Imagine you are a small business owner Essay Example | Topics and Well Written Essays - 1000 words

Imagine you argon a undersize business owner - look for ExampleNet margin can be calculated dividing net income by total sales. The managers of small businesses must pay close attention to the profitability of the business as well as its cash flow position. The current ratio is a good ratio to analyze small businesses because it measures the liquidity of a high society. It measures the ability of the company to pay off its short term debt. A current ratio is substantiative if is above 1.0. The caudex turnover ratio measures how many times a company sold its inventory during a year. The desired outcome is to have a high inventory turnover rate. Three ratios that are suitable to evaluate the financial performance of a large enterprise are return on assets (ROA), return on equity (ROE), and debt to equity ratio. Return on asset measures how well assets were employed by management, while return on equity measures the extent to which financial leverage is working for or against univ ersal strainholders (Garrison & Noreen, 2003). The debt to equity ratio is calculated dividing total liabilities by stockholders equity. B) Explain the advantages and disadvantages of debt financial support and why an organization would choose to issue stocks rather than bonds to generate funds. Debt financing has become an extremely popular financing tool in todays global economy. ... Another advantage of debt financing is that interest stipendiary on debt reduces tax burden of the business (Kido, 2012). Despite the advantages of debt financing it also has cons. A drawback of debt financing is that in cases of business failure lenders have first option at the liquidating assets of a firm. A second drawback of using debt financing is the obligation to pay interest to the lenders. Sometimes interest expenses of debt instrument can be real high. A third con of debt financing is that if it is excessively used it can negatively impact the assurance rating of the company (Simplyfin ance, 2007). C) Discuss how financial returns are related to jeopardy. Financial returns and risk are both factors that are positively related. This means that to obtain higher(prenominal) rewards managers must assume greater risk. In the stock market companies that have higher risk have a greater chance of equity appreciation. run a risk unseemly people try to stay away from risk. Being risk conservative can divine service a company minimize the risk of financial loss. Financial risk is the loss probability arising from adverse price fluctuations in financial markets or business partner defaults (Codjia, 2012). When companies get too greedy they a great deal make bad business decisions by incurring in too much risk. Firms that have higher risk tend to have higher cost of capital. When the cost of capital is high the profitability of the company is adversely affected. D) Describe the concept of important and how it is used. The beta coefficient is a measure of an assets risk i n relation to the market or to an alternative benchmark or factor (Thefreedictionary, 2012). The average beta coefficient of the stock market is 1.0. When the beta coefficient of a company is higher than 1.0 the stock has