Inventory Turnover Ratios

4-2 Why would the inventory turnover ratio be more important for someone analyzing a grocery store chain than an insurance company?

The inventory turnover ratio is important to a grocery store because of the much larger inventory required and because some of that inventory is perishable. An insurance company would have no inventory to speak of since its line of business is selling insurance policies or other similar financial products--contracts written on paper and entered into between the company and the insured. This question demonstrates that the student should not take a routine approach to financial analysis but rather should examine the business that he or she is analyzing.

4-8 why is it sometimes misleading to compare a company’s
financial ratios with those other firms that operates in the same industry?

It can be misleading if you don't know how the other companies developed their ratios. Companies will sometimes manipulate numbers or group them in a specific manner that will result in better ratios. Before you compare ratios, make sure you know the details behind the ratios so you know if you are comparing the same thing.

Chapter 4

4-1: 800,000

4.5: 12.0

4.6: 8%

4.8: 0.15%

Chapter 5

5-3: Is an initial public offering an example of a primary or a secondary market transaction?
An initial public offering (IPO) is an example of a primary market transaction.

Primary market = Market for new issues of securities. A market is primary if the proceeds of sales go to the issuer of the securities sold.

Secondary market = Market where securities are traded after they are initially offered in the primary market.

5-8: Identify and briefly compare the two leading stock exchanges in the United States today.

NASDAQ is an automated quotation system that reports on the trading of domestic securities not listed on the regular stock exchanges. It publishes two composite price indexes daily as well as bank, insurance, transportation, utilities, and industrial indexes.

The New York Stock Exchange (NYSE) has evolved into one of the world's foremost securities marketplaces. It is the oldest and largest stock exchange in the United States, and one of the most important world-wide. The NYSE operates as an auction market, whereas NASDAQ is an example of a dealer market.

6-3: Suppose you believe that the economy is just entering recession. Your firm must raise capital immediately, and debt will be used. Should you borrow on a long-term or a short term basis?
Why?

I would think that generally you determine borrowing based on many factors. At the beginning of a recession interest rates are higher than they will be in the middle or end of the recession. Because the Federal Reserve will lower interest rates to encourage investment in the economy as the economy recovers the Fed will begin to increase rates. The simple answer would be to borrow on a short term basis at the beginning of the recession and switch to a long term basis at the end of the recession.

6-9: What does it mean when it is said that the United States is running a trade deficit? What impact will a trade deficit have on interest rates?

The trade deficit is when the total goods and services the U.S. imports is greater than the total it exports. An ongoing trade deficit is detrimental to the nation’s economy over the long term because it is financed with debt. In other words, the U.S. can buy more than it makes because the countries that it buys from are lending it the money.

There are many examples of trade deficits having little or no influence in increasing interest rates if they are temporary. However, if trade deficits are large and persists indefinitely, such chronic trade deficits may indicate a fundamental disequilibrium in the country’s balance of payments. Moreover, trade deficits often caused by high interest rates during boom periods, and hence distort factor prices and the trade patterns between countries.