Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic...
Question:
Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on which he had secured patents. Although the company has been fairly profitable, it is now experiencing a severe cash shortage. For this reason, it is requesting a $640,000 long-term loan from Gulfport State Bank, $170,000 of which will be used to bolster the Cash account and $470,000 of which will be used to modernize equipment. The company's financial statements for the two most recent years follow:
During the past year, the company introduced several new product lines and raised the selling prices on a number of old product lines in order to improve its profit margin. The company also hired a new sales manager, who has expanded sales into several new territories. Sales terms are 3/10, n/30. All sales are on account. Assume Paul Sabin has asked you to assess his company's profitability and stock market performance.
| Sabin Electronics Comparative Balance Sheet | ||
|---|---|---|
| This Year | Last Year | |
| Assets | ||
| Current assets: | ||
| Cash | $126,000 | $290,000 |
| Marketable securities | $0 | $11,000 |
| Accounts receivable, net | $659,000 | $440,000 |
| Inventory | $1,020,000 | $735,000 |
| Prepaid expenses | $34,000 | $36,000 |
| Total current assets | $1,839,000 | $1,512,000 |
| Plant and equipment, net | $2,084,600 | $1,470,000 |
| Total assets | $3,923,600 | $2,982,000 |
| Liabilities and Stockholder's Equity | ||
| Liabilities: | ||
| Current liabilities | $870,000 | $440,000 |
| Bonds payable, 12% | $800,000 | $800,000 |
| Total liabilities | $1,670,000 | $1,240,000 |
| Stockholder's equity | ||
| Common stock, $20 par | $830,000 | $830,000 |
| Retained earnings | $1,423,600 | $912,000 |
| Total stockholder's equity | $2,253,600 | $1,742,000 |
| Total liabilities and stockholder's equity | $3,923,600 | $2,982,000 |
| Sabin Electronics Comparative Income Statement and Reconciliation | ||
|---|---|---|
| This Year | Last Year | |
| Sales | $5,700,000 | $4,770,000 |
| Cost of goods sold | $4,015,000 | $3,590,000 |
| Gross margin | $1,685,000 | $1,180,000 |
| Selling and administrative expenses | $681,000 | $576,000 |
| Net operating income | $1,004,000 | $604,000 |
| Interest expense | $96,000 | $96,000 |
| Net income before taxes | $908,000 | $508,000 |
| Income taxes (30%) | $272,400 | $152,400 |
| Net income | $635,600 | $355,600 |
| Common dividends | $124,000 | $103,000 |
| Net income retained | $511,600 | $252,600 |
| Beginning retained earnings | $912,000 | $659,400 |
| Ending retained earnings | $1,423,600 | $912,000 |
Is the company's financial leverage positive or negative?
Financial Leverage:
A company's financial leverage refers to the relationship between its debt financing and its equity financing. It illustrated the risk profile of a company's current financial position.
Answer and Explanation: 1
Become a Study.com member to unlock this answer! Create your account
View this answer
Recall that a company's financial leverage is positive when its return on assets is higher than the return on common stockholder's equity. We must...
See full answer below.
Learn more about this topic:
from
Chapter 3 / Lesson 47Learn about financial leverage and how to calculate leverage in this lesson. Use the financial leverage formula to understand how to maximize returns.