A-2 Appendix A Solutions to Self-Test Questions and Problems
(1) DSO! Accounts r__Sales/365 ec eiv able
40.55! (^) Sales/365_A/R
A/R! 40.55($2.7397)! $111.1 million
(2) Current ratio! ___CurrCurrent liabilitiesent assets! 3.0
! Curr_ent assets
$105.5
! 3.0
Current assets! 3.0($105.5)! $316.50 million
(3) Total assets! Current assets # Fixed assets
! $316.5 # $283.5! $600 million
(4) ROA! Pro! t margin $ Total assets turnover
! Net inc__Salesome $ (^) Total assets__Sales
! __$50
$1,000
$ $1,000__
$600
! 0.05 $ 1.667! 0.083333! 8.3333%
(5) ROE! ROA $ Assets__Equity
12.0%! 8.3333% $ __Equity$600
Equity! (8.3333%)($600)___12.0%
! $416.67 million
(6) Current assets! Cash and equivalents # Accounts receivable # Inventories
$316.5! $100.0 # $111.1 # Inventories
Inventories! $105.4 million
Quick ratio! ___Current assetsCurr (^) ent liabilities^ "^ Inventories
! $316.5_^ " $105.4
$105.5
! 2.00
(7) Total assets! Total claims! $600 million
Current liabilities # Long-term debt # Equity! $600 million
$105.5 # Long-term debt # $416.67! $600 million
Long-term debt! $600 " $105.5 " $416.67! $77.83 million
Note: We could have found equity as follows:
ROE! Net inc__Equityome
12.0%! (^) Equity__$50
Equity! $50/0.12
! $416.67 million
Then we could have gone on to! nd long-term debt.
b. Kaiser’s average sales per day were $1,000/365! $2.74 million. Its DSO was
40.55, so A/R! 40.55($2.74)! $111.1 million. Its new DSO of 30.4 would
cause A/R! 30.4($2.74)! $83.3 million. The reduction in receivables would
be $111.1 – $83.3! $27.8 million, which would equal the amount of cash
generated.