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Financial Management: Principles and Applications, Tenth Edition

by Arthur J. Keown - Virginia Polytechnic Institute and State University; John D. Martin - Baylor University; J. William Petty - Baylor University; David F. Scott,

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Copyright, iii
Preface, xvii
1. The Scope and Environment of Financial Management, 1
1. An Introduction to Financial Management, 2
What Is Finance?, 4
Goal of the Firm, 4
Legal Forms of Business Organization, 7
Ten Principles That Form the Basics of Financial Management, 12
Principle 1: The Risk-Return Trade-Off—We won’t take on additional risk unless we expect to be compensated with additional return, 13
Principle 2: The Time Value of Money—A dollar received today is worth more than a dollar received in the future, 14
Principle 3: Cash—Not Profits—Is King, 14
Principle 4: Incremental Cash Flows—It’s only what changes that counts, 15
Principle 5: The Curse of Competitive Markets—Why it’s hard to find exceptionally profitable projects, 15
Principle 6: Efficient Capital Markets—The markets are quick and the prices are right, 16
Principle 7: The Agency Problem—Managers won’t work for owners unless it’s in their best interest, 17
Principle 8: Taxes Bias Business Decisions, 18
Principle 9: All Risk Is Not Equal—Some risk can be diversified away, and some cannot, 18
Principle 10: Ethical behavior is doing the right thing, and ethical dilemmas are everywhere in finance, 20
Overview of the Text, 22
Finance and the Multinational Firm: The New Role, 24
How Financial Managers Use This Material, 25
Summary, 25
Key Terms, 26
Study Questions, 27
Integrative Problem, 27
2. Understanding Financial Statements, Taxes, and Cash Flows, 30
The Income Statement: Measuring a Company’s Profits, 32
The Balance Sheet: Measuring a Firm’s Book Value, 34
Computing a Company’s Taxes, 41
Measuring Free Cash Flows, 44
Financial Statements and International Finance, 49
How Financial Managers Use This Material, 50
Summary, 50
Key Terms, 51
Study Questions, 51
Self-Test Problems, 52
Web Works, 58
Integrative Problem, 58
Study Problems (Set B), 60
Appendix 2A: Measuring Cash Flows: An Accounting Perspective, 66
3. Evaluating a Firm’s Financial Performance, 70
Financial Ratio Analysis, 72
The DuPont Analysis: An Integrative Approach to Ratio Analysis, 85
How Financial Managers Use This Material, 89
Summary, 89
Key Terms, 90
Study Questions, 90
Self-Test Problems, 91
Integrative Problem, 98
Study Problems (Set B), 100
4. Financial Forecasting, Planning, and Budgeting, 106
Financial Forecasting, 108
Limitations of the Percent of Sales Forecast Method, 113
The Sustainable Rate of Growth, 115
Financial Planning and Budgeting, 117
How Financial Managers Use This Material, 120
Summary, 120
Key Terms, 121
Study Questions, 121
Self-Test Problems, 122
Study Problems (Set A), 122
Web Works, 127
Integrative Problem, 128
Study Problems (Set B), 129
Self-Test Solutions, 133
2. Valuation of Financial Assets, 135
5. The Time Value of Money, 136
Compound Interest and Future Value, 138
Compound Interest with Nonannual Periods, 146
Present Value, 147
Annuities—A Level Stream, 150
Annuities Due, 157
Present Value of Complex Stream, 160
Perpetuities and Infinite Annuities, 163
Making Interest Rates Comparable, 163
The Multinational Firm: The Time Value of Money, 164
How Financial Managers Use This Material, 165
Summary, 165
Key Terms, 166
Study Questions, 166
Self-Test Problems, 167
Study Problems (Set A), 167
Web Works, 173
Integrative Problem, 174
Study Problems (Set B), 174
Self-Test Solutions, 179
6. Risk and Rates of Return, 180
Rates of Return in the Financial Markets, 182
The Effects of Inflation on Rates of Return and the Fisher Effect, 184
The Term Structure of Interest Rates, 185
Expected Return, 187
Risk, 188
Risk and Diversification, 192
Measuring Market Risk, 196
Measuring a Portfolio’s Beta, 201
The Investor’s Required Rate of Return, 203
How Financial Managers Use This Material, 207
Summary, 208
Key Terms, 209
Study Questions, 209
Self-Test Problems, 209
Study Problems (Set A), 210
7. Valuation and Characteristics of Bonds, 222
Types of Bonds, 224
Terminology and Characteristics of Bonds, 227
Definitions of Value, 231
Determinants of Value, 232
Valuation: The Basic Process, 234
Bond Valuation, 235
The Bondholder’s Expected Rate of Return (Yield to Maturity), 238
Bond Valuation: Five Important Relationships, 240
How Financial Managers Use This Material, 246
Summary, 246
Key Terms, 247
Study Questions, 247
Self-Test Problems, 248
Study Problems (Set A), 248
Web Works, 250
Integrative Problem, 250
Study Problems (Set B), 250
Self-Test Solutions, 252
8. Stock Valuation, 254
Features and Types of Preferred Stock, 256
Valuing Preferred Stock, 259
Characteristics of Common Stock, 261
Valuing Common Stock, 267
Stockholder’s Expected Rate of Return, 272
How Financial Managers Use This Material, 275
Summary, 275
Key Terms, 276
Study Questions, 277
Self-Test Problems, 277
Study Problems (Set A), 277
Web Works, 279
Integrative Problem, 279
Study Problems (Set B), 280
Self-Test Solutions, 282
Appendix 8A: The Relationship between Value and Earnings, 283
Study Problems (Set A), 286
3. Investment in Long-Term Assets, 287
9. Capital-Budgeting Decision Criteria, 288
Finding Profitable Projects, 290
Payback Period, 292
Net Present Value, 295
Profitability Index (Benefit/Cost Ratio), 298
Internal Rate of Return, 299
Ethics in Capital Budgeting, 312
A Glance at Actual Capital-Budgeting Practices, 313
How Financial Managers Use This Material, 314
Summary, 315
Key Terms, 317
Study Questions, 318
Self-Test Problems, 318
Study Problems (Set A), 318
Web Works, 320
Integrative Problem, 320
Study Problems (Set B), 321
Self-Test Solutions, 325
10. Cash Flows and Other Topics in Capital Budgeting, 326
Guidelines for Capital Budgeting, 328
An Overview of the Calculations of a Project’s Free Cash Flows, 332
Complications in Capital Budgeting: Capital Rationing and Mutually Exclusive Projects, 344
The Multinational Firm: International Complications in Calculating Expected Free Cash Flows, 353
How Financial Managers Use This Material, 353
Summary, 354
Key Terms, 355
Study Questions, 355
Self-Test Problems, 356
Study Problems (Set A), 356
Web Works, 361
Integrative Problem, 362
Study Problems (Set B), 364
11. Capital Budgeting and Risk Analysis, 370
Risk and the Investment Decision, 372
Methods for Incorporating Risk into Capital Budgeting, 376
Other Approaches to Evaluating Risk in Capital Budgeting, 383
The Multinational Firm: Capital Budgeting and Risk, 389
How Financial Managers Use This Material, 390
Summary, 390
Key Terms, 391
Study Questions, 391
Self-Test Problems, 391
Study Problems (Set A), 392
Web Works, 395
Integrative Problem, 396
Study Problems (Set B), 397
Self-Test Solutions, 403
12. Cost of Capital, 404
The Cost of Capital: Key Definitions and Concepts, 406
Determining Individual Costs of Capital, 407
The Weighted Average Cost of Capital, 414
Cost of Capital in Practice: Briggs & Stratton, 417
Calculating Divisional Costs of Capital: PepsiCo, Inc., 419
Using a Firm’s Cost of Capital to Evaluate New Capital Investments, 420
How Financial Managers Use This Material, 424
Summary, 424
Key Terms, 426
Study Questions, 426
Self-Test Problems, 427
Study Problems (Set A), 427
Integrative Problem, 429
Web Works, 430
Study Problems (Set B), 430
Self-Test Solutions, 432
13. Managing for Shareholder Value, 434
Who are the Top Creators of Shareholder Value?, 437
Business Valuation — The Key to Creating Shareholder Value, 438
Value Drivers, 443
Economic Value Added (EVA)®, 445
Paying for Performance, 448
How Financial Managers Use This Material, 456
Summary, 457
Key Terms, 459
Study Questions, 459
Self-Test Problems, 460
Study Problems (Set A), 461
Web Works, 462
Integrative Problem, 462
Study Problems(Set B), 464
Self-Test Solutions, 465
Suggested Readings, 466
4. Capital Structure and Dividend Policy, 467
14. Raising Capital in the Financial Markets, 468
The Financial Manager, Internal and External Funds, and Flexibility, 472
The Mix of Corporate Securities Sold in the Capital Market, 474
Why Financial Markets Exist, 475
Financing of Business: The Movement of Funds through the Economy, 478
Components of the U.S. Financial Market System, 481
The Investment Banker, 489
More on Private Placements: The Debt Side, 493
Flotation Costs, 494
Regulation, 495
The Multinational Firm: Efficient Financial Markets and Intercountry Risk, 499
How Financial Managers Use This Material, 500
Summary, 501
Key Terms, 502
Study Questions, 502
Web Works, 503
15. Analysis and Impact of Leverage, 504
Business and Financial Risk, 506
Break-Even Analysis, 509
Operating Leverage, 519
Financial Leverage, 524
Combination of Operating and Financial Leverage, 527
The Multinational Firm: Business Risk and Global Sales, 531
How Financial Managers Use This Material, 532
Summary, 533
Key Terms, 534
Study Questions, 534
Self-Test Problems, 535
Study Problems (Set A), 536
Web Works, 542
Integrative Problem, 542
Study Problems (Set B), 543
Self-Test Solutions, 548
16. Planning the Firm’s Financing Mix, 550
Key Terms and Getting Started, 552
A Glance at Capital Structure Theory, 553
Basic Tools of Capital Structure Management, 568
The Multinational Firm: Beware of Currency Risk, 580
How Financial Managers Use This Material, 581
Summary, 587
Key Terms, 588
Study Questions, 588
Self-Test Problems, 589
Study Problems (Set A), 590
Web Works, 595
Integrative Problem, 596
Study Problems (SET B), 597
Self-Test Solutions, 601
17. Dividend Policy and Internal Financing, 604
Dividend Payment Versus Profit Retention, 607
Does Dividend Policy Affect Stock Price?, 608
The Dividend Decision in Practice, 621
Dividend Payment Procedures, 625
Stock Dividends and Stock Splits, 625
Stock Repurchases, 628
The Multinational Firm: The Case of Low Dividend Payments—So Where Do We Invest?, 631
How Financial Managers Use This Material, 633
Summary, 633
Key Terms, 635
Study Questions, 635
Self-Test Problems, 635
Study Problems (Set A), 636
Web Works, 638
Integrative Problem, 638
Study Problems (Set B), 640
Self-Test Solutions, 642
5. Working-Capital Management and Special Topics in Finance, 643
18. Working-Capital Management and Short-Term Financing, 644
Managing Current Assets and Liabilities, 646
Financing Working Capital with Current Liabilities, 647
Appropriate Level of Working Capital, 648
Hedging Principles, 648
Cash Conversion Cycle, 651
Estimation of the Cost of Short-Term Credit, 653
Sources of Short-Term Credit, 654
Multinational Working-Capital Management, 661
How Financial Managers Use This Material, 662
Summary, 662
Key Terms, 664
Study Questions, 664
Self-Test Problems, 665
Study Problems (Set A), 665
Web Works, 668
Study Problems (Set B), 668
Self-Test Solutions, 671
19. Cash and Marketable Securities Management, 672
What are Liquid Assets?, 674
Why a Company Holds Cash, 674
Cash-Management Objectives and Decisions, 676
Collection and Disbursement Procedures, 678
Composition of Marketable Securities Portfolio, 684
The Multinational Firm: The Use of Cash and Marketable Securities, 691
How Financial Managers Use This Material, 691
Summary, 691
Key Terms, 692
Study Questions, 692
Self-Test Problems, 693
Study Problems (Set A), 694
Web Works, 697
Integrative Problem, 697
Study Problems (Set B), 698
Self-Test Solutions, 702
20. Accounts Receivable and Inventory Management, 704
Accounts Receivable Management, 706
Inventory Management, 716
TQM and Inventory-Purchasing Management: The New Supplier Relationships, 724
How Financial Managers Use This Material, 727
Summary, 728
Key Terms, 728
Study Questions, 729
Self-Test Problems, 729
Study Problems (Set A), 730
Integrative Problem, 732
Study Problems (Set B), 733
Self-Test Solutions, 736
6. Special Topics in Finance, 737
21. Risk Management, 738
Futures, 740
Options, 746
Currency Swaps, 757
The Multinational Firm and Risk Management, 758
How Financial Managers Use This Material, 759
Summary, 759
Key Terms, 760
Study Questions, 760
Study Problems (Set A), 760
Web Works, 760
Integrative Problem, 761
Study Problems (Set B), 761
Appendix 21A: Convertible Securities and Warrants, 762
Convertible Securities, 762
Key Terms, 768
Study Questions, 768
Self-Test Problems, 768
Study Problems (Set A), 769
Study Problems (Set B), 770
Self-Test Solutions, 771
22. International Business Finance, 772
The Globalization of Product and Financial Markets, 774
Exchange Rates, 775
Interest-Rate Parity Theory, 785
Purchasing-Power Parity, 785
Exposure to Exchange Rate Risk, 787
Multinational Working-Capital Management, 791
International Financing and Capital-Structure Decisions, 793
Direct Foreign Investment, 794
How Financial Managers Use This Material, 796
Summary, 796
Key Terms, 797
Study Questions, 798
Self-Test Problems, 798
Study Problems (Set A), 799
Web Works, 799
Integrative Problem, 800
Study Problems (Set B), 801
Self-Test Solutions, 801
A. Using a Calculator, A-1
I. Introductory Comments, A-1
B. Compound Sum of $1, A-11
C. Present Value of $1, A-13
D. Sum of an Annuity of $1 for n Periods, A-15
E. Present Value of an Annuity of $1 for n Periods, A-17
F. Solutions For Selected End-of-Chapter Problems, A-19
CHAPTER 1, A-19
CHAPTER 2, A-19
CHAPTER 3, A-19
CHAPTER 4, A-19
CHAPTER 5, A-19
CHAPTER 6, A-19
CHAPTER 7, A-19
CHAPTER 8, A-19
CHAPTER 9, A-19
CHAPTER 10, A-20
CHAPTER 11, A-20
CHAPTER 12, A-20
CHAPTER 13, A-20
CHAPTER 14, A-20
CHAPTER 15, A-20
CHAPTER 16, A-20
CHAPTER 17, A-20
CHAPTER 18, A-20
CHAPTER 19, A-21
CHAPTER 20, A-21
CHAPTER 21, A-21
CHAPTER 22, A-21
CHAPTER 23, A-21
CHAPTER 24, A-21
Glossary, G-1
Organization Index, I-1-1
Subject Index, I-2-1

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