Three Things to Consider on B. S.

Three Things to Consider on B. S. - Debt levers the firms...

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Three Things to Consider on B. S. Liquidity Financial Leverage Fair Value Accounting (Market Value versus Book Value) 1
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Liquidity A liquid asset is one that can be quickly sold without significant loss of value. Accounts are listed on the Balance Sheet in order of liquidity. Current assets are relatively liquid; fixed assets are illiquid . Liquidity protects the firm from short-term financial distress. However, too much liquidity could limit growth opportunities. 2
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Financial Leverage Financial leverage is the relationship between the two pieces on the right-hand side of the Balance Sheet (liabilities and equity). Most firms finance some portion of their assets with debt.
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Unformatted text preview: Debt levers the firms earnings potential. The more debt as a percentage of the total, the more the firm is leveraged. It can magnify gains and losses. However, debt increases the risk to the shareholders. 3 Market Value Versus Book Value Assets are recorded on the Balance Sheet based on the acquisition (or historical) cost called book value (or accounting value ). Book value could be very different from the market value (what it could be sold for), particularly in the case of investments and fixed assets. For this reason, the Balance Sheet Stockholders Equity (book value) can be very different from the market value of the equity. 4...
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Three Things to Consider on B. S. - Debt levers the firms...

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