SOLUTION MANUAL Accounting Principles, 9th Canadian Edition Volume 1 & 2 By Jerry Weygandt, Donald Kieso,

SOLUTION MANUAL for Foundations of Financial Management,
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18th Edition by Stanley Block, Geoffrey Hirt,
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Chapters 1– 21, Complete bh b
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,
, Chapter 1 bh




The Goals and Functions of Financial Management
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Discussion Questions b h




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
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type of organization?
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A sole proprietorship offers the advantage of simplicity of decision making and low
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organizational and operating costs. A major drawback is that there is unlimited liability to
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the owner.
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1-3 What form of partnership allows some of the investors to limit their liability?
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Explain briefly.
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A limited partnership allows some of the partners to limit their liability. Under this
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arrangement, one or more partners are designated general partners and have unlimited
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liability for the debts of the firm; other partners are designated limited partners and
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bhare liable only for their initial contribution. The limited partners are normally prohibited
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from being active in the management of the firm.
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1-4 In a corporation, what group has the ultimate responsibility for protecting and
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bhmanaging the stockholders’ interests? bh bh bh




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
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corporation rather than in a private corporation?
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, Agency theory examines the relationship between the owners of the firm and the
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managers of the firm. In privately owned firms, management and the owners are
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usually the same people. Management operates the firm to satisfy its own goals, needs,
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financial requirements and the like. As a company moves from private to public
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ownership, management now represents all owners. This places management in the
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agency position of making decisions 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
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percentage of major U.S. companies, they are having more to say about the way
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publicly owned companies are managed. As a group, they have the ability to vote
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large blocks of shares for the election of a board of directors, which is supposed to run
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the company in an efficient, competitive manner. The threat of being able to replace
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poor performing boards of directors makes institutional investors quite influential. Since
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these institutions, like pension funds and mutual funds, represent individual workers
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and investors, they have a responsibility to see that the firm is managed in an
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efficient and ethical way.
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1-8 Why is profit maximization, by itself, an inappropriate goal? What is meant by the
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goal 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,
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the timing of the benefits is not considered, and profit measurement is a very inexact
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process. The goal of shareholders’ wealth maximization implies that the firm will
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attempt to achieve the highest possible total valuation in the marketplace. It is the one
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overriding objective of the firm and should influence every decision.
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1-9 When does insider trading occur? What government agency is responsible for
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protecting against the unethical practice of insider trading?
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Insider trading occurs when anyone with non-public information buys or sells securities
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bhto take advantage of that private information. The Securities and Exchange Commission
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bhis responsible for protecting markets against insider trading. In the past, people have
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bhgone to jail for trading on non-public information. This has included company
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officers, investment bankers, printers who have information before it is published, and
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bheven truck drivers who deliver business magazines and read positive or negative articles
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bhabout a company before the magazine is on the newsstands and then place trades or
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bhhave friends place trades based on that information. The SEC has prosecuted anyone
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bhwho 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
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and capital markets?
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Money markets refer to those markets dealing with short-term securities that have a life of
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one year or less. Capital markets refer to securities with a life of more than one
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year.
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1-11 What is the difference between a primary and a secondary market?
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