The Nelson Company has $1,312,500 in current assets and $525,000 in current liabilities.

Its initial inventory level is $375,000,

and it will raise funds as additional notes payable and use them to increase inventory. How much can Nelson’s short-term deb
(notes payable) increase without pushing its current ratio below 2.0? What will be the firm’s quick ratio after Nelson has raised
the maximum amount of short-term funds?

Data
CA 1,312,500
CL 525,000
I.Inve 375,000
Additional N/P
CA/CL (CA+X)/(CL+X) (1,312,500+X)/(525,000+X) 2*(525,000+X)=1,312,500+X
Steps
CR after increase in Payables should not be more than 2
So write 2 in place of CR
CR 2
Next open write hand side of the formula of CR as:
CR (2) = CA/CL
As question says amount of payable is used for purchasing inventory, so both CA and CL increase by same amount, we assume
2= (CA+X)/(CL+X) <== eq 1
CA = 1,312,500 CL=525,000
Put CA and CL amounts in eq 1 and it becomes as:
=> 2=(1,312,500+X)/(525,000+X) <=== eq 2
Solving eq 2
2*(525,000+X)=(1,312,500+X)
1050000
==> 1,050,000+2X=1,312,500+X ==> 2X-X=1,312,500-1,050,000
==>
X=262500 262,500
al inventory level is $375,000,
h can Nelson’s short-term debt
ck ratio after Nelson has raised

(525,000+X)=1,312,500+X

e by same amount, we assume it as X :

Winston Washers’s stock price is $75 per share. Winston has $10 billion in total assets. Its balance sheet shows $1 billion in cu
in common equity. It has 800 million shares of common stock outstanding. What is Winston’s market/book ratio?

Data
Market price 75$
Total Assets 10 Billion
CL 1 Billion
LTD 3 billion
CE 6 billion
Share outstading 800 million
Mkt to book ratio Mkt price per share/Book value per share =75/7.5 10
Book value / share Common equity/Shares outstanding 6 Billion/800 million
6,000,000,000 7.5
800,000,000
 sheet shows $1 billion in current liabilities, $3 billion in long-term debt, and $6 billion
ket/book ratio?
A company has an EPS of $1.50, a cash flow per share of $3.00, and a price/cash flow ratio of 8.0. What is its P/E ratio?

EPS 1.5
CF/Share 3
Price/CF ratio 8
P/E

Solution
Price/CF 8
Price 8*CF =8*3 24
EPS 1.5
P/E =24/1.5 16
at is its P/E ratio?
Needham Pharmaceuticals has a profit margin of 3% and an equity multiplier of 2.0. Its sales are $100 million and it
has total assets of $50 million. What is its ROE?
Data
PM NI/Sales 0.03
EM TA/CE 2
Sales 100 m
Assets 50M
ROE NI/CE
From PM we find the NI NI =0.03*100m 3 3Million
From EM we find CE CE =TA/EM =50M/2 25 25 M
ROE NI/CE =3M/25M 0.12
e $100 million and it
Donaldson & Son has an ROA of 10%, a 2% profit margin, and a return on equity equal to 15%. What is the
company’s total assets turnover? What is the firm’s equity multiplier?

Data
ROA NI/TA 0.1
PM NI/Sales 0.02
ROE NI/CE 0.15
TATO Sales /TA

Du-Pont ROA =PM*TATO

0.1 =0.02*TATO
==> =0.10/0.02 TATO
5 TATO
The Manor Corporation has $500,000 of debt outstanding, and it pays an interest rate of 10% annually: Manor’s annual sales a
average tax rate is 30%, and its net profit margin on sales is 5%. If the company does not maintain a TIE ratio of at least 5 to 1,
refuse to renew the loan and bankruptcy will result. What is Manor’s TIE ratio?

Data
Debt OS 500,000
Interest Rate (IR) 0.1
Sales 2M
TR 0.3 Tax expense =TR*EBT
NI =EBT (1-TR) ==> EBT=NI/(1-TR) ==> EBT =100,000/0142857.1
PM Ni/Sales 0.05 ==> NI =0.05*SALES 100,000
TIE EBIT/IE 3.857143

Interest Expense =IR*Debt OS 50000

EBIT 192857.1
We construct a small income statement

Sales
-COGS
=Gross Profit
-SGAE
=EBITDA
-DA
=EBIT 192857.1
-IE 50000
=EBT 142857.1
-TE
=EAT/NI 100,000
nnually: Manor’s annual sales are $2 million, its
in a TIE ratio of at least 5 to 1, then its bank will
SDJ, Inc., has net working capital of $1,050, current liabilities of $4,300, and inventory of $1,300. What is
the current ratio? What is the quick ratio?