Principles of managerial finance 13th edition full 9Ukgy8w1RYp7U1dls6CxRLDn1i8aezIq pdf

Principles of Managerial Finance The Prentice Hall Series in Finance Adelman/Marks Entrepreneurial Finance Andersen Global Derivatives: A Strategic Risk Management Perspective Bekaert/Hodrick International Financial Management Berk/DeMarzo Corporate Finance* Berk/DeMarzo Corporate Finance: The Core* Berk/DeMarzo/Harford Fundamentals of Corporate Finance* Boakes Reading and Understanding the Financial Times Brooks Financial Management: Core Concepts* Copeland/Weston/Shastri Financial Theory and Corporate Policy Dorfman/Cather Introduction to Risk Management and Insurance Eiteman/Stonehill/Moffett Multinational Business Finance Fabozzi Bond Markets: Analysis and Strategies Fabozzi/Modigliani Capital Markets: Institutions and Instruments Fabozzi/Modigliani/Jones/Ferri Foundations of Financial Markets and Institutions Finkler Financial Management for Public, Health, and Not-for-Profit Organizations Frasca Personal Finance Gitman/Joehnk/Smart Fundamentals of Investing* Gitman/Zutter Principles of Managerial Finance* * denotes Gitman/Zutter Principles of Managerial Finance— Brief Edition* Goldsmith Consumer Economics: Issues and Behaviors Haugen The Inefficient Stock Market: What Pays Off and Why Haugen The New Finance: Overreaction, Complexity, and Uniqueness Holden Excel Modeling and Estimation in Corporate Finance Holden Excel Modeling and Estimation in Investments Hughes/MacDonald International Banking: Text and Cases Hull Fundamentals of Futures and Options Markets Hull Options, Futures, and Other Derivatives Hull Risk Management and Financial Institutions McDonald Fundamentals of Derivatives Markets Mishkin/Eakins Financial Markets and Institutions Moffett/Stonehill/Eiteman Fundamentals of Multinational Finance Nofsinger Psychology of Investing Ormiston/Fraser Understanding Financial Statements Pennacchi Theory of Asset Pricing Rejda Principles of Risk Management and Insurance Seiler Performing Financial Studies: A Methodological Cookbook Shapiro Capital Budgeting and Investment Analysis Sharpe/Alexander/Bailey Investments Solnik/McLeavey Global Investments Stretcher/Michael Cases in Financial Management Keown Personal Finance: Turning Money into Wealth* Titman/Keown/Martin Financial Management: Principles and Applications* Keown/Martin/Petty Foundations of Finance: The Logic and Practice of Financial Management* Titman/Martin Valuation: The Art and Science of Corporate Investment Decisions Kim/Nofsinger Corporate Governance Van Horne Financial Management and Policy Madura Personal Finance* Van Horne/Wachowicz Fundamentals of Financial Management Marthinsen Risk Takers: Uses and Abuses of Financial Derivatives Weston/Mitchel/Mulherin Takeovers, Restructuring, and Corporate Governance McDonald Derivatives Markets titles Log onto www.myfinancelab.com to learn more Principles of Managerial Finance Thirteenth Edition Lawrence J Gitman San Diego State University Chad J Zutter University of Pittsburgh Prentice Hall Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Editor in Chief: Donna Battista Acquisitions Editor: Tessa O’Brien Editorial Project Managers: Melissa Pellerano and Kerri McQueen Managing Editor: Nancy Fenton Senior Production Project Manager: Nancy Freihofer Supplements Editor: Alison Eusden Marketing Assistant: Ian Gold Media Producer: Nicole Sackin MyFinanceLab Content Lead: Miguel Leonarte Senior Manufacturing Buyer: Carol Melville Cover Designer: Anthony Gemmellaro Cover Image: Stock4B-RF/Getty Images Image Permission Coordinator: Rachel Youdelman Photo Researcher: Elizabeth Anderson Interior Design, Project Coordination, and Composition: Nesbitt Graphics, Inc Printer/Binder: R.R Donnelley, Willard Cover Printer: Lehigh Phoenix Text Font: 10/12 Sabon Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on appropriate page within text (or on page C1) Microsoft® and Windows® are registered trademarks of the Microsoft Corporation in the U.S.A and other countries Screen shots and icons reprinted with permission from the Microsoft Corporation This book is not sponsored or endorsed by or affiliated with the Microsoft Corporation Copyright © 2012, 2009, 2006, 2003 by Lawrence J Gitman All rights reserved Manufactured in the United States of America This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Rights and Contracts Department, 501 Boylston Street, Suite 900, Boston, MA 02116, fax your request to 617 671-3447, or e-mail at http://www.pearsoned.com/legal/permission.htm Many of the designations by manufactures and sellers to distinguish their products are claimed as trademarks Where those designations appear in this book, and the publisher was aware of a trademark claim, the designations have been printed in initial caps or all caps Library of Congress Cataloging-in-Publication Data Gitman, Lawrence J Principles of managerial finance/Lawrence J Gitman, Chad J Zutter.—13th ed p cm.—(The Prentice Hall series in finance) Includes index ISBN 978-0-13-611946-3 (alk paper) Corporations—Finance Business enterprises—Finance I Zutter, Chad J II Title HG4011.G52 2010 658.15—dc22 2010044526 Prentice Hall is an imprint of ISBN-13: 978-0-13-611946-3 ISBN-10: 0-13-611946-8 Dedicated to the memory of my mother, Dr Edith Gitman, who instilled in me the importance of education and hard work LJG Dedicated to my wonderful wife, Heidi Zutter, who unconditionally supports my every endeavor CJZ Our Proven Teaching and Learning System sers of Principles of Managerial Finance have praised the effectiveness of the book’s Teaching and Learning System, which they hail as one of its hallmarks The system, driven by a set of carefully developed learning goals, has been retained and polished in this thirteenth edition The “walkthrough” on the pages that follow illustrates and describes the key elements of the Teaching and Learning System We encourage both students and instructors to acquaint themselves at the start of the semester with the many useful features the book offers U The Role of Managerial Finance Learning Goals Why This Chapter Matters to You LG Define finance and the In your professional life managerial finance function LG Describe the legal forms of business organization LG Describe the goal of the firm, and explain why maximizing the value of the firm is an appropriate goal for a business LG Describe how the managerial finance function is related to economics and accounting LG Identify the primary activities of the financial manager LG Describe the nature of the principal–agent relationship between the owners and managers of a corporation, and explain how various corporate governance mechanisms attempt to manage agency problems ACCOUNTING You need to understand the relationships between the accounting and finance functions within the firm; how decision makers rely on the financial statements you prepare; why maximizing a firm’s value is not the same as maximizing its profits; and the ethical duty that you have when reporting financial results to investors and other stakeholders INFORMATION SYSTEMS You need to understand why financial information is important to managers in all functional areas; the documentation that firms must produce to comply with various regulations; and how manipulating information for personal gain can get managers into serious trouble MANAGEMENT You need to understand the various legal forms of a business organization; how to communicate the goal of the firm to employees and other stakeholders; the advantages and disadvantages of the agency relationship between a firm’s managers and its owners; and how compensation systems can align or misalign the interests of managers and investors MARKETING You need to understand why increasing a firm’s revenues or market share is not always a good thing; how financial managers evaluate aspects of customer relations such as cash and credit management policies; and why a firm’s brands are an important part of its value to investors OPERATIONS You need to understand the financial benefits of increasing a firm’s production efficiency; why maximizing profit by cutting costs may not increase the firm’s value; and how managers act on behalf of investors when operating a corporation Many of the principles of manageIn your life rial finance also apply to your personal life Learning a few simple financial principles can help you manage your own money more effectively personal Six Learning Goals at the start of the chapter highlight the most important concepts and techniques in the chapter Students are reminded to think about the learning goals while working through the chapter by strategically placed learning goal icons Every chapter opens with a feature, titled Why This Chapter Matters to You, that helps motivate student interest by highlighting both professional and personal benefits from achieving the chapter learning goals Its first part, In Your Professional Life, discusses the intersection of the finance topics covered in the chapter with the concerns of other major business disciplines It encourages students majoring in accounting, information systems, management, marketing, and operations to appreciate how financial acumen will help them achieve their professional goals The second part, In Your Personal Life, identifies topics in the chapter that will have particular application to personal finance This feature also helps students appreciate the tasks performed in a business setting by pointing out that the tasks are not necessarily different from those that are relevant in their personal lives vii Each chapter begins with a short opening vignette that describes a recent real-company event related to the chapter topic These stories raise interest in the chapter by demonstrating its relevance in the business world Facebook In No Hurry to Go Public F acebook founder and chief executive officer Mark Zuckerberg is in no hurry to go public, even though he concedes that it is an inevitable step in the evolution of his firm The Facebook CEO is on record saying that “we’re going to go public eventually, because that’s the contract that we have with our investors and our employees [but] we are definitely in no rush.” Nearly all public firms were at one time privately held by relatively few shareholders, but at some point the firms’ managers decided to go public The decision to go public is one of the most important decisions managers can make Private firms are typically held by fewer shareholders and are subject to less regulation than are public firms So why firms go public at all? Often it is to provide an exit strategy for its private investors, gain access to investment capital, establish a market price for the firm’s shares, gain public exposure, or all of the above Going public helps firms grow, but that and other benefits of public ownership must be weighed against the costs of going public Although taking Facebook public would likely make Zuckerberg one of the richest persons in the world under the age of 30, it would also mean that his firm would become subject to the influences of outside investors and government regulators A public firm’s managers work for and are responsible to the firm’s investors, and government regulations require firms to provide investors with frequent reports disclosing material information about the firm’s performance The regulatory demands placed on managers of public firms can sometimes distract managers from important aspects of running their businesses This chapter will highlight the tradeoffs faced by financial managers as they make decisions intended to maximize the value of their firms Learning goal icons tie chapter content to the learning goals and appear next to related text sections and again in the chapter-end summary, end-ofchapter homework materials, and supplements such as the Study Guide, Test Item File, and MyFinanceLab For help in study and review, boldfaced key terms and their definitions appear in the margin where they are first introduced These terms are also boldfaced in the book’s index and appear in the endof-book glossary viii LG LG 1.1 Finance and Business The field of finance is broad and dynamic Finance influences everything that firms do, from hiring personnel to building factories to launching new advertising campaigns Because there are important financial dimensions to almost any aspect of business, there are many financially oriented career opportunities for those who understand the basic principles of finance described in this textbook Even if you not see yourself pursuing a career in finance, you’ll find that an understanding of a few key ideas in finance will help make you a smarter consumer and a wiser investor with your own money Corporations corporation An entity created by law stockholders The owners of a corporation, whose ownership, or equity, takes the form of either common stock or preferred stock A corporation is an entity created by law A corporation has the legal powers of an individual in that it can sue and be sued, make and be party to contracts, and acquire property in its own name Although only about 20 percent of all U.S businesses are incorporated, the largest businesses nearly always are; corporations account for nearly 90 percent of total business revenues Although corporations engage in all types of businesses, manufacturing firms account for the largest portion of corporate business receipts and net profits Table 1.1 lists the key strengths and weaknesses of corporations Matter of Fact boxes provide interesting empirical facts that add background and depth to the material covered in the chapter Matter of fact Problems with P/E Valuation T he P/E multiple approach is a fast and easy way to estimate a stock’s value However, P/E ratios vary widely over time In 1980, the average stock had a P/E ratio below 9, but by the year 2000, the ratio had risen above 40 Therefore, analysts using the P/E approach in the 1980s would have come up with much lower estimates of value than analysts using the model 20 years later In other words, when using this approach to estimate stock values, the estimate will depend more on whether stock market valuations generally are high or low rather than on whether the particular company is doing well or not In more depth P0 = To read about Deriving the Constant-Growth Model, go to www.myfinancelab.com D0 * (1 + g)1 (1 + rs) + D0 * (1 + g)2 (1 + rs) D0 * (1 + g) + Á + q (1 + rs) If we simplify Equation 7.3, it can be rewritten as: Example 6.3 The nominal interest rates on a number of classes of long-term securities in May 2010 were as follows: Security Nominal interest rate U.S Treasury bonds (average) Corporate bonds (by risk ratings): High quality (Aaa–Aa) Medium quality (A–Baa) Speculative (Ba–C) 3.30% 3.95 4.98 8.97 Because the U.S Treasury bond would represent the risk-free, long-term security, we can calculate the risk premium of the other securities by subtracting the riskfree rate, 3.30%, from each nominal rate (yield): Security Risk premium Corporate bonds (by ratings): High quality (Aaa–Aa) Medium quality (A–Baa) Speculative (Ba–C) 5.7 Time line for future value of an ordinary annuity ($1,000 end-of-year deposit, earning 7%, at the end of years) $1,310.80 1,225.04 1,144.90 1,070.00 1,000.00 $5,750.74 Future Value $1,000 $1,000 $1,000 (7.3) Examples are an important component of the book’s learning system Numbered and clearly set off from the text, they provide an immediate and concrete demonstration of how to apply financial concepts, tools, and techniques Some Examples demonstrate time-valueof-money techniques These examples often show the use of time lines, equations, financial calculators, and spreadsheets (with cell formulas) 3.95% - 3.30% = 0.65% 4.98 - 3.30 = 1.68 8.97 - 3.30 = 5.67 Fran Abrams wishes to determine how much money she will have at the end of years if she chooses annuity A, the ordinary annuity She will deposit $1,000 annually, at the end of each of the next years, into a savings account paying 7% annual interest This situation is depicted on the following time line: Personal Finance Example q In More Depth boxes point students to additional material, available on MyFinanceLab, intended to further highlight a particular topic for students who want to explore a topic in greater detail $1,000 $1,000 The Equation for Present Value The present value of a future amount can be found mathematically by solving Equation 5.4 for PV In other words, the present value, PV, of some future amount, FVn, to be received n periods from now, assuming an interest rate (or opportunity cost) of r, is calculated as follows: PV = Personal Finance Examples demonstrate how students can apply managerial finance concepts, tools, and techniques to their personal financial decisions FVn (1 + r)n (5.7) Note the similarity between this general equation for present value and the equation in the preceding example (Equation 5.6) Let’s use this equation in an example Key equations appear in green boxes throughout the text to help readers identify the most important mathematical relationships The variables used in these equations are, for convenience, printed on the back endpapers of the book ix Review Questions appear at the end of each major text section These questions challenge readers to stop and test their understanding of key concepts, tools, techniques, and practices before moving on to the next section In Practice boxes offer insights into important topics in managerial finance through the experiences of real companies, both large and small There are three categories of In Practice boxes: Focus on Ethics boxes in every chapter help readers understand and appreciate important ethical issues and problems related to managerial finance Focus on Practice boxes take a corporate focus that relates a business event or situation to a specific financial concept or technique Global Focus boxes look specifically at the managerial finance experiences of international companies All three types of In Practice boxes end with one or more critical thinking questions to help readers broaden the lesson from the content of the box REVIEW QUESTIONS 5–14 What effect does compounding interest more frequently than annually have on (a) future value and (b) the effective annual rate (EAR)? Why? 5–15 How does the future value of a deposit subject to continuous com- pounding compare to the value obtained by annual compounding? 5–16 Differentiate between a nominal annual rate and an effective annual rate (EAR) Define annual percentage rate (APR) and annual percentage yield (APY) focus on ETHICS If It Seems Too Good to Be True Then It Probably Is fraud Madoff’s hedge fund, Ascot Madoff’s arrest indicated that investors’ in practice For many years, Partners, turned out to be a giant Ponzi accounts contained over $64 billion, in investors around the scheme aggregate Many investors pursued world clamored to invest with Bernard Over the years, suspicions were claims based on the balance reported Madoff Those fortunate enough to raised about Madoff Madoff generin these statements However, a recent invest with “Bernie” might not have ated high returns year after year, seem- court ruling permits claims up to the difunderstood his secret trading system, ingly with very little risk Madoff ference between the amount an investor but they were happy with the doublecredited his complex trading strategy deposited with Madoff and the amount digit returns that they earned Madoff for his investment performance, but they withdrew The judge also ruled was well connected, having been the other investors employed similar stratethat investors who managed to withchairman of the board of directors of gies with much different results than draw at least their initial investment the NASDAQ Stock Market and a Madoff reported Harry Markopolos before the fraud was uncovered are not founding member of the International focusClearing on Corporation His went as far as to submit a report to the eligible to recover additional funds Securities SEC three years prior to Madoff’s arrest Total out-of-pocket cash losses as a credentials seemed to be impeccable However, the old saying goes, if titled “The World’s Largest Hedge Fund result of Madoff’s fraud were recently Limitsason Payback Analysis something sounds too good to be true, Is a Fraud” that detailed his concerns.a estimated at slightly over $20 billion In investors tough economic in Barrington, Illinois.Madoff “The simplicity of even more important than discounted it probably is Madoff’s On June 29, 2009, was in practice of the standard computing payback encourage What cash are flowsome (NPV hazards and IRR)—because it learned this lesson thetimes, hard way when, for sentenced to 150 years inmay prison allowing investors to pursue a payback period is often reduced Madoff’s sloppiness, especially the failure spotlights the risks inherent in lengthy IT on December 11, 2008, the U.S investors are still working to to claims based“Ittheir most recent Chief information officers (CIOs) are include all costs associated with an projects should be a hard and fast Securities and Exchange Commission recover what they can Fraudulent to reject projects with payback account investment, such as just training, mainte- accounts rule tostatements? never take an IT project with a (SEC)apt charged Madoff with securities statements sent prior to periods of more than years “We nance, and hardware upgrade costs,” payback period greater than years, a start with payback period,” says says Douglas Emond, senior vice presi- unless it’s an infrastructure project you Ron Fijalkowski, CIO at Strategic dent and chief technology officer at can’t without,” Campbell says Distribution, Inc., in Bensalem, Eastern Bank in Lynn, Massachusetts Whatever the weaknesses of the Pennsylvania “For sure, if the payback For example, he says, “you may be payback period method of evaluating period is over 36 months, it’s not going bringing in a hot new technology, but capital projects, the simplicity of the to get approved But our rule of thumb uh-oh, after implementation you realize method does allow it to be used in is we’d like to see 24 months And if that you need a dot-net guru in-house, conjunction with other, more sophistiit’s close to 12, it’s probably a noand you don’t have one.” cated measures It can be used to brainer.” But the payback method’s emphasis screen potential projects and winnow While easy to compute and easy on the short term has a special appeal them down to the few that merit more to understand, the payback periods sim- for IT managers “That’s because the careful scrutiny with, for example, net plicity brings with it some drawbacks history of IT projects that take longer present value (NPV) “Payback gives you an answer that tells than years is disastrous,” says In your view, if the payback period you a bit about the beginning stage of Gardner Indeed, Ian Campbell, chief method is used in conjunction with a project, but it doesn’t tell you much research officer at Nucleus Research, the NPV method, should it be used about the full lifetime of the project,” Inc., in Wellesley, Massachusetts, says before or after the NPV evaluation? says Chris Gardner, a cofounder of payback period is an absolutely esseniValue LLC, an IT valuation consultancy tial metric for evaluating IT projects— PRACTICE GLOBAL focus An International Flavor to Risk Reduction in practice Earlier in this chapter (see Table 8.5 on page 318), we learned that from 1900 through 2009 the U.S stock market produced an average annual nominal return of 9.3 percent, but that return was associated with a relatively high standard deviation: 20.4 percent per year Could U.S investors have done better by diversifying globally? The answer is a qualified yes Elroy Dimson, Paul Marsh, and Mike Staunton calculated the historical returns on a portfolio that included U.S stocks as well as stocks from 18 other countries This diversified portfolio produced returns that were not quite as high as the U.S average, just 8.6 percent per year However, the globally diversified portfolio was also less volatile, with an annual standard deviation of 17.8 percent Dividing the standard deviation by the annual return produces a coefficient of variation for the globally diversified portfolio of 2.07, slightly lower than the 2.10 coefficient of variation reported for U.S stocks in Table 8.5 International mutual funds not include any domestic assets whereas global mutual funds include both foreign and domestic assets How might this difference affect their correlation with U.S equity mutual funds? Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists: 101 Years of Global Investment Returns (Princeton University Press, 2002) x ... Gitman/Joehnk/Smart Fundamentals of Investing* Gitman/Zutter Principles of Managerial Finance* * denotes Gitman/Zutter Principles of Managerial Finance? ?? Brief Edition* Goldsmith Consumer Economics: Issues and... sers of Principles of Managerial Finance have praised the effectiveness of the book’s Teaching and Learning System, which they hail as one of its hallmarks The system, driven by a set of carefully... first edition of this book, but the goals of the text have not changed The conversational tone and wide use of examples set off in the text still characterize Principles of Managerial Finance