Solutions Manual
FINANCIAL
MANAGEMENT
Principles and Practice
Fourth Edition
demands of each field.6.1. Challenges in Business ExamsOne of the primary challenges in business exams is the need to balance theoretical understanding with practical application. Many business exams, especially those
based on case studies, require students to analyze.________________________________________
Timothy J. Gallagher
Colorado State University
Joseph D. Andrew, Jr.
Webster University
2006 Freeload Press, Madison Wisconsin
, Solutions Manual
to accompany
Financial Management: Principles and Practice
4rd Edition
by Timothy J. Gallagher and Joseph D. Andrew, Jr.
This solutions manual provides the answers to all the review questions and end-of-chapter problems
in Financial Management: Principles and Practice, by Gallagher and Andrew. The answers and the steps
taken to obtain the answers are shown.
We remind our readers that in finance there is often more than one answer to a question or to a
problem, depending on one’s viewpoint and assumptions. We provide one answer to each question and show
one approach to solving each problem. Other answers and approaches may be equally valid, or judged even
better according to each individual’s preference.
with current business trends. Case studies from leading businesses can be helpful, as they illustrate how business concepts are applied in real-world scenarios. Group discussions and practicing sample case studies can aid in
refining analytical skills.___ demands of each field.6.1. Challenges in Business ExamsOne of the primary challenges in business exams is the need to balance theoretical understanding with practical application. Many
business exams, especially those based on case studies, require students to analyze___________
2
, Chapter 1 Solutions
Answers to Review Questions
1. How is finance related to the disciplines of accounting and economics?
Financial management is essentially a combination of accounting and economics. First, financial
managers use accounting information—balance sheets, income statements, and so on—to analyze,
plan, and allocate financial resources for business firms. Second, financial managers use economic
principles to guide them in making financial decisions that are in the best interest of the firm. In other
words, finance is an applied area of economics that relies on accounting for input.
with current business trends. Case studies from leading businesses can be helpful, as they illustrate how business concepts are applied in real-world scenarios. Group discussions and practicing sample case studies can aid in
demands of each field.6.1. Challenges in Business ExamsOne of the primary challenges in business exams is the need to balance theoretical understanding with practical application. Many business exams, especially those
based on case studies, require students to analyze
2. List and describe the three career opportunities in the field of finance.
Finance has three main career paths: financial management, financial markets and institutions, and
investments.
Financial management involves managing the finances of a business. Financial managers—people
who manage a business firm's finances—perform a number of tasks. They analyze and forecast a
firm's finances; assess risk, evaluate investment opportunities, decide when and where to find money
sources and how much money to raise, and decide how much money to return to the firm's investors.
Bankers, stockbrokers, and others who work in financial markets and institutions focus on the flow
of money through financial institutions and the markets in which financial assets are exchanged.
They track the impact of interest rates on the flow of that money.
People who work in the field of investments locate, select, and manage income-producing assets. For
instance, security analysts and mutual fund managers both operate in the investment field.
3. Describe the duties of the financial manager in a business firm.
Financial managers measure the firm's performance, determine what the financial consequences will
be if the firm maintains its present course or changes it, and recommend how the firm should use its
assets. Financial managers also locate external financing sources and recommend the most beneficial
mix of financing sources, and they determine the financial expectations of the firm's owners.
All financial managers must be able to communicate, analyze, and make decisions based on
information from many sources. To do this, they need to be able to analyze financial statements,
forecast and plan, and determine the effect of size, risk, and timing of cash flows.
4. What is the basic goal of a business?
3
, The primary financial goal of the business firm is to maximize the wealth of the firm's owners.
Wealth, in turn, refers to value. If a group of people owns a business firm, the contribution that firm
makes to that group's wealth is determined by the market value of that firm.
5. List and explain the three financial factors that influence the value of a business.
The three factors that affect the value of a firm's stock price are cash flow, timing, and risk.
The Importance of Cash Flow: In business, cash is what pays the bills. It is also what the firm
receives in exchange for its products and services. Cash is therefore of ultimate importance, and the
expectation that the firm will generate cash in the future is one of the factors that gives the firm its
value.
The Effect of Timing on Cash Flows: Owners and potential investors look at when firms can expect
to receive cash and when they can expect to pay out cash. All other factors being equal, the sooner
companies expect to receive cash and the later they expect to pay out cash, the more valuable the
firm and the higher its stock price will be.
The Influence of Risk: Risk affects value because the less certain owners and investors are about a
firm's expected future cash flows, the lower they will value the company. The more certain owners
and investors are about a firm's expected future cash flows, the higher they will value the company.
In short, companies whose expected future cash flows are doubtful will have lower values than
companies whose expected future cash flows are virtually certain.
demands of each field.6.1. Challenges in Business ExamsOne of the primary challenges in business exams is the need to balance theoretical understanding with practical application. Many business exams, especially those
based on case studies, require students to analyzerefining analytical skills.________________________________________
6. Explain why accounting profits and cash flows are not the same thing.
Stock value depends on future cash flows, their timing, and their riskiness. Profit calculations do not
consider these three factors. Profit, as defined in accounting, is simply the difference between sales
revenue and expenses. It is true that more profits are generally better than less profits, but when the
pursuit of short-term profits adversely affects the size of future cash flows, their timing, or their
riskiness, then these profit maximization efforts are detrimental to the firm.
7. What is an agent? What are the responsibilities of an agent?
An agent is a person who has the implied or actual authority to act on behalf of another. The owners
whom the agents represent are the principals. Agents have a legal and ethical responsibility to make
decisions that further the interests of the principals.
8. Describe how society's interests can influence financial managers.
Sometimes the interests of a business firm's owners are not the same as the interests of society. For
instance, the cost of properly disposing of toxic waste can be so high that companies may be tempted
to simply dump their waste in nearby rivers. In so doing, the companies can keep costs low and
profits high, and drive their stock prices higher (if they are not caught). However, many people
suffer from the polluted environment. This is why we have environmental and other similar laws:
So that society's best interests take precedence over the interests of individual company owners.
4
FINANCIAL
MANAGEMENT
Principles and Practice
Fourth Edition
demands of each field.6.1. Challenges in Business ExamsOne of the primary challenges in business exams is the need to balance theoretical understanding with practical application. Many business exams, especially those
based on case studies, require students to analyze.________________________________________
Timothy J. Gallagher
Colorado State University
Joseph D. Andrew, Jr.
Webster University
2006 Freeload Press, Madison Wisconsin
, Solutions Manual
to accompany
Financial Management: Principles and Practice
4rd Edition
by Timothy J. Gallagher and Joseph D. Andrew, Jr.
This solutions manual provides the answers to all the review questions and end-of-chapter problems
in Financial Management: Principles and Practice, by Gallagher and Andrew. The answers and the steps
taken to obtain the answers are shown.
We remind our readers that in finance there is often more than one answer to a question or to a
problem, depending on one’s viewpoint and assumptions. We provide one answer to each question and show
one approach to solving each problem. Other answers and approaches may be equally valid, or judged even
better according to each individual’s preference.
with current business trends. Case studies from leading businesses can be helpful, as they illustrate how business concepts are applied in real-world scenarios. Group discussions and practicing sample case studies can aid in
refining analytical skills.___ demands of each field.6.1. Challenges in Business ExamsOne of the primary challenges in business exams is the need to balance theoretical understanding with practical application. Many
business exams, especially those based on case studies, require students to analyze___________
2
, Chapter 1 Solutions
Answers to Review Questions
1. How is finance related to the disciplines of accounting and economics?
Financial management is essentially a combination of accounting and economics. First, financial
managers use accounting information—balance sheets, income statements, and so on—to analyze,
plan, and allocate financial resources for business firms. Second, financial managers use economic
principles to guide them in making financial decisions that are in the best interest of the firm. In other
words, finance is an applied area of economics that relies on accounting for input.
with current business trends. Case studies from leading businesses can be helpful, as they illustrate how business concepts are applied in real-world scenarios. Group discussions and practicing sample case studies can aid in
demands of each field.6.1. Challenges in Business ExamsOne of the primary challenges in business exams is the need to balance theoretical understanding with practical application. Many business exams, especially those
based on case studies, require students to analyze
2. List and describe the three career opportunities in the field of finance.
Finance has three main career paths: financial management, financial markets and institutions, and
investments.
Financial management involves managing the finances of a business. Financial managers—people
who manage a business firm's finances—perform a number of tasks. They analyze and forecast a
firm's finances; assess risk, evaluate investment opportunities, decide when and where to find money
sources and how much money to raise, and decide how much money to return to the firm's investors.
Bankers, stockbrokers, and others who work in financial markets and institutions focus on the flow
of money through financial institutions and the markets in which financial assets are exchanged.
They track the impact of interest rates on the flow of that money.
People who work in the field of investments locate, select, and manage income-producing assets. For
instance, security analysts and mutual fund managers both operate in the investment field.
3. Describe the duties of the financial manager in a business firm.
Financial managers measure the firm's performance, determine what the financial consequences will
be if the firm maintains its present course or changes it, and recommend how the firm should use its
assets. Financial managers also locate external financing sources and recommend the most beneficial
mix of financing sources, and they determine the financial expectations of the firm's owners.
All financial managers must be able to communicate, analyze, and make decisions based on
information from many sources. To do this, they need to be able to analyze financial statements,
forecast and plan, and determine the effect of size, risk, and timing of cash flows.
4. What is the basic goal of a business?
3
, The primary financial goal of the business firm is to maximize the wealth of the firm's owners.
Wealth, in turn, refers to value. If a group of people owns a business firm, the contribution that firm
makes to that group's wealth is determined by the market value of that firm.
5. List and explain the three financial factors that influence the value of a business.
The three factors that affect the value of a firm's stock price are cash flow, timing, and risk.
The Importance of Cash Flow: In business, cash is what pays the bills. It is also what the firm
receives in exchange for its products and services. Cash is therefore of ultimate importance, and the
expectation that the firm will generate cash in the future is one of the factors that gives the firm its
value.
The Effect of Timing on Cash Flows: Owners and potential investors look at when firms can expect
to receive cash and when they can expect to pay out cash. All other factors being equal, the sooner
companies expect to receive cash and the later they expect to pay out cash, the more valuable the
firm and the higher its stock price will be.
The Influence of Risk: Risk affects value because the less certain owners and investors are about a
firm's expected future cash flows, the lower they will value the company. The more certain owners
and investors are about a firm's expected future cash flows, the higher they will value the company.
In short, companies whose expected future cash flows are doubtful will have lower values than
companies whose expected future cash flows are virtually certain.
demands of each field.6.1. Challenges in Business ExamsOne of the primary challenges in business exams is the need to balance theoretical understanding with practical application. Many business exams, especially those
based on case studies, require students to analyzerefining analytical skills.________________________________________
6. Explain why accounting profits and cash flows are not the same thing.
Stock value depends on future cash flows, their timing, and their riskiness. Profit calculations do not
consider these three factors. Profit, as defined in accounting, is simply the difference between sales
revenue and expenses. It is true that more profits are generally better than less profits, but when the
pursuit of short-term profits adversely affects the size of future cash flows, their timing, or their
riskiness, then these profit maximization efforts are detrimental to the firm.
7. What is an agent? What are the responsibilities of an agent?
An agent is a person who has the implied or actual authority to act on behalf of another. The owners
whom the agents represent are the principals. Agents have a legal and ethical responsibility to make
decisions that further the interests of the principals.
8. Describe how society's interests can influence financial managers.
Sometimes the interests of a business firm's owners are not the same as the interests of society. For
instance, the cost of properly disposing of toxic waste can be so high that companies may be tempted
to simply dump their waste in nearby rivers. In so doing, the companies can keep costs low and
profits high, and drive their stock prices higher (if they are not caught). However, many people
suffer from the polluted environment. This is why we have environmental and other similar laws:
So that society's best interests take precedence over the interests of individual company owners.
4
