Foundations of Financial Management, 18th Edition SOLUTION MANUAL by Stanley Block, Geoffrey Hirt, Verified Chapters 1 - 21, |Newest edition 2025/26

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Foundations of FinancialManagement, 18th Edition
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byStanleyBlock,GeoffreyHirt,Chapters 1 –21,Complete
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,
, Chapter 1 go




The Goals and Functions of Financial Management
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DiscussionQuestions o
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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. g o




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
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unlimited liability for the debts of the firm; other partners are designated limited
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partners and are liable only for their initial contribution. The limited partners are
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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
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the stockholders’ interests?
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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? g o go go go go go

, 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 and
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investors, they have a responsibility to see that the firm is managed in an efficient and
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ethical way. go




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, the
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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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to take advantage of that private information. The Securities and Exchange
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Commission is responsible for protecting markets against insider trading. In the past,
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people have gone to jail for trading on non-public information. This has included
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company officers, investment bankers, printers who have information before it is
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published, and even truck drivers who deliver business magazines and read positive
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or negative articles about a company before the magazine is on the newsstands and
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then place trades or have friends place trades based on that information. The SEC
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has prosecuted anyone who 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
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life of one year or less. Capital markets refer to securities with a life of more than
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one year. go




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