, FUNDAMENTALS
OF FINANCIAL
MANAGEMENT
Twelfth Edition
Eugene F. Brigham
UNIVERSITY OF FLORIDA
Joel F. Houston
UNIVERSITY OF FLORIDA
Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States
, Fundamentals of Financial © 2009, 2007 South-Western, a part of Cengage Learning
Management, 12th edition
ALL RIGHTS RESERVED. No part of this work covered by the copyright hereon
Eugene F. Brigham, Joel F. Houston may be reproduced or used in any form or by any means—graphic, electronic, or
Vice President of Editorial, Business: mechanical, including photocopying, recording, taping, Web distribution, information
Jack W. Calhoun storage and retrieval systems, or in any other manner—except as may be permitted by
the license terms herein.
Editor-in-Chief: Alex von Rosenberg
Executive Editor: Michael R. Reynolds
For product information and technology assistance, contact us at
Development Editor:
Cengage Learning Customer & Sales Support, 1-800-354-9706
Michael Guendelsberger
Executive Marketing Manager: For permission to use material from this text or product,
submit all requests online at www.cengage.com/permissions
Brian Joyner
Further permissions questions can be emailed to
Marketing Manager: Nathan Anderson
Senior Marketing Communications
Manager: Jim Overly
ExamView® is a registered trademark of eInstruction Corp.
Marketing Coordinator: Suellen Ruttkay
Web site Project Manager: Brian Courter © 2009 Cengage Learning. All Rights Reserved.
Frontlist Buyer, Manufacturing:
Library of Congress Control Number: 2008941113
Kevin Kluck
Senior Art Director: Michelle Kunkler ISBN 13: 978-0-324-59771-4
Content Project Manager: Jennifer A. ISBN 10: 0-324-59771-1
Ziegler Student Edition ISBN 13: 978-0-324-59770-7
Director of Production: Sharon Smith
Student Edition ISBN 10: 0-324-59770-3
Media Editor: Scott Fidler
Senior Editorial Assistant: Adele T.
South-Western Cengage Learning
Scholtz
5191 Natorp Boulevard
Production Service: Litten Editing Mason, OH 45040
and Publishing USA
Compositor: Macmillan Publishing
Solutions
Cengage Learning products are represented in Canada by
Cover and Internal Designer:
Nelson Education, Ltd.
Grannan Graphic Design
Photography Manager: Sheri Blaney For your course and learning solutions, visit academic.cengage.com
Purchase any of our products at your local college store or at our
preferred online store www.ichapters.com
Printed in the United States of America
1 2 3 4 5 6 7 12 11 10 09 08
, PREFACE
When the first edition of Fundamentals was published 31 years ago, we wanted to
provide an introductory text that students would find interesting and easy to
understand. Fundamentals immediately became the leading undergraduate finance
text, and it has maintained that position ever since. Our goal with this edition was
to produce a book and ancillary package that would maintain its lead and set a
new standard for finance textbooks.
Important changes in the financial environment have occurred since the last
edition. New technology and increased globalization continue to transform practices
and markets. Continued improvements in communications and transportation have
made it easier for businesses to operate on a worldwide basis—a company can be
headquartered in New York, develop products in India, manufacture them in China,
and sell them anywhere in the world. This has led to major changes in the labor
markets, especially to an increase in outsourcing, which has resulted in generally lower
consumer prices; but it has caused job losses for some U.S. workers and gains for
others. There have also been dramatic rises and falls in the stock market, and interest
rates have remained low even as energy prices continue to rise. Corporate scandals
have led to important changes in the laws governing corporate management and
financial reporting, as well as to equally important changes in managerial compen-
sation. These issues are discussed in this edition of Fundamentals, where we analyze
them from financial and ethical perspectives.
Our target audience is undergraduate students taking their first, and often only,
finance course. Some students will decide to major in finance and go on to take courses
in investments, money and capital markets, and advanced corporate finance. Others
will choose marketing, management, or some other nonfinance major. Still others will
major in areas other than business and take finance and a few other business courses
to gain information that will help them in law, real estate, and other fields.
Our challenge was to provide a book that serves all of these audiences well. Our
conclusion was that we should focus on the core principles of finance (i.e., on basic
topics such as the time value of money, risk analysis, and valuation). Moreover, we
concluded that we should address these topics from two points of view: (1) as an
investor who is seeking to make intelligent investment choices and (2) as a business
manager trying to maximize the value of his or her firm's stock. Note that both
investors and managers need to know the same set of principles, so the core topics
are important to students regardless of what they choose to do after they finish the
course.
THE FINANCIAL CRISIS OF 2008
As everyone knows, the financial markets experienced a meltdown in the fall of
2008. The average stock's price declined by about 50%, which wiped out trillions
of dollars of savings. The (sick) joke was that 401 (k) retirement plans were
becoming 201 (k) plans. These market losses delayed many retirements and also
caused many retirees to go back to work. Housing construction virtually ceased,
and home prices plunged by about 20% nationwide and by as much as 50% in
some parts of the country, wiping out trillions more of savings. Millions of
homeowners found that their mortgages exceeded the value of their homes, and
defaults and foreclosures followed. This led to huge losses by banks and other
lenders, which in turn led to bankruptcies, restructuring, and massive layoffs.
Three years ago, there were many strong, old, and independent global investment
banks. Today, all of those in the U.S. are gone—icons like Merrill Lynch and
iii
OF FINANCIAL
MANAGEMENT
Twelfth Edition
Eugene F. Brigham
UNIVERSITY OF FLORIDA
Joel F. Houston
UNIVERSITY OF FLORIDA
Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States
, Fundamentals of Financial © 2009, 2007 South-Western, a part of Cengage Learning
Management, 12th edition
ALL RIGHTS RESERVED. No part of this work covered by the copyright hereon
Eugene F. Brigham, Joel F. Houston may be reproduced or used in any form or by any means—graphic, electronic, or
Vice President of Editorial, Business: mechanical, including photocopying, recording, taping, Web distribution, information
Jack W. Calhoun storage and retrieval systems, or in any other manner—except as may be permitted by
the license terms herein.
Editor-in-Chief: Alex von Rosenberg
Executive Editor: Michael R. Reynolds
For product information and technology assistance, contact us at
Development Editor:
Cengage Learning Customer & Sales Support, 1-800-354-9706
Michael Guendelsberger
Executive Marketing Manager: For permission to use material from this text or product,
submit all requests online at www.cengage.com/permissions
Brian Joyner
Further permissions questions can be emailed to
Marketing Manager: Nathan Anderson
Senior Marketing Communications
Manager: Jim Overly
ExamView® is a registered trademark of eInstruction Corp.
Marketing Coordinator: Suellen Ruttkay
Web site Project Manager: Brian Courter © 2009 Cengage Learning. All Rights Reserved.
Frontlist Buyer, Manufacturing:
Library of Congress Control Number: 2008941113
Kevin Kluck
Senior Art Director: Michelle Kunkler ISBN 13: 978-0-324-59771-4
Content Project Manager: Jennifer A. ISBN 10: 0-324-59771-1
Ziegler Student Edition ISBN 13: 978-0-324-59770-7
Director of Production: Sharon Smith
Student Edition ISBN 10: 0-324-59770-3
Media Editor: Scott Fidler
Senior Editorial Assistant: Adele T.
South-Western Cengage Learning
Scholtz
5191 Natorp Boulevard
Production Service: Litten Editing Mason, OH 45040
and Publishing USA
Compositor: Macmillan Publishing
Solutions
Cengage Learning products are represented in Canada by
Cover and Internal Designer:
Nelson Education, Ltd.
Grannan Graphic Design
Photography Manager: Sheri Blaney For your course and learning solutions, visit academic.cengage.com
Purchase any of our products at your local college store or at our
preferred online store www.ichapters.com
Printed in the United States of America
1 2 3 4 5 6 7 12 11 10 09 08
, PREFACE
When the first edition of Fundamentals was published 31 years ago, we wanted to
provide an introductory text that students would find interesting and easy to
understand. Fundamentals immediately became the leading undergraduate finance
text, and it has maintained that position ever since. Our goal with this edition was
to produce a book and ancillary package that would maintain its lead and set a
new standard for finance textbooks.
Important changes in the financial environment have occurred since the last
edition. New technology and increased globalization continue to transform practices
and markets. Continued improvements in communications and transportation have
made it easier for businesses to operate on a worldwide basis—a company can be
headquartered in New York, develop products in India, manufacture them in China,
and sell them anywhere in the world. This has led to major changes in the labor
markets, especially to an increase in outsourcing, which has resulted in generally lower
consumer prices; but it has caused job losses for some U.S. workers and gains for
others. There have also been dramatic rises and falls in the stock market, and interest
rates have remained low even as energy prices continue to rise. Corporate scandals
have led to important changes in the laws governing corporate management and
financial reporting, as well as to equally important changes in managerial compen-
sation. These issues are discussed in this edition of Fundamentals, where we analyze
them from financial and ethical perspectives.
Our target audience is undergraduate students taking their first, and often only,
finance course. Some students will decide to major in finance and go on to take courses
in investments, money and capital markets, and advanced corporate finance. Others
will choose marketing, management, or some other nonfinance major. Still others will
major in areas other than business and take finance and a few other business courses
to gain information that will help them in law, real estate, and other fields.
Our challenge was to provide a book that serves all of these audiences well. Our
conclusion was that we should focus on the core principles of finance (i.e., on basic
topics such as the time value of money, risk analysis, and valuation). Moreover, we
concluded that we should address these topics from two points of view: (1) as an
investor who is seeking to make intelligent investment choices and (2) as a business
manager trying to maximize the value of his or her firm's stock. Note that both
investors and managers need to know the same set of principles, so the core topics
are important to students regardless of what they choose to do after they finish the
course.
THE FINANCIAL CRISIS OF 2008
As everyone knows, the financial markets experienced a meltdown in the fall of
2008. The average stock's price declined by about 50%, which wiped out trillions
of dollars of savings. The (sick) joke was that 401 (k) retirement plans were
becoming 201 (k) plans. These market losses delayed many retirements and also
caused many retirees to go back to work. Housing construction virtually ceased,
and home prices plunged by about 20% nationwide and by as much as 50% in
some parts of the country, wiping out trillions more of savings. Millions of
homeowners found that their mortgages exceeded the value of their homes, and
defaults and foreclosures followed. This led to huge losses by banks and other
lenders, which in turn led to bankruptcies, restructuring, and massive layoffs.
Three years ago, there were many strong, old, and independent global investment
banks. Today, all of those in the U.S. are gone—icons like Merrill Lynch and
iii
