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TESTBANK FOR Solution Manual For Foundations Of Financial
Management 12th Edition Stanley B Block, Geoffrey A Hirt
Chapter 1-21
Chapter 1
Discussion Questions
1-1. Regulation was greatly increased with the Dodd – Frank Act
and other measures.
2
-2. The student should be prepared to pay a higher price for
the promised $2 from the Royal Bank. The risk is lower.
1
-5. Because institutional investors such as pension funds (Ontario
Teachers‘, CPP) and mutual funds own a large percentage of major
companies, they are having more to say about the way publicly
owned companies are managed. As a group, they have the ability
to vote large blocks of shares for the election of a board of
directors, which is supposed to run the company in an efficient,
competitive manner. The threat of being able to replace poor
performing boards of directors makes institutional investors quite
influential. Since these institutions, like pension funds and mutual
funds, represent individual workers and investors, they have a
responsibility to see that the firm is managed in an efficient and
ethical way.
2
-6. Insider trading occurs when someone has information that
is not available to the public and then uses the information
Foundations of Fin. Mgt. 12Ce 3- 1 Block, Hirt, Danielsen, Short
,3
-3. The goal of shareholder wealth maximization implies that
the firm will attempt to achieve the highest possible
valuation in the marketplace. It is the one overriding
objective of the firm and should influence every decision.
The problem with a profit maximization goal is that it fails
to take account of risk, the timing of the benefits is not
considered, and profit measurement is a very inexact
process.
4
-4. Agency theory examines the relationship between the
owners of the firm and the managers of the firm. In
privately owned firms, management and the owners are
usually the same people. Management operates the firm
to satisfy its own goals, needs, financial requirements and
the like. As a company moves from private to public
ownership, management now represents all owners. This
places management in the agency position of making
decisions in the best interest of all shareholders.
to profit from trading in a company‘s common stock. The
provincial securities commissions are responsible for
protecting against insider trading.
3
-7. Regulations set the ―rules of the game‖ in which the firm operates. Shareholder wealth
maximization can and should still be sought within the rules, for economic efficiency to be
achieved. Society judge‘s deregulation benefits against the costs of regulation.
4
-8. Management operates within a competitive market and they should be paid their opportunity
cost. If managers do not act to maximize shareholder wealth, share prices will become
depressed. To the extent manager‘s compensation is tied to share price
Foundations of Fin. Mgt. 12Ce 3- 2 Block, Hirt, Danielsen, Short
, performance, shareholders can fire managers, and there
exists a market for corporate control, management will be
compensated based on their economic contribution.
1-9. Daily functions- cash management, inventory control,
receipt and disbursement of funds. Occasional- share
issue, bond issue, capital budgeting and dividend
decisions.
1-10. There is unlimited liability for the sole proprietorship and
partnership forms of ownership. Under the limited
partnership, only the general partner(s) has unlimited
liability, with limited partners obligated only to the extent
of their initial contribution. Finally, all shareholders in a
corporation have limited liability, although owner/
shareholders of small businesses often have to give banks
their personal guarantees.
1-11. The corporate form is best suited to large organizations
because of the easy divisibility of ownership through
issuance of shares. Also, the corporation has continued
existence independent of any shareholder.
1-12. Money markets refer to those markets dealing with short-
term securities that have a life of one year or less. Capital
Foundations of Fin. Mgt. 12Ce 3- 3 Block, Hirt, Danielsen, Short
, markets refer to securities with a life of more than one
year.
1-13. A primary market refers to the use of the financial
markets to raise new funds. After the securities are sold to
the public (institutions and individuals), they trade in the
secondary market between investors. It is in the secondary
market that prices are continually changing as investors
buy and sell securities based on the expectations of
corporate prospects. A liquid secondary market promotes
a successful primary market.
1-14. Government debt loads require financing. This puts large
demands ($1 trillion in accumulated federal and provincial
debt in 2017) on the capital markets, putting upward
pressure on interest rates and a corporation‘s ability to
invest in capital projects. When governments finance their
deficits abroad they place Canada‘s economic levers
outside of our control and debt servicing payments can
impact the foreign exchange markets. As the government
debt load relative to GDP been reduced in recent years
there has been less pressure on interest rates,
corporations have borrowed more, but there have been
less
‗risk free‘ government securities available (causing
liquidity problems particularly in the money markets).
Foundations of Fin. Mgt. 12Ce 3- 4 Block, Hirt, Danielsen, Short
TESTBANK FOR Solution Manual For Foundations Of Financial
Management 12th Edition Stanley B Block, Geoffrey A Hirt
Chapter 1-21
Chapter 1
Discussion Questions
1-1. Regulation was greatly increased with the Dodd – Frank Act
and other measures.
2
-2. The student should be prepared to pay a higher price for
the promised $2 from the Royal Bank. The risk is lower.
1
-5. Because institutional investors such as pension funds (Ontario
Teachers‘, CPP) and mutual funds own a large percentage of major
companies, they are having more to say about the way publicly
owned companies are managed. As a group, they have the ability
to vote large blocks of shares for the election of a board of
directors, which is supposed to run the company in an efficient,
competitive manner. The threat of being able to replace poor
performing boards of directors makes institutional investors quite
influential. Since these institutions, like pension funds and mutual
funds, represent individual workers and investors, they have a
responsibility to see that the firm is managed in an efficient and
ethical way.
2
-6. Insider trading occurs when someone has information that
is not available to the public and then uses the information
Foundations of Fin. Mgt. 12Ce 3- 1 Block, Hirt, Danielsen, Short
,3
-3. The goal of shareholder wealth maximization implies that
the firm will attempt to achieve the highest possible
valuation in the marketplace. It is the one overriding
objective of the firm and should influence every decision.
The problem with a profit maximization goal is that it fails
to take account of risk, the timing of the benefits is not
considered, and profit measurement is a very inexact
process.
4
-4. Agency theory examines the relationship between the
owners of the firm and the managers of the firm. In
privately owned firms, management and the owners are
usually the same people. Management operates the firm
to satisfy its own goals, needs, financial requirements and
the like. As a company moves from private to public
ownership, management now represents all owners. This
places management in the agency position of making
decisions in the best interest of all shareholders.
to profit from trading in a company‘s common stock. The
provincial securities commissions are responsible for
protecting against insider trading.
3
-7. Regulations set the ―rules of the game‖ in which the firm operates. Shareholder wealth
maximization can and should still be sought within the rules, for economic efficiency to be
achieved. Society judge‘s deregulation benefits against the costs of regulation.
4
-8. Management operates within a competitive market and they should be paid their opportunity
cost. If managers do not act to maximize shareholder wealth, share prices will become
depressed. To the extent manager‘s compensation is tied to share price
Foundations of Fin. Mgt. 12Ce 3- 2 Block, Hirt, Danielsen, Short
, performance, shareholders can fire managers, and there
exists a market for corporate control, management will be
compensated based on their economic contribution.
1-9. Daily functions- cash management, inventory control,
receipt and disbursement of funds. Occasional- share
issue, bond issue, capital budgeting and dividend
decisions.
1-10. There is unlimited liability for the sole proprietorship and
partnership forms of ownership. Under the limited
partnership, only the general partner(s) has unlimited
liability, with limited partners obligated only to the extent
of their initial contribution. Finally, all shareholders in a
corporation have limited liability, although owner/
shareholders of small businesses often have to give banks
their personal guarantees.
1-11. The corporate form is best suited to large organizations
because of the easy divisibility of ownership through
issuance of shares. Also, the corporation has continued
existence independent of any shareholder.
1-12. Money markets refer to those markets dealing with short-
term securities that have a life of one year or less. Capital
Foundations of Fin. Mgt. 12Ce 3- 3 Block, Hirt, Danielsen, Short
, markets refer to securities with a life of more than one
year.
1-13. A primary market refers to the use of the financial
markets to raise new funds. After the securities are sold to
the public (institutions and individuals), they trade in the
secondary market between investors. It is in the secondary
market that prices are continually changing as investors
buy and sell securities based on the expectations of
corporate prospects. A liquid secondary market promotes
a successful primary market.
1-14. Government debt loads require financing. This puts large
demands ($1 trillion in accumulated federal and provincial
debt in 2017) on the capital markets, putting upward
pressure on interest rates and a corporation‘s ability to
invest in capital projects. When governments finance their
deficits abroad they place Canada‘s economic levers
outside of our control and debt servicing payments can
impact the foreign exchange markets. As the government
debt load relative to GDP been reduced in recent years
there has been less pressure on interest rates,
corporations have borrowed more, but there have been
less
‗risk free‘ government securities available (causing
liquidity problems particularly in the money markets).
Foundations of Fin. Mgt. 12Ce 3- 4 Block, Hirt, Danielsen, Short
