TEST BANK For Foundations of Financial Management, 18th Edition by Stanley Block, Geoffrey Hirt, Bartley Danielsen| Verified Chapter's 1 - 21 | Complete Newest Version

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FoundationsofFinancialManagement,18thEdition
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byStanleyBlock,GeoffreyHirt,Chapters1 –21,Complete
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,
, Chapter 1 jh




The Goals and Functions of Financial Management
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DiscussionQuestions jh




1-1 What effect did the recession of 2007-2009 have on government regulation?
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It was greatly increased.
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1-2 What advantages does a sole proprietorship offer? What is a major drawback of this type
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of organization?
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A sole proprietorship offers the advantage of simplicity of decision making and low
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organizational and operating costs. A major drawback is that there is unlimited liability to
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the owner.
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1-3 What form of partnership allows some of the investors to limit their liability? Explain
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briefly.
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A limited partnership allows some of the partners to limit their liability. Under this
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arrangement, one or more partners are designated general partners and have unlimited
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j liability for the debts of the firm; other partners are designated limited partners and are
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liable only for their initial contribution. The limited partners are normally prohibited from
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being active in the management of the firm.
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1-4 In a corporation, what group has the ultimate responsibility for protecting and managing
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the stockholders’ interests?
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The board of directors.
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1-5 What document is necessary to form a corporation?
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The articles of incorporation.
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1-6 What issue does agency theory examine? Why is it important in a public
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corporation rather than in a private corporation?
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, Agency theory examines the relationship between the owners of the firm and the managers
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jof the firm. In privately owned firms, management and the owners are usually the same
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j people. Management operates the firm to satisfy its own goals, needs, financial
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requirements and the like. As a company moves from private to public ownership,
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management now represents all owners. This places management in the agency position of
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making decisions in the best interest of all shareholders.
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1-7 What are institutional investors important in today’s business world?
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Because institutional investors such as pension funds and mutual funds own a large
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percentage of major U.S. companies, they are having more to say about the way publicly
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j owned companies are managed. As a group, they have the ability to vote large blocks of
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j shares for the election of a board of directors, which is supposed to run the company in an
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j efficient, competitive manner. The threat of being able to replace poor performing boards
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of directors makes institutional investors quite influential. Since these institutions, like pension
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funds and mutual funds, represent individual workers and investors, they have a
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responsibility to see that the firm is managed in an efficient and ethical way.
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1-8 Why is profit maximization, by itself, an inappropriate goal? What is meant by the goal
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of maximization of shareholder wealth?
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The problem with a profit maximization goal is that it fails to take account of risk, the
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timing of the benefits is not considered, and profit measurement is a very inexact process.
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j The goal of shareholders’ wealth maximization implies that the firm will attempt to
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achieve the highest possible total valuation in the marketplace. It is the one overriding
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objective of the firm and should influence every decision.
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1-9 When does insider trading occur? What government agency is responsible for protecting
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jagainst the unethical practice of insider trading?
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Insider trading occurs when anyone with non-public information buys or sells securities to
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j take advantage of that private information. The Securities and Exchange Commission is
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responsible for protecting markets against insider trading. In the past, people have gone to
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j jail for trading on non-public information. This has included company officers, investment
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bankers, printers who have information before it is published, and even truck drivers who
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j hdeliver business magazines and read positive or negative articles about a company
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before the magazine is on the newsstands and then place trades or have friends place
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trades based on that information. The SEC has prosecuted anyone who profits from inside
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information.
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1-10 In terms of the life of the securities offered, what is the difference between money and
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capital markets?
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Money markets refer to those markets dealing with short-term securities that have a life of
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one year or less. Capital markets refer to securities with a life of more than one year.
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1-11 What is the difference between a primary and a secondary market?
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