Principles of Finance · free preview
Liquidity and Solvency
Liquidity ratios measure the ability to pay short-term obligations from short-term resources, with the current and quick ratios as the standard tools, while solvency ratios measure long-term survival, with debt-to-assets and debt-to-equity quantifying how heavily the firm relies on creditor funding.
1. Liquidity, can the firm pay its near-term bills
Liquidity, can the firm pay its near-term bills
2. Solvency, can the firm survive the long run
Solvency, can the firm survive the long run
3. Reading leverage
Reading leverage
4. The two families together
The two families together
5. The current ratio
A firm reports current assets of 900,000 dollars and current liabilities of 450,000 dollars. What is the current ratio, and what does it say?
6. Why the quick ratio subtracts inventory
Why does the quick ratio exclude inventory from current assets before dividing by current liabilities?
7. Liquidity versus solvency
Which statement correctly distinguishes liquidity from solvency?
8. Computing debt-to-assets
A firm has total liabilities of 900,000 dollars and total assets of 2,000,000 dollars. What is the debt-to-assets ratio?
9. Times interest earned
A firm reports operating income of 300,000 dollars and interest expense of 75,000 dollars. What is times interest earned, and why does it matter?
10. Leverage amplification
Why does debt amplify outcomes for shareholders, in both directions?
11. The stricter test
What two-word term names the liquidity ratio that excludes inventory from current assets? Answer in lowercase.
12. The long-run health
What one-word term names the capacity to meet all obligations as they mature over the long run? Answer in lowercase.
13. The creditor share
What two-word term names the ratio of total liabilities to total assets? Answer in lowercase.
14. The coverage multiple
What three-word term names operating income divided by interest expense? Answer in lowercase.
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