Solution Manual for Principles of Finance, 6th Edition

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Principles of Finance6eChapter 1Besley/Brigham1-1CHAPTER 1ANSWERS1-1At the beginning of the twentieth century, the study of finance was mostly descriptive. As theproliferation of electronics and information technology has grown in recent decades, the study offinance has shifted toward more analytical methods.At the beginning of the century, managerial finance focused on mergers and acquisitions,investments were held mostly by powerful individuals or groups, and the banking system consistedof thousands of independent banking organizations that were primarily small, hometown banks.There was a shift toward greater regulation and control of financial services organizations after thefinancial disasters that occurred during the Depression era of the late 1920s and early 1930s. Atthat time, managerial finance was concerned with bankruptcy issues, the investments arenabecame substantially more regulated with the birth of the Securities and Exchange Commission(SEC), and the banking system went through significant restructuring with the failure of more than6,000 banks. Modern finance finds its roots in the second half of the century when increasedcompetition reduced the profit opportunities available to firms, so more emphasis was placed onevaluating the value of investment projects; small, individual investors became more active in thestock markets as mutual funds became popular; and, the restrictions on banking operations in theUnited States were eased as international competition increased in the banking industry.1-2Simply stated, finance deals with how firms generate and use funds. To do a good job, people inmarketing must understand how marketing decisions affect and are affected by funds availability, byinventory levels, by excess plant capacity, and so forth. Similarly, accountants must understandhow accounting data are used in corporate planning and are viewed by investors. Some knowledgeof the financial function is necessary to do a good job in other areas of the firm. At the same time,however, financial managers must have an understanding of marketing, accounting, and so forth, tomake more informed decisions about replacement or expansion of plant and equipment and abouthow to best finance their firms.1-3As we will show in later chapters, the financial decisions corporations make concern how to raisefunds (sources) when they are needed and how invest funds that are available. As an individual, wemake the same decisions—when we buy and car or a house, we search for the appropriate fundingsources (in most cases the cheapest), and when we have excess funds, we decide whatinvestments should be made. Although our discussions focus on corporations, the techniquesdescribed in this book can also be applied by individuals to make personal decisions.1-4As a general rule of thumb, the government is fairly friendly to business when economic conditionsare good and individuals are prospering because of the conditions. However, when an economicdisaster occurs, traditionally, there are cries for new, tougher regulations to rein in those individuals,organizations, and practices that are considered to have contributed to the downturn.1-5Value is measured as the present value of the cash flows that an investment is expected togenerate during its life. The three factors that determine value are: (1) the amount of the future cashflows, (2) the timing of the future cash flows, and (3) investors’ required rate of return. If the amountof the cash flows increases, the cash flows are received sooner, investors’ required rate of returndecreases, or any combination of these events occur, the value of an investment will increase.1-6The value of a firm can be measured by the market value of its stock. Thus, the firm maximizesvalue/wealth by maximizing the value of itsstock.

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