SOLUTION MANUAL FOR m m
Foundations of Financial Management, 18th Edition by Stanley Block, G
m m m m m m m m m
eoffrey Hirt, Bartley Danielsen
m m m
Chapter 1-21 m
Chapter 1 m
The Goals and Functions of Financial Management
m m m m m m
Discussion Questions
m
1-1 What meffect mdid mthemrecessionmof m2007-2009mhavemonmgovernment mregulation?
It mwasmgreatlymincreased.
1-2 What madvantagesmdoesmamsolemproprietorshipmoffer?mWhat mismammajormdrawbackmof mthismty
pemof morganization?
A msolemproprietorshipmoffersmthemadvantagemof msimplicitymof mdecisionmmakingmand mlowmor
ganizationalmand moperatingmcosts.mA mmajormdrawbackmismthat mtheremismunlimited mliabilitymto
mthemowner.
1-3 What mformmof mpartnershipmallowsmsomemof mtheminvestorsmtomlimit mtheirmliability?mExpla
inmbriefly.
A mlimited mpartnershipmallowsmsomemof mthempartnersmtomlimit mtheirmliability.mUndermthismarr
angement,monemormmorempartnersmaremdesignated mgeneralmpartnersmand mhavemunlimited mliab
ilitymformthemdebtsmof mthemfirm;mothermpartnersmaremdesignated mlimited mpartnersmand maremlia
blemonlymformtheirminitialmcontribution.mThemlimited mpartnersmaremnormally mprohibited mfrom
mbeingmactiveminmthemmanagement mof mthemfirm.
1-4 Inmamcorporation,mwhat mgroupmhasmthemultimatemresponsibilitymformprotectingmand mmanagi
ngmthemstockholders’minterests?
Themboard mof mdirectors.
1-5 What mdocument mismnecessarymtomformmamcorporation?
Themarticlesmof mincorporation.
1-6 What missuemdoesmagencymtheorymexamine?mWhymismit mimportant minmampublicmcorporati
onmrathermthanminmamprivatemcorporation?
©m McGraw m HillmLLC.mAllmrightsmreserved.m Nom reproductionm orm distributionm withoutm them priorm writtenm consentm ofmMcGraw
m Hill m LLC.
, Agencymtheorymexaminesmthemrelationshipmbetweenmthemownersmof mthemfirmmand mthemmana
gersmof mthemfirm.mInmprivatelymowned mfirms,mmanagement mand mthemownersmaremusuallymthem
samempeople.mManagement moperatesmthemfirmmtomsatisfymitsmownmgoals,mneeds,mfinancialmre
quirementsmand mthemlike.mAsmamcompanymmovesmfrommprivatemtompublicmownership,m mana
gement mnowmrepresentsmallmowners.mThismplaces mmanagement minmthemagencympositionmof m
makingmdecisionsminmthembest minterest mof mallmshareholders.
1-7 What mareminstitutionalminvestorsmimportant minmtoday’smbusinessmworld?
Becauseminstitutionalminvestorsmsuchmasmpensionmfundsmand mmutualmfundsmownmamlargemperc
entagemof mmajormU.S.mcompanies,mtheymaremhavingmmoremtomsaymabout mthemwaympubliclymow
ned mcompaniesmaremmanaged.mAsmamgroup,mtheymhavemthemabilitymtomvotemlargemblocksmof msh
aresmformthemelectionmof mamboard mof mdirectors,mwhichmismsupposed mtomrunmthemcompanyminmanm
efficient,mcompetitivemmanner.mThemthreat mof mbeingmablemtomreplacempoormperformingmboard
smof mdirectorsmmakesminstitutionalminvestorsmquiteminfluential.mSincemtheseminstitutions,mlikem
pensionmfundsmand mmutualmfunds,mrepresent mindividualmworkersmand minvestors,mtheymhavema
mresponsibilitymtomseemthat mthemfirmmismmanaged minmanmefficient mand methicalmway.
1-8 Whymismprofit mmaximization,mbymitself,manminappropriatemgoal?mWhat mism meant mbymthemg
oalmof mmaximizationmof mshareholdermwealth?
Themproblemmwithmamprofit mmaximizationmgoalm ismthat mit mfailsmtomtakemaccount mof mrisk,mthem
timingmof mthembenefitsmismnot mconsidered,mand mprofit mmeasurement mismamveryminexact mproce
ss.mThemgoalmof mshareholders’mwealthmmaximizationm impliesmthat mthemfirmmwill mattempt mto
machievemthemhighest mpossiblemtotalmvaluationminmthemmarketplace.mIt mismthemonemoverriding
mobjectivemof mthemfirmmand mshould minfluencemeverymdecision.
1-9 Whenmdoesminsidermtradingmoccur?mWhat mgovernment magencymismresponsiblemformprotecti
ngmagainst mthemunethicalmpracticemof minsidermtrading?
Insidermtradingmoccursmwhenmanyonemwithmnon-
publicminformationmbuysmormsellsmsecuritiesmtomtakemadvantagemof mthat mprivateminformation
.mThemSecuritiesmand mExchangemCommissionmismresponsiblemformprotectingmmarketsmagains
t minsidermtrading.mInmthempast,mpeoplemhavemgonemtomjailmformtradingmonmnon-
publicminformation.mThismhasmincluded mcompanymofficers,minvestment mbankers,mprintersmw
homhaveminformationmbeforemit mismpublished,mand mevenmtruckmdriversmwhomdelivermbusiness
mmagazinesmand mread mpositivemormnegativemarticlesmabout mamcompanymbeforemthemmagazine
mismonmthemnewsstandsmand mthenmplacemtradesmormhavemfriendsmplacemtradesmbased monmthat mi
nformation.mThemSECmhasmprosecuted manyonemwhomprofitsmfromminsideminformation.
1-10 Inmtermsmof mthemlifemof mthemsecuritiesmoffered,mwhat mismthemdifferencembetweenmmoneyma
nd mcapitalmmarkets?
Moneymmarketsmrefermtomthosemmarketsmdealingmwithmshort-
termmsecuritiesmthat mhavemamlifemof monemyearmormless.mCapitalmmarketsmrefermtomsecuritiesm
withmamlifemof mmoremthanmonemyear.
1-11 What mismthemdifferencembetweenmamprimarymand mamsecondarymmarket?
©m McGraw m HillmLLC.mAllmrightsmreserved.m Nom reproductionm orm distributionm withoutm them priorm writtenm consentm ofmMcGraw
m Hill m LLC.
, A mprimarymmarket mrefersmtomthemusemof mthemfinancialmmarketsmtomraisemnew mfundsmformthemc
orporation.mAftermthemsecuritiesmaremsold mtomthempublicm(institutionsmand mindividuals),mthey
mtrademinmthemsecondarymmarket mbetweenminvestors.mIt misminmthemsecondarymmarket mthat mpric
esmaremcontinuallymchangingmasminvestorsmbuymand msellmsecuritiesmbased monmthemexpectation
smof mcorporatemprospects.
1-12 Assumemyoumaremlookingmat mmanymcompaniesmwithmequalmrisk.mWhichmonesmwillmhavemt
hemhighest mstockmprices?
Givenmcompaniesmwithmequalmrisk,mthosemcompanies mwithmexpectationsmof mhighmreturnmw
ill mhavemhighermcommonmstockmpricesmrelativemtomthosemcompaniesmwithmexpectationsmof
mpoormreturns.
1-13 How mismthemtimemvaluemof mmoneymconcept mrelated mtomthemvaluationmof mstocks?
Themvaluemof manminvestment mthat mismexpected mtomearnmmoneyminmthemfuturemcanmbemcalculat
ed musingmtime-
valuemof mmoneymprinciples.mCorporationsmaremexpected mtompaymdividendsmtomtheirmsharehol
ders.mThemcurrent mvaluemof mthesemfuturemdividendsmismthempresent mvalue.mThempresent mvalue
mof mamstock’smfuturemdividendsmshould mbemthemsamemasmthemstock’smcurrent mprice.
Chapter 2 m
Review of Accounting
m m
Discussion Questions
m
2-1. Discussmsome mfinancialmvariablesmthatmaffectmthe mprice-earningsmratio.
The mprice-
earningsmratiomwillmbe minfluencedmbymthe mearningsmandmsalesmgrowthmofmthemfirm,mthe
m risk m orm volatility m inm performance, m the m debt-
equitymstructure mofmthemfirm,mthemdividendmpaymentmpolicy,mthemqualitymofmmanagem
ent,mandmamnumbermofmothermfactors.mThe mratiomtendsmtombe mfuture-
oriented,mandmthe mmore mpositive mthe moutlook,mthe mhighermitmwillmbe.
2-2. Whatmismthe mdifferencembetweenmbookmvaluempermshare mofmcommonmstockmandmmarke
tmvalue mpermshare?mWhymdoesmthismdisparitymoccur?
Bookmvalue mpermshare mismarrivedmatmbymtakingmthemcostmofmthemassetsmandmsubtracting
m outm liabilities m andm preferred mstockm andm dividingm by mthem numbermof m common m shares
©m McGraw m HillmLLC.mAllmrightsmreserved.m Nom reproductionm orm distributionm withoutm them priorm writtenm consentm ofmMcGraw
m Hill m LLC.
, outstanding.mItmismbasedmonmthemhistoricalmcostmofmthe massets.mMarketmvaluempermshare
m is
basedmonmthemcurrentmassessedmvaluemofmthe mfirmminmthe mmarketplace mandmmaymbearml
ittle mrelationshipmtomoriginalmcost.mBesidesmthe mdisparitymbetweenmbookmandmmarketmv
alue mcausedmbymthemhistoricalmcostmapproach,mothermcontributingmfactorsmare mthe mgro
wthmprospectsmformthe mfirm,mthemqualitymofmmanagement,mandmthemindustrymoutlook.m
Tomthe mextentmthesemaremquitemnegativemormpositive;mmarketmvaluemmaymdiffermwidelym
frommbookmvalue.
2-3. Explainmhowmdepreciationmgeneratesmactualmcashmflowsmformthe mcompany.
Themonlymwaymdepreciationmgeneratesmcashmflowsmformthe mcompanymismbymservingmasm
amtaxmshieldmagainstmreportedmincome.mThismnon-
cashmdeductionmmaymprovide mcashmflowmequalmtomthemtax mratemtimesmthe mdepreciatio
nmcharged.mThismmuchminmtaxesmwillmbe msaved,mwhile mnomcashmpaymentsmoccur.
2-4. Whatmismthe mdifference mbetweenmaccumulatedmdepreciationmandmdepreciationmexpens
e?mHowmare mtheymrelated?
Accumulatedmdepreciationmismthemsummofmallmpastmandmpresentmdepreciationmcharges,m
while mdepreciationmexpensemismthe mcurrentmyear’smcharge.mTheymaremrelatedminmthatmth
e msummofmallmpriormdepreciationmexpensemshouldmbemequalmtomaccumulatedmdepreciati
onm(subjectmtomsome mdifferentialmrelatedmtomasset
write-offs).
2-5. Howmismthe mincome mstatementmrelatedmtomthe mbalance msheet?
Themearningsm(lessmdividends)mreportedminmthemincomemstatementmismtransferredmto
m them ownership msectionmofm them balancem sheetm asm retainedm earnings.m Thus,m whatmw
e mearnminmthemincomemstatementmbecomesmpartmofmthemownershipminterestminmthem
balance msheet.
2-6. Commentmonmwhyminflationmmaymrestrictmthemusefulnessmofmthe mbalancemsheetmasmnor
mallympresented.
The mbalance msheetmismbasedmonmhistoricalmcosts.mWhenmpricesmaremrisingmrapidly,mhistor
icalmcostmdatammaymlose mmuchmof mtheirmmeaning—
particularlymformplantmandmequipmentmand
©m McGraw m HillmLLC.mAllmrightsmreserved.m Nom reproductionm orm distributionm withoutm them priorm writtenm consentm ofmMcGraw
m Hill m LLC.
Foundations of Financial Management, 18th Edition by Stanley Block, G
m m m m m m m m m
eoffrey Hirt, Bartley Danielsen
m m m
Chapter 1-21 m
Chapter 1 m
The Goals and Functions of Financial Management
m m m m m m
Discussion Questions
m
1-1 What meffect mdid mthemrecessionmof m2007-2009mhavemonmgovernment mregulation?
It mwasmgreatlymincreased.
1-2 What madvantagesmdoesmamsolemproprietorshipmoffer?mWhat mismammajormdrawbackmof mthismty
pemof morganization?
A msolemproprietorshipmoffersmthemadvantagemof msimplicitymof mdecisionmmakingmand mlowmor
ganizationalmand moperatingmcosts.mA mmajormdrawbackmismthat mtheremismunlimited mliabilitymto
mthemowner.
1-3 What mformmof mpartnershipmallowsmsomemof mtheminvestorsmtomlimit mtheirmliability?mExpla
inmbriefly.
A mlimited mpartnershipmallowsmsomemof mthempartnersmtomlimit mtheirmliability.mUndermthismarr
angement,monemormmorempartnersmaremdesignated mgeneralmpartnersmand mhavemunlimited mliab
ilitymformthemdebtsmof mthemfirm;mothermpartnersmaremdesignated mlimited mpartnersmand maremlia
blemonlymformtheirminitialmcontribution.mThemlimited mpartnersmaremnormally mprohibited mfrom
mbeingmactiveminmthemmanagement mof mthemfirm.
1-4 Inmamcorporation,mwhat mgroupmhasmthemultimatemresponsibilitymformprotectingmand mmanagi
ngmthemstockholders’minterests?
Themboard mof mdirectors.
1-5 What mdocument mismnecessarymtomformmamcorporation?
Themarticlesmof mincorporation.
1-6 What missuemdoesmagencymtheorymexamine?mWhymismit mimportant minmampublicmcorporati
onmrathermthanminmamprivatemcorporation?
©m McGraw m HillmLLC.mAllmrightsmreserved.m Nom reproductionm orm distributionm withoutm them priorm writtenm consentm ofmMcGraw
m Hill m LLC.
, Agencymtheorymexaminesmthemrelationshipmbetweenmthemownersmof mthemfirmmand mthemmana
gersmof mthemfirm.mInmprivatelymowned mfirms,mmanagement mand mthemownersmaremusuallymthem
samempeople.mManagement moperatesmthemfirmmtomsatisfymitsmownmgoals,mneeds,mfinancialmre
quirementsmand mthemlike.mAsmamcompanymmovesmfrommprivatemtompublicmownership,m mana
gement mnowmrepresentsmallmowners.mThismplaces mmanagement minmthemagencympositionmof m
makingmdecisionsminmthembest minterest mof mallmshareholders.
1-7 What mareminstitutionalminvestorsmimportant minmtoday’smbusinessmworld?
Becauseminstitutionalminvestorsmsuchmasmpensionmfundsmand mmutualmfundsmownmamlargemperc
entagemof mmajormU.S.mcompanies,mtheymaremhavingmmoremtomsaymabout mthemwaympubliclymow
ned mcompaniesmaremmanaged.mAsmamgroup,mtheymhavemthemabilitymtomvotemlargemblocksmof msh
aresmformthemelectionmof mamboard mof mdirectors,mwhichmismsupposed mtomrunmthemcompanyminmanm
efficient,mcompetitivemmanner.mThemthreat mof mbeingmablemtomreplacempoormperformingmboard
smof mdirectorsmmakesminstitutionalminvestorsmquiteminfluential.mSincemtheseminstitutions,mlikem
pensionmfundsmand mmutualmfunds,mrepresent mindividualmworkersmand minvestors,mtheymhavema
mresponsibilitymtomseemthat mthemfirmmismmanaged minmanmefficient mand methicalmway.
1-8 Whymismprofit mmaximization,mbymitself,manminappropriatemgoal?mWhat mism meant mbymthemg
oalmof mmaximizationmof mshareholdermwealth?
Themproblemmwithmamprofit mmaximizationmgoalm ismthat mit mfailsmtomtakemaccount mof mrisk,mthem
timingmof mthembenefitsmismnot mconsidered,mand mprofit mmeasurement mismamveryminexact mproce
ss.mThemgoalmof mshareholders’mwealthmmaximizationm impliesmthat mthemfirmmwill mattempt mto
machievemthemhighest mpossiblemtotalmvaluationminmthemmarketplace.mIt mismthemonemoverriding
mobjectivemof mthemfirmmand mshould minfluencemeverymdecision.
1-9 Whenmdoesminsidermtradingmoccur?mWhat mgovernment magencymismresponsiblemformprotecti
ngmagainst mthemunethicalmpracticemof minsidermtrading?
Insidermtradingmoccursmwhenmanyonemwithmnon-
publicminformationmbuysmormsellsmsecuritiesmtomtakemadvantagemof mthat mprivateminformation
.mThemSecuritiesmand mExchangemCommissionmismresponsiblemformprotectingmmarketsmagains
t minsidermtrading.mInmthempast,mpeoplemhavemgonemtomjailmformtradingmonmnon-
publicminformation.mThismhasmincluded mcompanymofficers,minvestment mbankers,mprintersmw
homhaveminformationmbeforemit mismpublished,mand mevenmtruckmdriversmwhomdelivermbusiness
mmagazinesmand mread mpositivemormnegativemarticlesmabout mamcompanymbeforemthemmagazine
mismonmthemnewsstandsmand mthenmplacemtradesmormhavemfriendsmplacemtradesmbased monmthat mi
nformation.mThemSECmhasmprosecuted manyonemwhomprofitsmfromminsideminformation.
1-10 Inmtermsmof mthemlifemof mthemsecuritiesmoffered,mwhat mismthemdifferencembetweenmmoneyma
nd mcapitalmmarkets?
Moneymmarketsmrefermtomthosemmarketsmdealingmwithmshort-
termmsecuritiesmthat mhavemamlifemof monemyearmormless.mCapitalmmarketsmrefermtomsecuritiesm
withmamlifemof mmoremthanmonemyear.
1-11 What mismthemdifferencembetweenmamprimarymand mamsecondarymmarket?
©m McGraw m HillmLLC.mAllmrightsmreserved.m Nom reproductionm orm distributionm withoutm them priorm writtenm consentm ofmMcGraw
m Hill m LLC.
, A mprimarymmarket mrefersmtomthemusemof mthemfinancialmmarketsmtomraisemnew mfundsmformthemc
orporation.mAftermthemsecuritiesmaremsold mtomthempublicm(institutionsmand mindividuals),mthey
mtrademinmthemsecondarymmarket mbetweenminvestors.mIt misminmthemsecondarymmarket mthat mpric
esmaremcontinuallymchangingmasminvestorsmbuymand msellmsecuritiesmbased monmthemexpectation
smof mcorporatemprospects.
1-12 Assumemyoumaremlookingmat mmanymcompaniesmwithmequalmrisk.mWhichmonesmwillmhavemt
hemhighest mstockmprices?
Givenmcompaniesmwithmequalmrisk,mthosemcompanies mwithmexpectationsmof mhighmreturnmw
ill mhavemhighermcommonmstockmpricesmrelativemtomthosemcompaniesmwithmexpectationsmof
mpoormreturns.
1-13 How mismthemtimemvaluemof mmoneymconcept mrelated mtomthemvaluationmof mstocks?
Themvaluemof manminvestment mthat mismexpected mtomearnmmoneyminmthemfuturemcanmbemcalculat
ed musingmtime-
valuemof mmoneymprinciples.mCorporationsmaremexpected mtompaymdividendsmtomtheirmsharehol
ders.mThemcurrent mvaluemof mthesemfuturemdividendsmismthempresent mvalue.mThempresent mvalue
mof mamstock’smfuturemdividendsmshould mbemthemsamemasmthemstock’smcurrent mprice.
Chapter 2 m
Review of Accounting
m m
Discussion Questions
m
2-1. Discussmsome mfinancialmvariablesmthatmaffectmthe mprice-earningsmratio.
The mprice-
earningsmratiomwillmbe minfluencedmbymthe mearningsmandmsalesmgrowthmofmthemfirm,mthe
m risk m orm volatility m inm performance, m the m debt-
equitymstructure mofmthemfirm,mthemdividendmpaymentmpolicy,mthemqualitymofmmanagem
ent,mandmamnumbermofmothermfactors.mThe mratiomtendsmtombe mfuture-
oriented,mandmthe mmore mpositive mthe moutlook,mthe mhighermitmwillmbe.
2-2. Whatmismthe mdifferencembetweenmbookmvaluempermshare mofmcommonmstockmandmmarke
tmvalue mpermshare?mWhymdoesmthismdisparitymoccur?
Bookmvalue mpermshare mismarrivedmatmbymtakingmthemcostmofmthemassetsmandmsubtracting
m outm liabilities m andm preferred mstockm andm dividingm by mthem numbermof m common m shares
©m McGraw m HillmLLC.mAllmrightsmreserved.m Nom reproductionm orm distributionm withoutm them priorm writtenm consentm ofmMcGraw
m Hill m LLC.
, outstanding.mItmismbasedmonmthemhistoricalmcostmofmthe massets.mMarketmvaluempermshare
m is
basedmonmthemcurrentmassessedmvaluemofmthe mfirmminmthe mmarketplace mandmmaymbearml
ittle mrelationshipmtomoriginalmcost.mBesidesmthe mdisparitymbetweenmbookmandmmarketmv
alue mcausedmbymthemhistoricalmcostmapproach,mothermcontributingmfactorsmare mthe mgro
wthmprospectsmformthe mfirm,mthemqualitymofmmanagement,mandmthemindustrymoutlook.m
Tomthe mextentmthesemaremquitemnegativemormpositive;mmarketmvaluemmaymdiffermwidelym
frommbookmvalue.
2-3. Explainmhowmdepreciationmgeneratesmactualmcashmflowsmformthe mcompany.
Themonlymwaymdepreciationmgeneratesmcashmflowsmformthe mcompanymismbymservingmasm
amtaxmshieldmagainstmreportedmincome.mThismnon-
cashmdeductionmmaymprovide mcashmflowmequalmtomthemtax mratemtimesmthe mdepreciatio
nmcharged.mThismmuchminmtaxesmwillmbe msaved,mwhile mnomcashmpaymentsmoccur.
2-4. Whatmismthe mdifference mbetweenmaccumulatedmdepreciationmandmdepreciationmexpens
e?mHowmare mtheymrelated?
Accumulatedmdepreciationmismthemsummofmallmpastmandmpresentmdepreciationmcharges,m
while mdepreciationmexpensemismthe mcurrentmyear’smcharge.mTheymaremrelatedminmthatmth
e msummofmallmpriormdepreciationmexpensemshouldmbemequalmtomaccumulatedmdepreciati
onm(subjectmtomsome mdifferentialmrelatedmtomasset
write-offs).
2-5. Howmismthe mincome mstatementmrelatedmtomthe mbalance msheet?
Themearningsm(lessmdividends)mreportedminmthemincomemstatementmismtransferredmto
m them ownership msectionmofm them balancem sheetm asm retainedm earnings.m Thus,m whatmw
e mearnminmthemincomemstatementmbecomesmpartmofmthemownershipminterestminmthem
balance msheet.
2-6. Commentmonmwhyminflationmmaymrestrictmthemusefulnessmofmthe mbalancemsheetmasmnor
mallympresented.
The mbalance msheetmismbasedmonmhistoricalmcosts.mWhenmpricesmaremrisingmrapidly,mhistor
icalmcostmdatammaymlose mmuchmof mtheirmmeaning—
particularlymformplantmandmequipmentmand
©m McGraw m HillmLLC.mAllmrightsmreserved.m Nom reproductionm orm distributionm withoutm them priorm writtenm consentm ofmMcGraw
m Hill m LLC.
