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Problems (p.112) (3-1) Days Sales Outstanding 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. Day Sales Outstanding = Receivables / Average Sales Per Day AR = 20 X $20,000 = $400,000 (3-2) Debt Ratio 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? The equity multiplier is 2.5. For every dollar of equity the company has $2.5 of assets Equity Multiplier = 2.5 Equity Ratio = 1/EM Equity Ratio = 1/2.5 = 0.40 Debt Ratio + Equity Ratio = 1 Debt Ratio = 1 - Equity Ratio = 1 - 0.40 = 0.60 or 60% (3-3) Market/Book Ratio 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? Market value per share = $75 Common equity = 6,000,000 Number of shares outstanding = 800 million shares Market-to-book ratio = market value per share/(common equity/number of shares outstanding) Market-to-book ratio = $75/(6,000,000/800,000,000) Market-to-book ratio = $75/7.5 Market-to-book ratio = 10

a 2% profit margin. What is its ROE? Profit Margin (PM) = Net Income (NI) / Sales 3 = NI /$100M NI = PM x 100 (3 x 100) = $300M Equity Multiplier (EM) = Total Assets (TA) / Common Equity (CE) 2. Its sales are $100 million and it has total assets of $50 million. and a price/cash flow ratio of 8. What is the company’s total assets turnover? What is the firm’s equity multiplier? ROA = Profit Margin x Total Asset turnover 10 = 2 x Total asset turnover Total Asset turnover = ROA / Profit margin = 10/2 Total Asset turnover = 5 ROE = ROA x Equity Multiplier 15 = 10 x Equity multiplier Equity multiplier = ROE / ROA = 15 /10 Equity multiplier = 1. What is its P/E ratio? Price /cash flow ratio = Price per share / cash flow per share Price per share = $8 x $3 = $24 P.E = Price per share / EPS P. and a return on equity equal to 15%.E = $24 / 1.0 = 25 Return on Common Equity (ROE) = ROA (NI / TA) x EM (TA / CE) ROE = (300/50) x (50/25) = 6 x 2 ROE = 12% (3-6) Du Pont Analysis Donaldson & Son has an ROA of 10%.50.5 = 16 (3-5) ROE Needham Pharmaceuticals has a profit margin of 3% and an equity multiplier of 2.0.0.Derek Abbott Wk 2 Homework (3-4) Price/Earnings Ratio A company has an EPS of $1.5 (3-7) . a cash flow per share of $3.00.0 = $50M / CE CE = $50M / 2.

221 Solution: FVA5 = $1.5.300. 165-167) 4-1 FV of Single Amount If you deposit $10.07.000/(1. The company’s current ratio is 1.5 Current liabilities = $2M Quick ratio = (Current assets – Inventories) / current liabilities 1 = $3M . what would its future value be? Formula from Excel FV = (0.845. how much will be in your account after 5 years? Formula from Excel FVn=PV (1+I) n where FV = Future value PV = investment I = interest rate N = period $10. 4-6 FV of Ordinary Annuity What is the future value of a 7%.07.000 in a bank account that pays 10% interest annually.300)= 1. What is the firm’s level of current liabilities? What is the firm’s level of inventories? Current ratio = Current asset / Current liabilities 1.Derek Abbott Wk 2 Homework Current and Quick Ratios Ace Industries has current assets equal to $3 million.000 in 20 years if securities of equal risk pay 7% annually? Formula from Excel PVn = FV/(1+I)n PV = $5.Inventories / $2M Inventory = $3M .095 PV = $1.10) 5 = $16. 4-2 PV of Single Amount What is the present value of a security that will pay $5.725.07)20 = $1292.10 FV = $16.987 FVA5 Due = $1. and its quick ratio is 1.99 4-13a PV of an Annuity .000 (1.$2M = $1M [Quick ratio = ($3M .5 = $3M / Current liabilities Current liabilities = current assets / current ratio = $3M / 1.725.292.105.5. 5-year ordinary annuity that pays $300 each year? If this were an annuity due.845.5.0.1) = 1.$1M = $2M) / $2M = 1] Problems (pp.0.105.10.22 Formula from Excel FV = (.10.

400.08.300.25 Cash Stream B Formula from Excel = NPV (. a) $400 per year for 10 years at 10% Formula from Excel =PV(.32 b.100}) $1.400.300}) $1.400.251.300}) Solution: $1.400.457. you must enter CF0 = 0.400) $2.00. This will take a little time.10.400. Note also that it is quite easy to work the problem with Excel. {100.400. but the investment will pay huge dividends throughout the course. if you have a financial calculator. {100. (Hint: It is fairly easy to work this problem dealing with the individual cash flows.400. The appropriate interest rate is 8%.400. when working with the calculator’s cash flow register.Derek Abbott Wk 2 Homework Find the present value of the following ordinary annuities (see the Notes to Problem 4-12).600.83 4-14 PV Uneven Cash Flow Stream Find the present values of the following cash flow streams.00 Cash Stream B Formula from Excel = NPV (.) Year 1 2 3 4 5 Cash Stream A $100 400 400 400 300 Cash Stream B $300 400 400 400 100 Cash Stream A Formula from Excel =NPV (.400. Note that. {300.400.400. What is the value of each cash flow stream at a 0% interest rate? Cash Stream A Formula from Excel =NPV (.600. However.00 . read the section of the manual that describes how to enter cash flows such as the ones in this problem.08.400.1.100}) Solution: $1. {300.00. using procedures described in the Chapter 4 Tool Kit.

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