FREQUENTLY USED SYMBOLS Term for book ACP ADR AFN APR AR b bL bU BEP BVPS CAPM CCC CF CFPS COGS COViM CR CV D/E Δ di Dps Dt DCF DPS DRIP DRP DSO EAR EBIT EBITDA EFF% EPS EVA F FCF FVAN FVN g gL HVT I I/YR INT IP IPO IRR LP M/B M MIRR MRP MVA n N N di NOPAT NOWC NPV OP Definition Average collection period American Depository Receipt Additional funds needed Annual percentage rate Accounts receivable Beta coefficient in the CAPM 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 Cost of goods sold Covariance between stock i and the market (1) Capital requirement ratio (2) Conversion ratio Coefficient of variation Debt-to-equity ratio Difference, or change (uppercase delta) Input to the Black-Scholes option pricing model Dividend of preferred stock Dividend of common stock in Period t Discounted cash flow 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 Effective annual rate, EAR Earnings per share Economic Value Added (1) Flotation cost percentage (2) Fixed operating costs Free cash flow Future value of an annuity for N years Future value for Year N Growth rate in earnings, dividends, and stock prices Constant long-term growth rate in earnings, dividends, and stock prices Horizon value of stock or company at time T 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 Market-to-book ratio (1) Number of periods per year (2) Maturity value of a bond (3) Margin (profit margin) 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 to the left of di Net operating profit after taxes Net operating working capital Net present value Operating profitability ratio Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it P/E P Pc ^ P0 Pf Ph PI PN PM PMT PPP PV PVAN Q QBE r − r r* r^ rd re rf rh ri rM rNOM rp rps rPER rRF rs − r SMB − r HML ρ R ROA ROE ROIC RPi RPM RR S Σ σ σ2 SML t T TIE TVN V VB VC VL Vop Vps VU w wd wps ws WACC X YTC YTM Price/earnings ratio (1) Stock price; price in Period t Pt ; current price P0 (2) Sales price per unit of product sold Conversion price Expected stock price as PV of expected dividends Price of good in foreign country Price of good in home country Profitability index A stock’s horizon value 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) Percentage interest rate (2) Required rate of return “r bar,” actual rate of return Real risk-free rate of return “r hat,” expected rate of return Required return on debt Cost of new common stock including flotation costs Interest rate in foreign country Interest rate in home country Required return for an individual firm or security Required return for “the market” or for an “average” stock Nominal rate of interest; also denoted by INOM Required return on portfolio Required return on preferred stock Periodic rate of return Rate of return on a risk-free security Required return on common stock Return on Fama-French small (size) minus big (size) portfolio Return on Fama-French high (B/M) minus big (B/M) portfolio Correlation coefficient (lowercase rho) Estimated correlation coefficient for sample data Return on assets Return on equity Return on invested capital Risk premium for Stock i Market risk premium Retention rate (1) Sales (2) Estimated standard deviation for sample data (3) Intrinsic value of stock (i.e., all common equity) Summation sign (uppercase sigma) Standard deviation (lowercase sigma) Variance Security Market Line Time period Marginal income tax rate Times interest earned A stock’s horizon, or terminal, value Variable cost per unit Bond value Total variable costs Total market value of a levered firm Value of operations Value of preferred stock Total market value of an unlevered firm Proportion or weight Weight of debt Weight of preferred stock Weight of common stock Weighted average cost of capital Exercise price of option Yield to call Yield to maturity Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Feel confident as you use the most engaging digital content available to transform today’s students into critical thinkers Personalize your course to match the way you teach and your students learn… Improve outcomes with real-time insight into student progress… and SAVE TIME All while your students engage with your course content, enjoy the flexibility of studying anytime and anywhere, stay connected with the MindTap Mobile app… and EARN BETTER GRADES Try a demo, access the research, learn about our LMS integration and Cengage Learning’s unparalleled digital course support now at www.cengage.com/mindtap Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Financial Management Theory & Practice Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Financial Management Theory & Practice 15e 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 • Mexico • Singapore • United Kingdom • United States Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it This is an electronic version of the print textbook Due to electronic rights restrictions, some third party content may be suppressed Editorial review has deemed that any suppressed content does not materially affect the overall learning experience The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest Important Notice: Media content referenced within the product description or the product text may not be available in the eBook version Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Financial Management: Theory and Practice: Fifteenth Edition Eugene F Brigham and Michael C Ehrhardt Vice President, General Manager: Science, Math and Quantitative Business: Balraj Kalsi 2017, 2014 Cengage Learning® WCN: 02-200-203 ALL RIGHTS RESERVED No part of this work covered by the copyright herein may be reproduced or distributed in any form or by any means, except as permitted by U.S copyright law, without the prior written permission of the copyright owner Product Director: Mike Schenk Product Team Manager: Joe Sabatino Senior Product Manager: Mike Reynolds Senior Product Assistant: Adele Scholtz Associate Content Developer: Brad Sullender Senior Marketing Manager: Nathan Anderson 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 Content Project Manager: Jana Lewis Manufacturing Planner: Kevin Kluck Unless otherwise noted, all images are © Cengage Learning Marketing Coordinator: Eileen Corcoran Library of Congress Control Number: 2015943329 Media Developer: Mark Hopkinson ISBN: 978-1-305-63229-5 Production Service: Integra Software Services Pvt Ltd Senior Art Director: Michelle Kunkler Internal Designer: Ramsdell Design Cengage Learning 20 Channel Center Street Boston, MA 02210 USA Cover Designer: Ramsdell Design Intellectual Property Analyst: Brittani Morgan Cengage Learning is a leading provider of customized learning solutions with employees residing in nearly 40 different countries and sales in more than 125 countries around the world Find your local representative at www.cengage.com Project Manager: Erika Mugavin Cengage Learning products are represented in Canada by Nelson Education, Ltd Cover Image: © EpicStockMedia/Shutterstock com, © Panda3800/Shutterstock.com To learn more about Cengage Learning Solutions, visit www.cengage.com Purchase any of our products at your local college store or at our preferred online store www.cengagebrain.com Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Brief Contents © EpicStockMedia/Shutterstock.com Preface xix PART THE COMPANY AND ITS ENVIRONMENT CHAPTER An Overview of Financial Management and the Financial Environment 1A: An Overview of Derivatives CHAPTER Financial Statements, Cash Flow, and Taxes 57 PART STOCKS AND OPTIONS 239 CHAPTER Risk and Return 241 Web Extensions Web Extensions Web Extensions Web Extension 2A: The Federal Income Tax System for Individuals CHAPTER Analysis of Financial Statements 101 PART FIXED INCOME SECURITIES 137 CHAPTER Time Value of Money 139 Web Extensions 4A: The Tabular Approach 4B: Derivation of Annuity Formulas Web Extensions Web Extensions Web Extensions Web Extensions 5A: A Closer Look at Zero Coupon and Other OID Bonds 5B: A Closer Look at TIPS: Treasury Inflation-Protected Securities 5C: A Closer Look at Bond Risk: Duration 5D: The Pure Expectations Theory and Estimation of Forward Rates 6B: Estimating Beta with a Financial Calculator CHAPTER Corporate Valuation and Stock Valuation 293 Web Extension 7A: Derivation of Valuation Equations CHAPTER Financial Options and Applications in Corporate Finance 343 PART PROJECTS AND THEIR VALUATION 373 CHAPTER The Cost of Capital 375 Web Extension 4C: Continuous Compounding CHAPTER Bonds, Bond Valuation, and Interest Rates 193 6A: Continuous Probability Distributions 9A: The Required Return Assuming Nonconstant Dividends and Stock Repurchases CHAPTER 10 The Basics of Capital Budgeting: Evaluating Cash Flows 413 Web Extension 10A: The Accounting Rate of Return (ARR) CHAPTER 11 Cash Flow Estimation and Risk Analysis 453 Web Extension 11A: Certainty Equivalents and RiskAdjusted Discount Rates v Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 1170 managers’ personal incentives for, 876 merger waves, 877–878 mistakes, 898 regulation of, 879–881 relative bargaining power, 886 synergy and, 874–875 takeover structure, taxes and, 889–892 tax effects, 893f taxes and, 875 ten largest completed worldwide, 878t true consolidation, analysis, 895–896 types of, 877 value, estimating target’s, 882–885 winners, 898–899 Mergers and acquisitions, investment banks and, 771 Merrill Lynch, 25, 46, 756, 874–875 Merrill Lynch Global Private Equity, 27 “Methuselah Trust” (Franklin), 150 Mexico, 707 Microsoft, 88, 225, 769 Microwave Telecommunications Inc (MTI), 767 Miller Model, 617–618 Mirimax, 770 MIRR See Modified internal rate of return MM Proposition, 614–618 See also Modigliani & Miller models, of capital structure MM Proposition I, 615 MM Proposition II, 615 Moderate policy, 658 Modified accelerated cost recovery system (MACRS), 462, 498–500 Modified Income Preferred Securities (MIPs), 821n3 Modified internal rate of return (MIRR), 426–428 Modigliani & Miller models, of capital structure, 614–618, 853–854 corporate/personal taxes, effects of, 617–618 corporate taxes, effect of, 616–617 no taxes, 614–615 trade-off theory and, 619 Money cost of, required rate of return, 20–24 Subject Index time value of See Time value of money (TVM) See also Cash entries Money market funds, 27 Money market preferred stock, 823–824 Money markets, 29 Money market security, 16 Monte Carlo simulation project selection risk and, 935–938 risk analysis and, 474–477 Monthly cash budgets, 677–680 Moody’s Investors Service, 43, 46, 50, 221, 225 Morgan Stanley & Co, 35–36, 639, 751, 755–756 Mortgage-backed securities, 17–20, 50, 773 Mortgage bond, 220 Mortgage interest payments, 177–178 Mortgage markets, 30 globalization of, Great Recession and, 42–44 subprime mortgage meltdown, 44–48 Motley Fool, website, 67 Multinational capital budgeting, 732–737 cash flow estimation, 733–734 credit management, 739–740 exchange rate/political risk and, 732– 733 international capital structures, 737–738 inventory management, 740–741 project analysis, 735–737 Multinational corporations corporate valuation in, 706 domestic financial management v., 707–709 exchange rates, 709–713 See also Exchange rates international money/capital markets, 726–731 reasons for, 706–707 Multinational enterprises, 706–707 See also Multinational corporations Multinational firms, taxes and, 88 Multi-period binomial option pricing model, 355–357 Multiple discriminant analysis (MDA), 948 Multiple IRRs, 421–422 Multiple rates of return, IRR and, 421–422 Multistage compressed APV approach, 858–860 Multistage FCF corporate valuation model, 856–857 Multistage free cash flow to equity (FCFE) approach, 857–858 Multistage valuation model, nonconstant growth and, 305–309 current value of operations and, 307– 308 forecast period, horizon value and, 306–307 Municipal bonds, 195 Mutual bond insurance, 221 Mutual funds, 26–27 Mutually exclusive (project), 419 Mutual savings banks (MSBs), 26 MVA See Market Value Added N Naked options, 346 NASDAQ Composite Index, 42, 296 NASDAQ Stock Market, 8, 33 N-Asset case, portfolios and, 986 National Association of Credit Management, 950n2 National Association of Securities Dealers (NASD), 33n9 National Best Bid and Offer (NBBO), 34 Natural hedge, 924 Navistar International, 552, 952 Negative cash flows, 455 Negative within-firm externalities, 457–458 Negative working capital, 667 Negotiated bids, 766 Net additional financing, identify, 518 Net advantage to leasing (NAL), 801 Net asset value, 893 Net borrowers, 15 Net cash flow, 70 Net float, 685 Net income, 64 Net investment of operating capital, 74 Net operating assets, 74 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Subject Index Net operating profit after taxes (NOPAT), 71–72, 103 adjustments to, expansion project cash flow projection, 462–464 expansion project cash flow projections and, 462 Net operating working capital (NOWC), 72–73, 657 changes in, 455 expansion project cash flow projections, 460 Net Present Value (NPV) break-even analysis, 470 calculating/applying, 417–419 conflicts with IRR and, 423–425 of international investments, 735–737 IRR and, 423 Net Present Value (NPV) profile, 423– 425 Net profit margin, 114 Net savers, 14 Net working capital, 658 Net worth of shareholders, 62 Newbridge Capital, 733 New Century Mortgage, 46, 48 New-issue bond, 205 New York Commodity Exchange, 925 New York Stock Exchange (NYSE), 8, 29, 31, 33, 200 New York Stock Exchange Composite Index, 1003 New York Times, The, 686 Nike, 714 Nikkei 225 Index, 731 Nine Mile Point nuclear project, 781n22 Nominal interest rate, 201 Nominal (or quoted) interest rate, 171 Nominal risk-free interest rate, 213 Noncash adjustments, cash flow statements and, 66–67 Nonconstant growth stocks, valuing, 324–326 Nonconvertible currencies, 719 Nonconvertible preferred stock, 821 Nonfinancial companies, credit risk and, 938–939 Nonfinancial corporations, 14 Nonlinear relationships, economies of scale and, 528 1171 Nonnormal cash flow, 421–422 Nonoperating assets, 72, 299 Nonpecuniary benefits, 544 Nonqualifying grant, 362 Nonspontaneous funds, 688 Non-tax oriented lease, 796 NOPAT (net operating profit after taxes), 71–72 Normal cash flow, 421–422 Normal distribution, 248, 248f Normal yield curve, 227 Nortel, 728–729 Notional principal, 932 Notional value, 923 N-period annuity, 157n8 NPV See Net present value (NPV) Number of periods (N), finding, 164 Number of years, finding, TMV and, 154 NYSE Composite Index, 43 NYSE MKT, 33, 39 O Obama, Barack, 86 Occupational Safety and Health Administration (OSHA), 13 Off balance sheet financing, 798 Offer price, setting IPO, 758–760 Off-exchange transaction, 35 Office of the Whistleblower (SEC), 13 On-the-run bonds, 205 OpenIPO, 761 Open outcry auctions, 31 Operating assets, forecasting, 508–510 Operating break-even point, 610 Operating capital, 74 Operating companies, 901 Operating current assets, 72 aggressive approach, 661 alternative approaches to financing, 660f choosing approach to, 662 conservative approach, 661 financing, 659–662 investment in, 658–659 Operating current assets financing policy, 659 Operating current liabilities, 72 Operating economies, 874 Operating income, forecasting, 511 Operating leases, 792 Operating leverage, business risk and, 610–612 Operating liabilities, forecasting, 510 Operating long-term assets, 73, 74 Operating merger, 882 Operating plan financial planning and, 505 forecast amounts from, 515 Operating profitability ratio (OP), 79 Operating profit margin, 114 Operating transactions, 681 Operations, risk management and, 921 OPM (Black-Scholes option pricing model), 357–363 Opportunity cost, 82, 457, 464 Optimal capital budget, 437–441, 438–439 Optimal capital structure, estimating, 628–629, 628–634 Optimal distribution policy, 571 Optimal portfolio, choosing, 987–990 efficient frontier, 987–988 for investor, 989–990 risk-return indifference curves, 988–989 of risky assets, 989f Option pricing, 365–367 capital structure decisions, 366–367 compensation plans, 367 real option, 365–366 risk management, 366 Option reset adjustable rate mortgages (ARMs), 179 Option(s), 344–347 Black-Scholes option pricing model (OPM), 357–363 find value of, 351 on futures, 926–927 multi-period binomial pricing model, 355–357 single-period binomial pricing, 347–352 single-period binomial pricing formula, 353–355 types of real, 480–481 valuation of put, 363–365 Option to delay, 480 Option values, 1016 Order book, 32 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 1172 Ordinary annuity, 156 future value of, 156–158 present value of, 160–161 Ordinary income, 88 Organic Prairie, 823 Organic Valley, 823 Organisation for Economic Co-operation and Development (OECD), 727, 730, 737 Original issue discount (OID) bond, 197 Original maturity (bonds), 197 Out-of-the-money, 345 Outside directors, 547 Outside owner, 544 Outstanding bond, 205 OvaScience, 241 “Overallotment option” underwriting and, 757n4 Overseas Private Investment Corporation (OPIC), 733 Oversubscribed, 757 Over-the-counter (OTC) trades, 35 Own-bond-yield-plus-judgmental-risk premium approach, 397–398 P Paid-in capital, 61n2 Palisades Corporation, 453 Parent company, 901 Partial multiple taxation, 901 Partial public offering, 765 Partnerships, 6, 61n2 Par value, bonds and, 196 Patagonia (company), 12 Paulson & Company, 822 Payables deferral period (PDP), 663 Payback period, capital budgeting and, 430–431 Payday lending, 176 Payment date, 569 Payment-in-kind (PIK) bonds, 197 Payment (PMT) cash flows and, 165–168 Payment systems, 683–684 Payoff, hedge portfolio, 350–351 Payoff matrix, 244 Payoffs, in single-period binomial options, 348–349 Payout ratio, 391 Payout ratio (POR=DPS/EPS), 525 Subject Index Payroll debit cards, 686 Pecking order hypothesis, 621–622, 625–626 Pegged exchange rates, 718–719 convertible v nonconvertible securities, 719 currency devaluation/revaluation, 718–719 Penalty tax on improperly accumulated earnings, 593 Pension funds, 28 Pension plan liabilities, 963n18 Pentagon (9/11), 919 PepsiCo, 591, 878 Percentage change analysis, 118–122 Percentage flotation cost (F), 382–383 Perfect hedge, 930 Performance evaluation (FCF) statements, 78–83 Economic Value Added, 82–83 intrinsic value, MVA/EVA and, 83 Market Value Added (MVA), 81–82 return on invested capital (ROIC), 78–81 Performance measures, beta coefficient and, 999–101 Periodic interest rate, 171–172 Permanent operating current assets, 659 Perpetuities, TVM and, 154–155 Pershing Square Capital Management, 769 Personal income taxes, 88–89 Petition, bankruptcy, 953 Phased decisions, decision trees and, 482–484 Phoenix Stamping Group LLC, 375 Physical asset markets, 29 Physical life, 437 Physical location exchange, 31 Pilgrim’s Pride, 607 Poison pill, 549 Political risk, 732–733 Politics, multinational corporations and, 709 Pollution control agencies, 220–221 Pollution control bonds, 220–221 Ponzi scheme, Bernie Madoff and, 271 Pool (portfolio), 17 Portfolio companies, 753 Portfolio investments, 726 Portfolio risk, 243, 252–256 Capital Asset Pricing Model (CAPM) and, 269 contribution of individual stocks to, 259f correlation and risk for two-stock, 254–255 diversification and multi-stock, 255–257 Monte Carlo simulation to evaluate, 937 portfolio creation and, 252–253 Portfolio(s), 17 attainable/feasible, 983 Capital Asset Pricing Model and, 990 capital market line/security market line, 991–995 choosing optimal, 987–990 efficient, 982–986 efficient frontier and, 987–988 efficient set of, 987–989, 991–992 feasible set of, 983–985, 987, 989, 991 returns, risks and feasible set of, 985f risk-return indifference curve, 988–989 Positive within-firm externalities, 458 Post-audit program, 441 Post-merger projections, 883t Precautionary balances, 681 Preemptive bid, mergers and, 879 Preemptive right, of common stockholders, 295 Preemptive rights offering, 768 Preferred stock, 330–331 adjustable rate preferred stock (ARP), 822–823 advantages/disadvantages of, 824 cooperatives and, 823 cost of, 384 features of, 820–821 market action, 823–824 tax disadvantages of, 822 Preferred stock restrictions, 593 Preliminary prospectuses, 757 Premium, 346n5 Premium bond, 204 Premium (currency exchange), 721 Pre-pack, bankruptcy, 961 Prepackaged bankruptcy, 961 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Subject Index Present value of annuities due, 161–162 of hedge portfolio, 350–351 Present value of any annuity, 160–162 Present values (PVs), 141, 149–152 alternative procedures for calculating, 151f discounting future value to find, 149–152 graphic view, of discounting process, 152 of 100 dollars, 152f of ordinary annuity, 160–161 Price call option, factors affecting, 360–363 IPOs and, 760–761 manipulation of, 763n9 mark to market, fair market value and, 110 of put options, 364–365 seasoned equity offerings and, 767 solving for bond, 201–204 Price/cash flow ratio, 117 Price/earnings (P/E) ratio, 117, 328 Price/EBITDA ratio, 117 Price improvement, 37 Price of money, 20 Primary markets, 30 Primary Reserve Fund, 773 Prime rate, 690 Primitive securities, binomial pricing formula, 353–355 Principal, 542 Priority of claims in liquidation, 963 Private equity (PE) fund, 27–28, 773 Private firms adjusting for lack of liquidity, 398 estimate cost of stock by comparison approach, 397 estimating actual weights in capital structure of, 398 own-bond-yield-plus-judgmentalrisk premium approach, 397–398 Private markets, 30 Private placement of public equity (PIPE), 769 Private placements, 752 1173 Probability ranges, for normal distribution, 248f Procter & Gamble, 453, 849 Production efficiency, 707 Production opportunities, required rate of return and, 20–21 Product markets, competition in, 554–556 Professional association (PA), Professional corporation (PC), Profit, 64 Profitability index (PI), capital budgeting and, 429 Profitability ratios, net profit margin, 114 Profit margin, 114, 525 Profit margin on sales, 114 Pro forma financial statements, 504 Pro forma income, 64n4 Progressive tax, 88 Project analysis multinational capital budgeting and, 735–737 NPV and, calculate/apply, 417–419 Project cost of capital, 401 Projected financial statements, 504 Project financing, 221, 781–782 Project selection risk, 935–938 Project valuation, cash flows, risk analysis, 454 Promissory note, 688 Proprietorships, Prospectus, 756, 757 Providers, of finance, 4–5 allocation process, of capital, 15–16 capital and, 14–15 Proxy, 295 Proxy fight, 295 Proxy statements, 763 Public Company Accounting Oversight Board (PCAOB), 64n4, 553 Public markets, 30 Purchase accounting, mergers and, 892–895 Purchased goodwill, 891 Purchasing power bonds, 199 Purchasing power parity (PPP), currency exchange and, 724–725 Pure expectations theory, 227 Pure financial merger, 882 Pure play method, 400 Putable Automatic Rate Reset Securities (PARRS), 779 Put-call parity relationship, 363–364 Put option, 345 factors affecting pricing of, 364–365 put-call parity, 363–364 valuation of, 363–365 Q Qualcomm, 655 Qualitative factors, in bond ratings, 222 Quarterly Income Debt Securities (QUIDS), 821n3 Quick ratio, 106 Quiet period, 757 Quoted interest rate, 201 R RadioShack, 552 Rate-of-return probability distribution, 244 Ratings agencies, 46, 50, 223 See also entries for individual ratings agencies Ratio analysis, 104 current ratio, 104–106 uses/limitations of, 125–126 on the web, reuters.com, 126 Ratios, forecasting with changing, 526–529 Raw materials, 707 Real estate boom, housing prices and mortgage rates, 45f Real estate leases, 807 Realized rates of return, 249 Real option analysis, 365–366, 480–481 abandonment, 481 flexibility, 481 growth, 480–481 investment timing options, 480 valuing, 481 Real options concluding thoughts on, 1033–1034 financial engineering, 1025–1026 growth, 1027–1033 investment timing, 1017–1027 See also Investment timing option valuing, 1016–1017 Real rate of interest, 214n15 Real risk-free interest rate, 214 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 1174 Recapitalization, 634–639 debt, repurchased stock and, 634–637 pros/cons of, 638 repurchased stock, 637–638 Recapitalize, 634 Receivable conversion period, 663 Receivables management, 669–673 accumulation of, credit policy and, 670 credit policy, 669–670 monitoring position of, 671–673 Receivables position, monitoring, 671–673 Redeemable at par, 198 “Red herring” prospectuses, 757 Red line system, 668 Refunding operation, 198 Refunding operations, 775–781 analysis of, 776–777 steps in a, 777–779 when to refund, 780–781 Registered stock exchanges, 38–39 Registration, of securities sales, 756 Registration statement, 756 Regression, calculating beta coefficient and, 998 Regular interest loan, 690 Regular quarterly dividend, 568 Regulation of financial institutions, 28–29 of mergers, 879–881 risk management, corporate scandals and, 916 of secondary markets, 762–764 of securities sales, 756–757 subprime standards and, 44 Regulation National Market System (Reg NMS), 34 Regulator environment, corporate governance, 553–554 Regulatory hurdles, 707 Reinvestment rate risk, 218, 219 Relative priority doctrine, 956 Relaxed policy, 658 Relevant risk, 257 Reorganization Chapter 11 bankruptcy and, 953–962 See also Chapter 11 bankruptcy example of, 957–960 time and expense, 961–962 Subject Index Reorganization, bankruptcy and, 228–229, 952–953 Repatriation, currency and, 719, 734 Replacement analysis, 478–479 Replacement chain (common life) approach, capital budgeting and, 436 Replacement cost, asset purchase below, mergers and, 875 Replacement projects, cash flows and, 456 Replicating portfolios, 351–352 Reports financial statements and, 58–59 truth in prospectus, 757 Repurchase component, 591 See also Stock repurchase Repurchased stock, 634–637, 637–638 Required additional assets, identify, 518 Required increase in assets, financial planning and, 523 Required rate of return (cost of money), 20–24 business activity, 23 expected inflation and, 21 federal budget deficits/surpluses, 22 Federal Reserve policy and, 21–22 production opportunities, 20–21 risk and, 21 time preference for consumption, 21 trade balance, deficits/surpluses and, 23–24 Required rate of return on debt, 201 Required rate of return on stock, 384–387 Required return on a portfolio, 269 Required return on stock i, 264, 266–268 Reserve borrowing capacity, 621, 623, 626 Residual distribution model, 578–581, 584 Residual value (lease), 801, 806 Restricted policy, 658 Restricted voting rights, 549 Restrictive covenants, 220, 222 Restructuring, of debt, 950 Retail trading, 37 Retained earnings, 61–62 Retained earnings, addition to, financial planning, 523–524 Retention growth equation, 392 Retention growth model, 391–392 Retention ratio, 391 Return, intrinsic value, risk and, 242f Return on assets, 115–116 Return on common equity (ROE), 116 Return on equity, 116 Return on invested capital (ROIC), 78– 81, 103 Return on total assets (ROA), 115–116 Returns, holding period for measuring, 1003 Returns on investments, 242–243 Reuters, 710 Reuters, website, 67, 126 Revaluation, currency, 718–719 Revenue bond, 221 Reverse split, 596 Revolving credit agreement, 689 “R-hat,” 245 See also Expected rate of return Rights offering, 768 Risk adjustable rate mortgages and, 45 analysis, project valuation, cash flows and, 454 business See Business risk Capital Asset Pricing Model (CAPM) and, 256–271 See also Capital Asset Pricing Model commodity price, 923–927 See also Commodity price risk comparing, 219 in continuous distribution, 247–248 cost of capital and, 401 credit See Credit risk discrete probability distribution and, 244 diversification and, 252 exchange rate, 718, 732 Fama-French three-factor model and, 277 financial See Financial risk foreign exchange (FX), 922–923 historical data, estimating and, 249–252 historical trade-off, return and, 252 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Subject Index human safety and, 940–941 incentives, managers and, 641–6412 interest rate, 216–218, 927–935 See also Interest rate risk intrinsic value, return and, 242f management, option pricing and, 366 measuring for discrete distributions, 243–246 measuring stand-alone, 245–246 Ponzi scheme, Bernie Madoff story and, 271 portfolio (See Portfolio entries) portfolio context of, 252–256 See also Portfolio, risk probability and, 249 project selection, 935–938 reinvestment rate, 218 required rate of return and, 21 return and beta coefficient, 1001 stand-alone v portfolio, 243 subprime mortgage crisis and, 47 third party and, 919 total amount of 43 See also additional Risk entries Risk acceptance, 920 Risk-adjusted cost of capital (r), 401, 456 Risk analysis, capital budgeting and Monte Carlo simulation, 474–477 project risk conclusions, 477–478 scenario analysis, 471–474 sensitivity analysis, 468–471 See also Sensitivity analysis stand-alone, measuring, 467–468 types of risks, 467 Risk appetite, 918 Risk arbitrage, 897 Risk aversion, 242, 267–268, 988–989 Risk avoidance, 918 Risk events, categories of, 920–922 control/compliance and, 920 financial management, 921 hazards, 921 human resources, 921 operations, 921 strategy/reputation and, 920 technology, 921 Risk-free interest rate, 213, 362–363 changes in, required rate of return and, 267 1175 cost of common stock and, 388–389 Risk-free rate, 264, 920, 990, 994–996, 998–999, 1000–1001, 1007, 1008 Risk management corporate valuation and, 912 enterprise See Enterprise risk management foreign exchange (FX), 922–923 overview of enterprise, 915–917 project selection risk, 935–938 reasons for, 912–915 Risk Management Associates, 121n9, 124 Risk-neutral valuation, 1026 Risk premium, 988–989 Risk premium for an individual stock, 265–266 Risk response, 918–920 Risky assets, optimal portfolio of, 989f Risky event, 918, 919 Roadshow, book-building and, IPOs, 757 Rohm & Haas, Dow Chemical Company and, 822 Rojacks Food Stores, 807 Routine (but uncertain) operating transactions, 681 Royal Bank of Scotland, 733, 933 Rule of 78, 691n30 S Safety stocks, 681 Sale-and leaseback arrangement, 793 Sales revenues, forecasting, 508 Salvage value, of asset, 462 Sanofi, 879 Sarbanes-Oxley (SOX) Act of 2002, 13, 76, 552, 553, 916 Saudi Arabia, 709 Savings and loan associations (S&Ls), 17–19, 25–26 Scenario analysis, 471–474, 1019–1022 Scenario manager (Excel), 464–465 Schedule, 13D, 548n7 SCM See Supply chain management S corporations, 7, 88 Seasonal effects, 125 Seasoned bond, 205 Seasoned equity offering, Seasoned equity offerings, 767–768 Secondary markets, 30 importance of, 30–31 regulation of, 762–764 trading procedures in, 31–32 Secondary offering, 767–768 Second-mortgage bonds, 220 Secured basis, 692 Secured debt, 220 Securities financial See Financial securities sales, regulation of, 756–757 Securities Act, 752, 768 Securities and Exchange Commission (SEC), bond indentures, 220 earnings per share (EPS) and, 839 fraud protection and, 752 global accounting and, 115 HFT and, 40 international bond markets and, 728 liquidity/economic crisis, 48 private placements, 768–769 regulation of securities sales, 756– 757, 763–764 reorganization plans, 958n10 Sarbanes-Oxley Act and, 552 shelf registrations and, 768 website, 67 Securities Industry and Financial Markets Association (SIFMA), 766n11 Securitization, 17 investment banks and, 772 IPOs, capital market and, 769–770 leases and, 809 mortgage crisis, Great Recession and, 42–44 subprime mortgage meltdown, 44–48 Security, in short-term financing, 692–693 Security Market Line (SML), 264–266, 999 Capital Market Line and, 991–995 CAPM and, 1004–1006 changes in, risk aversion and, 268f market risk premium, 265 risk-free rate, 264 risk premium for an individual stock, 265–266 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 1176 Self-liquidating approach, 656 Self- regulatory organizations (SRO), 8n3 Self-supporting growth rate, financial planning and, 526 Selling group, 756 “Sell side” analysts, 293 Semiannual compounding, 170–174, 208–209 Semistrong-form Efficient Markets Hypothesis (EMH), 273, 275 Senior mortgages, 220 Sensitivity analysis, 468–471 extensions of, 470–471 NPV break-even analysis, 470 sensitivity graph, 468–469 tornado diagrams, 469–470 Sensitivity graph, 468–469 September 11, 2001, 919 Settlement systems, 683–684 Seven Country Working Group, 727 Shareholder rights provision, 549 Shareholders agency conflict and, 544–545 ESOPs and, 559 free cash flow, distributions to, 566 maximizing wealth of, 11 Sharpe’s reward-to-variability ratio, 1000–1001 Shelf registrations, 768 Shenzhen Development Bank (SDB), 733 Sherman Act of, 1890, 874n3 Short hedges, 924 Short term, assets, 29–30 Short-term bank loans, 688–691 compensating balances, 688–689 cost of, 690–691 informal line of credit, 689 maturity, 688 promissory note, 688 revolving line of credit, 689 Short-term debt, before-tax cost of, 379 Short-term financial policy, forecasting, 515–517 Short-term financing advantages/disadvantages, 687–688 security in, 692–693 Short-term free cash flows multistage valuation model and, 305–308 stock valuation and, 315–316 Subject Index Short-term investments, 685–687 Siemens, 727 Signaling hypothesis, 576–577, 625–626 Signaling theory, 620–621 Simple interest, compound interest v., 148–149 Simple interest loan, 690 Singapore Airlines, 791 Single A bonds, 221 Single-period binomial option pricing approach, 347–352 hedge portfolio approach, 349–351 payoffs in, 348–349 Single-period binomial option pricing formula, 353–355 binomial option pricing formula, 353 primitive securities and, 353–355 Sinking fund, 113n7 Sinking funds provision, 198–199 Small business adjusting for lack of liquidity, 398 estimate cost of stock by comparison approach, 397 own-bond-yield-plus-judgmentalrisk premium approach, 397–398 Small Business Administration (SBA), 195 Small businesses, taxes and, 88 Smart money, website, 67, 164 Smith Barney, 28 SML See Security Market Line Social welfare, stock value and, 11–12 Société Générale (France), 920, 933 Soft currency, 719 Sony, 458, 706 South Korea, 707 Southwest Airlines, 3, 241, 655 Sovereign debt, 729–731, 941f Special dividend, 574 Special purpose entity (SPE), 794 Speculation (futures), 924 Speculative balances, 686–687 S&P 500 Index, 42 “Spinning” IPOs and, 764 Spin-off, 900 Spin-out, 765 Spontaneous liabilities, financial planning, 523 Spontaneous liabilities-to-sales ratio, 525 Spot markets, 29 Spot rates, 720–721 Spread (IPO price), 762 Spreadsheets, financial calculations and, 144–147 Sprint, 878, 879 Staged decision tree, 482–484 Stand-alone risk, 243, 401, 467 measuring, 467–468 measuring, standard deviation of discrete distribution, 245–246 Standard deviations calculating, 245f historical average, calculating and, 250 Standard deviations (σ), 245–246 Standard & Poor’s, 43, 50, 221, 222t, 223, 225, 578 Starbucks, Start-up company equity carve-outs, 765 financial life cycle of, 752–753 going private, 773–775 going public, advantages/ disadvantages of, 753–754 initial public offering, process of, 755–764 See also Initial public offering (IPO) investment banking activities, 771–772 See also Investment banks project financing, 781–782 raising funds in capital market, 766–770 See also Capital markets, IPO fundraising in Statement of stockholders’ equity, 65 Statements of cash flows, 66–69 financing activities, 67 investing activities, 67 operating activities, 66–67 Statoil, 727 Status Quo scenario, 507 Steinway Musical Instruments, 774 Step-by-step approach, to calculating future values, 142–143 Stepped-up conversion price, 831n12 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Subject Index Stepped-up strike price, 827 Stern Stewart & Company, 81n9 Stock initial public offerings of See Initial public offering (IPO) types of common, 295–296 Stock dividends, 596–597 Stock exchanges, SEC regulation of, 763 Stockholders agency conflict and, 543 legal rights of common, 294–295 Stockholders’ equity, 65 Stock market alternative trading systems, dark pools, 38 efficiency, forms of, 273–275 high-frequency trading (HFT), 39– 40 how trade begins, 35 international, 729 measuring, 42–43 ordinary citizens and, 11 overview of U.S., 33 performance, 41f registered stock exchanges, 38–39 Reg NMS/transactions/quotes, market price and, 34 skill or luck?, 996 standard broker-dealer networks, 35 world indices, 731 Stock market reporting, 296–297 Stock offers, mergers and, 887 Stock option compensation plan, 549 Stock options intrinsic value of, 344 taxes and, 362 Stock prices corporate valuation and, 294 expected dividends, value and, 321–322 splits/dividends and, 597 why volatile?, 319 Stock repurchases, 569–570 distributions as, 588–589 dividends, pros/cons of, 590–592 dividends v., 581–590 See also Dividends v stock repurchases Stock splits, 595–596 Stock Trading Venues and Trading Activity, 36t Stonyfield dairy, 823 1177 Straight-line depreciation, 465–466, 498–500 Strategic alliances, 899 Strategic initiatives, evaluate, financial planning and, 512–514 Strategic options, 480 Strategic plan, analysis/selection of, 519–521 Street.com, website, 67 Stretching accounts payable, 676 Strike price, 345, 360, 549, 826, 828n8 Strong-form efficiency Efficient Markets Hypothesis (EMH), 273, 275 Structured investment vehicles (SIVs), 62 Subordinated debentures, 220 Subprime mortgages, Great Recession and, 44–48 Subsidiaries, 901 Sunk costs, 456–457, 464 Sun Microsystems, 596 Sunny Delight Beverage Co., 375 SunTrust, 879 Super poison put, 198 Supply chain, 656 Supply chain finance, 671 Supply chain management, 656–658 Swap, 51 Swap execution facility (SEF), 51 Swaps, 914, 931–935 Swaps market, 934 Sweeteners (warrants/convertibles), 826 Symmetric hedge, 926–927 Symmetric information, 620 Synchronization of cash flow, 684 Synchrony Financial, 765 Synergistic benefits, 886 Synergy, mergers and, 874–875 Synthetic leases, 794 T Tabular approach, financial calculations, 142n1 Target capital structure, 377, 522–523 Target cash balance, 681 Target cash distribution level, 591 Target company, 878 Target distribution policy, 571 Targeted share repurchases, 548 Target payout ratio, 571 Target stock, 296 Target weights, 394 Tariffs, 740 Taxable income, 88 Tax arbitrage, 85n12 Tax depreciation, appendix 11A, 498– 500 Tax effect theory, capital gains and, 573 Taxes after-tax cost of debt and, 379–383 See also After-tax cost of debt capital structure, trade-offs and, 624– 625 corporate, MM proposition and, 616–617 corporate avoidance of, 86, 88 corporate tax rate, effective?, 382 disadvantages of preferred stock and, 822 federal income, 84–89 global, international business and, 727 inventory management, multinational corporations, 741 laws, leases and, 808–809 leases and, 795–796 mergers and, 875, 893f Modigliani & Miller, capital structure theory and, 614–615, 853–854 penalty, on improperly accumulated earnings, 593 preferred stock and, 821 risk management and, 914 statements of cash flow and, 66–67 stock options and, 362 takeover structure and, 889–892 whistleblowing and, 14 Tax-exempt bonds, 220–221 Tax havens, 727, 735 Tax Increase Prevention and Reconciliation Act of , 2005, 573n11 Tax inversion, 705 Tax-oriented lease, 795 Tax-qualifying grant, 362 Tax rates, cost of capital and, 402 Tax Reform Act of 1986, 86, 498 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 1178 Tax savings due to interest, 851 Tax shelters, 727 Tax shield, dynamic capital structure effect on, 866, 888 Tax shield discount rate, 853 “Teaser rate,” 179 Technical analysts, 272 Technology new, 707 risk management and, 921 TED spread, 226 Telecom Italia, 879 Temporary operating current assets, 659 Tender offer, 879 Tennessee Valley Authority (TVA), 195 Terminal date, 305 Terminal value, 306 Term structure of interest rates, 226– 227 Terrorism, 919 Terrorism Risk Insurance Act (TRIA), 919 Tesla, 819 Thales Group, 453 Third party risk, 919 Thomson Reuters, 655, 933 3M, 225 TIAA-CREF, 554 Time lines, 140–141, 200–201 Time preference, for consumption, 21 Times-interest-earned (TIE) ratio, 112 Time value, 346 Time value of money (TVM) amortized loans, 175–178 See also Amortized loans annuities, 155–156 annuity due, future value of, 159 corporate valuation and, 140 defining, 140 finding annuity payments, PMT, 162–163 fractional time periods, 174–175 future values, 141–149 See also Future values growing annuities, 178–181 interest rates, finding, 153, 164–165 number of periods (N), finding, 164 numbers of years, finding, 154 Subject Index ordinary annuity, future value of, 156–158 perpetuities, 154–155 present values, 149–152 See also Present values present values, ordinary annuities/ annuities due, 160–162 semiannual and other compounding periods, 170–174 See also Compounding periods solving for I with irregular cash flows, 169–170 time lines, 140–141 uneven/irregular cash flows, 165–168 Time Warner, 874, 891 Title VII, of Dodd-Frank Act, 51 Tommy Hilfiger clothing, 714 Too-big-to-fail banks, 51 Tornado diagrams, sensitivity analysis and, 469–470 Toshiba, 706 Total amount of risk, 43 Total assets turnover ratio, 107 Total net operating capital, 74 Total rate of return, bonds and, 206 Toxic asset, 50 Toyota, 729 Tracking stock, 296 Trade deficits/surpluses and, 23–24 high frequency, 39–40 international, exchange rates and, 714–715 stock, 35 transparency/oversight and, 51 Trade balance, 714 Trade credit, cost of and, 674–677 Trade-off theory, 619–620, 624–625, 625 Trading, in foreign exchange, 720–721 Trading venue, Trailing twelve months, 297 Tranches, leases and, 809 Transactions balances, 681 Transferability of capital, 15 corporations, Transfer prices, 734 Transnational corporations, 706–707 See also Multinational corporations Transparency, oversight, in trading, 51 Transparency International (TI), 733, 734t Travelers insurance, 28 Treasury bills (T-bills), 14, 195 downgrade of, 223 interest rates on, 226–227f Treasury bond futures contracts, hedging with, 929–930 Treasury bonds (T-bonds), 195 Treasury Inflation-Protected Securities (TIPS), 199, 214 Treasury stock, 569n3 Trend analysis, 118–122 Treynor’s reward-to-volatility ratio, 1001 Trial-and-error calculating IRR, 420 Triple B bonds, 221 Triple taxation, 85 Troubled Asset Relief Plan (TARP), 49 Troubled Asset Relief Program (TARP), 967–968 Trustee, 220 Chapter 11 bankruptcy and, 953 liquidation and, 952 Trust Originated Preferred Stock (TOPrS), 821n3 Trusts, TVM and, 150 Turnover ratio (inventory), 108–109 TVA, debt refunding and, 779 TVM See Time value of money Twitter, 819 Tyco, 794, 916 U Ukraine, 725 Unbanked employees, 686 Underinvestment problem, 552, 622 Underpricing, IPOs and, 760–761, 764 Underwrite, 15, 755 Underwriters (of IPOs), 755, 771 Underwriting syndicate, IPOs and, 755–756 Unequal lives, capital budgeting and, 435–437 Uneven cash flows, 165–168, 168–169 Unilever, 453 Union Carbide, 598 Unit costs, cash flow projections, 459– 460 United Auto Workers (UAW), 967 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Subject Index United States Bankruptcy Court, 228 Unit prices, cash flow projections, 459– 460 University of Chicago, 176 Unlevered beta coefficient, 631 Unsyndicated stock offering, 756 Unsystematic risk, 256n10 UPS, 225 Upward-sloping yield curve, 227 U.S Bankruptcy Trustee, 961 U.S dollar index, v eight major currencies, 717f U.S government, as board director, 550 U.S Treasury, 195n2 U.S Treasury bond insurance, 196 U.S West, 599 Users, of finance, 4–5 allocation process, of capital, 15–16 capital and, 14–15 V Value constant growth model and, 300–305 corporate, free cash flows (FCF) statements and, 77 of corporations, managing, 9–10 dividend growth valuation model, 320–326 estimating firms, capital structure and, 632–634 fair, establishing, investment banks and, 897 formulas for a bond, 200–201 free cash flows (FCF) valuation model and, 298–299 hedge portfolio, 351 market multiplier method, 328 multistage valuation model and, 305–309 nonconstant growth stocks, 324–326 nonoperating assets and, 299 of put options, 363–365 real options, 481 stock, reflecting long/short-term cash flows, 315–316 See also Corporate valuation Value at risk (VaR), 936 Value-based management, 316–319, 520 1179 Value drivers, 316–319 Value Line (Dunn and Bradstreet), 124, 392, 1003 Valueline.com (website), 260t Value-maximizing companies, employees of, 12 Value of operations, 298, 506, 586 Variable annuities, 163 Variance, 246 Vehicle leases, 808 Venture capital fund, 752 Venture capitalist (VC), 753 Verizon Communications, 873 Verizon Wireless, 873 Vertical merger, 877 Vesting price, 549 Vetco International, 727 Virgin Group, 791 Vodafone Group (UK), 873, 879 Volcker Rule, 50 Voluntary bankruptcy, 953 Voluntary employees’ beneficiary association (VEBA), 967 Voya Financial, 733 W Wachovia, 879 Wall Street Journal, The, 41, 200, 226, 296, 359, 389, 710, 713, 996 Walmart, 674, 733 Walt Disney, 3, 197n4 Warrants, 199, 824–830 bonds, component cost of, 827–830 convertible securities v., 837–838 cost of, 829 exercise of in 10 years, 829t financing, use of in, 826–827 initial market price of bonds and, 825–826 report earnings when outstanding, 838–839 Washington Mutual, 607, 947 Weak-form, Efficient Markets Hypothesis (EMH), 272–273, 275 Webster’s Dictionary, 243 Weighted average cost of capital (WACC), 9, 77, 103, 212, 393–395 adjusting cost of equity for flotation costs, 395–397 component costs, book value v targets, 394–395 constant growth model and, 302– 304 cost of capital and, 378–379 debt and, 629–630 at different levels of debt, 631–632 equity, Hamada equation and, 630– 631 estimating, 376–377 financing choices and, 850 marginal v historical rates, 393–394 multistage valuation and, 306–308 target weights v annual financing choices, 394 Weighted average of outcomes, 245 “Well known seasoned issuers” (WKSIs), 768n13 Wells Fargo, 550, 639, 756, 879 West African Economic and Monetary Union (WAEMU), 720 Wheat belt, 923 Whistleblower protection, 553 Whistleblowing SEC and, 13 taxes and, 14 White collar crime, 553 White knight, 897 White squire, 897 Williams Act of 1968, 880 Wimm-Bill-Dann Foods, 878 Window dressing, 126 Wire transfers, 683 Within-firm risk, 401, 467 Working capital, 658, 658n2 See also Capital; Working capital management Working capital management accounts payable, 674 accruals, 673 bank loans, short-term, 688–691 cash budgets, 677–680 cash conversion cycle, 662–667 cash flow and, 67, 463 cash management, 681–688 cash management (multinational), 738–739 commercial paper, 692 corporate valuation and, 656 current assets, using/financing, 658– 659 financing operating current assets, 659–662 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 1180 firms operating without, 667 international, 737–738 inventory management, 668–669 receivables management, 669–673 security, in short-term financing, 692–693 short-term financing, 687–688 short-term investments, 685–687 supply chain management and, 656–658 trade credit, cost of, 674–677 Subject Index Workouts, debt restructuring, 950 WorldCom, 76, 544n2, 764 World Trade Center, 919 W.R Hambrecht & Co., 761 Writing (option), 346 Yield, 201, 210–212 See also Bond(s) Yield curve, 226–227f Yield to call (YTC), 210–211 Yield to maturity (YTM) bonds, 209–210 Y Z Yahoo! Finance, website, 41, 66, 200, 222t, 226, 260t, 296, 710 Yankee bond, 728–729 Yearly cash flows, 456 Zacks, stock market reporting, 296 Zero coupon bonds, 197 Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 2017 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it ... each question Additional Course Tools MindTap Finance for Financial Management: Theory and Practice Financial Management: Theory and Practice, 15th Edition, includes a brand new MindTap learning... 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... additional content at any time if subsequent rights restrictions require it Financial Management Theory & Practice 15e E U G E N E F B R I G H A M University of Florida MICHAEL C EHRHARDT University