Preface | p. iv |

Introduction to Financial Management | p. 1 |

An Overview of Financial Management | p. 2 |

Striking the Right Balance | p. 2 |

Putting Things in Perspective | p. 3 |

Forms of Business Organization | p. 4 |

Stock Prices and Shareholder Value | p. 6 |

Intrinsic Values, Stock Prices, and Compensation Plans | p. 8 |

Some Important Trends | p. 11 |

Is Shareholder Wealth Maximization a Worldwide Goal? | p. 12 |

Business Ethics | p. 12 |

What Companies Are Doing | p. 13 |

Consequences of Unethical Behavior | p. 13 |

How Should Employees Deal with Unethical Behavior? | p. 14 |

Protection for Whistle-Blowers | p. 15 |

Conflicts between Managers and Stockholders | p. 16 |

The Role of Finance in the Organization | p. 17 |

Tying it All Together | p. 18 |

Fundamental Concepts in Financial Management | p. 23 |

Time Value of Money | p. 24 |

Will You Be Able to Retire? | p. 24 |

Putting Things in Perspective | p. 24 |

Time Lines | p. 25 |

Future Values | p. 26 |

Simple versus Compound Interest | p. 27 |

Step-by-Step Approach | p. 27 |

Formula Approach | p. 27 |

Financial Calculators | p. 28 |

Spreadsheets | p. 28 |

Hints on Using Financial Calculators | p. 29 |

Graphic View of the Compounding Process | p. 30 |

Present Values | p. 31 |

Graphic View of the Discounting Process | p. 33 |

Finding the Interest Rate, I | p. 34 |

Finding the Number of Years, N | p. 35 |

Annuities | p. 35 |

Future Value of an Ordinary Annuity | p. 36 |

Future Value of an Annuity Due | p. 38 |

Present Value of an Ordinary Annuity | p. 39 |

Finding Annuity Payments, Periods, and Interest Rates | p. 40 |

Finding Annuity Payments, PMT | p. 40 |

Finding the Number of Periods, N | p. 41 |

Finding the Interest Rate, I | p. 41 |

Perpetuities | p. 42 |

Uneven Cash Flows | p. 44 |

Future Value of an Uneven Cash Flow Stream | p. 46 |

Solving for I with Uneven Cash Flows | p. 47 |

Semiannual and Other Compounding Periods | p. 48 |

Comparing Interest Rates | p. 50 |

Fractional Time Periods | p. 52 |

Amortized Loans | p. 52 |

Tying it All Together | p. 54 |

Integrated Case: First National Bank | p. 62 |

Continuous Compounding and Discounting | |

Financial Statements, Cash Flow, and Taxes | p. 64 |

Doing Your Homework with Financial Statements | p. 64 |

Putting Things in Perspective | p. 65 |

A Brief History of Accounting and Financial Statements | p. 65 |

Financial Statements and Reports | p. 66 |

The Balance Sheet | p. 68 |

The Income Statement | p. 72 |

Net Cash Flow | p. 75 |

Statement of Cash Flows | p. 75 |

Massaging the Cash Flow Statement | p. 78 |

Statement of Retained Earnings | p. 78 |

Uses and Limitations of Financial Statements | p. 79 |

Financial Analysis on the Internet | p. 80 |

Modifying Accounting Data for Investor and Managerial Decisions | p. 81 |

Operating Assets and Operating Capital | p. 81 |

Operating Cash Flows | p. 84 |

Free Cash Flow | p. 84 |

MVA and EVA | p. 86 |

The Federal Income Tax System | p. 87 |

Corporate Taxes | p. 87 |

Personal Taxes | p. 87 |

Interest Paid | p. 87 |

Interest Earned | p. 88 |

Dividends Paid | p. 88 |

Dividends Received | p. 88 |

Tax Loss Carry-Back and Carry-Forward | p. 88 |

Capital Gains | p. 88 |

Depreciation | p. 89 |

Small Businesses | p. 89 |

Tying it All Together | p. 89 |

Integrated Case: D'Leon Inc., Part I | p. 95 |

The Federal Income Tax System | |

Analysis of Financial Statements | p. 100 |

Lessons Learned from Enron and WorldCom | p. 100 |

Putting Things in Perspective | p. 102 |

Ratio Analysis | p. 102 |

Liquidity Ratios | p. 103 |

Current Ratio | p. 103 |

Quick, or Acid Test, Ratio | p. 104 |

Asset Management Ratios | p. 104 |

Inventory Turnover Ratio | p. 105 |

Days Sales Outstanding | p. 106 |

Fixed Assets Turnover Ratio | p. 106 |

Total Assets Turnover Ratio | p. 107 |

Debt Management Ratios | p. 108 |

Total Debt to Total Assets | p. 110 |

Times-Interest-Earned Ratio | p. 110 |

EBITDA Coverage Ratio | p. 111 |

Profitability Ratios | p. 112 |

Profit Margin on Sales | p. 112 |

Global Perspectives: Global Accounting Standards: Can One Size Fit All? | p. 113 |

Return on Total Assets | p. 114 |

Basic Earning Power (BEP) Ratio | p. 114 |

Return on Common Equity | p. 115 |

Market Value Ratios | p. 115 |

Price/Earnings Ratio | p. 116 |

Price/Cash Flow Ratio | p. 116 |

Market/Book Ratio | p. 116 |

Trend Analysis | p. 118 |

Tying the Ratios Together: The Du Pont Equations | p. 118 |

Comparative Ratios and "Benchmarking" | p. 121 |

Looking for Warning Signs within the Financial Statements | p. 123 |

Uses and Limitations of Ratio Analysis | p. 124 |

Problems with ROE | p. 125 |

EVA and ROE | p. 126 |

Looking Beyond the Numbers | p. 128 |

Tying it All Together | p. 129 |

Integrated Case: D'Leon Inc., Part II | p. 136 |

Financial Markets and Institutions | p. 141 |

A Strong Financial System Is Necessary for a Growing and Prosperous Economy | p. 141 |

Putting Things in Perspective | p. 142 |

An Overview of the Capital Allocation Process | p. 143 |

Financial Markets | p. 145 |

Types of Markets | p. 145 |

Recent Trends | p. 146 |

Financial Institutions | p. 148 |

The Stock Market | p. 153 |

Citigroup Built to Compete in a Changing Environment | p. 154 |

The Physical Location Stock Exchanges | p. 154 |

The NYSE and Nasdaq Combine Forces with the Leading Online Trading Systems | p. 155 |

The Over-the-Counter and the Nasdaq Stock Markets | p. 156 |

The Market for Common Stock | p. 157 |

Types of Stock Market Transactions | p. 157 |

Stock Markets and Returns | p. 160 |

Stock Market Reporting | p. 160 |

Stock Market Returns | p. 162 |

Stock Market Efficiency | p. 163 |

Levels of Market Efficiency | p. 163 |

Measuring the Market | p. 164 |

Implications of Market Efficiency | p. 166 |

Is the Stock Market Efficient? | p. 167 |

A Closer Look at Behavioral Finance Theory | p. 168 |

Tying it All Together | p. 169 |

Integrated Case: Smyth Barry & Company, Part I | p. 170 |

Financial Assets | p. 173 |

Interest Rates | p. 174 |

Low Interest Rates Encourage Investment and Stimulate Consumer Spending | p. 174 |

Putting Things in Perspective | p. 175 |

The Cost of Money | p. 175 |

Interest Rate Levels | p. 176 |

The Determinants of Market Interest Rates | p. 180 |

The Real Risk-Free Rate of Interest, r* | p. 181 |

The Nominal, or Quoted, Risk-Free Rate of Interest, r[subscript RF] | p. 182 |

Inflation Premium (IP) | p. 182 |

Default Risk Premium (DRP) | p. 183 |

An Almost Riskless Treasury Bond | p. 184 |

Liquidity Premium (LP) | p. 186 |

Maturity Risk Premium (MRP) | p. 186 |

The Term Structure of Interest Rates | p. 187 |

What Determines the Shape of the Yield Curve? | p. 189 |

The Links between Expected Inflation and Interest Rates: A Closer Look | p. 192 |

Using the Yield Curve to Estimate Future Interest Rates | p. 193 |

Other Factors that Influence Interest Rate Levels | p. 196 |

Federal Reserve Policy | p. 196 |

Federal Budget Deficits or Surpluses | p. 196 |

International Factors | p. 197 |

Business Activity | p. 197 |

Global Perspectives: Measuring Country Risk | p. 198 |

Investing Overseas | p. 199 |

Interest Rates and Business Decisions | p. 199 |

Tying it All Together | p. 201 |

Integrated Case: Smyth Barry & Company, Part II | p. 206 |

Bonds and Their Valuation | p. 207 |

Sizing Up Risk in the Bond Market | p. 207 |

Putting Things in Perspective | p. 208 |

Who Issues Bonds? | p. 208 |

Key Characteristics of Bonds | p. 209 |

Par Value | p. 210 |

Coupon Interest Rate | p. 210 |

Maturity Date | p. 210 |

Call Provisions | p. 211 |

Sinking Funds | p. 211 |

Other Features | p. 212 |

Bond Valuation | p. 213 |

Bond Yields | p. 216 |

Yield to Maturity | p. 216 |

Yield to Call | p. 217 |

Current Yield | p. 218 |

Changes in Bond Values over Time | p. 218 |

Bonds with Semiannual Coupons | p. 222 |

Assessing a Bond's Riskiness | p. 223 |

Interest Rate Risk | p. 223 |

Reinvestment Rate Risk | p. 225 |

Comparing Interest Rate and Reinvestment Rate Risk | p. 226 |

Default Risk | p. 227 |

Various Types of Corporate Bonds | p. 228 |

Bond Ratings | p. 229 |

Bankruptcy and Reorganization | p. 233 |

Bond Markets | p. 234 |

Tying it All Together | p. 236 |

Intergated Case: Western Money Management Inc. | p. 243 |

Zero Coupon Bonds | |

Bankruptcy and Reorganization | |

Risk and Rates of Return | p. 244 |

No Pain No Gain | p. 244 |

Putting Things in Perspective | p. 245 |

Stand-Alone Risk | p. 246 |

Probability Distributions | p. 247 |

Expected Rate of Return | p. 248 |

Measuring Stand-Alone Risk: The Standard Deviation | p. 250 |

Using Historical Data to Measure Risk | p. 252 |

Measuring Stand-Alone Risk: The Coefficient of Variation | p. 254 |

Risk Aversion and Required Returns | p. 255 |

The Trade-Off between Risk and Return | p. 256 |

Risk in a Portfolio Context | p. 257 |

Expected Portfolio Returns, r[subscript p] | p. 258 |

Portfolio Risk | p. 259 |

The Benefits of Diversification Are More Important Than Ever | p. 263 |

Diversifiable Risk versus Market Risk | p. 263 |

The Concept of Beta | p. 266 |

Global Perspectives: The Benefits of Diversifying Overseas | p. 270 |

The Relationship between Risk and Rates of Return | p. 271 |

Estimating the Market Risk Premium | p. 272 |

The Impact of Inflation | p. 275 |

Changes in Risk Aversion | p. 275 |

Changes in a Stock's Beta Coefficient | p. 277 |

Some Concerns about Beta and the CAPM | p. 277 |

Some Concluding Thoughts: Implications for Corporate Managers and Investors | p. 278 |

Tying it All Together | p. 280 |

Integrated Case: Merrill Finch Inc. | p. 286 |

Calculating Beta Coefficients | |

Stocks and Their Valuation | p. 289 |

Searching for the Right Stock | p. 289 |

Putting Things in Perspective | p. 290 |

Legal Rights and Privileges of Common Stockholders | p. 290 |

Control of the Firm | p. 290 |

The Preemptive Right | p. 291 |

Types of Common Stock | p. 292 |

Common Stock Valuation | p. 292 |

Definitions of Terms Used in Stock Valuation Models | p. 293 |

Expected Dividends as the Basis for Stock Values | p. 294 |

Constant Growth Stocks | p. 296 |

Illustration of a Constant Growth Stock | p. 296 |

Dividend and Earnings Growth | p. 297 |

When Can the Constant Growth Model Be Used? | p. 298 |

Expected Rate of Return on a Constant Growth Stock | p. 299 |

Valuing Stocks Expected to Grow at a Nonconstant Rate | p. 300 |

Evaluating Stocks That Don't Pay Dividends | p. 304 |

Valuing the Entire Corporation | p. 305 |

The Corporate Valuation Model | p. 306 |

Other Approaches to Valuing Common Stocks | p. 308 |

Comparing the Total Company and Dividend Growth Models | p. 308 |

Stock Market Equilibrium | p. 310 |

Changes in Equilibrium Stock Prices | p. 311 |

Investing in International Stocks | p. 313 |

Preferred Stock | p. 315 |

Global Perspectives: Investing in Emerging Markets | p. 316 |

Tying it All Together | p. 316 |

Integrated Case: Mutual of Chicago Insurance Company | p. 322 |

Investing in Long-Term Assets: Capital Budgeting | p. 327 |

The Cost of Capital | p. 328 |

Creating Value at GE | p. 328 |

Putting Things in Perspective | p. 329 |

An Overview of the Weighted Average Cost of Capital | p. 329 |

Basic Definitions | p. 331 |

Cost of Debt, r[subscript d](1 - T) | p. 332 |

Cost of Preferred Stock, r[subscript p] | p. 333 |

Funny-Named Preferred-Like Securities | p. 334 |

Cost of Retained Earnings, r[subscript s] | p. 335 |

The CAPM Approach | p. 336 |

Dividend-Yield-plus-Growth-Rate, or Discounted Cash Flow (DCF), Approach | p. 336 |

Bond-Yield-plus-Risk-Premium Approach | p. 339 |

How Much Does It Cost to Raise External Capital? | p. 340 |

Cost of New Common Stock, r[subscript e] | p. 340 |

Add Flotation Costs to a Project's Cost | p. 341 |

Increase the Cost of Capital | p. 341 |

When Must External Equity Be Used? | p. 342 |

Composite, or Weighted Average, Cost of Capital, WACC | p. 343 |

Factors That Affect the WACC | p. 344 |

Factors the Firm Cannot Control | p. 344 |

Factors the Firm Can Control | p. 344 |

Global Perspectives: Global Variations in the Cost of Capital | p. 345 |

Adjusting the Cost of Capital for Risk | p. 346 |

Some Other Problems with Cost of Capital Estimates | p. 348 |

Tying it All Together | p. 349 |

Integrated Case: Coleman Technologies Inc. | p. 355 |

The Cost of New Common Stock and the WACC | |

The Basics of Capital Budgeting | p. 357 |

Competition in the Aircraft Industry | p. 357 |

Putting Things in Perspective | p. 358 |

Generating Ideas for Capital Projects | p. 358 |

Project Classifications | p. 359 |

The Net Present Value (NPV) Criterion | p. 360 |

Internal Rate of Return (IRR) | p. 363 |

Comparison of the NPV and IRR Methods | p. 364 |

NPV Profiles | p. 364 |

NPV Rankings Depend on the Cost of Capital | p. 365 |

Independent Projects | p. 367 |

Mutually Exclusive Projects | p. 367 |

Multiple IRRs | p. 369 |

Modified Internal Rate of Return (MIRR) | p. 371 |

Payback Period | p. 373 |

Conclusions on Capital Budgeting Methods | p. 375 |

Decision Criteria Used in Practice | p. 376 |

Using Capital Budgeting Techniques in Other Contexts | p. 377 |

The Post-Audit | p. 378 |

Tying it All Together | p. 379 |

Integrated Case: Allied Components Company | p. 385 |

Cash Flow Estimation and Risk Analysis | p. 387 |

Home Depot Keeps Growing | p. 387 |

Putting Things in Perspective | p. 388 |

Background on the Project | p. 388 |

Project Analysis | p. 390 |

Input Data, Part 1 | p. 390 |

Depreciation Schedule, Part 2 | p. 390 |

Salvage Value Calculations, Part 3 | p. 391 |

Projected Cash Flows, Part 4 | p. 392 |

Appraisal of the Proposed Project, Part 5 | p. 393 |

Other Points on Cash Flow Analysis | p. 394 |

Cash Flow versus Accounting Income | p. 394 |

Timing of Cash Flows | p. 395 |

Incremental Cash Flows | p. 395 |

Replacement Projects | p. 395 |

Sunk Costs | p. 395 |

Opportunity Costs | p. 396 |

Externalities | p. 396 |

Estimating Project Risk | p. 397 |

Measuring Stand-Alone Risk | p. 398 |

Sensitivity Analysis | p. 398 |

Scenario Analysis | p. 400 |

Monte Carlo Simulation | p. 401 |

Global Perspectives: Capital Budgeting Practices in the Asian/Pacific Region | p. 402 |

Different Capital Structures | p. 403 |

Introduction to Real Options | p. 403 |

Abandonment/Shutdown Options | p. 404 |

The Optimal Capital Budget | p. 406 |

Tying it All Together | p. 408 |

Integrated Case: Allied Food Products | p. 414 |

Tax Depreciation | p. 418 |

Replacement Project Analysis | |

Refunding Operations | |

Using the CAPM to Estimate the Risk-Adjusted Cost of Capital | |

Techniques for Measuring Beta Risk | |

Comparing Mutually Exclusive Projects with Unequal Lives | |

Real Options: Investment Timing, Growth, and Flexibility | |

Capital Structure and Dividend Policy | p. 421 |

Capital Structure and Leverage | p. 422 |

Debt: Rocket Booster or Anchor? | p. 422 |

Putting Things in Perspective | p. 423 |

The Target Capital Structure | p. 423 |

Business and Financial Risk | p. 424 |

Business Risk | p. 425 |

Operating Leverage | p. 427 |

Financial Risk | p. 430 |

Determining the Optimal Capital Structure | p. 436 |

WACC and Capital Structure Changes | p. 436 |

The Hamada Equation | p. 438 |

The Optimal Capital Structure | p. 439 |

Capital Structure Theory | p. 442 |

Yogi Berra on the M&M Proposition | p. 443 |

The Effect of Taxes | p. 443 |

The Effect of Potential Bankruptcy | p. 444 |

Trade-Off Theory | p. 445 |

Signaling Theory | p. 446 |

Using Debt Financing to Constrain Managers | p. 447 |

Checklist for Capital Structure Decisions | p. 448 |

Global Perspectives: Taking a Look at Global Capital Structures | p. 451 |

Variations in Capital Structures | p. 451 |

Tying it All Together | p. 452 |

Integrated Case: Campus Deli Inc. | p. 458 |

Degree of Leverage | |

Distributions to Shareholders: Dividends and Share Repurchases | p. 464 |

Microsoft Shifts Gears and Begins to Unload Part of Its Vast Cash Hoard | p. 464 |

Putting Things in Perspective | p. 465 |

Dividends versus Capital Gains: What Do Investors Prefer? | p. 465 |

Dividend Irrelevance Theory | p. 466 |

Reasons Some Investors Prefer Dividends | p. 466 |

Reasons Some Investors May Prefer Capital Gains | p. 467 |

Other Dividend Policy Issues | p. 468 |

Information Content, or Signaling, Hypothesis | p. 468 |

Clientele Effect | p. 468 |

Establishing the Dividend Policy in Practice | p. 469 |

Setting the Target Payout Ratio: The Residual Dividend Model | p. 469 |

Global Perspectives: Dividend Yields Around the World | p. 472 |

Earnings, Cash Flows, and Dividends | p. 475 |

Payment Procedures | p. 476 |

Dividend Reinvestment Plans | p. 479 |

Summary of Factors Influencing Dividend Policy | p. 480 |

Constraints | p. 480 |

Investment Opportunities | p. 480 |

Alternative Sources of Capital | p. 481 |

Effects of Dividend Policy on r[subscript s] | p. 481 |

Stock Dividends and Stock Splits | p. 481 |

Stock Splits | p. 482 |

Stock Dividends | p. 482 |

Effect on Stock Prices | p. 483 |

Stock Repurchases | p. 484 |

The Effects of Stock Repurchases | p. 484 |

Stock Repurchases Soar in 2004 | p. 485 |

Advantages of Repurchases | p. 486 |

Disadvantages of Repurchases | p. 487 |

Conclusions on Stock Repurchases | p. 487 |

Tying it All Together | p. 488 |

Integrated Case: Southeastern Steel Company | p. 494 |

An Example: The Residual Dividend Model | |

Working Capital Management, Forecasting, and Multinational Financial Management | p. 497 |

Working Capital Management | p. 498 |

Best Buy Successfully Manages Its Working Capital | p. 498 |

Putting Things in Perspective | p. 498 |

Working Capital Terminology | p. 499 |

The Cash Conversion Cycle | p. 499 |

Calculating the Targeted CCC | p. 500 |

Calculating the Actual CCC | p. 501 |

Some Firms Operate with Negative Working Capital! | p. 502 |

Alternative Current Asset Investment Policies | p. 503 |

Alternative Current Asset Financing Policies | p. 504 |

Maturity Matching, or "Self-Liquidating," Approach | p. 505 |

Aggressive Approach | p. 505 |

Conservative Approach | p. 505 |

Choosing between the Approaches | p. 507 |

The Cash Budget | p. 507 |

Cash and Marketable Securities | p. 511 |

Currency | p. 512 |

Demand Deposits | p. 512 |

Marketable Securities | p. 513 |

Inventories | p. 514 |

Supply Chain Management | p. 515 |

Accounts Receivable | p. 516 |

Credit Policy | p. 516 |

Setting and Implementing the Credit Policy | p. 517 |

Monitoring Accounts Receivable | p. 518 |

Accounts Payable (Trade Credit) | p. 520 |

Bank Loans | p. 523 |

Promissory Note | p. 523 |

Line of Credit | p. 524 |

Revolving Credit Agreement | p. 524 |

Costs of Bank Loans | p. 525 |

Commercial Paper | p. 527 |

Accruals (Accrued Liabilities) | p. 528 |

Use of Security in Short-Term Financing | p. 528 |

Tying it All Together | p. 529 |

Integrated Case: Ski Equipment Inc. | p. 534 |

Inventory Management | |

Short-Term Loans and Bank Financing | |

Financial Planning and Forecasting | p. 538 |

Forecasting Apple's Future | p. 538 |

Putting Things in Perspective | p. 539 |

Strategic Planning | p. 539 |

The Sales Forecast | p. 541 |

The AFN Equation | p. 542 |

Key Determinants of External Funds Requirements | p. 544 |

Excess Capacity Adjustments | p. 544 |

Forecasted Financial Statements | p. 546 |

Initial Forecast: "Business as Usual" | p. 546 |

Using Regression to Improve Financial Forecasts | p. 549 |

Using Individual Ratios in the Forecasting Process | p. 551 |

Modifying Accounts Receivable | p. 551 |

Modifying Inventories | p. 552 |

Other "Special Studies" | p. 552 |

Tying it All Together | p. 553 |

Integrated Case: New World Chemicals Inc. | p. 558 |

Forecasting Financial Requirements When Financial Ratios Change | |

Multinational Financial Management | p. 562 |

U.S. Firms Look Overseas to Enhance Shareholder Value | p. 562 |

Putting Things in Perspective | p. 563 |

Multinational or Global Corporations | p. 563 |

Multinational versus Domestic Financial Management | p. 566 |

The International Monetary System | p. 568 |

International Monetary Terminology | p. 568 |

Current Monetary Arrangements | p. 569 |

Foreign Exchange Rate Quotations | p. 570 |

Cross Rates | p. 571 |

Interbank Foreign Currency Quotations | p. 572 |

Trading in Foreign Exchange | p. 573 |

Spot Rates and Forward Rates | p. 573 |

Interest Rate Parity | p. 574 |

Purchasing Power Parity | p. 576 |

Inflation, Interest Rates, and Exchange Rates | p. 577 |

Hungry for a Big Mac? Go to China! | p. 578 |

Stock Market Indices Around the World | p. 580 |

International Money and Capital Markets | p. 581 |

International Credit Markets | p. 582 |

International Stock Markets | p. 582 |

International Capital Budgeting | p. 583 |

International Capital Structures | p. 585 |

Multinational Working Capital Management | p. 586 |

Cash Management | p. 586 |

Credit Management | p. 587 |

Inventory Management | p. 588 |

Tying it All Together | p. 589 |

Integrated Case: Citrus Products Inc. | p. 593 |

Appendixes | |

Solutions to Self-Test Questions and Problems | p. 1 |

Answers to Selected End-of-Chapter Problems | p. 24 |

Selected Equations and Data | p. 29 |

Selected Equations and Data | |

Index | p. 1 |

Cyberproblems | |

Executive Compensation | |

Online Financial Calculators | |

Examining the Financial Report-3M | |

Using Ratio Analysis as a Tool-Brady Corporation | |

World Financial Markets | |

Yield Curves and Interest Rates | |

BondsOnline Educated Investor Center | |

Evaluating Portfolio Risk and Return | |

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