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…show more content… &/Ehrhardt M. (2010). Financial Management: Theory & Practice, 13th Edition. South Western Educational Publishing. Mason