9780321818171_berk_ch03

In addition we will see that the difference between

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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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