Managerial Finance – Chapter 1

Homework 1

E1-2 Answer:

When evaluating projects several factors should be taken into consideration. Those are
profitability, cash flow, risks associated with projects, economic framework... Thus, focusing only
on earnings generation is not enough to assess whether accept or not the project and the choice
is not obvious from the given information.

P1-5 Answer:

a. Front desk receptionist – front desk receptionist is the first person, who has direct contact
with the customer. When he/she is late after the lunch break, this means that there is a
long queue in front of the desk, which results in unsatisfied and angry customers and this,
of course, is not good for the company’s image and revenue. In this case, the company
needs to replace this person with another employee and pay an additional salary, while
this receptionist is still paid for non-working hours. The solution might be to give notice
regarding this behavior or to install employee monitoring software, track their working
hours and compensate accordingly.
b. Division managers – when managers make estimates and budget higher costs than is
expected, these expenses are included in the budget as possible costs. As a result, funds for
financing profitable projects might be decreased, thus some profitable projects might be
declined and shareholders’ wealth will not increase. In this case, the company should give
a second look on managers’ compensating system and rewards should be given when they
first - budget correctly and second - execute according to the plan.
c. CEO - there is an agency problem as the CEO does not act for the shareholders’ good and
places her goals in the first place. It is unethical to communicate with the competitors
secretly and suggest setting up a merger this way. In this case, the competitor might use
this situation for his good and arrange the deal with unfavorable terms. The solution can
be to openly communicate this possibility and search for other companies, who might be
more favorable for the merger.
d. Branch manager – employees are the biggest asset of each company and experienced and
motivated staff are key for success and profitability. When the manager replaces staff with
part-time or temporary workers, he losses knowledge and experiences the previous
employees had and also losses motivation as temporary workers are not as motivated as
full-time employees. The solution can be changed in the compensation plan. The
management can give the branch manager company shares as a bonus compensation and
in this way, they will manage to encourage the manager to maintain high-quality work in
order to increase the share price and thus his profit as well.