Trade Summary #4
Comprehensive Financial Management : BSA 554
September 11, 2012
Dr. Chung Kwon
Explain how the valuation model given in Equation 1.2 could be used to describe the integrated nature of managerial decision making across the functional areas of business. ANSWER: This expanded equation can be used to examine how the expected value maximization model relates to a firm’s various functional departments. The marketing department of a firm has a major responsibility for sales, the production department a major responsibility for costs, and the finance department has a major responsibility for acquiring the capital necessary to support the firm's investment activities. There are many important overlaps among these functional areas--the marketing department, for example, can help reduce the costs associated with a given level of output by affecting the size and timing of customer orders. The production department can stimulate sales by improving quality and making new products available to sales personnel. Other departments within the firm--for example, accounting, personnel, transportation, and engineering--provide information or services vital to both continued sales growth and cost control. These activities all affect the risks of the firm and thereby the discount rate used to determine present values. Thus, various decisions in different departments of the firm can be appraised in terms of their effects on the value of the firm. Therefore, the value maximization model is useful in describing the integrated nature of managerial decision making across the functional areas of business.
Describe the effects of each of the following managerial decisions or economic influences on the value of the firm: A.
The firm is required to install new equipment to reduce air pollution. B.
Through heavy expenditures on advertising, the firm's marketing department increases sales substantially. C.
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