FIN 300 - Principles of Finance for the Private Sector 1-8 - Essay Example

2009). Current ratio is obtained by dividing current assets by current liabilities while quick ratio is obtained the same way only that inventory is eliminated from current assets since it takes time to convert to cash. The two ratios indicate the level of liquidity and hence they help to maintain the required liquidity for retailers (Phillips et al. 2009). The higher the ratios the stronger liquidity is. Phillips, M. D., Volker, J. X., Anderson, S. J. (2009). A behavioral comparison of financial ratios for different size privately-held retail and service businesses.

Journal of Behavioral Studies in Business, 1(1), 1-7. Residual value estimated is normally the amount that can be realized if the asset was to be sold after its useful life. However, most organizations take the estimated residual value to be zero. This method allocates equal amount to each year. Present value is the current value of a given future value of money or cash flow streams (Chiu2010). Compounding is process of finding the future value when the present value is given while discounting if the process of finding the present value when the future value is given.

Gollier (2010) discusses the following differences. Future value of a lump sum is higher than future value of an annuity given similar factors. This is because the lump sum amount earns interest in all the periods while not all the annuities earn interest for the entire period. Long term bonds are those ones that have a longer maturity period. Interest rates are used as discounting rates in calculating the value of a bond. An increase in interest rate therefore reduces the value of a bond and this is a risk called interest rate risk.

Short term bonds have a shorter maturity period and a fluctuation in interest affects income hence reinvestment risk. The value of a corporate bond is determined through the fundamental theory, where the value is the present value of the