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