Financial Institutions, Investments, and Management An Introduction

by Mayo, Herbert B.

• ISBN13: 9780324178173
• ISBN10: 0324178174
• Format: Paperback
• Copyright: 2003-06-05
• Publisher: South-Western College Pub

Summary

A general introduction to the three primary aspects of Finance and examination of how they interrelate. The book discusses financial institutions and their roles in helping to allocate savings in the economy, along with a description and analysis of securities issued and traded in money and capital markets. The book covers fundamentals of investing in stocks, mutual funds, derivatives, and other marketable securities with an emphasis on securities markets, mechanics of trading, techniques of analysis, diversification, and valuation of assets. Finally, the book lays out the processes, decisions structures, and institutional arrangements concerned with the use and acquisition of funds by a firm. This will include the management of the asset and liability structure of the firm under certain and risky situations.

Table of Contents

Preface	xiii
Introduction to Finance	1	(9)
The Divisions of Finance	2	(1)
Key Financial Concepts	3	(4)
Finance and Other Business Disciplines	7	(1)
Plan of the Text	8	(2)
Part I Financial Institutions	10	(102)
The Creation of Financial Assets	13	(36)
Forms of Business	14	(4)
The Role of Money	18	(2)
The Role of Interest Rates	20	(3)
The Transfer of Funds to Business	23	(1)
The Direct Transfer: The Issuing and Selling of New Securities	24	(7)
The Indirect Transfer Through Financial Intermediaries	31	(14)
Summary	45	(1)
Review Questions	46	(3)
The Federal Reserve and the Supply and Cost of Credit	49	(40)
The Role of the Federal Reserve System	50	(5)
The Expansion of Money and Credit	55	(7)
The Tools of Monetary Policy	62	(3)
The Impact of Fiscal Policy on Credit Markets	65	(3)
Impact of an Inflationary Economic Environment on Credit Markets	68	(5)
The Impact of International Currency Flows on Credit Markets	73	(12)
Summary	85	(1)
Review Questions	86	(2)
Problems	88	(1)
The Role of Securities Markets	89	(23)
Securities Markets	90	(5)
The Mechanics of Investing in Securities	95	(4)
Measures of Security Prices	99	(3)
Regulation	102	(2)
Foreign Securities	104	(1)
Competition in the Security Markets	105	(3)
Summary	108	(1)
Review Questions	109	(1)
Problems	110	(2)
Part II Investments	112	(246)
The Tiem Value of Money	115	(38)
The Future Value of a Dollar	116	(6)
The Present Value of a Dollar	122	(3)
The Future Value of an Annuity	125	(6)
The Present Value of an Annuity	131	(4)
Illustrations of Compounding and Discounting	135	(9)
Nonannual Compounding	144	(1)
Periods of Less Than One Year	145	(1)
Summary	146	(1)
The Equations for the Interest Factors	147	(1)
Review Questions	148	(1)
Problems	148	(5)
Risk and Its Management	153	(34)
The Return on an Investment	154	(1)
The Sources of Risk	155	(12)
Beta Coefficients	167	(8)
The Capital Asset Pricing Model and an Investment's Required Return	175	(3)
Summary	178	(1)
Review Questions	178	(1)
Problems	179	(4)
Appendix: Using Excel to Compute Standard Deviations and Regressions Equations	183	(4)
Equity: Preferred and Common Stock	187	(30)
Equity	188	(2)
The Features of Preferred Stock	190	(1)
Preferred Stock and Bonds Contrasted	191	(2)
Analysis of Preferred Stock	193	(1)
Disadvantages of Preferred Stock From an Investor's Perspective	194	(1)
Common Stock	195	(2)
Dividend Policy	197	(7)
Cash Dividends	204	(2)
Stock Dividends	206	(1)
Stock Splits	207	(3)
Dividend Reinvestment Plans	210	(1)
Repurchase of Stock	210	(1)
Summary	211	(1)
Review Questions	212	(1)
Problems	213	(4)
Valuation of Stock	217	(20)
Valuation of Preferred Stock	218	(2)
Valuation of Common Stock: The Present Value and the Growth of Dividends	220	(5)
Risk and Stock Valuation	225	(3)
Alternative Valuation Techniques: Multiplier Models	228	(2)
Summary	230	(1)
Review Questions	231	(1)
Problems	232	(5)
Investing in Long-Term Debt (Bonds)	237	(42)
Characteristics of All Debt Instruments	238	(3)
Types of Corporate Bonds	241	(4)
Foreign Bonds	245	(1)
Registered and Book Entry Bonds	246	(1)
Determination of the Price of a Bond	246	(4)
Yields	250	(6)
Retiring Debt	256	(2)
Convertible Bonds and Convertible Preferred Stock	258	(10)
Convertible Preferred Stock	268	(1)
Government Securities	269	(4)
Summary	273	(1)
Review Questions	274	(1)
Problems	275	(4)
Analysis of Financial Statements	279	(56)
General Accounting Principles	280	(1)
The Balance Sheet	281	(6)
The Income Statement	287	(2)
Statement of Cash Flows	289	(4)
Limitations of Accounting Data	293	(1)
Depreciation	294	(6)
Losses and Tax Savings	300	(2)
Ratio Analysis	302	(2)
Liquidity Ratios	304	(3)
Activity Ratios	307	(5)
Profitability Ratios	312	(2)
Leverage Ratios	314	(4)
Coverage Ratios	318	(2)
Analysis of Financial Statements and the Internet	320	(2)
Analysis of Financial Statements and the Use of Excel Spreadsheets	322	(4)
Summary	326	(1)
Review Questions	327	(1)
Problems	328	(7)
Investment Companies	335	(23)
Investment Companies: Origins and Terminology	336	(2)
Closed-End Investment Companies	338	(4)
Mutual Funds	342	(5)
The Returns Earned on Investments in Mutual Funds	347	(3)
Selecting a Mutual Fund	350	(3)
Index Funds and Exchange-Traded Funds	353	(1)
Summary	354	(1)
Review Questions	354	(2)
Problems	356	(2)
Part III Corporate Finance	358	(247)
Break-Even Analysis and Leverage	361	(22)
Break-Even Analysis	362	(4)
Operating Leverage	366	(4)
Financial Leverage	370	(3)
Financial Leverage and Risk	373	(4)
Financial Leverage Through Preferred Stock Financing	377	(1)
Summary	378	(1)
Review Questions	379	(1)
Problems	379	(4)
Cost of Capital	383	(26)
Components of the Cost of Capital	384	(7)
Cost of Capital: A Weighted Average	391	(2)
The Optimal Capital Structure	393	(2)
The Marginal Cost of Capital	395	(4)
The Optimal Capital Structure and the Value of the Firm's Stock	399	(3)
Cost of Capital Review and Problem Areas	402	(1)
Summary	403	(1)
Review Questions	404	(1)
Problems	405	(4)
Capital Budgeting	409	(44)
Valuation and Long-Term Investment Decisions	411	(1)
Importance of Cash Flow	412	(2)
Payback Period	414	(2)
Introduction to Discounted Cash Flows Methods of Capital Budgeting	416	(1)
Net Present Value	417	(2)
Internal Rate of Return	419	(2)
Net Present Value and Internal Rate of Return Compared	421	(6)
Ranking Investment Opportunities	427	(7)
The Introduction of Risk into Capital Budgeting	434	(2)
Risk Adjustments in Capital Budgeting	436	(3)
Adjusting the Discount Rate	439	(4)
Summary	443	(1)
Review Questions	444	(1)
Problems	445	(8)
Planning: Forecasting and Budgeting	453	(36)
Planning	454	(2)
Fluctuations in Asset Requirements	456	(1)
Forecasting External Financial Requirements: Percent of Sales	457	(7)
Forecasting External Financial Requirements: Regression Analysis	464	(6)
Forecasting External Financial Requirements: Changes in Fixed Assets	470	(2)
The Cash Budget	472	(8)
Summary	480	(1)
Review Questions	481	(1)
Problems	481	(8)
Management of Short-Term Assets	489	(40)
Working Capital and Its Management	490	(1)
The Impact of the Operating Cycle on Working Capital Policy	491	(3)
Financing and Working Capital Policy	494	(3)
The Inventory Cycle	497	(1)
The Economic Order Quantity	498	(11)
Management of Accounts Receivable	509	(5)
Cash Management	514	(4)
Money Market Instruments and Yields	518	(2)
The Calculation of Yields	520	(2)
Summary	522	(1)
Review Questions	523	(1)
Problems	524	(5)
Sources of Short- and Intermediate-Term Funds	529	(40)
Free Sources: Accruals	531	(1)
Commercial Bank Loans	531	(7)
Trade Credit	538	(5)
Commercial Paper	543	(2)
Secured Loans	545	(2)
Factoring	547	(1)
Intermediate-Term Debt	548	(3)
Leasing	551	(8)
Bankruptcy and Reorganization	559	(3)
Summary	562	(1)
Review Questions	563	(1)
Problems	564	(5)
Derivatives and Risk Management	569	(36)
Options	570	(1)
The Intrinsic Value of an Option to Buy Stock	571	(2)
Leverage	573	(3)
Call Options	576	(6)
Puts	582	(2)
Stock Index Options	584	(2)
Futures	586	(7)
Hedging	593	(2)
Financial and Currency Futures	595	(3)
Stock Index Futures	598	(2)
Summary	600	(1)
Review Questions	601	(1)
Problems	602	(3)
Appendix A Interest Factors for the Future Value of One Dollar	605	(1)
Appendix B Interest Factors for the Present Value of One Dollar	606	(1)
Appendix C Interest Factors for the Future Value of an Annuity of One Dollar	607	(1)
Appendix D Interest Factors for the Present Value of an Annuity of One Dollar	608	(1)
Appendix E Answers to Selected Problems	609	(8)
Index	617