FINANCE 101

Finance 101

Finance 101

A1) Ratio that will be used to measure the performace of the comapny are as follows:

Profitability ratio

Profitability ratio is an important ratio for any business, one of the best way to compare small business with the large business is to measure the profitability of the business core operation for that we can use net profit margin, gross profit margin and EBIT margin

Leverage ratio

Leverage ratio is another way to measure the financial performance between the two firms. Leverage ratio tells us to what extent the business using debt to finance its operation. Generally it is considered that more debt on the company balance sheet more risk is the business.

Liquidity ratio

Liquid ratio can also be used to measure the performance of the business, it tell us the business ability to pay of its short term debt obligations. Current ratio and quick ratio are most commonly used to measure the liquidity of the business. The difference between the both ratio us that in the quick ratio, we do not include current asses in inventory in the total current assets calculation on contrary we includes all the total current assets in the calculation of the current ratio calculation.

A2) The advantage of using the debt is that firstly the company, with borrow the debt enjoys the tax benefit because interest that is paid on those loans is included in the expenses and ultimately it reduce the amount of taxable money left with the firm. Secondly, in most of the case debt did not come up with the covenant and the debt user have freedom to invest its money, he / she do not needs to be accountable for its investment decision. thirdly,on debt the company  do not need to share its profits profit that it make on the investment. Lastly, some time government provide incentive to business by providing scheme, in which debt is issued on low interest rate.

Disadvantages of using debt is that some time lender provide debt on very harsh term, which limits the borrowers from certain activities. Another disadvantage of using the debt is that company has to make periodic payment to the lender and in case the company is not able to pat interest on time then it affect the credit rating of the firm.

Some time companies issue equity over the debt because the investment that it is going to make is risk. By issuing equity business does not need to pay interest on the issued share plus the in case the business make a huge loss and looses all its money than the company does not need to pay a single penny to its shareholders. Where ever a company issue it share, the shareholder became the owner of the business and sometime these shareholder provide the business a valuable assistance in making decision.

A3)Risk is considered as uncertainty  chance or the probability of some bad event, whereas the return is considered as reward, gain or the probability of same good event.the relationship between return and risk is known as risk reward trade off. Generally in the financial market it is considered that if hte investment has high ...