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Copyright, iv
About the Authors, vi
Preface, xxi
Part 1. The Scope and Environment of Financial Management, 2
Chapter 1. An Introduction to the Foundations of Financial Management—The Ties That Bind, 5
The Goal of the Firm, 6
The Legal Forms of Business Organization, 7
Federal Income Taxation, 10
Ten Principles that Form the Foundations of Financial Management, 15
Principle 1: The Risk–Return Trade-Off—We Won’t Take On Additional Risk Unless We Expect to Be Compensated with Additional Return, 15
Principle 2: The Time Value of Money—A Dollar Received Today Is Worth More Than a Dollar Received in the Future, 16
Principle 3: Cash—Not Profits—Is King, 16
Principle 4: Incremental Cash Flows—It’s Only What Changes That Counts, 17
Principle 5: The Curse of Competitive Markets—Why It’s Hard to Find Exceptionally Profitable Projects, 17
Principle 6: Efficient Capital Markets—The Markets Are Quick and the Prices Are Right, 18
Principle 7: The Agency Problem—Managers Won’t Work for the Firm’s Owners Unless It’s in Their Best Interest, 19
Principle 8: Taxes Bias Business Decisions, 20
Principle 9: All Risk Is Not Equal—Some Risk Can Be Diversified Away, and Some Can Not, 20
Principle 10: Ethical Behavior Means Doing the Right Thing, but Ethical Dilemmas Are Everywhere in Finance, 21
Finance and the Multinational Firm: The New Role, 22
Ethics in Financial Management: The Enron Lessons: Trust, 23
Summary, 24
Key Terms, 25
Review Questions, 26
Self-Test Problem, 26
Study Problems, 26
Web Works, 28
Mini Case, 28
Self-Test Solution, 29
Chapter 2. The Financial Markets and Interest Rates, 31
Components of the U.S. Financial Market System, 32
Finance at Work: The New York Stock Exchange—the Exchange in Change, 37
The Investment Banker, 38
Across the Hall: Management and Selection Criteria for an Investment Banker, 39
Private Placements, 42
Flotation Costs, 43
Regulation Aimed at Making the Goal of the Firm Work: The Sarbanes-Oxley Act, 43
Rates of Return in the Financial Markets, 44
Interest Rate Levels in Recent Periods, 45
Interest Rate Determinants in a Nutshell, 48
Can You Do It? Solving for the Real Rate of Interest, 51
How Did You Do? Solving for the Real Rate of Interest, 52
The Term Structure of Interest Rates, 52
Can You Do It? Solving for the Nominal Rate of Interest, 53
How Did You Do? Solving for the Nominal Rate of Interest, 54
Finance and the Multinational Firm: Efficient Financial Markets and Intercountry Risk, 56
Summary, 56
Key Terms, 57
Review Questions, 58
Study Problems, 58
Web Works, 59
Mini Case, 59
Chapter 3. Understanding Financial Statements and Cash Flows, 61
The Income Statement, 62
Finance at Work: Everyone’s a CFO, 64
Can You Do It? Preparing an Income Statement, 66
The Balance Sheet, 66
How Did You Do? Preparing an Income Statement, 67
Finance at Work: Want to Talk to the CFO of the Largest Computer Systems Manufacturer in the World?, 68
Finance at Work: Lehman Brothers Announces Second Quarter 2006 Earnings, 70
Can You Do It? Preparing a Balance Sheet, 74
How Did You Do? Preparing a Balance Sheet, 75
Measuring Cash Flows, 75
Can You Do It?, 76
How Did You Do?, 78
Can You Do It? Measuring Cash Flows, 81
How Did You Do? Measuring Cash Flows, 82
Summary, 82
Key Terms, 83
Review Questions, 83
Self-Test Problem, 84
Study Problems, 85
Web Works, 89
Mini Case, 89
Self-Test Solution, 91
Appendix A Davies Inc. Statement of Cash Flows, 93
Chapter 4. Evaluating a Firm’s Financial Performance, 95
The Purpose of Financial Analysis, 97
Measuring Key Financial Relationships, 99
Can You Do It? Evaluating Disney’s Liquidity, 103
How Did You Do? Evaluating Disney’s Liquidity, 104
Finance at Work: Managing by the Numbers, 106
Can You Do It? Evaluating Disney’s Operating Return on Assets, 107
How Did You Do? Evaluating Disney’s Operating Return on Assets, 108
Can You Do It? Evaluating Disney’s Financing Decisions, 109
How Did You Do? Evaluating Disney’s Financing Practices, 110
Can You Do It? Evaluating Disney’s Return on Equity, 112
How Did You Do? Evaluating Disney’s Return on Equity, 113
Can You Do It? Computing Disney’s Price/Earnings Ratio and Price/Book Ratio, 114
How Did You Do? Computing Disney’s Price/Earnings Ratio and Price/Book Ratio, 117
Finance at Work: Using Economic Value Added to Measure a Firm’s Financial Performance, 117
Can You Do It? Calculating Disney’s Economic Value Added, 118
The Limitations Of Financial Ratio Analysis, 118
How Did You Do? Calculating Disney’s Economic Value Added, 119
Summary, 119
Key Terms, 120
Review Questions, 120
Self-Test Problems, 120
Study Problems, 122
Web Works, 126
Mini Case, 126
Self-Test Solutions, 126
Part 2. The Valuation of Financial Assets, 128
Chapter 5. The Time Value of Money, 131
Compound Interest and Future Value, 132
Tables, Calculators, and Spreadsheets—Three Alternatives to Solving Time Value of Money Problems, 134
Present Value, 139
Can You Do It? Solving for the Present Value with Two Flows in Different Years, 142
How Did You Do? Solving for the Present Value with Two Flows in Different Years, 143
Annuities, 144
Annuities Due, 149
Amortized Loans, 150
Making Interest Rates Comparable, 153
Can You Do It? How Much Can You Afford to Spend on a House? An Amortized Loan with Monthly Payments, 155
How Did You Do? How Much Can You Afford to Spend on a House? An Amortized Loan with Monthly Payments, 156
The Present Value of an Uneven Stream, 157
Perpetuities, 158
The Multinational Firm: The Time Value of Money, 158
Summary, 160
Key Terms, 160
Review Questions, 161
Self-Test Problems, 161
Study Problems, 161
Web Works, 167
Mini Case, 167
Self-Test Solutions, 169
Chapter 6. The Meaning and Measurement of Risk and Return, 171
Expected Return Defined and Measured, 172
Risk Defined and Measured, 173
Can You Do It? Computing Expected Return, 173
How Did You Do? Computing Expected Return, 174
Ethics in Financial Management: The Tyco Scandal: When It Comes to Ethics, Leadership Matters, 176
Can You Do It? Computing The Standard Deviation, 177
Finance at Work: A Different Perspective of Risk, 177
How Did You Do? Standard Deviation, 178
Rates of Return: The Investor’s Experience, 178
Finance at Work: Want to Get Better Returns with Less Risk? Try Midcaps, 179
Risk And Diversification, 180
Finance at Work: Three Wise Men of Finance: Their Insights into the Links between Risk and Return Revolutionized Investing Forever, 185
Can You Do It? Estimating Beta, 186
How Did You Do? Estimating Beta, 188
The Investor’s Required Rate of Return, 190
Finance at Work: Does Beta Always Work?, 191
Can You Do It? Computing an Expected Rate of Return, 193
Summary, 193
How Did You Do? Computing an Expected Rate of Return, 194
Key Terms, 194
Review Questions, 194
Self-Test Problems, 194
Study Problems, 195
Web Works, 198
Mini Case, 198
Self-Test Solutions, 200
Chapter 7. The Valuation and Characteristics of Bonds, 203
Types of Bonds, 204
Terminology and Characteristics of Bonds, 207
Finance at Work: Ford’s Debt Rating Gets Downgraded Two Notches, 209
Defining Value, 210
What Determines Value?, 210
Ethics in Financial Management: Keeping Perspective, 212
Valuation: The Basic Process, 212
Can You Do It? Computing an Asset’s Value, 213
Valuing Bonds, 213
How Did You Do? Computing an Asset’s Value, 214
Can You Do It? Computing a Bond’s Value, 216
Bond Yields, 216
How Did You Do? Computing a Bond’s Value, 217
Finance at Work: AT&T Bond Prices Fall, Thanks to WorldCom, 217
Bond Valuation: Three Important Relationships, 218
Can You Do It? Computing the Yield to Maturity and Current Yield, 219
How Did You Do? Computing the Yield to Maturity and Current Yield, 220
Summary, 222
Key Terms, 223
Review Questions, 223
Self-Test Problems, 224
Study Problems, 224
Web Works, 225
Mini Case, 226
Self-Test Solutions, 226
Chapter 8. The Valuation and Characteristics of Stock, 229
Preferred Stock, 230
Finance at Work: Reading A Stock Quote in the Wall Street Journal, 232
Can You Do It? Valuing Preferred Stock, 233
How Did You Do? Valuing Preferred Stock, 234
Common Stock, 234
Finance at Work: Does Stock by Any Other Name Smell as Sweet?, 235
Finance at Work: What Does a Stock Look Like?, 236
Finance at Work: What Do You Tell Your Shareholders?, 237
Can You Do It? Measuring Johnson & Johnson’s Growth Rate, 239
How Did You Do? Measuring Johnson & Johnson’s Growth Rate, 240
Can You Do It? Calculating Common Stock Value, 241
How Did You Do? Calculating Common Stock Value, 242
Finance at Work: A Darker Side of Starbucks, 242
Can You Do It? Computing Stock Value (A Free Cash Flow Approach), 245
The Expected Rate of Return of Stockholders, 245
Finance at Work: Earnings Per Share? Phooey!, 246
How Did You Do? Computing Stock Value (A Free Cash Flow Approach), 247
Can You Do It? Computing the Expected Rate of Return, 248
How Did You Do? Computing the Expected Rate of Return, 249
Summary, 249
Key Terms, 251
Review Questions, 251
Self-Test Problems, 251
Study Problems, 252
Web Works, 253
Mini Case, 254
Self-Test Solutions, 255
Part 3. Investment in Long - Term Assets, 256
Chapter 9. Capital-Budgeting Techniques and Practice, 259
Finding Profitable Projects, 260
Capital-Budgeting Decision Criteria, 261
Finance at Work: Finding Profitable Projects in Competitive Markets—Creating Them by Developing a Cost Advantage, 263
Can You Do It? Determining the NPV of a Project, 266
Across the Hall: Marketing’s Capital-Budgeting Role, 266
How Did You Do? Determining the NPV of a Project, 267
Can You Do It? Determining the IRR of a Project, 272
How Did You Do? Determining the IRR of a Project, 273
Capital Rationing, 278
Ranking Mutually Exclusive Projects, 279
Ethics in Financial Management: The Financial Downside of Poor Ethical Behavior, 284
Ethics in Capital Budgeting, 284
A Glance at Actual Capital-Budgeting Practices, 285
Finance and the Multinational Firm: Capital Budgeting, 285
Summary, 286
Key Terms, 288
Review Questions, 288
Self-Test Problem, 289
Study Problems, 289
Web Works, 292
Mini Case, 292
Self-Test Solution, 294
Chapter 10. Cash Flows and Other Topics in Capital Budgeting, 297
Guidelines for Capital Budgeting, 298
Finance at Work: Universal Studios, 301
An Overview of the Calculations of a Project’s Free Cash Flows, 301
Can You Do It? Calculating Operating Cash Flows, 307
How Did You Do? Calculating Operating Cash Flows, 308
Across the Hall: Test-Marketing New Products, 309
Can You Do It? Calculating Free Cash Flows, 311
Options In Capital Budgeting, 311
How Did You Do? Calculating Free Cash Flows, 312
Risk and the Investment Decision, 313
Incorporating Risk into Capital Budgeting, 316
Examining a Project’s Risk through Simulation, 319
Finance and the Multinational Firm: Calculating Cash Flows Amid the International Dimension of Risk, 322
Summary, 322
Key Terms, 323
Review Questions, 323
Self-Test Problem, 324
Study Problems, 324
Web Works, 328
Mini Case, 329
Self-Test Solution, 331
Chapter 11. The Cost of Capital, 333
The Cost of Capital: Key Definitions and Concepts, 334
Can You Do It? Determining How Flotation Costs Affect the Cost of Capital, 335
Determining the Costs of the Individual Sources of Capital, 335
How Did You Do? Determining How Flotation Costs Affect the Cost of Capital, 336
Can You Do It? Calculating the Cost of Debt Financing, 339
Can You Do It? Calculating the Cost of Preferred Stock Financing, 339
How Did You Do? Calculating the Cost of Debt Financing, 340
How Did You Do? Calculating the Cost of Preferred Stock Financing, 340
Can You Do It? Calculating the Cost of New Common Stock Using the Dividend Growth Model, 343
Can You Do It? Calculating the Cost of Common Stock Using the CAPM, 343
Finance at Work: IPOS: Should a Firm Go Public?, 344
The Weighted Average Cost of Capital, 344
How Did You Do? Calculating the Cost of New Common Stock Using the Dividend Growth Model, 345
How Did You Do? Calculating the Cost of Common Stock Using the CAPM, 345
Calculating Divisional Costs of Capital: Pepsico Inc., 347
Can You Do It? Calculating the Weighted Average Cost of Capital, 348
Finance at Work: The Pillsbury Company Adopts EVA with a Grassroots Education Program, 349
How Did You Do? Calculating the Weighted Average Cost of Capital, 350
Finance at Work: Weighted Average Costs of Capital Estimates: 1988–2003, 351
Using a Firm’s Cost of Capital to Evaluate New Capital Investments, 351
Can You Do It? Using Divisional Costs of Capital to Evaluate New Investments, 353
Shareholder Value-Based Management, 353
How Did You Do? Using Divisional Costs of Capital to Evaluate New Investments, 355
Finance at Work: Two Firms Explain their Goals and Objectives in Adopting EVA, 356
Can You Do It? Calculating a Firm’s EVA, 357
How Did You Do? Calculating a Firm’s EVA, 358
Finance at Work: Tying Incentive Compensation to Economic Value Added, 358
Finance and the Multinational Firm: Why Do Interest Rates Differ Between Countries?, 358
Can You Do It? Evaluating Interest Rate Parity across Countries, 359
How Did You Do? Evaluating Interest Rate Parity across Countries, 360
Summary, 360
Key Terms, 362
Review Questions, 362
Self-Test Problems, 363
Study Problems, 364
Web Works, 367
Mini Case, 368
Self-Test Solutions, 368
Part 4. Capital Structure and Dividend Policy, 372
Chapter 12. Determining the Financing Mix, 375
Business and Financial Risk, 377
Breakeven Analysis, 378
Across the Hall: Accounting—Cost Structure, Forecasting, and Investment, 379
Can You Do It? Analyzing the Break-Even Sales Level, 383
Operating Leverage, 383
How Did You Do? Analyzing the Break-Even Sales Level, 384
Can You Do It? Analyzing the Effects of Operating Leverage, 384
How Did You Do? Analyzing the Effects of Operating Leverage, 385
Can You Do It? Analyzing the Effects of Financial Leverage, 385
Financial Leverage, 385
How Did You Do? Analyzing the Effects of Financial Leverage, 386
Can You Do It? Analyzing the Combined Effects of Operating and Financial Leverage, 387
Combining Operating and Financial Leverage, 387
How Did You Do? Analyzing the Combined Effects of Operating and Financial Leverage, 388
Finance at Work: The Enron Lessons: Leverage, 389
Planning The Financing Mix, 389
A Quick Look at Capital Structure Theory, 390
The Moderate View: The Saucer-Shaped Cost of Capital Curve, 394
Firm Value and Agency Costs, 395
The Basic Tools of Capital Structure Management, 398
Finance at Work: The Walt Disney Company on Capital Costs and Capital Structure, 402
A Glance at Actual Capital Structure Management, 403
Finance and the Multinational Firm: Business Risk and Global Sales, 405
Summary, 406
Key Terms, 407
Review Questions, 407
Self-Test Problem, 408
Study Problems, 408
Web Works, 411
Mini Case, 411
Self-Test Solution, 413
Chapter 13. Dividend Policy and Internal Financing, 415
Key Terms, 416
Does a Firm’s Dividend Policy Affect the Company’s Stock Price?, 417
The Dividend Decision in Practice, 424
Alternative Dividend Policies, 424
Dividend Payment Procedures, 425
Stock Dividends and Stock Splits, 426
Stock Repurchases, 427
Finance at Work: Companies Increasingly Use Share Repurchases to Distribute Cash to their Stockholders, 429
Finance and the Multinational Firm: The Case of Low Dividend Payments; So Where Do We Invest?, 430
Summary, 430
Key Terms, 431
Review Questions, 432
Self-Test Problems, 432
Study Problems, 432
Web Works, 433
Mini Case, 434
Self-Test Solutions, 435
Part 5. Working - Capital Management and International Business Finance, 436
Chapter 14. Short-Term Financial Planning, 439
Financial Forecasting, 440
Can You Do It? Percent of Sales Forecasting, 444
How Did You Do? Percent of Sales Forecasting, 445
Limitations of the Percent of Sales Forecasting Method, 446
Constructing and Using a Cash Budget, 447
Ethics in Financial Management: To Bribe or Not to Bribe, 448
Ethics in Financial Management: Being Honest About the Uncertainty of the Future, 449
Summary, 450
Key Terms, 450
Review Questions, 450
Self-Test Problems, 451
Study Problems, 452
Web Works, 457
Mini Case, 457
Self-Test Solutions, 458
Chapter 15. Working-Capital Management, 461
Managing Current Assets and Liabilities, 462
The Appropriate Level of Working Capital, 464
The Cash Conversion Cycle, 466
Estimating the Cost of Short-Term Credit Using the Approximate Cost-of-Credit Formula, 468
Can You Do It? The Approximate Cost of Short-Term Credit, 469
Sources of Short-Term Credit, 469
Finance at Work: Managing Working Capital by Trimming Receivables, 470
How Did You Do? The Approximate Cost of Short-Term Credit, 471
Can You Do It? The Cost of Short-Term Credit (Considering Compounding Effects), 472
How Did You Do? The Cost of Short-Term Credit (Considering Compounding Effects), 473
Multinational Working-Capital Management, 478
Summary, 478
Key Terms, 479
Review Questions, 479
Self-Test Problems, 480
Study Problems, 481
Web Works, 484
Self-Test Solutions, 485
Chapter 16. Current Asset Management, 487
Why a Company Holds Cash, 488
Cash Management Objectives and Decisions, 490
Collection and Disbursement Procedures, 491
Evaluating the Costs of Cash Management Services, 495
The Composition of a Marketable-Securities Portfolio, 495
Accounts-Receivable Management, 499
Inventory Management, 503
Summary, 508
Key Terms, 509
Review Questions, 509
Self-Test Problems, 510
Study Problems, 510
Web Works, 515
Mini Case, 516
Self-Test Solutions, 517
Chapter 17. International Business Finance, 519
The Globalization of Product and Financial Markets, 520
Exchange Rates, 520
Can You Do It? Using the Spot Rate to Calculate a Foreign Currency Payment, 525
How Did You Do? Using the Spot Rate to Calculate a Foreign Currency Payment, 526
Can You Do It? Computing a Percent-Per-Annum Premium, 527
Across the Hall: Marketing, 528
How Did You Do? Computing a Percent-Per-Anum Premium, 529
Interest Rate Parity Theory, 529
Purchasing-Power Parity Theory, 530
Exposure to Exchange Rate Risk, 531
Multinational Working-Capital Management, 534
International Financing and Capital Structure Decisions, 535
Direct Foreign Investment, 536
Summary, 538
Key Terms, 538
Review Questions, 539
Self-Test Problem, 539
Study Problems, 540
Web Works, 540
Mini Case, 540
Self-Test Solution, 541
Appendix A. Using a Calculator, 543
Appendix B. Compound Sum of $1 - FVIF_{i%, n years}, 555
Appendix C. Present Value of $1 - PVIF_{i%, n years}, 557
Appendix D. Sum of an Annuity of $1 for n Periods - FVIFA_{i%, n years}, 559
Appendix E. Present Value of an Annuity of $1 for n Periods - PVIFA_{i%, n years}, 561
Appendix F. Check Figures for Selected End-of-Chapter Study Problems, 563
Glossary, 567
Indexes, 575

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