Explain the difference between profitability and cash flow. ...

[serike]

Explain the difference between profitability and cash flow.
 
  What will be an ideal response?

Question 2

Under which of the following assumptions would the nominal interest rate be equal to the real interest rate?
 
  A) Expected inflation is equal to the nominal interest rate.
  B) Expected inflation is equal to the real interest rate.
  C) Expected inflation is negative.
  D) Expected inflation is equal to zero.
  E) none of the above

[succesfull]

Answer to Question 1

Some firms are borrowing constrained. Their only source of funds to buy investment is current profit. So, when current profit rises, those borrowing constrained firms increase investment. This summarizes how cash flow can affect a firm's investment decision. Profitability simply refers to how changes in the expected present value of future profits affect investment.

Answer to Question 2

D

[serike]

Gracias!

[kusterl]

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