SOLUTION MANUAL for Foundations of Financial Management,
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18th Edition by Stanley Block, Geoffrey Hirt,
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Chapters 1– 21, Complete
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,
, Chapter1 g
The Goals and Functions of Financial Management
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Discussion Questions g
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 of
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gorganization?
A sole proprietorship offers the advantage of simplicity of decision making and low
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gorganizational and operating costs. A major drawback is that there is unlimited liability to the
g g g g g g g g g g g g g g
gowner.
1-3 What form of partnership allows some of the investors to limit their liability? Explain
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briefly.
g
A limited partnership allows some of the partners to limit their liability. Under this
g g g g g g g g g g g g g
garrangement, one or more partners are designated general partners and have unlimited
g g g g g g g g g g g
gliability for the debts of the firm; other partners are designated limited partners and are
g g g g g g g g g g g g g g
gliable only for their initial contribution. The limited partners are normally prohibited from
g g g g g g g g g g g g
gbeing active in the management of the firm.
g g g g g g g
1-4 In a corporation, what group has the ultimate responsibility for protecting and managing
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gthe stockholders’ interests?
g g
The board of directors.
g g g
1-5 What document is necessary to form a corporation?
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The articles of incorporation.
g g g
1-6 What issue does agency theory examine? Why is it important in a public corporation
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rather than in a private corporation?
g g g g g g
, Agency theory examines the relationship between the owners of the firm and the managers of
g g g g g g g g g g g g g g
gthe firm. In privately owned firms, management and the owners are usually the same
g g g g g g g g g g g g g
gpeople. Management operates the firm to satisfy its own goals, needs, financial requirements
g g g g g g g g g g g g
gand the like. As a company moves from private to public ownership, management now
g g g g g g g g g g g g g
grepresents all owners. This places management in the agency position of making decisions
g g g g g g g g g g g g
gin the best interest of all shareholders.
g g g g g g
1-7 What are institutional investors important in today’s business world?
g g g g g g g g
Because institutional investors such as pension funds and mutual funds own a large
g g g g g g g g g g g g
gpercentage of major U.S. companies, they are having more to say about the way publicly g g g g g g g g g g g g g g
gowned companies are managed. As a group, they have the ability to vote large blocks of
g g g g g g g g g g g g g g g
gshares for the election of a board of directors, which is supposed to run the company in an
g g g g g g g g g g g g g g g g g
gefficient, competitive manner. The threat of being able to replace poor performing boards of
g g g g g g g g g g g g g
gdirectors makes institutional investors quite influential. Since these institutions, like pension
g g g g g g g g g g
gfunds and mutual funds, represent individual workers and investors, they have a
g g g g g g g g g g g
gresponsibility to see that the firm is managed in an efficient and ethical way. g g g g g g g g g g g g g
1-8 Why is profit maximization, by itself, an inappropriate goal? What is meant by the goal of
g g g g g g g g g g g g g g g
gmaximization of shareholder wealth? g g g
The problem with a profit maximization goal is that it fails to take account of risk, the
g g g g g g g g g g g g g g g g
gtiming of the benefits is not considered, and profit measurement is a very inexact process. The
g g g g g g g g g g g g g g g
ggoal of shareholders’ wealth maximization implies that the firm will attempt to achieve the
g g g g g g g g g g g g g
ghighest possible total valuation in the marketplace. It is the one overriding objective of the
g g g g g g g g g g g g g g
gfirm and should influence every decision.
g g g g g
1-9 When does insider trading occur? What government agency is responsible for protecting
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against the unethical practice of insider trading?
g g g g g g g
Insider trading occurs when anyone with non-public information buys or sells securities to
g g g g g g g g g g g g
gtake advantage of that private information. The Securities and Exchange Commission is
g g g g g g g g g g g
gresponsible for protecting markets against insider trading. In the past, people have gone to jail
g g g g g g g g g g g g g g
gfor trading on non-public information. This has included company officers, investment
g g g g g g g g g g
gbankers, printers who have information before it is published, and even truck drivers who
g g g g g g g g g g g g g
gdeliver business magazines and read positive or negative articles about a company before the
g g g g g g g g g g g g g
gmagazine is on the newsstands and then place trades or have friends place trades based on
g g g g g g g g g g g g g g g
gthat information. The SEC has prosecuted anyone who profits from inside information.
g g g g g g g g g g g
1-10 In terms of the life of the securities offered, what is the difference between money and
g g g g g g g g g g g g g g g
gcapital markets? g
Money markets refer to those markets dealing with short-term securities that have a life of one
g g g g g g g g g g g g g g g
gyear or less. Capital markets refer to securities with a life of more than one year.
g g g g g g g g g g g g g g g
1-11 What is the difference between a primary and a secondary market?
g g g g g g g g g g
g g g g g g
18th Edition by Stanley Block, Geoffrey Hirt,
g g g g g g g
Chapters 1– 21, Complete
g g g g
,
, Chapter1 g
The Goals and Functions of Financial Management
g g g g g g
Discussion Questions g
1-1 What effect did the recession of 2007-2009 have on government regulation?
g g g g g g g g g g
It was greatly increased.
g g g
1-2 What advantages does a sole proprietorship offer? What is a major drawback of this type of
g g g g g g g g g g g g g g g
gorganization?
A sole proprietorship offers the advantage of simplicity of decision making and low
g g g g g g g g g g g g
gorganizational and operating costs. A major drawback is that there is unlimited liability to the
g g g g g g g g g g g g g g
gowner.
1-3 What form of partnership allows some of the investors to limit their liability? Explain
g g g g g g g g g g g g g
briefly.
g
A limited partnership allows some of the partners to limit their liability. Under this
g g g g g g g g g g g g g
garrangement, one or more partners are designated general partners and have unlimited
g g g g g g g g g g g
gliability for the debts of the firm; other partners are designated limited partners and are
g g g g g g g g g g g g g g
gliable only for their initial contribution. The limited partners are normally prohibited from
g g g g g g g g g g g g
gbeing active in the management of the firm.
g g g g g g g
1-4 In a corporation, what group has the ultimate responsibility for protecting and managing
g g g g g g g g g g g g
gthe stockholders’ interests?
g g
The board of directors.
g g g
1-5 What document is necessary to form a corporation?
g g g g g g g
The articles of incorporation.
g g g
1-6 What issue does agency theory examine? Why is it important in a public corporation
g g g g g g g g g g g g g
rather than in a private corporation?
g g g g g g
, Agency theory examines the relationship between the owners of the firm and the managers of
g g g g g g g g g g g g g g
gthe firm. In privately owned firms, management and the owners are usually the same
g g g g g g g g g g g g g
gpeople. Management operates the firm to satisfy its own goals, needs, financial requirements
g g g g g g g g g g g g
gand the like. As a company moves from private to public ownership, management now
g g g g g g g g g g g g g
grepresents all owners. This places management in the agency position of making decisions
g g g g g g g g g g g g
gin the best interest of all shareholders.
g g g g g g
1-7 What are institutional investors important in today’s business world?
g g g g g g g g
Because institutional investors such as pension funds and mutual funds own a large
g g g g g g g g g g g g
gpercentage of major U.S. companies, they are having more to say about the way publicly g g g g g g g g g g g g g g
gowned companies are managed. As a group, they have the ability to vote large blocks of
g g g g g g g g g g g g g g g
gshares for the election of a board of directors, which is supposed to run the company in an
g g g g g g g g g g g g g g g g g
gefficient, competitive manner. The threat of being able to replace poor performing boards of
g g g g g g g g g g g g g
gdirectors makes institutional investors quite influential. Since these institutions, like pension
g g g g g g g g g g
gfunds and mutual funds, represent individual workers and investors, they have a
g g g g g g g g g g g
gresponsibility to see that the firm is managed in an efficient and ethical way. g g g g g g g g g g g g g
1-8 Why is profit maximization, by itself, an inappropriate goal? What is meant by the goal of
g g g g g g g g g g g g g g g
gmaximization of shareholder wealth? g g g
The problem with a profit maximization goal is that it fails to take account of risk, the
g g g g g g g g g g g g g g g g
gtiming of the benefits is not considered, and profit measurement is a very inexact process. The
g g g g g g g g g g g g g g g
ggoal of shareholders’ wealth maximization implies that the firm will attempt to achieve the
g g g g g g g g g g g g g
ghighest possible total valuation in the marketplace. It is the one overriding objective of the
g g g g g g g g g g g g g g
gfirm and should influence every decision.
g g g g g
1-9 When does insider trading occur? What government agency is responsible for protecting
g g g g g g g g g g g
against the unethical practice of insider trading?
g g g g g g g
Insider trading occurs when anyone with non-public information buys or sells securities to
g g g g g g g g g g g g
gtake advantage of that private information. The Securities and Exchange Commission is
g g g g g g g g g g g
gresponsible for protecting markets against insider trading. In the past, people have gone to jail
g g g g g g g g g g g g g g
gfor trading on non-public information. This has included company officers, investment
g g g g g g g g g g
gbankers, printers who have information before it is published, and even truck drivers who
g g g g g g g g g g g g g
gdeliver business magazines and read positive or negative articles about a company before the
g g g g g g g g g g g g g
gmagazine is on the newsstands and then place trades or have friends place trades based on
g g g g g g g g g g g g g g g
gthat information. The SEC has prosecuted anyone who profits from inside information.
g g g g g g g g g g g
1-10 In terms of the life of the securities offered, what is the difference between money and
g g g g g g g g g g g g g g g
gcapital markets? g
Money markets refer to those markets dealing with short-term securities that have a life of one
g g g g g g g g g g g g g g g
gyear or less. Capital markets refer to securities with a life of more than one year.
g g g g g g g g g g g g g g g
1-11 What is the difference between a primary and a secondary market?
g g g g g g g g g g
