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Unformatted text preview: y of its benefits exceed the cash value today of its costs? In addition, we will see that the
difference between the cash values of the benefits and costs indicates the net amount by which the decision
will increase the value of the firm and therefore the wealth of its investors. The Valuation Principle also leads to
the important concept of the Law of One Price, which will prove to be a key tool in understanding the value of
stocks, bonds, and other securities that are traded in the market. 03_ch03_berk.indd 67 67 12/15/11 8:08 PM 68 Part 2 Interest Rates and Valuing Cash Flows 3.1 Managerial Decision Making
A financial manager’s job is to make decisions on behalf of the firm’s investors. For
example, a manager of a manufacturing company has to decide how much to produce.
By increasing production, more units can be sold, but the price per unit will probably
be lower. Does it make sense to increase production? A manager of another company
might expect an increase in demand for her products. Should she raise prices or
increase production? If the decision is to increase production and a new facility...
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- Spring '07