SOLUTION MANUAL for Foundations of Financial Management,
18th Edition by Stanley Block, Geoffrey Hirt,
Chapters 1 – 21, Complete
,
, Chapter 1 N
The Goals and Functions of Financial Management
N N N N N N
DiscussionNQuestions
1-1 WhatNeffectNdidNtheNrecessionNofN2007-2009NhaveNonNgovernmentNregulation?
ItNwasNgreatlyNincreased.
1-2 WhatNadvantagesNdoesNaNsoleNproprietorshipNoffer?NWhatNisNaNmajorNdrawbackNofNthisNtypeNofNor
ganization?
ANsoleNproprietorshipNoffersNtheNadvantageNofNsimplicityNofNdecisionNmakingNandNlowNorganization
alNandNoperatingNcosts.NANmajorNdrawbackNisNthatNthereNisNunlimitedNliabilityNtoNtheNowner.
1-3 WhatNformNofNpartnershipNallowsNsomeNofNtheNinvestorsNtoNlimitNtheirNliability?NExplainNbriefl
y.
ANlimitedNpartnershipNallowsNsomeNofNtheNpartnersNtoNlimitNtheirNliability.NUnderNthisNarrangeme
nt,NoneNorNmoreNpartnersNareNdesignatedNgeneralNpartnersNandNhaveNunlimitedNliabilityNforNtheNde
btsNofNtheNfirm;NotherNpartnersNareNdesignatedNlimitedNpartnersNandNareNliableNonlyNforNtheirNinitia
lNcontribution.NTheNlimitedNpartnersNareNnormallyNprohibitedNfromNbeingNactiveNinNtheNmanageme
ntNofNtheNfirm.
1-4 InNaNcorporation,NwhatNgroupNhasNtheNultimateNresponsibilityNforNprotectingNandNmanagingNtheNs
tockholders’Ninterests?
TheNboardNofNdirectors.
1-5 WhatNdocumentNisNnecessaryNtoNformNaNcorporation?
TheNarticlesNofNincorporation.
1-6 WhatNissueNdoesNagencyNtheoryNexamine?NWhyNisNitNimportantNinNaNpublicNcorporationNrathe
rNthanNinNaNprivateNcorporation?
, AgencyNtheoryNexaminesNtheNrelationshipNbetweenNtheNownersNofNtheNfirmNandNtheNmanagersNofNt
heNfirm.NInNprivatelyNownedNfirms,NmanagementNandNtheNownersNareNusuallyNtheNsameNpeople.NM
anagementNoperatesNtheNfirmNtoNsatisfyNitsNownNgoals,Nneeds,NfinancialNrequirementsNandNtheNlike.
NAsNaNcompanyNmovesNfromNprivateNtoNpublicNownership,NmanagementNnowNrepresentsNallNowne
rs.NThisNplacesNmanagementNinNtheNagencyNpositionNofNmakingNdecisionsNinNtheNbestNinterestNofNall
Nshareholders.
1-7 WhatNareNinstitutionalNinvestorsNimportantNinNtoday’sNbusinessNworld?
BecauseNinstitutionalNinvestorsNsuchNasNpensionNfundsNandNmutualNfundsNownNaNlargeNpercentageNof
NmajorNU.S.Ncompanies,NtheyNareNhavingNmoreNtoNsayNaboutNtheNwayNpubliclyNownedNcompaniesNar
eNmanaged.NAsNaNgroup,NtheyNhaveNtheNabilityNtoNvoteNlargeNblocksNofNsharesNforNtheNelectionNofNaN
boardNofNdirectors,NwhichNisNsupposedNtoNrunNtheNcompanyNinNanNefficient,NcompetitiveNmanner.NT
heNthreatNofNbeingNableNtoNreplaceNpoorNperformingNboardsNofNdirectorsNmakesNinstitutionalNinvesto
rsNquiteNinfluential.NSinceNtheseNinstitutions,NlikeNpensionNfundsNandNmutualNfunds,NrepresentNindivi
dualNworkersNandNinvestors,NtheyNhaveNaNresponsibilityNtoNseeNthatNtheNfirmNisNmanagedNinNanNeffici
entNandNethicalNway.
1-8 WhyNisNprofitNmaximization,NbyNitself,NanNinappropriateNgoal?NWhatNisNmeantNbyNtheNgoalNofNm
aximizationNofNshareholderNwealth?
TheNproblemNwithNaNprofitNmaximizationNgoalNisNthatNitNfailsNtoNtakeNaccountNofNrisk,NtheNtimingN
ofNtheNbenefitsNisNnotNconsidered,NandNprofitNmeasurementNisNaNveryNinexactNprocess.NTheNgoalNof
Nshareholders’NwealthNmaximizationNimpliesNthatNtheNfirmNwillNattemptNtoNachieveNtheNhighestNpo
ssibleNtotalNvaluationNinNtheNmarketplace.NItNisNtheNoneNoverridingNobjectiveNofNtheNfirmNandNshoul
dNinfluenceNeveryNdecision.
1-9 WhenNdoesNinsiderNtradingNoccur?NWhatNgovernmentNagencyNisNresponsibleNforNprotectingNagain
stNtheNunethicalNpracticeNofNinsiderNtrading?
InsiderNtradingNoccursNwhenNanyoneNwithNnon-
publicNinformationNbuysNorNsellsNsecuritiesNtoNtakeNadvantageNofNthatNprivateNinformation.NTheNSe
curitiesNandNExchangeNCommissionNisNresponsibleNforNprotectingNmarketsNagainstNinsiderNtrading.N
InNtheNpast,NpeopleNhaveNgoneNtoNjailNforNtradingNonNnon-
publicNinformation.NThisNhasNincludedNcompanyNofficers,NinvestmentNbankers,NprintersNwhoNhaveN
informationNbeforeNitNisNpublished,NandNevenNtruckNdriversNwhoNdeliverNbusinessNmagazinesNandNr
eadNpositiveNorNnegativeNarticlesNaboutNaNcompanyNbeforeNtheNmagazineNisNonNtheNnewsstandsNand
NthenNplaceNtradesNorNhaveNfriendsNplaceNtradesNbasedNonNthatNinformation.NTheNSECNhasNprosecu
tedNanyoneNwhoNprofitsNfromNinsideNinformation.
1-10 InNtermsNofNtheNlifeNofNtheNsecuritiesNoffered,NwhatNisNtheNdifferenceNbetweenNmoneyNandNcapi
talNmarkets?
MoneyNmarketsNreferNtoNthoseNmarketsNdealingNwithNshort-
termNsecuritiesNthatNhaveNaNlifeNofNoneNyearNorNless.NCapitalNmarketsNreferNtoNsecuritiesNwithNaNli
feNofNmoreNthanNoneNyear.
1-11 WhatNisNtheNdifferenceNbetweenNaNprimaryNandNaNsecondaryNmarket?
18th Edition by Stanley Block, Geoffrey Hirt,
Chapters 1 – 21, Complete
,
, Chapter 1 N
The Goals and Functions of Financial Management
N N N N N N
DiscussionNQuestions
1-1 WhatNeffectNdidNtheNrecessionNofN2007-2009NhaveNonNgovernmentNregulation?
ItNwasNgreatlyNincreased.
1-2 WhatNadvantagesNdoesNaNsoleNproprietorshipNoffer?NWhatNisNaNmajorNdrawbackNofNthisNtypeNofNor
ganization?
ANsoleNproprietorshipNoffersNtheNadvantageNofNsimplicityNofNdecisionNmakingNandNlowNorganization
alNandNoperatingNcosts.NANmajorNdrawbackNisNthatNthereNisNunlimitedNliabilityNtoNtheNowner.
1-3 WhatNformNofNpartnershipNallowsNsomeNofNtheNinvestorsNtoNlimitNtheirNliability?NExplainNbriefl
y.
ANlimitedNpartnershipNallowsNsomeNofNtheNpartnersNtoNlimitNtheirNliability.NUnderNthisNarrangeme
nt,NoneNorNmoreNpartnersNareNdesignatedNgeneralNpartnersNandNhaveNunlimitedNliabilityNforNtheNde
btsNofNtheNfirm;NotherNpartnersNareNdesignatedNlimitedNpartnersNandNareNliableNonlyNforNtheirNinitia
lNcontribution.NTheNlimitedNpartnersNareNnormallyNprohibitedNfromNbeingNactiveNinNtheNmanageme
ntNofNtheNfirm.
1-4 InNaNcorporation,NwhatNgroupNhasNtheNultimateNresponsibilityNforNprotectingNandNmanagingNtheNs
tockholders’Ninterests?
TheNboardNofNdirectors.
1-5 WhatNdocumentNisNnecessaryNtoNformNaNcorporation?
TheNarticlesNofNincorporation.
1-6 WhatNissueNdoesNagencyNtheoryNexamine?NWhyNisNitNimportantNinNaNpublicNcorporationNrathe
rNthanNinNaNprivateNcorporation?
, AgencyNtheoryNexaminesNtheNrelationshipNbetweenNtheNownersNofNtheNfirmNandNtheNmanagersNofNt
heNfirm.NInNprivatelyNownedNfirms,NmanagementNandNtheNownersNareNusuallyNtheNsameNpeople.NM
anagementNoperatesNtheNfirmNtoNsatisfyNitsNownNgoals,Nneeds,NfinancialNrequirementsNandNtheNlike.
NAsNaNcompanyNmovesNfromNprivateNtoNpublicNownership,NmanagementNnowNrepresentsNallNowne
rs.NThisNplacesNmanagementNinNtheNagencyNpositionNofNmakingNdecisionsNinNtheNbestNinterestNofNall
Nshareholders.
1-7 WhatNareNinstitutionalNinvestorsNimportantNinNtoday’sNbusinessNworld?
BecauseNinstitutionalNinvestorsNsuchNasNpensionNfundsNandNmutualNfundsNownNaNlargeNpercentageNof
NmajorNU.S.Ncompanies,NtheyNareNhavingNmoreNtoNsayNaboutNtheNwayNpubliclyNownedNcompaniesNar
eNmanaged.NAsNaNgroup,NtheyNhaveNtheNabilityNtoNvoteNlargeNblocksNofNsharesNforNtheNelectionNofNaN
boardNofNdirectors,NwhichNisNsupposedNtoNrunNtheNcompanyNinNanNefficient,NcompetitiveNmanner.NT
heNthreatNofNbeingNableNtoNreplaceNpoorNperformingNboardsNofNdirectorsNmakesNinstitutionalNinvesto
rsNquiteNinfluential.NSinceNtheseNinstitutions,NlikeNpensionNfundsNandNmutualNfunds,NrepresentNindivi
dualNworkersNandNinvestors,NtheyNhaveNaNresponsibilityNtoNseeNthatNtheNfirmNisNmanagedNinNanNeffici
entNandNethicalNway.
1-8 WhyNisNprofitNmaximization,NbyNitself,NanNinappropriateNgoal?NWhatNisNmeantNbyNtheNgoalNofNm
aximizationNofNshareholderNwealth?
TheNproblemNwithNaNprofitNmaximizationNgoalNisNthatNitNfailsNtoNtakeNaccountNofNrisk,NtheNtimingN
ofNtheNbenefitsNisNnotNconsidered,NandNprofitNmeasurementNisNaNveryNinexactNprocess.NTheNgoalNof
Nshareholders’NwealthNmaximizationNimpliesNthatNtheNfirmNwillNattemptNtoNachieveNtheNhighestNpo
ssibleNtotalNvaluationNinNtheNmarketplace.NItNisNtheNoneNoverridingNobjectiveNofNtheNfirmNandNshoul
dNinfluenceNeveryNdecision.
1-9 WhenNdoesNinsiderNtradingNoccur?NWhatNgovernmentNagencyNisNresponsibleNforNprotectingNagain
stNtheNunethicalNpracticeNofNinsiderNtrading?
InsiderNtradingNoccursNwhenNanyoneNwithNnon-
publicNinformationNbuysNorNsellsNsecuritiesNtoNtakeNadvantageNofNthatNprivateNinformation.NTheNSe
curitiesNandNExchangeNCommissionNisNresponsibleNforNprotectingNmarketsNagainstNinsiderNtrading.N
InNtheNpast,NpeopleNhaveNgoneNtoNjailNforNtradingNonNnon-
publicNinformation.NThisNhasNincludedNcompanyNofficers,NinvestmentNbankers,NprintersNwhoNhaveN
informationNbeforeNitNisNpublished,NandNevenNtruckNdriversNwhoNdeliverNbusinessNmagazinesNandNr
eadNpositiveNorNnegativeNarticlesNaboutNaNcompanyNbeforeNtheNmagazineNisNonNtheNnewsstandsNand
NthenNplaceNtradesNorNhaveNfriendsNplaceNtradesNbasedNonNthatNinformation.NTheNSECNhasNprosecu
tedNanyoneNwhoNprofitsNfromNinsideNinformation.
1-10 InNtermsNofNtheNlifeNofNtheNsecuritiesNoffered,NwhatNisNtheNdifferenceNbetweenNmoneyNandNcapi
talNmarkets?
MoneyNmarketsNreferNtoNthoseNmarketsNdealingNwithNshort-
termNsecuritiesNthatNhaveNaNlifeNofNoneNyearNorNless.NCapitalNmarketsNreferNtoNsecuritiesNwithNaNli
feNofNmoreNthanNoneNyear.
1-11 WhatNisNtheNdifferenceNbetweenNaNprimaryNandNaNsecondaryNmarket?
