Fundamentals of Financial Management , Concise Sixth Edition

Front Cover......Page 1
Title Page......Page 2
Copyright......Page 3
CONTENTS......Page 14
PREFACE......Page 4
PART 1 Introduction to Financial Management......Page 22
Striking the Right Balance......Page 23
PUTTING THINGS IN PERSPECTIVE......Page 24
1-1 What Is Finance......Page 25
1-3 Forms of Business Organization......Page 27
1-4 Stock Prices and Shareholder Value......Page 29
1-5 Intrinsic Values, Stock Prices, and Executive Compensation......Page 31
1-6 Important Business Trends......Page 35
1-7 Business Ethics......Page 36
1-8 Conflicts Between Managers, Stockholders, and Bondholders......Page 39
TYING IT ALL TOGETHER......Page 42
PART 2 Fundamental Concepts in Financial Management......Page 46
Efficient Financial Markets Are Necessary for a Growing Economy......Page 47
PUTTING THINGS IN PERSPECTIVE......Page 48
2-1 The Capital Allocation Process......Page 49
2-2 Financial Markets......Page 51
2-3 Financial Institutions......Page 55
2-4 The Stock Market......Page 59
2-5 The Market for Common Stock......Page 61
2-6 Stock Markets and Returns......Page 64
2-7 Stock Market Efficiency......Page 67
TYING IT ALL TOGETHER......Page 72
INTEGRATED CASE: Smyth Barry & Company......Page 73
The "Quality" of Financial Statements......Page 75
3-1 Financial Statements and Reports......Page 76
3-2 The Balance Sheet......Page 78
3-3 The Income Statement......Page 82
3-4 Statement of Cash Flows......Page 84
3-5 Statement of Stockholders' Equity......Page 88
3-6 Free Cash Flow......Page 89
3-7 Income Taxes......Page 91
TYING IT ALL TOGETHER......Page 97
INTEGRATED CASE: D'Leon Inc., Part I......Page 102
THOMSON ONE: BUSINESS SCHOOL EDITION: Exploring Starbucks' Financial Statements......Page 105
Can You Make Money Analyzing Stocks?......Page 106
PUTTING THINGS IN PERSPECTIVE......Page 107
4-1 Ratio Analysis......Page 108
4-2 Liquidity Ratios......Page 109
4-3 Asset Management Ratios......Page 110
4-4 Debt Management Ratios......Page 113
4-5 Profitability Ratios......Page 117
4-6 Market Value Ratios......Page 120
4-7 Trend Analysis......Page 121
4-8 The DuPont Equation......Page 122
4-9 Ratios in Different Industries......Page 124
4-10 Summary of Allied's Ratios......Page 125
4-11 Benchmarking......Page 126
4-12 Uses and Limitations of Ratios......Page 127
4-13 Potential Misuses of ROE......Page 129
4-14 Looking Beyond the Numbers......Page 130
TYING IT ALL TOGETHER......Page 131
INTEGRATED CASE: D'Leon Inc., Part II......Page 139
THOMSON ONE: BUSINESS SCHOOL EDITION: Conducting a Financial Ratio Analysis on Ford Motor Company......Page 143
Will You Be Able to Retire?......Page 144
5-1 Time Lines......Page 145
5-2 Future Values......Page 146
5-3 Present Values......Page 152
5-4 Finding the Interest Rate, I......Page 154
5-6 Annuities......Page 155
5-7 Future Value of an Ordinary Annuity......Page 156
5-8 Future Value of an Annuity Due......Page 158
5-9 Present Value of an Ordinary Annuity......Page 159
5-10 Finding Annuity Payments, Periods, and Interest Rates......Page 160
5-11 Perpetuities......Page 162
5-12 Uneven Cash Flows......Page 164
5-13 Future Value of an Uneven Cash Flow Stream......Page 165
5-14 Solving for I with Uneven Cash Flows......Page 166
5-15 Semiannual and Other Compounding Periods......Page 167
5-16 Comparing Interest Rates......Page 169
5-17 Fractional Time Periods......Page 171
5-18 Amortized Loans......Page 172
TYING IT ALL TOGETHER......Page 173
INTEGRATED CASE: First National Bank......Page 180
PART 3 Financial Assets......Page 182
Low Interest Rates Encourage Investment and Stimulate Consumer Spending......Page 183
6-1 The Cost of Money......Page 184
6-2 Interest Rate Levels......Page 186
6-3 The Determinants of Market Interest Rates......Page 189
6-4 The Term Structure of Interest Rates......Page 196
6-5 What Determines the Shape of the Yield Curve?......Page 197
6-6 Using the Yield Curve to Estimate Future Interest Rates......Page 201
6-7 Macroeconomic Factors That Influence Interest Rate Levels......Page 204
6-8 Interest Rates and Business Decisions......Page 206
TYING IT ALL TOGETHER......Page 208
INTEGRATED CASE: Morton Handley & Company......Page 213
Sizing Up Risk in the Bond Market......Page 215
7-1 Who Issues Bonds?......Page 216
7-2 Key Characteristics of Bonds......Page 217
7-3 Bond Valuation......Page 221
7-4 Bond Yields......Page 224
7-5 Changes in Bond Values Over Time......Page 227
7-6 Bonds with Semiannual Coupons......Page 230
7-7 Assessing a Bond’s Riskiness......Page 231
7-8 Default Risk......Page 235
7-9 Bond Markets......Page 241
TYING IT ALL TOGETHER......Page 243
INTEGRATED CASE: Western Money Management Inc.......Page 249
A Tale of Three Markets—or Is It Four?......Page 250
PUTTING THINGS IN PERSPECTIVE......Page 251
8-1 Stock Prices Over the Last 20 Years......Page 252
8-2 Stand-Alone Risk......Page 253
8-3 Risk in a Portfolio Context: The CAPM......Page 261
8-4 The Relationship between Risk and Rates of Return......Page 272
8-5 Some Concerns about Beta and the CAPM......Page 278
8-6 Some Concluding Thoughts: Implications for Corporate Managers and Investors......Page 279
TYING IT ALL TOGETHER......Page 280
INTEGRATED CASE: Merrill Finch Inc.......Page 287
THOMSON ONE: BUSINESS SCHOOL EDITION: Using Past Information to Estimate Required Returns......Page 289
Searching for the Right Stock......Page 290
9-1 Legal Rights and Privileges of Common Stockholders......Page 291
9-2 Types of Common Stock......Page 293
9-3 Stock Price versus Intrinsic Value......Page 294
9-4 The Discounted Dividend Model......Page 296
9-5 Constant Growth Stocks......Page 299
9-6 Valuing Nonconstant Growth Stocks......Page 304
9-7 Valuing the Entire Corporation......Page 307
9-8 Preferred Stock......Page 312
TYING IT ALL TOGETHER......Page 313
INTEGRATED CASE: Mutual of Chicago Insurance Company......Page 319
THOMSON ONE: BUSINESS SCHOOL EDITION: Estimating ExxonMobil’s Intrinsic Stock Value......Page 320
APPENDIX 9A: Stock Market Equilibrium......Page 322
PART 4 Investing in Long-Term Assets: Capital Budgeting......Page 326
Creating Value at GE......Page 327
10-1 An Overview of the Weighted Average Cost of Capital (WACC)......Page 328
10-2 Basic Definitions......Page 330
10-3 Cost of Debt, r[sub(d)](1 – T)......Page 331
10-5 The Cost of Retained Earnings, r[sub(s)]......Page 333
10-6 Cost of New Common Stock, r[sub(e)]......Page 339
10-8 Factors That Affect the WACC......Page 342
10-9 Adjusting the Cost of Capital for Risk......Page 344
10-10 Some Other Problems with Cost of Capital Estimates......Page 346
TYING IT ALL TOGETHER......Page 347
INTEGRATED CASE: Coleman Technologies Inc.......Page 354
THOMSON ONE: BUSINESS SCHOOL EDITION: Calculating 3M’s Cost of Capital 334......Page 355
Competition in the Aircraft Industry: Airbus vs. Boeing......Page 356
11-1 An Overview of Capital Budgeting......Page 357
11-2 Net Present Value (NPV)......Page 359
11-3 Internal Rate of Return (IRR)......Page 362
11-4 Multiple Internal Rates of Return......Page 365
11-5 Reinvestment Rate Assumptions......Page 367
11-6 Modified Internal Rate of Return (MIRR)......Page 368
11-7 NPV Profiles......Page 370
11-8 Payback Period......Page 374
11-9 Conclusions on Capital Budgeting Methods......Page 376
11-10 Decision Criteria Used in Practice......Page 377
TYING IT ALL TOGETHER......Page 378
INTEGRATED CASE: Allied Components Company......Page 383
Home Depot Keeps Growing......Page 385
12-1 Conceptual Issues in Cash Flow Estimation......Page 386
12-2 Analysis of an Expansion Project......Page 390
12-3 Replacement Analysis......Page 393
12-4 Risk Analysis in Capital Budgeting......Page 395
12-5 Measuring Stand-Alone Risk......Page 397
12-6 Within-Firm and Beta Risk......Page 402
12-7 Real Options......Page 403
12-8 The Optimal Capital Budget......Page 406
12-9 The Post-Audit......Page 407
TYING IT ALL TOGETHER......Page 408
INTEGRATED CASE: Allied Food Products......Page 415
APPENDIX 12A: Tax Depreciation......Page 418
PART 5 Capital Structure and Dividend Policy......Page 420
Debt: Rocket Booster or Anchor?......Page 421
13-1 The Target Capital Structure......Page 422
13-2 Business and Financial Risk......Page 424
13-3 Determining the Optimal Capital Structure......Page 434
13-4 Capital Structure Theory......Page 440
13-5 Checklist for Capital Structure Decisions......Page 446
13-6 Variations in Capital Structures......Page 448
TYING IT ALL TOGETHER......Page 450
INTEGRATED CASE: Campus Deli Inc.......Page 456
THOMSON ONE: BUSINESS SCHOOL EDITION: Exploring the Capital Structures for Four of the World’s Leading Auto Companies......Page 459
Microsoft Shifts Gears and Begins to Unload Part of Its Vast Cash Hoard......Page 461
14-1 Dividends versus Capital Gains: What Do Investors Prefer?......Page 462
14-2 Other Dividend Policy Issues......Page 465
14-3 Establishing the Dividend Policy in Practice......Page 467
14-4 Dividend Reinvestment Plans......Page 475
14-5 Summary of Factors Influencing Dividend Policy......Page 476
14-6 Stock Dividends and Stock Splits......Page 478
14-7 Stock Repurchases......Page 480
TYING IT ALL TOGETHER......Page 484
INTEGRATED CASE: Southeastern Steel Company......Page 489
THOMSON ONE: BUSINESS SCHOOL EDITION: Microsoft’s Dividend Policy......Page 490
PART 6 Working Capital Management, Forecasting, and Multinational Financial Management......Page 492
Best Buy Manages Its Working Capital Well......Page 493
15-1 Background on Working Capital......Page 494
15-2 Current Asset Investment Policies......Page 495
15-3 Current Asset Financing Policies......Page 496
15-4 The Cash Conversion Cycle......Page 500
15-5 The Cash Budget......Page 503
15-6 Cash and Marketable Securities......Page 506
15-7 Inventories......Page 509
15-8 Accounts Receivable......Page 511
15-9 Accounts Payable (Trade Credit)......Page 514
15-10 Bank Loans......Page 516
15-11 Commercial Paper......Page 520
15-13 Use of Security in Short-Term Financing......Page 521
TYING IT ALL TOGETHER......Page 522
INTEGRATED CASE: Ski Equipment Inc.......Page 527
The Miss That Hit Like a Bombshell......Page 530
PUTTING THINGS IN PERSPECTIVE......Page 531
16-1 Strategic Planning......Page 532
16-2 The Sales Forecast......Page 533
16-3 The AFN Equation......Page 535
16-4 Forecasted Financial Statements......Page 539
16-5 Using Regression to Improve Forecasts......Page 544
16-6 Analyzing the Effects of Changing Ratios......Page 545
TYING IT ALL TOGETHER......Page 546
INTEGRATED CASE: New World Chemicals Inc.......Page 552
THOMSON ONE: BUSINESS SCHOOL EDITION: Forecasting the Future Performance of Abercrombie & Fitch......Page 554
U.S. Firms Look Overseas to Enhance Shareholder Value......Page 555
17-1 Multinational or Global Corporations......Page 556
17-2 Multinational versus Domestic Financial Management......Page 559
17-3 The International Monetary System......Page 561
17-4 Foreign Exchange Rate Quotations......Page 563
17-5 Trading in Foreign Exchange......Page 565
17-6 Interest Rate Parity......Page 567
17-7 Purchasing Power Parity......Page 568
17-8 Inflation, Interest Rates, and Exchange Rates......Page 571
17-9 International Money and Capital Markets......Page 572
17-10 Investing Overseas......Page 575
17-11 International Capital Budgeting......Page 577
17-12 International Capital Structures......Page 579
TYING IT ALL TOGETHER......Page 581
INTEGRATED CASE: Citrus Products Inc.......Page 584
Appendix A: Solutions to Self-Test Questions and Problems......Page 586
Appendix B: Answers to Selected End-of-Chapter Problems......Page 609
Appendix C: Selected Equations and Tables......Page 612
INDEX......Page 618