However when the ratio of current liabilities to

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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 capital? 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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