SOLUTIONMANUAL l
FoundationsofFinancialManagement,18thEdition
l l l l l
byStanleyBlock,GeoffreyHirt,Chapters1–21,Complete
l l l l l l l l l
,
, Chapter1 l
The Goals and Functions of Financial Management
l ll ll l ll l
DiscussionQuestions l
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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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 the
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lowner.
l
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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l 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. l ll ll
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? Whyis it important in apublic corporation
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rather than in a private corporation?
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, Agency theory examines the relationship between the owners of the firm and the managers ll ll ll ll ll ll ll l ll ll ll ll ll
lof the firm. In privately owned firms, management and the owners are usually the same
l ll ll l ll ll ll ll ll ll ll ll l ll l
l people. Management operates the firm to satisfy its own goals, needs, financial requirements
l ll l l ll l l l l ll ll ll ll
l and the like. As a company moves from private to public ownership, management now
l ll ll ll ll ll ll ll ll ll ll ll ll ll
represents all owners. This places management in the agency position of making decisions in
l l l ll ll ll l ll ll ll l ll ll ll ll
lthe best interest of all shareholders.
l ll ll ll l ll
1-7 What are institutional investors important in today’sbusiness world?
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Because institutional investors such as pension funds and mutual funds own a large ll ll ll ll l ll ll ll ll ll ll ll
percentage of major U.S. companies, they are having more to say about the way publicly
l l ll l ll ll l ll ll ll ll ll ll ll ll ll
l owned companies are managed. As a group, they have the ability to vote large blocks of
l ll ll ll ll ll ll l ll ll ll ll ll ll ll ll
l shares for the election of aboard of directors, which is supposed to run the company in an
l ll ll ll l ll l l l ll ll ll ll ll ll ll l ll
l efficient, competitive manner. The threat of being able to replace poor performing boards of
l ll ll ll ll ll l ll ll ll ll ll ll ll
ldirectors makes institutional investors quite influential. Since these institutions, like pension
l l ll ll ll ll ll ll ll ll ll
funds and mutual funds, represent individual workers and investors, they have a responsibility
l l ll ll ll ll ll ll ll ll ll ll ll l
to see that the firm is managed in an efficient and ethical way.
l l ll ll ll ll ll ll ll ll ll ll ll ll
1-8 Why is profit maximization, by itself, an inappropriate goal? What is meant by the goal of
l ll ll ll l ll ll ll ll ll l ll l ll ll
maximization of shareholder wealth?
l l ll ll ll
The problem with a profit maximization goal is that it fails to take account of risk, the timing
ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll l l
of the benefits is not considered, and profit measurement is a very inexact process. The goal
l l l l l ll ll ll ll ll ll ll l ll l l ll
of shareholders’ wealth maximization implies that the firm will attempt to achieve the
ll ll ll ll ll ll ll ll ll ll ll ll l l
highest possible total valuation in the marketplace. It is the one overriding objective of the
ll ll ll ll ll ll ll ll ll ll ll ll ll ll l l
firm and should influence every decision.
ll ll ll ll ll ll
1-9 When does insider trading occur? What government agency is responsible for protecting
ll ll ll l ll l l l l ll l
lagainst the unethical practice of insider trading?
l ll ll ll ll ll ll
Insider trading occurs when anyone with non-public information buys or sells securities to
ll ll ll ll ll ll ll ll ll ll ll ll
l take advantage of that private information. The Securities and Exchange Commission is
l ll ll l ll ll ll ll ll ll ll ll
responsible for protecting markets against insider trading. In the past, people have gone to
l l ll l l l ll ll ll l l ll ll ll ll
l jail for trading on non-public information. This has included company officers, investment
l ll ll ll ll ll l l ll ll ll l
bankers, printers who have information before it is published, and even truck drivers who
l l l ll ll ll ll ll ll ll ll ll ll ll ll
deliver business magazines and read positive or negative articles about a company before
l l ll ll ll ll ll ll ll ll ll ll ll ll
the magazine is on the newsstands and then place trades or have friends place trades
ll l l ll ll ll ll ll ll ll ll ll ll ll ll ll
based on that information. The SEC has prosecuted anyone who profits from inside
ll ll l l ll l ll ll ll ll ll ll ll ll
information.
ll
1-10 In terms of the life of the securities offered, what is the difference between money and
ll l ll ll ll l l ll ll ll ll ll l ll l
capital markets?
l l l
Money marketsrefer to those markets dealing with short-term securities that have a life of
l l l l ll l l ll ll l l ll l ll
one year or less. Capital markets refer to securities with a life of more than one year.
l l ll l ll ll ll ll ll ll ll ll ll ll ll ll ll ll
1-11 What is the difference between a primary and a secondary market?
ll l ll ll ll l ll ll ll l
FoundationsofFinancialManagement,18thEdition
l l l l l
byStanleyBlock,GeoffreyHirt,Chapters1–21,Complete
l l l l l l l l l
,
, Chapter1 l
The Goals and Functions of Financial Management
l ll ll l ll l
DiscussionQuestions l
1-1 What effect did the recession of 2007-2009 have on government regulation?
ll ll l ll ll l ll ll l ll
It was greatly increased.
l ll ll
1-2 What advantages does a sole proprietorship offer? What is a major drawback of this type of
ll ll ll ll ll ll ll ll ll ll ll ll l ll ll
organization?
l l
A sole proprietorship offers the advantage of simplicity of decision making and low
ll ll ll ll ll ll ll ll ll ll ll ll
organizational and operating costs. A major drawback is that there is unlimited liability to the
l l ll ll ll ll l ll ll l ll ll ll ll l ll
lowner.
l
1-3 What form of partnership allows some of the investors to limit their liability? Explain
ll l ll ll ll l l l ll l ll ll ll
briefly.
l l
A limited partnership allows some of the partners to limit their liability. Under this
ll ll ll ll ll ll ll ll ll ll ll ll ll
arrangement, one or more partners are designated general partners and have unlimited
l l l ll ll ll l ll ll ll ll ll ll
l liability for the debts of the firm; other partners are designated limited partners and are
l ll ll ll l ll ll ll ll ll l ll ll ll ll
liable only for their initial contribution. The limited partners are normally prohibited from
ll l l l ll ll l l l ll l ll l ll
being active in the management of the firm.
ll l l ll ll ll ll l ll
1-4 In a corporation, what group has the ultimate responsibility for protecting and managing
ll ll ll ll ll ll l ll l ll l l
the stockholders’ interests?
ll ll
The board of directors. l ll ll
1-5 What document is necessary to form a corporation?
ll ll ll l ll ll ll
The articles of incorporation.
ll ll ll
1-6 What issue does agency theory examine? Whyis it important in apublic corporation
ll ll ll l l ll l ll ll ll ll l ll
rather than in a private corporation?
l l ll ll ll ll ll
, Agency theory examines the relationship between the owners of the firm and the managers ll ll ll ll ll ll ll l ll ll ll ll ll
lof the firm. In privately owned firms, management and the owners are usually the same
l ll ll l ll ll ll ll ll ll ll ll l ll l
l people. Management operates the firm to satisfy its own goals, needs, financial requirements
l ll l l ll l l l l ll ll ll ll
l and the like. As a company moves from private to public ownership, management now
l ll ll ll ll ll ll ll ll ll ll ll ll ll
represents all owners. This places management in the agency position of making decisions in
l l l ll ll ll l ll ll ll l ll ll ll ll
lthe best interest of all shareholders.
l ll ll ll l ll
1-7 What are institutional investors important in today’sbusiness world?
ll ll ll l ll ll l l
Because institutional investors such as pension funds and mutual funds own a large ll ll ll ll l ll ll ll ll ll ll ll
percentage of major U.S. companies, they are having more to say about the way publicly
l l ll l ll ll l ll ll ll ll ll ll ll ll ll
l owned companies are managed. As a group, they have the ability to vote large blocks of
l ll ll ll ll ll ll l ll ll ll ll ll ll ll ll
l shares for the election of aboard of directors, which is supposed to run the company in an
l ll ll ll l ll l l l ll ll ll ll ll ll ll l ll
l efficient, competitive manner. The threat of being able to replace poor performing boards of
l ll ll ll ll ll l ll ll ll ll ll ll ll
ldirectors makes institutional investors quite influential. Since these institutions, like pension
l l ll ll ll ll ll ll ll ll ll
funds and mutual funds, represent individual workers and investors, they have a responsibility
l l ll ll ll ll ll ll ll ll ll ll ll l
to see that the firm is managed in an efficient and ethical way.
l l ll ll ll ll ll ll ll ll ll ll ll ll
1-8 Why is profit maximization, by itself, an inappropriate goal? What is meant by the goal of
l ll ll ll l ll ll ll ll ll l ll l ll ll
maximization of shareholder wealth?
l l ll ll ll
The problem with a profit maximization goal is that it fails to take account of risk, the timing
ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll l l
of the benefits is not considered, and profit measurement is a very inexact process. The goal
l l l l l ll ll ll ll ll ll ll l ll l l ll
of shareholders’ wealth maximization implies that the firm will attempt to achieve the
ll ll ll ll ll ll ll ll ll ll ll ll l l
highest possible total valuation in the marketplace. It is the one overriding objective of the
ll ll ll ll ll ll ll ll ll ll ll ll ll ll l l
firm and should influence every decision.
ll ll ll ll ll ll
1-9 When does insider trading occur? What government agency is responsible for protecting
ll ll ll l ll l l l l ll l
lagainst the unethical practice of insider trading?
l ll ll ll ll ll ll
Insider trading occurs when anyone with non-public information buys or sells securities to
ll ll ll ll ll ll ll ll ll ll ll ll
l take advantage of that private information. The Securities and Exchange Commission is
l ll ll l ll ll ll ll ll ll ll ll
responsible for protecting markets against insider trading. In the past, people have gone to
l l ll l l l ll ll ll l l ll ll ll ll
l jail for trading on non-public information. This has included company officers, investment
l ll ll ll ll ll l l ll ll ll l
bankers, printers who have information before it is published, and even truck drivers who
l l l ll ll ll ll ll ll ll ll ll ll ll ll
deliver business magazines and read positive or negative articles about a company before
l l ll ll ll ll ll ll ll ll ll ll ll ll
the magazine is on the newsstands and then place trades or have friends place trades
ll l l ll ll ll ll ll ll ll ll ll ll ll ll ll
based on that information. The SEC has prosecuted anyone who profits from inside
ll ll l l ll l ll ll ll ll ll ll ll ll
information.
ll
1-10 In terms of the life of the securities offered, what is the difference between money and
ll l ll ll ll l l ll ll ll ll ll l ll l
capital markets?
l l l
Money marketsrefer to those markets dealing with short-term securities that have a life of
l l l l ll l l ll ll l l ll l ll
one year or less. Capital markets refer to securities with a life of more than one year.
l l ll l ll ll ll ll ll ll ll ll ll ll ll ll ll ll
1-11 What is the difference between a primary and a secondary market?
ll l ll ll ll l ll ll ll l
