Principles of Managerial Finance, Brief plus MyFinanceLab

by Gitman, Lawrence J.

• ISBN13: 9780321334305
• ISBN10: 0321334302
• Edition: 4th
• Format: Package
• Copyright: 2006-01-01
• Publisher: Addison Wesley

Summary

Gitman's Brief Fourth Edition approaches introductory finance with a focused concentration on the fundamental concepts, techniques, and practices of managerial finance. Through a proven, fully integrated learning system, this streamlined text provides students with a road map through the content. The overarching organization of the text is designed to conceptually link a firm's actions to its value as determined in the securities markets. Each major decision area is presented in terms of both risk and return factors and the potential impact on the owner's wealth.Principles of Managerial Finance, Brief now comes with MyFinanceLab, Addison-Wesley's online homework, testing, and tutorial system. MyFinanceLab saves instructors time with automatically graded homework, and gives students the benefit of individualized study plans, unlimited practice, and immediate feedback.

Table of Contents

Preface	xxvii
To the Student	xxxviii
Part 1 Introduction to Managerial Finance	1	(134)
The Role and Environment of Managerial Finance	2	(37)
Finance and Business	3	(5)
What Is Finance?	3	(1)
Major Areas and Opportunities in Finance	3	(1)
Legal Forms of Business Organization	4	(3)
Why Study Managerial Finance?	7	(1)
Review Questions	8	(1)
The Managerial Finance Function	8	(4)
Organization of the Finance Function	8	(1)
Relationship to Economics	9	(1)
Relationship to Accounting	10	(1)
Primary Activities of the Financial Manager	11	(1)
Review Questions	11	(1)
Goal of the Firm	12	(7)
Maximize Profit?	12	(1)
Maximize Shareholder Wealth	13	(1)
Corporate Governance	14	(1)
The Role of Ethics	15	(2)
The Agency Issue	17	(1)
Review Questions	18	(1)
Financial Institutions and Markets	19	(7)
Financial Institutions	19	(1)
Financial Markets	20	(1)
The Relationship Between Institutions and Markets	20	(1)
The Money Market	20	(2)
The Capital Market	22	(3)
In Practice Focus on Practice: Warren Buffett---The Oracle of Omaha	25	(1)
Review Questions	25	(1)
Business Taxes	26	(4)
Ordinary Income	26	(3)
Capital Gains	29	(1)
Review Questions	30	(1)
Using This Text	30	(9)
Summary	30	(2)
Self-Test Problem	32	(1)
Warm-Up Exercises	32	(1)
Problems	33	(3)
Chapter 1 Case: Assessing the Goal of Sports Products, Inc.	36	(1)
Spreadsheet Exercise	37	(1)
Web Exercise	38	(1)
Financial Statements and Analysis	39	(52)
The Stockholders' Report	40	(8)
The Letter to Stockholders	40	(1)
The Four Key Financial Statements	41	(4)
Notes to the Financial Statements	45	(1)
Consolidating International Financial Statements	46	(1)
In Practice Focus on Ethics: Investors and Sox Declare War on Accounting Misdeeds	47	(1)
Review Questions	47	(1)
Using Financial Ratios	48	(4)
Interested Parties	48	(1)
Types of Ratio Comparisons	48	(2)
Cautions About Using Ratio Analysis	50	(1)
Categories of Financial Ratios	51	(1)
Review Questions	52	(1)
Liquidity Ratios	52	(1)
Current Ratio	52	(1)
Quick (Acid-Test) Ratio	52	(1)
Review Questions	53	(1)
Activity Ratios	53	(3)
Inventory Turnover	54	(1)
Average Collection Period	54	(1)
Average Payment Period	55	(1)
Total Asset Turnover	55	(1)
Review Question	56	(1)
Debt Ratios	56	(3)
Debt Ratio	57	(1)
Times Interest Earned Ratio	58	(1)
Fixed-Payment Coverage Ratio	58	(1)
Review Questions	59	(1)
Profitability Ratios	59	(4)
Common-Size Income Statements	59	(1)
Gross Profit Margin	60	(1)
Operating Profit Margin	61	(1)
Net Profit Margin	61	(1)
Earnings per Share (EPS)	61	(1)
Return on Total Assets (ROA)	62	(1)
Return on Common Equity (ROE)	62	(1)
Review Questions	63	(1)
Market Ratios	63	(1)
Price/Earnings (P/E) Ratio	63	(1)
Market/Book (M/B) Ratio	63	(1)
Review Question	64	(1)
A Complete Ratio Analysis	64	(27)
Summarizing All Ratios	64	(4)
DuPont System of Analysis	68	(3)
Review Questions	71	(1)
Summary	71	(2)
Self-Test Problems	73	(1)
Warm-Up Exercises	74	(1)
Problems	75	(11)
Chapter 2 Case: Assessing Martin Manufacturing's Current Financial Position	86	(2)
Spreadsheet Exercise	88	(2)
Web Exercise	90	(1)
Cash Flow and Financial Planning	91	(44)
Analyzing the Firm's Cash Flow	92	(10)
Depreciation	92	(3)
Developing the Statement of Cash Flows	95	(3)
Operating Cash Flow	98	(3)
Free Cash Flow	101	(1)
Review Questions	102	(1)
The Financial Planning Process	102	(2)
Long-Term (Strategic) Financial Plans	103	(1)
Short-Term (Operating) Financial Plans	103	(1)
Review Questions	104	(1)
Cash Planning: Cash Budgets	104	(8)
The Sales Forecast	104	(1)
Preparing the Cash Budget	105	(1)
In Practice Focus on Practice: Cash Forecasts: Easier Said Than Done	106	(4)
Evaluating the Cash Budget	110	(1)
Coping with Uncertainty in the Cash Budget	111	(1)
Review Questions	112	(1)
Profit Planning: Pro Forma Statements	112	(2)
Preceding Year's Financial Statements	113	(1)
Sales Forecast	113	(1)
Review Question	114	(1)
Preparing the Pro Forma Income Statement	114	(3)
Considering Types of Costs and Expenses	115	(1)
Review Questions	116	(1)
Preparing the Pro Forma Balance Sheet	117	(2)
Review Questions	119	(1)
Evaluation of Pro Forma Statements	119	(16)
Review Questions	119	(1)
Summary	120	(1)
Self-Test Problems	121	(2)
Warm-Up Exercises	123	(1)
Problems	124	(7)
Chapter 3 Case: Preparing Martin Manufacturing's 2007 Pro Forma Financial Statements	131	(1)
Spreadsheet Exercise	132	(1)
Web Exercise	133	(2)
Part 2 Important Financial Concepts	135	(180)
Time Value of Money	136	(59)
The Role of Time Value in Finance	137	(4)
Future Value Versus Present Value	137	(1)
Computational Tools	138	(2)
Basic Patterns of Cash Flow	140	(1)
Review Questions	141	(1)
Single Amounts	141	(7)
Future Value of a Single Amount	141	(4)
Present Value of a Single Amount	145	(2)
Comparing Present Value and Future Value	147	(1)
Review Questions	148	(1)
Annuities	148	(6)
Types of Annuities	149	(1)
Finding the Future Value of an Ordinary Annuity	150	(1)
Finding the Present Value of an Ordinary Annuity	151	(2)
Finding the Present Value of a Perpetuity	153	(1)
Review Questions	154	(1)
Mixed Streams	154	(4)
Future Value of a Mixed Stream	154	(2)
Present Value of a Mixed Stream	156	(2)
Review Question	158	(1)
Compounding Interest More Frequently Than Annually	158	(7)
Semiannual Compounding	158	(1)
Quarterly Compounding	159	(1)
A General Equation for Compounding More Frequently Than Annually	160	(1)
Using Computational Tools for Compounding More Frequently Than Annually	161	(1)
Continuous Compounding	162	(1)
Nominal and Effective Annual Rates of Interest	163	(1)
Review Questions	164	(1)
In Practice Focus on Ethics: How Fair Is ``Check into Cash''?	165	(1)
Special Applications of Time Value	165	(30)
Determining Deposits Needed to Accumulate a Future Sum	166	(1)
Loan Amortization	167	(1)
Finding Interest or Growth Rates	168	(3)
Finding an Unknown Number of Periods	171	(1)
Review Questions	172	(1)
Summary	173	(2)
Self-Test Problems	175	(1)
Warm-Up Exercises	176	(1)
Problems	177	(15)
Chapter 4 Case: Funding Jill Moran's Retirement Annuity	192	(1)
Spreadsheet Exercise	192	(1)
Web Exercise	193	(2)
Risk and Return	195	(40)
Risk and Return Fundamentals	196	(3)
Risk Defined	196	(1)
Return Defined	196	(2)
Risk Aversion	198	(1)
Review Questions	199	(1)
Risk of a Single Asset	199	(6)
Risk Assessment	199	(2)
Risk Measurement	201	(4)
Review Questions	205	(1)
Risk of a Portfolio	205	(6)
Correlation	205	(1)
Diversification	206	(2)
Correlation, Diversification, Risk, and Return	208	(1)
International Diversification	209	(1)
In Practice Global Focus: An International Flavor to Risk Reduction	210	(1)
Review Questions	211	(1)
Risk and Return: The Capital Asset Pricing Model (CAPM)	211	(24)
Types of Risk	211	(1)
The Model: CAPM	212	(6)
Review Questions	218	(1)
Summary	219	(2)
Self-Test Problems	221	(1)
Warm-Up Exercises	222	(1)
Problems	223	(9)
Chapter 5 Case: Analyzing Risk and Return on Chargers Products' Investments	232	(1)
Spreadsheet Exercise	233	(1)
Web Exercise	234	(1)
Interest Rates and Bond Valuation	235	(39)
Interest Rates and Required Returns	236	(6)
Interest Rate Fundamentals	236	(2)
Term Structure of Interest Rates	238	(2)
Risk Premiums: Issuer and Issue Characteristics	240	(1)
Review Questions	241	(1)
Corporate Bonds	242	(8)
Legal Aspects of Corporate Bonds	242	(1)
Cost of Bonds to the Issuer	243	(1)
General Features of a Bond Issue	244	(1)
Interpreting Bond Quotations	245	(1)
Bond Ratings	246	(1)
In Practice Focus on Ethics: Can We Trust the Bond Raters?	247	(1)
Popular Types of Bonds	247	(1)
International Bond Issues	248	(2)
Review Questions	250	(1)
Valuation Fundamentals	250	(3)
Key Inputs	250	(1)
The Basic Valuation Model	251	(2)
Review Questions	253	(1)
Bond Valuation	253	(21)
Bond Fundamentals	253	(1)
Basic Bond Valuation	253	(2)
Bond Value Behavior	255	(3)
Yield to Maturity (YTM)	258	(2)
Semiannual Interest and Bond Values	260	(1)
Review Questions	261	(1)
Summary	262	(2)
Self-Test Problems	264	(1)
Warm-Up Exercises	264	(1)
Problems	265	(6)
Chapter 6 Case: Evaluating Annie Hegg's Proposed Investment in Atilier Industries Bonds	271	(1)
Spreadsheet Exercise	272	(1)
Web Exercise	273	(1)
Stock Valuation	274	(41)
Differences Between Debt and Equity Capital	275	(1)
Voice in Management	275	(1)
Claims on Income and Assets	275	(1)
Maturity	276	(1)
Tax Treatment	276	(1)
Review Question	276	(1)
Common and Preferred Stock	276	(12)
Common Stock	277	(3)
Preferred Stock	280	(2)
Issuing Common Stock	282	(4)
Interpreting Stock Quotations	286	(2)
Review Questions	288	(1)
Common Stock Valuation	288	(10)
In Practice Focus on Ethics: Do Investors Now Require a ``Credibility Premium''?	289	(1)
Market Efficiency	289	(2)
The Basic Stock Valuation Equation	291	(3)
Free Cash Flow Valuation Model	294	(2)
Other Approaches to Common Stock Valuation	296	(2)
Review Questions	298	(1)
Decision Making and Common Stock Value	298	(17)
Changes in Expected Return	298	(1)
Changes in Risk	299	(1)
Combined Effect	300	(1)
Review Questions	300	(1)
Summary	300	(3)
Self-Test Problems	303	(1)
Warm-Up Exercises	303	(1)
Problems	304	(7)
Chapter 7 Case: Assessing the Impact of Suarez Manufacturing's Proposed Risky Investment on Its Stock Value	311	(1)
Spreadsheet Exercise	312	(1)
Web Exercise	313	(2)
Part 3 Long-Term Investment Decisions	315	(86)
Capital Budgeting Cash Flows	316	(36)
The Capital Budgeting Decision Process	317	(4)
Motives for Capital Expenditure	317	(1)
Steps in the Process	317	(1)
Basic Terminology	318	(2)
Review Questions	320	(1)
The Relevant Cash Flows	321	(4)
In Practice Focus on Ethics: How Accurate Are Cash Flows?	321	(1)
Major Cash Flow Components	322	(1)
Expansion Versus Replacement Decisions	322	(1)
Sunk Costs and Opportunity Costs	323	(1)
International Capital Budgeting and Long-Term Investments	324	(1)
Review Questions	324	(1)
Finding the Initial Investment	325	(5)
Installed Cost of a New Asset	325	(1)
After-Tax Proceeds from Sale of Old Asset	326	(2)
Change in Net Working Capital	328	(1)
Calculating the Initial Investment	329	(1)
Review Questions	330	(1)
Finding the Operating Cash Inflows	330	(4)
Interpreting the Term After-Tax	330	(1)
Interpreting the Term Cash Inflows	331	(1)
Interpreting the Term Incremental	332	(2)
Review Questions	334	(1)
Finding the Terminal Cash Flow	334	(3)
Proceeds from Sale of Assets	335	(1)
Taxes on Sale of Assets	335	(1)
Change in Net Working Capital	335	(1)
Review Questions	336	(1)
Summarizing the Relevant Cash Flows	337	(15)
Review Question	337	(1)
Summary	337	(2)
Self-Test Problems	339	(1)
Warm-Up Exercises	340	(1)
Problems	340	(9)
Chapter 8 Case: Developing Relevant Cash Flows for Clark Upholstery Company's Machine Renewal or Replacement Decision	349	(1)
Spreadsheet Exercise	350	(1)
Web Exercise	351	(1)
Capital Budgeting Techniques: Certainty and Risk	352	(49)
Capital Budgeting Techniques	353	(9)
Bennet Company's Relevant Cash Flows	353	(1)
Payback Period	354	(3)
Net Present Value (NPV)	357	(2)
Internal Rate of Return (IRR)	359	(3)
Review Questions	362	(1)
Comparing NPV and IRR Techniques	362	(4)
Net Present Value Profiles	362	(1)
Conflicting Rankings	363	(1)
Which Approach Is Better?	364	(1)
Review Questions	365	(1)
Additional Considerations: Real Options and Capital Rationing	366	(4)
Recognizing Real Options	366	(2)
Choosing Projects Under Capital Rationing	368	(2)
Review Questions	370	(1)
Behavioral Approaches for Dealing with Risk	370	(5)
Sensitivity and Scenario Analysis	371	(1)
Decision Trees	372	(1)
Simulation	372	(1)
International Risk Considerations	373	(2)
Review Questions	375	(1)
Risk-Adjusted Discount Rates	375	(26)
Determining Risk-Adjusted Discount Rates (RADRs)	376	(1)
In Practice Focus on Ethics: Warren Buffett Versus California Earthquake Authority	377	(2)
RADRs in Practice	379	(1)
Review Questions	380	(1)
Summary	381	(2)
Self-Test Problems	383	(1)
Warm-Up Exercises	384	(2)
Problems	386	(11)
Chapter 9 Case: Making Norwich Tool's Lathe Investment Decision	397	(1)
Spreadsheet Exercise	398	(1)
Web Exercise	399	(2)
Part 4 Long-Term Financial Decisions	401	(108)
The Cost of Capital	402	(35)
An Overview of the Cost of Capital	403	(4)
Some Key Assumptions	403	(1)
In Practice Focus on Ethics: Creative Accounting and Cost of Capital at WorldCom	404	(1)
The Basic Concept	404	(1)
Specific Sources of Capital	405	(1)
Review Questions	406	(1)
The Cost of Long-Term Debt	407	(3)
Net Proceeds	407	(1)
Before-Tax Cost of Debt	407	(3)
After-Tax Cost of Debt	410	(1)
Review Questions	410	(1)
The Cost of Preferred Stock	410	(1)
Preferred Stock Dividends	410	(1)
Calculating the Cost of Preferred Stock	411	(1)
Review Question	411	(1)
The Cost of Common Stock	411	(4)
Finding the Cost of Common Stock Equity	411	(2)
The Cost of Retained Earnings	413	(1)
The Cost of New Issues of Common Stock	414	(1)
Review Questions	415	(1)
The Weighted Average Cost of Capital	415	(3)
Calculating the Weighted Average Cost of Capital (WACC)	415	(1)
Weighting Schemes	416	(1)
Economic Value Added (EVA®)	417	(1)
Review Questions	418	(1)
The Marginal Cost and Investment Decisions	418	(19)
The Weighted Marginal Cost of Capital (WMCC)	418	(3)
The Investment Opportunities Schedule (IOS)	421	(1)
Using the WMCC and IOS to Make Financing/Investment Decisions	421	(2)
Review Questions	423	(1)
Summary	423	(2)
Self-Test Problem	425	(1)
Warm-Up Exercises	426	(1)
Problems	427	(6)
Chapter 10 Case: Making Star Products' Financing/Investment Decision	433	(2)
Spreadsheet Exercise	435	(1)
Web Exercise	436	(1)
Leverage and Capital Structure	437	(42)
Leverage	438	(13)
Breakeven Analysis	439	(3)
Operating Leverage	442	(3)
In Practice Focus on Practice: Adobe's Operating Leverage	445	(1)
Financial Leverage	446	(2)
Total Leverage	448	(3)
Review Questions	451	(1)
The Firm's Capital Structure	451	(8)
Types of Capital	451	(1)
External Assessment of Capital Structure	452	(1)
Capital Structure of Non-U.S. Firms	452	(2)
Capital Structure Theory	454	(3)
The Optimal Capital Structure	457	(2)
Review Questions	459	(1)
The EBIT-EPS Approach to Capital Structure	459	(5)
Presenting a Financing Plan Graphically	459	(2)
Comparing Alternative Capital Structures	461	(1)
Considering Risk in EBIT-EPS Analysis	462	(1)
The Basic Shortcoming of EBIT-EPS Analysis	463	(1)
Review Question	464	(1)
Choosing the Optimal Capital Structure	464	(15)
Linkage	464	(1)
Estimating Value	465	(1)
Maximizing Value Versus Maximizing EPS	465	(1)
Some Other Important Considerations	466	(1)
Review Questions	466	(1)
Summary	467	(2)
Self-Test Problems	469	(1)
Warm-Up Exercises	470	(1)
Problems	471	(5)
Chapter 11 Case: Evaluating McGraw Industries' Capital Structure	476	(1)
Spreadsheet Exercise	477	(1)
Web Exercise	478	(1)
Dividend Policy	479	(30)
Dividend Fundamentals	480	(3)
Cash Dividend Payment Procedures	480	(2)
Tax Treatment of Dividends	482	(1)
Dividend Reinvestment Plans	482	(1)
Review Questions	482	(1)
The Relevance of Dividend Policy	483	(3)
The Residual Theory of Dividends	483	(2)
Arguments for Dividend Irrelevance	485	(1)
Arguments for Dividend Relevance	486	(1)
Review Questions	486	(1)
Factors Affecting Dividend Policy	486	(4)
Legal Constraints	487	(1)
Contractual Constraints	488	(1)
Internal Constraints	488	(1)
Growth Prospects	488	(1)
Owner Considerations	488	(1)
In Practice Focus on Ethics: Were Ford Managers Hoarding Cash?	489	(1)
Market Considerations	490	(1)
Review Question	490	(1)
Types of Dividend Policies	490	(3)
Constant-Payout-Ratio Dividend Policy	491	(1)
Regular Dividend Policy	491	(1)
Low-Regular-and-Extra Dividend Policy	492	(1)
Review Question	493	(1)
Other Forms of Dividends	493	(16)
Stock Dividends	493	(2)
Stock Splits	495	(1)
Stock Repurchases	496	(1)
Review Questions	497	(1)
Summary	498	(1)
Self-Test Problem	499	(1)
Warm-Up Exercises	500	(1)
Problems	501	(5)
Chapter 12 Case: Establishing General Access Company's Dividend Policy and Initial Dividend	506	(1)
Spreadsheet Exercise	507	(1)
Web Exercise	508	(1)
Part 5 Short-Term Financial Decisions	509
Working Capital and Current Assets Management	510	(39)
Net Working Capital Fundamentals	511	(3)
Net Working Capital	511	(1)
The Tradeoff Between Profitability and Risk	512	(1)
Review Questions	513	(1)
The Cash Conversion Cycle	514	(4)
Calculating the Cash Conversion Cycle	514	(1)
Funding Requirements of the Cash Conversion Cycle	515	(3)
Strategies for Managing the Cash Conversion Cycle	518	(1)
Review Questions	518	(1)
Inventory Management	518	(6)
Differing Viewpoints About Inventory Level	519	(1)
Common Techniques for Managing Inventory	519	(4)
In Practice Focus on Practice: RFID: The Wave of the Future	523	(1)
International Inventory Management	523	(1)
Review Questions	524	(1)
Accounts Receivable Management	524	(10)
Credit Selection and Standards	524	(5)
Credit Terms	529	(2)
Credit Monitoring	531	(2)
Review Questions	533	(1)
Management of Receipts and Disbursements	534	(15)
Float	534	(1)
Speeding Up Collections	534	(1)
Slowing Down Payments	535	(1)
Cash Concentration	535	(1)
Zero-Balance Accounts	536	(1)
Investing in Marketable Securities	537	(1)
Review Questions	537	(2)
Summary	539	(1)
Self-Test Problems	540	(1)
Warm-Up Exercises	541	(1)
Problems	542	(4)
Chapter 13 Case: Assessing Roche Publishing Company's Cash Management Efficiency	546	(1)
Spreadsheet Exercise	547	(1)
Web Exercise	548	(1)
Current Liabilities Management	549
Spontaneous Liabilities	550	(5)
Accounts Payable Management	550	(4)
In Practice Focus on Ethics: Amazon Stays Ethical to Avoid Biting the Hands that Feed It	554	(1)
Accruals	554	(1)
Review Questions	555	(1)
Unsecured Sources of Short-Term Loans	555	(7)
Bank Loans	555	(5)
Commercial Paper	560	(1)
International Loans	561	(1)
Review Questions	562	(1)
Secured Sources of Short-Term Loans	562
Characteristics of Secured Short-Term Loans	563	(1)
The Use of Accounts Receivable as Collateral	564	(2)
The Use of Inventory as Collateral	566	(1)
Review Questions	567	(1)
Summary	568	(3)
Self-Test Problem	571	(1)
Warm-Up Exercises	572	(1)
Problems	572	(6)
Chapter 14 Case: Selecting Kanton Company's Financing Strategy and Unsecured Short-Term Borrowing Arrangement	578	(1)
Spreadsheet Exercise	579	(1)
Web Exercise	580
Appendixes
A Financial Tables	1	(1)
B Solutions to Self-Test Problems	1	(1)
C Answers to Selected End-of-Chapter Problems	1	(1)
Glossary	1	(1)
Credits	1	(1)
Index	1