SOLUTION MANUAL
Foundations of Financial Management, 18th Edition
by Stanley Block, Geoffrey Hirt, Chapters 1 – 21, Complete
,
, Chapter 1 m
The Goals and Functions of Financial Management
m m m m m m
Discussion Questions
m
1-1 What meffect mdid mthe mrecession mof m2007-2009 mhave mon mgovernment mregulation?
It mwas mgreatly mincreased.
1-2 What madvantages mdoes ma msole mproprietorship moffer? mWhat mis ma mmajor mdrawback mof
mthis mtype mof m organization?
A msole mproprietorship moffers mthe madvantage mof msimplicity mof mdecision mmaking mand mlow
m organizational mand moperating mcosts. mA mmajor mdrawback mis mthat mthere mis munlimited
mliability mto mthe m owner.
1-3 What mform mof mpartnership mallows msome mof mthe minvestors mto mlimit mtheir mliability?
mExplain m briefly.
A mlimited mpartnership mallows msome mof mthe mpartners mto mlimit mtheir mliability. mUnder mthis
m arrangement, mone mor mmore mpartners mare mdesignated mgeneral mpartners mand mhave
munlimited m liability mfor mthe mdebts mof mthe mfirm; mother mpartners mare mdesignated mlimited
mpartners mand mare mliable m only mfor mtheir minitial mcontribution. mThe mlimited mpartners mare
mnormally mprohibited mfrom mbeing m active min mthe mmanagement mof mthe mfirm.
1-4 In ma mcorporation, mwhat mgroup mhas mthe multimate mresponsibility mfor mprotecting mand
mmanaging
the mstockholders’ minterests?
The mboard mof mdirectors.
1-5 What mdocument mis mnecessary mto mform ma mcorporation?
The marticles mof mincorporation.
1-6 What missue mdoes magency mtheory mexamine? mWhy mis mit mimportant min ma mpublic
mcorporation m rather mthan min ma mprivate mcorporation?
, Agency mtheory mexamines mthe mrelationship mbetween mthe mowners mof mthe mfirm mand mthe
mmanagers m of mthe mfirm. mIn mprivately mowned mfirms, mmanagement mand mthe mowners mare
musually mthe msame m people. mManagement moperates mthe mfirm mto msatisfy mits mown mgoals,
mneeds, mfinancial mrequirements m and mthe mlike. mAs ma mcompany mmoves mfrom mprivate mto
mpublic mownership, mmanagement mnow m represents mall mowners. mThis mplaces mmanagement
min mthe magency mposition mof mmaking mdecisions min m the mbest minterest mof mall mshareholders.
1-7 What mare minstitutional minvestors mimportant min mtoday’s mbusiness mworld?
Because minstitutional minvestors msuch mas mpension mfunds mand mmutual mfunds mown ma mlarge
m percentage mof mmajor mU.S. mcompanies, mthey mare mhaving mmore mto msay mabout mthe mway
mpublicly m owned mcompanies mare mmanaged. mAs ma mgroup, mthey mhave mthe mability mto
mvote mlarge mblocks mof m shares mfor mthe melection mof ma mboard mof mdirectors, mwhich mis
msupposed mto mrun mthe mcompany min man m efficient, mcompetitive mmanner. mThe mthreat mof
mbeing mable mto mreplace mpoor mperforming m boards mof m directors mmakes minstitutional
minvestors mquite minfluential. mSince mthese minstitutions, mlike mpension m funds mand mmutual
mfunds, mrepresent mindividual mworkers mand minvestors, mthey mhave ma mresponsibility m to msee
mthat mthe mfirm mis mmanaged min man mefficient mand methical mway.
1-8 Why mis mprofit mmaximization, mby mitself, man minappropriate mgoal? mWhat mis mmeant mby
mthe mgoal mof m maximization mof mshareholder mwealth?
The mproblem mwith ma mprofit mmaximization mgoal mis mthat mit mfails mto mtake maccount mof
mrisk, mthe m timing mof mthe mbenefits mis mnot mconsidered, mand mprofit mmeasurement mis ma mvery
minexact mprocess. m The mgoal mof mshareholders’ mwealth mmaximization m implies mthat mthe
mfirm m will mattempt mto machieve m the mhighest mpossible mtotal mvaluation min mthe
mmarketplace. mIt mis mthe mone moverriding mobjective mof m the mfirm mand mshould minfluence
mevery mdecision.
1-9 When mdoes minsider mtrading moccur? mWhat mgovernment magency mis mresponsible mfor
mprotecting m against mthe munethical mpractice mof minsider mtrading?
Insider mtrading moccurs mwhen manyone mwith mnon-public minformation mbuys mor msells
msecurities mto m take madvantage mof mthat mprivate minformation. mThe mSecurities mand
mExchange mCommission mis m responsible mfor mprotecting mmarkets magainst minsider mtrading.
mIn mthe mpast, mpeople mhave mgone mto m jail mfor mtrading mon mnon-public minformation. mThis
mhas mincluded m company mofficers, minvestment m bankers, mprinters mwho mhave minformation
mbefore mit mis mpublished, mand meven mtruck mdrivers mwho m deliver mbusiness mmagazines
mand mread mpositive mor mnegative marticles mabout ma mcompany mbefore mthe m magazine mis
mon mthe mnewsstands mand mthen mplace m trades mor mhave mfriends mplace mtrades mbased mon
m that minformation. mThe mSEC mhas mprosecuted manyone mwho mprofits mfrom minside
minformation.
1-10 In mterms mof mthe mlife mof mthe msecurities moffered, mwhat mis mthe mdifference mbetween
mmoney mand m capital mmarkets?
Money mmarkets mrefer mto mthose mmarkets mdealing mwith mshort-term msecurities mthat mhave
ma mlife mof m one myear mor mless. mCapital mmarkets mrefer mto msecurities mwith ma mlife mof
mmore mthan mone myear.
1-11 What mis mthe mdifference mbetween ma mprimary mand ma msecondary mmarket?
Foundations of Financial Management, 18th Edition
by Stanley Block, Geoffrey Hirt, Chapters 1 – 21, Complete
,
, Chapter 1 m
The Goals and Functions of Financial Management
m m m m m m
Discussion Questions
m
1-1 What meffect mdid mthe mrecession mof m2007-2009 mhave mon mgovernment mregulation?
It mwas mgreatly mincreased.
1-2 What madvantages mdoes ma msole mproprietorship moffer? mWhat mis ma mmajor mdrawback mof
mthis mtype mof m organization?
A msole mproprietorship moffers mthe madvantage mof msimplicity mof mdecision mmaking mand mlow
m organizational mand moperating mcosts. mA mmajor mdrawback mis mthat mthere mis munlimited
mliability mto mthe m owner.
1-3 What mform mof mpartnership mallows msome mof mthe minvestors mto mlimit mtheir mliability?
mExplain m briefly.
A mlimited mpartnership mallows msome mof mthe mpartners mto mlimit mtheir mliability. mUnder mthis
m arrangement, mone mor mmore mpartners mare mdesignated mgeneral mpartners mand mhave
munlimited m liability mfor mthe mdebts mof mthe mfirm; mother mpartners mare mdesignated mlimited
mpartners mand mare mliable m only mfor mtheir minitial mcontribution. mThe mlimited mpartners mare
mnormally mprohibited mfrom mbeing m active min mthe mmanagement mof mthe mfirm.
1-4 In ma mcorporation, mwhat mgroup mhas mthe multimate mresponsibility mfor mprotecting mand
mmanaging
the mstockholders’ minterests?
The mboard mof mdirectors.
1-5 What mdocument mis mnecessary mto mform ma mcorporation?
The marticles mof mincorporation.
1-6 What missue mdoes magency mtheory mexamine? mWhy mis mit mimportant min ma mpublic
mcorporation m rather mthan min ma mprivate mcorporation?
, Agency mtheory mexamines mthe mrelationship mbetween mthe mowners mof mthe mfirm mand mthe
mmanagers m of mthe mfirm. mIn mprivately mowned mfirms, mmanagement mand mthe mowners mare
musually mthe msame m people. mManagement moperates mthe mfirm mto msatisfy mits mown mgoals,
mneeds, mfinancial mrequirements m and mthe mlike. mAs ma mcompany mmoves mfrom mprivate mto
mpublic mownership, mmanagement mnow m represents mall mowners. mThis mplaces mmanagement
min mthe magency mposition mof mmaking mdecisions min m the mbest minterest mof mall mshareholders.
1-7 What mare minstitutional minvestors mimportant min mtoday’s mbusiness mworld?
Because minstitutional minvestors msuch mas mpension mfunds mand mmutual mfunds mown ma mlarge
m percentage mof mmajor mU.S. mcompanies, mthey mare mhaving mmore mto msay mabout mthe mway
mpublicly m owned mcompanies mare mmanaged. mAs ma mgroup, mthey mhave mthe mability mto
mvote mlarge mblocks mof m shares mfor mthe melection mof ma mboard mof mdirectors, mwhich mis
msupposed mto mrun mthe mcompany min man m efficient, mcompetitive mmanner. mThe mthreat mof
mbeing mable mto mreplace mpoor mperforming m boards mof m directors mmakes minstitutional
minvestors mquite minfluential. mSince mthese minstitutions, mlike mpension m funds mand mmutual
mfunds, mrepresent mindividual mworkers mand minvestors, mthey mhave ma mresponsibility m to msee
mthat mthe mfirm mis mmanaged min man mefficient mand methical mway.
1-8 Why mis mprofit mmaximization, mby mitself, man minappropriate mgoal? mWhat mis mmeant mby
mthe mgoal mof m maximization mof mshareholder mwealth?
The mproblem mwith ma mprofit mmaximization mgoal mis mthat mit mfails mto mtake maccount mof
mrisk, mthe m timing mof mthe mbenefits mis mnot mconsidered, mand mprofit mmeasurement mis ma mvery
minexact mprocess. m The mgoal mof mshareholders’ mwealth mmaximization m implies mthat mthe
mfirm m will mattempt mto machieve m the mhighest mpossible mtotal mvaluation min mthe
mmarketplace. mIt mis mthe mone moverriding mobjective mof m the mfirm mand mshould minfluence
mevery mdecision.
1-9 When mdoes minsider mtrading moccur? mWhat mgovernment magency mis mresponsible mfor
mprotecting m against mthe munethical mpractice mof minsider mtrading?
Insider mtrading moccurs mwhen manyone mwith mnon-public minformation mbuys mor msells
msecurities mto m take madvantage mof mthat mprivate minformation. mThe mSecurities mand
mExchange mCommission mis m responsible mfor mprotecting mmarkets magainst minsider mtrading.
mIn mthe mpast, mpeople mhave mgone mto m jail mfor mtrading mon mnon-public minformation. mThis
mhas mincluded m company mofficers, minvestment m bankers, mprinters mwho mhave minformation
mbefore mit mis mpublished, mand meven mtruck mdrivers mwho m deliver mbusiness mmagazines
mand mread mpositive mor mnegative marticles mabout ma mcompany mbefore mthe m magazine mis
mon mthe mnewsstands mand mthen mplace m trades mor mhave mfriends mplace mtrades mbased mon
m that minformation. mThe mSEC mhas mprosecuted manyone mwho mprofits mfrom minside
minformation.
1-10 In mterms mof mthe mlife mof mthe msecurities moffered, mwhat mis mthe mdifference mbetween
mmoney mand m capital mmarkets?
Money mmarkets mrefer mto mthose mmarkets mdealing mwith mshort-term msecurities mthat mhave
ma mlife mof m one myear mor mless. mCapital mmarkets mrefer mto msecurities mwith ma mlife mof
mmore mthan mone myear.
1-11 What mis mthe mdifference mbetween ma mprimary mand ma msecondary mmarket?
