Chapter 9

Question 1

Major Duties of a Financial Manager:

Answer 1

1. Evaluating firm’s current financial condition to determine strengths and weaknesses
2. Planning for effective use of financial resources to take advantage of strengths and to correct any weaknesses
3. Managing the firm’s working capital to achieve the right mix of current assets and current liabilities
4. Evaluating long-run investment opportunities to identify investments in property, plant, equipment, and other assets and activities that are likely to increase shareholder value.
5. Determining appropriate mix of debt and equity to meet long-term financial needs of the company

Question 2

One way financial managers identify existing strengths and weaknesses of the firm, is by computing ratios that compare values of key accounts listed on their firm’s financial statements. A technique called

Answer 2

financial ratio analysis

Question 3

All these ratios fall into 4 basic categories:

Answer 3

Liquidity Ratios
Asset Management Ratios:
Leverage Ratios
Profitability Ratios

Question 4

Liquidity Ratios

Answer 4

measure the ability of a firm to obtain the cash it needs to pay its short-term debt obligations as they come due.

Question 5

Asset Management Ratios

Answer 5

measure how effectively a firm is using its assets to generate revenues or cash.

Question 6

Leverage Ratios:

Answer 6

Measure the extent to which a firm relies on debt financing in its capital structure.

Question 7

Profitability Ratios

Answer 7

Measure the rate of return a firm is earning on various measures of investment.

Question 8

Equation for Current

Answer 8

Current = Current Assets/Current Liabilities

Question 9

Equations for Inventory Turnover

Answer 9

Inventory T/O = Goods Sold/Average Inventory

365/(Inventory T/O) =

Question 10

Equation for Debt to Equity

Answer 10

D to E = Total Debt/Total Owner’s Equity