SOLUTION MANUAL For Foundations of Financial Management, 18th Edition by Stanley Block, Geoffrey Hirt, Verified Chapters 1 - 21, Complete Newest Version

SOLUTION MANUAL for Foundations of Financial Management,

18th Edition by Stanley Block, Geoffrey Hirt,
Chapters 1 – 21, Complete

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The Goals and Functions of Financial Management
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Discussion Questions ug




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 organiza
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tion?

A sole proprietorship offers the advantage of simplicity of decision making and low organizational a
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nd operating costs. A major drawback is that there is unlimited liability to the owner.
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1-3 What form of partnership allows some of the investors to limit their liability? Explain briefly.
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A limited partnership allows some of the partners to limit their liability. Under this arrangement, o
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ne or more partners are designated general partners and have unlimited liability for the debts of the
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firm; other partners are designated limited partners and are liable only for their initial contribution.
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The limited partners are normally prohibited 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 managing the stockh
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olders’ interests? ug




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 corporation rather tha
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n in a private corporation?
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, Agency theory examines the relationship between the owners of the firm and the managers of the fi
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rm. In privately owned firms, management and the owners are usually the same people. Managemen
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t operates the firm to satisfy its own goals, needs, financial requirements and the like. As a company
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moves from private to public ownership, management now represents all owners. This places mana
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gement in the 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 percentage of maj
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or U.S. companies, they are having more to say about the way publicly owned companies are manage
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d. As a group, they have the ability to vote large blocks of shares for the election of a board of directo
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rs, which is supposed to run the company in an efficient, competitive manner. The threat of being abl
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e to replace 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 and investors, t
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hey have a responsibility to see that the firm is managed in an efficient and ethical way.
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1-8 Why is profit maximization, by itself, an inappropriate goal? What is meant by the goal of maximi
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zation of shareholder wealth? ug ug ug




The problem with a profit maximization goal is that it fails to take account of risk, the timing of the
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benefits is not considered, and profit measurement is a very inexact process. The goal of shareholder
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s’ wealth maximization implies that the firm will attempt to achieve the highest possible total valuat
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ion in the marketplace. It is the one overriding objective of the firm and should influence every deci
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sion.

1-9 When does insider trading occur? What government agency is responsible for protecting against th
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e unethical practice of insider trading?
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Insider trading occurs when anyone with non-
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public information buys or sells securities to take advantage of that private information. The Securit
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ies and Exchange Commission is responsible for protecting markets against insider trading. In the pa
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st, people have gone to jail for trading on non-
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public information. This has included company officers, investment bankers, printers who have info
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rmation before it is published, and even truck drivers who deliver business magazines and read posi
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tive or negative articles about a company before the magazine is on the newsstands and then place tr
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ades or have friends place trades based on that information. The SEC has prosecuted anyone who pr
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ofits from inside information.
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1-10 In terms of the life of the securities offered, what is the difference between money and capital ma
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rkets?

Money markets refer to those markets dealing with short-
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term securities that have a life of one year or less. Capital markets refer to securities with a life of
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more than one year. ug ug ug




1-11 What is the difference between a primary and a secondary market?
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