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# Problems (p.

112)
(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 acconts receiva!le" #ssme there are \$%& days in a year.
Ans:
DSO 'Days Sales Otstanding( ) #cconts *eceiva!les+#verage Sales per day
#cconts *eceiva!les ) 20 , 20000 ) \$-00,000
(3-2) Debt Ratio
.igo .acations has an e/ity mltiplier of 2.&. The companys assets are financed 0ith some
com!ination of long1term de!t and common e/ity. What is the companys de!tratio"
Ans:
2/ity 3ltiplier ) 2.&
Therefore 2/ity *atio ) 4+23
2/ity *atio ) 4+2.& ) 0.-0
De!t *atio 5 2/ity *atio ) 4
Therefore De!t *atio ) 4 1 2/ity *atio ) 4 1 0.-0 ) 0.%0 ) %06
(3-3) ar!et"#oo! Ratio
Winston Washerss stoc7 price is \$8& per share. Winston has \$40 !illion in total assets. 9ts
!alance sheet sho0s \$4 !illion in crrent lia!ilities, \$\$ !illion in long1term de!t, and \$%
!illion in common e/ity. 9t has :00 million shares of common stoc7 otstanding. What is
Winstons mar7et+!oo7 ratio"
Ans:
;oo7 vale per share ) <ommon 2/ity + Shares otstanding ) \$ % !illion + :00 million
shares
;oo7 vale per share ) %000+:00 ) \$ 8.& per share
3ar7et =rice per share ) \$ 8& per share
Winstons mar7et+!oo7 ratio ) 3ar7et =rice per share+ ;oo7 vale per share
Winstons mar7et+!oo7 ratio ) 8&+8.& ) 40
(3-\$) Pri%e"&arnings Ratio
# company has an 2=S of \$4.&0, a cash flo0 per share of \$\$.00, and a price+cash flo0 ratio
of :.0. What is its =+2 ratio"
Ans:
<ash flo0 per share ) \$\$.00
=rice+cash flo0 ratio ) :.0
=rice =er Share ) : , \$) \$ 2-
<ompanys =+2 ratio ) 2- +4.& ) 4%
(3-') RO&
>eedham =harmaceticals has a profit margin of \$6 and an e/ity mltiplier of 2.0. 9ts sales
are \$400 million and it has total assets of \$&0 million. What is its *O2"
Ans:
*O2 ) =rofit 3argin , Total #ssets Trnover , 2/ity 3ltiplier
*O2 ) '>et 9ncome+Sales( , ' Sales+Total #ssets( , ' Total #ssets+<ommon 2/ity(
*O2 ) '\$6( , '400+&0( , 2 ) \$6 , - ) 426
(3-() Du Pont Analysis
Donaldson ? Son has an *O# of 406, a 26 profit margin, and a retrn on e/ity e/al to
4&6. What is the companys total assets trnover" What is the firms e/ity mltiplier"
Ans:
=rofit 3argin ) >et 9ncome+Sales
*O#) =rofit 3argin , Total #ssets Trnover
40 6 ) 2 6 , Total #ssets Trnover
<ompanys total assets trnover ) &
*O2 ) =rofit 3argin , Total #ssets Trnover , 2/ity 3ltiplier
4&6 ) 26 , & , firms e/ity mltiplier
@irms e/ity mltiplier ) 4&+40 ) 4.&
(3-)) *urrent and +ui%! Ratios
#ce 9ndstries has crrent assets e/al to \$\$ million. The companys crrent ratio is 4.&, and
its /ic7 ratio is 4.0. What is the firms level of crrent lia!ilities" What is the firms level of
inventories"
Ans:
<ompanys crrent ratio ) <rrent #ssets+ <rrent Aia!ilities ) \$+@irms level of crrent
lia!ilities
@irms level of crrent lia!ilities ) \$+ 4.& ) \$2 million
Bic7 *atio ) '<rrent assets C 9nventories( + <rrent Aia!ilities
4 ) '\$ C 9nventories(+2
9nventories ) \$12 ) \$4 million
Problems (pp. 1('-1())
(\$-1) ,uture -alue o. a Single Payment
9f yo deposit \$40,000 in a !an7 accont that pays 406 interest annally, ho0 mch 0ill !e
in yor accont after & years"
Ans:
,- / 10000 1 (1.1)2 ' / 3 1(10'.10
FV \$16,105.10
(\$-2) Present -alue o. a Single Payment
What is the present vale of a secrity that 0ill pay \$&,000 in 20 years if secrities of e/al
ris7 pay 86 annally"
Ans:
P- / '000 "(1.0))220 / 1242.10
PV \$1,292.10
(\$-() ,uture -alue: ordinary Annuity 5ersus Annuity Due
What is the ftre vale of a 86, &1year ordinary annity that pays \$\$00 each year" 9f this
0ere an annity de, 0hat 0old its ftre vale !e"
Ans:
@tre vale of a 86, &1year ordinary annity that pays \$\$00 each year
FV \$1,725.22
9f this 0ere an annity de, 0hat 0old its ftre vale
FV \$1,845.99
(\$-13) Present -alue o. an Annuity
@ind the present vale of the follo0ing ordinary annities 'see the >otes to =ro!lem -142(.
a. \$-00 per year for 40 years at 406
Ans:
6e apply t7e .ollo8ing e9uation 8it7 P: / 3\$00; < / 10 and = / 10 >:
P-A< / P:"(1 ? =)1 ? P:"(1 ? =)2 ? @@@ ? P:"(1 ? =)<
NPV \$2,457.83
!. \$200 per year for & years at &6
Ans:
NPV \$865.90
c. \$-00 per year for & years at 06
Ans:
NPV \$2,000.00
d. >o0 re0or7 parts a, !, and c assming that payments are made at the !eginning of each
yearD that is, they are annities de.
Ans:
\$-00 per year for 40 years at 406
PV \$2,703.61
\$200 per year for & years at &6
PV \$909.19
\$-00 per year for & years at 06
PV \$2,000.00
(\$-1\$) Ane5en *as7 ,lo8 Stream
a) @ind the present vales of the follo0ing cash flo0 streams. The appropriate interest rate is
:6. 'EintF 9t is fairly easy to 0or7 this pro!lem dealing 0ith the individal cash flo0s.
Eo0ever, if yo have a financial calclator, read the section of the manal that descri!es
ho0 to enter cash flo0s sch as the ones in this pro!lem. This 0ill ta7e a little time, !t
the investment 0ill pay hge dividends throghot the corse. >ote that, 0hen 0or7ing
0ith the calclators cash flo0 register, yo mst enter <@ ) 0. >ote also that it is /ite
easy to 0or7 the pro!lem 0ith 2Gcel, sing procedres descri!ed in the <hapter - Tool
Hit.(
Ans:
*as7 Stream A
Interest
rate 8%
Year 1 2 3 4 5
CFs \$100 \$400 \$400 \$400 \$300
NPV \$1,251.35
*an be %al%ulated as
<P- / 100"1.0B ? \$00"(1.0B)22 ? \$00"(1.0B)23 ?\$00"(1.0B)2\$ ? 300"(1.0B)2'
<P- / 3 12'1.3'
*as7 Stream #
Interest
rate 8%
Year 1 2 3 4 5
CFs \$300 \$400 \$400 \$400 \$100
NPV \$1,300.32
*an be %al%ulated as
<P- / 300"1.0B ? \$00"(1.0B)22 ? \$00"(1.0B)23 ?\$00"(1.0B)2\$ ? 100"(1.0B)2'
<P- / 3 1300.32
b) 67at is t7e 5alue o. ea%7 %as7 .lo8 stream at 0> interest rateC
*as7 Stream A
Interest
rate 0%
Year 1 2 3 4 5
CFs \$100 \$400 \$400 \$400 \$300
NPV \$1,600.00
*as7 Stream #
Interest
rate 0%
Year 1 2 3 4 5
CFs \$300 \$400 \$400 \$400 \$100
NPV \$1,600.00