Principles of Managerial Finance

Cover......Page 1
Dedication......Page 6
Brief Contents......Page 14
Contents......Page 16
About the Authors......Page 36
Preface......Page 38
Supplements to the Fourteenth Edition......Page 42
Acknowledgments......Page 44
Part 1: Introduction to Managerial Finance......Page 48
 Chapter 1: The Role of Managerial Finance......Page 49
  Facebook: Not Much to \"Like\" about IPO......Page 50
   Career Opportunities in Finance......Page 51
   Focus on Practice: Professional Certifications in Finance......Page 52
   Why Study Managerial Finance?......Page 56
   Maximize Shareholder Wealth......Page 57
   Maximize Profit?......Page 58
   The Role of Business Ethics......Page 60
   Review Questions......Page 61
  1.3 Managerial Finance Function......Page 62
   Relationship to Economics......Page 63
   Relationship to Accounting......Page 64
   Review Questions......Page 66
   Corporate Governance......Page 67
   The Agency Issue......Page 68
  Summary......Page 71
  Self-Test Problem......Page 72
  Warm-Up Exercises......Page 73
  Problems......Page 74
  Spreadsheet Exercise......Page 76
 Chapter 2: The Financial Market Environment......Page 77
  A Crisis in Housing Finance: Under Water in the Desert......Page 78
   Financial Institutions......Page 79
   Commercial Banks, Investment Banks and the Shadow Banking System......Page 80
   The Relationship between Institutions and Markets......Page 81
   The Capital Market......Page 82
   Focus on Practice: Berkshire Hathaway: Can Buffett Be Replaced?......Page 84
   Focus on Ethics: The Ethics of Insider Trading......Page 87
   Financial Institutions and Real Estate Finance......Page 88
   Falling Home Prices and Delinquent Mortgages......Page 89
   Crisis of Confidence in Banks......Page 90
  2.3 Regulation of Financial Institutions and Markets......Page 91
   Regulations Governing Financial Markets......Page 92
   Ordinary Income......Page 93
  Summary......Page 96
  Self-Test Problem......Page 98
  Problems......Page 99
  Spreadsheet Exercise......Page 101
  Integrative Case 1: Merit Enterprise Corp.......Page 102
Part 2: Financial Tools......Page 104
 Chapter 3: Financial Statements and Ratio Analysis......Page 105
  General Dynamics: Ratios Tell the Story of a Well-Managed Firm......Page 106
   Global Focus: More Countries Adopt International Financial Reporting Standards......Page 107
   Focus on Ethics: Taking Earnings Reports at Face Value......Page 108
   Consolidating International Financial Statements......Page 114
   Review Questions......Page 115
   Types of Ratio Comparisons......Page 116
   Review Questions......Page 119
   Current Ratio......Page 120
   Quick (Acid-Test) Ratio......Page 121
   Inventory Turnover......Page 122
   Average Collection Period......Page 123
   Total Asset Turnover......Page 124
  3.5 Debt Ratios......Page 125
   Times Interest Earned Ratio......Page 127
   Review Questions......Page 128
   Operating Profit Margin......Page 129
   Net Profit Margin......Page 130
   Return on Equity (ROE)......Page 131
   Price/Earnings (P/E) Ratio......Page 132
  3.8 A Complete Ratio Analysis......Page 133
   Summarizing All Ratios......Page 134
   Dupont System of Analysis......Page 137
  Summary......Page 140
  Self-Test Problems......Page 142
  Warm-Up Exercises......Page 143
  Problems......Page 144
  Spreadsheet Exercise......Page 160
 Chapter 4: Cash Flow and Financial Planning......Page 163
  European Aeronautic Defense and Space Co.: Making a Profit While Bleeding Cash......Page 164
   Depreciation......Page 165
   Depreciation Methods......Page 166
   Developing the Statement of Cash Flows......Page 167
   Free Cash Flow......Page 172
   Review Questions......Page 173
  4.2 The Financial Planning Process......Page 174
   Short-Term (Operating) Financial Plans......Page 175
   Focus on Ethics: How Much is a CEO Worth?......Page 176
   The Sales Forecast......Page 177
   Preparing the Cash Budget......Page 178
   Evaluating the Cash Budget......Page 182
   Coping with Uncertainty in the Cash Budget......Page 183
   Cash Flow within the Month......Page 184
   Review Question......Page 185
   Considering Types of Costs and Expenses......Page 187
  4.6 Preparing the Pro Forma Balance Sheet......Page 189
   Review Questions......Page 191
  Summary......Page 192
  Self-Test Problems......Page 193
  Warm-Up Exercises......Page 195
  Problems......Page 196
  Spreadsheet Exercise......Page 207
 Chapter 5: Time Value of Money......Page 209
  City of Cincinnati: Pay Me Now or Pay Me Later......Page 210
   Future Value Versus Present Value......Page 211
   Computational Tools......Page 212
   Basic Patterns of Cash Flow......Page 213
   Future Value of a Single Amount......Page 214
   Present Value of a Single Amount......Page 218
   Review Questions......Page 220
   Types of Annuities......Page 221
   Finding the Future Value of an Ordinary Annuity......Page 222
   Finding the Present Value of an Ordinary Annuity......Page 223
   Finding the Future Value of an Annuity Due......Page 225
   Finding the Present Value of an Annuity Due......Page 226
   Finding the Present Value of a Perpetuity......Page 228
   Future Value of a Mixed Stream......Page 229
   Present Value of a Mixed Stream......Page 231
  5.5 Compounding Interest More Frequently Than Annually......Page 232
   Quarterly Compounding......Page 233
   A General Equation for Compounding More Frequently Than Annually......Page 234
   Continuous Compounding......Page 235
   Nominal and Effective Annual Rates of Interest......Page 236
   Excel Review Questions......Page 238
  5.6 Special Applications of Time Value......Page 239
   Determining Deposits Needed to Accumulate a Future Sum......Page 240
   Loan Amortization......Page 241
   Finding Interest or Growth Rates......Page 243
   Finding an Unknown Number of Periods......Page 244
  Summary......Page 246
  Self-Test Problems......Page 248
  Warm-Up Exercises......Page 249
  Problems......Page 250
  Spreadsheet Exercise......Page 267
  Integrative Case 2: Track Software, Inc.......Page 268
Part 3: Valuation of Securities......Page 272
 Chapter 6: Interest Rates and Bond Valuation......Page 273
  The Federal Debt: A Huge Appetite for Money......Page 274
   Interest Rate Fundamentals......Page 275
   Focus on Practice: Bond Valuation and Interest Rate Risk......Page 278
   Term Structure of Interest Rates......Page 279
   Risk Premiums: Issuer and Issue Characteristics......Page 283
  6.2 Corporate Bonds......Page 284
   Legal Aspects of Corporate Bonds......Page 285
   General Features of a Bond Issue......Page 286
   Bond Prices......Page 287
   Common Types of Bonds......Page 288
   Focus on Ethics: Can We Trust the Bond Raters?......Page 289
   International Bond Issues......Page 290
   Review Questions......Page 291
   Key Inputs......Page 292
   Basic Valuation Model......Page 293
   Bond Fundamentals......Page 294
   Basic Bond Valuation......Page 295
   Bond Value Behavior......Page 296
   Yield to Maturity (YTM)......Page 300
   Semiannual Interest and Bond Values......Page 301
   Review Questions......Page 302
  Summary......Page 303
  Self-Test Problems......Page 305
  Warm-Up Exercises......Page 306
  Problems......Page 307
  Spreadsheet Exercise......Page 316
 Chapter 7: Stock Valuation......Page 317
  Tesla Motors: Going Green to Find Value......Page 318
   Claims on Income and Assets......Page 319
  7.2 Common and Preferred Stock......Page 320
   Common Stock......Page 321
   Preferred Stock......Page 324
   Issuing Common Stock......Page 326
   Review Questions......Page 329
  7.3 Common Stock Valuation......Page 330
   The Efficient-Market Hypothesis......Page 331
   Basic Common Stock Valuation Equation......Page 332
   Focus on Practice: Understanding Human Behavior Helps Us Understand Investor Behavior......Page 333
   Free Cash Flow Valuation Model......Page 337
   Other Approaches to Common Stock Valuation......Page 340
   Focus on Ethics: Psst! Have You Heard Any Good Quarterly Earnings Forecasts Lately?......Page 341
   Changes in Expected Dividends......Page 343
   Changes in Risk......Page 344
  Summary......Page 345
  Opener-in-Review......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
 Chapter 8: Risk and Return......Page 361
  Legg Mason Global Asset Management: Miller\'s Time......Page 362
   Focus on Ethics: If It Seems Too Good to Be True, It Probably is......Page 363
   Return Defined......Page 364
   Risk Preferences......Page 365
   Risk Assessment......Page 366
   Risk Measurement......Page 368
   Review Questions......Page 373
   Portfolio Return and Standard Deviation......Page 374
   Diversification......Page 376
   Correlation, Diversification, Risk and Return......Page 379
   International Diversification......Page 380
   Review Questions......Page 381
   Types of Risk......Page 382
   The Model: CAPM......Page 383
  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
 Chapter 9: The Cost of Capital......Page 409
  Alcoa: Falling Short of Expectations......Page 410
   Focus on Ethics: The Ethics of Profit......Page 411
   The Basic Concept......Page 412
   Review Questions......Page 413
   Before-Tax Cost of Debt......Page 414
   After-Tax Cost of Debt......Page 416
   Preferred Stock Dividends......Page 417
   Finding the Cost of Common Stock Equity......Page 418
   Cost of New Issues of Common Stock......Page 421
   Review Questions......Page 422
   Calculating Weighted Average Cost of Capital (WACC)......Page 423
   Focus on Practice: Uncertain Times Make for an Uncertain Weighted Average Cost of Capital......Page 424
   Weighting Schemes......Page 425
  Summary......Page 426
  Opener-in-Review......Page 427
  Self-Test Problem......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
 Chapter 10: Capital Budgeting Techniques......Page 441
  Waffles and More: Treats—Waffles and More, Cairo Capital Budgeting TechniquesWork at Treats......Page 442
   Steps in the Process......Page 443
   Basic Terminology......Page 444
   Capital Budgeting Techniques......Page 445
   Decision Criteria......Page 446
   Pros and Cons of Payback Analysis......Page 447
   Focus on Practice: Limits on Payback Analysis......Page 448
   Decision Criteria......Page 450
   NPV and the Profitability Index......Page 452
   NPV and Economic Value Added......Page 453
   Decision Criteria......Page 454
   Calculating the IRR......Page 455
   Net Present Value Profiles......Page 457
   Conflicting Rankings......Page 459
   Which Approach is Better?......Page 462
   Review Questions......Page 464
  Summary......Page 465
  Opener-in-Review......Page 466
  Warm-Up Exercises......Page 467
  Problems......Page 468
  Spreadsheet Exercise......Page 478
 Chapter 11: Capital Budgeting Cash Flows......Page 479
  Diamond Comic Distributors: A Superhero for Retailers......Page 480
   Focus on Ethics: A Question of Accuracy......Page 481
   Expansion Versus Replacement Decisions......Page 482
   Sunk Costs and Opportunity Costs......Page 483
   Review Questions......Page 484
  11.2 Finding the Initial Investment......Page 485
   After-Tax Proceeds from Sale of Old Asset......Page 486
   Change in Net Working Capital......Page 489
   Calculating the Initial Investment......Page 490
   Interpreting the Term Cash Flows......Page 491
   Interpreting the Term Incremental......Page 494
   Taxes on Sale of Assets......Page 496
   Change in Net Working Capital......Page 497
  11.5 Summarizing the Relevant Cash Flows......Page 498
  Summary......Page 500
  Opener-in-Review......Page 501
  Self-Test Problems......Page 502
  Problems......Page 503
  Spreadsheet Exercise......Page 514
 Chapter 12: Risk and Refinements in Capital Budgeting......Page 516
  YPF: Argentina Seizes Oil Company from Spanish Owners......Page 517
   Review Question......Page 518
   Breakeven Analysis......Page 519
   Scenario Analysis......Page 520
   Simulation......Page 521
  12.3 International Risk Considerations......Page 523
   Review Question......Page 524
   Determining Risk-Adjusted Discount Rates (RADRs)......Page 525
   Applying RADRs......Page 528
   RADRs in Practice......Page 531
   Comparing Projects with Unequal Lives......Page 533
   Recognizing Real Options......Page 536
   Capital Rationing......Page 538
   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
 Chapter 13: Leverage and Capital Structure......Page 559
  Lowe\'s: Lowe\'s Builds Leverage......Page 560
  13.1 Leverage......Page 561
   Breakeven Analysis......Page 562
   Operating Leverage......Page 566
   Focus on Practice: Adobe\'s Leverage......Page 568
   Financial Leverage......Page 569
   Total Leverage......Page 573
   Focus on Ethics: Repo 105......Page 575
   Types of Capital......Page 576
   External Assessment of Capital Structure......Page 577
   Capital Structure of Non–U.S. Firms......Page 578
   Capital Structure Theory......Page 579
   Optimal Capital Structure......Page 588
   Review Questions......Page 589
   Presenting a Financing Plan Graphically......Page 590
   Considering Risk in EBIT–EPS Analysis......Page 592
   Linkage......Page 593
   Estimating Value......Page 594
   Some Other Important Considerations......Page 596
  Summary......Page 597
  Self-Test Problems......Page 599
  Problems......Page 601
  Spreadsheet Exercise......Page 612
 Chapter 14: Payout Policy......Page 613
  Whirlpool Corporation: Increasing Dividends......Page 614
   Trends in Earnings and Dividends......Page 615
   Trends in Dividends and Share Repurchases......Page 617
   Focus on Ethics: Are Buybacks Really a Bargain?......Page 618
  14.2 The Mechanics of Payout Policy......Page 619
   Cash Dividend Payment Procedures......Page 620
   Share Repurchase Procedures......Page 621
   Tax Treatment of Dividends and Repurchases......Page 623
   Dividend Reinvestment Plans......Page 624
   Review Questions......Page 625
   The Dividend Irrelevance Theory......Page 626
   Arguments for Dividend Relevance......Page 627
   Legal Constraints......Page 629
   Owner Considerations......Page 630
   Constant-Payout-Ratio Dividend Policy......Page 631
   Regular Dividend Policy......Page 632
  14.6 Other Forms of Dividends......Page 633
   Stock Dividends......Page 634
   Stock Splits......Page 635
  Summary......Page 637
  Warm-Up Exercises......Page 639
  Problems......Page 641
  Spreadsheet Exercise......Page 648
  Integrative Case 6: O\'Grady Apparel Company......Page 649
Part 7: Short-Term Financial Decisions......Page 652
 Chapter 15: Working Capital and Current Assets Management......Page 653
  Treasury Risk Survey 2013: Worries about Liquidity Occupy the Minds of Treasury Managers......Page 654
   Working Capital Management......Page 655
   Trade-Off between Profitability and Risk......Page 656
   Calculating the Cash Conversion Cycle......Page 658
   Funding Requirements of the Cash Conversion Cycle......Page 659
   Strategies for Managing the Cash Conversion Cycle......Page 662
   Differing Viewpoints about Inventory Level......Page 663
   Common Techniques for Managing Inventory......Page 664
   Focus on Practice: RFID: The Wave of the Future?......Page 668
   Review Questions......Page 669
   Credit Selection and Standards......Page 670
   Credit Terms......Page 674
   Credit Monitoring......Page 677
   Float......Page 679
   Speeding Up Collections......Page 680
   Focus on Ethics: Stretching Accounts Payable: Is It a Good Policy?......Page 681
   Cash Concentration......Page 682
   Zero-Balance Accounts......Page 683
   Investing in Marketable Securities......Page 684
  Summary......Page 685
  Opener-in-Review......Page 687
  Warm-Up Exercises......Page 688
  Problems......Page 689
  Spreadsheet Exercise......Page 694
 Chapter 16: Current Liabilities Management......Page 696
  FastPay: Getting Cash into the Hands of Online Media Companies......Page 697
   Accounts Payable Management......Page 698
   Focus on Ethics: Accruals Management......Page 703
   Bank Loans......Page 704
   Focus on Practice: The Ebb and Flow of Commercial Paper......Page 710
   International Loans......Page 711
   Review Questions......Page 712
   Characteristics of Secured Short-Term Loans......Page 713
   Use of Accounts Receivable as Collateral......Page 714
   Use of Inventory as Collateral......Page 716
  Summary......Page 718
  Opener-in-Review......Page 719
  Warm-Up Exercises......Page 720
  Problems......Page 721
  Spreadsheet Exercise......Page 727
  Integrative Case 7: Casa de Diseño......Page 728
Part 8: Special Topics in Managerial Finance......Page 730
 Chapter 17: Hybrid and Derivative Securities......Page 731
  Nokia Corporation: Nokia Calls on Convertible Bond Market for Help......Page 732
   Types of Leases......Page 733
   Leasing Arrangements......Page 734
   Focus on Practice: Leases to Airlines End on a Sour Note......Page 735
   Lease-Versus-Purchase Decision......Page 736
   Effects of Leasing on Future Financing......Page 740
   Advantages and Disadvantages of Leasing......Page 741
   Types of Convertible Securities......Page 742
   General Features of Convertibles......Page 743
   Financing with Convertibles......Page 744
   Determining the Value of a Convertible Bond......Page 746
   Key Characteristics......Page 748
   Implied Price of an Attached Warrant......Page 749
   Values of Warrants......Page 750
   Review Questions......Page 752
   Options Markets......Page 753
   Options Trading......Page 754
   Role of Call and Put Options in Fund Raising......Page 755
   Hedging Foreign-Currency Exposures with Options......Page 756
  Summary......Page 757
  Opener-in-Review......Page 759
  Self-Test Problems......Page 760
  Problems......Page 761
  Spreadsheet Exercise......Page 768
 Chapter 18: Mergers, LBOs, Divestitures and Business Failure......Page 769
  Dell, Inc.: Carl Icahn and Founder Michael Dell Fight for Computer Maker......Page 770
   Terminology......Page 771
   Motives for Merging......Page 773
   Types of Mergers......Page 775
   Leveraged Buyouts (LBOs)......Page 776
   Divestitures......Page 777
  18.3 Analyzing and Negotiating Mergers......Page 778
   Valuing the Target Company......Page 779
   Stock Swap Transactions......Page 781
   Merger Negotiation Process......Page 786
   Holding Companies......Page 788
   International Mergers......Page 790
   Review Questions......Page 791
  18.4 Business Failure Fundamentals......Page 792
   Major Causes of Business Failure......Page 793
   Voluntary Settlements......Page 794
   Review Questions......Page 795
   Bankruptcy Legislation......Page 796
   Reorganization in Bankruptcy (Chapter 11)......Page 797
   Liquidation in Bankruptcy (Chapter 7)......Page 799
   Review Questions......Page 800
  Summary......Page 801
  Opener-in-Review......Page 802
  Warm-Up Exercises......Page 803
  Problems......Page 804
  Spreadsheet Exercise......Page 810
 Chapter 19: International Managerial Finance......Page 812
  Air New Zealand: Kiwis Flying High on Currency Gains......Page 813
   Key Trading Blocs......Page 814
   Legal Forms of Business Organization......Page 816
   Taxes......Page 817
   Financial Markets......Page 819
  19.2 Financial Statements......Page 820
   Translation of Individual Accounts......Page 821
  19.3 Risk......Page 822
   Exchange Rate Risks......Page 823
   Political Risks......Page 828
   Review Questions......Page 829
   Foreign Direct Investment......Page 830
   Investment Cash Flows and Decisions......Page 831
   Capital Structure......Page 832
   Global Focus: Take an Overseas Assignment to Take a Step Up the Corporate Ladder......Page 833
   Long-Term Debt......Page 834
   Equity Capital......Page 835
  19.5 Short-Term Financial Decisions......Page 836
   Cash Management......Page 838
   Credit and Inventory Management......Page 841
  19.6 Mergers and Joint Ventures......Page 842
  Summary......Page 843
  Opener-in-Review......Page 845
  Problems......Page 846
  Spreadsheet Exercise......Page 849
  Integrative Case 8: Organic Solutions......Page 850
Appendix......Page 852
Glossary......Page 884
Credits......Page 912
Index......Page 914