Instructor’s Resource Manual fo
66 66 66
r
Principles of Managerial Financ
66 66 66
e
Sixteenth66Edition
ISBN-13:66 978-0-13-694561-1
ISBN-10:66 0-13-694561-9
, Chapter6616 6 6 6 The66Role66and66Environment66of66Managerial66Finance
iii
Table of Contents
66 66
PART66166Introduction66to66Managerial66Finance 1
1 The66Role66of66Managerial66Finance 3
2 The66Financial66Market66Environment 19
PART66266Financial66Tools 29
3 Financial66Statements66and66Ratio66Analysis 31
4 Long-66and66Short-Term66Financial66Planning 55
5 Time66Value66of66Money 79
PART66366Valuation66of66Securities 119
6 Interest66Rates66and66Bond66Valuation 121
7 Stock66Valuation 149
PART66466Risk66and66the66Required66Rate66of66Return 167
8 Risk66and66Return 169
9 The66Cost66of66Capital 205
PART66566Long-Term66Investment66Decisions 231
10 Capital66Budgeting66Techniques 233
11 Capital66Budgeting66Cash66Flows 261
12 Risk66Refinements66in66Capital66Budgeting 293
PART66666Long-Term66Financial66Decisions 327
13 Leverage66and66Capital66Structure 329
14 Payout66Policy 349
PART66766Short-Term66Financial66Decisions 367
15 Working66Capital66and66Current66Assets66Management 369
16 Current66Liabilities66Management 383
PART66866Special66Topics66in66Managerial66Finance 399
17 Hybrid66and66Derivative66Securities 401
18 Mergers,66LBOs,66Divestitures,66and66Business66Failure 421
19 International66Managerial66Finance 437
,iv Gitman6 6 •6 6 Principles66of66Managerial66Finance,66Twel
fth66 Edition
Part One 66
Introduction66to66Managerial66Finance
Chapters66in66This66Part
Chapter661 The66Role66of66Managerial66Finance
Chapter662
The66Financial66Market66Environm
ent66Integrative66Case661:66Merit66Enterprise66Corp.
, Chapter 1 66
The66Role66of66Managerial66Finance
Instructor’s66Resources
Chapter66Overview
This66chapter66introduces66the66field66of66finance66through66building-
block66terms66and66concepts.66The66chapter66starts66by66explaining66what66a66firm66is66and66discussing66the66go
als66that66managers66of66a66firm66might66pursue.66The66chapter66provides66a66justification66for66focusing66on66sh
areholders66rather66than66stakeholders66broadly,66but66it66also66discusses66other66goals66that66firms66might66pur
sue.66The66opening66section66concludes66with66material66on66the66importance66of66ethical66behavior66in66busine
ss.
The66next66section66discusses66the66managerial66finance66function,66the66key66decisions66that66financial66managers
66make,66and66the66principles66that66guide66their66decisions.66The66discussion66draws66out66distinctions66among6
6the66overlapping66disciplines66of66finance,66economics,66and66accounting.
The66third66section66describes66pros66and66cons66of66different66legal66forms66for66a66business.66This66section
66places66particular66emphasis66on66differences66in66taxation66of66proprietorships,66partnerships,66and66corp
orations,66and66it66highlights66the66importance66of66the66marginal66tax66rate66rather66than66the66average66ta
x66rate.66Next,66this66section66describes66the66classical66principal-
agent66problem66and66describes66both66internal66and66external66corporate66governance66mechanisms66that66
help66manage66that66problem.
This66chapter66and66the66ones66to66follow66stress66the66important66role66finance66vocabulary,66concepts,66and66t
ools66will66play66in66the66professional66and66personal66lives66of66students—
even66those66choosing66other66majors,66such66as66accounting,66economics66information66systems,66management,6
6marketing,66or66operations.66Whenever66possible,66personal-
finance66applications66are66provided66to66motivate66and66illustrate66topics.66This66pedagogical66approach66should
66inspire66students66to66master66chapter66content66quickly66and66easily.
Suggested66Answer66to66Opener-in-Review
Students66learned66the66stock66price66of66Brookdale66Senior66Living66lost6680%66of66its66value66from66201566to6
62019,66prompting66Land66and66Buildings66(a66prominent66stockholder)66to66urge66the66firm66sell66its66real-
estate66holdings,66distribute66the66anticipated66net66sales66proceeds66($2166cash)66to66shareholders,66and66then66f
ocus66on66managing66its66senior66living66facilities.66Students66were66asked66whether66the66proposal66would66ma
ke66Brookdale’s66shareholders66better66off66if66the66expected66cash66proceeds66were66realized,66but66stock66pri
ce66dipped66to66$566per66share.
Before66restructuring,66an66investor66with66one66Brookdale66share66had66$21.3566in66total66wealth.66Afterward,6
6that66same66investor66might66have66a66share66worth66$566and66$2166in66cash—
total66wealth66of66$26.66The66hypothetical66shareholder66reaped66a66gain66of66$4.6566per66share66or6621.8%.66Bef
66 66 66
r
Principles of Managerial Financ
66 66 66
e
Sixteenth66Edition
ISBN-13:66 978-0-13-694561-1
ISBN-10:66 0-13-694561-9
, Chapter6616 6 6 6 The66Role66and66Environment66of66Managerial66Finance
iii
Table of Contents
66 66
PART66166Introduction66to66Managerial66Finance 1
1 The66Role66of66Managerial66Finance 3
2 The66Financial66Market66Environment 19
PART66266Financial66Tools 29
3 Financial66Statements66and66Ratio66Analysis 31
4 Long-66and66Short-Term66Financial66Planning 55
5 Time66Value66of66Money 79
PART66366Valuation66of66Securities 119
6 Interest66Rates66and66Bond66Valuation 121
7 Stock66Valuation 149
PART66466Risk66and66the66Required66Rate66of66Return 167
8 Risk66and66Return 169
9 The66Cost66of66Capital 205
PART66566Long-Term66Investment66Decisions 231
10 Capital66Budgeting66Techniques 233
11 Capital66Budgeting66Cash66Flows 261
12 Risk66Refinements66in66Capital66Budgeting 293
PART66666Long-Term66Financial66Decisions 327
13 Leverage66and66Capital66Structure 329
14 Payout66Policy 349
PART66766Short-Term66Financial66Decisions 367
15 Working66Capital66and66Current66Assets66Management 369
16 Current66Liabilities66Management 383
PART66866Special66Topics66in66Managerial66Finance 399
17 Hybrid66and66Derivative66Securities 401
18 Mergers,66LBOs,66Divestitures,66and66Business66Failure 421
19 International66Managerial66Finance 437
,iv Gitman6 6 •6 6 Principles66of66Managerial66Finance,66Twel
fth66 Edition
Part One 66
Introduction66to66Managerial66Finance
Chapters66in66This66Part
Chapter661 The66Role66of66Managerial66Finance
Chapter662
The66Financial66Market66Environm
ent66Integrative66Case661:66Merit66Enterprise66Corp.
, Chapter 1 66
The66Role66of66Managerial66Finance
Instructor’s66Resources
Chapter66Overview
This66chapter66introduces66the66field66of66finance66through66building-
block66terms66and66concepts.66The66chapter66starts66by66explaining66what66a66firm66is66and66discussing66the66go
als66that66managers66of66a66firm66might66pursue.66The66chapter66provides66a66justification66for66focusing66on66sh
areholders66rather66than66stakeholders66broadly,66but66it66also66discusses66other66goals66that66firms66might66pur
sue.66The66opening66section66concludes66with66material66on66the66importance66of66ethical66behavior66in66busine
ss.
The66next66section66discusses66the66managerial66finance66function,66the66key66decisions66that66financial66managers
66make,66and66the66principles66that66guide66their66decisions.66The66discussion66draws66out66distinctions66among6
6the66overlapping66disciplines66of66finance,66economics,66and66accounting.
The66third66section66describes66pros66and66cons66of66different66legal66forms66for66a66business.66This66section
66places66particular66emphasis66on66differences66in66taxation66of66proprietorships,66partnerships,66and66corp
orations,66and66it66highlights66the66importance66of66the66marginal66tax66rate66rather66than66the66average66ta
x66rate.66Next,66this66section66describes66the66classical66principal-
agent66problem66and66describes66both66internal66and66external66corporate66governance66mechanisms66that66
help66manage66that66problem.
This66chapter66and66the66ones66to66follow66stress66the66important66role66finance66vocabulary,66concepts,66and66t
ools66will66play66in66the66professional66and66personal66lives66of66students—
even66those66choosing66other66majors,66such66as66accounting,66economics66information66systems,66management,6
6marketing,66or66operations.66Whenever66possible,66personal-
finance66applications66are66provided66to66motivate66and66illustrate66topics.66This66pedagogical66approach66should
66inspire66students66to66master66chapter66content66quickly66and66easily.
Suggested66Answer66to66Opener-in-Review
Students66learned66the66stock66price66of66Brookdale66Senior66Living66lost6680%66of66its66value66from66201566to6
62019,66prompting66Land66and66Buildings66(a66prominent66stockholder)66to66urge66the66firm66sell66its66real-
estate66holdings,66distribute66the66anticipated66net66sales66proceeds66($2166cash)66to66shareholders,66and66then66f
ocus66on66managing66its66senior66living66facilities.66Students66were66asked66whether66the66proposal66would66ma
ke66Brookdale’s66shareholders66better66off66if66the66expected66cash66proceeds66were66realized,66but66stock66pri
ce66dipped66to66$566per66share.
Before66restructuring,66an66investor66with66one66Brookdale66share66had66$21.3566in66total66wealth.66Afterward,6
6that66same66investor66might66have66a66share66worth66$566and66$2166in66cash—
total66wealth66of66$26.66The66hypothetical66shareholder66reaped66a66gain66of66$4.6566per66share66or6621.8%.66Bef
