Ali El Ahmar FIN515: Managerial Finance Professor Pedersen (3-1)

Days Sales Outstanding Greene Sisters has a DSO of 20 days. The companys average daily sales are $20,000. What is the level of its accounts receivable? Assume there are 365 days in a year. DSO = A/R / Daily Sales 20 = A/R / 20,000 A/R = $40,000
(3-2)

Debt Ratio Vigo Vacations has an equity multiplier of 2.5. The companys assets are financed with some combination of long-term debt and common equity. What is the companys debtratio? Equity Ratio = 1 / Equity Multiplier ER = 1 / 2.5 ER = 0.4 * 100 = 40% Debt Ratio = 100% - ER DR = 100% - 60% DR = 40%
(3-3)

Market/Book Ratio Winston Washerss 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 Winstons market/book ratio? Market Cap = 75 * 800 million = 60 billion Book value = Assets - Liabilities BV = 10 4 BV = 6 billion Market / Book ratio = 60 / 6 = 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? PPS = Price / Cash flow ratio * Cash flow /share PPS = 8 * 3 PPS = $24 P/e Ratio = Share price / EPS = 24 / 1.50 P/E Ratio = 16
(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?

Profit margin = 3% Asset turn over = Sales/ total assets = 100/50 = 2 Equity multiplier = 2 ROE = Profit margin * Total assets turnover * Equity multiplier ROE= 2 x 2 x 3 % = 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 companys total assets turnover? What is the firms equity multiplier? ROE = ROA * Equity Multiplier 15 = 10 * Equity Multiplier Equity Multiplier = 15/10 = 1.5 ROA = Profit Margin * Total Asset Turnover 10 = 2 * Total Asset Turnover Total Asset Turnover = 10/2 = 5
(3-7)

Current and Quick Ratios Ace Industries has current assets equal to $3 million. The companys current ratio is 1.5, and its quick ratio is 1.0. What is the firms level of current liabilities? What is the firms level of inventories?

Current Ratio = Current Assets / Current Liabilities 1.5 = 3 million / Current Liabilities Current Liabilities = 3/1.5 = 2 million Quick Ratio = Current Assets Inventory / Current Liabilities 1 = 3million Inventory / 2 million Inventory = 1 million

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? PV = 10,000 I = 10% N=5 FV = 16,105.10 (Calculated in excel with FV formula). Year 1: 10,000 * 10% = 11,000 Year 2: 11,000 * 10% = 12,100 (Repeat method for 5 years)

4-2

Present Value of a Single Payment What is the present value of a security that will pay $5,000 in 20 years if securities of equal risk pay 7% annually? Per the TVM table, the factor for 7% and 20 periods is 0.2584. 0.25842 * 5000 = 1292.10
(4-6)

Future Value: ordinary Annuity versus Annuity Due What is the future value of a 7%, 5-year ordinary annuity that pays $300 each year? If this were an annuity due, what would its future value be? Using the TVM table, FV = 300 * 5.75074 = $1725 If it was an annuity due, we discount one period back so FV = 1725 * 1.07 = $1846