Expert answer:Need help with Accounting-Financial Ratios
Answer & Explanation: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***
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