金融学第二版课后答案英文版中国人民大学Bodie2-IM-Ch01

金融学第二版课后答案英文版中国人民大学Bodie2JM_Ch01CHAPTER1Financial Economics一End-of-Chapter ProblemsDefiningFinance

1.What areyour maingoals inlife How does financeplay apartin achievingthose goalsWhat are the majortradeoffs youfaceSAMPLE ANSWER:Finish schoolGetgood payingjob whichI likeGetmarried and have childrenOwnmy ownhomeProvide forfamily,Pay forchildren s educationRetireHow FinancePlays aRole:SAMPLE ANSWER:Finance helps me pay for undergraduateand graduateeducationand helpsme decidewhether spendingthe moneyongraduate educationwill bea goodinvestment decisionor not.Higher educationshould enhancemy earning power andabilityto obtain a jobI like.Once Iam marriedand havechildren I will have additionalfinancial responsibilitiesdependents andIwill have to learn howto allocate resourcesamong individualsin thehousehold andlearnhow toset asideenough money to pay for emergencies,education,vacations etc.Finance also helpsmeunderstand how to manageriskssuch as for disability,life and health.Finance helpsme determinewhether the home Iwant to buyOne wayis toprovide incentivesfor the managers sothat theyincreasetheir paywhen owners interests areimproved.An examplewouldbe compensatingmanagers withstock options,the value ofwhich increasewith the market value of shareholdersinterests.Asecond methodis tomore closelymonitor thebehavior of themanagers.Outside managementconsultants andauditors servethisrole inpart particularlyto theextent that they reporttheirfindings torepresentatives fromownership groups.Both of thesesolutions assumethe managementcannot effectivelydeceivemarkets orconsultant/auditors throughmisleading informationoractions toinflate themarket value of the ownership sharesor thereperformancerecords.

11.Challenge Question:Consider apoorly runlocal coffeeshopwith itsprime locationfeaturing asteady streamof potentialclientspassing byon theirway toand fromcampus.How doesthelongtime disgruntled,sloppy andinefficient owner-manager ofCup-a-Joe surviveand avoiddisciplining fromthe takeover marketThis is not aquestion abouta misalignmentof thegoals of theowners andmanagers of a firmsince wehave explicitlysaid thefirmis owner-managed.If infact thecoffee shopis mismanagedthepotential existsfor anoutsider topurchase acontrollinginterest in the operationand putmore efficientmanagement intoplaceif the purchase pricedoes notexceed thevalueofprofits tobegenerated bythe efficiently managed firm.If thepresent ownerchoosesnot tosell hemust valuethe firmfor morethan thevalueof theprofits generatedby anefficientlymanagedfirm.Thereforehis positionin the firm mustgenerate forhim non-pecuniarybenefits,or benefitsunrelated tothefirms profitabilityandheistherefore nota valuemaximizer.Perhaps heenjoys makingfun ofhisclients ortakes pridein hiseclectic tastesin interiordecorating.In anycase the takeovermarketdoes disciplinehim in the sensethat he will be forcedto pay for hisnon-pecuniary benefitsin thesensethathetrades offprofits.The samecould besaid of an owner-manager wholacks therequiredspecialized skillsto properlyrun thefirm butnever thelesscontinues tooperate thecompany inefficientlybecause helikesthe work!The Roleof theFinance Specialistin aCorporation

12.Which of the followingtasks undertakenwithin acorporateoffice arelikely tofall under the supervisionof thetreasurerThe controllerArrangingto extenda lineof creditfrom a bankArranging with an investmentbank fora foreignexchangetransactionProducing adetailed analysisof thecost structureof thecompanys alternativeproduct linesTakingcash payments for companysales andpurchasing U.S.Treasury BillsFilingquarterly statementswith theSecurities andExchangeCommissionThe firsttwo and the fourthitems areresponsibilities of thetreasurer whilethe thirdand fifthitems fallundertheworkload ofzthecontroller soffice.Objectivesy Definefinance.y Explainwhy finance is worthstudying.y Introducetwo of the main players inthe worldof finance—households andfirms-and thekinds of financial decisionstheymake.The othermainplayers,financial intermediariesand

2.government,are introducedin chapterContentsl.lDefining Finance

1.2Why StudyFinanceUFinancial Decisions of Households

1.4Financial Decisionsof Firms

1.5Forms ofBusiness Organization

1.65eparation ofOwnership andManagement

1.66he Goalof Management

1.67arket Discipline:Takeovers

1.68he Roleof theFinance Specialistin aCorporationSummaryFinance is the studyof howtoallocatescarce resourcesovertime.The twofeatures thatdistinguish finance are that the costsandbenefits offinancial decisionsare spreadout overtime andareusually notknown withcertainty inadvance byeither the decisionmaker oranybody else.A basictenet of financeisthat the ultimate function of the7system is to satisfypeople sconsumption preferences.Economicorganizations such as firmsand governmentsexist inorder tofacilitatethe achievementof thatultimate function.Many financialdecisionscan bemade strictlyon thebasis ofimproving thetrade-offs available to peoplewithout knowledgeof theirconsumptionpreferences.There areat leastfive goodreasons tostudy finance:y Tomanage yourpersonal resources.y Todeal withthe worldof business.y Topursue interestingand rewardingcareer opportunities.y Tomake informedpublic choicesas acitizen.y Toexpand yourmind.The playersin financetheory arehouseholds,business firms,financial intermediaries,and governments.Households occupyaspecial placeinthetheory becausetheultimatefunctionof thesystem isto satisfythe preferencesof people,and thetheory treatsthosepreferences asgiven.Finance theoryexplains householdbehavioras anattempt tosatisfy thosepreferences.The behavioroffirms isviewed fromthe perspectiveof howit affectsthe welfareof households.Households facefour basic types offinancial decisions:y Savingdecisions:How muchof theircurrent incomeshouldthey save for thefuturey Investmentdecisions:How shouldthey investthe moneythey have savedyFinancing decisions:When andhow shouldthey useotherpeople smoneytosatisfy theirwants andneedsy Risk-management decisions:How andon whatterms shouldtheyseek toreduce theeconomic uncertaintiesthey faceor to takecalculated risksThere are threemain areasoffinancialdecision makingin abusiness:capital budgeting,capital structure,and workingcapitalmanagement.Therearefive reasonsfor separatingthe management fromthe ownership of a business enterprise:y Professionalmanagersmay befound whohave asuperior abilityto runthe business.y Toachieve theefficient scaleof abusiness theresources ofmanyhouseholds mayhave tobe pooled.y Inan uncertaineconomic environment,owners willwant todiversifytheir risksacross manyfirms.Such efficientdiversificationis difficultto achievewithout separationof ownership andmanagementy Toachieve savingsinthecosts ofgathering information.y Thelearning curveor goingconcern effect:When theowneris also the manager,the new owner hastolearnthebusiness fromthe formerowner inorder tomanage itefficiently.Ifthe owneris notthemanager,then whenthe businessis sold,themanager continuesin placeand worksfor thenewowner.The corporateform isespecially wellsuited tothe separationofownershipandmanagement offirms becauseit allowsrelativelyfrequent changesin ownersby sharetransfer withoutaffecting theoperationsof thefirm.The primarygoal ofcorporate managementisto maximizeshareholder wealth.It leadsmanagers to make thesameinvestment decisionsthat eachoftheindividual ownerswould havemadehad theymade thedecisions themselves.A competitivestock marketimposes astrong disciplineonmanagers to take actionstomaximizethemarketvalueofthe firmsshares.is agood valueor notThe studyoffinancealsohelpsme determinethecheapest sourceof financing for the purchase ofthat home.Finance helpsme determinehow muchmoney Iwill have to7save inorder to payformy children seducationas wellas myownretirementMajor Tradeoffs:SAMPLE ANSWERSpendmoney nowby goingto collegeand possiblygraduateschool butpresumably makemore moneyonce Igraduate due tomy highereducation.Consume nowandhaveless moneysaved forfutureexpenditures such asfora houseand/or caror savemore moneynowbut consumeless thansome ofmy friendsFinancialDecisionsofHouseholds

1.69What isyour networth Whathave youincluded amongyourassets andyour liabilitiesWould youlist thevalueofyourpotential lifetime earningpoweras anasset orliability Howdoes itcomparein valueto otherassets you have listedSAMPLEANSWER:$very possiblynegative atthis pointAssets:Checking accountbalanceSavings accountbalanceFurniture/Jewelry watchCarpossiblyLiabilities:Student loansCreditcard balanceIfrenting,remainder ofrental agreementunless sublettingis apossibilityCarpayments possiblyzStudentstypically dont thinkabout thehigh valueof theirpotentiallifetimeearningpower whencalculating theirnet worthbutfor youngpeople itis oftentheir mostvaluable asset.

1.70How are the financial decisions faced by asingle personlivingalone differentfrom thosefaced bythe head of ahouseholdwith responsibilityfor several children ofschool ageAre thetradeoffs theyhaveto makedifferent,or willthey evaluatethetradeoffs differentlyAsingle personneeds onlyto supporthimself andthereforecan makeevery financialdecision onhis own.If hedoes notwanthealth insuranceand iswilling tobear the financial risksassociatedwith thatdecision thenno onewill beaffected bythat decisionother than thatsingle person.In addition,this personneeds tomakeno decisionsabout allocatingincome amongdependents.Asingle person is verymobile andcan chooseto livealmostanywhere.The tradeoffsthis individualmakes generallyconcernissues ofconsuming orspending todayversus savingforconsumption tomorrow.Since thispersonissupporting onlyhimself,the needto savenow isless importantthan for the head ofhousehold discussednext.T heheadofhousehold withseveralchildrenmust shareresourcesincome amongdependents.This individualmust bepreparedto dealwith riskmanagement issuessuch ashowtobeprepared forpotential financialemergencies suchas aserioushealth problemexperienced bya memberofthe family orhomeowners insurancein caseof afire orother mishap.Because thereare more peoplein thishousehold thanwith asingle person,thereare greater risks thatsomeone willget sickor injured.And becausethere are dependents,the wageearners shouldthink carefullyaboutlife and disability insurance.In addition,thefamilyis notasmobile asthe singleindividual.Because ofthe school age children,,zthe familymight want to livenear goodschools thinkingthat a,stronger educationwill eventuallyhelp thosechildrensfuture wellbeingand financialsituation.Thus,the tradeoffsfor theheadofhouseholdaremorecomplex:more money is needed to consumetodayhe orshe needsto supportmore dependents,but a lotmore moneyis alsoneededtosaveforfuture expensessuch aseducationand housingand moremoneyisneeded forriskmanagement suchas lifeanddisabilityinsurance.

1.71Family Aand familyB bothconsist ofa father,mother andtwochildren ofschoolage.In familyA bothspouses havejobsoutside thehome andearn acombined incomeof$100,000peryear.In familyB only one spouseworks outsidethehome andzearns$100,000per year.Howdothe financialcircumstances anddecisionsfacedbythe twofamilies differWithtwo wageearners,there isless riskofatotal lossof familyincomedue tounemployment ordisability than there isinasinglewage earninghousehold.The singlewage earningfamily willprobablywant moredisability andlife insurancethanthe two wageearningfamily.On theflip side,however,thetwowage earningfamilymay needto spendextra moneyon childcare expensesifthey needto paysomeone towatch thechildren afterschool.

1.72Suppose wedefine financialindependence asthe abilitytoengage inthe fourbasic householdfinancial decisionswithout7resort tothe useof relatives resourceswhen makingfinancingdecisions.At whatage shouldchildren beexpected tobecomefinancially independentStudentswillhavediffering responsesto thisquestiondepending upon their specificexperiences andopinions.Most willprobablysay independenceshould comeafter finishingtheireducation,and theyhaveasignificant flowof income.

1.73You arethinking ofbuying acar.Analyze thedecision byaddressingthe followingissues:a.Are thereare otherways tosatisfy yourtransportationrequirements besidesbuying acar Makea listofall thealternatives andwrite down the prosand cons.Transportation ModePros ConsWalkingTakes you directly where you wantto goNo out of pocketcostsConvenient Takesa longtime Destination may be too farBicycleTakes you directly towhere youwant to goNoout ofpocket marginalcostsConvenientRequires physicalstrength andenduranceDestinationmaybetoofarBus InexpensiveReachesmore distantdestinations Maynot take you directlywhere you want to goInconvenient schedulestogoMany stops,not efficientSubwayInexpensiveFast Maynot takeyoudirectlywhereyouwant togoLocal destinationsonlyonlimited networkTrainReaches distantdestinations ModeratelyexpensiveMay not takeyoudirectly whereyouwanttogoAirplane Reachesdistant destinationsFastMost expensiveWillnottakeyoudirectlywhereyouwanttogob.What arethe differentways youcan financethepurchaseofa carFinance throughabankloan orlease,finance througha cardealerwith aloan ora leaseor financethe caroutofyour ownsavings.c.Obtain informationfrom atleast threedifferent providersofautomobile financingon theterms theyoffer.d.What criteriashould youuse inmaking yourdecisionYour decisionwill beto selectthe financingalternative thathasthe lowestcost toyou.When analyzingthe information,you shouldconsider thefollowing:Do youhave thecash savedto makean outrightpurchaseWhat interest rate wouldyou begiving uptomakethat purchaseDoyou paya differentprice forthe carif youpay cashrather thanfinanceFordiffering loanplans,what isthe downpayment todayWhat arethe monthly payments For howlong Whatis therelevant interestrateyou willbe payingDoes thewhole loangetpaid throughmonthly paymentsor isthereaballoon paymentatthe endAre taxes and/or insurancepayments included in themonthly paymentsFordiffering leaseplans,what isthe downpaymenttoday What arethemonthlypaymentsFor howlongDo youownthe car atthe end ofthelease Ifnot,what doesit costto buy thecar Doyouhavetobuythecarattheendofthe leaseoris itan optionIs therea chargeif youdecide not tobuythe carWhatrelevantinterestrate willyou bepaying Aretaxesand/orinsurance paymentsincludedinthemonthlypayments Aretheremileage restrictions

7.Match eachofthefollowing exampleswith oneofthefourcategories ofbasictypesofhouseholdfinancial decisions.At theSafeway payingwith yourdebit cardrather thantakingthe timeto writea checkDecidingtotakethe proceedsfrom yourwinning lotteryticketand useit to payforan extendedvacation onthe ItalianRiviera7Following Hillarys adviceand sellingyour Microsoftshares toinvestin porkbelly futuresHelpingyour15-year oldson learnto driveby lettingputtinghim behindthe wheelontheback roadinto townTakingup theoffer fromthe poolsupply companytopayoffyour newhot tubwitha15-month loanwith zeropaymentsforthefirst threemonthsThe firstisthe most difficultsince inpractice itis simplya cashtransactioninvolving nofinancing.As suchthepurchaseis aconsumptiondecision onlyandthepayment choiceis notafinancing decision.The secondis also a consumption/savingdecision.The thirdis anexchange ofone financialasset foranotherand thereforean investmentdecision.The fourthis arisk-management decisionsince youhave subjectedyourself toincreasedrisk thatis notcovered byinsurance.The finalexample isafinancing decisioninvolving aloan tofinanceapurchase.Forms ofBusiness Organization

8.You arethinking ofstarting your own business,but havenomoney.a.Think ofabusiness that youcould startwithout havingtoborrow anymoney.7A nybusiness thatinvolves astudent sown personalservicewould becheap tostart up.For instancehe orshe couldstart abusinessrunning errandsfor others,walking theirdogs,shoppingetc.Along thosesame linesthey couldstart somekind ofconsultingbusiness.Both ofthese businessescould berun outof theirdormroom ortheir ownhomeandcould bestarted withvery littlecapital.If theywanted tohire additionalworkers,they wouldhavetobepaid ona commissionbasis tolimit upfrontexpenses.b.Now thinkofabusinessthatyou wouldwanttostart ifyoucould borrowany amountof moneyatthegoing marketinterestrate.Certainly thereare manyinteresting businessesthat couldbestarted ifone couldfinance100%ofthebusiness withborrowedcapital andno equity.Since you willbeabletoborrow100%of thefinancing,youwillbe willingtotakealotgreaterriskthan ifyouwere investingyourownmoney.c.Whatarethe risksyou wouldface inthis business〃[Answer is,of course,dependent onanswer toquestion b.]d.Where canyou getfinancingforyour newbusinessDepending uponthe sizeofthefinancing needed,studentsshould belooking forboth debtand equityfinancing.The sourcesofthis financingranges fromindividuals andcredit cardsfor verysmallsums tobanks,venture capitalists,public debtand equitymarkets,insurance companiesand pensionfunds

9.Choose anorganization thatisnota firm,suchasa cluborchurch groupand listthemostimportant financialdecisions ithasto make.Whatarethe keytradeoffsthe organization facesWhatrole dopreferences playin choosingamong alternativesInterviewthefinancialmanager ofthe organizationand checktosee ifheorshe agreeswith you.SAMPLEANSWER:Local Churchgroup.Most importantfinancialdecisions:Whether ornottorepair damagedone tochurch andgroundsduring lastbig hurricanespecifically repairingthe leakingroofWhat projectto putoff inorder topayforrepair damageHowtopayfor renovationsto downstairsSunday schoolroomsHow toincrease memberattendance andcontributionsHow toorganize andsolicit volunteersfortheannual ChurchSalelargest fundraiser ofthe yearKeyTradeoffs andPreferences:C hurchgroup fundsare severelylimited,sotheorganizationneeds toprioritize expensesbased uponcost andneed.Not allprojectsthat areneeded willbe undertakenduetothe expenseinvolved.An equallylarge amountof timewillbe spenttrying toraise financingsince fundsinflow isvariable.Since notall projectscan befinanced,preferences ofdifferentimportant individualssuchasthe pastortake ongreatsignificance inthedecision-making process.Market Discipline:Takeovers

10.Challenge Question:While thereare clearadvantages totheseparation ofmanagementfromownershipofbusiness enterprises,there isalsoafundamental disadvantagein thatit maybe costlytoalign thegoals ofmanagement withthose oftheowners.Suggestat leasttwo methods,otherthanthetakeovermarket,by whichtheconflict canbe reduced,albeit atsome cost。