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  • 1. Standard Edition FUNDAMENTALS OF CORPORATE FINANCE ros3062x_fm_Standard.indd i 2/9/07 6:01:58 PM
  • 2. The McGraw-Hill/Irwin Series in Finance, Insurance, and Real Estate Stephen A. Ross Franco Modigliani Professor of Finance and Economics Sloan School of Management Massachusetts Institute of Technology Consulting Editor Financial Management Adair Excel Applications for Corporate Finance First Edition Benninga and Sarig Corporate Finance: A Valuation Approach Block and Hirt Foundations of Financial Management Twelfth Edition Brealey, Myers, and Allen Principles of Corporate Finance Eighth Edition Brealey, Myers, and Marcus Fundamentals of Corporate Finance Fifth Edition Brooks FinGame Online 4.0 Bruner Case Studies in Finance: Managing for Corporate Value Creation Fifth Edition Chew The New Corporate Finance: Where Theory Meets Practice Third Edition Chew and Gillan Corporate Governance at the Crossroads: A Book of Readings First Edition DeMello Cases in Finance Second Edition Grinblatt and Titman Financial Markets and Corporate Strategy Second Edition Helfert Techniques of Financial Analysis: A Guide to Value Creation Eleventh Edition Higgins Analysis for Financial Management Eighth Edition Kester, Ruback, and Tufano Case Problems in Finance Twelfth Edition Ross, Westerfield, and Jaffe Corporate Finance Eighth Edition ros3062x_fm_Standard.indd ii Ross, Westerfield, Jaffe, and Jordan Corporate Finance: Core Principles and Applications First Edition Ross, Westerfield, and Jordan Essentials of Corporate Finance Fifth Edition Ross, Westerfield, and Jordan Fundamentals of Corporate Finance Eighth Edition Shefrin Behavioral Corporate Finance: Decisions that Create Value First Edition Saunders and Cornett Financial Institutions Management: A Risk Management Approach Fifth Edition Saunders and Cornett Financial Markets and Institutions: An Introduction to the Risk Management Approach Third Edition International Finance White Financial Analysis with an Electronic Calculator Sixth Edition Eun and Resnick International Financial Management Fourth Edition Kuemmerle Case Studies in International Entrepreneurship: Managing and Financing Ventures in the Global Economy First Edition Investments Real Estate Adair Excel Applications for Investments First Edition Brueggeman and Fisher Real Estate Finance and Investments Thirteenth Edition Corgel, Ling, and Smith Real Estate Perspectives: An Introduction to Real Estate Fourth Edition Ling and Archer Real Estate Principles: A Value Approach Second Edition Bodie, Kane, and Marcus Essentials of Investments Sixth Edition Bodie, Kane, and Marcus Investments Seventh Edition Hirt and Block Fundamentals of Investment Management Eighth Edition Hirschey and Nofsinger Investments: Analysis and Behavior First Edition Jordan and Miller Fundamentals of Investments: Valuation and Management Fourth Edition Financial Institutions and Markets Rose and Hudgins Bank Management and Financial Services Seventh Edition Rose and Marquis Money and Capital Markets: Financial Institutions and Instruments in a Global Marketplace Ninth Edition Financial Planning and Insurance Allen, Melone, Rosenbloom, and Mahoney Pension Planning: Pension, Profit-Sharing, and Other Deferred Compensation Plans Ninth Edition Altfest Personal Financial Planning First Edition Harrington and Niehaus Risk Management and Insurance Second Edition Kapoor, Dlabay, and Hughes Focus on Personal Finance: An active approach to help you develop successful financial skills First Edition Kapoor, Dlabay, and Hughes Personal Finance Eighth Edition 2/9/07 6:01:59 PM
  • 3. Standard Edition Eighth Edition FUNDAMENTALS OF CORPORATE FINANCE Stephen A. Ross Massachusetts Institute of Technology Randolph W. Westerfield University of Southern California Bradford D. Jordan University of Kentucky Boston Burr Ridge, IL Dubuque, IA New York San Francisco St. Louis Bangkok Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto iii ros3062x_fm_Standard.indd iii 2/9/07 6:01:59 PM
  • 4. FUNDAMENTALS OF CORPORATE FINANCE Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 0 WCK/WCK 0 9 8 7 ISBN MHID ISBN MHID ISBN MHID 978-0-07-353062-8 (standard edition) 0-07-353062-X (standard edition) 978-0-07-328211-4 (alternate edition) 0-07-328211-1 (alternate edition) 978-0-07-328212-1 (annotated instructor’s edition) 0-07-328212-X (annotated instructor’s edition) Editorial director: Brent Gordon Executive editor: Michele Janicek Developmental editor II: Jennifer Rizzi Senior marketing manager: Julie Phifer Senior media producer: Victor Chiu Lead project manager: Christine A. Vaughan Lead production supervisor: Carol A. Bielski Senior designer: Kami Carter Lead media project manager: Cathy L. Tepper Cover design: Kiera Cunningham Pohl Cover image: © Corbis Images Typeface: 10/12 Times Roman Compositor: ICC Macmillan Inc. Printer: Quebecor World Versailles Inc. Library of Congress Cataloging-in-Publication Data Ross, Stephen A. Fundamentals of corporate finance/Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan. -- 8th ed., Standard ed. p. cm. -- (The McGraw-Hill/Irwin series in finance, insurance and real estate) Includes index. ISBN-13: 978-0-07-353062-8 (standard edition : alk. paper) ISBN-10: 0-07-353062-X (standard edition : alk. paper) ISBN-13: 978-0-07-328211-4 (alternate edition : alk. paper) ISBN-10: 0-07-328211-1 (alternate edition : alk. paper) [etc.] 1. Corporations--Finance. I. Westerfield, Randolph. II. Jordan, Bradford D. HG4026.R677 2008 658.15--dc22 2007002136 Copyright_page_FM.indd iv III. Title. 2/9/07 6:25:23 PM
  • 5. To our families and friends with love and gratitude. S.A.R. R.W.W. B.D.J. v ros3062x_fm_Standard.indd v 2/9/07 6:02:00 PM
  • 6. About the Authors 3 STEPHEN A. ROSS Sloan School of Management, Franco Modigliani Professor of Finance and Economics, Massachusetts Institute of Technology Stephen A. Ross is the Franco Modigliani Professor of Finance and Economics at the Sloan School of Management, Massachusetts Institute of Technology. One of the most widely published authors in finance and economics, Professor Ross is recognized for his work in developing the Arbitrage Pricing Theory and his substantial contributions to the discipline through his research in signaling, agency theory, option pricing, and the theory of the term structure of interest rates, among other topics. A past president of the American Finance Association, he currently serves as an associate editor of several academic and practitioner journals. He is a trustee of CalTech and Freddie Mac. RANDOLPH W. WESTERFIELD Marshall School of Business, University of Southern California Randolph W. Westerfield is Dean Emeritus of the University of Southern California’s Marshall School of Business and is the Charles B. Thornton Professor of Finance. He came to USC from the Wharton School, University of Pennsylvania, where he was the chairman of the finance department and a member of the finance faculty for 20 years. He is a member of several public company boards of directors including Health Management Associates, Inc., and the Nicholas Applegate growth fund. His areas of expertise include corporate financial policy, investment management, and stock market price behavior. BRADFORD D. JORDAN Gatton College of Business and Economics, University of Kentucky Bradford D. Jordan is Professor of Finance and holder of the Richard W. and Janis H. Furst Endowed Chair in Finance at the University of Kentucky. He has a long-standing interest in both applied and theoretical issues in corporate finance and has extensive experience teaching all levels of corporate finance and financial management policy. Professor Jordan has published numerous articles on issues such as cost of capital, capital structure, and the behavior of security prices. He is a past president of the Southern Finance Association, and he is coauthor of Fundamentals of Investments: Valuation and Management, 4e, a leading investments text, also published by McGraw-Hill/Irwin. vi ros3062x_fm_Standard.indd vi 2/9/07 6:02:00 PM
  • 7. Preface from the Authors When the three of us decided to write a book, we were united by one strongly held principle: Corporate finance should be developed in terms of a few integrated, powerful ideas. We believed that the subject was all too often presented as a collection of loosely related topics, unified primarily by virtue of being bound together in one book, and we thought there must be a better way. One thing we knew for certain was that we didn’t want to write a “me-too” book. So, with a lot of help, we took a hard look at what was truly important and useful. In doing so, we were led to eliminate topics of dubious relevance, downplay purely theoretical issues, and minimize the use of extensive and elaborate calculations to illustrate points that are either intuitively obvious or of limited practical use. As a result of this process, three basic themes became our central focus in writing Fundamentals of Corporate Finance: AN EMPHASIS ON INTUITION We always try to separate and explain the principles at work on a commonsense, intuitive level before launching into any specifics. The underlying ideas are discussed first in very general terms and then by way of examples that illustrate in more concrete terms how a financial manager might proceed in a given situation. A UNIFIED VALUATION APPROACH We treat net present value (NPV) as the basic concept underlying corporate finance. Many texts stop well short of consistently integrating this important principle. The most basic and important notion, that NPV represents the excess of market value over cost, often is lost in an overly mechanical approach that emphasizes computation at the expense of comprehension. In contrast, every subject we cover is firmly rooted in valuation, and care is taken throughout to explain how particular decisions have valuation effects. A MANAGERIAL FOCUS Students shouldn’t lose sight of the fact that financial management concerns management. We emphasize the role of the financial manager as decision maker, and we stress the need for managerial input and judgment. We consciously avoid “black box” approaches to finance, and, where appropriate, the approximate, pragmatic nature of financial analysis is made explicit, possible pitfalls are described, and limitations are discussed. In retrospect, looking back to our 1991 first edition IPO, we had the same hopes and fears as any entrepreneurs. How would we be received in the market? At the time, we had no idea that just 16 years later, we would be working on an eighth edition. We certainly never dreamed that in those years we would work with friends and colleagues from around the world to create country-specific Australian, Canadian, and South African editions, an International edition, Chinese, French, Polish, Portuguese, Thai, Russian, Korean, and Spanish language editions, and an entirely separate book, Essentials of Corporate Finance, now in its fifth edition. Today, as we prepare to once more enter the market, our goal is to stick with the basic principles that have brought us this far. However, based on an enormous amount of feedback we have received from you and your colleagues, we have made this edition and its package even more flexible than previous editions. We offer flexibility in coverage, by continuing to offer a variety of editions, and flexibility in pedagogy, by providing a wide variety of features in the book to help students to learn about corporate finance. We also provide flexibility in package options by offering the most extensive collection of teaching, learning, and technology aids of any corporate finance text. Whether you use just the textbook, or the book in conjunction with our other products, we believe you will find a combination with this edition that will meet your current as well as your changing needs. Stephen A. Ross Randolph W. Westerfield Bradford D. Jordan vii ros3062x_fm_Standard.indd vii 2/9/07 6:02:03 PM
  • 8. viii PA RT 1 Part Title Goes Here on Verso Page Coverage This book was designed and developed explicitly for a first course in business or corporate finance, for both finance majors and non-majors alike. In terms of background or prerequisites, the book is nearly self-contained, assuming some familiarity with basic algebra and accounting concepts, while still reviewing important accounting principles very early on. The organization of this text has been developed to give instructors the flexibility they need. Just to get an idea of the breadth of coverage in the eighth edition of Fundamentals, the following grid presents, for each chapter, some of the most significant new features as well as a few selected chapter highlights. Of course, in every chapter, opening vignettes, boxed features, in-chapter illustrated examples using real companies, and end-of-chapter material have been thoroughly updated as well. Chapters PART 1 Selected Topics of Interest Benefits to You Overview of Corporate Finance Chapter 1 Introduction to Corporate Finance New section: Sarbanes–Oxley. Brings in real-world issues concerning conflicts of interest and current controversies surrounding ethical conduct and management pay. Mini-case: Cash Flows and Financial Statements at Sunset Boards, Inc. New case written for this edition reinforces key cash flow concepts in a small-business setting. Cash flow vs. earnings. Clearly defines cash flow and spells out the differences between cash flow and earnings. Market values vs. book values. PART 2 Stresses value creation as the most fundamental aspect of management and describes agency issues that can arise. Ethics, financial management, and executive compensation. Chapter 2 Financial Statements, Taxes, and Cash Flow Goal of the firm and agency problems. Emphasizes the relevance of market values over book values. Financial Statements and Long-Term Financial Planning Chapter 3 Working with Financial Statements New ratios: PEG, price-to-sales, and Tobin’s Q. Expanded Du Pont analysis. New section expands the basic Du Pont equation to better explore the interrelationships between operating and financial performance. New material: Du Pont analysis for real companies using data from S&P Market Insight. Ratio and financial statement analysis using smaller firm data. Chapter 4 Long-Term Financial Planning and Growth New analysis shows students how to get and use real-world data, thereby applying key chapter ideas. Uses firm data from RMA to show students how to actually get and evaluate financial statements benchmarks. Expanded discussion on sustainable growth calculations. New case written for this edition illustrates the importance of financial planning in a small firm. Mini-case: Planning for Growth at S&S Air. Explanation of alternative formulas for sustainable and internal growth rates. Thorough coverage of sustainable growth as a planning tool. Explanation of growth rate formulas clears up a common misunderstanding about these formulas and the circumstances under which alternative formulas are correct. Provides a vehicle for examining the interrelationships between operations, financing, and growth. viii ros3062x_fm_Standard.indd viii 2/9/07 6:02:03 PM
  • 9. Chapters PART 3 Selected Topics of Interest Benefits to You Valuation of Future Cash Flows Chapter 5 Introduction to Valuation: The Time Value of Money First of two chapters on time value of money. Relatively short chapter introduces just the basic ideas on time value of money to get students started on this traditionally difficult topic. Chapter 6 Discounted Cash Flow Valuation New section: Growing annuities and perpetuities. Second of two chapters on time value of money. New minicase: The MBA Decision. Covers more advanced time value topics with numerous examples, calculator tips, and Excel spreadsheet exhibits. Contains many real-world examples. Chapter 7 Interest Rates and Bond Valuation New section: Inflation and present values. “Clean” vs. “dirty” bond prices and accrued interest. Clears up the pricing of bonds between coupon payment dates and also bond market quoting conventions. NASD’s new TRACE system and transparency in the corporate bond market. Up-to-date discussion of new developments in fixed income with regard to price, volume, and transactions reporting. “Make-whole” call provisions. Up-to-date discussion of a relatively new type of call provision that has become very common. New minicase: Stock Valuation at Ragan, Inc. Minicase: Financing S&S Air’s Expansion Plans with a Bond Issue. New case written for this edition examines the debt issuance process for a small firm. Stock valuation. Thorough coverage of constant and nonconstant growth models. NYSE and NASDAQ Market Operations. Up-to-date description of major stock market operations Chapter 8 Stock Valuation PART 4 Capital Budgeting Chapter 9 Net Present Value and Other Investment Criteria Relatively short chapter introduces key ideas on an intuitive level to help students with this traditionally difficult topic. NPV, IRR, payback, discounted payback, and accounting rate of return. Chapter 10 Making Capital Investment Decisions New section: Modified internal rate of return (MIRR). New minicase: Bullock Gold Mining. First of three chapters on capital budgeting. Consistent, balanced examination of advantages and disadvantages of various criteria. Projected cash flow. Thorough coverage of project cash flows and the relevant numbers for a project analysis. Emphasizes the equivalence of various formulas, thereby removing common misunderstandings. Considers important applications of chapter tools. Alternative cash flow definitions. Special cases of DCF analysis. Chapter 11 Project Analysis and Evaluation Minicase: Conch Republic Electronics. Sources of value. Scenario and sensitivity “what-if” analyses. Break-even analysis. Case analyzes capital budgeting issues and complexities. Stresses the need to understand the economic basis for value creation in a project. Illustrates how to actually apply and interpret these tools in a project analysis. Covers cash, accounting, and financial break-even levels. ix ros3062x_fm_Standard.indd ix 2/9/07 6:02:05 PM
  • 10. x PA RT 1 Coverage Chapters PART 5 Part Title Goes Here on Verso Page (continued) Selected Topics of Interest Benefits to You Risk and Return Chapter 12 Some Lessons from Capital Market History New minicase: A Job at S&S Air. Expanded discussion of geometric vs. arithmetic returns. Discusses calculation and interpretation of geometric returns. Clarifies common misconceptions regarding appropriate use of arithmetic vs. geometric average returns. Capital market history. Market efficiency. Chapter 13 Return, Risk, and the Security Market Line Chapter 14 Options and Corporate Finance PART 6 Extensive coverage of historical returns, volatilities, and risk premiums. Efficient markets hypothesis discussed along with common misconceptions. New minicase: The Beta for American Standard. Diversification, systematic and unsystematic risk. Beta and the security market line. Illustrates basics of risk and return in a straightforward fashion. Minicase: S&S Air’s Convertible Bond. New discussion in ESO backdating. Stock options, employee stock options, and real options. Option-embedded securities. New case written for this edition examines security issuance issues for a small firm. Discusses the basics of these important option types. Describes the different types of option found in corporate securities. Develops the security market line with an intuitive approach that bypasses much of the usual portfolio theory and statistics. Cost of Capital and Long-Term Financial Policy Chapter 15 Cost of Capital New section: Internal equity and flotation costs. Geometric vs. arithmetic growth rates. Cost of capital estimation. Both approaches are used in practice. Clears up issues surrounding growth rate estimates. Contains a complete, Web-based illustration of cost of capital for a real company. Chapter 16 Raising Capital Explains uniform price auctions using recent Google IPO as an example. IPO valuation. Chapter 17 Financial Leverage and Capital Structure Policy New minicase: S&S Air Goes Public. Dutch auction IPOs. IPO “quiet periods.” Rights vs. warrants. Extensive, up-to-date discussion of IPOs, including the 1999–2000 period. Explains the SEC’s quiet period rules. Clarifies the option-like nature of rights prior to their expiration dates. New section: The pecking-order theory of capital structure. New minicase: Stephenson Real Estate Capitalization. Basics of financial leverage. Optimal capital structure. Financial distress and bankruptcy. Illustrates effect of leverage on risk and return. Describes the basic trade-offs leading to an optimal capital structure. Briefly surveys the bankruptcy process. x ros3062x_fm_Standard.indd x 2/9/07 6:02:08 PM
  • 11. Chapters Selected Topics of Interest New case written for this edition analyzes cost of capital estimation for a non-public firm. New survey results show the most important (and least important) factors considered by financial managers in setting dividend policy. Effect of new tax laws. Discusses implications of new, lower dividend, and capital gains rates. Dividends and dividend policy. PART 7 New minicase: Electronic Timing, Inc. Minicase: Piepkorn Manufacturing Working Capital Management. Very recent survey evidence on dividend policy. Chapter 18 Dividends and Dividend Policy Benefits to You Describes dividend payments and the factors favoring higher and lower payout policies. Short-Term Financial Planning and Management Chapter 19 Short-Term Finance and Planning Operating and cash cycles. Stresses the importance of cash flow timing. Short-term financial planning. Illustrates creation of cash budgets and potential need for financing. Chapter 20 Cash and Liquidity Management New material on Check Clearing Act of the 21st century. New minicase: Cash Management at Webb Corporation. Float management. Thorough coverage of float management and potential ethical issues. Cash collection and disbursement. PART 8 New minicase: Credit Policy at Howlett Industries. New case written for this edition evaluates working capital issues for a small firm. Credit management. Analysis of credit policy and implementation. Inventory management. Chapter 21 Credit and Inventory Management Examination of systems used by firms to handle cash inflows and outflows. Brief overview of important inventory concepts. Topics in Corporate Finance Chapter 22 International Corporate Finance New minicase: S&S Air Goes International. Foreign exchange. Covers essentials of exchange rates and their determination. International capital budgeting. Shows how to adapt basic DCF approach to handle exchange rates. Exchange rate and political risk. Discusses hedging and issues surrounding sovereign risk. xi ros3062x_fm_Standard.indd xi 2/9/07 6:02:10 PM
  • 12. xii PA RT 1 Part Title Goes Here on Verso Page In-Text Study Features In addition to illustrating pertinent concepts and presenting up-to-date coverage, Fundamentals of Corporate Finance strives to present the material in a way that makes it coherent and easy to understand. To meet the varied needs of its intended audience, Fundamentals of Corporate Finance is rich in valuable learning tools and support. CHAPTER-OPENING VIGNETTES Vignettes drawn from real-world events introduce students to the chapter concepts. Questions about these vignettes are posed to the reader to ensure understanding of the concepts in the end-of-chapter material. For examples, see Chapter 4, page 89; Chapter 5, page 21. This approach works just fine. However, we will often encounter situations in which the number of cash flows is quite large. For example, a typical home mortgage calls for monthly payments over 30 years, for a total of 360 payments. If we were trying to determine the present value of those payments, it would be useful to have a shortcut. Because the cash flows of an annuity are all the same, we can come up with a handy variation on the basic present value equation. The present value of an annuity of C dollars per period for t periods when the rate of return or interest rate is r is given by: 1 Ϫ Present value factor Annuity present value ϭ C ϫ ____________________ r [6.1] 1 Ϫ [1͞(1 ϩ r)t] ______________ ϭCϫ r ( { ) } PEDAGOGICAL USE OF COLOR This learning tool continues to be an important feature of Fundamentals of Corporate Finance. In almost every chapter, color plays an extensive, nonschematic, and largely self-evident role. A guide to the functional use of color is found on the endsheets of both the Annotated Instructor’s Edition (AIE) and student version. For examples of this technique, see Chapter 5, page 130. IN THEIR OWN WORDS BOXES This series of boxes are the popular articles updated from previous editions written by a distinguished scholar or practitioner on key topics in the text. Boxes include essays by Merton Miller on capital structure, Fischer Black on dividends, and Roger Ibbotson on capital market history. A complete list of “In Their Own Words” boxes appears on page xxxvii. IN THEIR OWN WORDS . . . Robert C. Higgins on Sustainable Growth Most financial officers know intuitively that it takes money to make money. Rapid sales growth requires increased assets in the form of accounts receivable, inventory, and fixed plant, which, in turn, require money to pay for assets. They also know that if their company does not have the money when needed, it can literally “grow broke.” The sustainable growth equation states these intuitive truths explicitly. Sustainable growth is often used by bankers and other external analysts to assess a company’s credit worthiness. They are aided in this exercise by several sophisticated computer software packages that provide detailed analyses of the company’s past financial performance, including its annual sustainable growth rate. Bankers use this information in several ways. Quick comparison of a company’s actual growth rate to its sustainable rate tells the banker what issues will be at the top of management’s financial agenda. If actual growth consistently exceeds sustainable growth, management’s problem will be where to get the cash to finance growth. The banker thus can anticipate interest in loan products. Conversely, if sustainable growth consistently exceeds actual, the banker had best be prepared to talk about investment products, because management’s problem will be what to do with all the cash that keeps piling up in the till. xii ros3062x_fm_Standard.indd xii 2/9/07 6:02:13 PM
  • 13. CHAPTER 1 WORK THE WEB Chapter Title Goes Here on Recto Page ORK THE WEB These boxes in the chapter material show students how to research financial issues using the Web and how to use the information they find to make business decisions. See examples in Chapter 4, page 103; Chapter 5, page 140. xiii WORK THE WEB Calculating company growth rates can involve detailed research, and a major part of a stock analyst’s job is to estimate them. One place to find earnings and sales growth rates on the Web is Yahoo! Finance at com. We pulled up a quote for Minnesota Mining & Manufacturing (MMM, or 3M as it is known) and followed the “Analyst Estimates” link. Here is an abbreviated look at the results: As shown, analysts expect, on average, revenue (sales) of $22.77 billion in 2006, growing to $24.27 billion in 2007, an increase of 6.6 percent. We also have the following table comparing MMM to some benchmarks: ENHANCED! REAL-WORLD EXAMPLES Actual events are integrated throughout the text, tying chapter concepts to real life through illustration and reinforcing the relevance of the material. Some examples tie into the chapter opening vignette for added reinforcement. See example in Chapter 5, page 135. SPREADSHEET STRATEGIES Using a Spreadsheet for Time Value of Money Calculations More and more, businesspeople from many different areas (not just finance and accounting) rely on spreadsheets to do all the different types of calculations that come up in the real world. As a result, in this section, we will show you how to use a spreadsheet to handle the various time value of money problems we presented in this chapter. We will use Microsoft Excel™, but the commands are similar for other types of software. We assume you are already familiar with basic spreadsheet operations. As we have seen, you can solve for any one of the following four potential unknowns: future value, present value, the discount rate, or the number of periods. With a spreadsheet, there is a separate formula for each. In Excel, these are shown in a nearby box. In these formulas, pv and fv are present and future To Find Enter This Formula value, nper is the number of periods, and rate is the Future value ϭ FV (rate,nper,pmt,pv) discount, or interest, rate. Present value ϭ PV (rate,nper,pmt,fv) Two things are a little tricky here. First, unlike a financial calculator, the spreadsheet requires that the Discount rate ϭ RATE (nper,pmt,pv,fv) rate be entered as a decimal. Second, as with most Number of periods ϭ NPER (rate,pmt,pv,fv) financial calculators, you have to put a negative sign on either the present value or the future value to solve for the rate or the number of periods. For the same reason, if you solve for a present value, the answer will have a negative sign unless you input a negative future value. The same is true when you compute a future value. To illustrate how you might use these formulas, we will go back to an example in the chapter. If you invest $25,000 at 12 percent per year, how long until you have $50,000? You might set up a spreadsheet like this: A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 B C D E F G SPREADSHEET STRATEGIES This feature either introduces students to Excel or helps them brush up on their Excel spreadsheet skills, particularly as they relate to corporate finance. This feature appears in self-contained sections and shows students how to set up spreadsheets to analyze common financial problems—a vital part of every business student’s education. For examples, see Chapter 5, page 139; Chapter 6, page 153. H Using a spreadsheet for time value of money calculations If we invest $25,000 at 12 percent, how long until we have $50,000? We need to solve for the unknown number of periods, so we use the formula NPER(rate, pmt, pv, fv). Present value (pv): Future value (fv): Rate (rate): $25,000 $50,000 0.12 Periods: 6.1162554 The formula entered in cell B11 is =NPER(B9,0,-B7,B8); notice that pmt is zero and that pv has a negative sign on it. Also notice that rate is entered as a decimal, not a percentage. xiii ros3062x_fm_Standard.indd xiii 2/9/07 6:02:14 PM
  • 14. CALCULATOR HINTS CALCULATOR HINTS These brief calculator tutorials have been added in selected chapters to help students learn or brush up on their financial calculator skills. These complement the just-mentioned Spreadsheet Strategies. For examples, see Chapter 5, page 136; Chapter 6, page 152. How to Calculate Present Values with Multiple Future Cash Flows Using a Financial Calculator To calculate the present value of multiple cash flows with a financial calculator, we will simply discount the individual cash flows one at a time using the same technique we used in our previous chapter, so this is not really new. However, we can show you a shortcut. We will use the numbers in Example 6.3 to illustrate. To begin, of course we first remember to clear out the calculator! Next, from Example 6.3, the first cash flow is $200 to be received in one year and the discount rate is 12 percent, so we do the following: Enter 1 12 N I/Y 200 PMT PV FV Ϫ178.57 Solve for Now, you can write down this answer to save it, but that’s inefficient. All calculators have a memory where you can store numbers. Why not just save it there? Doing so cuts way down on mistakes because you don’t have to write down and/or rekey numbers, and it’s much faster. Next we value the second cash flow. We need to change N to 2 and FV to 400. As long as we haven’t changed anything else, we don’t have to reenter I/Y or clear out the calculator, so we have: Enter 2 N Solve for 400 I/Y PMT PV FV Ϫ318.88 You save this number by adding it to the one you saved in our first calculation, and so on for the remaining two calculations. As we will see in a later chapter, some financial calculators will let you enter all of the future cash flows at once, but we’ll discuss that subject when we get to it. CONCEPT BUILDING Chapter sections are intentionally kept short to promote a step-by-step, building block approach to learning. Each section is then followed by a series of short concept questions that highlight the key ideas just presented. Students use these questions to make sure they can identify and understand the most important concepts as they read. See Chapter 5, page 133; Chapter 6, page 154 for examples. SUMMARY TABLES These tables succinctly restate key principles, results, and equations. They appear whenever it is useful to emphasize and summarize a group of related concepts. For examples, see Chapter 6, page 163. LABELED EXAMPLES Separate numbered and titled examples are extensively integrated into the chapters as indicated below. These examples provide detailed applications and illustrations of the text material in a step-by-step format. Each example is completely self-contained so students don’t have to search for additional information. Based on our classroom testing, these examples are among the most useful learning aids because they provide both detail and explanation. See Chapter 6, page 163; Chapter 7, page 196. Preferred Stock EXAMPLE 6.7 Preferred stock (or preference stock) is an important example of a perpetuity. When a corporation sells preferred stock, the buyer is promised a fixed cash dividend every period (usually every quarter) forever. This dividend must be paid before any dividend can be paid to regular stockholders—hence the term preferred. Suppose the Fellini Co. wants to sell preferred stock at $100 per share. A similar issue of preferred stock already outstanding has a price of $40 per share and offers a dividend of $1 every quarter. What dividend will Fellini have to offer if the preferred stock is going to sell? The issue that is already out has a present value of $40 and a cash flow of $1 every quarter forever. Because this is a perpetuity: Present value ϭ $40 ϭ $1 ϫ (1͞r) r ϭ 2.5% To be competitive, the new Fellini issue will also have to offer 2.5 percent per quarter; so if the present value is to be $100, the dividend must be such that: Present value ϭ $100 ϭ C ϫ (1͞.025) C ϭ $2.50 (per quarter) xiv ros3062x_fm_Standard.indd xiv 2/9/07 6:02:18 PM
  • 15. KEY TERMS Key Terms are printed in bold type and defined within the text the first time they appear. They also appear in the margins with definitions for easy location and identification by the student. See Chapter 4, page 91; Chapter 7, page 199 for examples. EXPLANATORY WEB LINKS These Web links are provided in the margins of the text. They are specifically selected to accompany text material and provide students and instructors with a quick way to check for additional information using the Internet. See Chapter 4, page 91; Chapter 5, page 123. p y y g p p, the big online retailer, is another example. At one time, Amazon’s motto seemed to be “growth at any cost.” Unfortunately, what really grew rapidly for the company were losses. Amazon refocused its business, explicitly sacrificing growth in the hope of achieving profitability. The plan seems to be working as turned a profit for the first time in the third quarter of 2003. As we discussed in Chapter 1, the appropriate goal is increasing the market value of the owners’ equity. Of course, if a firm is successful in doing this, then growth will usually result. Growth may thus be a desirable consequence of good decision making, but it is not an end unto itself. We discuss growth simply because growth rates are so commonly used in the planning process. As we will see, growth is a convenient means of summarizing various aspects of a firm’s financial and investment policies. Also, if we think of growth as growth in the market value of the equity in the firm, then goals of growth and increasing the market value of the equity in the firm are not all that different. You can find growth rates under the research links at and KEY EQUATIONS Called out in the text, key equations are identified by an equation number. The list in Appendix B shows the key equations by chapter, providing students with a convenient reference. For examples, see Chapter 4, page 97; Chapter 5, page 123. HIGHLIGHTED CONCEPTS Throughout the text, important ideas are pulled out and presented in a highlighted box—signaling to students that this material is particularly relevant and critical for their understanding. See Chapter 4, page 107. y q y Given values for all four of these, there is only one growth rate that can be achieved. This is an important point, so it bears restating: If a firm does not wish to sell new equity and its profit margin, dividend policy, financial policy, and total asset turnover (or capital intensity) are all fixed, then there is only one possible growth rate. As we described early in this chapter, one of the primary benefits of financial planning is that it ensures internal consistency among the firm’s various goals. The concept of the sustainable growth rate captures this element nicely. Also, we now see how a financial planning model can be used to test the feasibility of a planned growth rate. If sales are to grow at a rate higher than the sustainable growth rate, the firm must increase profit margins, increase total asset turnover, increase financial leverage, increase earnings retention, or sell new shares. xv ros3062x_fm_Standard.indd xv 2/9/07 6:02:20 PM
  • 16. CHAPTER SUMMARY AND CONCLUSIONS Every chapter ends with a concise, but thorough, summary of the important ideas—helping students review the key points and providing closure to the chapter. See Chapter 4, page 111; Chapter 5, page 141. CHAPTER REVIEW AND SELF-TEST PROBLEMS 5.1 5.2 5.3 5.4 Calculating Future Values Assume you deposit $10,000 today in an account that pays 6 percent interest. How much will you have in five years? Calculating Present Values Suppose you have just celebrated your 19th birthday. A rich uncle has set up a trust fund for you that will pay you $150,000 when you turn 30. If the relevant discount rate is 9 percent, how much is this fund worth today? Calculating Rates of Return You’ve been offered an investment that will double your money in 10 years. What rate of return are you being offered? Check your answer using the Rule of 72. Calculating the Number of Periods You’ve been offered an investment that will pay you 9 percent per year. If you invest $15,000, how long until you have $30,000? How long until you have $45,000? CHAPTER REVIEW AND SELF-TEST PROBLEMS Appearing after the Summary and Conclusion, each chapter includes a Chapter Review and Self-Test Problem section. These questions and answers allow students to test their abilities in solving key problems related to the chapter content and provide instant reinforcement. See Chapter 5, page 141; Chapter 6, page 177. ANSWERS TO CHAPTER REVIEW AND SELF-TEST PROBLEMS 5.1 5.2 We need to calculate the future value of $10,000 at 6 percent for five years. The future value factor is: 1.065 ϭ 1.3382 The future value is thus $10,000 ϫ 1.3382 ϭ $13,382.26. We need the present value of $150,000 to be paid in 11 years at 9 percent. The discount factor is: 1͞1.0911 ϭ 1͞2.5804 ϭ .3875 The present value is thus about $58,130. CONCEPTS REVIEW AND CRITICAL THINKING QUESTIONS This successful end-of-chapter section facilitates your students’ knowledge of key principles, as well as intuitive understanding of the chapter concepts. A number of the questions relate to the chapter-opening vignette— reinforcing student critical-thinking skills and the learning of chapter material. For examples, see Chapter 6, page 180; Chapter 7, page 228. CONCEPTS REVIEW AND CRITICAL THINKING QUESTIONS 1. 2. 3. 4. 5. 6. 7. Annuity Factors There are four pieces to an annuity present value. What are they? Annuity Period As you increase the length of time involved, what happens to the present value of an annuity? What happens to the future value? Interest Rates What happens to the future value of an annuity if you increase the rate r? What happens to the present value? Present Value What do you think about the Tri-State Megabucks lottery discussed in the chapter advertising a $500,000 prize when the lump sum option is $250,000? Is it deceptive advertising? Present Value If you were an athlete negotiating a contract, would you want a big signing bonus payable immediately and smaller payments in the future, or vice versa? How about looking at it from the team’s perspective? Present Value Suppose two athletes sign 10-year contracts for $80 million. In one case, we’re told that the $80 million will be paid in 10 equal installments. In the other case, we’re told that the $80 million will be paid in 10 installments, but the installments will increase by 5 percent per year. Who got the better deal? APR and EAR Should lending laws be changed to require lenders to report EARs instead of APRs? Why or why not? xvi ros3062x_fm_Standard.indd xvi 2/9/07 6:02:22 PM
  • 17. QUESTIONS AND PROBLEMS 1. 2. 3. 4. 5. 6. 7. 8. Interpreting Bond Yields Is the yield to maturity on a bond the same thing as the required return? Is YTM the same thing as the coupon rate? Suppose today a 10 percent coupon bond sells at par. Two years from now, the required return on the same bond is 8 percent. What is the coupon rate on the bond then? The YTM? Interpreting Bond Yields Suppose you buy a 7 percent coupon, 20-year bond today when it’s first issued. If interest rates suddenly rise to 15 percent, what happens to the value of your bond? Why? Bond Prices Carpenter, Inc., has 8 percent coupon bonds on the market that have 10 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 9 percent, what is the current bond price? Bond Yields Linebacker Co. has 7 percent coupon bonds on the market with nine years left to maturity. The bonds make annual payments. If the bond currently sells for $1,080, what is its YTM? Coupon Rates Hawk Enterprises has bonds on the market making annual payments, with 16 years to maturity, and selling for $870. At this price, the bonds yield 7.5 percent. What must the coupon rate be on the bonds? Bond Prices Cutler Co. issued 11-year bonds a year ago at a coupon rate of 7.8 percent. The bonds make semiannual payments. If the YTM on these bonds is 8.6 percent, what is the current bond price? Bond Yields Ngata Corp. issued 12-year bonds 2 years ago at a coupon rate of 9.2 percent. The bonds make semiannual payments. If these bonds currently sell for 104 percent of par value, what is the YTM? Coupon Rates Wimbley Corporation has bonds on the market with 14.5 years to maturity, a YTM of 6.8 percent, and a current price of $1,136.50. The bonds make semiannual payments. What must the coupon rate be on these bonds? ros3062x_Ch07.indd 229 BASIC (Questions 1–14) END-OF-CHAPTER QUESTIONS AND PROBLEMS We have found that many students learn better when they have plenty of opportunity to practice; therefore, we provide extensive end-of-chapter questions and problems. The endof-chapter support greatly exceeds typical introductory textbooks. The questions and problems are segregated into three learning levels: Basic, Intermediate, and Challenge. All problems are fully annotated so that students and instructors can readily identify particular types. Answers to selected end-of-chapter material appear in Appendix C. Also, all problems are available in McGraw-Hill’s Homework Manager—see page xxi for details. See Chapter 6, page 181; Chapter 7, page 229. 2/8/07 4:36:33 AM WEB EXERCISES These end-of-chapter activities show students how to use and learn from the vast amount of financial resources available on the Internet. See examples in Chapter 6, page 190; Chapter 7, page 233. WEB EXERCISES 7.1 7.2 7.3 Bond Quotes You can find the current bond quotes for many companies at www. Go to the site and find the bonds listed for Georgia Pacific. What is the shortest-maturity bond listed for Georgia Pacific? What is the longestmaturity bond? What are the credit ratings for each bond? Do each of the bonds have the same credit rating? Why do you think this is? Yield Curves You can find information regarding the most current bond yields at Graph the yield curve for U.S. Treasury bonds. What is the general shape of the yield curve? What does this imply about the expected future inflation? Now graph the yield curve for AAA, AA, and A rated corporate bonds. Is the corporate yield curve the same shape as the Treasury yield curve? Why or why not? Default Premiums The St. Louis Federal Reserve Board has files listing historical interest rates on their Web site: Find the link for “FRED II” data, then “Interest Rates.” You will find listings for Moody’s Seasoned Aaa Corporate Bond Yield and Moody’s Seasoned Baa Corporate Bond Yield. A default premium can be calculated as the difference between the Aaa bond yield and the Baa bond yield. Calculate the default premium using these two bond indexes for the most recent 36 months. Is the default premium the same for every month? Why do you think this is? xvii ros3062x_fm_Standard.indd xvii 2/9/07 6:02:24 PM
  • 18. NEW END-OF-CHAPTER CASES Located at the end of the book’s chapters, these minicases focus on real-life company situations that embody important corporate finance topics. Each case presents a new scenario, data, and a dilemma. Several questions at the end of each case require students to analyze and focus on all of the material they learned from each chapter. See examples in Chapter 6, page 191; Chapter 7, page 233. The MBA Decision Ben Bates graduated from college six years ago with a finance undergraduate degree. Although he is satisfied with his current job, his goal is to become an investment banker. He feels that an MBA degree would allow him to achieve this goal. After examining schools, he has narrowed his choice to either Wilton University or Mount Perry College. Although internships are encouraged by both schools, to get class credit for the internship, no salary can be paid. Other than internships, neither school will allow its students to work while enrolled in its MBA program. Ben currently works at the money management firm of Dewey and Louis. His annual salary at the firm is $50,000 per year, and his salary is expected to increase at 3 percent per year until retirement. He is currently 28 years old and expects to work for 35 more years. His current job includes a fully paid health insurance plan, and his current average tax rate is 26 percent. Ben has a savings account with enough money to cover the entire cost of his MBA program. The Ritter College of Business at Wilton University is one of the top MBA programs in the country. The MBA degree requires two years of full-time enrollment at the university. The annual tuition is $60,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $2,500 per year. Ben expects that after graduation from Wilton, he will receive a job offer for about $95,000 per year, with a $15,000 signing bonus. The salary at this job will increase at 4 percent per year. Because of the higher salary, his average income tax rate will increase to 31 percent. The Bradley School of Business at Mount Perry College began its MBA program 16 years ago. The Bradley School is smaller and less well known than the Ritter College. Bradley offers an accelerated one-year program, with a tuition cost of $75,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $3,500. Ben thinks that he will receive an offer of $78,000 per year upon graduation, with a $10,000 signing bonus. The salary at this job will increase at 3.5 percent per year. His average tax rate at this level of income will be 29 percent. Both schools offer a health insurance plan that will cost $3,000 per year, payable at the beginning of the year. Ben also estimates that room and board expenses will cost $20,000 per year at both schools. The appropriate discount rate is 6.5 percent. 1. How does Ben’s age affect his decision to get an MBA? 2. What other, perhaps nonquantifiable, factors affect Ben’s decision to get an MBA? 3. Assuming all salaries are paid at the end of each year, what is the best option for Ben from a strictly financial standpoint? 4. Ben believes that the appropriate analysis is to calculate the future value of each option. How would you evaluate this statement? 5. What initial salary would Ben need to receive to make him indifferent between attending Wilton University and staying in his current position? 6. Visit us at MINICASE Suppose, instead of being able to pay cash for his MBA, Ben must borrow the money. The current borrowing rate is 5.4 percent. How would this affect his decision? xviii ros3062x_fm_Standard.indd xviii 2/9/07 6:02:26 PM
  • 19. Comprehensive Teaching and Learning Package CHAPTER 1 Chapter Title Goes Here on Recto Page xix This edition of Fundamentals has more options than ever in terms of the textbook, instructor supplements, student supplements, and multimedia products. Mix and match to create a package that is perfect for your course! TEXTBOOK As with the previous editions, we are offering two versions of this text, both of which are packaged with an exciting student CD-ROM (see description under “Student Supplements”), • Standard Edition (22 Chapters) • Alternate Edition (26 Chapters) INSTRUCTOR SUPPLEMENTS Annotated Instructor’s Edition (AIE) ISBN 007328212X All your teaching resources are tied together here! This handy resource contains extensive references to the Instructor’s Manual regarding lecture tips, ethics notes, Internet references, international notes, and the availability of teaching PowerPoint slides. The lecture tips vary in content and purpose—providing an alternative perspective on a subject, suggesting important points to be stressed, giving further examples, or recommending other readings. The ethics notes present background on topics that motivate classroom discussion of finance-related ethical issues. Other annotations include notes for the Real-World Tips, Concept Questions, Self-Test Problems, End-of-Chapter Problems, Videos, and answers to the end-ofchapter problems. Instructor’s CD-ROM ISBN 0073282138 Keep all the supplements in one place! This CD contains all the necessary supplements—Instructor’s Manual, Solutions, Test Bank, Computerized Test Bank, and PowerPoint—all in one useful product in an electronic format. • Instructor’s Manual (IM) prepared by Kent Ragan, Missouri State University and Joseph Smolira, Belmont University A great place to find new lecture ideas! The IM has three main sections. The first section contains a chapter outline and other lecture materials designed for use with the Annotated Instructor’s Edition. The annotated outline for each chapter includes lecture tips, real-world tips, ethics notes, suggested PowerPoint slides, and, when appropriate, a video synopsis. Detailed solutions for all end-of-chapter problems appear in section two. • Test Bank prepared by Kay Johnson, Penn State University—Erie Great format for a better testing process! All questions closely link with the text material. Each chapter is divided into four parts. Part I contains questions that test the understanding of the key terms in the book. Part II includes questions patterned after the learning objectives, concept questions, chapteropening vignettes, boxes, and highlighted phrases. Part III contains multiple-choice and true/false problems patterned after the end-of-chapter questions, in basic, intermediate, and challenge levels. Part IV provides essay questions to test problem-solving skills and more advanced understanding of concepts. Also included are ready-made quizzes to hand out in class. xix ros3062x_fm_Standard.indd xix 2/9/07 6:02:27 PM
  • 20. • Computerized Test Bank (Windows) Create your own tests in a snap! These additional questions are found in a computerized test bank utilizing McGraw-Hill’s EZ Test testing software to quickly create customized exams. This user-friendly program allows instructors to sort questions by format; edit existing questions or add new ones; and scramble questions for multiple versions of the same test. • PowerPoint Presentation System prepared by Kent Ragan, Missouri State University Customize our content for your course! This presentation has been thoroughly revised to include more lecture-oriented slides, as well as exhibits and examples both from the book and from outside sources. Applicable slides have Web links that take you directly to specific Internet sites, or a spreadsheet link to show an example in Excel. You can also go to the Notes Page function for more tips in presenting the slides. If you already have PowerPoint installed on your PC, you have the ability to edit, print, or rearrange the complete presentation to meet your specific needs. Videos (DVD Format) ISBN 0073282111 Current set of videos on hot topics! McGraw-Hill/Irwin produced a series of finance videos that are 10-minute case studies on topics such as Financial Markets, Careers, Rightsizing, Capital Budgeting, EVA (Economic Value Added), Mergers and Acquisitions, and International Finance. ONLINE SUPPORT Online learning center at The Online Learning Center (OLC) contains FREE access to additional Web-based study and teaching aids created for this text, such as: • Student Support A great resource for those seeking additional practice, students can access self-grading quizzes, Excel template problems, electronic flashcards, self-study software, Web Exercises, links to Corporate Finance Online questions, Finance Around the World problems, timely articles, and much more to help master the fundamentals of corporate finance! • Teaching Support Along with having access to all of the same material your students can view on the book’s OLC, you also have password protected access to the Instructor’s Manual, solutions to end-of-chapter problems and Excel, Instructor’s PowerPoint, Excel Template Solutions, Video clips, Video projects and questions, and teaching notes to Corporate Finance Online, a Web extension with additional exercises and projects for your course. • McGraw-Hill Investments Trader Students receive free access to this Web-based portfolio simulation with a hypothetical $100,000 brokerage account to buy and sell stocks and mutual funds. Students can use the real data found at this site in conjunction with the chapters on investments. They can also compete against students around the United States. This site is powered by Stock-Trak, the leading provider of investment simulation services to the academic community. xx ros3062x_fm_Standard.indd xx 2/9/07 6:02:27 PM
  • 21. ENHANCED CARTRIDGES Enhanced WebCT and Blackboard course cartridges allow instructors to manage their course and administer online examinations. Some of the new features include: • Narrated PowerPoint Each chapter’s slides follow the chapter topics and provide steps and explanations for how to solve those topics using real-life examples. Knowing that each student learns differently, a quick click on each slide and the slide will “talk through” its contents with students! Students can view these slides via computer or download them onto their video iPod (see details below). • Interactive FinSims Each module highlights a key concept of corporate finance from the book and simulates how to solve it, asking the student to input certain variables. This hands-on approach guides students through difficult and important corporate finance topics. • iPod Content Harness the power of one of the most popular technology tools students use today, the Apple iPod®. Our innovative approach enables students to download Narrated PowerPoints and quizzes right into their iPod and take learning materials with them wherever they go. This makes review and study time as easy as putting on headphones! • Chapter Overviews Concise recap of what students should learn from each chapter. A great reading prep assignment. • Pretest and Posttest Question Banks Administer comprehensive and chapter-specific pretest and posttests to evaluate student understanding. • Online Glossary Key terms and their definitions in a ready to use format. Distribute to students for a study tool, or mix and match to create a quiz. Ask your McGraw-Hill representative for more details about Enhanced Cartridges today! McGraw-Hill’s Homework Manager and Homework Manager Plus Are you looking for a way to spend less time grading and to have more flexibility with the problems you assign as homework and tests? McGraw-Hill’s Homework Manager is an exciting new package option developed for this text! Homework Manager is a Web-based tool for instructors and students for delivering, answering, and grading end-of-chapter problems and tests, and providing a limitless supply of self-graded practice for students. All of the book’s end-of-chapter Questions and Problems are loaded into Homework Manager, and instructors can choose to assign the exact problems as stated in the book, or algorithmic versions of them so each student has a unique set of variables for the problems. You create the assignments and control parameters such as do you want your students to receive hints, is this a graded assignment or practice, etc. The test bank is also available in Homework Manager, giving you the ability to use those questions for online tests. Both the problems and the tests are automatically graded and the results are stored in a private grade book, which is created when you set up your class. Detailed results let you see at a glance how each student does on an assignment or an individual problem—you can even see how many tries it xxi ros3062x_fm_Standard.indd xxi 2/9/07 9:54:28 PM
  • 22. took them to solve it. If you order this special package, students will receive a Homework Manager User’s Guide and an access code packaged with their text. There is also an enhanced version of McGraw-Hill’s Homework Manager through the Homework Manager Plus package option. If you order the text packaged with Homework Manager Plus, your students will receive Homework Manager as described above, but with an integrated online text included. When students are in Homework Manager and need more help to solve a problem, there will be a link that takes them to the section of the text online that explains the concept they are struggling with. All of McGraw-Hill’s media assets, such as videos, narrated lectures, and additional online quizzing, are also integrated at the appropriate places of the online text to provide students with a full learning experience. If you order this special package, students will receive the Homework Manager Plus card packaged with their text, which gives them access to all of these products. McGraw-Hill’s Homework Manager is powered by Brownstone. AVAILABLE FOR PURCHASE & PACKAGING Student Problem Manual ISBN 0073282154 prepared by Thomas Eyssell, University of Missouri—St. Louis Need additional reinforcement of the concepts? This valuable resource provides students with additional problems for practice. Each chapter begins with Concepts for Review, followed by Chapter Highlights. These re-emphasize the key terms and concepts in the chapter. A short Concept Test, averaging 10 questions and answers, appears next. Each chapter concludes with additional problems for the student to review. Answers to these problems appear at the end of the Student Problem Manual. BusinessWeek Subscription Your students can subscribe to BusinessWeek for a specially priced rate of $20.00 in addition to the price of the text. Students will receive a passcode card shrink-wrapped with their new text by ordering this special package. The card directs students to a Web site where they enter the code and then gain access to BusinessWeek’s registration page to enter address info and set up their print and online subscription for a 15-week period. Financial Times Subscription Your students can subscribe to the Financial Times for 15 weeks at a specially priced rate of $10 in addition to the price of the text by ordering this special package. Students will receive a subscription card shrink-wrapped with their new text to fill in and send to the Financial Times to start receiving their subscription. Instructors, once you order, make sure you contact your sales representative to receive a complimentary one-year subscription. xxii ros3062x_fm_Standard.indd xxii 2/9/07 6:02:28 PM
  • 23. Acknowledgments To borrow a phrase, writing an introductory finance textbook is easy—all you do is sit down at a word processor and open a vein. We never would have completed this book without the incredible amount of help and support we received from literally hundreds of our colleagues, students, editors, family members, and friends. We would like to thank, without implicating, all of you. Clearly, our greatest debt is to our many colleagues (and their students) who, like us, wanted to try an alternative to what they were using and made the decision to change. Needless to say, without this support, we would not be publishing an eighth edition! A great many of our colleagues read the drafts of our first and subsequent editions. The fact that this book has so little in common with our earliest drafts, along with the many changes and improvements we have made over the years, is a reflection of the value we placed on the many comments and suggestions that we received. To the following reviewers, then, we are grateful for their many contributions: Ibrahim Affeneh Sung C. Bae Robert Benecke Gary Benesh Scott Besley Sanjai Bhaghat Vigdis W. Boasson Elizabeth Booth Denis Boudreaux William Brent Ray Brooks Charles C. Brown Mary Chaffi