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Principles of Finance 6e Chapter 1
Besley/Brigham
1-1
CHAPTER 1
ANSWERS
1-1 At the beginning of the twentieth century, the study of finance was mostly descriptive. As the
proliferation of electronics and information technology has grown in recent decades, the study of
finance has shifted toward more analytical methods.
At the beginning of the century, managerial finance focused on mergers and acquisitions,
investments were held mostly by powerful individuals or groups, and the banking system consisted
1-2 Simply stated, finance deals with how firms generate and use funds. To do a good job, people in
1-3 As we will show in later chapters, the financial decisions corporations make concern how to raise
1-4 As a general rule of thumb, the government is fairly friendly to business when economic conditions
1-5 Value is measured as the present value of the cash flows that an investment is expected to
Chapter 1 Principles of Finance 6e
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1-8 A firm might be able to survive in the short term if it does not consider the effects its business
1-9 Lean manufacturing refers to the integration of the entire production process in an attempt to use
1-10 Lean manufacturing and value maximization go hand-in-hand. To maximize value, a firm
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SOLUTIONS
1-1 Integrative Problem
a. Finance deals with decisions about money—that is, how money is raised and used by
b. The general areas of finance include:
Financial markets and institutions—includes the study of (1) financial markets, such as the
stock markets and the bond markets and (2) participants in the markets, such as banks,
insurance companies, pension funds, and so forth that “manufacture” various financial
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c. One of the most important changes in finance during the past century has been that the
d. During the past couple of decades, Congress has been fairly “business friendly,” which has led
to more deregulation than regulation. Industries such as financial services, transportation, and
e. Value refers to the amount that should be paid for an asset (investment) today, and it is
g. Sustainability refers to the process by which we live and interact with businesses, governments,
h. Firms that adhere to the concepts of lean manufacturing attempt to eliminate excesses (“fat”)
ETHICAL DILEMMA
Who Has the Money—The Democrat or The Republican?
Ethical dilemma:
There are a few of factors that should be considered here. First, Sunflower Manufacturing has applied for a
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$10 million working capital loan at The Democrat Federal Bank (known as The Democrat). But the person
Discussion questions:
• What is the ethical dilemma?
In this case, the ethical dilemma is whether Sheli should grant Sunflower a loan for the amount that
• Do you agree with Sheli or Henry concerning the importance of loyalty as a factor in loan decisions?
To answer this question, other questions should be asked. Do you believe that customer loyalty is an
important factor when making financial decisions? If so, how important of an input should loyalty be in
such decisions?
It appears that Henry believes loyalty is a very important factor that should be considered when making
• Should The Democrat lend Sunflower the $10 million was requested?
On the positive side, if The Democrat lends Sunflower the amount that was requested, then it appears
that Sheli and Henry will meet their loan quotas and their jobs will be secure for a while. On the other
Principles of Finance 6e Chapter 1
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© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed
with a certain product or service or otherwise on a password-protected website for classroom use.
Sunflower, but her motives might not be appropriate. At least she is willing to reconsider her initial
recommendation. Perhaps Sheli could sit down with Sunflower’s executives and “map out” a plan that
will improve the company’s financial strength and permit The Democrat to approve the $10 million loan
without further harming its own financial.
• What would you do if you were Sheli?
Commercial lending is a very competitive business. Sheli would be wise to thoroughly examine
References:
“Banks Take a New Tack On Mortgage Lending,” The Wall Street Journal Online, November 1, 2006.
(http://online.wsj.com/)
Karen E. Klein, “Building Customer Relations by Listening.” BusinessWeek.com, June 1, 2007.
