SOLUTIONMANUAL |
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 |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?
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 |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?
