SOLUTIONMANUAL t
FoundationsofFinancialManagement,18thEdition
t t t t t
byStanley Block, GeoffreyHirt,Chapters 1 – 21,Complete
t t t t t t t t t
,
, Chapter 1 t
The Goals and Functions of Financial Management
t t t t t t
DiscussionQuestions
t
1-1 What teffect tdid tthe trecession tof t2007-2009 thave ton tgovernment tregulation?
It twas tgreatly tincreased.
1-2 What tadvantages tdoes ta tsole tproprietorship toffer? tWhat tis ta tmajor tdrawback tof tthis
ttype tof t organization?
A tsole tproprietorship toffers tthe tadvantage tof tsimplicity tof tdecision tmaking tand tlow
t organizational tand toperating tcosts. tA tmajor tdrawback tis tthat tthere tis tunlimited tliability
tto tthe t owner.
1-3 What tform tof tpartnership tallows tsome tof tthe tinvestors tto tlimit ttheir tliability?
tExplain t briefly.
A tlimited tpartnership tallows tsome tof tthe tpartners tto tlimit ttheir tliability. tUnder tthis
t arrangement, tone tor tmore tpartners tare tdesignated tgeneral tpartners tand thave tunlimited
t liability tfor tthe tdebts tof tthe tfirm; tother tpartners tare tdesignated tlimited tpartners tand
tare tliable t only tfor ttheir tinitial tcontribution. tThe tlimited tpartners tare tnormally tprohibited
tfrom tbeing t active tin tthe tmanagement tof tthe tfirm.
1-4 In ta tcorporation, twhat tgroup thas tthe tultimate tresponsibility tfor tprotecting tand tmanaging
the tstockholders’ tinterests?
The tboard tof tdirectors.
1-5 What tdocument tis tnecessary tto tform ta tcorporation?
The tarticles tof tincorporation.
1-6 What tissue tdoes tagency ttheory texamine? tWhy tis tit timportant tin ta tpublic
tcorporation t rather tthan tin ta tprivate tcorporation?
, Agency ttheory texamines tthe trelationship tbetween tthe towners tof tthe tfirm tand tthe
tmanagers t of tthe tfirm. tIn tprivately towned tfirms, tmanagement tand tthe towners tare
tusually tthe tsame t people. tManagement toperates tthe tfirm tto tsatisfy tits town tgoals, tneeds,
tfinancial trequirements t and tthe tlike. tAs ta tcompany tmoves tfrom tprivate tto tpublic
townership, tmanagement tnow t represents tall towners. tThis tplaces tmanagement tin tthe
t agency tposition tof tmaking tdecisions tin t the tbest tinterest tof tall tshareholders.
1-7 What tare tinstitutional tinvestors timportant tin ttoday’s tbusiness tworld?
Because tinstitutional tinvestors tsuch tas tpension tfunds tand tmutual tfunds town ta tlarge
t percentage tof tmajor tU.S. tcompanies, tthey tare thaving tmore tto tsay tabout tthe tway
tpublicly t owned tcompanies tare tmanaged. tAs ta tgroup, tthey thave tthe tability tto tvote
tlarge tblocks tof t shares tfor tthe telection tof ta tboard tof tdirectors, twhich tis tsupposed tto trun
tthe tcompany tin tan t efficient, tcompetitive tmanner. tThe tthreat tof tbeing table tto treplace
tpoor tperforming t boards tof t directors tmakes tinstitutional tinvestors tquite tinfluential. tSince
tthese tinstitutions, tlike tpension t funds tand tmutual tfunds, trepresent tindividual tworkers tand
tinvestors, tthey thave ta tresponsibility t to tsee tthat tthe tfirm tis tmanaged tin tan tefficient tand
tethical tway.
1-8 Why tis tprofit tmaximization, tby titself, tan tinappropriate tgoal? tWhat tis tmeant tby tthe
tgoal tof t maximization tof tshareholder twealth?
The tproblem twith ta tprofit tmaximization tgoal tis tthat tit tfails tto ttake taccount tof trisk, tthe
t timing tof tthe tbenefits tis tnot tconsidered, tand tprofit tmeasurement tis ta tvery tinexact
tprocess. t The tgoal tof tshareholders’ twealth tmaximization t implies tthat tthe tfirm t will
tattempt tto tachieve t the thighest tpossible ttotal tvaluation tin tthe tmarketplace. tIt tis tthe tone
toverriding tobjective tof t the tfirm tand tshould tinfluence tevery tdecision.
1-9 When tdoes tinsider ttrading toccur? tWhat tgovernment tagency tis tresponsible tfor
tprotecting t against tthe tunethical tpractice tof tinsider ttrading?
Insider ttrading toccurs twhen tanyone twith tnon-public tinformation tbuys tor tsells tsecurities tto
t take tadvantage tof tthat tprivate tinformation. tThe tSecurities tand tExchange tCommission tis
t responsible tfor tprotecting tmarkets tagainst tinsider ttrading. tIn tthe tpast, tpeople thave tgone
tto t jail tfor ttrading ton tnon-public tinformation. tThis thas tincluded t company tofficers,
tinvestment t bankers, tprinters twho thave tinformation tbefore tit tis tpublished, tand teven
ttruck tdrivers twho t deliver tbusiness tmagazines tand tread tpositive tor tnegative tarticles
tabout ta tcompany tbefore tthe t magazine tis ton tthe tnewsstands tand tthen tplace t trades tor
thave tfriends tplace ttrades tbased ton t that tinformation. tThe tSEC thas tprosecuted tanyone
twho tprofits tfrom tinside tinformation.
1-10 In tterms tof tthe tlife tof tthe tsecurities toffered, twhat tis tthe tdifference tbetween tmoney
tand t capital tmarkets?
Money tmarkets trefer tto tthose tmarkets tdealing twith tshort-term tsecurities tthat thave ta tlife
tof t one tyear tor tless. tCapital tmarkets trefer tto tsecurities twith ta tlife tof tmore tthan tone
tyear.
1-11 What tis tthe tdifference tbetween ta tprimary tand ta tsecondary tmarket?
FoundationsofFinancialManagement,18thEdition
t t t t t
byStanley Block, GeoffreyHirt,Chapters 1 – 21,Complete
t t t t t t t t t
,
, Chapter 1 t
The Goals and Functions of Financial Management
t t t t t t
DiscussionQuestions
t
1-1 What teffect tdid tthe trecession tof t2007-2009 thave ton tgovernment tregulation?
It twas tgreatly tincreased.
1-2 What tadvantages tdoes ta tsole tproprietorship toffer? tWhat tis ta tmajor tdrawback tof tthis
ttype tof t organization?
A tsole tproprietorship toffers tthe tadvantage tof tsimplicity tof tdecision tmaking tand tlow
t organizational tand toperating tcosts. tA tmajor tdrawback tis tthat tthere tis tunlimited tliability
tto tthe t owner.
1-3 What tform tof tpartnership tallows tsome tof tthe tinvestors tto tlimit ttheir tliability?
tExplain t briefly.
A tlimited tpartnership tallows tsome tof tthe tpartners tto tlimit ttheir tliability. tUnder tthis
t arrangement, tone tor tmore tpartners tare tdesignated tgeneral tpartners tand thave tunlimited
t liability tfor tthe tdebts tof tthe tfirm; tother tpartners tare tdesignated tlimited tpartners tand
tare tliable t only tfor ttheir tinitial tcontribution. tThe tlimited tpartners tare tnormally tprohibited
tfrom tbeing t active tin tthe tmanagement tof tthe tfirm.
1-4 In ta tcorporation, twhat tgroup thas tthe tultimate tresponsibility tfor tprotecting tand tmanaging
the tstockholders’ tinterests?
The tboard tof tdirectors.
1-5 What tdocument tis tnecessary tto tform ta tcorporation?
The tarticles tof tincorporation.
1-6 What tissue tdoes tagency ttheory texamine? tWhy tis tit timportant tin ta tpublic
tcorporation t rather tthan tin ta tprivate tcorporation?
, Agency ttheory texamines tthe trelationship tbetween tthe towners tof tthe tfirm tand tthe
tmanagers t of tthe tfirm. tIn tprivately towned tfirms, tmanagement tand tthe towners tare
tusually tthe tsame t people. tManagement toperates tthe tfirm tto tsatisfy tits town tgoals, tneeds,
tfinancial trequirements t and tthe tlike. tAs ta tcompany tmoves tfrom tprivate tto tpublic
townership, tmanagement tnow t represents tall towners. tThis tplaces tmanagement tin tthe
t agency tposition tof tmaking tdecisions tin t the tbest tinterest tof tall tshareholders.
1-7 What tare tinstitutional tinvestors timportant tin ttoday’s tbusiness tworld?
Because tinstitutional tinvestors tsuch tas tpension tfunds tand tmutual tfunds town ta tlarge
t percentage tof tmajor tU.S. tcompanies, tthey tare thaving tmore tto tsay tabout tthe tway
tpublicly t owned tcompanies tare tmanaged. tAs ta tgroup, tthey thave tthe tability tto tvote
tlarge tblocks tof t shares tfor tthe telection tof ta tboard tof tdirectors, twhich tis tsupposed tto trun
tthe tcompany tin tan t efficient, tcompetitive tmanner. tThe tthreat tof tbeing table tto treplace
tpoor tperforming t boards tof t directors tmakes tinstitutional tinvestors tquite tinfluential. tSince
tthese tinstitutions, tlike tpension t funds tand tmutual tfunds, trepresent tindividual tworkers tand
tinvestors, tthey thave ta tresponsibility t to tsee tthat tthe tfirm tis tmanaged tin tan tefficient tand
tethical tway.
1-8 Why tis tprofit tmaximization, tby titself, tan tinappropriate tgoal? tWhat tis tmeant tby tthe
tgoal tof t maximization tof tshareholder twealth?
The tproblem twith ta tprofit tmaximization tgoal tis tthat tit tfails tto ttake taccount tof trisk, tthe
t timing tof tthe tbenefits tis tnot tconsidered, tand tprofit tmeasurement tis ta tvery tinexact
tprocess. t The tgoal tof tshareholders’ twealth tmaximization t implies tthat tthe tfirm t will
tattempt tto tachieve t the thighest tpossible ttotal tvaluation tin tthe tmarketplace. tIt tis tthe tone
toverriding tobjective tof t the tfirm tand tshould tinfluence tevery tdecision.
1-9 When tdoes tinsider ttrading toccur? tWhat tgovernment tagency tis tresponsible tfor
tprotecting t against tthe tunethical tpractice tof tinsider ttrading?
Insider ttrading toccurs twhen tanyone twith tnon-public tinformation tbuys tor tsells tsecurities tto
t take tadvantage tof tthat tprivate tinformation. tThe tSecurities tand tExchange tCommission tis
t responsible tfor tprotecting tmarkets tagainst tinsider ttrading. tIn tthe tpast, tpeople thave tgone
tto t jail tfor ttrading ton tnon-public tinformation. tThis thas tincluded t company tofficers,
tinvestment t bankers, tprinters twho thave tinformation tbefore tit tis tpublished, tand teven
ttruck tdrivers twho t deliver tbusiness tmagazines tand tread tpositive tor tnegative tarticles
tabout ta tcompany tbefore tthe t magazine tis ton tthe tnewsstands tand tthen tplace t trades tor
thave tfriends tplace ttrades tbased ton t that tinformation. tThe tSEC thas tprosecuted tanyone
twho tprofits tfrom tinside tinformation.
1-10 In tterms tof tthe tlife tof tthe tsecurities toffered, twhat tis tthe tdifference tbetween tmoney
tand t capital tmarkets?
Money tmarkets trefer tto tthose tmarkets tdealing twith tshort-term tsecurities tthat thave ta tlife
tof t one tyear tor tless. tCapital tmarkets trefer tto tsecurities twith ta tlife tof tmore tthan tone
tyear.
1-11 What tis tthe tdifference tbetween ta tprimary tand ta tsecondary tmarket?
