Contemporary Financial Management

by Moyer, R. Charles; McGulgan, James R.; Kretlow, William J.

• ISBN13: 9780314043429
• ISBN10: 031404342X
• Edition: 6th
• Format: Paperback
• Copyright: 1994-11-02
• Publisher: South-Western College Pub

Summary

The ninth edition of this successful text provides a comprehensive and contemporary introduction to financial management, focusing on shareholder wealth maximization and cash flow management, the international aspects of financial management, the ethical behavior of managers, and the increased impact of the Internet in business practice. In addition, content has been added or enhanced to reflect the changing focus on finance areas including topics such as discounted payback period, dividend practices of foreign firms, risk management, and real options.

Author Biography

R. Charles Moyer holds the Integon Chair in Finance and is Dean of the Babcock Graduate School of Management, Wake Forest University James R. Mcguigan owns and operates his own numismatic investment firm William J. Kretlow is an Associate Professor of Finance at the University of Houston

Table of Contents

Introduction	p. 1
The Role and Objective of Financial Management	p. 2
Key Chapter Concepts	p. 2
Financial Challenge: Financial Management Questions	p. 3
Introduction	p. 4
Forms of Business Organization	p. 5
Foundation Concept: Maximizing Shareholder Wealth as the Primary Goal	p. 7
Maximization of Shareholder Wealth: Managerial Strategies	p. 12
Foundation Concept: Cash Flow	p. 16
Ethical Issues: The Practice of Financial Management	p. 18
Foundation Concept: Net Present Value Rule	p. 20
Organization of the Financial Management Function	p. 20
Entrepreneurial Issues: Shareholder Wealth Maximization	p. 23
Financial Management and Other Disciplines	p. 24
Career Opportunities in Finance	p. 25
Professional Finance Affiliations	p. 28
Organization of the Text	p. 28
Summary	p. 30
Questions and Topics for Discussion	p. 31
The Domestic and International Financial Marketplace	p. 33
Key Chapter Concepts	p. 33
Financial Challenge: Long-Term Capital Management, L.P.	p. 34
Introduction	p. 35
Income Taxes and Financial Management	p. 35
An Overview of the U.S. Financial System	p. 36
The Structure and Operation of U.S. Security Markets	p. 42
The Global Economy and Multinational Enterprises	p. 44
Ethical Issues: Insider Trading	p. 45
Foreign Currency Markets and Exchange Rates	p. 46
Foundation Concept: Market Efficiency	p. 52
Foundation Concept: Holding Period Returns	p. 56
International Issues: Market Efficiency Outside the United States	p. 57
Summary	p. 58
Questions and Topics for Discussion	p. 58
Self-Test Problems	p. 59
Problems	p. 59
Solutions to Self-Test Problems	p. 61
Taxes	p. 63
Introduction	p. 63
Corporate Income Taxes	p. 63
Entreprenerial Issues: S Corporations	p. 65
Questions and Topics for Discussion	p. 66
Self-Test Problems	p. 66
Problems	p. 66
Solutions to Self-Test Problems	p. 68
Evaluation of Financial Performance	p. 69
Key Chapter Concepts	p. 69
Financial Challenge: Earnings Management and Financial Performance Measurement	p. 70
Introduction	p. 71
Uses of Financial Analysis	p. 71
Interpreting Financial Ratios	p. 72
Basic Classifications of Financial Ratios	p. 72
Summary of Financial Ratio Analysis	p. 87
Trend Analysis	p. 90
Analysis of Profitability: Return on Investment	p. 90
Foundation Concept: Analyzing Profitability Through Return on Stockholders' Equity	p. 93
Sources of Comparative Financial Data	p. 94
A Word of Caution About Financial Ratio Analysis	p. 95
Earnings and Balance Sheet Quality and Financial Analysis	p. 96
Market Value Added: An Alternative Measure of Performance	p. 98
Inflation and Financial Statement Analysis	p. 100
International Issues: Financial Analysis of Multinational Corporations	p. 101
Foundation Concept: Cash Flow Analysis	p. 102
Summary	p. 108
Questions and Topics for Discussion	p. 109
Self-Test Problems	p. 110
Problems	p. 111
Solutions to Self-Test Problems	p. 120
Determinants of Valuation	p. 123
The Time Value of Money	p. 124
Key Chapter Concepts	p. 124
Financial Challenge: Powerball Opportunity	p. 125
Introduction	p. 125
Interest	p. 126
Simple Interest	p. 127
Compound Interest and Future Value	p. 129
Present Value	p. 133
Annuities	p. 137
Present Value: Some Additional Cash Flow Patterns	p. 146
Compounding Periods and Effective Interest Rates	p. 150
Solving the Financial Challenge	p. 154
Summary	p. 154
Questions and Topics for Discussion	p. 156
Self-Test Problems	p. 157
Problems	p. 157
Solutions to Self-Test Problems	p. 164
An Integrative Case Problem: Time Value of Money	p. 166
Continuous Compounding and Discounting	p. 168
Continuous Compounding	p. 168
Continuous Discounting	p. 169
Effective Rate Calculations	p. 169
Self-Test Problems	p. 170
Problems	p. 170
Solutions to Self-Test Problems	p. 170
Analysis of Risk and Return	p. 171
Key Chapter Concepts	p. 171
Financial Challenge: Risk at a Coca-Cola Company	p. 172
Introduction	p. 173
Meaning and Measurement of Risk	p. 173
Foundation Concept: Relationship Between Risk and Return	p. 180
Investment Diversification and Portfolio Risk Analysis	p. 187
Portfolio Risk and the Capital Asset Pricing Model	p. 196
International Issues: Diversification and Multinational Corporations	p. 205
Other Dimensions of Risk	p. 205
Ethical Issues: High-Risk Securities	p. 206
Summary	p. 207
Questions and Topics for Discussion	p. 208
Self-Test Problems	p. 210
Problems	p. 211
Solutions to Self-Test Problems	p. 216
Fixed-Income Securities: Characteristics and Valuation	p. 218
Key Chapter Concepts	p. 218
Financial Challenge: Marriott Corporation: Corporate Restructuring and Bond Valuation	p. 219
Introduction	p. 220
Characteristics of Long-Term Debt	p. 221
International Issues: The International Bond Market	p. 232
Foundation Concept: Valuation of Assets	p. 233
Bond Valuation	p. 236
Ethical Issues: Leveraged Buyouts and Bond Values	p. 243
Characteristics of Preferred Stock	p. 244
Valuation of Preferred Stock	p. 247
Summary	p. 248
Questions and Topics for Discussion	p. 249
Self-Test Problems	p. 250
Problems	p. 251
Solutions to Self-Test Problems	p. 255
Bond Refunding Analysis	p. 257
The Bond Refunding Process	p. 257
Problems	p. 260
Common Stock: Characteristics, Valuation, and Issuance	p. 262
Key Chapter Concepts	p. 262
Financial Challenge: Amazon.com	p. 263
Introduction	p. 264
Characteristics of Common Stock	p. 265
The Security Offering Process: Role of the Investment Banker	p. 271
International Issues: Global Equity Markets	p. 277
Foundation Concept: Valuation of Common Stock	p. 278
Applications of the General Dividend Valuation Model	p. 281
Entrepreneurial Issues: Valuation of Closely Held Firms	p. 284
Summary	p. 288
Questions and Topics for Discussion	p. 289
Self-Test Problems	p. 290
Problems	p. 290
Solutions to Self-Test Problems	p. 295
The Capital Investment Decision	p. 297
Capital Budgeting and Cash Flow Analysis	p. 298
Key Chapter Concepts	p. 298
Financial Challenge: Ford Motor Company's Investment in Jaguar Cars, Ltd.	p. 299
Introduction	p. 300
Key Terms and Concepts in Capital Budgeting	p. 301
Basic Framework for Capital Budgeting	p. 302
Generating Capital Investment Project Proposals	p. 304
Foundation Concept: Principles of Estimating Cash Flows	p. 306
Net Investment (NINV)	p. 308
Net (Operating) Cash Flows	p. 309
Asset Expansion Projects	p. 314
Asset Replacement Projects	p. 316
Problems in Cash Flow Estimation	p. 319
The Practice of Cash Flow Estimation for Capital Budgeting	p. 319
Ethical Issues: Cash Flow Estimation Biases	p. 320
Summary	p. 321
Questions and Topics for Discussion	p. 322
Self-Test Problems	p. 322
Problems	p. 323
Solutions to Self-Test Problems	p. 328
Depreciation	p. 330
Introduction to Depreciation	p. 330
Accelerated Depreciation	p. 332
Modified Accelerated Cost Recovery System	p. 332
Real Property	p. 335
Questions and Topics for Discussion	p. 335
Problems	p. 335
Capital Budgeting: Decision Criteria and Real Option Considerations	p. 337
Key Chapter Concepts	p. 337
Financial Challenge: Real Options at Enron Corporation	p. 338
Introduction	p. 339
Foundation Concept: Decision Models for Evaluating Alternatives	p. 339
Capital Rationing and the Capital Budgeting Decision	p. 352
Reviewing and Postauditing an Accepted Project	p. 355
A Comprehensive Example of Capital Budgeting: Opening a New Bank Branch	p. 356
Inflation and Capital Expenditures	p. 358
Real Options in Capital Budgeting	p. 359
International Issues: A Framework for International Capital Expenditure Decisions	p. 360
Entrepreneurial Issues: Capital Budgeting	p. 362
Ethical Issues: The Use of Shareholder Resources	p. 363
Summary	p. 365
Questions and Topics for Discussion	p. 365
Self-Test Problems	p. 366
Problems	p. 366
Solutions to Self-Test Problems	p. 373
An Integrative Case Problem: Capital Budgeting	p. 375
Mutually Exclusive Investments Having Unequal Lives	p. 376
Replacement Chains	p. 376
Equivalent Annual Annuities	p. 378
Problems	p. 379
Capital Budgeting and Risk	p. 381
Key Chapter Concepts	p. 381
Financial Challenge: The Boeing 747 Superjumbo Jet	p. 382
Introduction	p. 382
Total Project Risk versus Portfolio Risk	p. 383
Adjusting for Total Project Risk	p. 384
Adjusting for Beta Risk in Capital Budgeting	p. 394
International Issues: Special Elements of Capital Budgeting Risk	p. 398
Ethical Issues: Johnson and Johnson and Proprietary Competitive Information	p. 399
Summary	p. 399
Questions and Topics for Discussion	p. 400
Self-Test Problems	p. 401
Problems	p. 402
An Integrative Case Problem: Capital Budgeting and Risk Analysis	p. 409
Solutions to Self-Test Problems	p. 410
The Cost of Capital, Capital Structure, and Dividend Policy	p. 411
The Cost of Capital	p. 412
Key Chapter Concepts	p. 412
Financial Challenge: Cost of Equity Capital for Mountain Fuel Supply Company	p. 413
Introduction	p. 414
Summary of Notation	p. 414
Foundation Concept: Weighted Cost of Capital	p. 415
Relative Costs of Capital	p. 417
Computing the Component Costs of Capital	p. 419
Divisional Costs of Capital	p. 429
Determining the Weighted (Marginal) Cost of Capital Schedule	p. 431
International Issues: The Cost of Capital for Multinational Companies	p. 434
Determining the Optimal Capital Budget	p. 434
Entrepreneurial Issues: The Cost of Capital	p. 436
Cost of Depreciation-Generated Funds	p. 437
Summary	p. 437
Questions and Topics for Discussion	p. 438
Self-Test Problems	p. 439
Problems	p. 439
Solutions to Self-Test Problems	p. 447
An Integrative Case Problem: Cost of Capital	p. 448
Capital Structure Concepts	p. 450
Key Chapter Concepts	p. 450
Financial Challenge: Optimal Capital Structure in the Airline Industry: U.S. Airways vs. Southwest Airlines	p. 451
Introduction	p. 452
Capital Structure Decisions and Maximization of Shareholder Wealth	p. 452
Foundation Concept: Business Risk	p. 453
Foundation Concept: Financial Risk and Financial Leverage	p. 455
Capital Structure Theory	p. 458
Ethical Issues: LBO Stakeholder Impacts	p. 472
International Issues: Capital Structure	p. 473
Summary	p. 474
Questions and Topics for Discussion	p. 475
Self-Test Problem	p. 475
Problems	p. 476
Solution to Self-Test Problem	p. 479
Capital Structure Management in Practice	p. 480
Key Chapter Concepts	p. 480
Financial Challenge: Deregulation and Business Risk of Electric Utilities	p. 481
Introduction	p. 482
Operating and Financial Leverage	p. 482
Other Financial Risk Measures	p. 491
EBIT-EPS Analysis	p. 492
Cash Insolvency Analysis	p. 498
Other Factors to Consider in Making Capital Structure Decisions	p. 500
International Issues: Balancing Operating and Financial Risks at Nestle	p. 503
Summary	p. 503
Questions and Topics for Discussion	p. 504
Self-Test Problems	p. 505
Problems	p. 506
Solutions to Self-Test Problems	p. 514
Dividend Policy	p. 516
Key Chapter Concepts	p. 516
Financial Challenge: Florida Power and Light's Decision to Cut Its Dividend	p. 517
Introduction	p. 518
Determinants of Dividend Policy	p. 519
Dividend Policy and Firm Value	p. 526
Dividend Policies	p. 529
Entrepreneurial Issues: Dividend Policy	p. 534
How Dividends Are Paid	p. 534
International Issues: Dividend Policies for Multinational Firms	p. 535
Stock Dividends and Stock Splits	p. 536
Share Repurchases as Dividend Decisions	p. 538
Summary	p. 541
Questions and Topics for Discussion	p. 543
Self-Test Problems	p. 544
Problems	p. 544
Solutions to Self-Test Problems	p. 548
Working Capital Management and Financial Forecasting	p. 551
Financial Forecasting and Working Capital Policy	p. 552
Key Chapter Concepts	p. 552
Financial Challenge: Financial Forecasting at Boeing	p. 553
Introduction	p. 553
Financial Forecasting	p. 554
Working Capital Policy	p. 564
Ethical Issues: Use of Employee Retirement Funds	p. 565
Levels of Working Capital Investment	p. 569
Proportions of Short-Term and Long-Term Financing	p. 572
Overall Working Capital Policy	p. 577
Summary	p. 579
Questions and Topics for Discussion	p. 580
Self-Test Problems	p. 580
Problems	p. 582
Solutions to Self-Test Problems	p. 593
The Management of Cash and Marketable Securities	p. 595
Key Chapter Concepts	p. 595
Financial Challenge: Investing Microsoft's Cash Hoard	p. 596
Introduction	p. 596
Liquid Asset Balance	p. 598
Controlling the Collection and Disbursement of Cash	p. 603
Electronic Funds Transfer	p. 610
Ethical Issues: Cash Management	p. 611
Entrepreneurial Issues: Cash Management	p. 612
Investing in Marketable Securities	p. 612
International Issues: Cash Management	p. 617
Summary	p. 618
Questions and Topics for Discussion	p. 619
Self-Test Problems	p. 620
Problems	p. 621
Solutions to Self-Test Problems	p. 626
Management of Accounts Receivable and Inventories	p. 627
Key Chapter Concepts	p. 627
Financial Challenge: Just-in-Time Inventory Management at Dell Computer	p. 628
Introduction	p. 628
Accounts Receivable Management	p. 629
Evaluating Individual Credit Applicants	p. 638
Inventory Management	p. 641
Inventory Control Models	p. 644
Summary	p. 652
Questions and Topics for Discussion	p. 653
Self-Test Problems	p. 654
Problems	p. 655
Solutions to Self-Test Problems	p. 662
Short- and Intermediate-Term Funding Alternatives	p. 664
Key Chapter Concepts	p. 664
Financial Challenge: Using Inventory Loans to Save Fashion Bug from Bankruptcy	p. 665
Introduction	p. 666
Cost of Short-Term Funds	p. 667
Trade Credit	p. 668
Accrued Expenses and Deferred Income	p. 671
Short-Term Bank Credit	p. 672
Commercial Paper	p. 677
Accounts Receivable Loans	p. 678
Inventory Loans	p. 682
International Issues: Foreign Receivables Financing	p. 683
Term Loans	p. 685
Security Provisions and Protective Covenants	p. 688
Suppliers of Term Loans	p. 690
Equipment Loans	p. 692
Summary	p. 693
Questions and Topics for Discussion	p. 696
Self-Test Problems	p. 697
Problems	p. 698
Solutions to Self-Test Problems	p. 703
An Integrative Case Problem: Working Capital Management	p. 706
Advanced Topics in Contemporary Financial Management	p. 709
Lease Financing	p. 710
Key Chapter Concepts	p. 710
Financial Challenge: Kmart's Lease Guarantees Prove Costly	p. 711
Introduction	p. 711
Types of Leases	p. 712
Advantages and Disadvantages of Leasing	p. 716
Tax and Accounting Aspects of Leases	p. 718
Entrepreneurial Issues: Leasing by Small Businesses	p. 719
Determining Lease Payments: The Lessor's Perspective	p. 721
Lease-Buy Analysis: The Lessee's Perspective	p. 722
Ethical Issues: Continental Airlines' Leases in Bankruptcy	p. 724
Summary	p. 726
Questions and Topics for Discussion	p. 726
Self-Test Problem	p. 727
Problems	p. 727
Solution to Self-Test Problem	p. 730
An Integrative Case Problem: Lease and Term Loan Analysis	p. 731
Financing with Derivatives	p. 732
Key Chapter Concepts	p. 732
Financial Challenge: Repricing "Underwater Options"	p. 733
Introduction	p. 734
Options	p. 734
Convertible Securities	p. 738
Warrants	p. 743
Analysis of Rights Offerings	p. 746
Interest Rate Swaps	p. 747
Summary	p. 749
Questions and Topics for Discussion	p. 750
Self-Test Problems	p. 750
Problems	p. 751
Solutions to Self-Test Problems	p. 756
International Financial Management	p. 758
Key Chapter Concepts	p. 758
Financial Challenge: The Euro and the European Central Bank	p. 759
Introduction	p. 760
Factors That Affect Exchange Rates	p. 760
Forecasting Future Exchange Rates	p. 767
Foreign Exchange Risk	p. 769
Ethical Issues: Payment of Bribes Abroad	p. 774
Summary	p. 775
Questions and Topics for Discussion	p. 775
Self-Test Problems	p. 776
Problems	p. 776
Solutions to Self-Test Problems	p. 779
Corporate Restructuring	p. 780
Key Chapter Concepts	p. 780
Financial Challenge: Oil Company Mergers Sweep Through the Industry	p. 781
Introduction	p. 781
Mergers	p. 782
Valuation of Merger Candidates	p. 791
Analysis of a Leveraged Buyout	p. 796
Business Failure	p. 798
Alternatives for Failing Businesses	p. 801
Summary	p. 807
Questions and Topics for Discussion	p. 808
Self-Test Problem	p. 809
Problems	p. 810
Solution to Self-Test Problem	p. 813
An Integrative Case Problem: Mergers and Acquisitions	p. 814
Reference Materials
Future Value Interest Factor (FVIF)
Present Value Interest Factor (PVIF)
Future Value of an Annuity Interest Factor (FVIFA)
Present Value of an Annuity Interest Factor (PVIFA)
Normal Distribution
Glossary
Check Answers to Selected Problems
Financial Challenge Photo Credits
Index
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