Question #1: Chapter 1 (Ten Points)
Distinguish between a firm's capital budgeting decisions and its financing decisions by giving examples of each.
Capital budgeting decisions are investment decisions and financing decisions focus on raising the money that the firm needs for investments and operations. A company needs to decide which real assets to invest in (capital budgeting) and ways to raise funds to pay for those investments (financing decisions). An example of capital budgeting would be a company spending 1 million on a marketing campaign to advertise a new line of products to a new market. An example of financing decisions would be allowing investors to buy stock in the ...view middle of the document...
Leverage ratios measure how much the firm has borrowed and its obligations to pay interest.
Liquidity ratios measure how easily the firm can obtain cash. Liquidity is measured by using current ratio or quick ratio. Current ratio equals current assets over current liabilities. Quick ratio=current assets-inventory/current liabilities.
Efficiency ratios measure how intensively the firm uses its assets to generate sales. Efficiency ratios focus on inventory, receivables and use of fixed and total assets. Inventory turnover ratio measures how many times inventory turned over into saleable products. It is measured by cost of goods sold/inventory. Accounts receivables turnover ratio measures how quickly firm collects on its credit sales. It is measured by net sales/accounts receivable. Total asset turnover measures level of sales of the firm generates per dollar of total assets. It is measured by net sales/total assets.
Profitability ratios measure return on investment. Net profit is measured by net income/net sales. ROA measures amount of net income per dollar of total assets. ROA=net income/total assets. ROE ratio measures dollar amount of net income per dollar of shareholders equity. ROA=net income/total equity.
Question #5: Chapter 4 (Twenty Points)
Value Corp. recently reported earnings of $2 per share and each of its 50,000 shares is currently selling for $20. The firm's book equity is $600,000. Given this information, answer the following about the firm's market‐value ratios:
a. Calculate the firm's price‐to‐earnings (P/E) and market‐to‐book ratios.
b. If the P/E ratio is said to compare favorably...