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 I-8 Index Exercise (option) price, 693–694 Expansion, versus reinvesting earnings, 429–430 Expectations theory, 227–228 Expected value of a return, 316–317 Expenses See also Costs interest as See Interest payments (expense) on pro forma statement, 137–138 tax deductibility of, 47–48 Extendible notes, 238 Extension, 740 External financing (“plug” figure), 140–141 External forecast, 127 Extra dividend, 579 ExxonMobil, 427 F Facebook, Face-value bonds, 36, 235 Factor, 659 Factoring accounts receivable, 659–660 Fama, Eugene, 40 FASB See entries under Financial Accounting Standards Board (FASB) Federal agency issues, 629 Federal debt estimates (2010-2019), 221 funding methods, 221 Federal Deposit Insurance Corporation (FDIC), 43, 44 Field warehouse, 661 Fijalkowski, Ron, 395 Finance, See also Managerial finance career opportunities, 4–5 function, in organizations, 16–19 professional certifications in, Financial (capital) lease, 679 Financial Accounting Standards Board (FASB), 58 Financial Accounting Standards Board (FASB) Standard No 52, 66, 766 Financial analysts, 10 Financial calculator See also Computational tools keys, 162–163 Financial costs, fixed costs, 516–517 Financial crisis (2008), 41–44 bank bailouts, 31 causes of, 41–43 lessons of, 43–44 and mutual funds, 309 stimulus package, 43 and Treasury securities, 222 Financial institutions, 32–33 customers of, 32 federal regulation of, 44–45 relationship to financial markets, 34–35 types of, 32–33 Financial leverage, 76, 516–519 degree of, measuring, 518–519 on income statement, 508–509 Financial leverage multiplier (FLM), 89 Financial managers, agency issue, 21–22 capital budget, preparing, 360 cash flows, analysis of, 17–18 decision making role, 19 goals for firm, 10–13 inventory management, view of, 608 job of, 4–5 Financial markets, 32, 34–40 capital market, 35–39 efficient markets, 39 federal regulation of, 45 international, 38–39, 270–271, 764–765,780–781 money market, 35 primary and secondary, 34 relationship to financial institutions, 34–35 Financial mergers, 717, 721 Financial planning process, 124–141 cash budgets, 127–135 long- and short-term plans, 124–126 pro forma statements, 135–141 Financial ratios See Ratio analysis Financial risk, and capital structure, 528 Financial services, Financial Stability Oversight Council, 45 Financial statements, 59–66 See also specific statements balance sheet, 62–64 DuPont system of analysis, 87–90 income statement, 59–61 international, consolidation of, 65–66 multinational companies, 766 notes to, 65 for ratio analysis, 70 statement of cash flows, 65, 117–121 statement of retained earnings, 64–65 Financing cash flows, 118 Fiscal year, 60 Fitch bond ratings, 235–236 Five C’s of credit, 615 Fixed (semifixed) relationship, 768 Fixed assets, 390 Fixed costs financial costs, 516–517 and leverage, 508, 509, 513–520 operating costs, 513 Fixed-payment coverage ratio, 78 Fixed-rate loan, 649 Flat yield curve, 227 Flexibility option, 484 Float, 624–625 Floating inventory lien, 660–661 Floating-rate bonds, 236–238 Floating-rate loan, 649 Floating relationship, 768 Flotation costs, 360–361 Forecasts internal and external, 127 sales, 127, 135–136 Index Foreign bonds, 39, 238, 779 Foreign currency, current rate (translation) method, 66 Foreign direct investment (FDI), 431–432, 775–776 in China, 432 OLI paradigm, 775–776 strategic motives, 776 Foreign exchange managers, 10, 16 Foreign exchange rate, 768–773 changes, causes of, 770–771 fluctuations, impact of, 771–773 relationship among currencies, 768, 770 spot and forward exchange rate, 768–769 Forward contracts, 784 Forward exchange rate, 768–769 Free cash flow (FCF), 122–123, 284 Free cash flow valuation model, 284–287 Frequency chart, 470 Friendly mergers, 717 Functional currency, 766 Futures contracts, 784 Future value, 162–167, 164 of annuity due, 175–176 compounding, 162, 165 computational tools, 166–167 equation for, 165–166 graphical view of, 168 growth rates, finding, 191–192 mixed cash flow stream, 179–180 of mixed streams, 179–180 of ordinary annuity, 172–173 of single amount, 164–167 G Gardner, Chris, 395 Gateway Computers, 411 Genco Resources, 389 General Agreement on Tariffs and Trade (GATT), 761 General Electric, 59, 125, 265, 270, 357, 758 Generally accepted accounting principles (GAAP), 58 General Motors (GM), 739 General partnership, Genzyme, 507 Glass-Steagal Act (1933), 33, 44–45 Global firms See Multinational companies (MNCs) Going public decision-making about, initial public offering, 274–276 Golden parachutes, 733 Goldman Sachs, 275 Google, 15, 114 Gordon, Myron J., 573 Gordon growth model See Constant-growth valuation (Gordon growth) model Gramm-Leach-Bliley Act (1999), 45 Great Depression, 43–44 Greenfield investments, 431 Greenmail, 733 Green movement, companies, stock price, 265 Gross fixed assets, 62 Gross profit margin ratio, 79 Gross profits, 60 Growth options, 484 Growth rates, finding, 191–192 Gurtcheff, Glenn, 428 H Hain, Scott, 599 Hedging, 701 exchange rate risk, 783–785 in international trade, 619, 701–702 with options, 701–702 Herding, 279 Heron, Randall, 701 Historical weights, 372 Holding companies, 716, 733–735 pros/cons of, 733–735 taxation, 735 Home Depot, 71, 73, 89, 125 Horizontal mergers, 720 Hostile mergers (takeovers), 270, 717 defensive actions, 720, 732–733 threats to businesses, 23–24 Housing market Case Shiller Home Price Index, 41–42 collapse (2008), 41–43 Hybrid securities, 678, 784 Hyperinflation, 767 I I-bonds, 225 Illison, Lawrence J., 22–23 Implied price of warrant, 694–695 IMS Health, Inc., 715 Incentive plans, 22 Income, claims on, 266–267 Income bonds, 236–237 Income statement, 59–61 common-size, 79–80 composition of, 59–61 leverage stated on, 508–509 for pro forma statements, 135–136 Incremental cash flows, 428–430 calculating, 441–442 Independent projects, 391 Individual investors, 20 Industry averages, ratio comparison to, 67–68 Inflation, 222 and interest rates, 222, 224–225 and ratio analysis, 70 and Treasury securities, 225–226 Informational consent, 573 Initial investment, 429 calculating, 437–438 determining, 432–433 I-9 I-10 Index Initial public offering (IPO), 274–276 Insider trading, 40 Insolvent, 601, 738 Installation costs, 433 Installed cost of new asset, 433 Institutional investors, 20–21 Intel Capital, 432 Intel Corporation, 114, 432 Interest compound See Compounding; Compound interest as expense See Interest payments (expense) income, 47 rate of See Interest rates Interest coverage ratio, 78 Interest payments (expense) on bank loans, 648–650 on commercial paper, 654–655 on income statement, 60–61 tax deductibility of, 267, 527 Interest rate risk, 246–247 and bond valuation, 246–247 Interest rates, 222–231 computing interest, 649 discount loans, 649–650 fixed and floating rate loans, 649 and future value See Time value of money and inflation, 224–225 influencing factors, 222 nominal and effective, 185–187 nominal or actual, 223–224 prime rate, 648–649 real rate of, 222–223 on risk premium issues, 230 term structure of, 226–229 on Treasury securities, 224–228, 230 yield curve, 226–227 Interest rate swaps, 780, 784 Intermediate cash inflows, 406–407 Intermix Media, 737 Internal forecast, 127 Internal rate of return (IRR), 401–411 in capital rationing, 485–486 compared to net present value, 404–411 determining, 402–404 multiple IRRs, 410 International Accounting Standards Board (IASB), 58 International bonds, 779–780 bond markets, 38–39, 779 Eurobonds, 38–39, 237, 779 foreign bonds, 39, 238, 779 international issues, 38–39, 237–238 underwriting, 779–780 International equity market, 39 International finance, 758–788 See also Multinational companies (MNCs) accounting standards, 58 bond issues See International bonds international investments, diversifying with, 328 letters of credit, 656 trading blocks, 759–761 transfer prices, 471 U.S firms, foreign takeover of, 736–737 International financial markets bond markets, 38–39, 779 Eurocurrency market, 35 Euromarket, 764–765 International Securities Exchange (ISE), 699 stock market, 780 types of, 38–39 U.S companies traded on, 270–271 International Financial Reporting Standards (IFRS), 58 International Securities Clearing Corporation, 310 International stock market, 780 Inventory balance sheet, 62 as collateral, 660–662 ratios related to, 72–74 Inventory management, 608–615 ABC system, 609 economic order quantity (EOQ) method, 609–612 enterprise resource planning (ERP), 614 just-in-time (JIT) system, 612–613 managerial viewpoints on, 608–609 manufacturing resource planning II (MRP II), 614 materials requirement (MRP) system, 613–614 multinational companies, 614, 786 RFID tags, use of, 613 Inventory turnover ratio, 73 Inverted yield curves, 226–227 Investment bankers, 275–276, 731 Investment banks, 33 Investment cash flows, 118 Investment opportunities schedule (IOS), 485–486 Investor behavior risk preferences, 312–313 study of, 278–279 Involuntary reorganization, 742 Issued shares, 269 iValue LLC, 395 J Jamba, 737 Jen-Hsun Huang, 23 Jobs, Steven, 114 Jobs and Growth Tax Relief Reconciliation Act of 2003, 270, 569 Joint ventures, multinational companies, 761–762, 781, 787–788 JPMorgan Chase, 31, 42 JPMorgan Settlement Network, 641 Judgmental approach, 139–140 Junk bonds, 236–238, 717 Just-in-time (JIT) inventory system, 612–613 Index K Kahneman, Daniel, 278 Kelly, Martin, 522 Key Business Ratios, 67 L Leasing, 678–687 arrangements, types of, 679–680 capitalized lease, 685–686 equipment, common types of, 677 financial (capital) lease, 679 future financing, impact on, 685–686 leveraged lease, 679–680 operating lease, 678–679 pros/cons of, 686 versus purchase decision, 681–684 renewal and purchase options, 680 Legal action, for collection, 624 Legal capital, 574–575 Lehman Brothers, 33, 42–43, 222, 522 Lessee, 678 Lessor, 678 Letters of credit, 656 Letter to stockholders, 58–59 Leverage, 508–522 breakeven analysis, 509–513 financial leverage, 508–509, 516–519 limiting impact of, 508 multinational companies, 526 operating leverage, 513–516 sources, on income statement, 508–509 total leverage, 508–509, 520–522 types of, interrelationships, 522 Leveraged buyouts (LBOs), 721–722 Leveraged lease, 679–680 Leveraged recapitalization, 733 Levitt, Arthur, 288 Liabilities accounts payable management, 642–647 accruals management, 647–648 balance sheet, 62–64 and business forms, 6–7, current, management of, 603 loans, short-term See Secured short-term financing; Unsecured short-term financing spontaneous liabilities, 642–648 Lie, Erik, 701 Lien, 659 Limited liability, Limited liability company (LLC), Limited liability partnership (LLP), Limited partnership (LP), Lines of credit, 651–653 annual cleanup, 653 revolving credit agreements, 653 Lintner, John, 573 I-11 Liquidation value per share, 287 Liquidity, 71 Liquidity preference, 222 Liquidity preference theory, 228–229 Liquidity ratios, 71–73, 84 Listed exchanges, 38 Loan amortization, 189–190 schedule for, 189–190 Loans See also Secured short-term financing; Bank loans; Credit; Debt; Unsecured short-term financing amortizing, 189–190 discount loans, 649–650 fixed and floating rate loans, 649 floating inventory lien, 660–661 trust receipt inventory loans, 661 warehouse receipt loans, 661 Lockbox system, 625–627 cash transfer methods, 627 London Stock Exchange, 38, 270–271 Long-term (strategic) financial plans, 124–125 Long-term debt defined, 62 multinational companies, 779–780 Long-term debt, cost of, 360–364 after-tax costs, 363–364 before-tax cost, 361–363 Long-term decision-making and capital budgeting, 359–360 capital structure, 523–544 leverage, 508–522 Long-term funds, 35 Lowe’s, 71, 73 Low-regular-and-extra dividend policy, 579 M Macro political risk, 773 Madoff, Bernard, 310 Mail float, 625 Maintenance clauses, 680 Managerial finance, 4, 15–19 career opportunities, 10 function in organization, 15–16 relationship to accounting, 17–19 relationship to economics, 16–17 study, reasons for, Manufacturing managers, inventory management, view of, 609 Manufacturing resource planning II (MRP II), 614 Marginal cost–benefit analysis, 16–17 Marginal tax rate, 46–47 Marketable securities, 35 as form of cash, 62, 629 popular types of, 629–630 Market/book (M/B) ratio, 83 Market efficiency See Efficient markets Market makers, 36, 38 I-12 Index Market premium, 692–693 Market price per share, mergers, impact on, 730–731 Market ratios, 82–83, 87 Market return, 330 Markets, financial See Financial markets Market segmenation theory, 229 Market value weights, 372 Materials requirement (MRP) inventory system, 613–614 Maturity, corporate bonds, 35–36 Maturity risk, 231 McClendon, Aubrey K., 22–23 Memorial Sloan-Kettering Cancer Center, 641 Merck, 358 Mercosur, 760 Mergers, 716–721, 723–737 earnings per share (EPS), impact on, 727–730 holding companies, 733–735 hostile versus friendly, 716–717 market price per share, impact on, 730–731 multinational companies, 431, 735–736, 787–788 negotiation process, 731–733 reasons for, 718–720 stock swaps, 726–730 strategic versus financial, 717 target company, valuation of, 724–726 taxation, 718–719 types of, 720 Micro political risk, 773 Microsoft, 114, 270 Miller, Merton H., 526–527, 572–573 Mixed streams, 178–181, 438 cash flow pattern, 163–164 future value of, 179–180 payback period, 393 present value of, 180–181 Mobizzo, 737 Modified accelerated cost recovery system (MACRS), 115–116 lease versus purchase decision, 682–683 property classes under, 116–117 Modified DuPont formula, 89 Modigliani, Franco, 526–527, 572–573 Monetary union, 760 Money market, 34, 35 Money market mutual funds, 630 Monte Carlo method, 470 Moody’s bond ratings, 235–236 Morgan Stanley, 275 Mortgage-backed securities, 41 Mortgage bonds, 236–237 Mortgages securities based on, 41 subprime, 42, 191 Motorola, 265, 470 MSN Money, 38 Multinational companies (MNCs), 759–764 See also International finance bonds, types of, 38–39, 237–238, 779 business forms, 761–762 capital budgeting, 430–431 capital structure of, 525–526, 777–779 cash flows for, 776–777 cash management, 783–786 common stock issues, 270–271 credit management, 618–619, 786 currency risks, 431 debt, long-term, 779–780 diversification, 327–328, 777 equity capital, 780–781 Euromarket, 764–765 exchange rate risk, 470–471, 656, 767–768 financial reporting standards, 58 financial statements, 65–66, 766 financing sources, 35, 656, 781–782 foreign direct investment, 431–432, 775–776 foreign exchange rate, 768–773 hedging, use of, 783–785 international factors, impact on firm, 759 inventory management, 614, 786 joint ventures, 761–762, 781, 787–788 leverage, use of, 526 mergers, 431, 735–736, 787–788 overseas assignments, 778 political risks, 327–328, 431, 471, 773–774 share repurchases, popularity of, 565 short-term financing arrangements, 655–656, 782 taxation, 471, 762–764 translation methods, 66, 766–767 Multiple IRRs, 410 Munger, Charlie, 37 Murdoch, Rupert, 737 Mutual funds and financial collapse (2008), 309 international, 778 Mutually exclusive projects, 391 N Nardelli, Robert L., 125 Nasdaq market, 36, 38, 278, 310 National entry control systems, 774 National exchange, 37 Negative correlation, 323 Negative net working capital, 601 Net cash flow, 131 Net current asset investment (NCAI), 122–123 Net demanders, 32 Net fixed assets, 62 Net operating profits after taxes (NOPAT), 121–122 Net present value (NPV), 397–401 annualized approach, 482–483 in capital rationing, 486–487 Index compared to internal rate of return, 404–411 determining, 397–399 economic value added variation, 400–401 net present value profile, 404–406 profitability index (PI) variation, 399–400 in risk-adjusted discount rates, 472–479 in scenario analysis, 467–468 in simulations, 468–469 strategic versus traditional, 484–485 Net proceeds, 360–361 Net profit margin, 80–81 net profit margin ratio, 81 Net profits after taxes, 61 Net suppliers, 32 Net working capital, 436, 601 change in, 436–437, 444 News Corp, 737 New York Stock Exchange (NYSE Euronext), 36–38, 278 Noble-Nesbitt, Deryck, 309 Nominal (actual) rate of interest, 223–224 Nominal interest rate, 782 Nominal (stated) annual interest rate, 185–186, 649 Noncash charges, 119, 439 Noncumulative preferred stock, 272 Nondiversifiable risk, 329–330, 473 Nonnotification basis, 659 Nonresourse basis, 659 Nonvoting common stock, 270 No-par preferred stock, 271 Normal probability distribution, 318–319 Normal yield curves, 226–227 North American Free Trade Agreement (NAFTA), 759 Notes payable, 62 Notes to the financial statements, 65 Notification basis, 659 Nucleus Research, 395 O Office of Financial Research, 45 Offshore centers, 764 Old assets, selling See Sale of old asset Open-market share repurchase, 567 Operating breakeven point, 509, 511–513 calculating, 510 variables affecting outcome, 511–512 Operating cash flow (OCF), 118, 121–122 Operating cash inflows, 429 calculating, 439–442 Operating-change restrictions, 652 Operating costs, fixed costs, 513 Operating cycle (OC), 604 Operating expenditures, 390 Operating lease, 678–679 Operating leverage, 513–516 degree of, measuring, 514–515 and fixed costs, 516 on income statement, 508–509 and profitability, 515 Operating profit margin, 80 operating profit margin ratio, 80 Operating profits, 60, 509 Operating unit, 722 Opportunity costs, 430 Optimal capital structure, 535–536 Options, 698–702 backdating, 701 call option, 698 decline and recession, 699 as employee compensation, 700–701 hedging with, 701–702, 784 put option, 698, 700 strike price, 698 trading, reasons for, 699–700 transactions, methods of, 698–699 Oracle, 114 Order costs, 609–610 Ordinary annuity, 171–175 future value of, 172–173 present value of, 173–175 Ordinary income, 46–48 Outstanding shares, 269 Overhanging issue, 690 Over-the-counter (OTC) market, 36, 38 P Paid-in capital in excess of par, 62 Partnerships, 6–7 pros/cons of, types of, 6, Par-value bonds, 235 common stock, 62, 268 preferred stock, 271 Payback period, 393–396 pros/cons of, 394–396 Payday advance borrowing, 187 Payment date, 566 Payout policy, 561–582 catering theory, 576–577 constant-payout-ratio dividend policy, 577–578 dividend irrelevance theory, 572–573 dividend payment process, 565–567 dividend payment time line, 567 dividend payout ratio, 577–578 dividend reinvestment plans (DRIPs), 570 dividend relevance theory, 573–574 extra dividend, 579 factors affecting policy, 574–577 impact on stock price, 570–571 low-regular-and-extra dividend policy, 579 regular dividend policy, 578–579 residual theory of dividends, 571–572 I-13 I-14 Index Payout policy (continued) share repurchase, 563–565, 567–568 share repurchase process, 567–568 target dividend-payout ratio, 578–579 taxation, 568–569 trends in U.S firms (1950-2010), 562–565 Pecking order, 534 Pension fund managers, 10 Percentage advance, 658 Percent-of-sales method, 137 Perfectly negatively correlated, 323–325, 327 Perfectly positively correlated, 323–325, 327 Performance plans, 22 Performance shares, 22 Permanent funding requirement, 605–606 Perpetuity, present value, finding, 178 Personal budget, 132–133 Philadelphia Stock Exchange, 699 Piper Jaffray & Co., 428 Pledge of accounts receivable, 658–659 Plug figure, 140 Poison pills, 732–733 Political risk, 327–328, 432, 471, 773–774 defensive strategies, 773–774 macro and micro, 773 Portfolio, 310 Portfolio efficiency, 321–326 and betas, 332–333 correlation, 323–326 diversification, 323–329 standard deviation, 321–322 Positive correlation, 323 Positive net working capital, 601 Preemptive rights, 268–269 Preferred stock, 36, 271–272 convertible, 272, 687 cost of, 364–365 dividends in dollar amount, 364 features of, 36, 271–272 par-value and no-par, 271 stockholders’ rights, 271 straight, 687 Premium, 244 Present value, 168–170 of annuity due, 176–177 of annuity in perpetuity, 178 discounting, 162, 168–169 equation for, 169 graphical view of, 170 mixed cash flow stream, 180–181 of mixed streams, 180–181 of ordinary annuity, 173–175 of single amount, 168–170 Price/earnings (P/E) multiple approach, 288–289 Price/earnings (P/E) ratio, 82–83 Primary market, 34, 38 Prime rate of interest (prime rate), 648–649 Principal, 165 Principal–agent relationship, 21–22 Privately owned stock, 268 Private placement, 32, 34, 274 Probability, 314 Probability distributions, 315 Proceeds from sale of old asset, 433, 443 Processing float, 625 Procter & Gamble, 563 Profitability, 601 -risk trade-off, 601–603 Profitability index (PI), 399–400 Profitability ratios, 79–82, 87 Profit planning, pro forma statements, 135–141 Profits earnings per share (EPS) measure, 11–12 gross, 60 gross profit margin, 79 on income statement, 60–61 maximization by corporation, 11–13 net, after taxes, 61 net operating profits after taxes (NOPAT), 121–122 net profit margin, 80–81 operating, 60, 80 operating profit margin, 79 and share price, 12–13 Pro forma statements, 135–141 evaluating, 141 inputs for, 135 preparing, 139–141 with variable expenses, 137–138 Project finance managers, 10 Prospect theory, 279 Prospectus, 274–275 Proxy battle, 270 Proxy statement, 269–270 Public Company Accounting Oversight Board (PCAOB), 58 Publicly owned corporations, 58–59 Publicly owned stock, 268 Public offering, 34 Purchase option, 680 Purchasing managers, inventory management, view of, 609 Pure economic profit, 400 Putable bonds, 236, 238 Put option, 698, 700 Pyramiding, 734 Q Qatar Petroleum, 427 Qualcomm, 265 Quarterly compounding, 182–183 Quick (acid-test) ratio, 72 Quiet period, 274–275 Index R Radio frequency identification (RFID), 613 Range, 313, 315, 468 Ranking approach, capital budgeting, 391 Ratio analysis, 67–90 activity ratios, 73–75 cautions about use, 68–69, 80 debt ratios, 77–79 liquidity ratios, 71–73 market ratios, 82–83 profitability ratios, 79–82 ratio comparison methods, 67–79 summary of all ratios, 84–87 Ratio of exchange, 726–727 in market price, 730–731 Real options, 483–485 Real rate of interest, 222–223 Recapitalization, 743 Recaptured depreciation, 435 Receipts and disbursements management, 624–630 cash concentration, 626–627 controlled disbursing, 625–626 float, 624–625 lockbox system, 625–627 marketable securities, investing in, 629–630 zero-balance accounts (ZBA), 627–628 Recession and financial collapse (2008), 43–44 preventing, 223 Recovery period, 116 Red herring, 274 Regional exchanges, 37 Regret theory, 279 Regular dividend policy, 578–579 Relevant cash flows, 428–431, 445 Renewal option, 680 Reorder point, 611–612 Replacement, versus expansion decisions, 429–430 Representative office (RO), 432 Repurchase agreements, 630 Reputational risk, 522 Required return, 222 Required total financing, 131 Residual claimants, Residual owners, 268 Residual theory of dividends, 571–572 Restrictive covenants, 232 corporate bonds, 232 preferred stock, 272 Retained earnings, 64 cost of, 367–368 versus reinvesting earnings, 368 statement of, 64–65 Return on common equity (ROE), 82, 87–89 Return on total assets (ROA), 81, 87–89 Reverse stock split, 582 I-15 Revolving credit agreements, 653 Rights, 268 rights offering, 268–269, 274 warrants compared to, 694 Risk, 13, 310, 466–480 assessment models See Risk assessment business risk, 527–528 in capital budgeting, 466–480 and capital structure, 527–529 and cash inflows, 466–467 changes, and stock valuation, 291 debt-specific risk, 231 diversifiable and nondiversifiable, 329, 473 financial risk, 528 of insolvency, 601 and multinational companies, 327–328, 431, 470–471, 656 portfolio, protecting See Portfolio efficiency preferences, scope of, 312–313 -profitability trade-off, 601–603 risk classes, 478–479 total risk, 528–529 types of, 329–330 Risk-adjusted discount rates (RADR), 472–479 application of, 475–478 calculating, 473 finding with capital asset pricing model (CAPM), 473–474 popularity of, 478 in practice, procedure in, 478–479 Risk assessment, 313–321 capital asset pricing model (CAPM), 329–339 probability distributions, 315 scenario analysis, 313–314, 467–468 simulation, 468–469 standard deviation, 316–320 Risk averse, 13, 312 security market line (SML) slope, 336–337 Risk-free rate of return, 333 Risk neutral, 312 Risk premium issues, 229–231 corporate bonds, 233 interest rates, 230 Risk seeking, 313 RJR Nabisco, 470 RMA Annual Statement Studies, 67 Road show, 275 S Sale-leaseback arrangement, 679 Sale of old asset, 433–436 after-tax proceeds, 433 proceeds, 433, 443 tax on, 433–436, 443–444 Sales forecast, 127 for pro forma statements, 135–136 I-16 Index Sales revenue, 60 Salvage value, 443 Sarbanes-Oxley Act (SOX) of 2002, 14, 21, 58, 65, 701 Savings products annual percentage yield, 186–187 future value See Time value of money interest rates, 185–187 Scenario analysis, 133–134, 313–314, 467–468 S corporation, Seasonal funding requirement, 605–606 Secondary market, 34, 36 Secondary market, 45 Secured creditors, 744 Secured short-term financing, 657–662 accounts receivable factoring, 659–660 accounts receivable pledge, 658–659 collateral, 657–658 inventory liens, 660–662 sources of, 658 Securities See also Bonds; Stocks convertible securities, 687–693 derivative securities, 678 hybrid securities, 678 options, 698–702 sale, net proceeds, 360–361 stock purchase warrant, 693–697 Securities Act of 1933, 45 Securities and Exchange Commission (SEC), 22, 45, 58, 269–270, 310 Securities dealers, 36 Securities Exchange Act of 1934, 45 Securities exchanges, 36–38 international, 780–781 major exchanges, 36–38 Securitization, 41 Security agreement, 657 Security market line (SML), 334–338 in capital asset pricing model, 334–338, 474 shifts in, 335–338 Self-liquidating loans, short-term, 648 Selling group, 276 Semiannual compounding, 181–182 Semiannual interest payments, bonds, 248–249 Service debts, 77 Shadow banking system, 33 Shareholders cash distributions to See Payout policy individual versus institutional investors, 20–21 Share repurchase ethical issues, 564 impact on stock price, 570–571 methods of, 567–568 taxation, 568–569 trends in, 563–565 Shark repellents, 733 Short-term (operating) financial plan, 125–126 Short-term, self-liquidating loans, 648 Short-term decision-making accounts payable management, 642–647 accounts receivable management, 615–624 accruals management, 647–648 inventory management, 608–615 receipts and disbursements management, 624–630 secured short-term financing, 657–662 unsecured short-term financing, 648–657 working capital management, 600–608 Short-term financing, See also Secured short-term financing; Unsecured short-term financing multinational companies, 782 Short-term funds, 35 Signaling, 534 Simulations, 468–469 for cash budget uncertainty, 134 Monte Carlo method, 470 Single amount, cash flow pattern, 163–164 Single-payment notes, 650 Sinking-fund requirement, 232–234 Small (ordinary) stock dividend, 580 Sole proprietorships, 6–7 pros/cons of, Spin-off, 723 Spontaneous liabilities, 642–648 Spot exchange rate, 768–769 Spreadsheets, using, 163 See also Computational tools Stakeholders, 13 Standard & Poor’s 500 Stock Composite Index, 330 Banking Index, 43 bond ratings, 235–236 Case Shiller Home Price Index, 41–42 Industrial Ratios, 288 Standard debt provisions, 232 Standard deviation, 316–320 calculation of, 317 coefficient of variation, 319–320 for historical returns, 318 normal probability distribution, 318–319 and portfolio return, 321–322 Statement of cash flows, 65–66, 117–121 cash inflows/outflows, 118–119 preparing, 119–122 Statement of retained earnings, 64–65 Statement of stockholders’ equity, 64 Stewart, Martha, 40 Stock dividends, 579–581 costs to firm, 581 and share value, 580 small/ordinary, 580 Stockholders, 7–8 corporate ownership, 7–8, 268 corporate responsibility to, 10–11, 142 earnings reports to, 59–65 letter to, 58–59 report, 59 Index rights, and preferred stock, 271 risk taking, 13 Stockholders’ equity, 62–64 balance sheet, 62–63 statement of, 64 Stock options, 22 Stock purchase warrants, 234, 693–697 compared to rights and convertibles, 694 detachable, 694 exercise prices, 693–694 implied price, 694–695 values of, 695–697 warrant premium, 695–697 Stocks See also entries under Common stock; Preferred stock common and preferred, 35–36 common stock, 35–36, 268–271 dividends, 8, 579–581 efficient-market hypothesis, 278–279 preferred stock, 36, 271–272 selling process, 274–276 splits, 581–582 undervalued and overvalued, 277 Stock splits, 581–582 Stock swap transaction, 726–730 Straight bankruptcy, 743 Straight bonds, 687, 691 Straight preferred stock, 687 Strategic mergers, 717 Strategic options, 483 Stretching accounts payable, 646–647 Strike price, 698 Subordinated debentures, 236–237 Subordination, 232 Subprime mortgages, 42, 191, 522 Subsidiaries, 716 Sunk costs, 430 Supervoting shares, 270 Systematic risk, 329–330 T Takeovers See Hostile mergers (takeovers) Taleb, Nassim Nicholas, 314 Target capital structure, 359 Target company, 716 valuation of, 724–726 Target dividend-payout ratio, 578–579 Target market value proportions, 372–373 Target weights, 372 Taxation, 46–48 capital gains, 48, 569 and capital structure, 527 and debt financing, 527 deductible expenses, 47–48 depreciation, 115–117 dividends, 568–569 double, 47, 735 I-17 excess earnings accumulation tax, 575 holding companies, 735 interest and dividend income, 47 lease payments, 679 losses, carryforward, 48, 718–719 and mergers, 718–719 multinational companies, 471, 762–764 ordinary income, 46–48 sale of old asset, 433–436 share repurchase, 568–569 tax rates, 46–47 Tax Increase Prevention and Reconciliation Act of 2005, 569 Temporal method, 767 10K and 10Q forms, 45 Tender offer, 717, 732 Tender offer repurchase, 567–568 Terminal cash flow, 429, 443–445 sale of assets, proceeds and taxes, 443–444 Terminal warehouse, 661 Term structure of interest rates, 226–229 Time deposits, 35 Time line, 161 Time-series analysis, 69 Times interest earned ratio, 78 Time value of money, 161–170 annuities, 171–178 compounding, 181–185 computational tools, 162–163 defined, 161 future sum, deposits needed for, 188 future value, mixed cash flow stream, 179–180 future value, single amount, 164–167 future versus present value, 161–162 loan amortization, 189–190 present value, mixed cash flow stream, 180–181 present value, single amount, 168–170 time periods unknown, 192–193 Timing options, 484 Total asset turnover, 75, 87–89 ratio for, 75 Total cost of inventory, 610 Total leverage, 520–522 degree of, measuring, 521 on income statement, 508–509 Total operating costs, 511 Total rate of return, 311–312 Total risk, 329, 473 and capital structure, 528–529 Tracking Software, Inc., 215–218 Trade pacts, listing of, 759–761 Transfer prices, 471 Translation, (current rate), 766–767 Treasurer, 16 I-18 Index Treasury Bill (T-bill), 224, 333–334 Treasury securities features of, 629 and federal deficit, 221 and inflation, 225–226 interest rates, 224–228, 230 negative rates (2008), 222 purchasing, 221 returns (1900-2009), 312 as risk free asset, 224, 333–334 yield curves, 227 Treasury stock, 269 Trustee, 233 Trust receipt inventory loans, 661 Tucker, Jennifer, 288 Two-bin method, 609 Two-tier offer, 732 Voluntary settlements, 739–741 Voting rights, common stock, 269–270 W Uncorrelated assets, 324, 327 Underpriced, 368 Underwriting, 275–276 costs, 361 international bonds, 779–780 syndicate, 276 United Airlines, 680 Unlimited funds, 391 Unlimited liability, Unsecured (general) creditors, 744 Unsecured short-term financing, 642, 648–657 bank loans, 648–654 commercial paper, 654–655 international loans, 655–656 Unsystematic risk, 329 Waksal, Sam, 40 Wall Street Journal, 38, 361 Wal-Mart, RFID tags and inventory management, 613 Walt Disney Company, 470, 680 Warehouse terminal and field types, 661 warehouse receipt loans, 661 Warrants See also Stock purchase warrants warrant premium, 695–696 Weighted average cost of capital (WACC), 359, 369–373 book value weights, 372 calculating, 369–371 and debt levels, 535 historical weights, 372 target market value proportions, 372–373 target weights, 372 in unstable markets, 371 Welch, Jack, 125, 357 White knight strategy, 732 Wholly foreign-owned enterprise (WFOE), 432 Widely owned stock, 268 Wire transfers, 627 Working capital, 601 managing See Working capital management Working capital management, 600–608 cash conversion cycle (CCC), 603–608 current liabilities, changes in, 603 current assets, changes in, 601–603 net working capital in, 601 profitability/risk trade-off, 601–603 World Trade Organization (WTO), 761 V Y Valuation, 239–249 basic model, 240–241 of bonds See Bond valuation inputs for, 239–240 stock See Common stock valuation Value Line Investment Survey, 67, 331 Variable costs, 509 Variable-growth model, 282–284 Venture capital, 272–273 Venture capitalists (VCs), 273 operation of, 273–274 organizations, types of, 273 Verisign, 737 Vertical mergers, 720 Yield, bonds, 234 Yield curves, 226–227 inverted, normal, flat, 226–227 Yield to call, 234 Yield to maturity (YTM), 226, 234–235 bond valuation, 247–248 for before-tax cost of debt, 361 U Z Zero-balance accounts (ZBA), 627–628 Zero-coupon bonds, 236–238 Zero-growth model, 280 Zuckerberg, Mark, Credits p 3: Archivo particular/GDA Photo Service/Newscom p 31: Richard B Levine/Levine Roberts Photography/Newscom p 57: Kimimasa Mayama/Bloomberg/Getty Images p 114: Zuma Press/Newscom p 160: John A Rizzo/PhotoDisc/Getty Images p 221: Sara Piaseczynski p 265: Reprinted with permission by A123 Systems p 309: © 2010 Morningstar, Inc All Rights Reserved The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; (3) does not constitute investment 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Resource Planning AFj Amount of Funds Available from Financing Source j at a Given Cost EU European Union EVA Economic Value Added ANPV Annualized Net Present Value FC Fixed Operating Cost A/P Accounts Payable FCF Free Cash Flow APP Average Payment Period FDI Foreign Direct Investment APR Annual Percentage Rate FLM Financial Leverage Multiplier APY Annual Percentage Yield A/R Accounts Receivable bj Beta Coefficient or Index of Nondiversifiable Risk for Asset j bp Portfolio Beta B0 C FV Future Value GAAP Generally accepted accounting principles GATT General Agreement on Tariffs and Trade g Growth Rate Value of a Bond I Interest Payment Carrying Cost per Unit per Period IP Inflation Premium CAPM Capital Asset Pricing Model IPO Initial Public Offering CCC Cash Conversion Cycle IRR Internal Rate of Return CD Stated Cash Discount in Percentage Terms JIT Just-In-Time System CF0 Initial Investment LBO Leveraged Buyout CFt Cash Inflow in Period t m CV Coefficient of Variation Number of times per year interest is compounded Dp Preferred Stock Dividend M Bond’s Par Value Dt • Per-Share Dividend Expected at the End of Year t M/B Market/Book Ratio MACRS Modified Accelerated Cost Recovery System MNC Multinational Company MP Market Price per Share • Depreciation Expense in Year t DFL Degree of Financial Leverage DIP Debtor in Possession DOL Degree of Operating Leverage DPS Dividends per Share DTC Depository Transfer Check DTL Degree of Total Leverage e Exponential Function ϭ 2.7183 E Exercise Price of the Warrant EAR Effective Annual Rate EBIT Earnings Before Interest and Taxes EOM End of the Month MPR Market Price Ratio of Exchange MRP Materials Requirement Planning n • Number of Outcomes Considered • Number of Periods—Typically, Years • Years to Maturity N • Number of Days Payment Can Be Delayed by Giving up the Cash Discount • Number of Shares of Common Stock Obtainable with One Warrant Nd Net Proceeds from the Sale of Debt (Bond) FREQUENTLY USED SYMBOLS AND ABBREVIATIONS (CONTINUED) Nn Net Proceeds from the Sale of New Common Stock Np Net Proceeds from the Sale of the Preferred Stock NAFTA North American Free Trade Agreement NCAI Net Current Asset Investment NFAI Net Fixed Asset Investment NOPAT Net operating profits after taxes NPV Net Present Value O Order Cost Per Order OC Operating Cycle OCF Operating Cash Flow P Price (value) of asset P0 Value of Common Stock PBDTt Profits Before Depreciation and Taxes in year t PD Preferred Stock Dividend P/E Price/Earnings Ratio PI rr Cost of Retained Earnings rs • Required Return on Common Stock • Cost of Common Stock Equity RF Risk-Free Rate of Interest RADR Risk-Adjusted Discount Rate RE Ratio of Exchange ROA Return on Total Assets ROE Return on Common Equity S • Usage in Units per Period • Sales in Dollars SML Security Market Line t Time T Firm’s Marginal Tax Rate TVW Theoretical Value of a Warrant V • Value of an Asset or Firm • Venture Capital VC Value of Entire Company Profitability Index VD Value of All Debt PMT Amount of Payment VP Value of Preferred Stock Pr Probability VS Value of Common Stock PV Present Value VC Variable Operating Cost per Unit Q • Order Quantity in Units wj • Sales Quantity in Units • Proportion of the Portfolio’s Total Dollar Value Represented by Asset j • Actual, Expected (r), or Required Rate of Return • Proportion of a Specific Source of Financing j in the Firm’s Capital Structure r • Annual Rate of Interest WACC Weighted Average Cost of Capital • Cost of Capital WTO World Trade Organization Real Rate of Interest YTM Yield to Maturity Weighted Average Cost of Capital ZBA Zero Balance Account rd • Required Return on Bond ␴ Standard Deviation • Before-Tax Cost of Debt ⌺ Summation Sign r* ri After-Tax Cost of Debt rj Required Return on Asset j rm • Market Return • Return on the Market Portfolio of Assets rp • Cost of Preferred Stock • Portfolio Return ... 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