Week 2 Fin515 Homework
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.
Formula for DSO = Receivables/ Ave sales per day = Receivables/( Annual sales/365)
= 20 days x $20,000= $400,000
Solution: AR = $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?
Formula for Debt ratio = Debt Ratio + Equity Ratio = 1
Equity Multiplier = 2.5
Therefore Equity Ratio = 1/EM
Equity Ratio = 1/2.4 = 0.40
MEMORIZE this formula:
Debt Ratio + Equity Ratio = 1
There for Debt Ratio = 1 - Equity Ratio = 1 - 0.40 = 0.60%
Solution: D/A 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 x 800 million = $60 billion
Book Value = Assets ($10b in total asset) – Liabilities ($1b current liabilities + $3b long term debt)
= $10b - $4b = $6b
M/B = $60b/$6b = $10b
Solution/B = $10b
3-4 PE 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
P/E = $24.00 / $1.50 = 16
Solution: P/E = 16.0 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?
Net Income = $100millions x 3%= $30 million
ROE= Net Income/assets= $30 millions/$50 millions=6%
6% x 2.0 = 12%
Solution: ROE = 12%
3-6 Du Pont Analysis
Donaldson
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.
Formula for DSO = Receivables/ Ave sales per day = Receivables/( Annual sales/365)
= 20 days x $20,000= $400,000
Solution: AR = $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?
Formula for Debt ratio = Debt Ratio + Equity Ratio = 1
Equity Multiplier = 2.5
Therefore Equity Ratio = 1/EM
Equity Ratio = 1/2.4 = 0.40
MEMORIZE this formula:
Debt Ratio + Equity Ratio = 1
There for Debt Ratio = 1 - Equity Ratio = 1 - 0.40 = 0.60%
Solution: D/A 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 x 800 million = $60 billion
Book Value = Assets ($10b in total asset) – Liabilities ($1b current liabilities + $3b long term debt)
= $10b - $4b = $6b
M/B = $60b/$6b = $10b
Solution/B = $10b
3-4 PE 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
P/E = $24.00 / $1.50 = 16
Solution: P/E = 16.0 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?
Net Income = $100millions x 3%= $30 million
ROE= Net Income/assets= $30 millions/$50 millions=6%
6% x 2.0 = 12%
Solution: ROE = 12%
3-6 Du Pont Analysis
Donaldson
References: Brigham E. &/Ehrhardt M. (2010). Financial Management: Theory & Practice, 13th Edition. South Western Educational Publishing. Mason OH.