CHAPTER 2 CONCEPT QUESTIONS

CHAPTER 2 CONCEPT QUESTIONS - CHAPTER 2 CONCEPT QUESTIONS...

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CHAPTER 2 CONCEPT QUESTIONS 2.1a What is the balance sheet identity? ANSWER: Assets = Liabilities + shareholders’ equity The equation, and it always holds because shareholders’ equity is defined as the difference between assets and liabilities 2.1b What is liquidity? Why is it important? ANSWER: Liquidity refers to the speed and ease with which an asset can be converted to cash. The more liquid a business is, the less likely it is to experience financial distress. 2.1c What do we mean by financial leverage? ANSWER: The use of debt in a firm’s capital structure. The more debt a firm has (as a percentage of assets), the greater is its degree of financial leverage, so, financial leverage increases the potential reward to shareholders, but it also increases the potential for financial distress and business failure. 2.1d Explain the difference between accounting value and market value. Which is more important to the financial manager? Why? ANSWER:
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This note was uploaded on 10/03/2011 for the course MAT 101 taught by Professor Car during the Spring '11 term at N. Central IL.

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CHAPTER 2 CONCEPT QUESTIONS - CHAPTER 2 CONCEPT QUESTIONS...

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