Financial Management: Principles and Applications

Cover
Title Page
Copyright Page
Dedication
Brief Contents
Contents
Teaching Students the Logic of Finance
Preface
Acknowledgments
Chapter 1: Getting Started: Principles of Finance
	Principle 1: Money Has a Time Value
	Principle 2: There Is a Risk-Return Tradeoff
	Principle 3: Cash Flows Are the Source of Value
	Principle 4: Market Prices Reflect Information
	Principle 5: Individuals Respond to Incentives
	1.1. Finance: An Overview
		What Is Finance?
		Why Study Finance?
	1.2. Three Types of Business Organizations
		Sole Proprietorship
		Partnership
		Corporation
		How Does Finance Fit into the Firm’s Organizational Structure?
	1.3. The Goal of the Financial Manager
		Maximizing Shareholder Wealth
		Ethical Considerations in Corporate Finance
		Regulation Aimed at Making the Goal of the Firm Work: The Sarbanes–Oxley Act
	1.4. The Five Basic Principles of Finance
		Principle 1: Money Has a Time Value
		Principle 2: There Is a Risk-Return Tradeoff
		Principle 3: Cash Flows Are the Source of Value
		Principle 4: Market Prices Reflect Information
		Principle 5: Individuals Respond to Incentives
	Chapter Summaries
	Study Questions
Chapter 2: Firms and the Financial Markets
	Principle 2: There Is a Risk-Return Tradeoff
	Principle 4: Market Prices Reflect Information
	Principle 5: Individuals Respond to Incentives
	2.1. The Basic Structure of the U.S. Financial Markets
	2.2. The Financial Marketplace: Financial Institutions
		Commercial Banks: Everyone’s Financial Marketplace
		Nonbank Financial Intermediaries
		Finance for Life: Controlling Costs in Mutual Funds
	2.3. The Financial Marketplace: Securities Markets
		How Securities Markets Bring Corporations and Investors Together
		Types of Securities
		Finance in a Flat World: Where’s the Money Around the World
	Chapter Summaries
	Study Questions
Chapter 3: Understanding Financial Statements
	Principle 1: Money Has a Time Value
	Principle 3: Cash Flows Are the Source of Value
	Principle 4: Market Prices Reflect Information
	Principle 5: Individuals Respond to Incentives
	3.1. An Overview of the Firm’s Financial Statements
		Basic Financial Statements
		Why Study Financial Statements?
		What Are the Accounting Principles Used to Prepare Financial Statements?
	3.2. The Income Statement
		The Income Statement of H. J. Boswell, Inc.
		Connecting the Income Statement and Balance Sheet
		Interpreting Firm Profitability Using the Income Statement
		GAAP and Earnings Management
	3.3. Corporate Taxes
		Computing Taxable Income
		Federal Income Tax Rates for Corporate Income
		Marginal and Average Tax Rates
		Dividend Exclusion for Corporate Stockholders
	3.4. The Balance Sheet
		The Balance Sheet of H. J. Boswell, Inc.
		Firm Liquidity and Net Working Capital
		Debt and Equity Financing
		Book Values, Historical Costs, and Market Values
		Finance for Life: Your Personal Balance Sheet and Income Statement
	3.5. The Cash Flow Statement
		Sources and Uses of Cash
		H. J. Boswell’s Cash Flow Statement
		Finance in a Flat World: GAAP vs. IFRS
	Chapter Summaries
	Study Questions
	Study Problems
	Mini-Case
Chapter 4: Financial Analysis: Sizing Up Firm Performance
	Principle 3: Cash Flows Are the Source of Value
	Principle 4: Market Prices Reflect Information
	Principle 5: Individuals Respond to Incentives
	4.1. Why Do We Analyze Financial Statements?
	4.2. Common-Size Statements: Standardizing Financial Information
		The Common-Size Income Statement: H. J. Boswell, Inc.
		The Common-Size Balance Sheet: H. J. Boswell, Inc.
	4.3. Using Financial Ratios
		Liquidity Ratios
		Capital Structure Ratios
		Asset Management Efficiency Ratios
		Profitability Ratios
		Market Value Ratios
		Finance for Life: Your Cash Budget and Personal Savings Ratio
		Summing Up the Financial Analysis of H. J. Boswell, Inc.
		Finance in a Flat World: Ratios and International Accounting Standards
	4.4. Selecting a Performance Benchmark
		Trend Analysis
		Peer-Firm Comparisons
	4.5. Limitations of Ratio Analysis
	Chapter Summaries
	Study Questions
	Study Problems
	Mini-Case
Chapter 5: The Time Value of Money: The Basics
	Principle 1: Money Has a Time Value
	5.1. Using Timelines to Visualize Cash Flows
	5.2. Compounding and Future Value
		Compound Interest and Time
		Compound Interest and the Interest Rate
		Techniques for Moving Money Through Time
		Applying Compounding to Things Other Than Money
		Compound Interest with Shorter Compounding Periods
		Finance for Life: Saving for Your First House
	5.3. Discounting and Present Value
		The Mechanics of Discounting Future Cash Flows
		Two Additional Types of Discounting Problems
		The Rule of 72
	5.4. Making Interest Rates Comparable
		Calculating the Interest Rate and Converting It to an EAR
		To the Extreme: Continuous Compounding
		Finance in a Flat World: Financial Access at Birth
	Chapter Summaries
	Study Questions
	Study Problems
	Mini-Case
Chapter 6: The Time Value of Money: Annuities and Other Topics
	Principle 1: Money Has a Time Value
	Principle 3: Cash Flows Are the Source of Value
	6.1. Annuities
		Ordinary Annuities
		Amortized Loans
		Annuities Due
		Finance for Life: Saving for Retirement
	6.2. Perpetuities
		Calculating the Present Value of a Level Perpetuity
		Calculating the Present Value of a Growing Perpetuity
	6.3. Complex Cash Flow Streams
	Chapter Summaries
	Study Questions
	Study Problems
	Mini-Case
Chapter 7: An Introduction to Risk and Return: History of Financial Market Returns
	Principle 2: There Is a Risk-Return Tradeoff
	Principle 4: Market Prices Reflect Information
	7.1. Realized and Expected Rates of Return and Risk
		Calculating the Realized Return from an Investment
		Calculating the Expected Return from an Investment
		Measuring Risk
	7.2. A Brief History of Financial Market Returns
		U.S. Financial Markets: Domestic Investment Returns
		Lessons Learned
		U.S. Stocks Versus Other Categories of Investments
		Global Financial Markets: International Investing
		Finance for Life: Determining Your Tolerance for Risk
	7.3. Geometric Versus Arithmetic Average Rates of Return
		Computing the Geometric or Compound Average Rate of Return
		Choosing the Right “Average”
	7.4. What Determines Stock Prices?
		The Efficient Markets Hypothesis
		Do We Expect Financial Markets to Be Perfectly Efficient?
		Market Efficiency: What Does the Evidence Show?
	Chapter Summaries
	Study Questions
	Study Problems
	Mini-Case
Chapter 8: Risk and Return: Capital Market Theory
	Principle 2: There Is a Risk-Return Tradeoff
	Principle 4: Market Prices Reflect Information
	8.1. Portfolio Returns and Portfolio Risk
		Calculating the Expected Return of a Portfolio
		Evaluating Portfolio Risk
		Calculating the Standard Deviation of a Portfolio’s Returns
		Finance in a Flat World: International Diversification
	8.2. Systematic Risk and the Market Portfolio
		Diversification and Unsystematic Risk
		Diversification and Systematic Risk
		Systematic Risk and Beta
		Calculating the Portfolio Beta
	8.3. The Security Market Line and the CAPM
		Using the CAPM to Estimate Expected Rates of Return
	Chapter Summaries
	Study Questions
	Study Problems
	Mini-Case
Chapter 9: Debt Valuation and Interest Rates
	Principle 1: Money Has a Time Value
	Principle 2: There Is a Risk-Return Tradeoff
	Principle 3: Cash Flows Are the Source of Value
	9.1. Overview of Corporate Debt
		Borrowing Money in the Private Financial Market
		Borrowing Money in the Public Financial Market
		Basic Bond Features
		Finance for Life: Adjustable-Rate Mortgages
	9.2. Valuing Corporate Debt
		Valuing Bonds by Discounting Future Cash Flows
		Step 1: Determine Bondholder Cash Flows
		Step 2: Estimate the Appropriate Discount Rate
		Step 3: Calculate the Present Value Using the Discounted Cash Flow
	9.3. Bond Valuation: Four Key Relationships
		Relationship 1
		Relationship 2
		Relationship 3
		Relationship 4
	9.4. Types of Bonds
		Secured Versus Unsecured
		Priority of Claims
		Initial Offering Market
		Abnormal Risk
		Coupon Level
		Amortizing or Non-amortizing
		Convertibility
		Finance in a Flat World: International Bonds
	9.5. Determinants of Interest Rates
		Inflation and Real Versus Nominal Interest Rates
		Interest Rate Determinants—Breaking It Down
		The Maturity-Risk Premium and the Term Structure of Interest Rates
	Chapter Summaries
	Study Questions
	Study Problems
	Mini-Case
Chapter 10: Stock Valuation
	Principle 1: Money Has a Time Value
	Principle 2: There Is a Risk-Reward Tradeoff
	Principle 3: Cash Flows Are the Source of Value
	Principle 4: Market Prices Reflect Information
	Principle 5: Individuals Respond to Incentives
	10.1. Common Stock
		Characteristics of Common Stock
		Finance for Life: Herd Mentality
		Agency Costs and Common Stock
		Valuing Common Stock Using the Discounted Dividend Model
	10.2. The Comparables Approach to Valuing Common Stock
		Defining the P/E Ratio Valuation Model
		What Determines the P/E Ratio for a Stock?
		An Aside on Managing for Shareholder Value
		A Word of Caution About P/E Ratios
	10.3. Preferred Stock
		Features of Preferred Stock
		Valuing Preferred Stock
		A Quick Review: Valuing Bonds, Preferred Stock, and Common Stock
	Chapter Summaries
	Study Questions
	Study Problems
	Mini-Case
Chapter 11: Investment Decision Criteria
	Principle 1: Money Has a Time Value
	Principle 2: There Is a Risk-Return Tradeoff
	Principle 3: Cash Flows Are the Source of Value
	Principle 5: Individuals Respond to Incentives
	11.1. An Overview of Capital Budgeting
		The Typical Capital-Budgeting Process
		What Are the Sources of Good Investment Projects?
		Types of Capital Investment Projects
	11.2. Net Present Value
		Why Is the NPV the Right Criterion?
		Calculating an Investment’s NPV
		Independent Versus Mutually Exclusive Investment Projects
	11.3. Other Investment Criteria
		Profitability Index
		Internal Rate of Return
		Modified Internal Rate of Return
		Finance for Life: Higher Education as an Investment in Yourself
		Payback Period
		Discounted Payback Period
		Summing Up the Alternative Decision Rules
	11.4. A Glance at Actual Capital-Budgeting Practices
	Chapter Summaries
	Study Questions
	Study Problems
	Mini-Cases
Chapter 12: Analyzing Project Cash Flows
	Principle 3: Cash Flows Are the Source of Value
	Principle 5: Individuals Respond to Incentives
	12.1. Project Cash Flows
		Incremental Cash Flows Are What Matters
		Guidelines for Forecasting Incremental Cash Flows
	12.2. Forecasting Project Cash Flows
		Dealing with Depreciation Expense, Taxes, and Cash Flow
		Four-Step Procedure for Calculating Project Cash Flows
		Computing Project NPV
	12.3. Inflation and Capital Budgeting
		Estimating Nominal Cash Flows
	12.4. Replacement Project Cash Flows
		Category 1: Initial Outlay, CF0
		Category 2: Annual Cash Flows
		Replacement Example
		Finance in a Flat World: Entering New Markets
	Chapter Summaries
	Study Questions
	Study Problems
	Mini-Cases
	Appendix: The Modified Accelerated Cost Recovery System
Chapter 13: Risk Analysis and Project Evaluation
	Principle 1: Money Has a Time Value
	Principle 2: There Is a Risk-Return Tradeoff
	Principle 3: Cash Flows Are the Source of Value
	13.1. The Importance of Risk Analysis
	13.2. Tools for Analyzing the Risk of Project Cash Flows
		Key Concepts: Expected Values and Value Drivers
		Sensitivity Analysis
		Scenario Analysis
		Simulation Analysis
		Finance in a Flat World: Currency Risk
	13.3. Break-Even Analysis
		Accounting Break-Even Analysis
		Cash Break-Even Analysis
		NPV Break-Even Analysis
		Operating Leverage and the Volatility of Project Cash Flows
	13.4. Real Options in Capital Budgeting
		The Option to Delay the Launch of a Project
		The Option to Expand a Project
		The Option to Reduce the Scale and Scope of a Project
	Chapter Summaries
	Study Questions
	Study Problems
	Mini-Case
Chapter 14: The Cost of Capital
	Principle 1: Money Has a Time Value
	Principle 2: There Is a Risk-Return Tradeoff
	Principle 3: Cash Flows Are the Source of Value
	Principle 4: Market Prices Reflect Information
	Principle 5: Individuals Respond to Incentives
	14.1. The Cost of Capital: An Overview
		Investor’s Required Return and the Firm’s Cost of Capital
		WACC Equation
		Three-Step Procedure for Estimating the Firm’s WACC
	14.2. Determining the Firm’s Capital Structure Weights
	14.3. Estimating the Cost of Individual Sources of Capital
		The Cost of Debt
		The Cost of Preferred Equity
		The Cost of Common Equity
	14.4. Summing Up: Calculating the Firm’s WACC
		Use Market-Based Weights
		Use Market-Based Costs of Capital
		Use Forward-Looking Weights and Opportunity Costs
		Weighted Average Cost of Capital in Practice
	14.5. Estimating Project Costs of Capital
		The Rationale for Using Multiple Discount Rates
		Why Don’t Firms Typically Use Project Costs of Capital?
		Estimating Divisional WACCs
		Divisional WACC: Estimation Issues and Limitations
		Finance in a Flat World: Why Do Interest Rates Differ Among Countries?
	14.6. Flotation Costs and Project NPV
		WACC, Flotation Costs, and the NPV
	Chapter Summaries
	Study Questions
	Study Problems
	Mini-Case
Chapter 15: Capital Structure Policy
	Principle 2: There Is a Risk-Return Tradeoff
	Principle 3: Cash Flows Are the Source of Value
	Principle 5: Individuals Respond to Incentives
	15.1. A Glance at Capital Structure Choices in Practice
		Defining a Firm’s Capital Structure
		Financial Leverage
		How Do Firms in Different Industries Finance Their Assets?
	15.2. Capital Structure Theory
		A First Look at the Modigliani and Miller Capital Structure Theorem
		Yogi Berra and the M&M Capital Structure Theory
		Capital Structure, the Cost of Equity, and the Weighted Average Cost of Capital
		Why Capital Structure Matters in Reality
		Making Financing Choices When Managers Are Better Informed than Shareholders
		Managerial Implications
	15.3. Why Do Capital Structures Differ Across Industries?
	15.4. Making Financing Decisions
		Benchmarking the Firm’s Capital Structure
		Evaluating the Effect of Financial Leverage on Firm Earnings per Share
		Using the EBIT-EPS Chart to Analyze the Effect of Capital Structure on EPS
		Can the Firm Afford More Debt?
		Survey Evidence: Factors That Influence CFO Debt Policy
		Finance in a Flat World: Capital Structures Around the World
		Lease Versus Buy
		Finance for Life: Leasing or Buying Your Next Car
	Chapter Summaries
	Study Questions
	Study Problems
	Mini-Case
	Appendix: Demonstrating the Modigliani and Miller Theorem
Chapter 16: Dividend and Share Repurchase Policy
	Principle 1: Money Has a Time Value
	Principle 3: Cash Flows Are the Source of Value
	Principle 4: Market Prices Reflect Information
	16.1. How Do Firms Distribute Cash to Their Shareholders?
		Cash Dividends
		Stock Repurchases
		How Do Firms Repurchase Their Shares?
		Personal Tax Considerations: Dividend Versus Capital Gains Income
		Noncash Distributions: Stock Dividends and Stock Splits
	16.2. Does Dividend Policy Matter?
		The Irrelevance of the Distribution Choice
		Why Dividend Policy Is Important
		Finance for Life: The Importance of Dividends
	16.3. Cash Distribution Policies in Practice
		Stable Dividend Payout Policy
		Residual Dividend Payout Policy
		Other Factors Playing a Role in How Much to Distribute
	Chapter Summaries
	Study Questions
	Study Problems
	Mini-Case
Chapter 17: Financial Forecasting and Planning
	Principle 2: There Is a Risk-Return Tradeoff
	17.1. An Overview of Financial Planning
	17.2. Developing a Long-Term Financial Plan
		Financial Forecasting Example: Ziegen, Inc.
		Finance for Life: Your Personal Budget
	17.3. Developing a Short-Term Financial Plan
		Cash Budget Example: Melco Furniture, Inc.
		Uses of the Cash Budget
	Chapter Summaries
	Study Questions
	Study Problems
	Mini-Case
Chapter 18: Working-Capital Management
	Principle 2: There Is a Risk-Return Tradeoff
	18.1. Working-Capital Management and the Risk-Return Tradeoff
		Measuring Firm Liquidity
		Managing Firm Liquidity
		Risk-Return Tradeoff
	18.2. Working-Capital Policy
		The Principle of Self-Liquidating Debt
		A Graphic Illustration of the Principle of Self-Liquidating Debt
	18.3. Operating and Cash Conversion Cycles
		Measuring Working-Capital Efficiency
		Calculating the Operating and Cash Conversion Cycles
	18.4. Managing Current Liabilities
		Calculating the Cost of Short-Term Financing
		Evaluating the Cost of Trade Credit
		Evaluating the Cost of Bank Loans
	18.5. Managing the Firm’s Investment in Current Assets
		Managing Cash and Marketable Securities
		Managing Accounts Receivable
		Finance for Life: Credit Scoring
		Managing Inventories
	Chapter Summaries
	Study Questions
	Study Problems
	Mini-Case
Chapter 19: International Business Finance
	Principle 2: There Is a Risk-Return Tradeoff
	Principle 3: Cash Flows Are the Source of Value
	19.1. Foreign Exchange Markets and Currency Exchange Rates
		What a Change in the Exchange Rate Means for Business
		Foreign Exchange Rates
		Types of Foreign Exchange Transactions
	19.2. Interest Rate and Purchasing-Power Parity
		Interest Rate Parity
		Purchasing-Power Parity and the Law of One Price
		The International Fisher Effect
	19.3. Capital Budgeting for Direct Foreign Investment
		Finance for Life: International Investing
		Foreign Investment Risks
	Chapter Summaries
	Study Questions
	Study Problems
	Mini-Case
Chapter 20: Corporate Risk Management
	Principle 1: Money Has a Time Value
	Principle 2: There Is a Risk-Return Tradeoff
	20.1. Five-Step Corporate Risk Management Process
		Step 1: Identify and Understand the Firm’s Major Risks
		Step 2: Decide Which Types of Risks to Keep and Which to Transfer
		Step 3: Decide How Much Risk to Assume
		Step 4: Incorporate Risk into All the Firm’s Decisions and Processes
		Step 5: Monitor and Manage the Firm’s Risk Exposures
	20.2. Managing Risk with Insurance Contracts
		Types of Insurance Contracts
		Why Purchase Insurance?
		Finance for Life: Do You Need Life Insurance?
	20.3. Managing Risk by Hedging with Forward Contracts
		Hedging Commodity Price Risk Using Forward Contracts
		Hedging Currency Risk Using Forward Contracts
	20.4. Managing Risk with Exchange-Traded Financial Derivatives
		Futures Contracts
		Option Contracts
	20.5. Valuing Options and Swaps
		The Black-Scholes Option Pricing Model
		Swap Contracts
		Credit Default Swaps
	Chapter Summaries
	Study Questions
	Study Problems
	Mini-Case
Glossary
Organization Index
Subject Index
Back Cover