SOLUTIONMANUAL r
Foundations of Financial Management, 18th Edition
rr rr rr rr rr
by Stanley Block, Geoffrey Hirt, Chapters 1 – 21, Complete
r r r r r rr rr r rr
,
, Chapter 1 rr
The Goals and Functions of Financial Management
rr rr rr rr rr rr
DiscussionrQuestions
1-1 What rreffect rrdid rrthe rrrecession rrof rr2007-2009 rrhave rron rrgovernment rrregulation?
It rrwas rrgreatly rrincreased.
1-2 What rradvantages rrdoes rra rrsole rrproprietorship rroffer? rrWhat rris rra rrmajor rrdrawback rrof
rrthis rrtype rrof r r organization?
A rrsole rrproprietorship rroffers rrthe rradvantage rrof rrsimplicity rrof rrdecision rrmaking rrand rrlow
r r organizational rrand rroperating rrcosts. rrA rrmajor rrdrawback rris rrthat rrthere rris rrunlimited
rrliability rrto rrthe r r owner.
1-3 What rrform rrof rrpartnership rrallows rrsome rrof rrthe rrinvestors rrto rrlimit rrtheir rrliability?
rrExplain r r briefly.
A rrlimited rrpartnership rrallows rrsome rrof rrthe rrpartners rrto rrlimit rrtheir rrliability. rrUnder rrthis
r r arrangement, rrone rror rrmore rrpartners rrare rrdesignated rrgeneral rrpartners rrand rrhave
rrunlimited r r liability rrfor rrthe rrdebts rrof rrthe rrfirm; rrother rrpartners rrare rrdesignated rrlimited
rrpartners rrand rrare rrliable r r only rrfor rrtheir rrinitial rrcontribution. rrThe rrlimited rrpartners rrare
rrnormally rrprohibited rrfrom rrbeing r r active rrin rrthe rrmanagement rrof rrthe rrfirm.
1-4 In rra rrcorporation, rrwhat rrgroup rrhas rrthe rrultimate rrresponsibility rrfor rrprotecting rrand
rrmanaging
the rrstockholders’ rrinterests?
The rrboard rrof rrdirectors.
1-5 What rrdocument rris rrnecessary rrto rrform rra rrcorporation?
The rrarticles rrof rrincorporation.
1-6 What rrissue rrdoes rragency rrtheory rrexamine? rrWhy rris rrit rrimportant rrin rra rrpublic
rrcorporation r r rather rrthan rrin rra rrprivate rrcorporation?
, Agency rrtheory rrexamines rrthe rrrelationship rrbetween rrthe rrowners rrof rrthe rrfirm rrand rrthe
rrmanagers r r of rrthe rrfirm. rrIn rrprivately rrowned rrfirms, rrmanagement rrand rrthe rrowners rrare
rrusually rrthe rrsame r r people. rrManagement rroperates rrthe rrfirm rrto rrsatisfy rrits rrown rrgoals,
rrneeds, rrfinancial rrrequirements r r and rrthe rrlike. rrAs rra rrcompany rrmoves rrfrom rrprivate rrto
rrpublic rrownership, rrmanagement rrnow r r represents rrall rrowners. rrThis rrplaces rrmanagement
rrin rrthe rr agency rrposition rrof rrmaking rrdecisions rrin r r the rrbest rrinterest rrof rrall rrshareholders.
1-7 What rrare rrinstitutional rrinvestors rrimportant rrin rrtoday’s rrbusiness rrworld?
Because rrinstitutional rrinvestors rrsuch rras rrpension rrfunds rrand rrmutual rrfunds rrown rra rrlarge
r r percentage rrof rrmajor rrU.S. rrcompanies, rrthey rrare rrhaving rrmore rrto rrsay rrabout rrthe rrway
rrpublicly r r owned rrcompanies rrare rrmanaged. rrAs rra rrgroup, rrthey rrhave rrthe rrability rrto
rrvote rrlarge rrblocks rrof r r shares rrfor rrthe rrelection rrof rra rrboard rrof rrdirectors, rrwhich rris
rrsupposed rrto rrrun rrthe rrcompany rrin rran r r efficient, rrcompetitive rrmanner. rrThe rrthreat rrof
rrbeing rrable rrto rrreplace rrpoor rrperforming rrboards rrof r r directors rrmakes rrinstitutional
rrinvestors rrquite rrinfluential. rrSince rrthese rrinstitutions, rrlike rrpension r r funds rrand rrmutual
rrfunds, rrrepresent rrindividual rrworkers rrand rrinvestors, rrthey rrhave rra rrresponsibility r r to rrsee
rrthat rrthe rrfirm rris rrmanaged rrin rran rrefficient rrand rrethical rrway.
1-8 Why rris rrprofit rrmaximization, rrby rritself, rran rrinappropriate rrgoal? rrWhat rris rrmeant rrby
rrthe rrgoal rrof r r maximization rrof rrshareholder rrwealth?
The rrproblem rrwith rra rrprofit rrmaximization rrgoal rris rrthat rrit rrfails rrto rrtake rraccount rrof rrrisk,
rrthe r r timing rrof rrthe rrbenefits rris rrnot rrconsidered, rrand rrprofit rrmeasurement rris rra rrvery
rrinexact rrprocess. r r The rrgoal rrof rrshareholders’ rrwealth rrmaximization rr implies rrthat rrthe
rrfirm rr will rrattempt rrto rr achieve r r the rrhighest rrpossible rrtotal rrvaluation rrin rrthe
rrmarketplace. rrIt rris rrthe rrone rroverriding rrobjective rrof r r the rrfirm rrand rrshould rrinfluence
rrevery rrdecision.
1-9 When rrdoes rrinsider rrtrading rroccur? rrWhat rrgovernment rragency rris rrresponsible rrfor
rrprotecting r r against rrthe rrunethical rrpractice rrof rrinsider rrtrading?
Insider rrtrading rroccurs rrwhen rranyone rrwith rrnon-public rrinformation rrbuys rror rrsells rrsecurities
rrto r r take rradvantage rrof rrthat rrprivate rrinformation. rrThe rrSecurities rrand rrExchange
rrCommission rris r r responsible rrfor rrprotecting rrmarkets rragainst rrinsider rrtrading. rrIn rrthe rrpast,
rrpeople rrhave rrgone rrto r r jail rrfor rrtrading rron rrnon-public rrinformation. rrThis rrhas rrincluded
rr company rrofficers, rrinvestment r r bankers, rrprinters rrwho rrhave rrinformation rrbefore rrit rris
rrpublished, rrand rreven rrtruck rrdrivers rrwho r r deliver rrbusiness rrmagazines rrand rrread
rrpositive rror rrnegative rrarticles rrabout rra rrcompany rrbefore rrthe r r magazine rris rron rrthe
rrnewsstands rrand rrthen rrplace rr trades rror rrhave rrfriends rrplace rrtrades rrbased rron r r that
rrinformation. rrThe rrSEC rrhas rrprosecuted rranyone rrwho rrprofits rrfrom rrinside rrinformation.
1-10 In rrterms rrof rrthe rrlife rrof rrthe rrsecurities rroffered, rrwhat rris rrthe rrdifference rrbetween
rrmoney rrand r r capital rrmarkets?
Money rrmarkets rrrefer rrto rrthose rrmarkets rrdealing rrwith rrshort-term rrsecurities rrthat rrhave rra
rrlife rrof r r one rryear rror rrless. rrCapital rrmarkets rrrefer rrto rrsecurities rrwith rra rrlife rrof rrmore
rrthan rrone rryear.
1-11 What rris rrthe rrdifference rrbetween rra rrprimary rrand rra rrsecondary rrmarket?
Foundations of Financial Management, 18th Edition
rr rr rr rr rr
by Stanley Block, Geoffrey Hirt, Chapters 1 – 21, Complete
r r r r r rr rr r rr
,
, Chapter 1 rr
The Goals and Functions of Financial Management
rr rr rr rr rr rr
DiscussionrQuestions
1-1 What rreffect rrdid rrthe rrrecession rrof rr2007-2009 rrhave rron rrgovernment rrregulation?
It rrwas rrgreatly rrincreased.
1-2 What rradvantages rrdoes rra rrsole rrproprietorship rroffer? rrWhat rris rra rrmajor rrdrawback rrof
rrthis rrtype rrof r r organization?
A rrsole rrproprietorship rroffers rrthe rradvantage rrof rrsimplicity rrof rrdecision rrmaking rrand rrlow
r r organizational rrand rroperating rrcosts. rrA rrmajor rrdrawback rris rrthat rrthere rris rrunlimited
rrliability rrto rrthe r r owner.
1-3 What rrform rrof rrpartnership rrallows rrsome rrof rrthe rrinvestors rrto rrlimit rrtheir rrliability?
rrExplain r r briefly.
A rrlimited rrpartnership rrallows rrsome rrof rrthe rrpartners rrto rrlimit rrtheir rrliability. rrUnder rrthis
r r arrangement, rrone rror rrmore rrpartners rrare rrdesignated rrgeneral rrpartners rrand rrhave
rrunlimited r r liability rrfor rrthe rrdebts rrof rrthe rrfirm; rrother rrpartners rrare rrdesignated rrlimited
rrpartners rrand rrare rrliable r r only rrfor rrtheir rrinitial rrcontribution. rrThe rrlimited rrpartners rrare
rrnormally rrprohibited rrfrom rrbeing r r active rrin rrthe rrmanagement rrof rrthe rrfirm.
1-4 In rra rrcorporation, rrwhat rrgroup rrhas rrthe rrultimate rrresponsibility rrfor rrprotecting rrand
rrmanaging
the rrstockholders’ rrinterests?
The rrboard rrof rrdirectors.
1-5 What rrdocument rris rrnecessary rrto rrform rra rrcorporation?
The rrarticles rrof rrincorporation.
1-6 What rrissue rrdoes rragency rrtheory rrexamine? rrWhy rris rrit rrimportant rrin rra rrpublic
rrcorporation r r rather rrthan rrin rra rrprivate rrcorporation?
, Agency rrtheory rrexamines rrthe rrrelationship rrbetween rrthe rrowners rrof rrthe rrfirm rrand rrthe
rrmanagers r r of rrthe rrfirm. rrIn rrprivately rrowned rrfirms, rrmanagement rrand rrthe rrowners rrare
rrusually rrthe rrsame r r people. rrManagement rroperates rrthe rrfirm rrto rrsatisfy rrits rrown rrgoals,
rrneeds, rrfinancial rrrequirements r r and rrthe rrlike. rrAs rra rrcompany rrmoves rrfrom rrprivate rrto
rrpublic rrownership, rrmanagement rrnow r r represents rrall rrowners. rrThis rrplaces rrmanagement
rrin rrthe rr agency rrposition rrof rrmaking rrdecisions rrin r r the rrbest rrinterest rrof rrall rrshareholders.
1-7 What rrare rrinstitutional rrinvestors rrimportant rrin rrtoday’s rrbusiness rrworld?
Because rrinstitutional rrinvestors rrsuch rras rrpension rrfunds rrand rrmutual rrfunds rrown rra rrlarge
r r percentage rrof rrmajor rrU.S. rrcompanies, rrthey rrare rrhaving rrmore rrto rrsay rrabout rrthe rrway
rrpublicly r r owned rrcompanies rrare rrmanaged. rrAs rra rrgroup, rrthey rrhave rrthe rrability rrto
rrvote rrlarge rrblocks rrof r r shares rrfor rrthe rrelection rrof rra rrboard rrof rrdirectors, rrwhich rris
rrsupposed rrto rrrun rrthe rrcompany rrin rran r r efficient, rrcompetitive rrmanner. rrThe rrthreat rrof
rrbeing rrable rrto rrreplace rrpoor rrperforming rrboards rrof r r directors rrmakes rrinstitutional
rrinvestors rrquite rrinfluential. rrSince rrthese rrinstitutions, rrlike rrpension r r funds rrand rrmutual
rrfunds, rrrepresent rrindividual rrworkers rrand rrinvestors, rrthey rrhave rra rrresponsibility r r to rrsee
rrthat rrthe rrfirm rris rrmanaged rrin rran rrefficient rrand rrethical rrway.
1-8 Why rris rrprofit rrmaximization, rrby rritself, rran rrinappropriate rrgoal? rrWhat rris rrmeant rrby
rrthe rrgoal rrof r r maximization rrof rrshareholder rrwealth?
The rrproblem rrwith rra rrprofit rrmaximization rrgoal rris rrthat rrit rrfails rrto rrtake rraccount rrof rrrisk,
rrthe r r timing rrof rrthe rrbenefits rris rrnot rrconsidered, rrand rrprofit rrmeasurement rris rra rrvery
rrinexact rrprocess. r r The rrgoal rrof rrshareholders’ rrwealth rrmaximization rr implies rrthat rrthe
rrfirm rr will rrattempt rrto rr achieve r r the rrhighest rrpossible rrtotal rrvaluation rrin rrthe
rrmarketplace. rrIt rris rrthe rrone rroverriding rrobjective rrof r r the rrfirm rrand rrshould rrinfluence
rrevery rrdecision.
1-9 When rrdoes rrinsider rrtrading rroccur? rrWhat rrgovernment rragency rris rrresponsible rrfor
rrprotecting r r against rrthe rrunethical rrpractice rrof rrinsider rrtrading?
Insider rrtrading rroccurs rrwhen rranyone rrwith rrnon-public rrinformation rrbuys rror rrsells rrsecurities
rrto r r take rradvantage rrof rrthat rrprivate rrinformation. rrThe rrSecurities rrand rrExchange
rrCommission rris r r responsible rrfor rrprotecting rrmarkets rragainst rrinsider rrtrading. rrIn rrthe rrpast,
rrpeople rrhave rrgone rrto r r jail rrfor rrtrading rron rrnon-public rrinformation. rrThis rrhas rrincluded
rr company rrofficers, rrinvestment r r bankers, rrprinters rrwho rrhave rrinformation rrbefore rrit rris
rrpublished, rrand rreven rrtruck rrdrivers rrwho r r deliver rrbusiness rrmagazines rrand rrread
rrpositive rror rrnegative rrarticles rrabout rra rrcompany rrbefore rrthe r r magazine rris rron rrthe
rrnewsstands rrand rrthen rrplace rr trades rror rrhave rrfriends rrplace rrtrades rrbased rron r r that
rrinformation. rrThe rrSEC rrhas rrprosecuted rranyone rrwho rrprofits rrfrom rrinside rrinformation.
1-10 In rrterms rrof rrthe rrlife rrof rrthe rrsecurities rroffered, rrwhat rris rrthe rrdifference rrbetween
rrmoney rrand r r capital rrmarkets?
Money rrmarkets rrrefer rrto rrthose rrmarkets rrdealing rrwith rrshort-term rrsecurities rrthat rrhave rra
rrlife rrof r r one rryear rror rrless. rrCapital rrmarkets rrrefer rrto rrsecurities rrwith rra rrlife rrof rrmore
rrthan rrone rryear.
1-11 What rris rrthe rrdifference rrbetween rra rrprimary rrand rra rrsecondary rrmarket?
