,
, Chapter 1 m
The Goals and Functions of Financial Management
m m m m m m
Discussion Questions
m
1-1 Whatmeffectmdidmthemrecessionmofm2007-2009mhavemonmgovernmentmregulation?
Itmwasmgreatlymincreased.
1-2 Whatmadvantagesmdoesmamsolemproprietorshipmoffer?mWhatmismammajormdrawbackmofmthismtypemofmorga
nization?
Amsolemproprietorshipmoffersmthemadvantagemofmsimplicitymofmdecisionmmakingmandmlowmorganizationa
lmandmoperatingmcosts.mAmmajormdrawbackmismthatmtheremismunlimitedmliabilitymtomthemowner.
1-3 Whatmformmofmpartnershipmallowsmsomemofmtheminvestorsmtomlimitmtheirmliability?mExplainmbriefly
.
Amlimitedmpartnershipmallowsmsomemofmthempartnersmtomlimitmtheirmliability.mUndermthismarrangement
,monemormmorempartnersmaremdesignatedmgeneralmpartnersmandmhavemunlimitedmliabilitymformthemdebtsm
ofmthemfirm;mothermpartnersmaremdesignatedmlimitedmpartnersmandmaremliablemonlymformtheirminitialmcon
tribution.mThemlimitedmpartnersmaremnormallymprohibitedmfrommbeingmactiveminmthemmanagementmofmt
hemfirm.
1-4 Inmamcorporation,mwhatmgroupmhasmthemultimatemresponsibilitymformprotectingmandmmanagingmthemst
ockholders’minterests?
Themboardmofmdirectors.
1-5 Whatmdocumentmismnecessarymtomformmamcorporation?
Themarticlesmofmincorporation.
1-6 Whatmissuemdoesmagencymtheorymexamine?mWhymismitmimportantminmampublicmcorporationmrather
mthanminmamprivatemcorporation?
, Agencymtheorymexaminesmthemrelationshipmbetweenmthemownersmofmthemfirmmandmthemmanagersmofmth
emfirm.mInmprivatelymownedmfirms,mmanagementmandmthemownersmaremusuallymthemsamempeople.mMan
agementmoperatesmthemfirmmtomsatisfymitsmownmgoals,mneeds,mfinancialmrequirementsmandmthemlike.mAsm
amcompanymmovesmfrommprivatemtompublicmownership,mmanagementmnowmrepresentsmallmowners.mTh
ismplacesmmanagementminmthemagencympositionmofmmakingmdecisionsminmthembestminterestmofmallmshareh
olders.
1-7 Whatmareminstitutionalminvestorsmimportantminmtoday’smbusinessmworld?
Becauseminstitutionalminvestorsmsuchmasmpensionmfundsmandmmutualmfundsmownmamlargempercentagemofm
majormU.S.mcompanies,mtheymaremhavingmmoremtomsaymaboutmthemwaympubliclymownedmcompaniesmarem
managed.mAsmamgroup,mtheymhavemthemabilitymtomvotemlargemblocksmofmsharesmformthemelectionmofmamboar
dmofmdirectors,mwhichmismsupposedmtomrunmthemcompanyminmanmefficient,mcompetitivemmanner.mThemthr
eatmofmbeingmablemtomreplacempoormperformingmboardsmofmdirectorsmmakesminstitutionalminvestorsmquite
minfluential.mSincemtheseminstitutions,mlikempensionmfundsmandmmutualmfunds,mrepresentmindividualmwor
kersmandminvestors,mtheymhavemamresponsibilitymtomseemthatmthemfirmmismmanagedminmanmefficientmandmet
hicalmway.
1-8 Whymismprofitmmaximization,mbymitself,manminappropriatemgoal?mWhatmismmeantmbymthemgoalmofmma
ximizationmofmshareholdermwealth?
Themproblemmwithmamprofitmmaximizationmgoalmismthatmitmfailsmtomtakemaccountmofmrisk,mthemtimingmof
mthembenefitsmismnotmconsidered,mandmprofitmmeasurementmismamveryminexactmprocess.mThemgoalmofmsha
reholders’mwealthmmaximizationmimpliesmthatmthemfirmmwillmattemptmtomachievemthemhighestmpossible
mtotalmvaluationminmthemmarketplace.mItmismthemonemoverridingmobjectivemofmthemfirmmandmshouldminflu
encemeverymdecision.
1-9 Whenmdoesminsidermtradingmoccur?mWhatmgovernmentmagencymismresponsiblemformprotectingmagainst
mthemunethicalmpracticemofminsidermtrading?
Insidermtradingmoccursmwhenmanyonemwithmnon-
publicminformationmbuysmormsellsmsecuritiesmtomtakemadvantagemofmthatmprivateminformation.mThemSec
uritiesmandmExchangemCommissionmismresponsiblemformprotectingmmarketsmagainstminsidermtrading.mIn
mthempast,mpeoplemhavemgonemtomjailmformtradingmonmnon-
publicminformation.mThismhasmincludedmcompanymofficers,minvestmentmbankers,mprintersmwhomhavemi
nformationmbeforemitmismpublished,mandmevenmtruckmdriversmwhomdelivermbusinessmmagazinesmandmrea
dmpositivemormnegativemarticlesmaboutmamcompanymbeforemthemmagazinemismonmthemnewsstandsmandmth
enmplacemtradesmormhavemfriendsmplacemtradesmbasedmonmthatminformation.mThemSECmhasmprosecutedma
nyonemwhomprofitsmfromminsideminformation.
1-10 Inmtermsmofmthemlifemofmthemsecuritiesmoffered,mwhatmismthemdifferencembetweenmmoneymandmcapita
lmmarkets?
Moneymmarketsmrefermtomthosemmarketsmdealingmwithmshort-
termmsecuritiesmthatmhavemamlifemofmonemyearmormless.mCapitalmmarketsmrefermtomsecuritiesmwithmamlife
mofmmoremthanmonemyear.
1-11 Whatmismthemdifferencembetweenmamprimarymandmamsecondarymmarket?
, Chapter 1 m
The Goals and Functions of Financial Management
m m m m m m
Discussion Questions
m
1-1 Whatmeffectmdidmthemrecessionmofm2007-2009mhavemonmgovernmentmregulation?
Itmwasmgreatlymincreased.
1-2 Whatmadvantagesmdoesmamsolemproprietorshipmoffer?mWhatmismammajormdrawbackmofmthismtypemofmorga
nization?
Amsolemproprietorshipmoffersmthemadvantagemofmsimplicitymofmdecisionmmakingmandmlowmorganizationa
lmandmoperatingmcosts.mAmmajormdrawbackmismthatmtheremismunlimitedmliabilitymtomthemowner.
1-3 Whatmformmofmpartnershipmallowsmsomemofmtheminvestorsmtomlimitmtheirmliability?mExplainmbriefly
.
Amlimitedmpartnershipmallowsmsomemofmthempartnersmtomlimitmtheirmliability.mUndermthismarrangement
,monemormmorempartnersmaremdesignatedmgeneralmpartnersmandmhavemunlimitedmliabilitymformthemdebtsm
ofmthemfirm;mothermpartnersmaremdesignatedmlimitedmpartnersmandmaremliablemonlymformtheirminitialmcon
tribution.mThemlimitedmpartnersmaremnormallymprohibitedmfrommbeingmactiveminmthemmanagementmofmt
hemfirm.
1-4 Inmamcorporation,mwhatmgroupmhasmthemultimatemresponsibilitymformprotectingmandmmanagingmthemst
ockholders’minterests?
Themboardmofmdirectors.
1-5 Whatmdocumentmismnecessarymtomformmamcorporation?
Themarticlesmofmincorporation.
1-6 Whatmissuemdoesmagencymtheorymexamine?mWhymismitmimportantminmampublicmcorporationmrather
mthanminmamprivatemcorporation?
, Agencymtheorymexaminesmthemrelationshipmbetweenmthemownersmofmthemfirmmandmthemmanagersmofmth
emfirm.mInmprivatelymownedmfirms,mmanagementmandmthemownersmaremusuallymthemsamempeople.mMan
agementmoperatesmthemfirmmtomsatisfymitsmownmgoals,mneeds,mfinancialmrequirementsmandmthemlike.mAsm
amcompanymmovesmfrommprivatemtompublicmownership,mmanagementmnowmrepresentsmallmowners.mTh
ismplacesmmanagementminmthemagencympositionmofmmakingmdecisionsminmthembestminterestmofmallmshareh
olders.
1-7 Whatmareminstitutionalminvestorsmimportantminmtoday’smbusinessmworld?
Becauseminstitutionalminvestorsmsuchmasmpensionmfundsmandmmutualmfundsmownmamlargempercentagemofm
majormU.S.mcompanies,mtheymaremhavingmmoremtomsaymaboutmthemwaympubliclymownedmcompaniesmarem
managed.mAsmamgroup,mtheymhavemthemabilitymtomvotemlargemblocksmofmsharesmformthemelectionmofmamboar
dmofmdirectors,mwhichmismsupposedmtomrunmthemcompanyminmanmefficient,mcompetitivemmanner.mThemthr
eatmofmbeingmablemtomreplacempoormperformingmboardsmofmdirectorsmmakesminstitutionalminvestorsmquite
minfluential.mSincemtheseminstitutions,mlikempensionmfundsmandmmutualmfunds,mrepresentmindividualmwor
kersmandminvestors,mtheymhavemamresponsibilitymtomseemthatmthemfirmmismmanagedminmanmefficientmandmet
hicalmway.
1-8 Whymismprofitmmaximization,mbymitself,manminappropriatemgoal?mWhatmismmeantmbymthemgoalmofmma
ximizationmofmshareholdermwealth?
Themproblemmwithmamprofitmmaximizationmgoalmismthatmitmfailsmtomtakemaccountmofmrisk,mthemtimingmof
mthembenefitsmismnotmconsidered,mandmprofitmmeasurementmismamveryminexactmprocess.mThemgoalmofmsha
reholders’mwealthmmaximizationmimpliesmthatmthemfirmmwillmattemptmtomachievemthemhighestmpossible
mtotalmvaluationminmthemmarketplace.mItmismthemonemoverridingmobjectivemofmthemfirmmandmshouldminflu
encemeverymdecision.
1-9 Whenmdoesminsidermtradingmoccur?mWhatmgovernmentmagencymismresponsiblemformprotectingmagainst
mthemunethicalmpracticemofminsidermtrading?
Insidermtradingmoccursmwhenmanyonemwithmnon-
publicminformationmbuysmormsellsmsecuritiesmtomtakemadvantagemofmthatmprivateminformation.mThemSec
uritiesmandmExchangemCommissionmismresponsiblemformprotectingmmarketsmagainstminsidermtrading.mIn
mthempast,mpeoplemhavemgonemtomjailmformtradingmonmnon-
publicminformation.mThismhasmincludedmcompanymofficers,minvestmentmbankers,mprintersmwhomhavemi
nformationmbeforemitmismpublished,mandmevenmtruckmdriversmwhomdelivermbusinessmmagazinesmandmrea
dmpositivemormnegativemarticlesmaboutmamcompanymbeforemthemmagazinemismonmthemnewsstandsmandmth
enmplacemtradesmormhavemfriendsmplacemtradesmbasedmonmthatminformation.mThemSECmhasmprosecutedma
nyonemwhomprofitsmfromminsideminformation.
1-10 Inmtermsmofmthemlifemofmthemsecuritiesmoffered,mwhatmismthemdifferencembetweenmmoneymandmcapita
lmmarkets?
Moneymmarketsmrefermtomthosemmarketsmdealingmwithmshort-
termmsecuritiesmthatmhavemamlifemofmonemyearmormless.mCapitalmmarketsmrefermtomsecuritiesmwithmamlife
mofmmoremthanmonemyear.
1-11 Whatmismthemdifferencembetweenmamprimarymandmamsecondarymmarket?
