Foundations of Financial Management

Frontmatter
	Title
	Copyright
	Meet the Authors
	Preface
		Reinforcing Prerequisite Knowledge
		Content Improvements
	Distinguishing Features
		Integration of Learning Objectives to Discussion Questions and Problems
		Expanded! Finance in Action Boxes
		Pulling It Together with Color
		Excel, Calculator Solutions, and Formulas
		Digital Illustrations of Time Value of Money (Chapter 9)
		Practice Problems and Solutions
		Comprehensive Problems
		Excel Problems
		NEW! Integrated Excel: A live seamless experience
	Supplements
	Instructors: Student Success Starts with You
	Brief Contents
	Contents
	Finance in Action Managerial
		List of Selected Real-World Managerial Examples and Boxes
	Finance in Action Global
		List of Selected Global Examples and Boxes
Chapter 1: The Goals and Activities of Financial Management
	Part One: Introduction
	Introduction
	The Field of Finance
		Investments vs. Corporate Finance
		The Value of Studying Finance
	Activities of Financial Management
		Forms of Organization
	Corporate Governance
	The Time Value of Money
	Goals of Financial Management
		A Valuation Approach
		Maximizing Shareholder Wealth
		Management and Stockholder Wealth
		Social Responsibility and Ethical Behavior
	The Role of the Financial Markets
		Structure and Functions of the Financial Markets
		Allocation of Capital
		Internationalization of the Financial Markets
	Format of the Text
		Parts
	List of Terms
	Discussion Questions
	Practice Problems and Solutions
		Solutions
	Problems
		Basic Problems
Chapter 2: Review of Accounting
	Part Two: Financial Analysis and Planning
	Introduction
	Income Statement
		Return to Capital
		Price-Earnings Ratios and Earnings per Share
		Limitations of the Income Statement
	Balance Sheet
		Interpretation of Balance Sheet Items
		Concept of Book Value
		Limitations of the Balance Sheet
	Statement of Cash Flows
		Developing an Actual Statement
		Determining Cash Flows from Operating Activities
		Determining Cash Flows from Investing Activities
		Determining Cash Flows from Financing Activities
		Combining the Three Sections of the Statement
	Depreciation and Funds Flow
	Free Cash Flow
	Income Tax Considerations
		Corporate Tax Rates
		Cost of a Tax-Deductible Expense
		Depreciation as a Tax Shield
	Summary
	List of Terms
	Discussion Questions
	Practice Problems and Solutions
		Solutions
	Problems
		Basic Problems
		Intermediate Problems
		Advanced Problems
Chapter 3: Financial Analysis
	Introduction
	Ratio Analysis
		Classification System
		The Analysis
	Trend Analysis
	Impact of Inflation on Financial Analysis
		An Illustration
		Disinflation Effect
	Other Elements of Distortion in Reported Income
		Explanation of Discrepancies
		Net Income
	Summary
	List of Terms
	Discussion Questions
	Practice Problems and Solutions
		Solutions
	Problems
		Basic Problems
		Intermediate Problems
		Advanced Problems
Chapter 4: Financial Forecasting
	Introduction
	Constructing Pro Forma Statements
	Pro Forma Income Statement
		Establish a Sales Projection
		Determine a Production Schedule and the Gross Profit
		Other Expense Items
		Actual Pro Forma Income Statement
	Cash Budget
		Cash Receipts
		Cash Payments
		Actual Budget
	Pro Forma Balance Sheet
		Explanation of Pro Forma Balance Sheet
		Analysis of Pro Forma Statement
	Percent-of-Sales Method
	Summary
	List of Terms
	Discussion Questions
	Practice Problems and Solutions
		Solutions
	Problems
		Basic Problems
		Intermediate Problems
		Advanced Problems
Chapter 5: Operating and Financial Leverage
	Introduction
	Leverage in a Business
	Operating Leverage
		Break-Even Analysis
		A More Conservative Approach
		The Risk Factor
		Cash Break-Even Analysis
		Degree of Operating Leverage
		Limitations of Analysis
	Financial Leverage
		Impact on Earnings
		Degree of Financial Leverage
		Limitations to Use of Financial Leverage
	Combining Operating and Financial Leverage
	Degree of Combined Leverage
		A Word of Caution
	Summary
	Review of Formulas
	List of Terms
	Discussion Questions
	Practice Problems and Solutions
		Solutions
	Problems
		Basic Problems
		Intermediate Problems
		Advanced Problems
Chapter 6: Working Capital and the Financing Decision
	Part Three: Working Capital Management
	Introduction
	The Nature of Asset Growth
	Controlling Assets—Matching Sales and Production
		Temporary Assets under Level Production—an Example
	Patterns of Financing
		Alternative Plans
		Long-Term Financing
		Short-Term Financing (Opposite Approach)
	The Financing Decision
		Term Structure of Interest Rates
	A Decision Process
		Introducing Varying Conditions
		Expected Value
	Toward an Optimal Policy
	Summary
	List of Terms
	Discussion Questions
	Practice Problems and Solutions
		Solutions
	Problems
		Basic Problems
		Intermediate Problems
		Advanced Problems
Chapter 7: Current Asset Management
	Introduction
	Cash Management
		Reasons for Holding Cash Balances
		Cash Flow Cycle
	Collections and Disbursements
		Float
		Improving Collections
		Extending Disbursements
		Cost-Benefit Analysis
		Electronic Funds Transfer
		International Cash Management
	Marketable Securities
	Management of Accounts Receivable
		Accounts Receivable as an Investment
		Credit Policy Administration
		An Actual Credit Decision
	Inventory Management
		Level versus Seasonal Production
		Inventory Policy in Inflation (and Deflation)
		The Inventory Decision Model
		Economic Ordering Quantity
		Safety Stock and Stockouts
		Just-in-Time Inventory Management
	Summary
	List of Terms
	Discussion Questions
	Practice Problems and Solutions
		Solutions
	Problems
		Basic Problems
		Intermediate Problems
		Advanced Problems
Chapter 8: Sources of Short-Term Financing
	Introduction
	Trade Credit
		Payment Period
		Cash Discount Policy
		Net Credit Position
	Bank Credit
		Prime Rate and LIBOR
		Compensating Balances
		Maturity Provisions
		Cost of Commercial Bank Financing
		Interest Costs with Compensating Balances
		Rate on Installment Loans
		Annual Percentage Rate
		The Credit Crunch Phenomenon
	Financing through Commercial Paper
		Advantages of Commercial Paper
		Limitations on the Issuance of Commercial Paper
	Foreign Borrowing
	Use of Collateralin Short-Term Financing
	Accounts Receivable Financing
		Pledging Accounts Receivable
		Factoring Receivables
		Asset-Backed Public Offerings of Receivables
	Inventory Financing
		Stages of Production
		Nature of Lender Control
		Appraisal of Inventory Control Devices
	Hedging to Reduce Borrowing Risk
	Summary
	List of Terms
	Discussion Questions
	Practice Problems and Solutions
		Solutions
	Problems
		Basic Problems
		Intermediate Problems
		Advanced Problems
Chapter 9: The Time Value of Money
	Part Four: The Capital Budgeting Process
	Introduction
	Ratio Analysis
	Future Value—Single Amount
	The Refunding Decision
	Interest Rate—Single Amount
	Number of Periods—Single Amount
	Future Value—Annuity
	Present Value—Annuity
	Alternative Calculations: Using TVM Tables
	Graphical Presentation of Time Value Relationships
		The Relationship between Present Value and Future Value
		The Relationship between the Present Value of a Single Amount and the Present Value of an Annuity
		Future Value Related to the Future Value of an Annuity
	Determining the Annuity Value
		Annuity Equaling a Future Value
		Annuity Equaling a Present Value
		Finding Annuity Payments with a Financial Calculator or Excel
	Finding Interest Rates and the Number of Payments
		Finding Annuity Interest Rates
		Finding the Number of Annuity Payments
	Compounding over Additional Periods
		Patterns of Payment with a Deferred Annuity
		Annuities Due
	List of Terms
	Discussion Questions
	Practice Problems and Solutions
		Solutions
	Problems
		Basic Problems
		Intermediate Problems
		Advanced Problems
		Future Value of a Single Amount
		Present Value of a Single Amount
		Future Value of an Annuity
		Present Value of an Annuity
		Annuity Equaling a Future Value
		Annuity Equaling a Present Value
		Yield–Present Value of a Single Amount
		Yield–Present Value of an Annuity
		Bond Valuation Using Both the TI BAII Plus and the HP 12C
		Yield to Maturity on Both the TI BAII Plus and HP 12C
		Net Present Value of an Annuity on Both the TI BAII Plus and the HP 12C
		Net Present Value of an Uneven Cash Flow on Both the TI BAII Plus and the HP 12C
		Internal Rate of Return for an Annuity on Both the TI BAII Plus and the HP 12C
		Internal Rate of Return with an Uneven Cash Flow on Both the TI BAII Plus and the HP 12C
Chapter 10: Valuation and Rates of Return
	Introduction
	Valuation Concepts
	Valuation of Bonds
		Bond Valuation Using a Financial Calculator
		Using Excel’s PV Function to Calculate a Bond Price
		Concept of Yield to Maturity
		Changing the Yield to Maturity and the Impact on Bond Valuation
		Time to Maturity
		Determining Yield to Maturity from the Bond Price
		Semiannual Interest and Bond Prices
	Valuation and Preferred Stock
		Determining the Required Rate of Return (Yield) from the Market Price
	Valuation of Common Stock
		No Growth in Dividends
		Constant Growth in Dividends
		The Price-Earnings Ratio Concept and Valuation
		Variable Growth in Dividends
	Summary and Review of Formulas
	List of Terms
	Discussion Questions
	Practice Problems and Solutions
		Solutions
	Problems
		Basic Problems
		Intermediate Problems
		Advanced Problems
	Problems
Chapter 11: Cost of Capital
	Introduction
	The Overall Concept
	Cost of Debt
	Cost of Preferred Stock
	Cost of Common Equity
		Valuation Approach
		Required Return on Common Stock Using the Capital Asset Pricing Model
		Cost of Retained Earnings
		Cost of New Common Stock
		Overview of Common Stock Costs
	Optimum Capital Structure—Weighting Costs
	Capital Acquisition and Investment Decision Making
		Cost of Capital in the Capital Budgeting Decision
	The Marginal Cost of Capital
	Summary
	Review of Formulas
	List of Terms
	Discussion Questions
	Practice Problems and Solutions
		Solutions
	Problems
		Basic Problems
		Intermediate Problems
		Advanced Problems
	List of Terms
	Discussion Questions
	Problems
Chapter 12: The Capital Budgeting Decision
	Introduction
	Administrative Considerations
	Accounting Flows versus Cash Flows
	Methods of Ranking Investment Proposals
		Payback Method
		Net Present Value
		Internal Rate of Return
	Selection Strategy
		Reinvestment Assumption
	Capital Rationing
	Combining Cash Flow Analysis and Selection Strategy
		The Rules of Depreciation
		The Tax Rate
	Actual Investment Decision
	The Replacement Decision
		Sale of Old Asset
		Tax Benefit on the Sale of Old Asset
		Incremental Depreciation
	Elective Expensing
	Summary
	List of Terms
	Discussion Questions
	Practice Problems and Solutions
		Solutions
	Problems
		Basic Problems
		Intermediate Problems
		Advanced Problems
		Characteristics of Investment C
	Discussion Questions
	Problem
Chapter 13: Risk and Capital Budgeting
	Introduction
	Definition of Risk in Capital Budgeting
	The Concept of Risk-Averse
	Actual Measurement of Risk
	Risk and the Capital Budgeting Process
		Risk-Adjusted Discount Rate
		Increasing Risk over Time
		Qualitative Measures
	Simulation Models
		Decision Trees
	The Portfolio Effect
		Portfolio Risk
		Evaluation of Combinations
	The Share Price Effect
	Summary
	Review of Formulas
	List of Terms
	Discussion Questions
	Practice Problems and Solutions
		Solutions
	Problems
		Basic Problems
		Intermediate Problems
		Advanced Problems
Chapter 14: Capital Markets
	Part Five: Long-Term Financing
	Introduction
	Income Statement
	Competition for Funds in the U.S. Capital Markets
		Government Securities
		Corporate Securities
	The Supply of Capital Funds
		The Role of the Security Markets
	The Organization of the Security Markets
		Traditional Organized Exchanges
		The Major Exchanges
		Foreign Exchanges
		Other Financial Exchanges
		Electronic Communication Networks (ECNs)
	Market Efficiency
		The Efficient Market Hypothesis
	Regulation of the Security Markets
		The Securities Act of 1933
		The Securities Exchange Act of 1934
		The Securities Acts Amendments of 1975
		The Sarbanes–Oxley Act of 2002
	Summary
	List of Terms
	Discussion Questions
Chapter 15: Investment Banking: Public and Private Placement
	Introduction
	The Role of Investment Banking
	Enumeration of Functions
	The Distribution Process
	Pricing the Security
		Debt versus Equity Offerings
		Dilution
		Market Stabilization
		Aftermarket
		Shelf Registration
	Public versus Private Financing
		Advantages of Being Public
		Disadvantages of Being Public
	Public Offerings
		A Classic Example—Rosetta Stone Goes Public
	Private Placement
		Going Private and Leveraged Buyouts
	International Investment Banking Deals
		Privatization
	Summary
	List of Terms
	Discussion Questions
	Practice Problems and Solutions
		Solutions
	Problems
		Basic Problems
		Intermediate Problems
		Advanced Problems
Chapter 16: Long-Term Debt and Lease Financing
	Introduction
	The Role of Investment Banking
	The Debt Contract
		Security Provisions
		Unsecured Debt
		Methods of Repayment
		An Example: Eli Lilly’s 6.77 Percent Bond
	Bond Prices, Yields, and Ratings
		Bond Yields
		Bond Ratings
		Examining Actual Bond Ratings
	The Refunding Decision
		A Capital Budgeting Problem
		Step A—Identification of Cash Inflows and Outflows
		Step B—Calculating Each Cash Flow
		Step C—Net Present Value of Combined Cash Flows
	Other Forms of Bond Financing
	Advantages and Disadvantages of Debt
		Benefits of Debt
		Drawbacks of Debt
		Eurobond Market
	Leasing as a Form of Debt
		Finance Lease versus Operating Lease
		Income Statement Effect
		Advantages of Leasing
	Summary
	List of Terms
	Discussion Questions
	Practice Problems and Solutions
		Solutions
	Problems
		Basic Problems
		Intermediate Problems
		Advanced Problems
		Out-of-Court Settlement
		In-Court Settlements–Formal Bankruptcy
	List of Terms
	Discussion Questions
	Problems
Chapter 17: Common and Preferred Stock Financing
	Introduction
	Common Stockholders’ Claim to Income
	The Voting Right
		Cumulative Voting
	The Right to Purchase New Shares
		The Use of Rights in Financing
		Effect of Rights on Stockholder’s Position
		Desirable Features of Rights Offerings
		Poison Pills
	American Depository Receipts
	Preferred Stock Financing
		Justification for Preferred Stock
	Provisions Associated with Preferred Stock
	Comparing Features of Common and Preferred Stock and Debt
	Summary
	Review of Formulas
	List of Terms
	Discussion Questions
	Practice Problems and Solutions
		Solutions
	Problems
		Basic Problems
		Intermediate Problems
		Advanced Problems
Chapter 18: Dividend Policy and Retained Earnings
	Introduction
	The Marginal Principle of Retained Earnings
		Life Cycle Growth and Dividends
		Dividends as a Passive Variable
		An Incomplete Theory
		Arguments for the Relevance of Dividends
	Dividend Stability
	Other Factors Influencing Dividend Policy
		Legal Rules
		Cash Position of the Firm
		Access to Capital Markets
		Desire for Control
		Tax Position of Shareholders
	Dividend Payment Procedures
	Stock Dividend
		Accounting Considerations for a Stock Dividend
		Value to the Investor
		Possible Value of Stock Dividends
		Use of Stock Dividends
	Stock Splits
		Reverse Stock Splits
	Repurchase of Stock as an Alternative to Dividends
		Other Reasons for Repurchase
	Dividend Reinvestment Plans
	Summary
	List of Terms
	Discussion Questions
	Practice Problems and Solutions
		Solutions
	Problems
		Basic Problems
		Intermediate Problems
		Advanced Problems
Chapter 19: Convertibles, Warrants, and Derivatives
	Introduction
	Convertible Securities
		Value of the Convertible Bond
		Is This Fool’s Gold?
		Advantages and Disadvantages to the Corporation
		Forcing Conversion
		Accounting Considerations with Convertibles
	Financing through Warrants
		Valuation of Warrants
		Use of Warrants in Corporate Finance
		Accounting Considerations with Warrants
	Derivative Securities
		Options
		Futures
	Summary
	Review of Formulas
	List of Terms
	Discussion Questions
	Practice Problems and Solutions
		Solutions
	Problems
		Basic Problems
		Intermediate Problems
		Advanced Problems
Chapter 20: External Growth through Mergers
	Part Six: Expanding the Perspective of Corporate Finance
	Introduction
	Motives for Business Combinations
		Financial Motives
		Nonfinancial Motives
		Motives of Selling Stockholders
	Terms of Exchange
		Cash Purchases
		Stock-for-Stock Exchange
		Portfolio Effect
	Accounting Considerations in Mergers and Acquisitions
	Negotiated versus Tendered Offers
	Premium Offers and Stock Price Movements
	Two-Step Buyout
	Summary
	List of Terms
	Discussion Questions
	Practice Problems and Solutions
		Solutions
	Problems
		Basic Problems
		Intermediate Problems
		Advanced Problems
Chapter 21: International Financial Management
	Introduction
	The Multinational Corporation: Nature and Environment
	Foreign Exchange Rates
		Factors Influencing Exchange Rates
		Spot Rates and Forward Rates
		Cross Rates
	Managing Foreign Exchange Risk
	Foreign Investment Decisions
		Analysis of Political Risk
	Financing International Business Operations
		Funding of Transactions
	Income Tax Considerations
	Summary
	List of Terms
	Discussion Questions
	Practice Problems and Solutions
		Solutions
	Problems
		Basic Problems
		Intermediate Problems
		Advanced Problems
	Appendix 21A
		Cash Flow Analysis and the Foreign Investment Decision
Appendices
	Appendices
		Chapter 9
		Chapter 10
		Chapter 11
		Chapter 12
		Chapter 16
Backmatter
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