Accounting Problem - How can financial leverage benefit a common shareholder? How can it harm a common shareholder? Please provide a short essay 1 paragraph.
1. Analysis and Significance of Various Ratios
Paul Sabin founded 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 $500,000 long-term loan from Gulfport State Bank, of which $100,000 will be used to bolster the Cash account and $400,000 of which will be used to modernize equipment. Sabin Electronics' 2 most recent financial statements are attached:
Required:
a. You are the lending executive at the Bank who makes the loan decision. Your newly-hired MBA business analyst has prepared the following ratios for both 2010 and 2009:
(1) Amount of working capital
(2) Current ratio
(3) Acid-test (quick) ratio
(4) Average collection period (Note: You will need accounts receivable at the beginning of 2009, which was $250,000.)
(5) Average sale period (Note: You will need inventory at the beginning of 2009, which was $500,000.)
(6) Debt-to-equity ratio
(7) Times interest earned ratio
(8) Comment on what your ratio analysis tells you about Sabin internally and about Sabin compared to the industry in which it participates.
(9) Would you recommend that the Bank make the loan based on the available data? Yes or No? What reasons would you give to support your answer? What qualitative factors might Sabin want to encourage the Bank to consider in making the loan?
b. Now switch gears for this section. You are an account executive for a large brokerage house and one of your clients has asked you for a recommendation on whether she should purchase some of Sabin's common stock. You ask another of the newly-hired MBA analysts working for you to prepare some analysis. You are the MBA analyst and here is what you have been requested to prepare:
(1) Earnings per share. There has been no change in preferred or common stock over the last 2 years.
(2) The common stock dividend yield ratio. Sabin's stock is currently selling for $40 per share. Last year, in 2009, it sold for $36 per share.
(3) The common stock dividend payout ratio.
(4) The price-earnings ratio. How do investors regard Sabin's common stock as compared to other companies in the industry?
(5) Book value per share of common stock. What does the difference between book value and market price of the stock signify to you?
(6) For return on investment (ROI), calculate the components, margin and turnover, and the total ROI. Total assets at the beginning of 2009 were $2,300,000.
(7) Is there a difference between return on total assets used in chapter 16 and the ROI presented in chapter 12? Total assets at the beginning of 2009 were $2,300,000.
(8) Return on common stockholders' equity. Stockholders' equity at the beginning of 2009 was $1,329,000.
(9) Is Sabin's financial leverage positive or negative? Please explain.
(10) Would you recommend that your client purchase Sabin's stock? Why or why not?
2. Statement of Cash Flow
Wesley Corp's comparative balance sheet and income statement for the last year appear attached:
Wesley declared and paid a cash dividend of $26,000 during 2010, and has another cash dividend planned for 2011 in the amount of $40,000. Wesley has also planned to spend $150,000 in new capital equipment in 2011.
Required:
a. What does the statement tell you about Wesley's operations, investments, and financing decisions in 2010? Short paragraph answer.
Attachment:- Questions.rar