Solution Manual For
Foundations Of Financial Management, 18th Edition By Stanley
Block, Geoffrey Hirt, Bartley Danielsen
Chapter 1-21
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?
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill
LLC.
, Agency Theory Examines The Relationship Between The Owners Of The Firm And
The Managers Of The Firm. In Privately Owned Firms, Management And The
Owners Are Usually The Same People. Management Operates The Firm To Satisfy
Its Own Goals, Needs, Financial Requirements And The Like. As A Company
Moves From Private To Public Ownership, Management Now Represents All
Owners. This Places Management In The Agency Position Of Making Decisions In
The Best Interest Of All Shareholders.
1-7 What Are Institutional Investors Important In Today’s Business World?
Because Institutional Investors Such As Pension Funds And Mutual Funds Own A
Large Percentage Of Major U.S. Companies, They Are Having More To Say About
The Way Publicly Owned Companies Are Managed. As A Group, They Have The
Ability To Vote Large Blocks Of Shares For The Election Of A Board Of Directors,
Which Is Supposed To Run The Company In An Efficient, Competitive Manner. The
Threat Of Being Able To Replace Poor Performing Boards Of Directors Makes
Institutional Investors Quite Influential. Since These Institutions, Like Pension Funds
And Mutual Funds, Represent Individual Workers And Investors, They Have A
Responsibility To See That The Firm Is Managed In An Efficient And Ethical Way.
1-8 Why Is Profit Maximization, By Itself, An Inappropriate Goal? What Is Meant By
The Goal Of Maximization Of Shareholder Wealth?
The Problem With A Profit Maximization Goal Is That It Fails To Take Account Of
Risk, The Timing Of The Benefits Is Not Considered, And Profit Measurement Is A
Very Inexact Process. The Goal Of Shareholders’ Wealth Maximization Implies
That The Firm Will Attempt To Achieve The Highest Possible Total Valuation In
The Marketplace. It Is The One Overriding Objective Of The Firm And Should
Influence Every Decision.
1-9 When Does Insider Trading Occur? What Government Agency Is Responsible For
Protecting Against The Unethical Practice Of Insider Trading?
Insider Trading Occurs When Anyone With Non-Public Information Buys Or Sells
Securities To Take Advantage Of That Private Information. The Securities And
Exchange Commission Is Responsible For Protecting Markets Against Insider
Trading. In The Past, People Have Gone To Jail For Trading On Non-Public
Information. This Has Included Company Officers, Investment Bankers, Printers
Who Have Information Before It Is Published, And Even Truck Drivers Who
Deliver Business Magazines And Read Positive Or Negative Articles About A
Company Before The Magazine Is On The Newsstands And Then Place Trades Or
Have Friends Place Trades Based On That Information. The Sec Has Prosecuted
Anyone Who Profits From Inside Information.
1-10 In Terms Of The Life Of The Securities Offered, What Is The Difference
Between Money And Capital Markets?
Money Markets Refer To Those Markets Dealing With Short-Term Securities That
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill
LLC.
, Have A Life Of One Year Or Less. Capital Markets Refer To Securities With A
Life Of More Than One Year.
1-11 What Is The Difference Between A Primary And A Secondary Market?
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill
LLC.
, A Primary Market Refers To The Use Of The Financial Markets To Raise New
Funds For The Corporation. After The Securities Are Sold To The Public (Institutions
And Individuals), They Trade In The Secondary Market Between Investors. It Is In
The Secondary Market That Prices Are Continually Changing As Investors Buy And
Sell Securities Based On The Expectations Of Corporate Prospects.
1-12 Assume You Are Looking At Many Companies With Equal Risk. Which Ones Will
Have The Highest Stock Prices?
Given Companies With Equal Risk, Those Companies With Expectations Of High
Return Will Have Higher Common Stock Prices Relative To Those Companies
With Expectations Of Poor Returns.
1-13 How Is The Time Value Of Money Concept Related To The Valuation Of Stocks?
The Value Of An Investment That Is Expected To Earn Money In The Future Can
Be Calculated Using Time-Value Of Money Principles. Corporations Are Expected
To Pay Dividends To Their Shareholders. The Current Value Of These Future
Dividends Is The Present Value. The Present Value Of A Stock’s Future Dividends
Should Be The Same As The Stock’s Current Price.
Chapter 2
Review Of Accounting
Discussion Questions
2-1. Discuss Some Financial Variables That Affect The Price-Earnings Ratio.
The Price-Earnings Ratio Will Be Influenced By The Earnings And Sales Growth Of
The Firm, The Risk Or Volatility In Performance, The Debt-Equity Structure Of The
Firm, The Dividend Payment Policy, The Quality Of Management, And A Number
Of Other Factors. The Ratio Tends To Be Future-Oriented, And The More Positive
The Outlook, The Higher It Will Be.
2-2. What Is The Difference Between Book Value Per Share Of Common Stock And
Market Value Per Share? Why Does This Disparity Occur?
Book Value Per Share Is Arrived At By Taking The Cost Of The Assets And
Subtracting Out Liabilities And Preferred Stock And Dividing By The Number Of
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill
LLC.
Foundations Of Financial Management, 18th Edition By Stanley
Block, Geoffrey Hirt, Bartley Danielsen
Chapter 1-21
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?
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill
LLC.
, Agency Theory Examines The Relationship Between The Owners Of The Firm And
The Managers Of The Firm. In Privately Owned Firms, Management And The
Owners Are Usually The Same People. Management Operates The Firm To Satisfy
Its Own Goals, Needs, Financial Requirements And The Like. As A Company
Moves From Private To Public Ownership, Management Now Represents All
Owners. This Places Management In The Agency Position Of Making Decisions In
The Best Interest Of All Shareholders.
1-7 What Are Institutional Investors Important In Today’s Business World?
Because Institutional Investors Such As Pension Funds And Mutual Funds Own A
Large Percentage Of Major U.S. Companies, They Are Having More To Say About
The Way Publicly Owned Companies Are Managed. As A Group, They Have The
Ability To Vote Large Blocks Of Shares For The Election Of A Board Of Directors,
Which Is Supposed To Run The Company In An Efficient, Competitive Manner. The
Threat Of Being Able To Replace Poor Performing Boards Of Directors Makes
Institutional Investors Quite Influential. Since These Institutions, Like Pension Funds
And Mutual Funds, Represent Individual Workers And Investors, They Have A
Responsibility To See That The Firm Is Managed In An Efficient And Ethical Way.
1-8 Why Is Profit Maximization, By Itself, An Inappropriate Goal? What Is Meant By
The Goal Of Maximization Of Shareholder Wealth?
The Problem With A Profit Maximization Goal Is That It Fails To Take Account Of
Risk, The Timing Of The Benefits Is Not Considered, And Profit Measurement Is A
Very Inexact Process. The Goal Of Shareholders’ Wealth Maximization Implies
That The Firm Will Attempt To Achieve The Highest Possible Total Valuation In
The Marketplace. It Is The One Overriding Objective Of The Firm And Should
Influence Every Decision.
1-9 When Does Insider Trading Occur? What Government Agency Is Responsible For
Protecting Against The Unethical Practice Of Insider Trading?
Insider Trading Occurs When Anyone With Non-Public Information Buys Or Sells
Securities To Take Advantage Of That Private Information. The Securities And
Exchange Commission Is Responsible For Protecting Markets Against Insider
Trading. In The Past, People Have Gone To Jail For Trading On Non-Public
Information. This Has Included Company Officers, Investment Bankers, Printers
Who Have Information Before It Is Published, And Even Truck Drivers Who
Deliver Business Magazines And Read Positive Or Negative Articles About A
Company Before The Magazine Is On The Newsstands And Then Place Trades Or
Have Friends Place Trades Based On That Information. The Sec Has Prosecuted
Anyone Who Profits From Inside Information.
1-10 In Terms Of The Life Of The Securities Offered, What Is The Difference
Between Money And Capital Markets?
Money Markets Refer To Those Markets Dealing With Short-Term Securities That
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill
LLC.
, Have A Life Of One Year Or Less. Capital Markets Refer To Securities With A
Life Of More Than One Year.
1-11 What Is The Difference Between A Primary And A Secondary Market?
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill
LLC.
, A Primary Market Refers To The Use Of The Financial Markets To Raise New
Funds For The Corporation. After The Securities Are Sold To The Public (Institutions
And Individuals), They Trade In The Secondary Market Between Investors. It Is In
The Secondary Market That Prices Are Continually Changing As Investors Buy And
Sell Securities Based On The Expectations Of Corporate Prospects.
1-12 Assume You Are Looking At Many Companies With Equal Risk. Which Ones Will
Have The Highest Stock Prices?
Given Companies With Equal Risk, Those Companies With Expectations Of High
Return Will Have Higher Common Stock Prices Relative To Those Companies
With Expectations Of Poor Returns.
1-13 How Is The Time Value Of Money Concept Related To The Valuation Of Stocks?
The Value Of An Investment That Is Expected To Earn Money In The Future Can
Be Calculated Using Time-Value Of Money Principles. Corporations Are Expected
To Pay Dividends To Their Shareholders. The Current Value Of These Future
Dividends Is The Present Value. The Present Value Of A Stock’s Future Dividends
Should Be The Same As The Stock’s Current Price.
Chapter 2
Review Of Accounting
Discussion Questions
2-1. Discuss Some Financial Variables That Affect The Price-Earnings Ratio.
The Price-Earnings Ratio Will Be Influenced By The Earnings And Sales Growth Of
The Firm, The Risk Or Volatility In Performance, The Debt-Equity Structure Of The
Firm, The Dividend Payment Policy, The Quality Of Management, And A Number
Of Other Factors. The Ratio Tends To Be Future-Oriented, And The More Positive
The Outlook, The Higher It Will Be.
2-2. What Is The Difference Between Book Value Per Share Of Common Stock And
Market Value Per Share? Why Does This Disparity Occur?
Book Value Per Share Is Arrived At By Taking The Cost Of The Assets And
Subtracting Out Liabilities And Preferred Stock And Dividing By The Number Of
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill
LLC.
