Contemporary Project Management Timothy J. Kloppenborg • Vittal Anantatmula • Kathryn N. Wells F O U R T H E D I T I O N Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 MS Project 2016 Instructions in Contemporary Project Management 4e Chapter MS Project 3 MS Project 2016 Introduction Ribbon, Quick Access Toolbar, view panes, Zoom Slider, Shortcuts, Scheduling Mode Selector Setting Up Your First Project Auto schedule, start date, identifying information, summary row Create Milestone Schedule Key milestones, zero duration, must finish on, information 7 Set Up a Work Breakdown Structure (WBS) Understand the WBS definitions and displays Enter WBS Elements (tasks), Create the outline, Insert WBS Code Identifier column, Hide or show subtasks detail 8 Using MS Project for Critical Path Schedules Set Up the Project Schedule Set or update the project start date, Define organization’s working and nonworking time Build the Network Diagram and Identify the Critical Path Enter tasks and milestones, edit the timescale, understand and define task dependencies, assign task duration estimates, identify the critical path, understand the network diagram view Display and Print Schedules 9 Define Resources Resource views, max units, resource calendars Assigning Resources Basic assignment, modify an assignment Identify Overallocated Resources Resource usage and Detailed Gantt views together Overallocated Resources Finding overallocated resources, dealing with overallocations Crashing a Critical Path Activity 10 Develop Bottom-up Project Budget Assignment costs, task costs, various cost perspectives Develop Summary Project Budget 12 Baseline the Project Plan First time baseline, subsequent baselines, viewing variances 14 Using MS Project to Monitor and Control Projects What Makes a Schedule Useful? How MS Project recalculates based on reported actuals, current and future impacts of variances, define the performance update process (who, what, when) Steps to Update the Project Schedule Acquire performance data, set and display status date, Enter duration-based performance data, reschedule remaining work, revise future estimates 15 Close Project Creating project progress reports, sharing reports, export a report to MS Excel, archive project work, capture and publish lessons learned Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in wh.

1. Contemporary
Project Management
Timothy J. Kloppenborg
•
Vittal Anantatmula
•
Kathryn N. Wells
F O U R T H E D I T I O N
Copyright 2019 Cengage Learning. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part.
WCN 02-200-203
MS Project 2016 Instructions in Contemporary Project
Management 4e
Chapter MS Project
3 MS Project 2016 Introduction
Ribbon, Quick Access Toolbar, view panes, Zoom Slider,
Shortcuts, Scheduling Mode Selector
Setting Up Your First Project
Auto schedule, start date, identifying information, summary row

2. Create Milestone Schedule
Key milestones, zero duration, must finish on, information
7 Set Up a Work Breakdown Structure (WBS)
Understand the WBS definitions and displays
Enter WBS Elements (tasks), Create the outline,
Insert WBS Code Identifier column, Hide or show subtasks
detail
8 Using MS Project for Critical Path Schedules
Set Up the Project Schedule
Set or update the project start date, Define organization’s
working and nonworking time
Build the Network Diagram and Identify the Critical Path
Enter tasks and milestones, edit the timescale, understand and
define task dependencies, assign task
duration estimates, identify the critical path, understand the
network diagram view
Display and Print Schedules
9 Define Resources
Resource views, max units, resource calendars
Assigning Resources

3. Basic assignment, modify an assignment
Identify Overallocated Resources
Resource usage and Detailed Gantt views together
Overallocated Resources
Finding overallocated resources, dealing with overallocations
Crashing a Critical Path Activity
10 Develop Bottom-up Project Budget
Assignment costs, task costs, various cost perspectives
Develop Summary Project Budget
12 Baseline the Project Plan
First time baseline, subsequent baselines, viewing variances
14 Using MS Project to Monitor and Control Projects
What Makes a Schedule Useful?
How MS Project recalculates based on reported actuals, current
and future impacts of variances, define
the performance update process (who, what, when)
Steps to Update the Project Schedule
Acquire performance data, set and display status date, Enter
duration-based performance data,
reschedule remaining work, revise future estimates

4. 15 Close Project
Creating project progress reports, sharing reports, export a
report to MS Excel, archive project work,
capture and publish lessons learned
Copyright 2019 Cengage Learning. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part. Due
to electronic rights, some third party content may be suppressed
from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does
not materially affect the overall learning experience. Cengage
Learning reserves the right to remove additional content at any
time if subsequent rights restrictions require it.
Copyright 2019 Cengage Learning. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part.
WCN 02-200-203
PMBOK® Guide 6e Coverage in Contemporary Project
Management 4e
The numbers refer to the text page where the process is defined.
Project management (PM) processes and knowledge areas 10–11
Project life cycle 7–10, 62–64
Projects and strategic planning 33–37 Organizational influences
102–110
Portfolio and program management 37–42
PMBOK® Guide, 6th ed. Coverage
Knowledge
Areas
Initiating

5. Process
Group Planning Process Group
Executing Process
Group
Monitoring &
Controlling
Process Group
Closing
Process
Group
Project
Integration
Management
Develop
Project
Charter
60–79
Develop Project Management Plan
409–410
Direct and Manage
Project Work 459–460
Manage Project
Knowledge 192–193,
504–508
Monitor and Control
Project Work 460–462
Perform Integrated
Change Control

6. 229–232, 462–463
Close
Project
or Phase
503,
508–511
Project Scope
Management
Plan Scope Management 211–212
Collect Requirements 212–216
Define Scope 216–220
Create WBS 220–229
Validate Scope
500–501
Control Scope
475–476
Project
Schedule
Management
Plan Schedule Management 246
Define Activities 249–253
Sequence Activities 253–255
Estimate Activity Durations 255–258
Develop Schedule 259–267
Control Schedule
476–480
Project Cost
Management

7. Plan Cost Management 329–330
Estimate Costs 330–341
Determine Budget 342–344
Control Costs 345,
476–480
Project Quality
Management
Plan Quality Management 401–404 Manage Quality
404–406, 469–474
Control Quality
406–409, 469–474
Project
Resources
Management
Plan Resource Management 290–295
Estimate Activity Resources 290
Aquire Resources
138–141
Develop Team 141–157
Manage Team 157–161
Control Resources 476
Project Com-
munications
Management
Plan Communications Management

8. 188–192
Manage
Communications
193–199, 465–467
Monitor
Communications
467–468
Project Risk
Management
Plan Risk Management 360–366
Identify Risks 75, 366–368
Perform Qualitative Risk Analysis 75,
368–372
Perform Quantitative Risk Analysis
372–373
Plan Risk Responses 75, 373–377
Implement Risk
Responses 464–465
Monitor Risks
463–464
Project
Procurement
Management
Plan Procurement Management
431–433, 438–441
Conduct
Procurements

9. 434–438
Control Procurments
441
Project Stake-
holder
Management
Identify
Stakehold-
ers 75–77,
178–184
Plan Stakeholder Engagement 184–186 Manage Stakeholder
Engagement 187–188
Monitor Stakeholder
Engagement 188
Source: Adapted from A Guide to the Project Management Body
of Knowledge (PMBOK® Guide), 6th ed. (Newtown Square,
PA: Project Management
Institute, Inc., 2017): 31.
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not be copied, scanned, or duplicated, in whole or in part. Due
to electronic rights, some third party content may be suppressed
from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does
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Learning reserves the right to remove additional content at any
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10. WCN 02-200-203
Contemporary Project
Management
ORGANIZE LEAD PLAN PERFORM
FOURTH EDITION
TIMOTHY J. KLOPPENBORG
Xavier University
VITTAL ANANTATMULA
Western Carolina University
KATHRYN N. WELLS
Keller Williams Real Estate
Australia • Brazil • Mexico • Singapore • United Kingdom •
United States
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not be copied, scanned, or duplicated, in whole or in part. Due
to electronic rights, some third party content may be suppressed
from the eBook and/or eChapter(s).
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time if subsequent rights restrictions require it.
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not be copied, scanned, or duplicated, in whole or in part.
WCN 02-200-203

11. This is an electronic version of the print textbook. Due to
electronic rights restrictions,
some third party content may be suppressed. Editorial review
has deemed that any suppressed
content does not materially affect the overall learning
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WCN 02-200-203
Contemporary Project Management,
Fourth Edition

12. Timothy J. Kloppenborg
2019 2015
Cengage Learning Customer & Sales Support, 1-800-354-9706
www.cengage.com/permissions
[email protected]
2017947974
978 1 337 40645 1
Cengage Learning
20
02210
40
125
www.cengage.com.
www.cengage.com
www.cengagebrain.com
Printed in the United States of America
Print Number: 01 Print Year: 2017
Copyright 2019 Cengage Learning. All Rights Reserved. May
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to electronic rights, some third party content may be suppressed
from the eBook and/or eChapter(s).
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13. not materially affect the overall learning experience. Cengage
Learning reserves the right to remove additional content at any
time if subsequent rights restrictions require it.
Copyright 2019 Cengage Learning. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part.
WCN 02-200-203
MS Project 2016 Instructions in Contemporary Project
Management 4e
Chapter MS Project
3 MS Project 2016 Introduction
Ribbon, Quick Access Toolbar, view panes, Zoom Slider,
Shortcuts, Scheduling Mode Selector
Setting Up Your First Project
Auto schedule, start date, identifying information, summary row
Create Milestone Schedule
Key milestones, zero duration, must finish on, information
7 Set Up a Work Breakdown Structure (WBS)
Understand the WBS definitions and displays
Enter WBS Elements (tasks), Create the outline,
Insert WBS Code Identifier column, Hide or show subtasks
detail

14. 8 Using MS Project for Critical Path Schedules
Set Up the Project Schedule
Set or update the project start date, Define organization’s
working and nonworking time
Build the Network Diagram and Identify the Critical Path
Enter tasks and milestones, edit the timescale, understand and
define task dependencies, assign task
duration estimates, identify the critical path, understand the
network diagram view
Display and Print Schedules
9 Define Resources
Resource views, max units, resource calendars
Assigning Resources
Basic assignment, modify an assignment
Identify Overallocated Resources
Resource usage and Detailed Gantt views together
Overallocated Resources
Finding overallocated resources, dealing with overallocations
Crashing a Critical Path Activity
10 Develop Bottom-up Project Budget

15. Assignment costs, task costs, various cost perspectives
Develop Summary Project Budget
12 Baseline the Project Plan
First time baseline, subsequent baselines, viewing variances
14 Using MS Project to Monitor and Control Projects
What Makes a Schedule Useful?
How MS Project recalculates based on reported actuals, current
and future impacts of variances, define
the performance update process (who, what, when)
Steps to Update the Project Schedule
Acquire performance data, set and display status date, Enter
duration-based performance data,
reschedule remaining work, revise future estimates
15 Close Project
Creating project progress reports, sharing reports, export a
report to MS Excel, archive project work,
capture and publish lessons learned
Copyright 2019 Cengage Learning. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part. Due
to electronic rights, some third party content may be suppressed
from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does
not materially affect the overall learning experience. Cengage
Learning reserves the right to remove additional content at any

16. time if subsequent rights restrictions require it.
Copyright 2019 Cengage Learning. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part.
WCN 02-200-203
PMBOK® Guide 6e Coverage in Contemporary Project
Management 4e
The numbers refer to the text page where the process is defined.
Project management (PM) processes and knowledge areas 10–11
Project life cycle 7–10, 62–64
Projects and strategic planning 33–37 Organizational influences
102–110
Portfolio and program management 37–42
PMBOK® Guide, 6th ed. Coverage
Knowledge
Areas
Initiating
Process
Group Planning Process Group
Executing Process
Group
Monitoring &
Controlling
Process Group
Closing
Process
Group

17. Project
Integration
Management
Develop
Project
Charter
60–79
Develop Project Management Plan
409–410
Direct and Manage
Project Work 459–460
Manage Project
Knowledge 192–193,
504–508
Monitor and Control
Project Work 460–462
Perform Integrated
Change Control
229–232, 462–463
Close
Project
or Phase
503,
508–511
Project Scope
Management
Plan Scope Management 211–212
Collect Requirements 212–216

18. Define Scope 216–220
Create WBS 220–229
Validate Scope
500–501
Control Scope
475–476
Project
Schedule
Management
Plan Schedule Management 246
Define Activities 249–253
Sequence Activities 253–255
Estimate Activity Durations 255–258
Develop Schedule 259–267
Control Schedule
476–480
Project Cost
Management
Plan Cost Management 329–330
Estimate Costs 330–341
Determine Budget 342–344
Control Costs 345,
476–480
Project Quality
Management
Plan Quality Management 401–404 Manage Quality
404–406, 469–474

19. Control Quality
406–409, 469–474
Project
Resources
Management
Plan Resource Management 290–295
Estimate Activity Resources 290
Aquire Resources
138–141
Develop Team 141–157
Manage Team 157–161
Control Resources 476
Project Com-
munications
Management
Plan Communications Management
188–192
Manage
Communications
193–199, 465–467
Monitor
Communications
467–468
Project Risk
Management

20. Plan Risk Management 360–366
Identify Risks 75, 366–368
Perform Qualitative Risk Analysis 75,
368–372
Perform Quantitative Risk Analysis
372–373
Plan Risk Responses 75, 373–377
Implement Risk
Responses 464–465
Monitor Risks
463–464
Project
Procurement
Management
Plan Procurement Management
431–433, 438–441
Conduct
Procurements
434–438
Control Procurments
441
Project Stake-
holder
Management
Identify
Stakehold-
ers 75–77,
178–184

21. Plan Stakeholder Engagement 184–186 Manage Stakeholder
Engagement 187–188
Monitor Stakeholder
Engagement 188
Source: Adapted from A Guide to the Project Management Body
of Knowledge (PMBOK® Guide), 6th ed. (Newtown Square,
PA: Project Management
Institute, Inc., 2017): 31.
Copyright 2019 Cengage Learning. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part. Due
to electronic rights, some third party content may be suppressed
from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does
not materially affect the overall learning experience. Cengage
Learning reserves the right to remove additional content at any
time if subsequent rights restrictions require it.
Copyright 2019 Cengage Learning. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part.
WCN 02-200-203
Brief Contents
Preface xx
About the Authors xxix
PART 1 Organizing Projects
1 Introduction to Project Management 2
2 Project Selection and Prioritization 32

22. 3 Chartering Projects 60
PART 2 Leading Projects
4 Organizational Capability: Structure, Culture, and Roles 100
5 Leading and Managing Project Teams 136
6 Stakeholder Analysis and Communication Planning 176
PART 3 Planning Projects
7 Scope Planning 210
8 Scheduling Projects 244
9 Resourcing Projects 286
10 Budgeting Projects 328
11 Project Risk Planning 358
12 Project Quality Planning and Project Kickoff 386
PART 4 Performing Projects
13 Project Supply Chain Management 426
14 Determining Project Progress and Results 456
15 Finishing the Project and Realizing the Benefits 498
Appendix A PMP and CAPM Exam Prep Suggestions 522
Appendix B Agile Differences Covered 527
Appendix C Answers to Selected Exercises 532
Appendix D Project Deliverables 537
Appendix E Strengths Themes As Used in Project Management
[Available Online]

23. Index 539
v
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to electronic rights, some third party content may be suppressed
from the eBook and/or eChapter(s).
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WCN 02-200-203
Requirements
Documents
13.1 Identify
Stakeholders
Stakeholder
Register
Stakeholder
Engagement
Assessment Matrix
Integration

24. Scope
Schedule
Cost
Quality
Resources
Communication
Risk
Procurement
Stakeholders
12.1 Plan
Procurement
Management
11.1 Plan
Risk
Management
10.1 Plan
Communications
Management
9.1 Plan
Resource
Management

25. 8.1 Plan
Quality
Management
7.1 Plan
Cost
Management
6.1 Plan
Schedule
Management
5.1 Plan
Scope
Management
Duration
Estimates
Scope
Statement
Activity List
Milestone List
Network
4.1 Develop
Project Charter

26. Charter
Assumptions Log
Cost Baseline
Resource Requirements
RACI
Team
Charter
Quality
Mgt.
Plan
Communications
Matrix
Risk Register
Bid
Documents
Make or Buy
Analysis
6.5 Develop
Schedule
Schedule Baseline
5.2 Collect
Requirements

27. 5.4 Create
WBS
Scope
4.2 Develop Project Management Plan
Activities
9.2 Estimate
Activity
Resources
11.2 Identify
Risks
11.3 Perform
Qualitative
Risk Analysis
11.4 Perform
Quantitative
Risk Analysis
11.5 Plan
Risk
Responses
13.2 Plan
Stakeholders
Engagement

28. 6.4 Estimate
activity
Durations
7.3 Determine
Budget
7.2 Estimate
Costs
6.3 Sequence
Activities
1.2 Foundational Elements
2.4 Organizational Systems
3.4 Project Manager Competencies
Selecting Projects
Project Customer Tradeoff Matrix
Life Cycle and Development Approach
Elevator Pitch
Leader Roles and Responsibilities
Project Selection and Prioritization Matrix
Project Resource Assignment Matrix
Copyright 2019 Cengage Learning. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part. Due
to electronic rights, some third party content may be suppressed
from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does
not materially affect the overall learning experience. Cengage

29. Learning reserves the right to remove additional content at any
time if subsequent rights restrictions require it.
Copyright 2019 Cengage Learning. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part.
WCN 02-200-203
11.6 Implement
Risk Responses
13.3 Manage
Stakeholder
Engagement
13.4 Monitor
Stakeholder
Engagement
4.3 Direct and Manage
Project Work
4.4 Manage Project
Knowledge
Scope
Baseline with WBS
Resource Histogram
Project Crashing
Retrospectives
Closure
Documents

30. Customer
Feedback
Transition Plan
Scope
Backlog
Burn
Down/Up
Charts
Quality
Reports
s
Analysis
Realizing
s
PM Plan Baselines Life Cycle
and Development Approach 4.7 Close Project
or Phase
6.6 Control
Schedule
Earned Value
Analysis
7.4 Control
Costs
5.6 Control

31. Scope
5.5 Validate
Scope
8.2 Manage
Quality
9.3 Acquire
Resources
9.4 Develop
Team
9.6 Control
Resources
9.5 Manage
Team
8.3 Control
Quality
Change
Requests
10.2 Manage
Communications
11.7 Monitor
Risks
10.3 Monitor
Communications
Team

32. Assignments
Team
Assessments
Agendas
Minutes
Issues Log
Meeting Evaluation
Progress Report
12.2 Conduct
Procurements
12.3 Control
Procurements
Source
Selection
Matrix
Lessons
Learned
Register
Quality
Measurements
4.6 Perform
Integrated
Change Control
4.5 Monitor and

33. Control
Project Work
Copyright 2019 Cengage Learning. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part. Due
to electronic rights, some third party content may be suppressed
from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does
not materially affect the overall learning experience. Cengage
Learning reserves the right to remove additional content at any
time if subsequent rights restrictions require it.
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not be copied, scanned, or duplicated, in whole or in part.
WCN 02-200-203
Contents
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . xx
About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . xxix
PART 1 Organizing Projects
CHAPTER 1
Introduction to Project Management . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . 2
1.1 What Is a Project? 3
1.2 History of Project Management 5
1.3 How Can Project Work Be Described? 6

34. 1.3a Projects versus Operations 6 / 1.3b Soft Skills and Hard
Skills 7 / 1.3c Authority
and Responsibility 7 / 1.3d Project Life Cycle 7
1.4 Understanding Projects 10
1.4a Project Management Institute 10 / 1.4b Project
Management Body of Knowledge
(PMBOK®) 10 / 1.4c The PMI Talent Triangle 11 / 1.4d
Selecting and Prioritizing
Projects 14 / 1.4e Project Goals and Constraints 14 / 1.4f
Defining Project Success
and Failure 15 / 1.4g Using Microsoft Project to Help Plan and
Measure
Projects 16 / 1.4h Types of Projects 16 / 1.4i Scalability of
Project Tools 17
1.5 Project Roles 17
1.5a Project Executive-Level Roles 18 / 1.5b Project
Management-Level Roles 19 /
1.5c Project Associate-Level Roles 20
1.6 Overview of the Book 20
1.6a Part 1: Organizing and Initiating Projects 20 / 1.6b Part 2:
Leading Projects 21 /
1.6c Part 3: Planning Projects 21 / 1.6d Part 4: Performing
Projects 23
PMP/CAPM Study Ideas 23
Summary 24
Key Terms Consistent with PMI Standards and Guides 24

35. Chapter Review Questions 25
Discussion Questions 25
PMBOK® Guide Questions 26
Integrated Example Projects 27
Suburban Homes Construction Project 27
Casa DE PAZ Development Project 28
Semester Project Instructions 28
Project Management in Action 29
References 30
Endnotes 31
viii
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to electronic rights, some third party content may be suppressed
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WCN 02-200-203

36. CHAPTER 2
Project Selection and Prioritization . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . 32
2.1 Strategic Planning Process 33
2.1a Strategic Analysis 33 / 2.1b Guiding Principles 34 / 2.1c
Strategic
Objectives 36 / 2.1d Flow-Down Objectives 37
2.2 Portfolio Management 37
2.2a Portfolios 38 / 2.2b Programs 39 / 2.2c Projects and
Subprojects 39 /
2.2d Assessing an Organization’s Ability to Perform Projects 42
/ 2.2e Identifying
Potential Projects 42 / 2.2f Using a Cost-Benefit Analysis
Model to Select
Projects 43 / 2.2g Using a Scoring Model to Select Projects 45 /
2.2h Prioritizing
Projects 48 / 2.2i Resourcing Projects 48
2.3 Securing Projects 49
2.3a Identify Potential Project Opportunities 50 / 2.3b
Determine Which Opportunities to
Pursue 50 / 2.3c Prepare and Submit a Project Proposal 51 /
2.3d Negotiate to
Secure the Project 51
PMP/CAPM Study Ideas 52
Summary 52
Key Terms Consistent with PMI Standards and Guides 52

37. Chapter Review Questions 53
Discussion Questions 53
PMBOK® Guide Questions 53
Exercises 54
Integrated Example Projects 55
Casa DE PAZ Development Project 56
Semester Project Instructions 56
Project Management in Action 57
References 58
Endnotes 59
CHAPTER 3
Chartering Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . 60
3.1 What Is a Project Charter? 62
3.2 Why Is a Project Charter Used? 63
3.3 When Is a Charter Needed? 64
3.4 Typical Elements in a Project Charter 65
3.4a Title 65 / 3.4b Scope Overview 65 / 3.4c Business Case 66
/
3.4d Background 66 / 3.4e Milestone Schedule with Acceptance
Criteria 66 /
3.4f Risks, Assumptions, and Constraints 67 / 3.4g Resource
Estimates 69 /

38. 3.4h Stakeholder List 69 / 3.4i Team Operating Principles 69 /
3.4j Lessons
Learned 70 / 3.4k Signatures and Commitment 70
3.5 Constructing a Project Charter 70
3.5a Scope Overview and Business Case Instructions 70 / 3.5b
Background
Instructions 71 / 3.5c Milestone Schedule with Acceptance
Criteria
Instructions 72 / 3.5d Risks, Assumptions, and Constraints
Instructions 75 /
3.5e Resources Needed Instructions 75 / 3.5f Stakeholder List
Instructions 75 /
Contents ix
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not be copied, scanned, or duplicated, in whole or in part.
WCN 02-200-203
3.5g Team Operating Principles Instructions 77 / 3.5h Lessons
Learned
Instructions 77 / 3.5i Signatures and Commitment Instructions
78

39. 3.6 Ratifying the Project Charter 79
3.7 Starting a Project Using Microsoft Project 79
3.7a MS Project 2016 Introduction 80 / 3.7b Setting up Your
First Project 81 /
3.7c Define Your Project 82 / 3.7d Create a Milestone Schedule
83
PMP/CAPM Study Ideas 88
Summary 88
Key Terms Consistent with PMI Standards and Guides 88
Chapter Review Questions 89
Discussion Questions 89
PMBOK® Guide Questions 89
Exercises 90
Integrated Example Projects 91
Casa DE PAZ Development Project 93
Semester Project Instructions 93
Project Management in Action 93
References 96
Endnotes 97
PART 2 Leading Projects

40. CHAPTER 4
Organizational Capability: Structure, Culture, and Roles . . . . . .
. . . . . . . . . . . . . . . 100
4.1 Types of Organizational Structures 103
4.1a Functional 103 / 4.1b Projectized 104 / 4.1c Matrix 105
4.2 Organizational Culture and Its Impact on Projects 109
4.2a Culture of the Parent Organization 110 / 4.2b Project
Cultural Norms 111
4.3 Project Life Cycles 111
4.3a Define-Measure-Analyze-Improve-Control (DMAIC)
Model 112 / 4.3b Research and
Development (R&D) Project Life Cycle Model 113 / 4.3c
Construction Project Life
Cycle Model 113 / 4.3d Agile Project Life Cycle Model 113
4.4 Agile Project Management 114
4.4a What Is Agile? 114 / 4.4b Why Use Agile? 114 / 4.4c What
Is an Agile
Mindset? 114 / 4.4d What Are the Key Roles in Agile Projects?
115 / 4.4e How Do
You Start an Agile Project? 115 / 4.4f How Do You Continue an
Agile Project?
115 / 4.4g What Is Needed for Agile to Be Successful? 116
4.5 Traditional Project Executive Roles 116
4.5a Steering Team 116 / 4.5b Sponsor 117 / 4.5c Customer 119
/ 4.5d Chief
Projects Officer/Project Management Office 121

41. 4.6 Traditional Project Management Roles 121
4.6a Functional Manager 121 / 4.6b Project Manager 122 / 4.6c
Facilitator 124
4.7 Traditional Project Team Roles 126
4.7a Core Team Members 126 / 4.7b Subject Matter Experts 126
x Contents
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to electronic rights, some third party content may be suppressed
from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does
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Learning reserves the right to remove additional content at any
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WCN 02-200-203
4.8 Role Differences on Agile Projects 126
PMP/CAPM Study Ideas 128
Summary 128
Key Terms Consistent with PMI Standards and Guides 128
Chapter Review Questions 129
Discussion Questions 129

42. PMBOK® Guide Questions 129
Exercises 130
Integrated Example Projects 130
Casa DE PAZ Development Project 131
Semester Project Instructions 131
Project Management in …
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Week 5 Case Study
FIN/486 Version 6 1
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without the prior written consent of McGraw-Hill Education.
Harrod’s Sporting Goods
In January of 2016, Becky, who served as the company’s chief
financial officer, walked into Jim’s office and said, “I’ve
had it with the First National Bank of Omaha. It is willing to
renew our loan and line of credit, but the bank wants to
charge us 2½ percentage points over prime.” The prime rate is
the rate at which banks make loans to their most

43. creditworthy customers. It was 4.75 percent at the time Becky
had visited the bank, so that the total rate on the loan
would be 7.25 percent. It was not so much the total rate that
Becky objected to, as the fact that Harrod’s was being
asked to pay 2½ percent over prime. She felt that Harrod’s was
a strong enough company that one percent over prime
should be all that the bank required. Her banker told her he
would review the firm’s financial statements with her next
week and reconsider the premium Harrod’s was being asked to
pay over prime.
While Becky knew the bank “crunched all the numbers,” she
decided to do some additional financial analysis on her
own. She had a bachelor’s degree in finance with a 3.3 GPA.
She began by examining Figures 1, 2, and 3 below.
Figure 1
Harrod’s Sporting Goods
Income Statement
(2013-2015)
2013 2014 2015
Sales
.............................................................

44. $4,269,871 $4,483,360 $5,021,643
Cost of goods
sold
.............................................................
2,991,821 2,981,434 3,242,120
Gross
Profit
.............................................................
$1,278,050 $1,501,926 $1,779,523
Selling and administrative
expense
.............................................................
865,450 1,004,846 1,175,100
Operating
profit
.............................................................
$412,600 $497,080 $604,423

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Interest
expense
.............................................................
115,300 122,680 126,241
Extraordinary
loss
.............................................................
__ __ 170,000
Net income before
taxes
.............................................................

46. 297,300 374,400 308,182
Taxes
.............................................................
104,100 131,300 107,864
Net
income
.............................................................
$ 193,200 $ 243,100 $ 200,318
Figure 2
Harrod’s Sporting Goods
Balance Sheet
(2013-2015)
2013 2014 2015
Cash
...............................................................
$ 121,328 $ 125,789 $ 99,670
Marketable

47. securities
...............................................................
56,142 66,231 144,090
Accounts
receivable
...............................................................
341,525 216,240 398,200
Inventory
...............................................................
972,456 1,250,110 1,057,008
Total current
assets
...............................................................
$1,491,451 $1,658,370 $1,698,968
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Week 5 Case Study

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Net plant and
equipment
...............................................................
1,678,749 1,702,280 1,811,142
Total
assets
...............................................................
$3,170,200 $3,360,650 $3,510,110
Liabilities and Stockholders’ Equity
Accounts
payable
...............................................................
$ 539,788 $ 576,910 $ 601,000
Notes

49. payable
...............................................................
160,540 180,090 203,070
Total current
liabilities
...............................................................
$700,328 $757,000 $804,070
Long-term
liabilities
...............................................................
1,265,272 1,292,995 1,372,240
Total
liabilities
...............................................................
$1,965,600 $2,049,995 $2,176,310
Common
stock
...............................................................

50. 367,400 368,000 368,000
Retained
earnings1
...............................................................
837,200 942,665 965,800
Total Stockholders’
equity
...............................................................
1,204,600 1,310,655 1,333,800
Total liabilities and stockholders’
equity
...............................................................
$3,170,200 $3,360,650 $3,510,110
1 Withdrawal of funds in the form of dividends or other means
makes the increase in retained earnings less than net income.
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51. FIN/486 Version 6 4
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Figure 3
Harrod’s Sporting Goods
Selected Industry Ratios for 2015
1. Net income/Sales 4.51%
2a. Net income/Total Assets 5.10%
2b. Sales/Total Assets 1.33 x
3a. Net income/Stockholder’s Equity 9.80%
3b. Debt/Total Assets 0.48
4. Sales/Receivables 5.75 x
5. Sales/Inventory 3.01 x
6. Sales/Fixed Assets 3.20 x
+

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Required Activities:
1. Calculate the profitability ratios for all three years using the
formulas provided in section “A. Profitability Ratios”
within Chapter 3:
1. Profit margin
2. Return on assets (a and b)
3. Return on equity ( a and b)
2. Write a one-paragraph description of any trends that appear
to have taken place over the three-year time
period.
3. Examine the income statement in Figure 1 above. Note that

53. there was an extraordinary loss of $170,000 in
2015. This might have represented uninsured losses from a fire,
a lawsuit settlement, etc. It probably does not
represent a recurring event or affect the earnings capability of
the firm. For that reason, the astute financial
analyst might add back in the extraordinary loss to gauge the
true operating earnings of the firm. Since it was a
tax-deductible item, we must first multiply by (1-tax rate)
before adding it back in.* The tax rate was 35 percent
for the year.
$170,000 Extraordinary loss
_____.65_ (1-tax rate)
$110,500 After-tax addition to profits from eliminating the
extraordinary loss
from net income
The more representative net income number for 2015 would now
be:
Initially reported (Figure 1 above) $200,318
Adjustment for extraordinary loss being eliminated +110,500_
Adjusted net income $310,818

54. Note: This adjustment was made because the $170,000
deduction saved 35 percent of this amount in taxes. If we
eliminate the $170,000, the tax benefit would also be
eliminated. Thus, the firm would only benefit by 65 percent of
$170,000, based on a 35 percent tax rate. The after-tax benefit
of the tax adjustment for the extraordinary loss is
$110,500.
A. Recompute the same ratios for 2015 using the adjusted net
income figure of $310,818.
4. Write a one-paragraph description of trends that appear to
have taken place over the three-year time period
(Refer to question 1 above for 2013 and 2014 data and question
3 above for the adjusted net income numbers
for 2015).
5. Write a one-paragraph analysis of the company’s profitability
ratios compared to the industry ratios (Figure 3
above) using the revised ratios for 2015 from question 3 above.
Include asset turnover and debt to total assets
as supplemental material in your analysis.
6. Calculate the Asset Utilization ratios for 2015 using the
formulas provided in section “B. Asset Utilization Ratios”
within Chapter 3:

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1. Receivable turnover (Note: For the Receivables turnover
ratio, only half the sales are on credit
terms.)
2. Inventory turnover
3. Fixed Asset turnover
7. Write a brief one-paragraph description of any trends that
appear to have taken place. Compare Harrod’s sales
to total assets ratio to the industry in your description.
8. Write a one-paragraph conclusion that provides analysis of
your answers to questions 4 and 5 above.
a. Include your opinion on whether or not Becky Harrod has a
legitimate complaint about being charged
2½ percent, instead of 1 percent over prime.

56. 16
Long-Term Debt and Lease Financing
LEARNING OBJECTIVES
LO 16-1
Analyzing long-term debt requires consideration of the
collateral pledged, method of repayment, and other key factors.
LO 16-2
Bond yields are important to bond analysis and are influenced
by how bonds are rated by major bond rating agencies.
LO 16-3
An important corporate decision is whether to call in and
reissue debt (refund the obligation) when interest rates decline.
LO 16-4
Long-term lease obligations have many characteristics similar
to debt and are recognized as a form of indirect debt by the
accounting profession.
LO 16-5
When a firm fails to meet its financial obligations, it may be
subject to bankruptcy.
For those who invest in the highly rated bonds of firms such as
Exxon Mobil, Johnson & Johnson, and Microsoft, there is very
little to worry about. You get a higher return than you could get
on U.S. Government securities while still being able to sleep
soundly at night.
However, for those who invest in bonds of companies in
telecommunications or the home building industry, sleep may
not come so easily. In the case of the latter, 16 of the 21 largest
homebuilders had negative cash flow in 2009 and the outlook
was no better for the next 12–24 months. Bond buyer beware
when purchasing bonds of companies in cyclical industries.
As one example, D. R. Horton Inc. of Fort Worth, Texas, the
second largest homebuilder in the United States, saw its

57. earnings per share drop from a peak value of $4.62 in 2005 to a
negative $8.34 in 2008 and a continued loss in 2009. It suffered
from high inventories of unsold homes, rising foreclosures,
tightened lending standards, and declining home values. By
2012 year-end, the housing market started to recover and D. R.
Horton reported earnings per share of $2.77. The improving
housing market allowed the company to increase prices on the
homes it sold. Between 2008 and 2012, Horton brought down its
debt-to-equity ratio from 105 percent to 59 percent, and
management stated that the company was in the best position of
its existence. By early 2015, Standard & Poor’s had raised
Horton’s credit rating to BB.
The Expanding Role of Debt
Page 504
The amount of corporate debt has increased over time as
corporations grew with the economy. Sometimes the increased
use of debt was due to business expansion in capital-intensive
industries like airlines and telecommunications. Some
companies simply did not generate enough internal funds from
operations to fund expansion, so they sold bonds to finance
their growth. Other firms decided to recapitalize and
repurchased their common stock with funds raised from bond
offerings. One thing that hasn’t changed is the cyclical nature of
financial leverage ratios as the economy expands and contracts
and interest rates move up and down.
One ratio you may remember from Chapter 3 is the times-
interest-earned ratio. This ratio divides the operating income
(EBIT) by the interest expense and indicates how many times
the company can cover its interest expense. The higher the
number, the more protected are the interest payments and the
bondholders. The interesting thing about this ratio is that it
indirectly includes the amount of debt on the balance sheet. As
the amount of debt goes up, interest payments usually rise also.
However, when interest rates fall, companies can refinance their
debt at lower interest rates just like homeowners refinance their
homes when mortgage rates decline. So the times--interest-

58. earned ratio is also affected by the interest rates (coupon rates)
on their bonds. Two companies can have the same amount of
debt but different interest rates associated with their debt, and
even though they have the same operating income, their interest
coverage ratios would be different.
Page 505
In 1977, the average U.S. manufacturing corporation had its
interest payment covered by operating earnings at a rate of eight
times. By the time the financial crisis ended in 2007–08, the
average times interest earned was down to 2.4 times. Figure 16-
1 shows times interest earned for Walmart Stores, Inc. since
1998, along with the interest rate on AAA-rated long-term
corporate debt. Walmart may be the most financially sound
large retailer. Over the last 20 years, interest rates declined
dramatically. As interest rates fell, Walmart’s interest coverage
initially rose from around 8 percent to almost 16 percent in
2004. However, like many other companies, Walmart took
advantage of low interest rates to increase its leverage and to
borrow using longer-term debt, which carries a higher interest
rate. Although Walmart has more long-term debt than it had in
the 1990s, lower average interest costs have allowed the firm to
record a times interest earned that is better (higher) in 2015
than it had in the 1990s when it borrowed less.
Figure 16-1 Times interest earned for Walmart Stores, Inc. and
AAA long-term debt rates, 1998–2015
The Debt Contract
The corporate bond represents the basic long-term debt
instrument for most large U.S. corporations. The bond
agreement specifies such basic items as the par value, the
coupon rate, and the maturity date.
Par Value This is the initial value of the bond. The par value is
sometimes referred to as the principal or face value. Most
corporate bonds are initially traded in $1,000 units.
Coupon Rate This is the actual interest rate on the bond, usually
payable in semi-annual installments. To the extent that interest

59. rates in the market go above or below the coupon rate after the
bond has been issued, the market price of the bond will change
from the par value.
Maturity Date The maturity date is the final date on which
repayment of the bond principal is due.
The bond agreement is supplemented by a much longer
document termed a bond indenture. The indenture, often
containing over 100 pages of complicated legal wording, covers
every detail surrounding the bond issue—including collateral
pledged, methods of repayment, restrictions on the corporation,
and procedures for initiating claims against the corporation. The
corporation appoints a financially independent trustee to
administer the provisions of the bond indenture under the
guidelines of the Trust Indenture Act of 1939. Let’s examine
two items of interest in any bond agreement: the security
provisions of the bond and the methods of repayment.
Security Provisions
A secured debt is one in which specific assets are pledged to
bondholders in the event of default. Only infrequently are
pledged assets actually sold and the proceeds distributed to
bondholders. Typically the defaulting corporation is reorganized
and existing claims are partially satisfied by issuing new
securities to the participating parties. The stronger and better
secured the initial claim, the higher the quality of the new
security to be received in exchange. When a defaulting
corporation is reorganized for failure to meet obligations,
existing management may be terminated and, in extreme cases,
held legally responsible for any imprudent actions.
Page 506
A number of terms are used to denote collateralized or secured
debt. Under a mortgage agreement, real property (plant and
equipment) is pledged as security for the loan. A mortgage may
be senior or junior in nature, with senior requiring satisfaction
of claims before payment is given to junior debt. Bondholders
may also attach an after-acquired property clause, requiring that
any new property be placed under the original mortgage.

60. You should realize not all secured debt will carry every
protective feature, but rather represents a carefully negotiated
position including some safeguards and rejecting others.
Generally, the greater the protection offered a given class of
bondholders, the lower is the interest rate on the bond.
Bondholders are willing to assume some degree of risk to
receive a higher yield.
Unsecured Debt
A number of corporations issue debt that is not secured by a
specific claim to assets. In Wall Street jargon, the
name debenture refers to a long-term, unsecured corporate bond.
Among the major participants in debenture offerings are such
prestigious firms as ExxonMobil, IBM, Dow Chemical, and
Intel. Because of the legal problems associated with “specific”
asset claims in a secured bond offering, the trend is to issue
unsecured debt—allowing the bondholder a general claim
against the corporation—rather than a specific lien against an
asset.
Even unsecured debt may be divided between high-ranking and
subordinated debt. A subordinated debenture is an unsecured
bond in which payment to the holder will occur only after
designated senior debenture holders are satisfied. The hierarchy
of creditor obligations for secured as well as unsecured debt is
presented in Figure 16-2, along with consideration of the
position of stockholders.
Figure 16-2 Priority of claims
Page 507
A classic case of the ranking of bondholders (debtholders) and
stockholders took place on June 1, 2009, when General Motors
went into bankruptcy. The government provided over $50
billion in funds to GM to help them survive and ultimately come
out of bankruptcy as a stronger company. The U.S. government
owned 60 percent of the common stock of General Motors in
early 2010 and was able to sell a $13.6 billion stake when GM
came to the market with an IPO in November of 2010. By

61. December 2013, the U.S government had sold all of its shares in
GM.
When GM went into bankruptcy, the common stockholders (with
the lowest priority of claims, as shown at the bottom of Figure
16-2) received nothing for their shares. This was quite a
disappointment to the stockholders who only two years earlier
held shares that were valued at $40 and paying a $2 annual
dividend.
Preferred stockholders also received nothing—the next major
class, reading up the scale in Figure 16-2, were the unsecured
debtholders. They unhappily received 10 cents on the dollar (in
this case, there was no distinction between senior and
subordinated unsecured debt).
Finally, the secured debtholders (whether senior or junior) were
paid off in full with the sell-off of secured assets. The
unsecured bondholders were given 10 percent of the new
company’s common stock with warrants to purchase another 15
percent in the future.
For a further discussion of payment of claims and the hierarchy
of obligations, the reader should see Appendix 16A, “Financial
Alternatives for Distressed Firms,” which also covers other
bankruptcy considerations.
Methods of Repayment
The method of repayment for bond issues may not always call
for one lump-sum disbursement at the maturity date. Some
Canadian and British government bonds are perpetual in nature.
In 1951, West Shore Railroad Company issued bonds that were
scheduled to mature in 2361 (410 years later). More recently,
the Coca-Cola Company and the Walt Disney Company have
issued “century” bonds that mature in 100 years. Nevertheless
most bonds have some orderly or preplanned system of
repayment. In addition to the simplest arrangement—a single-
sum payment at maturity—bonds may be retired by serial
payments, through sinking-fund provisions, through conversion,
or by a call feature.
Serial Payments Bonds with serial payment provisions are paid

62. off in installments over the life of the issue. Each bond has its
own predetermined date of maturity and receives interest only
to that point. Although the total issue may span over 20 years,
15 or 20 different maturity dates may be assigned specific
dollar amounts.
Sinking-Fund Provision A less structured but more popular
method of debt retirement is through the use of a sinking fund.
Under this arrangement semiannual or annual contributions are
made by the corporation into a fund administered by a trustee
for purposes of debt retirement. The trustee takes the proceeds
and purchases bonds from willing sellers. If no willing sellers
are available, a lottery system may be used among outstanding
bondholders.
Page 508
Conversion A more subtle method of reducing debt outstanding
is to provide for debt conversion into common stock. Although
this feature is exercised at the option of the bondholder, a
number of incentives or penalties may be utilized to encourage
conversion. The mechanics of convertible bond trading are
discussed at length in Chapter 19, “Convertibles, Warrants, and
Derivatives.”
Call Feature A call provision allows the corporation to retire or
force in the debt issue before maturity. The corporation will pay
a premium over par value of 5 to 10 percent—a bargain value to
the corporation if bond prices are up. Modern call provisions
usually do not take effect until the bond has been outstanding at
least 5 to 10 years. Often the call provision declines over time,
usually by 0.5 to 1 percent per year after the call period begins.
A corporation may decide to call in outstanding debt issues
when interest rates on new securities are considerably lower
than those on previously issued debt (let’s get the high-cost, old
debt off the books).
An Example: Eli Lilly’s 6.77 Percent Bond
Now that we have covered the key features of the bond
indenture, let us examine an existing bond. More specific
features of this bond are found in Table 16-1, which provides

63. material from the Mergent Industrial Manual. In April 2015, we
find that Eli Lilly & Co., one of the largest drug companies in
the world, has a 6.77 percent bond due in 2036. The bond
carried a Moody’s rating of A1.
As we can see in Table 16-1, the 6.77 percent bond had an
original authorized offering of $300 million (third line). The
trustee is Citibank, and it is the trustee’s obligation to make
sure that Eli Lilly adheres to the terms of the offering. The
information in Table 16-1 also provides other pertinent
information found in the indenture, such as the interest payment
dates (January 1 and July 1), denomination of each bond,
security provisions, call features, and high and low bond prices.
Notice that the bond trades above its face value. Corporate bond
prices are quoted as a percentage of par value, which is almost
always $1,000. This table shows an important relationship
between interest rates and bond prices. As interest rates went
down after 1996, the price of this long-term bond went up.
Bond Prices, Yields, and Ratings
The financial manager must be sensitive to interest rate changes
and price movements in the bond market. For example, the
treasurer’s interpretation of market conditions will influence the
timing of new issues, the coupon rate offered, and the maturity
date. In case you may think bonds maintain stable long-term
price patterns, you need merely consider bond pricing during
the five-year period 1967–72. When the market interest rate on
outstanding 30-year, Aaa corporate bonds went from 5.10
percent to 8.10 percent, the average price of existing bonds
dropped 36 percent. A conservative investor would be quite
disillusioned to see a $1,000, 5.10 percent bond now quoted at
$640.1 Though most bonds are virtually certain to be redeemed
at their face value at maturity ($1,000 in this case), this is small
consolation to the bondholder who has many decades to wait. At
times, bonds also greatly increase in value, such as they did in
1984–85, 1990–92, 1994–95, 2007–08, and 2011–12 when
interest rates declined.
Page 509

64. Table 16-1 Eli Lilly’s bond offering
Eli Lilly Bonds Due January 1, 2036
Moody’s Rating: A1
Indenture Date: January 5, 1996
Authorized: $300,000,000
Outstanding: $286,000,000
Securing of Obligation: A direct unsecured obligation
Interest Payable: January 1, July 1
Grace Period: 30 days
Trustee: Citibank
Call Feature: None
Trading Exchange: OTC
Price Range Year
High
Low
2014
$135.40
$127.46
2013
143.96
123.22
2012
152.54
133.18
2011
138.43
113.50
2010
131.26
110.00
2009
123.18
118.72
2008
122.04

65. 117.36
2007
108.36
102.41
2006
106.26
101.38
2005
105.62
93.84
2004
100.28
89.99
2003
119.71
110.82
2002
113.62
107.88
2001
114.45
103.21
Source: Mergent Industrial Manual, 2014 and Nasdaq TRACE.
As indicated in the paragraph above and in Chapter 10, the price
of a bond is directly tied to current interest rates. One exception
to this rule was discussed at the beginning of the chapter; that
is, when bankruptcy becomes a key factor in pricing and
valuation. We will look at the more normal case where interest
rates are the key factor in determining price.
A bond paying 5.10 percent ($51 a year) will fare quite poorly
when the going market rate is 8.10 percent ($81 a year). To
maintain a market in the older issue, the price is adjusted
downward to reflect current market demands. The longer the life
of the issue, the greater the influence of interest rate changes on
the price of the bond. The same process will work in reverse if
interest rates go down. A 30-year, $1,000 bond initially issued

66. to yield 8.10 percent would go up to almost $1,500 if interest
rates declined to 5.10 percent (assuming the bond is not
callable). A further illustration of interest rate effects on bond
prices is presented in Table 16-2 (on the next page) for a bond
paying 12 percent interest. Observe that not only interest rates
in the market but also years to maturity have a strong influence
on bond prices.
Page 510
Table 16-2 Interest rates and bond prices (face value is $1,000
and annual coupon rate is 12%)
Prices are based on semiannual payments.
Thus, the annual rate is divided by two and the periods are
multiplied by 2.
Cash flow inputs are entered as negative values as required by
Excel’s PV function.
From 1945 through the early 1980s, the pattern had been for
long-term interest rates to move upward (Figure 16-3).
However, long-term interest rates have generally been declining
since 1982. The figure shows both Moody’s Aaa bond yields for
the highest quality corporate bonds and Moody’s Baa bonds,
which are three notches lower than the highest investment-grade
bonds. The graph does illustrate the pattern of rates over time
but also that the highest-quality bonds always have a lower
interest rate than lower quality bonds. See the bond rating
section for more details on bond quality.
Figure 16-3 Long-term yields on debt
Source: St. Louis Federal Reserve, research.stlouisfed.org
Bond Yields
Bond yields are quoted three different ways: coupon rate,
current yield, and yield to maturity. We will apply each to a
$1,000 par value bond paying $100 per year interest for 10
years. The bond is currently priced at $900.
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Nominal Yield (Coupon Rate) Stated interest payment divided

67. by the par value.
Current Yield Stated interest payment divided by the current
price of the bond.
FINANCIAL CALCULATOR
Bond Yield
Value
Function
10
N
−900
PV
100
PMT
1000
PV
Function
Solution
CPT

68. I/Y
11.75
Yield to Maturity The yield to maturity is the interest rate that
will equate future interest payments and the payment at maturity
(principal payment) to the current market price. This represents
the concept of the internal rate of return. In the present case, an
interest rate of 11.75 percent will equate interest payments of
$100 for 10 years and a final payment of $1,000 to the current
price of $900. Calculating yield to maturity is discussed in
detail in Chapter 10 beginning on page 303.2
When financial analysts speak of bond yields, the general
assumption is that they are speaking of yield to maturity. This is
deemed to be the most significant measure of return.
Bond Ratings
Both the issuing corporation and the investor are concerned
about the rating their bond is assigned by the two major bond
rating agencies—Moody’s Investor Service and Standard &
Poor’s Corporation. The higher the rating assigned a given
issue, the lower the required interest payments are to satisfy
potential investors. This is because highly rated bonds carry
lower risk. A major industrial corporation may be able to issue
a 30-year bond at 5.5 to 6 percent yield to maturity because it is
rated Aaa, whereas a smaller, regional firm may only qualify for

69. a B rating and be forced to pay 9 or 10 percent.
As an example of bond rating systems, Moody’s Investor
Service provides the following nine categories of ranking:
Aaa Aa A Baa Ba B Caa Ca C
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The first two categories of bond ratings represent the highest
quality (for example, IBM and Procter & Gamble); the next two,
medium to high quality; and so on. The first four categories are
considered investment grade, while bonds below that are labeled
“junk bonds.” Moody’s also applies numerical modifiers to
categories Aa through B: 1 is the highest in a category, 2 is the
midrange, and 3 is the lowest. Thus, a rating of Aa2 means the
bond is in the midrange of Aa. Standard & Poor’s has a similar
letter system with + and − modifiers.
Bonds receive ratings based on the corporation’s ability to make
interest payments, its consistency of performance, its size, its
debt-equity ratio, its working capital position, and a number of
other factors. The yield spread between higher- and lower-rated
corporate bonds changes with the economy. If investors are
pessimistic about economic events, they will accept as much as
3 percent less return to go into securities of very high quality,
whereas in more normal times the spread may be only 1.5
percent.
Examining Actual Bond Ratings
Three actual bond offerings are presented in Table 16-3 to

70. illustrate the various terms we have used.
Table 16-3 Outstanding bond issues
Source: Bloomberg, March 2015.
Recall that the true return on a bond is measured by yield to
maturity (the last column of Table 16-3). The Coca-Cola
Enterprises bonds are unsecured, as indicated by the
term debenture. The bonds are rated AA−, or investment grade,
and carry a price of $1,470.63. This price is higher than the par
value of $1,000 because the interest rate at time of issue (7.00
percent coupon) is higher than the demanded yield to maturity
of 4.72 percent in April 2015. The Microsoft bonds shown are
unsecured but senior to other unsecured debt that has been
issued. These bonds are rated AAA with a yield to maturity of
3.45 percent. Apple and Toyota bonds have lower credit ratings
and slightly higher yields to maturity.
The bonds in Table 16-3 can be refunded if the companies
desire. The meaning and benefits of refunding will be made
clear in the following section.
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“Open Sesame”—The Story of Alibaba and the Six Bond
Tranches Finance in ACTION Managerial
One of the most memorable tales from One Thousand and One
Nights is the story of Ali Baba, who opened a door to great
riches with the passwords, “Open Sesame.” China’s richest man,

71. Jack Ma, certainly knew the story when he launched the Chinese
e-commerce company Alibaba.com in 1999. In September 2014,
Alibaba Group Holding executed the largest initial public
offering in history, raising $25 billion. Two months later, they
were raising capital again in the bond market.
Alibaba provides services similar to Amazon and eBay, but its
market value is greater than either one. The company’s biggest
market is China, but it has aspirations to expand and compete
all over the world. While the company now has other web
portals for business-to-consumer and consumer-to-consumer
transactions, the group began with Alibaba.com, now the
world’s largest business-to-business e-commerce site.
Before Alibaba.com, if you wanted to find a Chinese supplier of
5000 tiny electric motors, you needed a contact in China who
could visit manufacturers to negotiate a price. Now, you go
to Alibaba.com where dozens of suppliers post product
availability for 500 or 500,000 units.
Alibaba’s big bond offering was for $8 billion, but the offering
consisted of six “tranches.” Each tranche was a specific class of
bond within the offering with a different due date and different
terms. The five fixed-rate tranches were:
• $1,000 million 1.625% notes due in 3 years
• $2,250 million 2.500% notes due in 5 years
• $1,500 million 3.125% notes due in 7 years
• $2,250 million 3.600% notes due in 10 years

72. • $700 million 4.500% notes due in 20 years
By spreading out the maturities in the offering, Alibaba locked
in its financing costs for several years. The company also issued
a sixth tranche of $300 million in floating rate notes
denominated in Singapore dollars.
One of the challenges faced by multinational corporations is
matching financing decisions with their expected operating
activities. Alibaba’s use of multiple tranches that mixed fixed-
rates with floating rates, offered multiple maturities with
differing coupon amounts, and promised repayments in a mix of
currencies suggests a significant level of financial
sophistication, either by the firm or by its investment bank.
The Refunding Decision
Assume you are the financial vice president for a corporation
that has issued bonds at 11.75 percent, only to witness a drop in
interest rates to 9.5 percent. If you believe interest rates will
rise rather than sink further, you may wish to redeem the
expensive 11.75 percent bonds and issue new debt at the
prevailing 9.5 percent rate. This process is labeled
a refunding operation. It is made feasible by the call provision
that enables a corporation to buy back bonds at close to par,
rather than at high market values, when interest rates are
declining.
A Capital Budgeting Problem
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73. The refunding decision involves outflows in the form of
financing costs related to redeeming and reissuing securities,
and inflows represented by savings in annual interest costs and
tax savings. In the present case, we shall assume the corporation
issued $10 million worth of 11.75 percent debt with a 25-year
maturity and the debt has been on the books for five years. The
corporation now has the opportunity to buy back the old debt at
10 percent above par (the call premium) and to issue new debt
at 9.5 percent interest with a 20-year life. The underwriting cost
for the old issue was $125,000, and the underwriting cost for
the new issue is $200,000. We shall also assume the corporation
is in the 35 percent tax bracket and uses a 6 percent discount
rate for refunding decisions. Since the savings from a refunding
decision are certain—unlike the savings from most other capital
budgeting decisions—we use the aftertax cost of new debt as the
discount rate, rather than the more generalized cost of
capital.3 Actually, in this case, the aftertax cost of new debt is
9.5 percent (1 − Tax rate), or 9.5% × 0.65 = 6.18%. We round to
6 percent. The facts in this example are restated as follows.
Let’s go through the capital budgeting process of defining our
outflows and inflows and determining the net present value.
Step A—Outflow Considerations
1. Payment of call premium—The first outflow is the 10 percent
call premium on $10 million, or $1 million. This prepayment

74. penalty is necessary to call in the original issue. Being an out-
of-pocket tax-deductible expense, the $1 million cash
expenditure will cost us only $650,000 on an aftertax basis. We
multiply the expense by (1 − Tax rate) to get the aftertax cost.
$1,000,000 (1 − T) = $1,000,000 (1 − 0.35) = $650,000
Net cost of call premium = $650,000
2. Underwriting cost on new issue—The second outflow is the
$200,000 underwriting cost on the new issue. The actual cost is
somewhat less because the payment is tax-deductible, though
the write-off must be spread over the life of the bond. While the
actual $200,000 is being spent now, equal tax deductions of
$10,000 a year will occur over the next 20 years (in a manner
similar to depreciation).
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The tax savings from a noncash write-off are equal to the
amount times the tax rate. For a company in the 35 percent tax
bracket, $10,000 of annual tax deductions will provide $3,500
of tax savings each year for the next 20 years. The present value
of these savings is the present value of a $3,500 annuity for 20
years at 6 percent interest, which is approximately $40,145, as
shown in the margin.
The net cost of underwriting the new issue is the actual
expenditure now, minus the present value of future tax savings
as indicated below.

75. FINANCIAL CALCULATOR
PV of Annuity
Enter
Function
20
N
6
I/Y
0
FV
−3500
PMT
Function