Fundamentals of financial management (book


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Fundamentals of financial management (book

  1. 1. Table of ContentsPart I Introduction to Financial ManagementChapter 1 An Overview of Financial Management 2 Striking the Right Balance Putting Things in Perspective Career Opportunities in Finance Financial Management in the New Millennium Global Perspectives Coke Rides the Global Economy Wave Technology Matters eToys Takes on Toys R Us The Financial Staffs Responsibilities Alternative Forms of Business Organization Finance in the Organizational Structure of the Firm The Goals of the Corporation Industry Practice Levi Strauss Tries to Blend Profits with Social Activism Business Ethics Agency Relationships Industry Practice Are CEOs Overpaid? Managerial Actions to Maximize Shareholder Wealth Does it Make Sense to Try to Maximize Earnings Per Share? Organization of the Book Tying It All TogetherChapter 2 Financial Statements, Cash Flow, and Taxes 34 Doing Your Homework with Financial Statements Putting Things in Perspective A Brief History of Accounting and Financial Statements Financial Statements and Reports The Balance Sheet The Income Statement Statement of Retained Earnings Technology Matters Financial Analysis on the Internet Industry Practice Analysts Are Increasingly Relying on Cash Flow to Value Stocks Net Cash Flow Industry Practice In Valuing Stocks, Is It Earnings or Cash Flow That Matters? Statement of Cash Flows Modifying Accounting Data for Managerial Decisions MVA and EVA Industry Practice Many Firms Adopt EVA in an Attempt to Enhance Shareholder Wealth The Federal Income Tax System Global Perspectives Tax Havens Depreciation Tying It All Together
  2. 2. Chapter 3 Analysis of Financial Statements 86 The Gap Warns Wall Street Putting Things in Perspective Ratio Analysis Liquidity Ratios Asset Management Ratios Debt Management Ratios Profitability Ratios Global Perspectives International Accounting Differences Create Headaches for Investors Market Value Ratios Technology Matters eBays Financial Statements Trend Analysis Tying the Ratios Together: The Du Pont Chart and Equation Comparative Ratios and "Benchmarking" Uses and Limitations of Ratio Analysis Problems with ROE Industry Practice Calculating EVA Looking Beyond the Numbers Small Business Financial Analysis in the Small Firm Tying It All TogetherChapter 4 Financial Planning and Forecasting 132 Forecasting Disneys Future Putting Things in Perspective Strategic Plans Operating Plans The Financial Plan Computerized Financial Planning Models Sales Forecasts Financial Statement Forecasting: The Percent of Sales Method The AFN Formula Forecasting Financial Requirements When the Balance Sheet Ratios Are Subject to Change Other Techniques for Forecasting Financial Statements Tying It All TogetherChapter 5 The Financial Environment: Markets, Institutions, and Interest Rates 176 Charles Schwab and Merrill Lynch Compete in a Changing Environment Putting Things in Perspective The Financial Markets Financial Institutions
  3. 3. The Stock Market Technology Matters Online Trading Systems Industry Practice A Very Expensive Beer The Cost of Money Industry Practice Measuring the Market Interest Rate Levels The Determinants of Market Interest Rates Industry Practice A New, Almost Riskless Treasury Bond The Term Structure of Interest Rates What Determines the Shape of the Yield Curve? Using the Yield Curve to Estimate Future Interest Rates Investing Overseas Global Perspectives Measuring Country Risk Other Factors That Influence Interest Rate Levels Interest Rates and Business Decisions Tying It All TogetherPart II Fundamental Concepts in Financial ManagementChapter 6 Risk and Rates of Return 230 No Pain No Gain Putting Things in Perspective Investment Returns Stand-Alone Risk Industry Practice The Trade-Off between Risk and Return Risk in a Portfolio Context Global Perspectives The Benefits of Diversifying Overseas Industry Practice Is the Dow Jones Heading to 36,000? The Relationship Between Risk and Rates of Return Industry Practice Estimating the Market Risk Premium Physical Assets versus Securities Some Concerns about Beta and the CAPM Volatility versus Risk Tying It All Together Appendix 6A Calculating Beta CoefficientsChapter 7 Time Value of Money 288 Will You Be Able to Retire? Putting Things in Perspective Time Lines Future Value Industry Practice The Power of Compound Interest Present Value Solving for Interest Rate and Time
  4. 4. Future Value of an Annuity Present Value of an Annuity Perpetuities Uneven Cash Flow Streams Semiannual and Other Compounding Periods Technology Matters Using the Internet for Personal Financial Planning Comparison of Different Types of Interest Rates Fractional Time Periods Amortized Loans Tying It All Together Appendix 7A Continuous Compounding and DiscountingPart III Financial AssetsChapter 8 Bonds and Their Valuation 348 Fords Bond Issue Sets a New Record Putting Things in Perspective Who Issues Bonds? Key Characteristics of Bonds Bond Valuation Bond Yields Global Perspectives Drinking Your Coupons Bonds with Semiannual Coupons Assessing the Riskiness of a Bond Technology Matters S&P Develops Criteria to Determine Bond Ratings for Internet Firms Industry Practice Santa Fe Bonds Finally Mature after 114 Years Bond Markets Tying It All Together Appendix 8A Zero Coupon Bonds Appendix 8B Bankruptcy and ReorganizationChapter 9 Stocks and Their Valuation 406 AOL Takes Investors on an Exciting Roller Coaster Ride Putting Things in Perspective Legal Rights and Privileges of Common Stockholders Types of Common Stock The Market for Common Stock Industry Practice Martha Bodyslams WWF Common Stock Valuation Constant Growth Stocks Expected Rate of Return on a Constant Growth Stock Industry Practice Other Approaches to Valuing Common Stocks Valuing Stocks That Have a Nonconstant Growth Rate
  5. 5. Valuing the Entire Corporation Industry Practice Evaluating Stocks That Dont Pay Dividends Stock Market Equilibrium Technology Matters A Nation of Traders Actual Stock Prices and Returns Global Perspectives Investing in Emerging Markets Preferred Stock Tying It All TogetherPart IV Investing in Long-Term Assets: Capital BudgetingChapter 10 The Cost of Capital 460 Creating Value at GE Putting Things in Perspective The Logic of the Weighted Average Cost of Capital Basic Definitions Cost of Debt, kd(1 - T) Cost of Preferred Stock, kp Industry Practice Funny-Named Preferred-Like Securities Cost of Retained Earnings, ks Cost of New Common Stock, ke Technology Matters Trends in Technology: Estimating the Cost of Capital for Internet Companies Industry Practice How Much Does It Cost to Raise External Capital? Composite, or Weighted Average, Cost of Capital, WACC Industry Practice WACC Estimates for Some Large U.S. Corporations Factors that Affect the Composite Cost of Capital Global Perspectives Global Variations in the Cost of Capital Adjusting the Cost of Capital for Risk Estimating Project Risk Using the CAPM to Estimate the Risk-Adjusted Cost of Capital Techniques for Measuring Beta Risk Some Problem Areas in Cost of Capital Small Business The Cost of Equity Capital for Small Firms Tying It All TogetherChapter 11 The Basics of Capital Budgeting 504 Boeing Recovers from Its Financial Tailspin Putting Things in Perspective Importance of Capital Budgeting Generating Ideas for Capital Projects Project Classifications Similarities between Capital Budgeting and Security Valuation Capital Budgeting Decision Rules
  6. 6. Modified Internal Rate of Return (MIRR) Conclusions on Capital Budgeting Methods Business Practices Industry Practice Techniques Firms Use to Evaluate Corporate Projects The Post-Audit Small Business Capital Budgeting in the Small Firm Using Capital Budgeting Techniques in Other Contexts Tying It All TogetherChapter 12 Cash Flow Estimation and Risk Analysis 546 Home Depot Keeps Growing Putting Things in Perspective Estimating Cash Flows Identifying the Relevant Cash Flows Evaluating Capital Budgeting Projects Introduction to Project Risk Analysis Techniques for Measuring Stand-Alone Risk Global Perspectives Capital Budgeting Practices in the Asia/Pacific Region Technology Matters High-Tech CFOs Project Risk Conclusions Incorporating Project Risk and Capital Structure into Capital Budgeting Incorporating Real Options into the Capital Budgeting Decision The Optimal Capital Budget Tying It All Together Appendix 12A DepreciationPart V Capital Structure and Dividend PolicyChapter 13 Capital Structure and Leverage 594 Debt: Rocket Booster or Anchor? Putting Things in Perspective The Target Capital Structure Business and Financial Risk Determining the Optimal Capital Structure Industry Practice Yogi Berra on the M&M Proposition Capital Structure Theory Checklist for Capital Structure Decisions Variations in Capital Structures Global Perspectives Taking a Look at Global Capital Structures Tying It All TogetherChapter 14 Distributions to Shareholders: Dividends and Share Repurchases 640
  7. 7. FPL Stuns the Market by Changing Its Dividend Policy Putting Things in Perspective Dividends versus Capital Gains: What Do Investors Prefer? Global Perspectives Dividend Yields around the World Other Dividend Policy Issues Dividend Stability Establishing the Dividend Policy in Practice Dividend Reinvestment Plans Summary of Factors Influencing Dividend Policy Overview of the Dividend Policy Decision Stock Dividends and Stock Splits Technology Matters Looking Online for Information on Dividends, Stock Splits, and Stock Repurchases Stock Repurchases Industry Practice Buybacks Have Lowered Dividend Yields Industry Practice Stock Repurchases: An Easy Way to Boost Stock Prices? Tying It All TogetherPart VI Working Capital Management and Multinational Financial ManagementChapter 15 Working Capital Management 686 Dell Revolutionizes Working Capital Management Putting Things in Perspective Working Capital Terminology The Cash Conversion Cycle Alternative Current Asset Investment Policies Industry Practice Free Cash Flow, EVA, and Working Capital Cash Management The Cash Budget Industry Practice The Great Debate: How Much Cash is Enough? Marketable Securities Inventory Inventory Costs Industry Practice Supply Chain Management Receivables Management Credit Policy Financing Current Assets Alternative Current Asset Financing Policies Advantages and Disadvantages for Short-Term Financing Sources of Short-Term Financing Accruals Accounts Payable (Trade Credit) Technology Matters The Internet Threatens to Transform the Banking Industry Short-Term Bank Loans Commercial Paper Use of Security in Short-Term Financing
  8. 8. Tying It All TogetherChapter 16 Multinational Financial Management 744 U.S. Firms Look Overseas to Enhance Shareholder Value Putting Things in Perspective Multinational, or Global, Corporations Multinational versus Domestic Financial Management Global Perspectives The Euro: What You Need to Know Exchange Rates The International Monetary System Trading in Foreign Exchange Interest Rate Parity Purchasing Power Parity Global Perspectives Hungry for a Big Mac? Go to Malaysia! Inflation, Interest Rates, and Exchange Rates International Money and Capital Markets Industry Practice Stock Market Indices around the World Multinational Capital Budgeting International Capital Structures Multinational Working Capital Management Tying It All Together
  9. 9. An Overview of FinancialCHAPTER 1 Management SOURCE: Courtesy BEN & JERRY’S HOMEMADE, INC.
  10. 10. STRIKING THE RIGHT BALANCE $ BEN & JERRYSF or many companies, the decision would have been an easy “yes.” However, Ben & Jerry’s Homemade Inc. has always taken pride in doing thingsdifferently. Its profits had been declining, but in 1995 make money. For example, in a recent article in Fortune magazine, Alex Taylor III commented that, “Operating a business is tough enough. Once you add social goals to the demands of serving customers, making a profit, andthe company was offered an opportunity to sell its returning value to shareholders, you tie yourself up inpremium ice cream in the lucrative Japanese market. knots.”However, Ben & Jerry’s turned down the business Ben & Jerry’s financial performance has had its upsbecause the Japanese firm that would have distributed and downs. While the company’s stock grew by leapstheir product had failed to develop a reputation for and bounds through the early 1990s, problems began topromoting social causes! Robert Holland Jr., Ben & arise in 1993. These problems included increasedJerry’s CEO at the time, commented that, “The only competition in the premium ice cream market, alongreason to take the opportunity was to make money.” with a leveling off of sales in that market, plus theirClearly, Holland, who resigned from the company in late own inefficiencies and sloppy, haphazard product1996, thought there was more to running a business development strategy.than just making money. The company lost money for the first time in 1994, The company’s cofounders, Ben Cohen and Jerry and as a result, Ben Cohen stepped down as CEO. BobGreenfield, opened the first Ben & Jerry’s ice cream shop Holland, a former consultant for McKinsey & Co. with ain 1978 in a vacant Vermont gas station with just reputation as a turnaround specialist, was tapped as$12,000 of capital plus a commitment to run the business Cohen’s replacement. The company’s stock pricein a manner consistent with their underlying values. Even rebounded in 1995, as the market responded positivelythough it is more expensive, the company only buys milk to the steps made by Holland to right the company. Theand cream from small local farms in Vermont. In addition, stock price, however, floundered toward the end of7.5 percent of the company’s before-tax income is 1996, following Holland’s resignation.donated to charity, and each of the company’s 750 Over the last few years, Ben & Jerry’s has had a newemployees receives three free pints of ice cream each day. resurgence. Holland’s replacement, Perry Odak, has done Many argue that Ben & Jerry’s philosophy and a number of things to improve the company’s financialcommitment to social causes compromises its ability to performance, and its reputation among Wall Street’s 3
  11. 11. analysts and institutional investors has benefited. Odak response to these concerns, Ben & Jerry’s will retain its quickly brought in a new management team to rework Vermont headquarters and its separate board, and its the company’s production and sales operations, and he social missions will remain intact. Others have aggressively opened new stores and franchises both in suggested that Ben & Jerry’s philosophy may even the United States and abroad. induce Unilever to increase its own corporate In April 2000, Ben & Jerry’s took a more dramatic philanthropy. Despite these assurances, it still remains step to benefit its shareholders. It agreed to be acquired to be seen whether Ben & Jerry’s vision can be by Unilever, a large Anglo-Dutch conglomerate that maintained within the confines of a large conglomerate. owns a host of major brands including Dove Soap, As you will see throughout the book, many of today’s Lipton Tea, and Breyers Ice Cream. Unilever agreed to companies face challenges similar to those of Ben & pay $43.60 for each share of Ben & Jerry’s stock—a 66 Jerry’s. Every day, corporations struggle with decisions percent increase over the price the stock traded at just such as these: Is it fair to our labor force to shift before takeover rumors first surfaced in December 1999. production overseas? What is the appropriate level of The total price tag for Ben & Jerry’s was $326 million. compensation for senior management? S