# Financial Management Chapter 3 Homework/Solutions

Topics: Financial ratios, Generally Accepted Accounting Principles, Financial ratio Pages: 7 (1101 words) Published: October 17, 2012
Financial Management
Chapter 3
What is the receivables turnover? (Round your answer to 2 decimal places (e.g., 32.16).)|
Receivables turnover| times  |

Requirement 2:|
The days’ sales in receivables? (Round your answer to 2 decimal places (e.g., 32.16).)|
Days’ sales in receivables| days   |

Requirement 3:|
How long did it take on average for credit customers to pay off their accounts during the past year? (Round your answer to 2 decimal places (e.g., 32.16).)|
Average collection period| days  |

Explanation:
1.
The receivables turnover for the company was:|

Receivables turnover| =|   Credit sales / Receivables| Receivables turnover| =|   \$7,535,050 / \$446,516|
Receivables turnover| =|   16.88 times|

2.
Using the receivables turnover, we can calculate the day’s sales in receivables as:|
Days’ sales in receivables| =|   365 days / Receivables turnover| Days’ sales in receivables| =|   365 days / 16.88|
Days’ sales in receivables| =|   21.63 days|

3.
The average collection period, which is the same as the day’s sales in receivables, was 21.63 days.|

Jiminy Cricket Removal has a profit margin of 10 percent, total asset turnover of 0.98, and ROE of 14.48 percent.|
Required:|
What is this firm’s debt-equity ratio? (Round your answer to 2 decimal places (e.g., 32.16).)|
Debt-equity ratio|  |

Explanation:
We can use the Du Pont identity and solve for the equity multiplier. With the equity multiplier we can find the debt-equity ratio. Doing so we find:|
ROE = (Profit margin)(Total asset turnover)(Equity multiplier)| 0.1448 = (0.10)(.98)(Equity multiplier)  |
Equity multiplier = 1.48  |

Now, using the equation for the equity multiplier, we get:|
Equity multiplier = 1 + Debt-equity ratio|
1.48 = 1 + Debt-equity ratio|
Debt-equity ratio = 0.48|

Assume the Crash Davis Driving School has a 16.5 percent ROE and a 64 percent payout ratio.|
Required:|
What is the sustainable growth rate? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)|
Sustainable growth rate| %  |

Explanation:
To find the internal growth rate we need the plowback, or retention, ratio. The plowback ratio is:|
b = 1 – 0.64|
b = 0.36  |

Now, we can use the sustainable growth rate equation to find:|
Sustainable growth rate| =|  [(ROE)(b)] / [1 – (ROE)(b)]| Sustainable growth rate| =|  [0.165(0.36)] / [1 – 0.165(0.36)]| Sustainable growth rate| =|  0.0632 or 6.32%|

Explanation:
Profit margin| = Net income / Sales|
| = \$95,381 / \$2,296,873|
| = 0.0415 or 4.15%|
|  |
Total asset turnover| = Sales / Total assets|
| = \$2,296,873 / \$935,080|
| = 2.46|
|  |
Equity multiplier| = Total assets / Total equity|
| = \$935,080 / \$435,131|
| = 2.15|

Using the Du Pont identity to calculate ROE, we get:|

ROE| =|   (Profit margin)(Total asset turnover)(Equity multiplier)| ROE| =|   (0.0415)(2.46)(2.15)|
ROE| =|   0.2192 or 21.92%|

The most recent financial statements for Shinoda Manufacturing Co. are shown below:|
Income Statement| Balance Sheet|
Sales| \$| 64,100|   Current assets| \$| 27,500|   Debt| \$| 43,700  |   Costs|  | 44,730|   Fixed assets|  | 80,400|   Equity|  | 64,200  |  | | |  | | |  | | |
Taxable income| \$| 19,370|      Total| \$| 107,900|      Total| \$| 107,900  |  |  |  |  | | |  | | |
Tax (30%)|  | 5,811|  |  |  |  |  |  |
| | |  |  |  |  |  |  |
Net Income| \$| 13,559|  |  |  |  |  |  |  | | |  |  |  |  |  |  |
|

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 42 percent dividend payout ratio. No external financing is possible.|
Required:...