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Jona

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Financial Analysis Problems 1. A firm has the following ratios: ROE=25% (return on equity), ACP=37 days (average collection period), PM=5% (profit margin), CR=2.4 (current ratio), ATO=2.2 (asset turnover), and DSI=92 days (days of sales in inventory). Find the firm’s debt-to-asset (D/A) ratio.
ROE=PM*ATO*EM
0.25=.05*2.2* EM
EM=2.2727 =A/E
D/A= 1.2727/2.2727 = .56 2. a) If the equity multiplier of a company is 3, what is its D/A ratio and its D/E ratio?
EM=3= A/E
E/A= 1/3
D/A=3x/x
D/E= (3x-x)/x = 2
b) If the D/A ratio of a company is 60%, what is its EM ratio and its D/E ratio?
D/A=.6
A/D=5/3= 5x/3x
A/E= 5x/(5x-3x)=5/2
D/E= 3x/2x= 3/2 =1.5

c) If the D/E ratio of a company is 1.5, what is its EM ratio and its D/A ratio?
D/E=1.5=1.5x/x
A/E=1.5x+x/x= 2.5
D/A=1.5x/2.5x= 3/5 = 0.60 3. A firm has current assets of $560,000 and current liabilities of $200,000. This firm has decided to change its current ratio to 2.0. To do so, it will change the level of its short-term loans by $X and make a corresponding change in its cash account by that same amount. Find the value of $X needed to achieve the firm’s goal. You must provide an analytical solution.
560,000-x/200,000-x=2.0
560,000-x=400,000-2x
160,000=-x
X= -160,000 In order to achieve a 2.0 current ratio we must increase current liabilities by $160,000 and also increase current assets by $160,000 4. Canes Bank pays its depositors 3% p.a. on their savings accounts, and charges 5% on its loans to borrowers. The only source of revenue for the bank is from its loan portfolio, which is 60% of its total assets of $3 billion. What is this bank’s asset turnover?
Revenue= 3* 0.6*0.05= 0.09
ATO=S/A= 0.09/3= 0.03

5. Some people argue that the DuPont relationship implies that firms should use as much leverage as possible because, other things being equal, as debt

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