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Fundamentals of financial management 9e by concise Fundamentals of financial management 9e by concise Fundamentals of financial management 9e by concise Fundamentals of financial management 9e by concise Fundamentals of financial management 9e by concise Fundamentals of financial management 9e by concise Fundamentals of financial management 9e by concise
www.downloadslide.com www.downloadslide.com FREQUENTLY USED SYMBOLS/ABBREVIATIONS ACP Average collection period ADR American depository receipt AFN Additional funds needed AMT Alternative minimum tax APR Annual percentage rate b bL bU BEP BVPS CAPEX CAPM CCC CF Beta coefficient, a measure of an asset’s riskiness Levered beta Unlevered beta Basic earning power Book value per share Capital expenditures Capital Asset Pricing Model Cash conversion cycle Cash flow; CFt is the cash flow in Period t CV Coefficient of variation Dp Dividend of preferred stock Dt Dividend in Period t DCF Discounted cash flow D/E Debt-to-equity ratio DEP Depreciation D1/P0 DPS DRIP DRP Expected dividend yield Dividends per share Dividend reinvestment plan Default risk premium DSO Days sales outstanding EAR Effective annual rate, EFF% EBIT Earnings before interest and taxes; operating income EBITDA EPS EVA F Earnings before interest, taxes, depreciation, and amortization Earnings per share Economic value added (1) Fixed operating costs (2) Flotation cost FCF Free cash flow FVN Future value for Year N FVAN g GAAP HVN I IFRS IPER I/YR INT IP IPO IRR LIBOR Future value of an annuity for N years Growth rate in earnings, dividends, and stock prices U.S Generally Accepted Accounting Principles Firm’s horizon value at t International Financial Reporting Standards Periodic interest rate Interest rate key on some calculators Interest payment in dollars Inflation premium Initial public offering Internal rate of return London Interbank Offered Rate LP Liquidity premium M Maturity value of a bond M/B MIRR N Interest rate; also referred to as r Market-to-book ratio Modified internal rate of return MRP Maturity risk premium MVA Market value added N Calculator key denoting number of periods NOPAT Net operating profit after taxes, EBIT(1 − T) NOWC NPV Net operating working capital Net present value P Sales price per unit of product sold Pf Price of good in foreign country Ph Price of good in home country Pt Price of a share of stock in Period t; P0 P/E price of the stock today Price-to-earnings ratio Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com PMT PPP PV PVAN Q QBE r Payment of an annuity Purchasing power parity Present value Present value of an annuity for N years Quantity produced or sold Break-even quantity (1) A percentage discount rate, or cost of capital; also referred to as I (2) Nominal risk-adjusted required rate of return r¯ “r bar,” historic, or realized, rate of return r^ “r hat,” an expected rate of return r* Real risk-free rate of return rd Before-tax cost of debt rd(1 − T) After-tax cost of debt re Cost of new common stock (external equity) rf Interest rate in foreign country rh Interest rate in home country ri Required return for an individual firm or security rM Return on “the market,” or on an “average” stock rNOM rp Nominal rate of interest; also referred to as INOM (1) Cost of preferred stock (2) Portfolio’s return rRF rs Rate of return on a risk-free security, equal to r* IP (1) Cost of retained earnings (2) Required return on common stock Correlation coefficient; also denoted as R when using historical data ROA Return on assets ROE Return on equity ROIC RP RPM S Return on invested capital Risk premium Market risk premium (1) Sales (2) Estimated standard deviation for sample data SML ∑ Security Market Line Summation sign Standard deviation t Time period T Marginal income tax rate TIE V Times interest earned VB (1) Variable cost per unit (2) Current value of a call option Bond value Vp Value of preferred stock VC Total variable costs WACC Weighted average cost of capital wc Percentage of common stock in capital structure wd Percentage of debt in capital structure wp Percentage of preferred stock in capital structure YTC Yield to call YTM Yield to maturity Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com Fundamentals of FINANCIAL MANAGEMENT CONCISE 9e EUGENE F BRIGHAM University of Florida JOEL F HOUSTON University of Florida Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com This is an electronic version of the print textbook Due to electronic rights restrictions, some third party content may be suppressed Editorial review has deemed that any suppressed content does not materially affect the overall learning experience The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest Important Notice: Media content referenced within the product description or the product text may not be available in the eBook version Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com Fundamentals of Financial Management: Concise, Ninth Edition Eugene F Brigham and Joel F Houston Vice President, General Manager: Science, Math and Quantitative Business: Balraj Kalsi Product Director: Mike Schenk Product Team Manager: Joe Sabatino Senior Product Manager: Michael Reynolds Senior Product Assistant: Adele Scholtz Associate Content Developer: Brad Sullender Senior Marketing Manager: Nathan Anderson Content Project Manager: Jana Lewis Manufacturing Planner: Kevin Kluck Marketing Coordinator: Eileen Corcoran Media Developer: Mark Hopkinson Production Service: Integra Software Services Pvt Ltd Senior Art Director: Michelle Kunkler © 2017, 2015 Cengage Learning® WCN: 02-200-203 ALL RIGHTS RESERVED No part of this work covered by the copyright herein may be reproduced or distributed in any form or by any means, except as permitted by U.S copyright law, without the prior written permission of the copyright owner For product information and technology assistance, contact us at Cengage Learning Customer & Sales Support, 1-800-354-9706 For permission to use material from this text or product, submit all requests online at www.cengage.com/permissions Further permissions questions can be emailed to permissionrequest@cengage.com Unless otherwise noted, all images are © Cengage Learning Library of Congress Control Number: 2015943331 ISBN 13: 978-1-305-63593-7 Cengage Learning 20 Channel Center Street Boston, MA 02210 USA Internal Designer: Imbue Design/Kim Torbeck Cover Designer: Imbue Design/Kim Torbeck Cover Image: olaser/Getty Images Intellectual Property Analyst: Brittani Morgan Project Manager: Erika Mugavin Cengage Learning is a leading provider of customized learning solutions with employees residing in nearly 40 different countries and sales in more than 125 countries around the world Find your local representative at www.cengage.com Cengage Learning products are represented in Canada by Nelson Education, Ltd To learn more about Cengage Learning Solutions, visit www.cengage.com Purchase any of our products at your local college store or at our preferred online store www.cengagebrain.com Printed in Canada Print Number: 01 Print Year: 2015 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com Brief Contents PREFACE PART xii INTRODUCTION TO FINANCIAL MANAGEMENT Chapter Chapter PART An Overview of Financial Management Financial Markets and Institutions FUNDAMENTAL CONCEPTS Chapter Chapter Chapter PART PART PART IN FINANCIAL MANAGEMENT Financial Statements, Cash Flow, and Taxes Analysis of Financial Statements Time Value of Money INVESTING IN 58 101 142 187 Interest Rates Bonds and Their Valuation Risk and Rates of Return Stocks and Their Valuation 188 222 263 308 LONG-TERM ASSETS: CAPITAL BUDGETING Chapter 10 Chapter 11 Chapter 12 The Cost of Capital The Basics of Capital Budgeting Cash Flow Estimation and Risk Analysis CAPITAL STRUCTURE AND Chapter 13 Chapter 14 Capital Structure and Leverage Distributions to Shareholders: Dividends and Share Repurchases DIVIDEND POLICY WORKING CAPITAL MANAGEMENT, FORECASTING, FINANCIAL MANAGEMENT Chapter 15 Chapter 16 Chapter 17 26 57 FINANCIAL ASSETS Chapter Chapter Chapter Chapter PART 347 348 378 410 451 AND 452 495 MULTINATIONAL 527 Working Capital Management Financial Planning and Forecasting Multinational Financial Management 528 568 594 Solutions to Self-Test Questions and Problems Answers to Selected End-of-Chapter Problems Selected Equations and Tables A-1 APPENDIXES Appendix A Appendix B Appendix C INDEX B-1 C-1 I-1 III Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com Contents PREFACE xii 2-1 2-2 PART Introduction to Financial Management CHAPTER An Overview of Financial Management 1-1 2-3 1-2 Jobs in Finance 1-3 Forms of Business Organization 1-4 The Main Financial Goal: Creating Value for Investors 1-4a Determinants of Value 1-4b Intrinsic Value 10 1-4c Consequences of Having a Short-Run Focus 12 1-5 Stockholder–Manager Conflicts 13 1-5a Compensation Packages 13 1-5b Direct Stockholder Intervention 13 Are CEOs Overpaid? 14 1-5c Managers’ Response 15 1-6 Stockholder–Debtholder Conflicts 16 1-7 Balancing Shareholder Interests and the Interests of Society 17 Investing in Socially Responsible Funds 18 1-8 Business Ethics 20 1-8a What Companies Are Doing 20 1-8b Consequences of Unethical Behavior 21 1-8c How Should Employees Deal with Unethical Behavior? 22 TYING IT ALL TOGETHER 23 CHAPTER Financial Markets and Institutions 26 The Economy Depends on a Strong Financial System 26 PUTTING THINGS IN PERSPECTIVE 27 Financial Institutions 35 Securitization Has Dramatically Transformed the Banking Industry 40 2-4 The Stock Market 41 2-4a Physical Location Stock Exchanges 41 2-4b Over-the-Counter (OTC) and the NASDAQ Stock Markets 42 Global Perspectives: The NYSE and NASDAQ Go Global 42 2-5 The Market for Common Stock 43 2-5a Types of Stock Market Transactions 43 Initial Buzz Surrounding IPOs Doesn’t Always Translate Into Long-Lasting Success 45 What Is Finance? 1-1a Areas of Finance 1-1b Finance within an Organization 1-1c Finance versus Economics and Accounting Financial Markets 30 2-2a Types of Markets 30 2-2b Recent Trends 31 Striking the Right Balance PUTTING THINGS IN PERSPECTIVE The Capital Allocation Process 28 2-6 Stock Markets and Returns 46 2-6a Stock Market Reporting 46 2-6b Stock Market Returns 47 Measuring the Market 48 2-7 Stock Market Efficiency 49 2-7a Behavioral Finance Theory 51 2-7b Conclusions about Market Efficiency 53 TYING IT ALL TOGETHER 54 INTEGRATED CASE Smyth Barry & Company 55 PART Fundamental Concepts in Financial Management 57 CHAPTER Financial Statements, Cash Flow, and Taxes 58 Unlocking the Valuable Information in Financial Statements 58 PUTTING THINGS IN PERSPECTIVE 59 3-1 Financial Statements and Reports 60 Global Perspectives: Global Accounting Standards: Will It Ever Happen? 61 3-2 The Balance Sheet 61 3-2a Allied’s Balance Sheet 63 Cash Holdings and Net Operating Working Capital: A Closer Look 67 The Balance Sheet of an Average American Household 68 IV Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com 3-3 3-4 The Income Statement 69 4-9 Statement of Cash Flows 71 Statement of Stockholders’ Equity 75 3-6 Uses and Limitations of Financial Statements 76 3-7 Free Cash Flow 77 Using Financial Ratios to Assess Performance 122 4-10 Uses and Limitations of Ratios 125 Looking for Warning Signs within the Financial Statements 127 4-11 Looking Beyond the Numbers 127 Free Cash Flow Is Important for Businesses Both Small and Large 79 TYING IT ALL TOGETHER 129 3-8 MVA and EVA 80 INTEGRATED CASE D’Leon Inc., Part II 138 3-9 Income Taxes 82 3-9a Individual Taxes 82 3-9b Corporate Taxes 85 Taking a Closer Look Conducting a Financial Ratio Analysis on Hewlett Packard Co 141 TYING IT ALL TOGETHER 89 INTEGRATED CASE D’Leon Inc., Part I 96 WEB APPENDIX 4A Common Size and Percent Change Analyses Taking a Closer Look Exploring Whole Foods’ Financial Statements 100 CHAPTER Time Value of Money 142 CHAPTER Analysis of Financial Statements 101 Can You Make Money Analyzing Stocks? 101 PUTTING THINGS IN PERSPECTIVE 102 4-1 4-2 Will You Be Able to Retire? 142 PUTTING THINGS IN PERSPECTIVE 143 5-1 5-2 Ratio Analysis 103 Liquidity Ratios 104 Asset Management Ratios 106 4-4 Debt Management Ratios 109 4-4a Total Debt to Total Capital 111 4-4b Times-Interest-Earned Ratio 112 4-5 Profitability Ratios 113 4-5a Operating Margin 113 4-5b Profit Margin 113 4-5c Return on Total Assets 114 4-5d Return on Common Equity 114 4-5e Return on Invested Capital 114 4-5f Basic Earning Power (BEP) Ratio 115 4-6 Market Value Ratios 116 4-6a Price/Earnings Ratio 116 4-6b Market/Book Ratio 117 4-7 Tying the Ratios Together: The DuPont Equation 118 Microsoft Excel: A Truly Essential Tool 119 4-8 Potential Misuses of ROE 120 Economic Value Added (EVA) versus Net Income 121 Future Values 145 Simple versus Compound Interest 146 5-2c Financial Calculators 147 5-2d Spreadsheets 147 5-2e Graphic View of the Compounding Process 149 Financial Analysis on the Internet 105 4-2b Quick, or Acid Test, Ratio 106 4-3a Inventory Turnover Ratio 107 4-3b Days Sales Outstanding 107 4-3c Fixed Assets Turnover Ratio 108 4-3d Total Assets Turnover Ratio 109 Time Lines 144 5-2a Step-by-Step Approach 145 5-2b Formula Approach 146 4-2a Current Ratio 104 4-3 v 4-9a Comparison to Industry Average 122 4-9b Benchmarking 122 4-9c Trend Analysis 124 Massaging the Cash Flow Statement 74 3-5 Contents 5-3 Present Values 151 5-3a Graphic View of the Discounting Process 153 5-4 Finding the Interest Rate, I 154 5-5 Finding the Number of Years, N 155 5-6 Annuities 155 5-7 Future Value of an Ordinary Annuity 156 5-8 Future Value of an Annuity Due 159 5-9 Present Value of an Ordinary Annuity 160 5-10 Finding Annuity Payments, Periods, and Interest Rates 162 5-10a Finding Annuity Payments, PMT 162 5-10b Finding the Number of Periods, N 163 5-10c Finding the Interest Rate, I 163 5-11 Perpetuities 164 5-12 Uneven Cash Flows 165 5-13 Future Value of an Uneven Cash Flow Stream 167 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it vi Contents www.downloadslide.com 5-14 Solving for I with Uneven Cash Flows 168 5-15 Semiannual and Other Compounding Periods 169 5-16 Comparing Interest Rates 171 5-17 Fractional Time Periods 174 5-18 Amortized Loans 175 TYING IT ALL TOGETHER 176 INTEGRATED CASE First National Bank 184 WEB APPENDIX 5A Continuous Compounding and Discounting WEB APPENDIX 5B Growing Annuities 6-7c International Factors 212 6-7d Business Activity 212 6-8 Interest Rates and Business Decisions 213 TYING IT ALL TOGETHER 214 INTEGRATED CASE Morton Handley & Company 220 Taking a Closer Look Using Yahoo! Finance’s Bonds Center to Understand Interest Rates 221 CHAPTER Bonds and Their Valuation 222 Sizing Up Risk in the Bond Market 222 PUTTING THINGS IN PERSPECTIVE 223 PART Financial Assets 187 7-1 7-2 7-3 7-4 The Cost of Money 190 6-2 Interest Rate Levels 191 6-3 The Determinants of Market Interest Rates 195 6-3a The Real Risk-Free Rate of Interest, r* 195 Global Perspectives: European Banks Confront the Reality of Negative Interest Rates 196 6-3b The Nominal, or Quoted, Risk-Free Rate of Interest, rRF = r* + IP 197 6-3c Inflation Premium (IP) 197 6-3d Default Risk Premium (DRP) 198 6-3e Liquidity Premium (LP) 199 6-3f Interest Rate Risk and the Maturity Risk Premium (MRP) 199 An Almost Riskless Treasury Bond 200 6-4 The Term Structure of Interest Rates 202 6-5 What Determines the Shape of the Yield Curve? 204 The Links between Expected Inflation and Interest Rates: A Closer Look 206 6-6 Using the Yield Curve to Estimate Future Interest Rates 208 6-7 Macroeconomic Factors That Influence Interest Rate Levels 211 6-7a Federal Reserve Policy 211 6-7b Federal Budget Deficits or Surpluses 212 Bond Valuation 229 Bond Yields 232 7-4a Yield to Maturity 233 7-4b Yield to Call 234 PUTTING THINGS IN PERSPECTIVE 189 6-1 Key Characteristics of Bonds 225 7-2a Par Value 225 7-2b Coupon Interest Rate 225 7-2c Maturity Date 226 7-2d Call Provisions 226 7-2e Sinking Funds 227 7-2f Other Features 228 CHAPTER Interest Rates 188 The Fed Contemplates an Increase in Interest Rates as the U.S Economy Shows Signs of a Strong Rebound 188 Who Issues Bonds? 224 7-5 7-6 7-7 Changes in Bond Values over Time 236 Bonds with Semiannual Coupons 239 Assessing a Bond’s Riskiness 241 7-7a Price Risk 242 7-7b Reinvestment Risk 243 7-7c Comparing Price Risk and Reinvestment Risk 244 7-8 Default Risk 246 7-8a Various Types of Corporate Bonds 246 7-8b Bond Ratings 247 7-8c Bankruptcy and Reorganization 252 7-9 Bond Markets 253 Accrued Interest and the Pricing of Coupon Bonds 253 TYING IT ALL TOGETHER 255 INTEGRATED CASE Western Money Management Inc 261 Taking a Closer Look Using Yahoo! Finance’s Bonds Center to Understand The Impact of Interest Rates on Bond Valuation 262 WEB APPENDIX 7A Zero Coupon Bonds WEB APPENDIX 7B Bond Risk and Duration WEB APPENDIX 7C Bankruptcy and Reorganization Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it C-4 www.downloadslide.com Appendix C Selected Equations and Tables Chapter Quoted interest rate r rRF r rt IPt rt IPt rT-bill rT-bond rC-bond r IP DRP LP MRP rRF DRP LP MRP IP MRPt MRPt DRPt rRF with cross-product term LPt r IP r IP Chapter Bond’s value INT VB N t INT rd INT rd N Price of callable bond t 2N VB t INT rd INT rd rd rd M N rd N N Call price t rd N M t Accrued interest Dirty price Invoice price t INT rd M 2N rd Number of days since last coupon payment Number of days in coupon period Coupon payment Clean price Accrued interest Quoted price Accrued interest Chapter Expected rate of return ^ r P1 r1 P2 r2 PN rN N Pi ri i N Standard deviation σ ri ^ r Pi i N rt r Avg N Estimated σ Coefficient of variation ^ rp ^ w1 r1 N t ^ w2 r2 CV ^ wN rN σ ^ r ^ wi ri i bp w1 b1 w2 b2 wN bN N wi bi i RPM RPi ri rM rRF RPM bi rRF rM rRF bi Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com Appendix C Selected Equations and Tables C-5 Chapter ^ Value of stock P0 PV of expected future dividends D1 rs ∞ D2 1 Dt rs t 1 g D0 1 rs D0 g rs g Expected rate of return Expected dividend yield D1 g P0 ^ rs Growth rate D∞ rs ∞ g D0 g ∞ rs ∞ rs D1 rs g Expected growth rate, or capital gains yield Payout ratio ROE D rs ^ Zero growth stock P0 Horizon value t D0 ^ Constant growth stock P0 rs DN rs g ^ PN D1 ^ Nonconstant growth stock P0 D2 rs 1 DN rs D1 rs DN rs 1 N 1 D∞ rs DN ^ Market value of company rs rs rs N ^ PV of horizon value, PN g FCF2 WACC VCompany at t Market value of equity N N FCF1 Horizon value ^ rp rs rs PN PV of expected future free cash flows Vcompany Vp 1 ^ DN PV of nonconstant dividends PV of horizon value, PN N ∞ D2 rs N WACC FCFN Book value WACC FCF∞ WACC ∞ gFCF PV of all future EVAs Dp rp Dp Vp Chapter 10 WACC % of debt After-tax cost of debt wd rd T % of preferred stock Cost of preferred stock wp rp % of common equity Cost of common equity wc rs Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it C-6 www.downloadslide.com Appendix C Selected Equations and Tables After-tax cost of debt Interest rate on new debt rd rd T rd T Component cost of preferred stock Required rate of return rs rRF RP rs rRF rRF rs Bond yield Dp Pp rp Expected rate of return ^ D1 P0 g rs RPM bi rM rRF bi D1 rs ∞ Dt rs t P0 Tax savings Risk premium D2 1 rs D∞ rs ∞ t D1 P0 rs rs g ^ D1 P0 rs Expected g Flotation cost adjustment g Pure DCF cost Adjusted DCF cost Cost of external equity D1 P0 F re Cost of equity from new stock Flotation cost adjustment rs Addition to retained earnings for the year Equity fraction Retained earnings breakpoint Chapter 11 NPV CF0 N t CF0 CF1 r CFt rt CF2 CF1 IRR r CFN CF2 1 N t CIFt 0 N t t t PV costs Payback r IRR N CFt IRR t t COFt r N CFN IRR N N r MIRR N TV MIRR N Number of years prior to full recovery Unrecovered cost at start of year Cash flow during full recovery year Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com Appendix C Selected Equations and Tables C-7 Chapter 12 Taxes paid on salvaged assets Tax rate Salvage value Book value Recovery Allowance Percentage for Personal Property Class of Investment Ownership Year 3-Year 5-Year 7-Year 33% 45 15 20% 32 19 12 11 14% 25 17 13 9 100% 100% 100% 10 11 10-Year 10% 18 14 12 7 7 100% Chapter 13 EBIT T Total invested capital ROIC PQ Operating breakeven : EBIT QBE F F P V bL bU bU bL rs VQ rRF T D E T D E Premium for business risk Net debt Premium for financial risk Short-term debt Long-term debt Cash and equivalents Chapter 14 Dividends Net income Net income Retained earnings required to help finance new investments Target equity ratio Total capital budget Chapter 15 Inventory conversion period Average collection period Payables deferral period Inventory conversion period Cash conversion cycle Inventory Cost of goods sold 365 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it C-8 www.downloadslide.com Appendix C Selected Equations and Tables Receivables Sales 365 Average collection period ACP or DSO Payables Purchases per day Payables deferral period Sales per day ADS DSO Accounts receivable Nominal annual cost of trade credit Discount % 100 Discount % Length of collection period 365 Days credit is outstanding Discount period Nominal rate Days in year Simple interest rate per day Interest charge for month Payables Cost of goods sold 365 Rate per day Amount of loan Days in month Interest paid Amount received Approximate annual rateAdd-on Chapter 16 AFN Projected asset increase Spontaneous liabilities increase A0 S0 ΔS Full capacity sales L0 S0 ΔS Increase in retained earnings MS1 Payout Actual sales Percentage of capacity at which fixed assets were operated Target fixed assets Sales Required level of fixed assets Actual fixed assets Full capacity sales Target fixed assets Sales Projected sales Chapter 17 Direct quotation : U S $ required unit of foreign currency Indirect quotation : Units of foreign currency 1US$ Forward exchange rate Spot exchange rate Ph 1 rh rf Pf Spot rate Spot rate Ph Pf Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com Index INDEX Terms indicated in bold represent key terms A Abandonment option, 430–433 ABB, 595 Abercrombie & Fitch, 537, 593 “Abnormal” (inverted) yield curve, 203 Accounting vs finance, 5–6 Accounting income vs free cash flow, 412 Accounting standards, global, 61 Accounts payable, 62, 73 Accounts payable (trade credit), 550– 553 Accounts receivable, 547–550 credit policy, 547–548 increase in, 72–73 modifying, 584 monitoring, 549–550 setting and implementing the credit policy, 548–549 and working capital management, 547–550 Accruals, 558 Accrued interest and coupon bond pricing, 253 defined, 253 Accrued liabilities, 558 Accrued wages, 73 Acid test (quick) ratio, 106 Actively managed funds, 37 Actual (realized) rate of return, rs, 316 Additional funds needed (AFN), 573 Add-on interest, 556–557 Add-on loans, 554 Adjustable inputs, 580 Adobe Systems, 502 ADRs See American depository receipts (ADRs) AFLAC, 594 AFN equation, 572, 573–577 After-tax cost of debt, rd (1 – T), 353– 354 Agency theory, 13n6 Aggressive approach, current asset financing, 532–534 Aging Schedule, 550n Agricultural Bank of China Ltd., 39 AICPA See American Institute of Certified Public Accountants (AICPA) Airbus, 378–379, 400 Airline industry, and capital budgeting, 378–379 Albertson’s, 38 Alcan Aluminum, 617 Alcoa Inc., 537 Alibaba, 27 Allergan Inc., 308 Allied Food Products additional funds needed (AFN) Model, 573–574 balance sheet, 62–67 and benchmark companies, 122–124 as bond issuer, 224–225 bonds, time line for, 231 bond valuation, 229–232 capital structure, WACC calculation, 350–351 cash budget, 539–542 cash flow statement, 71–75 corporate valuation model, 330 cost of capital, 350–351 cost of debt, rd (1 − T), 353n6 expansion project analysis, 416–420 financial planning, 571–585 financial statements, 60 forecasted financial statement, 577, 578–582 free cash flow, 78 income statement, 69–71 integrated case, 444–447 market value added (MVA), 80 and ratios, 103–128 regression models, 582–583 sales forecast, 571–572 stock market transactions, 43–44 stock shares, 44n10 Allocation, capital, 28–29 Alternative estimates, averaging, 359– 360 Alternative Minimum Tax (AMT), 84 Amazon.com, 502, 528–529 American Airlines, 483 American Association of Individual Investors (AAII), 127–128 American depository receipts (ADRs), 617 American Development Corporation (ADC), 516–517 American Eagle Outfitters, 537 American Express, 101 American Institute of Certified Public Accountants (AICPA), 61 American terms, 607 Amortization, 70–71, 72 Amortization schedule, 176 Amortized loan, 175–176, 554 Anaconda Copper, 622 Anheuser-Busch, 146 Annual compounding, 169–171 Annual depreciation rates, 448–449 Annual percentage rate (APR), 171– 173 Annual report, 60 Annuity, 155–156, 162–163 See also Ordinary (deferred) annuity Annuity due, 155–156 Annuity due, future value of (FVAdue), 159 Annuity payments (PMT), finding, 162–163 Apartment Investment and Management Co (AIMCO), 251 Apple, Inc., 48, 128, 364, 378, 415, 495– 496, 515, 516, 526, 537 Appreciation of a currency, 602 AQR Capital Management, 38 Arbitrage, 610 Arthur Andersen, 21 Ask price, 41n, 42 “Asset-backed paper,” 557 Asset-based financing, 559n Asset management ratios, 103, 106–109 Assets, 62 Asset structure, 480–481 AstraZeneca, 502 Asymmetric information, 477 AT&T, 15, 48, 502, 510 Atlantic Richfield, 516 Auction markets, 41 Availability of cash, 511 Average collection period (ACP), 107, 536 Average stock’s beta, bA, 282 Average tax rate, 82 B Baker, Malcolm, 480, 501 Balance sheet, 60, 61–69 Bankers’ acceptances, 32 Banking industry, and securitization, 40 Bank loans, costs of, 555–557 Bank of America Corp., 21, 36, 39 Bank of China Ltd., 39 Bank of New York Mellon Corp., 39 Bankruptcy, 66 effect on capital structure, 476 and reorganization, 252 Bankruptcy Act, 252 Banks, 36, 39 Barberis, Nicholas, 52 Barclays Bank PLC, 21, 39 Barron’s, 40 Base-case NPV, 424 Base-case scenario, 426 Baseline Scenario, The, 68 Basic earning power (BEP) ratio, 115–116 Bear Stearns, 36, 313 Beecham, 596 Before-tax cost of debt, rd, 351n, 353–354 Behavioral finance theory, 5, 27, 51–53, 501 BellSouth Telecommunications, 226n Benchmarking, 122–124 Berkshire Hathaway, 38, 101–102, 310, 515 Bernanke, Ben, 188, 479 Berra, Yogi, 474, 569 BESPOKE Investment Group, 507–508 Best Buy, 537 Best-case scenario, 426 Beta (market) risk, 423 Beta coefficient, b, 281, 282–285 concerns about, 295 of a stock, changes in, 294–295 Beta risk, 429–430 BHP Billiton, 429 Bid-ask spread, 43 Bid price, 41n, 42 Bigbee Electronics, 457–467 “Bigger fool” theory of investment, 317n I-1 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it I-2 Index Big Lots, 537 “Big Mac Index,” 614 Biogen Idec Inc., 502 Bird-in-the-hand fallacy, 498 Bitcoin, 34 BlackRock Alternative Investors, 38 Blackstone Group, 39 Black Swan, The (Taleb), 264 Black Swan event, 264 Bloomberg, 105, 202, 515, 603–604 BMW, 596 BNP Paribas SA, 39 Board of directors, Boeing, 364, 378–379, 385n, 400 BofA Merrill Lynch, 39 Bogle, Jack, 313 Bombay Stock Exchange (BSE), 618 Bond contract terms, 248 Bond indentures, 511 Bond markets, 253–255 risk in, 222–223 Bond ratings changes in, 251–252 criteria for, 247–248, 249 importance of, 248, 250–251 Bonds, 32, 224 and bankruptcy/reorganization, 252 characteristics of, 225–228 convertible, 66 default risk, 246–252 increase in, 73 issuers of, 224–225 riskiness of, assessing, 241–246 with semiannual coupons, 239–241 Treasury, almost riskless, 200 types of, 40 Bond valuation, 229–232, 262 Bond values, 236–239 Bond-yield-plus-risk-premium approach, to cost of equity, 357–358 Bond yields, 232–236 Book values, 66 Borrowers, 190n BP, 483, 502, 505 Bridgewater Associates, 38 Brokerage departments, 41 Brown, Stephen, 290 Bryan, Alex, 313 BSE Sensex, 618 Budget, 379 Buffett, Warren, 13, 38, 50, 101–102, 310, 311, 430n11, 515 Burlington Northern Santa Fe, 515 Business ethics in, 20–22 organization, forms of, 7–9 Business activity, and interest rate levels, 212–213 Business climate, 623 Business cycles, 323n Business decisions, and interest rates, 213–214 Business risk, 457–458 factors affecting, 458–459 operating leverage, 459–463 Buy orders, 41 C Cadbury, 310 Calculator solution, 386 California Public Employees’ Retirement System (CalPERS), 13, 311 www.downloadslide.com Call premium, 226–227 Call protection, 226–227 Call provision, 226–227 Campbell Soup, 122, 364 Candy Crush Saga, 26 Cannibalization, 414–415, 419 Capital, 453 alternative sources of, 512 obtaining, 348 Capital allocation process, 28–29 Capital asset pricing model (CAPM), 275–285, 290 approach to estimating cost of common equity, 356–357 concerns about, 295 and portfolio risk, 275–285 Capital budget, 379, 433–434 Capital budgeting, 379 in the Asian/Pacific region, 428 competition in the aircraft industry, 378–379 decision criteria used in practice, 401–402 and internal rate of return (IRR), 385–388 international, 622–623 methods, conclusions on, 400–401 and modified internal rate of return (MIRR), 391–395 multiple internal rates of return, 388–390 and net present value (NPV), 381–385 and NPV profiles, 395–398 overview, 379–381 and payback period, 398–400 post-audit, 434–435 and reinvestment rate assumptions, 390–391 risk analysis in, 422–423 Capital budgeting decision rules, 365 Capital components, 351–352 Capital gains, 82–83 corporate, 87 vs dividends, 497–499 reasons preferred, 498–499 Capital gains yield, 237, 316 Capital intensity ratio, 575 Capital loss, 82 Capital management See Working capital management Capital markets, 30 defined, 4–5 and international money, 616–619 Capital rationing, 433 Capital structure, 365, 454 changes in, WACC and, 468 changes over time, 456 decisions, checklist for, 480–482 international, 623–625 measuring, 454–456 optimal, 454, 468–471, 472–473 restaurant example, 494 target, 351 variations in, 483 Capital structure theory, 473 bankruptcy, 476 effect of taxes, 475 MM proposition, 474–480 pecking order hypothesis, 479 signaling theory, 477–478 trade-off theory, 476–477 using debt financing to constrain managers, 478–479 windows of opportunity, 480 CAPM See Capital asset pricing model (CAPM) Captive finance companies, 548n17 Carlyle Group, 39 Carolina Power & Light Energy (CP&L), 28, 31 Carryback, 87–88 Carryforward, 87–88 Cash currency, 543 demand deposits, 543–544 and market securities, 543–546 Cash budget, 539–542 Cash conversion cycle (CCC), 535 calculating from financial statements, 536–539 real-world examples, 537 targeted, calculating, 535–536 Cash equivalents, 543 Cash flow (CFt), 165 vs accounting income, 412 and dividend policy, 506–508 incremental, 413 timing of, 413 Cash flow estimation conceptual issues in, 411–416 expansion project analysis, 416–420 and Home Depot growth, 410–411 replacement analysis, 420–422 risk analysis in capital budgeting, 422–423 Cash flow statement Allied Food Products, 71–75 massaging, 74 Catering theory, 501 Caterpillar Inc., 452–453 CBS, 14 C corporations, 8, 88 Cengage Learning, 414–415 CFO magazine, 552 Chairperson of the board, Chance, Don, 281 Chevron Corporation, 310, 506–508 Chicago Stock Exchange (CSE), 617 Chief executive officer (CEO), 5, 14 Chief financial officer (CFO), Chief operating officer (COO), China Construction Bank Corporation, 39 Chipotle Mexican Grill, 3, 44 Cisco Systems, Inc., 202 Citibank, 36, 598 Citigroup Inc., 15, 21, 36, 39, 313, 557, 594 Claim against assets, 75 Classified stock, 312 Class life, 448 Clear Channel, 38 Clientele effect, 500–501 Clienteles, 500 Closely held corporation, 43 Closely held stock, 43 CNBC, 105, 313 CNNMoney.com, 105, 202 Coca-Cola Co., 13, 15, 101, 205, 311, 364, 516, 537, 594–597, 622 Code of ethics See Business, ethics in Coefficient of variation (CV), 273 Colgate-Palmolive, 594 Collateral, 554 Collateralized debt obligations (CDOs), 40 Collection float, 544n Collection policy, 547 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com Columbia/HCA Healthcare Corporation, 226n Comcast, 570n3 Commercial bank, 36 Commercial paper, 32, 557–558 Common size analysis, 103n Common size balance sheet, 103n Common size income statement, 103n Common stockholders, legal rights and privileges of, 310–311 Common stocks, 33, 66 dividends, 309 external equity, 362 flotation costs, 361 increased cost of capital, 361 market for, 43–46 types of, 312 valuing, approaches to, 331 Company-specific risk, 279 Compensating balance, 553n Compensation packages, 13, 14, 311 Competition, 458 Composite cost of capital See Weighted average cost of capital (WACC) Compounding, 145, 169–171 Compounding process, 149–151 Compound interest, 146 ConAgra Foods, 122, 483 Conservative approach, current asset financing, 533, 534 Constant growth (Gordon) model, 318–323 Constant growth stocks, 318–323 Constraints, in dividend policy, 511– 512 Consumer credit, 32 Continuing (horizon) value, 324 Convertible bonds, 66, 228 Cook, Tim, 496 Coors, 44n11 Corporate (within-firm) risk, 422–423, 429–430 Corporate bonds, 33, 205–207, 224, 246–247 Corporate finance, Corporate inversions, 599 Corporate objectives, statement of, 570 Corporate raiders, 15 Corporate scope, 570 Corporate strategies, 570 Corporate taxes and capital gains, 87 consolidated returns, 88 depreciation, 88 and interest/dividends paid by, 86–87 and interest/dividends received, 85–86 loss carryback/carryforward, 87–88 small businesses: S corporations, 88 Corporate valuation model, 309, 314, 327n, 328–332 Corporation, closely held, 43 double taxation, 84 global, 595–598 multinational, 595–598 publicly owned, 43 stockholders, 7n2 taxes, Correlation, 278 Correlation coefficient, , 277–278 Costly trade credit, 552 Cost of capital, 348–368 adjusting for risk, 365–367 after-tax cost of debt, 351n estimates, problems with, 367–368 estimating, 348–349 increase in, 361 influences on, 348–349 risk-adjusted, 423 of 3M, calculating, 376–377 Cost of common equity, 356–357 Cost of debt, rd (1 − T), 353–354 Cost of money, 190 Cost of new common stock, re, 355, 360–362 Cost of preferred stock, rp, 354–355 Cost of retained earnings, rs, 355–360 Country risk, 619 Coupon bonds, pricing of, and accrued interest, 253 Coupon interest rate, 225 Coupon payment, 225 Coupons, semiannual, bonds with, 239–241 Covidien PLC, 599 Credit Agricole SA, 39 Credit default swaps, 35 Credit Department, 552 Credit period, 547 Credit policy, 547 setting and implementing, 548–549 variables, 547–548 CreditRiskMonitor, 552 Credit scores, 548 Credit-scoring systems, 548n16 Credit standards, 547 Credit Suisse, 39 Credit terms, 548 Credit unions, 36 Crossover rate, 395 Cross rates, 606–607 Crowdfunding, 34 CSX, 483 Cumulative voting, 310n Currency, 543 Currency board arrangement, 605 Current assets, 62, 530–535 Current assets financing policy, 532– 535 Current liabilities, 62, 65 Current ratio, 104 Current real rate of interest, 193, 196n Current yield, 236n CVS, 537 D Days sales outstanding (DSO) ratio, 107– 108, 536 Dealer markets, 42–43 Debenture, 247 Debt, Caterpillar and, 452–453 Debt crisis, in Europe, 603–604 Debt financing, to constrain managers, 478–479 Debtholders vs stockholders, 16–17 Debt management ratios, 103, 109– 112 Debt ratio, 111–112 Debt-to-equity ratio, 111n2 Decision tree, 430 Declaration date, 508–509 Deepwater Horizon oil spill crisis, 505 Default risk, 246–252 Default risk premium (DRP), 198 Index I-3 Defaults, 222–223 Deferred (ordinary) annuity, 155–156 Deferred call, 226–227 Dell Computer, 38–39, 327, 415, 516 Demand deposits, 543–544 Depreciation, 66, 70–72, 88 Depreciation-generated funds, 367 Depreciation of a currency, 602 Depreciation rates, effect on cash flow, 418–419 Derivatives, 34–35 Derivative securities, 30 Deutsche Bank AG, 21, 39, 50 Devaluation of a currency, 602 Dimon, Jamie, 599 Dimson, Elroy, 18, 507–508 Direct funds transfers, 35 Direct investments, 616–617 Direct quotation, 607 Direct transfers, of money, 29 DIRECTV, 101 Discount bond, 231 Discounted cash flow (DCF) approach, to cost of equity, 358–359 Discounted dividend model, 309, 314, 315–318, 327, 330–332 Discounted payback, 399 Discounting, 152 Discounting process, 153 Discount on forward rate, 609 Discounts, 547 Discriminant analysis, 126n Diversifiable risk, 279, 457 Diversification, 264, 265, 286–287, 296, 597 Dividend irrelevance theory, 497–498 Dividend payout ratio, 365 Dividend policy alternative sources of capital, 512 Apple example, 526 clientele effect, 500–501 constraints, 511–512 earnings, cash flows, and dividends, 506–508 effects on rs, 512 establishing, in practice, 501–510 factors influencing, 511–513 and investment opportunities, 512 issues in, 499–501 payment procedures, 508–510 target payout ratio: residual dividend model, 501–505 Dividend reinvestment plans (DRIPs), 510–511 Dividends vs capital gains, 497–499 expected, as basis for stock values, 317 vs growth, 320–322 paid by corporations, 86–87 reasons preferred, 498 received by corporations, 85–86 stock, and stock splits, 513–519 Dividend yield, 316 Dividend-yield-plus-growth-rate approach, to cost of equity, 358– 359 DJIA See Down Jones Industrial Average (DJIA) Dodd-Frank Act, 13n8, 14–15, 39, 61, 252, 311 Domestic vs multinational financial management, 599–600 Domini Social Equity Fund, 18 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it I-4 Index Double taxation, 84 Dow, Charles H., 48 Dow Chemical, 594 Dow Jones Industrial Average (DJIA), 48 Dow Jones Industrial Index, 511 Dual-class share structures, 312 Dun and Bradstreet (D&B), 123 DuPont equation, 118–120 Duration, 245 Dutch auction, 45 E Earnings, and dividend policy, 506–508 Earnings per share (EPS), 69, 581 eBay, 502 EBITDA, 71 ECNs See Electronic communications networks (ECNs) Economic profit, 81 Economics vs finance, 5–6 Economic value added (EVA), 80–81, 121, 331 Economist, The, 15, 196, 507–508, 614 Economy healthy, 31 and strong financial system, 26–27 Effective (equivalent) annual rate (EFF% or EAR), 171–173 Efficiency continuum, 50–51 Efficient market, 49 Efficient market advocates, 101 Efficient markets hypothesis (EMH), 50n15, 51–53 Electronic communications networks (ECNs), 42 Eli Lilly, 483 Ellison, Larry, 14 Ells, Steve, EMH See Efficient markets hypothesis (EMH) Employee Benefit Research Institute (EBRI), 142–143 Employees dealing with unethical behavior of company, 22 value on, Enron, 5, 9–10, 21, 22, 76 Enterprise-based approach, to valuation, 327–332 Environmental externalities, 415 EPS (earnings per share), 69, 581 Equilibrium, 10, 343 Equilibrium price, 49 Equilibrium stock prices, changes in, 343–344 Equity capital, estimating cost of, 428 Equivalent annual rate, 171–172 ETFs See Exchange Traded Funds (ETFs) Ethics See Business, ethics in Eurobond, 617 Eurocredits, 617 Eurodollar, 617 Eurodollar market time deposits, 32 Europe, debt crisis in, 603–604 European Aeronautic Defence & Space Co (EADS), 378 European banks and negative interest rates, 196 European Central Bank (ECB), 196, 211, 603–604 European Union (EU), 603–604 www.downloadslide.com EVA (economic value added) approach, to valuing common stocks, 331 Excel, 386 for financial statement analysis, 119 for future values, 148–149 Excess capacity adjustments, 575–577 Exchange rate risk, 621 Exchange rate, 601, 605–608, 616 Exchange Traded Funds (ETFs), 37 Ex-dividend date, 509 Executive compensation, 13, 14, 311 Expansion projects, 413, 416–420 Expected dividends, basis for stock value, 317 Expected future inflation rate, 198n7 Expected inflation, impact of, 291–292 Expected rate of return, r, 269 Expected rate of return, rs, 316 Expected return on a portfolio, rp, 276–277 Expected risk premium, 357n Expected total return, 316 External equity, when to use, 362 Externalities, 414 environmental, 415 negative within-firm, 414–415 positive within-firm, 415 Exxon Mobil Corporation, 340–341, 364, 511, 597 F Facebook, 26, 44, 45, 48 Fama, Eugene, 50, 502 Fannie Mae, 15 FASB See Financial Accounting Standards Board (FASB) FDIC See Federal Deposit Insurance Corporation (FDIC) Federal budget deficits or surpluses, 212 Federal Deposit Insurance Corporation (FDIC), 21 Federal Reserve Board, 68, 202 Federal Reserve Bulletin, 202 Federal Reserve policy, 211 Federal Reserve System, 5, 36, 188–189 Finance areas of, 4–5 capital markets, 4–5 corporate, defined, 4–6 vs economics and accounting, 5–6 investments, jobs in, 6–7 within an organization, 5, Finance theory, behavioral, 5, 27, 51–53, 501 Financial Accounting Standards Board (FASB), 61 Financial analysis on the Internet, 105 Financial asset markets, 30 Financial assets, 264 Financial calculators, 147, 149 Financial crisis of 2007-2008, 3, 26, 31, 35, 40, 188, 308, 603–604 Financial flexibility, 482 Financial goal, of firm, 2, 9–12 Financial Industry Regulatory Authority (FINRA), 43 Financial institutions, 35–40 Financial intermediary, 29, 36–40 Financial leverage, 110, 463 Financial management, 4, 596 See also Multinational financial management Financial markets and technology, 34 trends in, 31, 34–35 types of, 30–31, 32–33 Financial plan, 571 Financial planning See entries for forecasting topics Financial ratios, 248 Financial risk, 463–467 Financial scandals, 127 Financial services corporation, 36 Financial statement analysis Buffet example, 101–102 on the Internet, 105 qualitative factors, 127–128 ratio analysis, 103–104 See also Ratios Financial statements See also entries for specific financial statements balance sheet, 61–69 cash conversion cycle (CCC), 536–539 forecasted, 577, 578–582 free cash flow (FCF), 77–80 income statement, 69–71 and reports, 60 statement of cash flows, 71–75 statement of stockholders’ equity, 75 uses/limitations of, 76–77 value in, 58–59 warning signs within, 127 Whole Foods example, 100 Financing, short-term, 558–559 Financing policies, current asset, 532– 535 First mortgage bonds, 247 Fitch Investors Service, 247 Fixed assets, 62 Fixed assets turnover ratio, 108 Fixed exchange rate, 601 Fixed-exchange-rate regime, 604–605 Fixed inputs, 580 Fixed-peg arrangement, 605 Fixed-rate bonds, 226, 230 Flash Boys (Lewis), 34 Flexible exchange rate, 601–602 Float, 544n Floating exchange rate, 601–602 Floating-rate bonds, 226, 236 Flotation cost, F, 360–361 Flotation cost adjustment, 361 Flowers Foods, 122 Flum, Jerry, 552 Forbes, 510 Ford, Henry, 45–46 Ford Motor Company, 45–46, 74, 378, 483 Forecasted balance sheet, 581 Forecasted financial statements, 577, 578–582 Forecasted income statements, 580–581 Forecasting future performance of Abercrombie & Fitch, 593 to improve operations, 582 measuring country risk, 619 in volatile times, importance of, 568–569 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com Forecasts and effects of changing ratios, 583–585 improving with regression, 582–583 Foreign bonds, 224, 617 Foreign exchange, trading in, 608–609 Foreign exchange rate quotations, 605–608 Foreign trade deficit, 212 Formula approach, future values, 146 Fortune, 45, 515 Forward exchange rate, 601, 608–609 Founders’ shares, 312 Fractional time periods, 174 Frankfurt Exchange, 618 Free cash flow (FCF), 77–80 vs accounting income, 412 and small business, 79 Free enterprise system, Freely floating regime, 602 Free trade credit, 552 French, Kenneth, 502 Fries, Michael T., 14 FT-SE 100 Index, 618 Fujitsu, 595 Funds, spontaneously generated, 573 Future incremental cash flows, 413 Futures markets, 30 Future value (FV), 145–151 FVAN, 156–159 G GAAP See Generally Accepted Accounting Principles (GAAP) Galleon Group LLC, 21 Gap, 537 General Electric (GE), 15, 30, 568–569, 570, 596 General Electric Capital Corp., 39 Generally Accepted Accounting Principles (GAAP), 61, 66 General Motors (GM), 15, 21, 44, 74, 312 General Stock Price Index (IGPA), 618 Geometric average, 198n7 GlaxoSmithKline, 596 Glaxo Wellcome, 596 Global accounting standards, 61 Global corporations See Multinational (global) corporations Global economy, 26–27 Globalization, 34 See also entries for international topics Global Perspectives capital budgeting in the Asian/Pacific region, 428 country risk, measuring, 619 diversifying overseas, 286–287 dividend yields around the world, 507– 508 European banks and negative interest rates, 196 global accounting standards, 61 Google’s time limit on R&D projects, 432 international stocks, investing in, 620–621 NYSE and NASDAQ, 42 Global stock market indexes, 618, 630–631 Goedhart, Marc, 290 Goetzmann, William, 290 Going public, 44 Goldman Sachs Group, Inc., 21, 27, 36, 39, 41, 50 Goodyear, 296, 516 Google, 3, 43, 44, 45, 48, 264, 312, 327, 432, 483 Google Finance, 105 Gordon, Myron, 498 Gordon-Lintner theory, 498 Gordon model, 318–323 Government bonds, 82n18 Graham, Benjamin, 101 Greece, financial crisis in, 603–604 Greenspan, Alan, 35 Grinblatt, Mark, 53 Growth rate, g, 316 Growth vs dividends, 320–322 Gulf Oil, 310, 622 H Half-year convention, 448 Hamada equation, 468–471 Hang Seng Stock Exchange, 618 Hansen, Lars, 50 Harrah’s Entertainment, 38 Hay Group, 14 Hedge funds, 37–38 Hedging, 30, 223, 459n Hedging operation, 35 Hershey Foods, 122 Hewlett-Packard, 8, 141, 415, 537, 594 HFT See High-frequency trading (HFT) firms HH Gregg, 308 High-frequency trading (HFT) firms, 34 Hindsight bias, 52 Historical risk premium, 357n H.J Heinz Co., 38, 102, 310 Holder-of-record date, 509 Home Depot, 77–78, 328, 364, 410–411, 413, 516 Honda, 595, 596 Horizon (continuing) value, 324 Horizon (terminal) date, 324 Hostile takeover, 15 HSI Services Limited, 618 Hughes Aircraft, 312 Humped yield curve, 203 Hybrid securities, 66 Hybrid stock, 332–333 I iBank, 29 Ibbotson Associates, 357n IBEX 35, 618 IBM, 15, 101, 226n, 415, 516, 594, 596, 617 Immelt, Jeffrey, 568–569, 570 Impairment of capital rule, 511 Improperly accumulated earnings, 512 Incentive signaling, 500n Income bond, 228 Income statement, 69–71 defined, 60 forecasted, 580–581 Income taxes corporate, 85–88 individual, 82–85 Incremental cash flows, 413, 420, 422 Indenture, 247 Independent projects, 384–385, 387 Indexed (purchasing power) bond, 228 Indexed funds, 37 Indexes, stock market, 48 Index I-5 Indiegogo, 34 Indirect quotation, 607 Individual Retirement Accounts (IRAs), 84 Industrial & Commercial Bank of China Ltd., 39 Inflation, 190 expected, and interest rates, 206 expected, impact of, 291–292 in foreign countries, 616 and interest rates, 189 and long-term interest rates, 193– 194 “Inflationary psychology,” 193 Inflation hedge, 223 Inflation premium (IP), 197–198, 291– 292 Information (signaling) content, 499– 500 Initial public offering (IPO), 26–27, 44, 45 Inputs, 580 Insolvency, 252 Installment loans, 554 Intel, 43, 48, 332, 415 INTER-10 Index, 618 Interbank foreign currency quotations, 607–608 Intercontinental Exchange (ICE), 42 Interest paid by corporations, 86–87 received by corporations, 85–86 simple vs compound, 146 Interest charges, calculating, 556–557 Interest income, 82 Interest rate, I, finding, 154, 163–164, 168–169 Interest rate conversion, 172n Interest rate levels, 191–194, 211–213 Interest rate parity, 609–611 Interest rate risk, 199, 201, 242–243, 244 Interest rates on bank loans, 554 and business decisions, 213–214 comparing, 171–173 effective (equivalent) annual rate (EFF% or EAR), 171–172 and expected inflation, 206 Federal Reserve example, 188–189 in foreign countries, 616 market, determinants of, 195–201 negative, and European banks, 196 term structure of, 192n, 202–203 and Yahoo! Finance Bonds Center, 221, 262 yield curve, determining shape of, 204– 207 Internal rate of return (IRR), 385–388 Internal Revenue Service (IRS), 66, 448– 449 International Accounting Standards Board (IASB), 61 International Accounting Standards Committee, 61 International capital budgeting, 622– 623 International capital structures, 623– 625 International credit markets, 617 International factors, interest rate levels and, 212 International Financial Reporting Standards (IFRS), 61 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it I-6 Index International Monetary Fund (IMF), 603–604 International monetary system, 601 current monetary arrangements, 602, 604–605 debt crisis in Europe, 603–604 terminology, 601–602 International money and capital markets, 616–619 International stock markets, 617–619, 630–631 International stocks, investing in, 620– 621 Internet exchange rates and international indexes on, 630–631 for financial statement analysis, 105 Intrinsic value, 10–12, 308 estimating, of Exxon Mobil Corporation stock, 340–341 and investors/companies, 314–315 and stock market efficiency, 49 vs stock price, 312–314 Inventories increase in, 72 modifying, 584 and working capital management, 546 Inventory conversion period, 535 Inventory turnover ratio, 107 Inverted (“abnormal”) yield curve, 203 Investment, vertically integrated, 597 Investment bank, 29, 36 Investment-grade bonds, 247–248 Investment horizon, 244–245 Investment opportunities, and dividend policy, 512 Investment policies, current assets, 530–532 Investments defined, overseas, 619–621 in socially responsible funds, 18 Investor, marginal, 10, 315 Investors, and intrinsic value, 314–315 Investors at the margin, 10n3 Investor-supplied funds, 453–454 “Invisible hand” theory, IPO See Initial public offering (IPO) IRR See Internal rate of return ITT, 622 Ivashina, Victoria, 555 J J&J Snack Foods, 122 Japan Post Bank Co Ltd., 39 J.C Penney Corp., 222 Jefferies & Co., 39 Jobs, in finance, 6–7 Jobs, Steve, 495–496 Johnson & Johnson, 222 JPMorgan Chase Bank National Assoc (USA), 39 JPMorgan Chase & Co., 21, 36, 39, 50, 598, 599 Junior mortgages, 247 Junk bonds, 247–248 K Kahneman, Daniel, 51–52 Kellogg Company, 122 www.downloadslide.com Keloharju, Matti, 53 Kickstarter, 34 King Digital Entertainment, 26 KKR, 310 Kohlberg Kravis Roberts, 39 Koller, Tim, 290 Kraft Foods, 102, 310 Krank, Pam, 552 Kroger, 483 Kuehn, Kurt, 568–569 Kwak, James, 68 L Law of one price, 612 Leases, 33, 66 Lehman Brothers, 15, 36 Lev, Baruch, 127 Leverage financial, 463 operating, 459–463 Leveraged buyout (LBO), 479 Lew, Jack, 599 Lewis, Michael, 34 Liabilities, 62 Liabilities-to-assets ratio, 111n1 Liberty Global, 14 Life cycle, 323 Life insurance companies, 36 Limited liability company (LLC), Limited liability partnership (LLP), Limited partnership, 7n2 Line of credit, 554–555 LinkedIn Corp., 44 Lintner, John, 498 Liquid asset, 104 Liquidation, 252 Liquidity premium (LP), 199 Liquidity ratios, 103, 104 Loan guarantees, 554 Loans, amortized, 175–176 Lockboxes, 544 London Interbank Offered Rate (LIBOR rate), 21, 617 London Stock Exchange, 42, 43, 618 Lone Pine Capital, 38 Long-term (fixed) assets, 62 Long-Term Capital Management (LTCM), 38 Long-term debt, 62, 73 Long-term debt markets, 30 Long-term interest rates, 193–194 Long-term investing activities, 73 Low-regular-dividend-plus-extras, 505 LTCM See Long-Term Capital Management (LTCM) M Macroeconomic factors, and interest rate levels, 211–213 MACRS (Modified Accelerated Cost Recovery System), 448–449 Madrid Stock Exchange General Index, 618 Malmendier, Ulrike, 53 Managed-float regime, 602 Managers vs stockholders, 13–16 Man Investments, 38 Marginal investor, 10, 315 Marginal tax rate, 82 Maris, Roger, 146 Maris Distributing, 146 Market (beta) risk, 423 Market, initial public offering (IPO), 44 Marketable securities, 544–545 Market analysis, Market/book (M/B) ratio, 117 Market efficiency, 49–53 See also Efficient markets hypothesis (EMH) Market instruments, participants, and security characteristics, 32–33 Market interest rates, determinants of, 195–201 Market portfolio, 280 Market price, 49 Market price, P0, 10, 315 Market risk, 265, 279, 457 Market risk premium, RPM, 288, 290 Market value added (MVA), 80–81 Market value ratios, 103, 116–117 Market values, 66 MarketWatch, 105 Marsh, Paul, 18, 507–508 Mattel, 502 Maturity date, 226 Maturity matching approach, 532 Maturity risk premium (MRP), 199, 201 Mazda, 596 McDonald’s, 44, 483, 543, 594, 596, 614 Medtronic Inc., 599 Merck & Co., 20, 22, 364 Mergers, 381 Merrill Lynch, 15, 21, 36, 313 Microsoft Corp., 8, 14, 28, 43, 48, 67, 323n, 364, 415 Microsoft Excel See Excel Millennium Management, 38 Miller, Merton, 474–480, 497–498 MIRR See Modified internal rate of return (MIRR) Mission statement, 569–570 Mitsubishi, 596 MM proposition, 474–480, 497–498 Moderate current assets financing policy, 532, 533 Moderate investment policy, 531 Modified Accelerated Cost Recovery System (MACRS), 448–449 Modified internal rate of return (MIRR), 391, 392–395 Modigliani, Franco, 474–480, 497–498 Modigliani-Miller (MM) proposition See MM proposition Mollenkopf, Steven, 14 Money cost of, 190 direct transfer of, 29 Money market funds, 37 Money market mutual funds, 32 Money markets, 30 Monte Carlo simulation, 426–427 Moody’s Investors Service (Moody’s), 247 Moonves, Leslie, 14 Moran, Monty, Morgan Stanley, 29, 36, 39, 41 Morningstar Mutual Funds, 37, 313, 364 Mortgage bond, 246–247 Mortgages, 32, 40 Motley Fool, 105 MSN Money, 105, 122, 123 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com Mulford, Charles, 74 Multinational (global) corporations, 595–598 Multinational financial management complications in, 599–600 vs domestic, 599–600 U.S firms and shareholder value, 594–595 Multiple internal rates of return (IRRs), 388–390 Municipal bonds (munis), 82n18, 224 Mutual funds, 37 Mutually exclusive projects, 384–385, 387, 398n18 Mutual savings banks, 36n MVA See Market Value Added (MVA) N Nadella, Satya, 14 NASDAQ Composite Index, 41, 42, 48 National Association of Securities Dealers Automated Quotations See NASDAQ Composite Index NBC Universal (NBCU), 570n3 Negative growth rate, 324n Negotiable certificates of deposit (CDs), 32 Neiman Marcus, 38 Net capital loss, 82n19 Net cash, 73 Net debt, 480 Net fixed assets, 62, 63 Netflix, 26, 128, 596–597 Net float, 544n Net income, 71–72, 121 Net operating profit after taxes (NOPAT), 77–80 Net operating working capital (NOWC), 65, 67, 530 Net present value (NPV), 381, 382–385, 388 Net present value profile, 395–398 Net working capital, 65, 530 New issue bond, 236 New York Stock Exchange (NYSE), 30, 41, 42, 617 Nikkei 225 Index, 618 Nissan, 596 Nominal (quoted or stated) interest rate (INOM), 171–173, 195 Nominal (quoted) risk-free rate, rRF, 197 Nonconstant (uneven) cash flows, 165–167 Nonconstant growth stocks, 323–327 Non-operating income, 69 NOPAT See Net operating profit after taxes (NOPAT) Normal and nonnormal cash flows, 388–390 “Normal” yield curve, 203 North Atlantic Drilling, 308 Northwest Milling Company, 227 Norwalk Agreement, 61 Notes payable, 62, 73 NOWC See Net operating working capital (NOWC) NPV See Net present value (NPV) NUCOR, 483 Number of periods, N, finding, 163 Number of years, N, finding, 155 NYSE Euronext, 41, 43 O Occidental Petroleum, 622 Och-Ziff Capital Management Group, 38 Online trading systems, 42 Operating activities, 71–72 Operating breakeven, 460 Operating income, 69 Operating leverage, 459–463, 481 Operating margin, 113 Operating plan, 570 Operating short-term securities, 543 Opportunity costs, 151, 414, 419 Optimal capital budget, 433–434 Optimal capital structure, 454, 468–473 Optimal dividend policy, 497 Option to abandon, 430 Option value, 432 Oracle Corp., 13, 14 Ordinary (deferred) annuity, 155–156 future value of (FVAN), 156–159 present value of (PVAN), 160–162 Organization for Economic Cooperation and Development (OECD), 623 Original issue discount (OID) bond, 226 Original maturity, 226 Outstanding bond, 236 Overconfidence, 52, 53 Overseas investing, 619–621 Overseas Private Investment Corporation (OPIC), 623 Oversubscribed deals, 44–45 Over-the-counter (OTC) market, 42–43 “Overvalued” stocks, 313 P Pacific Timber Company, 227 Paramount, 310 Partnership, Par value, 225 Payables deferral period, 536 Payback period, 398–400 Payment (PMT), 165 Payment date, 509 Payment float, 544n Payment procedures, for dividends, 508–510 PayPal, 34 Pecking order hypothesis, 479 Pegs, 605 P/E multiple approach, to valuing common stocks, 331 Penalty tax, 512 Pension funds, 36 PepsiCo Inc., 537, 570 Permanent current assets, 532 Perpetuity, 164–165, 332–333 Peugeot, 15 Philadelphia Stock Exchange, 42 Philip Morris, 502 Philips, 595 Physical asset markets, 30 Physical location exchanges, 41 Piper Jaffray, 39 Plant and equipment, 62 PNC Financial Services Group, Inc., 39 “Poison pill” provision, 310 Political risk, 600, 622 Index I-7 Portfolio, 264–265 and beta coefficient, 281–285 defined, 265n and stocks and risks, 281 Portfolio investments, 616 Portfolio theory, Positive within-firm externalities, 415 Post-audit, in capital budgeting, 434–435 PPP See Purchasing power parity (PPP) Preemptive right, 311 Preferred stock restrictions, 511 Preferred stocks, 33, 66, 332–333 cost of, rp, 354–355 dividends, 309 Premium bond, 231 Premium on forward rate, 609 Present value (PV), 145, 151–153 Price (interest rate) risk, 242–243, 244– 246 Price/earnings (P/E) ratio, 116–117, 331 Primary markets, 30, 44 Primary market transaction, 29 Prime rate, 555 Private equity companies, 38–39 Privately owned corporation, 43 Private markets, 31 Probability distributions, 268–270 Procter & Gamble, 35, 102, 323n, 516 Producers, 190n Product cycle, 323n Production opportunities, 190 Product obsolescence, 459 Profitability ratios, 103, 113–116 Profit margin, 113 Profit maximization, Progressive tax, 82 Promissory note, 553–554 Proprietorship, Proxy, 310 Proxy fight, 310 Proxy rules, 15 Publicly held stock, 43 Publicly owned corporation, 43 Public markets, 31 Purchasing power (indexed) bond, 228 Purchasing power parity (PPP), 612–615 Pure expectations theory, 208–210 Pure financial asset, 30 “Pure-play” companies, 429 Putable bonds, 228 PVAN, 160 Q Qualcomm, 14 Qualified dividend, 84n20 Quantitative easing, 188, 211 Quick (acid test) ratio, 106 Quotas, 596 Quoted/stated interest rate, 171 QVC/Viacom, 310 R Rabobank, 21 Radius Health, 308 Rajan, Raghuram, 623–625 Rajaratnam, Raj, 21 Rate risk, 223 Rates of return, risk and, 288–291 Ratio analysis See also Ratios Ratios See also entries for specific ratios Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it I-8 Index and DuPont Equation, 118–120 and forecasting, 581, 583–585 for performance assessment, 122–125 purpose of, 103 types of, 103–104 uses/limitations of, 125–127 RBS, 21 Real asset markets, 30 Real assets, 264 Real inflation-free rate of return, r*, 291–292 Realized rates of return, r, 276–277 Real options, 430–433 Real rate of interest, 196n Real risk-free rate of interest, r*, 195– 196 Recapture of depreciation, 417n1 Refunding operation, 227 Regression analysis, 582–583 Regular (simple) interest, 556 Reinvestment plans, 510–511 Reinvestment rate assumptions, 390–391 Reinvestment rate risk, 199, 201 Reinvestment risk, 243, 244–246 Relative inflation, 616 Relaxed investment policy, 531 Relevant risk, 281 Reorganization, and bankruptcy, 252 Repatriation of earnings, 622 Replacement analysis, 420–422 Replacement projects, 413 Required rate of return rs, 316 Required returns, 273–274 Reserve borrowing capacity, 478 Residual dividend model, 501, 502–505 Restricted investment policy, 531 Restrictive covenants, 554 Restructuring, of debt, 252 Retained earnings, 63, 355n averaging alternative estimates, 359–360 bond-yield-plus-risk premium approach, 357–358 capital asset pricing model (CAPM), 356–357 cost of, rs, 355–360 discounted cash flow (DCF) approach, 358–359 Retained earnings breakpoint, 362 Retention ratio, 573 Retirement, and time-value of money, 142–143 Return on common equity (ROE), 114 DuPont Equation, 118–120 misuses of, 120–122 Return on invested capital (ROIC), 114 Return on investment (ROI), 190 Return on total assets (ROA), 114 Returns, stock market, 46, 47, 49 Reuters, 105 Revaluation of a currency, 602 Reverse splits, 513n Revolving credit agreement, 555 Rio Tinto, 429 Risk, 190, 267 See also Business risk; Standalone risk adjusting cost of capital for, 365–367 almost riskless Treasury bond, 200 assessing, 428 beta, 429–430 in bond market, 222–223 www.downloadslide.com business, 457–463 country risk, in overseas investments, 619–621 financial, 463–467 implications for corporate managers and investors, 296–297 interest rate, 199, 201 managing, in difficult times, 263–264 measuring, with historical data, 272 overview, 264 portfolio, 277–285 in a portfolio context: CAPM, 275–286 and rates of return, 288–291 reinvestment, 243 within-firm, 429–430 Risk-adjusted cost of capital, 423 Risk analysis in capital budgeting, 422–423 and cash flow estimation, 422–423 Risk and return, trade-off between, 274, 296 Risk assessments, 119 Risk aversion, 265, 273–274, 292–293 Risk-free rate, 197 Riskiness of bonds, assessing, 241–246 Risk Management Association, 123 Risk premium (RP), 274 Risk-return trade-off, 265–267 RJR Nabisco, 310 ROA See Return on total assets (ROA) Robinson-Patman Act, 549 Rockwell Collins, 483 ROE See Return on common equity (ROE) ROI See Return on investment (ROI) ROIC See Return on invested capital (ROIC) Ross, Stephen, 290, 500n Roth IRAs, 84 Royal Dutch Petroleum, 617 S S&P 500 Index, 18, 37, 48, 247, 308, 364 S&P BSE Sensex, 618 Sales forecast, 571–572 Salvage value, 412 Samsung, 378 Santiago Stock Exchange, 618 Sarbanes-Oxley Act, 5, 76 Savings, 190 Savings and loan associations, 36n Scenario analysis, 425–426 Scharfstein, David, 555 Schmidt, Eric, 432 Schnurr, James, 61 S corporations, 8, 88 Seasoned issue bond, 236 SEC See Securities and Exchange Commission (SEC) Secondary markets, 30, 43 Secured financing, 559n Secured loans, 558 Securities and Exchange Commission (SEC), 5, 14–15, 21, 37, 105 Securitization, and banking industry, 40 Security analysis, Security in short-term financing, 558–559 Security market line (SML) Equation, 289 Seekingalpha.com, 105 Selective Stock Price Index (IPSA), 618 Self-attribution bias, 52 Self-liquidating approach, 532 Sell orders, 41 Semiannual compounding, 169–171 Semiannual coupons, bonds with, 239– 241 Semi-strong form, of efficiency, 50n15 Senior mortgages, 247 Sensitivity analysis, 119, 420, 424–425 Shake Shack, 27 Shareholders See also Stockholders and Apple, Inc., 495–496 interests of, and interests of society, 17–20 Shareholder wealth maximization, 17– 20 Shiller, Robert, 50 Short-term debt markets, 30 Short-term financing, security in, 558– 559 Short-term interest rates, 192 Siegel, Jeremy, 297 Signal, 478 Signaling (information) content, 499– 500 Signaling theory, 477–478 Silver Lake Partners, 39 Simple interest, 146, 556 Single-stock, 264–265 Sinking fund provision, 227 Sinking funds, 227–228 “Smart beta” funds, 313 Smith, Adam, SmithKline, 596 Socially responsible funds, 18 Social Security, 142, 143 Southwest Airlines, 308, 364 Specialists, 41n Spontaneous funds, 558 Spontaneously generated funds, 573 Spot exchange rate, 601 Spot markets, 30 Spot rates, 608 Spreadsheets, 147–149 Stand-alone risk, 264–265, 267–275, 422 measuring, 423–427 measuring: coefficient of variation (CV), 273 measuring: standard deviation ( ), 270–271 statistical measures of, 268–270 Standard & Poor’s 500 (S&P 500) See S&P 500 Index Standard & Poor’s Index Committee, 48 Standard deviation, , 270, 271–272 Standard Life Investments, 38 Stated/quoted interest rate, 171–173 Stated rate of interest, 195n Statement of cash flows, 60, 71–75 Statement of corporate objectives, 570 Statement of stockholders’ equity, 60, 75 Staunton, Mike, 18, 507–508 Step-by-step approach, future values, 145–146 Stiglitz, Joseph, Stock dividends, 513–514 Stockholders vs debtholders, 16–17 direct intervention of, 13–15 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com legal rights and privileges of, 310–311 vs managers, 13–16 preemptive rights of, 311 Stockholders’ equity, 61, 62–63 Stock market, 41–43 global indexes, 618 international, 617–619, 630–631 measuring (indexes), 48 NASDAQ market, 42–43 and new IPOs, 44 over-the-counter market, 42–43 physical location stock exchanges, 41 and returns, 46, 47, 49 transaction types, 43–46 Stock market efficiency, 49–53 Stock market equilibrium, 342–345 Stock market indexes, 48, 618 Stock market reporting, 46–47 Stock market returns, 46, 47, 49 Stock market transactions, 43–46 Stock price maximization, Stock prices effect of stock splits on, 514–515 vs intrinsic value, 312–314 Stock repurchases, 515, 516–519 advantages of, 517–518 conclusions on, 518–519 disadvantages of, 518 effects of, 516–517 Stocks common, 33 constant growth, 318–323 international, 620–621 nonconstant growth, valuing, 323–327 “overvalued,” 313 and portfolio risk, 281 preferred, 33 searching for, 308–309 that don’t pay dividends, evaluating, 327 Stocks for the Long Run (Siegel), 297 Stock splits, 513 Stock values, expected dividends as basis for, 317 Strategic business plan, 380 Strategic planning, 569–571 Street, The, 105 Strong form, of efficiency, 50n15 Subordinated debentures, 247 Subprime mortgage, 40 Sung Won Sohn, 552 Sunk cost, 413–414, 419, 435 Supernormal (nonconstant) growth stocks, 323 Supply and demand, 191–192 Survey of Consumer Finances, 68 Survivor (survivorship) bias, 117n, 290 Sustainable growth rate, 574 Symmetric information, 477 Synergy, 570n3 T Takeover, 310 Taking a Closer Look Apple’s dividend policy, 526 capital structures for restaurant companies, 494 exchange rates and international indexes on the Internet, 630– 631 Hewlett-Packard, financial ratio analysis, 141 required returns, estimating, 306– 307 Whole Foods’ financial statements, 100 Yahoo! Finance Bond Center, and interest rates, 221 Yahoo! Finance Bonds Center and impact of interest rates on bond valuation, 262 Taleb, Nassim, 264 Tangible asset markets, 30 Target, 15 Target capital structure, 351 Target cash balance, 541 Target debt ratio range, 455 Target payout ratio, 497, 501–505 Tariffs, 596 Tate, Geoffrey, 53 Tax depreciation, 448–449 Taxes corporate, 8, 85–88 effect on capital structure, 475 income, 82–88 increase in, 73 individual, 82–85 Tax loss carryback/carryforward, 87– 88 Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF), 13 Technology, and financial markets, 34 TECO Energy, 483 Teledyne, 516 Temporary current assets, 532 Tender offer, 516n24 10-K reports, 60n Terminal (horizon) date, 324 Term structure of interest rates, 192n Term structure of interest rates, 202– 203 Texas and Western (T&W) Transport Company, 503–504 Texas Instruments, 516 Thaler, Richard, 51–52 Thomson, 595 3G Capital, 38, 102, 310 3M, 376–377 Time dimension, 67 Time line, 144, 231 Time, 19 Time periods, fractional, 174 Time preferences for consumption, 190 Times-interest-earned (TIE) ratio, 112 Time value of money, 142–143 TIPS See Treasury Inflation Protected Security (TIPS) Toshiba, 595, 597 Total assets turnover ratio, 109 Total debt to total assets, 625 Total debt to total capital ratio, 111– 112 Total liabilities, 65 Toyota, 21, 596 Trade credit, 550–553 Trade-off theory, 476–477 Trading in foreign exchange, 608–609 Traditional IRAs, 84 Tranches, 40 Treasury bonds, 224 Treasury Inflation Protected Security (TIPS), 197 Treasury securities, 222 Trend analysis, 124–125 Index I-9 Trial-and-error procedure, 385–386 Tully, Shawn, 127 Turnover, 107 Tversky, Amos, 51–52 Twitter, Inc., 26, 44, 45 46, 47 Tyson Foods, 122 U UBS, 21 Underwriters/underwriting, 29, 36, 39 Unethical behavior, 21–22 Uneven (nonconstant) cash flows, 165–167 Uneven cash flows, solving for I with, 168–169 Uneven cash flow stream, future value of, 167–168 Uniform Commercial Code (UCC), 559 Unisys Corp., 502 Unlevered beta, bU, 470 Unsystematic risk, 279 UPS, 568–569 U.S Bancorp, 39 Used shares, 43 U.S Generally Accepted Accounting Principles (GAAP), 61 U.S Justice Department, 21 U.S Steel Corp., 537 U.S Treasury bills, 32, 48 U.S Treasury notes and bonds, 32 V Value intrinsic, 10–12 as main financial goal, 9–12 short-run focus, consequences of, 12 Value-based management, 571 Value Line Investment Survey, 37, 105, 123, 358–359, 364 ValuePro, 105 Vanguard, 313 Vertically integrated investment, 597 Viking Global Investors, 38 Vioxx, 20, 22 W WACC See Weighted average cost of capital (WACC) Wall Street Journal, The, 15, 18, 19, 26, 46, 48, 74, 84, 105, 189, 202, 222, 223, 232, 253, 281, 432, 495, 515, 552, 607 Walmart, 364, 537 Walt Disney Company, 226n, 348–349, 364 Warrants, 228 Weak form, of efficiency, 50n15 Weighted average cost of capital (WACC), 352 capital structure changes and, 468 factors affecting, 363–365 overview, 350–351 real-world estimates, 364 Wells Fargo & Co., 36, 39, 101, 552 Wessels, David, 290 Wharton Asset Management, 126 Whole Foods Market, 58–59, 100 “Window dressing” techniques, 126 Windows of opportunity, 480 Winton Capital Management, 38 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it I-10 Index Wisconsin Electric Power Company, 226n Within-firm (corporate) risk, 422–423, 429–430 Working capital, 64–65, 529–530 Working capital management accounts payable (trade credit), 550–553 accounts receivable, 547–550 accruals (accrued liabilities), 558 and amazon.com, 528–529 bank loans, 553–557 cash and marketable securities, 543–546 cash budget, 539–542 cash conversion cycle (CCC), 535–539 commercial paper, 557–558 components of, 528 current assets financing policies, 532–535 www.downloadslide.com current assets investment policies, 530–532 inventories, 546 use of security in short-term financing, 558–559 WorldCom, 5, 21, 22, 76 Worst-case scenario, 426 Wurgler, Jeffrey, 480, 501 Wyndham Worldwide, 364 X Xerox, 15, 510, 516, 595 XETRA DAX, 618 Y Yahoo!, 46 Yahoo! Finance, 105, 123, 202 Yahoo! Finance Bonds Center, 364 Yellen, Janet, 188–189 Yelp, 26 Yield curve, 202 to estimate future interest rates, 208–210 position and slope, 202–203 shape of, determining, 204–207 Yield spread, 250n Yield to call (YTC), 234–235 Yield to maturity (YTM), 233–234 YTC See Yield to call (YTC) YTM See Yield to maturity (YTM) Z Zacks Investment Research, 105 Zero coupon bonds, 226 Zero growth stock, 323 Zingales, Luigi, 623–625 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it ... number of top journals including the Journal of Finance, Journal of Financial Economics, Journal of Business, Journal of Financial and Quantitative Analysis, and Financial Management Professor... TO FINANCIAL MANAGEMENT Chapter Chapter PART An Overview of Financial Management Financial Markets and Institutions FUNDAMENTAL CONCEPTS Chapter Chapter Chapter PART PART PART IN FINANCIAL MANAGEMENT. .. restrictions require it www.downloadslide.com Fundamentals of FINANCIAL MANAGEMENT CONCISE 9e EUGENE F BRIGHAM University of Florida JOEL F HOUSTON University of Florida Australia • Brazil • Japan •