SOLUTION MANUAL
Foundations of Financial Management, 18th Edition
by Stanley Block, Geoffrey Hirt, Chapters 1 – 21, Complete
,
, Chapter 1
The Goals and Functions of Financial Management
Discussion Questions
1-1 What effect did the recession of 2007-2009 have on government regulation?
It was greatly increased.
1-2 What advantages does a sole proprietorship offer? What is a major drawback of this
type of organization?
A sole proprietorship offers the advantage of simplicity of decision making and low
organizational and operating costs. A major drawback is that there is unlimited liability to
the owner.
1-3 What form of partnership allows some of the investors to limit their liability? Explain
briefly.
A limited partnership allows some of the partners to limit their liability. Under this
arrangement, one or more partners are designated general partners and have unlimited
liability for the debts of the firm; other partners are designated limited partners and are
liable only for their initial contribution. The limited partners are normally prohibited from
being active in the management of the firm.
1-4 In a corporation, what group has the ultimate responsibility for protecting and managing
the stockholders’ interests?
The board of directors.
1-5 What document is necessary to form a corporation?
The articles of incorporation.
1-6 What issue does agency theory examine? Why is it important in a public
corporation rather than in a private corporation?
, Agencyftheoryfexaminesfthefrelationshipfbetweenfthefownersfofftheffirmfandfthefmanagersf off
theffirm.fInfprivatelyfownedffirms,fmanagementfandfthefownersfarefusuallyfthefsamef people.f
Managementfoperatesftheffirmftofsatisfyfitsfownfgoals,fneeds,ffinancialfrequirementsf andfthefl
ike.fAsfafcompanyfmovesffromfprivateftofpublicfownership,fmanagementfnowf representsfallfo
wners.fThisfplacesfmanagementfinfthef agencyfpositionfoffmakingfdecisionsfinf thefbestfinterestfo
ffallfshareholders.
1-7 Whatfarefinstitutionalfinvestorsfimportantfinftoday’sfbusinessfworld?
Becausefinstitutionalfinvestorsfsuchfasfpensionffundsfandfmutualffundsfownfaflargef percentagefo
ffmajorfU.S.fcompanies,ftheyfarefhavingfmoreftofsayfaboutfthefwayfpubliclyf ownedfcompaniesf
arefmanaged.fAsfafgroup,ftheyfhavefthefabilityftofvoteflargefblocksfoff sharesfforfthefelectionfoff
afboardfoffdirectors,fwhichfisfsupposedftofrunfthefcompanyfinfanf efficient,fcompetitivefmanner.fT
hefthreatfoffbeingfableftofreplacefpoorfperformingfboardsfoff directorsfmakesfinstitutionalfinve
storsfquitefinfluential.fSincefthesefinstitutions,flikefpensionf fundsfandfmutualffunds,frepresentfindi
vidualfworkersfandfinvestors,ftheyfhavefafresponsibilityf tofseefthatftheffirmfisfmanagedfinfanfeffi
cientfandfethicalfway.
1-8 Whyfisfprofitfmaximization,fbyfitself,fanfinappropriatefgoal?fWhatfisfmeantfbyfthefgoalfoff
maximizationfoffshareholderfwealth?
Thefproblemfwithfafprofitfmaximizationfgoalfisfthatfitffailsftoftakefaccountfoffrisk,fthef timingfoff
thefbenefitsfisfnotfconsidered,fandfprofitfmeasurementfisfafveryfinexactfprocess.f Thefgoalfoffs
hareholders’fwealthfmaximizationfimpliesfthatftheffirmfwillfattemptftofachievef thefhighestfpos
sibleftotalfvaluationfinfthefmarketplace.fItfisfthefonefoverridingfobjectivefoff theffirmfandfshoul
dfinfluencefeveryfdecision.
1-9 Whenfdoesfinsiderftradingfoccur?fWhatfgovernmentfagencyfisfresponsiblefforfprotectingf
againstfthefunethicalfpracticefoffinsiderftrading?
Insiderftradingfoccursfwhenfanyonefwithfnon-
publicfinformationfbuysforfsellsfsecuritiesftof takefadvantagefoffthatfprivatefinformation.fThefS
ecuritiesfandfExchangefCommissionfisf responsiblefforfprotectingfmarketsfagainstfinsiderftradin
g.fInfthefpast,fpeoplefhavefgoneftof jailfforftradingfonfnon-
publicfinformation.fThisfhasfincludedfcompanyfofficers,finvestmentf bankers,fprintersfwhofhavef
informationfbeforefitfisfpublished,fandfevenftruckfdriversfwhof deliverfbusinessfmagazinesfandf
readfpositiveforfnegativefarticlesfaboutfafcompanyfbeforefthef magazinefisfonfthefnewsstandsf
andfthenfplacef tradesforfhaveffriendsfplaceftradesfbasedfonf thatfinformation.fThefSECfhasfpr
osecutedfanyonefwhofprofitsffromfinsidefinformation.
1-10 Inftermsfofftheflifefoffthefsecuritiesfoffered,fwhatfisfthefdifferencefbetweenfmoneyfandf ca
pitalfmarkets?
Moneyfmarketsfreferftofthosefmarketsfdealingfwithfshort-
termfsecuritiesfthatfhavefaflifefoff onefyearforfless.fCapitalfmarketsfreferftofsecuritiesfwithfafli
fefoffmorefthanfonefyear.
1-11 Whatfisfthefdifferencefbetweenfafprimaryfandfafsecondaryfmarket?
Foundations of Financial Management, 18th Edition
by Stanley Block, Geoffrey Hirt, Chapters 1 – 21, Complete
,
, Chapter 1
The Goals and Functions of Financial Management
Discussion Questions
1-1 What effect did the recession of 2007-2009 have on government regulation?
It was greatly increased.
1-2 What advantages does a sole proprietorship offer? What is a major drawback of this
type of organization?
A sole proprietorship offers the advantage of simplicity of decision making and low
organizational and operating costs. A major drawback is that there is unlimited liability to
the owner.
1-3 What form of partnership allows some of the investors to limit their liability? Explain
briefly.
A limited partnership allows some of the partners to limit their liability. Under this
arrangement, one or more partners are designated general partners and have unlimited
liability for the debts of the firm; other partners are designated limited partners and are
liable only for their initial contribution. The limited partners are normally prohibited from
being active in the management of the firm.
1-4 In a corporation, what group has the ultimate responsibility for protecting and managing
the stockholders’ interests?
The board of directors.
1-5 What document is necessary to form a corporation?
The articles of incorporation.
1-6 What issue does agency theory examine? Why is it important in a public
corporation rather than in a private corporation?
, Agencyftheoryfexaminesfthefrelationshipfbetweenfthefownersfofftheffirmfandfthefmanagersf off
theffirm.fInfprivatelyfownedffirms,fmanagementfandfthefownersfarefusuallyfthefsamef people.f
Managementfoperatesftheffirmftofsatisfyfitsfownfgoals,fneeds,ffinancialfrequirementsf andfthefl
ike.fAsfafcompanyfmovesffromfprivateftofpublicfownership,fmanagementfnowf representsfallfo
wners.fThisfplacesfmanagementfinfthef agencyfpositionfoffmakingfdecisionsfinf thefbestfinterestfo
ffallfshareholders.
1-7 Whatfarefinstitutionalfinvestorsfimportantfinftoday’sfbusinessfworld?
Becausefinstitutionalfinvestorsfsuchfasfpensionffundsfandfmutualffundsfownfaflargef percentagefo
ffmajorfU.S.fcompanies,ftheyfarefhavingfmoreftofsayfaboutfthefwayfpubliclyf ownedfcompaniesf
arefmanaged.fAsfafgroup,ftheyfhavefthefabilityftofvoteflargefblocksfoff sharesfforfthefelectionfoff
afboardfoffdirectors,fwhichfisfsupposedftofrunfthefcompanyfinfanf efficient,fcompetitivefmanner.fT
hefthreatfoffbeingfableftofreplacefpoorfperformingfboardsfoff directorsfmakesfinstitutionalfinve
storsfquitefinfluential.fSincefthesefinstitutions,flikefpensionf fundsfandfmutualffunds,frepresentfindi
vidualfworkersfandfinvestors,ftheyfhavefafresponsibilityf tofseefthatftheffirmfisfmanagedfinfanfeffi
cientfandfethicalfway.
1-8 Whyfisfprofitfmaximization,fbyfitself,fanfinappropriatefgoal?fWhatfisfmeantfbyfthefgoalfoff
maximizationfoffshareholderfwealth?
Thefproblemfwithfafprofitfmaximizationfgoalfisfthatfitffailsftoftakefaccountfoffrisk,fthef timingfoff
thefbenefitsfisfnotfconsidered,fandfprofitfmeasurementfisfafveryfinexactfprocess.f Thefgoalfoffs
hareholders’fwealthfmaximizationfimpliesfthatftheffirmfwillfattemptftofachievef thefhighestfpos
sibleftotalfvaluationfinfthefmarketplace.fItfisfthefonefoverridingfobjectivefoff theffirmfandfshoul
dfinfluencefeveryfdecision.
1-9 Whenfdoesfinsiderftradingfoccur?fWhatfgovernmentfagencyfisfresponsiblefforfprotectingf
againstfthefunethicalfpracticefoffinsiderftrading?
Insiderftradingfoccursfwhenfanyonefwithfnon-
publicfinformationfbuysforfsellsfsecuritiesftof takefadvantagefoffthatfprivatefinformation.fThefS
ecuritiesfandfExchangefCommissionfisf responsiblefforfprotectingfmarketsfagainstfinsiderftradin
g.fInfthefpast,fpeoplefhavefgoneftof jailfforftradingfonfnon-
publicfinformation.fThisfhasfincludedfcompanyfofficers,finvestmentf bankers,fprintersfwhofhavef
informationfbeforefitfisfpublished,fandfevenftruckfdriversfwhof deliverfbusinessfmagazinesfandf
readfpositiveforfnegativefarticlesfaboutfafcompanyfbeforefthef magazinefisfonfthefnewsstandsf
andfthenfplacef tradesforfhaveffriendsfplaceftradesfbasedfonf thatfinformation.fThefSECfhasfpr
osecutedfanyonefwhofprofitsffromfinsidefinformation.
1-10 Inftermsfofftheflifefoffthefsecuritiesfoffered,fwhatfisfthefdifferencefbetweenfmoneyfandf ca
pitalfmarkets?
Moneyfmarketsfreferftofthosefmarketsfdealingfwithfshort-
termfsecuritiesfthatfhavefaflifefoff onefyearforfless.fCapitalfmarketsfreferftofsecuritiesfwithfafli
fefoffmorefthanfonefyear.
1-11 Whatfisfthefdifferencefbetweenfafprimaryfandfafsecondaryfmarket?
