Core Concepts - GBV · CHAPTER 8 ever seen in an introductory text. **.4; Alex Wilson, University...
Transcript of Core Concepts - GBV · CHAPTER 8 ever seen in an introductory text. **.4; Alex Wilson, University...
Detailed Contents
PartilFundamental Concepts and BasicTools of Finance 29
11.21.31.4
1.5
31
33
3840
Financial Management1.1 The Cycle of Money 32
Overview of Finance AreasFinancial Markets 34The Finance Manager and FinancialManagement 35Objective of the Finance Manager 36Profit Maximization 37Maximizing Current Stock Price 37Maximizing Equity Value 38
1.6 Internal and External Players1.7 The Legal Forms of Business
Proprietorship 40Partnership 40Corporations 41Hybrid Corporations 42Not-for-Profit Corporations 42
1.8 The Financial Management Setting:The Agency Model 42
1.9 Corporate Governance and Business Ethics 45FINANCE FOLLIES The Financial Meltdown
of 2008 471.10 Why Study Finance? 48
PUTTING FINANCE TO WORK Now Hiring 49
Key Terms 50Questions 50Prepping for Exams 51MINI-CASE Richards' Tree Farm
Grows Up 53
L Financial Statements 552.1 Financial Statements 56
The Balance Sheet 56The Income Statement 59Statement of Retained Earnings 61
2.2 Cash Flow Identity and the Statement ofCash Flows 62The First Component: Cash Flow from
Assets 62The Second Component: Cash Flow to
Creditors 64The Third Component: Cash Flow to
Owners 65Putting It All Together: The Cash Flow
Identity 65The Statement of Cash Flows 65Free Cash Flow 67
2.3 Financial Performance Reporting 68Regulation Fair Disclosure 68Notes to the Financial Statements 68
2.4 Financial Statements on the Internet 69PUTTING FINANCE TO WORK Look Before
You Leap 72
Key Terms 73Questions 73Prepping for Exams 73Problems 75Advanced Problems for Spreadsheet
Application 78MINI-CASE Hudson Valley Realty 80
3 The Time Value of Money (Parti) 833.1 Future Value and Compounding Interest 84
The Single-Period Scenario 84The Multiple-Period Scenario 84Methods of Solving Future Value Problems 85
3.2 Present Value and Discounting 89The Single-Period Scenario 89The Multiple-Period Scenario 90The Use of Time Lines 92
3.3 One Equation and Four Variables 923.4 Applications of the Time Value of Money
Equation 94PUTTING FINANCE TO WORK Sports
Agent 99
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CHAPTERS 1-3 te
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3.5 Doubling of Money: The Rule of 72 100
Key Terms 101Questions 101Prepping for Exams 102Problems 104Advanced Problems for Spreadsheet
Application 108MINI-CASE Richards' Tree Farm, Inc.:
The Continuing Saga 109
4 The Time Value of Money (Part 2) i l l
4.1 Future Value of Multiple PaymentStreams 112
4.2 Future Value of an Annuity Stream 113Future Value of an Annuity: An
Application 1154.3 Present Value of an Annuity 117
PUTTING FINANCE TO WORK Modelingthe Future with Actuarial Science 119
4.4 Annuity Due and Perpetuity 120Perpetuity 122
4.5 Three Loan Payment Methods 123Interest and Principal at the Maturity of Loan
(Discount Loan) 123Interest as You Go, Principal at Maturity of Loan
(Interest-Only Loan) 123Interest and Principal as You Go
(Amortized Loan) 1244.6 Amortization Schedules 1254.7 Waiting Time and Interest Rates for
Annuities 1274.8 Solving a Lottery Problem 1284.9 Ten Important Points about the TVM
Equation 131
Key Terms 132Questions 132Prepping for Exams 132Problems 134Advanced Problems for Spreadsheet
Application 140MINI-CASE Fitchminster Injection Molding, Inc.:
Rose Climbs High 141
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Interest Rates 1435.1 How Financial Institutions Quote Interest
Rates: Annual and Periodic Interest Rates 1445.2 Effect of Compounding Periods on the Time
Value of Money Equations 1465.3 Consumer Loans and Amortization
Schedules 1505.4 Nominal and Real Interest Rates 1555.5 Risk-Free Rate and Premiums 157
Maturity Premiums 159Yield Curves 160
5.6 A Brief History of Interest Rates and Inflationin the United States 162
Key Terms 164Questions 165Prepping for Exams 165Problems 167Advanced Problems for Spreadsheet
Application 170MINI-CASE Sweetening the Deal: Povero
Construction Company 171
Valuing Stocks and Bonds andUnderstanding Risk andReturn 173
O Bonds and Bond Valuation 1756.1 Application of the Time Value of Money Tool:
Bond Pricing 176Key Components of a Bond 176Pricing a Bond in Steps 177
6.2 Semiannual Bonds and Zero-Coupon Bonds 181Pricing Bonds after Original Issue 183Zero-Coupon Bonds 184Amortization of a Zero-Coupon Bond 186
6.3 Yields and Coupon Rates 187The First Interest Rate: Yield to Maturity 187The "Other" Interest Rate: Coupon Rate 188
CHAPTER 8
ever seen in an introductory text. **.4; Alex Wilson, University of Arizona
,y sophisticated information very well. **iRobert Bartolacci, Carnegie Mellon University
Relationship of Yield to Maturity and CouponRate 189
6.4 Bond Ratings 1906.5 Some Bond History and More Bond
Features 193PUTTING FINANCE TO WORK Municipal
Manager 197
6.6 U.S. Government Bonds 197Pricing a U.S. Government Note or Bond 198Pricing a Treasury Bill 199
Key Terms 201Questions 201Prepping for Exams 202Problems 203Advanced Problems for Spreadsheet
Application 206MINI-CASE Bay Path Cranberry
Products 207
/ Stocks and Stock Valuation 2097.1 Characteristics of Common Stock 210
Ownership 210Claim on Assets and Cash Flow (Residual
Claim) 210Vote (Voice in Management) 210No Maturity Date 211Dividends and Their Tax Effect 211Authorized, Issued, and Outstanding Shares 211Treasury Stock 212Preemptive Rights 212
7.2 Stock Markets 212Primary Markets 212Secondary Markets: How Stocks Trade 213Bull Markets and Bear Markets 214
7.3 Stock Valuation 215The Constant Dividend Model with an Infinite
Horizon 217The Constant Dividend Model with a Finite
Horizon 218The Constant Growth Dividend Model with an
Infinite Horizon 220
The Constant Growth Dividend Model with aFinite Horizon 222
Nonconstant Growth Dividends 223FINANCE FOLLIES Irrational Expectations:
Bulbs and Bubbles 2247.4 Dividend Model Shortcomings 2257.5 Preferred Stock 2297.6 Efficient Markets 230
Operational Efficiency 230Informational Efficiency 230
Key Terms 231Questions 232,Prepping for Exams 232Problems 234Advanced Problems for Spreadsheet
Application 238
MINI-CASE Lawrence's Legacy:Part 1 239
O Risk and Return 2418.1 Returns 242
Dollar Profits and Percentage Returns 242Converting Holding Period Returns to
Annual Returns 243Extrapolating Holding Period
Returns 2448.2 Risk (Certainty and Uncertainty) 245
FINANCE FOLLIES "Dangerous toYour Wealth": Is Investing JustGambling? 246 —
8.3 Historical Returns 2478.4 Variance and Standard Deviation as a
Measure of Risk 251Normal Distributions 253
8.5 Returns in an Uncertain World (Expectationsand Probabilities) 255FINANCE FOLLIES "Scam of the Century":
Bernie Madoff and the $50 BillionFraud 256
Determining the Probabilities of All PotentialOutcomes 251
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CHAPTER 9 •;:;•* m4
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8.6 The Risk-and-Return Trade-off 259Investment Rules 260
8.7 Diversification: Minimizing Risk orUncertainty 261When Diversification Works 262Adding More Stocks to the Portfolio: Systematic
and Unsystematic Risk 2658.8 Beta: The Measure of Risk in a
Well-Diversified Portfolio 2668.9 The Capital Asset Pricing Model and the
Security Market Line 267The Capital Asset Pricing Model •,
(CAPM) 268Application of the SML 270
Key Terms 272Questions 272Prepping for Exams 273Problems 275Advanced Problems for Spreadsheet
Application 280MINI-CASE Lawrence's Legacy:
Part 2 281
Capital Budgeting 283
Capital Budgeting DecisionModels 285
9.1
9.2
9.3
Short-Term and Long-Term DecisionsFINANCE FOLLIES IBM Exits the
Consumer Software Market:Misreading Future Cash Flows 287
Payback Period 288Discounted Payback Period 290Net Present Value 291Mutually Exclusive versus Independent
Projects 293Unequal Lives of Projects 295Net Present Value Example: Equation and
Calculator Function 296
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9.4 Internal Rate of Return 298Appropriate Discount Rate or Hurdle Rate 300Problems with the Internal Rate of Return 301PUTTING FINANCE TO WORK Marketing
and Sales: Your Product = YourCustomer's Capital BudgetingDecision 302
Multiple Internal Rates of Return 302Reinvestment and Crossover Rates 304Modified Internal Rate of Return 306
9.5 Profitability Index 3089.6 Overview of Six Decision Models 310
Capital Budgeting Using a Spreadsheet 310
Key Terms 313Questions 313Prepping for Exams 314Problems 316Advanced Problems for Spreadsheet
Application 321MINI-CASE BioCom, Inc.: Part 1 322
1 U Cash Flow Estimation 32510.1 The Importance of Cash Flow 32610.2 Estimating Cash Flow for Projects:
Incremental Cash Flow 327Sunk Costs 328Opportunity Costs 328Erosion Costs 329Synergy Gains 331Working Capital 331FINANCE FOLLIES Boston's "Big Dig"
Gets Dug Under 33310.3 Capital Spending and Depreciation 334
Straight-Line Depreciation 334Modified Accelerated Cost Recovery
System 33510.4 Cash Flow and the Disposal of Capital
Equipment 33710.5 Projected Cash Flow for a New
Product 339
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CHAPTER 11
Cathy Goldberg, University of San Francisco
CHAPTER 13
nts receivable managementWarren Palmer, Beloit College
Key Terms 343Questions 343Prepping for Exams 344Problems 345Advanced Problems for Spreadsheet
Application 349
MINI-CASE BioCom, Inc.: Part 2,Evaluating a New Product Line 351
1 1 The Cost of Capital 35311.1 The Cost of Capital: A Starting Point 35411.2 Components of the Weighted Average Cost
of Capital 357Debt Component 357Preferred Stock Component 359Equity Component 359Retained Earnings 361
11.3 Weighting the Components: Book Value orMarket Value? 362Book Value 363Adjusted Weighted Average Cost of
Capital 364Market Value 364
11.4 Using the Weighted Average Cost of Capital ina Budgeting Decision 366Individual Weighted Average Cost of Capital for
Individual Projects 36711.5 Selecting Appropriate Betas for
Projects 36911.6 Constraints on Borrowing and Selecting
Projects for the Portfolio 370
Key Terms 372Questions 372Prepping for Exams 373Problems 375Advanced Problems for Spreadsheet
Application 380
MINI-CASE BioCom, Inc.: Part 3,A Fresh Look at the WACC 381
Financial Planning and EvaluatingPerformance 383
Forecasting and Short-Term FinancialPlanning 385Sources and Uses of Cash 386Cash Budgeting and the Sales Forecast 388Cash Inflow from Sales 390Other Cash Receipts 391Cash Outflow from Production 392The Cash Forecast: Short-Term Deficits andShort-Term Surpluses 393Funding Cash Deficits 394Investing Cash Surpluses 395Planning with Pro Forma FinancialStatements 396Pro Forma Income Statement 396Pro Forma Balance Sheet 398PUTTING FINANCE TO WORK Information
Technology 402
Key Terms 403Questions 403Prepping for Exams 403Problems 405Advanced Problems for Spreadsheet
Application 408
MINI-CASE Midwest Properties: QuarterlyForecasting 409 —
12.112.2
12.312.4
12.5
1 3 Working Capital Management 41313.1 The Cash Conversion Cycle 414
Average Production Cycle 416Average Collection Cycle 417Average Payment Cycle 418Putting It All Together: The Cash Conversion
Cycle 419
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CHAPTER 14
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13.2 Managing Accounts Receivable and SettingCredit Policy 419Collecting Accounts Receivable 420Credit: A Two-Sided Coin 421Qualifying for Credit 422Setting Payment Policy 424Collecting Overdue Debt 426
13.3 The Float 427Speeding Up the Collection (Shortening the
Lag Time) 428Slowing Down Payment (Lengthening the
Lag Time) 42913.4 Inventory Management: Carrying Costs and
Ordering Costs 430ABC Inventory Management 430Redundant Inventory Items 431Economic Order Quantity 432
13.5 The Effect of Working Capital on CapitalBudgeting 437PUTTING FINANCE TO WORK Operations
Management 438Inventories and Daily Operations 438
Key Terms 441Questions 441Prepping for Exams 442Problems 444Advanced Problems for Spreadsheet
Application 447MINI-CASE Cranston Dispensers, Inc.:
Part 1 448
1 4 Financial Ratios and FirmPerformance 451
14.1 Financial Statements 452Benchmarking 453
14.2 Financial Ratios 456Short-Term Solvency: Liquidity
Ratios 457Long-Term Solvency: Solvency or Financial
Leverage Ratios 459Asset Management Ratios 460
Profitability Ratios 462Market Value Ratios 463DuPont Analysis 465
14.3 External Uses of Financial Statements andIndustry Averages 466Cola Wars 467Industry Ratios 469FINANCE FOLLIES Cooking the Books at
Enron and WorldCom 470
Key Terms 471Questions 471Prepping for Exams 471Problems 473Advanced Problems for Spreadsheet
Application 47 9MINI-CASE Cranston Dispensers, Inc.:
Part 2 479
Other Selected Finance Topics 483
1 J Raising Capital 48515.1 The Business Life Cycle 48615.2 Borrowing for a Start-up and Growing
Business 486Personal Funds and Family Loans 486Commercial Bank Loans 487Commercial Bank Loans through the Small'
Business Administration 487Angel Financing and Venture Capital 488
15.3 Borrowing for a Stable and Mature Business:Bank Loans 492Straight Loans 492Discount Loans 493Letter of Credit or Line of Credit 494Compensating Balance 494
15.4 Borrowing for a Stable and Mature Business:Selling Bonds 495
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* TJTJ
CHAPTER 16
John Banko, University of Central Florida
15.5 Borrowing for a Stable and Mature Business:Selling Stock 497Initial Public Offerings and Underwriting 498Registration, Prospectus, and Tombstone 500The Marketing Process: Road Show 500The Auction 502
The Aftermarket: Dealer in the Shares 502PUTTING FINANCE TO WORK Corporate
Law 50415.6 Other Borrowing Options for a Mature
Business 50515.7 The Final Phase: Closing the
Business 507Straight Liquidation: Chapter 7 507Reorganization: Chapter 11 508Key Terms 509Questions 509Prepping for Exams 509Problems 511Advanced Problems for Spreadsheet
Application 515MINI-CASEAKWebDevelopers.com 515
1 0 Capital Structure 519
52016.1 Capital Markets: A Quick Review16.2 Benefits of Debt 521
Earnings per Share as a Measure of the Benefits ofBorrowing 522
16.3 Break-Even Earnings for Different CapitalStructures 524
16.4 Pecking Order 527Firms Prefer Internal Financing First 527Firms Choose to Issue Cheapest Security First and
Use Equity as a Last Resort 52716.5 Modigliani and Miller on Optimal Capital
Structure 529Capital Structure in a World of No Taxes and
No Bankruptcy 530Capital Structure in a World of Corporate Taxes
and No Bankruptcy 533Debt and the Tax Shield 534
16.6 The Static Theory of CapitalStructure 536Bankruptcy 536Static Theory of Capital Structure 537FINANCE FOLLIES Hedge Funds: Some
Really Smart Guys Get intoBig Trouble 538
Key Terms 540Questions 541Prepping for Exams 541Problems 543Advanced Problems for Spreadsheet
Application 545
MINI-CASE General Energy StorageSystems: How Much Debt and HowMuch Equity? 546
1 / Dividends, Dividend Policy, andStock Splits 549
17.1 Cash Dividends 550Buying and Selling Stock 550Declaring and Paying a Cash Dividend:
A Chronology 550Different Types of Dividends 552
17.2 Dividend Policy 554Dividend Clienteles 554Dividend Policy Irrelevance 555Reasons Favoring a Low- or No-Diyidend-
Payout Policy 558Reasons Favoring a High-Dividend-Payout
Policy 559Optimal Dividend Policy 559
17.3 Selecting a Dividend Policy 560Some Further Considerations in the Selection of a
Dividend Policy 56217.4 Stock Dividends, Stock Splits, and
Reverse Splits 563Reasons for Stock Splits 564Reverse Splits 565
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CHAPTER 18
The presentation on foreign exchange is excellent. ** Eric Hayden, University r
17.5 Specialized Dividend Plans 566 18.3Stock Repurchase 566Dividend Reinvestment Plans 568
Key Terms 570Questions 570 184Prepping for Exams 571Problems 572Advanced Problems for Spreadsheet
Application 575MINI-CASE East Coast Warehouse
Club 575
1 0 International FinancialManagement 579
18.1 Managing Multinational Operations 580Cultural Risk 580Business Risk 582Political Risk 583FINANCE FOLLIES Rino International 584
18.2 Foreign Exchange 585Purchasing Power Parity 586Currency Exchange Rates 587Cross Rates 589Arbitrage Opportunities 590Forward Rates 591Using Forward Rates 593
Transaction, Operating, and TranslationExposures 595Transaction Exposure 595Operating Exposure 596Translation Exposure 597Foreign Investment Decisions 597
Key Terms 601Questions 601Prepping for Exams 602Problems 603Advanced Problems for Spreadsheet
Application 607MINI-CASE Scholastic Travel
Services, Inc. 608
Appendix 1Appendix 2Appendix 3
Appendix 4
Appendix 5
GlossaryIndexCredits
j Future Value Interest Factors 610Present Value Interest Factors 612Future Value Interest Factors of an
Annuity 614Present Value Interest Factors of an
Annuity 616Answers to Prepping for Exam
Questions 618627637 .645
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