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University Carr P Collins Chair in Finance New York, NY A01_TITM7219_13_SE_FM.indd 21/11/16 2:23 PM Vice President, Business Publishing: Donna Battista Director of Portfolio Management: Adrienne D’Ambrosio Portfolio Manager: Kate Fernandes Editorial Assistant: Kathryn Brightney Vice President, Product Marketing: Roxanne McCarley Director of Strategic Marketing: Brad Parkins Strategic Marketing Manager: Deborah Strickland Product Marketer: Kaylee Carlson Field Marketing Manager: Ramona Elmer Product Marketing Assistant: Jessica Quazza Vice President, Production and Digital Studio, Arts and Business: Etain O’Dea Director of Production, Business: Jeff Holcomb Managing Producer, Business: Alison Kalil Content Producer: Carolyn Philips Operations Specialist: Carol Melville Creative Director: Blair Brown Manager, Learning Tools: Brian Surette Content Developer, Learning Tools: Lindsey Sloan Managing Producer, Digital Studio, Arts and Business: Diane Lombardo Digital Studio Producer: Melissa 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Microsoft Corporation in the U.S.A and other countries This book is not sponsored or endorsed by or affiliated with the Microsoft Corporation Copyright © 2018, 2014, 2011 by Pearson Education, Inc or its affiliates 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 otherwise For information regarding permissions, request forms, and the appropriate contacts within the Pearson Education Global Rights and Permissions department, please visit www.pearsoned.com/permissions/ Acknowledgments of third-party content appear on the appropriate page within the text PEARSON, ALWAYS LEARNING, and MYFINANCELABTM are exclusive trademarks owned by Pearson Education, Inc or its affiliates in the U.S and/or other countries Unless otherwise indicated herein, any third-party trademarks, logos, or icons that may appear in this work are the property of their respective owners, and any references to third-party trademarks, logos, icons, or other trade dress are for demonstrative or descriptive purposes only Such references are not intended to imply any sponsorship, endorsement, authorization, or promotion of Pearson’s products by the owners of such marks, or any relationship between the owner and Pearson Education, Inc., or its affiliates, authors, licensees, or distributors Library of Congress Cataloging-in-Publication Data Names: Titman, Sheridan, author | Keown, Arthur J., author | Martin, John D., author Title: Financial management: principles and applications / Sheridan Titman, University of Texas at Austin Walter W McAllister Centennial Chair in Financial Services, Arthur J Keown, Virginia Polytechnic Institute and State University, R.B Pamplin Professor of Finance, John D Martin, Baylor University Carr P Collins Chair in Finance Description: Thirteenth Edition | Boston: Pearson, [2016] | Revised edition of | Includes bibliographical references and index Identifiers: LCCN 2016035806 | ISBN 9780134417219 | ISBN 0134417216 Subjects: LCSH: Business enterprises—Finance | Corporations—Finance Classification: LCC HG4026 T58 2016 | DDC 658.15—dc23 LC record available at hjps://lccn.loc.gov/2016035806 1 16 ISBN 10: 0-13-441721-6 ISBN 13: 978-0-13-441721-9 A01_TITM7219_13_SE_FM.indd 02/12/16 5:58 PM www.ebookslides.com The thirteenth edition of Financial Management: Principles and Applications is dedicated to our families—the ones who love us the most To my parents, wife (Meg), and sons (Trevor, Elliot, and Gordon) Sheridan Titman Barb, Emily, and Artie Arthur J Keown To the Martin women (my wife, Sally, and daughter-in-law Mel), men (sons David and Jess), and boys (grandsons Luke and Burke) John D Martin A01_TITM7219_13_SE_FM.indd 16/11/16 12:10 PM www.ebookslides.com Brief Contents Preface xxii Part 1: Introduction to Financial Management CHAPTER Getting Started—Principles of Finance CHAPTER Firms and the Financial Markets 18 CHAPTER Understanding Financial Statements 38 CHAPTER Financial Analysis—Sizing Up Firm Performance 78 Part 2: Valuation of Financial Assets CHAPTER The Time Value of Money—The Basics 128 CHAPTER The Time Value of Money—Annuities and Other Topics 158 CHAPTER An Introduction to Risk and Return—History of Financial Market Returns 192 CHAPTER Risk and Return—Capital Market Theory 222 CHAPTER Debt Valuation and Interest Rates 254 CHAPTER 10 Stock Valuation 300 vi A01_TITM7219_13_SE_FM.indd 16/11/16 12:10 PM www.ebookslides.com G-8 GLOSSARY | Stock split A stock dividend exceeding 25 percent of the number of shares currently outstanding Stockholders The owners of the corporation’s stock The corporation is legally owned by its current set of stockholders, or owners, who elect a board of directors Stockholders’ equity The sum of the par value of common stock plus paid-in capital plus retained earnings This quantity is sometimes referred to as the book value of the firm’s equity Strategic plan A general description of the firm, its products and services, and how it plans to compete with other firms in order to sell those products and services Strike price The price at which the stock or asset may be purchased from the option writer in the case of a call or sold to the option writer in the case of a put; also called the exercise price Strong-form efficient market A market in which even private information is fully and quickly reflected in market prices Subordinated debenture A debenture that is subordinated to other debentures in being paid in case of insolvency Sunk costs Costs that have already been incurred Swap contract An agreement in which two parties agree to exchange one set of payments for another For example, the holder of a stream of fixed-interest-rate payments on a loan might exchange them for variable-interest-rate payments on a like-size loan Syndicate A group of investment bankers that are invited to help buy and resell the bond issue Systematic risk See Nondiversifiable risk Taxable income Firm revenues for the period less all tax-deductible expenses (such as cost of goods sold, operating expenses, and interest expense for the period) Temporary investments in assets Investments in current assets—that is, those that will be liquidated and not replaced within the current year—including cash and marketable securities, accounts receivable, and seasonal fluctuations in inventories Also referred to simply as temporary assets Temporary sources of financing Sources of financing that typically consist of current liabilities the firm incurs on a discretionary basis Examples include unsecured bank loans and commercial paper (which is simply unsecured promissory notes with maturities Z01_TITM7219_13_SE_GLOS.indd of to 270 days that the firm sells in the money market) as well as short-term loans that are secured by the firm’s inventories or accounts receivable Tender offer A formal offer by the company to buy back a specified number of shares at a predetermined and stated price The tender price is set above the current market price in order to attract sellers Term structure of interest rates Also called the yield curve, which is the relationship between interest rates and the term to maturity, where the risk of default is held constant Terms of sale The time period until payment must be made, any discount for early payment Timeline A linear representation of the timing of cash flows Times interest earned ratio A measure of the ability of the firm to pay its interest expense equal to the ratio of net operating income divided by interest expense Total asset turnover (TATO) ratio A measure of the efficiency of a firm’s use of its total assets equal to the ratio of sales to total assets Total assets The total of current and longterm assets recorded in the firm’s balance sheet Total liabilities The total amount of money the firm owes its creditors (including the firm’s banks and other creditors) Total stockholders’ equity Total assets less total liabilities Trade credit A type of account payable that arises when a firm provides goods or services to a customer with an agreement to bill the customer later Transaction loan A loan where the proceeds are designated for a specific purpose— for example, a bank loan used to finance the acquisition of a piece of equipment Treasury stock Stock that has been bought back by the issuing company Trend analysis The use of historical ratios compared to a firm’s current-period ratios to indicate whether the firm’s financial condition is improving or deteriorating Unfavorable financial leverage When the firm’s investments earn a rate of return (before taxes) that is less than the cost of borrowing, this results in lower EPS and a lower rate of return on the firm’s common equity Unsecured current liabilities Debts of the company that are due and payable within a period of one year and that are secured only by the promise of the firm to repay the debt Unsubordinated debenture A debenture that is unsubordinated to other debentures in being paid in case of insolvency Unsystematic risk See Diversifiable risk Use of cash Any activity that causes cash to leave the firm, such as the payment of taxes or payments made to stockholders, creditors, and suppliers Value drivers The primary determinants of an investment’s cash flows and its performance (e.g., number of units sold and cost per unit to produce) Variance The average of the squared differences between the possible rates of return and the expected rate of return As such, the variance is a measure of the average squared difference in possible and expected rates of return Venture capital firm An investment company that raises money from accredited investors and uses the proceeds to invest in new start-up companies Volatility Another term for the fluctuation in returns Weak-form efficient market A market in which current prices quickly and accurately reflect information that can be derived from patterns in past security prices and trading volumes Working capital management Management of day-to-day operations and decisions related to working capital and short-term financing Yield curve Also called the term structure of interest rates, which is the relationship between interest rates and the term to maturity, where the risk of default is held constant Yield spread The spread, or difference in interest rates (generally expressed in terms of basis points), between a corporate bond and a U.S Treasury security of the same maturity Also referred to as the spread over Treasury bonds or the credit spread Yield to maturity The promised rate of return to an investor who holds the bond until maturity, assuming the bond issuer does not default on any of the interest and principal payments Zero-coupon bond A bond that pays no interest to the lender but instead is issued at a substantial discount from its face value The lender realizes its interest when the bond matures and the issuer repays its full face value to the lender 21/10/16 12:28 PM www.ebookslides.com Organization Index A Advance America, 129 AFL-CIO Pension Fund, 257 Airbus, 422 Alphabet, Inc (GOOG), 10, 28, 301, 303, 311 Amazon.com, Inc (AMZN), 79, 311 American Airlines (AAL), 464, 486 American Electric Power Co (AEP), 237, 318, 463, 464, 483, 486 American International Group, Inc (AIG), 22, 23, 658 Analog Devices Inc (ADI), 126 Apple (AAPL), 3, 9, 25, 87–88, 103–104, 125, 228–230, 236, 237, 240–241, 331–332, 395, 483, 500, 584, 609 AT&T (T), 270–273 B Bangers, Inc., 395 Bank of America (BAC), 22, 23, 256, 315–316 Barclays, 23 Barker Electronics, 575 Barryman Drilling Company, 550 Bear Stearns, 33, 658 Berkshire Hathaway (BRK-A), 532 Big Box, Inc., 74–75 Boeing (BA), 422, 584, 609 BP, 202 Burger King, 25 C California Public Employees Retirement System, 257 Caraway Seed Company, 550, 602 Caswell Publishing Company, 573 Centerpoint Energy (CNP), 237 Cerberus Capital Management, L.P., 25 CGC Corporation, 442 Chesapeake Energy Corporation (CHK), 12, 635 Chevron, 624 Chrysler Corporation, 25 CIT Group, Inc (CIT), 22, 23 Citigroup, Inc (C), 22, 23, 497 Clinton Enterprises, Inc., 533, 534 CL Marshall Liquors, 601 Coca-Cola (KO), 9–10, 228–230, 312 Comcast (CMCSA), 530 Compaq, 108 Compustat, 108 Con Edison’s (ED), 320 ConocoPhillips (COP), 223, 527, 528, 530, 540, 624 Continental Airlines (CAL), 25 Credit Suisse, 23 Crockett Clothing Company, 378–379, 381–383 CROCS, Inc (CROX), 650–651 Cypress Semiconductor (CY), 24 D Danforth & Donnalley (D&D) Laundry Products Company, 403–405 Dell Inc (DELL), 28, 108, 109, 125, 540, 577, 584 Deutsche Bank, 23 Dick’s Sporting Goods (DKS), 194 Digital Equipment Corp., 553 Disney See Walt Disney Co (DIS) Dow Chemical (DOW), 528 Ducati (DMH.BE), 25 Duke Energy (DUK), 195, 237 E eBay (EBAY), 311 E I du Pont de Nemours Company, 99 Emerson Electric (EMR), 125–126, 195, 225–226, 463, 464, 476, 486, 547 Enron Corporation, 10, 110, 643 ExxonMobil (XOM), 223, 224, 460, 464, 466–467, 624, 645 F Facebook (FB), 255, 303 Farmers Brothers (FARM), 14, 304 Fatburner Gyms, Inc., 549–550 Fidelity Investments, 212 Fitbit, Fitch, 454 Ford (F), 247, 312, 390, 393, 464, 486, 646–648, 649 Freescale Semiconductor (FSL-B), 25 Frito-Lay, 376 G The Gap, Inc., 39, 75–77, 108, 584 GE Capital, 22–23 GE Money Bank (GE), 98 General Electric (GE), 7, 22, 109, 125–126, 224, 255, 278, 389, 464, 486, 528 General Motors (GM), 4–5, 376, 390, 484, 609, 657 GoFast Enterprises, Inc., 533, 536–537 Goldman Sachs (GS), 22, 33, 212 Google, Inc (GOOG), 10, 25, 73–74, 301, 302 See also Alphabet, Inc Google Finance, 463 Great Atlantic and Pacific Tea Company (GAP), 303 Green Bay Packers, 657–658 I IBM (IBM), 312, 390, 584 Indianapolis Colts, 14 Intel (INTC), 28, 202, 332, 468 J JPMorgan Chase (JPM), 22, 23, 33, 212, 223 K Kimberly-Clark (KMB), 332 KKR (Kohlberg, Kravis, and Roberts), 25 Kleiner Perkins Caufield & Byers (KPCB), 24–25 L Landcruisers Plus (LP), 394–395 Leggett Scrap Metal, Inc., 386–389 Lehman Brothers, 33, 484, 658 Lockheed Martin’s (LMT), 460 Lowe’s (LOW), 91–92, 97–98, 107, 519, 520, 522 Lyft, M Marriott, 176 Marshall Custom Homes, 412–413 Marshall Pottery Barn, 550 Marx and Winter, Inc., 664 McDonald’s Corp (MCD), 127, 390, 394, 446, 607, 617–618 Melco Furniture, Inc., 564–566 Merck (MRK), 309 Merrill Lynch, 23, 33, 460 MGM, 25 Microsoft (MSFT), 87–88, 103–104, 202, 528–529 Minelli Enterprises, 663 MoneyCentral.com, 235–236 Moody’s, 454 Morgan Stanley (MS), 22, 23, 33 Morten Food Products, Inc., 394 MSN.com, 237 N H Harley Davidson (HOG), 247, 376 Harrah’s (HAG.HM), 25 Harrison Electronics, Inc., 572, 585–586 Heineken, 280 Hershey Foods Corporation (HSY), 644–645 Hewlett Packard (HPQ), 87–88, 237, 240–241, 395, 522 Home Depot (HD), 55, 91–92, 97–98, 107, 235–236, 240, 519, 520, 522 Honda, 390 HSBC, 23 NASDAQ (National Association of Securities Dealers Automated Quotations), 28 National Semiconductor Corporation (NSM), 126 Nealon Manufacturing Company, Inc., 481 Neiman Marcus, 25 Netflix (NFLX), 12, 25–26, 312 Network Solutions, 602 New York Stock Exchange (NYSE), 28 New York Yankees, 490 Nike (NKE), 13 Nissan, 231, 390 Northwest Wire and Cable Company, 535–536 I-1 Z02_TITM7219_13_SE_OIDX.indd 17/11/16 11:38 AM ... Investing* Solnik/McLeavey Global Investments Titman/ Keown/Martin Financial Management: Principles and ? ?Applications* Titman/ Martin Valuation: The Art and Science of Corporate Investment Decisions... edition of Financial Management: Principles and Applications is dedicated to our families—the ones who love us the most To my parents, wife (Meg), and sons (Trevor, Elliot, and Gordon) Sheridan Titman. .. Introduction to Financial Management CHAPTER Getting Started? ?Principles of Finance CHAPTER Firms and the Financial Markets 18 CHAPTER Understanding Financial Statements 38 CHAPTER Financial Analysis—Sizing