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    week 13 1. Read and summarize chapter 29 of your financial management and analysis text book in at least 500 words.

    -Thinking about what you just read, what strategic and financial plan would you put in place to help bring down inflation in America? There is no right or wrong answer. Just answer from your opinion and from what you read in the chapter.

    siness  that  maximizes  its  owners  wealth  allocates  its  resources
    efficiently, resulting in an efficient allocation of resources for society
    as a whole. Owners, employees, customers, and anyone else who has a
    stake  in  the  business  enterprise  are  all  better  off  when  its  managers
    make decisions that maximize the value of the firm.
    Just as there may be alternative routes to a destination, there may be
    alternative  ways  to  maximize  owners  wealth.  A  strategy is  a  sense  of
    how to reach an objective such as maximizing wealth. And just as some
    routes may get you where you are going faster, some strategies may be
    better than others.
    Suppose a firm has decided it has an advantage over its competitors
    in  marketing  and  distributing  its  products  in  the  global  market.  The
    firms strategy may be to expand into European market, followed by an
    expansion into the Asian market. Once the firm has its strategy, it needs
    a  plan,  in  particular  the  strategic  plan, which  is  the  set  of  actions  the
    firm intends to use to follow its strategy.
    The investment opportunities that enable the firm to follow its strat-
    egy  comprise  the  firms  investment  strategy.  The  firm  may  pursue  its
    strategy of expanding into European and Asian markets by either estab-
    lishing  itself  or  acquiring  businesses  already  in  these  markets.  This  is
    where  capital  budgeting  analysis  comes  in:  We  evaluate  the  possible
    investment  opportunities  to  see  which  ones,  if  any,  provide  a  return
    greater than necessary for the investments risk. And lets not forget the
    investment  in  working  capital,  the  resources  the  firm  needs  to  support
    its day-to-day operations.
    Suppose  as  a  result  of  evaluating  whether  to  establish  or  acquire
    businesses,  our  firm  decides  it  is  betterin  terms  of  maximizing  the
    value  of  the  firmto  acquire  selected  European  businesses.  The  next
    A
    29-Strategy_FinancialPlan  Page 933  Wednesday, April 30, 2003  12:19 PM

    934 SELECTED TOPICS IN FINANCIAL MANAGEMENT
    step  is  to  figure  out  how  it  is  going  to  pay for  these  acquisitions.  The
    financial managers must make sure that the firm has sufficient funds to
    meet its operating needs, as well as its investment needs. This is where
    the firms financing strategy enters the picture. Where should the funds
    needed  come  from?  What  is  the  precise  timing  of  the  needs  for  funds?
    To answer  these  questions,  working  capital  management  (in  particular,
    short-term financing) and the capital structure decision (the mix of long-
    term sources of financing) enters the picture.

    Strategy and Owners Wealth Maximization
    Often  firms  conceptualize  a  strategy  in  terms  of  the  consumers  of  the
    firms  goods  and  services.  For  example,  you  may  have  a  strategy  to
    become  the  worlds  leading  producer  of  microcomputer  chips  by  pro-
    ducing  the  best  quality  chip  or  by  producing  chips  at  the  lowest  cost,
    developing a cost (and price) advantage over your competitors. So your
    focus  is  on  product  quality  and  cost.  Is  this  strategy  in  conflict  with
    maximizing owners wealth? No.
    To maximize  owners  wealth,  we  focus  on  the  returns  and  risks  of
    future  cash  flows  to  the  firms  owners.  And  we  look  at  a  projects  net
    present  value  when  we  make  decisions  regarding  whether  or  not  to
    invest  in  it.  A  strategy  of  gaining  a  competitive  or  comparative  advan-
    tage  is  consistent  with  maximizing  shareholder  wealth.  This  is  because
    projects with positive net present value arise when the firm has a com-
    petitive or comparative advantage over other firms.
    Suppose a new piece of equipment is expected to generate a return
    greater than what is expected for the projects risk (its cost of capital).
    But how can a firm create value simply by investing in a piece of equip-
    ment? How can it maintain a competitive advantage? If investing in this
    equipment  can  create  value,  wouldnt  the  firms  competitors  also  want
    this  equipment?  Of  courseif  they  could  use  it  to  create  value,  they
    would surely be interested in it.
    1 Lois  Therrien,  Patrick  Oster,  and  Chuck  Hawkins,  How  Sweet  It  Isnt  At  Nutra-
    Sweet, Business Week (December 14, 1992), p. 42.2 Monsanto sold its sweetener division in 2000.
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    Strategy and Financial Planning 937
    Now suppose that the firms competitors face no barriers to buying the
    equipment and exploiting its benefits. What will happen? The firm and its
    competitors  will  compete  for  the  equipment,  bidding  up  its  price.  When
    does it all end? When the net present value of the equipment is zero. 

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