Why does finance focus on cash flows not net profits?

| November 9, 2018

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.

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