Principles of Managerial Finance

Cover......Page 1
Title Page......Page 4
Copyright Page......Page 5
Contents......Page 16
About the Authors......Page 36
Preface......Page 38
Supplements to the Thirteenth Edition......Page 46
Acknowledgments......Page 48
To the Student......Page 52
Part 1 Introduction to Managerial Finance......Page 54
1 The Role of Managerial Finance......Page 55
Facebook—In No Hurry To Go Public......Page 56
1.1 Finance and Business......Page 57
In Practice Focus on Practice: Professional Certifications in Finance......Page 58
REVIEW QUESTIONS......Page 62
1.2 Goal of the Firm......Page 63
REVIEW QUESTIONS......Page 67
1.3 Managerial Finance Function......Page 68
REVIEW QUESTIONS......Page 72
1.4 Governance and Agency......Page 73
Summary......Page 77
Self-Test Problem......Page 78
Warm-Up Exercises......Page 79
Problems......Page 80
Spreadsheet Exercise......Page 82
2 The Financial Market Environment......Page 83
JPMorgan Chase & Co.— Cut to the Chase......Page 84
2.1 Financial Institutions and Markets......Page 85
In Practice Focus on Practice: Berkshire Hathaway—Can Buffett Be Replaced?......Page 90
REVIEW QUESTIONS......Page 93
2.2 The Financial Crisis......Page 94
2.3 Regulation of Financial Institutions......Page 97
REVIEW QUESTIONS......Page 98
2.4 Business Taxes......Page 99
Summary......Page 102
Opener-in-Review......Page 103
Problems......Page 104
Spreadsheet Exercise......Page 106
Integrative Case 1 Merit Corp......Page 107
Part 2 Financial Tools......Page 108
3 Financial Statements and Ratio Analysis......Page 109
Abercrombie & Fitch—The Value of Casual Luxury......Page 110
In Practice Global Focus: More Countries Adopt International Financial Reporting Standards......Page 111
In Practice Focus on Ethics: Taking Earnings Reports at Face Value......Page 112
REVIEW QUESTIONS......Page 119
3.2 Using Financial Ratios......Page 120
REVIEW QUESTIONS......Page 123
3.3 Liquidity Ratios......Page 124
3.4 Activity Ratios......Page 126
3.5 Debt Ratios......Page 129
3.6 Profitability Ratios......Page 132
3.7 Market Ratios......Page 135
REVIEW QUESTION......Page 136
3.8 A Complete Ratio Analysis......Page 137
Summary......Page 143
Self-Test Problems......Page 145
Warm-Up Exercises......Page 146
Problems......Page 147
Spreadsheet Exercise......Page 163
4 Cash Flow and Financial Planning......Page 166
Apple—Investors Want Apple to Take a Bite Out of its Cash Hoard......Page 167
4.1 Analyzing the Firm’s Cash Flow......Page 168
In Practice Focus on Practice: Free Cash Flow at Cisco Systems......Page 176
4.2 The Financial Planning Process......Page 177
In Practice Focus on Ethics: How Much Is a CEO Worth?......Page 178
4.3 Cash Planning: Cash Budgets......Page 180
REVIEW QUESTION......Page 188
4.5 Preparing the Pro Forma Income Statement......Page 190
4.6 Preparing the Pro Forma Balance Sheet......Page 192
REVIEW QUESTIONS......Page 194
Summary......Page 195
Opener-in-Review......Page 196
Self-Test Problems......Page 197
Warm-Up Exercises......Page 198
Problems......Page 199
Spreadsheet Exercise......Page 210
5 Time Value of Money......Page 212
Eli Lilly and Company—Riding the Pipeline......Page 213
5.1 The Role of Time Value in Finance......Page 214
5.2 Single Amounts......Page 217
REVIEW QUESTIONS......Page 223
5.3 Annuities......Page 224
5.4 Mixed Streams......Page 231
5.5 Compounding Interest More Frequently Than Annually......Page 234
REVIEW QUESTIONS......Page 240
5.6 Special Applications of Time Value......Page 241
In Practice Focus on Practice: New Century Brings Trouble for Subprime Mortgages......Page 244
Summary......Page 247
Opener-in-Review......Page 248
Self-Test Problems......Page 249
Warm-Up Exercises......Page 250
Problems......Page 251
Spreadsheet Exercise......Page 267
Integrative Case 2 Track Software, Inc.......Page 268
Part 3 Valuation of Securities......Page 272
6 Interest Rates and Bond Valuation......Page 273
The Federal Debt—A Huge Appetite for Money......Page 274
6.1 Interest Rates and Required Returns......Page 275
In Practice Focus on Practice: I-Bonds Adjust for Inflation......Page 278
REVIEW QUESTIONS......Page 283
6.2 Corporate Bonds......Page 284
In Practice Focus on Ethics: Can We Trust the Bond Raters?......Page 289
REVIEW QUESTIONS......Page 291
6.3 Valuation Fundamentals......Page 292
6.4 Bond Valuation......Page 294
REVIEW QUESTIONS......Page 302
Summary......Page 303
Opener-in-Review......Page 304
Warm-Up Exercises......Page 305
Problems......Page 307
Spreadsheet Exercise......Page 316
7 Stock Valuation......Page 317
A123 Systems Inc.—Going Green to Find Value......Page 318
7.1 Differences between Debt and Equity......Page 319
7.2 Common and Preferred Stock......Page 320
REVIEW QUESTIONS......Page 329
7.3 Common Stock Valuation......Page 330
In Practice Focus on Practice: Understanding Human Behavior Helps Us Understand Investor Behavior......Page 332
In PracticeFocus on Ethics: Psst You Heard Any Good Quarterly Earnings Forecasts Lately?......Page 341
REVIEW QUESTIONS......Page 342
7.4 Decision Making and Common Stock Value......Page 343
Summary......Page 345
Self-Test Problems......Page 347
Warm-Up Exercises......Page 348
Problems......Page 349
Spreadsheet Exercise......Page 356
Integrative Case 3 Encore International......Page 357
Part 4 Risk and the Required Rate of Return......Page 360
8 Risk and Return......Page 361
Mutual Funds—Fund’s Returns Not Even Close to Average......Page 362
In Practice Focus on Ethics: If It Seems Too Good to Be True Then It Probably Is in practice......Page 363
8.2 Risk of a Single Asset......Page 366
REVIEW QUESTIONS......Page 373
8.3 Risk of a Portfolio......Page 374
REVIEW QUESTIONS......Page 381
8.4 Risk and Return: The Capital Asset Pricing Model (CAPM)......Page 382
Summary......Page 392
Opener-in-Review......Page 393
Self-Test Problems......Page 394
Warm-Up Exercises......Page 395
Problems......Page 396
Spreadsheet Exercise......Page 408
9 The Cost of Capital......Page 409
General Electric—Falling Short of Expectations......Page 410
In Practice Focus on Ethics: The Ethics of Profit......Page 411
9.2 Cost of Long-Term Debt......Page 413
9.3 Cost of Preferred Stock......Page 417
9.4 Cost of Common Stock......Page 418
9.5 Weighted Average Cost of Capital......Page 422
In Practice Focus on Practice: Uncertain Times Make for an Uncertain Weighted Average Cost of Capital......Page 424
Summary......Page 426
Self-Test Problems......Page 427
Warm-Up Exercises......Page 428
Problems......Page 429
Spreadsheet Exercise......Page 436
Integrative Case 4 Eco Plastics Company......Page 438
Part 5 Long-Term Investment Decisions......Page 440
10 Capital Budgeting Techniques......Page 441
Genco Resources—The Gold Standard for Evaluating Gold Mines......Page 442
10.1 Overview of Capital Budgeting......Page 443
10.2 Payback Period......Page 446
In Practice Focus on Practice: Limits on Payback Analysis......Page 448
10.3 Net Present Value (NPV)......Page 450
10.4 Internal Rate of Return IRR)......Page 454
10.5 Comparing NPV and IRR Techniques......Page 457
REVIEW QUESTIONS......Page 464
Summary......Page 465
Opener-in-Review......Page 466
Warm-Up Exercises......Page 467
Problems......Page 468
Spreadsheet Exercise......Page 478
11 Capital Budgeting Cash Flows......Page 479
ExxonMobil—Maintaining Its Project Inventory......Page 480
In Practice Focus on Ethics: A Question of Accuracy......Page 481
REVIEW QUESTIONS......Page 484
11.2 Finding the Initial Investment......Page 485
11.3 Finding the Operating Cash Inflows......Page 491
11.4 Finding the Terminal Cash Flow......Page 496
11.5 Summarizing the Relevant Cash Flows......Page 498
Summary......Page 500
Opener-in-Review......Page 501
Warm-Up Exercises......Page 502
Problems......Page 503
Spreadsheet Exercise......Page 514
12 Risk and Refinements in Capital Budgeting......Page 516
BP—Worst Case Scenario......Page 517
REVIEW QUESTION......Page 518
12.2 Behavioral Approaches for Dealing with Risk......Page 519
12.3 International Risk Considerations......Page 523
REVIEW QUESTION......Page 524
12.4 Risk-Adjusted Discount Rates......Page 525
In Practice Focus on Ethics: Ethics and the Cost of Capital......Page 528
12.5 Capital Budgeting Refinements......Page 533
REVIEW QUESTIONS......Page 540
Summary......Page 541
Opener-in-Review......Page 542
Warm-Up Exercises......Page 543
Problems......Page 545
Spreadsheet Exercise......Page 555
Integrative Case 5 Lasting Impressions Company......Page 556
Part 6 Long-Term Financial Decisions......Page 558
13 Leverage and Capital Structure......Page 559
Genzyme Corp.—Trading Equity for Debt......Page 560
13.1 Leverage......Page 561
In Practice Focus on Practice: Adobe’s Leverage......Page 568
In Practice Focus on Ethics: Repo 105......Page 575
13.2 The Firm’s Capital Structure......Page 576
REVIEW QUESTIONS......Page 589
13.3 EBIT–EPS Approach to Capital Structure......Page 590
13.4 Choosing the Optimal Capital Structure......Page 593
Summary......Page 597
Self-Test Problems......Page 599
Warm-Up Exercises......Page 600
Problems......Page 601
Spreadsheet Exercise......Page 611
14 Payout Policy......Page 612
Best Buy—Payback Time......Page 613
14.1 The Basics of Payout Policy......Page 614
In Practice Focus on Ethics: Are Buybacks Really a Bargain?......Page 617
14.2 The Mechanics of Payout Policy......Page 618
In Practice Focus on Practice: Capital Gains and Dividend Tax Treatment Extended to 2010......Page 622
14.3 Relevance of Payout Policy......Page 624
14.4 Factors Affecting Dividend Policy......Page 627
14.5 Types of Dividend Policies......Page 630
14.6 Other Forms of Dividends......Page 632
Summary......Page 636
Opener-in-Review......Page 637
Warm-Up Exercises......Page 638
Problems......Page 639
Spreadsheet Exercise......Page 646
Integrative Case 6 O’Grady Apparel Company......Page 647
Part 7 Short-Term Financial Decisions......Page 650
15 Working Capital and Current Assets Management......Page 651
Cytec Industries—Focusing on Working Capital......Page 652
15.1 Net Working Capital Fundamentals......Page 653
15.2 Cash Conversion Cycle......Page 656
15.3 Inventory Management......Page 661
In Practice Focus on Practice: RFID: The Wave of the Future......Page 666
REVIEW QUESTIONS......Page 667
15.4 Accounts Receivable Management......Page 668
REVIEW QUESTIONS......Page 676
15.5 Management of Receipts and Disbursements......Page 677
In Practice Focus on Ethics: Stretching Accounts Payable—Is It a Good Policy?......Page 679
Summary......Page 683
Self-Test Problems......Page 685
Warm-Up Exercises......Page 686
Problems......Page 687
Spreadsheet Exercise......Page 692
16 Current Liabilities Management......Page 693
Memorial Sloan-Kettering Cancer Center—Reducing Accounts Payable Expenses......Page 694
16.1 Spontaneous Liabilities......Page 695
In Practice Focus on Ethics: Accruals Management......Page 700
16.2 Unsecured Sources of Short-Term Loans......Page 701
In Practice Focus on Practice: The Ebb and Flow of Commercial Paper......Page 707
REVIEW QUESTIONS......Page 709
16.3 Secured Sources of Short-Term Loans......Page 710
Summary......Page 715
Opener-in-Review......Page 716
Warm-Up Exercises......Page 717
Problems......Page 718
Spreadsheet Exercise......Page 724
Integrative Case 7 Casa de Diseño......Page 725
Part 8 Special Topics in Managerial Finance......Page 728
17 Hybrid and Derivative Securities......Page 729
Boeing—”We’ll Buy It, You Fly It”......Page 730
17.2 Leasing......Page 731
In Practice Focus on Practice: Leases to Airlines End on a Sour Note......Page 733
17.3 Convertible Securities......Page 740
17.4 Stock Purchase Warrants......Page 746
REVIEW QUESTIONS......Page 750
17.5 Options......Page 751
In PracticeFocus on Ethics: Options Backdating......Page 754
Summary......Page 755
Opener-in-Review......Page 757
Warm-Up Exercises......Page 758
Problems......Page 759
Spreadsheet Exercise......Page 765
18 Mergers, LBOs, Divestitures, and Business Failure......Page 767
IMS Health, Inc.—Creating Value by Going Private......Page 768
18.1 Merger Fundamentals......Page 769
18.2 LBOs and Divestitures......Page 774
18.3 Analyzing and Negotiating Mergers......Page 776
REVIEW QUESTIONS......Page 789
18.4 Business Failure Fundamentals......Page 790
In Practice Focus on Ethics: Too Big to Fail?......Page 792
REVIEW QUESTIONS......Page 793
18.5 Reorganization and Liquidation in Bankruptcy......Page 794
REVIEW QUESTIONS......Page 797
Summary......Page 798
Opener-in-Review......Page 800
Warm-Up Exercises......Page 801
Problems......Page 802
Spreadsheet Exercise......Page 808
19 International Managerial Finance......Page 810
General Electric—Establishing a Presence in China......Page 811
19.1 The Multinational Company and Its Environment......Page 812
19.2 Financial Statements......Page 818
19.3 Risk......Page 820
REVIEW QUESTIONS......Page 827
19.4 Long-Term Investment and Financing Decisions......Page 828
In Practice Global Focus: Take an Overseas Assignment to Take a Step Corporate Ladder......Page 831
19.5 Short-Term Financial Decisions......Page 834
19.6 Mergers and Joint Ventures......Page 840
Summary......Page 841
Self-Test Problems......Page 843
Problems......Page 844
Spreadsheet Exercise......Page 847
Integrative Case 8 Organic Solutions......Page 848
Appendix......Page 850
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D......Page 892
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B......Page 927
C......Page 928
D......Page 931
E......Page 932
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Q......Page 939
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