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Chapter 2: Question 3-9DQ (page 75)

Why might disinflation prove favorable to financial assets?

Short Answer

Expert verified

Disinflation prove favorable to the financial assets because softening in price reduces the perceived need to hold the real estate as a hedge against inflation. Hence, the shifting back and forth by investors between the financial and real estate may occur many time during the operating cycle of the business under disinflation.

Step by step solution

01

Financial assets

Financial assets are the non physical assets whose values are derived from the contractual claims, such as bank deposits, bonds, etc.

02

Effect of disinflation on financial assets

The effect of disinflation is favorable for the financial assets because the moderate price of the assets may reduce the need to hold the asset as hedge. Hence, the movement between the real estate and the financial assets are undertaken many time during the reporting period of the company.

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Most popular questions from this chapter

Using the income statement for Times Mirror and Glass Co., compute the following ratios:

a. The interest coverage.

Times mirror and glass company

Sales

\(126,000

Less: Cost of goods sold

93,000

Gross profit

\)33,000

Less: selling and administrative expenses

11,000

Lease Expenses

4,000

Operating profit*

\(18,000

Less: Interest expenses

3,000

Earning before taxes

\)15,000

Less: Taxes (30%)

4,500

Earning after taxes

$10,500

*equal income before interest and taxes

Using the income statement for Times Mirror and Glass Co., compute the following ratios:

The total assets for this company equal \(80,000. Set up the equation for the Du Pont system of ratio analysis, and compute c, d, and e.

d. Total assets turnover ratio.

Times mirror and glass company

Sales

\)126,000

Less: Cost of goods sold

93,000

Gross profit

\(33,000

Less: selling and administrative expenses

11,000

Lease Expenses

4,000

Operating profit*

\)18,000

Less: Interest expenses

3,000

Earning before taxes

\(15,000

Less: Taxes (30%)

4,500

Earning after taxes

\)10,500

*equal income before interest and taxes

Why is trend analysis helpful in analyzing ratios?

Network Communications has total assets of \(1,500,000 and current assets of \)612,000. It turns over its fixed assets three times a year. It has $319,000 of debt. Its return on sales is 8 percent. What is its return on stockholders鈥� equity?

Inflation can have significant effects on income statements and balance sheets, and therefore on the calculation of ratios. Discuss the possible impact of inflation on the following ratios, and explain the direction of the impact based on your assumptions.

a. Return on investment
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