SOLUTION MANUAL m
Foundations of Financial Management, 18th Edition
m m m m m
by Stanley Block, Geoffrey Hirt, Chapters 1 – 21, Complete
m m m m m m m m m
,
, Chapter 1 m
The Goals and Functions of Financial Management
m m m m m m
Discussion Questions
m
1-1 Whatmeffectmdidmthemrecessionmofm2007-2009mhavemonmgovernmentmregulation?
Itmwasmgreatlymincreased.
1-2 Whatmadvantagesmdoesmamsolemproprietorshipmoffer?mWhatmismammajormdrawbackmofmthismty
pemofm organization?
Amsolemproprietorshipmoffersmthemadvantagemofmsimplicitymofmdecisionmmakingmandmlowm orga
nizationalmandmoperatingmcosts.mAmmajormdrawbackmismthatmtheremismunlimitedmliabilitymtomthem
owner.
1-3 Whatmformmofmpartnershipmallowsmsomemofmtheminvestorsmtomlimitmtheirmliability?mExplain
m briefly.
Amlimitedmpartnershipmallowsmsomemofmthempartnersmtomlimitmtheirmliability.mUndermthism arrange
ment,monemormmorempartnersmaremdesignatedmgeneralmpartnersmandmhavemunlimitedm liabilitym
formthemdebtsmofmthemfirm;mothermpartnersmaremdesignatedmlimitedmpartnersmandmaremliablem o
nlymformtheirminitialmcontribution.mThemlimitedmpartnersmaremnormallymprohibitedmfrommbeingm ac
tiveminmthemmanagementmofmthemfirm.
1-4 Inmamcorporation,mwhatmgroupmhasmthemultimatemresponsibilitymformprotectingmandmmanaging
themstockholders’minterests?
Themboardmofmdirectors.
1-5 Whatmdocumentmismnecessarymtomformmamcorporation?
Themarticlesmofmincorporation.
1-6 Whatmissuemdoesmagencymtheorymexamine?mWhymismitmimportantminmampublicmcorporat
ionm rathermthanminmamprivatemcorporation?
, Agencymtheorymexaminesmthemrelationshipmbetweenmthemownersmofmthemfirmmandmthemmanage
rsm ofmthemfirm.mInmprivatelymownedmfirms,mmanagementmandmthemownersmaremusuallymthemsame
m people.mManagementmoperatesmthemfirmmtomsatisfymitsmownmgoals,mneeds,mfinancialmrequirem
entsm andmthemlike.mAsmamcompanymmovesmfrommprivatemtompublicmownership,mmanagementmno
wm representsmallmowners.mThismplacesmmanagementminmthemagencympositionmofmmakingmdecisi
onsminm thembestminterestmofmallmshareholders.
1-7 Whatmareminstitutionalminvestorsmimportantminmtoday’smbusinessmworld?
Becauseminstitutionalminvestorsmsuchmasmpensionmfundsmandmmutualmfundsmownmamlargem percent
agemofmmajormU.S.mcompanies,mtheymaremhavingmmoremtomsaymaboutmthemwaympubliclym ownedm
companiesmaremmanaged.mAsmamgroup,mtheymhavemthemabilitymtomvotemlargemblocksmofm sharesm
formthemelectionmofmamboardmofmdirectors,mwhichmismsupposedmtomrunmthemcompanyminmanm efficie
nt,mcompetitivemmanner.mThemthreatmofmbeingmablemtomreplacempoormperformingmboardsmofm dir
ectorsmmakesminstitutionalminvestorsmquiteminfluential.mSincemtheseminstitutions,mlikempensionm fund
smandmmutualmfunds,mrepresentmindividualmworkersmandminvestors,mtheymhavemamresponsibilitym t
omseemthatmthemfirmmismmanagedminmanmefficientmandmethicalmway.
1-8 Whymismprofitmmaximization,mbymitself,manminappropriatemgoal?mWhatmismmeantmbymthemgo
almofm maximizationmofmshareholdermwealth?
Themproblemmwithmamprofitmmaximizationmgoalmismthatmitmfailsmtomtakemaccountmofmrisk,mthem tim
ingmofmthembenefitsmismnotmconsidered,mandmprofitmmeasurementmismamveryminexactmprocess.m T
hemgoalmofmshareholders’mwealthmmaximizationmimpliesmthatmthemfirmmwillmattemptmtomachiev
em themhighestmpossiblemtotalmvaluationminmthemmarketplace.mItmismthemonemoverridingmobjective
mofm themfirmmandmshouldminfluencemeverymdecision.
1-9 Whenmdoesminsidermtradingmoccur?mWhatmgovernmentmagencymismresponsiblemformprotecti
ngm againstmthemunethicalmpracticemofminsidermtrading?
Insidermtradingmoccursmwhenmanyonemwithmnon-
publicminformationmbuysmormsellsmsecuritiesmtom takemadvantagemofmthatmprivateminformation.m
ThemSecuritiesmandmExchangemCommissionmism responsiblemformprotectingmmarketsmagainstminsi
dermtrading.mInmthempast,mpeoplemhavemgonemtom jailmformtradingmonmnon-
publicminformation.mThismhasmincludedmcompanymofficers,minvestmentm bankers,mprintersmwhomh
aveminformationmbeforemitmismpublished,mandmevenmtruckmdriversmwhom delivermbusinessmmagaz
inesmandmreadmpositivemormnegativemarticlesmaboutmamcompanymbeforemthem magazinemismonmt
hemnewsstandsmandmthenmplacemtradesmormhavemfriendsmplacemtradesmbasedmonm thatminforma
tion.mThemSECmhasmprosecutedmanyonemwhomprofitsmfromminsideminformation.
1-10 Inmtermsmofmthemlifemofmthemsecuritiesmoffered,mwhatmismthemdifferencembetweenmmoneyman
dm capitalmmarkets?
Moneymmarketsmrefermtomthosemmarketsmdealingmwithmshort-
termmsecuritiesmthatmhavemamlifemofm onemyearmormless.mCapitalmmarketsmrefermtomsecuritiesm
withmamlifemofmmoremthanmonemyear.
1-11 Whatmismthemdifferencembetweenmamprimarymandmamsecondarymmarket?
Foundations of Financial Management, 18th Edition
m m m m m
by Stanley Block, Geoffrey Hirt, Chapters 1 – 21, Complete
m m m m m m m m m
,
, Chapter 1 m
The Goals and Functions of Financial Management
m m m m m m
Discussion Questions
m
1-1 Whatmeffectmdidmthemrecessionmofm2007-2009mhavemonmgovernmentmregulation?
Itmwasmgreatlymincreased.
1-2 Whatmadvantagesmdoesmamsolemproprietorshipmoffer?mWhatmismammajormdrawbackmofmthismty
pemofm organization?
Amsolemproprietorshipmoffersmthemadvantagemofmsimplicitymofmdecisionmmakingmandmlowm orga
nizationalmandmoperatingmcosts.mAmmajormdrawbackmismthatmtheremismunlimitedmliabilitymtomthem
owner.
1-3 Whatmformmofmpartnershipmallowsmsomemofmtheminvestorsmtomlimitmtheirmliability?mExplain
m briefly.
Amlimitedmpartnershipmallowsmsomemofmthempartnersmtomlimitmtheirmliability.mUndermthism arrange
ment,monemormmorempartnersmaremdesignatedmgeneralmpartnersmandmhavemunlimitedm liabilitym
formthemdebtsmofmthemfirm;mothermpartnersmaremdesignatedmlimitedmpartnersmandmaremliablem o
nlymformtheirminitialmcontribution.mThemlimitedmpartnersmaremnormallymprohibitedmfrommbeingm ac
tiveminmthemmanagementmofmthemfirm.
1-4 Inmamcorporation,mwhatmgroupmhasmthemultimatemresponsibilitymformprotectingmandmmanaging
themstockholders’minterests?
Themboardmofmdirectors.
1-5 Whatmdocumentmismnecessarymtomformmamcorporation?
Themarticlesmofmincorporation.
1-6 Whatmissuemdoesmagencymtheorymexamine?mWhymismitmimportantminmampublicmcorporat
ionm rathermthanminmamprivatemcorporation?
, Agencymtheorymexaminesmthemrelationshipmbetweenmthemownersmofmthemfirmmandmthemmanage
rsm ofmthemfirm.mInmprivatelymownedmfirms,mmanagementmandmthemownersmaremusuallymthemsame
m people.mManagementmoperatesmthemfirmmtomsatisfymitsmownmgoals,mneeds,mfinancialmrequirem
entsm andmthemlike.mAsmamcompanymmovesmfrommprivatemtompublicmownership,mmanagementmno
wm representsmallmowners.mThismplacesmmanagementminmthemagencympositionmofmmakingmdecisi
onsminm thembestminterestmofmallmshareholders.
1-7 Whatmareminstitutionalminvestorsmimportantminmtoday’smbusinessmworld?
Becauseminstitutionalminvestorsmsuchmasmpensionmfundsmandmmutualmfundsmownmamlargem percent
agemofmmajormU.S.mcompanies,mtheymaremhavingmmoremtomsaymaboutmthemwaympubliclym ownedm
companiesmaremmanaged.mAsmamgroup,mtheymhavemthemabilitymtomvotemlargemblocksmofm sharesm
formthemelectionmofmamboardmofmdirectors,mwhichmismsupposedmtomrunmthemcompanyminmanm efficie
nt,mcompetitivemmanner.mThemthreatmofmbeingmablemtomreplacempoormperformingmboardsmofm dir
ectorsmmakesminstitutionalminvestorsmquiteminfluential.mSincemtheseminstitutions,mlikempensionm fund
smandmmutualmfunds,mrepresentmindividualmworkersmandminvestors,mtheymhavemamresponsibilitym t
omseemthatmthemfirmmismmanagedminmanmefficientmandmethicalmway.
1-8 Whymismprofitmmaximization,mbymitself,manminappropriatemgoal?mWhatmismmeantmbymthemgo
almofm maximizationmofmshareholdermwealth?
Themproblemmwithmamprofitmmaximizationmgoalmismthatmitmfailsmtomtakemaccountmofmrisk,mthem tim
ingmofmthembenefitsmismnotmconsidered,mandmprofitmmeasurementmismamveryminexactmprocess.m T
hemgoalmofmshareholders’mwealthmmaximizationmimpliesmthatmthemfirmmwillmattemptmtomachiev
em themhighestmpossiblemtotalmvaluationminmthemmarketplace.mItmismthemonemoverridingmobjective
mofm themfirmmandmshouldminfluencemeverymdecision.
1-9 Whenmdoesminsidermtradingmoccur?mWhatmgovernmentmagencymismresponsiblemformprotecti
ngm againstmthemunethicalmpracticemofminsidermtrading?
Insidermtradingmoccursmwhenmanyonemwithmnon-
publicminformationmbuysmormsellsmsecuritiesmtom takemadvantagemofmthatmprivateminformation.m
ThemSecuritiesmandmExchangemCommissionmism responsiblemformprotectingmmarketsmagainstminsi
dermtrading.mInmthempast,mpeoplemhavemgonemtom jailmformtradingmonmnon-
publicminformation.mThismhasmincludedmcompanymofficers,minvestmentm bankers,mprintersmwhomh
aveminformationmbeforemitmismpublished,mandmevenmtruckmdriversmwhom delivermbusinessmmagaz
inesmandmreadmpositivemormnegativemarticlesmaboutmamcompanymbeforemthem magazinemismonmt
hemnewsstandsmandmthenmplacemtradesmormhavemfriendsmplacemtradesmbasedmonm thatminforma
tion.mThemSECmhasmprosecutedmanyonemwhomprofitsmfromminsideminformation.
1-10 Inmtermsmofmthemlifemofmthemsecuritiesmoffered,mwhatmismthemdifferencembetweenmmoneyman
dm capitalmmarkets?
Moneymmarketsmrefermtomthosemmarketsmdealingmwithmshort-
termmsecuritiesmthatmhavemamlifemofm onemyearmormless.mCapitalmmarketsmrefermtomsecuritiesm
withmamlifemofmmoremthanmonemyear.
1-11 Whatmismthemdifferencembetweenmamprimarymandmamsecondarymmarket?
