Introduction p. 1 The Role and Objective of Financial Management p. 2 Key Chapter Concepts p. 2 Financial Challenge: Financial Management Questions

Transcription

1 Introduction p. 1 The Role and Objective of Financial Management p. 2 Key Chapter Concepts p. 2 Financial Challenge: Financial Management Questions p. 3 Introduction p. 4 Forms of Business Organization p. 5 Foundation Concept: Maximizing Shareholder Wealth as the Primary Goal p. 7 Maximization of Shareholder Wealth: Managerial Strategies p. 12 Foundation Concept: Cash Flow p. 16 Ethical Issues: The Practice of Financial Management p. 18 Foundation Concept: Net Present Value Rule p. 20 Organization of the Financial Management Function p. 20 Entrepreneurial Issues: Shareholder Wealth Maximization p. 23 Financial Management and Other Disciplines p. 24 Career Opportunities in Finance p. 25 Professional Finance Affiliations p. 28 Organization of the Text p. 28 Summary p. 30 Questions and Topics for Discussion p. 31 The Domestic and International Financial Marketplace p. 33 Key Chapter Concepts p. 33 Financial Challenge: Long-Term Capital Management, L.P. p. 34 Introduction p. 35 Income Taxes and Financial Management p. 35 An Overview of the U.S. Financial System p. 36 The Structure and Operation of U.S. Security Markets p. 42 The Global Economy and Multinational Enterprises p. 44 Ethical Issues: Insider Trading p. 45 Foreign Currency Markets and Exchange Rates p. 46 Foundation Concept: Market Efficiency p. 52 Foundation Concept: Holding Period Returns p. 56 International Issues: Market Efficiency Outside the United States p. 57 Summary p. 58 Questions and Topics for Discussion p. 58 Self-Test Problems p. 59 Problems p. 59 Solutions to Self-Test Problems p. 61 Taxes p. 63 Introduction p. 63 Corporate Income Taxes p. 63 Entreprenerial Issues: S Corporations p. 65

2 Questions and Topics for Discussion p. 66 Self-Test Problems p. 66 Problems p. 66 Solutions to Self-Test Problems p. 68 Evaluation of Financial Performance p. 69 Key Chapter Concepts p. 69 Financial Challenge: Earnings Management and Financial Performance Measurement p. 70 Introduction p. 71 Uses of Financial Analysis p. 71 Interpreting Financial Ratios p. 72 Basic Classifications of Financial Ratios p. 72 Summary of Financial Ratio Analysis p. 87 Trend Analysis p. 90 Analysis of Profitability: Return on Investment p. 90 Foundation Concept: Analyzing Profitability Through Return on Stockholders' Equity p. 93 Sources of Comparative Financial Data p. 94 A Word of Caution About Financial Ratio Analysis p. 95 Earnings and Balance Sheet Quality and Financial Analysis p. 96 Market Value Added: An Alternative Measure of Performance p. 98 Inflation and Financial Statement Analysis p. 100 International Issues: Financial Analysis of Multinational Corporations p. 101 Foundation Concept: Cash Flow Analysis p. 102 Summary p. 108 Questions and Topics for Discussion p. 109 Self-Test Problems p. 110 Problems p. 111 Solutions to Self-Test Problems p. 120 Determinants of Valuation p. 123 The Time Value of Money p. 124 Key Chapter Concepts p. 124 Financial Challenge: Powerball Opportunity p. 125 Introduction p. 125 Interest p. 126 Simple Interest p. 127 Compound Interest and Future Value p. 129 Present Value p. 133 Annuities p. 137 Present Value: Some Additional Cash Flow Patterns p. 146 Compounding Periods and Effective Interest Rates p. 150 Solving the Financial Challenge p. 154 Summary p. 154

3 Questions and Topics for Discussion p. 156 Self-Test Problems p. 157 Problems p. 157 Solutions to Self-Test Problems p. 164 An Integrative Case Problem: Time Value of Money p. 166 Continuous Compounding and Discounting p. 168 Continuous Compounding p. 168 Continuous Discounting p. 169 Effective Rate Calculations p. 169 Self-Test Problems p. 170 Problems p. 170 Solutions to Self-Test Problems p. 170 Analysis of Risk and Return p. 171 Key Chapter Concepts p. 171 Financial Challenge: Risk at a Coca-Cola Company p. 172 Introduction p. 173 Meaning and Measurement of Risk p. 173 Foundation Concept: Relationship Between Risk and Return p. 180 Investment Diversification and Portfolio Risk Analysis p. 187 Portfolio Risk and the Capital Asset Pricing Model p. 196 International Issues: Diversification and Multinational Corporations p. 205 Other Dimensions of Risk p. 205 Ethical Issues: High-Risk Securities p. 206 Summary p. 207 Questions and Topics for Discussion p. 208 Self-Test Problems p. 210 Problems p. 211 Solutions to Self-Test Problems p. 216 Fixed-Income Securities: Characteristics and Valuation p. 218 Key Chapter Concepts p. 218 Financial Challenge: Marriott Corporation: Corporate Restructuring and Bond Valuation p. 219 Introduction p. 220 Characteristics of Long-Term Debt p. 221 International Issues: The International Bond Market p. 232 Foundation Concept: Valuation of Assets p. 233 Bond Valuation p. 236 Ethical Issues: Leveraged Buyouts and Bond Values p. 243 Characteristics of Preferred Stock p. 244 Valuation of Preferred Stock p. 247 Summary p. 248 Questions and Topics for Discussion p. 249

4 Self-Test Problems p. 250 Problems p. 251 Solutions to Self-Test Problems p. 255 Bond Refunding Analysis p. 257 The Bond Refunding Process p. 257 Problems p. 260 Common Stock: Characteristics, Valuation, and Issuance p. 262 Key Chapter Concepts p. 262 Financial Challenge: Amazon.com p. 263 Introduction p. 264 Characteristics of Common Stock p. 265 The Security Offering Process: Role of the Investment Banker p. 271 International Issues: Global Equity Markets p. 277 Foundation Concept: Valuation of Common Stock p. 278 Applications of the General Dividend Valuation Model p. 281 Entrepreneurial Issues: Valuation of Closely Held Firms p. 284 Summary p. 288 Questions and Topics for Discussion p. 289 Self-Test Problems p. 290 Problems p. 290 Solutions to Self-Test Problems p. 295 The Capital Investment Decision p. 297 Capital Budgeting and Cash Flow Analysis p. 298 Key Chapter Concepts p. 298 Financial Challenge: Ford Motor Company's Investment in Jaguar Cars, Ltd. p. 299 Introduction p. 300 Key Terms and Concepts in Capital Budgeting p. 301 Basic Framework for Capital Budgeting p. 302 Generating Capital Investment Project Proposals p. 304 Foundation Concept: Principles of Estimating Cash Flows p. 306 Net Investment (NINV) p. 308 Net (Operating) Cash Flows p. 309 Asset Expansion Projects p. 314 Asset Replacement Projects p. 316 Problems in Cash Flow Estimation p. 319 The Practice of Cash Flow Estimation for Capital Budgeting p. 319 Ethical Issues: Cash Flow Estimation Biases p. 320 Summary p. 321 Questions and Topics for Discussion p. 322 Self-Test Problems p. 322 Problems p. 323

5 Solutions to Self-Test Problems p. 328 Depreciation p. 330 Introduction to Depreciation p. 330 Accelerated Depreciation p. 332 Modified Accelerated Cost Recovery System p. 332 Real Property p. 335 Questions and Topics for Discussion p. 335 Problems p. 335 Capital Budgeting: Decision Criteria and Real Option Considerations p. 337 Key Chapter Concepts p. 337 Financial Challenge: Real Options at Enron Corporation p. 338 Introduction p. 339 Foundation Concept: Decision Models for Evaluating Alternatives p. 339 Capital Rationing and the Capital Budgeting Decision p. 352 Reviewing and Postauditing an Accepted Project p. 355 A Comprehensive Example of Capital Budgeting: Opening a New Bank Branch p. 356 Inflation and Capital Expenditures p. 358 Real Options in Capital Budgeting p. 359 International Issues: A Framework for International Capital Expenditure Decisions p. 360 Entrepreneurial Issues: Capital Budgeting p. 362 Ethical Issues: The Use of Shareholder Resources p. 363 Summary p. 365 Questions and Topics for Discussion p. 365 Self-Test Problems p. 366 Problems p. 366 Solutions to Self-Test Problems p. 373 An Integrative Case Problem: Capital Budgeting p. 375 Mutually Exclusive Investments Having Unequal Lives p. 376 Replacement Chains p. 376 Equivalent Annual Annuities p. 378 Problems p. 379 Capital Budgeting and Risk p. 381 Key Chapter Concepts p. 381 Financial Challenge: The Boeing 747 Superjumbo Jet p. 382 Introduction p. 382 Total Project Risk versus Portfolio Risk p. 383 Adjusting for Total Project Risk p. 384 Adjusting for Beta Risk in Capital Budgeting p. 394 International Issues: Special Elements of Capital Budgeting Risk p. 398 Ethical Issues: Johnson and Johnson and Proprietary Competitive Information p. 399 Summary p. 399

6 Questions and Topics for Discussion p. 400 Self-Test Problems p. 401 Problems p. 402 An Integrative Case Problem: Capital Budgeting and Risk Analysis p. 409 Solutions to Self-Test Problems p. 410 The Cost of Capital, Capital Structure, and Dividend Policy p. 411 The Cost of Capital p. 412 Key Chapter Concepts p. 412 Financial Challenge: Cost of Equity Capital for Mountain Fuel Supply Company p. 413 Introduction p. 414 Summary of Notation p. 414 Foundation Concept: Weighted Cost of Capital p. 415 Relative Costs of Capital p. 417 Computing the Component Costs of Capital p. 419 Divisional Costs of Capital p. 429 Determining the Weighted (Marginal) Cost of Capital Schedule p. 431 International Issues: The Cost of Capital for Multinational Companies p. 434 Determining the Optimal Capital Budget p. 434 Entrepreneurial Issues: The Cost of Capital p. 436 Cost of Depreciation-Generated Funds p. 437 Summary p. 437 Questions and Topics for Discussion p. 438 Self-Test Problems p. 439 Problems p. 439 Solutions to Self-Test Problems p. 447 An Integrative Case Problem: Cost of Capital p. 448 Capital Structure Concepts p. 450 Key Chapter Concepts p. 450 Financial Challenge: Optimal Capital Structure in the Airline Industry: U.S. Airways vs. Southwest Airlines p. 451 Introduction p. 452 Capital Structure Decisions and Maximization of Shareholder Wealth p. 452 Foundation Concept: Business Risk p. 453 Foundation Concept: Financial Risk and Financial Leverage p. 455 Capital Structure Theory p. 458 Ethical Issues: LBO Stakeholder Impacts p. 472 International Issues: Capital Structure p. 473 Summary p. 474 Questions and Topics for Discussion p. 475 Self-Test Problem p. 475 Problems p. 476 Solution to Self-Test Problem p. 479

7 Capital Structure Management in Practice p. 480 Key Chapter Concepts p. 480 Financial Challenge: Deregulation and Business Risk of Electric Utilities p. 481 Introduction p. 482 Operating and Financial Leverage p. 482 Other Financial Risk Measures p. 491 EBIT-EPS Analysis p. 492 Cash Insolvency Analysis p. 498 Other Factors to Consider in Making Capital Structure Decisions p. 500 International Issues: Balancing Operating and Financial Risks at Nestle p. 503 Summary p. 503 Questions and Topics for Discussion p. 504 Self-Test Problems p. 505 Problems p. 506 Solutions to Self-Test Problems p. 514 Dividend Policy p. 516 Key Chapter Concepts p. 516 Financial Challenge: Florida Power and Light's Decision to Cut Its Dividend p. 517 Introduction p. 518 Determinants of Dividend Policy p. 519 Dividend Policy and Firm Value p. 526 Dividend Policies p. 529 Entrepreneurial Issues: Dividend Policy p. 534 How Dividends Are Paid p. 534 International Issues: Dividend Policies for Multinational Firms p. 535 Stock Dividends and Stock Splits p. 536 Share Repurchases as Dividend Decisions p. 538 Summary p. 541 Questions and Topics for Discussion p. 543 Self-Test Problems p. 544 Problems p. 544 Solutions to Self-Test Problems p. 548 Working Capital Management and Financial Forecasting p. 551 Financial Forecasting and Working Capital Policy p. 552 Key Chapter Concepts p. 552 Financial Challenge: Financial Forecasting at Boeing p. 553 Introduction p. 553 Financial Forecasting p. 554 Working Capital Policy p. 564 Ethical Issues: Use of Employee Retirement Funds p. 565 Levels of Working Capital Investment p. 569

8 Proportions of Short-Term and Long-Term Financing p. 572 Overall Working Capital Policy p. 577 Summary p. 579 Questions and Topics for Discussion p. 580 Self-Test Problems p. 580 Problems p. 582 Solutions to Self-Test Problems p. 593 The Management of Cash and Marketable Securities p. 595 Key Chapter Concepts p. 595 Financial Challenge: Investing Microsoft's Cash Hoard p. 596 Introduction p. 596 Liquid Asset Balance p. 598 Controlling the Collection and Disbursement of Cash p. 603 Electronic Funds Transfer p. 610 Ethical Issues: Cash Management p. 611 Entrepreneurial Issues: Cash Management p. 612 Investing in Marketable Securities p. 612 International Issues: Cash Management p. 617 Summary p. 618 Questions and Topics for Discussion p. 619 Self-Test Problems p. 620 Problems p. 621 Solutions to Self-Test Problems p. 626 Management of Accounts Receivable and Inventories p. 627 Key Chapter Concepts p. 627 Financial Challenge: Just-in-Time Inventory Management at Dell Computer p. 628 Introduction p. 628 Accounts Receivable Management p. 629 Evaluating Individual Credit Applicants p. 638 Inventory Management p. 641 Inventory Control Models p. 644 Summary p. 652 Questions and Topics for Discussion p. 653 Self-Test Problems p. 654 Problems p. 655 Solutions to Self-Test Problems p. 662 Short- and Intermediate-Term Funding Alternatives p. 664 Key Chapter Concepts p. 664 Financial Challenge: Using Inventory Loans to Save Fashion Bug from Bankruptcy p. 665 Introduction p. 666 Cost of Short-Term Funds p. 667

9 Trade Credit p. 668 Accrued Expenses and Deferred Income p. 671 Short-Term Bank Credit p. 672 Commercial Paper p. 677 Accounts Receivable Loans p. 678 Inventory Loans p. 682 International Issues: Foreign Receivables Financing p. 683 Term Loans p. 685 Security Provisions and Protective Covenants p. 688 Suppliers of Term Loans p. 690 Equipment Loans p. 692 Summary p. 693 Questions and Topics for Discussion p. 696 Self-Test Problems p. 697 Problems p. 698 Solutions to Self-Test Problems p. 703 An Integrative Case Problem: Working Capital Management p. 706 Advanced Topics in Contemporary Financial Management p. 709 Lease Financing p. 710 Key Chapter Concepts p. 710 Financial Challenge: Kmart's Lease Guarantees Prove Costly p. 711 Introduction p. 711 Types of Leases p. 712 Advantages and Disadvantages of Leasing p. 716 Tax and Accounting Aspects of Leases p. 718 Entrepreneurial Issues: Leasing by Small Businesses p. 719 Determining Lease Payments: The Lessor's Perspective p. 721 Lease-Buy Analysis: The Lessee's Perspective p. 722 Ethical Issues: Continental Airlines' Leases in Bankruptcy p. 724 Summary p. 726 Questions and Topics for Discussion p. 726 Self-Test Problem p. 727 Problems p. 727 Solution to Self-Test Problem p. 730 An Integrative Case Problem: Lease and Term Loan Analysis p. 731 Financing with Derivatives p. 732 Key Chapter Concepts p. 732 Financial Challenge: Repricing "Underwater Options" p. 733 Introduction p. 734 Options p. 734 Convertible Securities p. 738

10 Warrants p. 743 Analysis of Rights Offerings p. 746 Interest Rate Swaps p. 747 Summary p. 749 Questions and Topics for Discussion p. 750 Self-Test Problems p. 750 Problems p. 751 Solutions to Self-Test Problems p. 756 International Financial Management p. 758 Key Chapter Concepts p. 758 Financial Challenge: The Euro and the European Central Bank p. 759 Introduction p. 760 Factors That Affect Exchange Rates p. 760 Forecasting Future Exchange Rates p. 767 Foreign Exchange Risk p. 769 Ethical Issues: Payment of Bribes Abroad p. 774 Summary p. 775 Questions and Topics for Discussion p. 775 Self-Test Problems p. 776 Problems p. 776 Solutions to Self-Test Problems p. 779 Corporate Restructuring p. 780 Key Chapter Concepts p. 780 Financial Challenge: Oil Company Mergers Sweep Through the Industry p. 781 Introduction p. 781 Mergers p. 782 Valuation of Merger Candidates p. 791 Analysis of a Leveraged Buyout p. 796 Business Failure p. 798 Alternatives for Failing Businesses p. 801 Summary p. 807 Questions and Topics for Discussion p. 808 Self-Test Problem p. 809 Problems p. 810 Solution to Self-Test Problem p. 813 An Integrative Case Problem: Mergers and Acquisitions p. 814 Reference Materials Future Value Interest Factor (FVIF) Present Value Interest Factor (PVIF) Future Value of an Annuity Interest Factor (FVIFA) Present Value of an Annuity Interest Factor (PVIFA)

11 Normal Distribution Glossary Check Answers to Selected Problems Financial Challenge Photo Credits Index Table of Contents provided by Blackwell's Book Services and R.R. Bowker. Used with permission.