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©PearsonEducationLimited2005VanHorneandWachowicz:FundamentalsofFinancialManagement,12e61TheRoleofFinancialManagementIncreasingshareholdervalueovertimeisthebottomlineofeverymovewemake.ROBERTGOIZUETAFormerCEO,TheCoca-ColaCompanyPart1IntroductiontoFinancialManagementChapter1:TheRoleofFinancialManagement©PearsonEducationLimited2005VanHorneandWachowicz:FundamentalsofFinancialManagement,12e7_______________________________________________________________________ANSWERSTOQUESTIONS_______________________________________________________________________1.Withanobjectiveofmaximizingshareholderwealth,capitalwilltendtobeallocatedtothemostproductiveinvestmentopportunitiesonarisk-adjustedreturnbasis.Otherdecisionswillalsobemadetomaximizeefficiency.Ifallfirmsdothis,productivitywillbeheightenedandtheeconomywillrealizehigherrealgrowth.Therewillbeagreaterlevelofoveralleconomicwantsatisfaction.Presumablypeopleoverallwillbenefit,butthisdependsinpartontheredistributionofincomeandwealthviataxationandsocialprograms.Inotherwords,theeconomicpiewillgrowlargerandeverybodyshouldbebetteroffifthereisnoreslicing.Withreslicing,itispossiblesomepeoplewillbeworseoff,butthatistheresultofagovernmentalchangeinredistribution.Itisnotduetotheobjectivefunctionofcorporations.2.Maximizingearningsisanonfunctionalobjectiveforthefollowingreasons:a.Earningsisatimevector.Unlessonetimevectorofearningsclearlydominatesallothertimevectors,itisimpossibletoselectthevectorthatwillmaximizeearnings.b.Eachtimevectorofearningpossessesariskcharacteristic.Maximizingexpectedearningsignorestheriskparameter.Chapter1:TheRoleofFinancialManagement©PearsonEducationLimited2005VanHorneandWachowicz:FundamentalsofFinancialManagement,12e8c.Earningscanbeincreasedbysellingstockandbuyingtreasurybills.Earningswillcontinuetoincreasesincestockdoesnotrequireout-of-pocketcosts.d.Theimpactofdividendpoliciesisignored.Ifallearningsareretained,futureearningsareincreased.However,stockpricesmaydecreaseasaresultofadversereactiontotheabsenceofdividends.Maximizingwealthtakesintoaccountearnings,thetimingandriskoftheseearnings,andthedividendpolicyofthefirm.3.Financialmanagementisconcernedwiththeacquisition,financing,andmanagementofassetswithsomeoverallgoalinmind.Thus,thefunctionoffinancialmanagementcanbebrokendownintothreemajordecisionareas:theinvestment,financing,andassetmanagementdecisions.4.Yes,zeroaccountingprofitwhilethefirmestablishesmarketpositionisconsistentwiththemaximizationofwealthobjective.Otherinvestmentswhereshort-runprofitsaresacrificedforthelongrunalsoarepossible.5.Thegoalofthefirmgivesthefinancialmanageranobjectivefunctiontomaximize.He/shecanjudgethevalue(efficiency)ofanyfinancialdecisionbyitsimpactonthatgoal.Withoutsuchagoal,themanagerwouldbeatseainthathe/shewouldhavenoobjectivecriteriontoguidehis/heractions.Chapter1:TheRoleofFinancialManagement©PearsonEducationLimited2005VanHorneandWachowicz:FundamentalsofFinancialManagement,12e96.Thefinancialmanagerisinvolvedintheacquisition,financing,andmanagementofassets.Thesethreefunctionalareasareallinterrelated(e.g.,adecisiontoacquireanassetnecessitatesthefinancingandmanagementofthatasset,whereasfinancingandmanagementcostsaffectthedecisiontoinvest).7.Ifmanagershavesizablestockpositionsinthecompany,theywillhaveagreaterunderstandingforthevaluationofthecompany.Moreover,theymayhaveagreaterincentivetomaximizeshareholderwealththantheywouldintheabsenceofstockholdings.However,totheextentpersonshavenotonlyhumancapitalbutalsomostoftheirfinancialcapitaltiedupinthecompany,theymaybemoreriskaversethanisdesirable.Ifthecompanydeterioratesbecauseariskydecisionprovesbad,theystandtolosenotonlytheirjobsbuthaveadropinthevalueoftheirassets.Excessiveriskaversioncanworktothedetrimentofmaximizingshareholderwealthascanexcessiveriskseekingifthemanagerisparticularlyriskprone.8.Regulationsimposedbythegovernmentconstituteconstraintsagainstwhichshareholderwealthcanstillbemaximized.Itisimportantthatwealthmaximizationremaintheprincipalgoaloffirmsifeconomicefficiencyistobeachievedinsocietyandpeoplearetohaveincreasingrealstandardsofliving.Thebenefitsofregulationstosocietymustbeevaluatedrelativetothecostsimposedoneconomicefficiency.WherebenefitsaresmallChapter1:TheRoleofFinancialManagement©PearsonEducationLimited2005VanHorneandWachowicz:FundamentalsofFinancialManagement,12e10relativetothecosts,businessesneedtomakethisknownthroughthepoliticalprocesssothattheregulationscanbemodified.PresentlythereisconsiderableattentionbeinggiveninWashingtontoderegulation.Somethingshavebeendonetomakeregulationslessonerousandtoallowcompetitivemarketstowork.9.Asinotherthings,thereisacompetitivemarketforgoodmanagers.Acompanymustpaythemtheiropportunitycost,andindeedthisisintheinterestofstockholders.Totheextentmanagersarepaidinexcessoftheireconomiccontribution,thereturnsavailabletoinvestorswillbeless.However,stockholderscanselltheirstockandinvestelsewhere.Therefore,thereisabalancingfactorthatworksinthedirectionofequilibratingmanagers'payacrossbusinessfirmsforagivenlevelofeconomiccontribution.10.Incomp