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Unformatted text preview: Review Questions 1. What is the ultimate objective of finance and the two goals that must be pursued to achieve this objective? Explain the tradeoff that exists to make this more difficult. 2. What are the 3 key responsibilites of the finance department? 3. What are the 3 major decision areas in finance? Explain in more detail some examples of the decisions that fit in each area and why they are important. 4. What is the 3 step process to doing a ratio analysis? 5. What are the 5 types of ratios that we discussed and what does each measure? Try to list the ratios that fall into each of the 5 categories without looking at your notes. Then try to write out the formula for each ratio without looking at your notes. 6. What are the 5 comparisons that can be made to give a ratio more meaning? 7. Explain the risk-return tradeoff as it relates to maximizing shareholder wealth. 8. What is net working capital? Why is it so important to have an adequate amount of net working capital? And how does a firm determine the optimum amount? 9. Try to draw a diagram of the working capital cycle without looking at your notes. Discuss the significance of the working capital cycle with respect to risk and return. 10. What is the difference between the current ratio and the acid test ratio both in terms of computation and interpretation? What is the rule of thumb for what a firm's current ratio and acid test ratio should be? 11. What ratios measure how a firm manages its working capital and what do they tell you? 12. What is the difference between debt to equity and leverage in both in terms of computation and interpretation? 13. What does it mean to be highly levered? Explain the advantages and disadvantages of a firm being highly levered. What ratio can be calculated to measure the risk inherent in being highly levered? 14. What is the difference between the gross and net profit margin both in terms of computation and interpretation? 15. Why is return on investment such an important measure of profitability? 16. Why is it important to measure growth? 17. What does earnings per share measure? What other marketability ratios use EPS in their computation?...
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- Winter '10