Foundations of Financial Management 17th Edition pdf.

Foundations of Financial Management 17th Edition pdf. Brief Contents PART 1 | INTRODUCTION The Goals and Activities of Financial Management 2 PART 2 | FINANCIAL ANALYSIS AND PLANNING Review of Accounting 26 Financial Analysis 58 Financial Forecasting 96 Operating and Financial Leverage 125 PART 3 | WORKING CAPITAL MANAGEMENT Working Capital and the Financing Decision 158 Current Asset Management 191 Sources of Short-Term Financing 227 PART 4 | THE CAPITAL BUDGETING PROCESS The Time Value of Money 256 Valuation and Rates of Return 303 Cost of Capital 341 The Capital Budgeting Decision 380 Risk and Capital Budgeting 418 PART 5 | LONG-TERM FINANCING 28 14 15 16 17 18 19 20 21 Capital Markets 452 Investment Banking: Public and Private Placement 475 Long-Term Debt and Lease Financing 505 Common and Preferred Stock Financing 541 Dividend Policy and Retained Earnings 572 Convertibles, Warrants, and Derivatives 602 PART 6 | EXPANDING THE PERSPECTIVE OF CORPORATE FINANCE External Growth through Mergers 629 International Financial Management 653 Appendixes A-1 Glossary G-1 Indexes I-1 29 1 page xix Contents PART 1 | INTRODUCTION The Goals and Activities of Financial Management 2 The Field of Finance 3 Evolution of the Field of Finance 3 Modern Issues in Finance 4 Risk Management and a Review of the Financial Crisis 4 The Dodd–Frank Act 5 The Impact of Information Technology 7 Activities of Financial Management 7 Forms of Organization 8 Impact of 2017 Tax Cuts and Jobs Act on Organizations 8 Sole Proprietorship 8 Partnership 9 Corporation 10 Corporate Governance 11 The Sarbanes–Oxley Act 13 Goals of Financial Management 13 A Valuation Approach 14 Maximizing Shareholder Wealth 14 Management and Stockholder Wealth 15 Social Responsibility and Ethical Behavior 15 The Role of the Financial Markets 17 Structure and Functions of the Financial Markets 18 Allocation of Capital 18 Institutional Pressure on Public Companies to Restructure 19 Internationalization of the Financial Markets 20 30 2 page xx Information Technology and Changes in the Capital Markets 20 Format of the Text 21 Parts 21 1. Introduction 21 2. Financial Analysis and Planning 22 3. Working Capital Management 22 4. The Capital Budgeting Process 22 5. Long-Term Financing 22 6. Expanding the Perspective of Corporate Finance 22 List of Terms 23 Discussion Questions 23 Web Exercise 24 PART 2 | FINANCIAL ANALYSIS AND PLANNING 25 Review of Accounting 26 Income Statement 27 Return to Capital 28 Price-Earnings Ratio Applied to Earnings per Share 28 Limitations of the Income Statement 29 Balance Sheet 30 Interpretation of Balance Sheet Items 30 Concept of Net Worth 32 Limitations of the Balance Sheet 32 Statement of Cash Flows 34 Developing an Actual Statement 34 Determining Cash Flows from Operating Activities 35 Determining Cash Flows from Investing Activities 38 Determining Cash Flows from Financing Activities 38 Combining the Three Sections of the Statement 39 Depreciation and Funds Flow 41 Free Cash Flow 44 Income Tax Considerations 44 Corporate Tax Rates 44 Cost of a Tax-Deductible Expense 46 Depreciation as a Tax Shield 46 Summary 47 List of Terms 47 Discussion Questions 48 Practice Problems and Solutions 48 Problems 49 31 3 4 Web Exercise 57 Financial Analysis 58 Ratio Analysis 59 Classification System 59 The Analysis 60 A. Profitability Ratios 61 B. Asset Utilization Ratios 64 C. Liquidity Ratios 65 D. Debt Utilization Ratios 65 Trend Analysis 67 Impact of Inflation on Financial Analysis 69 An Illustration 70 Disinflation Effect 72 Deflation 72 Other Elements of Distortion in Reported Income 73 Explanation of Discrepancies 73 Sales 73 Cost of Goods Sold 74 Net Income 74 Summary 75 List of Terms 75 Discussion Questions 75 Practice Problems and Solutions 76 Problems 79 Comprehensive Problem 90 Comprehensive Problem 92 Web Exercise 95 Financial Forecasting 96 Constructing Pro Forma Statements 97 Pro Forma Income Statement 98 Establish a Sales Projection 98 Determine a Production Schedule and the Gross Profit 98 Cost of Goods Sold 100 Other Expense Items 101 Actual Pro Forma Income Statement 101 Cash Budget 102 Cash Receipts 102 Cash Payments 103 Actual Budget 104 32 5 Pro Forma Balance Sheet 105 Explanation of Pro Forma Balance Sheet 107 Analysis of Pro Forma Statement 108 Percent-of-Sales Method 108 Summary 111 List of Terms 111 Discussion Questions 112 Practice Problems and Solutions 112 Problems 113 Comprehensive Problem 122 Comprehensive Problem 123 Web Exercise 124 Operating and Financial Leverage 125 Leverage in a Business 126 Operating Leverage 126 Break-Even Analysis 126 A More Conservative Approach 128 The Risk Factor 130 Cash Break-Even Analysis 130 Degree of Operating Leverage 131 Leveraged Firm 131 Conservative Firm 132 Limitations of Analysis 133 Financial Leverage 133 Impact on Earnings 134 Degree of Financial Leverage 136 Plan A (Leveraged) 137 Plan B (Conservative) 137 Limitations to Use of Financial Leverage 137 Combining Operating and Financial Leverage 137 Degree of Combined Leverage 139 A Word of Caution 140 Summary 141 Review of Formulas 142 List of Terms 143 Discussion Questions 143 Practice Problems and Solutions 143 Problems 145 Comprehensive Problem 154 Web Exercise 156 33 6 7 page xxi PART 3 | WORKING CAPITAL MANAGEMENT Working Capital and the Financing Decision 158 The Nature of Asset Growth 159 Controlling Assets—Matching Sales and Production 160 Temporary Assets under Level Production—an Example 164 Patterns of Financing 168 Alternative Plans 170 Long-Term Financing 170 Short-Term Financing (Opposite Approach) 170 The Financing Decision 171 Term Structure of Interest Rates 173 A Decision Process 176 Introducing Varying Conditions 177 Expected Value 177 Shifts in Asset Structure 178 Toward an Optimal Policy 179 Summary 181 List of Terms 182 Discussion Questions 182 Practice Problems and Solutions 182 Problems 184 Web Exercise 190 Current Asset Management 191 Cash Management 192 Reasons for Holding Cash Balances 192 Cash Flow Cycle 192 Collections and Disbursements 194 Float 196 Improving Collections 196 Extending Disbursements 196 Cost-Benefit Analysis 197 Electronic Funds Transfer 198 International Cash Management 199 Marketable Securities 200 Management of Accounts Receivable 204 Accounts Receivable as an Investment 204 Credit Policy Administration 205 34 8 Credit Standards 205 Terms of Trade 209 Collection Policy 209 An Actual Credit Decision 209 Inventory Management 210 Level versus Seasonal Production 211 Inventory Policy in Inflation (and Deflation) 211 The Inventory Decision Model 211 Carrying Costs 212 Ordering Costs 212 Economic Ordering Quantity 213 Safety Stock and Stockouts 214 Just-in-Time Inventory Management 216 Cost Savings from Lower Inventory 216 Other Benefits 216 The Downside of JIT 216 Summary 217 List of Terms 218 Discussion Questions 218 Practice Problems and Solutions 219 Problems 220 Comprehensive Problem 225 Web Exercise 226 Sources of Short-Term Financing 227 Trade Credit 228 Payment Period 228 Cash Discount Policy 228 Net Credit Position 229 Bank Credit 229 Prime Rate and LIBOR 230 Compensating Balances 230 Maturity Provisions 233 Cost of Commercial Bank Financing 233 Interest Costs with Compensating Balances 234 Rate on Installment Loans 234 Annual Percentage Rate 235 The Credit Crunch Phenomenon 235 Financing through Commercial Paper 236 Advantages of Commercial Paper 238 Limitations on the Issuance of Commercial Paper 238 Foreign Borrowing 239 35 9 page xxii Use of Collateral in Short-Term Financing 240 Accounts Receivable Financing 240 Pledging Accounts Receivable 241 Factoring Receivables 241 Asset-Backed Public Offerings of Receivables 242 Inventory Financing 243 Stages of Production 243 Nature of Lender Control 243 Blanket Inventory Liens 243 Trust Receipts 243 Warehousing 243 Appraisal of Inventory Control Devices 244 Hedging to Reduce Borrowing Risk 245 Summary 246 List of Terms 247 Discussion Questions 247 Practice Problems and Solutions 248 Problems 249 Web Exercise 254 PART 4 | THE CAPITAL BUDGETING PROCESS The Time Value of Money 256 Relationship to the Capital Outlay Decision 256 Future Value—Single Amount 257 Present Value—Single Amount 260 Interest Rate—Single Amount 262 Number of Periods—Single Amount 263 Future Value—Annuity 264 Present Value—Annuity 266 Alternative Calculations: Using TVM Tables 267 Graphical Presentation of Time Value Relationships 267 The Relationship between Present Value and Future Value 267 The Relationship between the Present Value of a Single Amount and the Present Value of an Annuity 269 Future Value Related to the Future Value of an Annuity 270 Determining the Annuity Value 272 Annuity Equaling a Future Value 272 Annuity Equaling a Present Value 272 Finding Annuity Payments with a Financial Calculator or Excel 273 Finding Interest Rates and the Number of Payments 274 36 10 page xxiii Finding Annuity Interest Rates 274 Finding the Number of Annuity Payments 275 Compounding over Additional Periods 275 Patterns of Payment with a Deferred Annuity 276 Annuities Due 278 List of Terms 279 Discussion Questions 279 Practice Problems and Solutions 279 Problems 281 Comprehensive Problem 286 Web Exercise 287 Appendix 9A Alternative Calculations: Using TVM Tables 288 Appendix 9B Yield and Payment Examples Using TVM Tables 291 Appendix 9C Using Calculators for Financial Analysis 294 Valuation and Rates of Return 303 Valuation Concepts 304 Valuation of Bonds 304 Present Value of Interest Payments 306 Present Value of Principal Payment (Par Value) at Maturity 306 Bond Valuation Using a Financial Calculator 306 Using Excel’s PV Function to Calculate a Bond Price 307 Concept of Yield to Maturity 307 Changing the Yield to Maturity and the Impact on Bond Valuation 309 Increase in Inflation Premium 309 Decrease in Inflation Premium 310 Time to Maturity 311 Determining Yield to Maturity from the Bond Price 311 Semiannual Interest and Bond Prices 315 Valuation and Preferred Stock 315 Determining the Required Rate of Return (Yield) from the Market Price 317 Valuation of Common Stock 318 No Growth in Dividends 318 Constant Growth in Dividends 318 Stock Valuation Based on Future Stock Value 320 Determining the Required Rate of Return from the Market Price 321 The Price-Earnings Ratio Concept and Valuation 322 Variable Growth in Dividends 323 Summary and Review of Formulas 325 List of Terms 327 Discussion Questions 327 37 11 12 Practice Problems and Solutions 328 Problems 329 Comprehensive Problem 336 Web Exercise 337 Appendix 10A Valuation of a Supernormal Growth Firm 338 Problem 340 Cost of Capital 341 The Overall Concept 341 Cost of Debt 342 Cost of Preferred Stock 344 Cost of Common Equity 345 Valuation Approach 345 Required Return on Common Stock Using the Capital Asset Pricing Model 346 Cost of Retained Earnings 347 Cost of New Common Stock 348 Overview of Common Stock Costs 349 Optimum Capital Structure—Weighting Costs 349 Capital Acquisition and Investment Decision Making 351 Cost of Capital in the Capital Budgeting Decision 352 The Marginal Cost of Capital 354 Summary 358 Review of Formulas 359 List of Terms 360 Discussion Questions 360 Practice Problems and Solutions 361 Problems 363 Comprehensive Problem 371 Comprehensive Problem 371 Web Exercise 372 Appendix 11A Cost of Capital and the Capital Asset Pricing Model 373 List of Terms 379 Discussion Questions 379 Problems 379 The Capital Budgeting Decision 380 Administrative Considerations 381 Accounting Flows versus Cash Flows 381 Methods of Ranking Investment Proposals 383 Payback Method 384 38 13 Net Present Value 385 Internal Rate of Return 387 Selection Strategy 389 Reinvestment Assumption 390 Modified Internal Rate of Return 391 Capital Rationing 392 Net Present Value Profile 393 Characteristics of Investment C 394 Combining Cash Flow Analysis and Selection Strategy 396 The Rules of Depreciation 396 The Tax Rate 399 Actual Investment Decision 399 The Replacement Decision 400 Sale of Old Asset 401 Incremental Depreciation 402 Cost Savings 403 Elective Expensing 404 Summary 405 List of Terms 405 Discussion Questions 405 Practice Problems and Solutions 406 Problems 407 Comprehensive Problem 416 Web Exercise 417 Risk and Capital Budgeting 418 Definition of Risk in Capital Budgeting 418 The Concept of Risk-Averse 420 Actual Measurement of Risk 420 Risk and the Capital Budgeting Process 423 Risk-Adjusted Discount Rate 424 Increasing Risk over Time 425 Qualitative Measures 425 Example—Risk-Adjusted Discount Rate 427 Simulation Models 428 Decision Trees 429 The Portfolio Effect 430 Portfolio Risk 430 Evaluation of Combinations 434 The Share Price Effect 435 Summary 435 Review of Formulas 436 39 14 page xxiv List of Terms 436 Discussion Questions 436 Practice Problems and Solutions 437 Problems 438 Comprehensive Problem 448 Comprehensive Problem 449 Web Exercise 450 PART 5 | LONG-TERM FINANCING Capital Markets 452 International Capital Markets 453 Competition for Funds in the U.S. Capital Markets 456 Government Securities 456 U.S. Government Securities 456 Federally Sponsored Credit Agencies 456 State and Local Securities 457 Corporate Securities 457 Corporate Bonds 457 Preferred Stock 457 Common Stock 457 Internal versus External Sources of Funds 458 The Supply of Capital Funds 458 The Role of the Security Markets 461 The Organization of the Security Markets 462 Traditional Organized Exchanges 462 Listing Requirements for Firms 463 Electronic Communication Networks (ECNs) 463 BATS 463 The New York Stock Exchange 463 The NASDAQ Market 465 Foreign Exchanges 465 Other Financial Exchanges 466 Market Efficiency 467 The Efficient Market Hypothesis 467 Regulation of the Security Markets 468 The Securities Act of 1933 469 The Securities Exchange Act of 1934 470 The Securities Acts Amendments of 1975 471 The Sarbanes–Oxley Act of 2002 471 Summary 472 40 15 16 List of Terms 472 Discussion Questions 473 Web Exercise 473 Investment Banking: Public and Private Placement 475 The Role of Investment Banking 477 Investment Banking Competition 477 Enumeration of Functions 478 Underwriter 478 Market Maker 478 Advisor 478 Agency Functions 479 The Distribution Process 480 The Spread 481 Pricing the Security 483 Debt versus Equity Offerings 483 Dilution 483 Market Stabilization 485 Aftermarket 487 Shelf Registration 487 The Gramm–Leach–Bliley Act Repeals the Glass–Steagall Act 487 Public versus Private Financing 488 Advantages of Being Public 488 Disadvantages of Being Public 489 Public Offerings 489 A Classic Example—Rosetta Stone Goes Public 489 Private Placement 492 Going Private and Leveraged Buyouts 492 International Investment Banking Deals 494 Privatization 494 Summary 495 List of Terms 495 Discussion Questions 495 Practice Problems and Solutions 496 Problems 497 Comprehensive Problem 503 Web Exercise 504 Long-Term Debt and Lease Financing 505 The Expanding Role of Debt 505 The Debt Contract 506 41 page xxv Par Value 507 Coupon Rate 507 Maturity Date 507 Security Provisions 507 Unsecured Debt 507 Methods of Repayment 509 Serial Payments 509 Sinking-Fund Provision 509 Conversion 509 Call Feature 509 An Example: Eli Lilly’s 6.77 Percent Bond 509 Bond Prices, Yields, and Ratings 511 Bond Yields 512 Nominal Yield (Coupon Rate) 512 Current Yield 512 Yield to Maturity 512 Bond Ratings 513 Examining Actual Bond Ratings 514 The Refunding Decision 515 A Capital Budgeting Problem 515 Step A—Outflow Considerations 516 Step B—Inflow Considerations 517 Step C—Net Present Value 518 Other Forms of Bond Financing 519 Advantages and Disadvantages of Debt 520 Benefits of Debt 520 Drawbacks of Debt 521 Eurobond Market 521 Leasing as a Form of Debt 522 Finance Lease versus Operating Lease 523 Income Statement Effect 523 Advantages of Leasing 524 Summary 525 List of Terms 525 Discussion Questions 526 Practice Problems and Solutions 527 Problems 529 Comprehensive Problem 534 Web Exercise 534 Appendix 16A Financial Alternatives for Distressed Firms 535 List of Terms 539 Discussion Questions 539 Problem 540 42 17 18 Common and Preferred Stock Financing 541 Common Stockholders’ Claim to Income 542 The Voting Right 544 Cumulative Voting 544 The Right to Purchase New Shares 547 The Use of Rights in Financing 548 Rights Required 549 Monetary Value of a Right 549 Effect of Rights on Stockholder’s Position 551 Desirable Features of Rights Offerings 552 Poison Pills 553 American Depository Receipts 554 Preferred Stock Financing 555 Justification for Preferred Stock 556 Investor Interest 556 Summary of Tax Considerations 557 Provisions Associated with Preferred Stock 557 1. Cumulative Dividends 557 2. Conversion Feature 557 3. Call Feature 558 4. Participation Provision 558 5. Floating Rate 558 6. Auction Rate Preferred Stock 558 7. Par Value 559 Comparing Features of Common and Preferred Stock and Debt 559 Summary 561 Review of Formulas 561 List of Terms 562 Discussion Questions 562 Practice Problems and Solutions 563 Problems 564 Comprehensive Problem 569 Comprehensive Problem 570 Web Exercise 571 Dividend Policy and Retained Earnings 572 The Marginal Principle of Retained Earnings 573 Life Cycle Growth and Dividends 573 Dividends as a Passive Variable 574 An Incomplete Theory 575 Arguments for the Relevance of Dividends 575 43 19 page xxvi Dividend Stability 576 Other Factors Influencing Dividend Policy 579 Legal Rules 579 Cash Position of the Firm 580 Access to Capital Markets 580 Desire for Control 580 Tax Position of Shareholders 580 Dividend Payment Procedures 582 Stock Dividend 583 Accounting Considerations for a Stock Dividend 583 Value to the Investor 584 Possible Value of Stock Dividends 585 Use of Stock Dividends 585 Stock Splits 585 Reverse Stock Splits 586 Repurchase of Stock as an Alternative to Dividends 587 Other Reasons for Repurchase 589 Dividend Reinvestment Plans 590 Summary 591 List of Terms 591 Discussion Questions 591 Practice Problems and Solutions 592 Problems 593 Comprehensive Problem 600 Web Exercise 601 Convertibles, Warrants, and Derivatives 602 Convertible Securities 603 Value of the Convertible Bond 603 Is This Fool’s Gold? 606 Advantages and Disadvantages to the Corporation 607 Forcing Conversion 608 Accounting Considerations with Convertibles 610 Financing through Warrants 611 Valuation of Warrants 612 Use of Warrants in Corporate Finance 615 Accounting Considerations with Warrants 615 Derivative Securities 616 Options 616 Futures 617 Summary 618 Review of Formulas 619 44 20 21 List of Terms 619 Discussion Questions 619 Practice Problems and Solutions 620 Problems 621 Comprehensive Problem 626 Comprehensive Problem 627 Web Exercise 627 PART 6 | EXPANDING THE PERSPECTIVE OF CORPORATE FINANCE.