Which of the financial ratios of a company would you refer to in the following situation?...

Which of the financial ratios of a company would you refer to in the following situation? give reasons.

-You are thinking of investing $25,000 in the company’s shares

What are the basic financial decisions? How do they involve risk-return trade-off?

Solutions

Expert Solution

1. Profitability ratios, solvency ratios, Payout ratios, growth rates

2. Financing decisions : how to pay for investments & expenses: use existing capital, borrow using debt or loans or issue equity.

Debt has fixed cash flows to the investor and hence involves limited risk and hence has low return. FOr companies, debt has cheaper cost but the risk to the company lies in not being able to generate sufficient cash flows to service debt obligations.

Equity has higher risk because there is no fixed payments guaranteed to the investor-sometimes the company will pay dividends sometimes not and hence the invesotr demands higher return to invest in equity.

jeff jeffy answered 2 years ago

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