Title Details

Frank J. Fabozzi, PhD, CFA, CPA, is Professor in the Practice of Finance in the School of Management at Yale University. He is a Fellow of the International Center for Finance at Yale University and serves on the Advisory Council for the Department of Operations Research and Financial Engineering at Princeton University. He has authored and edited numerous books in finance.

Pamela Peterson Drake, PhD, CFA, is the J. Gray Ferguson Professor of Finance and Department Head of Finance and Business Law at James Madison University, Harrisonburg, Virginia. She is author or coauthor of numerous books and articles.

Ralph S. Polimeni, PhD, CPA, is the Vice Provost for Accreditation and Assessment and holds the Chaykin Endowed Chair in Accounting at Hofstra University, Long Island, New York. He has authored numerous articles and books on accounting.

Preface xv

About the Authors xix

CHAPTER 1

The Changing Role of the CFO: From Accounting to Accountable 1

SOX Act of 2002 and the CFO 2

Expanded Responsibilities of the CFO 6

Our Agenda 14

Part One

Funding 15

CHAPTER 2

Capital Structure Decisions 17

Debt versus Equity 18

Concept of Leverage 21

Capital Structure and Financial Leverage 25

Financial Leverage and Risk 29

Capital Structure and Taxes 31

Capital Structure and Financial Distress 37

Cost of Capital 41

Agency Relationship 43

Optimal Capital Structure: Theory and Practice 47

A Capital Structure Prescription 51

Bottom Line 52

Appendix: Capital Structure Theory—The Modigliani-Miller Theory and Beyond 53

CHAPTER 3

Types of Debt Financing 63

General Features of Debt Obligations 64

Term Loans 65

Syndicated Bank Loans 69

Notes and Bonds 71

Short-Term Financing 86

Off-Balance-Sheet Financing 93

Bottom Line 95

CHAPTER 4

Equity Funding 99

Common Stock 100

Preferred Stock 115

Bottom Line 121

CHAPTER 5

Structured Financing: Asset Securitization and Structured Notes 123

Asset Securitization 124

Structured Notes 139

Bottom Line 149

Part Two

Strategy, Taxes, and Risk Management 151

CHAPTER 6

Strategy and Financial Planning 153

Strategy and Value 155

Financial Planning and Budgeting 158

Importance of Financial Planning 158

Budgeting Process 160

Sales Forecasting 161

Seasonal Considerations 163

Budgeting 165

Pro Forma Financial Statements 172

Long-Term Financial Planning 179

Financial Modeling 179

Performance Evaluation 183

Strategy and Value Creation 191

Bottom Line 195

CHAPTER 7

Basics of Corporate Taxes and Tax Risk Management 197

Tax Management 199

Tax Risk 200

U.S. Tax Law and Taxation of Corporations 205

State and Local Taxes 218

Non-U.S. Taxes 218

Bottom Line 224

CHAPTER 8

Corporate Risk Management 227

Risk Defined 228

Enterprise Risk Management 230

Managing Risks 235

Risk Transfer 237

Bottom Line 255

Part Three

Performance Evaluation 259

CHAPTER 9

Financial Ratio Analysis 261

Ratios and Their Classification 262

Return-on-Investment Ratios 264

Liquidity 271

Profitability Ratios 279

Activity Ratios 282

Financial Leverage Ratios 284

Common-Size Analysis 289

Using Financial Ratio Analysis 290

Illustration: Pfizer, Inc., 1990–2005 292

Bottom Line 307

CHAPTER 10

Cash Flow Analysis 309

Difficulties with Measuring Cash Flow 309

Cash Flows and the Statement of Cash Flows 311

Free Cash Flow 316

Calculating Free Cash Flow 318

Net Free Cash Flow 320

Usefulness of Cash Flows in Financial Analysis 322

Bottom Line 327

CHAPTER 11

Decentralized Operations and Responsibility Accounting 329

Organization Structures and Concepts 330

Examples of Types of Organization Structure and Resposibility Reporting 331

Decentralization Problems 337

Responsibility Accounting 338

Controllable Costs 345

Costs of Service Departments 346

Executive Incentive Compensation Plans and Dysfunctional Decision Making 347

Bottom Line 351

CHAPTER 12

Responsibility Center Performance Evaluation 353

Basis for Comparison 354

Cost Center Performance Evaluation 356

Profit Center Performance Evaluation 364

Profit Center Decision Making 372

Investment Center Performance Evaluation 373

Bottom Line 394

Appendix: Gross Profit Analysis 394

CHAPTER 13

Transfer Pricing 405

Transfer Pricing Methods 407

Dual Transfer Pricing System 418

International Transfer Pricing 419

Bottom Line 424

Part Four

Asset Management 427

CHAPTER 14

Capital Budgeting and Cash Flow Analysis 429

The Investment Problem 430

Capital Budgeting 432

Cash Flow from Investments 437

Bottom Line 454

Appendix 14.A: Expected Cash Flows from the Disposition of an Asset 455

Appendix 14.B: Expansion of the Williams 5 & 10 457

CHAPTER 15

Capital Budgeting Techniques 463

Evaluation Techniques 464

Net Present Value 466

Profitability Index 471

Internal Rate of Return 472

Modified Internal Rate of Return 477

Payback Period 480

Discounted Payback Period 482

Issues in Capital Budgeting 483

Comparing Techniques 486

Capital Budgeting Techniques in Practice 489

Conflicts with Responsibility Center Performance Evaluation Measures 490

Capital Budgeting and the Justification of New Technology 491

Bottom Line 495

CHAPTER 16

Capital Budgeting and Risk 497

Project Risk 498

Measurement of Project Risk 500

Measuring a Project’s Market Risk 505

Incorporating Risk in the Capital Budgeting Decision 514

Real Options 518

Certainty Equivalents 525

Assessment of Project Risk in Practice 526

Bottom Line 528

CHAPTER 17

Leasing 531

How Leasing Works 532

Types of Equipment Leases 533

Full-Payout Leases versus Operating Leases 535

Reasons for Leasing 536

Types of Lessors 541

Lease Brokers and Financial Advisers 541

Lease Programs 542

Financial Reporting of Lease Transactions by Lessees 543

Leveraged Lease Fundamentals 546

Federal Income Tax Requirements for True Lease Transactions 556

Synthetic Leases 558

Valuing a Lease: The Lease or Borrow-to-Buy Decision 560

Bottom Line 574

CHAPTER 18

Managing Short-Term Assets 579

Cash Management 581

Marketable Securities 589

Receivables Management 591

Inventory Management 601

Bottom Line 607

Part Five

Cost and Managerial Accounting 609

CHAPTER 19

Classifying Costs 611

Elements of a Product 612

Relationship to Production 615

Relationship to Volume 616

Ability to Trace 622

Department Where Incurred 623

Functional Areas 624

Period Charge in Income 625

Relationship to Planning, Controlling, and Decision Making 626

Techniques for New Product Cost Estimation 629

Bottom Line 633

CHAPTER 20

Costing and Control of Materials, Labor, and Factory Overhead 635

Materials (Stores) 636

Labor 641

Factory Overhead Costs 646

Activity-Based Costing 660

Bottom Line 664

CHAPTER 21

Job Order and Process Costing 667

Comparison of Job Order and Process Cost Accumulation Systems 668

Job Order Costing 669

Operation Costing 673

Project Costing 674

Process Costing 676

Backflush Costing 694

Bottom Line 695

Appendix: Spoiled Units, Defective Units, Scrap Material, and Waste Material in Job Order and Process Costing Systems 697

CHAPTER 22

Joint Product and By-Product Costing 703

Joint Products 703

By-Products 711

Effects of Joint Cost Allocation upon Decision Making 715

Bottom Line 716

CHAPTER 23

Master Budget 719

Conventional Master Budget System 721

Budgeted Schedules 723

Budgeted Summaries 740

Bottom Line 744

CHAPTER 24

Standard Costing 749

Actual, Normal, and Standard Costing 750

Uses of Standard Costs 751

Types of Standards 752

Establishment of Standards 753

Just-in-Time Philosophy and Cost Accounting 764

Variance Analysis 769

Disposition of All Variances 786

Bottom Line 788

CHAPTER 25

Direct and Absorption Costing 791

Meaning of Direct Costing 791

Direct Costing versus Absorption Costing 792

Advantages of Direct Costing 802

Disadvantages of Direct Costing 805

Adjusting Financial Statements for External Reports 807

Bottom Line 807

Index 809