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Foundations of Finance: The Logic and Practice of Financial Management, Sixth Edition

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Foundations of Finance: The Logic and Practice of Financial Management, Sixth Edition

by Arthur J. Keown; John D. Martin; J. William Petty

Publisher: Prentice Hall

Copyright Year: 2008

Publishing Date: 2007/06/11

eText ISBN-10: 0-13-613675-3

eText ISBN-13: 978-0-13-613675-0

Print ISBN-10: 0-13-233922-6

Print ISBN-13: 978-0-13-233922-3

Course: Corporate Finance

Pages: 624

eTextbook $46.00

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Table of Contents | Description

Instructor Resources | Student Resources

ABOUT THIS TITLE - TABLE OF CONTENTS

About the Authors, vi

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

Review Questions, 26

Self-Test Problem, 26

Study Problems, 26

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

Review Questions, 58

Study Problems, 58

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

Review Questions, 83

Self-Test Problem, 84

Study Problems, 85

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

Review Questions, 120

Self-Test Problems, 120

Study Problems, 122

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 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

Review Questions, 161

Self-Test Problems, 161

Study Problems, 161

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

How Did You Do? Computing an Expected Rate of Return, 194

Review Questions, 194

Self-Test Problems, 194

Study Problems, 195

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

Review Questions, 223

Self-Test Problems, 224

Study Problems, 224

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

Review Questions, 251

Self-Test Problems, 251

Study Problems, 252

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

Review Questions, 288

Self-Test Problem, 289

Study Problems, 289

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

Review Questions, 323

Self-Test Problem, 324

Study Problems, 324

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

Review Questions, 362

Self-Test Problems, 363

Study Problems, 364

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

Review Questions, 407

Self-Test Problem, 408

Study Problems, 408

Self-Test Solution, 413

Chapter 13. Dividend Policy and Internal Financing, 415

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

Review Questions, 432

Self-Test Problems, 432

Study Problems, 432

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

Review Questions, 450

Self-Test Problems, 451

Study Problems, 452

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

Review Questions, 479

Self-Test Problems, 480

Study Problems, 481

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

Review Questions, 509

Self-Test Problems, 510

Study Problems, 510

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

Review Questions, 539

Self-Test Problem, 539

Study Problems, 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

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ABOUT THIS TITLE - DESCRIPTION

For the introductory Finance course required at all undergraduate business schools. Keown enables students to see the big picture by letting them understand the logic that drives finance rather than having them memorize formulas.

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