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Financial Management: Core Concepts, Third Edition

Name: Financial Management: Core Concepts, Third Edition
Author: Raymond M. Brooks
ISBN: 9780133866698

by Raymond M. Brooks

January 2015

Beginner

480 pages

31h 42m

English

Pearson

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Financial Management Core Concepts
Financial Management Core Concepts
The Pearson Series in Finance
About the Author
The Student Front and Center
From the Author
Reviewers
Brief Contents
Contents

Part One Fundamental Concepts and Basic Tools of Finance
Chapter 1 Financial Management
Learning Objectives
1.1 The Cycle of Money
1.2 Overview of Finance Areas
1.3 Financial Markets
1.4 The Finance Manager and Financial Management
1.5 Objective of the Finance Manager
Profit MaximizationMaximizing Current Stock PriceMaximizing Equity Value
1.6 Internal and External Players
1.7 The Legal Forms of Business
ProprietorshipPartnershipCorporationsHybrid CorporationsNot-for-Profit Corporations
1.8 The Financial Management Setting: The Agency Model
1.9 Corporate Governance and Business Ethics
1.10 Why Study Finance?
Key Terms
Questions
Prepping for Exams
Chapter 1 Financial Management
Chapter 2 Financial Statements
Learning Objectives
2.1 Financial Statements
The Balance SheetCash account Working capital accounts Long-term capital assets accounts Long-term debt (liabilities) accounts Ownership accounts The Income StatementIssue 1: Generally accepted accounting principles Issue 2: Noncash expense items Issue 3: Classifying interest expense as part of the financing decision Statement of Retained Earnings
2.2 Cash Flow Identity and the Statement of Cash Flows
The First Component: Cash Flow from AssetsThe Second Component: Cash Flow to CreditorsThe Third Component: Cash Flow to OwnersPutting It All Together: The Cash Flow IdentityThe Statement of Cash FlowsFree Cash Flow
2.3 Financial Performance Reporting
Regulation Fair DisclosureNotes to the Financial Statements
2.4 Financial Statements on the Internet
Key Terms
Questions
Prepping for Exams
Problems
Advanced Problems for Spreadsheet Application
Chapter 2 Financial Statements
Chapter 3 The Time Value of Money (Part 1)
Learning Objectives
3.1 Future Value and Compounding Interest
The Single-Period ScenarioThe Multiple-Period ScenarioMethods of Solving Future Value ProblemsMethod 1: The equation Method 2: The TVM keys Method 3: The spreadsheet Problem Solution
3.2 Present Value and Discounting
The Single-Period ScenarioThe Multiple-Period ScenarioProblem Solution The Use of Time Lines
3.3 One Equation and Four Variables
3.4 Applications of the Time Value of Money Equation
Problem Solution Method 1 Using the equationMethod 2 Using the TVM keysMethod 3 Using a spreadsheetProblem Solution Method 1 Using the equationMethod 2 Using the TVM keys Method 3 Using a spreadsheetProblem Solution Method 1 Using the equationMethod 2 Using the TVM keys Method 3 Using a spreadsheetProblem Solution Method 1 Using the equationMethod 2 Using the TVM keys Method 3 Using a spreadsheet Problem Solution Method 1 Using the equationMethod 2 Using the TVM keysMethod 3 Using a spreadsheet
3.5 Doubling of Money: The Rule of 72
Key Terms
Questions
Prepping for Exams
Problems
Advanced Problems for Spreadsheet Application
Chapter 3 The Time Value of Money (Part 1)
Chapter 4 The Time Value of Money (Part 2)
Learning Objectives
4.1 Future Value of Multiple Payment Streams
4.2 Future Value of an Annuity Stream
Future Value of an Annuity: An ApplicationProblem Solution Method 1 Using the equationMethod 2 Using the TVM keysMethod 3 Using a spreadsheet
4.3 Present Value of an Annuity
ProblemSolutionMethod 1 Using the equationMethod 2 Using the TVM keysmethod 3 Using a spreadsheet
4.4 Annuity Due and Perpetuity
Perpetuity
4.5 Three Loan Payment Methods
Interest and Principal at Maturity of Loan (Discount Loan)Interest as You Go, Principal at Maturity of Loan (Interest-Only Loan)Interest and Principal as You Go (Amortized Loan)
4.6 Amortization Schedules
4.7 Waiting Time and Interest Rates for Annuities
Problem Solution Method 1 Using the equationMethod 2 Using the TVM keysMethod 3 Using a spreadsheetMethod 1 Using the equation
4.8 Solving a Lottery Problem
4.9 Ten Important Points about the TVM Equation
Key Terms
Questions
Prepping for Exams
Problems
Advanced Problems for Spreadsheet Application
Chapter 4 The Time Value of Money (Part 2)
Chapter 5 Interest Rates
Learning Objectives
5.1 How Financial Institutions Quote Interest Rates: Annual and Periodic Interest Rates
5.2 Effect of Compounding Periods on the Time Value of Money Equations
Problem SolutionMETHOD 1 Using the equationMETHOD 2 Using a calculatorMETHOD 3 Using a spreadsheetProblem SolutionMETHOD 1 Using the equationMETHOD 2 Using the TVM keysMETHOD 3 Using a spreadsheet
5.3 Consumer Loans and Amortization Schedules
Problem SolutionMETHOD 1 Using the TVM keysMETHOD 2 Using the TVM keysProblem SolutionPayment method 1Payment method 2
5.4 Nominal and Real Interest Rates
Problem Solution
5.5 Risk-Free Rate and Premiums
Maturity Premiums
5.6 Yield Curves
Problem Solution
5.7 A Brief History of Interest Rates and Inflation in the United States
Key Terms
Questions
Prepping for Exams
Problems
Advanced Problems for Spreadsheet Application
Chapter 5 Interest Rates
Part Two Valuing Stocks and Bonds and Understanding Risk and Return
Chapter 6 Bonds and Bond Valuation
Learning Objectives
6.1 Application of the Time Value of Money Tool: Bond Pricing
Key Components of a BondPricing a Bond in StepsMethod 1: Using the equation Method 2: Using the TVM keysMethod 3: Using a spreadsheet
6.2 Semiannual Bonds and Zero-Coupon Bonds
Pricing Bonds after Original IssueMethod 1: Using the equation Method 2: Using the TVM keys Method 3: Using a spreadsheet Zero-Coupon BondsProblem Solution Method 1 Using the equation method 2 Using the TVM keys Method 3 Using a spreadsheet Amortization of a Zero-Coupon Bond
6.3 Yields and Coupon Rates
The First Interest Rate: Yield to MaturityMethod 1: Using the equation Method 2: Using the TVM keys Method 3: Using a spreadsheet The “Other” Interest Rate: Coupon RateRelationship of Yield to Maturity and Coupon Rate
6.4 Bond Ratings
6.5 Some Bond History and More Bond Features
6.6 U.S. Government Bonds
Pricing a U.S. Government Note or BondPricing a Treasury Bill
Key Terms
Questions
Prepping for Exams
Problems
Bond prices. For Problems 1 through 4, use the information in the following table.Yield to maturity. For Problems 5 through 8, use the information in the following table.Treasury notes and bonds. For Problems 19 through 23, use the information in the following table.Treasury bills. For Problems 24 through 28, use the information in the following table. A face value of $10,000 is assumed for these Treasury bills.
Advanced Problems for Spreadsheet Application
Chapter 6 Bonds and Bond Valuation
Chapter 7 Stocks and Stock Valuation
Learning Objectives
7.1 Characteristics of Common Stock
OwnershipClaim on Assets and Cash Flow (Residual Claim)Vote (Voice in Management)No Maturity DateDividends and Their Tax EffectAuthorized, Issued, and Outstanding SharesTreasury StockPreemptive Rights
7.2 Stock Markets
Primary MarketsSecondary Markets: How Stocks TradeBull Markets and Bear Markets
7.3 Stock Valuation
ProblemSolutionmethod 1method 2The Constant Dividend Model with an Infinite HorizonProblemSolutionThe Constant Dividend Model with a Finite HorizonMethod 1: Using the equation Method 2: Using the TVM keysThe Constant Growth Dividend Model with an Infinite HorizonProblemSolutionThe Constant Growth Dividend Model with a Finite HorizonNonconstant Growth DividendsProblemSolution
7.4 Dividend Model Shortcomings
7.5 Preferred Stock
ProblemSolution
7.6 Efficient Markets
Operational EfficiencyInformational Efficiency
Key Terms
Questions
Prepping for Exams
Problems
Advanced Problems for Spreadsheet Application
Chapter 7 Stocks and Stock Valuation
Chapter 8 Risk and Return
Learning Objectives
8.1 Returns
Dollar Profits and Percentage ReturnsProblem Solution Converting Holding Period Returns to Annual ReturnsMethod 1: Using equations Method 2: Using the TVM keys Extrapolating Holding Period Returns
8.2 Risk (Certainty and Uncertainty)
8.3 Historical Returns
8.4 Variance and Standard Deviation as a Measure of Risk
Problem Solution Normal Distributions
8.5 Returns in an Uncertain World (Expectations and Probabilities)
Determining the Probabilities of All Potential OutcomesProblem Solution
8.6 The Risk-and-Return Trade-Off
Investment Rules
8.7 Diversification: Minimizing Risk or Uncertainty
When Diversification WorksAdding More Stocks to the Portfolio: Systematic and Unsystematic Risk
8.8 Beta: The Measure of Risk in a Well-Diversified Portfolio
Problem Solution
8.9 The Capital Asset Pricing Model and the Security Market Line
The Capital Asset Pricing ModelProblem Solution Application of the SML
Key Terms
Questions
Prepping for Exams
Problems
Advanced Problems for Spreadsheet Application
Chapter 8 Risk and Return
Part Three Capital Budgeting
Chapter 9 Capital Budgeting Decision Models
Learning Objectives
9.1 Short-Term and Long-Term Decisions
9.2 Payback Period
Problem Solution Discounted Payback Period
9.3 Net Present Value
Mutually Exclusive versus Independent ProjectsProblem Solution Unequal Lives of ProjectsNet Present Value Example: Equation and Calculator Function
9.4 Internal Rate of Return
Problem Solution Input and Results of NPV and IRR Calculations on CalculatorAppropriate Discount Rate or Hurdle RateProblems with the Internal Rate of ReturnMultiple Internal Rates of ReturnProblem Solution Reinvestment and Crossover RatesProblem Solution Modified Internal Rate of Return
9.5 Profitability Index
Problem Solution
9.6 Overview of Six Decision Models
Capital Budgeting Using a Spreadsheet
Key Terms
Questions
Prepping for Exams
Problems
Advanced Problems for Spreadsheet Application
Chapter 9 Capital Budgeting Decision Models
Chapter 10 Cash Flow Estimation
Learning Objectives
10.1 The Importance of Cash Flow
10.2 Estimating Cash Flow for Projects: Incremental Cash Flow
Sunk CostsOpportunity CostsErosion CostsProblem Solution Synergy GainsWorking CapitalProblem Solution
10.3 Capital Spending and Depreciation
Straight-Line DepreciationModified Accelerated Cost Recovery System
10.4 Cash Flow and the Disposal of Capital Equipment
Problem Solution
10.5 Projected Cash Flow For a New Product
Key Terms
Questions
Prepping for Exams
Problems
Advanced Problems for Spreadsheet Application
Chapter 10 Cash Flow Estimation
Chapter 11 The Cost of Capital
Learning Objectives
11.1 The Cost of Capital: A Starting Point
Problem Solution
11.2 Components of the Weighted Average Cost of Capital
Debt ComponentProblem Solution Problem Solution Preferred Stock ComponentProblem Solution Equity ComponentThe security market line approach to Re Problem Solution The dividend growth model approach to Re Problem Solution Retained EarningsThe Debt Component and Taxes
11.3 Weighting the Components: Book Value or Market Value?
Book ValueAdjusted Weighted Average Cost of CapitalMarket ValueProblem Solution
11.4 Using the Weighted Average Cost of Capital in a Budgeting Decision
The Weighted Average Cost of Capital for Individual Projects
11.5 Selecting Appropriate Betas for Projects
Problem Solution
11.6 Constraints on Borrowing and Selecting Projects for the Portfolio
Problem Solution
Key Terms
Questions
Prepping for Exams
Problems
Advanced Problems for Spreadsheet Application
Chapter 11 The Cost of Capital
Part Four Financial Planning and Evaluating Performance
Chapter 12 Forecasting and Short-Term Financial Planning
Learning Objectives
12.1 Sources and Uses of Cash
12.2 Cash Budgeting and the Sales Forecast
Cash Inflow from SalesOther Cash Receipts
12.3 Cash Outflow from Production
Problem Solution
12.4 The Cash Forecast: Short-Term Deficits and Short-Term Surpluses
Funding Cash DeficitsInvesting Cash Surpluses
12.5 Planning with Pro Forma Financial Statements
Pro Forma Income StatementPro Forma Balance SheetProblem Solution
Key Terms
Questions
Prepping for Exams
Problems
Advanced Problems for Spreadsheet Application
Chapter 12 Forecasting and Short-Term Financial Planning
Chapter 13 Working Capital Management
Learning Objectives
13.1 The Cash Conversion Cycle
Average Production CycleAverage Collection CycleAverage Payment CyclePutting It All Together: The Cash Conversion Cycle
13.2 Managing Accounts Receivable and Setting Credit Policy
Collecting Accounts ReceivableProblem Solution Credit: A Two-Sided CoinQualifying for CreditProblem Solution Setting Payment PolicyCollecting Overdue Debt
13.3 The Float
Speeding Up the Collection Float (Shortening the Lag Time)Extending Disbursement Float (Lengthening the Lag Time)
13.4 Inventory Management: Carrying Costs and Ordering Costs
ABC Inventory ManagementRedundant Inventory ItemsEconomic Order QuantityThe Trade-off between Ordering Costs and Carrying Costs Measuring Ordering Costs Problem Solution Measuring Carrying Costs Problem Solution Reorder Point and Safety Stock Just in Time
13.5 The Effect of Working Capital on Capital Budgeting
Inventories and Daily OperationsProblem Solution
Key Terms
Questions
Prepping for Exams
Problems
Advanced Problems for Spreadsheet Application
Chapter 13 Working Capital Management
Chapter 14 Financial Ratios and Firm Performance
Learning Objectives
14.1 Financial Statements
Benchmarking
14.2 Financial Ratios
Short-Term Solvency: Liquidity RatiosLong-Term Solvency: Solvency or Financial Leverage RatiosAsset Management RatiosProfitability RatiosMarket Value RatiosDuPont Analysis
14.3 External Uses of Financial Statements and Industry Averages
Cola WarsIndustry Ratios
Key Terms
Questions
Prepping for Exams
Problems
Advanced Problems for Spreadsheet Application
Chapter 14 Financial Ratios and Firm Performance
Part Five Other Selected Finance Topics
Chapter 15 Raising Capital
Learning Objectives
15.1 The Business Life Cycle
15.2 Borrowing for a Start-Up and Growing Business
Personal Funds and Family LoansCommercial Bank LoansCommercial Bank Loans through the Small Business AdministrationAngel Financing and Venture Capital Financial Strength Contacts Exit Strategy Problem Solution
15.3 Borrowing for a Stable and Mature Business: Bank Loans
Straight LoansProblem Solution Discount LoansProblem Solution Letters of Credit or Lines of CreditCompensating Balance Loans
15.4 Borrowing for a Stable and Mature Business: Selling Bonds
Problem Solution
15.5 Borrowing For a Stable and Mature Business: Selling Stock
Initial Public Offerings and UnderwritingProblemSolutionRegistration, Prospectus, and TombstoneThe Marketing Process: Road ShowThe AuctionThe Aftermarket: Dealer in the SharesProblem Solution
15.6 Other Borrowing Options for a Mature Business
Problem Solution
15.7 The Final Phase: Closing the Business
Straight Liquidation: Chapter 7Reorganization: Chapter 11
Key Terms
Questions
Prepping for Exams
Problems
Advanced Problems for Spreadsheet Application
Chapter 15 Raising Capital
Chapter 16 Capital Structure
Learning Objectives
16.1 Capital Markets: A Quick Review
Problem Solution
16.2 Benefits of Debt
Earnings per Share as a Measure of the Benefits of Borrowing
16.3 Break-Even Earnings for Different Capital Structures
Problem (A) Solution Problem (B) Solution
16.4 Pecking Order
Firms Prefer Internal Financing FirstFirms Choose to Issue the Cheapest Security First and Use Equity as a Last ResortProblem Solution
16.5 Modigliani and Miller on Optimal Capital Structure
Capital Structure in a World of No Taxes and No BankruptcyM&M Proposition I M&M Proposition II Problem Solution Capital Structure in a World of Corporate Taxes and No BankruptcyDebt and the Tax ShieldProblem Solution
16.6 The Static Theory of Capital Structure
BankruptcyStatic Theory of Capital Structure
Key Terms
Questions
Prepping for Exams
Problems
Advanced Problems for Spreadsheet Application
Chapter 16 Capital Structure
Chapter 17 Dividends, Dividend Policy, and Stock Splits
Learning Objectives
17.1 Cash Dividends
Buying and Selling StockDeclaring and Paying a Cash Dividend: A ChronologyDifferent Types of DividendsRegular cash dividends Special or extra cash dividends Stock dividends Liquidating dividends
17.2 Dividend Policy
Dividend ClientelesDividend Policy IrrelevanceDividend Policy in a World of No Taxes and No Transaction CostsProblem SolutionProblem SolutionDividends in a world of taxes Problem SolutionProblem Solution Reasons Favoring a Low- or No-Dividend-Payout PolicyTax Advantages Higher potential returns from positive net present value projects Less need for outside funding Reasons Favoring a High-Dividend-Payout PolicyFreedom from transaction costs Certainty versus uncertainty Optimal Dividend Policy
17.3 Selecting a Dividend Policy
Problem Solution Some Further Considerations in the Selection of a Dividend PolicyRestrictions on legal capital Restrictive bond covenants Cash availability
17.4 Stock Dividends, Stock Splits, and Reverse Splits
Reasons for Stock SplitsPreferred trading range Signaling hypothesis Increased liquidity Reverse Splits
17.5 Specialized Dividend Plans
Stock RepurchaseProblem SolutionScenario 1 Stock repurchaseScenario 2 Cash dividend payoutDividend Reinvestment PlansProblem Solution
Key Terms
Questions
Prepping for Exams
Problems
Advanced Problems for Spreadsheet Application
Chapter 17 Dividends, Dividend Policy, and Stock Splits
Chapter 18 International Financial Management
Learning Objectives
18.1 Managing Multinational Operations
Cultural RiskDifferences in ownership structure Differences in human resource norms Religious heritage of the host country Nepotism and corrupt practices in the host country Intellectual property rights Business RiskPolitical Risk
18.2 Foreign Exchange
Purchasing Power ParityCurrency Exchange RatesCross RatesArbitrage OpportunitiesProblem Solution Forward RatesUsing Forward RatesProblem Solution Changing Spot Rates
18.3 Transaction, Operating, and Translation Exposures
Transaction ExposureOperating ExposureTranslation Exposure
18.4 Foreign Investment Decisions
Problem Solution Domestic Currency ApproachForeign Currency Approach
Key Terms
Questions
Prepping for Exams
Problems
Advanced Problems for Spreadsheet Application
Chapter 18 International Financial Management
Key Formulas and Spreadsheet Functions
Appendix 1 Future Value Interest Factors
Appendix 2 Present Value Interest Factors
Appendix 3 Future Value Interest Factors of an Annuity
Appendix 4 Present Value Interest Factors of an Annuity
Appendix 5 Answers to Prepping for Exam Questions
Glossary
Index
Credits

Content preview from Financial Management: Core Concepts, Third Edition

12.2 Cash Budgeting and the Sales Forecast

We start the process of building a cash budget with a prediction of the cash inflow from future sales, or the sales forecast. Remember that the act of the sale and the cash inflow from the sale often happen at different times. So we have two timing issues in sales forecasting:

When will the sale occur?
When will the firm receive the money for the sale?

An illustration of the concept of sales forecasting. — In sales forecasting, the time when a company records a sale is often different from the time when it actually receives cash because of credit arrangements. The collection or accounts receivable cycle deals with the timing of credit sales.

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Financial Management: Core Concepts, Third Edition

by Raymond M. Brooks

12.2 Cash Budgeting and the Sales Forecast

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