Financial Management: Core Concepts, Global Edition

Cover
Title Page
Copyright Page
ABOUT THE AUTHOR
ACKNOWLEDGMENTS
Contents
PART 1 Fundamental Concepts and Basic Tools of Finance
	1 Financial Management
		1.1 The Cycle of Money
		1.2 Overview of Finance Areas
		1.3 Financial Markets
		1.4 The Finance Manager and Financial Management
		1.5 Objective of the Finance Manager
			Profit Maximization
			Maximizing Current Stock Price
			Maximizing Equity Value
		1.6 Internal and External Players
		1.7 The Legal Forms of Business
			Proprietorship
			Partnership
			Corporations
			Hybrid Corporations
			Not-for-Profit Corporations
		1.8 The Financial Management Setting: The Agency Model
		1.9 Corporate Governance and Business Ethics
			FINANCE FOLLIES The Financial Meltdown of 2008
		1.10 Why Study Finance?
			PUTTING FINANCE TO WORK Now Hiring
			Key Terms
			Questions
			Prepping for Exams
			MINI-CASE Richardses’ Tree Farm Grows Up
			Summary Card at end of text
	2 Financial Statements
		2.1 Financial Statements
			The Balance Sheet
			The Income Statement
			Statement of Retained Earnings
		2.2 Cash Flow Identity and the Statement of Cash Flows
			The First Component: Cash Flow from Assets
			The Second Component: Cash Flow to Creditors
			The Third Component: Cash Flow to Owners
			Putting It All Together: The Cash Flow Identity
			The Statement of Cash Flows
			Free Cash Flow
		2.3 Financial Performance Reporting
			Regulation Fair Disclosure
			Notes to the Financial Statements
		2.4 Financial Statements on the Internet
			PUTTING FINANCE TO WORK Look Before You Leap
			Key Terms
			Questions
			Prepping for Exams
			Problems
			Advanced Problems for Spreadsheet Application
			MINI-CASE Hudson Valley Realty
			Summary Card at end of text
	3 The Time Value of Money (Part 1)
		3.1 Future Value and Compounding Interest
			The Single-Period Scenario
			The Multiple-Period Scenario
			Methods of Solving Future Value Problems
		3.2 Present Value and Discounting
			The Single-Period Scenario
			The Multiple-Period Scenario
			The Use of Time Lines
		3.3 One Equation and Four Variables
		3.4 Applications of the Time Value of Money Equation
			PUTTING FINANCE TO WORK Sports Agent
		3.5 Doubling of Money: The Rule of
			Key Terms
			Questions
			Prepping for Exams
			Problems
			Advanced Problems for Spreadsheet Application
			MINI-CASE Richardses’ Tree Farm, Inc.: The Continuing Saga
			Summary Card at end of text
	4 The Time Value of Money (Part 2)
		4.1 Future Value of Multiple Payment Streams
		4.2 Future Value of an Annuity Stream
			Future Value of an Annuity: An Application
		4.3 Present Value of an Annuity
		4.4 Annuity Due and Perpetuity
			PUTTING FINANCE TO WORK Modeling the Future with Actuarial Science
			Perpetuity
		4.5 Three Loan Payment Methods
			Interest and Principal at Maturity of Loan (Discount Loan)
			Interest as You Go, Principal at Maturity of Loan (Interest-Only Loan)
			Interest and Principal as You Go (Amortized Loan)
		4.6 Amortization Schedules
		4.7 Waiting Time and Interest Rates for Annuities
		4.8 Solving a Lottery Problem
		4.9 Ten Important Points about the TVM Equation
			Key Terms
			Questions
			Prepping for Exams
			Problems
			Advanced Problems for Spreadsheet Application
			MINI-CASE Fitchminster Injection Molding, Inc.: Rose Climbs High
			Summary Card at end of text
	5 Interest Rates
		5.1 How Financial Institutions Quote Interest Rates: Annual and Periodic Interest Rates
		5.2 Effect of Compounding Periods on the Time Value of Money Equations
		5.3 Consumer Loans and Amortization Schedules
		5.4 Nominal and Real Interest Rates
		5.5 Risk-Free Rate and Premiums
			Maturity Premiums
		5.6 Yield Curves
		5.7 A Brief History of Interest Rates and Inflation in the United States
			Key Terms
			Questions
			Prepping for Exams
			Problems
			Advanced Problems for Spreadsheet Application
			MINI-CASE Sweetening the Deal: Povero Construction Company
			Summary Card at end of text
PART 2 Valuing Stocks and Bonds and Understanding Risk and Return
	6 Bonds and Bond Valuation
		6.1 Application of the Time Value of Money Tool: Bond Pricing
			Key Components of a Bond
			Pricing a Bond in Steps
		6.2 Semiannual Bonds and Zero-Coupon Bonds
			Pricing Bonds after Original Issue
			Zero-Coupon Bonds
			Amortization of a Zero-Coupon Bond
		6.3 Yields and Coupon Rates
			The First Interest Rate: Yield to Maturity
			The “Other” Interest Rate: Coupon Rate
			Relationship of Yield to Maturity and Coupon Rate
		6.4 Bond Ratings
		6.5 Some Bond History and More Bond Features
		6.6 U.S. Government Bonds
			PUTTING FINANCE TO WORK Municipal Manager
			Pricing a U.S. Government Note or Bond
			Pricing a Treasury Bill
			Key Terms
			Questions
			Prepping for Exams
			Problems
			Advanced Problems for Spreadsheet Application
			MINI-CASE Bay Path Cranberry Products
			Summary Card at end of text
	7 Stocks and Stock Valuation
		7.1 Characteristics of Common Stock
			Ownership
			Claim on Assets and Cash Flow (Residual Claim)
			Vote (Voice in Management)
			No Maturity Date
			Dividends and Their Tax Effect
			Authorized, Issued, and Outstanding Shares
			Treasury Stock
			Preemptive Rights
		7.2 Stock Markets
			Primary Markets
			Secondary Markets: How Stocks Trade
			Bull Markets and Bear Markets
		7.3 Stock Valuation
			The Constant Dividend Model with an Infinite Horizon
			The Constant Dividend Model with a Finite Horizon
			The Constant Growth Dividend Model with an Infinite Horizon
			The Constant Growth Dividend Model with a Finite Horizon
			Nonconstant Growth Dividends
			FINANCE FOLLIES Irrational Expectations: Bulbs and Bubbles
		7.4 Dividend Model Shortcomings
		7.5 Preferred Stock
		7.6 Efficient Markets
			Operational Efficiency
			Informational Efficiency
			Key Terms
			Questions
			Prepping for Exams
			Problems
			Advanced Problems for Spreadsheet Application
			MINI-CASE Lawrence’s Legacy: Part 1
			Summary Card at end of text
	8 Risk and Return
		8.1 Returns
			Dollar Profits and Percentage Returns
			Converting Holding Period Returns to Annual Returns
			Extrapolating Holding Period Returns
		8.2 Risk (Certainty and Uncertainty)
			FINANCE FOLLIES “Dangerous to Your Wealth”: Is Investing Just Gambling?
		8.3 Historical Returns
		8.4 Variance and Standard Deviation as a Measure of Risk
			Normal Distributions
		8.5 Returns in an Uncertain World (Expectations and Probabilities)
			FINANCE FOLLIES “Scam of the Century”: Bernie Madoff and the $50 Billion Fraud
			Determining the Probabilities of All Potential Outcomes
		8.6 The Risk-and-Return Trade-Off
			Investment Rules
		8.7 Diversification: Minimizing Risk or Uncertainty
			When Diversification Works
			Adding More Stocks to the Portfolio: Systematic and Unsystematic Risk
		8.8 Beta: The Measure of Risk in a Well- Diversified Portfolio
		8.9 The Capital Asset Pricing Model and the Security Market Line
			The Capital Asset Pricing Model
			Application of the SML
			Key Terms
			Questions
			Prepping for Exams
			Problems
			Advanced Problems for Spreadsheet Application
			MINI-CASE Lawrence’s Legacy: Part 2
			Summary Card at end of text
PART 3 Capital Budgeting
	9 Capital Budgeting Decision Models
		9.1 Short-Term and Long-Term Decisions
		9.2 Payback Period
			FINANCE FOLLIES IBM Exits the Consumer Software Market: Misreading Future Cash Flows
			Discounted Payback Period
		9.3 Net Present Value
			Mutually Exclusive versus Independent Projects
			Unequal Lives of Projects
			Net Present Value Example: Equation and Calculator Function
		9.4 Internal Rate of Return
			Appropriate Discount Rate or Hurdle Rate
			Problems with the Internal Rate of Return
			Multiple Internal Rates of Return
			PUTTING FINANCE TO WORK Marketing and Sales: Your Product = Your Customer’s Capital Budgeting Decision
			Reinvestment and Crossover Rates
			Modified Internal Rate of Return
		9.5 Profitability Index
		9.6 Overview of Six Decision Models
			Capital Budgeting Using a Spreadsheet
			Key Terms
			Questions
			Prepping for Exams
			Problems
			Advanced Problems for Spreadsheet Application
			MINI-CASE BioCom, Inc.: Part 1
			Summary Card at end of text
	10 Cash Flow Estimation
		10.1 The Importance of Cash Flow
		10.2 Estimating Cash Flow for Projects: Incremental Cash Flow
			Sunk Costs
			Opportunity Costs
			Erosion Costs
			Synergy Gains
			Working Capital
			FINANCE FOLLIES Boston’s “Big Dig” Gets Dug Under
		10.3 Capital Spending and Depreciation
			Straight-Line Depreciation
			Modified Accelerated Cost Recovery System
		10.4 Cash Flow and the Disposal of Capital Equipment
		10.5 Projected Cash Flow For a New Product
			Key Terms
			Questions
			Prepping for Exams
			Problems
			Advanced Problems for Spreadsheet Application
			MINI-CASE BioCom, Inc.: Part 2, Evaluating a New Product Line
			Summary Card at end of text
	11 The Cost of Capital
		11.1 The Cost of Capital: A Starting Point
		11.2 Components of the Weighted Average Cost of Capital
			Debt Component
			Preferred Stock Component
			Equity Component
			Retained Earnings
			The Debt Component and Taxes
		11.3 Weighting the Components: Book Value or Market Value?
			Book Value
			Adjusted Weighted Average Cost of Capital
			Market Value
		11.4 Using the Weighted Average Cost of Capital in a Budgeting Decision
			Individual Weighted Average Cost of Capital for Individual Projects
		11.5 Selecting Appropriate Betas for Projects
		11.6 Constraints on Borrowing and Selecting Projects for the Portfolio
			Key Terms
			Questions
			Prepping for Exams
			Problems
			Advanced Problems for Spreadsheet Application
			MINI-CASE BioCom, Inc.: Part 3, A Fresh Look at the WACC
			Summary Card at end of text
PART 4 Financial Planning and Evaluating Performance
	12 Forecasting and Short-Term Financial Planning
		12.1 Sources and Uses of Cash
		12.2 Cash Budgeting and the Sales Forecast
			Cash Inflow from Sales
			Other Cash Receipts
		12.3 Cash Outflow from Production
		12.4 The Cash Forecast: Short-Term Deficits and Short-Term Surpluses
			Funding Cash Deficits
			Investing Cash Surpluses
		12.5 Planning with Pro Forma Financial Statements
			Pro Forma Income Statement
			Pro Forma Balance Sheet
			PUTTING FINANCE TO WORK Information Technology
			Key Terms
			Questions
			Prepping for Exams
			Problems
			Advanced Problems for Spreadsheet Application
			MINI-CASE Midwest Properties: Quarterly Forecasting
			Summary Card at end of text
	13 Working Capital Management
		13.1 The Cash Conversion Cycle
			Average Production Cycle
			Average Collection Cycle
			Average Payment Cycle
			Putting It All Together: The Cash Conversion Cycle
		13.2 Managing Accounts Receivable and Setting Credit Policy
			Collecting Accounts Receivable
			Credit: A Two-Sided Coin
			Qualifying for Credit
			Setting Payment Policy
			Collecting Overdue Debt
		13.3 The Float
			Speeding Up the Collection Float (Shortening the Lag Time)
			Extending Disbursement Float (Lengthening the Lag Time)
		13.4 Inventory Management: Carrying Costs and Ordering Costs
			ABC Inventory Management
			Redundant Inventory Items
			Economic Order Quantity
		13.5 The Effect of Working Capital on Capital Budgeting
			PUTTING FINANCE TO WORk Operations Management
			Inventories and Daily Operations
			Key Terms
			Questions
			Prepping for Exams
			Problems
			Advanced Problems for Spreadsheet Application
			MINI-CASE Cranston Dispensers, Inc.: Part 1
			Summary Card at end of text
	14 Financial Ratios and Firm Performance
		14.1 Financial Statements
			Benchmarking
		14.2 Financial Ratios
			Short-Term Solvency: Liquidity Ratios
			Long-Term Solvency: Solvency or Financial Leverage Ratios
			Asset Management Ratios
			Profitability Ratios
			Market Value Ratios
			DuPont Analysis
		14.3 External Uses of Financial Statements and Industry Averages
			Cola Wars
			Industry Ratios
			FINANCE FOLLIEE Cooking the Books at Enron and WorldCom
			Key Terms
			Questions
			Prepping for Exams
			Problems
			Advanced Problems for Spreadsheet Application
			MINI-CASE Cranston Dispensers, Inc.: Part 2
			Summary Card at end of text
PART 5 Other Selected Finance Topics
	15 Raising Capital
		15.1 The Business Life Cycle
		15.2 Borrowing for a Start-Up and Growing Business
			Personal Funds and Family Loans
			Commercial Bank Loans
			Commercial Bank Loans through the Small Business Administration
			Angel Financing and Venture Capital
		15.3 Borrowing for a Stable and Mature Business: Bank Loans
			Straight Loans
			Discount Loans
			Letters of Credit or Lines of Credit
			Compensating Balance Loans
		15.4 Borrowing for a Stable and Mature Business: Selling Bonds
		15.5 Borrowing For a Stable and Mature Business: Selling Stock
			Initial Public Offerings and Underwriting
			Registration, Prospectus, and Tombstone
			The Marketing Process: Road Show
			The Auction
			The Aftermarket: Dealer in the Shares
			PUTTING FINANCE TO WORK Corporate Law
		15.6 Other Borrowing Options for a Mature Business
		15.7 The Final Phase: Closing the Business
			Straight Liquidation: Chapter 7
			Reorganization: Chapter 11
			Key Terms
			Questions
			Prepping for Exams
			Problems
			Advanced Problems for Spreadsheet Application
			MINI-CASE AK Web Developers.com
			Summary Card at end of text
	16 Capital Structure
		16.1 Capital Markets: A Quick Review
		16.2 Benefits of Debt
			Earnings per Share as a Measure of the Benefits of Borrowing
		16.3 Break-Even Earnings for Different Capital Structures
		16.4 Pecking Order
			Firms Prefer Internal Financing First
			Firms Choose to Issue the Cheapest Security First and Use Equity as a Last Resort
		16.5 Modigliani and Miller on Optimal Capital Structure
			Capital Structure in a World of No Taxes and No Bankruptcy
			Capital Structure in a World of Corporate Taxes and No Bankruptcy
			Debt and the Tax Shield
		16.6 The Static Theory of Capital Structure
			Bankruptcy
			Static Theory of Capital Structure
			FINANCE FOLLIES Hedge Funds: Some Really Smart Guys Get into Big Trouble
			Key Terms
			Questions
			Prepping for Exams
			Problems
			Advanced Problems for Spreadsheet Application
			MINI-CASE General Energy Storage Systems: How Much Debt and How Much Equity?
			Summary Card at end of text
	17 Dividends, Dividend Policy, and Stock Splits
		17.1 Cash Dividends
			Buying and Selling Stock
			Declaring and Paying a Cash Dividend: A Chronology
			Different Types of Dividends
		17.2 Dividend Policy
			Dividend Clienteles
			Dividend Policy Irrelevance
			Dividend Policy in a World of No Taxes and No Transaction Costs
			Reasons Favoring a Low- or No-Dividend-Payout Policy
			Reasons Favoring a High-Dividend-Payout Policy
			Optimal Dividend Policy
		17.3 Selecting a Dividend Policy
			Some Further Considerations in the Selection of a Dividend Policy
		17.4 Stock Dividends, Stock Splits, and Reverse Splits
			Reasons for Stock Splits
			Reverse Splits
		17.5 Specialized Dividend Plans
			Stock Repurchase
			Dividend Reinvestment Plans
			Key Terms
			Questions
			Prepping for Exams
			Problems
			Advanced Problems for Spreadsheet Application
			MINI-CASE East Coast Warehouse Club
			Summary Card at end of text
	18 International Financial Management
		18.1 Managing Multinational Operations
			Cultural Risk
			Business Risk
			Political Risk
			FINANCE FOLLIES Rino International
		18.2 Foreign Exchange
			Purchasing Power Parity
			Currency Exchange Rates
			Cross Rates
			Arbitrage Opportunities
			Forward Rates
			Using Forward Rates
			Changing Spot Rates
		18.3 Transaction, Operating, and Translation Exposures
			Transaction Exposure
			Operating Exposure
			Translation Exposure
		18.4 Foreign Investment Decisions
			Key Terms
			Questions
			Prepping for Exams
			Problems
			Advanced Problems for Spreadsheet Application
			MINI-CASE Scholastic Travel Services, Inc.
			Summary Card at end of text
Appendix 1 Future Value Interest Factors
Appendix 2 Present Value Interest Factors
Appendix 3 Future Value Interest Factors of an Annuity
Appendix 4 Present Value Interest Factors of an Annuity
Appendix 5 Answers to Prepping for Exam Questions
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Index
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Credits