SOLUTION MANUAL
Foundations of Financial Management, 18th Edition
by Stanley Block, Geoffrey Hirt, Chapters 1 – 21, Complete
,
, Chapter671
The67Goals67and67Functions67of67Financial67Management
Discussion67Questions
1-1 What67effect67did67the67recession67of672007-200967have67on67government67regulation?
It67was67greatly67increased.
1-2 What67advantages67does67a67sole67proprietorship67offer?67What67is67a67major67drawb
ack67of67this67type67of6 7 organization?
A67sole67proprietorship67offers67the67advantage67of67simplicity67of67decision67making67a
nd67low6 7 organizational67and67operating67costs.67A67major67drawback67is67that67there67i
s67unlimited67liability67to67the6 7 owner.
1-3 What67form67of67partnership67allows67some67of67the67investors67to67limit67their67lia
bility?67Explain6 7 briefly.
A67limited67partnership67allows67some67of67the67partners67to67limit67their67liability.67Unde
r67this6 7 arrangement,67one67or67more67partners67are67designated67general67partners67a
nd67have67unlimited6 7 liability67for67the67debts67of67the67firm;67other67partners67are67des
ignated67limited67partners67and67are67liable6 7 only67for67their67initial67contribution.67The6
7limited67partners67are67normally67prohibited67from67being6 7 active67in67the67manageme
nt67of67the67firm.
1-4 In67a67corporation,67what67group67has67the67ultimate67responsibility67for67protecting67and67
managing
the67stockholders’67interests?
The67board67of67directors.
1-5 What67document67is67necessary67to67form67a67corporation?
The67articles67of67incorporation.
1-6 What67issue67does67agency67theory67examine?67Why67is67it67important67in67a67p
ublic67corporation6 7 rather67than67in67a67private67corporation?
, Agency67theory67examines67the67relationship67between67the67owners67of67the67firm67and
67the67managers6 7 of67the67firm.67In67privately67owned67firms,67management67and67the67
owners67are67usually67the67same6 7 people.67Management67operates67the67firm67to67satis
fy67its67own67goals,67needs,67financial67requirements6 7 and67the67like.67As67a67company6
7moves67from67private67to67public67ownership,67management67now6 7 represents67all67ow
ners.67This67places67management67in67the67 agency67position67of67making67decisions67in6 7
the67best67interest67of67all67shareholders.
1-7 What67are67institutional67investors67important67in67today’s67business67world?
Because67institutional67investors67such67as67pension67funds67and67mutual67funds67own67a67l
arge6 7 percentage67of67major67U.S.67companies,67they67are67having67more67to67say67abo
ut67the67way67publicly6 7 owned67companies67are67managed.67As67a67group,67they67have
67the67ability67to67vote67large67blocks67of6 7 shares67for67the67election67of67a67board67of6
7directors,67which67is67supposed67to67run67the67company67in67an6 7 efficient,67competitive67
manner.67The67threat67of67being67able67to67replace67poor67performing67boards67of6 7 dir
ectors67makes67institutional67investors67quite67influential.67Since67these67institutions,67like67p
ension6 7 funds67and67mutual67funds,67represent67individual67workers67and67investors,67they
67have67a67responsibility6 7 to67see67that67the67firm67is67managed67in67an67efficient67and67
ethical67way.
1-8 Why67is67profit67maximization,67by67itself,67an67inappropriate67goal?67What67is67mea
nt67by67the67goal67of6 7 maximization67of67shareholder67wealth?
The67problem67with67a67profit67maximization67goal67is67that67it67fails67to67take67account
67of67risk,67the6 7 timing67of67the67benefits67is67not67considered,67and67profit67measureme
nt67is67a67very67inexact67process.6 7 The67goal67of67shareholders’67wealth67maximization
67 implies67that67the67firm67 will67attempt67to67 achieve6 7 the67highest67possible67total67val
uation67in67the67marketplace.67It67is67the67one67overriding67objective67of6 7 the67firm67an
d67should67influence67every67decision.
1-9 When67does67insider67trading67occur?67What67government67agency67is67responsible67f
or67protecting6 7 against67the67unethical67practice67of67insider67trading?
Insider67trading67occurs67when67anyone67with67non-
public67information67buys67or67sells67securities67to6 7 take67advantage67of67that67private
67information.67The67Securities67and67Exchange67Commission67is6 7 responsible67for67prote
cting67markets67against67insider67trading.67In67the67past,67people67have67gone67to6 7 jail6
7for67trading67on67non-
public67information.67This67has67included67company67officers,67investment6 7 bankers,67prin
ters67who67have67information67before67it67is67published,67and67even67truck67drivers67who
6 7 deliver67business67magazines67and67read67positive67or67negative67articles67about67a67
company67before67the6 7 magazine67is67on67the67newsstands67and67then67place67 trades6
7or67have67friends67place67trades67based67on6 7 that67information.67The67SEC67has67pros
ecuted67anyone67who67profits67from67inside67information.
1-10 In67terms67of67the67life67of67the67securities67offered,67what67is67the67difference67bet
ween67money67and6 7 capital67markets?
Money67markets67refer67to67those67markets67dealing67with67short-
term67securities67that67have67a67life67of6 7 one67year67or67less.67Capital67markets67refe
r67to67securities67with67a67life67of67more67than67one67year.
1-11 What67is67the67difference67between67a67primary67and67a67secondary67market?
Foundations of Financial Management, 18th Edition
by Stanley Block, Geoffrey Hirt, Chapters 1 – 21, Complete
,
, Chapter671
The67Goals67and67Functions67of67Financial67Management
Discussion67Questions
1-1 What67effect67did67the67recession67of672007-200967have67on67government67regulation?
It67was67greatly67increased.
1-2 What67advantages67does67a67sole67proprietorship67offer?67What67is67a67major67drawb
ack67of67this67type67of6 7 organization?
A67sole67proprietorship67offers67the67advantage67of67simplicity67of67decision67making67a
nd67low6 7 organizational67and67operating67costs.67A67major67drawback67is67that67there67i
s67unlimited67liability67to67the6 7 owner.
1-3 What67form67of67partnership67allows67some67of67the67investors67to67limit67their67lia
bility?67Explain6 7 briefly.
A67limited67partnership67allows67some67of67the67partners67to67limit67their67liability.67Unde
r67this6 7 arrangement,67one67or67more67partners67are67designated67general67partners67a
nd67have67unlimited6 7 liability67for67the67debts67of67the67firm;67other67partners67are67des
ignated67limited67partners67and67are67liable6 7 only67for67their67initial67contribution.67The6
7limited67partners67are67normally67prohibited67from67being6 7 active67in67the67manageme
nt67of67the67firm.
1-4 In67a67corporation,67what67group67has67the67ultimate67responsibility67for67protecting67and67
managing
the67stockholders’67interests?
The67board67of67directors.
1-5 What67document67is67necessary67to67form67a67corporation?
The67articles67of67incorporation.
1-6 What67issue67does67agency67theory67examine?67Why67is67it67important67in67a67p
ublic67corporation6 7 rather67than67in67a67private67corporation?
, Agency67theory67examines67the67relationship67between67the67owners67of67the67firm67and
67the67managers6 7 of67the67firm.67In67privately67owned67firms,67management67and67the67
owners67are67usually67the67same6 7 people.67Management67operates67the67firm67to67satis
fy67its67own67goals,67needs,67financial67requirements6 7 and67the67like.67As67a67company6
7moves67from67private67to67public67ownership,67management67now6 7 represents67all67ow
ners.67This67places67management67in67the67 agency67position67of67making67decisions67in6 7
the67best67interest67of67all67shareholders.
1-7 What67are67institutional67investors67important67in67today’s67business67world?
Because67institutional67investors67such67as67pension67funds67and67mutual67funds67own67a67l
arge6 7 percentage67of67major67U.S.67companies,67they67are67having67more67to67say67abo
ut67the67way67publicly6 7 owned67companies67are67managed.67As67a67group,67they67have
67the67ability67to67vote67large67blocks67of6 7 shares67for67the67election67of67a67board67of6
7directors,67which67is67supposed67to67run67the67company67in67an6 7 efficient,67competitive67
manner.67The67threat67of67being67able67to67replace67poor67performing67boards67of6 7 dir
ectors67makes67institutional67investors67quite67influential.67Since67these67institutions,67like67p
ension6 7 funds67and67mutual67funds,67represent67individual67workers67and67investors,67they
67have67a67responsibility6 7 to67see67that67the67firm67is67managed67in67an67efficient67and67
ethical67way.
1-8 Why67is67profit67maximization,67by67itself,67an67inappropriate67goal?67What67is67mea
nt67by67the67goal67of6 7 maximization67of67shareholder67wealth?
The67problem67with67a67profit67maximization67goal67is67that67it67fails67to67take67account
67of67risk,67the6 7 timing67of67the67benefits67is67not67considered,67and67profit67measureme
nt67is67a67very67inexact67process.6 7 The67goal67of67shareholders’67wealth67maximization
67 implies67that67the67firm67 will67attempt67to67 achieve6 7 the67highest67possible67total67val
uation67in67the67marketplace.67It67is67the67one67overriding67objective67of6 7 the67firm67an
d67should67influence67every67decision.
1-9 When67does67insider67trading67occur?67What67government67agency67is67responsible67f
or67protecting6 7 against67the67unethical67practice67of67insider67trading?
Insider67trading67occurs67when67anyone67with67non-
public67information67buys67or67sells67securities67to6 7 take67advantage67of67that67private
67information.67The67Securities67and67Exchange67Commission67is6 7 responsible67for67prote
cting67markets67against67insider67trading.67In67the67past,67people67have67gone67to6 7 jail6
7for67trading67on67non-
public67information.67This67has67included67company67officers,67investment6 7 bankers,67prin
ters67who67have67information67before67it67is67published,67and67even67truck67drivers67who
6 7 deliver67business67magazines67and67read67positive67or67negative67articles67about67a67
company67before67the6 7 magazine67is67on67the67newsstands67and67then67place67 trades6
7or67have67friends67place67trades67based67on6 7 that67information.67The67SEC67has67pros
ecuted67anyone67who67profits67from67inside67information.
1-10 In67terms67of67the67life67of67the67securities67offered,67what67is67the67difference67bet
ween67money67and6 7 capital67markets?
Money67markets67refer67to67those67markets67dealing67with67short-
term67securities67that67have67a67life67of6 7 one67year67or67less.67Capital67markets67refe
r67to67securities67with67a67life67of67more67than67one67year.
1-11 What67is67the67difference67between67a67primary67and67a67secondary67market?
