Financial Management: Theory & Practice

Brief Contents......Page 10
Contents......Page 14
Preface......Page 24
Part 1: The Company and Its Environment......Page 38
Ch 1: An Overview of Financial Management and the Financial Environment......Page 40
1-2: Finance from 40,000 Feet Above......Page 41
1-3: The Corporate Life Cycle......Page 42
1-4: Governing a Corporation......Page 47
1-5: An Overview of Financial Markets......Page 51
1-6: Claims on Future Cash Flows: Types of Financial Securities......Page 53
1-7: Claims on Future Cash Flows: The Required Rate of Return (The Cost of Money)......Page 57
1-8: The Functions of Financial Institutions......Page 61
1-9: Financial Markets......Page 66
1-10: Overview of the U.S. Stock Markets......Page 70
1-11: Trading in the Modern Stock Markets......Page 71
1-12: Finance and the Great Recession of 2007......Page 79
1-13: The Big Picture......Page 89
Summary......Page 90
Questions......Page 91
Mini Case......Page 92
Ch 2: Financial Statements, Cash Flow, and Taxes......Page 94
2-1: Financial Statements and Reports......Page 95
2-2: The Balance Sheet......Page 96
2-3: The Income Statement......Page 99
2-4: Statement of Stockholders' Equity......Page 102
2-5: Statement of Cash Flows......Page 103
2-7: Free Cash Flow: The Cash Flow Available for Distribution to Investors......Page 107
2-8: Performance Evaluation......Page 115
2-9: The Federal Income Tax System......Page 121
Summary......Page 126
Self-Test Problem......Page 128
Problems......Page 129
Spreadsheet Problems......Page 132
Mini Case......Page 134
Ch 3: Analysis of Financial Statements......Page 138
3-1: Financial Analysis......Page 139
3-2: Liquidity Ratios......Page 141
3-3: Asset Management Ratios......Page 143
3-4: Debt Management Ratios......Page 146
3-5: Profitability Ratios......Page 151
3-6: Market Value Ratios......Page 153
3-7: Trend Analysis, Common Size Analysis, and Percentage Change Analysis......Page 157
3-8: Tying the Ratios Together: The DuPont Equation......Page 160
3-9: Comparative Ratios and Benchmarking......Page 161
3-10: Uses and Limitations of Ratio Analysis......Page 162
3-11: Looking beyond the Numbers......Page 163
Questions......Page 164
Problems......Page 165
Spreadsheet Problem......Page 169
Mini Case......Page 170
Selected Additional Cases......Page 173
Part 2: Fixed Income Securities......Page 174
Ch 4: Time Value of Money......Page 176
4-1: Time Lines......Page 177
4-2: Future Values......Page 178
4-3: Present Values......Page 186
4-4: Finding the Interest Rate, I......Page 190
4-6: Perpetuities......Page 191
4-7: Annuities......Page 192
4-8: Future Value of an Ordinary Annuity......Page 193
4-9: Future Value of an Annuity Due......Page 196
4-10: Present Value of Ordinary Annuities and Annuities Due......Page 197
4-11: Finding Annuity Payments, Periods, and Interest Rates......Page 199
4-12: Uneven, or Irregular, Cash Flows......Page 202
4-13: Future Value of an Uneven Cash Flow Stream......Page 205
4-14: Solving for I with Irregular Cash Flows......Page 206
4-15: Semiannual and Other Compounding Periods......Page 207
4-16: Fractional Time Periods......Page 211
4-17: Amortized Loans......Page 212
4-18: Growing Annuities......Page 215
Summary......Page 218
Self-Test Problems......Page 220
Problems......Page 221
Mini Case......Page 226
Ch 5: Bonds, Bond Valuation, and Interest Rates......Page 230
5-1: Who Issues Bonds?......Page 231
5-2: Key Characteristics of Bonds......Page 233
5-3: Bond Valuation......Page 237
5-4: Changes in Bond Values over Time......Page 242
5-5: Bonds with Semiannual Coupons......Page 245
5-6: Bond Yields......Page 246
5-7: The Pre-Tax Cost of Debt: Determinants of Market Interest Rates......Page 249
5-8: The Risk-Free Interest Rate: Nominal (rRF) and Real (r*)......Page 250
5-9: The Inflation Premium (IP)......Page 251
5-10: The Maturity Risk Premium (MRP)......Page 253
5-11: The Default Risk Premium (DRP)......Page 256
5-12: The Liquidity Premium (LP)......Page 262
5-13: The Term Structure of Interest Rates......Page 263
5-15: Bankruptcy and Reorganization......Page 265
Summary......Page 266
Questions......Page 268
Problems......Page 269
Spreadsheet Problem......Page 272
Mini Case......Page 273
Selected Additional Cases......Page 274
Part 3: Stocks and Options......Page 276
Ch 6: Risk and Return......Page 278
6-1: Investment Returns and Risk......Page 279
6-2: Measuring Risk for Discrete Distributions......Page 280
6-3: Risk in a Continuous Distribution......Page 284
6-4: Using Historical Data to Estimate Risk......Page 286
6-5: Risk in a Portfolio Context......Page 289
6-6: The Relevant Risk of a Stock: The Capital Asset Pricing Model (CAPM)......Page 293
6-7: The Relationship between Risk and Return in the Capital Asset Pricing Model......Page 300
6-8: The Efficient Markets Hypothesis......Page 309
6-9: The Fama-French Three-Factor Model......Page 313
6-10: Behavioral Finance......Page 317
6-11: The CAPM and Market Efficiency: Implications for Corporate Managers and Investors......Page 319
Summary......Page 320
Questions......Page 321
Self-Test Problems......Page 322
Problems......Page 323
Spreadsheet Problems......Page 325
Mini Case......Page 326
Selected Additional Cases......Page 329
Ch 7: Corporate Valuation and Stock Valuation......Page 330
7-1: Legal Rights and Privileges of Common Stockholders......Page 331
7-2: Types of Common Stock......Page 332
7-3: Stock Market Reporting......Page 333
7-4: Valuing Common Stocks-Introducing the Free Cash Flow (FCF) Valuation Model......Page 334
7-5: The Constant Growth Model: Valuation When Expected Free Cash Flow Grows at a Constant Rate......Page 337
7-6: The Multistage Model: Valuation When Expected Short-Term Free Cash Flow Grows at a Nonconstant Rate......Page 342
7-7: Application of the FCF Valuation Model to MicroDrive......Page 346
7-8: Do Stock Values Reflect Long-Term or Short-Term Cash Flows?......Page 352
7-9: Value-Based Management: Using the Free Cash Flow Valuation Model to Identify Value Drivers......Page 353
7-10: Why are Stock Prices So Volatile?......Page 356
7-11: Valuing Common Stocks with the Dividend Growth Model......Page 357
7-12: The Market Multiple Method......Page 365
7-13: Comparing the FCF Valuation Model, the Dividend Growth Model, and the Market Multiple Method......Page 366
7-14: Preferred Stock......Page 367
Summary......Page 368
Self-Test Problems......Page 370
Problems......Page 371
Spreadsheet Problems......Page 374
Mini Case......Page 376
Selected Additional Cases......Page 378
Ch 8: Financial Options and Applications in Corporate Finance......Page 380
8-1: Overview of Financial Options......Page 381
8-2: The Single-Period Binomial Option Pricing Approach......Page 384
8-3: The Single-Period Binomial Option Pricing Formula......Page 390
8-4: The Multi-Period Binomial Option Pricing Model......Page 392
8-5: The Black-Scholes Option Pricing Model (OPM)......Page 394
8-6: The Valuation of Put Options......Page 400
8-7: Applications of Option Pricing in Corporate Finance......Page 402
Summary......Page 404
Problems......Page 405
Mini Case......Page 406
Part 4: Projects and Their Valuation......Page 410
Ch 9: The Cost of Capital......Page 412
9-1: The Weighted Average Cost of Capital......Page 413
9-2: Choosing Weights for the Weighted Average Cost of Capital......Page 415
9-3: After-Tax Cost of Debt: rd(1-T) and rstd(1-T)......Page 416
9-5: Cost of Common Stock: The Market Risk Premium, RPM......Page 421
9-6: Using the CAPM to Estimate the Cost of Common Stock, rs......Page 425
9-7: Using the Dividend Growth Approach to Estimate the Cost of Common Stock......Page 427
9-8: The Weighted Average Cost of Capital (WACC)......Page 430
9-9: Adjusting the Cost of Equity for Flotation Costs......Page 432
9-10: Privately Owned Firms and Small Businesses......Page 434
9-11: The Divisional Cost of Capital......Page 435
9-12: Estimating the Cost of Capital for Individual Projects......Page 438
9-13: Managerial Issues and the Cost of Capital......Page 439
Summary......Page 441
Self-Test Problem......Page 443
Problems......Page 444
Spreadsheet Problem......Page 447
Mini Case......Page 448
Selected Additional Cases......Page 449
Ch 10: The Basics of Capital Budgeting: Evaluating Cash Flows......Page 450
10-1: An Overview of Capital Budgeting......Page 451
10-2: The First Step in Project Analysis......Page 453
10-3: Net Present Value (NPV)......Page 454
10-4: Internal Rate of Return (IRR)......Page 456
10-5: Modified Internal Rate of Return (MIRR)......Page 463
10-6: Profitability Index (PI)......Page 466
10-7: Payback Period......Page 467
10-8: How to Use the Different Capital Budgeting Methods......Page 469
10-9: Other Issues in Capital Budgeting......Page 472
Summary......Page 478
Questions......Page 479
Problems......Page 480
Spreadsheet Problem......Page 485
Mini Case......Page 486
Selected Additional Cases......Page 488
Ch 11: Cash Flow Estimation and Risk Analysis......Page 490
11-1: Identifying Relevant Cash Flows......Page 491
11-2: Analysis of an Expansion Project......Page 496
11-4: Measuring Stand-Alone Risk......Page 504
11-5: Sensitivity Analysis......Page 505
11-6: Scenario Analysis......Page 508
11-7: Monte Carlo Simulation......Page 511
11-8: Project Risk Conclusions......Page 514
11-9: Replacement Analysis......Page 515
11-10: Real Options......Page 517
11-11: Phased Decisions and Decision Trees......Page 519
Summary......Page 522
Self-Test Problems......Page 524
Problems......Page 525
Spreadsheet Problem......Page 531
Mini Case......Page 532
Selected Additional Cases......Page 534
Appendix 11A: Tax Depreciation......Page 535
Part 5: Corporate Valuation and Governance......Page 538
Ch 12: Corporate Valuation and Financial Planning......Page 540
12-1: Overview of Financial Planning......Page 541
12-2: Financial Planning at MicroDrive, Inc.......Page 543
12-3: Forecasting Operations......Page 545
12-4: Evaluating MicroDrive's Strategic Initiatives......Page 549
12-5: Projecting MicroDrive's Financial Statements......Page 552
12-6: Analysis and Selection of a Strategic Plan......Page 556
12-7: The CFO's Model......Page 558
12-8: Additional Funds Needed (AFN) Equation Method......Page 560
12-9: Forecasting When the Ratios Change......Page 563
Questions......Page 567
Self-Test Problems......Page 568
Problems......Page 570
Spreadsheet Problems......Page 573
Mini Case......Page 575
Selected Additional Cases......Page 577
Ch 13: Corporate Governance......Page 578
13-1: Agency Conflicts......Page 579
13-2: Corporate Governance......Page 582
13-3: Employee Stock Ownership Plans (ESOPs)......Page 594
Summary......Page 597
Mini Case......Page 598
Part 6: Cash Distributions and Capital Structure......Page 600
Ch 14: Distributions to Shareholders: Dividends and Repurchases......Page 602
14-1: An Overview of Cash Distributions......Page 603
14-2: Procedures for Cash Distributions......Page 605
14-3: Cash Distributions and Firm Value......Page 608
14-4: Clientele Effect......Page 612
14-5: Signaling Hypothesis......Page 613
14-6: Implications for Dividend Stability......Page 614
14-7: Setting the Target Distribution Level: The Residual Distribution Model......Page 615
14-8: The Residual Distribution Model in Practice......Page 617
14-9: A Tale of Two Cash Distributions: Dividends versus Stock Repurchases......Page 618
14-10: The Pros and Cons of Dividends and Repurchases......Page 627
14-11: Other Factors Influencing Distributions......Page 629
14-12: Summarizing the Distribution Policy Decision......Page 631
14-13: Stock Splits and Stock Dividends......Page 632
14-14: Dividend Reinvestment Plans......Page 635
Summary......Page 636
Questions......Page 637
Problems......Page 638
Mini Case......Page 641
Selected Additional Cases......Page 643
Ch 15: Capital Structure Decisions......Page 644
15-1: An Overview of Capital Structure......Page 645
15-2: Business Risk and Financial Risk......Page 647
15-3: Capital Structure Theory: The Modigliani and Miller Models......Page 651
15-4: Capital Structure Theory: Beyond the Modigliani and Miller Models......Page 655
15-5: Capital Structure Evidence and Implications......Page 660
15-6: Estimating the Optimal Capital Structure......Page 665
15-7: Anatomy of a Recapitalization......Page 671
15-8: Risky Debt and Equity as an Option......Page 676
15-9: Managing the Maturity Structure of Debt......Page 679
Summary......Page 682
Questions......Page 683
Problems......Page 684
Spreadsheet Problems......Page 687
Mini Case......Page 688
Selected Additional Cases......Page 689
Part 7: Managing Global Operations......Page 690
Ch 16: Supply Chains and Working Capital Management......Page 692
16-1: Overview of Supply Chain Management......Page 693
16-2: Using and Financing Operating Current Assets......Page 695
16-3: The Cash Conversion Cycle......Page 699
16-4: Inventory Management......Page 705
16-5: Receivables Management......Page 706
16-6: Accruals and Accounts Payable (Trade Credit)......Page 710
16-7: The Cash Budget......Page 714
16-8: Cash Management and the Target Cash Balance......Page 718
16-9: Cash Management Techniques......Page 719
16-10: Managing Short-Term Investments......Page 722
16-11: Short-Term Financing......Page 724
16-12: Short-Term Bank Loans......Page 725
16-14: Use of Security in Short-Term Financing......Page 729
Summary......Page 730
Questions......Page 732
Self-Test Problems......Page 733
Problems......Page 734
Spreadsheet Problem......Page 737
Mini Case......Page 739
Selected Additional Cases......Page 741
Ch 17: Multinational Financial Management......Page 742
17-1: Multinational, or Global, Corporations......Page 743
17-2: Multinational versus Domestic Financial Management......Page 744
17-3: Exchange Rates......Page 746
17-4: Exchange Rates and International Trade......Page 751
17-5: The International Monetary System and Exchange Rate Policies......Page 752
17-6: Trading in Foreign Exchange......Page 757
17-7: Interest Rate Parity......Page 759
17-8: Purchasing Power Parity......Page 761
17-10: International Money and Capital Markets......Page 763
17-11: Multinational Capital Budgeting......Page 769
17-12: International Capital Structures......Page 774
17-13: Multinational Working Capital Management......Page 775
Summary......Page 778
Questions......Page 780
Problems......Page 781
Mini Case......Page 783
Selected Additional Case......Page 785
Part 8: Tactical Financing Decisions......Page 786
Ch 18: Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks......Page 788
18-1: The Financial Life Cycle of a Start-Up Company......Page 789
18-2: The Decision to Go Public......Page 790
18-3: The Process of Going Public: An Initial Public Offering......Page 792
18-4: Equity Carve-Outs: A Special Type of IPO......Page 802
18-5: Other Ways to Raise Funds in the Capital Markets......Page 803
18-6: Investment Banking Activities......Page 808
18-7: The Decision to Go Private......Page 810
18-8: Refunding Operations......Page 812
18-9: Managing the Risk Structure of Debt with Project Financing......Page 818
Summary......Page 819
Self-Test Problems......Page 821
Problems......Page 822
Spreadsheet Problems......Page 824
Mini Case......Page 825
Selected Additional Cases......Page 826
Ch 19: Lease Financing......Page 828
19-1: Types of Leases......Page 829
19-2: Tax Effects......Page 832
19-3: Financial Statement Effects......Page 833
19-4: Evaluation by the Lessee......Page 836
19-5: Evaluation by the Lessor......Page 841
19-6: Other Issues in Lease Analysis......Page 843
19-7: Other Reasons for Leasing......Page 847
Summary......Page 848
Questions......Page 849
Self-Test Problem......Page 850
Problems......Page 851
Spreadsheet Problem......Page 852
Mini Case......Page 853
Selected Additional Cases......Page 854
Ch 20: Hybrid Financing: Preferred Stock, Warrants, and Convertibles......Page 856
20-1: Preferred Stock......Page 857
20-2: Warrants......Page 861
20-3: Convertible Securities......Page 867
20-4: A Final Comparison of Warrants and Convertibles......Page 874
20-5: Reporting Earnings When Warrants or Convertibles are Outstanding......Page 875
Summary......Page 876
Questions......Page 877
Problems......Page 878
Mini Case......Page 881
Selected Additional Cases......Page 883
Part 9: Strategic Finance in a Dynamic Environment......Page 884
Ch 21: Dynamic Capital Structures and Corporate Valuation......Page 886
21-1: The Adjusted Present Value (APV) Approach......Page 887
21-2: The Modigliani and Miller Models......Page 890
21-3: The Compressed Adjusted Present Value (CAPV) Model......Page 892
21-4: Multistage Valuation When the Capital Structure is Stable......Page 893
21-5: Illustration of the Three Valuation Approaches for a Constant Capital Structure......Page 897
21-6: Analysis of a Dynamic Capital Structure......Page 903
Summary......Page 904
Self-Test Problem......Page 905
Problems......Page 906
Spreadsheet Problem......Page 907
Selected Additional Cases......Page 908
Ch 22: Mergers and Corporate Control......Page 910
22-1: Rationale for Mergers......Page 911
22-3: Level of Merger Activity......Page 914
22-4: Hostile versus Friendly Takeovers......Page 915
22-5: Merger Regulation......Page 916
22-6: Overview of Merger Analysis......Page 918
22-7: Estimating a Target's Value......Page 919
22-8: Setting the Bid Price......Page 923
22-9: Analysis When the Capital Structure Changes during the Explicit Forecast Period......Page 925
22-10: Taxes and the Structure of the Takeover Bid......Page 926
22-11: Financial Reporting for Mergers......Page 929
22-12: Analysis for a "True Consolidation"......Page 932
22-13: The Role of Investment Bankers......Page 933
22-14: Who Wins: The Empirical Evidence......Page 935
22-15: Corporate Alliances......Page 936
22-16: Divestitures......Page 937
22-17: Holding Companies......Page 938
Summary......Page 939
Questions......Page 940
Problems......Page 941
Mini Case......Page 944
Selected Additional Cases......Page 946
Ch 23: Enterprise Risk Management......Page 948
23-1: Reasons to Manage Risk......Page 949
23-2: An Overview of Enterprise Risk Management......Page 952
23-3: A Framework for Enterprise Risk Management......Page 954
23-4: Categories of Risk Events......Page 957
23-5: Foreign Exchange (FX) Risk......Page 959
23-6: Commodity Price Risk......Page 960
23-7: Interest Rate Risk......Page 964
23-8: Project Selection Risks......Page 972
23-9: Managing Credit Risks......Page 975
23-10: Risk and Human Safety......Page 977
Summary......Page 978
Questions......Page 979
Problems......Page 980
Spreadsheet Problem......Page 981
Mini Case......Page 982
Ch 24: Bankruptcy, Reorganization, and Liquidation......Page 984
24-1: Financial Distress and Its Consequences......Page 985
24-2: Issues Facing a Firm in Financial Distress......Page 986
24-3: Settlements without Going through Formal Bankruptcy......Page 987
24-4: Federal Bankruptcy Law......Page 989
24-5: Reorganization in Bankruptcy (Chapter 11 of Bankruptcy Code)......Page 990
24-6: Liquidation in Bankruptcy......Page 999
24-7: Anatomy of a Bankruptcy: Transforming the GM Corporation into the GM Company......Page 1004
24-8: Other Motivations for Bankruptcy......Page 1005
24-9: Some Criticisms of Bankruptcy Laws......Page 1006
Summary......Page 1007
Self-Test Problem......Page 1008
Problems......Page 1009
Spreadsheet Problem......Page 1012
Mini Case......Page 1013
Selected Additional Cases......Page 1014
Part 10: Special Topics......Page 1016
Ch 25: Portfolio Theory and Asset Pricing Models......Page 1018
25-1: Efficient Portfolios......Page 1019
25-2: Choosing the Optimal Portfolio......Page 1024
25-3: The Basic Assumptions of the Capital Asset Pricing Model......Page 1027
25-4: The Capital Market Line and the Security Market Line......Page 1028
25-5: Calculating Beta Coefficients......Page 1032
25-6: Empirical Tests of the CAPM......Page 1041
25-7: Arbitrage Pricing Theory......Page 1043
Summary......Page 1046
Self-Test Problem......Page 1047
Problems......Page 1048
Spreadsheet Problem......Page 1050
Selected Additional Case......Page 1051
Ch 26: Real Options......Page 1052
26-1: Valuing Real Options......Page 1053
26-2: The Investment Timing Option: An Illustration......Page 1054
26-3: The Growth Option: An Illustration......Page 1064
26-4: Concluding Thoughts on Real Options......Page 1070
Summary......Page 1071
Self-Test Problem......Page 1072
Problems......Page 1073
Mini Case......Page 1075
Appendix A: Solutions to Self-Test Problems......Page 1078
Appendix B: Answers to End-of-Chapter Problems......Page 1112
Appendix C: Selected Equations......Page 1122
Appendix D: Values of the Areas under the Standard Normal Distribution Function......Page 1136
Glossary......Page 1138
Name Index......Page 1186
Subject Index......Page 1190