Chapter 1,2,3 – Answers to Assigned End of the Chapter Questions

1-1. Shareholder (owner) wealth maximization is the most widely cited business goal. The justification for shareholder wealth maximization is that managers are hired by the owners (shareholders) and serve as their agents. In addition, the well-being of the managers is closely tied to the wealth of the shareholders. In perfect competition, shareholder wealth maximizing behavior is necessary just to survive.

1-2. a. Wealth maximization for a single-period decision is measured by economic profit which is the excess of earnings or cash flow over that which could have been earned on investments of similar risk.

b. Wealth maximization for a multi-period decision is measured by discounting the expected future economic profits (which is the excess of earnings or cash flow for each period over that which could have been earned on investments of similar risk for that period) back to present.

1-4. Present value is either a single future amount discounted back to present or the sum of a number of future amounts discounted back to present. Net present value is the sum of the present value and the initial outlay or outlays necessary to produce the future amount(s).

1-5. A capital investment is an outlay that is expected to result in benefits extending more than one year into the future. Capital budgeting is the process of selecting capital investments.

1-6. Steps in capital budgeting process: - Establish Goals - Develop Strategy - Search for Investment Opportunities - Evaluate Investment Opportunities - Select Investments - Implement and Monitor - Post audit

1-7. The main question is whether the future benefits are worth the present cost. Thus, it is necessary to consider the amount of costs and benefits,