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3. What is the purpose of ratio analysis?

Ratio analysis allows for standardized comparison of firms, this information is used when considering investments. Ratio analysis also gives better insight to a company’s financial strategy and current position, illuminating potential areas of concern.

4. What is the concept of time value of money?

The time value of money (TVM) concept addresses the difference in the present and future value of money, and how it can impact financial decisions. Money available in the present is worth more than it is in the future due to the interest that money can earn over time as well as the impacts of inflation.

5. Why understanding of time value of money is important?

Understanding TVM is critical when making financial decisions regarding loans, annuities, compounding interest, and payment schedule impacts. TVM analysis allows firms to make smart decisions regarding future investments, as well as impacts to stock prices.

Reference

Brigham, E. & Ehrhardt, M. (2017). Corporate Finance: A Focused Approach, 6th Ed. Boston, MA: Cengage Learning.

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