SOLUTION MANUAL
Foundations of Financial Management, 18th Edition
by Stanley Block, Geoffrey Hirt, Chapters 1 – 21, Complete
,
, Chapterbe 1
Thebe Goalsbe andbe Functionsbe ofbe Financialbe
Management
DiscussionbeQuestions
1-1 Whatbe effectbe didbe thebe recessionbe ofbe 2007-2009be havebe onbe governmentbe
regulation?
Itbe wasbe greatlybe increased.
1-2 Whatbe advantagesbe doesbe abe solebe proprietorshipbe offer?be Whatbe isbe abe
majorbe drawbackbe ofbe thisbe typebe ofb e organization?
Abe solebe proprietorshipbe offersbe thebe advantagebe ofbe simplicitybe ofbe
decisionbe makingbe andbe lowb e organizationalbe andbe operatingbe costs.be Abe
majorbe drawbackbe isbe thatbe therebe isbe unlimitedbe liabilitybe tobe theb e owner.
1-3 Whatbe formbe ofbe partnershipbe allowsbe somebe ofbe thebe investorsbe tobe
limitbe theirbe liability?be Explainb e briefly.
Abe limitedbe partnershipbe allowsbe somebe ofbe thebe partnersbe tobe limitbe theirbe
liability.be Underbe thisb e arrangement,be onebe orbe morebe partnersbe arebe
designatedbe generalbe partnersbe andbe havebe unlimitedb e liabilitybe forbe thebe
debtsbe ofbe thebe firm;be otherbe partnersbe arebe designatedbe limitedbe partnersbe
andbe arebe liableb e onlybe forbe theirbe initialbe contribution.be Thebe limitedbe
partnersbe arebe normallybe prohibitedbe frombe beingb e activebe inbe thebe
managementbe ofbe thebe firm.
1-4 Inbe abe corporation,be whatbe groupbe hasbe thebe ultimatebe responsibilitybe forbe
protectingbe andbe managing
thebe stockholders’be interests?
Thebe boardbe ofbe directors.
1-5 Whatbe documentbe isbe necessarybe tobe formbe abe corporation?
Thebe articlesbe ofbe incorporation.
1-6 Whatbe issuebe doesbe agencybe theorybe examine?be Whybe isbe itbe
importantbe inbe abe publicbe corporationb e ratherbe thanbe inbe abe
privatebe corporation?
, Agencybe theorybe examinesbe thebe relationshipbe betweenbe thebe ownersbe ofbe
thebe firmbe andbe thebe managersb e ofbe thebe firm.be Inbe privatelybe ownedbe
firms,be managementbe andbe thebe ownersbe arebe usuallybe thebe sameb e
people.be Managementbe operatesbe thebe firmbe tobe satisfybe itsbe ownbe goals,be
needs,be financialbe requirementsb e andbe thebe like.be Asbe abe companybe
movesbe frombe privatebe tobe publicbe ownership,be managementbe nowb e
representsbe allbe owners.be Thisbe placesbe managementbe inbe thebe agencybe
positionbe ofbe makingbe decisionsbe inb e thebe bestbe interestbe ofbe allbe
shareholders.
1-7 Whatbe arebe institutionalbe investorsbe importantbe inbe today’sbe businessbe world?
Becausebe institutionalbe investorsbe suchbe asbe pensionbe fundsbe andbe mutualbe
fundsbe ownbe abe largeb e percentagebe ofbe majorbe U.S.be companies,be theybe
arebe havingbe morebe tobe saybe aboutbe thebe waybe publiclyb e ownedbe
companiesbe arebe managed.be Asbe abe group,be theybe havebe thebe abilitybe tobe
votebe largebe blocksbe ofb e sharesbe forbe thebe electionbe ofbe abe boardbe ofbe
directors,be whichbe isbe supposedbe tobe runbe thebe companybe inbe anb e
efficient,be competitivebe manner.be Thebe threatbe ofbe beingbe ablebe tobe
replacebe poorbe performingbe boardsbe ofb e directorsbe makesbe institutionalbe
investorsbe quitebe influential.be Sincebe thesebe institutions,be likebe pensionb e
fundsbe andbe mutualbe funds,be representbe individualbe workersbe andbe investors,be
theybe havebe abe responsibilityb e tobe seebe thatbe thebe firmbe isbe managedbe
inbe anbe efficientbe andbe ethicalbe way.
1-8 Whybe isbe profitbe maximization,be bybe itself,be anbe inappropriatebe goal?be
Whatbe isbe meantbe bybe thebe goalbe ofb e maximizationbe ofbe shareholderbe
wealth?
Thebe problembe withbe abe profitbe maximizationbe goalbe isbe thatbe itbe failsbe
tobe takebe accountbe ofbe risk,be theb e timingbe ofbe thebe benefitsbe isbe notbe
considered,be andbe profitbe measurementbe isbe abe verybe inexactbe process.b e
Thebe goalbe ofbe shareholders’be wealthbe maximizationbe impliesbe thatbe thebe
firmbe willbe attemptbe tobe achieveb e thebe highestbe possiblebe totalbe
valuationbe inbe thebe marketplace.be Itbe isbe thebe onebe overridingbe objectivebe
ofb e thebe firmbe andbe shouldbe influencebe everybe decision.
1-9 Whenbe doesbe insiderbe tradingbe occur?be Whatbe governmentbe agencybe isbe
responsiblebe forbe protectingb e againstbe thebe unethicalbe practicebe ofbe
insiderbe trading?
Insiderbe tradingbe occursbe whenbe anyonebe withbe non-publicbe informationbe
buysbe orbe sellsbe securitiesbe tob e takebe advantagebe ofbe thatbe privatebe
information.be Thebe Securitiesbe andbe Exchangebe Commissionbe isb e responsiblebe
forbe protectingbe marketsbe againstbe insiderbe trading.be Inbe thebe past,be
peoplebe havebe gonebe tob e jailbe forbe tradingbe onbe non-publicbe
information.be Thisbe hasbe includedbe companybe officers,be investmentb e bankers,be
printersbe whobe havebe informationbe beforebe itbe isbe published,be andbe evenbe
truckbe driversbe whob e deliverbe businessbe magazinesbe andbe readbe positivebe
orbe negativebe articlesbe aboutbe abe companybe beforebe theb e magazinebe isbe
onbe thebe newsstandsbe andbe thenbe placebe tradesbe orbe havebe friendsbe
placebe tradesbe basedbe onb e thatbe information.be Thebe SECbe hasbe
prosecutedbe anyonebe whobe profitsbe frombe insidebe information.
Foundations of Financial Management, 18th Edition
by Stanley Block, Geoffrey Hirt, Chapters 1 – 21, Complete
,
, Chapterbe 1
Thebe Goalsbe andbe Functionsbe ofbe Financialbe
Management
DiscussionbeQuestions
1-1 Whatbe effectbe didbe thebe recessionbe ofbe 2007-2009be havebe onbe governmentbe
regulation?
Itbe wasbe greatlybe increased.
1-2 Whatbe advantagesbe doesbe abe solebe proprietorshipbe offer?be Whatbe isbe abe
majorbe drawbackbe ofbe thisbe typebe ofb e organization?
Abe solebe proprietorshipbe offersbe thebe advantagebe ofbe simplicitybe ofbe
decisionbe makingbe andbe lowb e organizationalbe andbe operatingbe costs.be Abe
majorbe drawbackbe isbe thatbe therebe isbe unlimitedbe liabilitybe tobe theb e owner.
1-3 Whatbe formbe ofbe partnershipbe allowsbe somebe ofbe thebe investorsbe tobe
limitbe theirbe liability?be Explainb e briefly.
Abe limitedbe partnershipbe allowsbe somebe ofbe thebe partnersbe tobe limitbe theirbe
liability.be Underbe thisb e arrangement,be onebe orbe morebe partnersbe arebe
designatedbe generalbe partnersbe andbe havebe unlimitedb e liabilitybe forbe thebe
debtsbe ofbe thebe firm;be otherbe partnersbe arebe designatedbe limitedbe partnersbe
andbe arebe liableb e onlybe forbe theirbe initialbe contribution.be Thebe limitedbe
partnersbe arebe normallybe prohibitedbe frombe beingb e activebe inbe thebe
managementbe ofbe thebe firm.
1-4 Inbe abe corporation,be whatbe groupbe hasbe thebe ultimatebe responsibilitybe forbe
protectingbe andbe managing
thebe stockholders’be interests?
Thebe boardbe ofbe directors.
1-5 Whatbe documentbe isbe necessarybe tobe formbe abe corporation?
Thebe articlesbe ofbe incorporation.
1-6 Whatbe issuebe doesbe agencybe theorybe examine?be Whybe isbe itbe
importantbe inbe abe publicbe corporationb e ratherbe thanbe inbe abe
privatebe corporation?
, Agencybe theorybe examinesbe thebe relationshipbe betweenbe thebe ownersbe ofbe
thebe firmbe andbe thebe managersb e ofbe thebe firm.be Inbe privatelybe ownedbe
firms,be managementbe andbe thebe ownersbe arebe usuallybe thebe sameb e
people.be Managementbe operatesbe thebe firmbe tobe satisfybe itsbe ownbe goals,be
needs,be financialbe requirementsb e andbe thebe like.be Asbe abe companybe
movesbe frombe privatebe tobe publicbe ownership,be managementbe nowb e
representsbe allbe owners.be Thisbe placesbe managementbe inbe thebe agencybe
positionbe ofbe makingbe decisionsbe inb e thebe bestbe interestbe ofbe allbe
shareholders.
1-7 Whatbe arebe institutionalbe investorsbe importantbe inbe today’sbe businessbe world?
Becausebe institutionalbe investorsbe suchbe asbe pensionbe fundsbe andbe mutualbe
fundsbe ownbe abe largeb e percentagebe ofbe majorbe U.S.be companies,be theybe
arebe havingbe morebe tobe saybe aboutbe thebe waybe publiclyb e ownedbe
companiesbe arebe managed.be Asbe abe group,be theybe havebe thebe abilitybe tobe
votebe largebe blocksbe ofb e sharesbe forbe thebe electionbe ofbe abe boardbe ofbe
directors,be whichbe isbe supposedbe tobe runbe thebe companybe inbe anb e
efficient,be competitivebe manner.be Thebe threatbe ofbe beingbe ablebe tobe
replacebe poorbe performingbe boardsbe ofb e directorsbe makesbe institutionalbe
investorsbe quitebe influential.be Sincebe thesebe institutions,be likebe pensionb e
fundsbe andbe mutualbe funds,be representbe individualbe workersbe andbe investors,be
theybe havebe abe responsibilityb e tobe seebe thatbe thebe firmbe isbe managedbe
inbe anbe efficientbe andbe ethicalbe way.
1-8 Whybe isbe profitbe maximization,be bybe itself,be anbe inappropriatebe goal?be
Whatbe isbe meantbe bybe thebe goalbe ofb e maximizationbe ofbe shareholderbe
wealth?
Thebe problembe withbe abe profitbe maximizationbe goalbe isbe thatbe itbe failsbe
tobe takebe accountbe ofbe risk,be theb e timingbe ofbe thebe benefitsbe isbe notbe
considered,be andbe profitbe measurementbe isbe abe verybe inexactbe process.b e
Thebe goalbe ofbe shareholders’be wealthbe maximizationbe impliesbe thatbe thebe
firmbe willbe attemptbe tobe achieveb e thebe highestbe possiblebe totalbe
valuationbe inbe thebe marketplace.be Itbe isbe thebe onebe overridingbe objectivebe
ofb e thebe firmbe andbe shouldbe influencebe everybe decision.
1-9 Whenbe doesbe insiderbe tradingbe occur?be Whatbe governmentbe agencybe isbe
responsiblebe forbe protectingb e againstbe thebe unethicalbe practicebe ofbe
insiderbe trading?
Insiderbe tradingbe occursbe whenbe anyonebe withbe non-publicbe informationbe
buysbe orbe sellsbe securitiesbe tob e takebe advantagebe ofbe thatbe privatebe
information.be Thebe Securitiesbe andbe Exchangebe Commissionbe isb e responsiblebe
forbe protectingbe marketsbe againstbe insiderbe trading.be Inbe thebe past,be
peoplebe havebe gonebe tob e jailbe forbe tradingbe onbe non-publicbe
information.be Thisbe hasbe includedbe companybe officers,be investmentb e bankers,be
printersbe whobe havebe informationbe beforebe itbe isbe published,be andbe evenbe
truckbe driversbe whob e deliverbe businessbe magazinesbe andbe readbe positivebe
orbe negativebe articlesbe aboutbe abe companybe beforebe theb e magazinebe isbe
onbe thebe newsstandsbe andbe thenbe placebe tradesbe orbe havebe friendsbe
placebe tradesbe basedbe onb e thatbe information.be Thebe SECbe hasbe
prosecutedbe anyonebe whobe profitsbe frombe insidebe information.
