chap2_3_criticalthink

chap2_3_criticalthink - Part 1 Overview of Corporate...

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Part 1 Overview of Corporate Finance Chapter 1: Introduction to Corporate Finance Chapter 2: Financial Statements, Taxes, and Cash Flow Liquidity [LO1] What does liquidity measure? Explain the trade-off a firm faces between high liquidity and low liquidity levels. Liquidity is the term used to describe how easily a company can convert an asset into cash. Liquid assets are useful because if a company is in need of a means of capital for paying off its liabilities, it can easily do so by selling liquid assets. However, any asset can be sold if the price is cut enough. Liquid assets are those that can be sold quickly for cash. These are all current assets which include cash, accounts receivable, and inventory. Illiquid assets are those that cannot be quickly converted to cash. These are all fixed assets such as net plant and equipment. There is a trade-off between high liquidity and low liquidity levels. The trade- off is between the advantages of liquidity and forgone potential profits. Essentially, the trade- off deals with risk and return. High liquid assets are low risk and therefore hold less profits.
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chap2_3_criticalthink - Part 1 Overview of Corporate...

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