Instructor’s Resource Manual
for
Principles of Managerial
Finance
Sixteenth Edition
ISBN-13: 978-0-13-694561-1
ISBN-10: 0-13-694561-9
, Chapter 1 The Role and Environment of Managerial Finance iii
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
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
,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
Integrative 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 managers of a firm might pursue. The chapter provides a
justification for focusing on shareholders rather than stakeholders 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 disciplines of
finance, economics, and accounting.
The third section describes pros and cons of different legal forms for a business. This section places particular
emphasis on differences in taxation of proprietorships, partnerships, and corporations, and it highlights the
importance of the marginal tax rate rather than the average tax rate. Next, this section describes the classical
principal-agent problem and describes both internal and external corporate governance mechanisms that help
manage 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, marketing, or operations. Whenever possible, personal-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, prompting
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 managing its senior living facilities.
Students were asked whether the proposal would make Brookdale’s shareholders 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
investor 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 per
share now $26, shareholder wealth rose to $4.82 billion—a net gain of $0.86 billion.
for
Principles of Managerial
Finance
Sixteenth Edition
ISBN-13: 978-0-13-694561-1
ISBN-10: 0-13-694561-9
, Chapter 1 The Role and Environment of Managerial Finance iii
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
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
,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
Integrative 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 managers of a firm might pursue. The chapter provides a
justification for focusing on shareholders rather than stakeholders 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 disciplines of
finance, economics, and accounting.
The third section describes pros and cons of different legal forms for a business. This section places particular
emphasis on differences in taxation of proprietorships, partnerships, and corporations, and it highlights the
importance of the marginal tax rate rather than the average tax rate. Next, this section describes the classical
principal-agent problem and describes both internal and external corporate governance mechanisms that help
manage 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, marketing, or operations. Whenever possible, personal-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, prompting
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 managing its senior living facilities.
Students were asked whether the proposal would make Brookdale’s shareholders 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
investor 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 per
share now $26, shareholder wealth rose to $4.82 billion—a net gain of $0.86 billion.
