Instructor’sResourceManual for
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PrinciplesofManagerial Finance
f f f
Sixteenth Edition
f
ISBN-13: 978-0-13-694561-1
f
ISBN-10: 0-13-694561-9
f
, Chapter 1
f f f The Role and Environment of Managerial Finance
f f f f f f iii
Tableof Contents f f
PART 1 Introduction to Managerial Finance
f f f f f 1
1 The Role of Managerial Finance
f f f f 3
2 The Financial Market Environment
f f f 19
PART 2 Financial Tools
f f f 29
3 Financial Statements and Ratio Analysis f f f f 31
4 Long- and Short-Term Financial Planning
f f f f 55
5 Time Value of Money
f f f 79
PART 3 Valuation of Securities
f f f f 119
6 Interest Rates and Bond Valuation
f f f f 121
7 Stock Valuation f 149
PART 4 Risk and the Required Rate of Return
f f f f f f f f 167
8 Risk and Return
f f 169
9 The Cost of Capital
f f f 205
PART 5 Long-Term Investment Decisions
f f f f 231
10 Capital Budgeting Techniques f f 233
11 Capital Budgeting Cash Flows f f f 261
12 Risk Refinements in Capital Budgeting
f f f f 293
PART 6 Long-TermFinancial Decisions
f f f f 327
13 Leverage and Capital Structure f f f 329
14 Payout Policy f 349
PART 7 Short-TermFinancial Decisions
f f f f 367
15 Working Capital and Current Assets Management
f f f f f 369
16 Current Liabilities Management f f 383
PART 8 Special Topics in Managerial Finance
f f f f f f 399
17 Hybrid and Derivative Securities
f f f 401
18 Mergers, LBOs, Divestitures, and Business Failure
f f f f f 421
19 InternationalManagerial Finance f f 437
,iv Gitman • Principles of Managerial Finance, Twelfth Edition
f f f f f f f
PartOne f
Introduction to Managerial Finance f f f
Chapters in This Part
f f f
Chapter 1 f The Role of Managerial Finance
f f f f
Chapter 2 f TheFinancialMarketEnvironment
f f f
Integrative Case 1: Merit Enterprise Corp.
f f f f f f
, Chapter1 f
The Role of Managerial Finance
f f f f
Instructor’s Resources f
Chapter Overview f
This chapter introduces the field of finance through building-block terms and concepts. The chapter starts by
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explaining what a firm is and discussing the goals that managers of a firm might pursue. The chapter provides a
f f f f f f f f f f f f f f f f f f f f
justification for focusing on shareholders rather than stakeholders broadly, but it also discusses other goals that firms
f f f f f f f f f f f f f f f f f
might pursue. The opening section concludes with material on the importance of ethical behavior in business.
f f f f f f f f f f f f f f f f
The next section discusses the managerial finance function, the key decisions that financial managers make, and the
f f f f f f f f f f f f f f f f
principles that guide their decisions. The discussion draws out distinctions among the overlapping disciplines of
f f f f f f f f f f f f f f f
finance, economics, and accounting.
f f f f
The third section describes pros and cons of different legal forms for a business. This section places particular
f f f f f f f f f f f f f f f f f
emphasis on differences in taxation of proprietorships, partnerships, and corporations, and it highlights the
f f f f f f f f f f f f f f
importance of the marginal tax rate rather than the average tax rate. Next, this section describes the classical
f f f f f f f f f f f f f f f f f f
principal-agent problem and describes both internal and external corporate governance mechanisms that help
f f f f f f f f f f f f f
manage that problem.
f f f
This chapter and the ones to follow stress the important role finance vocabulary, concepts, and tools will play in the
f f f f f f f f f f f f f f f f f f f
professional and personal lives of students—even those choosing other majors, such as accounting, economics
f f f f f f f f f f f f f f
information systems, management, marketing, or operations. Whenever possible, personal-finance applications are
f f f f f f f f f f f
provided to motivate and illustrate topics. This pedagogical approach should inspire students to master chapter
f f f f f f f f f f f f f f f
content quickly and easily.
f f f f
Suggested Answer toOpener-in-Review f f f
Students learned the stock price of Brookdale Senior Living lost 80% of its value from 2015 to 2019, prompting Land
f f f f f f f f f f f f f f f f f f f
and Buildings (a prominent stockholder) to urge the firm sell its real-estate holdings, distribute the anticipated net
f f f f f f f f f f f f f f f f f
sales proceeds ($21 cash) to shareholders, and then focus on managing its senior living facilities. Students were asked
f f f f f f f f f f f f f f f f f f
whether the proposal would make Brookdale’s shareholders better off if the expected cash proceeds were realized,
f f f f f f f f f f f f f f f f
but stock price dipped to $5 per share.
f f f f f f f f
Before restructuring, an investor with one Brookdale share had $21.35 in total wealth. Afterward, that same investor
f f f f f f f f f f f f f f f f
might have a share worth $5 and $21 in cash—total wealth of $26. The hypothetical shareholder reaped a gain of $4.65
f f f f f f f f f f f f f f f f f f f f f
per share or 21.8%. Before the asset sale, with 185.45 million shares outstanding and a share price of
f f f f f f f f f f f f f f f f f f
$21.35, total shareholder wealth was $3.96 billion. After the sale, with same shares outstanding and wealth per share
f f f f f f f f f f f f f f f f f
now $26, shareholder wealth rose to $4.82 billion—a net gain of $0.86 billion.
f f f f f f f f f f f f f
f f f
PrinciplesofManagerial Finance
f f f
Sixteenth Edition
f
ISBN-13: 978-0-13-694561-1
f
ISBN-10: 0-13-694561-9
f
, Chapter 1
f f f The Role and Environment of Managerial Finance
f f f f f f iii
Tableof Contents f f
PART 1 Introduction to Managerial Finance
f f f f f 1
1 The Role of Managerial Finance
f f f f 3
2 The Financial Market Environment
f f f 19
PART 2 Financial Tools
f f f 29
3 Financial Statements and Ratio Analysis f f f f 31
4 Long- and Short-Term Financial Planning
f f f f 55
5 Time Value of Money
f f f 79
PART 3 Valuation of Securities
f f f f 119
6 Interest Rates and Bond Valuation
f f f f 121
7 Stock Valuation f 149
PART 4 Risk and the Required Rate of Return
f f f f f f f f 167
8 Risk and Return
f f 169
9 The Cost of Capital
f f f 205
PART 5 Long-Term Investment Decisions
f f f f 231
10 Capital Budgeting Techniques f f 233
11 Capital Budgeting Cash Flows f f f 261
12 Risk Refinements in Capital Budgeting
f f f f 293
PART 6 Long-TermFinancial Decisions
f f f f 327
13 Leverage and Capital Structure f f f 329
14 Payout Policy f 349
PART 7 Short-TermFinancial Decisions
f f f f 367
15 Working Capital and Current Assets Management
f f f f f 369
16 Current Liabilities Management f f 383
PART 8 Special Topics in Managerial Finance
f f f f f f 399
17 Hybrid and Derivative Securities
f f f 401
18 Mergers, LBOs, Divestitures, and Business Failure
f f f f f 421
19 InternationalManagerial Finance f f 437
,iv Gitman • Principles of Managerial Finance, Twelfth Edition
f f f f f f f
PartOne f
Introduction to Managerial Finance f f f
Chapters in This Part
f f f
Chapter 1 f The Role of Managerial Finance
f f f f
Chapter 2 f TheFinancialMarketEnvironment
f f f
Integrative Case 1: Merit Enterprise Corp.
f f f f f f
, Chapter1 f
The Role of Managerial Finance
f f f f
Instructor’s Resources f
Chapter Overview f
This chapter introduces the field of finance through building-block terms and concepts. The chapter starts by
f f f f f f f f f f f f f f f
explaining what a firm is and discussing the goals that managers of a firm might pursue. The chapter provides a
f f f f f f f f f f f f f f f f f f f f
justification for focusing on shareholders rather than stakeholders broadly, but it also discusses other goals that firms
f f f f f f f f f f f f f f f f f
might pursue. The opening section concludes with material on the importance of ethical behavior in business.
f f f f f f f f f f f f f f f f
The next section discusses the managerial finance function, the key decisions that financial managers make, and the
f f f f f f f f f f f f f f f f
principles that guide their decisions. The discussion draws out distinctions among the overlapping disciplines of
f f f f f f f f f f f f f f f
finance, economics, and accounting.
f f f f
The third section describes pros and cons of different legal forms for a business. This section places particular
f f f f f f f f f f f f f f f f f
emphasis on differences in taxation of proprietorships, partnerships, and corporations, and it highlights the
f f f f f f f f f f f f f f
importance of the marginal tax rate rather than the average tax rate. Next, this section describes the classical
f f f f f f f f f f f f f f f f f f
principal-agent problem and describes both internal and external corporate governance mechanisms that help
f f f f f f f f f f f f f
manage that problem.
f f f
This chapter and the ones to follow stress the important role finance vocabulary, concepts, and tools will play in the
f f f f f f f f f f f f f f f f f f f
professional and personal lives of students—even those choosing other majors, such as accounting, economics
f f f f f f f f f f f f f f
information systems, management, marketing, or operations. Whenever possible, personal-finance applications are
f f f f f f f f f f f
provided to motivate and illustrate topics. This pedagogical approach should inspire students to master chapter
f f f f f f f f f f f f f f f
content quickly and easily.
f f f f
Suggested Answer toOpener-in-Review f f f
Students learned the stock price of Brookdale Senior Living lost 80% of its value from 2015 to 2019, prompting Land
f f f f f f f f f f f f f f f f f f f
and Buildings (a prominent stockholder) to urge the firm sell its real-estate holdings, distribute the anticipated net
f f f f f f f f f f f f f f f f f
sales proceeds ($21 cash) to shareholders, and then focus on managing its senior living facilities. Students were asked
f f f f f f f f f f f f f f f f f f
whether the proposal would make Brookdale’s shareholders better off if the expected cash proceeds were realized,
f f f f f f f f f f f f f f f f
but stock price dipped to $5 per share.
f f f f f f f f
Before restructuring, an investor with one Brookdale share had $21.35 in total wealth. Afterward, that same investor
f f f f f f f f f f f f f f f f
might have a share worth $5 and $21 in cash—total wealth of $26. The hypothetical shareholder reaped a gain of $4.65
f f f f f f f f f f f f f f f f f f f f f
per share or 21.8%. Before the asset sale, with 185.45 million shares outstanding and a share price of
f f f f f f f f f f f f f f f f f f
$21.35, total shareholder wealth was $3.96 billion. After the sale, with same shares outstanding and wealth per share
f f f f f f f f f f f f f f f f f
now $26, shareholder wealth rose to $4.82 billion—a net gain of $0.86 billion.
f f f f f f f f f f f f f
