FIN 370 Week 1 DQ 3

FIN 370 Week 1 DQ 3 - example, an acceptable current ratio...

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Discussion Question(s) #3 Please reply to this thread by or before Sunday, day 6 with your answers! What ratios measure a corporation’s liquidity? What are some problems associated with using such rations? How would the DuPont analysis overcome these problems? What ratios measure a corporation’s liquidity? Financial ratios help us identify some of the financial strengths and weaknesses of a company. The higher the ratio, the more liquid the company is. Current ratio is equal to current assets divided by current liabilities. If the current assets of a company are more than twice the current liabilities, then that company is generally considered to have good short-term financial strength. If current liabilities exceed current assets, then the company may have problems meeting its short-term obligations. What are some problems associated with using such rations? One concern is that the appropriate values for any ratio tend to be dependent on the industry. For
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Unformatted text preview: example, an acceptable current ratio for a high volume low markup business (supermarket) would be quite different from an acceptable current ratio for a low volume high markup business (jewelry store). How would the DuPont analysis overcome these problems? The Dupont Analysis breaks apart the return on equity and gets a much better understanding about where movements in the return on equity are coming from. The return on equity is a strong measure of how well the management of a company creates value for its shareholders. Therefore, if you were comparing a low markup business like a supermarket compared to a high markup business like a jewelry store the Dupont Analysis would be able to determine the appropriate values for each business in the current industry....
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This note was uploaded on 02/21/2011 for the course FIN 370 taught by Professor Unknown during the Spring '08 term at University of Phoenix.

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