SOLUTION MANUAL FOR g g
Foundations of Financial Management, 18th Edition by Stanley Block, Geo
g g g g g g g g g
ffrey Hirt, Bartley Danielsen
g g g
Chapter 1-21 g
Chapter 1 g
The Goals and Functions of Financial Management
g g g g g g
Discussion Questions
g
1-1 Whatgeffectgdidgthegrecessiongofg2007-2009ghavegonggovernmentgregulation?
Itgwasggreatlygincreased.
1-2 Whatgadvantagesgdoesgagsolegproprietorshipgoffer?gWhatgisgagmajorgdrawbackgofgthisgtypego
fgorganization?
Agsolegproprietorshipgoffersgthegadvantagegofgsimplicitygofgdecisiongmakinggandglowgorgani
zationalgandgoperatinggcosts.gAgmajorgdrawbackgisgthatgtheregisgunlimitedgliabilitygtogthegow
ner.
1-3 Whatgformgofgpartnershipgallowsgsomegofgtheginvestorsgtoglimitgtheirgliability?gExplaingb
riefly.
Aglimitedgpartnershipgallowsgsomegofgthegpartnersgtoglimitgtheirgliability.gUndergthisgarrange
ment,gonegorgmoregpartnersgaregdesignatedggeneralgpartnersgandghavegunlimitedgliabilitygforg
thegdebtsgofgthegfirm;gothergpartnersgaregdesignatedglimitedgpartnersgandgaregliablegonlygforgt
heirginitialgcontribution.gTheglimitedgpartnersgaregnormallygprohibitedgfromgbeinggactivegingt
hegmanagementgofgthegfirm.
1-4 Ingagcorporation,gwhatggroupghasgthegultimategresponsibilitygforgprotectinggandgmanaginggt
hegstockholders’ginterests?
Thegboardgofgdirectors.
1-5 Whatgdocumentgisgnecessarygtogformgagcorporation?
Thegarticlesgofgincorporation.
1-6 Whatgissuegdoesgagencygtheorygexamine?gWhygisgitgimportantgingagpublicgcorporationgr
athergthangingagprivategcorporation?
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHillgLL
C.
, Agencygtheorygexaminesgthegrelationshipgbetweengthegownersgofgthegfirmgandgthegmanagers
gofgthegfirm.gIngprivatelygownedgfirms,gmanagement gandgthegownersgaregusuallygthegsamegpe
ople.gManagementgoperatesgthegfirmgtogsatisfygitsgownggoals,gneeds,gfinancialgrequirementsg
andgtheglike.gAsgagcompanygmovesgfromgprivategtogpublicgownership,gmanagementgnowgrep
resentsgallgowners.gThisgplacesgmanagementgingthegagencygpositiongofgmakinggdecisionsgingt
hegbestginterestgofgallgshareholders.
1-7 Whatgareginstitutionalginvestorsgimportantgingtoday’sgbusinessgworld?
Becauseginstitutionalginvestorsgsuchgasgpensiongfundsgandgmutualgfundsgowngaglargegpercenta
gegofgmajorgU.S.gcompanies,gtheygareghavinggmoregtogsaygaboutgthegwaygpubliclygownedgcom
paniesgaregmanaged.gAsgaggroup,gtheyghavegthegabilitygtogvoteglargegblocksgofgsharesgforgthegel
ectiongofgagboardgofgdirectors,gwhichgisgsupposedgtogrungthegcompanygingangefficient,gcompetit
ivegmanner.gThegthreatgofgbeinggablegtogreplacegpoorgperforminggboardsgofgdirectorsgmakesgin
stitutionalginvestorsgquiteginfluential.gSincegtheseginstitutions,glikegpensiongfundsgandgmutualg
funds,grepresentgindividualgworkersgandginvestors,gtheyghavegagresponsibilitygtogseegthatgthegf
irmgisgmanagedgingangefficientgandgethicalgway.
1-8 Whygisgprofitgmaximization,gbygitself,ganginappropriateggoal?gWhatgisgmeantgbygtheggoalgo
fgmaximizationgofgshareholdergwealth?
Thegproblemgwithgagprofitgmaximizationggoalgisgthatgitgfailsgtogtakegaccountgofgrisk,gthegtimi
nggofgthegbenefitsgisgnotgconsidered,gandgprofitgmeasurementgisgagveryginexactgprocess.gThegg
oalgofgshareholders’gwealthgmaximizationgimpliesgthatgthegfirmgwillgattemptgtogachievegtheg
highestgpossiblegtotalgvaluationgingthegmarketplace.gItgisgthegonegoverridinggobjectivegofgtheg
firmgandgshouldginfluencegeverygdecision.
1-9 Whengdoesginsidergtradinggoccur?gWhatggovernmentgagencygisgresponsiblegforgprotectingg
againstgthegunethicalgpracticegofginsidergtrading?
Insidergtradinggoccursgwhenganyonegwithgnon-
publicginformationgbuysgorgsellsgsecuritiesgtogtakegadvantagegofgthatgprivateginformation.gT
hegSecuritiesgandgExchangegCommissiongisgresponsiblegforgprotectinggmarketsgagainstginsi
dergtrading.gIngthegpast,gpeopleghaveggonegtogjailgforgtradinggongnon-
publicginformation.gThisghasgincludedgcompanygofficers,ginvestmentgbankers,gprintersgwhog
haveginformationgbeforegitgisgpublished,gandgevengtruckgdriversgwhogdelivergbusinessgmaga
zinesgandgreadgpositivegorgnegativegarticlesgaboutgagcompanygbeforegthegmagazinegisgongtheg
newsstandsgandgthengplacegtradesgorghavegfriendsgplacegtradesgbasedgongthatginformation.gT
hegSECghasgprosecutedganyonegwhogprofitsgfromginsideginformation.
1-10 Ingtermsgofgtheglifegofgthegsecuritiesgoffered,gwhatgisgthegdifferencegbetweengmoneygandgc
apitalgmarkets?
Moneygmarketsgrefergtogthosegmarketsgdealinggwithgshort-
termgsecuritiesgthatghavegaglifegofgoneg yeargorgless.gCapitalgmarketsgrefergtogsecuritiesgwithg
aglifegofgmoregthangonegyear.
1-11 Whatgisgthegdifferencegbetweengagprimarygandgagsecondarygmarket?
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHillgLL
C.
, Agprimarygmarketgrefersgtogthegusegofgthegfinancialgmarketsgtograisegnewgfundsgforgthegcorpo
ration.gAftergthegsecuritiesgaregsoldgtogthegpublicg(institutionsgandgindividuals),gtheygtradeging
thegsecondarygmarketgbetweenginvestors.gItgisgingthegsecondarygmarketgthatgpricesgaregcontin
uallygchanginggasginvestorsgbuygandgsellgsecuritiesgbasedgongthegexpectationsgofgcorporategpr
ospects.
1-12 Assumegyougareglookinggatgmanygcompaniesgwithgequalgrisk.gWhichgonesgwillghavegthegh
ighestgstockgprices?
Givengcompaniesgwithgequalgrisk,gthosegcompaniesgwithgexpectationsgofghighgreturngwillg
haveghighergcommongstockgpricesgrelativegtogthosegcompaniesgwithgexpectationsgofgpoorgr
eturns.
1-13 Howgisgthegtimegvaluegofgmoneygconceptgrelatedgtogthegvaluationgofgstocks?
Thegvaluegofganginvestmentgthatgisgexpectedgtogearngmoneygingthegfuturegcangbegcalculatedgu
singgtime-
valuegofgmoneygprinciples.gCorporationsgaregexpectedgtogpaygdividendsgtogtheirgshareholder
s.gThegcurrentgvaluegofgthesegfuturegdividendsgisgthegpresentgvalue.gThegpresentgvaluegofgagst
ock’sgfuturegdividendsgshouldgbegthegsamegasgthegstock’sgcurrentgprice.
Chapter 2 g
Review of Accounting
g g
Discussion Questions
g
2-1. Discussgsomegfinancialgvariablesgthatgaffectgthegprice-earningsgratio.
Thegprice-
earningsgratiogwillgbeginfluencedgbygthegearningsgandgsalesggrowthgofgthegfirm,gthegriskg
orgvolatilitygingperformance,gthegdebt-
equitygstructuregofgthegfirm,gthegdividendgpaymentgpolicy,gthegqualitygofgmanagement,g
andgagnumbergofgothergfactors.gThegratiogtendsgtogbegfuture-
oriented,gandgthegmoregpositivegthegoutlook,gtheghighergitgwillgbe.
2-2. Whatgisgthegdifferencegbetweengbookgvaluegpergsharegofgcommongstockgandgmarketgval
uegpergshare?gWhygdoesgthisgdisparitygoccur?
Bookgvaluegpergsharegisgarrivedgatgbygtakinggthegcostgofgthegassetsgandgsubtractinggoutgli
abilitiesgandgpreferredgstockgandgdividinggbygthegnumbergofgcommongshares
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHillgLL
C.
, outstanding.gItgisgbasedgongtheghistoricalgcostgofgthegassets.gMarketgvaluegpergsharegis
basedgongthegcurrentgassessedgvaluegofgthegfirmgingthegmarketplacegandgmaygbearglittlegr
elationshipgtogoriginalgcost.gBesidesgthegdisparitygbetweengbookgandgmarketgvaluegcaus
edgbygtheghistoricalgcostgapproach,gothergcontributinggfactorsgaregtheggrowthgprospectsg
forgthegfirm,gthegqualitygofgmanagement,gandgthegindustrygoutlook.gTogthegextentgtheseg
aregquitegnegativegorgpositive;gmarketgvaluegmaygdiffergwidelygfromgbookgvalue.
2-3. Explainghowgdepreciationggeneratesgactualgcashgflowsgforgthegcompany.
Thegonlygwaygdepreciationggeneratesgcashgflowsgforgthegcompanygisgbygservinggasgagtaxg
shieldgagainstgreportedgincome.gThisgnon-
cashgdeductiongmaygprovidegcashgflowgequalgtogthegtaxgrategtimesgthegdepreciationgcha
rged.gThisgmuchgingtaxesgwillgbegsaved,gwhilegnogcashgpaymentsgoccur.
2-4. Whatgisgthegdifferencegbetweengaccumulatedgdepreciationgandgdepreciationgexpense?g
Howgaregtheygrelated?
Accumulatedgdepreciationgisgthegsumgofgallgpastgandgpresentgdepreciationgcharges,gwhil
egdepreciationgexpensegisgthegcurrentgyear’sgcharge.gTheygaregrelatedgingthatgthegsumgofg
allgpriorgdepreciationgexpensegshouldgbegequalgtogaccumulatedgdepreciationg(subjectgtog
somegdifferentialgrelatedgtogasset
write-offs).
2-5. Howgisgthegincomegstatementgrelatedgtogthegbalancegsheet?
Thegearningsg(lessgdividends)greportedgingthegincomegstatementgisgtransferredgtogtheg
ownershipgsectiongofgthegbalancegsheetgasgretainedgearnings.gThus,gwhatgwegearnging
thegincomegstatementgbecomesgpartgofgthegownershipginterestgingthegbalancegsheet.
2-6. Commentgongwhyginflationgmaygrestrictgthegusefulnessgofgthegbalancegsheetgasgnormall
ygpresented.
Thegbalancegsheetgisgbasedgonghistoricalgcosts.gWhengpricesgaregrisinggrapidly,ghistoricalg
costgdatagmayglosegmuchgofgtheirgmeaning—particularlygforgplantgandgequipmentgand
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHillgLL
C.
Foundations of Financial Management, 18th Edition by Stanley Block, Geo
g g g g g g g g g
ffrey Hirt, Bartley Danielsen
g g g
Chapter 1-21 g
Chapter 1 g
The Goals and Functions of Financial Management
g g g g g g
Discussion Questions
g
1-1 Whatgeffectgdidgthegrecessiongofg2007-2009ghavegonggovernmentgregulation?
Itgwasggreatlygincreased.
1-2 Whatgadvantagesgdoesgagsolegproprietorshipgoffer?gWhatgisgagmajorgdrawbackgofgthisgtypego
fgorganization?
Agsolegproprietorshipgoffersgthegadvantagegofgsimplicitygofgdecisiongmakinggandglowgorgani
zationalgandgoperatinggcosts.gAgmajorgdrawbackgisgthatgtheregisgunlimitedgliabilitygtogthegow
ner.
1-3 Whatgformgofgpartnershipgallowsgsomegofgtheginvestorsgtoglimitgtheirgliability?gExplaingb
riefly.
Aglimitedgpartnershipgallowsgsomegofgthegpartnersgtoglimitgtheirgliability.gUndergthisgarrange
ment,gonegorgmoregpartnersgaregdesignatedggeneralgpartnersgandghavegunlimitedgliabilitygforg
thegdebtsgofgthegfirm;gothergpartnersgaregdesignatedglimitedgpartnersgandgaregliablegonlygforgt
heirginitialgcontribution.gTheglimitedgpartnersgaregnormallygprohibitedgfromgbeinggactivegingt
hegmanagementgofgthegfirm.
1-4 Ingagcorporation,gwhatggroupghasgthegultimategresponsibilitygforgprotectinggandgmanaginggt
hegstockholders’ginterests?
Thegboardgofgdirectors.
1-5 Whatgdocumentgisgnecessarygtogformgagcorporation?
Thegarticlesgofgincorporation.
1-6 Whatgissuegdoesgagencygtheorygexamine?gWhygisgitgimportantgingagpublicgcorporationgr
athergthangingagprivategcorporation?
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHillgLL
C.
, Agencygtheorygexaminesgthegrelationshipgbetweengthegownersgofgthegfirmgandgthegmanagers
gofgthegfirm.gIngprivatelygownedgfirms,gmanagement gandgthegownersgaregusuallygthegsamegpe
ople.gManagementgoperatesgthegfirmgtogsatisfygitsgownggoals,gneeds,gfinancialgrequirementsg
andgtheglike.gAsgagcompanygmovesgfromgprivategtogpublicgownership,gmanagementgnowgrep
resentsgallgowners.gThisgplacesgmanagementgingthegagencygpositiongofgmakinggdecisionsgingt
hegbestginterestgofgallgshareholders.
1-7 Whatgareginstitutionalginvestorsgimportantgingtoday’sgbusinessgworld?
Becauseginstitutionalginvestorsgsuchgasgpensiongfundsgandgmutualgfundsgowngaglargegpercenta
gegofgmajorgU.S.gcompanies,gtheygareghavinggmoregtogsaygaboutgthegwaygpubliclygownedgcom
paniesgaregmanaged.gAsgaggroup,gtheyghavegthegabilitygtogvoteglargegblocksgofgsharesgforgthegel
ectiongofgagboardgofgdirectors,gwhichgisgsupposedgtogrungthegcompanygingangefficient,gcompetit
ivegmanner.gThegthreatgofgbeinggablegtogreplacegpoorgperforminggboardsgofgdirectorsgmakesgin
stitutionalginvestorsgquiteginfluential.gSincegtheseginstitutions,glikegpensiongfundsgandgmutualg
funds,grepresentgindividualgworkersgandginvestors,gtheyghavegagresponsibilitygtogseegthatgthegf
irmgisgmanagedgingangefficientgandgethicalgway.
1-8 Whygisgprofitgmaximization,gbygitself,ganginappropriateggoal?gWhatgisgmeantgbygtheggoalgo
fgmaximizationgofgshareholdergwealth?
Thegproblemgwithgagprofitgmaximizationggoalgisgthatgitgfailsgtogtakegaccountgofgrisk,gthegtimi
nggofgthegbenefitsgisgnotgconsidered,gandgprofitgmeasurementgisgagveryginexactgprocess.gThegg
oalgofgshareholders’gwealthgmaximizationgimpliesgthatgthegfirmgwillgattemptgtogachievegtheg
highestgpossiblegtotalgvaluationgingthegmarketplace.gItgisgthegonegoverridinggobjectivegofgtheg
firmgandgshouldginfluencegeverygdecision.
1-9 Whengdoesginsidergtradinggoccur?gWhatggovernmentgagencygisgresponsiblegforgprotectingg
againstgthegunethicalgpracticegofginsidergtrading?
Insidergtradinggoccursgwhenganyonegwithgnon-
publicginformationgbuysgorgsellsgsecuritiesgtogtakegadvantagegofgthatgprivateginformation.gT
hegSecuritiesgandgExchangegCommissiongisgresponsiblegforgprotectinggmarketsgagainstginsi
dergtrading.gIngthegpast,gpeopleghaveggonegtogjailgforgtradinggongnon-
publicginformation.gThisghasgincludedgcompanygofficers,ginvestmentgbankers,gprintersgwhog
haveginformationgbeforegitgisgpublished,gandgevengtruckgdriversgwhogdelivergbusinessgmaga
zinesgandgreadgpositivegorgnegativegarticlesgaboutgagcompanygbeforegthegmagazinegisgongtheg
newsstandsgandgthengplacegtradesgorghavegfriendsgplacegtradesgbasedgongthatginformation.gT
hegSECghasgprosecutedganyonegwhogprofitsgfromginsideginformation.
1-10 Ingtermsgofgtheglifegofgthegsecuritiesgoffered,gwhatgisgthegdifferencegbetweengmoneygandgc
apitalgmarkets?
Moneygmarketsgrefergtogthosegmarketsgdealinggwithgshort-
termgsecuritiesgthatghavegaglifegofgoneg yeargorgless.gCapitalgmarketsgrefergtogsecuritiesgwithg
aglifegofgmoregthangonegyear.
1-11 Whatgisgthegdifferencegbetweengagprimarygandgagsecondarygmarket?
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHillgLL
C.
, Agprimarygmarketgrefersgtogthegusegofgthegfinancialgmarketsgtograisegnewgfundsgforgthegcorpo
ration.gAftergthegsecuritiesgaregsoldgtogthegpublicg(institutionsgandgindividuals),gtheygtradeging
thegsecondarygmarketgbetweenginvestors.gItgisgingthegsecondarygmarketgthatgpricesgaregcontin
uallygchanginggasginvestorsgbuygandgsellgsecuritiesgbasedgongthegexpectationsgofgcorporategpr
ospects.
1-12 Assumegyougareglookinggatgmanygcompaniesgwithgequalgrisk.gWhichgonesgwillghavegthegh
ighestgstockgprices?
Givengcompaniesgwithgequalgrisk,gthosegcompaniesgwithgexpectationsgofghighgreturngwillg
haveghighergcommongstockgpricesgrelativegtogthosegcompaniesgwithgexpectationsgofgpoorgr
eturns.
1-13 Howgisgthegtimegvaluegofgmoneygconceptgrelatedgtogthegvaluationgofgstocks?
Thegvaluegofganginvestmentgthatgisgexpectedgtogearngmoneygingthegfuturegcangbegcalculatedgu
singgtime-
valuegofgmoneygprinciples.gCorporationsgaregexpectedgtogpaygdividendsgtogtheirgshareholder
s.gThegcurrentgvaluegofgthesegfuturegdividendsgisgthegpresentgvalue.gThegpresentgvaluegofgagst
ock’sgfuturegdividendsgshouldgbegthegsamegasgthegstock’sgcurrentgprice.
Chapter 2 g
Review of Accounting
g g
Discussion Questions
g
2-1. Discussgsomegfinancialgvariablesgthatgaffectgthegprice-earningsgratio.
Thegprice-
earningsgratiogwillgbeginfluencedgbygthegearningsgandgsalesggrowthgofgthegfirm,gthegriskg
orgvolatilitygingperformance,gthegdebt-
equitygstructuregofgthegfirm,gthegdividendgpaymentgpolicy,gthegqualitygofgmanagement,g
andgagnumbergofgothergfactors.gThegratiogtendsgtogbegfuture-
oriented,gandgthegmoregpositivegthegoutlook,gtheghighergitgwillgbe.
2-2. Whatgisgthegdifferencegbetweengbookgvaluegpergsharegofgcommongstockgandgmarketgval
uegpergshare?gWhygdoesgthisgdisparitygoccur?
Bookgvaluegpergsharegisgarrivedgatgbygtakinggthegcostgofgthegassetsgandgsubtractinggoutgli
abilitiesgandgpreferredgstockgandgdividinggbygthegnumbergofgcommongshares
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHillgLL
C.
, outstanding.gItgisgbasedgongtheghistoricalgcostgofgthegassets.gMarketgvaluegpergsharegis
basedgongthegcurrentgassessedgvaluegofgthegfirmgingthegmarketplacegandgmaygbearglittlegr
elationshipgtogoriginalgcost.gBesidesgthegdisparitygbetweengbookgandgmarketgvaluegcaus
edgbygtheghistoricalgcostgapproach,gothergcontributinggfactorsgaregtheggrowthgprospectsg
forgthegfirm,gthegqualitygofgmanagement,gandgthegindustrygoutlook.gTogthegextentgtheseg
aregquitegnegativegorgpositive;gmarketgvaluegmaygdiffergwidelygfromgbookgvalue.
2-3. Explainghowgdepreciationggeneratesgactualgcashgflowsgforgthegcompany.
Thegonlygwaygdepreciationggeneratesgcashgflowsgforgthegcompanygisgbygservinggasgagtaxg
shieldgagainstgreportedgincome.gThisgnon-
cashgdeductiongmaygprovidegcashgflowgequalgtogthegtaxgrategtimesgthegdepreciationgcha
rged.gThisgmuchgingtaxesgwillgbegsaved,gwhilegnogcashgpaymentsgoccur.
2-4. Whatgisgthegdifferencegbetweengaccumulatedgdepreciationgandgdepreciationgexpense?g
Howgaregtheygrelated?
Accumulatedgdepreciationgisgthegsumgofgallgpastgandgpresentgdepreciationgcharges,gwhil
egdepreciationgexpensegisgthegcurrentgyear’sgcharge.gTheygaregrelatedgingthatgthegsumgofg
allgpriorgdepreciationgexpensegshouldgbegequalgtogaccumulatedgdepreciationg(subjectgtog
somegdifferentialgrelatedgtogasset
write-offs).
2-5. Howgisgthegincomegstatementgrelatedgtogthegbalancegsheet?
Thegearningsg(lessgdividends)greportedgingthegincomegstatementgisgtransferredgtogtheg
ownershipgsectiongofgthegbalancegsheetgasgretainedgearnings.gThus,gwhatgwegearnging
thegincomegstatementgbecomesgpartgofgthegownershipginterestgingthegbalancegsheet.
2-6. Commentgongwhyginflationgmaygrestrictgthegusefulnessgofgthegbalancegsheetgasgnormall
ygpresented.
Thegbalancegsheetgisgbasedgonghistoricalgcosts.gWhengpricesgaregrisinggrapidly,ghistoricalg
costgdatagmayglosegmuchgofgtheirgmeaning—particularlygforgplantgandgequipmentgand
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHillgLL
C.
