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Colton Lane Charlson

September 9, 2014
Managerial Finance
Assignment 2
Problem 2-29
Yes, a firm with positive net income can run out of cash. It could run out of cash if it spends too
much on financing activities. For an example a company could pay too much of a dividend, pay
off too much long term debt, or buying back too many shares of stock.

Problem 2-30
a) Current Ratio = Current Assets/Current Liabilities
$51.94B / 33.06B = 1.5711
b) Quick Ratio = (Cash and Cash Equivalent + Marketable Securities + Accounts
Receivables) / Current Liabilities
($27.65B + 14.30B) / 33.06B = 1.2689
c) Cash Ratio = (Cash and Cash Equivalent + Invested Funds) / Current Liabilities
$27.65B / 33.06B = .8364
d) Apple has more liquid assets than Dell relative to current liabilities

Problem 2-31
a) Accounts Receivable Days = ((Accounts Receivable / (Sales/365))
2013 2012 2011 2010 2009
Accounts Receivable 86.1 76.9 69.8 69.8 88.6
Sales 604.1 510.7 424.6 363.8 404.3
Sales / 365 1.65507 1.39918 1.16329 .9967 1.1077
Accounts Receivable Days 52.02 54.96 60.00 70.03 79.99
The accounts receivable period has decreased every year since 2009. This essentially means that
it is taking Mydeco less time/days to collect its account receivables. This is a positive thing for
the company.

b) Inventory Days = ((Inventory / (Sales/365))
2013 2012 2011 2010 2009
Inventory 35.3 31.7 28.4 30.9 33.7
Sales 604.1 510.7 424.6 363.8 404.3
Sales / 365 1.65507 1.39918 1.16329 .9967 1.1077
Inventory Days 21.33 22.66 24.41 31.00 30.42
More the most part the Inventory Days has decreased every year which means Mydecco is
becoming more efficient in converting its inventory into sales. This is a positive thing for the
company.

c) Current Ratio = (Current Assets – Liabilities)
2013 2012 2011 2010 2009
Current Assets 206.4 186.1 184.5 169.6 171.1
Current Liabilities 41.4 34.9 29 24.3 25.4
Current Ratio 165 151.2 155.5 145.3 145.7

The working capital has increased since 2009 which is a positive thing for Mydecco. It means
that they are more able to meet its short-term obligations.
Colton Lane Charlson
September 9, 2014
Managerial Finance
Assignment 2
Problem 2-36
d) Firm A: Market debt equity ratio = (500/400) = 1.25
Firm B: Market debt equity ratio = (80/40) = 2
e) Firm A: Book debt-equity ratio = (500/300) = 1.67
Firm B: Book debt-equity ratio = (80/35) = 2.29
f) Firm A: Interest coverage ratio = (100/50) = 2
Firm B: Interest coverage ratio = (8/7) = 1.14
g) Firm B has a lower coverage ratio and will find it more difficult to meet its debt
obligation than Firm A.

Problem 2-42
a) Starbucks ROE = (Net Income /Sales) X (Sales / Assets) X (Assets/Equity)
Starbucks ROE = (1.25/11.7)*(11.7/7.36)*(7.36/4.38) = 28.54%
b) Peet ROE = (Net Income /Sales) X (Sales / Assets) X (Assets/Equity)
Peet ROE = 4.78%*1.73*1.21 = 10.01%
The difference in return on equity is mainly because Starbucks profit margin is much
higher than Peet’s.
Problem 2-43
a) 3.5 X 1.8 X (44/18) = 15.4%
b) 4 X 1.8 X (44/18) = 17.6%
c) 4 X (1.8 * 1.2) X (44/18) =21.1%

Problem 3-10
a) Project A NPV = -10 + (20/1.1) = $8.18
Project B NPV = 5 + (5/1.1) = $9.55
Project C NPV = 20 – (10/1.1) = $10.91
b) Project C is the best choice if only one can be selected because it has the highest NPV.
c) Project B and C should be selected because they have the highest NPV combinations.

Problem 4-3
a) FV = $2,000 X 1.05^5 = $2,552.56
b) FV = $2,000 X 1.05^10 = 3,257.79
c) FV = $2,000 X 1.1^5 = $3,221.02
d) Because you are getting interest on the interest earned in the first five years.

Problem 4-4
a) PV = 10,000 / (1.04^12) = $6,245.97
b) PV = 10,000 / (1.08^20) = $2,145.48
c) PV = 10,000 / (1.02^6) = $8,879.71





Colton Lane Charlson
September 9, 2014
Managerial Finance
Assignment 2
Problem 4-11
a) PV1 = 100/1.08^1 = 92.59
PV2 = 100/1.08^2 = 85.73
PV3 = 100/1.08^3 = 79.38
SUM = $257.71
b) FV = $257.71 X (1.08^3) = $324.64
c) FV1 = $100
FV2 = $100 + (100 X (1.08)) = $208
FV3 = $100 + 208 + (100 X (1.08^2)) = $324.64
This balance is the same as the answer in B because it’s simply the same question asked
backwards.

Problem 4-12
a) PV = (10,000/1.035) + ((20,000/(1.035^2)) + ((30,000/(1.035^3)) = $55,390
b) FV = 55,390 X 1.035^3 = $61,412

Problem 4-27
Since the rate = the growth ( r = g), this equation becomes real easy.

PV of tuition payments if the interest rate is 5%:
PV = $10,000 X 12 = $120,000

Amount needed to have in the bank to fund all 13 years of tuition:
$120,000 + 10,000 = $130,000