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