Title Details

PART 1 INSTITUTIONS AND MARKETS 2

CHAPTER 1 THE FINANCIAL ENVIRONMENT 4

HOW HAS THE FINANCIAL ENVIRONMENT CHANGED? 5

WHAT IS FINANCE? 5

TWO THEMES 7

WHY STUDY FINANCE? 7

CAREERS IN FINANCE 8

SIX PRINCIPLES OF FINANCE 10

TIME VALUE OF MONEY 10

RISK VERSUS RETURN 10

DIVERSIFICATION OF RISK 10

FINANCIAL MARKETS ARE EFFICIENT 11

MANAGEMENT VERSUS OWNER OBJECTIVES 11

REPUTATION MATTERS 12

OVERVIEW OF THE FINANCIAL SYSTEM 13

CHARACTERISTICS AND REQUIREMENTS 13

FINANCIAL SYSTEM COMPONENTS AND FINANCIAL FUNCTIONS 14

FINANCIAL MARKETS CHARACTERISTICS 16

MONEY AND CAPITAL MARKETS 16

PRIMARY AND SECONDARY MARKETS 16

MAJOR TYPES OF FINANCIAL MARKETS 16

THE PLAN OF STUDY 17

SUMMARY 18

KEY TERMS 19

DISCUSSION QUESTIONS 19

EXERCISES 19

CHAPTER 2 MONEY AND THE MONETARY SYSTEM 21

THE 2007–2008 FINANCIAL CRISIS 22

PROCESS OF MOVING SAVINGS INTO INVESTMENTS 23

OVERVIEW OF THE MONETARY SYSTEM 24

IMPORTANCE AND FUNCTIONS OF MONEY 26

DEVELOPMENT OF MONEY IN THE UNITED STATES 27

PHYSICAL MONEY (COIN AND PAPER CURRENCY) 27

DEPOSIT MONEY 32

MONEY MARKET SECURITIES 33

MEASURES OF THE U.S. MONEY SUPPLY 34

M1 MONEY SUPPLY 34

M2 MONEY SUPPLY 35

EXCLUSIONS FROM THE MONEY SUPPLY 36

MONEY SUPPLY AND ECONOMIC ACTIVITY 36

INTERNATIONAL MONETARY SYSTEM 38

SUMMARY 39

KEY TERMS 40

DISCUSSION QUESTIONS 40

EXERCISES 41

PROBLEMS 41

CHAPTER 3 BANKS AND OTHER FINANCIAL INSTITUTIONS 43

FINANCIAL INSTITUTION DISTRESS DURING THE FINANCIAL CRISIS 44

TYPES AND ROLES OF FINANCIAL INSTITUTIONS 45

DEPOSITORY INSTITUTIONS 46

CONTRACTUAL SAVINGS ORGANIZATIONS 46

SECURITIES FIRMS 47

FINANCE FIRMS 48

OVERVIEW OF THE BANKING SYSTEM 48

COMMERCIAL, INVESTMENT, AND UNIVERSAL BANKING 48

FUNCTIONS OF BANKS AND THE BANKING SYSTEM 50

HISTORICAL DEVELOPMENT OF THE U.S. BANKING SYSTEM 51

BEFORE THE CIVIL WAR 51

ENTRY OF THRIFT INSTITUTIONS 53

REGULATION OF THE BANKING SYSTEM 53

GENERAL BANKING LEGISLATION 53

THE SAVINGS AND LOAN CRISIS 55

PROTECTION OF DEPOSITORS’ FUNDS 56

STRUCTURE OF BANKS 57

BANK CHARTERS 57

DEGREE OF BRANCH BANKING 57

BANK HOLDING COMPANIES 58

THE BANK BALANCE SHEET 59

ASSETS 60

LIABILITIES AND OWNERS’ CAPITAL 63

BANK MANAGEMENT 63

LIQUIDITY MANAGEMENT 64

CAPITAL MANAGEMENT 65

INTERNATIONAL BANKING AND FOREIGN SYSTEMS 67

SUMMARY 68

KEY TERMS 69

DISCUSSION QUESTIONS 69

EXERCISES 70

PROBLEMS 70

CHAPTER 4 THE FEDERAL RESERVE SYSTEM 73

U.S. CENTRAL BANK RESPONSE TO THE FINANCIAL CRISIS AND GREAT RECESSION 74

THE U.S. BANKING SYSTEM PRIOR TO THE FED 75

WEAKNESSES OF THE NATIONAL BANKING SYSTEM 75

THE MOVEMENT TO CENTRAL BANKING 76

STRUCTURE OF THE FEDERAL RESERVE SYSTEM 77

MEMBER BANKS 77

FEDERAL RESERVE DISTRICT BANKS 78

BOARD OF GOVERNORS 80

FEDERAL OPEN MARKET COMMITTEE (FOMC) 80

ADVISORY COMMITTEES 80

ROLE OF THE CHAIR OF THE FED BOARD OF GOVERNORS 80

MONETARY POLICY FUNCTIONS AND INSTRUMENTS 82

OVERVIEW OF RESPONSIBILITIES 82

RESERVE REQUIREMENTS 83

DISCOUNT RATE POLICY 85

OPEN-MARKET OPERATIONS 86

QUANTITATIVE EASING 87

IMPLEMENTATION OF MONETARY POLICY 88

FED SUPERVISORY AND REGULATORY FUNCTIONS 88

SPECIFIC SUPERVISORY RESPONSIBILITIES 88

SPECIFIC REGULATORY RESPONSIBILITIES 89

FED SERVICE FUNCTIONS 89

THE PAYMENTS MECHANISM 90

TRANSFER OF CREDIT 92

OTHER SERVICE ACTIVITIES 92

CENTRAL BANKS IN OTHER COUNTRIES 92

SUMMARY 94

KEY TERMS 95

DISCUSSION QUESTIONS 95

EXERCISES 95

PROBLEMS 96

CHAPTER 5 POLICY MAKERS AND THE MONEY SUPPLY 97

NATIONAL ECONOMIC POLICY OBJECTIVES 98

ECONOMIC GROWTH 98

HIGH EMPLOYMENT 99

PRICE STABILITY 99

BALANCE IN INTERNATIONAL TRANSACTIONS 99

FOUR POLICY MAKER GROUPS 100

ETHICAL BEHAVIOR IN GOVERNMENT 100

POLICY MAKERS IN THE EUROPEAN ECONOMIC UNION 101

GOVERNMENT REACTION TO THE PERFECT FINANCIAL STORM 101

GOVERNMENT INFLUENCE ON THE ECONOMY 102

POLICY INSTRUMENTS OF THE U.S. TREASURY 104

MANAGING THE TREASURY’S CASH BALANCES 104

POWERS RELATING TO THE FEDERAL BUDGET AND TO SURPLUSES OR DEFICITS 105

RECENT FINANCIAL CRISIS-RELATED ACTIVITIES 106

AMOUNT OF NATIONAL DEBT AND DEBT MANAGEMENT 107

CHANGING THE MONEY SUPPLY 108

CHECKABLE DEPOSIT EXPANSION 108

OFFSETTING OR LIMITING FACTORS 112

CONTRACTION OF DEPOSITS 112

FACTORS AFFECTING BANK RESERVES 113

CHANGES IN THE DEMAND FOR CURRENCY 113

FEDERAL RESERVE SYSTEM TRANSACTIONS 114

THE MONETARY BASE AND THE MONEY MULTIPLIER 117

SUMMARY 119

KEY TERMS 119

DISCUSSION QUESTIONS 119

EXERCISES 120

PROBLEMS 120

CHAPTER 6 INTERNATIONAL FINANCE AND TRADE 123

GLOBAL OR INTERNATIONAL MONETARY SYSTEM 124

DEVELOPMENT OF INTERNATIONAL FINANCE 124

HOW THE INTERNATIONAL MONETARY SYSTEM EVOLVED 124

EUROPEAN UNIFICATION 126

EUROPEAN UNION 126

EUROZONE MEMBERS 126

THE EURO 126

EUROPEAN UNION FINANCIAL CRISES 127

CURRENCY EXCHANGE MARKETS AND RATES 127

CURRENCY EXCHANGE MARKETS 127

EXCHANGE RATE QUOTATIONS 128

FACTORS THAT AFFECT CURRENCY EXCHANGE RATES 129

CURRENCY EXCHANGE RATE APPRECIATION AND DEPRECIATION 132

ARBITRAGE 133

EXCHANGE RATE DEVELOPMENTS FOR THE U.S. DOLLAR 133

CONDUCTING BUSINESS INTERNATIONALLY 134

MANAGING FOREIGN EXCHANGE RISK 134

ETHICAL CONSIDERATIONS 135

FINANCING INTERNATIONAL TRADE 135

FINANCING BY THE EXPORTER 136

FINANCING BY THE IMPORTER 138

BANKER’S ACCEPTANCES 140

OTHER AIDS TO INTERNATIONAL TRADE 140

BALANCE IN INTERNATIONAL TRANSACTIONS GOAL 141

NATURE OF THE PROBLEM 142

BALANCE-OF-PAYMENTS ACCOUNTS 142

SUMMARY 144

KEY TERMS 144

DISCUSSION QUESTIONS 145

EXERCISES 145

PROBLEMS 146

PART 2 INVESTMENTS 148

CHAPTER 7 SAVINGS AND THE INVESTMENT PROCESS 150

GROSS DOMESTIC PRODUCT AND CAPITAL FORMATION 151

GDP COMPONENTS 151

IMPLICATIONS OF INTERNATIONAL PAYMENT IMBALANCES 153

LINK BETWEEN SAVING AND INVESTMENT 153

FEDERAL GOVERNMENT RECEIPTS AND EXPENDITURES 155

THE BUDGET 155

FISCAL POLICY MAKERS 156

DEBT FINANCING 157

HISTORICAL ROLE AND CREATION OF SAVINGS 158

FOREIGN SOURCES OF SAVINGS 158

DOMESTIC SUPPLY OF SAVINGS 158

CREATION OF SAVINGS 158

MAJOR SOURCES OF SAVINGS 159

PERSONAL SAVINGS 159

CORPORATE SAVINGS 160

FACTORS AFFECTING SAVINGS 161

LEVELS OF INCOME 161

ECONOMIC EXPECTATIONS 162

ECONOMIC CYCLES 162

LIFE STAGES OF THE INDIVIDUAL SAVER 163

LIFE STAGES OF THE CORPORATION 163

CAPITAL MARKET SECURITIES 164

MORTGAGE MARKETS 165

TYPES OF MORTGAGES AND MORTGAGE-BACKED SECURITIES 165

CREDIT RATINGS AND SCORES 166

MAJOR PARTICIPANTS IN THE SECONDARY MORTGAGE MARKETS 167

A FURTHER LOOK AT THE 2007–2008 FINANCIAL CRISIS 167

EARLY FACTORS 167

A BORROWING-RELATED CULTURAL SHIFT 168

SUMMARY 168

KEY TERMS 169

DISCUSSION QUESTIONS 169

EXERCISES 170

PROBLEMS 170

CHAPTER 8 INTEREST RATES 173

SUPPLY AND DEMAND FOR LOANABLE FUNDS 174

HISTORICAL CHANGES IN U.S. INTEREST RATE LEVELS 175

LOANABLE FUNDS THEORY 176

DETERMINANTS OF MARKET INTEREST RATES 179

RISK-FREE SECURITIES: U.S. TREASURY DEBT OBLIGATIONS 180

MARKETABLE OBLIGATIONS 181

DEALER SYSTEM 182

TAX STATUS OF FEDERAL OBLIGATIONS 182

OWNERSHIP OF PUBLIC DEBT SECURITIES 183

MATURITY DISTRIBUTION OF MARKETABLE DEBT SECURITIES 184

TERM OR MATURITY STRUCTURE OF INTEREST RATES 185

RELATIONSHIP BETWEEN YIELD CURVES AND THE ECONOMY 186

TERM STRUCTURE THEORIES 186

INFLATION PREMIUMS AND PRICE MOVEMENTS 188

HISTORICAL INTERNATIONAL PRICE MOVEMENTS 188

INFLATION IN THE UNITED STATES 189

TYPES OF INFLATION 191

DEFAULT RISK PREMIUMS 193

SUMMARY 195

KEY TERMS 195

DISCUSSION QUESTIONS 195

EXERCISES 196

PROBLEMS 196

CHAPTER 9 TIME VALUE OF MONEY 199

PRINCIPLES OF FINANCE 200

BASIC CONCEPTS 201

COMPOUNDING TO DETERMINE FUTURE VALUES 201

INFLATION OR PURCHASING POWER IMPLICATIONS 205

DISCOUNTING TO DETERMINE PRESENT VALUES 206

EQUATING PRESENT VALUES AND FUTURE VALUES 209

FINDING INTEREST RATES AND TIME REQUIREMENTS 210

SOLVING FOR INTEREST RATES 210

SOLVING FOR TIME PERIODS 211

RULE OF 72 212

FUTURE VALUE OF AN ANNUITY 212

PRESENT VALUE OF AN ANNUITY 214

INTEREST RATES AND TIME REQUIREMENTS FOR ANNUITIES 216

SOLVING FOR INTEREST RATES 216

SOLVING FOR TIME PERIODS 217

DETERMINING PERIODIC ANNUITY PAYMENTS 218

EXAMPLES INVOLVING ANNUAL PAYMENTS 218

REAL ESTATE MORTGAGE LOANS WITH MONTHLY PAYMENTS 219

MORE FREQUENT COMPOUNDING OR DISCOUNTING INTERVALS 220

COST OF CONSUMER CREDIT 221

UNETHICAL LENDERS 221

APR VERSUS EAR 222

SUMMARY 223

KEY TERMS 223

DISCUSSION QUESTIONS 223

EXERCISES 224

PROBLEMS 224

LEARNING EXTENSION 9

ANNUITY DUE PROBLEMS 226

FUTURE VALUE OF AN ANNUITY DUE 226

PRESENT VALUE OF AN ANNUITY DUE 227

INTEREST RATES AND TIME REQUIREMENTS FOR ANNUITY DUE PROBLEMS 228

PROBLEMS 229

CHAPTER 10 BONDS AND STOCKS: CHARACTERISTICS AND VALUATIONS 231

LONG-TERM EXTERNAL FINANCING SOURCES FOR BUSINESSES 232

DEBT CAPITAL 234

WHO BUYS BONDS? 235

BOND COVENANTS 236

BOND RATINGS 237

BONDHOLDER SECURITY 238

TIME TO MATURITY 240

INCOME FROM BONDS 241

GLOBAL BOND MARKET 242

READING BOND QUOTES 242

CORPORATE EQUITY CAPITAL 244

COMMON STOCK 245

PREFERRED STOCK 246

READING STOCK QUOTES 248

DIVIDENDS AND STOCK REPURCHASES 249

HOW DO FIRMS DECIDE ON THE DOLLAR AMOUNT OF DIVIDENDS? 249

STOCK DIVIDENDS AND STOCK SPLITS 251

SHARE REPURCHASES 252

VALUATION PRINCIPLES 252

VALUATION OF BONDS 255

DETERMINING A BOND’S PRESENT VALUE 255

CALCULATING THE YIELD TO MATURITY 258

RISK IN BOND VALUATION 259

VALUATION OF STOCKS 262

VALUING STOCKS WITH CONSTANT DIVIDENDS 263

VALUING STOCKS WITH CONSTANT DIVIDEND GROWTH RATES 263

RISK IN STOCK VALUATION 265

VALUATION AND THE FINANCIAL ENVIRONMENT 265

GLOBAL ECONOMIC INFLUENCES 265

DOMESTIC ECONOMIC INFLUENCES 266

INDUSTRY AND COMPETITION 266

SUMMARY 267

KEY TERMS 267

DISCUSSION QUESTIONS 268

EXERCISES 269

LEARNING EXTENSION 10 ANNUALIZING RATES OF RETURN 272

HOLDING PERIOD RETURNS 272

ANNUALIZED RATES OF RETURN 272

PROBLEMS 274

CHAPTER 11 SECURITIES AND MARKETS 275

ISSUING SECURITIES: PRIMARY SECURITIES MARKETS 276

PRIMARY MARKET FUNCTIONS OF INVESTMENT BANKERS 276

COST OF GOING PUBLIC 281

THE FACEBOOK IPO 284

OTHER FUNCTIONS OF INVESTMENT BANKING FIRMS 286

INVESTMENT BANKING REGULATION 287

TRADING SECURITIES—SECONDARY SECURITIES MARKETS 288

ORGANIZED SECURITY EXCHANGES 288

STRUCTURE OF THE NEW YORK STOCK EXCHANGE 289

WHAT MAKES A GOOD MARKET? 294

A WORD ON COMMISSIONS 296

SECURITY MARKET INDEXES 296

FOREIGN SECURITIES 297

INSIDE INFORMATION AND OTHER ETHICAL ISSUES 298

CHANGES IN THE STRUCTURE OF THE STOCK MARKET 299

SUMMARY 301

KEY TERMS 301

DISCUSSION QUESTIONS 302

PROBLEMS 302

LEARNING EXTENSION 11 INTRODUCTION TO FUTURES AND OPTIONS 305

WHY DO DERIVATIVES EXIST? 305

FUTURES CONTRACTS 306

OPTIONS 307

OPTION PAYOFF DIAGRAMS 308

SUMMARY 310

KEY TERMS 310

DISCUSSION QUESTIONS 311

PROBLEMS 311

CHAPTER 12 FINANCIAL RETURNS AND RISK CONCEPTS 313

HISTORICAL RETURN AND RISK FOR A SINGLE FINANCIAL ASSET 314

ARITHMETIC AVERAGE ANNUAL RATES OF RETURN 315

VARIANCE AS A MEASURE OF RISK 316

STANDARD DEVIATION AS A MEASURE OF RISK 316

WHERE DOES RISK COME FROM? 319

EXPECTED MEASURES OF RETURN AND RISK 320

HISTORICAL RETURNS AND RISK OF DIFFERENT ASSETS 323

EFFICIENT CAPITAL MARKETS 324

PORTFOLIO RETURNS AND RISK 327

EXPECTED RETURN ON A PORTFOLIO 327

VARIANCE AND STANDARD DEVIATION OF RETURN ON A PORTFOLIO 328

TO DIVERSIFY OR NOT TO DIVERSIFY? 329

PORTFOLIO RISK AND THE NUMBER OF INVESTMENTS IN THE PORTFOLIO 330

SYSTEMATIC AND UNSYSTEMATIC RISK 331

CAPITAL ASSET PRICING MODEL (CAPM) 332

ETHICS AND JOB OPPORTUNITIES IN INVESTMENTS 335

SUMMARY 337

KEY TERMS 337

DISCUSSION QUESTIONS 337

PROBLEMS 338

LEARNING EXTENSION 12

ESTIMATING BETA 341

SECURITY MARKET LINE 342

QUESTIONS AND PROBLEMS 344

PART 3 FINANCIAL MANAGEMENT 346

CHAPTER 13 BUSINESS ORGANIZATION AND FINANCIAL DATA 348

STARTING A BUSINESS 349

STRATEGIC PLAN WITH A VISION OR MISSION 349

BUSINESS AND FINANCIAL GOALS 350

FORMS OF BUSINESS ORGANIZATION IN THE UNITED STATES 350

PROPRIETORSHIP 351

PARTNERSHIP 352

CORPORATION 353

THE ANNUAL REPORT 355

ACCOUNTING PRINCIPLES 355

INCOME STATEMENT 357

THE BALANCE SHEET 359

ASSETS 359

LIABILITIES 360

OWNERS’ EQUITY 361

STATEMENT OF CASH FLOWS 361

FINANCIAL STATEMENTS OF DIFFERENT COMPANIES 363

THE AUTO BAILOUT AND FINANCIAL STATEMENTS 364

GOAL OF A FIRM 365

MEASURING SHAREHOLDER WEALTH 366

LINKING STRATEGY AND FINANCIAL PLANS 367

CRITERION FOR NONPUBLIC FIRMS 368

WHAT ABOUT ETHICS? 368

CORPORATE GOVERNANCE 369

PRINCIPAL-AGENT PROBLEM 369

REDUCING AGENCY PROBLEMS 370

FINANCE IN THE ORGANIZATION CHART 372

SUMMARY 374

KEY TERMS 375

DISCUSSION QUESTIONS 375

PROBLEMS 375

LEARNING EXTENSION 13 FEDERAL INCOME TAXATION 379

DEPRECIATION BASICS 381

A FEW WORDS ON DEPRECIATION METHODS 382

QUESTIONS AND PROBLEMS 382

CHAPTER 14 FINANCIAL ANALYSIS AND LONG-TERM

FINANCIAL PLANNING 385

FINANCIAL STATEMENT ANALYSIS 386

RATIO ANALYSIS OF BALANCE SHEET AND INCOME STATEMENT 386

TYPES OF FINANCIAL RATIOS 387

LIQUIDITY RATIOS AND ANALYSIS 388

ASSET MANAGEMENT RATIOS AND ANALYSIS 390

FINANCIAL LEVERAGE RATIOS AND ANALYSIS 392

PROFITABILITY RATIOS AND ANALYSIS 396

MARKET VALUE RATIOS AND ANALYSIS 398

SUMMARY OF RATIO ANALYSIS FOR WALGREENS 400

DUPONT METHOD OF RATIO ANALYSIS 400

LONG-TERM FINANCIAL PLANNING 402

PERCENTAGE OF SALES TECHNIQUE 403

COST-VOLUME-PROFIT ANALYSIS 405

DEGREE OF OPERATING LEVERAGE 407

SUMMARY 409

KEY TERMS 410

DISCUSSION QUESTIONS 410

PROBLEMS 410

CHAPTER 15 MANAGING WORKING CAPITAL 415

OPERATING AND CASH CONVERSION CYCLES 417

OPERATING CYCLE 417

CASH CONVERSION CYCLE 418

DETERMINING THE LENGTH OF THE OPERATING CYCLE AND CASH CONVERSION CYCLE 419

WORKING CAPITAL REQUIREMENTS 420

CASH BUDGETS 423

MINIMUM DESIRED CASH BALANCE 423

ESTIMATED CASH INFLOWS 423

ESTIMATED CASH OUTFLOWS 424

CONSTRUCTING THE CASH BUDGET 425

SEASONAL VERSUS LEVEL PRODUCTION 426

MANAGEMENT OF CURRENT ASSETS 428

CASH AND MARKETABLE SECURITIES MANAGEMENT 428

GETTING AND KEEPING THE CASH 434

ACCOUNTS RECEIVABLE MANAGEMENT 436

CREDIT ANALYSIS 437

CREDIT-REPORTING AGENCIES 437

CREDIT TERMS AND COLLECTION EFFORTS 438

INVENTORY MANAGEMENT 440

TECHNOLOGY AND WORKING CAPITAL MANAGEMENT 441

CASH MANAGEMENT 441

PROCESSING INVOICES AND FLOAT 442

TRACKING INVENTORY 442

SUMMARY 443

KEY TERMS 443

DISCUSSION QUESTIONS 443

PROBLEMS 444

CHAPTER 16 SHORT-TERM BUSINESS FINANCING 447

STRATEGIES FOR FINANCING WORKING CAPITAL 448

MATURITY-MATCHING APPROACH 449

AGGRESSIVE APPROACH 451

CONSERVATIVE APPROACH 451

FACTORS AFFECTING SHORT-TERM FINANCING 452

OPERATING CHARACTERISTICS 452

OTHER INFLUENCES IN SHORT-TERM FINANCING 454

PROVIDERS OF SHORT-TERM FINANCING 456

COMMERCIAL BANK LENDING 456

TRADE CREDIT FROM SUPPLIERS 460

COMMERCIAL FINANCE COMPANIES 461

COMMERCIAL PAPER 462

ADDITIONAL VARIETIES OF SHORT-TERM FINANCING 464

ACCOUNTS RECEIVABLE FINANCING 464

INVENTORY LOANS 467

LOANS SECURED BY STOCKS AND BONDS 468

OTHER FORMS OF SECURITY FOR BANK LOANS 469

THE COST OF SHORT-TERM FINANCING 469

SUMMARY 470

KEY TERMS 471

DISCUSSION QUESTIONS 471

PROBLEMS 471

CHAPTER 17 CAPITAL BUDGETING ANALYSIS 475

MANAGEMENT OF FIXED ASSETS 476

IDENTIFYING POTENTIAL CAPITAL BUDGET PROJECTS 476

CAPITAL BUDGETING PROCESS 478

CAPITAL BUDGETING TECHNIQUES 481

NET PRESENT VALUE 481

INTERNAL RATE OF RETURN 484

NPV AND IRR 487

MODIFIED INTERNAL RATE OF RETURN 488

PROFITABILITY INDEX 490

CONFLICTS BETWEEN DISCOUNTED CASH FLOW TECHNIQUES 490

DIFFERENT CASH FLOW PATTERNS 490

DIFFERENT TIME HORIZONS 490

DIFFERENT SIZES 491

PAYBACK PERIOD 491

DIFFERENCE BETWEEN THEORY AND PRACTICE 492

SAFETY MARGIN 492

MANAGERIAL FLEXIBILITY AND OPTIONS 493

ESTIMATING PROJECT CASH FLOWS 493

ISOLATING PROJECT CASH FLOWS 493

APPROACHES TO ESTIMATING PROJECT CASH FLOWS 495

CASH FLOW FROM OPERATIONS 495

CASH FLOW FROM INVESTMENT ACTIVITIES 497

CASH FLOW FROM FINANCING ACTIVITIES 497

AN EXAMPLE 497

DEPRECIATION AS A TAX SHIELD 498

KEEPING MANAGERS HONEST 499

RISK-RELATED CONSIDERATIONS 500

SUMMARY 501

KEY TERMS 502

DISCUSSION QUESTIONS 502

PROBLEMS 503

LEARNING EXTENSION 17 ESTIMATING PROJECT CASH FLOWS 505

PROJECT STAGES AND CASH FLOW ESTIMATION 505

INITIAL OUTLAY 505

CASH FLOWS DURING THE PROJECT’S OPERATING LIFE 506

SALVAGE VALUE AND NWC RECOVERY AT PROJECT TERMINATION 506

APPLICATIONS 507

CASH FLOW ESTIMATION FOR A REVENUE EXPANDING PROJECT 507

CASH FLOW ESTIMATION FOR A COST-SAVING PROJECT 509

SETTING A BID PRICE 511

SUMMARY 513

DISCUSSION QUESTIONS 513

PROBLEMS 513

CHAPTER 18 CAPITAL STRUCTURE AND THE COST OF CAPITAL 515

WHY CHOOSE A CAPITAL STRUCTURE? 516

TRENDS IN CORPORATE USE OF DEBT 517

CASHING IN ON LOW INTEREST RATES 518

REQUIRED RATE OF RETURN AND THE COST OF CAPITAL 519

COST OF CAPITAL 520

COST OF DEBT 520

COST OF PREFERRED STOCK 521

COST OF COMMON EQUITY 521

COST OF NEW COMMON STOCK 523

WEIGHTED AVERAGE COST OF CAPITAL 523

CAPITAL STRUCTURE WEIGHTS 524

MEASURING THE TARGET WEIGHTS 524

WHAT DO BUSINESSES USE AS THEIR COST OF CAPITAL? 525

DIFFICULTY OF MAKING CAPITAL STRUCTURE DECISIONS 527

PLANNING GROWTH RATES 528

INTERNAL GROWTH RATE 529

SUSTAINABLE GROWTH RATE 529

EFFECTS OF UNEXPECTEDLY HIGHER (OR LOWER) GROWTH 530

EBIT/EPS ANALYSIS 531

INDIFFERENCE LEVEL 531

COMBINED OPERATING AND FINANCIAL LEVERAGE EFFECTS 534

UNIT VOLUME VARIABILITY 534

PRICE-VARIABLE COST MARGIN 534

FIXED COSTS 534

DEGREE OF FINANCIAL LEVERAGE 535

TOTAL RISK 535

INSIGHTS FROM THEORY AND PRACTICE 537

TAXES AND NONDEBT TAX SHIELDS 537

BANKRUPTCY COSTS 537

AGENCY COSTS 539

A FIRM’S ASSETS AND ITS FINANCING POLICY 540

THE PECKING ORDER HYPOTHESIS 540

MARKET TIMING 540

BEYOND DEBT AND EQUITY 541

GUIDELINES FOR FINANCING STRATEGY 541

SUMMARY 543

KEY TERMS 543

DISCUSSION QUESTIONS 543

PROBLEMS 544

APPENDIX 547

GLOSSARY 556

INDEX 570