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Managerial Finance - Chapter 3 Problems

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Managerial Financial
3-1: 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.

Answer:
Days Sales Outstanding = Receivables / Average Sales per day or Receivables / (Annual Sales/365)

DSO 20 = Receivables / 20000

Receivables = DSO x Average daily sales = 20 x $20,000
Receivables = $400,000

3-2: 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?

Answer:
Equity Multiplier (EM) = 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: Winston Washers’s stock price is $75 per share. Winston has $10 billion in total as- sets. 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?

Answer:
Book value per share = Common equity/shares outstanding ($6,000,000,000/800,000,000) = $7.5

Market/book ratio = market price per share/book value per share ($75/$7.5) = 10

3-4: 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?

Answer:
Price/Cash flow ratio = Price per share (PPS) / Cash flow per share
8 = Price per share (PPS) / 3
Price per share (PPS) = 8 x 3 = 24

Price/Earnings (PE) ratio = Price per share (PPS) / Earnings per share (EPS)
P/E ratio = Price per share (PPS) / Earnings per share (EPS) = 24 / 1.5
P/E ratio = 16

3-5: 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

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