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© Pearson Education Limited 2008
The Role of Financial Management
Increasing shareholder value over time is the bottom line
of every move we make.
ROBERT GOIZUETA
Former CEO, The Coca-Cola Company
Chapter 1: The Role of Financial Management
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© Pearson Education Limited 2008
ANSWERS TO QUESTIONS
1. With an objective of maximizing shareholder wealth, capital will tend to be allocated to the
most productive investment opportunities on a risk-adjusted return basis. Other decisions
will also be made to maximize efficiency. If all firms do this, productivity will be
2. Maximizing earnings is a nonfunctional objective for the following reasons:
a. Earnings is a time vector. Unless one time vector of earnings clearly dominates all other
time vectors, it is impossible to select the vector that will maximize earnings.
3. Financial management is concerned with the acquisition, financing, and management of
4. Yes, zero accounting profit while the firm establishes market position is consistent with the
5. The goal of the firm gives the financial manager an objective function to maximize. He/she
6. The financial manager is involved in the acquisition, financing, and management of assets.
7. If managers have sizable stock positions in the company, they will have a greater
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition, Instructor’s Manual
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© Pearson Education Limited 2008
8. Regulations imposed by the government constitute constraints against which shareholder
wealth can still be maximized. It is important that wealth maximization remain the principal
goal of firms if economic efficiency is to be achieved in society and people are to have
9. As in other things, there is a competitive market for good managers. A company must pay
them their opportunity cost, and indeed this is in the interest of stockholders. To the extent
10. In competitive and efficient markets, greater rewards can be obtained only with greater risk.
The financial manager is constantly involved in decisions involving a trade-off between the
11. Corporate governance refers to the system by which corporations are managed and
controlled. It encompasses the relationships among a company’s shareholders, board of
The board of directors sets company-wide policy and advises the CEO and other senior
12. The controller’s responsibilities are primarily accounting in nature. Cost accounting, as well
The treasurer’s responsibilities fall into the decision areas most commonly associated with
