Finance: Acquiring and Using Funds to Maximize Value
1. What is the key goal that guides the decisions of financial managers? What challenges do financial managers face when they try to find the best sources and uses of funds to meet this goal?
The financial mangers goal is acquisition, financing, and management of assets. The challenges are investment, financing, and asset management decisions.
2. List the four basic types of financial ratios used to measure a company’s performance, give an example of each type of ratio and explain its significance.
Liquidity, Solvency, Profitability, and Efficiency are the basic types of financial ratios. The liquidity ratio is the ratio of current assets to current liabilities. Profitability ratios indicate management's ability to convert sales dollars into profits and cash flow. Solvency ratios indicate financial stability because they measure a company's debt relative to its assets and equity. Two common efficiency ratios are inventory turnover and receivables turnover. Business manager needs to determine what the financial health of the firm, he would use liquidity ratio. A business needs to figure out how to pay off the debt to the bank, they would use solvency ratio. A company makes paper plates; they need to know how much profit they can make. They would use profitability ratio. For example, if the bank cost totaled $5,000,000 and its revenues totaled $10,000,000, then using the formula above, we can calculate that bank’s efficiency ratio is $5,000,000 / $10,000,000 = 50%. This means that it costs the bank $0.50 to generate $1 of revenue. This is an example of efficiency ratio.
3. What are the key questions financial planning must answer? What role does the budgeted income statement and budgeted balance sheet play in finding answers to these questions?
What are your long term goals for the business? What are the most significant risks you are facing? How have you mitigated these risks? How do you expect your market to evolve over the years to come? Those are the four questions. They provide the answers to these questions. It is a plan to predict and show what can happen in time, it is a prediction for theses questions.
4. What is the purpose of a cash budget? How can this tool help firms with rapidly increasing sales? Cash budgets are often used to assess whether the entity has sufficient cash to fulfill regular operations. They can use it to figure out where money needs to go or where they need to gain money. It helps financial managers determine when the firm is likely to need additional funds to meet short term cash shortages, and when surpluses of cash will be available to pay off loans or to invest in other assets.
5. Name and describe 4 commonly used sources of short-term financing.
Trade credit, advances from customers, commercial banks loans, and financial institutions are types of short-term financing. Trade credit is a loan in the form of goods. An advance from customers is the reputed business houses receive a part of the price or payment from the buyers before the supply of goods. The finance institutions can help the business by providing short term funds.
6. What is equity financing and what are its major sources? What advantages and disadvantages of are associated with equity financing?
Equity financing is the sale of an ownership interest to raise funds for business purposes. Personal savings, life insurance policies, home equity loans, and venture capital are major sources of equity financing. The advantages are it doesn't have to be repaid. They share the liabilities of company with the investors. The disadvantages are you have to share some of the ownership, and you have to also share your profits.
7. What is financial leverage? How, and under what conditions, can financial leverage benefit a company? How, and...
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