Foundations of Financial Management, 18th Edition SOLUTION MANUAL by Stanley Block, Geoffrey Hirt, Verified Chapters 1 - 21, Complete Newest Version

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, Chapter1 fx




TheGoalsandFunctionsofFinancialManagement fx fx fx fx fx fx




DiscussionQuestions fx




1-1 Whateffect did the recession of 2007-2009 have on government regulation?
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It was greatlyincreased.
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1-2 Whatadvantagesdoes asoleproprietorshipoffer?What isa majordrawbackof thistype of organization?
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A sole proprietorship offers the advantage of simplicity of decision making and low organizational and ope
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ratingcosts.Amajor drawback isthatthereisunlimited liabilityto the owner.
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1-3 Whatformofpartnership allowssomeoftheinvestorstolimittheirliability? Explain briefly.
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A limited partnership allows some of the partners to limit their liability. Under this arrangement, one or m
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ore partners are designated general partners and have unlimited liability for the debts of the firm; other par
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tners are designated limited partners and are liable onlyfor their initial contribution. Thelimitedpartnersa
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renormallyprohibitedfrom being active in the management of the firm.
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1-4 In acorporation, what grouphas theultimate responsibilityforprotectingandmanaging the stockholder
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s’ interests?
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Theboard of directors. xf fx fx




1-5 What document is necessaryto form a corporation?
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Thearticles of incorporation.
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1-6 What issue does agencytheoryexamine? Whyis it important in apublic corporation rather than in a pr
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ivate corporation? fx

, Agency theory examines the relationship between the owners of the firm and the managers ofthefirm. In p fx fx fx fx fx fx fx fx fx fx fx fx fx fx xf xf fx fx




rivatelyowned firms, management and the owners areusually thesamepeople. Management operates thef xf fx xf fx fx fx xf xf fx xf xf xf xf xf xf




irmtosatisfyitsowngoals,needs, financial requirements and the like. As a company moves from private to
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public ownership, management now represents all owners. This places management in the agencypositio
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n of making decisions in the best interest of all shareholders.
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1-7 Whatareinstitutional investorsimportant in today’sbusiness world? xf xf fx xf xf fx xf xf




Because institutional investors such as pension funds and mutual funds own a large percentage of major U.S. fx fx fx fx fx fx fx fx fx fx fx fx fx fx fx fx fx




companies, they are having more to say about the way publicly owned companies are managed. As a group, t fx fx fx fx fx fx fx fx fx fx fx fx fx fx fx fx fx fx




hey have the ability to vote large blocks of shares for theelection of aboard ofdirectors, which is supposed to r
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un the companyin an efficient, competitive manner. The threat of being able to replace poor performing boa
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rds of directors makes institutional investors quite influential. Since these institutions, like pension funds an
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d mutual funds, represent individual workers and investors, they have a responsibility to see that the firm is
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managed in an efficient and ethical way. fx fx fx fx fx fx




1-8 Whyisprofitmaximization, byitself, an inappropriate goal? Whatismeant bythe goal of maximization o
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f shareholder wealth?
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The problem with a profit maximization goal is that it fails to take account of risk, the timingofthebenefitsis
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notconsidered, andprofitmeasurement is averyinexactprocess. The goal of shareholders’ wealth maximi
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zation implies that the firm will attempt to achieve the highest possible total valuation in the marketplace. I
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t is the one overriding objective of the firm and should influence every decision.
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1-9 Whendoes insidertradingoccur? Whatgovernment agencyisresponsible for protecting against the unet xf xf xf xf fx xf xf xf xf xf xf fx fx fx




hical practice of insider trading? fx fx fx fx




Insider trading occurs when anyone with non- fx fx fx fx fx fx




public information buys or sells securities to take advantage of that private information. The Securities and
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Exchange Commission isresponsible forprotectingmarketsagainst insidertrading. Inthepast, peoplehav
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egone to jail for trading on non-
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public information. This has included company officers, investment bankers, printers who have informat
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ion before it is published, and even truck drivers who deliver business magazines and read positive or negat
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ive articles about a company before the magazine is on the newsstands and then place trades or have friends
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place trades based on that information. The SEC has prosecuted anyone who profits from inside informati
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on.

1-10 Intermsofthe lifeofthe securities offered, whatisthe differencebetween moneyand capital markets?
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Moneymarkets refer to thosemarketsdealingwith short- xf xf xf fx xf xf xf fx




termsecurities thathavea life ofone year or less. Capital markets refer to securities with a lifeof more than
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one year. fx




1-11 What is the difference between a primaryand a secondary market? fx fx fx fx fx fx xf fx fx fx