,ACCESS Test Bank for Foundations of Financial Management 18th EditionBloc
N N N N N N N N N N
ChapterN01:NTheNGoalsNandNFunctionsNofNFinancialNManagement
Chapter 1 N
The Goals and Functions of Financial Management
N N N N N N
Discussion Questions
N
1-1 WhatNeffectNdidNtheNrecessionNofN2007-2009NhaveNonNgovernmentNregulation?
ItNwasNgreatlyNincreased.
1-2 WhatNadvantagesNdoesNaNsoleNproprietorshipNoffer?NWhatNisNaNmajorNdrawbackNofNthisNty
peNofNorganization?
ANsoleNproprietorshipNoffersNtheNadvantageNofNsimplicityNofNdecisionNmakingNandNlowNorg
anizationalNandNoperatingNcosts.NANmajorNdrawbackNisNthatNthereNisNunlimitedNliabilityNtoNt
heNowner.
1-3 WhatNformNofNpartnershipNallowsNsomeNofNtheNinvestorsNtoNlimitNtheirNliability?NExpla
inNbriefly.
ANlimitedNpartnershipNallowsNsomeNofNtheNpartnersNtoNlimitNtheirNliability.NUnderNthisNarra
ngement,NoneNorNmoreNpartnersNareNdesignatedNgeneralNpartnersNandNhaveNunlimitedNliabil
ityNforNtheNdebtsNofNtheNfirm;NotherNpartnersNareNdesignatedNlimitedNpartnersNandNareNliable
NonlyNforNtheirNinitialNcontribution.NTheNlimitedNpartnersNareNnormallyNprohibitedNfromNbei
ngNactiveNinNtheNmanagementNofNtheNfirm.
1-4 InNaNcorporation,NwhatNgroupNhasNtheNultimateNresponsibilityNforNprotectingNandNmanagi
ngNtheNstockholders’Ninterests?
TheNboardNofNdirectors.
1-5 WhatNdocumentNisNnecessaryNtoNformNaNcorporation?
TheNarticlesNofNincorporation.
1-6 WhatNissueNdoesNagencyNtheoryNexamine?NWhyNisNitNimportantNinNaNpublicNcorporati
onNratherNthanNinNaNprivateNcorporation?
AgencyNtheoryNexaminesNtheNrelationshipNbetweenNtheNownersNofNtheNfirmNandNtheNmana
gersNofNtheNfirm.NInNprivatelyNownedNfirms,NmanagementNandNtheNownersNareNusuallyNtheN
sameNpeople.NManagementNoperatesNtheNfirmNtoNsatisfyNitsNownNgoals,Nneeds,NfinancialNre
quirementsNandNtheNlike.NAsNaNcompanyNmovesNfromNprivateNtoNpublicNownership,Nmana
gementNnowNrepresentsNallNowners.NThisNplacesNmanagementNinNtheNagencyNpositionNofN
makingNdecisionsNinNtheNbestNinterestNofNallNshareholders.
1-7 WhatNareNinstitutionalNinvestorsNimportantNinNtoday’sNbusinessNworld?
©NMcGrawNHillNLLC.NAllNrightsNreserved.NNoNreproductionNorNdistributionNwithoutNtheNpriorNwrittenNconsentNofNMcGrawNHil
lNLLC.
mynursytest.store
,ACCESS Test Bank for Foundations of Financial Management 18th EditionBloc
N N N N N N N N N N
ChapterN01:NTheNGoalsNandNFunctionsNofNFinancialNManagement
BecauseNinstitutionalNinvestorsNsuchNasNpensionNfundsNandNmutualNfundsNownNaNlargeNperc
entageNofNmajorNU.S.Ncompanies,NtheyNareNhavingNmoreNtoNsayNaboutNtheNwayNpubliclyNo
wnedNcompaniesNareNmanaged.NAsNaNgroup,NtheyNhaveNtheNabilityNtoNvoteNlargeNblocksNofN
sharesNforNtheNelectionNofNaNboardNofNdirectors,NwhichNisNsupposedNtoNrunNtheNcompanyNinN
anNefficient,NcompetitiveNmanner.NTheNthreatNofNbeingNableNtoNreplaceNpoorNperformingNbo
ardsNofNdirectorsNmakesNinstitutionalNinvestorsNquiteNinfluential.NSinceNtheseNinstitutions,Nli
keNpensionNfundsNandNmutualNfunds,NrepresentNindividualNworkersNandNinvestors,NtheyNhav
eNaNresponsibilityNtoNseeNthatNtheNfirmNisNmanagedNinNanNefficientNandNethicalNway.
1-8 WhyNisNprofitNmaximization,NbyNitself,NanNinappropriateNgoal?NWhatNisNmeantNbyNtheNgo
alNofNmaximizationNofNshareholderNwealth?
TheNproblemNwithNaNprofitNmaximizationNgoalNisNthatNitNfailsNtoNtakeNaccountNofNrisk,NtheNt
imingNofNtheNbenefitsNisNnotNconsidered,NandNprofitNmeasurementNisNaNveryNinexactNproces
s.NTheNgoalNofNshareholders’NwealthNmaximizationNimpliesNthatNtheNfirmNwillNattemptNtoNac
hieveNtheNhighestNpossibleNtotalNvaluationNinNtheNmarketplace.NItNisNtheNoneNoverridingNobj
ectiveNofNtheNfirmNandNshouldNinfluenceNeveryNdecision.
1-9 WhenNdoesNinsiderNtradingNoccur?NWhatNgovernmentNagencyNisNresponsibleNforNprotecti
ngNagainstNtheNunethicalNpracticeNofNinsiderNtrading?
InsiderNtradingNoccursNwhenNanyoneNwithNnon-
publicNinformationNbuysNorNsellsNsecuritiesNtoNtakeNadvantageNofNthatNprivateNinformation.
NTheNSecuritiesNandNExchangeNCommissionNisNresponsibleNforNprotectingNmarketsNagainst
NinsiderNtrading.N InNtheNpast,NpeopleNhaveNgoneN
toNjailNforNtradingNonNnon-
publicNinformation.NThisNhasNincludedNcompanyNofficers,NinvestmentNbankers,NprintersNw
hoNhaveNinformationNbeforeNitNisNpublished,NandNevenNtruckNdriversNwhoNdeliverNbusinessN
magazinesNandNreadNpositiveNorNnegativeNarticlesNaboutNaNcompanyNbeforeNtheNmagazineNi
sNonNtheNnewsstandsNandNthenNplaceNtradesNorNhaveNfriendsNplaceNtradesNbasedNonNthatNinf
ormation.NTheNSECNhasNprosecutedNanyoneNwhoNprofitsNfromNinsideNinformation.
1-10 InNtermsNofNtheNlifeNofNtheNsecuritiesNoffered,NwhatNisNtheNdifferenceNbetweenNmoneyNa
ndNcapitalNmarkets?
MoneyNmarketsNreferNtoNthoseNmarketsNdealingNwithNshort-
termNsecuritiesNthatNhaveNaNlifeNofNoneNyearNorNless.NCapitalNmarketsNreferNtoNsecuritiesN
withNaNlifeNofNmoreNthanNoneNyear.
1-11 WhatNisNtheNdifferenceNbetweenNaNprimaryNandNaNsecondaryNmarket?
ANprimaryNmarketNrefersNtoNtheNuseNofNtheNfinancialNmarketsNtoNraiseNnewNfundsNforNtheNc
orporation.NAfterNtheNsecuritiesNareNsoldNtoNtheNpublicN(institutionsNandNindividuals),NtheyN
tradeNinNtheNsecondaryNmarketNbetweenNinvestors.NItNisNinNtheNsecondaryNmarketNthatNpric
esNareNcontinuallyNchangingNasNinvestorsNbuyNandNsellNsecuritiesNbasedNonNtheNexpectation
sNofNcorporateNprospects.
©NMcGrawNHillNLLC.NAllNrightsNreserved.NNoNreproductionNorNdistributionNwithoutNtheNpriorNwrittenNconsentNofNMcGrawNHil
lNLLC.
mynursytest.store
, ACCESS Test Bank for Foundations of Financial Management 18th EditionBloc
N N N N N N N N N N
ChapterN01:NTheNGoalsNandNFunctionsNofNFinancialNManagement
1-12 AssumeNyouNareNlookingNatNmanyNcompaniesNwithNequalNrisk.NWhichNonesNwillNhaveNt
heNhighestNstockNprices?
GivenNcompaniesNwithNequalNrisk,NthoseNcompaniesNwithNexpectationsNofNhighNreturnNw
illNhaveNhigherNcommonNstockNpricesNrelativeNtoNthoseNcompaniesNwithNexpectationsNofN
poorNreturns.
1-13 HowNisNtheNtimeNvalueNofNmoneyNconceptNrelatedNtoNtheNvaluationNofNstocks?
TheNvalueNofNanNinvestmentNthatNisNexpectedNtoNearnNmoneyNinNtheNfutureNcanNbeNcalculate
dNusingNtime-
valueNofNmoneyNprinciples.NCorporationsNareNexpectedNtoNpayNdividendsNtoNtheirNsharehold
ers.NTheNcurrentNvalueNofNtheseNfutureNdividendsNisNtheNpresentNvalue.NTheNpresentNvalueNo
fNaNstock’sNfutureNdividendsNshouldNbeNtheNsameNasNtheNstock’sNcurrentNprice.
©NMcGrawNHillNLLC.NAllNrightsNreserved.NNoNreproductionNorNdistributionNwithoutNtheNpriorNwrittenNconsentNofNMcGrawNHil
lNLLC.
mynursytest.store
N N N N N N N N N N
ChapterN01:NTheNGoalsNandNFunctionsNofNFinancialNManagement
Chapter 1 N
The Goals and Functions of Financial Management
N N N N N N
Discussion Questions
N
1-1 WhatNeffectNdidNtheNrecessionNofN2007-2009NhaveNonNgovernmentNregulation?
ItNwasNgreatlyNincreased.
1-2 WhatNadvantagesNdoesNaNsoleNproprietorshipNoffer?NWhatNisNaNmajorNdrawbackNofNthisNty
peNofNorganization?
ANsoleNproprietorshipNoffersNtheNadvantageNofNsimplicityNofNdecisionNmakingNandNlowNorg
anizationalNandNoperatingNcosts.NANmajorNdrawbackNisNthatNthereNisNunlimitedNliabilityNtoNt
heNowner.
1-3 WhatNformNofNpartnershipNallowsNsomeNofNtheNinvestorsNtoNlimitNtheirNliability?NExpla
inNbriefly.
ANlimitedNpartnershipNallowsNsomeNofNtheNpartnersNtoNlimitNtheirNliability.NUnderNthisNarra
ngement,NoneNorNmoreNpartnersNareNdesignatedNgeneralNpartnersNandNhaveNunlimitedNliabil
ityNforNtheNdebtsNofNtheNfirm;NotherNpartnersNareNdesignatedNlimitedNpartnersNandNareNliable
NonlyNforNtheirNinitialNcontribution.NTheNlimitedNpartnersNareNnormallyNprohibitedNfromNbei
ngNactiveNinNtheNmanagementNofNtheNfirm.
1-4 InNaNcorporation,NwhatNgroupNhasNtheNultimateNresponsibilityNforNprotectingNandNmanagi
ngNtheNstockholders’Ninterests?
TheNboardNofNdirectors.
1-5 WhatNdocumentNisNnecessaryNtoNformNaNcorporation?
TheNarticlesNofNincorporation.
1-6 WhatNissueNdoesNagencyNtheoryNexamine?NWhyNisNitNimportantNinNaNpublicNcorporati
onNratherNthanNinNaNprivateNcorporation?
AgencyNtheoryNexaminesNtheNrelationshipNbetweenNtheNownersNofNtheNfirmNandNtheNmana
gersNofNtheNfirm.NInNprivatelyNownedNfirms,NmanagementNandNtheNownersNareNusuallyNtheN
sameNpeople.NManagementNoperatesNtheNfirmNtoNsatisfyNitsNownNgoals,Nneeds,NfinancialNre
quirementsNandNtheNlike.NAsNaNcompanyNmovesNfromNprivateNtoNpublicNownership,Nmana
gementNnowNrepresentsNallNowners.NThisNplacesNmanagementNinNtheNagencyNpositionNofN
makingNdecisionsNinNtheNbestNinterestNofNallNshareholders.
1-7 WhatNareNinstitutionalNinvestorsNimportantNinNtoday’sNbusinessNworld?
©NMcGrawNHillNLLC.NAllNrightsNreserved.NNoNreproductionNorNdistributionNwithoutNtheNpriorNwrittenNconsentNofNMcGrawNHil
lNLLC.
mynursytest.store
,ACCESS Test Bank for Foundations of Financial Management 18th EditionBloc
N N N N N N N N N N
ChapterN01:NTheNGoalsNandNFunctionsNofNFinancialNManagement
BecauseNinstitutionalNinvestorsNsuchNasNpensionNfundsNandNmutualNfundsNownNaNlargeNperc
entageNofNmajorNU.S.Ncompanies,NtheyNareNhavingNmoreNtoNsayNaboutNtheNwayNpubliclyNo
wnedNcompaniesNareNmanaged.NAsNaNgroup,NtheyNhaveNtheNabilityNtoNvoteNlargeNblocksNofN
sharesNforNtheNelectionNofNaNboardNofNdirectors,NwhichNisNsupposedNtoNrunNtheNcompanyNinN
anNefficient,NcompetitiveNmanner.NTheNthreatNofNbeingNableNtoNreplaceNpoorNperformingNbo
ardsNofNdirectorsNmakesNinstitutionalNinvestorsNquiteNinfluential.NSinceNtheseNinstitutions,Nli
keNpensionNfundsNandNmutualNfunds,NrepresentNindividualNworkersNandNinvestors,NtheyNhav
eNaNresponsibilityNtoNseeNthatNtheNfirmNisNmanagedNinNanNefficientNandNethicalNway.
1-8 WhyNisNprofitNmaximization,NbyNitself,NanNinappropriateNgoal?NWhatNisNmeantNbyNtheNgo
alNofNmaximizationNofNshareholderNwealth?
TheNproblemNwithNaNprofitNmaximizationNgoalNisNthatNitNfailsNtoNtakeNaccountNofNrisk,NtheNt
imingNofNtheNbenefitsNisNnotNconsidered,NandNprofitNmeasurementNisNaNveryNinexactNproces
s.NTheNgoalNofNshareholders’NwealthNmaximizationNimpliesNthatNtheNfirmNwillNattemptNtoNac
hieveNtheNhighestNpossibleNtotalNvaluationNinNtheNmarketplace.NItNisNtheNoneNoverridingNobj
ectiveNofNtheNfirmNandNshouldNinfluenceNeveryNdecision.
1-9 WhenNdoesNinsiderNtradingNoccur?NWhatNgovernmentNagencyNisNresponsibleNforNprotecti
ngNagainstNtheNunethicalNpracticeNofNinsiderNtrading?
InsiderNtradingNoccursNwhenNanyoneNwithNnon-
publicNinformationNbuysNorNsellsNsecuritiesNtoNtakeNadvantageNofNthatNprivateNinformation.
NTheNSecuritiesNandNExchangeNCommissionNisNresponsibleNforNprotectingNmarketsNagainst
NinsiderNtrading.N InNtheNpast,NpeopleNhaveNgoneN
toNjailNforNtradingNonNnon-
publicNinformation.NThisNhasNincludedNcompanyNofficers,NinvestmentNbankers,NprintersNw
hoNhaveNinformationNbeforeNitNisNpublished,NandNevenNtruckNdriversNwhoNdeliverNbusinessN
magazinesNandNreadNpositiveNorNnegativeNarticlesNaboutNaNcompanyNbeforeNtheNmagazineNi
sNonNtheNnewsstandsNandNthenNplaceNtradesNorNhaveNfriendsNplaceNtradesNbasedNonNthatNinf
ormation.NTheNSECNhasNprosecutedNanyoneNwhoNprofitsNfromNinsideNinformation.
1-10 InNtermsNofNtheNlifeNofNtheNsecuritiesNoffered,NwhatNisNtheNdifferenceNbetweenNmoneyNa
ndNcapitalNmarkets?
MoneyNmarketsNreferNtoNthoseNmarketsNdealingNwithNshort-
termNsecuritiesNthatNhaveNaNlifeNofNoneNyearNorNless.NCapitalNmarketsNreferNtoNsecuritiesN
withNaNlifeNofNmoreNthanNoneNyear.
1-11 WhatNisNtheNdifferenceNbetweenNaNprimaryNandNaNsecondaryNmarket?
ANprimaryNmarketNrefersNtoNtheNuseNofNtheNfinancialNmarketsNtoNraiseNnewNfundsNforNtheNc
orporation.NAfterNtheNsecuritiesNareNsoldNtoNtheNpublicN(institutionsNandNindividuals),NtheyN
tradeNinNtheNsecondaryNmarketNbetweenNinvestors.NItNisNinNtheNsecondaryNmarketNthatNpric
esNareNcontinuallyNchangingNasNinvestorsNbuyNandNsellNsecuritiesNbasedNonNtheNexpectation
sNofNcorporateNprospects.
©NMcGrawNHillNLLC.NAllNrightsNreserved.NNoNreproductionNorNdistributionNwithoutNtheNpriorNwrittenNconsentNofNMcGrawNHil
lNLLC.
mynursytest.store
, ACCESS Test Bank for Foundations of Financial Management 18th EditionBloc
N N N N N N N N N N
ChapterN01:NTheNGoalsNandNFunctionsNofNFinancialNManagement
1-12 AssumeNyouNareNlookingNatNmanyNcompaniesNwithNequalNrisk.NWhichNonesNwillNhaveNt
heNhighestNstockNprices?
GivenNcompaniesNwithNequalNrisk,NthoseNcompaniesNwithNexpectationsNofNhighNreturnNw
illNhaveNhigherNcommonNstockNpricesNrelativeNtoNthoseNcompaniesNwithNexpectationsNofN
poorNreturns.
1-13 HowNisNtheNtimeNvalueNofNmoneyNconceptNrelatedNtoNtheNvaluationNofNstocks?
TheNvalueNofNanNinvestmentNthatNisNexpectedNtoNearnNmoneyNinNtheNfutureNcanNbeNcalculate
dNusingNtime-
valueNofNmoneyNprinciples.NCorporationsNareNexpectedNtoNpayNdividendsNtoNtheirNsharehold
ers.NTheNcurrentNvalueNofNtheseNfutureNdividendsNisNtheNpresentNvalue.NTheNpresentNvalueNo
fNaNstock’sNfutureNdividendsNshouldNbeNtheNsameNasNtheNstock’sNcurrentNprice.
©NMcGrawNHillNLLC.NAllNrightsNreserved.NNoNreproductionNorNdistributionNwithoutNtheNpriorNwrittenNconsentNofNMcGrawNHil
lNLLC.
mynursytest.store
