Solution Manual For Foundations of Financial Management, 13Ce Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen, Doug Short, Michael Meehan Chapter 1-21
Chapter 1 Discussion Questions 1-1.
Regulation was increased with the Dodd – Frank Act and other measures. These measures were intended to increase the transparency of financial institutions and to generally limit speculative investing.
1-2.
The student should be prepared to pay a higher price for the promised $2 from the Royal Bank. The risk is lower.
1-3.
The goal of shareholder wealth maximization implies that the firm will attempt to achieve the highest possible valuation in the marketplace. It is the one overriding objective of the firm and should influence every decision. The problem with a profit maximization goal is that it fails to take account of risk, the timing of the benefits is not considered, and profit measurement is a very inexact process.
1-4.
Agency theory examines the relationship between the owners of the firm and the managers of the firm. In privately owned firms, management and the owners are usually the same people. Management operates the firm to satisfy its own goals, needs, financial requirements and the like. As a company moves from private to public ownership, management now represents all owners. This places management in the agency position of making decisions in the best interest of all shareholders.
1-5.
Because institutional investors such as pension funds (Ontario Teachers, CPP) and mutual funds own a significant percentage of major companies, they are having more to say about the way publicly owned companies are managed. As a group, they have the ability to vote large blocks of shares for the election of a board of directors, which is supposed to run the company in an efficient, competitive manner. The threat of being able to replace poorly performing boards of directors makes institutional investors quite influential. Since these institutions, like pension funds and mutual funds, represent individual workers and investors, they have a responsibility to see that the firm is managed in an efficient and ethical way.
1-6.
Insider trading occurs when someone has information that is not available to the public and then uses the information to profit from trading in a company‘s common stock. The provincial securities commissions are responsible for protecting against insider trading.
1-7.
Pollution controls and other socially acceptable practices may at times be inconsistent with a corporation‘s objective to achieve the highest possible value, however they should still be pursued. Maximization of shareholder wealth can still be achieved in the long run 4-1
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Block/Hirt/Danielsen/Short/Meehan