SOLUTION MANUAL FOR . .
Foundations of Financial Management, 18th Edition by Stanley Block, Geoff
. . . . . . . . .
rey Hirt, Bartley Danielsen
. . .
Chapter 1-21.
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.or
ganization?
A.sole.proprietorship.offers.the.advantage.of.simplicity.of.decision.making.and.low.organizati
onal.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.brief
ly.
A.limited.partnership.allows.some.of.the.partners.to.limit.their.liability..Under.this.arrangeme
nt,.one.or.more.partners.are.designated.general.partners.and.have.unlimited.liability.for.the.deb
ts.of.the.firm;.other.partners.are.designated.limited.partners.and.are.liable.only.for.their.initial.c
ontribution..The.limited.partners.are.normally.prohibited.from.being.active.in.the.managemen
t.of.the.firm.
1-4 In.a.corporation,.what.group.has.the.ultimate.responsibility.for.protecting.and.managing.the.s
tockholders’.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.rath
er.than.in.a.private.corporation?
©.McGraw.Hill.LLC..All.rights.reserved..No.reproduction.or.distribution.without.the.prior.written.consent.of.McGraw.Hill.LLC.
, Agency.theory.examines.the.relationship.between.the.owners.of.the.firm.and.the.managers.of.t
he.firm..In.privately.owned.firms,.management.and.the.owners.are.usually.the.same.people..M
anagement.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.own
ers..This.places.management.in.the.agency.position.of.making.decisions.in.the.best.interest.of.a
ll.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.a.group,.they.have.the.ability.to.vote.large.blocks.of.shares.for.the.election.of.a.b
oard.of.directors,.which.is.supposed.to.run.the.company.in.an.efficient,.competitive.manner..The
.threat.of.being.able.to.replace.poor.performing.boards.of.directors.makes.institutional.investors.
quite.influential..Since.these.institutions,.like.pension.funds.and.mutual.funds,.represent.indivi
dual.workers.and.investors,.they.have.a.responsibility.to.see.that.the.firm.is.managed.in.an.effici
ent.and.ethical.way.
1-8 Why.is.profit.maximization,.by.itself,.an.inappropriate.goal?.What.is.meant.by.the.goal.of.m
aximization.of.shareholder.wealth?
The.problem.with.a.profit.maximization.goal.is.that.it.fails.to.take.account.of.risk,.the.timing.of.
the.benefits.is.not.considered,.and.profit.measurement.is.a.very.inexact.process..The.goal.of.sha
reholders’.wealth.maximization.implies.that.the.firm.will.attempt.to.achieve.the.highest.possi
ble.total.valuation.in.the.marketplace..It.is.the.one.overriding.objective.of.the.firm.and.should.i
nfluence.every.decision.
1-9 When.does.insider.trading.occur?.What.government.agency.is.responsible.for.protecting.agai
nst.the.unethical.practice.of.insider.trading?
Insider.trading.occurs.when.anyone.with.non-
public.information.buys.or.sells.securities.to.take.advantage.of.that.private.information..The.S
ecurities.and.Exchange.Commission.is.responsible.for.protecting.markets.against.insider.tradi
ng..In.the.past,.people.have.gone.to.jail.for.trading.on.non-
public.information..This.has.included.company.officers,.investment.bankers,.printers.who.ha
ve.information.before.it.is.published,.and.even.truck.drivers.who.deliver.business.magazines.a
nd.read.positive.or.negative.articles.about.a.company.before.the.magazine.is.on.the.newsstand
s.and.then.place.trades.or.have.friends.place.trades.based.on.that.information..The.SEC.has.pro
secuted.anyone.who.profits.from.inside.information.
1-10 In.terms.of.the.life.of.the.securities.offered,.what.is.the.difference.between.money.and.capit
al.markets?
Money.markets.refer.to.those.markets.dealing.with.short-
term.securities.that.have.a.life.of.one.year.or.less..Capital.markets.refer.to.securities.with.a.life.
of.more.than.one.year.
1-11 What.is.the.difference.between.a.primary.and.a.secondary.market?
©.McGraw.Hill.LLC..All.rights.reserved..No.reproduction.or.distribution.without.the.prior.written.consent.of.McGraw.Hill.LLC.
, A.primary.market.refers.to.the.use.of.the.financial.markets.to.raise.new.funds.for.the.corporatio
n..After.the.securities.are.sold.to.the.public.(institutions.and.individuals),.they.trade.in.the.seco
ndary.market.between.investors..It.is.in.the.secondary.market.that.prices.are.continually.changi
ng.as.investors.buy.and.sell.securities.based.on.the.expectations.of.corporate.prospects.
1-12 Assume.you.are.looking.at.many.companies.with.equal.risk..Which.ones.will.have.the.high
est.stock.prices?
Given.companies.with.equal.risk,.those.companies.with.expectations.of.high.return.will.hav
e.higher.common.stock.prices.relative.to.those.companies.with.expectations.of.poor.returns.
1-13 How.is.the.time.value.of.money.concept.related.to.the.valuation.of.stocks?
The.value.of.an.investment.that.is.expected.to.earn.money.in.the.future.can.be.calculated.using.t
ime-
value.of.money.principles..Corporations.are.expected.to.pay.dividends.to.their.shareholders..T
he.current.value.of.these.future.dividends.is.the.present.value..The.present.value.of.a.stock’s.fut
ure.dividends.should.be.the.same.as.the.stock’s.current.price.
Chapter2 .
Review of Accounting
. .
Discussion Questions
.
2-1. Discuss.some.financial.variables.that.affect.the.price-earnings.ratio.
The.price-
earnings.ratio.will.be.influenced.by.the.earnings.and.sales.growth.of.the.firm,.the.risk.or.vo
latility.in.performance,.the.debt-
equity.structure.of.the.firm,.the.dividend.payment.policy,.the.quality.of.management,.an
d.a.number.of.other.factors..The.ratio.tends.to.be.future-
oriented,.and.the.more.positive.the.outlook,.the.higher.it.will.be.
2-2. What.is.the.difference.between.book.value.per.share.of.common.stock.and.market.value.p
er.share?.Why.does.this.disparity.occur?
Book.value.per.share.is.arrived.at.by.taking.the.cost.of.the.assets.and.subtracting.out.liabili
ties.and.preferred.stock.and.dividing.by.the.number.of.common.shares
©.McGraw.Hill.LLC..All.rights.reserved..No.reproduction.or.distribution.without.the.prior.written.consent.of.McGraw.Hill.LLC.
, outstanding..It.is.based.on.the.historical.cost.of.the.assets..Market.value.per.share.is
based.on.the.current.assessed.value.of.the.firm.in.the.marketplace.and.may.bear.little.relat
ionship.to.original.cost..Besides.the.disparity.between.book.and.market.value.caused.by.th
e.historical.cost.approach,.other.contributing.factors.are.the.growth.prospects.for.the.firm
,.the.quality.of.management,.and.the.industry.outlook..To.the.extent.these.are.quite.negat
ive.or.positive;.market.value.may.differ.widely.from.book.value.
2-3. Explain.how.depreciation.generates.actual.cash.flows.for.the.company.
The.only.way.depreciation.generates.cash.flows.for.the.company.is.by.serving.as.a.tax.shie
ld.against.reported.income..This.non-
cash.deduction.may.provide.cash.flow.equal.to.the.tax.rate.times.the.depreciation.charge
d..This.much.in.taxes.will.be.saved,.while.no.cash.payments.occur.
2-4. What.is.the.difference.between.accumulated.depreciation.and.depreciation.expense?.Ho
w.are.they.related?
Accumulated.depreciation.is.the.sum.of.all.past.and.present.depreciation.charges,.while.d
epreciation.expense.is.the.current.year’s.charge..They.are.related.in.that.the.sum.of.all.prio
r.depreciation.expense.should.be.equal.to.accumulated.depreciation.(subject.to.some.diff
erential.related.to.asset
write-offs).
2-5. How.is.the.income.statement.related.to.the.balance.sheet?
The.earnings.(less.dividends).reported.in.the.income.statement.is.transferred.to.the.ow
nership.section.of.the.balance.sheet.as.retained.earnings..Thus,.what.we.earn.in.the.inc
ome.statement.becomes.part.of.the.ownership.interest.in.the.balance.sheet.
2-6. Comment.on.why.inflation.may.restrict.the.usefulness.of.the.balance.sheet.as.normally.pr
esented.
The.balance.sheet.is.based.on.historical.costs..When.prices.are.rising.rapidly,.historical.cost
.data.may.lose.much.of.their.meaning—particularly.for.plant.and.equipment.and
©.McGraw.Hill.LLC..All.rights.reserved..No.reproduction.or.distribution.without.the.prior.written.consent.of.McGraw.Hill.LLC.
Foundations of Financial Management, 18th Edition by Stanley Block, Geoff
. . . . . . . . .
rey Hirt, Bartley Danielsen
. . .
Chapter 1-21.
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.or
ganization?
A.sole.proprietorship.offers.the.advantage.of.simplicity.of.decision.making.and.low.organizati
onal.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.brief
ly.
A.limited.partnership.allows.some.of.the.partners.to.limit.their.liability..Under.this.arrangeme
nt,.one.or.more.partners.are.designated.general.partners.and.have.unlimited.liability.for.the.deb
ts.of.the.firm;.other.partners.are.designated.limited.partners.and.are.liable.only.for.their.initial.c
ontribution..The.limited.partners.are.normally.prohibited.from.being.active.in.the.managemen
t.of.the.firm.
1-4 In.a.corporation,.what.group.has.the.ultimate.responsibility.for.protecting.and.managing.the.s
tockholders’.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.rath
er.than.in.a.private.corporation?
©.McGraw.Hill.LLC..All.rights.reserved..No.reproduction.or.distribution.without.the.prior.written.consent.of.McGraw.Hill.LLC.
, Agency.theory.examines.the.relationship.between.the.owners.of.the.firm.and.the.managers.of.t
he.firm..In.privately.owned.firms,.management.and.the.owners.are.usually.the.same.people..M
anagement.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.own
ers..This.places.management.in.the.agency.position.of.making.decisions.in.the.best.interest.of.a
ll.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.a.group,.they.have.the.ability.to.vote.large.blocks.of.shares.for.the.election.of.a.b
oard.of.directors,.which.is.supposed.to.run.the.company.in.an.efficient,.competitive.manner..The
.threat.of.being.able.to.replace.poor.performing.boards.of.directors.makes.institutional.investors.
quite.influential..Since.these.institutions,.like.pension.funds.and.mutual.funds,.represent.indivi
dual.workers.and.investors,.they.have.a.responsibility.to.see.that.the.firm.is.managed.in.an.effici
ent.and.ethical.way.
1-8 Why.is.profit.maximization,.by.itself,.an.inappropriate.goal?.What.is.meant.by.the.goal.of.m
aximization.of.shareholder.wealth?
The.problem.with.a.profit.maximization.goal.is.that.it.fails.to.take.account.of.risk,.the.timing.of.
the.benefits.is.not.considered,.and.profit.measurement.is.a.very.inexact.process..The.goal.of.sha
reholders’.wealth.maximization.implies.that.the.firm.will.attempt.to.achieve.the.highest.possi
ble.total.valuation.in.the.marketplace..It.is.the.one.overriding.objective.of.the.firm.and.should.i
nfluence.every.decision.
1-9 When.does.insider.trading.occur?.What.government.agency.is.responsible.for.protecting.agai
nst.the.unethical.practice.of.insider.trading?
Insider.trading.occurs.when.anyone.with.non-
public.information.buys.or.sells.securities.to.take.advantage.of.that.private.information..The.S
ecurities.and.Exchange.Commission.is.responsible.for.protecting.markets.against.insider.tradi
ng..In.the.past,.people.have.gone.to.jail.for.trading.on.non-
public.information..This.has.included.company.officers,.investment.bankers,.printers.who.ha
ve.information.before.it.is.published,.and.even.truck.drivers.who.deliver.business.magazines.a
nd.read.positive.or.negative.articles.about.a.company.before.the.magazine.is.on.the.newsstand
s.and.then.place.trades.or.have.friends.place.trades.based.on.that.information..The.SEC.has.pro
secuted.anyone.who.profits.from.inside.information.
1-10 In.terms.of.the.life.of.the.securities.offered,.what.is.the.difference.between.money.and.capit
al.markets?
Money.markets.refer.to.those.markets.dealing.with.short-
term.securities.that.have.a.life.of.one.year.or.less..Capital.markets.refer.to.securities.with.a.life.
of.more.than.one.year.
1-11 What.is.the.difference.between.a.primary.and.a.secondary.market?
©.McGraw.Hill.LLC..All.rights.reserved..No.reproduction.or.distribution.without.the.prior.written.consent.of.McGraw.Hill.LLC.
, A.primary.market.refers.to.the.use.of.the.financial.markets.to.raise.new.funds.for.the.corporatio
n..After.the.securities.are.sold.to.the.public.(institutions.and.individuals),.they.trade.in.the.seco
ndary.market.between.investors..It.is.in.the.secondary.market.that.prices.are.continually.changi
ng.as.investors.buy.and.sell.securities.based.on.the.expectations.of.corporate.prospects.
1-12 Assume.you.are.looking.at.many.companies.with.equal.risk..Which.ones.will.have.the.high
est.stock.prices?
Given.companies.with.equal.risk,.those.companies.with.expectations.of.high.return.will.hav
e.higher.common.stock.prices.relative.to.those.companies.with.expectations.of.poor.returns.
1-13 How.is.the.time.value.of.money.concept.related.to.the.valuation.of.stocks?
The.value.of.an.investment.that.is.expected.to.earn.money.in.the.future.can.be.calculated.using.t
ime-
value.of.money.principles..Corporations.are.expected.to.pay.dividends.to.their.shareholders..T
he.current.value.of.these.future.dividends.is.the.present.value..The.present.value.of.a.stock’s.fut
ure.dividends.should.be.the.same.as.the.stock’s.current.price.
Chapter2 .
Review of Accounting
. .
Discussion Questions
.
2-1. Discuss.some.financial.variables.that.affect.the.price-earnings.ratio.
The.price-
earnings.ratio.will.be.influenced.by.the.earnings.and.sales.growth.of.the.firm,.the.risk.or.vo
latility.in.performance,.the.debt-
equity.structure.of.the.firm,.the.dividend.payment.policy,.the.quality.of.management,.an
d.a.number.of.other.factors..The.ratio.tends.to.be.future-
oriented,.and.the.more.positive.the.outlook,.the.higher.it.will.be.
2-2. What.is.the.difference.between.book.value.per.share.of.common.stock.and.market.value.p
er.share?.Why.does.this.disparity.occur?
Book.value.per.share.is.arrived.at.by.taking.the.cost.of.the.assets.and.subtracting.out.liabili
ties.and.preferred.stock.and.dividing.by.the.number.of.common.shares
©.McGraw.Hill.LLC..All.rights.reserved..No.reproduction.or.distribution.without.the.prior.written.consent.of.McGraw.Hill.LLC.
, outstanding..It.is.based.on.the.historical.cost.of.the.assets..Market.value.per.share.is
based.on.the.current.assessed.value.of.the.firm.in.the.marketplace.and.may.bear.little.relat
ionship.to.original.cost..Besides.the.disparity.between.book.and.market.value.caused.by.th
e.historical.cost.approach,.other.contributing.factors.are.the.growth.prospects.for.the.firm
,.the.quality.of.management,.and.the.industry.outlook..To.the.extent.these.are.quite.negat
ive.or.positive;.market.value.may.differ.widely.from.book.value.
2-3. Explain.how.depreciation.generates.actual.cash.flows.for.the.company.
The.only.way.depreciation.generates.cash.flows.for.the.company.is.by.serving.as.a.tax.shie
ld.against.reported.income..This.non-
cash.deduction.may.provide.cash.flow.equal.to.the.tax.rate.times.the.depreciation.charge
d..This.much.in.taxes.will.be.saved,.while.no.cash.payments.occur.
2-4. What.is.the.difference.between.accumulated.depreciation.and.depreciation.expense?.Ho
w.are.they.related?
Accumulated.depreciation.is.the.sum.of.all.past.and.present.depreciation.charges,.while.d
epreciation.expense.is.the.current.year’s.charge..They.are.related.in.that.the.sum.of.all.prio
r.depreciation.expense.should.be.equal.to.accumulated.depreciation.(subject.to.some.diff
erential.related.to.asset
write-offs).
2-5. How.is.the.income.statement.related.to.the.balance.sheet?
The.earnings.(less.dividends).reported.in.the.income.statement.is.transferred.to.the.ow
nership.section.of.the.balance.sheet.as.retained.earnings..Thus,.what.we.earn.in.the.inc
ome.statement.becomes.part.of.the.ownership.interest.in.the.balance.sheet.
2-6. Comment.on.why.inflation.may.restrict.the.usefulness.of.the.balance.sheet.as.normally.pr
esented.
The.balance.sheet.is.based.on.historical.costs..When.prices.are.rising.rapidly,.historical.cost
.data.may.lose.much.of.their.meaning—particularly.for.plant.and.equipment.and
©.McGraw.Hill.LLC..All.rights.reserved..No.reproduction.or.distribution.without.the.prior.written.consent.of.McGraw.Hill.LLC.
