Practical Financial Management with Thomson ONE

by Lasher, William R.

• ISBN13: 9780324260762
• ISBN10: 0324260768
• Edition: 4th
• Format: Hardcover
• Copyright: 2004-01-05
• Publisher: South-Western College Pub

Summary

A text that offers clear, concise, and practical real world treatment of key financial management topics with the assumption readers have little knowledge of financial concepts. Advanced math is eliminated from the theory sections and everyday math is geared towards making the material useful yet understandable, supported by numerous worked-out examples and graphical and intuitive presentations of math where appropriate. Written by a former CFO, the book offers practical, real-world discussion of key topics, including cross-functional coverage of the agendas and biases decision-makers across the firm may bring to a financial proposal.

Table of Contents

PART 1 Introduction to Financial Management	1	(150)
Foundations	2	(23)
An Overview of Finance	3	(4)
Financial Assets	3	(1)
Financial Markets	4	(1)
Raising Money	5	(1)
Financial Management	6	(1)
The Price of Securities---A Link between the Firm and the Market	7	(1)
Finance and Accounting	7	(2)
The Importance of Cash Flow	8	(1)
The Language of Finance	9	(1)
Financial Theory---The Relationship with Economics	9	(1)
Forms of Business Organization and Their Financial Impact	10	(5)
The Proprietorship Form	11	(1)
The Corporate Form	12	(2)
The Truth about Limited Liability	14	(1)
S-Type Corporations and Limited Liability Companies	15	(1)
Insights: The Limited Liability Company (LLC): An Alternative to the S-Type Corporation	15	(1)
The Goals of Management	16	(1)
Stakeholders and Conflicts of Interest	16	(1)
Conflicts of Interest---An Illustration	17	(1)
Management---A Privileged Stakeholder Group	17	(1)
The Agency Problem	17	(1)
Insights: Ethics and Ethical Investing	18	(2)
Creditors versus Stockholders---A Financially Important Conflict of Interest	20	(1)
Thomson One	20	(1)
Questions	21	(1)
Business Analysis	22	(1)
Problems	23	(1)
Internet Problem	23	(1)
Thomson One	23	(2)
Financial Background: A Review of Accounting, Financial Statements, and Taxes	25	(90)
Accounting Systems and Financial Statements	25	(4)
The Nature of Financial Statements	26	(1)
The Accounting System	27	(2)
The Income Statement	29	(2)
Presentation	29	(2)
The Balance Sheet	31	(10)
Presentation	31	(1)
Assets	32	(5)
Liabilities	37	(3)
Equity	40	(1)
The Tax Environment	41	(4)
Taxing Authorities and Tax Bases	41	(1)
Income Taxes---The Total Effective Tax Rate	42	(1)
Progressive Tax Systems, Marginal and Average Rates	43	(1)
Capital Gains and Losses	44	(1)
Income Tax Calculations	45	(8)
Personal Taxes	45	(4)
Corporate Taxes	49	(4)
Questions	53	(1)
Problems	54	(6)
Internet Problem	60	(1)
Computer Problems	60	(3)
Cash Flows and Financial Analysis
Financial Information---Where Does It Come From, Who Uses It, and What Are We Looking For?	63	(4)
Users of Financial Information	64	(1)
Sources of Financial Information	64	(3)
Insights: The Devil Is in the Details	67	(1)
The Orientation of Financial Analysis	67	(1)
Insights: The Ethics of Presenting Financial Information	68	(2)
The Statement of Cash Flows	70	(10)
How the Statement of Cash Flows Works---Preliminary Examples	70	(3)
Business Cash Flows	73	(2)
Constructing the Statement of Cash Flows	75	(4)
Free Cash Flows	79	(1)
Ratio Analysis	80	(14)
Comparisons	80	(1)
Common Size Statements	81	(1)
Ratios	82	(1)
Liquidity Ratios	83	(1)
Asset Management Ratios	84	(3)
Debt Management Ratios	87	(2)
Profitability Ratios	89	(2)
Market Value Ratios	91	(1)
Du Pont Equations	92	(2)
Insights: New Ideas in Financial Analysis: MVA and EVA	94	(4)
Using the Du Pont Equations	96	(1)
Sources of Comparative Information	97	(1)
Limitations and Weaknesses of Ratio Analysis	97	(1)
Questions	98	(1)
Business Analysis	99	(1)
Problems	99	(10)
Internet Problem	109	(1)
Computer Problems	109	(4)
Thomson One	113	(2)
The Financial System and Interest	115	(36)
The Financial System	115	(6)
Cash Flows Between the Sectors	116	(1)
Savings and Investment	116	(2)
Financial Markets	118	(3)
The Stock Market and Stock Exchanges	121	(5)
Overview	121	(1)
Trading---The Role of Brokers	121	(1)
Exchanges	122	(1)
Private, Public, and Listed Companies, and the Nasdaq Market	123	(3)
Insights: It's All in the Timing---IPOs Are a Risky Business	126	(2)
Reading Stock Quotations	127	(1)
Insights: Efficient Financial Markets	128	(1)
Interest	129	(4)
The Relationship Between Interest and the Stock Market	129	(1)
Interest and the Economy	130	(1)
Debt Markets	130	(3)
The Components of an Interest Rate	133	(9)
Components of the Base Rate	133	(1)
Risk Premiums	134	(2)
Putting the Pieces Together	136	(1)
Federal Government Securities, Risk-Free and Real Rates	137	(3)
Yield Curves---The Term Structure of Interest Rates	140	(2)
Questions	142	(1)
Business Analysis	143	(1)
Problems	144	(3)
Internet Problem	147	(1)
Appendix 4A: Can There Be Interest Without Money? The Desert Island	147	(4)
PART 2 Discounted Cash Flow and the Value of Securities	151	(204)
Time Value of Money	153	(50)
Outline of Approach	154	(1)
Amount Problems	155	(7)
The Future Value of an Amount	156	(3)
Financial Calculators	159	(1)
The Expression for the Present Value of an Amount	160	(2)
Annuity Problems	162	(16)
Annuities	163	(1)
The Future Value of an Annuity---Developing a Formula	163	(3)
The Future Value of an Annuity---Solving Problems	166	(3)
Compound Interest and Non-Annual Compounding	169	(6)
The Present Value of an Annuity---Developing a Formula	175	(1)
The Present Value of an Annuity---Solving Problems	176	(2)
Insights: The Lottery: Congratulations, Youire Rich---But Not As Rich As You Thought	178	(16)
The Annuity Due	183	(3)
Perpetuities	186	(3)
Multipart Problems	189	(3)
Uneven Streams and Imbedded Annuities	192	(2)
Questions	194	(1)
Business Analysis	195	(1)
Problems	195	(5)
Internet Problem	200	(1)
Computer Problems	200	(3)
The Valuation and Characteristics of Bonds	203	(61)
The Basis of Value	203	(2)
Investing	204	(1)
Return	204	(1)
Bond Valuation	205	(13)
Bond Terminology and Practice	205	(1)
Bond Valuation---Basic Ideas	206	(1)
Determining the Price of a Bond	207	(6)
Maturity Risk Revisited	213	(1)
Finding the Yield at a Given Price	214	(3)
Call Provisions	217	(1)
Insights: Can a Bond Be a Bond Without Paying Interest?	218	(5)
Risky Issues	222	(1)
Convertible Bonds	223	(9)
Advantages of Convertible Bonds	225	(1)
Forced Conversion	225	(1)
Valuation (Pricing) Convertibles	226	(3)
Effect of Earnings per Share---Diluted EPS	229	(3)
Other Convertible Securities	232	(1)
Institutional Characteristics of Bonds	232	(4)
Registration, Transfer Agents, and Owners of Record	232	(1)
Kinds of Bonds	232	(1)
Bond Ratings---Assessing Default Risk	233	(3)
Insights: Even the Safest Companies Can Default on Bonds---The Perils of Utility Deregulation in California	236	(2)
Bond Indentures---Controlling Default Risk	236	(2)
Insights: Ethical Debt Management	238	(1)
Questions	238	(1)
Business Analysis	239	(1)
Problems	240	(3)
Internet Problem	243	(1)
Computer Problems	243	(2)
Appendix 6A: Lease Financing	245	(19)
The Valuation and Characteristics of Stock	264	(42)
Common Stock	264	(4)
The Return on an Investment in Common Stock	264	(1)
The Nature of Cash Flows from Common Stock Ownership	265	(2)
The Basis of Value	267	(1)
Growth Models of Common Stock Valuation	268	(10)
Developing Growth-Based Models	269	(2)
The Constant Growth Model	271	(2)
The Expected Return	273	(1)
Two-Stage Growth	274	(2)
Practical Limitations of Pricing Models	276	(2)
Insights: Reconciling Valuation Theory and Practice	278	(1)
Some Institutional Characteristics of Common Stock	279	(1)
Corporate Organization and Control	279	(1)
Insights: Corporate Governance in Large Companies: The Role of Boards of Directors	280	(3)
Voting Rights and Issues	281	(1)
Stockholders' Claims on Income and Assets	282	(1)
Preferred Stock	283	(2)
Valuation of Preferred Stock	283	(1)
Characteristics of Preferred Stock	284	(1)
Securities Analysis	285	(2)
Options and Warrants	287	(12)
Options in General	287	(1)
Stock Options	287	(1)
Call Options	288	(1)
Intrinsic Value	289	(1)
Options and Leverage	290	(2)
Trading in Options	292	(1)
Writing Options	292	(2)
Put Options	294	(2)
Option Pricing Models	296	(1)
Warrants	296	(1)
Employee Stock Options	297	(2)
Questions	299	(1)
Business Analysis	299	(1)
Problems	300	(3)
Internet Problem	303	(1)
Computer Problems	303	(2)
Thomson One	305	(1)
Risk and Return	306	(49)
Why Study Risk and Return?	306	(5)
The General Relationship between Risk and Return	307	(1)
The Return on an Investment	308	(2)
Risk---A Preliminary Definition	310	(1)
Portfolio Theory	311	(18)
Review of the Concept of a Random Variable	311	(4)
The Return on a Stock Investment as a Random Variable	315	(2)
Risk Redefined as Variability	317	(2)
Risk Aversion	319	(3)
Decomposing Risk---Systematic (Market) and Unsystematic (Business-Specific) Risk	322	(1)
Portfolios	323	(1)
Diversification---How Portfolio Risk Is Affected When Stocks Are Added	324	(3)
Measuring Market Risk---The Concept of Beta	327	(2)
Insights: Is It Investing or Gambling?	329	(3)
Insights: Just How Risky Is AT&T---Really? A Problem With Betas	332	(10)
Using Beta---The Capital Asset Pricing Model (Capm)	333	(9)
The Validity and Acceptance of the Capm and Its Sml	342	(1)
Insights: Beta in Practice	342	(1)
Questions	343	(1)
Business Analysis	344	(1)
Problems	344	(6)
Internet Problem	350	(1)
Computer Problems	351	(2)
Thomson One	353	(2)
PART 3 Business Investment Decisions---Capital Budgeting	355	(132)
Capital Budgeting	357	(36)
Characteristics of Business Projects	357	(3)
Project Types and Risk	357	(1)
Stand-Alone and Mutually Exclusive Projects	358	(1)
Project Cash Flows	358	(1)
The Cost of Capital	359	(1)
Capital Budgeting Techniques	360	(17)
Payback Period	360	(2)
Net Present Value (Npv)	362	(4)
Internal Rate of Return (Irr)	366	(5)
Comparing IRR and NPV	371	(2)
NPV and IRR Solutions Using Financial Calculators and Spreadsheets	373	(1)
Projects with a Single Outflow and Regular Inflows	374	(1)
Profitability Index (PI)	375	(2)
Insights: Which Methods Do Businesses Prefer?	377	(5)
Comparing Projects with Unequal Lives	378	(3)
Capital Rationing	381	(1)
Questions	382	(2)
Business Analysis	384	(1)
Problems	384	(6)
Internet Problem	390	(1)
Computer Problems	390	(3)
Cash Flow Estimation	393	(28)
Cash Flow Estimation	393	(1)
Capital Budgeting Processes	393	(1)
Project Cash Flows---An Overview and Some Specifics	394	(4)
The General Approach to Cash Flow Estimation	394	(1)
A Few Specific Issues	395	(3)
Estimating New Venture Cash Flows	398	(7)
Terminal Values	402	(1)
Accuracy and Estimates	402	(2)
Macrs---A Note on Depreciation	404	(1)
Estimating Cash Flows for Replacement Projects	405	(4)
Insights: Ethics in Cash Flow Estimation	409	(1)
Question	410	(1)
Business Analysis	410	(2)
Problems	412	(6)
Internet Problem	418	(1)
Computer Problems	418	(3)
Risk Topics and Real Options in Capital Budgeting	421	(32)
Risk in Capital Budgeting---General Considerations	421	(3)
Cash Flows as Random Variables	421	(1)
The Importance of Risk in Capital Budgeting	422	(2)
Incorporating Risk into Capital Budgeting---Numerical and Computer Methods	424	(9)
Scenario/Sensitivity Analysis	424	(2)
Computer (Monte Carlo) Simulation	426	(2)
Decision Tree Analysis	428	(5)
Real Options	433	(4)
Real Options in Capital Budgeting	433	(3)
Valuing Real Options	436	(1)
Insights: Volatile Energy Prices and Real Options, Thinking Can Lead to Big Profits on Inefficient Facilities	437	(2)
Designing Real Options into Projects	438	(1)
Incorporating Risk into Capital Budgeting---The Theoretical Approach and Risk-Adjusted Rates of Return	439	(6)
Estimating Risk-Adjusted Rates Using Capm	440	(3)
Problems with the Theoretical Approach---Finding the Right Beta and Concerns About the Appropriate Risk Definition	443	(2)
Questions	445	(1)
Business Analysis	446	(1)
Problems	447	(6)
Cost of Capital	453	(34)
The Purpose of the Cost of Capital	453	(1)
Cost of Capital Concepts	454	(1)
Capital Components	454	(1)
Capital Structure	454	(1)
Insights: The Cost of Capital---Intuitively	455	(4)
Returns on Investments and the Costs of Capital Components	455	(1)
The Weighted Average Calculation---the WACC	456	(1)
Capital Structure and Cost---Book vs. Market Value	457	(2)
Calculating the WACC	459	(8)
Developing Market-Value-Based Capital Structure	459	(1)
Calculating Component Costs of Capital	460	(7)
Putting the Weights and Costs Together	467	(1)
The Marginal Cost of Capital (MCC)	467	(3)
The Break in MCC When Retained Earnings Run Out	467	(1)
The MCC Schedule	468	(2)
The Cost of Capital---A Comprehensive Example	470	(5)
A Potential Mistake---Handling Separately Funded Projects	475	(1)
Insights: Revisiting Eva	476	(1)
Questions	477	(1)
Business Analysis	478	(1)
Problems	479	(6)
Internet Problem	485	(2)
PART 4 Long-Term Financing Issues	487	(78)
Capital Structure and Leverage	489	(50)
Background	489	(4)
The Central Issue	490	(1)
Risk in the Context of Leverage	490	(2)
Leverage and Risk---Two Kinds of Each	492	(1)
Our Approach to Leverage	492	(1)
Financial Leverage	493	(9)
The Effect of Financial Leverage	493	(5)
Financial Leverage and Financial Risk	498	(1)
Putting the Ideas Together---The Effect on Stock Price	499	(3)
Insights: AOL Time Warner: The Perils of Leverage	502	(5)
The Degree of Financial Leverage (DFL)---A Measurement	503	(2)
Ebit--Eps Analysis	505	(2)
Operating Leverage	507	(11)
Terminology and Definitions	508	(1)
Breakeven Analysis	509	(1)
Breakeven Diagrams	509	(3)
The Effect of Operating Leverage	512	(2)
The Degree of Operating Leverage (DOL)---A Measurement	514	(1)
Comparing Operating and Financial Leverage	515	(2)
The Compounding Effect of Operating and Financial Leverage	517	(1)
Capital Structure Theory	518	(1)
Background---The Value of the Firm	518	(1)
Insights: Leverage and Business Strategy	519	(11)
The Early Theory by Modigliani and Miller	521	(4)
Relaxing the Assumptions---More Insights	525	(4)
An Insight into Mergers and Acquisitions	529	(1)
Questions	530	(1)
Business Analysis	531	(2)
Problems	533	(4)
Internet Problem	537	(1)
Thomson One	538	(1)
Dividends	539	(26)
Background	539	(2)
Dividends as a Basis for Value	539	(1)
Understanding the Dividend Decision	540	(1)
The Dividend Controversy	541	(6)
Dividend Irrelevance	541	(3)
Dividend Preference	544	(1)
Dividend Aversion	544	(1)
Other Theories and Ideas	545	(1)
Conclusion	546	(1)
Insights: Microsoft Shocks the High-Tech World By Declaring a Dividend	547	(1)
Practical Considerations	548	(1)
Legal and Contractual Restrictions on Dividends	548	(1)
Insights: The Painful Decision to Cut Dividends	549	(6)
Dividend Policy	549	(1)
The Mechanics of Dividend Payments	550	(2)
Stock Splits and Dividends	552	(3)
Stock Repurchases	555	(3)
Repurchase as an Alternative to a Dividend	555	(2)
Other Repurchase Issues	557	(1)
Questions	558	(1)
Business Analysis	559	(1)
Problems	560	(3)
Internet Problem	563	(2)
PART 5 Operations Issues---Working Capital Management and Planning	565	(102)
The Management of Working Capital	567	(48)
Working Capital Basics	567	(1)
Working Capital, Funding Requirements, and the Current Accounts	568	(1)
Insights: Going Broke Profitably	568	(8)
The Objective of Working Capital Management	570	(1)
Operations---The Cash Conversion Cycle	570	(2)
Permanent and Temporary Working Capital	572	(1)
Financing Net Working Capital	572	(4)
Working Capital Policy	576	(1)
Sources of Short-Term Financing	576	(9)
Spontaneous Financing	576	(2)
Unsecured Bank Loans	578	(1)
Revolving Credit Agreement	579	(2)
Commercial Paper	581	(1)
Short-Term Credit Secured by Current Assets	582	(3)
Cash Management	585	(7)
Definitions and Objectives	586	(1)
Marketable Securities	587	(1)
Check Disbursement and Collection Procedures	587	(2)
Accelerating Cash Receipts	589	(2)
Managing Cash Outflow	591	(1)
Evaluating the Cost of Cash Management Services	591	(1)
Insights: Ethical Cash Management	592	(1)
Managing Accounts Receivable	593	(2)
Objectives and Policy	593	(1)
Determinants of the Receivables Balance	593	(2)
Insights: A Practical Management Warning	595	(2)
Insights: How Lafarge's Western Region Controls Receivables---Sharing Responsibility for Collections with Sales	597	(1)
Inventory Management	598	(7)
Who Is Responsible for Inventories?	598	(1)
The Benefits and Costs of Carrying Inventory	598	(2)
Inventory Control and Management	600	(1)
The Economic Order Quantity (EOQ) Model	600	(3)
Safety Stocks, Reorder Points, and Lead Times	603	(1)
Tracking Inventories---The ABC System	604	(1)
Just in Time (JIT) Inventory Systems	604	(1)
Questions	605	(2)
Business Analysis	607	(1)
Problems	608	(5)
Internet Problem	613	(2)
Financial Planning	615	(52)
Business Planning	615	(8)
Component Parts of a Business Plan	616	(1)
The Purpose of Planning and Plan Information	616	(2)
Credibility and Supporting Detail	618	(1)
Four Kinds of Business Plan	619	(4)
The Financial Plan as a Component of a Business Plan	623	(1)
Making Financial Projections	623	(28)
Planning for New and Existing Businesses	623	(1)
The General Approach, Assumptions, and the Debt/Interest Problem	624	(6)
Plans with Simple Assumptions	630	(2)
Forecasting Cash Needs	632	(1)
The Percentage of Sales Method---A Formula Approach	632	(3)
The Sustainable Growth Rate	635	(1)
Plans with More Complicated Assumptions	636	(3)
A Comprehensive Example---A Complex Plan for an Existing Business	639	(7)
Planning at the Department Level	646	(1)
The Cash Budget	647	(4)
Management Issues in Financial Planning	651	(3)
The Financial Plan as a Set of Goals	651	(1)
Risk in Financial Planning in General	652	(2)
Insights: Judgment Calls and Ethics in Business Planning	654	(2)
Financial Planning and Computers	655	(1)
Questions	656	(1)
Business Analysis	657	(2)
Problems	659	(6)
Internet Problem	665	(2)
PART 6 Current Topics in Financial Management	667	(60)
Corporate Restructuring	669	(38)
Mergers and Acquisitions	669	(17)
Basic Definitions, Terminology, and Procedure	669	(4)
The Antitrust Laws	673	(1)
The Reasons Behind Mergers	674	(2)
Holding Companies	676	(1)
The History of Merger Activity in the United States	676	(3)
Merger Analysis and the Price Premium	679	(7)
Insights: How A Trendy Soft Drink Gave Cereal Giant Quaker Oats a $1.4 Billion Case of Indigestion	686	(3)
Defensive Tactics	687	(2)
Other Kinds of Takeovers---LBOs and Proxy Fights	689	(2)
Leveraged Buyouts (LBOs)	689	(1)
Proxy Fights	690	(1)
Divestitures	691	(1)
The Reasons for Divestitures	691	(1)
Methods of Divesting Operations	691	(1)
Bankruptcy and the Reorganization of Failed Businesses	692	(4)
Failure and Insolvency	692	(1)
Bankruptcy---Concept and Objectives	693	(1)
Bankruptcy Procedures---Reorganization, Restructuring, Liquidation	693	(3)
Insights: Is Bankruptcy Too Easy---What About Ethics and Fraud	696	(2)
Questions	698	(1)
Business Analysis	699	(2)
Problems	701	(4)
Internet Problem	705	(1)
Thomson One	706	(1)
International Finance	707	(20)
Currency Exchange	708	(9)
The Foreign Exchange Market	708	(1)
Exchange Rates	708	(2)
Changing Exchange Rates and Exchange Rate Risk	710	(2)
European Currencies in the Twenty-First Century---The Euro	712	(1)
Supply and Demand---The Source of Exchange Rate Movement	712	(3)
Governments and the International Monetary System	715	(2)
International Capital Markets	717	(2)
The Eurodollar Market	718	(1)
The International Bond Market	718	(1)
Political Risk	719	(1)
Transaction and Translation Risks	720	(2)
Questions	722	(1)
Business Analysis	722	(1)
Problems	723	(1)
Internet Problems	724	(3)
Appendix A Financial Tables	727	(9)
Appendix B Answers to Selected Problems	736	(4)
Glossary	740	(9)
Index	749