Fundamentals of Financial Management (12th edition)

Front Cover......Page 1
Title Page......Page 2
Copyright......Page 3
Preface......Page 4
Brief Contents......Page 13
Contents......Page 15
PART 1: Introduction to Financial Management......Page 26
Striking the Right Balance......Page 27
PUTTING THINGS IN PERSPECTIVE......Page 28
1-1 What is Finance?......Page 29
1-3 Forms of Business Organization......Page 31
1-4 Stock Prices and Shareholder Value......Page 33
1-5 Intrinsic Values, Stock Prices, and Executive Compensation......Page 35
1-6 Important Business Trends......Page 39
1-7 Business Ethics......Page 40
1-8 Conflicts between Managers, Stockholders, and Bondholders......Page 43
TYING IT ALL TOGETHER......Page 46
PART 2: Fundamental Concepts in Financial Management......Page 50
Efficient Financial Markets Are Necessary for Growing Economy......Page 51
PUTTING THINGS IN PERSPECTIVE......Page 52
2-1 The Capital Allocation Process......Page 53
2-2 Financial Markets......Page 55
2-3 Financial Institutions......Page 59
2-4 The Stock Market......Page 63
2-5 The Market for Common Stock......Page 65
2-6 Stock Markets and Returns......Page 68
2-7 Stock Market Efficiency......Page 71
TYING IT ALL TOGETHER......Page 75
INTEGRATED CASE: Smyth Barry & Company......Page 77
The "Quality" of Financial Statements......Page 78
3-1 Financial Statements and Reports......Page 79
3-2 The Balance Sheet......Page 81
3-3 The Income Statement......Page 85
3-4 Statement of Cash Flows......Page 87
3-5 Statement of Stockholders' Equity......Page 91
3-6 Free Cash Flow......Page 92
3-7 Income Taxes......Page 94
TYING IT ALL TOGETHER......Page 100
INTEGRATED CASE: D'Leon Inc., Part I......Page 105
THOMSON ONE: BUSINESS SCHOOL EDITION: Exploring Starbucks' Financial Statements......Page 108
Can You Make Money Analyzing Stocks?......Page 109
PUTTING THINGS IN PERSPECTIVE......Page 110
4-1 Ratio Analysis......Page 111
4-2 Liquidity Ratios......Page 112
4-3 Asset Management Ratios......Page 113
4-4 Debt Management Ratios......Page 116
4-5 Profitability Ratios......Page 120
4-6 Market Value Ratios......Page 123
4-7 Trend Analysis......Page 124
4-8 The DuPont Equation......Page 125
4-9 Ratios in Different Industries......Page 127
4-10 Summary of Allied's Ratios......Page 128
4-11 Benchmarking......Page 129
4-12 Uses and Limitations of Ratios......Page 130
4-13 Potential Misuses of ROE......Page 132
4-14 Looking Beyond the Numbers......Page 133
TYING IT ALL TOGETHER......Page 134
INTEGRATED CASE: D'Leon Inc., Part II......Page 142
THOMSON ONE: BUSINESS SCHOOL EDITION: Conducting a Financial Ratio Analysis on Ford Motor Company......Page 146
Will You Be Able to Retire?......Page 147
5-1 Time Lines......Page 148
5-2 Future Values......Page 149
5-3 Present Values......Page 155
5-4 Finding the Interest Rate, I......Page 157
5-6 Annuities......Page 158
5-7 Future Value of an Ordinary Annuity......Page 159
5-8 Future Value of an Annuity Due......Page 161
5-9 Present Value of an Ordinary Annuity......Page 162
5-10 Finding Annuity Payments, Periods, and Interest Rates......Page 163
5-11 Perpetuities......Page 165
5-12 Uneven Cash Flows......Page 167
5-13 Future Value of an Uneven Cash Flow Stream......Page 168
5-14 Solving for I with Uneven Cash Flows......Page 169
5-15 Semiannual and Other Compounding Periods......Page 170
5-16 Comparing Interest Rates......Page 172
5-17 Fractional Time Periods......Page 174
5-18 Amortized Loans......Page 175
TYING IT ALL TOGETHER......Page 176
INTEGRATED CASE: First National Bank......Page 183
PART 3: Financial Assets......Page 186
Low Interest Rates Encourage Investment and Stimulate Consumer Spending......Page 187
6-1 The Cost of Money......Page 188
6-2 Interest Rate Levels......Page 190
6-3 The Determinants of Market Interest Rates......Page 193
6-4 The Term Structure of Interest Rates......Page 200
6-5 What Determines the Shape of the Yield Curve?......Page 201
6-6 Using the Yield Curve to Estimate Future Interest Rates......Page 205
6-7 Macroeconomic Factors That Influence Interest Rate Levels......Page 208
6-8 Interest Rates and Business Decisions......Page 210
TYING IT ALL TOGETHER......Page 212
INTEGRATED CASE Morton Handley & Company......Page 217
Sizing Up Risk in the Bond Market......Page 219
7-1 Who Issues Bonds?......Page 220
7-2 Key Characteristics of Bonds......Page 221
7-3 Bond Valuation......Page 225
7-4 Bond Yields......Page 228
7-5 Changes in Bond Values over Time......Page 231
7-6 Bonds with Semiannual Coupons......Page 234
7-7 Assessing a Bond's Riskiness......Page 235
7-8 Default Risk......Page 239
7-9 Bond Markets......Page 245
TYING IT ALL TOGETHER......Page 247
INTEGRATED CASE: Western Money Management Inc.......Page 253
A Tale of Three Markets—or Is It Four?......Page 254
PUTTING THINGS IN PERSPECTIVE......Page 255
8-1 Stock Prices over the Last 20 Years......Page 256
8-2 Stand-Alone Risk......Page 257
8-3 Risk in a Portfolio Context: The CAPM......Page 265
8-4 The Relationship between Risk and Rates of Return......Page 276
8-5 Some Concerns about Beta and the CAPM......Page 282
8-6 Some Concluding Thoughts: Implications for Corporate Managers and Investors......Page 283
TYING IT ALL TOGETHER......Page 284
INTEGRATED CASE: Merrill Finch Inc.......Page 291
THOMSON ONE: BUSINESS SCHOOL EDITION: Using Past Information to Estimate Required Returns......Page 293
Searching for the Right Stock......Page 294
9-1 Legal Rights and Privileges of Common Stockholders......Page 295
9-2 Types of Common Stock......Page 297
9-3 Stock Price vs. Intrinsic Value......Page 298
9-4 The Discounted Dividend Model......Page 300
9-5 Constant Growth Stocks......Page 303
9-6 Valuing Nonconstant Growth Stocks......Page 308
9-7 Valuing the Entire Corporation......Page 311
9-8 Preferred Stock......Page 316
TYING IT ALL TOGETHER......Page 317
INTEGRATED CASE: Mutual of Chicago Insurance Company......Page 323
THOMSON ONE: BUSINESS SCHOOL EDITION: Estimating ExxonMobil's Intrinsic Stock Value......Page 324
APPENDIX 9A: Stock Market Equilibrium......Page 326
PART 4: Investing in Long-Term Assets: Capital Budgeting......Page 330
Creating Value at GE......Page 331
10-1 An Overview of the Weighted Average Cost of Capital (WACC)......Page 332
10-2 Basic Definitions......Page 334
10-3 Cost of Debt, r[sub(d)](1 – T)......Page 335
10-5 The Cost of Retained Earnings, r[sub(s)]......Page 337
10-6 Cost of New Common Stock, r[sub(e)]......Page 343
10-8 Factors that Affect the WACC......Page 346
10-9 Adjusting the Cost of Capital for Risk......Page 348
10-10 Some Other Problems with Cost of Capital Estimates......Page 350
TYING IT ALL TOGETHER......Page 351
INTEGRATED CASE: Coleman Technologies Inc.......Page 358
THOMSON ONE: BUSINESS SCHOOL EDITION: Calculating 3M's Cost of Capital......Page 359
Competition in the Aircraft Industry: Airbus vs. Boeing......Page 360
11-1 An Overview of Capital Budgeting......Page 361
11-2 Net Present Value (NPV)......Page 363
11-3 Internal Rate of Return (IRR)......Page 366
11-4 Multiple Internal Rates of Return......Page 369
11-5 Reinvestment Rate Assumptions......Page 371
11-6 Modified Internal Rate of Return (MIRR)......Page 372
11-7 NPV Profiles......Page 374
11-8 Payback Period......Page 378
11-9 Conclusions on Capital Budgeting Methods......Page 380
11-10 Decision Criteria Used in Practice......Page 381
TYING IT ALL TOGETHER......Page 382
INTEGRATED CASE: Allied Components Company......Page 387
Home Depot Keeps Growing......Page 389
12-1 Conceptual Issues in Cash Flow Estimation......Page 390
12-2 Analysis of an Expansion Project......Page 394
12-3 Replacement Analysis......Page 397
12-4 Risk Analysis in Capital Budgeting......Page 399
12-5 Measuring Stand-Alone Risk......Page 401
12-6 Within-Firm and Beta Risk......Page 406
12-7 Unequal Project Lives......Page 407
TYING IT ALL TOGETHER......Page 409
INTEGRATED CASE: Allied Food Products......Page 418
APPENDIX 12A: Tax Depreciation......Page 421
Anheuser-Busch Used Real Options to Enhance Its Value......Page 423
13-1 Introduction to Real Options......Page 424
13-2 Growth (Expansion) Options......Page 425
13-3 Abandonment/Shutdown Options......Page 427
13-4 Investment Timing Options......Page 428
13-5 Flexibility Options......Page 430
13-6 The Optimal Capital Budget......Page 431
13-7 The Post-Audit......Page 433
TYING IT ALL TOGETHER......Page 434
INTEGRATED CASE: 21st Century Educational Products......Page 438
PART 5: Capital Structure and Dividend Policy......Page 440
Debt: Rocket Booster or Anchor?......Page 441
14-1 The Target Capital Structure......Page 442
14-2 Business and Financial Risk......Page 444
14-3 Determining the Optimal Capital Structure......Page 454
14-4 Capital Structure Theory......Page 460
14-5 Checklist for Capital Structure Decisions......Page 466
14-6 Variations in Capital Structures......Page 468
TYING IT ALL TOGETHER......Page 470
INTEGRATED CASE: Campus Deli Inc.......Page 476
THOMSON ONE: BUSINESS SCHOOL EDITION: Exploring the Capital Structures for Four of the World's Leading Auto Companies......Page 479
Microsoft Shifts Gears and Begins to Unload Part of Its Vast Cash Hoard......Page 481
15-1 Dividends versus Capital Gains: What Do Investors Prefer?......Page 482
15-2 Other Dividend Policy Issues......Page 485
15-3 Establishing the Dividend Policy in Practice......Page 486
15-4 Dividend Reinvestment Plans......Page 495
15-5 Summary of Factors In uencing Dividend Policy......Page 496
15-6 Stock Dividends and Stock Splits......Page 498
15-7 Stock Repurchases......Page 500
TYING IT ALL TOGETHER......Page 504
INTEGRATED CASE: Southeastern Steel Company......Page 509
THOMSON ONE: BUSINESS SCHOOL EDITION: Microsoft's Dividend Policy......Page 511
PART 6: Working Capital Management and Financial Forecasting......Page 512
Best Buy Manages Its Working Capital Well......Page 513
16-1 Background on Working Capital......Page 514
16-2 Current Asset Investment Policies......Page 515
16-3 Current Asset Financing Policies......Page 516
16-4 The Cash Conversion Cycle......Page 520
16-5 The Cash Budget......Page 523
16-6 Cash and Marketable Securities......Page 526
16-7 Inventories......Page 529
16-8 Accounts Receivable......Page 531
16-9 Accounts Payable (Trade Credit)......Page 534
16-10 Bank Loans......Page 536
16-11 Commercial Paper......Page 540
16-13 Use of Security in Short-Term Financing......Page 541
TYING IT ALL TOGETHER......Page 542
INTEGRATED CASE: Ski Equipment Inc.......Page 547
The Miss That Hit Like a Bombshell......Page 550
PUTTING THINGS IN PERSPECTIVE......Page 551
17-1 Strategic Planning......Page 552
17-2 The Sales Forecast......Page 553
17-3 The AFN Equation......Page 555
17-4 Forecasted Financial Statements......Page 559
17-5 Using Regression to Improve Forecasts......Page 564
17-6 Analyzing the Effects of Changing Ratios......Page 565
TYING IT ALL TOGETHER......Page 566
INTEGRATED CASE: New World Chemicals Inc.......Page 572
THOMSON ONE: BUSINESS SCHOOL EDITION: Forecasting the Future Performance of Abercrombie & Fitch......Page 574
PART 7: Special Topics in Financial Management......Page 576
Using Derivatives to Manage Risk......Page 577
18-1 Reasons to Manage Risk......Page 578
18-2 Background on Derivatives......Page 581
18-3 Options......Page 583
18-4 Introduction to Option Pricing Models......Page 588
18-5 The Black-Scholes Option Pricing Model (OPM)......Page 591
18-6 Forward and Futures Contracts......Page 596
18-7 Other Types of Derivatives......Page 599
18-8 Using Derivatives to Reduce Risks......Page 602
18-9 Risk Management......Page 606
TYING IT ALL TOGETHER......Page 610
INTEGRATED CASE: Tropical Sweets Inc.......Page 612
APPENDIX 18A: Valuation of Put Options......Page 615
U.S. Firms Look Overseas to Enhance Shareholder Value......Page 617
19-1 Multinational, or Global, Corporations......Page 618
19-2 Multinational versus Domestic Financial Management......Page 621
19-3 The International Monetary System......Page 623
19-4 Foreign Exchange Rate Quotations......Page 625
19-5 Trading in Foreign Exchange......Page 627
19-6 Interest Rate Parity......Page 629
19-7 Purchasing Power Parity......Page 630
19-8 Inflation, Interest Rates, and Exchange Rates......Page 633
19-9 International Money and Capital Markets......Page 634
19-10 Investing Overseas......Page 637
19-11 International Capital Budgeting......Page 639
19-12 International Capital Structures......Page 641
TYING IT ALL TOGETHER......Page 643
INTEGRATED CASE: Citrus Products Inc.......Page 646
Now Enticing: Convertible Securities......Page 648
20-1 Preferred Stock......Page 649
20-2 Leasing......Page 654
20-3 Warrants......Page 660
20-4 Convertibles......Page 664
20-5 A Final Comparison of Warrants and Convertibles......Page 670
20-6 Reporting Earnings When Warrants or Convertibles Are Outstanding......Page 671
TYING IT ALL TOGETHER......Page 672
INTEGRATED CASE: Fish & Chips, Inc., Part II......Page 678
Mergers: Reshaping the Corporate Landscape......Page 680
21-1 Rationale for Mergers......Page 681
21-3 Level of Merger Activity......Page 684
21-4 Hostile versus Friendly Takeovers......Page 685
21-5 Merger Analysis......Page 686
21-6 The Role of Investment Bankers......Page 693
21-7 Do Mergers Create Value? The Empirical Evidence......Page 696
21-8 Corporate Alliances......Page 697
21-9 Private Equity Investments......Page 698
21-10 Divestitures......Page 699
TYING IT ALL TOGETHER......Page 701
INTEGRATED CASE: Smitty's Home Repair Company......Page 704
APPENDIX A: Solutions to Self-Test Questions and Problems......Page 706
APPENDIX B: Answers to Selected End-of-Chapter Problems......Page 733
APPENDIX C: Selected Equations and Tables......Page 737
Index......Page 746