Detailed Contents. Partil Fundamental Concepts and Basic Tools of Finance 29. Financial Management. 3 The Time Value of Money (Parti) 83

Transcription

1 Core Concepts

2 Detailed Contents Partil Fundamental Concepts and Basic Tools of Finance Financial Management 1.1 The Cycle of Money 32 Overview of Finance Areas Financial Markets 34 Maximizing Equity Value Internal and External Players The Legal Forms of Business 40 Proprietorship 40 Partnership 40 Corporations 41 Hybrid Corporations 42 Not-for-Profit Corporations The Financial Management Setting: The Agency Model Corporate Governance and Business Ethics 45 FINANCE FOLLIES The Financial Meltdown of Why Study Finance? 48 PUTTING FINANCE TO WORK Now Hiring The Finance Manager and Financial Management 35 Objective of the Finance Manager 36 Profit Maximization 37 Maximizing Current Stock Price 37 Key Terms 50 Questions 50 Prepping for Exams 51 MINI-CASE Richards' Tree Farm Grows Up 53 L Financial Statements Financial Statements 56 The Balance Sheet 56 The Income Statement 59 Statement of Retained Earnings Cash Flow Identity and the Statement of Cash Flows 62 The First Component: Cash Flow from Assets 62 The Second Component: Cash Flow to Creditors 64 The Third Component: Cash Flow to Owners 65 Putting It All Together: The Cash Flow Identity 65 The Statement of Cash Flows 65 Free Cash Flow Financial Performance Reporting 68 Regulation Fair Disclosure 68 Notes to the Financial Statements Financial Statements on the Internet 69 PUTTING FINANCE TO WORK Look Before You Leap 72 Key Terms 73 Questions 73 Prepping for Exams 73 Problems 75 Application 78 MINI-CASE Hudson Valley Realty 80 3 The Time Value of Money (Parti) Future Value and Compounding Interest 84 The Single-Period Scenario 84 The Multiple-Period Scenario 84 Methods of Solving Future Value Problems Present Value and Discounting 89 The Single-Period Scenario 89 The Multiple-Period Scenario 90 The Use of Time Lines One Equation and Four Variables Applications of the Time Value of Money Equation 94 PUTTING FINANCE TO WORK Sports Agent 99 21

3 CHAPTERS 1-3 A very good job in making the concept of finance oftvm early in the text. The author has obviously i The explanation of bond pricing and yield calcula te I'll' J [l J [ ' l -If II '' I it.!' M.'il, '.V...1 Vfl3 5fei 3.5 Doubling of Money: The Rule of Key Terms 101 Questions 101 Prepping for Exams 102 Problems 104 Application 108 MINI-CASE Richards' Tree Farm, Inc.: The Continuing Saga The Time Value of Money (Part 2) ill 4.1 Future Value of Multiple Payment Streams Future Value of an Annuity Stream 113 Future Value of an Annuity: An Application Present Value of an Annuity 117 PUTTING FINANCE TO WORK Modeling the Future with Actuarial Science Annuity Due and Perpetuity 120 Perpetuity Three Loan Payment Methods 123 Interest and Principal at the Maturity of Loan (Discount Loan) 123 Interest as You Go, Principal at Maturity of Loan (Interest-Only Loan) 123 Interest and Principal as You Go (Amortized Loan) Amortization Schedules Waiting Time and Interest Rates for Annuities Solving a Lottery Problem Ten Important Points about the TVM Equation 131 Key Terms 132 Questions 132 Prepping for Exams 132 Problems 134 Application 140 MINI-CASE Fitchminster Injection Molding, Inc.: Rose Climbs High Interest Rates How Financial Institutions Quote Interest Rates: Annual and Periodic Interest Rates Effect of Compounding Periods on the Time Value of Money Equations Consumer Loans and Amortization Schedules Nominal and Real Interest Rates Risk-Free Rate and Premiums 157 Maturity Premiums 159 Yield Curves A Brief History of Interest Rates and Inflation in the United States 162 Key Terms 164 Questions 165 Prepping for Exams 165 Problems 167 Application 170 MINI-CASE Sweetening the Deal: Povero Construction Company 171 Valuing Stocks and Bonds and Understanding Risk and Return 173 O Bonds and Bond Valuation Application of the Time Value of Money Tool: Bond Pricing 176 Key Components of a Bond 176 Pricing a Bond in Steps Semiannual Bonds and Zero-Coupon Bonds 181 Pricing Bonds after Original Issue 183 Zero-Coupon Bonds 184 Amortization of a Zero-Coupon Bond Yields and Coupon Rates 187 The First Interest Rate: Yield to Maturity 187 The "Other" Interest Rate: Coupon Rate 188

4 CHAPTER 8 ever seen in an introductory text. **.4; Alex Wilson, University of Arizona, y sophisticated information very well. ** irobert Bartolacci, Carnegie Mellon University Relationship of Yield to Maturity and Coupon Rate Bond Ratings Some Bond History and More Bond Features 193 PUTTING FINANCE TO WORK Municipal Manager U.S. Government Bonds 197 Pricing a U.S. Government Note or Bond 198 Pricing a Treasury Bill 199 Key Terms 201 Questions 201 Prepping for Exams 202 Problems 203 Application 206 MINI-CASE Bay Path Cranberry Products 207 / Stocks and Stock Valuation Characteristics of Common Stock 210 Ownership 210 Claim on Assets and Cash Flow (Residual Claim) 210 Vote (Voice in Management) 210 No Maturity Date 211 Dividends and Their Tax Effect 211 Authorized, Issued, and Outstanding Shares 211 Treasury Stock 212 Preemptive Rights Stock Markets 212 Primary Markets 212 Secondary Markets: How Stocks Trade 213 Bull Markets and Bear Markets Stock Valuation 215 The Constant Dividend Model with an Infinite Horizon 217 The Constant Dividend Model with a Finite Horizon 218 The Constant Growth Dividend Model with an Infinite Horizon 220 The Constant Growth Dividend Model with a Finite Horizon 222 Nonconstant Growth Dividends 223 FINANCE FOLLIES Irrational Expectations: Bulbs and Bubbles Dividend Model Shortcomings Preferred Stock Efficient Markets 230 Operational Efficiency 230 Informational Efficiency 230 Key Terms 231 Questions 232, Prepping for Exams 232 Problems 234 Application 238 MINI-CASE Lawrence's Legacy: Part O Risk and Return Returns 242 Dollar Profits and Percentage Returns 242 Converting Holding Period Returns to Annual Returns 243 Extrapolating Holding Period Returns Risk (Certainty and Uncertainty) 245 FINANCE FOLLIES "Dangerous to Your Wealth": Is Investing Just Gambling? Historical Returns Variance and Standard Deviation as a Measure of Risk 251 Normal Distributions Returns in an Uncertain World (Expectations and Probabilities) 255 FINANCE FOLLIES "Scam of the Century": Bernie Madoff and the $50 Billion Fraud 256 Determining the Probabilities of All Potential Outcomes

5 CHAPTER 9 ;:; * m 4 Capital budgeting: Just exactly what I like to cover in an tntrodtmorymiiti CHAPTER 10 ' : /\ : : &% : m 8.6 The Risk-and-Return Trade-off 259 Investment Rules Diversification: Minimizing Risk or Uncertainty 261 When Diversification Works 262 Adding More Stocks to the Portfolio: Systematic and Unsystematic Risk Beta: The Measure of Risk in a Well-Diversified Portfolio The Capital Asset Pricing Model and the Security Market Line 267 The Capital Asset Pricing Model, (CAPM) 268 Application of the SML 270 Key Terms 272 Questions 272 Prepping for Exams 273 Problems 275 Application 280 MINI-CASE Lawrence's Legacy: Part Capital Budgeting Capital Budgeting Decision Models 285 Short-Term and Long-Term Decisions 286 FINANCE FOLLIES IBM Exits the Consumer Software Market: Misreading Future Cash Flows 287 Payback Period 288 Discounted Payback Period 290 Net Present Value 291 Mutually Exclusive versus Independent Projects 293 Unequal Lives of Projects 295 Net Present Value Example: Equation and Calculator Function Internal Rate of Return 298 Appropriate Discount Rate or Hurdle Rate 300 Problems with the Internal Rate of Return 301 PUTTING FINANCE TO WORK Marketing and Sales: Your Product = Your Customer's Capital Budgeting Decision 302 Multiple Internal Rates of Return 302 Reinvestment and Crossover Rates 304 Modified Internal Rate of Return Profitability Index Overview of Six Decision Models 310 Capital Budgeting Using a Spreadsheet 310 Key Terms 313 Questions 313 Prepping for Exams 314 Problems 316 Application 321 MINI-CASE BioCom, Inc.: Part U Cash Flow Estimation The Importance of Cash Flow Estimating Cash Flow for Projects: Incremental Cash Flow 327 Sunk Costs 328 Opportunity Costs 328 Erosion Costs 329 Synergy Gains 331 Working Capital 331 FINANCE FOLLIES Boston's "Big Dig" Gets Dug Under Capital Spending and Depreciation 334 Straight-Line Depreciation 334 Modified Accelerated Cost Recovery System Cash Flow and the Disposal of Capital Equipment Projected Cash Flow for a New Product 339

6 CHAPTER 11 Cathy Goldberg, University of San Francisco CHAPTER 13 nts receivable management Warren Palmer, Beloit College Key Terms 343 Questions 343 Prepping for Exams 344 Problems 345 Application 349 MINI-CASE BioCom, Inc.: Part 2, Evaluating a New Product Line The Cost of Capital The Cost of Capital: A Starting Point Components of the Weighted Average Cost of Capital 357 Debt Component 357 Preferred Stock Component 359 Equity Component 359 Retained Earnings Weighting the Components: Book Value or Market Value? 362 Book Value 363 Adjusted Weighted Average Cost of Capital 364 Market Value Using the Weighted Average Cost of Capital in a Budgeting Decision 366 Individual Weighted Average Cost of Capital for Individual Projects Selecting Appropriate Betas for Projects Constraints on Borrowing and Selecting Projects for the Portfolio 370 Key Terms 372 Questions 372 Prepping for Exams 373 Problems 375 Application 380 MINI-CASE BioCom, Inc.: Part 3, A Fresh Look at the WACC 381 Financial Planning and Evaluating Performance Forecasting and Short-Term Financial Planning 385 Sources and Uses of Cash 386 Cash Budgeting and the Sales Forecast 388 Cash Inflow from Sales 390 Other Cash Receipts 391 Cash Outflow from Production 392 The Cash Forecast: Short-Term Deficits and Short-Term Surpluses 393 Funding Cash Deficits 394 Investing Cash Surpluses 395 Planning with Pro Forma Financial Statements 396 Pro Forma Income Statement 396 Pro Forma Balance Sheet 398 PUTTING FINANCE TO WORK Information Technology 402 Key Terms 403 Questions 403 Prepping for Exams 403 Problems 405 Application 408 MINI-CASE Midwest Properties: Quarterly Forecasting Working Capital Management The Cash Conversion Cycle 414 Average Production Cycle 416 Average Collection Cycle 417 Average Payment Cycle 418 Putting It All Together: The Cash Conversion Cycle

7 CHAPTER 14 I, too, savei 13.2 Managing Accounts Receivable and Setting Credit Policy 419 Collecting Accounts Receivable 420 Credit: A Two-Sided Coin 421 Qualifying for Credit 422 Setting Payment Policy 424 Collecting Overdue Debt The Float 427 Speeding Up the Collection (Shortening the Lag Time) 428 Slowing Down Payment (Lengthening the Lag Time) Inventory Management: Carrying Costs and Ordering Costs 430 ABC Inventory Management 430 Redundant Inventory Items 431 Economic Order Quantity The Effect of Working Capital on Capital Budgeting 437 PUTTING FINANCE TO WORK Operations Management 438 Inventories and Daily Operations 438 Key Terms 441 Questions 441 Prepping for Exams 442 Problems 444 Application 447 MINI-CASE Cranston Dispensers, Inc.: Part Financial Ratios and Firm Performance Financial Statements 452 Benchmarking Financial Ratios 456 Short-Term Solvency: Liquidity Ratios 457 Long-Term Solvency: Solvency or Financial Leverage Ratios 459 Asset Management Ratios 460 Profitability Ratios 462 Market Value Ratios 463 DuPont Analysis External Uses of Financial Statements and Industry Averages 466 Cola Wars 467 Industry Ratios 469 FINANCE FOLLIES Cooking the Books at Enron and WorldCom 470 Key Terms 471 Questions 471 Prepping for Exams 471 Problems 473 Application 47 9 MINI-CASE Cranston Dispensers, Inc.: Part Other Selected Finance Topics J Raising Capital The Business Life Cycle Borrowing for a Start-up and Growing Business 486 Personal Funds and Family Loans 486 Commercial Bank Loans 487 Commercial Bank Loans through the Small' Business Administration 487 Angel Financing and Venture Capital Borrowing for a Stable and Mature Business: Bank Loans 492 Straight Loans 492 Discount Loans 493 Letter of Credit or Line of Credit 494 Compensating Balance Borrowing for a Stable and Mature Business: Selling Bonds

8 CHAPTER 16 * TJTJ John Banko, University of Central Florida 15.5 Borrowing for a Stable and Mature Business: Selling Stock 497 Initial Public Offerings and Underwriting 498 Registration, Prospectus, and Tombstone 500 The Marketing Process: Road Show 500 The Auction 502 The Aftermarket: Dealer in the Shares 502 PUTTING FINANCE TO WORK Corporate Law Other Borrowing Options for a Mature Business The Final Phase: Closing the Business 507 Straight Liquidation: Chapter Reorganization: Chapter Key Terms 509 Questions 509 Prepping for Exams 509 Problems 511 Application 515 MINI-CASEAKWebDevelopers.com Capital Structure Capital Markets: A Quick Review Benefits of Debt 521 Earnings per Share as a Measure of the Benefits of Borrowing Break-Even Earnings for Different Capital Structures Pecking Order 527 Firms Prefer Internal Financing First 527 Firms Choose to Issue Cheapest Security First and Use Equity as a Last Resort Modigliani and Miller on Optimal Capital Structure 529 Capital Structure in a World of No Taxes and No Bankruptcy 530 Capital Structure in a World of Corporate Taxes and No Bankruptcy 533 Debt and the Tax Shield The Static Theory of Capital Structure 536 Bankruptcy 536 Static Theory of Capital Structure 537 FINANCE FOLLIES Hedge Funds: Some Really Smart Guys Get into Big Trouble 538 Key Terms 540 Questions 541 Prepping for Exams 541 Problems 543 Application 545 MINI-CASE General Energy Storage Systems: How Much Debt and How Much Equity? / Dividends, Dividend Policy, and Stock Splits Cash Dividends 550 Buying and Selling Stock 550 Declaring and Paying a Cash Dividend: A Chronology 550 Different Types of Dividends Dividend Policy 554 Dividend Clienteles 554 Dividend Policy Irrelevance 555 Reasons Favoring a Low- or No-Diyidend- Payout Policy 558 Reasons Favoring a High-Dividend-Payout Policy 559 Optimal Dividend Policy Selecting a Dividend Policy 560 Some Further Considerations in the Selection of a Dividend Policy Stock Dividends, Stock Splits, and Reverse Splits 563 Reasons for Stock Splits 564 Reverse Splits

9 CHAPTER 18 The presentation on foreign exchange is excellent. ** Eric Hayden, University r 17.5 Specialized Dividend Plans Stock Repurchase 566 Dividend Reinvestment Plans 568 Key Terms 570 Questions Prepping for Exams 571 Problems 572 Application 575 MINI-CASE East Coast Warehouse Club International Financial Management Managing Multinational Operations 580 Cultural Risk 580 Business Risk 582 Political Risk 583 FINANCE FOLLIES Rino International Foreign Exchange 585 Purchasing Power Parity 586 Currency Exchange Rates 587 Cross Rates 589 Arbitrage Opportunities 590 Forward Rates 591 Using Forward Rates 593 Appendix 1 Appendix 2 Appendix 3 Appendix 4 Appendix 5 Glossary Index Credits Transaction, Operating, and Translation Exposures 595 Transaction Exposure 595 Operating Exposure 596 Translation Exposure 597 Foreign Investment Decisions 597 Key Terms 601 Questions 601 Prepping for Exams 602 Problems 603 Application 607 MINI-CASE Scholastic Travel Services, Inc. 608 j Future Value Interest Factors 610 Present Value Interest Factors 612 Future Value Interest Factors of an Annuity 614 Present Value Interest Factors of an Annuity 616 Answers to Prepping for Exam Questions

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