SOLUTIONS MANUAL
CFIN 7th Edition
By Scott Besley, Eugene Brigham
SC
O
R
EG
U
ID
ES
,Table Content
Part 1.
Chapter 1. An Overview of Managerial Finance
Part 2.
Chapter 2. Analysis of Financial Statements
SC
Chapter 3. The Financial Environment: Markets, Institutions, and Investment Banking
Chapter 4. Time Value of Money
Part 3.
O
Chapter 5. The Cost of Money (Interest Rates)
Chapter 6. Bonds (Debt)—Characteristics and Valuation
R
Chapter 7. Stocks (Equity)—Characteristics and Valuation
Chapter 8. Risk and Rates of Return
EG
Part 4.
Chapter 9. Capital Budgeting Techniques
Chapter 10. Project Cash Flows and Risk
U
Part 5.
Chapter 11. The Cost of Capital
ID
Chapter 12. Capital Structure
Chapter 13. Distribution of Retained Earnings: Dividends and Stock Repurchases
ES
Part 6.
Chapter 14. Managing Short-Term Financing (Liabilities)
Chapter 15. Managing Short-Term Assets
Part 7.
Chapter 16. Financial Planning and Control
, 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)
SC
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 salary compensation you
expect to be associated with the success of the new micro system to make the mortgage
O
payments on the expensive house you just purchased. What should you do?
Discussion questions:
R
Is there an ethical problem (dilemma)? If so, what is it?
EG
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
U
willing to introduce a new product without full knowledge of its flaws; but this is not
unusual in very competitive markets.
ID
Should FET discontinue the distribution of its new micro system until further laboratory
tests can be completed?
ES
Certainly, additional testing will give the company a better idea of whether a flaw
actually does exist, 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?
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
SC
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
O
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
R
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
EG
publicly announced as soon as they are available; 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:
U
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
ID
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
ES
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
CFIN 7th Edition
By Scott Besley, Eugene Brigham
SC
O
R
EG
U
ID
ES
,Table Content
Part 1.
Chapter 1. An Overview of Managerial Finance
Part 2.
Chapter 2. Analysis of Financial Statements
SC
Chapter 3. The Financial Environment: Markets, Institutions, and Investment Banking
Chapter 4. Time Value of Money
Part 3.
O
Chapter 5. The Cost of Money (Interest Rates)
Chapter 6. Bonds (Debt)—Characteristics and Valuation
R
Chapter 7. Stocks (Equity)—Characteristics and Valuation
Chapter 8. Risk and Rates of Return
EG
Part 4.
Chapter 9. Capital Budgeting Techniques
Chapter 10. Project Cash Flows and Risk
U
Part 5.
Chapter 11. The Cost of Capital
ID
Chapter 12. Capital Structure
Chapter 13. Distribution of Retained Earnings: Dividends and Stock Repurchases
ES
Part 6.
Chapter 14. Managing Short-Term Financing (Liabilities)
Chapter 15. Managing Short-Term Assets
Part 7.
Chapter 16. Financial Planning and Control
, 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)
SC
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 salary compensation you
expect to be associated with the success of the new micro system to make the mortgage
O
payments on the expensive house you just purchased. What should you do?
Discussion questions:
R
Is there an ethical problem (dilemma)? If so, what is it?
EG
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
U
willing to introduce a new product without full knowledge of its flaws; but this is not
unusual in very competitive markets.
ID
Should FET discontinue the distribution of its new micro system until further laboratory
tests can be completed?
ES
Certainly, additional testing will give the company a better idea of whether a flaw
actually does exist, 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?
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
SC
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
O
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
R
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
EG
publicly announced as soon as they are available; 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:
U
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
ID
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
ES
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
