Corporate Finance

1) Please explain why shareholder wealth is important.

2) Why does finance focus on cash flows not net profits?

3) How would the following actions affect a firm's current ratio? Would it go up, down, or stay the same?

a) Inventory is sold.

b) The firm takes out a bank loan to pay its suppliers.

c) A customer pays its overdue bills.

d) The firm uses cash to purchase additional inventories.

4) Please explain how risk is taken into account for a financial instrument.

5) Interest rates on bank loans exceed rates on commercial paper. Why don't all firms issue commercial paper rather than borrow from banks?

6) Why is shareholders wealth maximization a better objective than maximizing earnings of earnings per share?

7) What is the importance of the acid-test ratio?

8) Current Ratio. What would the following actions have on a firm's current ratio? Assume that net working capital is positive. Why?

a) Inventory is purchased.

b) A supplier is paid.

c) A short-term bank loan is repaid.

d) A long-term debt is paid off early.

e) A customer pays off a credit account.

f) Inventory is sold at cost.

g) Inventory is sold for a profit.

9) Current ratio and Quick Ration. In recent years, Dixie Co. has greatly increased its current ratio. At the same time, the quick ration has fallen. What has happened? Has the liquidity of the company improved? Why?

10) Current Ratio. Explain what it means for a firm to have a current ratio equal to 0.50. Would the firm be better off if the current ratio were 1.5? What if it were 15.0? Explain your answers.