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• Contents
• Preface
• Part 1 The Scope and Environment of Financial Management
• 1 Financial Management and the Firm
• The Goal of the Firm
• Five Principles That Form the Foundations of Finance
• Principle 1: Cash Flow Is What Matters
• Principle 2: Money Has a Time Value
• Principle 3: Risk Requires a Reward
• Principle 4: Market Prices Are Generally Right
• Principle 5: Conflicts of Interest Cause Agency Problems
• The Current Global Financial Crisis
• Avoiding Financial Crisis—Back to the Principles
• The Essential Elements of Ethics and Trust
• The Role of Finance in Business
• Why Study Finance?
• The Role of the Financial Manager
• The Legal Forms of Business Organization
• Sole Proprietorships
• Partnerships
• Corporations
• Organizational Form and Taxes: The Double Taxation on Dividends
• S-Corporations and Limited Liability Companies (LLCs)
• Which Organizational Form Should Be Chosen?
• Finance and the Multinational Firm: of Finance
• Chapter Summaries
• Review Questions
• Mini Case
• 2 Financial Markets and the Investment Banking System
• Financing of Business: The Movement of Funds Through the Economy
• Public Offerings Versus Private Placements
• Primary Markets Versus Secondary Markets
• The Money Market Versus the Capital Market
• Spot Markets Versus Futures Markets
• Stock Exchanges: Organized Security Exchanges Versus Over-the-Counter Markets, a Blurring Difference
• Selling Securities to the Public
• Functions
• The Demise of the Stand-Alone Investment-Banking Industry
• Distribution Methods
• Private Debt Placements
• Flotation Costs
• Cautionary Tale: Forgetting Principle 5:
• Conflicts of Interest Cause Agency Problems
• Regulation Aimed at Making the Goal of the Firm Work: The Sarbanes-Oxley Act
• Rates of Return in the Financial Markets
• Rates of Return over Long Periods
• Interest Rate Levels in Recent Periods
• Interest Rate Determinants in a Nutshell
• Estimating Specific Interest Rates Using Risk Premiums
• Real Risk-Free Interest Rate and the Risk-Free Interest Rate
• Real and Nominal Rates of Interest
• Can You Do It?
• Did You Get It?
• Inflation and Real Rates of Return: The Financial Analyst’s Approach
• Can You Do It? Solving for the Real Rate of Interest
• Did You Get It? Solving for the Real Rate of Interest
• The Term Structure of Interest Rates
• Observing the Historical Term Structures of Interest Rates
• Can You Do It? Solving for the Nominal Rate of Interest
• Did You Get It? Solving for the Nominal Rate of Interest
• What Explains the Shape of the Term Structure?
• Chapter Summaries
• Review Questions
• Study Problems
• Mini Case
• 3 A Review of Financial Statements
• The Income Statement
• Income Statement Illustrated: The Home Depot, Inc.
• Home Depot’s Common-Sized Income Statement
• The Balance Sheet
• Types of Assets
• Types of Financing
• Balance Sheet Illustrated: The Home Depot, Inc.
• Working Capital
• The Balance Sheet and Income Statement—as One Picture
• Measuring Cash Flows
• Profits Versus Cash Flows
• Did You Get It? Preparing an Income Statement and aBalance Sheet
• A Beginning Look: Determining Sources and Uses of Cash
• Statement of Cash Flows
• Finance at Work: Managing Your Cash Flows
• Concluding Suggestions for Computing Cash Flows
• Conclusions About Home Depot’s Financial Position
• Finance at Work: What Did Home Depot’s Management Have to Say?
• Can You Do It? Measuring Cash Flows
• GAAP and IFRS
• Did You Get It? Measuring Cash Flows
• Income Taxes and Finance
• Computing Taxable Income
• Computing the Taxes Owed
• Can You Do It? Computing a Corporation’s Income Taxes
• Accounting Malpractice and Limitations of Financial Statements
• Did You Get It? Computing a Corporation’s Income Taxes
• Chapter Summaries
• Review Questions
• Study Problems
• Mini Case
• Appendix 3A: Free Cash Flows
• What Is a Free Cash Flow?
• Computing Free Cash Flow
• The Other Side of the Coin: Financing Cash Flows
• Financing Cash Flows
• A Concluding Thought
• Appendix Summary
• Study Problems
• 4 Financial Statement Analysis
• The Purpose of Financial Analysis
• Finance at Work: Home Depot and Lowe’s: The Histories
• Measuring Key Financial Relationships
• Question 1: How Liquid Is the Firm—Can It Pay Its Bills?
• Question 2: Are the Firm’s Managers Generating Adequate Operating Profits from the Company’s Ass
• Question 3: How Is the Firm Financing Its Assets?
• Question 4: Are the Firm’s Managers Providing a Good Return on the Capital Provided by the Shareho
• Question 5: Are the Firm’s Managers Creating Shareholder Value?
• The Limitations of Financial Ratio Analysis
• Chapter Summaries
• Review Questions
• Study Problems
• Mini Case
• Part 2 The Valuation of Financial Assets
• 5 Discounted Cash Flow Analytics
• Compound Interest, Future, and Present Value
• Using Timelines to Visualize Cash Flows
• Techniques for Moving Money Through Time
• Two Additional Types of Time Value of Money Problems
• Applying Compounding to Things Other Than Money
• Present Value
• Cautionary Tale: Forgetting Principle 4: Market Prices Are Generally Right
• Can You Do It? Solving for the Present Value with Two Flows in Different Years
• Annuities
• Compound Annuities
• Did You Get It? Solving for the Present Value with Two Flows in Different Years
• The Present Value of an Annuity
• Annuities Due
• Amortized Loans
• Making Interest Rates Comparable
• Finding Present and Future Values with Nonannual Periods
• Can You Do It? How Much Can You Afford to Spend on a House? An Amortized Loan with Monthly Payments
• Did You Get It? How Much Can You Afford to Spend on a House? An Amortized Loan with Monthly Payments
• The Present Value of an Uneven Stream and Perpetuities
• Perpetuities
• Chapter Summaries
• Review Questions
• Study Problems
• Mini Case
• 6 Risk Analysis
• Expected Return Defined and Measured
• Can You Do It? Computing Expected Cash Flow and Expected Return
• Risk Defined and Measured
• Did You Get It? Computing Expected Cash Flow and Expected Return
• Can You Do It? Computing the Standard Deviation
• Finance at Work: A Different Perspective of Risk
• Did You Get It? Computing the Standard Deviation
• Rates of Return: The Investor’s Experience
• Risk and Diversification
• Diversifying Away the Risk
• Measuring Market Risk
• Can You Do It? Estimating Beta
• Measuring a Portfolio’s Beta
• Risk and Diversification Demonstrated
• Did You Get It? Estimating Beta
• The Investor’s Required Rate of Return
• The Required Rate of Return Concept
• Measuring the Required Rate of Return
• Finance at Work: Does Beta Always Work?
• Can You Do It? Computing a Required Rate of Return
• Did You Get It? Computing a Required Rate of Return
• Chapter Summaries
• Review Questions
• Study Problems
• Mini Case
• 7 Interest Rates and Bond ­Valuation
• Types of Bonds
• Debentures
• Subordinated Debentures
• Mortgage Bonds
• Eurobonds
• Convertible Bonds
• Terminology and Characteristics of Bonds
• Claims on Assets and Income
• Par Value
• Coupon Interest Rate
• Maturity
• Call Provision
• Indenture
• Bond Ratings
• Finance at Work: J.C. Penney Credit Rating Reduced to Junk
• Defining Value
• What Determines Value?
• Valuation: The Basic Process
• Can You Do It? Computing an Asset’s Value
• Valuing Bonds
• Did You Get It? Computing an Asset’s Value
• Can You Do It? Computing a Bond’s Value
• Did You Get It? Computing a Bond’s Value
• Bond Yields
• Yield to Maturity
• Current Yield
• Bond Valuation: Three Important Relationships
• Can You Do It? Computing the Yield to Maturity and Current Yield
• Did You Get It? Computing the Yield to Maturity and Current Yield
• Chapter Summaries
• Review Questions
• Study Problems
• Mini Case
• 8 Equity Valuation
• Preferred Stock
• The Characteristics of Preferred Stock
• Valuing Preferred Stock
• Finance at Work: Reading a Stock Quote in the wallstreet journal
• Can You Do It? Valuing Preferred Stock
• Common Stock
• The Characteristics of Common Stock
• Did You Get It? Valuing Preferred Stock
• Valuing Common Stock
• Can You Do It? Measuring Johnson & Johnson’s Growth Rate
• Did You Get It? Measuring Johnson & Johnson’s Growth Rate
• Can You Do It? Calculating Common Stock Value
• The Expected Rate of Return of Stockholders
• Did You Get It? Calculating Common Stock Value
• The Expected Rate of Return of Preferred Stockholders
• The Expected Rate of Return of Common Stockholders
• Can You Do It? Computing the Expected Rate of Return
• Did You Get It? Computing the Expected Rate of Return
• Chapter Summaries
• Review Questions
• Study Problems
• Mini Case
• 9 The Opportunity Cost of Capital
• The Cost of Capital: Key Definitions and Concepts
• Opportunity Costs, Required Rates of Return, and the Cost of Capital
• Can You Do It? Determining How Flotation Costs Affect the Cost of Capital
• The Firm’s Financial Policy and the Cost of Capital
• Determining the Costs of the Individual Sources of Capital
• The Cost of Debt
• Did You Get It? Determining How Flotation Costs Affect the Cost of Capital
• Can You Do It? Calculating the Cost of Debt Financing
• The Cost of Preferred Stock
• Can You Do It? Calculating the Cost of Preferred Stock Financing
• Did You Get It? Calculating the Cost of Debt Financing
• The Cost of Common Equity
• The Dividend Growth Model
• Did You Get It? Calculating the Cost of Preferred Stock Financing
• Issues in Implementing the Dividend Growth Model
• The Capital Asset Pricing Model
• Can You Do It? Calculating the Cost of New Common Stock Using the Dividend Growth Model
• Can You Do It? Calculating the Cost of Common Stock Using the CAPM
• Issues in Implementing the CAPM
• Finance at Work: IPOs: Should a Firm Go Public?
• Did You Get It? Calculating the Cost of New Common Stock Using the Dividend Growth Model
• Did You Get It? Calculating the Cost of Common Stock Using the CAPM
• The Weighted Average Cost of Capital
• Capital Structure Weights
• Calculating the Weighted Average Cost of Capital
• Cautionary Tale: Forgetting Principle 3: Risk Requires a Reward
• Calculating Divisional Costs of Capital
• Estimating Divisional Costs of Capital
• Using Pure Play Firms to Estimate Divisional WACCs
• Finance at Work: The Pillsbury Company Adopts Eva with a Grassroots Education Program
• Can You Do It? Calculating the Weighted Average Cost of Capital
• Did You Get It? Calculating the Weighted Average Cost of Capital
• Using a Firm’s Cost of Capital to Evaluate New Capital Investments
• Chapter Summaries
• Review Questions
• Study Problems
• Mini Cases
• Part 3 Investment in Long-Term Assets
• 10 Capital Investment Decision Analysis-I
• Finding Profitable Projects
• Cautionary Tale: Forgetting Principle
• Risk Requires a Reward and Principle
• Market Prices Are Generally Right
• Capital-Budgeting Decision Criteria
• The Payback Period
• The Net Present Value
• Using Spreadsheets to Calculate the Net Present Value
• Can You Do It? Determining the Npv of a Project
• The Profitability Index (Benefit–Cost Ratio)
• Did You Get It? Determining the Npv of a Project
• The Internal Rate of Return
• Can You Do It? Determining the IRR of a Project
• Viewing the NPV Relationship: The Net Present Value Profile
• Did You Get It? Determining the IRR of a Project
• Complications with the IRR: Multiple Rates of Return
• The Modified Internal Rate of Return (MIRR)2
• Using Spreadsheets to Calculate the MIRR
• Capital Rationing
• The Rationale for Capital Rationing
• Capital Rationing and Project Selection
• Ranking Mutually Exclusive Projects
• The Size-Disparity Problem
• The Time-Disparity Problem
• The Unequal-Lives Problem
• Ethics in Financial Management: The Financial Downside of Poor Ethical Behavior
• Chapter Summaries
• Review Questions
• Study Problems
• Mini Case
• 11 Capital Investment Decision Analysis-II
• Guidelines for Capital Budgeting
• Use Free Cash Flows Rather Than Accounting Profits
• Think Incrementally
• Beware of Cash Flows Diverted from Existing Products
• Look for Incidental or Synergistic Effects
• Work in Working-Capital Requirements
• Consider Incremental Expenses
• Remember That Sunk Costs Are Not Incremental Cash Flows
• Account for Opportunity Costs
• Decide If Overhead Costs Are Truly Incremental Cash Flows
• Ignore Interest Payments and Financing Flows
• Finance at Work: Universal Studios
• Calculating a Project’s Free Cash Flows
• What Goes into the Initial Outlay
• What Goes into the Annual Free Cash Flows Over the Project’s Life
• What Goes into the Terminal Cash Flow
• Calculating the Free Cash Flows
• A Comprehensive Example: Calculating Free Cash Flows
• Can You Do It? Calculating Operating Cash Flows
• Did You Get It? Calculating Operating Cash Flows
• Can You Do It? Calculating Free Cash Flows
• Options in Capital Budgeting
• The Option to Delay a Project
• Did You Get It? Calculating Free Cash Flows
• The Option to Expand a Project
• The Option to Abandon a Project
• Options in Capital Budgeting: The Bottom Line
• Risk and the Investment Decisions
• What Measure of Risk Is Relevant in Capital Budgeting?
• Measuring Risk for Capital-Budgeting Purposes with a Dose of Reality—Is Systematic Risk All There
• Incorporating Risk into Capital Budgeting
• Risk-Adjusted Discount Rates
• Measuring a Project’s Systematic Risk
• Using Accounting Data to Estimate a Project’s Beta
• The Pure Play Method for Estimating Beta
• Examining a Project’s Risk through Simulation
• Conducting a Sensitivity Analysis Through Simulation
• Chapter Summaries
• Review Questions
• Study Problems
• Mini Case
• Appendix 11A: The Modified Accelerated Cost of Recovery System
• What Does All This Mean?
• Study Problems
• Part 4 Capital Structure and Dividend Policy
• 12 Financial Leverage and Capital Structure Policy
• Business Risk
• Operating Risk
• Break-Even Analysis
• Essential Elements of the Break-Even Model
• Finding the Break-Even Point
• The Break-Even Point in Sales Dollars
• Can You Do It? Analyzing the Break-Even Sales Level
• Did You Get It? Analyzing the Break-Even Sales Level
• Sources of Operating Leverage
• Can You Do It? Analyzing the Effects of Operating Leverage
• Did You Get It? Analyzing the Effects of Operating Leverage
• Can You Do It? Analyzing the Effects of Financial Leverage
• Did You Get It? Analyzing the Effects of Financial Leverage
• Financial Leverage
• Combining Operating and Financial Leverage
• Can You Do It? Analyzing the Combined Effects of Operating and FinancialLeverage
• Did You Get It? Analyzing the Combined Effects of Operating and FinancialLeverage
• Finance at Work: When Financial Leverage Proves to Be Too Much to Handle
• Capital Structure Theory
• Cautionary Tale: Forgetting Principle 3: Risk Requiresa Reward
• A Quick Look at Capital Structure Theory
• The Importance of Capital Structure
• Independence Position
• The Moderate Position
• Firm Value and Agency Costs
• Agency Costs, Free Cash Flow, and Capital Structure
• Managerial Implications
• The Basic Tools of Capital Structure Management
• EBIT-EPS Analysis
• Comparative Leverage Ratios
• Industry Norms
• A Glance at Actual Capital Structure Management
• Finance at Work: Capital Structures Around the World
• Chapter Summaries
• Review Questions
• Study Problems
• Mini Cases
• 13 Payout Policy
• Key Terms
• Does Dividend Policy Matter to Stockholders
• Three Basic Views
• Making Sense of Dividend Policy Theory
• What Are We to Conclude?
• The Dividend Decision in Practice
• Legal Restrictions
• Liquidity Constraints
• Earnings Predictability
• Maintaining Ownership Control
• Alternative Dividend Policies
• Dividend Payment Procedures
• Stock Dividends and Stock Splits
• Stock Repurchases
• A Share Repurchase as a Dividend Decision
• The Investor’s Choice
• Finance at Work: Companies Increasingly Use Share Repurchases to Distribute Cash to Their Stockholde
• A Financing or Investment Decision?
• Practical Considerations—The Stock Repurchase Procedure
• Chapter Summaries
• Review Questions
• Study Problems
• Mini Case
• Part 5 Working-Capital Management and International Business Finance
• 14 Financial Forecasting and Planning
• Financial Forecasting
• The Sales Forecast
• Forecasting Financial Variables
• The Percent of Sales Method of Financial Forecasting
• Analyzing the Effects of Profitability and Dividend Policy on DFN
• Analyzing the Effects of Sales Growth on a Firm’s DFN
• Can You Do It? Percent of Sales Forecasting
• Did You Get It? Percent of Sales Forecasting
• Limitations of the Percent of Sales Forecasting Method
• Constructing and Using a Cash Budget
• Budget Functions
• Ethics in Financial Management: To Bribe or Not to Bribe
• The Cash Budget
• Ethics in Financial Management: Being Honest About the Uncertainty of the Future
• Chapter Summaries
• Review Questions
• Study Problems
• Mini Case
• 15 Managing Firm Liquidity
• Managing Current Assets and Liabilities
• The Risk–Return Trade-Off
• The Advantages of Current Liabilities: Return
• The Disadvantages of Current Liabilities: Risk
• Determining the Appropriate Level of Working Capital
• The Hedging Principles
• Permanent and Temporary Assets
• Temporary, Permanent, and Spontaneous Sources of Financing
• The Hedging Principle: A Graphic Illustration
• Cautionary Tale: Forgetting Principle 3: Risk Requires a Reward
• The Cash Conversion Cycle
• Can You Do It? Computing the Cash Conversion Cycle
• Did You Get It? Computing the Cash Conversion Cycle
• Estimating the Cost of Short-Term Credit Using the Approximate Cost-of-Credit Formula
• Can You Do It? The Approximate Cost of Short-Term Credit
• Sources of Short-Term Credit
• Did You Get It? The Approximate Cost of Short-Term Credit
• Finance at Work: Managing Working Capital by TrimmingReceivables
• Unsecured Sources: Accrued Wages and Taxes
• Can You Do It? The Cost of Short-Term Credit (Considering Compounding Effects)
• Unsecured Sources: Trade Credit
• Did You Get It? The Cost of Short-Term Credit (Considering Compounding Effects)
• Unsecured Sources: Bank Credit
• Unsecured Sources: Commercial Paper
• Secured Sources: Accounts-Receivable Loans
• Secured Sources: Inventory Loans
• Chapter Summaries
• Review Questions
• Study Problems
• 16 International Corporate Finance
• The Globalization of Product and Financial Markets
• Foreign Exchange Markets and Currency Exchange Rates
• Foreign Exchange Rates
• Exchange Rates and Arbitrage
• Asked and Bid Rates
• Cross Rates
• Can You Do It? Using the Spot Rate to Calculate a Foreign Currency Payment
• Types of Foreign Exchange Transactions
• Did You Get It? Using the Spot Rate to Calculate a Foreign Currency Payment
• Exchange Rate Risk
• Can You Do It? Computing a Percent-per-Annum Premium
• Did You Get It? Computing a Percent-per-Annum Premium
• Interest Rate Parity
• Purchasing-Power Parity and the Law of One Price
• The International Fisher Effect
• Capital Budgeting for Direct Foreign Investment
• Foreign Investment Risks
• Chapter Summaries
• Review Questions
• Study Problems
• Mini Case
• 17 Managing Short-TermInvestments in Current Assets
• Web Appendix A Using a Calculator
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