Question

 

6. When short term liabilities exceed short term assets, what options are available to a going concern?

 

7.Depreciation and amortization are non-cash expenses that are deductible for tax purposes. In the extreme, as in some sports teams, why are these appealing to very rich individual investors?

 

8.In what way does equity represent a residual interest in the profits of a company?

 

9. Why is a high debt to equity ratio risky especially in a company with irregular cash flows?

 

10. What should happen to the price of a stock with aggressive growth in earnings per share?

 

Answer 1

 

 Solution 6.

 When Short term Liabilities exceed Short term Assets, it means the company has to pay liabilities more than the assets it possesses. It can borrow from Banks or the public in order to pay its excess short-term liabilities.

 Solution 7.

 Depreciation and amortization are deductible for tax purposes, however, no such cash actually outflown from the company's available cash balances. It is appealing to the Investors as they see that money is retained in the company and such money is either further reinvested or distributed amongst the Investors (making high returns)

 Solution 8.

 Equity is paid at last, after making payment to all the Debenture holders, Loans, Pref. shareholders, and other dues.

 Equity shareholders at paid if some distributable profits are left after paying all others.

 Equity also possesses the highest risk, therefore Equity represents a residual interest in the profits of a company.

 Solution 9.

 High debt to equity ratio is risky with irregular cashflows as Interest on debt is a compulsory payment at regular intervals. However no such bindings on equity.

 Solution 10.

 The price of the stock will rise due to a rise in demand arising due to growth in earnings per share, investors will demand more of such shares.