,SOLUTION MANUAL FOR Financial Management
Principles & Applications, 14th edition Sheridan
Titman
Notes
1- The file is chapter after chapter.
2- We have shown you few pages sample.
3- The file contains all Appendix and Excel sheet
if it exists.
4- We have all what you need, we make update
at every time. There are many new editions
waiting you.
5- If you think you purchased the wrong file You
can contact us at every time, we can replace it
with true one.
Our email:
, Part One
Instructor’s Manual
Copyright © 2025 Pearson Education, Inc.
,
,Chapter 1
Getting Started—Principles of Finance
◼ Chapter Orientation
Finance is the study of how people and businesses evaluate investments and raise capital to fund these
investments. Key principles guide the process of evaluating investment decisions. This chapter lays the
foundation for understanding the principles that underpin financial decision making. Financial decisions
permeate every aspect of the business world and of our personal lives. Understanding basic financial
concepts is critical to making informed decisions concerning the use of financial resources.
This chapter describes the three types of business organizations--sole proprietorships, partnerships, and
corporations—and compares and contrasts the similarities and differences among these types of business
organization. Further, the role of finance is discussed relative to the overall structure of the organization.
The overriding goal of finance is to maximize shareholder wealth. Ethical errors in judgment tend to
destroy trust in management thereby preventing management from working toward that goal.
Finance encompasses five basic principles: Money has a time value; there is a risk-return tradeoff; cash
flows are the source of value; market prices reflect information; and individuals respond to incentives.
◼ Chapter Outline
1.1 Overview of Finance
A. Finance is the study of how people and businesses evaluate investments and raise capital for
these investments.
B. Finance concerns the study of the management of money, as well as the interpretation of
information.
1.2 Three Types of Business Organization
A. A sole proprietorship is a business owned by a single individual.
B. A general partnership is an association of two or more persons who come together as owners for
the purpose of operating a business for profit.
C. A corporation is a business organization that legally functions separately and apart from its
owners (shareholders).
3
Copyright © 2025 Pearson Education, Inc.
,4 Titman/Keown/Martin • Financial Management, Thirteenth Edition
1.3 The Goal of the Financial Manager: Maximize Shareholder Wealth
A. Because shareholders are the owners of the firm, the goal of the financial manager is the
maximize shareholder wealth.
B. Maximizing shareholders wealth is achieved by maximizing stock price.
C. The Sarbanes-Oxley Act attempts to safeguard the interests of shareholders by providing
protection against agency problems related to accounting fraud and financial misconduct.
1.4 Financial concepts can be classified into five general principles.
A. Principle 1: Money has a time value
B. Principle 2: There is a risk-return tradeoff
C. Principle 3: Cash flows are the source of value
D. Principle 4: Market prices reflect information
E. Principle 5: Individuals respond to incentives
◼ Learning Objectives
1.1. Understand the importance of finance in your personal and professional lives and identify the three
primary business decisions that financial managers make.
1.2. Identify the key differences among three major legal forms of business.
1.3. Understand the role of the financial manager within the firm and the goal for making financial
choices.
1.4. Explain the five principles of finance that form the basis of financial management for both businesses
and individuals.
◼ End-of-Chapter Problem Complexity Rating and
Spreadsheet Solutions
The end-of-chapter problems are sorted below, according to their level of complexity.
Simple Average Complex
There are no problems in this chapter.
◼ Lecture Tips
1. Identify various investments that individuals make that require knowledge of finance:
a) going to college
b) purchasing a car
c) buying a home
d) rent versus owning a home
Copyright © 2025 Pearson Education, Inc.
, Chapter 1 Getting Started—Principles of Finance 5
2. Use real-world, non-financial situations to describe the relationship between risk and return; for
example, choice of career, travels, etc.
◼ Further Questions for Class Discussion
1. When managers act in an unethical manner, it can have a long-term impact on the value of the firm.
Use the example of Enron’s board of directors temporarily suspending its own “code of ethics” to
describe how that impact may be negative and permanent.
2. Explain the difference between cash flow and profit.
◼ Internet Resources
None
Copyright © 2025 Pearson Education, Inc.
,2-1 Titman/Keown/Martin Financial Management, Thirteenth Edition
Chapter 2
Solutions to Study Questions
2-1. The “Regardless of Your Major” box describes two types of retirement plans: defined
contribution and defined benefit. The “defined” part of each name means that benefits are
specified, or defined; the difference between the two plans is in when those benefits are
defined. Defined benefit (DB) plans specify the amounts to be paid in retirement—that is,
the benefits the retiree will receive are specified. Thus, the sponsor of the plan promises to
make specific payments to the retiree, and then the sponsor accepts the responsibility for
investing a pool of assets now (or at least, before the covered person retires) to ensure that
those benefits in fact can be paid in the future. Managing pension assets to ensure future
payments is complicated, and companies these days prefer to offer defined contribution
plans, like 401(k) plans, instead of defined benefit plans. Defined contribution (DC) plans
specify the contributions that will be made to the plan (now), not the benefits that will be
paid at retirement. It’s a lot easier to specify an amount to be paid today than it is to ensure
that one will be made in the future. With defined contribution plans, employees accept the
responsibility of investing their funds to ensure adequate resources in retirement, removing
that burden from employers. It’s therefore not surprising that employers prefer defined
contribution plans, while employees who have defined benefit plans count themselves lucky.
2-2. The three players who interact in the financial markets are borrowers, savers, and financial
intermediaries.
Borrowers need money to help finance some specific purpose—a student loan to help pay
for college, an auto loan for a car, or a mortgage for a house. Savers have money that they
don’t need for consumption today, so they set this money aside to use in the future.
Financial intermediaries bring the two together, channeling the savers’ “extra” money to
the borrowers for their immediate use. If the borrowers and savers could get together
themselves somehow, they could “cut out the middleman” and save the intermediation
costs. This might sound good—but is it feasible? Financial intermediaries specialize in
evaluating the creditworthiness of borrowers, so they help ensure that savers’ money is
channeled to borrowers who will repay. They also allow efficient aggregation of small
amounts of individual savings into blocks of loanable funds large enough to be useful to
borrowers.
Copyright © 2025 Pearson Education, Inc.
,2-2 Titman/Keown/Martin Financial Management, Thirteenth Edition
lenders
$
FINANCIAL
INTERMEDIARIES
$
borrowers
2-3. As outlined in Section 2.2 of the text, a financial intermediary is a firm that collects money
from savers, bundles it into attractive sizes with attractive terms, and lends it to borrowers.
The principal types of financial intermediaries in the United States are:
COMMERCIAL BANKS
Commercial banks are depository institutions that take deposits (such as checking or savings
deposits) and make loans (such as mortgage loans or auto loans). Commercial banks are also
integral parts of our national payment system. Their importance to the functioning of our
economy has led to their being heavily regulated and subject to extensive oversight (for
example, by the FDIC, which insures their deposits, and by the Fed, which mandates their
reserve requirements).
NONBANK FINANCIAL INTERMEDIARIES
While these businesses channel money from those who have it to those who need it,
they do not both take deposits and make loans, as a depository institution does.
Financial services corporations: Financial services corporations, like GE Capital, provide
loans and credit to businesses and individuals (including credit card services). Some of
these companies are charged with ensuring financing for the expensive products of large
manufacturing companies (for example, Ford Motor Credit). These institutions do not take
deposits, so they are missing one of the two elements of a depository institution’s job
description.
Insurance companies: Insurance companies insure individuals and businesses against certain
types of risks (for example, the risk that your automobile will be damaged in a collision,
and/or cause damage or injury to someone else; the risk that your house will burn down; the
risk that you will die unexpectedly, leaving your heirs without their major breadwinner).
Insurance companies are major players in the financial markets, because they must invest the
Copyright © 2025 Pearson Education, Inc.
, 2-3 Titman/Keown/Martin Financial Management, Thirteenth Edition
premiums they collect until the money is needed to pay claims. The type of insurance a firm
provides tends to determine the type of market in which they invest most frequently. For
example, life insurers often have decades between premium collection and claim payments,
so they are large players in the capital markets. On the other hand, property and casualty
companies (like auto and home insurers) must stay closer to their money, since their claims
may come much sooner; they are larger players in the money markets.
Investment banks: Investment banks like Goldman Sachs and Morgan Stanley advise firms
about their financing needs and act as intermediaries when the firms float new securities.
For example, an investment banker may advise a client about the most favorable terms for a
new bond issue (e.g., covenants, term, options, coupon), then underwrite the issuance of the
bonds (buying the bonds from the issuer, then selling them to investors, taking inventory
risk in return for a spread).
INVESTMENT COMPANIES
These companies take savings and invest them in other companies’ securities. As the text
puts it, they are “financial institutions that pool the savings of individual savers and invest
the money, purely for investment purposes, in the securities issued by other companies.”
Perhaps the most familiar type of investment company is the mutual fund.
Mutual funds: Mutual funds collect money from investors, then invest that money into
specific types of financial assets. Each mutual fund has a prospectus that describes the
particular type of assets that the fund may buy: for example, the fund may buy bonds, or
stocks, or money market assets, or some combination. Mutual fund investors own shares
of the fund that entitle them to a proportional share of the assets held by the fund.
Be careful to distinguish mutual fund shares from the shares of stock that a mutual fund
may own. Say an equity mutual fund has 10 investors who each put $1,000 into the fund.
The fund’s size is therefore $10,000, and each investor owns 1/10th of the fund. Let’s
assume that the fund issues 1,000 mutual fund shares—100 to each investor. Now, say the
fund takes its $10,000 and buys 1 share of stock (a very expensive, $10,000/share stock!).
Each investor has 100 mutual fund shares, representing a 1/10th interest in a single share of
the fund’s chosen (very expensive) stock.
Exchange-traded funds (ETFs): ETFs are like mutual funds that trade on exchanges, as
stocks do. Investors trade mutual funds shares with the fund itself—they send money to the
fund, receiving mutual fund shares in return; they submit sell requests to the mutual fund,
receiving cash in return. In contrast, investors who wish to divest themselves of their ETF
shares can simply enter a sell order with their brokers. They can also do the other types of
things that one can do with shares of stock: for example, buy ETF shares on margin, or sell
ETF shares short. Nonetheless, investors who wish to make small, periodic contributions to
a diversified fund may want to stick with mutual funds, since ETFs require brokerage
commissions with every trade.
Hedge funds: Hedge funds are intermediaries like mutual funds, gathering money from
investors, then using those pooled funds to buy assets. However, hedge funds are less
regulated than mutual funds, and therefore may engage in various strategies that are not
allowed to mutual funds. For example, short positions are important parts of many hedge
fund strategies.
Copyright © 2025 Pearson Education, Inc.
Principles & Applications, 14th edition Sheridan
Titman
Notes
1- The file is chapter after chapter.
2- We have shown you few pages sample.
3- The file contains all Appendix and Excel sheet
if it exists.
4- We have all what you need, we make update
at every time. There are many new editions
waiting you.
5- If you think you purchased the wrong file You
can contact us at every time, we can replace it
with true one.
Our email:
, Part One
Instructor’s Manual
Copyright © 2025 Pearson Education, Inc.
,
,Chapter 1
Getting Started—Principles of Finance
◼ Chapter Orientation
Finance is the study of how people and businesses evaluate investments and raise capital to fund these
investments. Key principles guide the process of evaluating investment decisions. This chapter lays the
foundation for understanding the principles that underpin financial decision making. Financial decisions
permeate every aspect of the business world and of our personal lives. Understanding basic financial
concepts is critical to making informed decisions concerning the use of financial resources.
This chapter describes the three types of business organizations--sole proprietorships, partnerships, and
corporations—and compares and contrasts the similarities and differences among these types of business
organization. Further, the role of finance is discussed relative to the overall structure of the organization.
The overriding goal of finance is to maximize shareholder wealth. Ethical errors in judgment tend to
destroy trust in management thereby preventing management from working toward that goal.
Finance encompasses five basic principles: Money has a time value; there is a risk-return tradeoff; cash
flows are the source of value; market prices reflect information; and individuals respond to incentives.
◼ Chapter Outline
1.1 Overview of Finance
A. Finance is the study of how people and businesses evaluate investments and raise capital for
these investments.
B. Finance concerns the study of the management of money, as well as the interpretation of
information.
1.2 Three Types of Business Organization
A. A sole proprietorship is a business owned by a single individual.
B. A general partnership is an association of two or more persons who come together as owners for
the purpose of operating a business for profit.
C. A corporation is a business organization that legally functions separately and apart from its
owners (shareholders).
3
Copyright © 2025 Pearson Education, Inc.
,4 Titman/Keown/Martin • Financial Management, Thirteenth Edition
1.3 The Goal of the Financial Manager: Maximize Shareholder Wealth
A. Because shareholders are the owners of the firm, the goal of the financial manager is the
maximize shareholder wealth.
B. Maximizing shareholders wealth is achieved by maximizing stock price.
C. The Sarbanes-Oxley Act attempts to safeguard the interests of shareholders by providing
protection against agency problems related to accounting fraud and financial misconduct.
1.4 Financial concepts can be classified into five general principles.
A. Principle 1: Money has a time value
B. Principle 2: There is a risk-return tradeoff
C. Principle 3: Cash flows are the source of value
D. Principle 4: Market prices reflect information
E. Principle 5: Individuals respond to incentives
◼ Learning Objectives
1.1. Understand the importance of finance in your personal and professional lives and identify the three
primary business decisions that financial managers make.
1.2. Identify the key differences among three major legal forms of business.
1.3. Understand the role of the financial manager within the firm and the goal for making financial
choices.
1.4. Explain the five principles of finance that form the basis of financial management for both businesses
and individuals.
◼ End-of-Chapter Problem Complexity Rating and
Spreadsheet Solutions
The end-of-chapter problems are sorted below, according to their level of complexity.
Simple Average Complex
There are no problems in this chapter.
◼ Lecture Tips
1. Identify various investments that individuals make that require knowledge of finance:
a) going to college
b) purchasing a car
c) buying a home
d) rent versus owning a home
Copyright © 2025 Pearson Education, Inc.
, Chapter 1 Getting Started—Principles of Finance 5
2. Use real-world, non-financial situations to describe the relationship between risk and return; for
example, choice of career, travels, etc.
◼ Further Questions for Class Discussion
1. When managers act in an unethical manner, it can have a long-term impact on the value of the firm.
Use the example of Enron’s board of directors temporarily suspending its own “code of ethics” to
describe how that impact may be negative and permanent.
2. Explain the difference between cash flow and profit.
◼ Internet Resources
None
Copyright © 2025 Pearson Education, Inc.
,2-1 Titman/Keown/Martin Financial Management, Thirteenth Edition
Chapter 2
Solutions to Study Questions
2-1. The “Regardless of Your Major” box describes two types of retirement plans: defined
contribution and defined benefit. The “defined” part of each name means that benefits are
specified, or defined; the difference between the two plans is in when those benefits are
defined. Defined benefit (DB) plans specify the amounts to be paid in retirement—that is,
the benefits the retiree will receive are specified. Thus, the sponsor of the plan promises to
make specific payments to the retiree, and then the sponsor accepts the responsibility for
investing a pool of assets now (or at least, before the covered person retires) to ensure that
those benefits in fact can be paid in the future. Managing pension assets to ensure future
payments is complicated, and companies these days prefer to offer defined contribution
plans, like 401(k) plans, instead of defined benefit plans. Defined contribution (DC) plans
specify the contributions that will be made to the plan (now), not the benefits that will be
paid at retirement. It’s a lot easier to specify an amount to be paid today than it is to ensure
that one will be made in the future. With defined contribution plans, employees accept the
responsibility of investing their funds to ensure adequate resources in retirement, removing
that burden from employers. It’s therefore not surprising that employers prefer defined
contribution plans, while employees who have defined benefit plans count themselves lucky.
2-2. The three players who interact in the financial markets are borrowers, savers, and financial
intermediaries.
Borrowers need money to help finance some specific purpose—a student loan to help pay
for college, an auto loan for a car, or a mortgage for a house. Savers have money that they
don’t need for consumption today, so they set this money aside to use in the future.
Financial intermediaries bring the two together, channeling the savers’ “extra” money to
the borrowers for their immediate use. If the borrowers and savers could get together
themselves somehow, they could “cut out the middleman” and save the intermediation
costs. This might sound good—but is it feasible? Financial intermediaries specialize in
evaluating the creditworthiness of borrowers, so they help ensure that savers’ money is
channeled to borrowers who will repay. They also allow efficient aggregation of small
amounts of individual savings into blocks of loanable funds large enough to be useful to
borrowers.
Copyright © 2025 Pearson Education, Inc.
,2-2 Titman/Keown/Martin Financial Management, Thirteenth Edition
lenders
$
FINANCIAL
INTERMEDIARIES
$
borrowers
2-3. As outlined in Section 2.2 of the text, a financial intermediary is a firm that collects money
from savers, bundles it into attractive sizes with attractive terms, and lends it to borrowers.
The principal types of financial intermediaries in the United States are:
COMMERCIAL BANKS
Commercial banks are depository institutions that take deposits (such as checking or savings
deposits) and make loans (such as mortgage loans or auto loans). Commercial banks are also
integral parts of our national payment system. Their importance to the functioning of our
economy has led to their being heavily regulated and subject to extensive oversight (for
example, by the FDIC, which insures their deposits, and by the Fed, which mandates their
reserve requirements).
NONBANK FINANCIAL INTERMEDIARIES
While these businesses channel money from those who have it to those who need it,
they do not both take deposits and make loans, as a depository institution does.
Financial services corporations: Financial services corporations, like GE Capital, provide
loans and credit to businesses and individuals (including credit card services). Some of
these companies are charged with ensuring financing for the expensive products of large
manufacturing companies (for example, Ford Motor Credit). These institutions do not take
deposits, so they are missing one of the two elements of a depository institution’s job
description.
Insurance companies: Insurance companies insure individuals and businesses against certain
types of risks (for example, the risk that your automobile will be damaged in a collision,
and/or cause damage or injury to someone else; the risk that your house will burn down; the
risk that you will die unexpectedly, leaving your heirs without their major breadwinner).
Insurance companies are major players in the financial markets, because they must invest the
Copyright © 2025 Pearson Education, Inc.
, 2-3 Titman/Keown/Martin Financial Management, Thirteenth Edition
premiums they collect until the money is needed to pay claims. The type of insurance a firm
provides tends to determine the type of market in which they invest most frequently. For
example, life insurers often have decades between premium collection and claim payments,
so they are large players in the capital markets. On the other hand, property and casualty
companies (like auto and home insurers) must stay closer to their money, since their claims
may come much sooner; they are larger players in the money markets.
Investment banks: Investment banks like Goldman Sachs and Morgan Stanley advise firms
about their financing needs and act as intermediaries when the firms float new securities.
For example, an investment banker may advise a client about the most favorable terms for a
new bond issue (e.g., covenants, term, options, coupon), then underwrite the issuance of the
bonds (buying the bonds from the issuer, then selling them to investors, taking inventory
risk in return for a spread).
INVESTMENT COMPANIES
These companies take savings and invest them in other companies’ securities. As the text
puts it, they are “financial institutions that pool the savings of individual savers and invest
the money, purely for investment purposes, in the securities issued by other companies.”
Perhaps the most familiar type of investment company is the mutual fund.
Mutual funds: Mutual funds collect money from investors, then invest that money into
specific types of financial assets. Each mutual fund has a prospectus that describes the
particular type of assets that the fund may buy: for example, the fund may buy bonds, or
stocks, or money market assets, or some combination. Mutual fund investors own shares
of the fund that entitle them to a proportional share of the assets held by the fund.
Be careful to distinguish mutual fund shares from the shares of stock that a mutual fund
may own. Say an equity mutual fund has 10 investors who each put $1,000 into the fund.
The fund’s size is therefore $10,000, and each investor owns 1/10th of the fund. Let’s
assume that the fund issues 1,000 mutual fund shares—100 to each investor. Now, say the
fund takes its $10,000 and buys 1 share of stock (a very expensive, $10,000/share stock!).
Each investor has 100 mutual fund shares, representing a 1/10th interest in a single share of
the fund’s chosen (very expensive) stock.
Exchange-traded funds (ETFs): ETFs are like mutual funds that trade on exchanges, as
stocks do. Investors trade mutual funds shares with the fund itself—they send money to the
fund, receiving mutual fund shares in return; they submit sell requests to the mutual fund,
receiving cash in return. In contrast, investors who wish to divest themselves of their ETF
shares can simply enter a sell order with their brokers. They can also do the other types of
things that one can do with shares of stock: for example, buy ETF shares on margin, or sell
ETF shares short. Nonetheless, investors who wish to make small, periodic contributions to
a diversified fund may want to stick with mutual funds, since ETFs require brokerage
commissions with every trade.
Hedge funds: Hedge funds are intermediaries like mutual funds, gathering money from
investors, then using those pooled funds to buy assets. However, hedge funds are less
regulated than mutual funds, and therefore may engage in various strategies that are not
allowed to mutual funds. For example, short positions are important parts of many hedge
fund strategies.
Copyright © 2025 Pearson Education, Inc.
