Solution Manual
For Foundations Of Financial Management,
18th Edition By Stanley Block, Geoffrey Hirt
,Solution Manual For
Foundations Of Financial Management, 18th Edition By Stanley Block,
Geoffrey Hirt, Bartley Danielsen
Chapter 1-21
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?
, 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.
1-7 What Are Institutional Investors Important In Today’s Business World?
Because Institutional Investors Such As Pension Funds And Mutual Funds Own A Large
Percentage Of Major U.S. 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.
1-8 Why Is Profit Maximization, By Itself, An Inappropriate Goal? What Is Meant By The
Goal Of Maximization Of Shareholder Wealth?
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. The Goal Of Shareholders’ Wealth Maximization Implies That The Firm
Will Attempt To Achieve The Highest Possible Total Valuation In The Marketplace. It Is
The One Overriding Objective Of The Firm And Should Influence Every Decision.
1-9 When Does Insider Trading Occur? What Government Agency Is Responsible For
Protecting Against The Unethical Practice Of Insider Trading?
Insider Trading Occurs When Anyone With Non-Public Information Buys Or Sells
Securities To Take Advantage Of That Private Information. The Securities And
Exchange Commission Is Responsible For Protecting Markets Against Insider Trading.
In The Past, People Have Gone To Jail For Trading On Non-Public Information. This
Has Included Company Officers, Investment Bankers, Printers Who Have Information
Before It Is Published, And Even Truck Drivers Who Deliver Business Magazines And
Read Positive Or Negative Articles About A Company Before The Magazine Is On The
Newsstands And Then Place Trades Or Have Friends Place Trades Based On That
Information. The Sec Has Prosecuted Anyone Who Profits From Inside Information.
1-10 In Terms Of The Life Of The Securities Offered, What Is The Difference Between
Money And Capital Markets?
Money Markets Refer To Those Markets Dealing With Short-Term Securities That Have
A Life Of One Year Or Less. Capital Markets Refer To Securities With A Life Of More
Than One Year.
1-11 What Is The Difference Between A Primary And A Secondary Market?
, A Primary Market Refers To The Use Of The Financial Markets To Raise New Funds
For The Corporation. 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.
1-12 Assume You Are Looking At Many Companies With Equal Risk. Which Ones Will
Have The Highest Stock Prices?
Given Companies With Equal Risk, Those Companies With Expectations Of High
Return Will Have Higher Common Stock Prices Relative To Those Companies With
Expectations Of Poor Returns.
1-13 How Is The Time Value Of Money Concept Related To The Valuation Of Stocks?
The Value Of An Investment That Is Expected To Earn Money In The Future Can Be
Calculated Using Time-Value Of Money Principles. Corporations Are Expected To Pay
Dividends To Their Shareholders. The Current Value Of These Future Dividends Is The
Present Value. The Present Value Of A Stock’s Future Dividends Should Be The Same
As The Stock’s Current Price.
Chapter 2
Review Of Accounting
Discussion Questions
2-1. Discuss Some Financial Variables That Affect The Price-Earnings Ratio.
The Price-Earnings Ratio Will Be Influenced By The Earnings And Sales Growth Of The
Firm, The Risk Or Volatility In Performance, The Debt-Equity Structure Of The Firm,
The Dividend Payment Policy, The Quality Of Management, And A Number Of Other
Factors. The Ratio Tends To Be Future-Oriented, And The More Positive The Outlook,
The Higher It Will Be.
2-2. What Is The Difference Between Book Value Per Share Of Common Stock And Market
Value Per Share? Why Does This Disparity Occur?
Book Value Per Share Is Arrived At By Taking The Cost Of The Assets And Subtracting
Out Liabilities And Preferred Stock And Dividing By The Number Of Common Shares
For Foundations Of Financial Management,
18th Edition By Stanley Block, Geoffrey Hirt
,Solution Manual For
Foundations Of Financial Management, 18th Edition By Stanley Block,
Geoffrey Hirt, Bartley Danielsen
Chapter 1-21
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?
, 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.
1-7 What Are Institutional Investors Important In Today’s Business World?
Because Institutional Investors Such As Pension Funds And Mutual Funds Own A Large
Percentage Of Major U.S. 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.
1-8 Why Is Profit Maximization, By Itself, An Inappropriate Goal? What Is Meant By The
Goal Of Maximization Of Shareholder Wealth?
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. The Goal Of Shareholders’ Wealth Maximization Implies That The Firm
Will Attempt To Achieve The Highest Possible Total Valuation In The Marketplace. It Is
The One Overriding Objective Of The Firm And Should Influence Every Decision.
1-9 When Does Insider Trading Occur? What Government Agency Is Responsible For
Protecting Against The Unethical Practice Of Insider Trading?
Insider Trading Occurs When Anyone With Non-Public Information Buys Or Sells
Securities To Take Advantage Of That Private Information. The Securities And
Exchange Commission Is Responsible For Protecting Markets Against Insider Trading.
In The Past, People Have Gone To Jail For Trading On Non-Public Information. This
Has Included Company Officers, Investment Bankers, Printers Who Have Information
Before It Is Published, And Even Truck Drivers Who Deliver Business Magazines And
Read Positive Or Negative Articles About A Company Before The Magazine Is On The
Newsstands And Then Place Trades Or Have Friends Place Trades Based On That
Information. The Sec Has Prosecuted Anyone Who Profits From Inside Information.
1-10 In Terms Of The Life Of The Securities Offered, What Is The Difference Between
Money And Capital Markets?
Money Markets Refer To Those Markets Dealing With Short-Term Securities That Have
A Life Of One Year Or Less. Capital Markets Refer To Securities With A Life Of More
Than One Year.
1-11 What Is The Difference Between A Primary And A Secondary Market?
, A Primary Market Refers To The Use Of The Financial Markets To Raise New Funds
For The Corporation. 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.
1-12 Assume You Are Looking At Many Companies With Equal Risk. Which Ones Will
Have The Highest Stock Prices?
Given Companies With Equal Risk, Those Companies With Expectations Of High
Return Will Have Higher Common Stock Prices Relative To Those Companies With
Expectations Of Poor Returns.
1-13 How Is The Time Value Of Money Concept Related To The Valuation Of Stocks?
The Value Of An Investment That Is Expected To Earn Money In The Future Can Be
Calculated Using Time-Value Of Money Principles. Corporations Are Expected To Pay
Dividends To Their Shareholders. The Current Value Of These Future Dividends Is The
Present Value. The Present Value Of A Stock’s Future Dividends Should Be The Same
As The Stock’s Current Price.
Chapter 2
Review Of Accounting
Discussion Questions
2-1. Discuss Some Financial Variables That Affect The Price-Earnings Ratio.
The Price-Earnings Ratio Will Be Influenced By The Earnings And Sales Growth Of The
Firm, The Risk Or Volatility In Performance, The Debt-Equity Structure Of The Firm,
The Dividend Payment Policy, The Quality Of Management, And A Number Of Other
Factors. The Ratio Tends To Be Future-Oriented, And The More Positive The Outlook,
The Higher It Will Be.
2-2. What Is The Difference Between Book Value Per Share Of Common Stock And Market
Value Per Share? Why Does This Disparity Occur?
Book Value Per Share Is Arrived At By Taking The Cost Of The Assets And Subtracting
Out Liabilities And Preferred Stock And Dividing By The Number Of Common Shares
