Fundamentals of Financial Management: Concise

by Brigham, Eugene F.

• ISBN13: 9780324319835
• ISBN10: 0324319835
• Edition: 5th
• Format: Hardcover
• Copyright: 2006-02-06
• Publisher: Cengage Learning

Summary

"Brigham/Houston: A Classic, redefined...because a classic never goes out of style." The market leader, Brigham/Houston, continues to grow in reputation and amount of users as the most effective approach for teaching the first undergraduate corporate finance course. This Concise version of the extremely successful, Brigham/Houston-Fundamentals of Financial Management, contains the same level of topical rigor while also reflecting the latest in theory, research, real-world examples, and use of technology as Fundamentals. The seamless, integrated ancillary package, still painstakingly prepared by the authors, is a hallmark of the Brigham/Houston package which reduces course preparation time for instructors and makes the subject more accessible for learners. New for this edition is the addition of iLrn Finance, an online student assessment and tutorial resource to help improve student performance. Additionally, access to Thomson ONE - Business School Edition, an online financial database that students can use to complete projects or select end of chapter exercises, is included with each new text.

Table of Contents

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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