When we wrote the first edition of Financial Management: Theory and Practice, we had four goals: (1) to create a text that would help students make better financial decisions; (2) to provide a book that could be used in the introductory MBA course, but one that was complete enough for use as a reference text in follow-on case courses and after graduation; (3) to motivate students by demonstrating that finance is both interesting and relevant; and (4) to make the book clear enough so that students could go through the material without wasting either their time or their professors’ time trying to figure out what we were saying. The collapse of the sub-prime mortgage market, the financial crisis, and the global economic crisis make it more important than ever for students and managers to understand the role that finance plays in a global economy, in their own companies, and in their own lives. So in addition to the four goals listed above, this edition has a fifth goal, to prepare students for a changed world.
FREQUENTLY USED SYMBOLS ACP ADR APR AR b bL bU BEP BVPS CAPM CCC CF CFPS CR CV Á Dps Dt DCF D/E DPS DRIP DRP DSO EAR EBIT EBITDA EPS EVA F Average collection period American Depository Receipt Annual percentage rate Accounts receivable Beta coefficient, a measure of an asset’s market risk Levered beta Unlevered beta Basic earning power Book value per share Capital Asset Pricing Model Cash conversion cycle Cash flow; CFt is the cash flow in Period t Cash flow per share Conversion ratio Coefficient of variation Difference or change (uppercase delta) Dividend of preferred stock Dividend in Period t Discounted cash flow Debt-to-equity ratio Dividends per share Dividend reinvestment plan Default risk premium Days sales outstanding Effective annual rate, EFF% Earnings before interest and taxes; net operating income Earnings before interest, taxes, depreciation, and amortization Earnings per share Economic Value Added (1) Fixed operating costs (2) Flotation cost FCF FVN FVAN g I I/YR INT IP IPO IRR LP M Free cash flow Future value for Year N Future value of an annuity for N years Growth rate in earnings, dividends, and stock prices Interest rate; also denoted by r Interest rate key on some calculators Interest payment in dollars Inflation premium Initial public offering Internal rate of return Liquidity premium M/B MIRR MRP MVA n N N(di) NOPAT NOWC NPV P Market-to-book ratio Modified Internal Rate of Return Maturity risk premium Market Value Added Number of shares outstanding Calculator key denoting number of periods Area under a standard normal distribution function Net operating profit after taxes Net operating working capital Net present value Pc (1) Maturity value of a bond (2) Margin (profit margin) (1) Price of a share of stock in Period t; P0 = price of the stock today (2) Sales price per unit of product sold Conversion price Copyright 201 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 Pf Ph PN P/E PM PMT PPP PV PVAN Q QBE r −r ^r r* rd re rf rh ri rM rNOM rps rPER rRF rs r ROA ROE RP RPM RR S SML ∑ s s2 t T TVN TIE V VB VL Vop Vps VU VC w wd wps ws WACC X YTC YTM Price of good in foreign country Price of good in home country A stock’s horizon, or terminal, value Price/earnings ratio Profit margin Payment of an annuity Purchasing power parity Present value Present value of an annuity for N years Quantity produced or sold Breakeven quantity (1) A percentage discount rate, or cost of capital; also denoted by i (2) Nominal risk-adjusted required rate of return “r bar,” historic, or realized, rate of return “r hat,” an expected rate of return Real risk-free rate of return Before-tax cost of debt Cost of new common stock (outside equity) Interest rate in foreign country Interest rate in home country Required return for an individual firm or security Return for “the market” or for an “average” stock Nominal rate of interest; also denoted by iNOM (1) Cost of preferred stock (2) Portfolio’s return Periodic rate of return Rate of return on a risk-free security (1) Required return on common stock (2) Cost of current outstanding common stock Correlation coefficient (lowercase rho); also denoted by R when using historical data Return on assets Return on equity Risk premium Market risk premium Retention rate (1) Sales (2) Estimated standard deviation for sample data (3) Intrinsic value of stock (i.e., all common equity) Security Market Line Summation sign (uppercase sigma) Standard deviation (lowercase sigma) Variance Time period Marginal income tax rate A stock’s horizon, or terminal, value Times interest earned Variable cost per unit Bond value Total market value of a levered firm Value of operations Value of preferred stock Total market value of an unlevered firm Total variable costs Proportion or weight Weight of debt Weight of preferred stock Weight of common equity raised internally by retaining earnings Weighted average cost of capital Exercise price of option Yield to call Yield to maturity Copyright 201 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 financial management 14e theor y & practice E U G E N E F B R I G H A M University of Florida MICHAEL C EHRHARDT University of Tennessee Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States Copyright 201 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 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 Copyright 201 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 Financial Management: Theory and Practice, Fourteenth Edition Eugene F Brigham and Michael C Ehrhardt Editorial Director, Business & Economics: Erin Joyner Editor-in-Chief: Joe Sabatino Executive Editor: Mike Reynolds ª 2014, 2011 South-Western, Cengage Learning ALL RIGHTS RESERVED No part of this work covered by the copyright herein may be reproduced, transmitted, stored, or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, web distribution, information networks, or information storage and retrieval systems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the publisher Developmental Editor: Kendra Brown Sr Editorial Assistant: Adele Scholtz Sr Content Project Manager: Holly Henjum Supervising Media Editor: Scott Fidler Manufacturing Planner: Kevin Kluck 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 Sr Art Director: Michelle Kunkler Brand Manager: Robin Lefevre Market Development Manager: John Carey Rights Acquisitions Specialist: Anne Sheroff Production Service/Compositor: Integra Software Services Pvt Ltd ExamView® is a registered trademark of eInstruction Corp Windows is a registered trademark of the Microsoft Corporation used herein under license Macintosh and Power Macintosh are registered trademarks of Apple Computer, Inc used herein under license Microsoft Excel displays are © 2012 Microsoft Microsoft Excel ® is a registered trademark of Microsoft Corporation Cover and Internal Designer: c miller design Library of Congress Control Number: 2012956039 Cover Image: © Fernando Bueno/Getty Images, Inc.; © Adalberto Rios Szalay/Sexto Sol/ Getty Images, Inc Student Edition ISBN-13: 978-1-111-97221-9 Student Edition ISBN-10: 1-111-97221-4 South-Western 5191 Natorp Boulevard Mason, OH 45040 USA Cengage Learning is a leading provider of customized learning solutions with office locations around the globe, including Singapore, the United Kingdom, Australia, Mexico, Brazil, and Japan Locate your local office at: www.cengage.com/global Cengage Learning products are represented in Canada by Nelson Education, Ltd For your course and 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 16 15 14 13 12 Copyright 201 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 © lulu/fotolia.com Preface xviii PART CHAPTER Web Extensions CHAPTER Web Extensions CHAPTER PART Brief Contents Web Extensions The Company and Its Environment An Overview of Financial Management and the Financial Environment 1A: An Overview of Derivatives 1B: A Closer Look at the Stock Markets Financial Statements, Cash Flow, and Taxes 51 2A: The Federal Income Tax System for Individuals Analysis of Financial Statements 95 CHAPTER Web Extensions CHAPTER PART 9A: The Required Return Assuming Nonconstant Dividends and Stock Repurchases The Basics of Capital Budgeting: Evaluating Cash Flows 397 10A: The Accounting Rate of Return (ARR) CHAPTER 10 Web Extensions 4A: The Tabular Approach 4B: Derivation of Annuity Formulas Web Extensions 4C: Continuous Compounding CHAPTER 11 CHAPTER Bond, Bond Valuation, and Interest Rates 187 Web Extensions Web Extensions 5A: A Closer Look at Zero Coupon Bonds 5B: A Closer Look at TIPS: Treasury Inflation-Protected Securities PART CHAPTER Risk and Return 235 Cash Flow Estimation and Risk Analysis 437 11A: Certainty Equivalents and Risk-Adjusted Discount Rates Corporate Valuation and Governance 485 CHAPTER 12 Corporate Valuation and Financial Planning 487 CHAPTER 13 Agency Conflicts and Corporate Governance 523 PART Stocks and Options 233 Projects and Their Valuation 355 Web Extensions Time Value of Money 133 7A: Derivation of Valuation Equations Financial Options and Applications in Corporate Finance 325 The Cost of Capital 357 CHAPTER PART 6B: Estimating Beta with a Financial Calculator Valuation of Stocks and Corporations 289 CHAPTER Fixed Income Securities 131 5C: A Closer Look at Bond Risk: Duration 5D: The Pure Expectations Theory and Estimation of Forward Rates 6A: Continuous Probability Distributions CHAPTER 14 Cash Distributions and Capital Structure 545 Distributions to Shareholders: Dividends and Repurchases 547 Copyright 201 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 iii iv Brief Contents CHAPTER 15 Web Extensions Capital Structure Decisions 589 15A: Degree of Leverage CHAPTER 24 Web Extensions PART CHAPTER 16 Web Extensions CHAPTER 17 PART CHAPTER 18 Managing Global Operations 629 Supply Chains and Working Capital Management 631 16A: Secured Short-Term Financing Tactical Financial Decisions 727 Web Extensions CHAPTER 19 Lease Financing 771 Web Extensions 19A: Leasing Feedback 19B: Percentage Cost Analysis 19C: Leveraged Leases CHAPTER 20 Hybrid Financing: Preferred Stock, Warrants, and Convertibles 799 PART 20A: Calling Convertible Issues Strategic Finance in a Dynamic Environment 827 CHAPTER 21 Dynamic Capital Structures 829 CHAPTER 22 Mergers and Corporate Control 867 22A: Projecting Consistent Debt and Interest Expenses Web Extensions CHAPTER 23 10 Enterprise Risk Management 909 Special Topics 975 CHAPTER 25 Portfolio Theory and Asset Pricing Models 977 CHAPTER 26 Real Options 1011 Web Extensions Multinational Financial Management 681 Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks 729 18A: Rights Offerings Web Extensions PART Bankruptcy, Reorganization, and Liquidation 943 24A: Multiple Discriminant Analysis 26A: The Abandonment Real Option 26B: Risk-Neutral Valuation Appendixes APPENDIX A Solutions to Self-Test Problems 1035 APPENDIX B Answers to End-of-Chapter Problems 1067 APPENDIX C Selected Equations 1077 APPENDIX D Values of the Areas under the Standard Normal Distribution Function 1091 Glossary 1093 Name Index 1121 Subject Index 1127 Web Chapters: CHAPTER 27 Providing and Obtaining Credit CHAPTER 28 Advanced Issues in Cash Management and Inventory Control CHAPTER 29 Pension Plan Management CHAPTER 30 Financial Management in Not-forProfit Businesses Copyright 201 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 Contents © lulu/fotolia.com Preface xviii PART The Company and Its Environment CHAPTER An Overview of Financial Management and the Financial Environment Box: The Global Economic Crisis The Five-Minute MBA The Corporate Life Cycle Box: Columbus Was Wrong—the World Is Flat! And Hot! And Crowded! The Primary Objective of the Corporation: Value Maximization Box: Ethics for Individuals and Businesses 10 Box: Corporate Scandals and Maximizing Stock Price 12 An Overview of the Capital Allocation Process 13 Financial Securities 14 The Cost of Money 18 Financial Institutions 23 Financial Markets 27 Trading Procedures in Financial Markets 29 Box: Life in the Fast Lane: High-Frequency Trading! 30 Types of Stock Market Transactions 30 The Secondary Stock Markets 31 Box: Measuring the Market 33 Stock Market Returns 34 The Global Economic Crisis 36 Box: Anatomy of a Toxic Asset 43 The Big Picture 45 e-Resources 46 Summary 46 Web Extensions 1A: An Overview of Derivatives 1B: A Closer Look at the Stock Markets CHAPTER Financial Statements, Cash Flow, and Taxes 51 Box: Intrinsic Value, Free Cash Flow, and Financial Statements 52 Financial Statements and Reports 52 The Balance Sheet 53 Box: The Global Economic Crisis 56 Copyright 201 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 v vi Contents The Income Statement 56 Statement of Stockholders’ Equity 58 Statement of Cash Flows 59 Box: Financial Analysis on the Web 60 Box: Filling in the GAAP 63 Net Cash Flow 64 Free Cash Flow: The Cash Flow Available for Distribution to Investors 65 Box: Sarbanes-Oxley and Financial Fraud 70 Performance Evaluation 72 The Federal Income Tax System 76 Box: When It Comes to Taxes, History Repeats and Repeals Itself! 79 Summary 82 Web Extensions 2A: The Federal Income Tax System for Individuals CHAPTER Analysis of Financial Statements 95 Box: Intrinsic Value and Analysis of Financial Statements 96 Financial Analysis 96 Liquidity Ratios 97 Asset Management Ratios 100 Box: The Global Economic Crisis 103 Debt Management Ratios 103 Profitability Ratios 107 Box: The World Might Be Flat, but Global Accounting Is Bumpy! The Case of IFRS versus FASB 108 Market Value Ratios 110 Trend Analysis, Common Size Analysis, and Percentage Change Analysis 113 Tying the Ratios Together: The DuPont Equation 115 Comparative Ratios and Benchmarking 117 Uses and Limitations of Ratio Analysis 118 Box: Ratio Analysis on the Web 119 Looking Beyond the Numbers 119 Summary 120 PART Fixed Income Securities 131 CHAPTER Time Value of Money 133 Box: Corporate Valuation and the Time Value of Money 134 Time Lines 135 Future Values 135 Box: Hints on Using Financial Calculators 139 Present Values 143 Box: It’s a Matter of Trust 144 Finding the Interest Rate, I 147 Finding the Number of Years, N 148 Copyright 201 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 1154 Probability distribution, 238–239 Probability ranges, normal distribution, 242f Procter & Gamble, 3, 32, 51, 254t, 437, 829, 867 Production opportunities, 18–19 Product line, increase capacity of existing, 463 Product markets, competition in, 537 Products, add new, 464 Professional association (PA), Professional corporation (PC), Profit, 58 Profitability index (PI), 413, 413f Profitability ratios, 107 basic earning power (BEP), 108 net profit margin, 107–108 return on common equity, 109 return on total assets, 109 Profit margin, 506 Profit margin on sales, 107–108 Pro forma financial statements, 488 Pro forma income, 58n Progressive tax, 81 Project analysis capital budgeting and, 398–399 first step in, 400–401 Monte Carlo simulation applied to, 934f multinational capital budgeting, 711–714 mutually exclusive projects, using IRR, 407–409 valuation, cash flows, and risk analysis, 438 See also Project selection risks Project cash flows, 438 Projected financial statements, 488 Project financing, 365, 763–764 Project selection risks, 933–936 Promissory notes, 665 Property, depreciation of residential rental, 483t Proprietorship, Prospectus, 734 preliminary or “red herring,” 735 Proxy, 291 Proxy ballot, 529 Proxy fight, 291, 874 Proxy statements, SEC and, 741 Public markets, 28 Purchase accounting, 892 Purchasing power bonds, 193 Purchasing power parity (PPP), 700–702 Pure expectation theory, 222 Pure financial merger, 879 Pure play method, 384, 384n Putable Automatic Rate Reset Securities (PARRS), 760 Subject Index Put-call parity relationships, 346–347 Put option, 327 five factors affecting prices of, 347–348 put-call parity, 346–347 Q Qualcomm, 631 Qualitative factors, bond ratings, 214 Quantitative easing, 44 Quick ratio, 99–100 QUIDS (Quarterly Income Debt Securities), 802n Quiet period, 735 QUIPS (Quarterly Income Preferred Securities), 802n Quoted interest rate, 207, 210 Quoted rate (interest), 166 Qwest, 870 R Ralcorp Holdings, 899 Random Walk Down Wall Street (Malkiel), 992 Ratings agencies AAA-rated companies, 217 bonds, 212–213 subprime mortgages and, 40 U.S Treasury bonds downgrade, 215 Ratio analysis, 97 asset management, 100–103 See also Asset management comparative/benchmarking, 117 current ratio, 97–99 debt management, 103–107 See also Debt management ratio Du Pont equation, 115–117 market value, 110–112 profitability, 107–109 See also Profitability ratio quick/acid test, 99–100 uses and limitations of, 118–119 on the web, 119 Ratio relationships, 508f Rayonier Inc., 553t Real estate appraisers, liar loans and, 40 boom, housing prices/mortgage rates, 39f Real estate leases, 787 Realized rate of return, 242–243, 295 Real options, 463, 1011–1034 abandonment options, 464 concluding thoughts on, 1028–1029 flexibility options, 464 growth options, 463–464, 1023–1028 Copyright 201 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 Subject Index pricing, 348–349 valuing, 464–465, 1012–1013 Real Options: Managing Strategic Investment in an Uncertain World (Amram and Kulatilaka), 466n Real risk-free rate of interest, 207–208 Recap, 614 See also Recapitalization Recapitalization, 614–618, 614f deleveraging and, 618 issuing new debt, 615 stock repurchases, 615–617 Receivables conversion period, 639 Receivables management, 654–658 accumulation of receivables, 654–655 credit policy, 654 monitoring the receivables position, 655–658 Recovery period, 481 Redeemable at par, 192 “Red herring” prospectuses, 735 Refunding operations, 192, 756–762 annual interest savings, 759 flotation costs and, 758–759 now vs later, 761–762 NPV of, 760–761 required investment outlay, 757–758 spreadsheet for bond refunding decision, 757f Regional markets, 28 Regions Financial Corp., 553t Registration statement, 734 Regular interest, 666–667 Regular quarterly dividend, 550 Regulation D, 747n Regulation Fair Disclosure, 95 Regulation S, 747n Regulations, as noncontrollable factor, 536 Reinvestment rate risk, 219–220 Relative priority doctrine, 953 Relaxed policy (of holding current assets), 634 Relevant risk, 249 Renaissance Capital, Global IPO Report, 744n Reorganization bankruptcy See Bankruptcy reorganization informal, 946–948 Repatriated, 710 Repatriation taxes, 547 Replacement analysis, 461–462, 462f Replacement chains, 420 Replacement projects, 399, 440 Replicating portfolios, 334–335 Reporting annual reports, 52, 61–64 1155 for employee stock options, 330 stock market, 292–293 Reporting objectives, 916 Required level of fixed assets, 510 Required rate of return, 294, 612f Required return on a portfolio, 262–265 Reserve borrowing capacity, 602–604, 606 Reserve Primary Fund, 42 Residual distribution model, 560 financial statements and, 563, 565 in practice, 561–562 Residual value, 781 estimated, of lease, 786 Restricted policy (of holding current assets), 634 Restricted voting rights, 531 Restrictive covenants, 211, 213–214 Restructuring, 947 Retention growth equation, 373–374 Retirement plans, self-directed, 26 Return on assets, 109 Return on common equity (ROE), 109 efficient use of operating current assets and, 634 financial leverage and, 595 Return on invested capital (ROIC), 72, 495 analysis, 97 expected, 502 free cash flows and, 72–74 Return on total assets (ROA), 109 operating leverage and, 594 Returns, 237 actual/expected, 241 required/expected portfolio, SML and, 262–263 trade-off between risk and, 246 Reuters, 117, 685 Revaluation, 695 Reverse split, 577 Revolving credit agreement, 665–666 Reynolds American Inc., 553t Rho, 247 Right of offset, 960n Risk, 237, 243 Bernie Madoff, 265 commodity price, 921–924 in continuous distribution, 241–242 cost of money and, 18–19 country, 22 diversifiable, 249 exchange rate, 22 financial, 594–595 foreign exchange, 920–921 Copyright 201 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 1156 historical data to estimate, 242–245 information from payback methods about, 416–417 interest rate, 925–932 interest rate, reinvestment rate, and maturity risk premium, 220 investment return and, 236 market, 249, 251–253 measuring for discrete distribution, 238–241 mortgages and, 37 in portfolio context, 246–250 relevant of stock, CAPM and, 250–257 security market line and, 257–259 stand-alone vs portfolio, 237 trade-off between return and, 246 types of, 450 using historical data to estimate, 242–245 intrinsic value, return and, 978 Risk-adjusted cost of capital, 385, 398, 401–402, 451 See also Weighted average cost of capital Risk analysis in capital budgeting, 450–451 measuring stand-alone risk, 451 Monte Carlo simulation, 457–460 phased decisions and decision trees, 465–466 project risk conclusions, 460–461 project valuation, cash flows and, 438 real options, 463–465 replacement analysis, 461–462 scenario analysis, 455–457 sensitivity analysis, 451–454 Risk appetite, 916 Risk arbitrage, 896 Risk averse, 985 Risk aversion, 236, 260–261, 261f Risk events dimensions of risk, 919–920 major categories, 919 Risk-free rate of interest, 210, 258 estimate using CAPM, 370–371 impact of changes in, 259–260 option prices and, 345 Risk management corporate finance, option pricing in, 349 corporate valuation and, 910 See also Enterprise risk management Risk Management Associates, 117 Risk-neutral valuation, 1022 Risk premium, 985 forward-looking, 368–369 Risk premium for an individual stock, 258–259 Subject Index Risk–return indifference curves, 984–986, 984f Risky assets, selecting optimal portfolio of, 985f Risky event, 916 ROA See Return on total assets Roadshow, 735 Robert’s Online Option Pricer, 341 ROE See Return on common equity Rohm & Haas, 801 ROI See Return on investment ROIC See Return on invested capital Rojacks Food Stores, 787 Rolling forecast, 487 Royal Bank of Scotland, 709 Rule 144A, 747, 747n S S-1 form, 734n Saddleback Valley Community Church, 217 Safety projects, capital budgeting for, 399 Saint Emilion Grand Cru., 202 Sales annual unit, projections for, 444 under GAAP, 63 Sale to another firm, 898 Sales growth, 506 Sanofi, 873 Sarbanes-Oxley Act (SOX), 10, 30, 70, 535, 914 Savings and loan associations (S&Ls), 15, 17–18, 24 Scenario analysis, 455 expected NPV and its risk, 457f inputs and key results for each scenario, 455f for investment timing option, 1015–1018, 1016f, 1017f SCF See Supply chain finance techniques SCM See Supply chain management S corporation, 8, 81, 890n Seasoned equity offering, 30–31, 745–746 Seasoned issue (bond), 199 SEC See Securities and Exchange Commission Secondary offering, 745 Secondary stock market, 28, 31 competition in, 34 NASDAQ, 32–33 New York Stock exchange, 31–32 regulating, 741–742 Securities asset-backed, 748 financial intermediaries and, 13 regulation of sales, 734–735 securitization process, 15–18 Copyright 201 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 Subject Index structured investment vehicles (SIVs0, 56 See also Financial securities Securities Act (1933), 730, 747 Securities and Exchange Commission (SEC), 30, 33, 42, 53, 95, 108, 211, 730, 741 bankruptcy reorganization plan and, 954n on basic and diluted EPS, 819 Dodd-Frank Act and, 937 Sarbanes-Oxley Act (SOX) and, 535 SEC oversight of new security issuance, 891 Securities Industry and Financial Markets Association, 977 Securitization, 748–749 investment banking and, 750 lease, 789 Securitization process, 15–18 mortgage securities, globalization and, 37 subprime meltdown and, 42 Securitize, 748 Security in short-term financing, 668–669 use of term, 748 Security Market Line (SML), 257–258, 991 Capital Asset Pricing Model (CAPM) and, 987–991 changes in beta coefficient, common stock and, 261 figures, 260, 261 impact of changes in risk free rate, 259–260 portfolio returns and performance evaluation, 262–263 risk aversion, changes in, 260–261, 262f risk-free rate, 258 risk premium for individual stock, 258–259 tests of CAPM based on slope of, 1000–1001 Self-insure, 917 Self-liquidating approach, 635 Self-supporting growth rate, 507 Selling group, 734 Sell orders, 32 Semiannual compounding periods, 165 Semiannual coupons, bonds with, 202–203 Semiannual payments, 202–203 Semistrong-form efficiency, 267, 269 Senior mortgages, 211 Sensitivity analysis, 451 extensions of, 453–454 NPV break-even analysis, 453, 454f sensitivity graph, 452–453, 452f Tornado diagrams, 453, 454f Sensitivity graph, 452–453, 452f September 11, 2001, attacks, 917 1157 SETS, stock exchange, 30 Settlement price, 925 Seven Country Working Group, 703 Shareholder rights provision, 531 Sharpe’s reward-to-variability ratio, 996 Shelf registration, 746 Shenzhen Development Bank, 709 Sherman Act (1890), 868n Short hedges, 922 Short sales, arbitrage with, 856 Short-term bank loans, 664–667 Short-term debt, flexibility of, 638 Short-term financing, 663–664 use of security in, 668–669 Short-term investments managing, 662–663 purchase or sell, 549–550 Siemens, 703 Sigma, 240 Signal, 602 Signaling, 557, 606 Simon Property Group, 534 Simple interest, 143, 170, 666–667 Simulation analysis, probability distribution in, 457–458 Singapore, 705 Singapore Airlines, 771 Single-period binomial option pricing approach, 330 hedge portfolio approach, 331–334 See also Hedge portfolio approach formula, 335–336 payoff in, 331 primitive securities and, 336–337 Sinking fund, 106 Sinking fund provision, 192–193 SIX Swiss Exchange, 30 Small Business Administration, 189 Small businesses adjusting for lack of liquidity, 380 estimating consistent weights in capital structure, 380 estimating cost of stock by comparison approach, 378 own-bond-yield-plus judgmental-risk premium approach, 378–380 SMG Fairfax, 789 Smith Barney, 27 SML See Security market line Social Security, 238, 369 Social Security Trust fund, 706 Copyright 201 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 1158 Social welfare, stock value maximization and, 10–11 Soft currency, 696 Somalia, 710 Sony, 442 South America, 701 Southwest Airlines, 3, 631 Sovereign debt, 706–707 Soviet Union, Pizza Hut in, 696 SOX See Sarbanes-Oxley Act S&P 500 Index, 33 performance of, 35f Spain, 937 Special purpose entity (SPE), 774 Speculation, 922 Spinning, 742 Spin-off, 898 Spontaneous liabilities, 494, 504–505 Spontaneous liabilities-to-sales ratio, 506 Spot exchange rate interest rate parity and, 699 purchasing power parity and, 700 selected, units per U.S dollar, 698t Spot exchange rate, 697 Spot markets, 27 Spread, 739 Spreadsheets time value and, 138–141 uneven cash flows, 162–163 Sprint Nextel, 530 Sprint–Nextel merger, 871 Staged decision tree, 466 Stand-alone risk, 237, 384, 450 measuring, 240, 451 quantitative analysis of, 451 portfolio risk vs., 237 Standard deviation, 240 calculating historical, 243–244 Standard & Poor’s (S&P), 37, 43, 212–213, 215, 217, 559, 607 Standard & Poor’s depository receipt (SPDR), 33 Starbucks, 90, 591, 712 Start-up company, financial life cycle of, 730–731 Starz Entertainment Group, 292 Statement of cash flows, 52, 59 analyze, 97 annual reports and, 61–64 financing activities, 61 investing activities, 61 operating activities, 60–61 Statement of stockholders’ equity, 52 Subject Index Statoil, 703 Status quo scenario, forecasted financial statements, 495, 500f Step-by-step approach, future value, 136–137 Stock intrinsic value, maximize, 10–11 issue new, as use of cash, 550 reluctance to issue new, 424 repurchase, as use of cash, 550 tracking, 292 types of common, 291–292 valuing constant growth, 296–301 valuing nonconstant growth, 301–304 Stock dividends, 577, 578 See also Dividends Stock exchanges, SEC and, 741 Stockholders choices with stock repurchases, 571 claims, 54 clientele effect, 556–557 common, legal rights/privileges of, 290–291 wealth maximization, Stockholders’ equity statement, 58–59 Stock index, 33 Stock market bubbles in, 267–268 manipulation of, 741, 742n measuring, 33 reporting, 292–293 returns, 34–36 secondary, 31–34 See also Secondary stock markets social welfare and, 10–11 trading, 33 types of transactions on, 30–31 Stock market indices, worldwide, 708 Stock option compensation plan, 531 Stock options intrinsic value of, 326 reporting for employee, 330 taxes and, 345 Stock price maximization, 11–13 Stock prices, effects of capital structure on, 617f Stock quote, 293f Stock repurchases, 615–617 cash distributions as, 565f, 570–571 disadvantages of, 572 procedures, 551–552 pros and cons of, 571–573 Stock splits, 576–578 Stonyfield, 803 Straight-line method of depreciation, 481 Copyright 201 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 Subject Index accelerated depreciation vs., 449–450 Strategic alliances, 898 Strategic Investments: Real Options and Games (Smit and Trigeorgis), 466n Strategic objectives, 916 Strategic options, 463 Strategy, as risk event category, 919 Stretching accounts payable, 661 Strike price, 327, 807, 1018, 1019f Strong-form efficiency, 267, 269 Structured investment vehicles (SIVs), 56 Subordinated debentures (bonds), 211–212 Subprime mortgage meltdown, 38–41 Sum-of-years’-digits method of depreciation, 481 Sunbeam, 12 Sunk costs, 440–441, 448 Sun Microsystems, 577 Sunny Delight Beverage Co., 357 SunTrust, 873 Supernormal growth firms, 302 Super poison put, 192 Supply chain finance (SCF) techniques, 656 Supply chain management (SCM), 653 Surplus cash, 646 Swap, 928 cash flows under, 929f See also Credit default swaps; Currency swaps Switzerland, 701, 702, 705 Symmetric hedge, 924 Symmetric information, 600 Synchronization of cash flows, 650 Synergistic benefits, 884 Synergy, 868 Synthetic lease, 774 T Taiwan, 573 TALF See Term Asset-Backed Securities Loan Facility Target capital structure, 360, 375, 503–504, 590 Target cash distribution, 572 Target company, 872 Target distribution ratio, 553 Targeted share repurchases, 530 Target fixed assets/Sales, 510 Target payout ratio, 553, 561 Target stock, 292 TARP See Troubled Asset Relief Program Taxable offer, 889 Tax Code, 80 interest payments as expense, 597 1159 surtax on improperly accumulated income, 574 Tax depreciation, 481–483 Tax effect theory, 554–555 Taxes after-tax cost of debt, 361–365 corporate, Modigliani and Miller model and, 597–598 corporate and personal, Miller model and, 598–599 corporate evasion of, 79 double taxation, federal rate for corporations, 363n, 364 federal system See Federal income tax system long-term debt, before-tax cost of, 362–363 managerial decisions, cost of capital and, 381 net operating profit after (NOPAT), 65–66 noncash adjustments, 60–61 overseas income, corporate, 81 personal, 81–82 as rationale for merger, 869 repatriation, 547 risk management and, 912 short-term debt, before-tax cost, of t, 361–362 stock options and, 345 takeover bid structure and, 888–891 Tax-exempt bonds, 212 Tax havens “Double Irish” and “Dutch Sandwich,” 712 See also Tax shelters Tax Increase Prevention and Reconciliation Act (2005), 555n Tax laws lease financing and, 788–789 legal systems and, 684 See also Internal Revenue Service Tax-oriented lease, 775 Tax-qualifying grant, 345 Tax Reform Act (1986), 79, 481 Tax shelters international regulation of, 703 See also Tax havens Tax shield capital structure and, 886–887 impact on value, 830–833 present value of, 598 value of, 843, 857 Technical analysts, 266 Technology, as risk event category, 919 TED spread, 218 Telecom Italia, 873 Telefonica SA, 937 Temporary operating current assets, 635 Copyright 201 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 1160 Tender, 873 Tender offer, 873 Tennessee Valley Authority, 189 Term Asset-Backed Securities Loan Facility (TALF), 759 Terminal date, 303 Terminal value, 163, 303, 411 Term structure of interest rates, 221–222 Terrorism Risk Insurance Act (TRIA), 917–918 Terrorist attacks, risk management and, 917 Texas and Western (T&W) Transport Company, 560–561 Thales Group, 437 Thomson Reuters, 631, 930 3M, 217, 394–395, 417 TIAA-CREF, 536 Ticker tape, 292–293 Tiffany and Company, 553t Time deposits, as short-term investment, 662 Time lines bond value and, 194–195 time value of money analysis, 135 Time preferences for consumption, 18–19 Times-interest-earned ratio (TIE), 105–106 Time value of money (TVM), 134–135 amortized loans, 170–176 See also Amortized loans annuities, 150 annuity payments, periods, interest rates, finding, 158–159 corporate valuation, 134 fractional time periods, 169–170 future value of annuity, 151–153 future value of uneven cash flow, 163 future values, 135–143 See also Future values, of money interest rate (I), finding, 147–148, 164–165 perpetuities, 149–150 present values, 143–147, 155–157 See also Present value semiannual/other compounding periods, 165–170 See also Compounding periods time lines, 135 years, finding number of, N, 148 Time Warner, 292, 325, 868, 889, 899 Tobacco bonds, 748 Tommy Hilfiger, 690 Too-big-to-fail banks, 45 TOPrS (Trust Originated Preferred Stock), 802n Tornado diagrams, 453, 454f Total assets turnover ratio, 100 Subject Index Total investor-supplied capital, 68 Total investor-supplied operating capital, 68 Total net operating capital, 67–68 Total returns, 34 Total Revenue (GAAP), 63 Toxic assets, 43 Toyota, 624 Tracking stock, 292 Trade high-frequency, 30 international, deficits/surpluses, 21–22 Trade balances, federal budget surplus/deficits and, 20f Trade credit, 659–662 See also Accounts payable Trade deficit, 690 Trade discounts, 648 Trade-off theory, 599–600 dynamic, 605 effect of financial leverage on value, 601f Trading in financial markets, 29–30 insider, 329n Trading-day returns, 342n Trailing twelve months, 293 Tranches, 37, 43, 789 Trane Corporation, 652 Transactions balances, 648 Transfer price, 711 Transfers, 13, 14f Transnational corporations, 682 See also Multinational corporations Transparency, in markets, 45 Transparency International (TI), 710 Corruption Perceptions Index (CPI), 711t TransUnion, 936 Travelers insurance, 27 Treasury bills, 16t, 246 Treasury bonds, 189, 760 credit default swaps, 190 futures contracts, hedging with, 926–928 futures prices, 925t interest rate futures and, 925 interest rates, 221f Treasury Inflation-Protected Securities (TIPS), 193, 208 Treasury stock, 551n Trend analysis, 113–115 Treynor’s reward-to-volatility ratio, 996 Trial, in Monte Carlo simulation, 458 Triple taxation, 78 Copyright 201 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 Subject Index Troubled Asset Relief Program (TARP), 43–44, 799, 964 investment banks and, 751 TARP funds, 532 Trustee, 211 bankruptcy, 949 Truth in Lending Act, 168 Turnover ratio, inventory, 102 TVA, 760 Two-period binomial lattice and option valuation, 339f Tyco, 12, 914 U UAW See United Auto Workers UBS, 729, 867 Ukraine, Big Macs in, 702 Underinvestment problem, 534 Underwrite, 733 Underwriters, 13, 733 Underwriting, mergers & acquisitions and, 749 Underwriting syndicate, 733–734 Unequal lives, conclusions about, 420–421 Uneven cash flows, 160–163 Unilever, 437 Union Carbide, 579 Union Fire Company, 913 Unit costs, projections for expansion project, 444 United Auto Workers (UAW), 964 United Kingdom, 715 See also Great Britain United Parcel Service (UPS), 217 United States board of director’s duty toward managers in, 528 corporate governance in, 538 dividend yields in, 573 merger waves in, 871–872 OECD Anti-Bribery Convention and, 703 ranking as honest country, 710 runaway inflation in (1970s), 913 stockholder protection, 292 trade deficits, 22n use of futures contracts in, 913 Unit prices, projections for expansion project, 444 University of Chicago, 171, 714 University of Florida, 738 University of Michigan, 209n Unlevered beta, 611 Unlevered cost of equity, 882 Unsyndicated stock offering, 734 U.S agency securities, as short-term investment, 662 U.S Bankruptcy Court, 223 1161 U.S Bankruptcy Trustee, 598 U.S Congress antitrust acts, 868n Bankruptcy Act, 946, 950 bankruptcy law and, 949–950 bonus depreciation rate, 788 Foreign Corrupt Practices Act (FCPA), 914 Job Creation and Worker Assistance Act of 2002, 482n Sarbanes-Oxley (SOX) Act, 914 Securities Act (1933), 730, 747 on tax shelters, 712 temporary “bonus” depreciation (2008-09), 449n Terrorism Risk Insurance Act (TRIA), 917–918 Williams Act (1968), 874 U.S Department of Justice, 868n, 871 U.S dollar currency appreciation and, 693 currency depreciation and, 694 foreign bonds denominated in, 705–706 foreign currency depreciating or appreciating against, 701 index, vs major currencies, 693f as leading currency, 704 spot and forward exchange rates per, 698t U.S Export-import Bank, 717 U.S Financial Accounting Standards Board (FASB), 63 U.S firms, debt to total assets in, 714–715 U.S government as board of director, 532 as Chrysler owner, 943 response to global economic crisis, 799 U.S Justice Department, 10, 930 U.S Supreme Court, 874–875 U.S Treasury, 25n, 103, 189n U.S Treasury bills, 16t, 246 U.S Treasury bond See Treasury bonds U.S Treasury Department, 799 U.S Treasury securities notes and bonds, 16t as short-term investment, 662 STRIP bonds, 191 See also U.S Treasury bills; Treasury bonds V Valuation of constant growth stock, 296–301 corporate, cost of capital, 358 corporate, stock prices and, 290 estimating operations, 306–308 Copyright 201 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 1162 free cash flows (FCF) model, 304–311 nonconstant growth stocks, 301–304 preferred stock, 312–313 of put options, 346–348 See also Put options, valuation Valuation formulas, bonds, 194–195 Value, estimated intrinsic, 495 Value at risk (VaR), 934 Value Line, 117, 253, 254, 371, 997, 998 Value maximization, corporate, Value of operations cash distributions and, 566–567 under different distribution methods, 566f effects of capital structure on, 613f estimating, 613–614 levered, APV model and, 843 Variable annuities, 157 Variance, 240 VCs See Venture capitalists VEBA See Voluntary employee’s beneficiary association Vehicle leases, 788 Venezuela, 710 Venture capital fund, 730 Venture capitalists (VCs), 731 Verizon, 870 Vertical merger, 871 Vesting period, 531 Vetco International, 703 Vietnam War, 17 Virco Manufacturing, 791 Virgin Atlantic, 771 Virgin Group, 771 Vodafone AirTouch, 873 Volatility, call options and, 344 Volker Rule, 44–45 Volume, trading, 34 Voluntary bankruptcy, 949 Voluntary employee’s beneficiary association (VEBA), 964 Voluntary settlements, 948 Vote, stockholder, 290–291 W W R Hambrecht & Co., 739 WACC See Weighted average cost of capital Wachovia, 530, 873, 945 Wachovia–Wells Fargo merger, 871 WAEMU See West African Economic and Monetary Union Subject Index Walgreens, 51 Wall Street Journal, The, 16t, 30, 160, 194, 221, 292, 342, 397, 685 cross rate reports in, 689 Investment Dartboard Contest, 992 Wall Street Journal Online, 750, 925t Walmart, 578, 659 Walmart credit card, in China, 709 Walt Disney Co., 191n Warrants, 193, 805–810 component cost of bond with, 807–809 convertibles vs., 817–818 initial market price of bond with, 805–806 reporting earnings with outstanding, 818–819 strike price on, 807 use in financing, 806–807 valuation analysis after exercise of, 809t Washington Mutual, 589, 943 WD-40 Company, 553t Weak-form efficiency, 266, 269 Wealth management, investment banks and, 750 Weighted average cost of capital (WACC), 12, 359–360, 375, 400, 444 book values vs market values vs targets, 376 choosing weights for, 360–361 at different debt levels, 611 estimating for different debt levels, 609–612 estimated target, 495 financing choices and, 590–591 marginal rates vs historical rates, 375–376 project cash flow and, 440 risk and, 525 risk-adjusted, 398 target weights vs annual financing choices, 376 value of unlevered firm and, 831 Well known seasoned issuers (WKSIs), 746n Wells Fargo, 532, 618, 734, 873, 945 West African Economic and Monetary Union (WAEMU), 696 What-if analysis, with operating plans, 489 Whistleblowers, ethics and, 10 White knight, 895 White squire, 895 Williams Act (1968), 874 Williamson Scientific Company, 807 Wimm-Bill-Dann Foods, 872 Window dressing techniques, 119 Wire, payment by, 651 Within-firm risk, 384, 450 WKSIs See Well known seasoned issuers Copyright 201 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 Subject Index Working capital, 634 changes in, 61 negative, 644 net operating, 439 origination of term, 634n projections for expansion project, 447–448 use of term, 633–634 Working capital management corporate valuation and, 632 efficient use of operating current assets, 634 overview, 633–634 using and financing operating current assets, 634–638 multinational, 715–718 Workouts, 947 WorldCom, 10, 12, 70, 526, 742, 914 World is Flat, The (Friedman), World markets, 28 World Trade Center, Sept 11 attacks on, 917 WPP, 534 Writing (option), 328 1163 X XTO Energy, 217 Y Yahoo! Finance, 33, 74, 221, 253, 291, 293f, 685, 998 Yankee bond, 705 Years, finding number of, time value of money, 148, 195 Yield curve, 221 Yield on debt, 845 Yields to maturity (YTM), bonds, 203–204, 410 Yield to call (YTC), 204–205 Yom Kippur War, 913 YRC Worldwide, 235 Z Zacks.com, 95, 96–97 Zero coupon bonds, 191 Copyright 201 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 Copyright 201 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 Copyright 201 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 Copyright 201 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 Copyright 201 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 Copyright 201 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 ... The following equation defines the relationship between a firm’s fundamental value, its free cash flows, and its cost of capital: Value ¼ FCF1 FCF2 FCF3 FCF ỵ ỵ ỵ ::: ỵ (1-1) ỵ WACCị 1 ỵ WACCị... conversion cycle Cash flow; CFt is the cash flow in Period t Cash flow per share Conversion ratio Coefficient of variation Difference or change (uppercase delta) Dividend of preferred stock Dividend... intrinsic value of a firm, which is determined by cash flows as revealed in financial statements Our early coverage of financial statements helps students see how particular financial decisions affect