Debt to Equity Ratio + Electronics by jeq20592


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									Problem 14-11                                           Name

                                SABIN ELECTRONICS

                                          This Year      Last Year
a. Current assets                         $1,520,000    $1,090,000
   Current liabilities                        800,000      430,000
   Working capital

b. Current assets                         $1,520,000    $1,090,000
   Current liabilities                      $800,000      $430,000
   Current ratio

c. Quick assets                             $550,000     $468,000
   Current liabilities                      $800,000     $430,000
   Acid-test ratio

d. Sales on account                       $5,000,000    $4,350,000
   Average receivables                      $390,000      $275,000
   Accounts receivables turnover
   Averabe collection period

e. Cost of goods sold                     $3,875,000    $3,450,000
   Average inventory                        $775,000      $550,000
   Inventory turnover
   Average sales period

f.   Total liabilities                    $1,400,000    $1,030,000
     Stockholders' equity                 $1,600,000    $1,430,000
     Debt-to-equity ratio

g. Net income before interest and taxes     $472,000     $352,000
   Interest expense                          $72,000      $72,000
   Times interest earned
Problem 14-11                                         Name

                          SABIN ELECTRONICS                                       SABIN ELECTRONICS
                        Common-Size Balance Sheets                              Common-Size Balance Sheets

                                         This Year    Last Year                                    This Year
  Current assets:                                                  Current assets:
   Cash                                     $70,000    $150,000     Cash
   Marketable securities                          0      18,000     Marketable securities
   Accounts receivable, net                 480,000     300,000     Accounts receivable, net
   Inventory                                950,000     600,000     Inventory
   Prepaid expenses                          20,000      22,000     Prepaid expenses
  Total current assets                                             Total current assets
  Plant and equipment, net                1,480,000    1,370,000   Plant and equipment, net
  Total assets                                                     Total assets

  Liabilities:                                                     Liabilities:
   Current liabilities                     $800,000    $430,000     Current liabilities
   Bonds payable, 12%                       600,000     600,000     Bonds payable, 12%
  Total liabilities                                                Total liabilities
  Stockholders' equity:                                            Stockholders' equity:
   Preferred stock, $25 par, 8%             250,000     250,000     Preferred stock, $25 par, 8%
   Common stock, $10 par                    500,000     500,000     Common stock, $10 par
   Retained earnings                        850,000     680,000     Retained earnings
  Total stockholders' equity                                       Total stockholders' equity
  Total liabilities and equity                                     Total liabilities and equity

                         SABIN ELECTRONICS                                       SABIN ELECTRONICS
                      Common-Size Income Statements                           Common-Size Income Statements

                                         This Year     Last Year                                   This Year
  Sales                                  $5,000,000   $4,350,000   Sales
  Less cost of goods sold                 3,875,000    3,450,000   Less cost of goods sold
  Gross margin                                                     Gross margin
  Less operating expenses                   653,000     548,000    Less operating expenses
  Net operating income                                             Net operating income
  Less interest expense                      72,000      72,000    Less interest expense
  Net income before taxes                                          Net income before taxes
  Less income taxes @ 30%                                          Less income taxes
  Net income                                                       Net income
Problem 14-11                                                         Name

3. Comment on the results of your analysis in (1) and (2) above and make a
   recommendation as to whether or not the loan should be approved.

The following points can be made from the analytical work in parts (1) and (2):
a. The company has improved its profit margin from last year. This is
attributable primarily to an increase in gross margin, which is offset somewhat
by a small increase in operating expenses. Overall, the company's income
statement looks very good

b. The company's current position has deteriorated significantly since last
year. Both the current ratio and the acid-test ratio are well below the industry
average and are trending downward. At the present rate, it will soon be
impossible for the company to pay its bills as they come due.

c. The drain on the cash account seems to be a result mostly of a large
buildup in accounts receivable and inventory. Notice that the average age of
the receivables has increased by five days since last year and is now 10 days. Many of the
over the industry average. Many of the company's customers are not taking their
discounts, since the average collection period is 28 days and collections terms
2/10, n/30. This suggests financial weakness on the part of these customers, or
sales to customers who are poor credit risks.

d. The inventory turned only five times this year as compared to over six times
last year. It takes nearly two weeks longer for the company to turn its inventory
than the average for the industry (73 days as compared to 60 days for the
industry). This suggests that inventory stocks are higher than they need to be.

e. In the author's opinion, the loan should be approved only if the company
gets its accounts receivable and inventory back under control. If the accounts
receivable collection period is reduced to about 20 days, and if the inventory is
pared down enough to reduce the turnover time to about 60 days, enough funds
could be released to substantially improve the company's cash position. Then a
loan might not even be needed.
 Common-Size Balance Sheets

                                Last Year

Common-Size Income Statements

                                Last Year

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