SOLUTION MANUAL for Foundations of Financial Management,
18th Edition by Stanley Block, Geoffrey Hirt,
Chapters 1 – 21, Complete
,
, Chapter 1
The Goals and Functions of Financial Management
Discussion Questions
1-1 What effect did the recession of 2007-2009 have on government regulation?
It was greatly increased.
1-2 What advantages does a sole proprietorship offer? What is a major drawback of this type of
organization?
A sole proprietorship offers the advantage of simplicity of decision making and low organizational
and operating costs. A major drawback is that there is unlimited liability to the owner.
1-3 What form of partnership allows some of the investors to limit their liability? Explain briefly.
A limited partnership allows some of the partners to limit their liability. Under this arrangement,
one or more partners are designated general partners and have unlimited liability for the debts of
the firm; other partners are designated limited partners and are liable only for their initial
contribution. The limited partners are normally prohibited from being active in the management of
the firm.
1-4 In a corporation, what group has the ultimate responsibility for protecting and managing the
stockholders’ interests?
The board of directors.
1-5 What document is necessary to form a corporation?
The articles of incorporation.
1-6 What issue does agency theory examine? Why is it important in a public corporation rather
than in a private corporation?
, Agency40theory40examines40the40relationship40between40the40owners40of40the40firm40and40the40man
agers40of40the40firm.40In40privately40owned40firms,40management40and40the40owners40are40usually40t
he40same40people.40Management40operates40the40firm40to40satisfy40its40own40goals,40needs,40financia
l40requirements40and40the40like.40As40a40company40moves40from40private40to40public40ownership,40
management40now40represents40all40owners.40This40places40management40in40the40agency40position
40of40making40decisions40in40the40best40interest40of40all40shareholders.
1-7 What40are40institutional40investors40important40in40today’s40business40world?
Because40institutional40investors40such40as40pension40funds40and40mutual40funds40own40a40large40perc
entage40of40major40U.S.40companies,40they40are40having40more40to40say40about40the40way40publicly40
owned40companies40are40managed.40As40a40group,40they40have40the40ability40to40vote40large40blocks4
0of40shares40for40the40election40of40a40board40of40directors,40which40is40supposed40to40run40the40comp
any40in40an40efficient,40competitive40manner.40The40threat40of40being40able40to40replace40poor40perfo
rming40boards40of40directors40makes40institutional40investors40quite40influential.40Since40these40instit
utions,40like40pension40funds40and40mutual40funds,40represent40individual40workers40and40investors,4
0they40have40a40responsibility40to40see40that40the40firm40is40managed40in40an40efficient40and40ethical40
way.
1-8 Why40is40profit40maximization,40by40itself,40an40inappropriate40goal?40What40is40meant40by40the40
goal40of40maximization40of40shareholder40wealth?
The40problem40with40a40profit40maximization40goal40is40that40it40fails40to40take40account40of40risk,40
the40timing40of40the40benefits40is40not40considered,40and40profit40measurement40is40a40very40inexact4
0process.40The40goal40of40shareholders’40wealth40maximization40implies40that40the40firm40will40atte
mpt40to40achieve40the40highest40possible40total40valuation40in40the40marketplace.40It40is40the40one40
overriding40objective40of40the40firm40and40should40influence40every40decision.
1-9 When40does40insider40trading40occur?40What40government40agency40is40responsible40for40protectin
g40against40the40unethical40practice40of40insider40trading?
Insider40trading40occurs40when40anyone40with40non-
public40information40buys40or40sells40securities40to40take40advantage40of40that40private40information
.40The40Securities40and40Exchange40Commission40is40responsible40for40protecting40markets40against
40insider40trading.40In40the40past,40people40have40gone40to40jail40for40trading40on40non-
public40information.40This40has40included40company40officers,40investment40bankers,40printers40wh
o40have40information40before40it40is40published,40and40even40truck40drivers40who40deliver40business
40magazines40and40read40positive40or40negative40articles40about40a40company40before40the40magazin
e40is40on40the40newsstands40and40then40place40trades40or40have40friends40place40trades40based40on40t
hat40information.40The40SEC40has40prosecuted40anyone40who40profits40from40inside40information.
1-10 In40terms40of40the40life40of40the40securities40offered,40what40is40the40difference40between40mone
y40and40capital40markets?
Money40markets40refer40to40those40markets40dealing40with40short-
term40securities40that40have40a40life40of40one40year40or40less.40Capital40markets40refer40to40securiti
es40with40a40life40of40more40than40one40year.
1-11 What40is40the40difference40between40a40primary40and40a40secondary40market?
18th Edition by Stanley Block, Geoffrey Hirt,
Chapters 1 – 21, Complete
,
, Chapter 1
The Goals and Functions of Financial Management
Discussion Questions
1-1 What effect did the recession of 2007-2009 have on government regulation?
It was greatly increased.
1-2 What advantages does a sole proprietorship offer? What is a major drawback of this type of
organization?
A sole proprietorship offers the advantage of simplicity of decision making and low organizational
and operating costs. A major drawback is that there is unlimited liability to the owner.
1-3 What form of partnership allows some of the investors to limit their liability? Explain briefly.
A limited partnership allows some of the partners to limit their liability. Under this arrangement,
one or more partners are designated general partners and have unlimited liability for the debts of
the firm; other partners are designated limited partners and are liable only for their initial
contribution. The limited partners are normally prohibited from being active in the management of
the firm.
1-4 In a corporation, what group has the ultimate responsibility for protecting and managing the
stockholders’ interests?
The board of directors.
1-5 What document is necessary to form a corporation?
The articles of incorporation.
1-6 What issue does agency theory examine? Why is it important in a public corporation rather
than in a private corporation?
, Agency40theory40examines40the40relationship40between40the40owners40of40the40firm40and40the40man
agers40of40the40firm.40In40privately40owned40firms,40management40and40the40owners40are40usually40t
he40same40people.40Management40operates40the40firm40to40satisfy40its40own40goals,40needs,40financia
l40requirements40and40the40like.40As40a40company40moves40from40private40to40public40ownership,40
management40now40represents40all40owners.40This40places40management40in40the40agency40position
40of40making40decisions40in40the40best40interest40of40all40shareholders.
1-7 What40are40institutional40investors40important40in40today’s40business40world?
Because40institutional40investors40such40as40pension40funds40and40mutual40funds40own40a40large40perc
entage40of40major40U.S.40companies,40they40are40having40more40to40say40about40the40way40publicly40
owned40companies40are40managed.40As40a40group,40they40have40the40ability40to40vote40large40blocks4
0of40shares40for40the40election40of40a40board40of40directors,40which40is40supposed40to40run40the40comp
any40in40an40efficient,40competitive40manner.40The40threat40of40being40able40to40replace40poor40perfo
rming40boards40of40directors40makes40institutional40investors40quite40influential.40Since40these40instit
utions,40like40pension40funds40and40mutual40funds,40represent40individual40workers40and40investors,4
0they40have40a40responsibility40to40see40that40the40firm40is40managed40in40an40efficient40and40ethical40
way.
1-8 Why40is40profit40maximization,40by40itself,40an40inappropriate40goal?40What40is40meant40by40the40
goal40of40maximization40of40shareholder40wealth?
The40problem40with40a40profit40maximization40goal40is40that40it40fails40to40take40account40of40risk,40
the40timing40of40the40benefits40is40not40considered,40and40profit40measurement40is40a40very40inexact4
0process.40The40goal40of40shareholders’40wealth40maximization40implies40that40the40firm40will40atte
mpt40to40achieve40the40highest40possible40total40valuation40in40the40marketplace.40It40is40the40one40
overriding40objective40of40the40firm40and40should40influence40every40decision.
1-9 When40does40insider40trading40occur?40What40government40agency40is40responsible40for40protectin
g40against40the40unethical40practice40of40insider40trading?
Insider40trading40occurs40when40anyone40with40non-
public40information40buys40or40sells40securities40to40take40advantage40of40that40private40information
.40The40Securities40and40Exchange40Commission40is40responsible40for40protecting40markets40against
40insider40trading.40In40the40past,40people40have40gone40to40jail40for40trading40on40non-
public40information.40This40has40included40company40officers,40investment40bankers,40printers40wh
o40have40information40before40it40is40published,40and40even40truck40drivers40who40deliver40business
40magazines40and40read40positive40or40negative40articles40about40a40company40before40the40magazin
e40is40on40the40newsstands40and40then40place40trades40or40have40friends40place40trades40based40on40t
hat40information.40The40SEC40has40prosecuted40anyone40who40profits40from40inside40information.
1-10 In40terms40of40the40life40of40the40securities40offered,40what40is40the40difference40between40mone
y40and40capital40markets?
Money40markets40refer40to40those40markets40dealing40with40short-
term40securities40that40have40a40life40of40one40year40or40less.40Capital40markets40refer40to40securiti
es40with40a40life40of40more40than40one40year.
1-11 What40is40the40difference40between40a40primary40and40a40secondary40market?
