【正文】 he material on the first midterm exam. One point we emphasize in the first class is that students should get a copy of Blueprints and a financial calculator immediately, and bring both to class regularly. We also put copies of the various versions of our ―Brief Calculator Manual,‖ which in about 12 pages explains how to use the most popular calculators, in the copy center. We want students to start learning to use their calculators early, because in the past we have found that many students wait to learn to use their calculators at the same time they are trying to understand time value of money concepts. If students learn how to use the calculator early, they are less likely to get confused by time value concepts. We are often asked what calculator students should buy. If they already have a financial calculator that can find IRRs, we tell them that it will do, but if they do not have one, we remend either the HP10B or 17B. Please see the ―Lecture Suggestions‖ for Chapter 7 for more on calculators. DAYS ON CHAPTER: 1 OF 58 DAYS (50minute periods) LECTURE SUGGESTIONS Answers and Solutions: 1 3 11 The three principal forms of business anization are sole proprietorship, partnership, and corporation. The advantages of the first two include the ease and low cost of formation. The advantages of the corporation include limited liability, indefinite life, ease of ownership transfer, and access to capital markets. The disadvantages of a sole proprietorship are (1) difficulty in obtaining large sums of capital。 (2) THE PROPRIETOR HAS UNLIMITED PERSONAL LIABILITY FOR THE BUSINESS’S DEBTS, AND (3) THE LIFE OF A BUSINESS ORGANIZED AS A PROPRIETORSHIP IS LIMITED TO THE LIFE OF THE INDIVIDUAL WHO CREATED IT. THE MAJOR ADVANTAGE OF A PARTNERSHIP IS ITS LOW COST AND EASE OF FORMATION. THE DISADVANTAGES ARE SIMILAR TO THOSE ASSOCIATED WITH PROPRIETORSHIPS: (1) UNLIMITED LIABILITY, (2) LIMITED LIFE OF THE ORGANIZATION, (3) DIFFICULTY OF TRANSFERRING OWNERSHIP, AND (4) DIFFICULTY OF RAISING LARGE AMOUNTS OF CAPITAL. THE TAX TREATMENT OF A PARTNERSHIP IS SIMILAR TO THAT FOR PROPRIETORSHIPS, WHICH IS OFTEN AN ADVANTAGE. THE CORPORATE FORM OF BUSINESS HAS THREE MAJOR ADVANTAGES: (1) UNLIMITED LIFE, (2) EASY TRANSFERABILITY OF OWNERSHIP INTEREST, AND (3) LIMITED LIABILITY. WHILE THE CORPORATE FORM OFFERS SIGNIFICANT ADVANTAGES OVER PROPRIETORSHIPS AND PARTNERSHIPS, IT DOES HAVE TWO PRIMARY DISADVANTAGES: (1) CORPORATE EARNINGS MAY BE SUBJECT TO DOUBLE TAXATION AND (2) SETTING UP A CORPORATION AND FILING THE MANY REQUIRED STATE AND FEDERAL REPORTS IS MORE COMPLEX AND TIMECONSUMING THAN FOR A PROPRIETORSHIP OR A PARTNERSHIP. E. WHAT IS THE PRIMARY GOAL OF THE CORPORATION? Learning Objectives: 5 11 ANSWER: [SHOW S110 AND S111 HERE.] THE CORPORATION’S PRIMARY GOAL IS STOCKHOLDER WEALTH MAXIMIZATION, WHICH TRANSLATES TO MAXIMIZING THE PRICE OF THE FIRM’S COMMON STOCK. E. 1. DO FIRMS HAVE ANY RESPONSIBILITIES TO SOCIETY AT LARGE? ANSWER: FIRMS HAVE AN ETHICAL RESPONSIBILITY TO PROVIDE A SAFE WORKING ENVIRONMENT, TO AVOID POLLUTING THE AIR OR WATER, AND TO PRODUCE SAFE PRODUCTS. HOWEVER, THE MOST SIGNIFICANT COSTINCREASING ACTIONS WILL HAVE TO BE PUT ON A MANDATORY RATHER THAN A VOLUNTARY BASIS TO ENSURE THAT THE BURDEN FALLS UNIFORMLY ON ALL BUSINESSES. E. 2. IS STOCK PRICE MAXIMIZATION GOOD OR BAD FOR SOCIETY? ANSWER: THE SAME ACTIONS THAT MAXIMIZE STOCK PRICES ALSO BENEFIT SOCIETY. STOCK PRICE MAXIMIZATION REQUIRES EFFICIENT, LOWCOST OPERATIONS THAT PRODUCE HIGHQUALITY GOODS AND SERVICES AT THE LOWEST POSSIBLE COST. STOCK PRICE MAXIMIZATION REQUIRES THE DEVELOPMENT OF PRODUCTS AND SERVICES THAT CONSUMERS WANT AND NEED, SO THE PROFIT MOTIVE LEADS TO NEW TECHNOLOGY, TO NEW PRODUCTS, AND TO NEW JOBS. ALSO, STOCK PRICE MAXIMIZATION NECESSITATES EFFICIENT AND COURTEOUS SERVICE, ADEQUATE STOCKS OF MERCHANDISE, AND WELLLOCATED BUSINESS ESTABLISHMENTSFACTORS THAT ARE ALL NECESSARY TO MAKE SALES, WHICH ARE NECESSARY FOR PROFITS. E. 3. SHOULD FIRMS BEHAVE ETHICALLY? ANSWER: YES. EXECUTIVES OF MOST MAJOR FIRMS IN THE UNITED STATES BELIEVE THAT FIRMS DO TRY TO MAINTAIN HIGH ETHICAL STANDARDS IN ALL OF THEIR BUSINESS DEALINGS. FURTHERMORE, MOST EXECUTIVES BELIEVE THAT THERE IS A POSITIVE CORRELATION BETWEEN ETHICS AND LONGRUN PROFITABILITY. CONFLICTS OFTEN ARISE BETWEEN PROFITS AND ETHICS. COMPANIES MUST DEAL WITH THESE CONFLICTS ON A REGULAR BASIS, AND A FAILURE TO HANDLE THE SITUATION PROPERLY CAN LEAD TO HUGE PRODUCT LIABILITY SUITS AND EVEN TO BANKRUPTCY. THERE IS NO ROOM FOR UNETHICAL BEHAVIOR IN THE BUSINESS WORLD. Learning Objectives: 5 12 Dryden Press F. WHAT IS AN AGENCY RELATIONSHIP? ANSWER: [SHOW S112 HERE.] AN AGENCY RELATIONSHIP EXISTS WHENEVER A ―PRINCIPAL‖ ENGAGES AN ―AGENT‖ AND GRANTS THE AGENT SOME DECISIONMAKING POWER. F. 1. WHAT AGENCY RELATIONSHIPS EXIST WITHIN A CORPORATION? ANSWER: WITHIN THE FINANCIAL MANAGEMENT CONTEXT, THE PRIMARY AGENCY RELATIONSHIPS ARE THOSE (1) BETWEEN STOCKHOLDERS AND MANAGERS AND (2) BETWEEN DEBTHOLDERS AND STOCKHOLDERS (THROUGH MANAGERS). F. 2. WHAT MECHANISMS EXIST TO INFLUENCE MANAGERS TO ACT IN SHAREHOLDERS’ BEST INTERESTS? ANSWER: [SHOW S113 HERE.] TO REDUCE AGENCY CONFLICTS, STOCKHOLDERS MUST INCUR AGENCY COSTS, WHICH INCLUDE ALL COSTS BORNE BY SHAREHOLDERS TO ENCOURAGE MANAGERS TO MAXIMIZE THE FIRM’S STOCK PRICE RATHER THAN ACT IN THEIR OWN SELFINTERESTS. SOME SPECIFIC MECHANISMS THAT ENCOURAGE MANAGERS TO ACT IN SHAREHOLDERS’ INTERESTS INCLUDE: (1) PERFORMANCEBASED MANAGERIAL COMPENSATION, (2) DIRECT INTERVENTION BY SHAREHOLDERS, (3) THE THREAT OF FIRING, AND (4) THE THREAT OF TAKEOVER. F. 3. SHOULD SHAREHOLDERS (THROUGH MANAGERS) TAKE A