SOLUTION MANUAL
Foundations of Financial Management, 18th Edition
by Stanley Block, Geoffrey Hirt, Chapters 1 – 21, Complete
,
, Chapter 1
The Goals and Functions of Financial Management
Discussion Questions
1-1 WhatAeffectAdidAtheArecessionAofA2007-2009AhaveAonAgovernmentAregulation?
ItAwasAgreatlyAincreased.
1-2 WhatAadvantagesAdoesAaAsoleAproprietorshipAoffer?AWhatAisAaAmajorAdrawbackAofAthisAtyp
eAofA organization?
AAsoleAproprietorshipAoffersAtheAadvantageAofAsimplicityAofAdecisionAmakingAandAlowA organ
izationalAandAoperatingAcosts.AAAmajorAdrawbackAisAthatAthereAisAunlimitedAliabilityAtoAtheA ow
ner.
1-3 WhatAformAofApartnershipAallowsAsomeAofAtheAinvestorsAtoAlimitAtheirAliability?AExplain
A briefly.
AAlimitedApartnershipAallowsAsomeAofAtheApartnersAtoAlimitAtheirAliability.AUnderAthisA arrange
ment,AoneAorAmoreApartnersAareAdesignatedAgeneralApartnersAandAhaveAunlimitedA liabilityAf
orAtheAdebtsAofAtheAfirm;AotherApartnersAareAdesignatedAlimitedApartnersAandAareAliableA onl
yAforAtheirAinitialAcontribution.ATheAlimitedApartnersAareAnormallyAprohibitedAfromAbeingA activ
eAinAtheAmanagementAofAtheAfirm.
1-4 InAaAcorporation,AwhatAgroupAhasAtheAultimateAresponsibilityAforAprotectingAandAmanaging
theAstockholders’Ainterests?
TheAboardAofAdirectors.
1-5 WhatAdocumentAisAnecessaryAtoAformAaAcorporation?
TheAarticlesAofAincorporation.
1-6 WhatAissueAdoesAagencyAtheoryAexamine?AWhyAisAitAimportantAinAaApublicAcorporati
onA ratherAthanAinAaAprivateAcorporation?
, AgencyAtheoryAexaminesAtheArelationshipAbetweenAtheAownersAofAtheAfirmAandAtheAmanager
sA ofAtheAfirm.AInAprivatelyAownedAfirms,AmanagementAandAtheAownersAareAusuallyAtheAsameA
people.AManagementAoperatesAtheAfirmAtoAsatisfyAitsAownAgoals,Aneeds,AfinancialArequireme
ntsA andAtheAlike.AAsAaAcompanyAmovesAfromAprivateAtoApublicAownership,AmanagementAnow
A representsAallAowners. AThisAplacesAmanagementAinAtheA agencyApositionAofAmakingAdecisions
AinA theAbestAinterestAofAallAshareholders.
1-7 WhatAareAinstitutionalAinvestorsAimportantAinAtoday’sAbusinessAworld?
BecauseAinstitutionalAinvestorsAsuchAasApensionAfundsAandAmutualAfundsAownAaAlargeA percenta
geAofAmajorAU.S.Acompanies,AtheyAareAhavingAmoreAtoAsayAaboutAtheAwayApubliclyA ownedAco
mpaniesAareAmanaged.AAsAaAgroup,AtheyAhaveAtheAabilityAtoAvoteAlargeAblocksAofA sharesAforA
theAelectionAofAaAboardAofAdirectors,AwhichAisAsupposedAtoArunAtheAcompanyAinAanA efficient,Aco
mpetitiveAmanner.ATheAthreatAofAbeingAableAtoAreplaceApoorAperformingAboardsAofA directors
AmakesAinstitutionalAinvestorsAquiteAinfluential.ASinceAtheseAinstitutions,AlikeApensionA fundsAandA
mutualAfunds,ArepresentAindividualAworkersAandAinvestors,AtheyAhaveAaAresponsibilityA toAseeAt
hatAtheAfirmAisAmanagedAinAanAefficientAandAethicalAway.
1-8 WhyAisAprofitAmaximization,AbyAitself,AanAinappropriateAgoal?AWhatAisAmeantAbyAtheAgoa
lAofA maximizationAofAshareholderAwealth?
TheAproblemAwithAaAprofitAmaximizationAgoalAisAthatAitAfailsAtoAtakeAaccountAofArisk,AtheA timi
ngAofAtheAbenefitsAisAnotAconsidered,AandAprofitAmeasurementAisAaAveryAinexactAprocess.A The
AgoalAofAshareholders’AwealthAmaximizationA impliesAthatAtheAfirmA willAattemptAtoA achieveA th
eAhighestApossibleAtotalAvaluationAinAtheAmarketplace.AItAisAtheAoneAoverridingAobjectiveAofA t
heAfirmAandAshouldAinfluenceAeveryAdecision.
1-9 WhenAdoesAinsiderAtradingAoccur?AWhatAgovernmentAagencyAisAresponsibleAforAprotectin
gA againstAtheAunethicalApracticeAofAinsiderAtrading?
InsiderAtradingAoccursAwhenAanyoneAwithAnon-
publicAinformationAbuysAorAsellsAsecuritiesAtoA takeAadvantageAofAthatAprivateAinformation.AT
heASecuritiesAandAExchangeACommissionAisA responsibleAforAprotectingAmarketsAagainstAinside
rAtrading.AInAtheApast,ApeopleAhaveAgoneAtoA jailAforAtradingAonAnon-
publicAinformation.AThisAhasAincludedAcompanyAofficers,AinvestmentA bankers,AprintersAwhoAh
aveAinformationAbeforeAitAisApublished,AandAevenAtruckAdriversAwhoA deliverAbusinessAmagazi
nesAandAreadApositiveAorAnegativeAarticlesAaboutAaAcompanyAbeforeAtheA magazineAisAonAth
eAnewsstandsAandAthenAplaceAtradesAorAhaveAfriendsAplaceAtradesAbasedAonA thatAinformati
on.ATheASECAhasAprosecutedAanyoneAwhoAprofitsAfromAinsideAinformation.
1-10 InAtermsAofAtheAlifeAofAtheAsecuritiesAoffered,AwhatAisAtheAdifferenceAbetweenAmoneyAan
dA capitalAmarkets?
MoneyAmarketsAreferAtoAthoseAmarketsAdealingAwithAshort-
termAsecuritiesAthatAhaveAaAlifeAofA oneAyearAorAless.ACapitalAmarketsAreferAtoAsecuritiesAwi
thAaAlifeAofAmoreAthanAoneAyear.
1-11 WhatAisAtheAdifferenceAbetweenAaAprimaryAandAaAsecondaryAmarket?
Foundations of Financial Management, 18th Edition
by Stanley Block, Geoffrey Hirt, Chapters 1 – 21, Complete
,
, Chapter 1
The Goals and Functions of Financial Management
Discussion Questions
1-1 WhatAeffectAdidAtheArecessionAofA2007-2009AhaveAonAgovernmentAregulation?
ItAwasAgreatlyAincreased.
1-2 WhatAadvantagesAdoesAaAsoleAproprietorshipAoffer?AWhatAisAaAmajorAdrawbackAofAthisAtyp
eAofA organization?
AAsoleAproprietorshipAoffersAtheAadvantageAofAsimplicityAofAdecisionAmakingAandAlowA organ
izationalAandAoperatingAcosts.AAAmajorAdrawbackAisAthatAthereAisAunlimitedAliabilityAtoAtheA ow
ner.
1-3 WhatAformAofApartnershipAallowsAsomeAofAtheAinvestorsAtoAlimitAtheirAliability?AExplain
A briefly.
AAlimitedApartnershipAallowsAsomeAofAtheApartnersAtoAlimitAtheirAliability.AUnderAthisA arrange
ment,AoneAorAmoreApartnersAareAdesignatedAgeneralApartnersAandAhaveAunlimitedA liabilityAf
orAtheAdebtsAofAtheAfirm;AotherApartnersAareAdesignatedAlimitedApartnersAandAareAliableA onl
yAforAtheirAinitialAcontribution.ATheAlimitedApartnersAareAnormallyAprohibitedAfromAbeingA activ
eAinAtheAmanagementAofAtheAfirm.
1-4 InAaAcorporation,AwhatAgroupAhasAtheAultimateAresponsibilityAforAprotectingAandAmanaging
theAstockholders’Ainterests?
TheAboardAofAdirectors.
1-5 WhatAdocumentAisAnecessaryAtoAformAaAcorporation?
TheAarticlesAofAincorporation.
1-6 WhatAissueAdoesAagencyAtheoryAexamine?AWhyAisAitAimportantAinAaApublicAcorporati
onA ratherAthanAinAaAprivateAcorporation?
, AgencyAtheoryAexaminesAtheArelationshipAbetweenAtheAownersAofAtheAfirmAandAtheAmanager
sA ofAtheAfirm.AInAprivatelyAownedAfirms,AmanagementAandAtheAownersAareAusuallyAtheAsameA
people.AManagementAoperatesAtheAfirmAtoAsatisfyAitsAownAgoals,Aneeds,AfinancialArequireme
ntsA andAtheAlike.AAsAaAcompanyAmovesAfromAprivateAtoApublicAownership,AmanagementAnow
A representsAallAowners. AThisAplacesAmanagementAinAtheA agencyApositionAofAmakingAdecisions
AinA theAbestAinterestAofAallAshareholders.
1-7 WhatAareAinstitutionalAinvestorsAimportantAinAtoday’sAbusinessAworld?
BecauseAinstitutionalAinvestorsAsuchAasApensionAfundsAandAmutualAfundsAownAaAlargeA percenta
geAofAmajorAU.S.Acompanies,AtheyAareAhavingAmoreAtoAsayAaboutAtheAwayApubliclyA ownedAco
mpaniesAareAmanaged.AAsAaAgroup,AtheyAhaveAtheAabilityAtoAvoteAlargeAblocksAofA sharesAforA
theAelectionAofAaAboardAofAdirectors,AwhichAisAsupposedAtoArunAtheAcompanyAinAanA efficient,Aco
mpetitiveAmanner.ATheAthreatAofAbeingAableAtoAreplaceApoorAperformingAboardsAofA directors
AmakesAinstitutionalAinvestorsAquiteAinfluential.ASinceAtheseAinstitutions,AlikeApensionA fundsAandA
mutualAfunds,ArepresentAindividualAworkersAandAinvestors,AtheyAhaveAaAresponsibilityA toAseeAt
hatAtheAfirmAisAmanagedAinAanAefficientAandAethicalAway.
1-8 WhyAisAprofitAmaximization,AbyAitself,AanAinappropriateAgoal?AWhatAisAmeantAbyAtheAgoa
lAofA maximizationAofAshareholderAwealth?
TheAproblemAwithAaAprofitAmaximizationAgoalAisAthatAitAfailsAtoAtakeAaccountAofArisk,AtheA timi
ngAofAtheAbenefitsAisAnotAconsidered,AandAprofitAmeasurementAisAaAveryAinexactAprocess.A The
AgoalAofAshareholders’AwealthAmaximizationA impliesAthatAtheAfirmA willAattemptAtoA achieveA th
eAhighestApossibleAtotalAvaluationAinAtheAmarketplace.AItAisAtheAoneAoverridingAobjectiveAofA t
heAfirmAandAshouldAinfluenceAeveryAdecision.
1-9 WhenAdoesAinsiderAtradingAoccur?AWhatAgovernmentAagencyAisAresponsibleAforAprotectin
gA againstAtheAunethicalApracticeAofAinsiderAtrading?
InsiderAtradingAoccursAwhenAanyoneAwithAnon-
publicAinformationAbuysAorAsellsAsecuritiesAtoA takeAadvantageAofAthatAprivateAinformation.AT
heASecuritiesAandAExchangeACommissionAisA responsibleAforAprotectingAmarketsAagainstAinside
rAtrading.AInAtheApast,ApeopleAhaveAgoneAtoA jailAforAtradingAonAnon-
publicAinformation.AThisAhasAincludedAcompanyAofficers,AinvestmentA bankers,AprintersAwhoAh
aveAinformationAbeforeAitAisApublished,AandAevenAtruckAdriversAwhoA deliverAbusinessAmagazi
nesAandAreadApositiveAorAnegativeAarticlesAaboutAaAcompanyAbeforeAtheA magazineAisAonAth
eAnewsstandsAandAthenAplaceAtradesAorAhaveAfriendsAplaceAtradesAbasedAonA thatAinformati
on.ATheASECAhasAprosecutedAanyoneAwhoAprofitsAfromAinsideAinformation.
1-10 InAtermsAofAtheAlifeAofAtheAsecuritiesAoffered,AwhatAisAtheAdifferenceAbetweenAmoneyAan
dA capitalAmarkets?
MoneyAmarketsAreferAtoAthoseAmarketsAdealingAwithAshort-
termAsecuritiesAthatAhaveAaAlifeAofA oneAyearAorAless.ACapitalAmarketsAreferAtoAsecuritiesAwi
thAaAlifeAofAmoreAthanAoneAyear.
1-11 WhatAisAtheAdifferenceAbetweenAaAprimaryAandAaAsecondaryAmarket?
