Solution Manual For Foundations Of Financial Management 12th Edition S
c c c c c c c c c
tanley B Block, Geoffrey A Hirt Chapter 1-21
c c c c c c c
Chapter 1 c
Discussion Questions
c
1-1. RegulationcwascgreatlycincreasedcwithcthecDoddc–cFrankcActcandcothercmeasures.
1-
2.c c Thecstudentcshouldcbecpreparedctocpaycachighercpricecforcthecpromisedc$2cfromcthecRoyal
cBank.cThecriskcisclower.
1-
3.c c Thecgoalcofcshareholdercwealthcmaximizationcimpliescthatcthecfirmcwillcattemptctocachie
vecthechighestcpossiblecvaluationcincthecmarketplace.cItcisctheconecoverridingcobjectivecofcthec
firmcandcshouldcinfluenceceverycdecision.cThecproblemcwithcacprofitcmaximizationcgoalciscth
atcitcfailsctoctakecaccountcofcrisk,cthectimingcofcthecbenefitsciscnotcconsidered,candcprofitcmeas
urementciscacverycinexactcprocess.
1-
4.c Agencyc theoryc examinesc thec relationshipc betweenc thec ownersc ofc thec firmc andc thecm
anagerscofcthecfirm.cIncprivatelycownedcfirms,cmanagementcandcthecownerscarecusuallycthecs
amecpeople.cManagementcoperatescthecfirmctocsatisfycitscowncgoals,cneeds,cfinancialcrequire
mentscandctheclike.cAscaccompanycmovescfromcprivatectocpubliccownership,cmanagementcno
wcrepresentscallcowners.cThiscplacescmanagementcincthecagencycpositioncofcmakingcdecision
scincthecbestcinterestcofcallcshareholders.
1-
5.c c Becausec institutionalc investorsc suchc asc pensionc fundsc (Ontarioc Teachers‘,c CPP)c andc
mutualcfundscowncaclargecpercentagecofcmajorccompanies,ctheycarechavingcmorectocsaycabout
cthecwaycpubliclycownedccompaniescarecmanaged. cAscacgroup,ctheychavecthecabilityctocvotecl
argecblockscofcsharescforcthecelectioncofcacboardcofcdirectors,cwhichciscsupposedctocruncthecco
mpanycincancefficient,ccompetitivecmanner.cThecthreatcofcbeingcablectocreplacecpoorcperform
ingcboardscofcdirectorscmakescinstitutionalcinvestorscquitecinfluential.cSincecthesecinstitution
s,clikecpensioncfundscandcmutualcfunds,crepresentcindividualcworkerscandcinvestors,ctheychav
ecacresponsibilityctocseecthatcthecfirmciscmanagedcincancefficientcandcethicalcway.
1-
6.c c Insiderctradingcoccurscwhencsomeonechascinformationcthatciscnotcavailablectocthecpublicc
andcthencusescthecinformationctocprofitcfromctradingcincaccompany‘sccommoncstock.cThecpro
vincialcsecuritiesccommissionscarecresponsiblecforcprotectingcagainstcinsiderctrading.
1-
7.c Regulationscsetcthec―rulescofcthecgame‖cincwhichcthecfirmcoperates.cShareholdercwealthc
maximizationccancandcshouldcstillcbecsoughtcwithincthecrules,cforceconomiccefficiencyctocbec
achieved.cSocietycjudge‘scderegulationcbenefitscagainstctheccostscofcregulation.
Foundations of Fin. Mgt. 12Ce 3-1 Block, Hirt, Danielsen, Short
,1-
8.c Managementcoperatescwithincaccompetitivecmarketcandctheycshouldcbecpaidctheircopportu
nityccost.cIfcmanagerscdocnotcactctocmaximizecshareholdercwealth,csharecpricesc willc become
c depressed.c Toc thec extentc manager‘sc compensationc isc tiedc toc sharec price
Foundations of Fin. Mgt. 12Ce 3-2 Block, Hirt, Danielsen, Short
, performance,cshareholdersccancfirecmanagers,candctherecexistscacmarketcforccorporateccontro
l,cmanagementcwillcbeccompensatedcbasedconctheirceconomicccontribution.
1-9. Dailycfunctions-ccashcmanagement,cinventoryccontrol,creceiptcandcdisbursementcofcfunds.
Occasional-csharecissue,cbondcissue,ccapitalcbudgetingcandcdividendcdecisions.
1-
10.c Therec isc unlimitedc liabilityc forc thec solec proprietorshipc andc partnershipc formsc ofcow
nership.cUnderctheclimitedcpartnership,conlycthecgeneralcpartner(s)chascunlimitedcliability,cw
ithclimitedcpartnerscobligatedconlyctocthecextentcofctheircinitialccontribution.cFinally,callcshare
holderscincaccorporationchaveclimitedcliability,calthoughcowner/cshareholderscofcsmallcbusin
essescoftenchavectocgivecbanksctheircpersonalcguarantees.
1-
11.c Theccorporatecformciscbestcsuitedctoclargecorganizationscbecausecofctheceasycdivisibilityc
ofcownershipcthroughcissuancecofcshares.cAlso,ctheccorporationchasccontinuedcexistencecinde
pendentcofcanycshareholder.
1-12.c Moneycmarketscreferctocthosecmarketscdealingcwithcshort-
termcsecuritiescthatchavecaclifec ofconecyearcorcless.cCapitalcmarketscreferctocsecuritiescwithcacl
ifecofcmorecthanconecyear.
1-
13.c Acprimarycmarketcrefersctocthecusecofcthecfinancialcmarketsctocraisecnewcfunds.cAftercthe
csecuritiescarecsoldctocthecpublicc(institutionscandcindividuals),ctheyctradecincthecsecondarycm
arketcbetweencinvestors.cItciscincthecsecondarycmarketcthatcpricescareccontinuallycchangingcas
cinvestorscbuycandcsellcsecuritiescbasedconcthecexpectationscofccorporatecprospects.cAcliquidc
secondarycmarketcpromotescacsuccessfulcprimarycmarket.
1-
14.c Governmentcdebtcloadscrequirecfinancing.cThiscputsclargecdemandsc($1ctrillioncincaccum
ulatedcfederalcandcprovincialcdebtcinc2017)conctheccapitalcmarkets,cputtingcupwardcpressurec
oncinterestcratescandcaccorporation‘scabilityctocinvestcinccapitalcprojects.cWhencgovernmentsc
financectheircdeficitscabroadctheycplacecCanada‘sceconomiccleverscoutsidecofcourccontrolcand
cdebtcservicingcpaymentsccancimpactcthecforeigncexchangecmarkets.cAscthecgovernmentcdebt
cloadcrelativectocGDPcbeencreducedcincrecentc yearsctherechascbeenclesscpressurec onc interestc r
ates,c corporationsc havec borrowedc more,c butc therec havec beenc less
‗riskcfree‘cgovernmentcsecuritiescavailablec(causingcliquiditycproblemscparticularlycincthecm
oneycmarkets).
1-
15.c Stakeholderscinclude:cshareholders,ccreditors,cemployees,cunions,cenvironmentalists,cc
onsumercgroups,cCanadacRevenuecAgency,cgovernmentcregulatorycbodies,ccustomers,cman
agerscandcothers.
Internet Resources and Questions
c c c
1. www.nobelprize.org
2. www.fin.gc.ca
3. www.bankofcanada.ca
4. http://www.onex.com/Our-
Goals/Index?Key‘GenPage=1073751432chttp://www.rbc.com/aboutu
Foundations of Fin. Mgt. 12Ce 3-3 Block, Hirt, Danielsen, Short
, s/visionandvalues.html
5. http://www.bce.ca/responsibility/corporateresponsibility
Foundations of Fin. Mgt. 12Ce 3-4 Block, Hirt, Danielsen, Short
c c c c c c c c c
tanley B Block, Geoffrey A Hirt Chapter 1-21
c c c c c c c
Chapter 1 c
Discussion Questions
c
1-1. RegulationcwascgreatlycincreasedcwithcthecDoddc–cFrankcActcandcothercmeasures.
1-
2.c c Thecstudentcshouldcbecpreparedctocpaycachighercpricecforcthecpromisedc$2cfromcthecRoyal
cBank.cThecriskcisclower.
1-
3.c c Thecgoalcofcshareholdercwealthcmaximizationcimpliescthatcthecfirmcwillcattemptctocachie
vecthechighestcpossiblecvaluationcincthecmarketplace.cItcisctheconecoverridingcobjectivecofcthec
firmcandcshouldcinfluenceceverycdecision.cThecproblemcwithcacprofitcmaximizationcgoalciscth
atcitcfailsctoctakecaccountcofcrisk,cthectimingcofcthecbenefitsciscnotcconsidered,candcprofitcmeas
urementciscacverycinexactcprocess.
1-
4.c Agencyc theoryc examinesc thec relationshipc betweenc thec ownersc ofc thec firmc andc thecm
anagerscofcthecfirm.cIncprivatelycownedcfirms,cmanagementcandcthecownerscarecusuallycthecs
amecpeople.cManagementcoperatescthecfirmctocsatisfycitscowncgoals,cneeds,cfinancialcrequire
mentscandctheclike.cAscaccompanycmovescfromcprivatectocpubliccownership,cmanagementcno
wcrepresentscallcowners.cThiscplacescmanagementcincthecagencycpositioncofcmakingcdecision
scincthecbestcinterestcofcallcshareholders.
1-
5.c c Becausec institutionalc investorsc suchc asc pensionc fundsc (Ontarioc Teachers‘,c CPP)c andc
mutualcfundscowncaclargecpercentagecofcmajorccompanies,ctheycarechavingcmorectocsaycabout
cthecwaycpubliclycownedccompaniescarecmanaged. cAscacgroup,ctheychavecthecabilityctocvotecl
argecblockscofcsharescforcthecelectioncofcacboardcofcdirectors,cwhichciscsupposedctocruncthecco
mpanycincancefficient,ccompetitivecmanner.cThecthreatcofcbeingcablectocreplacecpoorcperform
ingcboardscofcdirectorscmakescinstitutionalcinvestorscquitecinfluential.cSincecthesecinstitution
s,clikecpensioncfundscandcmutualcfunds,crepresentcindividualcworkerscandcinvestors,ctheychav
ecacresponsibilityctocseecthatcthecfirmciscmanagedcincancefficientcandcethicalcway.
1-
6.c c Insiderctradingcoccurscwhencsomeonechascinformationcthatciscnotcavailablectocthecpublicc
andcthencusescthecinformationctocprofitcfromctradingcincaccompany‘sccommoncstock.cThecpro
vincialcsecuritiesccommissionscarecresponsiblecforcprotectingcagainstcinsiderctrading.
1-
7.c Regulationscsetcthec―rulescofcthecgame‖cincwhichcthecfirmcoperates.cShareholdercwealthc
maximizationccancandcshouldcstillcbecsoughtcwithincthecrules,cforceconomiccefficiencyctocbec
achieved.cSocietycjudge‘scderegulationcbenefitscagainstctheccostscofcregulation.
Foundations of Fin. Mgt. 12Ce 3-1 Block, Hirt, Danielsen, Short
,1-
8.c Managementcoperatescwithincaccompetitivecmarketcandctheycshouldcbecpaidctheircopportu
nityccost.cIfcmanagerscdocnotcactctocmaximizecshareholdercwealth,csharecpricesc willc become
c depressed.c Toc thec extentc manager‘sc compensationc isc tiedc toc sharec price
Foundations of Fin. Mgt. 12Ce 3-2 Block, Hirt, Danielsen, Short
, performance,cshareholdersccancfirecmanagers,candctherecexistscacmarketcforccorporateccontro
l,cmanagementcwillcbeccompensatedcbasedconctheirceconomicccontribution.
1-9. Dailycfunctions-ccashcmanagement,cinventoryccontrol,creceiptcandcdisbursementcofcfunds.
Occasional-csharecissue,cbondcissue,ccapitalcbudgetingcandcdividendcdecisions.
1-
10.c Therec isc unlimitedc liabilityc forc thec solec proprietorshipc andc partnershipc formsc ofcow
nership.cUnderctheclimitedcpartnership,conlycthecgeneralcpartner(s)chascunlimitedcliability,cw
ithclimitedcpartnerscobligatedconlyctocthecextentcofctheircinitialccontribution.cFinally,callcshare
holderscincaccorporationchaveclimitedcliability,calthoughcowner/cshareholderscofcsmallcbusin
essescoftenchavectocgivecbanksctheircpersonalcguarantees.
1-
11.c Theccorporatecformciscbestcsuitedctoclargecorganizationscbecausecofctheceasycdivisibilityc
ofcownershipcthroughcissuancecofcshares.cAlso,ctheccorporationchasccontinuedcexistencecinde
pendentcofcanycshareholder.
1-12.c Moneycmarketscreferctocthosecmarketscdealingcwithcshort-
termcsecuritiescthatchavecaclifec ofconecyearcorcless.cCapitalcmarketscreferctocsecuritiescwithcacl
ifecofcmorecthanconecyear.
1-
13.c Acprimarycmarketcrefersctocthecusecofcthecfinancialcmarketsctocraisecnewcfunds.cAftercthe
csecuritiescarecsoldctocthecpublicc(institutionscandcindividuals),ctheyctradecincthecsecondarycm
arketcbetweencinvestors.cItciscincthecsecondarycmarketcthatcpricescareccontinuallycchangingcas
cinvestorscbuycandcsellcsecuritiescbasedconcthecexpectationscofccorporatecprospects.cAcliquidc
secondarycmarketcpromotescacsuccessfulcprimarycmarket.
1-
14.c Governmentcdebtcloadscrequirecfinancing.cThiscputsclargecdemandsc($1ctrillioncincaccum
ulatedcfederalcandcprovincialcdebtcinc2017)conctheccapitalcmarkets,cputtingcupwardcpressurec
oncinterestcratescandcaccorporation‘scabilityctocinvestcinccapitalcprojects.cWhencgovernmentsc
financectheircdeficitscabroadctheycplacecCanada‘sceconomiccleverscoutsidecofcourccontrolcand
cdebtcservicingcpaymentsccancimpactcthecforeigncexchangecmarkets.cAscthecgovernmentcdebt
cloadcrelativectocGDPcbeencreducedcincrecentc yearsctherechascbeenclesscpressurec onc interestc r
ates,c corporationsc havec borrowedc more,c butc therec havec beenc less
‗riskcfree‘cgovernmentcsecuritiescavailablec(causingcliquiditycproblemscparticularlycincthecm
oneycmarkets).
1-
15.c Stakeholderscinclude:cshareholders,ccreditors,cemployees,cunions,cenvironmentalists,cc
onsumercgroups,cCanadacRevenuecAgency,cgovernmentcregulatorycbodies,ccustomers,cman
agerscandcothers.
Internet Resources and Questions
c c c
1. www.nobelprize.org
2. www.fin.gc.ca
3. www.bankofcanada.ca
4. http://www.onex.com/Our-
Goals/Index?Key‘GenPage=1073751432chttp://www.rbc.com/aboutu
Foundations of Fin. Mgt. 12Ce 3-3 Block, Hirt, Danielsen, Short
, s/visionandvalues.html
5. http://www.bce.ca/responsibility/corporateresponsibility
Foundations of Fin. Mgt. 12Ce 3-4 Block, Hirt, Danielsen, Short
