Answer-Chapter 3-Financial Management

836 Words Mar 26th, 2011 4 Pages
Problems (Page 112) 3-1 to 3.7,

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.

Day Sales Outstanding= Receivables / Average Sales per day

AR = 20 X $20000 = $400,000

3-2 Vigo vacations has an equity multiplier of 2.5.The company’s assets are financed assets with some combination of long-term debt and common equity. What is the company’s debt ratio?

The equity multiplier is 2.5. This means that for every dollar of equity the company has $2.5 of assets

Equity Multiplier = 2.5
Therefore Equity Ratio = 1/EM
Equity Ratio = 1/2.5 = 0.40 the formula is:
Debt Ratio + Equity Ratio
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What is the firm’s equity multiplier?

A/Asset turn over = ROE/ profit margin
Asset turn over = 10%/ 2% = 5

B/ ROE = (Profit margin) (Total assets turnover) (Equity multiplier)

Equity multiplier = ROE/ profit margin X asset turn over

Equity multiplier = 15 % / 5x 2 % = 1.5

3-7 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: The current ratio gauges how capable a business is in paying current liabilities by using current assets only. Current ratio is also called the working capital ratio. A general rule of thumb for the current ratio is 2 to 1 (or 2:1 or 2/1). However, an industry average may be a better standard than this rule of thumb. The actual quality and management of assets must also be considered.
The formula is:
Total Current Assets

Total Current Liabilities

1.5=3000000/ current liabilities
Current liabilities= $2,000,000

Quick Ratio: Quick ratio focuses on immediate liquidity (i.e., cash, accounts receivable, etc.) but specifically
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