Principles of Managerial Finance Gitman 14th

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Chapter 1
The Role of Managerial Finance

Instructor’s Resources
Overview
This chapter introduces the students to the field of finance and explores career opportunities in both financial
services and managerial finance. The three basic legal forms of business organization (sole proprietorship,
partnership, and corporation) and their strengths and weaknesses are described. The managerial finance
function is defined and differentiated from economics and accounting. A discussion of the financial manager’s
goals—maximizing shareholder wealth and preserving stakeholder wealth—and the role of ethics in meeting
these goals is presented. The chapter then summarizes the three key activities of the financial manager:
financial analysis and planning, making investment decisions, and making financing decisions. The chapter
includes discussion of the agency problem—the conflict that exists between managers and owners in a large
corporation.

This chapter, and all that follow, emphasizes how the chapter content plays a vital role in the student’s
professional and personal life. Each chapter includes an early discussion of the relevance of the topic to majors
in accounting, information systems, management, marketing, and operations. Throughout each chapter are
detailed examples of how the chapter’s topic relates to the student's financial life. These pedagogic tools
should motivate students to grasp quickly an understanding of the chapter content and employ it in both their
professional and personal lives.

Suggested Answer to Opener-in-Review Question

Facebook sold shares to investors at $38 each in its IPO. One year later, its stock price was hovering
around
$26. What was the percentage drop in Facebook shares in its first year as a public company? Just after
the IPO, Facebook’s CEO, Mark Zuckerberg, owned 443 million shares. What was the total value of his
Facebook stock immediately after the IPO and one year later? How much wealth did Zuckerberg
personally lose over the year?
Percentage drop in Facebook shares in its first year as a public company
= ($38 í $26) / $38 × 100 = 31.58%
Total value of Mark Zuckerberg’s Facebook stock immediately after the IPO
= $38 × 443 million = $16,834 million
Total value of Mark Zuckerberg’s Facebook stock one year after the IPO
© 2015 Pearson Education, Inc.
 = $26 × 443 million = $11,518 million
Total personal loss of Mark Zuckerberg over the year
= $16,834 million í $11,518 million
= $5,316 million

© 2015 Pearson Education, Inc.

 Chapter 1 The Role of Managerial Finance 3

Answers to Review Questions

1. Finance is the art and science of managing money. Finance affects all individuals, businesses, and
governments in the process of the transfer of money through institutions, markets, and instruments. At
the personal level, finance is concerned with an individual’s decisions regarding the spending and
investing of income. Businesses also have to determine how to raise money from investors, how to
invest money in an attempt to earn a profit, and how to reinvest profits in the business or distribute
them back to investors.

2. Financial services is the area of finance concerned with the design and delivery of advice and financial
products to individuals, businesses, and governments. It involves a variety of interesting career
opportunities within the areas of banking, personal financial planning, investments, real estate, and
insurance. Managerial finance is concerned with the duties of the financial manager working in a
business. Managerial finance encompasses the functions of budgeting, financial forecasting, credit
administration, investment analysis, and funds procurement for a firm. Managerial finance is the
management of the firm’s funds within the firm. This field offers many career opportunities, including
financial analyst, capital budgeting analyst, and cash manager. (Note: Other answers are possible.)

3. Sole proprietorships are the most common form of business organization, while corporations are
responsible for the majority of business revenues. The majority of sole proprietorships operate in the
wholesale, retail, service, and construction industries. Although corporations engage in all types of
businesses, manufacturing firms account for the largest portion of corporate business receipts and net
profits.
4. Stockholders are the owners of a corporation, whose ownership, or equity, takes the form of common
stock or, less frequently, preferred stock. They elect the board of directors, which has the ultimate
authority to guide corporate affairs and set general policy. The board is usually composed of key
corporate personnel and outside directors. The president or chief executive officer (CEO) reports to the
board. He or she is responsible for day-to-day operations and carrying out the policies established by the
board. The owners of the
corporation do not have a direct relationship with management but give their input through the election of
board members and voting on major charter issues. The owners of the firm are compensated through the
receipt of dividends paid by the firm or by realizing capital gains through increases in the price of their
common stock shares.

5. The most popular form of limited liability organizations other than corporations are:
x Limited partnerships—A partnership with at least one general partner with unlimited liability and
one or more limited partners who have limited liability. In return for the limited liability, the limited
partners are prohibited from active management of the partnership.
x S corporation—If certain requirements are met, the S corporation can be taxed as a partnership
but receive most of the benefits of the corporate form of organization.
x Limited liability company (LLC)—This form of organization is like an S corporation in that it is
taxed as a partnership but primarily functions like a corporation. The LLC differs from the S
corporation in that it is allowed to own other corporations and be owned by other corporations,
partnerships, and non-U.S. residents.
x Limited liability partnership (LLP)—A partnership form authorized by many states that gives the
partners limited liability from the acts of other partners, but not from personal individual acts of
malpractice. The LLP is taxed as a partnership. This form is most frequently used by legal and
accounting professionals.
These firms generally do not have large numbers of owners. Most typically they have fewer than
100 owners.

© 2015 Pearson Education, Inc.

4 Gitman/Zutter • Principles of Managerial Finance, Fourteenth Edition

6. Virtually every function within a firm is in some way connected with the receipt or disbursement of cash.
The cash relationship may be associated with the generation of sales through the marketing department,
the incurring of raw material costs through purchasing, or the earnings of production workers. Because
finance deals primarily with management of cash for operation of the firm, every person within the firm
needs to be knowledgeable of finance to work effectively with employees of the financial departments.
Individuals plan, monitor, and assess the financial aspects of their activities over a given period through
the consideration of cash inflows and outflows.

7. The goal of a firm, and therefore of all managers, is to maximize shareholder wealth. This goal is
measured by share price; an increasing price per share of common stock relative to the stock market as
a whole indicates achievement of this goal.

8. Profit maximization is not consistent with wealth maximization due to: (1) the timing, (2) earnings that do
not represent cash flows available to stockholders, and (3) a failure to consider risk.

9. Risk is the chance that actual outcomes may differ from expected outcomes. Financial managers must
consider both risk and return because of their inverse effect on the share price of the firm. Increased risk
may decrease the share price, while increased return is likely to increase the share price.

10. In recent years, the magnitude and severity of “white collar crime” has increased dramatically, with a
corresponding emphasis on prosecution by government authorities. As a result, the actions of all
corporations and their executives have been subjected to closer scrutiny. The increased scrutiny of this
type of crime has resulted in many firms establishing corporate ethics guidelines and policies to cover
employee actions in dealing with all corporate constituents. The adoption of high ethical standards by a
corporation strengthens its competitive position by reducing the potential for litigation, maintaining a
positive corporate image, and building shareholder confidence. The result is enhancement of long-term
value and a positive effect on share price.
11. The treasurer or the chief financial manager typically manages a firm’s cash, investing surplus funds
when available and securing outside financing when needed. The treasurer also oversees a firm’s pension
plans and manages critical risks related to movements in foreign currency values, interest rates, and
commodity prices. The treasurer in a mature firm must make decisions with respect to handling financial
planning, acquisition of fixed assets, obtaining funds to finance fixed assets, managing working capital
needs, managing the pension fund, managing foreign exchange, and distribution of corporate earnings to
owners.

12. Finance is often considered a form of applied economics. Firms operate within the economy and must
be aware of the economic principles, changes in economic activity, and economic policy. Principles
developed in economic theory are applied to specific areas in finance. The primary economic principle
used in managerial finance is marginal cost–benefit analysis, the principle that financial decisions
should be made and actions taken only when the added benefits exceed the added costs. Nearly, all
financial decisions ultimately come down to an assessment of their marginal benefits and marginal
costs.

13. Accountants operate on an accrual basis, recognizing revenues at the point of sale and expenses when
incurred. The financial manager focuses on the actual inflows and outflows of cash, recognizing
revenues when actually received and expenses when actually paid.
Accountants primarily collect and present financial data; financial managers devote attention
primarily to decision making through analysis of financial data.

© 2015 Pearson Education, Inc.

Another random document with
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262. «Quando osservavamo con insultante dispregio que’ secoli che ci
trovarono servi e ci lasciarono uomini, non somigliavamo a persona che
siasi dimenticata della famiglia e de’ primi suoi anni? Or ne troviamo la
ricordanza; e senza ribramarlo, perchè il passato compì la sua
destinazione, e l’avvenire deve crescere per esso non già con esso, non
possiamo che ammirare secoli di tanta vita, ecc.» Epoca xii, p. 334.

263. Pur dianzi un giornale grave contrapponeva a giudizj da noi dati nella
presente opera, i giudizj portati da Lamartine nel Cours familier de
littérature; e un giornale leggero riproduceva questo parallelo,
applaudendovi.

264. Non discompagniamone suo fratello Saverio, combattente anch’esso pel

re di Sardegna, e avverso alla rivoluzione francese. Rinchiuso per un
duello, scrisse il Viaggio attorno alla mia camera, opericciuola non
indegna di Sterne; come il suo Lebbroso della val d’Aosta. A servizio
della Russia fece la campagna del Caucaso.

265. Se traînent à la suite de la France... leur présent est le passé de la

France.

266. Essai sur le principe et les limites de la philosophie de l’histoire. 1843.

267. Secondo lui, i sintomi d’una buona amministrazione sono: 1. Desiderio

di conoscere lo stato della nazione; 2. Pubblicità dello stato della
nazione; 3. Buone qualità degl’impiegati; 4. 5. 6. Semplicità, Rapidità,
Poco costo nelle operazioni; 7. Esattezza nei pagamenti; 8. Solido
impiego del denaro pubblico; 9. Rispetto pratico alle leggi; 10.
Moderazione nei partiti; 11. Sicurezza e felicità pubblica; 12. Mancanza
d’uomini oziosi e di terre incolte.

268. Nuovo prospetto, p. 194-218.

269. Teme che la Russia ci mandi per Odessa i grani, sicchè i paesi d’Italia si
cambierebbero in deserti. Nuovo prospetto, tom. v. p. 127 e Filosofia
della statistica, tom. ii. p. 159.

270. «Il dazio sulle importazioni delle manifatture estere è ottimo finchè le
fabbriche nazionali bambine devono lottare colle estere adulte».
Filosofia della statistica, Arti e mestieri.

271. Teoria del divorzio, part. v.

272. Nuovo prospetto, part. i. c. 3.

273. Merito e ricompense, tom. i. p. 231.

274. Nuovo Galateo, p. 355.

275. Nuovo prospetto, part. i. c. 3.

276. Elementi di filosofia, lib. ii. c. 1.

277. Assunto primo, § ix.

278. Introduzione alla genesi del diritto penale.

279. Nella logica del Genovesi; Veduta sull’incivilimento.

280. Sono fra queste eccezioni i teologi dell’Università torinese Marchini,

Regis, Bardi, Ghiringhello ed altri, che vi cercano meglio che gloria
letteraria. Il gesuita Patuzzi dell’ermeneutica fece un trattato e la applicò
a molti punti; il padre Ungarelli ebbe a scolaro il padre Vercellone, che
con gran franchezza pubblicò la Bibbia greca del manoscritto vaticano in
cinque volumi (1857) e le varianti della vulgata.

281. Nel 1874 si pronunziò una divisione fra gli economisti italiani: gli uni
volendo l’assoluta astensione dello Stato nelle ragioni economiche, gli
altri ammettendone, anzi credendone necessaria una moderata
ingerenza.

282. Pensieri sulla moneta cartacea.

283. Messedaglia, Levi, Mora, Zanini, Boccardo, Leone Carpi, Luzzato, ecc.

284. Una Società Geografica qui formatasi contribuì alle esplorazioni

massime dell’Africa, oltre raccogliere i fasti patrj dei tempi andati. I
viaggi de’ semaj e delle corvette militari diedero a conoscere la Cina e il
Giappone.

285. Ora si sta eseguendo una nuova triangolazione di tutta la penisola, sotto
la presidenza del padre Secchi.

286. Il Governo italiano gli commise nel 1811 il più gran telescopio che
ancora si fosse veduto in Italia. Il fisico Gualtieri di Modena ne pretese il
merito, e ne fabbricò uno più grande, cioè di undici piedi di fuoco e nove
e mezzo d’apertura, che darà luce doppia di quello d’Herschel.

287. Bisogna aggiungere l’analisi spettrale, che ci portò a conoscere la

natura del sole e delle altre stelle: e gli studj dello Schiaparelli sulle
 stelle cadenti.

288. L’asciugamento di questo fu compito nel 1876 per munificenza del

principe Torlonia di Roma.

289. Grimelli (Storia della elettro-metallurgia italiana. Modena 1844)

annovera quanto i nostri operarono in tale materia fino a quell’anno.

290. Vanno rammentati in proposito i fisici napoletani Miranda e Paci, e gli

studj anatomici del Pacini sugli organi elettrici del gimnoto e del siluro
elettrico.

291. Accenniamo fra le sue scoperte quella del piccolo verme entro le perle
degli unio e degli anodonti, dalla cui molestia crede originata la preziosa
concrezione.

292. È curioso a notare che erano preti anche i più di quelli che, nel secolo
passato, ridestavano l’agricoltura in Toscana: il pievano Paoletti, il
parroco Landeschi, il preposto Lastri, gli abati Lupi, Lami, Manetti,
Giovan Gualberto Franceschi, l’arcidiacono Giuseppe Albizzi, il canonico
Zucchini, il monaco Soldani, e a tacer altri, il canonico Ubaldo
Montelatici che nel 1753 fondava l’accademia de’ Georgofili. Così
canonico era il Guasco agronomo piemontese, abati il Genovesi e lo
Scrofani e molti della Società patriotica a Milano.

293. L’uso dell’acqua come rimedio esterno è raccomandato anche dal Nessi
medico comasco (1741-1820), che diede un buon corso d’ostetricia.

294. Al 20 gennajo 1774, Ferdinando III di Napoli mandava un rescritto,

qualmente la Facoltà medica gli aveva esposto la repugnanza delle
comunità religiose a ricevere figli, sorelle, nipoti di medici, mentre
ammettono quelli di avvocati, dottori, negozianti. Per ciò espone il merito
e la dignità di questa condizione.

295. Il bellunese Zanon pretende ora di saper dare solidità lapidea alle
sostanze animali, mentre Gorini crede poterne mantenere la morbidezza
e le altre qualità fisiche.

296. Alla confutazione che fino dal principio del secolo ne faceva il Moreschi,
professore d’anatomia a Bologna, è messa quest’epigrafe tolta dal
Menkenio, che proverebbe già da un pezzo conosciuta quella teoria:
Quis nescit nostris temporibus extitisse plures, qui novam quamdam
artem exploratoriam commenti, intimos mentis humanæ recessus
 perreptarunt, et iræ, avaritiæ, cupiditatis nunc semiuncium, nunc assem
deprehendisse sibi visi sunt?

297. Erangli assegnati quindicimila scudi: il duca ne aggiunse tremila, e il

titolo di commendatore, e fu sepolto in quella cappella medesima.

298. Nel Commercio di Firenze, 12 gennajo 1842.

299. Materiali per la storia dell’incisione in rame e in legno furono pubblicati

dall’abate Zani di Borgosandonnimo (1801), autore anche
dell’Enciclopedia delle belle arti (1819-24).

300. Vedi la nota 15 del Cap. clvii.

301. Non saranno dimenticati Marchesi, Marini, Lablache, Pacchiarotti,

Moriani, Gaillard..., e la Grassini, la Catalani, la Pasta, l’Alboni, la
Frezzolini, la Galletti, la Stolz... Il Barili (-1824) buffo cantante, pareva
inimitabile nelle Cantatrici villane; ma i continui trionfi gli furono
amareggiati dalle disgraziate amministrazioni di teatri. Sua moglie
sassone, rinomatissima, empì il mondo delle sue gare colla Festa-
Mattei, siccome da poi quelle fra la Taglioni e la Cerrito poterono far
all’Italia dimenticare le supreme quistioni sociali.
 Nota del Trascrittore

Ortografia e punteggiatura originali sono state

mantenute, correggendo senza annotazione minimi
errori tipografici.
Copertina creata dal trascrittore e posta nel pubblico
dominio.
*** END OF THE PROJECT GUTENBERG EBOOK STORIA DEGLI
ITALIANI, VOL. 13 (DI 15) ***

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