CONTENTS
Preface xix
1 The Role and Objective of Financial Management
Key Chapter Comcepts
Financial Challenge: Finandal Managmient Questions
Introduction
Forms ofBusiness Organization
Fmndatwi Cmcept: Maximmng Shareholder Wealth as the Primary Goal
Maximizadon ofShareholder Wealth: Managerial Strategies
Fwndation Concept: CashFlow
Foundatum Concept: Net Present Value Rule
Ethical Issues: The Practice ofFinandal Managmmt
EntrefrenMrialFinanceIssues: Shareholder Weahh Maximizatim
Organization of the Financial Management Function
Financial Management and Other Disciplines
Career Opportunities in Finance
Professional Finance Affiliations
Organization of the Text
Summary
Qwstions and, Tofrics for Discusswn
Glossary
2 The Domestic and Intemational Financial Marketplace
Key.Chapter Concepts
Financial Challenge: Datmler-Benz AG's Decision to List Its Shares m the Nm York
Stock Exchange
Introduction
Income Taxes and Financial Management
An Overview of the U.S. Financial System
The Structure and Operadon ofU.S. Security Markets
Ethical Issues: Insider Trading
The Global Economy and Muldnadonal Enterprises
Foreign Currency Markets and Exchange Rates
Fwndation Concept: Marte Efficiency
Intemational Issws: Market Efficiency Outside the United States
Foundatim Concept: HoldingPeriod Returns
Summary
Queslitons and TopcsforDiscussion
Self-Test Problems
Problems
Solutions to Self-Tesl Problems
Glossary
3 Evaluadon of Financial Performance
Key Chapter Cmcepts
Financial Challenge: Financial Performance Measurement and Restructuring
Charges: The Case ofAT & T
Introduction
Uses ofFinancial Analysis
Interpreting Financial Ratios
Basic Classification ofFinancial Ratios
Summary ofFinancial Ratio Analysis
Trend Analysis
Analysis ofProfitability: Return on Investment
Foundation Concept: Analyzing Profitability Through Return on Stockholder 'Equily
Sources ofComparative Financial Data
A Word ofCaution About Financial Ratio Analysis
Earnings.and Balance Sheet Quality and Financial Analysis
Market Value Added: An Alternarive Measure ofPerformance
InflaUon and Financial Statement Analysis
Fondation Concept: Cash Flow Analysis
Intemational Issues: Financial Analysis of Multinational Corporatiims
Ethical Issues: Accuracy ofFinancual Statements
Summary
Questions and Topics forDismssim
Self-TestProblems
Problems
Solutions to Self-Test Problems
Glossary
PARTⅡ
4 The Time Value of Money
Key Chapter Cmcepts
Finandal Challenge: How Much Is $1 Million Worth ?
Introduction
Interest
Simple Interest
Compound Interest and Future Value
PresentValue
Annuities
Present Value: Some Additional Cash Flow Patterns
Compounding Periods and Effective Interest Rates
Solving the Financial Challenge
Summary
Questions and Topics for Diswssion
Self-TestProblems
Problems
Solutions to Self-Test Problems
Glossary
An Integrative Case Problem. Time Value ofMoney
Appendix 4A
Continuous Compounding and Discounting
Continuous Compounding
Continuous Discounting
Effective Rate Calculations
Self-Test Problems
Problems
Solutions to Self-Test Problems
5 Analysis of Risk and Return
Key Chapter Concepts
Financial Challenge: AppUcatim ofPortfolw Management Technique
to Citibank's Corporate Loan Business
Introduction
Meaning and Measurement ofRisk
Foundalion Concept: Relationship Between Risk and Retum
Investment Diversification and Portfolio Risk Analysis
Portfolio Risk and the Capital Asset Pricing Model
Intemational Issues: Diversification and Muhinational Corporations
Other Dimensions of Risk
Ethical Issues: High-Risk Securities
Summary
Questions and Topics fw Discussion
Self-Test Problems
Problems
Solutiow to Self-Test Problems
Glossary
6 Fixed-lncome Securities: Characteristics and Valuation
Key Chapter Concepts
Financial Chalknge: Marriott Corporatvm. Corporate Restructuring and Bond Valuatim
Introduction
Characteristics of Long-Term Debt
Intematwnal Issues: The Intemational Bond Market
Foundation Concept: Valuatim ofAssets
Bond Valuation
Elhical issues: Leveraged Buyouts and Bond Value
Characteristics of Preferred Stock
Valuation ofPreferred Stock
Summary
Questtoms and Topics for Discussion
Self-TestPmblems
Problms
Solulims lo Self-Tesl Problms
Glossary
Appendix6A
Bond Refunding Analysis
The Bond Refunding Process
Summary
Questons and TopicsforDiscussion
Self-TestProblems
Problems
Solutim to Self-Test Problems
7 Common Stock: Characteristics, Valuation, and Issuance
KeyChapterConcepts 272
Financial Challenge: Bostm Chicken's InitialPublic Offering
Introducdon
Characterisdcs ofCommon Stock
The Security Offering Process: Role of the Investment Banker
International Issuses: GlobalEquity Markets
Foundation Concept: Valuation ofCommon Stodk
Applications of the General Dividend Valuation Model
EntreprmeurialFinance: Valuatwn ofClosely HeldFirms
Ethical Issws: ATT Versus NCR
Summary
Questiims ana lopicsJor Discussion
Self-TestProblems
Problems
Solutions to Self-Test Problems
Glossary
8 CapitalBudgetingandCashFlowAnalysis
KeyChapterConcepts
Finandal Challenge: Ford Motor Company 's Investmmt inJaguar Cars, Ltd
introducdon
Key Terms and Concepts in Capital Budgedng
Basic Framework for Capital Budgedng
Generadng Capital Investment Project Proposals
Foundation Conupt: Principles ofEstimating Cash Flows
Net Investment (NlNV)
Net (Operadng) Cash Flows
Asset Expansion Projects
Asset Replacement Projects
Problems in Cash Flow Esdmadon
The Pracdce ofCash Flow Esdmadon for Capital Budgedng
Ethical Issues: CashFlowEstinationBiases
Summary
Questions and Topics for Diswssum
Self-Test Problems
Problems
Solutions to Self-Test Problems
Glossary
9 Capital Budgetmg:
Decision Criteria and Real Option Considerations
Key Chapler Conupts
Finandal Challenge: A New Casinofor Circus Grcus
Introduction
Foundatwn Comcefpt: Decision ModelsforEvaluatingAltemalives
Capital Rationing and the Capital Budgeting Decision
Reviewing and Postauditing an Accepted Project
A Comprehensive Example ofCapital Budgeting: Opening a New
Bank Branch
Inflation and Capital Expenditures
Real Options in Capital Budgeting
Intematuonal Issues: A Frameworkfarlntemational Capital Expenditure Decisions
EntrepreneunalFinance Issws: Capital Budgeting
Ethical Issues: The Use ofShareholder Resources
Summary
Qwstions and TofncsforDiscussion
Self-Test Problems
PnMems
Solutions to self-TESt Problems
Glossary
An Inttgralive Case Problem: Capital Budgettng
Appendix 9A
Mutually Exclusive Investments Having Unequal Lives
Replacement Chains
EquivalentAnnual Annuities
Self-TestProblem
Problems
Solutions to Self-Test Problem
lO CapitalBudgetmgandRisk
Key Chapter Concepts
Financial Challenge: The Boeing 747 SupeijumboJet
Introduction
Total Project Risk Versus Portfolio Risk
Adjusting for Beta Risk in Capital Budgeting
Adjusting for Total Project Risk
International Issues: Special Elements of Capital Budgeting Risk
Ethical Issues: johnson &johnsm and Profnietar) Competitive Information
Summary
Qwstvms and TopicsforDiscussum
Self-TestProblems
Problems
Solutions lo Self-Tesl Problems
Glossary
An Inlegrative Case Problem Capital Budgeting and Risk Analysis
11 Tbe Cost of Capital
Key Chapter Cmcepts
Financial Challenge: Cost ofEquity CapilalfwMwntamFuel Supply Company
Introduction
Summary of Notation
Fwndation Concept: Weighted Cosl ofCapital
Nature ofRisk Premiums
Relative Costs ofCapital
Computing the Component Costs ofCapital
Divisional Costs of Capital
Determining the Weighted (Marginal) Cost ofCapital Schedule
Determining the Optimal Capital Budget
Cost ofDepreciation-Generated Funds
Intemational Issues: The Cost of Capitalfor Multinatimal Companies
EntreprreMurialFinance Issues: The Cost ofCapital
Summary
Questions and Topics for Discttssim
Self-Test Problems
Problems
Solutums to Self-Test Problems
Glossary
An Integrative Case Probkm Cost of Capital
12 Capital Structure Concepts
Key Chapter Conwpts
Financial Challenge: Corporate Deleveraging
Introduction
Capital Structure Decisions and Maximizadon ofShareholder Wealth
Foudation Concept: Business Risk
Faundation Concept: Financial Risk and Finandal Lwerage
Capital Structure Theory
Ethical hsues: LBO Stakeholder Impacts
Interationd Issues: Capital Structme
Summary
Questions and TafncsforDucassion
Self-Test Problem
Problems
Solulim to Self-Test Problem
Glossary
13 Capital Structure Management in Practice
Key Chapter Concepts
Financial Challmge: Deregulation and Business Risk ofElectric Utilities
Introduction
Operating and Financial Leverage
Other Financial Risk Measures
EBlT-EPSAnalysis
Cash Insolvency Analysis
Other Factors to Consider in Making Capital Structure Decisions
Intematiwal Issues: Balancing Operating and Financial Risks at Nestle
Summary
Questions and TopicsforDiscusswn
Seif-TestProblems
Problems
Solutions to Self-Test Problems
Glossary
Appendix 13A
Breakeven Analysis
Glessary afNew Terms
Introduction
Graphic Breakeven Analysis
Algebraic Breakeven Analysis
Breakeven Analysis and Risk Assessment
Some Limitations ofBreakeven Analysis
Cash Breakeven Point
Qwstwns and TofncsfarDiscussion
Self-TestProblems
Problems
Solulions to Self-Test Problems
l4 Dividend Policy
KiyChapterCmcepts
Financial Challenge: Florida Piwer & Light's Dedsvm to Cut Jts Dividend
introduction
Determinants ofDividend Policy
Dividend Policy and Firm Value
Dividend Policies
EntrffireneunalFinance Issues: Dividmd Policy
Intematiumal Issues: Dividend Policiesfor Muhmalional Firms
How Dividends Are Paid
Stock Dividends and Stock Splits
Share Repurchases as Dividend Decisions
Summary
Questions and Tofics for Diswssim
Self-TestProblems
Problems
Solutions to Self-Test Problems
Glossary
15 FmancialForecastingandWortkingCapitalPolicy
Key Chapter Concepts
Financial Challenp: Going Broke Whie Making a Profit
Introduction
Financial Forecasting
Ethical Issues: UseofEmpbiyeeRetinmentFunds
Working Capital Policy
Levels ofWorking Capital Investment
Proportions ofShort-Term and Long-Term Financing
Overall Working Capital Policy
Summary
Questiwns and TopicsforDiscussion
Self-TestProblems
Problems
Solutions to Self-Test Problems
Glossary
16 The Management of Cash and Marketable Securities
Key Chapter Concepts
Financial Challenge: Chrysler's $7.3 Billim Cash Hoard: Haw Much Is Too MucA?
Introduction
Liquid Asset Balance
Controlling the Collection and Disbursement ofCash
Electronic Funds Transfer
Ethical Issues: Cash Management
Enlrepreneurial Finance Issues: Cash Management
Investing in Marketable Securities
Inlernational Issues: Cash Managemmt
Summary
Qaestwns and Toflics for Discussion
Self-TestProblems
Problems
Solutions to Self-Test Problems
Glossary
17 Management of Accounts Receivable and Inventories
Key Chapter Comcepts
Financial Challenge: Changing Credit Terms at Procter & Gambk
introduction
Accounts Receivable Management
Evaluating Individual Credit Applicants
Inventory Management
Inventory Control Models
Summary
Questions and TopicsforDwussion
Self-TestProbblems
Problems
Solutions to Self-Test ProMems
Glossary
18 Short andIntermediate-TermFundingAlternatives
Key Chapter comcepts
Fmandal Challenge: R.H. Macy & Company and Its SuppLiers
Introduction
Cost ofShort-Term Funds
Trade Credit
Accrued Expenses and Deferred Income
Short-Term Bank Credit
Commercial Paper
Accounts Receivable Loans
Intemalional Issues: Foreign Receivables Finandng
Inventory Loans
Tenn Loans
Security Provisions and Protecrive Covenants
Suppliers ofTerm Loans
Equipment Loans
Summary
Quesfions and TopicsfwDiscussum
Self-TestProblems
Problems
Solutums to Self-Test Problems
Glossary
An IntegrativtCaseProblem. Working Capilal Management
19 Lease Financingcmg
Key Chapter Conwpts
Finandal Challenge: Ryder's Airline Leasing Business Crash Lands
Introduction
TypesofLeases
Advantages and Disadvantages ofLeasing
Tax and Accounting Aspects of Leases
EntrepreneunialFinance Issues: Leasing by Small Businesses
Detennining Lease Payments: The Lessor's Perspective
Lease-Buy Analysis: The Lessee's Perspective
Ethicall Issues: ContinentalAtrlines' Leases in Bankruptcy
Summary
Questions and Topics for Discussion
Self-Test Problem
Problems
Solution to Self-Test Problem
Glossary
An Integrative Case Problem: Lease and Term Loan Analysi,
20 Financing with Derivatives
Key Chapter Concepts
Fimndal Challlenge: Baring Brothers Bank
introduction
Options
Converrible Securities
Warrants
Analysis of Rights Offerings
Interest Rate Swaps
Summary
Qyestions and Topics for Discussion
Self-TestProblems
Problems
Solutions to Self-Test Problems
Glossary
21 International Financial Management
Key Chapler Concepts
Financial Challmgc: Panic inJapan and Germany aver the Value of theDollar
Introduction
Factors That Affect Exchange Rates
Forecasting Future Exchange Rates
Foreign Exchange Risk
Ethical Issues: Payment ofBribes Abroad
Summary
Questwns and Tofncs for Diswssiim
Self-TestProblems
Problems
Solutions to Self-Test Problems
Glossary
22 Corporate Restructuring
Key Chapter Concepts
Financial ChaUenge: The Snapple Debacle at Quaker Oats
introducdon
Mergers
Valuation ofMerger Candidates
Analysis ofa Leveraged Buyout
Business Failure
Alternatives for Failing Businesses
Summary
Questions and TopicsforDiscusswn
Self-Test Problem
Problems
Solutiw to Self-Test Problem
Glossary
An Integrative Case Problem: Mergers and Acquisitions
AppendixA
Taxes and Depreciation
Glossary of New Terms
Introduction
Corporate Income Taxes
EntrepreneurialFinanw: S CorpMrations
Introduction to Depreciation
Straight-Line Depreciation
Sum-of-the-Years'-Digits Method
Declining Balance Method
Modified Accelerated Cost Recovery System
Real Property
Questions and Tofncs fw Discussion
Self-Test Problems
Problems
Solutivns to Self-Test Problems
AppendixB
An Overview of the CEMExcel Disk
AppendixC
An Introduction to the Intemet with Applicarions in Finance
What Is the Internet?
The Origin of the Internet
How Information Is Relayed over the Internet
Accessing the Internet
Financial Information Available on the Internet
What Is the Web?
Newsgroups
Financial Services Available on the Net
How Do 1 Get Started?
Sumnary
Glossan
Reference Materials
Tables
Table 1: Future Value Interest Factor (FVIF)
Table 11: PresentValue Interest Factor (PVIF)
Table III: Future Value ofan Annuity Interest Factor (FVIFA)
Table IV: Present Value of an Annuity Interest Factor (PVIFA
Table V: Normal Distribution
Index to Glossary Terms
Subject Index
Financial Challenge Photo Credits
Check Answers to Selected Problems
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