Foundations of Financial Management, 18th Edition by Stanley Block & Geoffrey Hirt – Chapters 1–21 Complete Solutions Manual & Study Guide

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



The Goals and Functions of Financial Management
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Discussion Questions x




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 organizational
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and operating costs. A major drawback is that there is unlimited liability to the owner.
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1-3 What form of partnership allows some of the investors to limit their liability? Explain 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 debts of
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the firm; other partners are designated limited partners and are liable only for their initial
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contribution. The limited partners are normally prohibited from being active in the management of
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the firm.
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1-4 In a corporation, what group has the ultimate responsibility for protecting and managing the
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xstockholders’ interests? x




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? Why is it important in a public corporation rather
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than in a private corporation?
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, Agency theory examines the relationship between the owners of the firm and the managers of the
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firm. In privately owned firms, management and the owners are usually the same people.
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Management operates the firm to satisfy its own goals, needs, financial requirements and the like.
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As a company moves from private to public ownership, management now represents all owners.
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This places management in the agency position of making decisions in the best interest of all
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shareholders.
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1-7 What are institutional investors important in today’s business world?
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Because institutional investors such as pension funds and mutual funds own a large percentage of
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major U.S. companies, they are having more to say about the way publicly owned companies are
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managed. As a group, they have the ability to vote large blocks of shares for the election of a board of
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directors, which is supposed to run the company in an efficient, competitive manner. The threat of
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being able to replace poor performing boards of directors makes institutional investors quite
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influential. Since these institutions, like pension funds and mutual funds, represent individual
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workers and investors, they have a responsibility to see that the firm is managed in an efficient and
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ethical way.
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1-8 Why is profit maximization, by itself, an inappropriate goal? What is meant 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 the
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benefits is not considered, and profit measurement is a very inexact 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 should
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influence every decision.
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1-9 When does insider trading occur? What government agency is responsible for protecting against
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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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xadvantage of that private information. The Securities and Exchange Commission is responsible for
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xprotecting markets against insider trading. In the past, people have gone to jail for trading on non-
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public information. This has included company officers, investment bankers, printers who have
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xinformation before it is published, and even truck drivers who deliver business magazines and read
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xpositive or negative articles about a company before the magazine is on the newsstands and then
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xplace trades or have friends place trades based on that information. The SEC has prosecuted
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xanyone who profits from inside information.
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1-10 In terms of the life of the securities offered, what is the difference between money and capital
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xmarkets?

Money markets refer to those markets dealing with short-term securities that have a life of one year
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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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