FIN111: Introductory Principles of Finance
Spring 2015 – School of Accounting, Economics and Finance
WEEK 3: Parrino et al chapter 1: Critical Thinking 2, 4 & 6; Questions and problems 4, 7, 8, 14 & 23;
Kidwell et al chapter 1: Questions and problems 1, 4 & 6.

Parrino et al Chapter 1
Critical Thinking
2. The primary financial management decisions every company faces are capital budgeting decisions, financing decisions, and working capital management decisions. Capital budgeting addresses the question of which productive assets to buy; thus, it affects the asset side of the balance sheet. Financing decisions focus on raising the money the company needs to buy productive assets. This is typically accomplished by selling long-term debt and equity. Finally, working capital decisions involve how companies manage their current assets and liabilities. The focus here is seeing that a company has enough money to pay its bills and that any spare money is invested to earn interest.
4. Although profit maximisation appears to be the logical goal for any company, it has many drawbacks.
First, profit can be defined in a number of different ways, and variations in profit for similar companies can vary widely. Second, accounting profits do not exactly equal cash flows. Third, profit maximisation does not account for timing and ignores risk associated with cash flows. An appropriate goal for financial managers who do not have these objections is to maximise the shareholders’ wealth. In order to achieve this goal, management must make financial decisions so that the total value of cash inflows exceeds the total value of cash outflows.
6.

Agency costs are the costs that result from a conflict of interest between the agent and the principal.
They can either be direct, such as lavish dinners or trips, or indirect, which are usually missed
investment