Question

1. Describe how ratio analysis can assist in “measuring” maximization of stockholder wealth.

2. Describe how technical analysis (i.e. the analysis of stock price charts) can assist in “measuring” maximization of stockholder wealth.

Answer 1

1,

>> The objectives of oraganization is to maximize shareholders wealth. It is measured by increase sales, earnings, and free cash flow, which can lead to increase shareholder's wealth maximization in terms of dividends and capital gains.

>> Ratio analysis indicates strategic decisions taken by the firm's management. It will states weather firm has effectively employed investment to have increase in return on capital invested.

>> These all actions is reflected in share price of a stock on stock market.

>> Ratio analysis will help to identify that whatever capital firm has got are effectively invested to acquire assets which in terms increase net sales and lead to decrease interest expense which will lead to increase in share holders wealth maximization.

>> Decisions taken by firm will increase net income which interms will pay to shareholders in terms of dividend or increase in shareprice on stock market.

>> Ratio analysis is quantitative part of fundamental analysis which shareholders use to make investment in particular stock.

>> Ex: Current Ratio and Quick ratio will give idea weather firm would be able to pay all the current liabilities. It will give broader perspective on liquidity the firm have. Same way inventory turnover and assets turn over will give idea of company's ability to minimize cost of storage of investment and that will lead to increase in net income, assets turnover will give idea of firms ability to utilise its assets in effective way.

>> Debt coverage ratio states weather firm have that much income from which it can pay of all its debt and interest covergae ratio will give braoder perspective on weather firm have income that can pay interest expense.

>> So, this is how it will healp.

2.

>> Technical analysis is a process where stasttical data analysed for particular stock based on the price and volume.

>> Many tools are utilised to see movement of stock on particular day, week, month.

>> It is done from the historical data of stock

>> It works on certain assumptions like market action discount everything , Prices moves in trends and history tends to repeat it self.

>> Technical analysis and fundamental analysis both can be combined to plan investment to maximize wealth of share holders.

>> Technical analysis is useful in terms of estimating future prices movements of stock.

>> It is used to maximize shareholders wealth for a short term period from past data and tools used to get insight from having available past data.