,Table of Contents s s
PART 1 Introduction to Managerial Finance
s s s s s 1
1 The Role of Managerial Finance
s s s s 3
2 The Financial Market Environment
s s s 19
PART 2 Financial Tools
s s s 29
3 Financial Statements and Ratio Analysis
s s s s 31
4 Long- and Short-Term Financial Planning
s s s s 55
5 Time Value of Money
s s s 79
PART 3 Valuation of Securities
s s s s 119
6 Interest Rates and Bond Valuation
s s s s 121
7 Stock Valuation
s 149
PART 4 Risk and the Required Rate of Return
s s s s s s s s 167
8 Risk and Return
s s 169
9 The Cost of Capital
s s s 205
PART 5 Long-Term Investment Decisions
s s s s 231
10 Capital Budgeting Techniques
s s 233
11 Capital Budgeting Cash Flows
s s s 261
12 Risk Refinements in Capital Budgeting
s s s s 293
PART 6 Long-Term Financial Decisions
s s s s 327
13 Leverage and Capital Structure s s s 329
14 Payout Policy s 349
PART 7 Short-Term Financial Decisions
s s s s 367
15 Working Capital and Current Assets Management
s s s s s 369
16 Current Liabilities Management
s s 383
PART 8 Special Topics in Managerial Finance
s s s s s s 399
17 Hybrid and Derivative Securities
s s s 401
18 Mergers, LBOs, Divestitures, and Business Failure
s s s s s 421
19 International Managerial Finance s s 437
,Part One s
Introduction to Managerial Finance
s s s
Chapters in This Part
s s s
Chapter 1 s The Role of Managerial Finance
s s s s
Chapter 2 s The Financial Market Environment
s s s
Integrative Case 1: Merit Enterprise Corp.
s s s s s s
, iv
Chapter1 s
The Role of Managerial Finance
s s s s
Instructor’s Resources s
Chapter Overview s
This chapter introduces the field of finance through building-block terms and concepts. The chapter starts by
s s s s s s s s s s s s s s s
explaining what a firm is and discussing the goals that managers of a firm might pursue. The chapter provides a
s s s s s s s s s s s s s s s s s s s s
justification for focusing on shareholders rather than stakeholders broadly, but it also discusses other goals that
s s s s s s s s s s s s s s s s
firms might pursue. The opening section concludes with material on the importance of ethical behavior in
s s s s s s s s s s s s s s s s
business.
s
The next section discusses the managerial finance function, the key decisions that financial managers make, and the
s s s s s s s s s s s s s s s s
principles that guide their decisions. The discussion draws out distinctions among the overlapping disciplines of
s s s s s s s s s s s s s s s
finance, economics, and accounting.
s s s s
The third section describes pros and cons of different legal forms for a business. This section places particular
s s s s s s s s s s s s s s s s s
emphasis on differences in taxation of proprietorships, partnerships, and corporations, and it highlights the
s s s s s s s s s s s s s s
importance of the marginal tax rate rather than the average tax rate. Next, this section describes the classical
s s s s s s s s s s s s s s s s s s
principal-agent problem and describes both internal and external corporate governance mechanisms that help
s s s s s s s s s s s s s
manage that problem.
s s s
This chapter and the ones to follow stress the important role finance vocabulary, concepts, and tools will play in
s s s s s s s s s s s s s s s s s s
the professional and personal lives of students—even those choosing other majors, such as accounting, economics
s s s s s s s s s s s s s s s
information systems, management, marketing, or operations. Whenever possible, personal-finance applications are
s s s s s s s s s s s
provided to motivate and illustrate topics. This pedagogical approach should inspire students to master chapter
s s s s s s s s s s s s s s s
content quickly and easily.
s s s s
Suggested Answer to Opener-in-Review s s s
Students learned the stock price of Brookdale Senior Living lost 80% of its value from 2015 to 2019, prompting
s s s s s s s s s s s s s s s s s s
Land and Buildings (a prominent stockholder) to urge the firm sell its real-estate holdings, distribute the
s s s s s s s s s s s s s s s s
anticipated net sales proceeds ($21 cash) to shareholders, and then focus on managing its senior living facilities.
s s s s s s s s s s s s s s s s s
Students were asked whether the proposal would make Brookdale’s shareholders better off if the expected cash
s s s s s s s s s s s s s s s s
proceeds were realized, but stock price dipped to $5 per share.
s s s s s s s s s s s
Before restructuring, an investor with one Brookdale share had $21.35 in total wealth. Afterward, that same
s s s s s s s s s s s s s s s
investor might have a share worth $5 and $21 in cash—total wealth of $26. The hypothetical shareholder reaped a
s s s s s s s s s s s s s s s s s s s
gain of $4.65 per share or 21.8%. Before the asset sale, with 185.45 million shares outstanding and a share price of
s s s s s s s s s s s s s s s s s s s s s
$21.35, total shareholder wealth was $3.96 billion. After the sale, with same shares outstanding and wealth per
s s s s s s s s s s s s s s s s
share now $26, shareholder wealth rose to $4.82 billion—a net gain of $0.86 billion.
s s s s s s s s s s s s s s
PART 1 Introduction to Managerial Finance
s s s s s 1
1 The Role of Managerial Finance
s s s s 3
2 The Financial Market Environment
s s s 19
PART 2 Financial Tools
s s s 29
3 Financial Statements and Ratio Analysis
s s s s 31
4 Long- and Short-Term Financial Planning
s s s s 55
5 Time Value of Money
s s s 79
PART 3 Valuation of Securities
s s s s 119
6 Interest Rates and Bond Valuation
s s s s 121
7 Stock Valuation
s 149
PART 4 Risk and the Required Rate of Return
s s s s s s s s 167
8 Risk and Return
s s 169
9 The Cost of Capital
s s s 205
PART 5 Long-Term Investment Decisions
s s s s 231
10 Capital Budgeting Techniques
s s 233
11 Capital Budgeting Cash Flows
s s s 261
12 Risk Refinements in Capital Budgeting
s s s s 293
PART 6 Long-Term Financial Decisions
s s s s 327
13 Leverage and Capital Structure s s s 329
14 Payout Policy s 349
PART 7 Short-Term Financial Decisions
s s s s 367
15 Working Capital and Current Assets Management
s s s s s 369
16 Current Liabilities Management
s s 383
PART 8 Special Topics in Managerial Finance
s s s s s s 399
17 Hybrid and Derivative Securities
s s s 401
18 Mergers, LBOs, Divestitures, and Business Failure
s s s s s 421
19 International Managerial Finance s s 437
,Part One s
Introduction to Managerial Finance
s s s
Chapters in This Part
s s s
Chapter 1 s The Role of Managerial Finance
s s s s
Chapter 2 s The Financial Market Environment
s s s
Integrative Case 1: Merit Enterprise Corp.
s s s s s s
, iv
Chapter1 s
The Role of Managerial Finance
s s s s
Instructor’s Resources s
Chapter Overview s
This chapter introduces the field of finance through building-block terms and concepts. The chapter starts by
s s s s s s s s s s s s s s s
explaining what a firm is and discussing the goals that managers of a firm might pursue. The chapter provides a
s s s s s s s s s s s s s s s s s s s s
justification for focusing on shareholders rather than stakeholders broadly, but it also discusses other goals that
s s s s s s s s s s s s s s s s
firms might pursue. The opening section concludes with material on the importance of ethical behavior in
s s s s s s s s s s s s s s s s
business.
s
The next section discusses the managerial finance function, the key decisions that financial managers make, and the
s s s s s s s s s s s s s s s s
principles that guide their decisions. The discussion draws out distinctions among the overlapping disciplines of
s s s s s s s s s s s s s s s
finance, economics, and accounting.
s s s s
The third section describes pros and cons of different legal forms for a business. This section places particular
s s s s s s s s s s s s s s s s s
emphasis on differences in taxation of proprietorships, partnerships, and corporations, and it highlights the
s s s s s s s s s s s s s s
importance of the marginal tax rate rather than the average tax rate. Next, this section describes the classical
s s s s s s s s s s s s s s s s s s
principal-agent problem and describes both internal and external corporate governance mechanisms that help
s s s s s s s s s s s s s
manage that problem.
s s s
This chapter and the ones to follow stress the important role finance vocabulary, concepts, and tools will play in
s s s s s s s s s s s s s s s s s s
the professional and personal lives of students—even those choosing other majors, such as accounting, economics
s s s s s s s s s s s s s s s
information systems, management, marketing, or operations. Whenever possible, personal-finance applications are
s s s s s s s s s s s
provided to motivate and illustrate topics. This pedagogical approach should inspire students to master chapter
s s s s s s s s s s s s s s s
content quickly and easily.
s s s s
Suggested Answer to Opener-in-Review s s s
Students learned the stock price of Brookdale Senior Living lost 80% of its value from 2015 to 2019, prompting
s s s s s s s s s s s s s s s s s s
Land and Buildings (a prominent stockholder) to urge the firm sell its real-estate holdings, distribute the
s s s s s s s s s s s s s s s s
anticipated net sales proceeds ($21 cash) to shareholders, and then focus on managing its senior living facilities.
s s s s s s s s s s s s s s s s s
Students were asked whether the proposal would make Brookdale’s shareholders better off if the expected cash
s s s s s s s s s s s s s s s s
proceeds were realized, but stock price dipped to $5 per share.
s s s s s s s s s s s
Before restructuring, an investor with one Brookdale share had $21.35 in total wealth. Afterward, that same
s s s s s s s s s s s s s s s
investor might have a share worth $5 and $21 in cash—total wealth of $26. The hypothetical shareholder reaped a
s s s s s s s s s s s s s s s s s s s
gain of $4.65 per share or 21.8%. Before the asset sale, with 185.45 million shares outstanding and a share price of
s s s s s s s s s s s s s s s s s s s s s
$21.35, total shareholder wealth was $3.96 billion. After the sale, with same shares outstanding and wealth per
s s s s s s s s s s s s s s s s
share now $26, shareholder wealth rose to $4.82 billion—a net gain of $0.86 billion.
s s s s s s s s s s s s s s
