Wiley Pathways Finance reprint

by Melicher, Ronald W.; Norton, Edgar A.

• ISBN13: 9780470392140
• ISBN10: 0470392142
• Edition: 1st
• Format: Paperback
• Copyright: 2009-11-17
• Publisher: Wiley

Summary

How do financial markets and institutions affect businesses and individuals? How do firms raise funds? How can an individual use markets and institutions to meet their own personal goals? In order to answer these questions, a reader must have a strong understanding of financial markets and institutions. This concise book provides the necessary information, presenting the general principles of finance and showing how they are applied in the field.

Author Biography

Ronald Melicher is a Professor of Finance and Chair of the Finance Division in the College of Business at the University of Colorado at Boulder. He is also a President's Teaching Scholar and the W. H. Baughn Distinguished Scholar. Dr. Melicher is currently in his 31st year of teaching at the University of Colorado.

Edgar Norton's teaching and research interests include investments, corporate finance, and entrepreneurial finance. His research has been published in a variety of finance, economic, and small business journals, including Financial Review nad the Journal of Business Research. A recipient of an Award of Excellence for a research paper at a conference sponsored by the International Council for Small Business, he was recognized in an article in the Journal of Management as one of the most productive entrepreneurship researchers of the early 1990s. He has co-authored four books.

Table of Contents

Preface v

Acknowledgements xii

Part I: Basic Financial Principles

1 Introduction to Finance 1

Introduction 2

1.1 Why Study Finance?

1.2 What Is Finance? 3

1.3 Four Principles of Finance 5

1.4 The Financial System 9

1.5 Financial Functions 12

1.6 Types of Financial Institutions 15

1.7 Types of Financial Markets 18

1.8 Types of Securities 20

1.9 International Securities and Markets 24

2 Money and Interest Rates 37

Introduction 38

2.1 Overview of the Monetary System 38

2.2 The Federal Reserve System 40

2.3 The Development of Money in the United States 47

2.4 U.S. Money Supply Today 49

2.5 Money Supply and Economic Activity 53

2.6 Interest: The Cost of Money 56

2.7 Structure of Interest Rates 60

2.8 The Yield Curve 63

3 Time Value of Money 80

Introduction 81

3.1 The Math of Finance 81

3.2 Compounding to Determine Future Values 83

3.3 Inflation or Purchasing Power Implications 87

3.4 Discounting to Determine Present Value 88

3.5 Finding Interest Rates and Time Requirements 89

3.6 Future Value of an Annuity 92

3.7 Future Value of an Annuity Due 97

3.8 Frequent Compounding or Discounting Intervals 99

3.9 APR Versus EAR 100

3.10 Cost of Consumer Credit 102

4 Financial Statements, Cash Flow and Taxes 110

Introduction 111

4.1 Overview of Financial Statements 111

4.2 U.S. Business Organizations 112

4.3 Starting a Business 116

4.4 Annual Reports 117

4.5 Balance Sheet 119

4.6 Income Statement 124

4.7 Cash Flow Statement 126

4.8 Financial Statements of Different Companies 129

4.9 Our Federal Tax System 133

5 Analysis of Financial Statements 150

Introduction 151

5.1 Financial Statement Analysis 151

5.2 Ratio Analysis 152

5.3 Types of Financial Ratios 154

5.4 Du Pont Method of Ratio Analysis 174

5.5 Long-Term Financial Planning 177

5.6 Cost-Volume-Profit Analysis 178

Part II: Using Financial Principles in Business

6 The Basics of Capital Budgeting 189

Introduction 190

6.1 Overview of Capital Budgeting 190

6.2 Capital Budgeting Decisions 191

6.3 Capital Budgeting Techniques 196

7 Cash Flow Estimation and Risk Analysis 210

Introduction 211

7.1 Cash Flows and Competitive Advantage 211

7.2 Isolating Project Cash Flows 212

7.3 Approaches to Estimating Project Cash Flows 212

7.4 Risk-Related Considerations 219

7.5 Strategic Analysis 221

7.6 Real-Opinion Analysis 223

8 Managing Working Capital 232

Introduction 233

8.1 Identifying Working Capital 233

8.2 Operating Cash and conversion Cycles 234

8.3 Working Capital Requirements 239

8.4 Cash Budgets 243

8.5 Seasonal Versus Level Production 248

8.6 Management of Current Assets 251

8.7 Getting-and Keeping-the Cash 258

8.8 Accounts Receivable Management and Credit Analysis 261

8.9 Inventory Management 265

8.10 Technology and Managing Working Capital 267

9 Short-Term Business Financing 280

9.1 Strategies for Financing Working Capital 281

9.2 Factors Affecting Short-Term Financing 285

9.3 Short-Term Financing Sources 289

9.4 Computing Interest Rates 298

9.5 Asset-Based Lending for Short-Term Financing 299

9.6 Other Forms of Security 305

9.7 The Cost of Short-Term Financing 306

10 Risk and Rate of Return 316

Introduction 317

10.1 Historical Return and Risk for a Single Asset 317

10.2 Expected Measures of Return and Risk Self-Check 327

10.3 Historical Returns and Risk of Different Assets 328

10.4 Efficient Capital Markets 330

10.5 Portfolio Returns and Risk 333

10.6 Diversification 337

10.7 Portfolio Risk and the Number of Investments 339

10.8 Capital Asset Pricing Model 341

11 Capital Structure and the Cost of Capital 352

Introduction 353

11.1 Capital Structure 353

11.2 Required Rate of Return and the Cost of Capital 357

11.3 Weighted Average Cost of Capital 363

11.4 Making Capital Structure Decisions 366

11.5 Planning Growth Rates 367

11.6 EBIT/EPS Analysis 371

11.7 Combined Operating and Financial Leverage Effects 375

11.8 Other Costs and Risks 379

11.9 Debt and Equity 381

Part III: Stocks, Bonds, and the International Market

12 Stocks and the Markets: Trading Securities 388

12.1 Types of Common Stock 389

12.2 Preferred Stock 392

12.3 The New York Stock Exchange 394

12.4 Stock Transactions 398

12.5 Initial Public Offerings (IPOs) 402

12.6 Direct and Indirect Costs of Going Public 408

12.7 Trading Securities – Secondary Securities Markets 409

12.8 A Word on Commissions 413

12.9 Security Market Indexes 414

12.10 Inside Information and Other Ethical Issues 416

13 Distributions to Stockholders 431

Introduction 432

13.1 Dividends versus Capital Gains 432

13.2 Estimating future Dividends 433

13.3 Dividend Stability and Dividend Policy 434

13.4 Constant Growth Stocks 435

13.5 Reading Stock Quotes 438

13.6 Tracking Stocks 440

13.7 Evaluating the Corporation 441

13.8 Stock Options 444

13.9 Dividend Reinvestment Plans 447

14 Annuities, Bonds, Futures and Options 456

14.1 Annuities 457

14.2 Bonds 458

14.3 Bondholder Security 464

14.4 Other Types of Bonds 466

14.5 Bond Income and Strategies 469

14.6 Global Bond Market 471

14.7 Reading Bond Quotes 472

14.8 Futures and Options 473

15 International Trade and Finance 487

15.1 International Monetary System 488

15.2 European Unification 491

15.3 Currency Exchange Markets and Rates 493

15.4 Investing Overseas 496

15.5 Arbitrage 498

15.6 Exchange Rate Developments for the U.S. Dollar 498

15.7 Conducting Business Internationally 500

15.8 Financing International Trade 502

15.9 Other Aids to International Trade 511

15.10 Balance in International Trade 511

Appendices 523

Glossary 533

Index 555