SOLUTION MANUAL
Foundations of Financial Management, 18th Edition
by Stanley Block, Geoffrey Hirt, Chapters 1 – 21, Complete
,
, Chapter 1 j
The Goals and Functions of Financial Management
j j j j j j
DiscussionQuestions
j
1-1 Whatjeffectjdidjthejrecessionjofj2007-2009jhavejonjgovernmentjregulation?
Itjwasjgreatlyjincreased.
1-2 Whatjadvantagesjdoesjajsolejproprietorshipjoffer?jWhatjisjajmajorjdrawbackjofjthisjtypejofj o
rganization?
Ajsolejproprietorshipjoffersjthejadvantagejofjsimplicityjofjdecisionjmakingjandjlowj organizatio
naljandjoperatingjcosts.jAjmajorjdrawbackjisjthatjtherejisjunlimitedjliabilityjtojthej owner.
1-3 Whatjformjofjpartnershipjallowsjsomejofjthejinvestorsjtojlimitjtheirjliability?jExplainj briefl
y.
Ajlimitedjpartnershipjallowsjsomejofjthejpartnersjtojlimitjtheirjliability.jUnderjthisj arrangement,jo
nejorjmorejpartnersjarejdesignatedjgeneraljpartnersjandjhavejunlimitedj liabilityjforjthejdebtsjo
fjthejfirm;jotherjpartnersjarejdesignatedjlimitedjpartnersjandjarejliablej onlyjforjtheirjinitialjcontr
ibution.jThejlimitedjpartnersjarejnormallyjprohibitedjfromjbeingj activejinjthejmanagementjofjthe
jfirm.
1-4 Injajcorporation,jwhatjgroupjhasjthejultimatejresponsibilityjforjprotectingjandjmanaging
thejstockholders’jinterests?
Thejboardjofjdirectors.
1-5 Whatjdocumentjisjnecessaryjtojformjajcorporation?
Thejarticlesjofjincorporation.
1-6 Whatjissuejdoesjagencyjtheoryjexamine?jWhyjisjitjimportantjinjajpublicjcorporationj ra
therjthanjinjajprivatejcorporation?
, Agencyjtheoryjexaminesjthejrelationshipjbetweenjthejownersjofjthejfirmjandjthejmanagersj ofjth
ejfirm.jInjprivatelyjownedjfirms,jmanagementjandjthejownersjarejusuallyjthejsamej people.jMan
agementjoperatesjthejfirmjtojsatisfyjitsjownjgoals,jneeds,jfinancialjrequirementsj andjthejlike.jAsj
ajcompanyjmovesjfromjprivatejtojpublicjownership,jmanagementjnowj representsjalljowners.jTh
isjplacesjmanagementjinjthejagencyjpositionjofjmakingjdecisionsjinj thejbestjinterestjofjalljshareh
olders.
1-7 Whatjarejinstitutionaljinvestorsjimportantjinjtoday’sjbusinessjworld?
Becausejinstitutionaljinvestorsjsuchjasjpensionjfundsjandjmutualjfundsjownjajlargej percentagejofj
majorjU.S.jcompanies,jtheyjarejhavingjmorejtojsayjaboutjthejwayjpubliclyj ownedjcompaniesjarej
managed.jAsjajgroup,jtheyjhavejthejabilityjtojvotejlargejblocksjofj sharesjforjthejelectionjofjajboa
rdjofjdirectors,jwhichjisjsupposedjtojrunjthejcompanyjinjanj efficient,jcompetitivejmanner.jThejthre
atjofjbeingjablejtojreplacejpoorjperformingjboardsjofj directorsjmakesjinstitutionaljinvestorsjquit
ejinfluential.jSincejthesejinstitutions,jlikejpensionj fundsjandjmutualjfunds,jrepresentjindividualjwor
kersjandjinvestors,jtheyjhavejajresponsibilityj tojseejthatjthejfirmjisjmanagedjinjanjefficientjandjeth
icaljway.
1-8 Whyjisjprofitjmaximization,jbyjitself,janjinappropriatejgoal?jWhatjisjmeantjbyjthejgoaljofj m
aximizationjofjshareholderjwealth?
Thejproblemjwithjajprofitjmaximizationjgoaljisjthatjitjfailsjtojtakejaccountjofjrisk,jthej timingjofjth
ejbenefitsjisjnotjconsidered,jandjprofitjmeasurementjisjajveryjinexactjprocess.j Thejgoaljofjshare
holders’jwealthjmaximizationjimpliesjthatjthejfirmjwilljattemptjtojachievej thejhighestjpossiblejt
otaljvaluationjinjthejmarketplace.jItjisjthejonejoverridingjobjectivejofj thejfirmjandjshouldjinfluen
cejeveryjdecision.
1-9 Whenjdoesjinsiderjtradingjoccur?jWhatjgovernmentjagencyjisjresponsiblejforjprotectingj a
gainstjthejunethicaljpracticejofjinsiderjtrading?
Insiderjtradingjoccursjwhenjanyonejwithjnon-
publicjinformationjbuysjorjsellsjsecuritiesjtoj takejadvantagejofjthatjprivatejinformation.jThejSe
curitiesjandjExchangejCommissionjisj responsiblejforjprotectingjmarketsjagainstjinsiderjtrading.jI
njthejpast,jpeoplejhavejgonejtoj jailjforjtradingjonjnon-
publicjinformation.jThisjhasjincludedjcompanyjofficers,jinvestmentj bankers,jprintersjwhojhavejin
formationjbeforejitjisjpublished,jandjevenjtruckjdriversjwhoj deliverjbusinessjmagazinesjandjrea
djpositivejorjnegativejarticlesjaboutjajcompanyjbeforejthej magazinejisjonjthejnewsstandsjandjt
henjplacejtradesjorjhavejfriendsjplacejtradesjbasedjonj thatjinformation.jThejSECjhasjprosecute
djanyonejwhojprofitsjfromjinsidejinformation.
1-10 Injtermsjofjthejlifejofjthejsecuritiesjoffered,jwhatjisjthejdifferencejbetweenjmoneyjandj capit
aljmarkets?
Moneyjmarketsjreferjtojthosejmarketsjdealingjwithjshort-
termjsecuritiesjthatjhavejajlifejofj onejyearjorjless.jCapitaljmarketsjreferjtojsecuritiesjwithjajlife
jofjmorejthanjonejyear.
1-11 Whatjisjthejdifferencejbetweenjajprimaryjandjajsecondaryjmarket?
Foundations of Financial Management, 18th Edition
by Stanley Block, Geoffrey Hirt, Chapters 1 – 21, Complete
,
, Chapter 1 j
The Goals and Functions of Financial Management
j j j j j j
DiscussionQuestions
j
1-1 Whatjeffectjdidjthejrecessionjofj2007-2009jhavejonjgovernmentjregulation?
Itjwasjgreatlyjincreased.
1-2 Whatjadvantagesjdoesjajsolejproprietorshipjoffer?jWhatjisjajmajorjdrawbackjofjthisjtypejofj o
rganization?
Ajsolejproprietorshipjoffersjthejadvantagejofjsimplicityjofjdecisionjmakingjandjlowj organizatio
naljandjoperatingjcosts.jAjmajorjdrawbackjisjthatjtherejisjunlimitedjliabilityjtojthej owner.
1-3 Whatjformjofjpartnershipjallowsjsomejofjthejinvestorsjtojlimitjtheirjliability?jExplainj briefl
y.
Ajlimitedjpartnershipjallowsjsomejofjthejpartnersjtojlimitjtheirjliability.jUnderjthisj arrangement,jo
nejorjmorejpartnersjarejdesignatedjgeneraljpartnersjandjhavejunlimitedj liabilityjforjthejdebtsjo
fjthejfirm;jotherjpartnersjarejdesignatedjlimitedjpartnersjandjarejliablej onlyjforjtheirjinitialjcontr
ibution.jThejlimitedjpartnersjarejnormallyjprohibitedjfromjbeingj activejinjthejmanagementjofjthe
jfirm.
1-4 Injajcorporation,jwhatjgroupjhasjthejultimatejresponsibilityjforjprotectingjandjmanaging
thejstockholders’jinterests?
Thejboardjofjdirectors.
1-5 Whatjdocumentjisjnecessaryjtojformjajcorporation?
Thejarticlesjofjincorporation.
1-6 Whatjissuejdoesjagencyjtheoryjexamine?jWhyjisjitjimportantjinjajpublicjcorporationj ra
therjthanjinjajprivatejcorporation?
, Agencyjtheoryjexaminesjthejrelationshipjbetweenjthejownersjofjthejfirmjandjthejmanagersj ofjth
ejfirm.jInjprivatelyjownedjfirms,jmanagementjandjthejownersjarejusuallyjthejsamej people.jMan
agementjoperatesjthejfirmjtojsatisfyjitsjownjgoals,jneeds,jfinancialjrequirementsj andjthejlike.jAsj
ajcompanyjmovesjfromjprivatejtojpublicjownership,jmanagementjnowj representsjalljowners.jTh
isjplacesjmanagementjinjthejagencyjpositionjofjmakingjdecisionsjinj thejbestjinterestjofjalljshareh
olders.
1-7 Whatjarejinstitutionaljinvestorsjimportantjinjtoday’sjbusinessjworld?
Becausejinstitutionaljinvestorsjsuchjasjpensionjfundsjandjmutualjfundsjownjajlargej percentagejofj
majorjU.S.jcompanies,jtheyjarejhavingjmorejtojsayjaboutjthejwayjpubliclyj ownedjcompaniesjarej
managed.jAsjajgroup,jtheyjhavejthejabilityjtojvotejlargejblocksjofj sharesjforjthejelectionjofjajboa
rdjofjdirectors,jwhichjisjsupposedjtojrunjthejcompanyjinjanj efficient,jcompetitivejmanner.jThejthre
atjofjbeingjablejtojreplacejpoorjperformingjboardsjofj directorsjmakesjinstitutionaljinvestorsjquit
ejinfluential.jSincejthesejinstitutions,jlikejpensionj fundsjandjmutualjfunds,jrepresentjindividualjwor
kersjandjinvestors,jtheyjhavejajresponsibilityj tojseejthatjthejfirmjisjmanagedjinjanjefficientjandjeth
icaljway.
1-8 Whyjisjprofitjmaximization,jbyjitself,janjinappropriatejgoal?jWhatjisjmeantjbyjthejgoaljofj m
aximizationjofjshareholderjwealth?
Thejproblemjwithjajprofitjmaximizationjgoaljisjthatjitjfailsjtojtakejaccountjofjrisk,jthej timingjofjth
ejbenefitsjisjnotjconsidered,jandjprofitjmeasurementjisjajveryjinexactjprocess.j Thejgoaljofjshare
holders’jwealthjmaximizationjimpliesjthatjthejfirmjwilljattemptjtojachievej thejhighestjpossiblejt
otaljvaluationjinjthejmarketplace.jItjisjthejonejoverridingjobjectivejofj thejfirmjandjshouldjinfluen
cejeveryjdecision.
1-9 Whenjdoesjinsiderjtradingjoccur?jWhatjgovernmentjagencyjisjresponsiblejforjprotectingj a
gainstjthejunethicaljpracticejofjinsiderjtrading?
Insiderjtradingjoccursjwhenjanyonejwithjnon-
publicjinformationjbuysjorjsellsjsecuritiesjtoj takejadvantagejofjthatjprivatejinformation.jThejSe
curitiesjandjExchangejCommissionjisj responsiblejforjprotectingjmarketsjagainstjinsiderjtrading.jI
njthejpast,jpeoplejhavejgonejtoj jailjforjtradingjonjnon-
publicjinformation.jThisjhasjincludedjcompanyjofficers,jinvestmentj bankers,jprintersjwhojhavejin
formationjbeforejitjisjpublished,jandjevenjtruckjdriversjwhoj deliverjbusinessjmagazinesjandjrea
djpositivejorjnegativejarticlesjaboutjajcompanyjbeforejthej magazinejisjonjthejnewsstandsjandjt
henjplacejtradesjorjhavejfriendsjplacejtradesjbasedjonj thatjinformation.jThejSECjhasjprosecute
djanyonejwhojprofitsjfromjinsidejinformation.
1-10 Injtermsjofjthejlifejofjthejsecuritiesjoffered,jwhatjisjthejdifferencejbetweenjmoneyjandj capit
aljmarkets?
Moneyjmarketsjreferjtojthosejmarketsjdealingjwithjshort-
termjsecuritiesjthatjhavejajlifejofj onejyearjorjless.jCapitaljmarketsjreferjtojsecuritiesjwithjajlife
jofjmorejthanjonejyear.
1-11 Whatjisjthejdifferencejbetweenjajprimaryjandjajsecondaryjmarket?
