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Part 1. INTRODUCTION, 2
1. The Goals and Functions of Financial Management, 4
The Field of Finance, 5
Evolution of the Field of Finance, 5
Recent Issues in Finance, 6
The Impact of the Internet, 6
Functions of Financial Management, 7
Forms of Organization, 8
Corporate Governance, 10
Sarbanes-Oxley Act, 11
Goals of Financial Management, 11
A Valuation Approach, 12
Maximizing Shareholder Wealth, 12
Management and Stockholder Wealth, 13
Social Responsibility and Ethical Behavior, 13
The Role of the Financial Markets, 15
Structure and Functions of the Financial Markets, 15
Allocation of Capital, 16
Institutional Pressure on Public Companies to Restructure, 17
Internationalization of the Financial Markets, 17
The Internet and Changes in the Capital Markets, 18
Format of the Text, 18
Parts, 19
List of Terms, 20
Discussion Questions, 20
Web Exercise, 21
Part 2. FINANCIAL ANALYSIS AND PLANNING, 22
2. Review of Accounting, 24
Income Statement, 25
Return to Capital, 26
Price-Earnings Ratio Applied to Earnings per Share, 26
Limitations of the Income Statement, 27
Balance Sheet, 28
Interpretation of Balance Sheet Items, 28
Concept of Net Worth, 30
Limitations of the Balance Sheet, 30
Statement of Cash Flows, 31
Developing an Actual Statement, 32
Determining Cash Flows from Operating Activities, 32
Determining Cash Flows from Investing Activities, 34
Determining Cash Flows from Financing Activities, 34
Combining the Three Sections of the Statement, 36
Depreciation and Funds Flow, 37
Free Cash Flow, 37
Income Tax Considerations, 38
Corporate Tax Rates, 40
Cost of a Tax-Deductible Expense, 40
Depreciation as a Tax Shield, 40
Summary, 42
List of Terms, 42
Discussion Questions, 43
Practice Problems and Solutions, 43
Problems, 44
Web Exercise, 51
S&P Problems, 52
3. Financial Analysis, 53
Ratio Analysis, 54
Classification System, 54
The Analysis, 56
Trend Analysis, 61
Impact of Inflation on Financial Analysis, 65
An Illustration, 65
Disinflation Effect, 66
Other Elements of Distortion in Reported Income, 67
Explanation of Discrepancies, 67
Net Income, 69
Summary, 70
List of Terms, 70
Discussion Questions, 70
Practice Problems and Solutions, 71
Problems, 74
Comprehensive Problems, 85
Web Exercise, 90
S&P Problems, 90
4. Financial Forecasting, 92
Constructing Pro Forma Statements, 93
Pro Forma Income Statement, 93
Establish a Sales Projection, 94
Determine a Production Schedule and the Gross Profit, 94
Cost of Goods Sold, 96
Other Expense Items, 97
Actual Pro Forma Income Statement, 97
Cash Budget, 97
Cash Receipts, 98
Cash Payments, 98
Actual Budget, 100
Pro Forma Balance Sheet, 101
Explanation of Pro Forma Balance Sheet, 101
Analysis of Pro Forma Statement, 104
Percent-of-Sales Method, 104
Summary, 106
List of Terms, 106
Discussion Questions, 107
Practice Problems and Solutions, 107
Problems, 108
Comprehensive Problems, 116
Web Exercise, 118
5. Operating and Financial Leverage, 119
Leverage in a Business, 120
Operating Leverage, 120
Break-Even Analysis, 120
A More Conservative Approach, 122
The Risk Factor, 123
Cash Break-Even Analysis, 124
Degree of Operating Leverage, 124
Limitations of Analysis, 126
Financial Leverage, 127
Impact on Earnings, 128
Degree of Financial Leverage, 128
Limitations to Use of Financial Leverage, 131
Combining Operating and Financial Leverage, 131
Degree of Combined Leverage, 133
A Word of Caution, 135
Summary, 135
Review of Formulas, 135
List of Terms, 136
Discussion Questions, 136
Practice Problems and Solutions, 137
Problems, 138
Comprehensive Problem, 147
Web Exercise, 148
S&P Problems, 149
Part 3. WORKING CAPITAL MANAGEMENT, 150
6. Working Capital and the Financing Decision, 152
The Nature of Asset Growth, 154
Controlling Assets—Matching Sales and Production, 154
Temporary Assets under Level Production—An Example, 158
Patterns of Financing, 163
Alternative Plans, 164
Long-Term Financing, 164
Short-Term Financing (Opposite Approach), 165
The Financing Decision, 165
Term Structure of Interest Rates, 167
A Decision Process, 170
Introducing Varying Conditions, 171
Expected Value, 171
Shifts in Asset Structure, 172
Toward an Optimal Policy, 173
Summary, 175
List of Terms, 175
Discussion Questions, 175
Practice Problems and Solutions, 176
Problems, 183
Web Exercise, 183
S&P Problems, 183
7. Current Asset Management, 185
Cash Management, 186
Reasons for Holding Cash Balances, 186
Cash Flow Cycle, 186
Collections and Disbursements, 189
Float, 190
Improving Collections, 191
Extending Disbursements, 192
Cost-Benefit Analysis, 192
Electronic Funds Transfer, 193
International Cash Management, 196
Marketable Securities, 196
Management of Accounts Receivable, 201
Accounts Receivable as an Investment, 201
Credit Policy Administration, 201
An Actual Credit Decision, 206
Inventory Management, 207
Level versus Seasonal Production, 207
Inventory Policy in Inflation (and Deflation), 208
The Inventory Decision Model, 208
Economic Ordering Quantity, 209
Safety Stock and Stock Outs, 211
Just-in-Time Inventory Management, 211
Summary, 214
List of Terms, 214
Discussion Questions, 215
Practice Problems and Solutions, 215
Problems, 216
Comprehensive Problem, 221
Web Exercise, 222
8. Sources of Short-Term Financing, 223
Trade Credit, 224
Payment Period, 224
Cash Discount Policy, 224
Net Credit Position, 225
Bank Credit, 225
Prime Rate and LIBOR, 226
Compensating Balances, 227
Maturity Provisions, 228
Cost of Commercial Bank Financing, 229
Interest Costs with Compensating Balances, 229
Rate on Installment Loans, 230
Annual Percentage Rate, 230
The Credit Crunch Phenomenon, 231
Financing through Commercial Paper, 231
Advantages of Commercial Paper, 233
Limitations on the Issuance of Commercial Paper, 234
Foreign Borrowing, 234
Use of Collateral in Short-Term Financing, 235
Accounts Receivable Financing, 235
Pledging Accounts Receivable, 235
Factoring Receivables, 236
Asset-Backed Public Offerings, 236
Inventory Financing, 238
Stages of Production, 239
Nature of Lender Control, 239
Appraisal of Inventory Control Devices, 239
Hedging to Reduce Borrowing Risk, 240
Summary, 241
List of Terms, 242
Discussion Questions, 242
Practice Problems and Solutions, 243
Problems, 244
Web Exercise, 248
Part 4. THE CAPITAL BUDGETING PROCESS, 250
9. The Time Value of Money, 253
Relationship to the Capital Outlay Decision, 254
Future Value—Single Amount, 254
Present Value—Single Amount, 255
Future Value—Annuity, 256
Present Value—Annuity, 258
Graphical Presentation of Time Value Relationships, 260
The Relationship between Present Value and Future Value, 260
The Relationship between the Present Value of a Single Amount and the Present Value of an Annuity, 263
Future Value Related to the Future Value of an Annuity, 265
Determining the Annuity Value, 266
Annuity Equaling a Future Value, 266
Annuity Equaling a Present Value, 266
Determining the Yield on an Investment, 268
Yield—Present Value of a Single Amount, 268
Yield—Present Value of an Annuity, 269
Special Considerations in Time Value Analysis, 270
Patterns of Payment, 270
Special Review of the Chapter, 272
List of Terms, 274
Discussion Questions, 274
Practice Problems and Solutions, 275
Problems, 276
Comprehensive Problem, 281
10. Valuation and Rates of Return, 282
Valuation Concepts, 283
Valuation of Bonds, 283
Concept of Yield to Maturity, 285
Changing the Yield to Maturity and the Impact on Bond Valuation, 286
Time to Maturity, 289
Determining Yield to Maturity from the Bond Price, 289
Semiannual Interest and Bond Prices, 292
Valuation and Preferred Stock, 293
Determining the Required Rate of Return (Yield) from the Market Price, 294
Valuation of Common Stock, 295
No Growth in Dividends, 295
Constant Growth in Dividends, 296
Determining the Required Rate of Return from the Market Price, 298
The Price-Earnings Ratio Concept and Valuation, 299
Variable Growth in Dividends, 300
Summary and Review of Formulas, 302
Bonds, 303
Preferred Stock, 303
Common Stock, 304
List of Terms, 304
Discussion Questions, 304
Practice Problems and Solutions, 305
Problems, 306
Comprehensive Problem, 312
Web Exercise, 313
Appendix 10A The Bond Yield to Maturity Using Interpolation, 314
Appendix 10B Using Calculators for Financial Analysis, 315
Appendix 10C Valuation of a Supernormal Growth Firm, 324
11. Cost of Capital, 327
The Overall Concept, 328
Cost of Debt, 328
Costs of Preferred Stock, 331
Cost of Common Equity, 331
Valuation Approach, 332
Required Return on Common Stock Using the Capital Asset Pricing Model, 332
Cost of Retained Earnings, 333
Cost of New Common Stock, 335
Overview of Common Stock Costs, 335
Optimal Capital Structure—Weighting Costs, 336
Capital Acquisition and Investment Decision Making, 338
Cost of Capital in the Capital Budgeting Decision, 338
The Marginal Cost of Capital, 340
Summary, 345
Review of Formulas, 345
List of Terms, 346
Discussion Questions, 346
Practice Problems and Solutions, 347
Problems, 349
Comprehensive Problems, 356
Web Exercise, 358
S&P Problems, 358
Appendix 11A Cost of Capital and the Capital Asset Pricing Model (Optional), 359
12. The Capital Budgeting Decision, 367
Administrative Considerations, 368
Accounting Flows versus Cash Flows, 368
Methods of Ranking Investment Proposals, 371
Payback Method, 371
Internal Rate of Return, 372
Net Present Value, 374
Selection Strategy, 375
Reinvestment Assumption, 376
Capital Rationing, 378
Net Present Value Profile, 379
Characteristics of Investment C, 380
Combining Cash Flow Analysis and Selection Strategy, 382
The Rules of Depreciation, 382
The Tax Rate, 384
Actual Investment Decision, 384
The Replacement Decision, 385
Sale of Old Asset, 386
Incremental Depreciation, 387
Cost Savings, 388
Elective Expensing, 390
Summary, 390
List of Terms, 390
Discussion Questions, 390
Practice Problems and Solutions, 391
Problems, 392
Comprehensive Problem, 400
Web Exercise, 401
S&P Problems, 401
13. Risk and Capital Budgeting, 403
Definition of Risk in Capital Budgeting, 404
The Concept of Risk-Averse, 405
Actual Measurement of Risk, 405
Risk and the Capital Budgeting Process, 408
Risk-Adjusted Discount Rate, 409
Increasing Risk over Time, 410
Qualitative Measures, 411
Simulation Models, 412
Decision Trees, 413
The Portfolio Effect, 415
Portfolio Risk, 415
Evaluation of Combinations, 418
The Share Price Effect, 419
Summary, 419
Review of Formulas, 419
List of Terms, 420
Discussion Questions, 420
Practice Problems and Solutions, 420
Problems, 422
Comprehensive Problems, 431
Web Exercise, 433
Part 5. LONG-TERM FINANCING, 434
14. Capital Markets, 436
International Capital Markets, 437
Competition for Funds in the U.S. Capital Markets, 439
Government Securities, 439
Corporate Securities, 440
The Supply of Capital Funds, 442
The Role of the Security Markets, 444
The Organization of the Security Markets, 445
The New York Stock Exchange, 445
The NASDAQ Market, 448
The American Stock Exchange, 448
Regional Stock Exchanges, 448
Foreign Exchanges, 449
Electronic Communication Networks (ECNs), 449
National Association of Securities Dealers (NASD), 450
Market Efficiency, 450
The Efficient Market Hypothesis, 450
Regulation of the Security Markets, 451
Securities Act of 1933, 451
Securities Exchange Act of 1934, 452
Securities Acts Amendments of 1975, 452
Sarbanes-Oxley Act of 2002, 453
Summary, 454
List of Terms, 454
Discussion Questions, 455
Web Exercise, 455
S&P Problems, 456
15. Investment Banking: Public and Private Placement, 457
The Role of Investment Banking, 458
Enumeration of Functions, 461
The Distribution Process, 462
Pricing the Security, 465
Dilution, 465
Market Stabilization, 465
Aftermarket, 466
Shelf Registration, 466
Public versus Private Financing, 467
Advantages of Being Public, 467
Disadvantages of Being Public, 468
Public Offerings, 468
A Classic Example of Instant Wealth—EDS Goes Public, 468
Internet Capital Group—A Second Example, 469
Private Placement, 473
Going Private and Leveraged Buyouts, 473
International Investment Banking Deals, 474
Privatization, 474
Summary, 477
List of Terms, 477
Discussion Questions, 477
Practice Problems and Solutions, 478
Problems, 479
Comprehensive Problem, 484
Web Exercise, 486
S&P Problems, 486
16. Long-Term Debt and Lease Financing, 488
The Expanding Role of Debt, 489
The Debt Contract, 489
Security Provisions, 490
Methods of Repayment, 491
An Example: Dillard's 7.875 Percent Bond, 492
Bond Prices, Yields, and Ratings, 492
Bond Yields, 495
Bond Ratings, 496
Examining Actual Bond Ratings, 497
The Refunding Decision, 498
A Capital Budgeting Problem, 498
Step A—Outflow Considerations, 499
Step B—Inflow Considerations, 500
Step C—Net Present Value, 501
Other Forms of Bond Financing, 502
Advantages and Disadvantages of Debt, 503
Benefits of Debt, 504
Drawbacks of Debt, 504
Eurobond Market, 504
Leasing as a Form of Debt, 505
Capital Lease versus Operating Lease, 506
Income Statement Effect, 507
Advantages of Leasing, 507
Summary, 508
List of Terms, 508
Discussion Questions, 508
Practice Problems and Solutions, 509
Problems, 512
Comprehensive Problem, 516
Web Exercise, 517
S&P Problems, 517
Appendix 16A Financial Alternatives for Distressed Firms, 518
Out-of-Court Settlement, 518
In-Court Settlements—Formal Bankruptcy, 519
List of Terms, 522
Discussion Questions, 523
Problem, 523
Appendix 16B Lease versus Purchase Decision, 524
17. Common and Preferred Stock Financing, 527
Common Stockholders' Claim to Income, 528
The Voting Right, 529
Cumulative Voting, 530
The Right to Purchase New Shares, 532
The Use of Rights in Financing, 533
Effect of Rights on Stockholder's Position, 535
Desirable Features of Rights Offerings, 536
Poison Pills, 536
American Depository Receipts, 537
Preferred Stock Financing, 538
Justification for Preferred Stock, 539
Provisions Associated with Preferred Stock, 540
Comparing Features of Common and Preferred Stock and Debt, 542
Summary, 543
Review of Formulas, 544
List of Terms, 544
Discussion Questions, 545
Practice Problems and Solutions, 546
Problems, 547
Comprehensive Problems, 551
Web Exercise, 553
18. Dividend Policy and Retained Earnings, 554
The Marginal Principle of Retained Earnings, 555
Life Cycle Growth and Dividends, 555
Dividends as a Passive Variable, 556
An Incomplete Theory, 556
Arguments for the Relevance of Dividends, 557
Dividend Stability, 558
Other Factors Influencing Dividend Policy, 558
Legal Rules, 558
Cash Position of the Firm, 560
Access to Capital Markets, 560
Desire for Control, 561
Tax Position of Shareholders, 561
Dividend Payment Procedures, 561
Stock Dividend, 563
Accounting Considerations for a Stock Dividend, 563
Value to the Investor, 563
Possible Value of Stock Dividends, 564
Use of Stock Dividends, 565
Stock Splits, 565
Reverse Stock Splits, 566
Repurchase of Stock as an Alternative to Dividends, 566
Other Reasons for Repurchase, 568
Dividend Reinvestment Plans, 568
Summary, 569
List of Terms, 569
Discussion Questions, 569
Practice Problems and Solutions, 570
Problems, 571
Comprehensive Problem, 578
Web Exercise, 578
S&P Problems, 579
19. Convertibles, Warrants, and Derivatives, 580
Convertible Securities, 581
Value of the Convertible Bond, 581
Is This Fool's Gold?, 584
Advantages and Disadvantages to the Corporation, 584
Forcing Conversion, 586
Accounting Considerations with Convertibles, 587
Financing through Warrants, 589
Valuation of Warrants, 590
Use of Warrants in Corporate Finance, 592
Accounting Considerations with Warrants, 592
Derivative Securities, 593
Options, 593
Futures, 594
Summary, 595
Review of Formulas, 595
List of Terms, 596
Discussion Questions, 596
Practice Problems and Solutions, 597
Problems, 598
Comprehensive Problems, 602
Web Exercise, 603
Part 6. EXPANDING THE PERSPECTIVE OF CORPORATE FINANCE, 604
20. External Growth through Mergers, 606
Motives for Business Combinations, 607
Financial Motives, 608
Nonfinancial Motives, 609
Motives of Selling Stockholders, 609
Terms of Exchange, 611
Cash Purchases, 611
Stock-for-Stock Exchange, 612
Portfolio Effect, 613
Accounting Considerations in Mergers and Acquisitions, 614
Negotiated versus Tendered Offers, 615
Premium Offers and Stock Price Movements, 617
Two-Step Buyout, 618
Summary, 619
List of Terms, 619
Discussion Questions, 619
Practice Problems and Solutions, 620
Problems, 621
Web Exercise, 625
S&P Problems, 626
21. International Financial Management, 627
The Multinational Corporation: Nature and Environment, 630
Foreign Exchange Rates, 631
Factors Influencing Exchange Rates, 632
Spot Rates and Forward Rates, 634
Cross Rates, 636
Managing Foreign Exchange Risk, 636
Foreign Investment Decisions, 639
Analysis of Political Risk, 641
Financing International Business Operations, 643
Funding of Transactions, 643
Some Unsettled Issues in International Finance, 649
Summary, 649
List of Terms, 650
Discussion Questions, 651
Practice Problems and Solutions, 651
Problems, 652
Web Exercise, 654
S&P Problems, 654
Appendix 21A Cash Flow Analysis and the Foreign Investment Decision, 655
Appendixes, A-1
Appendix A. Future Value of $1, FV_IF, A-2
Appendix B. Present Value of $1, PV_IF, A-4
Appendix C. Future Value of an Annuity of $1, FV _IFA, A-6
Appendix D. Present Value of an Annuity of $1, PV _IFA, A-8
Selected References, R-1
Glossary, G-1
Indexes, I-1

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