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# Week 1 And 2 Essay

578 words - 3 pages

a) Why is corporate finance important to all managers?
Corporate finance is important because it enables managers to have an understanding of what funds would be necessary for upcoming projects and projects of their company as well as allowing them to plan ahead.

b) Describe the organizational forms a company might have as it evolves from a start-up to a major corporation. List the advantages and disadvantages of each form.
When a company is evolving from a start up to a major corporation, it will probably have to grow through the stages of sole proprietorship, partnership, and then a corporation. A sole proprietorship has advantages such as being easily and inexpensively formed and has to deal with less regulation by the government. Some of the disadvantages of a sole proprietorship include difficulties with obtaining ...view middle of the document...

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Page 112
3-1 Days Sales Outstanding
Greene Sisters has a DSO of 20 days. The company’s average daily sales are \$20,000. What is the level of its accounts receivable? Assume there are 365 days in a year.

Formula for DSO = Receivables/ Ave sales per day = Receivables/( Annual sales/365)

= 20 days x \$20,000= \$400,000

Solution: AR = \$400,000

3-2 Debt Ratio
Vigo Vacations has an equity multiplier of 2.5. The company’s assets are financed with some combination of long-term debt and common equity. What is the company’s debt ratio?

Formula for Debt ratio = Debt Ratio + Equity Ratio = 1
Equity Multiplier = 2.5
Therefore Equity Ratio = 1/EM
Equity Ratio = 1/2.4 = 0.40
MEMORIZE this formula:
Debt Ratio + Equity Ratio = 1
There for Debt Ratio = 1 - Equity Ratio = 1 - 0.40 = 0.60%

Solution: D/A 60%

3-3 Market/Book Ratio
Winston Washers’s stock price is \$75 per share. Winston has \$10 billion in total assets. Its balance sheet shows \$1 billion in current liabilities, \$3 billion in long-term debt, and \$6 billion in common equity. It has 800 million shares of common stock outstanding. What is Winston’s market/book ratio?

Winston market = \$75 x 800 million = \$60 billion

Book Value = Assets (\$10b in total asset) – Liabilities (\$1b current liabilities + \$3b long term debt)
= \$10b - \$4b = \$6b
M/B = \$60b/\$6b = \$10b

Solution/B = \$10b

3-4 PE 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?
Cash Flow per Share = \$3.00
Price / Cash Flow = 8.0 times
Price / \$3.00 = 8.0 x 3.00 = \$24.00
Price = \$24.00
P/E = \$24.00 / \$1.50 = 16

Solution: P/E = 16.0 times

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