Finance Week 2

Finance Week 2 After reviewing the material for this week, I can say that I now understand a whole lot more about financial ratios, time value of money, and interest rates. I learned that the financial ratios are extremely important because they tell management how the firm is doing and which are its strong and weak areas. I was surprised to learn that the financial ratios depend on GAAP accounting/book value information because I would have thought that a firm would compare it assets and liabilities based on current market values. I was very confused about the time value of money because of all the cash flows equations that are used. I am pleased that we can use a financial calculator to help us, but if I am unsure about the variables then it won’t help me much. For interest rates, I was previously unsure about how they are determined and why they can change so quickly. After going through Chapter 6, however, I now feel like I have a good grasp of it.
2. The financial ratio that I find easiest to understand is the single future cash flow ratio because it is very straightforward and there are no added variables. By that I mean that anyone with only a basic understanding of math would be able to comprehend it because the ratio follows a pattern. The hardest financial ratios to understand are those with multiple future cash flows because the answers can be unpredictable if there is a series of unequal amounts. The cash flow timeline helps me a lot because I can visualize each cash flow in terms of where it comes from and how it influences the overall outcome. The most difficult thing is trying to figure out where the investment problems variables fit into the equation. Once I have the right equation, I can usually solve for the unknown variable because then it just becomes a simple case of math.
3. The financial calculator is both useful and challenging for me at the same time. I like it because it helps me to find the correct answer in a short amount of time. If I have figured out all the variables, then I can simply plug the numbers in and the calculator will spit out the answer. The one problem that I have with it is that I sometimes don’t fully understand why it gave me a certain answer. If I was able to work through the problem step-by-step, then I would have a better understanding of it.
4. I would describe the current level of interest rates as moderately high. Although current inflation is relatively low due to the financial crisis, there is still a lot of risk in the marketplace, and this ensures that interest rates do not fall. Over the next five years, I expect interest rates to rise because the economy will likely recover and so will production opportunities. This will lead to higher interest rates as more people are willing to borrow.