SOLUTION MANUAL
Foundations of Financial Management,
18th Edition by Stanley Block, Geoffrey Hirt,
Chapters 1 – 21, Complete
,
, Chapter 1 g
The Goals and Functions of Financial Management
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Discussion Questions
g
1-1 Whatgeffectgdidgthegrecessiongofg2007-2009ghavegonggovernmentgregulation?
Itgwasggreatlygincreased.
1-2 Whatgadvantagesgdoesgagsolegproprietorshipgoffer?gWhatgisgagmajorgdrawbackgofgt
hisgtypegofgorganization?
Agsolegproprietorshipgoffersgthegadvantagegofgsimplicitygofgdecisiongmakinggandglow
gorganizational gandgoperating gcosts.gAgmajor gdrawbackgis gthatgtheregisgunlimitedgliab
ilitygtogthegowner.
1-3 Whatgformgofgpartnershipgallowsgsomegofgtheginvestorsgtoglimitgtheirgliability?gEx
plaingbriefly.
Aglimitedgpartnershipgallowsgsomegofgthegpartnersgtoglimitgtheirgliability.gUndergthisgar
rangement,gonegorgmoregpartnersgaregdesignatedggeneralgpartnersgandghavegunlimi
tedgliabilitygforgthegdebtsgofgthegfirm;gothergpartnersgaregdesignatedglimitedgpartnersg
andgaregliablegonlygforgtheirginitialgcontribution.gTheglimitedgpartnersgaregnormallygpro
hibitedgfromgbeinggactivegingthegmanagementgofgthegfirm.
1-4 Ingagcorporation,gwhatggroupghasgthegultimategresponsibilitygforgprotectinggandgma
naginggthegstockholders’ginterests?
Thegboardgofgdirectors.
1-5 Whatgdocumentgisgnecessarygtogformgagcorporation?
Thegarticlesgofgincorporation.
1-6 Whatgissuegdoesgagencygtheorygexamine?gWhygisgitgimportantgingagpublicgcorpo
rationgrathergthangingagprivategcorporation?
, Agencygtheorygexaminesgthegrelationshipgbetweengthegownersgofgthegfirmgandgtheg
managersgofgthegfirm.gIngprivatelygownedgfirms,gmanagementgandgthegownersgaregu
suallygthegsamegpeople.gManagementgoperatesgthegfirmgtogsatisfygitsgownggoals,gne
eds,gfinancialgrequirementsgandgtheglike.gAsgagcompanygmovesgfromgprivategtogpubli
cgownership,gmanagementgnowgrepresentsgallgowners.gThisgplacesgmanagementgi
ngthegagencygpositiongofgmakinggdecisionsgingthegbestginterestgofgallgshareholders.
1-7 Whatgareginstitutionalginvestorsgimportantgingtoday’sgbusinessgworld?
Becauseginstitutionalginvestorsgsuchgasgpensiongfundsgandgmutualgfundsgowngaglarg
egpercentagegofgmajorgU.S.gcompanies,gtheygareghavinggmoregtogsaygaboutgthegwayg
publiclygownedgcompaniesgaregmanaged.gAsgaggroup,gtheyghavegthegabilitygtogvotegla
rgegblocksgofgsharesgforgthegelectiongofgagboardgofgdirectors,gwhichgisgsupposedgtogrun
gthegcompanygingangefficient,gcompetitivegmanner.gThegthreatgofgbeinggablegtogreplac
egpoorgperforminggboardsgofgdirectorsgmakesginstitutionalginvestorsgquiteginfluential.g
Sincegtheseginstitutions,glikegpensiongfundsgandgmutualgfunds,grepresentgindividualgw
orkersgandginvestors,gtheyghavegagresponsibilitygtogseegthatgthegfirmgisgmanagedginga
ngefficientgandgethicalgway.
1-8 Whygisgprofitgmaximization,gbygitself,ganginappropriateggoal?gWhatgisgmeantgbygthe
ggoal gofgmaximizationgofgshareholder gwealth?
Thegproblemgwithgagprofitgmaximizationggoalgisgthatgitgfailsgtogtakegaccountgofgrisk,gth
egtiminggofgthegbenefitsgisgnotgconsidered,gandgprofitgmeasurement gisgagveryginexactg
process.gTheggoalgofgshareholders’gwealthgmaximizationgimpliesgthatgthegfirmgwillgat
temptgtogachievegtheghighestgpossiblegtotalgvaluationgingthegmarketplace.gItgisgthegon
egoverridinggobjectivegofgthegfirmgandgshouldginfluencegeverygdecision.
1-9 Whengdoesginsidergtradinggoccur?gWhatggovernmentgagencygisgresponsiblegforgpr
otectinggagainstgthegunethicalgpracticegofginsidergtrading?
Insidergtradinggoccursgwhenganyonegwithgnon-
publicginformationgbuysgorgsellsgsecuritiesgtogtakegadvantagegofgthatgprivateginforma
tion.gThegSecuritiesgandgExchangegCommissiongisgresponsiblegforgprotectinggmark
etsgagainstginsidergtrading.gIngthegpast,gpeopleghaveggonegtogjailgforgtradinggongnon-
publicginformation.gThisghasgincludedgcompanygofficers,ginvestmentgbankers,gprint
ersgwhoghaveginformationgbeforegitgisgpublished,gandgevengtruckgdriversgwhogdeliver
gbusinessgmagazinesgandgreadgpositivegorgnegativegarticlesgaboutgagcompanygbefor
egthegmagazinegisgongthegnewsstandsgandgthengplacegtradesgorghavegfriendsgplacegt
radesgbasedgongthatginformation.gThegSECghasgprosecutedganyonegwhogprofitsgfro
mginsideginformation.
1-10 Ingtermsgofgtheglifegofgthegsecuritiesgoffered,gwhatgisgthegdifferencegbetweengmon
eygandgcapitalgmarkets?
Moneygmarketsgrefergtogthosegmarketsgdealinggwithgshort-
termgsecuritiesgthatghavegaglifegofgonegyeargorgless.gCapitalgmarketsgrefergtogsecuriti
esgwithgaglifegofgmoregthangonegyear.
