SOLUTION MANUAL
Foundations of Financial Management, 18th Edition
by Stanley Block, Geoffrey Hirt, Chapters 1 – 21, Complete
,
, 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 ba bgroup, bthey bhave bthe bability bto bvote blarge
bblocks bof b shares bfor bthe belection bof ba bboard bof bdirectors, bwhich bis bsupposed bto
brun bthe bcompany bin ban b efficient, bcompetitive bmanner. bThe bthreat bof bbeing bable bto
breplace bpoor bperforming bboards bof b directors bmakes binstitutional binvestors bquite
binfluential. bSince bthese binstitutions, blike bpension b funds band bmutual bfunds, brepresent
bindividual bworkers band binvestors, bthey bhave ba bresponsibility b to bsee bthat bthe bfirm bis
bmanaged bin ban befficient band bethical bway.
1-8 Why bis bprofit bmaximization, bby bitself, ban binappropriate bgoal? bWhat bis bmeant bby
bthe bgoal bof b maximization bof bshareholder bwealth?
The bproblem bwith ba bprofit bmaximization bgoal bis bthat bit bfails bto btake baccount bof
brisk, bthe b timing bof bthe bbenefits bis bnot bconsidered, band bprofit bmeasurement bis ba
bvery binexact bprocess. b The bgoal bof bshareholders’ bwealth bmaximization b implies
bthat bthe bfirm b will battempt bto b achieve b the bhighest bpossible btotal bvaluation bin bthe
bmarketplace. bIt bis bthe bone boverriding bobjective bof b the bfirm band bshould binfluence
bevery bdecision.
1-9 When bdoes binsider btrading boccur? bWhat bgovernment bagency bis bresponsible bfor
bprotecting b against bthe bunethical bpractice bof binsider btrading?
Insider btrading boccurs bwhen banyone bwith bnon-public binformation bbuys bor bsells
bsecurities bto b take badvantage bof bthat bprivate binformation. bThe bSecurities band
bExchange bCommission bis b responsible bfor bprotecting bmarkets bagainst binsider btrading.
bIn bthe bpast, bpeople bhave bgone bto b jail bfor btrading bon bnon-public binformation. bThis
bhas bincluded b company bofficers, binvestment b bankers, bprinters bwho bhave binformation
bbefore bit bis bpublished, band beven btruck bdrivers bwho b deliver bbusiness bmagazines
band bread bpositive bor bnegative barticles babout ba bcompany bbefore bthe b magazine
bis bon bthe bnewsstands band bthen bplace b trades bor bhave bfriends bplace btrades bbased
bon b that binformation. bThe bSEC bhas bprosecuted banyone bwho bprofits bfrom binside
binformation.
1-10 In bterms bof bthe blife bof bthe bsecurities boffered, bwhat bis bthe bdifference bbetween
bmoney band b capital bmarkets?
Money bmarkets brefer bto bthose bmarkets bdealing bwith bshort-term bsecurities bthat
bhave ba blife bof b one byear bor bless. bCapital bmarkets brefer bto bsecurities bwith ba
blife bof bmore bthan bone byear.
1-11 What bis bthe bdifference bbetween ba bprimary band ba bsecondary bmarket?
Foundations of Financial Management, 18th Edition
by Stanley Block, Geoffrey Hirt, Chapters 1 – 21, Complete
,
, 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 ba bgroup, bthey bhave bthe bability bto bvote blarge
bblocks bof b shares bfor bthe belection bof ba bboard bof bdirectors, bwhich bis bsupposed bto
brun bthe bcompany bin ban b efficient, bcompetitive bmanner. bThe bthreat bof bbeing bable bto
breplace bpoor bperforming bboards bof b directors bmakes binstitutional binvestors bquite
binfluential. bSince bthese binstitutions, blike bpension b funds band bmutual bfunds, brepresent
bindividual bworkers band binvestors, bthey bhave ba bresponsibility b to bsee bthat bthe bfirm bis
bmanaged bin ban befficient band bethical bway.
1-8 Why bis bprofit bmaximization, bby bitself, ban binappropriate bgoal? bWhat bis bmeant bby
bthe bgoal bof b maximization bof bshareholder bwealth?
The bproblem bwith ba bprofit bmaximization bgoal bis bthat bit bfails bto btake baccount bof
brisk, bthe b timing bof bthe bbenefits bis bnot bconsidered, band bprofit bmeasurement bis ba
bvery binexact bprocess. b The bgoal bof bshareholders’ bwealth bmaximization b implies
bthat bthe bfirm b will battempt bto b achieve b the bhighest bpossible btotal bvaluation bin bthe
bmarketplace. bIt bis bthe bone boverriding bobjective bof b the bfirm band bshould binfluence
bevery bdecision.
1-9 When bdoes binsider btrading boccur? bWhat bgovernment bagency bis bresponsible bfor
bprotecting b against bthe bunethical bpractice bof binsider btrading?
Insider btrading boccurs bwhen banyone bwith bnon-public binformation bbuys bor bsells
bsecurities bto b take badvantage bof bthat bprivate binformation. bThe bSecurities band
bExchange bCommission bis b responsible bfor bprotecting bmarkets bagainst binsider btrading.
bIn bthe bpast, bpeople bhave bgone bto b jail bfor btrading bon bnon-public binformation. bThis
bhas bincluded b company bofficers, binvestment b bankers, bprinters bwho bhave binformation
bbefore bit bis bpublished, band beven btruck bdrivers bwho b deliver bbusiness bmagazines
band bread bpositive bor bnegative barticles babout ba bcompany bbefore bthe b magazine
bis bon bthe bnewsstands band bthen bplace b trades bor bhave bfriends bplace btrades bbased
bon b that binformation. bThe bSEC bhas bprosecuted banyone bwho bprofits bfrom binside
binformation.
1-10 In bterms bof bthe blife bof bthe bsecurities boffered, bwhat bis bthe bdifference bbetween
bmoney band b capital bmarkets?
Money bmarkets brefer bto bthose bmarkets bdealing bwith bshort-term bsecurities bthat
bhave ba blife bof b one byear bor bless. bCapital bmarkets brefer bto bsecurities bwith ba
blife bof bmore bthan bone byear.
1-11 What bis bthe bdifference bbetween ba bprimary band ba bsecondary bmarket?
