Solution MANUAL for Foundations of Financial Management,
18th Edition by Stanley Block, Geoffrey Hirt,
Chapters 1 – 21, Complete
,
, Chapter 1 dg
The Goals and Functions of Financial Management
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Discussion Questions dg
1-1 What effect did the recession of 2007-2009 have on government regulation?
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It was greatly increased.
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1-2 What advantages does a sole proprietorship offer? What is a major drawback of this type
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of organization?
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A sole proprietorship offers the advantage of simplicity of decision making and low orga
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nizational and operating costs. A major drawback is that there is unlimited liability to the
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owner.
1-3 What form of partnership allows some of the investors to limit their liability? Explain
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briefly.
A limited partnership allows some of the partners to limit their liability. Under this arrang
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ement, one or more partners are designated general partners and have unlimited liability f
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or the debts of the firm; other partners are designated limited partners and are liable only
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for their initial contribution. The limited partners are normally prohibited from being activ
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e in the management of the firm.
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1-4 In a corporation, what group has the ultimate responsibility for protecting and managing
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the stockholders’ interests?
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The board of directors.
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1-5 What document is necessary to form a corporation?
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The articles of incorporation.
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1-6 What issue does agency theory examine? Why is it important in a public corporation
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rather than in a private corporation?
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, Agency theory examines the relationship between the owners of the firm and the manage
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rs of the firm. In privately owned firms, management and the owners are usually the same
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people. Management operates the firm to satisfy its own goals, needs, financial requireme
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nts and the like. As a company moves from private to public ownership, management no
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w represents all owners. This places management in the agency position of making decisi
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ons in the best interest of all shareholders.
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1-7 What are institutional investors important in today’s business world?
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Because institutional investors such as pension funds and mutual funds own a large percen
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tage of major U.S. companies, they are having more to say about the way publicly owned c
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ompanies are managed. As a group, they have the ability to vote large blocks of shares for
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the election of a board of directors, which is supposed to run the company in an efficient, c
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ompetitive manner. The threat of being able to replace poor performing boards of directors
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makes institutional investors quite influential. Since these institutions, like pension funds a
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nd mutual funds, represent individual workers and investors, they have a responsibility to s
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ee that the firm is managed in an efficient and ethical way.
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1-8 Why is profit maximization, by itself, an inappropriate goal? What is meant by the goal
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of maximization of shareholder wealth?
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The problem with a profit maximization goal is that it fails to take account of risk, the tim
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ing of the benefits is not considered, and profit measurement is a very inexact process. The
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goal of shareholders’ wealth maximization implies that the firm will attempt to achieve t
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he highest possible total valuation in the marketplace. It is the one overriding objective of
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the firm and should influence every decision.
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1-9 When does insider trading occur? What government agency is responsible for protecting
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against the unethical practice of insider trading?
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Insider trading occurs when anyone with non-
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public information buys or sells securities to take advantage of that private information.
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The Securities and Exchange Commission is responsible for protecting markets against in
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sider trading. In the past, people have gone to jail for trading on non-
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public information. This has included company officers, investment bankers, printers wh
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o have information before it is published, and even truck drivers who deliver business ma
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gazines and read positive or negative articles about a company before the magazine is on
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the newsstands and then place trades or have friends place trades based on that informati
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on. The SEC has prosecuted anyone who profits from inside information.
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1-10 In terms of the life of the securities offered, what is the difference between money and
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capital markets? dg
Money markets refer to those markets dealing with short-
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term securities that have a life of one year or less. Capital markets refer to securities with
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a life of more than one year.
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1-11 What is the difference between a primary and a secondary market?
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18th Edition by Stanley Block, Geoffrey Hirt,
Chapters 1 – 21, Complete
,
, Chapter 1 dg
The Goals and Functions of Financial Management
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Discussion Questions dg
1-1 What effect did the recession of 2007-2009 have on government regulation?
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It was greatly increased.
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1-2 What advantages does a sole proprietorship offer? What is a major drawback of this type
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of organization?
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A sole proprietorship offers the advantage of simplicity of decision making and low orga
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nizational and operating costs. A major drawback is that there is unlimited liability to the
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owner.
1-3 What form of partnership allows some of the investors to limit their liability? Explain
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briefly.
A limited partnership allows some of the partners to limit their liability. Under this arrang
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ement, one or more partners are designated general partners and have unlimited liability f
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or the debts of the firm; other partners are designated limited partners and are liable only
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for their initial contribution. The limited partners are normally prohibited from being activ
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e in the management of the firm.
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1-4 In a corporation, what group has the ultimate responsibility for protecting and managing
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the stockholders’ interests?
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The board of directors.
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1-5 What document is necessary to form a corporation?
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The articles of incorporation.
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1-6 What issue does agency theory examine? Why is it important in a public corporation
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rather than in a private corporation?
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, Agency theory examines the relationship between the owners of the firm and the manage
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rs of the firm. In privately owned firms, management and the owners are usually the same
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people. Management operates the firm to satisfy its own goals, needs, financial requireme
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nts and the like. As a company moves from private to public ownership, management no
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w represents all owners. This places management in the agency position of making decisi
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ons in the best interest of all shareholders.
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1-7 What are institutional investors important in today’s business world?
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Because institutional investors such as pension funds and mutual funds own a large percen
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tage of major U.S. companies, they are having more to say about the way publicly owned c
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ompanies are managed. As a group, they have the ability to vote large blocks of shares for
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the election of a board of directors, which is supposed to run the company in an efficient, c
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ompetitive manner. The threat of being able to replace poor performing boards of directors
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makes institutional investors quite influential. Since these institutions, like pension funds a
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nd mutual funds, represent individual workers and investors, they have a responsibility to s
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ee that the firm is managed in an efficient and ethical way.
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1-8 Why is profit maximization, by itself, an inappropriate goal? What is meant by the goal
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of maximization of shareholder wealth?
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The problem with a profit maximization goal is that it fails to take account of risk, the tim
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ing of the benefits is not considered, and profit measurement is a very inexact process. The
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goal of shareholders’ wealth maximization implies that the firm will attempt to achieve t
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he highest possible total valuation in the marketplace. It is the one overriding objective of
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the firm and should influence every decision.
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1-9 When does insider trading occur? What government agency is responsible for protecting
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against the unethical practice of insider trading?
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Insider trading occurs when anyone with non-
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public information buys or sells securities to take advantage of that private information.
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The Securities and Exchange Commission is responsible for protecting markets against in
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sider trading. In the past, people have gone to jail for trading on non-
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public information. This has included company officers, investment bankers, printers wh
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o have information before it is published, and even truck drivers who deliver business ma
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gazines and read positive or negative articles about a company before the magazine is on
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the newsstands and then place trades or have friends place trades based on that informati
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on. The SEC has prosecuted anyone who profits from inside information.
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1-10 In terms of the life of the securities offered, what is the difference between money and
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capital markets? dg
Money markets refer to those markets dealing with short-
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term securities that have a life of one year or less. Capital markets refer to securities with
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a life of more than one year.
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1-11 What is the difference between a primary and a secondary market?
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