© McGra w Hi ll LLC. Al l ri ghts reserved. No reproduction or distribution without the prior wri tten consent of McGraw Hill LLC.
,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?
© McGra w Hi ll LLC. Al l ri ghts reserved. No reproduction or distribution without the prior wri tten 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
© McGra w Hi ll LLC. Al l ri ghts reserved. No reproduction or distribution without the prior wri tten consent of McGraw Hill LLC.
, money and capital markets?
Money markets refer to those markets dealing with short-term securities
that 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?
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
© McGra w Hi ll LLC. Al l ri ghts reserved. No reproduction or distribution without the prior wri tten consent of McGraw Hill LLC.
,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?
© McGra w Hi ll LLC. Al l ri ghts reserved. No reproduction or distribution without the prior wri tten 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
© McGra w Hi ll LLC. Al l ri ghts reserved. No reproduction or distribution without the prior wri tten consent of McGraw Hill LLC.
, money and capital markets?
Money markets refer to those markets dealing with short-term securities
that 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?
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
© McGra w Hi ll LLC. Al l ri ghts reserved. No reproduction or distribution without the prior wri tten consent of McGraw Hill LLC.
