Question

1. Baker Brothers has a DSO of 40 days, & its annual sales are $7,300,000. What is its account receivable balance? Assume it uses a 365-day year.

2. Bartley Barstools has an equity multiplier of 2.4 & its assets are financed with some combination of long-term debt & common equity. What is its ratio?

3. Doublewide Dealers has an ROA of 10 percent, a 2 percent profit margin, & an ROE of 15 percent. What is its total assets turnover? What is its equity multiplier?

4. Jaster Jets has $10 billion in total assets. Its balance sheet shows $1 billion in current liabilities, $3 billion in long-term debt, & $6 billion in common equity. It has 800 million shares of common stock outstanding, & its stock price is $32 per share. What is Jaster’s market/book ratio?

Answer 1

2.
Debt ratio:

It is a measure which represents the relationship between total debt and total assets and measures the percentage of funds provided by creditors.

Formula of debt ratio:

Under above formula, divide total debt with total assets to calculate the debt ratio.

Equity multiplier:

It is a measure of financial leverage, measures the amount or percentage of assets owned by each dollar of the common stockholders ‘equity. It shows relationship between total assets and common stockholders’ equity.

Formula of equity multiplier :

Under above formula, divide total assets with common stockholders’ equity to calculate the equity multiplier .

Equity ratio:

It is a measure which represents the relationship between common stockholders’ equity and total assets and measures the percentage of funds provided by common stockholders.

Formula of equity ratio:

Under above formula, divide common stockholders’ equity with total assets to calculate the equity ratio.

Now, we can re write the equity ratio in the form of following equation to simplify the solution:

In this company, assets are financed with the combination of the debt and common stockholders’ equity. Thus, the amount of asses is sum of debt and common stockholders’ equity.

Express this in the form of following equation:

Thus, sum of debt ratio and equity ratio is equals to 100% of total assets, then debt ratio is and equity ratio is.

Therefore, debt ratio is equals to 1 minus equity ratio. Express this in the form of following equation:

Now, calculate debt ratio using above equation:

Substitute 2.4 for equity multiplier in the above equation to get debt ratio:

Therefore, debt ratio is .