SOLUTION MANUAL For Foundations of Financial Management, 18th Edition by Stanley Block, Geoffrey Hirt, All Chapters 1 to 47 Complete, Verified Edition

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The Goals and Functions of Financial Management
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Discussion Questions CT




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 of orga
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nization?

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




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 rather
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than in a private corporation?
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, Agency theory examines the relationship between the owners of the firm and the managers of th
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e firm. In privately owned firms, management and the owners are usually the same people. Mana
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gement operates the firm to satisfy its own goals, needs, financial requirements and the like. As a
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company moves from private to public ownership, management now represents all owners. This
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places management in the agency position of making decisions in the best interest of all sharehol
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ders.

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 percentage of
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major U.S. companies, they are having more to say about the way publicly owned companies are
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managed. As a group, they have the ability to vote large blocks of shares for the election of a boar
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d of directors, which is supposed to run the company in an efficient, competitive manner. The thr
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eat of being able to replace poor performing boards of directors makes institutional investors quite
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influential. Since these institutions, like pension funds and mutual funds, represent individual wor
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kers and investors, they have a responsibility to see that the firm is managed in an efficient and et
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hical way. CT




1-8 Why is profit maximization, by itself, an inappropriate goal? What is meant by the goal of maxi
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mization of shareholder wealth? CT CT CT




The problem with a profit maximization goal is that it fails to take account of risk, the timing of
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the benefits is not considered, and profit measurement is a very inexact process. The goal of shar
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eholders’ wealth maximization implies that the firm will attempt to achieve the highest possible t
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otal valuation in the marketplace. It is the one overriding objective of the firm and should influe
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nce every decision.
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1-9 When does insider trading occur? What government agency is responsible for protecting against
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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. The Sec
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urities and Exchange Commission is responsible for protecting markets against insider trading. In
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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 who have i
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nformation before it is published, and even truck drivers who deliver business magazines and rea
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d positive or negative articles about a company before the magazine is on the newsstands and the
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n place trades or have friends place trades based on that information. The SEC has prosecuted an
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yone 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 capital
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markets?
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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 a life
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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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