SOLUTION MANUAL for Foundations of Financial Management,
18th Edition by Stanley Block, Geoffrey Hirt,
Chapters 1 – 21, Complete
,
, Chapter 1
The uGoals uand uFunctions uof uFinancial uManagement
Discussion uQuestions
1-1 What ueffect udid uthe urecession uof u2007-2009 uhave uon ugovernment uregulation?
It uwas ugreatly uincreased.
1-2 What uadvantages udoes ua usole uproprietorship uoffer? uWhat uis ua umajor udrawback uof uthis utype
uof uorganization?
A usole uproprietorship uoffers uthe uadvantage uof usimplicity uof udecision umaking uand ulow
uorganizational uand uoperating ucosts. uA umajor udrawback uis uthat uthere uis uunlimited uliability uto
uthe uowner.
1-3 What uform uof upartnership uallows usome uof uthe uinvestors uto ulimit utheir uliability? uExplain
ubriefly.
A ulimited upartnership uallows usome uof uthe upartners uto ulimit utheir uliability. uUnder uthis
uarrangement, uone uor umore upartners uare udesignated ugeneral upartners uand uhave uunlimited
uliability ufor uthe udebts uof uthe ufirm; uother upartners uare udesignated ulimited upartners uand uare
uliable uonly ufor utheir uinitial ucontribution. uThe ulimited upartners uare unormally uprohibited ufrom
ubeing uactive uin uthe umanagement uof uthe ufirm.
1-4 In ua ucorporation, uwhat ugroup uhas uthe uultimate uresponsibility ufor uprotecting uand umanaging
uthe ustockholders’ uinterests?
The uboard uof udirectors.
1-5 What udocument uis unecessary uto uform ua ucorporation?
The uarticles uof uincorporation.
1-6 What uissue udoes uagency utheory uexamine? uWhy uis uit uimportant uin ua upublic ucorporation
urather uthan uin ua uprivate ucorporation?
, Agency utheory uexamines uthe urelationship ubetween uthe uowners uof uthe ufirm uand uthe umanagers
uof uthe ufirm. uIn uprivately uowned ufirms, umanagement uand uthe uowners uare uusually uthe usame
upeople. uManagement uoperates uthe ufirm uto usatisfy uits uown ugoals, uneeds, ufinancial
urequirements uand uthe ulike. uAs ua ucompany umoves ufrom uprivate uto upublic uownership,
umanagement unow urepresents uall uowners. uThis uplaces umanagement uin uthe uagency uposition uof
umaking udecisions uin uthe ubest uinterest uof uall ushareholders.
1-7 What uare uinstitutional uinvestors uimportant uin utoday’s ubusiness uworld?
Because uinstitutional uinvestors usuch uas upension ufunds uand umutual ufunds uown ua ularge
upercentage uof umajor uU.S. ucompanies, uthey uare uhaving umore uto usay uabout uthe uway upublicly
uowned ucompanies uare umanaged. uAs ua ugroup, uthey uhave uthe uability uto uvote ularge ublocks uof
ushares ufor uthe uelection uof ua uboard uof udirectors, uwhich uis usupposed uto urun uthe ucompany uin uan
uefficient, ucompetitive umanner. uThe uthreat uof ubeing uable uto ureplace upoor uperforming uboards
uof udirectors umakes uinstitutional uinvestors uquite uinfluential. uSince uthese uinstitutions, ulike
upension ufunds uand umutual ufunds, urepresent uindividual uworkers uand uinvestors, uthey uhave ua
uresponsibility uto usee uthat uthe ufirm uis umanaged uin uan uefficient uand uethical uway.
1-8 Why uis uprofit umaximization, uby uitself, uan uinappropriate ugoal? uWhat uis umeant uby uthe ugoal
uof umaximization uof ushareholder uwealth?
The uproblem uwith ua uprofit umaximization ugoal uis uthat uit ufails uto utake uaccount uof urisk, uthe
utiming uof uthe ubenefits uis unot uconsidered, uand uprofit umeasurement uis ua uvery uinexact uprocess.
uThe ugoal uof ushareholders’ uwealth umaximization uimplies uthat uthe ufirm uwill uattempt uto
uachieve uthe uhighest upossible utotal uvaluation uin uthe umarketplace. uIt uis uthe uone uoverriding
uobjective uof uthe ufirm uand ushould uinfluence uevery udecision.
1-9 When udoes uinsider utrading uoccur? uWhat ugovernment uagency uis uresponsible ufor uprotecting
uagainst uthe uunethical upractice uof uinsider utrading?
Insider utrading uoccurs uwhen uanyone uwith unon-public uinformation ubuys uor usells usecurities uto
utake uadvantage uof uthat uprivate uinformation. uThe uSecurities uand uExchange uCommission uis
uresponsible ufor uprotecting umarkets uagainst uinsider utrading. uIn uthe upast, upeople uhave ugone uto
ujail ufor utrading uon unon-public uinformation. uThis uhas uincluded ucompany uofficers, uinvestment
ubankers, uprinters uwho uhave uinformation ubefore uit uis upublished, uand ueven utruck udrivers uwho
udeliver ubusiness umagazines uand uread upositive uor unegative uarticles uabout ua ucompany ubefore
uthe umagazine uis uon uthe unewsstands uand uthen uplace utrades uor uhave ufriends uplace utrades
ubased uon uthat uinformation. uThe uSEC uhas uprosecuted uanyone uwho uprofits ufrom uinside
uinformation.
1-10 In uterms uof uthe ulife uof uthe usecurities uoffered, uwhat uis uthe udifference ubetween umoney uand
ucapital umarkets?
Money umarkets urefer uto uthose umarkets udealing uwith ushort-term usecurities uthat uhave ua ulife uof
uone uyear uor uless. uCapital umarkets urefer uto usecurities uwith ua ulife uof umore uthan uone uyear.
1-11 What uis uthe udifference ubetween ua uprimary uand ua usecondary umarket?
18th Edition by Stanley Block, Geoffrey Hirt,
Chapters 1 – 21, Complete
,
, Chapter 1
The uGoals uand uFunctions uof uFinancial uManagement
Discussion uQuestions
1-1 What ueffect udid uthe urecession uof u2007-2009 uhave uon ugovernment uregulation?
It uwas ugreatly uincreased.
1-2 What uadvantages udoes ua usole uproprietorship uoffer? uWhat uis ua umajor udrawback uof uthis utype
uof uorganization?
A usole uproprietorship uoffers uthe uadvantage uof usimplicity uof udecision umaking uand ulow
uorganizational uand uoperating ucosts. uA umajor udrawback uis uthat uthere uis uunlimited uliability uto
uthe uowner.
1-3 What uform uof upartnership uallows usome uof uthe uinvestors uto ulimit utheir uliability? uExplain
ubriefly.
A ulimited upartnership uallows usome uof uthe upartners uto ulimit utheir uliability. uUnder uthis
uarrangement, uone uor umore upartners uare udesignated ugeneral upartners uand uhave uunlimited
uliability ufor uthe udebts uof uthe ufirm; uother upartners uare udesignated ulimited upartners uand uare
uliable uonly ufor utheir uinitial ucontribution. uThe ulimited upartners uare unormally uprohibited ufrom
ubeing uactive uin uthe umanagement uof uthe ufirm.
1-4 In ua ucorporation, uwhat ugroup uhas uthe uultimate uresponsibility ufor uprotecting uand umanaging
uthe ustockholders’ uinterests?
The uboard uof udirectors.
1-5 What udocument uis unecessary uto uform ua ucorporation?
The uarticles uof uincorporation.
1-6 What uissue udoes uagency utheory uexamine? uWhy uis uit uimportant uin ua upublic ucorporation
urather uthan uin ua uprivate ucorporation?
, Agency utheory uexamines uthe urelationship ubetween uthe uowners uof uthe ufirm uand uthe umanagers
uof uthe ufirm. uIn uprivately uowned ufirms, umanagement uand uthe uowners uare uusually uthe usame
upeople. uManagement uoperates uthe ufirm uto usatisfy uits uown ugoals, uneeds, ufinancial
urequirements uand uthe ulike. uAs ua ucompany umoves ufrom uprivate uto upublic uownership,
umanagement unow urepresents uall uowners. uThis uplaces umanagement uin uthe uagency uposition uof
umaking udecisions uin uthe ubest uinterest uof uall ushareholders.
1-7 What uare uinstitutional uinvestors uimportant uin utoday’s ubusiness uworld?
Because uinstitutional uinvestors usuch uas upension ufunds uand umutual ufunds uown ua ularge
upercentage uof umajor uU.S. ucompanies, uthey uare uhaving umore uto usay uabout uthe uway upublicly
uowned ucompanies uare umanaged. uAs ua ugroup, uthey uhave uthe uability uto uvote ularge ublocks uof
ushares ufor uthe uelection uof ua uboard uof udirectors, uwhich uis usupposed uto urun uthe ucompany uin uan
uefficient, ucompetitive umanner. uThe uthreat uof ubeing uable uto ureplace upoor uperforming uboards
uof udirectors umakes uinstitutional uinvestors uquite uinfluential. uSince uthese uinstitutions, ulike
upension ufunds uand umutual ufunds, urepresent uindividual uworkers uand uinvestors, uthey uhave ua
uresponsibility uto usee uthat uthe ufirm uis umanaged uin uan uefficient uand uethical uway.
1-8 Why uis uprofit umaximization, uby uitself, uan uinappropriate ugoal? uWhat uis umeant uby uthe ugoal
uof umaximization uof ushareholder uwealth?
The uproblem uwith ua uprofit umaximization ugoal uis uthat uit ufails uto utake uaccount uof urisk, uthe
utiming uof uthe ubenefits uis unot uconsidered, uand uprofit umeasurement uis ua uvery uinexact uprocess.
uThe ugoal uof ushareholders’ uwealth umaximization uimplies uthat uthe ufirm uwill uattempt uto
uachieve uthe uhighest upossible utotal uvaluation uin uthe umarketplace. uIt uis uthe uone uoverriding
uobjective uof uthe ufirm uand ushould uinfluence uevery udecision.
1-9 When udoes uinsider utrading uoccur? uWhat ugovernment uagency uis uresponsible ufor uprotecting
uagainst uthe uunethical upractice uof uinsider utrading?
Insider utrading uoccurs uwhen uanyone uwith unon-public uinformation ubuys uor usells usecurities uto
utake uadvantage uof uthat uprivate uinformation. uThe uSecurities uand uExchange uCommission uis
uresponsible ufor uprotecting umarkets uagainst uinsider utrading. uIn uthe upast, upeople uhave ugone uto
ujail ufor utrading uon unon-public uinformation. uThis uhas uincluded ucompany uofficers, uinvestment
ubankers, uprinters uwho uhave uinformation ubefore uit uis upublished, uand ueven utruck udrivers uwho
udeliver ubusiness umagazines uand uread upositive uor unegative uarticles uabout ua ucompany ubefore
uthe umagazine uis uon uthe unewsstands uand uthen uplace utrades uor uhave ufriends uplace utrades
ubased uon uthat uinformation. uThe uSEC uhas uprosecuted uanyone uwho uprofits ufrom uinside
uinformation.
1-10 In uterms uof uthe ulife uof uthe usecurities uoffered, uwhat uis uthe udifference ubetween umoney uand
ucapital umarkets?
Money umarkets urefer uto uthose umarkets udealing uwith ushort-term usecurities uthat uhave ua ulife uof
uone uyear uor uless. uCapital umarkets urefer uto usecurities uwith ua ulife uof umore uthan uone uyear.
1-11 What uis uthe udifference ubetween ua uprimary uand ua usecondary umarket?
