The Capital Market

Current ratio, quick ratio and the operating cash flow ratio are used in measuring the corporation’s liquidity. The current ratio usually refers to the ratio of current assets to the current liabilities while the quick ratio which is also known as the acid-test establishes whether the corporation can pay short-term liabilities without selling the inventory. On the other hand, operating cash flow ratio is determined by summing up the cash and the marketable securities over the current liabilities. It does not include all the current assets but the cash and cash equivalents. Basically, all these ratios try to measure if the firm can be able to pay its short-term debts by comparing the liquid assets to the short term liabilities. When the value of the ratio is higher then there is a larger margin of safety for the corporation to pay-off its short-term debts. However, these ratios have a great problem because they differ depending on the industry or the kind of corporation hence giving different values. ‘They also depend on the balance sheet date and therefore they cannot determine the position of the corporation round the year’ (Kirsch, 2010, p.113). Moreover, they don’t give the future trends but only give the present and past trends of the organization. Inflation cannot also be determined properly by these ratios. ‘These problems can be solved by using the DuPont analysis because it gives information on why the corporation’s profitability is low or high basing on its performance and the returns on equity’ (Rocher & Patrick, 2005, p 51).

3. What is the main difference between an investment banker and a commercial banker? Why were commercial banking and investment banking separated by the Banking Act of 1933? How has this separation affected current day banking practices

Regulations have changed the way in which commercial banking and investment banking is conducted. ‘A commercial banking has the main role in taking deposits for checking and savings accounts from the consumers which is not done by the investment banking’ (Efrat, 2005, p.35). They do not have an inventory of cash deposits to lend money as a commercial bank. It deals mainly with stock and bond markets. This separation was done in order to maintain the core aspects of these different lines of businesses in order to remain intact. ‘Both the investment bank and the commercial bank have the same end’ (Kapoor, 2004, p.56). That is, if a company may need a loan, it may consult a commercial bank for a financial support in form of a loan or it may also consult an investment bank to sell equity or debts in form of stocks or bonds.

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