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Assignment 3 “THE ANALYSIS OF BALANCE SHEET AND INCOME STATEMENT”

1. Greene Sisters has a DSO of 20 days. The company’s average daily sales are $20,000.
What is the level of its accounts receivable? Assume there are 365 days in a year.
Answer :
Account Receivable = Day Sales Outstanding X Average Sales Per Day
= 20 X $20.000
= $ 40.000
2. Vigo Vacations has an equity multiplier of 2.5. The company’s assets are financed with
some combination of long-term debt and common equity. What is the company’s debt
ratio?
Answer :

Equity Ratio = 1/ EM

Equity Ratio = 1/2,5

Equity Ratio = 0,40

Debt Ratio + Equity Ratio = 1

Debt Ratio = 1 - Equity Ratio
Debt Ratio = 1 - 0.40
Debt Ratio = 0.60 or 60%

Vigo Vacations has 0.60or 60% debt ratio

3. Winston Washers’s stock price is $75 per share. Winston has $10 billion in total assets.
Its balance sheet shows $1 billion in current liabilities, $3 billion in long-term debt, and
$6 billion in common equity. It has 800 million shares of common stock outstanding.
What is Winston’s market/book ratio?
 Answer :

Market value per share = $75

Common equity = 6.000.000
Number of shares outstanding = 800 million shares
market value per share
Market-to-book ratio =
¿¿
Market-to-book ratio = $ 75
¿¿
Market-to-book ratio = $75/7,5
Market-to-book ratio = 10

4. A company has an EPS of $1.50, a cash flow per share of $3.00, and a price/cash flow
ratio of 8.0. What is its P/E ratio?
Answer :
Price per share = Price/cash flow ratio X cash flow per share
= $8 x $3 = $24
P/E = Price per share / EPS
P/E = $24 / 1.5
P/E = 16
5. Ace Industries has current assets equal to $3 million. The company’s current ratio is 1.5,
and its quick ratio is 1.0. What is the firm’s level of current liabilities? What is the firm’s
level of inventories?
Answer :
Current ratio = Current asset / Current liabilities
1.5 = $ 3M / Current liabilities
Current liabilities = current assets / current ratio
= $3M / 1.5
Current liabilities = $2M
Quick ratio = (Current assets – Inventories) / current liabilities
1 =( $3M – Inventories) / $2M
Inventory = $3M - $2M = $1M
 [Quick ratio = ($3M - $1M = $2M) / $2M = 1]
6. Assume you are given the following relationships for the Clayton Corporation: Sales/total
assets 1.5 Return on assets (ROA) 3% Return on equity (ROE) 5% Calculate Clayton’s
profit margin and debt ratio.
Answer :
ROE = ROA x EM
5% = 3% x EM
EM = 5%/3% = TA/E
Take the reciprocal:
E/TA = 3/5
= 60%
therefore, D/A = 1 - 0.60 = 0.40 = 40%
The firm’s profit margin = 2% and its debt ratio = 40%
7. The Nelson Company has $1,312,500 in current assets and $525,000 in current liabilities.
Its initial inventory level is $375,000, and it will raise funds as additional notes payable
and use them to increase inventory. How much can Nelson’s short-term debt (notes
payable) increase without pushing its current ratio below 2.0? What will be the firm’s
quick ratio after Nelson has raised the maximum amount of short-term funds?
Answer :
Current Ratio = Current Asset/Current Liabilities
Current Ratio = $1.312.500/$525.000
Current Ratio = 2.5
Minimum CR = 2.0
Minimum CR = Current Asset+∆Notes Payable/Current Liabilities+∆Notes Payable
2.0 = 1.312.500+∆NP/525.000+∆NP
1.312.500+∆NP = 2(525.000+∆NP)
∆NP = 1.312.500–1050000
∆NP = 262.500