as low as $0.01
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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