Il Rai 2. 3 Ratios are only useful for those areas of business that involve investment decisions. Taking on additional debt will reduce the cost of equity. Existing securities are traded in the secondary market. The variable growth dividend model can be used for both constant and variable growth stocks. T. 9 10 Higher interest rates (discount rates) reduce the present value of amounts to be received in the future. The only difference in the cost of retained earnings and the cost of new common stock is the flotation cost on new common stock. Capital markets refer to those markets dealing with short-term securities having a life of one year or less. A company can improve their ROE by changing their capital structure. Investors are most concerned with the liquidity ratios of a company. The price-earnings ratio is another tool used to measure the value of common stock. In paying off a mortgage loan, the amount of the periodic payment that goes toward the reduction of principal decreases over the life of the mortgage. The higher the profit of a firm, the higher the value the firm is assured of receiving in the market. An increase in yield to maturity would be associated with an increase in the price of a bond. To compute the quick ratio, accounts receivable are not included in current assets. 12 13 14 15 Firms with an expectation for great potential tend to trade at low P/E ratios