Financial Management
Financial Management
1. Problem 1-7 (Accrual income vs cash flow)
What is the Primary economic principle used in managerial 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.
2. Problem 2-15 (Ratio Comparison)
How do the price/earnings (P/E) ratio and the market/book (M/B) ratio provide a feel for the firm’s risk and return?
The price/earning ratio is commonly used to assess the owner’s appraisal of share value. The P/E ratio represents the amount investors are willing to pay for each dollar of the firm’s earnings. The level of P/E indicates the degree of confidence (or certainty) that investors have in the firm’s future performance.
The market/book ratio provides an assessment of how investors view the firm’s performance. It relates to the market value of the firm’s shares to their book – strict accounting value.
3. Problem 3-9 (Basic cash budget)
What is the purpose of the cash budget? What role does the sales forecast play in its preparation?
The cash budget provides the firm with figures indicating the expected ending cash balance, which can be analysed to determine whether a cash shortage or surplus is expected to result in each of the months covered by the forecast.
There are also 2 ways of coping with uncertainty in the cash budget. One is to prepare several cash budgets. From this range of cash flows, the financial manager can determine the amount of financing necessary to cover the most adverse situation. The second is computer simulation. By simulating the occurrence of sales and other uncertain events, the firm can develop a probability distribution of its ending cash flows for each month.
4. Problem 3-17 (Profit Projection)
1. Problem 1-7 (Accrual income vs cash flow)
What is the Primary economic principle used in managerial 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.
2. Problem 2-15 (Ratio Comparison)
How do the price/earnings (P/E) ratio and the market/book (M/B) ratio provide a feel for the firm’s risk and return?
The price/earning ratio is commonly used to assess the owner’s appraisal of share value. The P/E ratio represents the amount investors are willing to pay for each dollar of the firm’s earnings. The level of P/E indicates the degree of confidence (or certainty) that investors have in the firm’s future performance.
The market/book ratio provides an assessment of how investors view the firm’s performance. It relates to the market value of the firm’s shares to their book – strict accounting value.
3. Problem 3-9 (Basic cash budget)
What is the purpose of the cash budget? What role does the sales forecast play in its preparation?
The cash budget provides the firm with figures indicating the expected ending cash balance, which can be analysed to determine whether a cash shortage or surplus is expected to result in each of the months covered by the forecast.
There are also 2 ways of coping with uncertainty in the cash budget. One is to prepare several cash budgets. From this range of cash flows, the financial manager can determine the amount of financing necessary to cover the most adverse situation. The second is computer simulation. By simulating the occurrence of sales and other uncertain events, the firm can develop a probability distribution of its ending cash flows for each month.
4. Problem 3-17 (Profit Projection)