FIN 515, HW #2

(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.

Days sales outstanding = Receivables Annual sales /365

20 Days = Receivables = Receivables Annual sales /365 $20,000

Receivables = $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?

Debt ratio = Total liabilities Total assets

Equity multiplier 2.5
Equity Ratio = 1/EM = 1/2.5 = 0.4
Debt Ratio + Equity Ratio = 1
Debt Ratio = 1 – Equity Ratio = 1 – 0.4
Debt Ratio = 0.6 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?
Winston market = $75/share x 800 million shares = $60 billion
Book Value = Assets ($10b in total asset) – Liabilities ($1b current liabilities + $3b long term debt)
Book Value = $10b - $4b = $6b
Market/Book Ratio = $60b / $6b
Market/Book Ratio = 10

(3-4) Price/Earnings Ratio

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?

Cash Flow per Share = $3.00
Price / Cash Flow = 8.0 times
Price / $3.00 = 8.0 x 3.00 = $24.00
Price = $24.00
Price/Earnings Ratio = $24.00 / $1.50 = 16
Price/Earnings Ratio =16 times

(3-5) ROE

Needham Pharmaceuticals has a profit margin of 3% and an equity multiplier of 2.0. Its sales are $100 million and it has total assets of $50 million. What is its ROE?
ROE = Profit margin x Asset T/O x Equity multiplier
Asset T/O = Sales / Assets
ROE = 3% x ($100M / $50M) x 2
ROE = 12%

(3-6) Du Pont Analysis

Donaldson & Son has an ROA of 10%, a 2% profit margin, and a return on equity equal to 15%. 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
10% /2% = Total Asset Turnover
5 = Total Asset Turnover

ROE= ROA x Equity Multiplier
15% = 10% x Equity Multiplier
15% /10% = Equity Multiplier
1.5 = Equity Multiplier

(3-7) Current and Quick Ratios

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?

Current ratio = Current assets / Current liabilities
1.5 = $3,000,000 / Current liabilities
Current liabilities = $2,000,000

Quick ratio = (Current assets – Inventories) / Current liabilities
1= ($3,000,000 – Inventory) / $2,000,000
Inventory = $1,000,000

(4-1) Future Value of a Single Payment

If you deposit $10,000 in a bank account that pays 10% interest annually, how much will be in your account after 5 years?
FV n = PV * FVF i, n
FV5 = $10000 x FVF 10%, 5yrs
FV5 = $10000 x 1.61051
= $16,105.10

(4-2) Present Value of a Single Payment

What is the present