Foundations of Financial Management

Cover
Foundations of Financial Management
Meet the Authors
Dedication
Preface
Acknowledgements
Distinguishing Features
Supplements
Brief Contents
Contents
List of Selected Real-World Managerial Examples and Boxes
List of Selected Global Examples and Boxes
part 1: Introduction
	1: The Goals and Activities of Financial Management
		The Field of Finance
			Investments vs. Corporate Finance
			The Value of Studying Finance
		Activities of Financial Management
			Forms of Organization
				Sole Proprietorship
				Partnership
				Corporation
		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
				1. Introduction
				2. Financial Analysis and Planning
				3. Working Capital Management
				4. The Capital Budgeting Process
				5. Long-Term Financing
				6. Expanding the Perspective of Corporate Finance
		List of Terms
		Discussion Questions
		Practice Problems and Solutions
		Problems
		Web Exercise
part 2: Financial Analysis and Planning
	2: Review of Accounting
		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
		Problems
		Web Exercise
	3: Financial Analysis
		Ratio Analysis
			Classification System
			The Analysis
				A. Profitability Ratios
				B. Asset Utilization Ratios
				C. Liquidity Ratios
				D. Debt Utilization Ratios
		Trend Analysis
		Impact of Inflation on Financial Analysis
			An Illustration
			Disinflation Effect
				Deflation
		Other Elements of Distortion in Reported Income
			Explanation of Discrepancies
				Sales
				Cost of Goods Sold
			Net Income
		Summary
		List of Terms
		Discussion Questions
		Practice Problems and Solutions
		Problems
		Comprehensive Problems
		Web Exercise
	4: Financial Forecasting
		Constructing Pro Forma Statements
		Pro Forma Income Statement
			Establish a Sales Projection
			Determine a Production Schedule and the Gross Profit
				Cost of Goods Sold
			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
		Problems
		Comprehensive Problems
		Web Exercise
	5: Operating and Financial Leverage
		Leverage in a Business
		Operating Leverage
			Break-Even Analysis
			A More Conservative Approach
			The Risk Factor
			Cash Break-Even Analysis
			Degree of Operating Leverage
				Leveraged Firm
				Conservative Firm
			Limitations of Analysis
		Financial Leverage
			Impact on Earnings
			Degree of Financial Leverage
				Plan A (Leveraged)
				Plan B (Conservative)
			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
		Problems
		Comprehensive Problems
		Web Exercise
part 3: Working Capital Management
	6: Working Capital and the Financing Decision
		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
		Problems
		Web Exercise
	7: Current Asset Management
		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
				Credit Standards
				Terms of Trade
				Collection Policy
			An Actual Credit Decision
		Inventory Management
			Level versus Seasonal Production
			Inventory Policy in Inflation (and Deflation)
			The Inventory Decision Model
				Carrying Costs
				Ordering Costs
			Economic Ordering Quantity
			Safety Stock and Stockouts
			Just-in-Time Inventory Management
				Cost Savings from Lower Inventory
				Other Benefits
				The Downside of JIT
		Summary
		List of Terms
		Discussion Questions
		Practice Problems and Solutions
		Problems
		Comprehensive Problems
		Web Exercise
	8: Sources of Short-Term Financing
		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 Collateral in 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
				Blanket Inventory Liens
				Trust Receipts
				Warehousing
			Appraisal of Inventory Control Devices
		Hedging To Reduce Borrowing Risk
		Summary
		List of Terms
		Discussion Questions
		Practice Problems and Solutions
		Problems
		Web Exercise
part 4: The Capital Budgeting Process
	9: The Time Value of Money
		Relationship to the Capital Outlay Decision
		Future Value„Single Amount
		Present Value„Single Amount
		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
		Problems
		Comprehensive Problems
		Web Exercise
		Appendix 9A Alternative Calculations: Using TVM Tables
		Appendix 9B Yield and Payment Examples Using TVM Tables
		Appendix 9C Using Calculators for Financial Analysis
	10: Valuation and Rates ofæReturn
		Valuation Concepts
		Valuation of Bonds
			Present Value of Interest Payments
			Present Value of Principal Payment (Par Value) at Maturity
			Bond Valuation Using a Financial Calculator
			Using ExcelÍs PV Function to Calculate a Bond Price
			Concept of Yield to Maturity
			Changing the Yield to Maturity and the Impact on Bond Valuation
				Increase in Inflation Premium
				Decrease in Inflation Premium
			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
				Stock Valuation Based on Future Stock Value
			Determining the Required Rate of Return from the Market Price
			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
		Problems
		Comprehensive Problems
		Web Exercise
		Appendix 10A Valuation of a Supernormal Growth Firm
	11: Cost of Capital
		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
		Problems
		Comprehensive Problems
		Web Exercise
		Appendix 11 Cost of Capital and the Capital Asset Pricing Model
		List of Terms
		Discussion Questions
		Problems
	12: The Capital Budgeting Decision
		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
				Modified Internal Rate of Return
		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
		Problems
		Comprehensive Problems
		Web Exercise
		APPENDIX 12: New Present Value Profile
	13: Risk and Capital Budgeting
		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
				Example„Risk-Adjusted Discount Rate
		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
		Problems
		Comprehensive Problems
		Web Exercise
part 5: Long-Term Financing
	14: Capital Markets
		International Capital Markets
		Competition for Funds in the U.S. Capital Markets
			Government Securities
				U.S. Government Securities
				Federally Sponsored Credit Agencies
				State and Local Securities
			Corporate Securities
				Corporate Bonds
				Preferred Stock
				Common Stock
				Internal versus External Sources of Funds
		The Supply of Capital Funds
			The Role of the Security Markets
		The Organization of the Security Markets
			Traditional Organized Exchanges
				Listing Requirements for Firms
			The Major Exchanges
				ICE
				Cboe Global Markets
				The NASDAQ Market
			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
		Web Exercise
	15: Investment Banking
		The Role of Investment Banking
		Enumeration of Functions
			Underwriter
			Market Maker
			Advisor
			Agency Functions
			The Distribution Process
			The Spread
		Pricing the Security
			Debt versus Equity Offerings
			Dilution
			Market Stabilization
			Aftermarket
			Shelf Registration
				The Gramm_Leach_Bliley Act Repeals the Glass_Steagall Act
		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
		Problems
		Comprehensive Problem
		Web Exercise
	16: Long-Term Debt and Lease Financing
		The Expanding Role of Debt
		The Debt Contract
			Par Value
			Coupon Rate
			Maturity Date
			Security Provisions
			Unsecured Debt
			Methods of Repayment
				Serial Payments
				Sinking-Fund Provision
				Conversion
				Call Feature
			An Example: Eli LillyÍs 6.77 Percent Bond
		Bond Prices, Yields, and Ratings
			Bond Yields
				Nominal Yield (Coupon Rate)
				Current Yield
				Yield to Maturity
			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
				Aftertax Interest Savings
				Aftertax Call Premium Cost
				New Underwriting Costs and Tax Benefits of Amortization
				Accelerated Tax Benefits from Unamortized Underwriting Cost on Original Bond
				Loss of Amortization Tax Benefits from the Original Bond Underwriting
			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
		Problems
		Comprehensive Problems
		Web Exercise
		Appendix 16A Financial Alternatives for Distressed Firms
	17: Common and Preferred Stock Financing
		Common StockholdersÍ Claim to Income
		The Voting Right
			Cumulative Voting
		The Right to Purchase New Shares
			The Use of Rights in Financing
				Rights Required
				Monetary Value of a Right
			Effect of Rights on StockholderÍs Position
			Desirable Features of Rights Offerings
			Poison Pills
		American Depository Receipts
		Preferred Stock Financing
			Justification for Preferred Stock
				Investor Interest
				Summary of Tax Considerations
		Provisions Associated with Preferred Stock
			1. Cumulative Dividends
			2. Conversion Feature
			3. Call Feature
			4. Participation Provision
			5. Floating Rate
			6. Auction Rate Preferred Stock
			7. Par Value
		Comparing Features of Common and Preferred Stock and Debt
		Summary
		Review of Formulas
		List of Terms
		Discussion Questions
		Practice Problems And Solutions
		Problems
		Comprehensive Problems
		Web Exercise
	18: Dividend Policy and Retained Earnings
		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
		Problems
		Comprehensive Problems
		Web Exercise
	19: Convertibles, Warrants, and Derivatives
		Convertible Securities
			Value of the Convertible Bond
			Is This FoolÍs 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
		Problems
		Comprehensive Problems
		Web Exercise
PART 6: Expanding the Perspective of Corporate Finance
	20: External Growth through Mergers
		Motives for Business Combinations
			Financial Motives
				Portfolio Effect
				Access to Financial Markets
				Tax Inversions
				Tax Loss Carryforward
			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
		Problems
		Web Exercise
	21: International Financial Management
		The Multinational Corporation: Nature and Environment
			Exporter
			Licensing Agreement
			Joint Venture
			Fully Owned Foreign Subsidiary
		Foreign Exchange Rates
			Factors Influencing Exchange Rates
				Purchasing Power Parity
				Interest Rates
				Balance of Payments
				Government Policies
				Other Factors
			Spot Rates and Forward Rates
			Cross Rates
		Managing Foreign Exchange Risk
			Forward Exchange Market Hedge
			Money Market Hedge
			Currency Futures Market Hedge
		Foreign Investment Decisions
			Analysis of Political Risk
		Financing International Business Operations
			Funding of Transactions
				Eximbank (Export-Import Bank)
				Loans from the Parent Company or a Sister Affiliate
				Eurodollar Loans
				Eurobond Market
				International Equity Markets
				The International Finance Corporation
		Some Unsettled Issues in International Finance
		Summary
		List of Terms
		Discussion Questions
		Practice Problems and Solutions
		Problems
		Web Exercise
		Appendix 21 Cash Flow Analysis and the Foreign Investment Decision
Appendices
	Appendix A Future Value of $1, FVIF
	Appendix B Present Value of $1, PVIF
	Appendix C Future Value of an Annuity of $1, FVIFA
	Appendix D Present Value of an Annuity of $1, PVIFA
	Appendix E Keystrokes for HP 12C and HP 10bii Calculators
Glossary
Indexes