Solution manual for foundations of financial management 18th edition by stanley block

SOLUTION MANUAL for Foundations of Financial Management,
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18th Edition by Stanley Block, Geoffrey Hirt,
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Chapters 1 – 21, Complete
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,
, Chapter1 n




The Goals and Functions of Financial Management
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Discussion Questions n




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 organization?
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A sole proprietorship offers the advantage of simplicity of decision making and low organizational and
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operating costs. A major drawback is that there is unlimited liabilityto 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, one or
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more partners are designated general partners and have unlimited liability for the debts of the firm;
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other partners are designated limited partners and are liable only for their initial contribution. The
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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
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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 corporation rather than in a
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private corporation?
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, Agency theory examines the relationship between the owners of the firm and the managers of the firm.
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In privately owned firms, management and the owners are usually the same people. Management
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operates the firm to satisfy its own goals, needs, financial requirements and the like. As a company moves
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from private to public ownership, management now represents all owners. This places management in
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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 major
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U.S. companies, they are having more to say about the way publicly owned companies are managed. As a
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group, they have the ability to vote large blocks of shares for the election of a board of directors, which is
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supposed to run the company in an efficient, competitive manner. The threat of being able to replace poor
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performing boards of directors makes institutional investors quite influential. Since these institutions,
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like pension funds and mutual funds, represent individual workers and investors, they have a
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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
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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 timing of the
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benefits is not considered, and profit measurement is a very inexact process. The goal of shareholders’
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wealth maximization implies that the firm will attempt to achieve the highest possible total valuation in
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the marketplace. It is the one 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 protecting against the
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unethical practice of insider trading?
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Insider trading occurs when anyone with non-public information buys or sells securities to take
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advantage of that private information. The Securities and Exchange Commission is responsible for
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protecting markets against insider trading. In the past, people have gone to jail for trading on non-public
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information. This has included company officers, investment bankers, printers who have information
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before it is published, and even truck drivers who deliver business magazines and read positive or
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negative articles about a company before the magazine is on the newsstands and then place trades or
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have friends place trades based on that information. The SEC has prosecuted anyone who profits from
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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
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markets?
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Money markets refer to those markets dealing with short-term securities that have a life of one year or
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less. Capital markets refer to securities with a life of more than one year.
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1-11 What is the difference between a primary and a secondary market?
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