SOLUTION MANUAL for Foundations of Financial Management,
t t t t t t
18th Edition by Stanley Block, Geoffrey Hirt,
t t t t t t t
Chapters 1 – 21, Complete
t t t t
,
, Chapter 1 t
The Goals and Functions of Financial Management
t t t t t t
Discussion Questions
t
1-1 What teffect tdid tthe trecession tof t2007-2009 thave ton tgovernment tregulation?
It twas tgreatly tincreased.
1-2 What tadvantages tdoes ta tsole tproprietorship toffer? tWhat tis ta tmajor tdrawback tof tthis ttype tof
torganization?
A tsole tproprietorship toffers tthe tadvantage tof tsimplicity tof tdecision tmaking tand tlow
torganizational tand toperating tcosts. tA tmajor tdrawback tis tthat tthere tis tunlimited tliability tto tthe
towner.
1-3 What tform tof tpartnership tallows tsome tof tthe tinvestors tto tlimit ttheir tliability? tExplain tbriefly.
A tlimited tpartnership tallows tsome tof tthe tpartners tto tlimit ttheir tliability. tUnder tthis
tarrangement, tone tor tmore tpartners tare tdesignated tgeneral tpartners tand thave tunlimited tliability
tfor tthe tdebts tof tthe tfirm; tother tpartners tare tdesignated tlimited tpartners tand tare tliable tonly tfor
ttheir tinitial tcontribution. tThe tlimited tpartners tare tnormally tprohibited tfrom tbeing tactive tin tthe
tmanagement tof tthe tfirm.
1-4 In ta tcorporation, twhat tgroup thas tthe tultimate tresponsibility tfor tprotecting tand tmanaging tthe
tstockholders’ tinterests?
The tboard tof tdirectors.
1-5 What tdocument tis tnecessary tto tform ta tcorporation?
The tarticles tof tincorporation.
1-6 What tissue tdoes tagency ttheory texamine? tWhy tis tit timportant tin ta tpublic tcorporation trather
tthan tin ta tprivate tcorporation?
, Agency ttheory texamines tthe trelationship tbetween tthe towners tof tthe tfirm tand tthe tmanagers tof
tthe tfirm. tIn tprivately towned tfirms, tmanagement tand tthe towners tare tusually tthe tsame tpeople.
tManagement toperates tthe tfirm tto tsatisfy tits town tgoals, tneeds, tfinancial trequirements tand tthe tlike.
tAs ta tcompany tmoves tfrom tprivate tto tpublic townership, tmanagement tnow trepresents tall
towners. tThis tplaces tmanagement tin tthe tagency tposition tof tmaking tdecisions tin tthe tbest tinterest
tof tall tshareholders.
1-7 What tare tinstitutional tinvestors timportant tin ttoday’s tbusiness tworld?
Because tinstitutional tinvestors tsuch tas tpension tfunds tand tmutual tfunds town ta tlarge tpercentage tof
tmajor tU.S. tcompanies, tthey tare thaving tmore tto tsay tabout tthe tway tpublicly towned tcompanies tare
tmanaged. tAs ta tgroup, tthey thave tthe tability tto tvote tlarge tblocks tof tshares tfor tthe telection tof ta
tboard tof tdirectors, twhich tis tsupposed tto trun tthe tcompany tin tan tefficient, tcompetitive tmanner.
tThe tthreat tof tbeing table tto treplace tpoor tperforming tboards tof tdirectors tmakes tinstitutional
tinvestors tquite tinfluential. tSince tthese tinstitutions, tlike tpension tfunds tand tmutual tfunds, trepresent
tindividual tworkers tand tinvestors, tthey thave ta tresponsibility tto tsee tthat tthe tfirm tis tmanaged tin tan
tefficient tand tethical tway.
1-8 Why tis tprofit tmaximization, tby titself, tan tinappropriate tgoal? tWhat tis tmeant tby tthe tgoal tof
tmaximization tof tshareholder twealth?
The tproblem twith ta tprofit tmaximization tgoal tis tthat tit tfails tto ttake taccount tof trisk, tthe ttiming tof
tthe tbenefits tis tnot tconsidered, tand tprofit tmeasurement tis ta tvery tinexact tprocess. tThe tgoal tof
tshareholders’ twealth tmaximization timplies tthat tthe tfirm twill tattempt tto tachieve tthe thighest
tpossible ttotal tvaluation tin tthe tmarketplace. tIt tis tthe tone toverriding tobjective tof tthe tfirm tand
tshould tinfluence tevery tdecision.
1-9 When tdoes tinsider ttrading toccur? tWhat tgovernment tagency tis tresponsible tfor tprotecting tagainst
tthe tunethical tpractice tof tinsider ttrading?
Insider ttrading toccurs twhen tanyone twith tnon-public tinformation tbuys tor tsells tsecurities tto ttake
tadvantage tof tthat tprivate tinformation. tThe tSecurities tand tExchange tCommission tis tresponsible
tfor tprotecting tmarkets tagainst tinsider ttrading. tIn tthe tpast, tpeople thave tgone tto tjail tfor ttrading ton
tnon-public tinformation. tThis thas tincluded tcompany tofficers, tinvestment tbankers, tprinters twho
thave tinformation tbefore tit tis tpublished, tand teven ttruck tdrivers twho tdeliver tbusiness tmagazines
tand tread tpositive tor tnegative tarticles tabout ta tcompany tbefore tthe tmagazine tis ton tthe tnewsstands
tand tthen tplace ttrades tor thave tfriends tplace ttrades tbased ton tthat tinformation. tThe tSEC thas
tprosecuted tanyone twho tprofits tfrom tinside tinformation.
1-10 In tterms tof tthe tlife tof tthe tsecurities toffered, twhat tis tthe tdifference tbetween tmoney tand tcapital
tmarkets?
Money tmarkets trefer tto tthose tmarkets tdealing twith tshort-term tsecurities tthat thave ta tlife tof tone
t year tor tless. tCapital tmarkets trefer tto tsecurities twith ta tlife tof tmore tthan tone tyear.
1-11 What tis tthe tdifference tbetween ta tprimary tand ta tsecondary tmarket?
t t t t t t
18th Edition by Stanley Block, Geoffrey Hirt,
t t t t t t t
Chapters 1 – 21, Complete
t t t t
,
, Chapter 1 t
The Goals and Functions of Financial Management
t t t t t t
Discussion Questions
t
1-1 What teffect tdid tthe trecession tof t2007-2009 thave ton tgovernment tregulation?
It twas tgreatly tincreased.
1-2 What tadvantages tdoes ta tsole tproprietorship toffer? tWhat tis ta tmajor tdrawback tof tthis ttype tof
torganization?
A tsole tproprietorship toffers tthe tadvantage tof tsimplicity tof tdecision tmaking tand tlow
torganizational tand toperating tcosts. tA tmajor tdrawback tis tthat tthere tis tunlimited tliability tto tthe
towner.
1-3 What tform tof tpartnership tallows tsome tof tthe tinvestors tto tlimit ttheir tliability? tExplain tbriefly.
A tlimited tpartnership tallows tsome tof tthe tpartners tto tlimit ttheir tliability. tUnder tthis
tarrangement, tone tor tmore tpartners tare tdesignated tgeneral tpartners tand thave tunlimited tliability
tfor tthe tdebts tof tthe tfirm; tother tpartners tare tdesignated tlimited tpartners tand tare tliable tonly tfor
ttheir tinitial tcontribution. tThe tlimited tpartners tare tnormally tprohibited tfrom tbeing tactive tin tthe
tmanagement tof tthe tfirm.
1-4 In ta tcorporation, twhat tgroup thas tthe tultimate tresponsibility tfor tprotecting tand tmanaging tthe
tstockholders’ tinterests?
The tboard tof tdirectors.
1-5 What tdocument tis tnecessary tto tform ta tcorporation?
The tarticles tof tincorporation.
1-6 What tissue tdoes tagency ttheory texamine? tWhy tis tit timportant tin ta tpublic tcorporation trather
tthan tin ta tprivate tcorporation?
, Agency ttheory texamines tthe trelationship tbetween tthe towners tof tthe tfirm tand tthe tmanagers tof
tthe tfirm. tIn tprivately towned tfirms, tmanagement tand tthe towners tare tusually tthe tsame tpeople.
tManagement toperates tthe tfirm tto tsatisfy tits town tgoals, tneeds, tfinancial trequirements tand tthe tlike.
tAs ta tcompany tmoves tfrom tprivate tto tpublic townership, tmanagement tnow trepresents tall
towners. tThis tplaces tmanagement tin tthe tagency tposition tof tmaking tdecisions tin tthe tbest tinterest
tof tall tshareholders.
1-7 What tare tinstitutional tinvestors timportant tin ttoday’s tbusiness tworld?
Because tinstitutional tinvestors tsuch tas tpension tfunds tand tmutual tfunds town ta tlarge tpercentage tof
tmajor tU.S. tcompanies, tthey tare thaving tmore tto tsay tabout tthe tway tpublicly towned tcompanies tare
tmanaged. tAs ta tgroup, tthey thave tthe tability tto tvote tlarge tblocks tof tshares tfor tthe telection tof ta
tboard tof tdirectors, twhich tis tsupposed tto trun tthe tcompany tin tan tefficient, tcompetitive tmanner.
tThe tthreat tof tbeing table tto treplace tpoor tperforming tboards tof tdirectors tmakes tinstitutional
tinvestors tquite tinfluential. tSince tthese tinstitutions, tlike tpension tfunds tand tmutual tfunds, trepresent
tindividual tworkers tand tinvestors, tthey thave ta tresponsibility tto tsee tthat tthe tfirm tis tmanaged tin tan
tefficient tand tethical tway.
1-8 Why tis tprofit tmaximization, tby titself, tan tinappropriate tgoal? tWhat tis tmeant tby tthe tgoal tof
tmaximization tof tshareholder twealth?
The tproblem twith ta tprofit tmaximization tgoal tis tthat tit tfails tto ttake taccount tof trisk, tthe ttiming tof
tthe tbenefits tis tnot tconsidered, tand tprofit tmeasurement tis ta tvery tinexact tprocess. tThe tgoal tof
tshareholders’ twealth tmaximization timplies tthat tthe tfirm twill tattempt tto tachieve tthe thighest
tpossible ttotal tvaluation tin tthe tmarketplace. tIt tis tthe tone toverriding tobjective tof tthe tfirm tand
tshould tinfluence tevery tdecision.
1-9 When tdoes tinsider ttrading toccur? tWhat tgovernment tagency tis tresponsible tfor tprotecting tagainst
tthe tunethical tpractice tof tinsider ttrading?
Insider ttrading toccurs twhen tanyone twith tnon-public tinformation tbuys tor tsells tsecurities tto ttake
tadvantage tof tthat tprivate tinformation. tThe tSecurities tand tExchange tCommission tis tresponsible
tfor tprotecting tmarkets tagainst tinsider ttrading. tIn tthe tpast, tpeople thave tgone tto tjail tfor ttrading ton
tnon-public tinformation. tThis thas tincluded tcompany tofficers, tinvestment tbankers, tprinters twho
thave tinformation tbefore tit tis tpublished, tand teven ttruck tdrivers twho tdeliver tbusiness tmagazines
tand tread tpositive tor tnegative tarticles tabout ta tcompany tbefore tthe tmagazine tis ton tthe tnewsstands
tand tthen tplace ttrades tor thave tfriends tplace ttrades tbased ton tthat tinformation. tThe tSEC thas
tprosecuted tanyone twho tprofits tfrom tinside tinformation.
1-10 In tterms tof tthe tlife tof tthe tsecurities toffered, twhat tis tthe tdifference tbetween tmoney tand tcapital
tmarkets?
Money tmarkets trefer tto tthose tmarkets tdealing twith tshort-term tsecurities tthat thave ta tlife tof tone
t year tor tless. tCapital tmarkets trefer tto tsecurities twith ta tlife tof tmore tthan tone tyear.
1-11 What tis tthe tdifference tbetween ta tprimary tand ta tsecondary tmarket?
