1-1Titman/Keown/Martināļ·āFinancial Management, Thirteenth Edition
Solution Manual for Financial Management 13th
Edition by Titman
Complete downloadable file at:
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13th-Edition-by-Titman
1-1. The solution to this problem is dependent upon the studentās experiences.
1-2. There are three basic types of issues that are addressed by the study of finance:
a. W
h a t lon g - t er m inv e stm e
nts should the f i r m und er t a k e ? This area of finance is
generally referred to as capital budgeting.
b. How should the f i r m ra i s
e mon e
y to f und th e se i n
v e stm e nt s ? The firmās funding
choices are generally referred to as capital structure decisions.
c. How ca n the
f i r m b e st m a n a
g e its ca sh
f lows a s t h
e
y ar ise in its d a
y - to - d
a
y
op era tions ? This area of finance is generally referred to as working capital
management.
1-3. First, investors demand a minimum return for delaying consumption that must be greater
than the anticipated rate of inflation. If they didnāt receive enough to compensate for
anticipated inflation, investors would purchase whatever goods they desired ahead of time.
There isnāt much incentive to postpone consumption if your savings are going to decline in
terms of purchasing power.
Investment alternatives have different amounts of risk and expected returns. Investors
sometimes choose to put their money in risky investments because these investments offer
higher expected returns. The more risk an investment has, the higher will be its expected
return ā thatās because risk investors donāt like risk, in particular, they donāt like the chance
that they might lose their money. That makes risky investments less attractive, which
means that to attract investors, riskier investments must be priced to offer investors a higher
expected rate of return. This relationship between risk and expected return is shown in
Figure 1.3.
Notice that we keep referring to expected return rather than actual return. We may have
expectations of what the returns for investing will be, but we canāt peer into the future and
see what those returns are actually going to be. Until after the fact, you are never sure what
the return on an investment will be. That is why General Motors bonds pay more interest
than U.S. Treasury bonds of the same maturity. The additional interest induces some
investors to take on the added risk of purchasing a General Motors bond.
1-4. When evaluating an investment opportunity it is the cash flows, not accounting profits, that
determine its value. That is, we will be concerned with when the money hits our hand, when
we can invest it and start earning more money on it. As a personal investor or a financial
manager, you must remember, it is the cash flows, not profits, which are actually received
by the firms and can be reinvested. Accounting profits, however, appear when they are
earned rather than when the money is actually in hand. As a result, a firmās cash flows
and accounting profits may not be the same. For example, a capital expense, such as the
purchase of new equipment or a building, is depreciated over several years, with the annual
depreciation subtracted from profits. However, the cash flow, or actual dollars, associated
with this expense generally occurs immediately. Therefore cash inflows and outflows involve
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