SOLUTION MANUAL FOR g g
FoundationsgofgFinancialgManagement,g18thgEditiongbygStanleygBlock,gG
eoffreygHirt,gBartleygDanielsen
Chapterg1-21
Chapterg1
ThegGoalsgandgFunctionsgofgFinancialgManagement
DiscussiongQuestions
1-1 Whatgeffectgdidgthegrecessiongofg2007-2009ghavegonggovernmentgregulation?
Itgwasggreatlygincreased.
1-2 Whatgadvantagesgdoesgagsolegproprietorshipgoffer?gWhatgisgagmajorgdrawbackgofgthisgtyp
egofgorganization?
Agsolegproprietorshipgoffersgthegadvantagegofgsimplicitygofgdecisiongmakinggandglowgorg
anizationalgandgoperatinggcosts.gAgmajorgdrawbackgisgthatgtheregisgunlimitedgliabilitygtogt
hegowner.
1-3 Whatgformgofgpartnershipgallowsgsomegofgtheginvestorsgtoglimitgtheirgliability?gExplai
ngbriefly.
Aglimitedgpartnershipgallowsgsomegofgthegpartnersgtoglimitgtheirgliability.gUndergthisgarra
ngement,gonegorgmoregpartnersgaregdesignatedggeneralgpartnersgandghavegunlimitedgliabili
tygforgthegdebtsgofgthegfirm;gothergpartnersgaregdesignatedglimitedgpartnersgandgaregliableg
onlygforgtheirginitialgcontribution.gTheglimitedgpartnersgaregnormallygprohibitedgfromgbein
ggactivegingthegmanagementgofgthegfirm.
1-4 Ingagcorporation,gwhatggroupghasgthegultimategresponsibilitygforgprotectinggandgmanagin
ggthegstockholders’ginterests?
Thegboardgofgdirectors.
1-5 Whatgdocumentgisgnecessarygtogformgagcorporation?
Thegarticlesgofgincorporation.
1-6 Whatgissuegdoesgagencygtheorygexamine?gWhygisgitgimportantgingagpublicgcorporatio
ngrathergthangingagprivategcorporation?
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHi
llgLLC.
, Agencygtheorygexaminesgthegrelationshipgbetweengthegownersgofgthegfirmgandgthegmanag
ersgofgthegfirm.gIngprivatelygownedgfirms,gmanagementgandgthegownersgaregusuallygthegsa
megpeople.gManagementgoperatesgthegfirmgtogsatisfygitsgownggoals,gneeds,gfinancialgrequi
rementsgandgtheglike.gAsgagcompanygmovesgfromgprivategtogpublicgownership,gmanagem
entgnowgrepresentsgallgowners.gThisgplacesgmanagementgingthegagencygpositiongofgmakin
ggdecisionsgingthegbestginterestgofgallgshareholders.
1-7 Whatgareginstitutionalginvestorsgimportantgingtoday’sgbusinessgworld?
Becauseginstitutionalginvestorsgsuchgasgpensiongfundsgandgmutualgfundsgowngaglargegperce
ntagegofgmajorgU.S.gcompanies,gtheygareghavinggmoregtogsaygaboutgthegwaygpubliclygowne
dgcompaniesgaregmanaged.gAsgaggroup,gtheyghavegthegabilitygtogvoteglargegblocksgofgshares
gforgthegelectiongofgagboardgofgdirectors,gwhichgisgsupposedgtogrungthegcompanygingangeffici
ent,gcompetitivegmanner.gThegthreatgofgbeinggablegtogreplacegpoorgperforminggboardsgofgdi
rectorsgmakesginstitutionalginvestorsgquiteginfluential.gSincegtheseginstitutions,glikegpensio
ngfundsgandgmutualgfunds,grepresentgindividualgworkersgandginvestors,gtheyghavegagrespon
sibilitygtogseegthatgthegfirmgisgmanagedgingangefficientgandgethicalgway.
1-8 Whygisgprofitgmaximization,gbygitself,ganginappropriateggoal?gWhatgisgmeantgbygtheggo
algofgmaximizationgofgshareholdergwealth?
Thegproblemgwithgagprofitgmaximizationggoalgisgthatgitgfailsgtogtakegaccountgofgrisk,gthegti
minggofgthegbenefitsgisgnotgconsidered,gandgprofitgmeasurementgisgagveryginexactgprocess.
gTheggoalgofgshareholders’gwealthgmaximizationgimpliesgthatgthegfirmgwillgattemptgtogach
ievegtheghighestgpossiblegtotalgvaluationgingthegmarketplace.gItgisgthegonegoverridinggobje
ctivegofgthegfirmgandgshouldginfluencegeverygdecision.
1-9 Whengdoesginsidergtradinggoccur?gWhatggovernmentgagencygisgresponsiblegforgprotectin
ggagainstgthegunethicalgpracticegofginsidergtrading?
Insidergtradinggoccursgwhenganyonegwithgnon-
publicginformationgbuysgorgsellsgsecuritiesgtogtakegadvantagegofgthatgprivateginformation.g
ThegSecuritiesgandgExchangegCommissiongisgresponsiblegforgprotectinggmarketsgagainstgi
nsidergtrading.gIngthegpast,gpeopleghaveggonegtogjailgforgtradinggongnon-
publicginformation.gThisghasgincludedgcompanygofficers,ginvestmentgbankers,gprintersgw
hoghaveginformationgbeforegitgisgpublished,gandgevengtruckgdriversgwhogdelivergbusinessg
magazinesgandgreadgpositivegorgnegativegarticlesgaboutgagcompanygbeforegthegmagazinegi
sgongthegnewsstandsgandgthengplacegtradesgorghavegfriendsgplacegtradesgbasedgongthatginfo
rmation.gThegSECghasgprosecutedganyonegwhogprofitsgfromginsideginformation.
1-10 Ingtermsgofgtheglifegofgthegsecuritiesgoffered,gwhatgisgthegdifferencegbetweengmoneygan
dgcapitalgmarkets?
Moneygmarketsgrefergtogthosegmarketsgdealinggwithgshort-
termgsecuritiesgthatghavegaglifegofgonegyeargorgless.gCapitalgmarketsgrefergtogsecuritiesgwi
thgaglifegofgmoregthangonegyear.
1-11 Whatgisgthegdifferencegbetweengagprimarygandgagsecondarygmarket?
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHi
llgLLC.
, Agprimarygmarketgrefersgtogthegusegofgthegfinancialgmarketsgtograisegnewgfundsgforgthegco
rporation.gAftergthegsecuritiesgaregsoldgtogthegpublicg(institutionsgandgindividuals),gtheygtr
adegingthegsecondarygmarketgbetweenginvestors.gItgisgingthegsecondarygmarketgthatgpricesg
aregcontinuallygchanginggasginvestorsgbuygandgsellgsecuritiesgbasedgongthegexpectationsgof
gcorporategprospects.
1-12 Assumegyougareglookinggatgmanygcompaniesgwithgequalgrisk.gWhichgonesgwillghavegth
eghighestgstockgprices?
Givengcompaniesgwithgequalgrisk,gthosegcompaniesgwithgexpectationsgofghighgreturngwi
llghaveghighergcommongstockgpricesgrelativegtogthosegcompaniesgwithgexpectationsgofgp
oorgreturns.
1-13 Howgisgthegtimegvaluegofgmoneygconceptgrelatedgtogthegvaluationgofgstocks?
Thegvaluegofganginvestmentgthatgisgexpectedgtogearngmoneygingthegfuturegcangbegcalculate
dgusinggtime-
valuegofgmoneygprinciples.gCorporationsgaregexpectedgtogpaygdividendsgtogtheirgsharehold
ers.gThegcurrentgvaluegofgthesegfuturegdividendsgisgthegpresentgvalue.gThegpresentgvaluego
fgagstock’sgfuturegdividendsgshouldgbegthegsamegasgthegstock’sgcurrentgprice.
Chapterg2
ReviewgofgAccounting
DiscussiongQuestions
2-1. Discussgsomegfinancialgvariablesgthatgaffectgthegprice-earningsgratio.
Thegprice-
earningsgratiogwillgbeginfluencedgbygthegearningsgandgsalesggrowthgofgthegfirm,gthegri
skgorgvolatilitygingperformance,gthegdebt-
equitygstructuregofgthegfirm,gthegdividendgpaymentgpolicy,gthegqualitygofgmanageme
nt,gandgagnumbergofgothergfactors.gThegratiogtendsgtogbegfuture-
oriented,gandgthegmoregpositivegthegoutlook,gtheghighergitgwillgbe.
2-2. Whatgisgthegdifferencegbetweengbookgvaluegpergsharegofgcommongstockgandgmarketg
valuegpergshare?gWhygdoesgthisgdisparitygoccur?
Bookgvaluegpergsharegisgarrivedgatgbygtakinggthegcostgofgthegassetsgandgsubtractinggo
utgliabilitiesgandgpreferredgstockgandgdividinggbygthegnumbergofgcommongshares
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHi
llgLLC.
, outstanding.gItgisgbasedgongtheghistoricalgcostgofgthegassets.gMarketgvaluegpergsharegis
basedgongthegcurrentgassessedgvaluegofgthegfirmgingthegmarketplacegandgmaygbearglitt
legrelationshipgtogoriginalgcost.gBesidesgthegdisparitygbetweengbookgandgmarketgvalue
gcausedgbygtheghistoricalgcostgapproach,gothergcontributinggfactorsgaregtheggrowthgpr
ospectsgforgthegfirm,gthegqualitygofgmanagement,gandgthegindustrygoutlook.gTogthegex
tentgthesegaregquitegnegativegorgpositive;gmarketgvaluegmaygdiffergwidelygfromgbookg
value.
2-3. Explainghowgdepreciationggeneratesgactualgcashgflowsgforgthegcompany.
Thegonlygwaygdepreciationggeneratesgcashgflowsgforgthegcompanygisgbygservinggasgagt
axgshieldgagainstgreportedgincome.gThisgnon-
cashgdeductiongmaygprovidegcashgflowgequalgtogthegtaxgrategtimesgthegdepreciationg
charged.gThisgmuchgingtaxesgwillgbegsaved,gwhilegnogcashgpaymentsgoccur.
2-4. Whatgisgthegdifferencegbetweengaccumulatedgdepreciationgandgdepreciationgexpense?
gHowgaregtheygrelated?
Accumulatedgdepreciationgisgthegsumgofgallgpastgandgpresentgdepreciationgcharges,gw
hilegdepreciationgexpensegisgthegcurrentgyear’sgcharge.gTheygaregrelatedgingthatgthegsu
mgofgallgpriorgdepreciationgexpensegshouldgbegequalgtogaccumulatedgdepreciationg(su
bjectgtogsomegdifferentialgrelatedgtogasset
write-offs).
2-5. Howgisgthegincomegstatementgrelatedgtogthegbalancegsheet?
Thegearningsg(lessgdividends)greportedgingthegincomegstatementgisgtransferredgtogt
hegownershipgsectiongofgthegbalancegsheetgasgretainedgearnings.gThus,gwhatgwege
arngingthegincomegstatementgbecomesgpartgofgthegownershipginterestgingthegbalan
cegsheet.
2-6. Commentgongwhyginflationgmaygrestrictgthegusefulnessgofgthegbalancegsheetgasgnorm
allygpresented.
Thegbalancegsheetgisgbasedgonghistoricalgcosts.gWhengpricesgaregrisinggrapidly,ghistoric
algcostgdatagmayglosegmuchgofgtheirgmeaning—
particularlygforgplantgandgequipmentgand
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHi
llgLLC.
FoundationsgofgFinancialgManagement,g18thgEditiongbygStanleygBlock,gG
eoffreygHirt,gBartleygDanielsen
Chapterg1-21
Chapterg1
ThegGoalsgandgFunctionsgofgFinancialgManagement
DiscussiongQuestions
1-1 Whatgeffectgdidgthegrecessiongofg2007-2009ghavegonggovernmentgregulation?
Itgwasggreatlygincreased.
1-2 Whatgadvantagesgdoesgagsolegproprietorshipgoffer?gWhatgisgagmajorgdrawbackgofgthisgtyp
egofgorganization?
Agsolegproprietorshipgoffersgthegadvantagegofgsimplicitygofgdecisiongmakinggandglowgorg
anizationalgandgoperatinggcosts.gAgmajorgdrawbackgisgthatgtheregisgunlimitedgliabilitygtogt
hegowner.
1-3 Whatgformgofgpartnershipgallowsgsomegofgtheginvestorsgtoglimitgtheirgliability?gExplai
ngbriefly.
Aglimitedgpartnershipgallowsgsomegofgthegpartnersgtoglimitgtheirgliability.gUndergthisgarra
ngement,gonegorgmoregpartnersgaregdesignatedggeneralgpartnersgandghavegunlimitedgliabili
tygforgthegdebtsgofgthegfirm;gothergpartnersgaregdesignatedglimitedgpartnersgandgaregliableg
onlygforgtheirginitialgcontribution.gTheglimitedgpartnersgaregnormallygprohibitedgfromgbein
ggactivegingthegmanagementgofgthegfirm.
1-4 Ingagcorporation,gwhatggroupghasgthegultimategresponsibilitygforgprotectinggandgmanagin
ggthegstockholders’ginterests?
Thegboardgofgdirectors.
1-5 Whatgdocumentgisgnecessarygtogformgagcorporation?
Thegarticlesgofgincorporation.
1-6 Whatgissuegdoesgagencygtheorygexamine?gWhygisgitgimportantgingagpublicgcorporatio
ngrathergthangingagprivategcorporation?
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHi
llgLLC.
, Agencygtheorygexaminesgthegrelationshipgbetweengthegownersgofgthegfirmgandgthegmanag
ersgofgthegfirm.gIngprivatelygownedgfirms,gmanagementgandgthegownersgaregusuallygthegsa
megpeople.gManagementgoperatesgthegfirmgtogsatisfygitsgownggoals,gneeds,gfinancialgrequi
rementsgandgtheglike.gAsgagcompanygmovesgfromgprivategtogpublicgownership,gmanagem
entgnowgrepresentsgallgowners.gThisgplacesgmanagementgingthegagencygpositiongofgmakin
ggdecisionsgingthegbestginterestgofgallgshareholders.
1-7 Whatgareginstitutionalginvestorsgimportantgingtoday’sgbusinessgworld?
Becauseginstitutionalginvestorsgsuchgasgpensiongfundsgandgmutualgfundsgowngaglargegperce
ntagegofgmajorgU.S.gcompanies,gtheygareghavinggmoregtogsaygaboutgthegwaygpubliclygowne
dgcompaniesgaregmanaged.gAsgaggroup,gtheyghavegthegabilitygtogvoteglargegblocksgofgshares
gforgthegelectiongofgagboardgofgdirectors,gwhichgisgsupposedgtogrungthegcompanygingangeffici
ent,gcompetitivegmanner.gThegthreatgofgbeinggablegtogreplacegpoorgperforminggboardsgofgdi
rectorsgmakesginstitutionalginvestorsgquiteginfluential.gSincegtheseginstitutions,glikegpensio
ngfundsgandgmutualgfunds,grepresentgindividualgworkersgandginvestors,gtheyghavegagrespon
sibilitygtogseegthatgthegfirmgisgmanagedgingangefficientgandgethicalgway.
1-8 Whygisgprofitgmaximization,gbygitself,ganginappropriateggoal?gWhatgisgmeantgbygtheggo
algofgmaximizationgofgshareholdergwealth?
Thegproblemgwithgagprofitgmaximizationggoalgisgthatgitgfailsgtogtakegaccountgofgrisk,gthegti
minggofgthegbenefitsgisgnotgconsidered,gandgprofitgmeasurementgisgagveryginexactgprocess.
gTheggoalgofgshareholders’gwealthgmaximizationgimpliesgthatgthegfirmgwillgattemptgtogach
ievegtheghighestgpossiblegtotalgvaluationgingthegmarketplace.gItgisgthegonegoverridinggobje
ctivegofgthegfirmgandgshouldginfluencegeverygdecision.
1-9 Whengdoesginsidergtradinggoccur?gWhatggovernmentgagencygisgresponsiblegforgprotectin
ggagainstgthegunethicalgpracticegofginsidergtrading?
Insidergtradinggoccursgwhenganyonegwithgnon-
publicginformationgbuysgorgsellsgsecuritiesgtogtakegadvantagegofgthatgprivateginformation.g
ThegSecuritiesgandgExchangegCommissiongisgresponsiblegforgprotectinggmarketsgagainstgi
nsidergtrading.gIngthegpast,gpeopleghaveggonegtogjailgforgtradinggongnon-
publicginformation.gThisghasgincludedgcompanygofficers,ginvestmentgbankers,gprintersgw
hoghaveginformationgbeforegitgisgpublished,gandgevengtruckgdriversgwhogdelivergbusinessg
magazinesgandgreadgpositivegorgnegativegarticlesgaboutgagcompanygbeforegthegmagazinegi
sgongthegnewsstandsgandgthengplacegtradesgorghavegfriendsgplacegtradesgbasedgongthatginfo
rmation.gThegSECghasgprosecutedganyonegwhogprofitsgfromginsideginformation.
1-10 Ingtermsgofgtheglifegofgthegsecuritiesgoffered,gwhatgisgthegdifferencegbetweengmoneygan
dgcapitalgmarkets?
Moneygmarketsgrefergtogthosegmarketsgdealinggwithgshort-
termgsecuritiesgthatghavegaglifegofgonegyeargorgless.gCapitalgmarketsgrefergtogsecuritiesgwi
thgaglifegofgmoregthangonegyear.
1-11 Whatgisgthegdifferencegbetweengagprimarygandgagsecondarygmarket?
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHi
llgLLC.
, Agprimarygmarketgrefersgtogthegusegofgthegfinancialgmarketsgtograisegnewgfundsgforgthegco
rporation.gAftergthegsecuritiesgaregsoldgtogthegpublicg(institutionsgandgindividuals),gtheygtr
adegingthegsecondarygmarketgbetweenginvestors.gItgisgingthegsecondarygmarketgthatgpricesg
aregcontinuallygchanginggasginvestorsgbuygandgsellgsecuritiesgbasedgongthegexpectationsgof
gcorporategprospects.
1-12 Assumegyougareglookinggatgmanygcompaniesgwithgequalgrisk.gWhichgonesgwillghavegth
eghighestgstockgprices?
Givengcompaniesgwithgequalgrisk,gthosegcompaniesgwithgexpectationsgofghighgreturngwi
llghaveghighergcommongstockgpricesgrelativegtogthosegcompaniesgwithgexpectationsgofgp
oorgreturns.
1-13 Howgisgthegtimegvaluegofgmoneygconceptgrelatedgtogthegvaluationgofgstocks?
Thegvaluegofganginvestmentgthatgisgexpectedgtogearngmoneygingthegfuturegcangbegcalculate
dgusinggtime-
valuegofgmoneygprinciples.gCorporationsgaregexpectedgtogpaygdividendsgtogtheirgsharehold
ers.gThegcurrentgvaluegofgthesegfuturegdividendsgisgthegpresentgvalue.gThegpresentgvaluego
fgagstock’sgfuturegdividendsgshouldgbegthegsamegasgthegstock’sgcurrentgprice.
Chapterg2
ReviewgofgAccounting
DiscussiongQuestions
2-1. Discussgsomegfinancialgvariablesgthatgaffectgthegprice-earningsgratio.
Thegprice-
earningsgratiogwillgbeginfluencedgbygthegearningsgandgsalesggrowthgofgthegfirm,gthegri
skgorgvolatilitygingperformance,gthegdebt-
equitygstructuregofgthegfirm,gthegdividendgpaymentgpolicy,gthegqualitygofgmanageme
nt,gandgagnumbergofgothergfactors.gThegratiogtendsgtogbegfuture-
oriented,gandgthegmoregpositivegthegoutlook,gtheghighergitgwillgbe.
2-2. Whatgisgthegdifferencegbetweengbookgvaluegpergsharegofgcommongstockgandgmarketg
valuegpergshare?gWhygdoesgthisgdisparitygoccur?
Bookgvaluegpergsharegisgarrivedgatgbygtakinggthegcostgofgthegassetsgandgsubtractinggo
utgliabilitiesgandgpreferredgstockgandgdividinggbygthegnumbergofgcommongshares
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHi
llgLLC.
, outstanding.gItgisgbasedgongtheghistoricalgcostgofgthegassets.gMarketgvaluegpergsharegis
basedgongthegcurrentgassessedgvaluegofgthegfirmgingthegmarketplacegandgmaygbearglitt
legrelationshipgtogoriginalgcost.gBesidesgthegdisparitygbetweengbookgandgmarketgvalue
gcausedgbygtheghistoricalgcostgapproach,gothergcontributinggfactorsgaregtheggrowthgpr
ospectsgforgthegfirm,gthegqualitygofgmanagement,gandgthegindustrygoutlook.gTogthegex
tentgthesegaregquitegnegativegorgpositive;gmarketgvaluegmaygdiffergwidelygfromgbookg
value.
2-3. Explainghowgdepreciationggeneratesgactualgcashgflowsgforgthegcompany.
Thegonlygwaygdepreciationggeneratesgcashgflowsgforgthegcompanygisgbygservinggasgagt
axgshieldgagainstgreportedgincome.gThisgnon-
cashgdeductiongmaygprovidegcashgflowgequalgtogthegtaxgrategtimesgthegdepreciationg
charged.gThisgmuchgingtaxesgwillgbegsaved,gwhilegnogcashgpaymentsgoccur.
2-4. Whatgisgthegdifferencegbetweengaccumulatedgdepreciationgandgdepreciationgexpense?
gHowgaregtheygrelated?
Accumulatedgdepreciationgisgthegsumgofgallgpastgandgpresentgdepreciationgcharges,gw
hilegdepreciationgexpensegisgthegcurrentgyear’sgcharge.gTheygaregrelatedgingthatgthegsu
mgofgallgpriorgdepreciationgexpensegshouldgbegequalgtogaccumulatedgdepreciationg(su
bjectgtogsomegdifferentialgrelatedgtogasset
write-offs).
2-5. Howgisgthegincomegstatementgrelatedgtogthegbalancegsheet?
Thegearningsg(lessgdividends)greportedgingthegincomegstatementgisgtransferredgtogt
hegownershipgsectiongofgthegbalancegsheetgasgretainedgearnings.gThus,gwhatgwege
arngingthegincomegstatementgbecomesgpartgofgthegownershipginterestgingthegbalan
cegsheet.
2-6. Commentgongwhyginflationgmaygrestrictgthegusefulnessgofgthegbalancegsheetgasgnorm
allygpresented.
Thegbalancegsheetgisgbasedgonghistoricalgcosts.gWhengpricesgaregrisinggrapidly,ghistoric
algcostgdatagmayglosegmuchgofgtheirgmeaning—
particularlygforgplantgandgequipmentgand
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHi
llgLLC.
