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Unformatted text preview: nt liabilities are
basically debts on which the firm pays no charge or interest. However, when the
ratio of current liabilities to total assets increases, the risk of technical insolvency
also increases, because the increase in current liabilities in turn decreases net
working capital. The opposite effects on profit and risk result from a decrease in
the ratio of current liabilities to total assets. Review Questions
14–1 Why is short-term financial management one of the most important and
time-consuming activities of the financial manager? What is net working
14–2 What is the relationship between the predictability of a firm’s cash inflows
and its required level of net working capital? How are net working capital, liquidity, and risk of technical insolvency related?
14–3 Why does an increase in the ratio of current to total assets decrease both
profits and risk as measured by net working capital? How do changes in
the ratio of current liabilities to total assets affect profit...
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