1) Why is it essential for the firm to preserve a reasonable level of liquid assets? Do you think some industries need higher or lower levels of liquid assets than others? Write down the factors that might affect a firm’s liquidity requirements and explain them in detail.
2) It has been said that anyone with the pencil can compute financial ratios, but it takes a brain to understand them. What must financial analysts remember when estimating the financial statements of any firm?
3) The notion that money has time value is based on existence of a non–zero opportunity rate (that is, a rate of return at which it is possible to invest). Describe why is the opportunity rate so significant? Create suitable example which shows, with the opportunity rate of 0%, that the value of $1 received today will be $1 in future.
4) Suppose you are a treasurer of a small manufacturing firm. Your firm is planning to go public (that is, sell stock to investors for first time). One unresolved question concerns the market’s necessary return on stock. Given what you have learned, how do you think the requisite return will affect market value of your firm’s stock? How would you go about evaluating this rate?