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

SOLUTIONMANUAL v




FoundationsofFinancialManagement,18thEdition
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byStanleyBlock,GeoffreyHirt,Chapters1–21,Complete
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,
, Chapter1 v




The Goals and Functionsof FinancialManagement
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DiscussionQuestions v




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
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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 the
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vowner.

1-3 What form of partnership allows some of the investors to limit their liability? Explain
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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
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debts of the firm; other partners are designated limited partners and are liable only for their
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initial contribution. The limited partners are normally prohibited from being active in the
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management of the firm.
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1-4 In a corporation, what group has the ultimate responsibility for protecting andmanaging
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the stockholders’ interests?
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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? Whyis it important in apublic corporation
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rather than in a private corporation?
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, Agency theory examines the relationship between the owners of the firm and the managers of
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the firm. In privately owned firms, management and the owners are usually the same people.
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Management operatesthe firm to satisfyits own goals, needs, financial requirements and the
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like. As a company moves from private to public ownership, management now represents all
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owners. This places management in the agency position of making decisions in the best interest
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of all shareholders.
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1-7 What are institutional investors important in today’sbusiness world?
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Because institutional investors such as pension funds and mutual funds own a large percentage
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of major U.S. companies, they are having more to say about the way publicly owned companies
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are managed. As a group, they have the ability to vote large blocks of shares for the election of
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aboard of directors, which is supposed to run the company in an efficient, competitive manner.
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The threat of being able to replace poor performing boards of directors makes institutional
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investors quite influential. Since these institutions, like pension funds and mutual funds, represent
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individual workers 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 ismeant by the goal of
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maximization of shareholder wealth?
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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 veryinexact process. The goal of
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shareholders’ wealth maximization implies that the firm will attempt to achieve the highest
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possible total valuation in the marketplace. It is the one overriding objective of the firm and
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should influence every decision.
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1-9 When does insider trading occur? What government agency is responsible for protecting
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against the unethical practice of insider trading?
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Insider trading occurs when anyone with non-public information buys or sells securities to take
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advantage of that private information. The Securities and Exchange Commission is responsible
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for protectingmarkets against insider trading. In the past, people have gone to jail for trading
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on non-public information. This has included company officers, investment bankers, printers
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who have information before it is published, and even truck drivers who deliver business
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magazines and read positive or negative articles about a company before the magazine is on
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the newsstands and then place trades or have friends place trades based on that information.
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The SEC has prosecuted anyone who profits from inside information.
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1-10 In termsof the life of the securities offered, what is the difference between money and
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vcapital markets? v




Money marketsrefer 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 year.
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1-11 What is the difference between a primary and a secondary market?
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