Chapter 2

Question 1

What is the net working capital?

Answer 1

Current Assets - Current Liabilities

Question 2

3 important things considering a balance sheet

Answer 2

1) Liquidity
2) Debt vs. Equity
3) Market value vs. book value

Question 3

What is liquidity?

Answer 3

Liquidity refers to the ease and quickness with which
assets can be converted to cash quickly and without
a significant loss in value
-> 2 dimensions: ease of conversion versus loss of value

Question 4

Liquidity: Pro’s and Con’s

Answer 4

PRO: The more liquid a firm’s assets, the less likely the
firm is to experience problems meeting short-term
obligations.

CON: Liquid assets frequently have lower rates of return
than fixed assets. Too much liquidity shows that the firm is not using their capital in an effective and value-adding way

Question 5

Equation of Assets

Answer 5

Assets = Liabilities + Shareholder’s equity

Question 6

Difference between market value and book value

Answer 6

• The balance sheet provides the book value of the assets, liabilities, and equity.
• Market value is the price at which the assets, liabilities, or equity can actually be bought or sold