PART 1 Introduction to Managerial Finance 1

Contents PART 1 Introduction to Managerial Finance 1

• The Role of Managerial Finance 2
• The Financial Market Environment 19

PART 2 Financial Tools 29

• Financial Statements and Ratio Analysis 31
• Long- and Short-Term Financial Planning 55
• Time Value of Money 79

PART 3 Valuation of Securities 107

• Interest Rates and Bond Valuation 109
• Stock Valuation 129

PART 4 Risk and the Required Rate of Return 143

• Risk and Return 145
• The Cost of Capital 179

PART 5 Long-Term Investment Decisions 199 10 Capital Budgeting Techniques 201 11 Capital Budgeting Cash Flows and Risk Refinements 225 PART 6 Long-Term Financial Decisions 255 12 Leverage and Capital Structure 257 13 Payout Policy 287 PART 7 Short-Term Financial Decisions 301 14 Working Capital and Current Assets Management 303 15 Current Liabilities Management 321 Principles of Managerial Finance, Brief Edition, 8e Chad Zutter, Scott Smart (Solutions Manual All Chapters) Supplement files download link at the end of this file. 1 / 4

© 2019 Pearson Education, Inc.Part 1 Introduction to Managerial Finance Chapters in This Part Chapter 1 The Role of Managerial Finance Chapter 2 The Financial Market Environment

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© 2019 Pearson Education, Inc.

Chapter 1 The Role of Managerial Finance

„ Instructor’s Resources Chapter Overview This chapter introduces the field of finance through building-block terms and concepts. The discussion starts by defining “firm” and stressing its principal goal—maximizing shareholder wealth. The importance of focusing on shareholders rather than stakeholders broadly and stock price rather than current profits is explained. The managerial-finance function is then described and differentiated from economics and accounting, with special attention to the role ethics play in a financial manager’s efforts to maximize the firm’s stock price. Next, the three basic legal forms of business organization (sole proprietorship, partnership, and corporation) are discussed and the strengths and weaknesses of each form noted. The chapter concludes with an exploration of the agency problem—the conflict arising when the managers and owners of the firm are not the same people—and the private- and public-sector tools available to focus managerial attention on shareholder wealth.This chapter and the ones to follow stress the important role finance vocabulary, concepts, and tools will play in the professional and personal lives of students—even those choosing other majors such as accounting, economics information systems, management, marketing, or operations. Whenever possible, personal-finance applications are provided to motivate and illustrate topics. This pedagogical approach should inspire students to master chapter content quickly and easily.NOTE: After this text went to press, Congress passed the Tax Cuts and Job Act of 2017, which dramatically changed both corporate and personal tax rates. The first printing of this text did not reflect these tax changes, but subsequent print runs do. For tax-related problems below, we provide solutions under both the old and the new tax law. Of particular relevance to this chapter, the corporate tax rate is now a flat 21%. Individuals still face a progressive rate schedule, so there is still value in explaining the progressive nature of the old corporate structure as well as the difference between marginal and average tax rates (which are essentially the same under a flat-rate structure). The change in the corporate tax code—in particular the introduction of a lower, flatter rate—can serve as a useful discussion point throughout this text. For example, instructors may wish to discuss the impact of a lower tax rate on the NPV of investments or a firm’s optimal capital structure.„ Answers to Review Questions 1-1. The goal of a firm, and therefore of all financial managers, is maximizing shareholder wealth. The proper metric for this goal is the price of the firm’s stock. Other things equal, an increasing price per share of common stock relative to the stock market as a whole indicates achievement of this goal. 3 / 4

Chapter 1 The Role of Managerial Finance 3 © 2019 Pearson Education, Inc.1-2 Actions that maximize the firm’s current profit may not produce the highest stock price because (1) some firm activities that result in slightly lower profit today generate much larger profits in the future periods (i.e., focusing on current profit overlooks the time value of money); (2) activities that generate higher accounting profits today may not result in higher cash flows to stockholders; and (3) activities that lead to high profits today may involve higher risk, which could result in significant future losses.1-3 Risk is the chance actual outcomes may differ from expected outcomes. Financial managers must consider risk and return because the two factors tend to have an opposite effect on share price. That is, other things equal, an increase in the risk of cash flows to shareholders will depress firm stock price while higher average cash flows to shareholders will increase stock price.1-4 Maximizing shareholder wealth does not mean overlooking or minimizing the welfare of other firm stakeholders. Firms with satisfied employees, customers, and suppliers tend to produce higher (or less risky) cash flows for their shareholders compared with companies that neglect non-owner stakeholders.That said, customers prefer lower prices for firm output, firm employees prefer higher wages, and firm suppliers prefer higher prices for the input goods and services they provide. So actions that produce the highest price of the firm’s stock cannot simultaneously maximize customer, employee, and supplier satisfaction.1-5 Broadly speaking, the decisions made by financial managers fall under three headings: (i) investment, (ii) capital budgeting, and (iii) working capital. Investment decisions involve the firm’s long-term projects while financing decisions concern the funding of those projects. Working-capital decisions, in contrast are related to the firm’s management of short-term financial resources.1-6 Financial managers must recognize the tradeoff between risk and return because shareholders prefer higher cash flows but dislike large swings in cash flows. And, as a general rule, actions that boost the firm’s average cash flows also result in greater cash-flow greater volatility. Viewed another way, firm actions to reduce the chance cash flows will be low or negative also tend to reduce average cash flows over time. Understanding this trade-off is important because shareholders are risk averse. That is, they will only accept larger swings in a firm’s cash flows only if compensated over time with higher average cash flows.1-7 Finance is often considered applied economics. One reason is firms operate within the larger economy.More importantly, the bedrock concept in economics—marginal benefit-marginal cost analysis—is also central to managerial finance. Marginal benefit-marginal cost analysis is the notion a firm (or any other economic actor) should take only those actions for which the extra benefits exceed the extra costs.Nearly, all financial decisions ultimately turn on an assessment of their marginal benefits and marginal costs.1-8 Accountants and financial managers perform separate but equally important functions for the firm.Accountants primarily collect and present financial data according to generally accepted financial principles while financial managers make investment, capital-budgeting, and working-capital decisions with financial data. In part because of their different functions, accountants and financial managers log firm revenues and expenses using different conventions. Accountants operate on an accrual basis, recognizing revenues as firm output is sold (whether or not payment is actually received) and firm expenses as incurred. Financial managers, in contrast, focus on actual inflows and outflows of cash, recognizing revenues when physically received and expenses when actually paid.

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