Solution and Answer Guide: Besley and Brigham, CFIN, 8e, 2027, 9798214056692; Chapter 1: An Overview of Managerial Finance
Solution and Answer Guide
BESLEY AND BRIGHAM, CFIN, 8E, 2027, 9798214056692;
CHAPTER 1: AN OVERVIEW OF MANAGERIAL FINANCE
TABLE OF CONTENTS
Ethical Dilemma...........................................................................................................1
Chances Are What They Don’t Know Won’t Hurt Them!........................................................................1
Chapter 1 Solutions......................................................................................................3
Integrative Problem Solutions...................................................................................10
ETHICAL DILEMMA
CHANCES ARE WHAT THEY DON’T KNOW WON’T HURT THEM!
Ethical dilemma:
It appears that the ethical dilemma is whether Futuristic Electronic Technologies (FET) should continue to distribute
its new micro system even though laboratory tests have shown the system might be flawed. To make matters worse,
as an executive with FET, your salary is based on the performance of the company’s common stock, and it is
expected the stock will not do well unless the new micro system is successful. You need the new micro system to be
successful to ensure the overall compensation you earn from FET is sufficient to make the mortgage payments on
the expensive house you just purchased. What should you do?
Discussion questions:
Is there an ethical problem (dilemma)? If so, what is it?
You will get some interesting answers to these questions. In reality, the new micro system might not be flawed.
The information provided in the text indicates that the lab tests on the new micro system are not conclusive—it
is implied that additional tests are needed to reach more concrete conclusions. If an ethical dilemma exists, it
might be that FET is willing to introduce a new product without full knowledge of its flaws; but this is not
unusual in very competitive markets.
Should FET discontinue the distribution of its new micro system until further laboratory tests can be
completed?
Certainly, additional testing will give the company a better idea of whether a flaw actually exists, and, if there is
a flaw, to what degree it is harmful to customers. But, if distribution of the new micro system is temporarily
discontinued, FET’s competitors might be able to introduce their new systems and significantly cut into FET’s
share of the market. At the same time, if FET is not fully aware of any flaws in its system, continuing to
distribute a product of inferior quality might be extremely harmful to the company’s reputation.
There is no clear answer to this question because the extent of the problem is unknown—the flaw could be
nonexistent, it could exist and be very insignificant, or it could exist and cause very significant difficulties for
those customers purchasing the new micro system.
What action do you think FET should take?
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 1
accessible website, in whole or in part.
, Solution and Answer Guide: Besley and Brigham, CFIN, 8e, 2027, 9798214056692; Chapter 1: An Overview of Managerial Finance
There are a variety of responses to this question. Some students will suggest that FET ignore the flaw, because it
doesn’t seem to occur very often. Remind these students that the new micro system will be used by such financial
institutions as banks and savings and loan associations, by large corporations, and by governments to store large
amounts of financial data. If such data are lost, even once in 10 million retrievals, the consequences could be
devastating. Some students will suggest that FET should do “the right thing,” and discontinue distribution until
further testing is complete so it can be determined to what extent a flaw does exist, and the necessary corrections can
be made. A few students will suggest a third alternative—continue to distribute the new micro system but inform
those who buy it there is a possibility that a flaw exists. In addition, inform the customers that the new micro system
currently is undergoing further tests, and the results will be publicly announced as soon as they are available. And, if
it is determined a flaw actually exists, corrections will be made at no cost to the customer, and with as little
interruption as possible.
References:
It is well documented in the business press that Intel Corporation was embroiled in controversy over a flaw in the Pentium
computer chip it introduced in 1994. The cost of replacing the flawed chips that were installed in computers resulted in a
fourth-quarter profit in 1994 that was
37 percent lower than the previous year. In addition, a number of lawsuits were filed accusing Intel of fraud, false
advertising, and various violations of state laws protecting consumers.
On the other hand, in part because of the controversy created by the Intel situation, in 1995, Advanced Micro
Devices, Inc. delayed the distribution of its new computer chip, which was intended to compete directly with Intel’s
Pentium chip, because it was felt technical corrections and additional testing were needed.
You can find additional information concerning these two situations in articles that appear in The Wall Street
Journal at the end of 1994 and throughout 1995. The following articles might be assigned for background material:
“Chip Shot: Computer Giants’ War over Flaw in Pentium Jolts the PC Industry,” The Wall Street Journal, December
3, 1994, p. A1+.
“AMD Will Delay Delivery of New Chips Aimed at Competing with Intel Pentium,” The Wall Street Journal, April
11, 1995, p. B5.
AnnickJesdanun, “Experts Spot Security Flaw in Windows Vista Software,” The Tampa Tribune, December 27,
2006, Business 1+.
Other more recent examples can be found in the following articles:
Cade Metz and Nicole Perloth, “Researchers Discover Two Major Flaws in the World’s Computers,” The New York
Times, January 3, 2018. (http://www.nytimes.com) Available online at
https://www.nytimes.com/2018/01/03/business/computer-flaws.html.
Selena Larson, “Major Chip Flaws Affect Billions of Devices,” January 4, 2018, CNN Business.
(http://cnn.com/business) Available online at https://money.cnn.com/2018/01/03/
technology/computer-chip-flaw-security/index.html.
Roger Atiken, “Solving Blockchain’s Current Flaws & Enabling Future Mainstream Adoption.” Forbes, February
28, 2019. (http://www.forbes.com) Available online at
https://www.forbes.com/sites/rogeraitken/2019/02/28/solving-blockchains-current-
flaws-enabling-future-mainstream-adoption/#59bbeafa274b.
CHAPTER 1 SOLUTIONS
1-1 What is finance? What types of decisions do people in finance make? (LO 1-1)
Answer:
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 2
accessible website, in whole or in part.
, Solution and Answer Guide: Besley and Brigham, CFIN, 8e, 2027, 9798214056692; Chapter 1: An Overview of Managerial Finance
Finance deals with decisions about money. Finance decisions deal with how money is raised and used by
businesses, governments, and individuals. In business, decisions about cash inflows include for what
price products should be sold, how funds should be raised when firms have good investment
opportunities, and so forth. Decisions about cash outflows include what expenses must be incurred,
which investments should be purchased, and so forth.
1-2 Why should individuals who pursue careers in business have a basic understanding of finance even if
their jobs are in areas other than finance, such as marketing
or information systems? (LO 1-1)
Answer:
Simply stated, everyone should have a basic understanding of finance because everyone faces financial
decisions daily, whether those decisions are as simple as determining how much money to carry in one’s
pocket or they require more sophisticated thought processes, such as the purchase of a house or planning
for retirement. Persons who make business decisions must understand finance because their decisions
generally include an element of finance in the sense that the results of their decisions generally require
some type of funding to be operationalized.
1-3 What does it mean to maximize the value of a corporation? (LO 1-3)
Answer:
The value of a firm can be measured by the market value of its stock. Thus, the firm maximizes
value/wealth by maximizing the value of its stock.
1-4 In general terms, how is value measured? What three factors determine value? How does each factor
affect value? (LO 1-3)
Answer:
Value is measured as the present value of the cash flows that an investment is expected to generate
during its life. The three factors that determine value are
(1) the amount of the future cash flows, (2) the timing of the future cash flows, and (3) investors’
required rate of return. If the amount of the cash flows increases, the cash flows are received sooner,
investors’ required rate of return decreases, or any combination of these events occur, the value of an
investment will increase, and vice versa.
1-5 What is the difference between stock price maximization and profit maximization? Under what
conditions might profit maximization not lead to stock price maximization? (LO 1-3)
Answer:
A firm’s value is determined by the cash flows it is expected to generate long into the future, as well as the
risk associated with those expected cash flows. On the other hand, profit maximization is a short-sighted goal
because it doesn’t consider the impact on future earnings or the firm’s risk position. Thus, profit maximization
would not necessarily lead to stock price maximization. A firm could maximize its current profit but go
bankrupt in the near future by implementing “corner-cutting” measures that increase profits. Such measures
might include not replacing equipment when it is worn out, decreasing the quality of the product that is
manufactured and sold, reducing the number of employees, and so forth. Although cutting costs in this
manner might maximize the firm’s net income in the short term, it could lead to bankruptcy in the long run if
the equipment required to sustain operations ceases to work or customers take their business to competitors
because the quality of the products has declined.
1-6 What are some actions stockholders can take to ensure that management’s interests and the interests of
stockholders align? What are some other factors that might influence management’s actions? (LO 1-3)
Answer:
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 3
accessible website, in whole or in part.
, Solution and Answer Guide: Besley and Brigham, CFIN, 8e, 2027, 9798214056692; Chapter 1: An Overview of Managerial Finance
Such factors as a compensation system that is based on management performance (e.g., bonuses tied to
profits, stock option plans) as well as the possibility of being removed from office (e.g., voted out of
office, an unfriendly tender offer by another firm) serve to keep management’s focus on stockholders’
interests. If a firm is taken over, or acquired, by another firm, generally top management is let go. To
help ensure that they are not in this position, management should take steps to ensure the firm is
operated as efficiently as possible. Efficient firms generally are priced correctly in the financial markets,
thus are not takeover targets.
1-7 If you were the owner of a proprietorship, would you make decisions to maximize the value of your
business or your personal satisfaction? (LO 1-2 & LO 1-3)
Answer:
The answer to this question depends on which action satisfies you more as the sole owner of the
business. But chances are you would be inclined to maximize your personal satisfaction, which does not
preclude you from maximizing the value of the business. No agency problem exists in a proprietorship
because there is only one owner, and they are the person who makes the day-to-day business decisions.
1-8 Suppose you are the president of a large corporation. How do you think the stockholders will react if you
decide to substantially increase the proportion of the company’s assets that is financed with debt. (LO
1-3)
Answer:
Provided the rate of return on assets exceeds the interest rate on debt, greater use of debt will raise the
expected rate of return on stockholders’ equity. Also, the interest on debt is tax deductible, which
provides a further advantage. However,
(1) greater use of debt will have a negative impact on the stockholders if the company’s return on assets
falls below the cost of debt, and (2) increased use of debt increases the chances of going bankrupt. The
effects of the use of debt, called “financial leverage,” are discussed in detail in Chapter 16.
1-9 What is corporate governance? How does corporate governance affect the returns generated for
stockholders? (LO 1-4)
Answer:
Corporate governance refers to the “set of rules” that a firm follows when conducting business. In general,
corporate governance relates to how a firm is operated. Corporate governance affects the manner in which a
firm approaches its decision-making tasks, treats its employees and customers, constructs its financial
statements, and so forth. Because its governance policy affects how a company does business, corporate
governance is a major factor that determines whether a firm “acts” ethically. If a firm does not have a good
corporate governance policy—that is, a good set of rules to follow—then there is a chance that management
might behave unethically—either intentionally or unintentionally—at some point. Firms that have good
corporate governance policies generally have higher values than firms that don’t.
1-10 Why do U.S. corporations go international? (LO 1-5)
Answer:
Firms “go international” for many reasons, including to seek new markets, to get access to raw materials,
and to avoid political hurdles, to name a few. Considering differential labor costs abroad, transportation,
tax advantages, and so forth, U.S. corporations can increase long-run profits by “going international.”
There are also nonprofit behavioral and strategic considerations, such as maximizing market share and
enhancing the prestige of corporate officers.
1-11 What are some factors that make financial decision making more complicated for firms that operate in
foreign countries than for purely domestic firms? (LO 1-5)
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 4
accessible website, in whole or in part.
Solution and Answer Guide
BESLEY AND BRIGHAM, CFIN, 8E, 2027, 9798214056692;
CHAPTER 1: AN OVERVIEW OF MANAGERIAL FINANCE
TABLE OF CONTENTS
Ethical Dilemma...........................................................................................................1
Chances Are What They Don’t Know Won’t Hurt Them!........................................................................1
Chapter 1 Solutions......................................................................................................3
Integrative Problem Solutions...................................................................................10
ETHICAL DILEMMA
CHANCES ARE WHAT THEY DON’T KNOW WON’T HURT THEM!
Ethical dilemma:
It appears that the ethical dilemma is whether Futuristic Electronic Technologies (FET) should continue to distribute
its new micro system even though laboratory tests have shown the system might be flawed. To make matters worse,
as an executive with FET, your salary is based on the performance of the company’s common stock, and it is
expected the stock will not do well unless the new micro system is successful. You need the new micro system to be
successful to ensure the overall compensation you earn from FET is sufficient to make the mortgage payments on
the expensive house you just purchased. What should you do?
Discussion questions:
Is there an ethical problem (dilemma)? If so, what is it?
You will get some interesting answers to these questions. In reality, the new micro system might not be flawed.
The information provided in the text indicates that the lab tests on the new micro system are not conclusive—it
is implied that additional tests are needed to reach more concrete conclusions. If an ethical dilemma exists, it
might be that FET is willing to introduce a new product without full knowledge of its flaws; but this is not
unusual in very competitive markets.
Should FET discontinue the distribution of its new micro system until further laboratory tests can be
completed?
Certainly, additional testing will give the company a better idea of whether a flaw actually exists, and, if there is
a flaw, to what degree it is harmful to customers. But, if distribution of the new micro system is temporarily
discontinued, FET’s competitors might be able to introduce their new systems and significantly cut into FET’s
share of the market. At the same time, if FET is not fully aware of any flaws in its system, continuing to
distribute a product of inferior quality might be extremely harmful to the company’s reputation.
There is no clear answer to this question because the extent of the problem is unknown—the flaw could be
nonexistent, it could exist and be very insignificant, or it could exist and cause very significant difficulties for
those customers purchasing the new micro system.
What action do you think FET should take?
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 1
accessible website, in whole or in part.
, Solution and Answer Guide: Besley and Brigham, CFIN, 8e, 2027, 9798214056692; Chapter 1: An Overview of Managerial Finance
There are a variety of responses to this question. Some students will suggest that FET ignore the flaw, because it
doesn’t seem to occur very often. Remind these students that the new micro system will be used by such financial
institutions as banks and savings and loan associations, by large corporations, and by governments to store large
amounts of financial data. If such data are lost, even once in 10 million retrievals, the consequences could be
devastating. Some students will suggest that FET should do “the right thing,” and discontinue distribution until
further testing is complete so it can be determined to what extent a flaw does exist, and the necessary corrections can
be made. A few students will suggest a third alternative—continue to distribute the new micro system but inform
those who buy it there is a possibility that a flaw exists. In addition, inform the customers that the new micro system
currently is undergoing further tests, and the results will be publicly announced as soon as they are available. And, if
it is determined a flaw actually exists, corrections will be made at no cost to the customer, and with as little
interruption as possible.
References:
It is well documented in the business press that Intel Corporation was embroiled in controversy over a flaw in the Pentium
computer chip it introduced in 1994. The cost of replacing the flawed chips that were installed in computers resulted in a
fourth-quarter profit in 1994 that was
37 percent lower than the previous year. In addition, a number of lawsuits were filed accusing Intel of fraud, false
advertising, and various violations of state laws protecting consumers.
On the other hand, in part because of the controversy created by the Intel situation, in 1995, Advanced Micro
Devices, Inc. delayed the distribution of its new computer chip, which was intended to compete directly with Intel’s
Pentium chip, because it was felt technical corrections and additional testing were needed.
You can find additional information concerning these two situations in articles that appear in The Wall Street
Journal at the end of 1994 and throughout 1995. The following articles might be assigned for background material:
“Chip Shot: Computer Giants’ War over Flaw in Pentium Jolts the PC Industry,” The Wall Street Journal, December
3, 1994, p. A1+.
“AMD Will Delay Delivery of New Chips Aimed at Competing with Intel Pentium,” The Wall Street Journal, April
11, 1995, p. B5.
AnnickJesdanun, “Experts Spot Security Flaw in Windows Vista Software,” The Tampa Tribune, December 27,
2006, Business 1+.
Other more recent examples can be found in the following articles:
Cade Metz and Nicole Perloth, “Researchers Discover Two Major Flaws in the World’s Computers,” The New York
Times, January 3, 2018. (http://www.nytimes.com) Available online at
https://www.nytimes.com/2018/01/03/business/computer-flaws.html.
Selena Larson, “Major Chip Flaws Affect Billions of Devices,” January 4, 2018, CNN Business.
(http://cnn.com/business) Available online at https://money.cnn.com/2018/01/03/
technology/computer-chip-flaw-security/index.html.
Roger Atiken, “Solving Blockchain’s Current Flaws & Enabling Future Mainstream Adoption.” Forbes, February
28, 2019. (http://www.forbes.com) Available online at
https://www.forbes.com/sites/rogeraitken/2019/02/28/solving-blockchains-current-
flaws-enabling-future-mainstream-adoption/#59bbeafa274b.
CHAPTER 1 SOLUTIONS
1-1 What is finance? What types of decisions do people in finance make? (LO 1-1)
Answer:
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 2
accessible website, in whole or in part.
, Solution and Answer Guide: Besley and Brigham, CFIN, 8e, 2027, 9798214056692; Chapter 1: An Overview of Managerial Finance
Finance deals with decisions about money. Finance decisions deal with how money is raised and used by
businesses, governments, and individuals. In business, decisions about cash inflows include for what
price products should be sold, how funds should be raised when firms have good investment
opportunities, and so forth. Decisions about cash outflows include what expenses must be incurred,
which investments should be purchased, and so forth.
1-2 Why should individuals who pursue careers in business have a basic understanding of finance even if
their jobs are in areas other than finance, such as marketing
or information systems? (LO 1-1)
Answer:
Simply stated, everyone should have a basic understanding of finance because everyone faces financial
decisions daily, whether those decisions are as simple as determining how much money to carry in one’s
pocket or they require more sophisticated thought processes, such as the purchase of a house or planning
for retirement. Persons who make business decisions must understand finance because their decisions
generally include an element of finance in the sense that the results of their decisions generally require
some type of funding to be operationalized.
1-3 What does it mean to maximize the value of a corporation? (LO 1-3)
Answer:
The value of a firm can be measured by the market value of its stock. Thus, the firm maximizes
value/wealth by maximizing the value of its stock.
1-4 In general terms, how is value measured? What three factors determine value? How does each factor
affect value? (LO 1-3)
Answer:
Value is measured as the present value of the cash flows that an investment is expected to generate
during its life. The three factors that determine value are
(1) the amount of the future cash flows, (2) the timing of the future cash flows, and (3) investors’
required rate of return. If the amount of the cash flows increases, the cash flows are received sooner,
investors’ required rate of return decreases, or any combination of these events occur, the value of an
investment will increase, and vice versa.
1-5 What is the difference between stock price maximization and profit maximization? Under what
conditions might profit maximization not lead to stock price maximization? (LO 1-3)
Answer:
A firm’s value is determined by the cash flows it is expected to generate long into the future, as well as the
risk associated with those expected cash flows. On the other hand, profit maximization is a short-sighted goal
because it doesn’t consider the impact on future earnings or the firm’s risk position. Thus, profit maximization
would not necessarily lead to stock price maximization. A firm could maximize its current profit but go
bankrupt in the near future by implementing “corner-cutting” measures that increase profits. Such measures
might include not replacing equipment when it is worn out, decreasing the quality of the product that is
manufactured and sold, reducing the number of employees, and so forth. Although cutting costs in this
manner might maximize the firm’s net income in the short term, it could lead to bankruptcy in the long run if
the equipment required to sustain operations ceases to work or customers take their business to competitors
because the quality of the products has declined.
1-6 What are some actions stockholders can take to ensure that management’s interests and the interests of
stockholders align? What are some other factors that might influence management’s actions? (LO 1-3)
Answer:
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 3
accessible website, in whole or in part.
, Solution and Answer Guide: Besley and Brigham, CFIN, 8e, 2027, 9798214056692; Chapter 1: An Overview of Managerial Finance
Such factors as a compensation system that is based on management performance (e.g., bonuses tied to
profits, stock option plans) as well as the possibility of being removed from office (e.g., voted out of
office, an unfriendly tender offer by another firm) serve to keep management’s focus on stockholders’
interests. If a firm is taken over, or acquired, by another firm, generally top management is let go. To
help ensure that they are not in this position, management should take steps to ensure the firm is
operated as efficiently as possible. Efficient firms generally are priced correctly in the financial markets,
thus are not takeover targets.
1-7 If you were the owner of a proprietorship, would you make decisions to maximize the value of your
business or your personal satisfaction? (LO 1-2 & LO 1-3)
Answer:
The answer to this question depends on which action satisfies you more as the sole owner of the
business. But chances are you would be inclined to maximize your personal satisfaction, which does not
preclude you from maximizing the value of the business. No agency problem exists in a proprietorship
because there is only one owner, and they are the person who makes the day-to-day business decisions.
1-8 Suppose you are the president of a large corporation. How do you think the stockholders will react if you
decide to substantially increase the proportion of the company’s assets that is financed with debt. (LO
1-3)
Answer:
Provided the rate of return on assets exceeds the interest rate on debt, greater use of debt will raise the
expected rate of return on stockholders’ equity. Also, the interest on debt is tax deductible, which
provides a further advantage. However,
(1) greater use of debt will have a negative impact on the stockholders if the company’s return on assets
falls below the cost of debt, and (2) increased use of debt increases the chances of going bankrupt. The
effects of the use of debt, called “financial leverage,” are discussed in detail in Chapter 16.
1-9 What is corporate governance? How does corporate governance affect the returns generated for
stockholders? (LO 1-4)
Answer:
Corporate governance refers to the “set of rules” that a firm follows when conducting business. In general,
corporate governance relates to how a firm is operated. Corporate governance affects the manner in which a
firm approaches its decision-making tasks, treats its employees and customers, constructs its financial
statements, and so forth. Because its governance policy affects how a company does business, corporate
governance is a major factor that determines whether a firm “acts” ethically. If a firm does not have a good
corporate governance policy—that is, a good set of rules to follow—then there is a chance that management
might behave unethically—either intentionally or unintentionally—at some point. Firms that have good
corporate governance policies generally have higher values than firms that don’t.
1-10 Why do U.S. corporations go international? (LO 1-5)
Answer:
Firms “go international” for many reasons, including to seek new markets, to get access to raw materials,
and to avoid political hurdles, to name a few. Considering differential labor costs abroad, transportation,
tax advantages, and so forth, U.S. corporations can increase long-run profits by “going international.”
There are also nonprofit behavioral and strategic considerations, such as maximizing market share and
enhancing the prestige of corporate officers.
1-11 What are some factors that make financial decision making more complicated for firms that operate in
foreign countries than for purely domestic firms? (LO 1-5)
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 4
accessible website, in whole or in part.
