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Financial Manager-Risk, Return, and Goals of Position

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1.Why must the financial manager when evaluating a decision alternative or action consider risk as well as return?

2.What is goal of the financial manager? Discuss how one measure achievement of this goal.

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Solution Summary

The solution describes the goals of a financial manager as well as the importance of weighing risks as well as returns.

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1. When considering competing projects, a financial manager must consider risk at least as heavily as he/she considers return as risk is half of the equation. Consider a project with a potential 45% return and 20% probability of doing so. On the other hand, the project could lose the firm 300% and has a probability of 80% of doing so. Suppose the cost of capital for the firm is 9%. In the above scenario, the financial manager is likely to conclude that the project is worthy of investment if he/she considers the return exclusively. However, with such a ...

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