Question

• Why is beta a measure of systematic risk? What is its meaning?
• In trying to judge whether a company has too much debt, what financial ratios would you use and for what purpose?
• Auxier Manufacturing Company has a current ratio of 4 to 1 but is unable to pay its bills. Why?
• Explain, what is meant by the time value of money. Why is it important to calculate the present value?
• What kind of personal financial decisions have you made that involve compound interest?

Answer 1

1-	Beta measures the degree of sensitivity of security returns to market return. It means how much security returns will change if there is any change in market return. Systematic risk is a measure of market risk and systematic risk is measured by beta coefficient and it measures the change in individual security return due to change in overall market return.
2-	Debt ratio and debt to equity ratio are the ratios which are used to measure the solvency position of the company and these ratios are used to measure the solvency position of the company.
3-	Current ratio is 4 but company is not able to pay its bills, this may be because of company may have low liquidity ratio and cash ratio. Company may have excess investment in Inventories, supplies and prepaid expenses due to which its current ratio may be high but liquidity and cash ratio may be low.
4-	Time value of money is used to measure the expected future benefits which an investor can get due to investment. It is used to measure the effect of inflation of value of money.Techniques of discounting and compounding is used to measure the time value of money. Present value is calculated using discounting technique and it is used to compare the future value of benefits to the cost of investment in present value term.
5-	In personal financing, compound interest is used when we have to find out the future value of our money or investment after a certain time period and it is used in opening a term deposit, retirement planning etc.