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Fundamentals of financial management doc

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CHAPTER An Overview of Financial Management SOURCE: Courtesy BEN & JERRY’S HOMEMADE, INC www.benjerry.com STRIKING THE RIGHT BALANCE $ BEN & JERRY'S F or many companies, the decision would have been make money For example, in a recent article in Fortune an easy “yes.” However, Ben & Jerry’s Homemade magazine, Alex Taylor III commented that, “Operating a Inc has always taken pride in doing things business is tough enough Once you add social goals to differently Its profits had been declining, but in 1995 the demands of serving customers, making a profit, and the company was offered an opportunity to sell its returning value to shareholders, you tie yourself up in premium ice cream in the lucrative Japanese market knots.” However, Ben & Jerry’s turned down the business Ben & Jerry’s financial performance has had its ups because the Japanese firm that would have distributed and downs While the company’s stock grew by leaps their product had failed to develop a reputation for and bounds through the early 1990s, problems began to promoting social causes! Robert Holland Jr., Ben & arise in 1993 These problems included increased Jerry’s CEO at the time, commented that, “The only competition in the premium ice cream market, along reason to take the opportunity was to make money.” with a leveling off of sales in that market, plus their Clearly, Holland, who resigned from the company in late own inefficiencies and sloppy, haphazard product 1996, thought there was more to running a business development strategy than just making money The company’s cofounders, Ben Cohen and Jerry The company lost money for the first time in 1994, and as a result, Ben Cohen stepped down as CEO Bob Greenfield, opened the first Ben & Jerry’s ice cream shop Holland, a former consultant for McKinsey & Co with a in 1978 in a vacant Vermont gas station with just reputation as a turnaround specialist, was tapped as $12,000 of capital plus a commitment to run the business Cohen’s replacement The company’s stock price in a manner consistent with their underlying values Even rebounded in 1995, as the market responded positively though it is more expensive, the company only buys milk to the steps made by Holland to right the company The and cream from small local farms in Vermont In addition, stock price, however, floundered toward the end of 7.5 percent of the company’s before-tax income is 1996, following Holland’s resignation donated to charity, and each of the company’s 750 employees receives three free pints of ice cream each day Many argue that Ben & Jerry’s philosophy and commitment to social causes compromises its ability to Over the last few years, Ben & Jerry’s has had a new resurgence Holland’s replacement, Perry Odak, has done a number of things to improve the company’s financial performance, and its reputation among Wall Street’s analysts and institutional investors has benefited Odak response to these concerns, Ben & Jerry’s will retain its quickly brought in a new management team to rework Vermont headquarters and its separate board, and its the company’s production and sales operations, and he social missions will remain intact Others have aggressively opened new stores and franchises both in suggested that Ben & Jerry’s philosophy may even the United States and abroad induce Unilever to increase its own corporate In April 2000, Ben & Jerry’s took a more dramatic philanthropy Despite these assurances, it still remains step to benefit its shareholders It agreed to be acquired to be seen whether Ben & Jerry’s vision can be by Unilever, a large Anglo-Dutch conglomerate that maintained within the confines of a large conglomerate owns a host of major brands including Dove Soap, As you will see throughout the book, many of today’s Lipton Tea, and Breyers Ice Cream Unilever agreed to companies face challenges similar to those of Ben & pay $43.60 for each share of Ben & Jerry’s stock—a 66 Jerry’s Every day, corporations struggle with decisions percent increase over the price the stock traded at just such as these: Is it fair to our labor force to shift before takeover rumors first surfaced in December 1999 production overseas? What is the appropriate level of The total price tag for Ben & Jerry’s was $326 million compensation for senior management? Should we While the deal clearly benefited Ben & Jerry’s increase, or decrease, our charitable contributions? In shareholders, some observers believe that the company general, how we balance social concerns against the “sold out” and abandoned its original mission In need to create shareholder value? I See http:// www.benjerry.com/ mission.html for Ben & Jerry’s interesting mission statement It might be a good idea to print it out and take it to class for discussion The purpose of this chapter is to give you an idea of what financial management is all about After you finish the chapter, you should have a reasonably good idea of what finance majors might after graduation You should also have a better understanding of (1) some of the forces that will affect financial management in the future; (2) the place of finance in a firm’s organization; (3) the relationships between financial managers and their counterparts in the accounting, marketing, production, and personnel departments; (4) the goals of a firm; and (5) the way financial managers can contribute to the attainment of these goals Information on finance careers, additional chapter links, and practice quizzes are available on the web site to accompany this text: http://www.harcourtcollege com/finance/concise3e CHAPTER I I CAREER OPPORTUNITIES IN FINANCE Finance consists of three interrelated areas: (1) money and capital markets, which deals with securities markets and financial institutions; (2) investments, which focuses on the decisions made by both individual and institutional investors as AN OVERVIEW OF FINANCIAL MANAGEMENT they choose securities for their investment portfolios; and (3) financial management, or “business finance,” which involves decisions within firms The career opportunities within each field are many and varied, but financial managers must have a knowledge of all three areas if they are to their jobs well MONEY AND C A P I TA L M A R K E T S Many finance majors go to work for financial institutions, including banks, insurance companies, mutual funds, and investment banking firms For success here, one needs a knowledge of valuation techniques, the factors that cause interest rates to rise and fall, the regulations to which financial institutions are subject, and the various types of financial instruments (mortgages, auto loans, certificates of deposit, and so on) One also needs a general knowledge of all aspects of business administration, because the management of a financial institution involves accounting, marketing, personnel, and computer systems, as well as financial management An ability to communicate, both orally and in writing, is important, and “people skills,” or the ability to get others to their jobs well, are critical INVESTMENTS Consult http:// www.careers-inbusiness.com for an excellent site containing information on a variety of business career areas, listings of current jobs, and a variety of other reference materials Finance graduates who go into investments often work for a brokerage house such as Merrill Lynch, either in sales or as a security analyst Others work for banks, mutual funds, or insurance companies in the management of their investment portfolios; for financial consulting firms advising individual investors or pension funds on how to invest their capital; for investment banks whose primary function is to help businesses raise new capital; or as financial planners whose job is to help individuals develop long-term financial goals and portfolios The three main functions in the investments area are sales, analyzing individual securities, and determining the optimal mix of securities for a given investor FINANCIAL MANAGEMENT Financial management is the broadest of the three areas, and the one with the most job opportunities Financial management is important in all types of businesses, including banks and other financial institutions, as well as industrial and retail firms Financial management is also important in governmental operations, from schools to hospitals to highway departments The job opportunities in financial management range from making decisions regarding plant expansions to choosing what types of securities to issue when financing expansion Financial managers also have the responsibility for deciding the credit terms under which customers may buy, how much inventory the firm should carry, how much cash to keep on hand, whether to acquire other firms (merger analysis), and how much of the firm’s earnings to plow back into the business versus pay out as dividends Regardless of which area a finance major enters, he or she will need a knowledge of all three areas For example, a bank lending officer cannot his or her CAREER OPPORTUNITIES IN FINANCE job well without a good understanding of financial management, because he or she must be able to judge how well a business is being operated The same thing holds true for Merrill Lynch’s security analysts and stockbrokers, who must have an understanding of general financial principles if they are to give their customers intelligent advice Similarly, corporate financial managers need to know what their bankers are thinking about, and they also need to know how investors judge a firm’s performance and thus determine its stock price So, if you decide to make finance your career, you will need to know something about all three areas But suppose you not plan to major in finance Is the subject still important to you? Absolutely, for two reasons: (1) You need a knowledge of finance to make many personal decisions, ranging from investing for your retirement to deciding whether to lease versus buy a car (2) Virtually all important business decisions have financial implications, so important decisions are generally made by teams from the accounting, finance, legal, marketing, personnel, and production departments Therefore, if you want to succeed in the business arena, you must be highly competent in your own area, say, marketing, but you must also have a familiarity with the other business disciplines, including finance Thus, there are financial implications in virtually all business decisions, and nonfinancial executives simply must know enough finance to work these implications into their own specialized analyses.1 Because of this, every student of business, regardless of his or her major, should be concerned with financial management SELF-TEST QUESTIONS What are the three main areas of finance? If you have definite plans to go into one area, why is it necessary that you know something about the other areas? Why is it necessary for business students who not plan to major in finance to understand the basics of finance? FINANCIAL MANAGEMENT IN THE NEW MILLENNIUM When financial management emerged as a separate field of study in the early 1900s, the emphasis was on the legal aspects of mergers, the formation of new firms, and the various types of securities firms could issue to raise capital During the Depression of the 1930s, the emphasis shifted to bankruptcy and reorganization, corporate liquidity, and the regulation of security markets During the 1940s and early 1950s, finance continued to be taught as a descriptive, institutional subject, viewed more from the standpoint of an outsider rather than that of a manager However, a movement toward theoretical analysis began during the late 1950s, and the focus shifted to managerial decisions designed to maximize the value of the firm It is an interesting fact that the course “Financial Management for Nonfinancial Executives” has the highest enrollment in most executive development programs CHAPTER I AN OVERVIEW OF FINANCIAL MANAGEMENT The focus on value maximization continues as we begin the 21st century However, two other trends are becoming increasingly important: (1) the globalization of business and (2) the increased use of information technology Both of these trends provide companies with exciting new opportunities to increase profitability and reduce risks However, these trends are also leading to increased competition and new risks To emphasize these points throughout the book, we regularly profile how companies or industries have been affected by increased globalization and changing technology These profiles are found in the boxes labeled “Global Perspectives” and “Technology Matters.” G L O B A L I Z AT I O N Check out http:// www.nummi.com/ home.htm to find out more about New United Motor Manufacturing, Inc (NUMMI), the joint venture between Toyota and General Motors Read about NUMMI’s history and organizational goals TABLE OF BUSINESS Many companies today rely to a large and increasing extent on overseas operations Table 1-1 summarizes the percentage of overseas revenues and profits for 10 well-known corporations Very clearly, these 10 “American” companies are really international concerns Four factors have led to the increased globalization of businesses: (1) Improvements in transportation and communications lowered shipping costs and made international trade more feasible (2) The increasing political clout of consumers, who desire low-cost, high-quality products This has helped lower trade barriers designed to protect inefficient, high-cost domestic manufacturers and their workers (3) As technology has become more advanced, the costs of developing new products have increased These rising costs have led to joint ventures between such companies as General Motors and Toyota, and to global operations for many firms as they seek to expand markets and thus spread development costs over higher unit sales (4) In a world populated with multinational firms able to shift production to wherever costs are lowest, a firm whose manufacturing operations are restricted to one country cannot compete unless costs in its home country happen to be low, a condition that does not Percentage of Revenue and Net Income from Overseas Operations for 10 Well-Known Corporations 1-1 PERCENTAGE OF REVENUE ORIGINATED OVERSEAS PERCENTAGE OF NET INCOME GENERATED OVERSEAS Chase Manhattan 23.9 21.9 Coca-Cola 61.2 65.1 Exxon Mobil 71.8 62.7 General Electric 31.7 22.8 General Motors 26.3 55.3 COMPANY IBM 57.5 49.6 McDonald’s 61.6 60.9 Merck 21.6 43.4 Minn Mining & Mfg 52.1 27.2 Walt Disney 15.4 16.6 SOURCE: Forbes Magazine’s 1999 Ranking of the 100 Largest U.S Multinationals; Forbes, July 24, 2000, 335–338 FINANCIAL MANAGEMENT IN THE NEW MILLENNIUM COKE RIDES THE GLOBAL ECONOMY WAVE uring the past 20 years, Coca-Cola has created tremendous value for its shareholders A $10,000 investment in Coke stock in January 1980 would have grown to nearly $600,000 by mid-1998 A large part of that impressive growth was due to Coke’s overseas expansion program Today nearly 75 percent of Coke’s profit comes from overseas, and Coke sells roughly half of the world’s soft drinks More recently, Coke has discovered that there are also risks when investing overseas Indeed, between mid-1998 and January 2001, Coke’s stock fell by roughtly a third—which means that the $600,000 stock investment decreased in value to $400,000 in about 2.5 years Coke’s poor performance during this period was due in large part to troubles overseas Weak economic conditions in Brazil, Germany, Japan, Southeast Asia, Venezuela, Colombia, and Russia, plus a quality scare in Belgium and France, hurt the company’s bottom line Despite its recent difficulties, Coke remains committed to its global vision Coke is also striving to learn from these difficulties The company’s leaders have acknowledged that Coke may have become overly centralized Centralized control enabled Coke to standardize quality and to capture operating efficiencies, both of which initially helped to establish its brand name throughout the world More recently, however, Coke has become concerned D For more information about the Coca-Cola Company, go to http://www.thecocacolacompany.com/world/ index.html, where you can find profiles of Coca-Cola’s presence in foreign countries You may follow additional links to Coca-Cola web sites in foreign countries that too much centralized control has made it slow to respond to changing circumstances and insensitive to differences among the various local markets it serves Coke’s CEO, Douglas N Daft, reflected these concerns in a recent editorial that was published in the March 27, 2000, edition of Financial Times Daft’s concluding comments appear below: So overall, we will draw on a long-standing belief that CocaCola always flourishes when our people are allowed to use their insight to build the business in ways best suited to their local culture and business conditions We will, of course, maintain clear order Our small corporate team will communicate explicitly the clear strategy, policy, values, and quality standards needed to keep us cohesive and efficient But just as important, we will also make sure we stay out of the way of our local people and let them their jobs That will enhance significantly our ability to unlock growth opportunities, which will enable us to consistently meet our growth expectations In our recent past, we succeeded because we understood and appealed to global commonalties In our future, we’ll succeed because we will also understand and appeal to local differences The 21st century demands nothing less necessarily exist for many U.S corporations As a result of these four factors, survival requires that most manufacturers produce and sell globally Service companies, including banks, advertising agencies, and accounting firms, are also being forced to “go global,” because these firms can best serve their multinational clients if they have worldwide operations There will, of course, always be some purely domestic companies, but the most dynamic growth, and the best employment opportunities, are often with companies that operate worldwide Even businesses that operate exclusively in the United States are not immune to the effects of globalization For example, the costs to a homebuilder in rural Nebraska are affected by interest rates and lumber prices — both of which are determined by worldwide supply and demand conditions Furthermore, demand for the homebuilder’s houses is influenced by interest rates and also by conditions in the local farm economy, which depend to a large extent on foreign demand for wheat To operate efficiently, the Nebraska builder must be able to forecast the demand for houses, and that demand depends on worldwide events So, at least some knowledge of global economic conditions is important to virtually everyone, not just to those involved with businesses that operate internationally I N F O R M AT I O N T E C H N O L O G Y As we advance into the new millennium, we will see continued advances in computer and communications technology, and this will continue to revolutionize the way financial decisions are made Companies are linking networks of personal CHAPTER I AN OVERVIEW OF FINANCIAL MANAGEMENT eTOYS TAKES ON TOYS “ R ” US he toy market illustrates how electronic commerce is changing the way firms operate Over the past decade, this market has been dominated by Toys “ R” Us, although Toys “ R” Us has faced increasing competition from retail chains such as WalMart, Kmart, and Target Then, in 1997, Internet startup eToys Inc began selling and distributing toys through the Internet When eToys first emerged, many analysts believed that the Internet provided toy retailers with a sensational opportunity This point was made amazingly clear in May 1999 when eToys issued stock to the public in an initial public offering (IPO) The stock immediately rose from its $20 offering price to $76 per share, and the company’s market capitalization (calculated by multiplying stock price by the number of shares outstanding) was a mind-blowing $7.8 billion To put this valuation in perspective, eToys’ market value at the time of the offering ($7.8 billion) was 35 percent greater than that of Toys “ R” Us ($5.7 billion) eToys’ valuation was particularly startling given that the company had yet to earn a profit (It lost $73 million in the year ending March 1999.) Moreover, while Toys “ R” Us had nearly 1,500 stores and revenues in excess of $11 billion, eToys had no stores and revenues of less than $35 million Investors were clearly expecting that an increasing number of toys will be bought over the Internet One analyst estimated at the time of the offering that eToys would be worth $10 billion within a decade His analysis assumed that in 10 years the toy market would total $75 billion, with $20 billion T coming from online sales Indeed, online sales appear to be here to stay For many customers, online shopping is quicker and more convenient, particularly for working parents of young children, who purchase the lion’s share of toys From the company’s perspective, Internet commerce has a number of other advantages The costs of maintaining a web site and distributing toys online may be smaller than the costs of maintaining and managing 1,500 retail stores Not surprisingly, Toys “ R” Us did not sit idly by — it recently announced plans to invest $64 million in a separate online subsidiary, Toysrus.com The company also announced an online partnership with Internet retailer Amazon.com In addition, Toys “ R” Us is redoubling its efforts to make traditional store shopping more enjoyable and less frustrating While the Internet provides toy companies with new and interesting opportunities, these companies also face tremendous risks as they try to respond to the changing technology Indeed, in the months following eToys’ IPO, Toys “ R” Us’ stock fell sharply, and by January 2000, its market value was only slightly above $2 billion Since then, Toys “ R” Us stock has rebounded, and its market capitalization was once again approaching $5 billion The shareholders of eToys were less fortunate Concerns about inventory management during the 1999 holiday season and the collapse of many Internet stocks spurred a tremendous collapse in eToys’ stock — its stock fell from a post–IPO high of $76 a share to $0.31 a share in January 2001 Two months later, eToys declared bankruptcy computers to one another, to the firms’ own mainframe computers, to the Internet and the World Wide Web, and to their customers’ and suppliers’ computers Thus, financial managers are increasingly able to share information and to have “face-to-face” meetings with distant colleagues through video teleconferencing The ability to access and analyze data on a real-time basis also means that quantitative analysis is becoming more important, and “gut feel” less sufficient, in business decisions As a result, the next generation of financial managers will need stronger computer and quantitative skills than were required in the past Changing technology provides both opportunities and threats Improved technology enables businesses to reduce costs and expand markets At the same time, however, changing technology can introduce additional competition, which may reduce profitability in existing markets The banking industry provides a good example of the double-edged technology sword Improved technology has allowed banks to process information much more efficiently, which reduces the costs of processing checks, providing credit, and identifying bad credit risks Technology has also allowed banks to serve customers better For example, today bank customers use automatic teller machines (ATMs) everywhere, from the supermarket to the local mall Today, FINANCIAL MANAGEMENT IN THE NEW MILLENNIUM many banks also offer products that allow their customers to use the Internet to manage their accounts and to pay bills However, changing technology also threatens banks’ profitability Many customers no longer feel compelled to use a local bank, and the Internet allows them to shop worldwide for the best deposit and loan rates An even greater threat is the continued development of electronic commerce Electronic commerce allows customers and businesses to transact directly, thus reducing the need for intermediaries such as commercial banks In the years ahead, financial managers will have to continue to keep abreast of technological developments, and they must be prepared to adapt their businesses to the changing environment SELF-TEST QUESTIONS What two key trends are becoming increasingly important in financial management today? How has financial management changed from the early 1900s to the present? How might a person become better prepared for a career in financial management? T H E F I N A N C I A L S TA F F ’ S R E S P O N S I B I L I T I E S The financial staff’s task is to acquire and then help operate resources so as to maximize the value of the firm Here are some specific activities: Forecasting and planning The financial staff must coordinate the planning process This means they must interact with people from other departments as they look ahead and lay the plans that will shape the firm’s future Major investment and financing decisions A successful firm usually has rapid growth in sales, which requires investments in plant, equipment, and inventory The financial staff must help determine the optimal sales growth rate, help decide what specific assets to acquire, and then choose the best way to finance those assets For example, should the firm finance with debt, equity, or some combination of the two, and if debt is used, how much should be long term and how much short term? Coordination and control The financial staff must interact with other personnel to ensure that the firm is operated as efficiently as possible All business decisions have financial implications, and all managers — financial and otherwise — need to take this into account For example, marketing decisions affect sales growth, which in turn influences investment requirements Thus, marketing decision makers must take account of how their actions affect and are affected by such factors as the availability of funds, inventory policies, and plant capacity utilization Dealing with the financial markets The financial staff must deal with the money and capital markets As we shall see in Chapter 5, each firm affects and is affected by the general financial markets where funds are 10 CHAPTER I AN OVERVIEW OF FINANCIAL MANAGEMENT 13-1 QBE ϭ 500,000 13-2 30% debt and 70% equity 14-11 13-3 bU ϭ 1.0435 13-4 a(1) Ϫ$75,000 (2) $175,000 b QBE ϭ 140,000 13-5 a(1) Ϫ$60,000 b QBE ϭ 14,000 13-6 13-9 No leverage: ROE ϭ 10.5%; ␴ ϭ 5.4%; CV ϭ 0.51; 60% leverage: ROE ϭ 13.7%; ␴ ϭ 13.5%; CV ϭ 0.99 13-10 ks ϭ 17% 13-12 a EPSOld ϭ $2.04; New: EPSD ϭ $4.74; EPSS ϭ $3.27 b 339,750 units c QNew, Debt ϭ 272,250 units Debt used: E(EPS) ϭ $5.78; ␴EPS ϭ $1.05; E(TIE) ϭ 3.49ϫ Stock used: E(EPS) ϭ $5.51; ␴EPS ϭ $0.85; E(TIE) ϭ 6.00ϫ 13-14 a FCA ϭ $80,000; VA ϭ $4.80/unit; PA ϭ $8.00/unit 13-15 40% debt and 60% equity; WACC ϭ 11.45% EAR ϭ 8.49% 15-5 a ROELL ϭ 14.6%; ROEHL ϭ 16.8% b ROELL ϭ 16.5% kNom ϭ 75.26%; EAR ϭ 109.84% 15-4 13-8 A/R ϭ $59,500 15-3 a(2) $125,000 b QBE ϭ 7,000 $3,000,000 15-2 a P0 ϭ $25 b P0 ϭ $25.81 14-1 $6,000,000 $2.00; 25% $5,000,000 50% $1,000,000 $8,333,333 15-1 13-7 13-13 a b c e f g $7,500,000 15-6 a DSO ϭ 28 days b A/R ϭ $70,000 15-7 b 14.90% d 21.28% 15-8 a 45.15% 15-9 Nominal cost ϭ 14.90%; Effective cost ϭ 15.89% 15-10 14.91% 15-11 a 32 days b $288,000 c $45,000 d(1) 30 (2) $378,000 15-12 a 83 days b $356,250 c 4.87ϫ 15-13 a 69.5 days b(1) 1.875ϫ (2) 11.25% c(1) 46.5 days (2) 2.1262ϫ (3) 12.76% Payout ϭ 55% 14-2 P0 ϭ $60 14-3 P0 ϭ $40 15-14 14-4 14-5 $3,250,000 Payout ϭ 20% a ROET ϭ 11.75%; ROEM ϭ 10.80%; ROER ϭ 9.16% 15-15 a Feb surplus ϭ $2,000 14-6 14-7 14-8 14-9 Payout ϭ 52% D0 ϭ $3.44 Payout ϭ 31.39% a $1.44 b 3% c $1.20 d 33 1/3% 14-10 A-42 15-16 APPENDIX C I a $100,000 c(1) $300,000 (2) Nominal cost ϭ 37.24%; Effective cost ϭ 44.59% 15-18 14.35% 15-19 a(1) $3,960,000 (2) $4,800,000 (3) $9,360,000 (4) Regular ϭ $3,960,000; Extra ϭ $5,400,000 c 15% d 15% a Oct loan ϭ $22,800 15-17 a $300,000 15-20 a(1) $27,260 (3) $25,616 16-1 27.2436 yen per shekel 16-2 yen ϭ $0.00907 A N S W E R S TO E N D - O F - C H A P T E R P R O B L E MS 16-3 euro ϭ $0.68966 or $1 ϭ 1.45 euros 16-12 b $20,045.45 16-4 0.6667 pound per dollar 16-13 16-5 6.49351 krones 16-6 15 kronas per pound a $2,772,003 b $2,777,585 c $3,333,333 16-8 $468,837,209 16-14 b $1.6488 16-9 ϩ$250,000 16-15 kNom-U.S ϭ 4.6% 16-16 117 pesos 16-17 20 yen per euro, or 0.05 euro per yen 16-10 DOLLARS PER 1,000 UNITS OF: POUNDS CAN DOLLARS EUROS $1,442.80 $654.00 $891.70 YEN PESOS KRONAS $9.06 $106.10 $104.40 APPENDIX C I A N S W E R S TO E N D - O F - C H A P T E R P R O B L E MS A-43 APPENDIX D SELECTED EQUATIONS AND DATA CHAPTER Net cash flow ϭ Net income Ϫ Noncash revenues ϩ Noncash charges Net cash flow ϭ Net income ϩ Depreciation and amortization All current All current liabilities that Net operating ϭ Ϫ not charge interest working capital assets Net operating Cash and Accounts Accounts working ϭ ° marketable ϩ ϩ Inventories ¢ Ϫ a ϩ Accrualsb receivable payable capital securities Total operating capital ϭ Net operating working capital ϩ Net fixed assets NOPAT ϭ EBIT(1 Ϫ Tax rate) Operating cash flow ϭ NOPAT ϩ Depreciation Free cash flow ϭ Operating cash flow Ϫ Gross investment in operating capital Free cash flow ϭ NOPAT Ϫ Net investment in operating capital MVA ϭ Market value of stock Ϫ Equity capital supplied by shareholders ϭ [(Shares outstanding)(Stock price)] Ϫ Total common equity EVA ϭ NOPAT Ϫ After-tax dollar cost of capital used to support operations ϭ (EBIT)(1 Ϫ T) Ϫ (Operating capital)(After-tax percentage cost of capital) Equivalent pre-tax yield Muni yield ϭ on taxable bond 1ϪT INDIVIDUAL TAX RATES FOR APRIL 2001 Single Individuals IF YOUR TAXABLE INCOME IS Up to $26,250 YOU PAY THIS AMOUNT ON THE BASE OF THE BRACKET $ PLUS THIS PERCENTAGE ON THE EXCESS OVER THE BASE AVERAGE TAX RATE AT TOP OF BRACKET 15.0% 15.0% $26,250–$63,550 I 22.6 31.0 27.0 35,787.00 36.0 31.9 Over $288,350 APPENDIX D 28.0 14,381.50 $132,600–$288,350 A-44 3,937.50 $63,550–$132,600 91,857.00 39.6 39.6 S E L E C T E D E Q U AT I O N S A N D D ATA Married Couples Filing Joint Returns YOU PAY THIS AMOUNT ON THE BASE OF THE BRACKET IF YOUR TAXABLE INCOME IS Up to $43,850 $ PLUS THIS PERCENTAGE ON THE EXCESS OVER THE BASE AVERAGE TAX RATE AT TOP OF BRACKET 15.0% 15.0% $43,850–$105,950 6,577.50 28.0 22.6 $105,950–$161,450 23,965.50 31.0 25.5 $161,450–$288,350 41,170.50 36.0 30.1 Over $288,350 86,854.50 39.6 39.6 Corporate Tax Rates IT PAYS THIS AMOUNT ON THE BASE OF THE BRACKET IF A CORPORATION’S TAXABLE INCOME IS Up to $50,000 $ PLUS THIS PERCENTAGE ON THE EXCESS OVER THE BASE $50,000–$75,000 7,500 AVERAGE TAX RATE AT TOP OF BRACKET 15.0% 15.0% 25.0 18.3 $75,000–$100,000 13,750 34.0 22.3 $100,000–$335,000 22,250 39.0 34.0 $335,000–$10,000,000 113,900 34.0 34.0 3,400,000 $10,000,000–$15,000,000 35.0 34.3 $15,000,000–$18,333,333 5,150,000 38.0 35.0 Over $18,333,333 6,416,667 35.0 35.0 CHAPTER Current ratio ϭ Current assets Current liabilities Quick, or acid test, ratio ϭ Current assets Ϫ Inventories Current liabilities Inventory turnover ratio ϭ Sales Inventories DSO ϭ Days Receivables Receivables ϭ sales ϭ Average sales per day Annual sales/365 outstanding Fixed assets turnover ratio ϭ Sales Net fixed assets Total assets turnover ratio ϭ Sales Total assets Debt ratio ϭ D/E ϭ Total debt Total assets D/A D/E , and D/A ϭ Ϫ D/A ϩ D/E Debt ratio ϭ Ϫ Equity multiplier APPENDIX D I S E L E C T E D E Q U AT I O N S A N D D ATA A-45 Times-interest-earned (TIE) ratio ϭ EBITDA coverage ratio ϭ EBIT Interest charges EBITDA ϩ Lease payments Interest ϩ Principal payments ϩ Lease payments Net income available to common stockholders Profit margin on sales ϭ Sales Basic earning power ratio ϭ EBIT Total assets Net income available to common stockholders Return on total assets (ROA) ϭ Total assets ROA ϭ a Profit b (Total assets turnover) margin Return on common equity (ROE) ϭ Net income available to common stockholders Common equity ROE ϭ ROA ϫ Equity multiplier ϭa Profit Total assets Equity ba ba b margin turnover multiplier ϭa Net income Sales Total assets ba ba b Sales Total assets Common equity Return on investors' capital ϭ Price/earnings (P/E) ratio ϭ Price/cash flow ratio ϭ Book value per share ϭ Net income ϩ Interest Debt ϩ Equity Price per share Earnings per share Price per share Cash flow per share Common equity Shares outstanding Market/book (M/B) ratio ϭ Market price per share Book value per share EVA ϭ Net income Ϫ [(Cost of Equity Capital)(Equity Capital)] EVA ϭ (ROE Ϫ % Cost of Equity)(Dollars of Equity Capital) CHAPTER AFN ϭ (A*/S0)⌬S Ϫ (L*/S0)⌬S Ϫ MS1(RR) Full capacity sales ϭ A-46 APPENDIX D I Actual sales Percentage of capacity at which fixed assets were operated S E L E C T E D E Q U AT I O N S A N D D ATA Target FA/Sales ratio ϭ Actual fixed assets Full capacity sales Required level of FA ϭ (Target FA/Sales ratio) (Projected sales) CHAPTER k ϭ k* ϩ IP ϩ DRP ϩ LP ϩ MRP kRF ϭ k* ϩ IP I1 ϩ I2 ϩ # # # ϩ In n IPn ϭ CHAPTER Dollar return ϭ Amount received Ϫ Amount invested Percentage return ϭ Amount received Ϫ Amount invested Amount invested n ˆ Expected rate of return ϭ k ϭ a Piki iϭ1 n ˆ Variance ϭ ␴2 ϭ a (ki Ϫ k )2Pi iϭ1 ˆ a (ki Ϫ k ) Pi B iϭ1 n Standard deviation ϭ ␴ ϭ CV ϭ ␴ ˆ k n ˆ ˆ k p ϭ a wik i ˆ a (kpj Ϫ k p) Pj B iϭj iϭ1 n ␴p ϭ n b p ϭ a wibi iϭ1 SML ϭ ki ϭ kRF ϩ (kM Ϫ kRF)bi RPi ϭ (RPM)bi bϭ Y2 Ϫ Y1 ϭ Slope coefficient in kit ϭ a ϩ b kMt ϩ et X2 Ϫ X1 CHAPTER FVn ϭ PV(1 ϩ i)n ϭ PV(FVIFi,n) PV ϭ FVn a n b ϭ FVn(1 ϩ i)Ϫn ϭ FVn(PVIFi,n) 1ϩi APPENDIX D I S E L E C T E D E Q U AT I O N S A N D D ATA A-47 PVIFi,n ϭ FVIFi,n FVIFA i,n ϭ [(1 ϩ i)n Ϫ 1]/i PVIFA i,n ϭ [1 Ϫ (1/(1 ϩ i)n)]/i FVAn ϭ PMT(FVIFAi,n) FVAn (Annuity due) ϭ PMT(FVIFA i,n)(1 ϩ i) PVAn ϭ PMT(PVIFAi,n) PVAn (Annuity due) ϭ PMT(PVIFA i,n)(1 ϩ i) PV (Perpetuity) ϭ Payment Interest rate ϭ PMT i n t n PVUneven stream ϭ a CFt a b ϭ a CFt(PVIFi,t) 1ϩi tϭ1 tϭ1 n n FVUneven stream ϭ a CFt (1 ϩ i)nϪt ϭ a CFt(FVIFi,nϪt) tϭ1 FVn ϭ PVa1 ϩ iNom b m tϭ1 mn Effective annual rate ϭ a1 ϩ iNom m b Ϫ 1.0 m Periodic rate ϭ iNom/m iNom ϭ APR ϭ (Periodic rate)(m) FVn ϭ PV(ein) PV ϭ FVn(eϪin) CHAPTER N INT M VB ϭ a t ϩ (1 ϩ kd)N tϭ1 (1 ϩ kd) ϭ INT(PVIFAkd,N) ϩ M(PVIFkd,N) 2N INT/2 M INT (PVIFAkd/2,2N) ϩ M(PVIFkd/2,2N) VB ϭ a ϭ t ϩ 2N (1 ϩ kd/2) tϭ1 (1 ϩ kd /2) N Call price INT Price of callable bond ϭ a t ϩ (1 ϩ kd)N tϭ1 (1 ϩ kd) Current yield ϭ A-48 APPENDIX D I Annual interest Bond's current price S E L E C T E D E Q U AT I O N S A N D D ATA Accrued value at end of Year n ϭ Issue price ϫ (1 ϩ kd)n Interest in Year n ϭ Accrued valuen Ϫ Accrued valuenϪ1 Tax savings ϭ (Interest deduction)(T) CHAPTER ϱ Dt ˆ P0 ϭ PV of expected future dividends ϭ a (1 ϩ ks)t tϭ1 ˆ P0 ϭ D0(1 ϩ g) ks Ϫ g ϭ D1 ks Ϫ g D1 ˆ ks ϭ ϩ g P0 For a constant growth stock, Pn ϭ P0(1 ϩ g)n DNϩ1 ˆ Horizon value ϭ P N ϭ ks Ϫ g VCompany ϭ FCF1 (1 ϩ WACC)1 ϩ FCF2 (1 ϩ WACC)2 FCF ϭ EBIT(1 Ϫ T) ϩ Depreciation Ϫ Vp ϭ kp ϭ Dp kp Dp Vp ϩ ###ϩ FCFϱ (1 ϩ WACC)ϱ Change in Capital Ϫ net operating expenditures working capital CHAPTER 10 After-tax component cost of debt ϭ kd(1 Ϫ T) Component cost of preferred stock ϭ kp ϭ Dp Pp ˆ ks ϭ k s ϭ kRF ϩ RP ϭ D1/P0 ϩ g ks ϭ kRF ϩ (kM Ϫ kRF)bi ks ϭ Bond yield ϩ Risk premium ke ϭ D1 ϩ g P0(1 Ϫ F) N M(1 Ϫ F) ϭ a tϭ1 INT(1 Ϫ T) M ϩ t (1 ϩ kd) (1 ϩ kd)N g ϭ (Retention rate)(ROE) ϭ (1.0 Ϫ Payout rate)(ROE) REBreakpoint ϭ Addition to retained earnings Equity fraction APPENDIX D I S E L E C T E D E Q U AT I O N S A N D D ATA A-49 WACC ϭ wdkd(1 Ϫ T) ϩ wpkp ϩ wcks kp ϭ kRF ϩ (kM Ϫ kRF)bp CHAPTER 11 Payback ϭ Year before full recovery ϩ NPV ϭ CF0 ϩ CF1 ϩ (1 ϩ k)1 CF2 (1 ϩ k)2 Unrecovered cost at start of year Cash flow during year ϩ ###ϩ CFn (1 ϩ k)n n CFt ϭ a (1 ϩ k)t tϭ0 IRR: CF0 ϩ CF1 ϩ (1 ϩ IRR) CF2 (1 ϩ IRR) ϩ ###ϩ CFn ϭ0 (1 ϩ IRR)n n CFt a (1 ϩ IRR)t ϭ tϭ0 MIRR: PV costs ϭ PV terminal value n n COF a (1 ϩ k)t ϭ tϭ0 PV costs ϭ nϪt a CIFt(1 ϩ k) tϭ0 (1 ϩ MIRR)n TV (1 ϩ MIRR)n CHAPTER 12 Free cash flow ϭ EBIT(1 Ϫ T) ϩ Depreciation Ϫ Change in Capital Ϫ net operating expenditures working capital APPENDIX 12A Recovery Allowance Percentages for Personal Property CLASS OF INVESTMENT OWNERSHIP YEAR 3-YEAR 5-YEAR 7-YEAR 10-YEAR 33% 20% 14% 10% 45 32 25 18 15 19 17 14 12 13 12 11 9 6 7 9 10 11 A-50 APPENDIX D I S E L E C T E D E Q U AT I O N S A N D D ATA _ 100% _ 100% _ 100% 100% CHAPTER 13 Return on invested capital ϭ NOPAT Capital EBIT ϭ PQ Ϫ VQ Ϫ F QBE ϭ F PϪV EPS ϭ (S Ϫ FC Ϫ VC Ϫ I)(1 Ϫ T) (EBIT Ϫ I)(1 Ϫ T) ϭ Shares outstanding Shares outstanding b ϭ bU [1 ϩ (1 Ϫ T)(D/E)] bU ϭ b/[1 ϩ (1 Ϫ T)(D/E)] D/E ϭ D/A Ϫ D/A ks ϭ kRF ϩ Premium for business risk ϩ Premium for financial risk CHAPTER 14 g ϭ (Retention rate)(ROE) ϭ (1 Ϫ Payout rate)(ROE) Dividends ϭ Net income Ϫ [(Target equity ratio) (Total capital budget)] CHAPTER 15 Inventory conversion Inventory ϭ period Sales/365 Receivables Receivables collection ϭ DSO ϭ period Sales/365 Payables deferral period ϭ Payables Cost of goods sold/365 Inventory Receivables Payables Cash conversion ϩ collection Ϫ deferral ϭ conversion period period period cycle A/R ϭ Credit sales Length of ϫ per day collection period ADS ϭ Annual sales/365 ϭ (Units sold)(Sales price) 365 Receivables ϭ (ADS)(DSO) Nominal annual cost of payables ϭ 365 days Discount percent ϫ Discount Days credit is Discount Ϫ 100 Ϫ percent outstanding period APPENDIX D I S E L E C T E D E Q U AT I O N S A N D D ATA A-51 CHAPTER 16 Forward exchange rate Spot exchange rate ϭ Ph ϭ (Pf)(Spot rate) Spot rate ϭ A-52 APPENDIX D I Ph Pf S E L E C T E D E Q U AT I O N S A N D D ATA ϩ kh ϩ kf APR A/R b CAPM CF CV D DCF DRP DSO EAR EBIT EPS EVA F FVn FVAn FVIF FVIFA g i I INT IP IRR k ෆ k ˆ k k* kd ke kf kh kj kM kNom kp kRF ks Frequently Used Symbols Annual percentage rate Accounts receivable Beta coefficient, a measure of an asset’s riskiness Capital Asset Pricing Model Cash flow; CFt is the cash flow in Period t Coefficient of variation Dividend per share of stock (DPS); Dt is the dividend in Period t Discounted cash flow Default risk premium Days sales outstanding Effective annual rate, EFF% Earnings before interest and taxes ϭ net operating income Earnings per share Economic value added (1) Fixed operating costs (2) Flotation cost Future value for Year n Future value of an annuity for n years Future value interest factor for a lump sum Future value interest factor for an annuity Growth rate in earnings, dividends, and stock prices Interest rate; also referred to as k Interest rate key on some calculators Interest payment in dollars Inflation premium Internal rate of return (1) A percentage discount rate, or cost of capital; also referred to as i (2) Required rate of return “k bar,” historic, or realized, rate of return “k hat,” an expected rate of return Real risk-free rate of interest Cost of debt Cost of new common stock (outside equity) Interest rate in foreign country Interest rate in home country Cost of capital for an individual firm or security Cost of capital for “the market,” or an “average” stock Nominal rate of interest; also referred to as iNom (1) Cost of preferred stock (2) Project cost of capital (3) Portfolio’s return Rate of return on a risk-free security (1) Cost of retained earnings (2) Required return on a stock LP M M/B MCC MIRR MRP MVA N n NPV NOWC P Pf Ph PN P/E PMT PPP PV PVAn PVIF PVIFA Q r ROA ROE RP RPM RR S SML ⌺ ␴ ␴2 t T TIE V VB VC WACC YTC YTM Liquidity premium Maturity value of a bond Market-to-book ratio Marginal cost of capital Modified internal rate of return Maturity risk premium Market value added Calculator key denoting number of periods (1) Life of a project or investment (2) Number of shares outstanding Net present value Net operating working capital (1) Price of a share of stock; P0 ϭ price of the stock today (2) Sales price per unit of product sold Price of good in foreign country Price of good in home country A stock’s horizon, or terminal, value Price/earnings ratio Payment of an annuity Purchasing power parity Present value Present value of an annuity for n years Present value interest factor for a lump sum Present value interest factor for an annuity Quantity produced or sold Correlation coefficient Return on assets Return on equity Risk premium Market risk premium Retention rate Sales Security Market Line Summation sign (capital sigma) Standard deviation (lowercase sigma) Variance Time period Marginal income tax rate Times-interest-earned ratio Variable cost per unit Bond value Total variable costs Weighted average cost of capital Yield to call Yield to maturity ... optimal mix of securities for a given investor FINANCIAL MANAGEMENT Financial management is the broadest of the three areas, and the one with the most job opportunities Financial management is... Professional Corporation (Professional Association) A type of corporation common among professionals that provides most of the benefits of incorporation but does not relieve the participants of. .. the basics of finance? FINANCIAL MANAGEMENT IN THE NEW MILLENNIUM When financial management emerged as a separate field of study in the early 1900s, the emphasis was on the legal aspects of mergers,

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Mục lục

  • 0324178298

  • 1 - An Overview of Financial Management

  • 2 - Financial Statements, Cash Flow, and Taxes

  • 3 - Analysis of Financial Statements

  • 4 - Financial Planning and Forecasting

  • 5 - The Financial Environment Markets, Institutions, and Interest Rates

  • 6 - Risk and Rates of Return

  • 7 - Time Value of Money

  • 8 - Bonds and Their Valuation

  • 9 - Stocks and Their Valuation

  • 10 - The Cost of Capital

  • 11 - The Basics of Capital Budgeting

  • 12 - Cash Flow Estimation and Risk Analysis

  • 13 - Capital Structure and Leverage

  • 14 - Distributions to Shareholders Dividends and Share Repurchases

  • 15 - Working Capital Management

  • 16 - Multinational Financial Management

  • Appendix A - Mathematical Tables

  • Appendix B - Solutions to Self-Test Problems

  • Appendix C - Answers to End-of-Chapter Problems

  • Appendix D - Selected Equations and Data

  • Endsheets

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