Chapter..1..... . The..Role..and..Environment..of..Managerial..Finance iii
Solution Manual for Principles Of Managerial
Finance 16th Edition by Chad J. Zutter, Scott
Smart
Table of Contents
PART 1 Introduction to Managerial Finance 1
1 The Role of Managerial Finance 3
2 The Financial Market Environment 19
PART 2 Financial Tools 29
3 Financial Statements and Ratio Analysis 31
4 Long- and Short-Term Financial Planning 55
5 Time Value of Money 79
PART 3 Valuation of Securities 119
6 Interest Rates and Bond Valuation 121
7 Stock Valuation 149
PART 4 Risk and the Required Rate of Return 167
8 Risk and Return 169
©..2022..Pearson..Education,..In
c.
,9 The Cost of Capital 205
PART 5 Long-Term Investment Decisions 231
10 Capital Budgeting Techniques 233
11 Capital Budgeting Cash Flows 261
12 Risk Refinements in Capital Budgeting 293
PART 6 Long-Term Financial Decisions 327
13 Leverage and Capital Structure 329
14 Payout Policy 349
PART 7 Short-Term Financial Decisions 367
15 Working Capital and Current Assets Management 369
16 Current Liabilities Management 383
PART 8 Special Topics in Managerial Finance 399
17 Hybrid and Derivative Securities 401
18 Mergers, LBOs, Divestitures, and Business Failure 421
19 International Managerial Finance 437
©..2022..Pearson..Education,..In
c.
,iv Gitman. . •. . Principles..of..Managerial..Finance,..Twelfth..Edition
Part One ..
Introduction..to..Managerial..Finance
Chapters..in..This..Part
Chapter..1 The..Role..of..Managerial..Finance
Chapter..2
The..Financial..Market..Environment. . Inte
grative..Case..1:..Merit..Enterprise..Corp.
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..chapter..starts..by. . explaining..what..a..firm..is..and..discussing..the..goals..that..man
agers..of..a..firm..might..pursue...The..chapter..provides..a. . justification..for..focusing..on..shareholders..rather..than..st
akeholders..broadly,..but..it..also..discusses..other..goals..that. . firms..might..pursue...The..opening..section..concludes..
with..material..on..the..importance..of..ethical..behavior..in. . business.
The..next..section..discusses..the..managerial..finance..function,..the..key..decisions..that..financial..managers..make,..and
..the. . principles..that..guide..their..decisions...The..discussion..draws..out..distinctions.. among..the..overlapping..discipl
ines..of. . finance,..economics,..and..accounting.
The..third..section..describes..pros..and..cons..of..different..legal..forms..for..a..business...This..section..places..partic
ular. . emphasis..on..differences..in..taxation..of..proprietorships,..partnerships,..and..corporations,..and..it..highligh
ts..the. . importance..of..the..marginal..tax..rate..rather..than..the..average..tax..rate...Next,..this..section..describes..th
e..classical. . principal-
agent..problem..and..describes..both..internal..and..external..corporate..governance..mechanisms..that..help. . mana
ge..that..problem.
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,..marketi
ng,..or..operations...Whenever..possible,..personal-
©..2022..Pearson..Education,..In
c.
, finance..applications..are. . provided..to..motivate..and..illustrate..topics...This..pedagogical..approach..should..inspire..
students..to..master..chapter. . content..quickly..and..easily.
◼ Suggested..Answer..to..Opener-in-Review
Students..learned..the..stock..price..of..Brookdale..Senior..Living..lost..80%..of..its..value..from..2015..to..2019,..prompt
ing. . Land..and..Buildings..(a..prominent..stockholder)..to..urge..the..firm..sell..its..real-
estate..holdings,..distribute..the. . anticipated..net..sales..proceeds..($21..cash)..to..shareholders,..and..then..focus..on..m
anaging..its..senior..living..facilities.. . Students..were..asked..whether..the..proposal..would..make..Brookdale’s..share
holders..better..off..if..the..expected..cash. . proceeds..were..realized,..but..stock..price..dipped..to..$5..per..share.
Before..restructuring,..an..investor..with..one..Brookdale..share..had..$21.35..in..total..wealth...Afterward,..that..same. . i
nvestor..might..have..a..share..worth..$5..and..$21..in..cash—
total..wealth..of..$26...The..hypothetical..shareholder..reaped..a. . gain..of..$4.65..per..share..or..21.8%...Before..the..asset
..sale,..with..185.45..million..shares..outstanding..and..a..share..price..of
$21.35,..total..shareholder..wealth..was..$3.96..billion...After..the..sale,..with..same..shares..outstanding..and..wealth..pe
r. . share..now..$26,..shareholder..wealth..rose..to..$4.82..billion—a..net..gain..of..$0.86..billion.
6..... . Zutter/Smart..•..Principles..of..Managerial..Finance,..Sixteenth..Edition
Here..is..a..discussion..question..for..the..class..to..motivate..future..exploration..of..CEO..compensation:..Suppose. .
Brookdale’s..CEO..came..up..with..the..asset-
sale..idea..rather..than..a..prominent..shareholder,..and..Brookdale’s..board. . rewarded..him..with..a..$1..million..doll
ar..bonus—a..figure..alone..that..would..easily..vault..the..CEO..into..the..top..1%..of
U.S...income..earners...Is..the..CEO’s..compensation..excessive?
◼ Answers..to..Review..Questions
1-1 The..goal..of..a..firm,..and..therefore..of..all..financial..managers,..is..maximizing..shareholder..wealth...T
he. . 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.
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..t
hat..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..sig
nificant..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...Th
at..is,. . other..things..equal,..an..increase..in..the..risk..of..cash..flows..to..shareholders..will..depress..firm..st
ock..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..prefe
r..higher..wages,..and..firm. . suppliers..prefer..higher..prices..for..the..input..goods..and..services..they..provi
de...So..actions..that..produce..the. . highest..price..of..the..firm’s..stock..cannot..simultaneously..maximize..
customer,..employee,..and..supplier. . satisfaction.
©..2022..Pearson..Education,..In
c.
Solution Manual for Principles Of Managerial
Finance 16th Edition by Chad J. Zutter, Scott
Smart
Table of Contents
PART 1 Introduction to Managerial Finance 1
1 The Role of Managerial Finance 3
2 The Financial Market Environment 19
PART 2 Financial Tools 29
3 Financial Statements and Ratio Analysis 31
4 Long- and Short-Term Financial Planning 55
5 Time Value of Money 79
PART 3 Valuation of Securities 119
6 Interest Rates and Bond Valuation 121
7 Stock Valuation 149
PART 4 Risk and the Required Rate of Return 167
8 Risk and Return 169
©..2022..Pearson..Education,..In
c.
,9 The Cost of Capital 205
PART 5 Long-Term Investment Decisions 231
10 Capital Budgeting Techniques 233
11 Capital Budgeting Cash Flows 261
12 Risk Refinements in Capital Budgeting 293
PART 6 Long-Term Financial Decisions 327
13 Leverage and Capital Structure 329
14 Payout Policy 349
PART 7 Short-Term Financial Decisions 367
15 Working Capital and Current Assets Management 369
16 Current Liabilities Management 383
PART 8 Special Topics in Managerial Finance 399
17 Hybrid and Derivative Securities 401
18 Mergers, LBOs, Divestitures, and Business Failure 421
19 International Managerial Finance 437
©..2022..Pearson..Education,..In
c.
,iv Gitman. . •. . Principles..of..Managerial..Finance,..Twelfth..Edition
Part One ..
Introduction..to..Managerial..Finance
Chapters..in..This..Part
Chapter..1 The..Role..of..Managerial..Finance
Chapter..2
The..Financial..Market..Environment. . Inte
grative..Case..1:..Merit..Enterprise..Corp.
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..chapter..starts..by. . explaining..what..a..firm..is..and..discussing..the..goals..that..man
agers..of..a..firm..might..pursue...The..chapter..provides..a. . justification..for..focusing..on..shareholders..rather..than..st
akeholders..broadly,..but..it..also..discusses..other..goals..that. . firms..might..pursue...The..opening..section..concludes..
with..material..on..the..importance..of..ethical..behavior..in. . business.
The..next..section..discusses..the..managerial..finance..function,..the..key..decisions..that..financial..managers..make,..and
..the. . principles..that..guide..their..decisions...The..discussion..draws..out..distinctions.. among..the..overlapping..discipl
ines..of. . finance,..economics,..and..accounting.
The..third..section..describes..pros..and..cons..of..different..legal..forms..for..a..business...This..section..places..partic
ular. . emphasis..on..differences..in..taxation..of..proprietorships,..partnerships,..and..corporations,..and..it..highligh
ts..the. . importance..of..the..marginal..tax..rate..rather..than..the..average..tax..rate...Next,..this..section..describes..th
e..classical. . principal-
agent..problem..and..describes..both..internal..and..external..corporate..governance..mechanisms..that..help. . mana
ge..that..problem.
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,..marketi
ng,..or..operations...Whenever..possible,..personal-
©..2022..Pearson..Education,..In
c.
, finance..applications..are. . provided..to..motivate..and..illustrate..topics...This..pedagogical..approach..should..inspire..
students..to..master..chapter. . content..quickly..and..easily.
◼ Suggested..Answer..to..Opener-in-Review
Students..learned..the..stock..price..of..Brookdale..Senior..Living..lost..80%..of..its..value..from..2015..to..2019,..prompt
ing. . Land..and..Buildings..(a..prominent..stockholder)..to..urge..the..firm..sell..its..real-
estate..holdings,..distribute..the. . anticipated..net..sales..proceeds..($21..cash)..to..shareholders,..and..then..focus..on..m
anaging..its..senior..living..facilities.. . Students..were..asked..whether..the..proposal..would..make..Brookdale’s..share
holders..better..off..if..the..expected..cash. . proceeds..were..realized,..but..stock..price..dipped..to..$5..per..share.
Before..restructuring,..an..investor..with..one..Brookdale..share..had..$21.35..in..total..wealth...Afterward,..that..same. . i
nvestor..might..have..a..share..worth..$5..and..$21..in..cash—
total..wealth..of..$26...The..hypothetical..shareholder..reaped..a. . gain..of..$4.65..per..share..or..21.8%...Before..the..asset
..sale,..with..185.45..million..shares..outstanding..and..a..share..price..of
$21.35,..total..shareholder..wealth..was..$3.96..billion...After..the..sale,..with..same..shares..outstanding..and..wealth..pe
r. . share..now..$26,..shareholder..wealth..rose..to..$4.82..billion—a..net..gain..of..$0.86..billion.
6..... . Zutter/Smart..•..Principles..of..Managerial..Finance,..Sixteenth..Edition
Here..is..a..discussion..question..for..the..class..to..motivate..future..exploration..of..CEO..compensation:..Suppose. .
Brookdale’s..CEO..came..up..with..the..asset-
sale..idea..rather..than..a..prominent..shareholder,..and..Brookdale’s..board. . rewarded..him..with..a..$1..million..doll
ar..bonus—a..figure..alone..that..would..easily..vault..the..CEO..into..the..top..1%..of
U.S...income..earners...Is..the..CEO’s..compensation..excessive?
◼ Answers..to..Review..Questions
1-1 The..goal..of..a..firm,..and..therefore..of..all..financial..managers,..is..maximizing..shareholder..wealth...T
he. . 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.
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..t
hat..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..sig
nificant..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...Th
at..is,. . other..things..equal,..an..increase..in..the..risk..of..cash..flows..to..shareholders..will..depress..firm..st
ock..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..prefe
r..higher..wages,..and..firm. . suppliers..prefer..higher..prices..for..the..input..goods..and..services..they..provi
de...So..actions..that..produce..the. . highest..price..of..the..firm’s..stock..cannot..simultaneously..maximize..
customer,..employee,..and..supplier. . satisfaction.
©..2022..Pearson..Education,..In
c.
