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SOLUTIONS
3.1. The following information is available about Marne Company for 2010. All sales are
on credit.
Average cash and marketable securities = $1 million EBIT = $2 million
Average inventory = $5 million COGS = $15 million
Average accounts payable = $3 million Long-term bonds = $8 million
Average accounts receivable = $3 million Coupon rate on bonds = 10%
Total Sales = $20 million
Find its:
(A) Inventory turnover ratio
Inventory turnover ratio = Cost of goods sold
Average inventory

Cost of goods sold= $ 15 million
Average inventory = $ 5 million
Inventory turnover ratio = $ 15 million
$ 5 million
Inventory turnover ratio = 3.00
Thus the inventory turnover ratio is 3.
3.00 ♥
(B) Number of days sales outstanding
Days Sales outstanding = Receivables
Sales per day
Average accounts receivable = $ 3 million
Total sales = $ 20 million
Number of days in a year = 365 days
Sales per day = Total sales
Number of days
Sales per day = $ 0.05479 million
Therefore,
Days sales outstanding = $ 3 million
$ 0.05479 million
Days sales outstanding = 54.75 days
Thus the number of days sales outstanding is 54.75 days.
54.75 days ♥
(C) Interest coverage ratio
Interest coverage ratio = EBIT
Interest charges
EBIT = $ 2 million
Interest charges can be calculated as follows:
Long term bonds = $ 8 million
Coupon rate on bonds = 10%
Interest charges = Coupon rate * long term bonds
Interest charges = 10% * $ 8 million
Interest charges = $ 0.8 million
Therefore,
Interest coverage ratio = $ 2 million
$ 0.8 million
Interest coverage ratio = 2.50
Thus the interest coverage ratio is 2.50.
2.50 ♥

(D) Current ratio
Current ratio = Total current assets
Total current liabilities
Total current assets = Average cash and marketable securities + Average inventory +
Average accounts receivable
Total current assets = $ 1 million + $ 5 million + $ 3 million
Total current assets = $ 9 million
Total current liabilities = Average accounts payable
Total current liabilities = $ 3 million
Therefore,
Current ratio = $ 9 million
$ 3 million
Current ratio = 3.00
Thus the current ratio is 3.00
3.00 ♥
(E) Quick ratio
Quick ratio = Current Assets- inventories
Total current liabilities
Total current assets = $ 9 million (as per part D)
Inventories = $ 5 million
Total Current liabilities = $ 3 million (as per part D)
Quick ratio = $ 9 million - $ 5 million
$ 3 million
Quick ratio = $ 4 million
$ 3 million
Quick ratio = 1.333
Thus the quick ratio is 1.333
1.333 ♥
3.2. Ider Corp expects to have $3.73 as earnings per share next year. The cost of equity
for Ider is 16%, whereas its dividend yield is 4%. The price per share of Ider is $40. Find
its dividend payout ratio. Find its current P/E ratio.
Solution:
Dividend payout ratio = Dividend per share
Earnings per share
Earnings per share = $ 3.73
Dividend per share can be calculated as follows:
Dividend yield = Dividend per share
Market price per share
Dividend yield = 4%
Market price per share = $ 40
Therefore,
.04 = Dividend per share
$ 40
Dividend per share =.04 * $ 40
Dividend per share = $ 1.6
Hence
Dividend payout ratio = $ 1.6
$ 3.73
Dividend payout ratio = 0.429
Dividend payout ratio = 42.9 %
P/E ratio = Market Price per share
Earnings per share
Earnings per share for the next year =...