Ques Answers Chap 03

Ques Answers Chap 03 - Note: Assigned Q&A are 1, 6,...

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QUESTIONS & ANSWERS CHAP. 03 3-1 The emphasis of the various types of analysts is by no means uniform nor should it be. Management is interested in all types of ratios for two reasons. First the ratios point out weaknesses that should be strengthened; second, management recognizes that the other parties are interested in all the ratios and that financial appearances must be kept up if the firm is to be regarded highly by creditors and equity investors. Equity investors are interested primarily in profitability, but they examine the other ratios to get information on the riskiness of equity commitments. Long-term creditors are more interested in the debt, TIE, and EBITDA coverage ratios, as well as the profitability ratios. Short-term creditors emphasize liquidity and look most carefully at the current ratio. 3-2 The inventory turnover ratio is important to a grocery store or supermarket because of the much larger inventory required and because some of that inventory is perishable. An insurance company would have no inventory to speak of since its line of business is selling insurance policies or other similar financial products – contracts written on paper and entered into between the company and the insured. The rationale of this question is to point out that any interested party (here it is the financial analyst) should not take a routine approach to financial analysis but rather should examine the business that he or
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Ques Answers Chap 03 - Note: Assigned Q&A are 1, 6,...

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