Chapter 1:
1-2) Would the role of the financial manager be likely to increase or decrease in importance relative to other executives if the rate of inflation increased? Explain.
During times of increasing inflation, the role of a financial manager is likely to increase mostly due to the broad areas of expertise a financial manager is capable of handling. Even in other areas of business such as management, marketing, accounting, information systems and economics, financial managers are able to provide guidance during times of inflation. Financial managers are well-equipped to manage the cash flow of an organization and may even be able to create forecast models that assist with identifying new opportunities to invest.
1-4) In general terms, how is value measured? What are the three factors that determine value? How does each factor affect value?
According to our text, value is “the present, or current, value of the cash flows an asset is expected to generate in the future” (Besley p15). Generally, it is measured by three things: expected future cash flows, timing of cash flows and risk of receiving cash flows less than the expected amount. Each of these factors plays an important role in determining value and a swing in one factor can either cause a sharp drop in value or a dramatic increase. If the expected future cash flows increase, the value will also increase. However, if the valuing asset is very risky, its ending value may be less than the same asset with more certainty of the expected cash flows. Finally, due to the time value of money, an asset that returns more cash flows sooner rather than later, its value will also increase. As the timing of expected cash flows is stretched, external factors such as inflation will play a larger role and may drive the value down. Additionally, the risk that the asset may not return all of the expected cash flows will