# Fi515 Week 4 Homework

FIN515 Homework 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/ Average 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 Debt Ratio + Equity Ratio = 1 There for Debt Ratio = 1 - Equity Ratio = 1 - 0.40 = 0.60% Solution: D/A 60% 3-3 Market/Book Ratio Winston Washers’ 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 Winston’s market/book ratio? Winston market = $75 x 800m = $60b Book Value = Assets ($10b in total asset) – Liabilities ($1b current liabilities + $3b long term debt) = $10b - $4b = $6b M/B = $60b/$6b = $10b Solution/B = $10b 3-4 PE Ratios A company has an EPS of $1.50, a cash flow per share of $3.00, and a price/cash flow ratio

Week 5 Problem Set Chapter 10 (pages 345–348): Purchase Price of Stock $50.00 Selling Price of Stock $55.00 Dividend per Share $1.00 Realized Return 12% $1+ ($55-$50) / $50 = 12% Purchase Price of Stock $50.00 Selling Price of Stock $55.00 Dividend per Share $1.00 Return from Dividend Yield 2% Dividend / Purchased Price Capital Gain 10% Capital gain = ($55-$50) / $55 = 10% a. What was your realized return? b. How much of the return came from dividend yield and how much came from capital gain? Bank A has several loans compared to Bank B, therefore Bank A is less risky. Also, Bank A has 100 loans each of $ 1 million and faces a 5% probability of default on each loan, Both the banks face credit risk which refers to the risk that a borrower will default on any type of debt by failing to make required payments. Bank A clearly faces less risk. I would choose the economy in which stock returns are independent, this is because this risk can be diversiFed away in a larger porTolio. If all the stocks you invested in acted the same way, you would not have any opportunity to invest in a stock that would alleviate the risk.

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