week 13 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 resourcesefficiently, resulting in an efficient allocation of resources for societyas a whole. Owners, employees, customers, and anyone else who has astake in the business enterprise are all better off when its managersmake decisions that maximize the value of the firm.Just as there may be alternative routes to a destination, there may bealternative ways to maximize owners’ wealth. A strategy is a sense ofhow to reach an objective such as maximizing wealth. And just as someroutes may get you where you are going faster, some strategies may bebetter than others. Suppose a firm has decided it has an advantage over its competitorsin marketing and distributing its products in the global market. Thefirm’s strategy may be to expand into European market, followed by anexpansion into the Asian market. Once the firm has its strategy, it needsa plan, in particular the strategic plan, which is the set of actions thefirm intends to use to follow its strategy.The investment opportunities that enable the firm to follow its strat-egy comprise the firm’s investment strategy. The firm may pursue itsstrategy of expanding into European and Asian markets by either estab-lishing itself or acquiring businesses already in these markets. This iswhere capital budgeting analysis comes in: We evaluate the possibleinvestment opportunities to see which ones, if any, provide a returngreater than necessary for the investment’s risk. And let’s not forget theinvestment in working capital, the resources the firm needs to supportits day-to-day operations. Suppose as a result of evaluating whether to establish or acquirebusinesses, our firm decides it is better—in terms of maximizing thevalue of the firm—to acquire selected European businesses. The nextA29-Strategy_FinancialPlan Page 933 Wednesday, April 30, 2003 12:19 PM934 SELECTED TOPICS IN FINANCIAL MANAGEMENTstep is to figure out how it is going to pay for these acquisitions. Thefinancial managers must make sure that the firm has sufficient funds tomeet its operating needs, as well as its investment needs. This is wherethe firm’s financing strategy enters the picture. Where should the fundsneeded 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 MaximizationOften firms conceptualize a strategy in terms of the consumers of thefirm’s goods and services. For example, you may have a strategy tobecome the world’s 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 yourfocus is on product quality and cost. Is this strategy in conflict withmaximizing owners’ wealth? No.To maximize owners’ wealth, we focus on the returns and risks offuture cash flows to the firm’s owners. And we look at a project’s netpresent value when we make decisions regarding whether or not toinvest in it. A strategy of gaining a competitive or comparative advan-tage is consistent with maximizing shareholder wealth. This is becauseprojects 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 returngreater than what is expected for the project’s 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 thisequipment can create value, wouldn’t the firm’s competitors also wantthis equipment? Of course—if they could use it to create value, theywould surely be interested in it. 1 Lois Therrien, Patrick Oster, and Chuck Hawkins, How Sweet It Isn’t At Nutra-Sweet,” Business Week (December 14, 1992), p. 42.2 Monsanto sold its sweetener division in 2000.29-Strategy_FinancialPlan Page 936 Wednesday, April 30, 2003 12:19 PMStrategy and Financial Planning 937Now suppose that the firm’s competitors face no barriers to buying theequipment and exploiting its benefits. What will happen? The firm and itscompetitors will compete for the equipment, bidding up its price. Whendoes it all end? When the net present value of the equipment is zero.