# Need help with Accounting-Financial Ratios

Problem 15-19

 This Year Last Year 1. a. Net income……………………………………. \$280,000 \$196,000 Average number of common shares (b) Earnings per share (a) ÷ (b)…………….. b. Dividends per share (a)……………………. Market price per share (b)………………… Dividend yield ratio (a) ÷ (b)…………….. c. Dividends per share (a)……………………. Earnings per share (b)…………………….. Dividend payout ratio (a) ÷ (b)…………. d. Market price per share (a)………………… Earnings per share (b)…………………….. Price-earnings ratio (a) ÷ (b)…………….. 7.14 9.18

Investors regard Sabin Electronics less favorably than other companies in the industry. This is evidenced by the fact that they are willing to pay only 7.14 times current earnings for a share of Sabin’s stock, as compared to 12 times current earnings for other companies in the industry. If investors were willing to pay 12 times current earnings for Sabin’s stock, it would be selling for about \$67.20 per share (12 × \$5.60), rather than for only \$40 per share.

 This Year Last Year e. Total stockholders’ equity (a)………………. \$1,600,000 \$1,430,000 Number of common shares outstanding (b)……………………………………………….. Book value per share (a) ÷ (b)……………..

The market value is above book value for both years. However, this does not necessarily indicate that the stock is overpriced. Market value reflects investors’ perceptions of future earnings, whereas book value is a result of already completed transactions.

 This Year Last Year 2. a. Gross margin (a)……………………………… \$1,125,000 \$900,000 Sales (b)………………………………………… Gross margin percentage (a) ÷ (b)…….. b. Net income (a)……………………………….. Sales (b)………………………………………… Net profit margin percentage (a) ÷ (b)… c. Net income…………………………………….. Add after-tax cost of interest paid: [\$72,000 × (1 – 0.30)]………………….. Total (a)………………………………………… Average total assets (b)……………………. Return on total assets (a) ÷ (b)…………. d. Net income…………………………………….. \$ 280,000 \$ 196,000 Average total stockholders’ equity……… Return on equity (a) ÷ (b)…………………

e.  Financial leverage is positive in both years because the return on equity is greater than the return on total assets. This positive financial leverage is due to two factors: the bonds, which have an after-tax interest cost of only 8.4% [12% interest rate × (1 – 0.30) = 8.4%]; and the accounts payable, which may bear no interest cost.

3.  All profitability measures and the earnings per share are trending upwards, which is a good sign. However, the price-earnings ratio has dropped from 9.18 to 7.14. This decline indicates investor concerns about Sabin’s potential for earnings growth. Perhaps investors are concerned about Sabin’s accounts receivable and inventory management problems. Conceivably, this problem could worsen, leading to an eventual reduction in profits through an inability to operate, a suspension of dividends, and a precipitous drop in the market price of the company’s stock. That said, if Sabin can get its current assets under control the stock price may very well have the potential for further growth.

***You must work the entire problem which includes answering the theory questions***