SOLUTION MANUAL for 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?
, Agency ytheory yexamines ythe yrelationship ybetween ythe yowners yof ythe yfirm yand ythe ymanagers
yof ythe yfirm. yIn yprivately yowned yfirms, ymanagement yand ythe yowners yare yusually ythe ysame
ypeople. yManagement yoperates ythe yfirm yto ysatisfy yits yown ygoals, yneeds, yfinancial yrequirements
yand ythe ylike. yAs ya ycompany ymoves yfrom yprivate yto ypublic yownership, ymanagement ynow
yrepresents yall yowners. yThis yplaces ymanagement yin ythe yagency yposition yof ymaking ydecisions
yin ythe ybest yinterest yof yall yshareholders.
1-7 What yare yinstitutional yinvestors yimportant yin ytoday’s ybusiness yworld?
Because yinstitutional yinvestors ysuch yas ypension yfunds yand ymutual yfunds yown ya ylarge ypercentage
yof ymajor yU.S. ycompanies, ythey yare yhaving ymore yto ysay yabout ythe yway ypublicly yowned
ycompanies yare ymanaged. yAs ya ygroup, ythey yhave ythe yability yto yvote ylarge yblocks yof yshares yfor
ythe yelection yof ya yboard yof ydirectors, ywhich yis ysupposed yto yrun ythe ycompany yin yan yefficient,
ycompetitive ymanner. yThe ythreat yof ybeing yable yto yreplace ypoor yperforming yboards yof ydirectors
ymakes yinstitutional yinvestors yquite yinfluential. ySince ythese yinstitutions, ylike ypension yfunds yand
ymutual yfunds, yrepresent yindividual yworkers yand yinvestors, ythey yhave ya yresponsibility yto ysee
ythat ythe yfirm yis ymanaged yin yan yefficient yand yethical yway.
1-8 Why yis yprofit ymaximization, yby yitself, yan yinappropriate ygoal? yWhat yis ymeant yby ythe ygoal yof
ymaximization yof yshareholder ywealth?
The yproblem ywith ya yprofit ymaximization ygoal yis ythat yit yfails yto ytake yaccount yof yrisk, ythe
ytiming yof ythe ybenefits yis ynot yconsidered, yand yprofit ymeasurement yis ya yvery yinexact yprocess.
yThe ygoal yof yshareholders’ ywealth ymaximization yimplies ythat ythe yfirm ywill yattempt yto yachieve
ythe yhighest ypossible ytotal yvaluation yin ythe ymarketplace. yIt yis ythe yone yoverriding yobjective yof
ythe yfirm yand yshould yinfluence yevery ydecision.
1-9 When ydoes yinsider ytrading yoccur? yWhat ygovernment yagency yis yresponsible yfor yprotecting
yagainst ythe yunethical ypractice yof yinsider ytrading?
Insider ytrading yoccurs ywhen yanyone ywith ynon-public yinformation ybuys yor ysells ysecurities yto
ytake yadvantage yof ythat yprivate yinformation. yThe ySecurities yand yExchange yCommission yis
yresponsible yfor yprotecting ymarkets yagainst yinsider ytrading. yIn ythe ypast, ypeople yhave ygone yto
yjail yfor ytrading yon ynon-public yinformation. yThis yhas yincluded ycompany yofficers, yinvestment
ybankers, yprinters ywho yhave yinformation ybefore yit yis ypublished, yand yeven ytruck ydrivers ywho
ydeliver ybusiness ymagazines yand yread ypositive yor ynegative yarticles yabout ya ycompany ybefore
ythe ymagazine yis yon ythe ynewsstands yand ythen yplace ytrades yor yhave yfriends yplace ytrades ybased
yon ythat yinformation. yThe ySEC yhas yprosecuted yanyone ywho yprofits yfrom yinside yinformation.
1-10 In yterms yof ythe ylife yof ythe ysecurities yoffered, ywhat yis ythe ydifference ybetween ymoney yand
ycapital ymarkets?
Money ymarkets yrefer yto ythose ymarkets ydealing ywith yshort-term ysecurities ythat yhave ya ylife yof
yone yyear yor yless. yCapital ymarkets yrefer yto ysecurities ywith ya ylife yof ymore ythan yone yyear.
1-11 What yis ythe ydifference ybetween ya yprimary yand ya ysecondary ymarket?
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?
, Agency ytheory yexamines ythe yrelationship ybetween ythe yowners yof ythe yfirm yand ythe ymanagers
yof ythe yfirm. yIn yprivately yowned yfirms, ymanagement yand ythe yowners yare yusually ythe ysame
ypeople. yManagement yoperates ythe yfirm yto ysatisfy yits yown ygoals, yneeds, yfinancial yrequirements
yand ythe ylike. yAs ya ycompany ymoves yfrom yprivate yto ypublic yownership, ymanagement ynow
yrepresents yall yowners. yThis yplaces ymanagement yin ythe yagency yposition yof ymaking ydecisions
yin ythe ybest yinterest yof yall yshareholders.
1-7 What yare yinstitutional yinvestors yimportant yin ytoday’s ybusiness yworld?
Because yinstitutional yinvestors ysuch yas ypension yfunds yand ymutual yfunds yown ya ylarge ypercentage
yof ymajor yU.S. ycompanies, ythey yare yhaving ymore yto ysay yabout ythe yway ypublicly yowned
ycompanies yare ymanaged. yAs ya ygroup, ythey yhave ythe yability yto yvote ylarge yblocks yof yshares yfor
ythe yelection yof ya yboard yof ydirectors, ywhich yis ysupposed yto yrun ythe ycompany yin yan yefficient,
ycompetitive ymanner. yThe ythreat yof ybeing yable yto yreplace ypoor yperforming yboards yof ydirectors
ymakes yinstitutional yinvestors yquite yinfluential. ySince ythese yinstitutions, ylike ypension yfunds yand
ymutual yfunds, yrepresent yindividual yworkers yand yinvestors, ythey yhave ya yresponsibility yto ysee
ythat ythe yfirm yis ymanaged yin yan yefficient yand yethical yway.
1-8 Why yis yprofit ymaximization, yby yitself, yan yinappropriate ygoal? yWhat yis ymeant yby ythe ygoal yof
ymaximization yof yshareholder ywealth?
The yproblem ywith ya yprofit ymaximization ygoal yis ythat yit yfails yto ytake yaccount yof yrisk, ythe
ytiming yof ythe ybenefits yis ynot yconsidered, yand yprofit ymeasurement yis ya yvery yinexact yprocess.
yThe ygoal yof yshareholders’ ywealth ymaximization yimplies ythat ythe yfirm ywill yattempt yto yachieve
ythe yhighest ypossible ytotal yvaluation yin ythe ymarketplace. yIt yis ythe yone yoverriding yobjective yof
ythe yfirm yand yshould yinfluence yevery ydecision.
1-9 When ydoes yinsider ytrading yoccur? yWhat ygovernment yagency yis yresponsible yfor yprotecting
yagainst ythe yunethical ypractice yof yinsider ytrading?
Insider ytrading yoccurs ywhen yanyone ywith ynon-public yinformation ybuys yor ysells ysecurities yto
ytake yadvantage yof ythat yprivate yinformation. yThe ySecurities yand yExchange yCommission yis
yresponsible yfor yprotecting ymarkets yagainst yinsider ytrading. yIn ythe ypast, ypeople yhave ygone yto
yjail yfor ytrading yon ynon-public yinformation. yThis yhas yincluded ycompany yofficers, yinvestment
ybankers, yprinters ywho yhave yinformation ybefore yit yis ypublished, yand yeven ytruck ydrivers ywho
ydeliver ybusiness ymagazines yand yread ypositive yor ynegative yarticles yabout ya ycompany ybefore
ythe ymagazine yis yon ythe ynewsstands yand ythen yplace ytrades yor yhave yfriends yplace ytrades ybased
yon ythat yinformation. yThe ySEC yhas yprosecuted yanyone ywho yprofits yfrom yinside yinformation.
1-10 In yterms yof ythe ylife yof ythe ysecurities yoffered, ywhat yis ythe ydifference ybetween ymoney yand
ycapital ymarkets?
Money ymarkets yrefer yto ythose ymarkets ydealing ywith yshort-term ysecurities ythat yhave ya ylife yof
yone yyear yor yless. yCapital ymarkets yrefer yto ysecurities ywith ya ylife yof ymore ythan yone yyear.
1-11 What yis ythe ydifference ybetween ya yprimary yand ya ysecondary ymarket?
