book

Financial Management: Principles and Applications, 13/e

Name: Financial Management: Principles and Applications, 13/e
ISBN: 9780134417219

by Sheridan Titman, Arthur J. Keown, John D. Martin

January 2017

Beginner

500 pages

147h 53m

English

Pearson

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Financial Management Principles and Applications
Financial Management Principles and Applications
Brief Contents
Contents
Teaching Students the of Finance
Preface
Our Approach to Financial ManagementNew to This EditionA Total Learning PackageLearning Aids in the TextContent UpdatingLearning Aids Supplemental to the Text
Financial Management Principles and Applications
Part 1 Introduction to Financial Management
Chapter 1 Getting Started Principles of FinanceChapter OutlinePrinciples , , , , and Applied
1.1 Finance: An Overview
What Is Finance?Why Study Finance?Concept Check 1.1
1.2 Three Types of Business Organizations
Sole ProprietorshipPartnershipCorporationHow Does Finance Fit into the Firm’s Organizational Structure?Concept Check 1.2

1.3 The Goal of the Financial Manager
Maximizing Shareholder WealthEthical Considerations in Corporate FinanceRegulation Aimed at Making the Goal of the Firm Work: The Sarbanes–Oxley ActConcept Check 1.3
1.4 The Five Basic Principles of Finance
Principle 1: Money Has a Time ValuePrinciple 2: There Is a Risk-Return TradeoffPrinciple 3: Cash Flows Are the Source of ValuePrinciple 4: Market Prices Reflect InformationPrinciple 5: Individuals Respond to IncentivesConcept Check 1.4
Chapter Summaries
1.1 Understand the importance of finance in your personal and professional lives and identify the three primary business decisions that financial managers make. (pgs. 4–5)Summary:Key TermsConcept Check 1.11.2 Identify the key differences among the three major legal forms of business. (pgs. 5–9)Summary:Key TermsConcept Check 1.21.3 Understand the role of the financial manager within the firm and the goal for making financial choices. (pgs. 9–11)Summary:Concept Check 1.31.4 Explain the five principles of finance that form the basis of financial management for both businesses and individuals. (pgs. 11–14)Summary:Key TermsConcept Check 1.4
Study Questions
Chapter 2 Firms and the Financial Markets
Chapter OutlinePrinciples ,, and Applied
2.1 The Basic Structure of the U.S. Financial Markets
2.2 The Financial Marketplace: Financial Institutions
Commercial Banks: Everyone’s Financial MarketplaceNonbank Financial IntermediariesFinancial Services CorporationsInsurance CompaniesInvestment BanksInvestment CompaniesMutual Funds and Exchange-Traded Funds (ETFs)Hedge FundsPrivate Equity FirmsConcept Check 2.2
2.3 The Financial Marketplace: Securities Markets
How Securities Markets Bring Corporations and Investors TogetherTypes of SecuritiesDebt SecuritiesEquity SecuritiesCommon StockPreferred StockStock MarketsReading Stock Price QuotesOther Financial InstrumentsThe Financial Markets and the Financial CrisisConcept Check 2.3
Chapter Summaries
2.1 Describe the structure and functions of financial markets. (pg. 20)Summary:Key Terms2.2 Distinguish between commercial banks and other financial institutions in the financial marketplace. (pgs. 20–25)Summary:Key TermsConcept Check 2.22.3 Describe the different securities markets for bonds and stocks. (pgs. 25–33)Summary:Key TermsConcept Check 2.3
Study Questions
Chapter 3 Understanding Financial Statements
Chapter OutlinePrinciples , , , and Applied
3.1 An Overview of the Firm’s Financial Statements
Basic Financial StatementsWhy Study Financial Statements?What Are the Accounting Principles Used to Prepare Financial Statements?Concept Check 3.1
3.2 The Income Statement
The Income Statement of H. J. Boswell, Inc.Reading and Interpreting Boswell’s Income StatementEvaluating Boswell’s per Share Earnings and DividendsConnecting the Income Statement and Balance SheetInterpreting Firm Profitability Using the Income StatementGAAP and Earnings ManagementConcept Check 3.2
3.3 Corporate Taxes
Computing Taxable IncomeFederal Income Tax Rates for Corporate IncomeMarginal and Average Tax RatesDividend Exclusion for Corporate StockholdersConcept Check 3.3
3.4 The Balance Sheet
The Balance Sheet of H. J. Boswell, Inc.Assets: The Left-Hand Side of the Balance SheetCurrent AssetsFixed AssetsLiabilities and Stockholders’ Equity: The Right-Hand Side of the Balance SheetFirm Liquidity and Net Working CapitalDebt and Equity FinancingBook Values, Historical Costs, and Market ValuesConcept Check 3.4
3.5 The Cash Flow Statement
Sources and Uses of CashH. J. Boswell’s Cash Flow StatementEvaluating the Cash Flow StatementQuality of Earnings—Evaluating Cash Flow from OperationsSustainable Capital Expenditures—Evaluating Investment ActivitiesConcept Check 3.5
Chapter Summaries
3.1 Describe the content of the four basic financial statements and discuss the importance of financial statement analysis to the financial manager. (pgs. 40–42)Summary:Key TermsConcept Check 3.13.2 Evaluate firm profitability using the income statement. (pgs. 42–47)Summary:Key TermsKey EquationConcept Check 3.23.3 Estimate a firm’s tax liability using the corporate tax schedule and distinguish between the average and marginal tax rates. (pgs. 47–49)Summary:Key TermsConcept Check 3.33.4 Use the balance sheet to describe a firm’s investments in assets and the way it has financed them. (pgs. 49–57)Summary:Key TermsKey EquationsConcept Check 3.43.5 Identify the sources and uses of cash for a firm using the firm’s cash flow statement. (pgs. 58–66)Summary:Key TermsKey EquationsConcept Check 3.5
Study Questions
Study Problems
The Income StatementCorporate Income TaxThe Balance SheetCash Flow Statement
Chapter 4 Financial Analysis Sizing Up Firm Performance
Chapter OutlinePrinciples and Applied
4.1 Why Do We Analyze Financial Statements?
Concept Check 4.1
4.2 Common-Size Statements: Standardizing Financial Information
The Common-Size Income Statement: H. J. Boswell, Inc.The Common-Size Balance Sheet: H. J. Boswell, Inc.Concept Check 4.2
4.3 Using Financial Ratios
Liquidity RatiosMeasuring the Overall Liquidity of a FirmCurrent Ratio.Acid-Test (Quick) Ratio.Measuring the Liquidity of Individual Asset CategoriesHow Long Does It Take to Convert the Firm’s Accounts Receivable to Cash?Average Collection Period.Accounts Receivable Turnover.How Long Does It Take to Convert the Firm’s Inventory to Cash?Inventory Turnover.Days’ Sales in Inventory.Can a Firm Have Too Much Liquidity?Capital Structure RatiosAsset Management Efficiency RatiosProfitability RatiosCost Control: Is the Firm Earning Reasonable Profit Margins?Return on Invested CapitalIs the Firm Providing a Reasonable Return on the Owners’ Investment?Market Value RatiosPrice-Earnings RatioSumming Up the Financial Analysis of H. J. Boswell, Inc.Concept Check 4.3
4.4 Selecting a Performance Benchmark
Trend AnalysisPeer-Firm ComparisonsIndustry Average Financial RatiosConcept Check 4.4
4.5 Limitations of Ratio Analysis
Concept Check 4.5
Chapter Summaries
4.1 Explain what we can learn by analyzing a firm’s financial statements. (pg. 80)Summary:Concept Check 4.14.2 Use common-size financial statements as a tool of financial analysis. (pgs. 81–83)Summary:Concept Check 4.24.3 Calculate and use a comprehensive set of financial ratios to evaluate a company’s performance. (pgs. 83–107)Summary:Key TermsKey EquationsConcept Check 4.34.4 Select an appropriate benchmark for use in performing a financial ratio analysis. (pgs. 107–109)Summary:Key TermConcept Check 4.44.5 Describe the limitations of financial ratio analysis. (pgs. 109–110)Summary:Concept Check 4.5
Study Questions
Study Problems
Common-Size StatementsUsing Financial RatiosSelecting a Performance Benchmark
Part 2 Valuation of Financial Assets
Chapter 5 The Time Value of Money The BasicsChapter OutlinePrinciple Applied
5.1 Using Timelines to Visualize Cash Flows
Concept Check 5.1
5.2 Compounding and Future Value
Compound Interest and TimeCompound Interest and the Interest RateTechniques for Moving Money Through TimeApplying Compounding to Things Other Than MoneyCompound Interest with Shorter Compounding PeriodsConcept Check 5.2
5.3 Discounting and Present Value
The Mechanics of Discounting Future Cash FlowsTwo Additional Types of Discounting ProblemsSolving for the Number of PeriodsThe Rule of 72Solving for the Rate of InterestConcept Check 5.3
5.4 Making Interest Rates Comparable
Calculating the Interest Rate and Converting It to an EARTo the Extreme: Continuous CompoundingConcept Check 5.4
Chapter Summaries
5.1 Construct cash flow timelines to organize your analysis of problems involving the time value of money. (pgs. 130–131)Summary:Key TermConcept Check 5.15.2 Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet. (pgs. 132–139)Summary:Key TermsKey EquationsConcept Check 5.25.3 Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet. (pgs. 139–144)Summary:Key TermsKey EquationsConcept Check 5.35.4 Understand how interest rates are quoted and know how to make them comparable. (pgs. 145–149)Summary:Key TermsKey EquationsConcept Check 5.4
Study Questions
Study Problems
Compound InterestDiscounting and Present ValueMaking Interest Rates ComparableQuestions
Chapter 6 The Time Value of Money Annuities and Other Topics
Chapter OutlinePrinciples and Applied
6.1 Annuities
Ordinary AnnuitiesThe Future Value of an Ordinary AnnuityThe Formula for the Future Value of an Ordinary AnnuityUsing the Mathematical Formulas.Using a Financial Calculator.Using an Excel Spreadsheet.Solving for the Payment in an Ordinary AnnuitySolving for the Interest Rate in an Ordinary AnnuityUsing the Mathematical Formulas.Using a Financial Calculator.Using an Excel Spreadsheet.Solving for the Number of Periods in an Ordinary AnnuityUsing a Financial Calculator.Using an Excel Spreadsheet.The Present Value of an Ordinary AnnuityAmortized LoansAmortized Loans with Monthly PaymentsComputing Your Outstanding BalanceAnnuities DueConcept Check 6.1
6.2 Perpetuities
Calculating the Present Value of a Level PerpetuityCalculating the Present Value of a Growing PerpetuityConcept Check 6.2
6.3 Complex Cash Flow Streams
Concept Check 6.3
Chapter Summaries
6.1 Distinguish between an ordinary annuity and an annuity due, and calculate the present and future values of each. (pgs. 160–173)Summary:Key TermsConcept Check 6.1Key Equations6.2 Calculate the present value of a level perpetuity and a growing perpetuity. (pgs. 173–175)Summary:Key TermsKey EquationsConcept Check 6.26.3 Calculate the present and future values of complex cash flow streams. (pgs. 176–179)Summary:Concept Check 6.3
Study Questions
Study Problems
AnnuitiesPerpetuitiesComplex Cash Flow StreamsQuestions
Chapter 7 An Introduction to Risk and Return History of Financial Market Returns
Chapter OutlinePrinciples and Applied
7.1 Realized and Expected Rates of Return and Risk
Calculating the Realized Return from an InvestmentCalculating the Expected Return from an InvestmentMeasuring RiskCalculating the Variance and Standard Deviation of the Rate of Return on an InvestmentConcept Check 7.1
7.2 A Brief History of Financial Market Returns
U.S. Financial Markets: Domestic Investment ReturnsLessons LearnedU.S. Stocks Versus Other Categories of InvestmentsGlobal Financial Markets: International InvestingConcept Check 7.2
7.3 Geometric Versus Arithmetic Average Rates of Return
Computing the Geometric or Compound Average Rate of ReturnChoosing the Right “Average”Concept Check 7.3
7.4 What Determines Stock Prices?
The Efficient Markets HypothesisDo We Expect Financial Markets to Be Perfectly Efficient?The Behavioral ViewMarket Efficiency: What Does the Evidence Show?Concept Check 7.4
Chapter Summaries
7.1 Calculate realized and expected rates of return and risk. (pgs. 194–202)Summary:Key TermsKey EquationsConcept Check 7.17.2 Describe the historical pattern of financial market returns. (pgs. 202–207)Summary:Key TermsConcept Check 7.27.3 Compute geometric (or compound) and arithmetic average rates of return. (pgs. 207–211)Summary:Key TermsKey EquationsConcept Check 7.37.4 Explain the efficient market hypothesis and why it is important to stock prices. (pgs. 211–214)Summary:Key TermsConcept Check 7.4
Study Questions
Study Problems
Realized and Expected Rates of Return and RiskGeometric vs. Arithmetic Average Rates of ReturnQuestions
Chapter 8 Risk and Return Capital Market Theory
Chapter OutlinePrinciples and Applied
8.1 Portfolio Returns and Portfolio Risk
Calculating the Expected Return of a PortfolioEvaluating Portfolio RiskPortfolio DiversificationDiversification LessonsCalculating the Standard Deviation of a Portfolio’s ReturnsConcept Check 8.1
8.2 Systematic Risk and the Market Portfolio
Diversification and Unsystematic RiskDiversification and Systematic RiskSystematic Risk and BetaCalculating the Portfolio BetaConcept Check 8.2
8.3 The Security Market Line and the CAPM
Using the CAPM to Estimate Expected Rates of ReturnConcept Check 8.3
Chapter Summaries
8.1 Calculate the expected rate of return and volatility for a portfolio of investments and describe how diversification affects the returns of a portfolio of investments. (pgs. 224–233)Summary:Key TermsKey EquationsConcept Check 8.18.2 Understand the concept of systematic risk for an individual investment and calculate portfolio systematic risk (beta). (pgs. 233–238)Summary:Key TermsKey EquationsConcept Check 8.28.3 Estimate an investor’s expected rate of return using the Capital Asset Pricing Model. (pgs. 238–242)Summary:Key TermsKey EquationsConcept Check 8.3
Study Questions
Study Problems
Portfolio Returns and Portfolio RiskSystematic Risk and the Market PortfolioThe Security Market Line and the CAPM
Chapter 9 Debt Valuation and Interest Rates
Chapter OutlinePrinciples , , and Applied
9.1 Overview of Corporate Debt
Borrowing Money in the Private Financial MarketPrivate Debt PlacementsFloating-Rate LoansBorrowing Money in the Public Financial MarketCorporate BondsBasic Bond FeaturesBond IndentureClaims on Assets and IncomePar or Face Value“Clean Price” and “Dirty Price”Coupon Interest RateMaturity and Repayment of PrincipalCall Provisions and Conversion FeaturesBond Ratings and Default RiskConcept Check 9.1
9.2 Valuing Corporate Debt
Valuing Bonds by Discounting Future Cash FlowsStep 1: Determine Bondholder Cash FlowsStep 2: Estimate the Appropriate Discount RateCalculating a Bond’s Yield to MaturityUsing Market-Yield-to-Maturity DataPromised or Contractual Versus Expected Yield to MaturityQuoted Yields to Maturity for Corporate BondsStep 3: Calculate the Present Value Using the Discounted Cash FlowSemiannual Interest PaymentsConcept Check 9.2
9.3 Bond Valuation: Four Key Relationships
Relationship 1Relationship 2Relationship 3Relationship 4Concept Check 9.3
9.4 Types of Bonds
Secured Versus UnsecuredPriority of ClaimsInitial Offering MarketAbnormal RiskCoupon LevelAmortizing or Non-amortizingConvertibilityConcept Check 9.4
9.5 Determinants of Interest Rates
Inflation and Real Versus Nominal Interest RatesFisher Effect: The Nominal and Real Rates of InterestInterest Rate Determinants—Breaking It DownReal Risk-Free Interest Rate and Risk-Free Interest RateInflation PremiumDefault-Risk PremiumMaturity-Risk PremiumLiquidity-Risk PremiumThe Maturity-Risk Premium and the Term Structure of Interest RatesThe Shape of the Yield CurveShifts in the Yield CurveConcept Check 9.5
Chapter Summaries
9.1 Identify the key features of bonds and describe the difference between private and public debt markets. (pgs. 256–265)Summary:Key TermsKey EquationConcept Check 9.19.2 Calculate the value of a bond and relate it to the yield to maturity on the bond. (pgs. 265–273)Summary:Key TermsKey EquationsConcept Check 9.29.3 Describe the four key bond valuation relationships. (pgs. 273–277)Summary:Key TermsConcept Check 9.39.4 Identify the major types of corporate bonds. (pgs. 278–280)Summary:Key TermsConcept Check 9.49.5 Explain the effects of inflation on interest rates and describe the term structure of interest rates. (pgs. 280–289)Summary:Key TermsKey EquationsConcept Check 9.5
Study Questions
Study Problems
Overview of Corporate DebtValuing Corporate DebtBond Valuation: Four Key RelationshipsDeterminants of Interest Rates
Chapter 10 Stock Valuation
Chapter OutlinePrinciples , , , , and Applied
10.1 Common Stock
Characteristics of Common StockClaim on IncomeClaim on AssetsVoting RightsAgency Costs and Common StockValuing Common Stock Using the Discounted Dividend ModelThree-Step Procedure for Valuing Common StockBasic Concept of the Stock Valuation ModelThe Constant Dividend Growth Rate ModelWhat Causes Stock Prices to Go Up and Down?Determinants of the Investor’s Required Rate of ReturnDeterminants of the Growth Rate of Future DividendsConcept Check 10.1
10.2 The Comparables Approach to Valuing Common Stock
Defining the P/E Ratio Valuation ModelWhat Determines the P/E Ratio for a Stock?An Aside on Managing for Shareholder ValueA Word of Caution About P/E RatiosConcept Check 10.2
10.3 Preferred Stock
Features of Preferred StockMultiple ClassesClaim on Assets and IncomePreferred Stock as a Hybrid SecurityValuing Preferred StockDealing with Reality: Promised Versus Expected Returns for Preferred StockA Quick Review: Valuing Bonds, Preferred Stock, and Common StockConcept Check 10.3
Chapter Summaries
10.1 Identify the basic characteristics and features of common stock and use the discounted cash flow model to value common shares. (pgs. 302–311)Summary:Key TermsConcept Check 10.1Key Equations10.2 Use the price/earnings (P/E) ratio to value common stock. (pgs. 311–315)Summary:Key TermKey EquationsConcept Check 10.210.3 Identify the basic characteristics and features of preferred stock and value preferred shares. (pgs. 315–320)Summary:Key TermsKey EquationsConcept Check 10.3
Study Questions
Study Problems
Common StockComparables Approach to Valuing Common StockPreferred Stock
Part 3 Capital Budgeting
Chapter 11 Investment Decision CriteriaChapter OutlinePrinciples , , , and Applied
11.1 An Overview of Capital Budgeting
The Typical Capital-Budgeting ProcessWhat Are the Sources of Good Investment Projects?Types of Capital Investment ProjectsRevenue-Enhancing InvestmentsCost-Reducing InvestmentsMandated InvestmentsConcept Check 11.1
11.2 Net Present Value
Why Is the NPV the Right Criterion?Calculating an Investment’s NPVIndependent Versus Mutually Exclusive Investment ProjectsEvaluating an Independent Investment OpportunityEvaluating Mutually Exclusive Investment OpportunitiesChoosing Between Mutually Exclusive InvestmentsConcept Check 11.2
11.3 Other Investment Criteria
Profitability IndexInternal Rate of ReturnComplications with the IRR: Multiple Rates of ReturnUsing the IRR with Mutually Exclusive InvestmentsModified Internal Rate of ReturnPayback PeriodDiscounted Payback PeriodSumming Up the Alternative Decision RulesConcept Check 11.3
11.4 A Glance at Actual Capital-Budgeting Practices
Concept Check 11.4
Chapter Summaries
11.1 Understand how to identify the sources and types of profitable investment opportunities. (pgs. 330–332)Summary:Concept Check 11.111.2 Evaluate investment opportunities using the net present value and describe why it is the best measure to use. (pgs. 332–340)Summary:Concept Check 11.2Key TermsKey Equations11.3 Use the profitability index, internal rate of return, and payback criteria to evaluate investment opportunities. (pgs. 340–355)Summary:Key TermsKey EquationsConcept Check 11.311.4 Understand current business practice with respect to the use of capital-budgeting criteria. (pgs. 355–357)Summary:Concept Check 11.4
Study Questions
Study Problems
Net Present ValueOther Investment CriteriaQuestions
Chapter 12 Analyzing Project Cash Flows
Chapter OutlinePrinciples and Applied
12.1 Project Cash Flows
Incremental Cash Flows Are What MattersGuidelines for Forecasting Incremental Cash FlowsSunk Costs Are Not Incremental Cash FlowsOverhead Costs Are Generally Not Incremental Cash FlowsLook for Synergistic EffectsDon’t Overlook Positive SynergiesBeware of Cash Flows Diverted from Existing ProductsAccount for Opportunity CostsWork in Working-Capital RequirementsIgnore Interest Payments and Other Financing CostsConcept Check 12.1
12.2 Forecasting Project Cash Flows
Dealing with Depreciation Expense, Taxes, and Cash FlowFour-Step Procedure for Calculating Project Cash FlowsStep 1: Estimate the Project’s Operating Cash FlowsStep 2: Calculate the Project’s Working-Capital RequirementsStep 3: Calculate the Project’s Capital Expenditure RequirementsStep 4: Calculate the Project’s Free Cash FlowComputing Project NPVConcept Check 12.2
12.3 Inflation and Capital Budgeting
Estimating Nominal Cash FlowsConcept Check 12.3
12.4 Replacement Project Cash Flows
Category 1: Initial Outlay, CF0Category 2: Annual Cash FlowsChanges in Depreciation and TaxesChanges in Working CapitalChanges in Capital SpendingReplacement ExampleConcept Check 12.4
Chapter Summaries
12.1 Identify incremental cash flows that are relevant to project valuation. (pgs. 374–377)Summary:Key TermsKey EquationConcept Check 12.112.2 Calculate and forecast project cash flows for expansion-type investments. (pgs. 377–383)Summary:Key TermKey EquationsConcept Check 12.212.3 Evaluate the effect of inflation on project cash flows. (pg. 384)Summary:Key TermsConcept Check 12.312.4 Calculate the incremental cash flows for replacement-type investments. (pgs. 385–390)Summary:Key TermsConcept Check 12.4
Study Questions
Study Problems
Forecasting Project Cash FlowsInflation and Capital BudgetingReplacement Project Cash Flows
Appendix: The Modified Accelerated Cost Recovery System
What Does All of This Mean?Study Problems
Chapter 13 Risk Analysis and Project Evaluation
Chapter OutlinePrinciples , , and Applied
13.1 The Importance of Risk Analysis
Concept Check 13.1
13.2 Tools for Analyzing the Risk of Project Cash Flows
Key Concepts: Expected Values and Value DriversExpected ValuesValue DriversSensitivity AnalysisScenario AnalysisSimulation AnalysisConcept Check 13.2
13.3 Break-Even Analysis
Accounting Break-Even AnalysisFixed CostsVariable CostsTotal Revenues or Volume of OutputCalculating the Accounting Break-Even PointCash Break-Even AnalysisNPV Break-Even AnalysisOperating Leverage and the Volatility of Project Cash FlowsConcept Check 13.3
13.4 Real Options in Capital Budgeting
The Option to Delay the Launch of a ProjectThe Option to Expand a ProjectThe Option to Reduce the Scale and Scope of a ProjectConcept Check 13.4
Chapter Summaries
13.1 Explain the importance of risk analysis in the capital-budgeting decision-making process. (pg. 410)Summary:Concept Check 13.113.2 Use sensitivity, scenario, and simulation analyses to investigate the determinants of project cash flows. (pgs. 411–421)Summary:Concept Check 13.2Key Terms13.3 Use break-even analysis to evaluate project risk. (pgs. 422–432)Summary:Key TermsConcept Check 13.3Key Equations13.4 Describe the types of real options. (pgs. 432–434)Summary:Key TermConcept Check 13.4
Study Questions
Study Problems
Tools for Analyzing the Risk of Project Cash FlowsBreak-Even AnalysisOptions in Capital Budgeting
Chapter 14 The Cost of Capital
Chapter OutlinePrinciples , , , , and Applied
14.1 The Cost of Capital: An Overview
Investor’s Required Return and the Firm’s Cost of CapitalWACC EquationThree-Step Procedure for Estimating the Firm’s WACCConcept Check 14.1
14.2 Determining the Firm’s Capital Structure Weights
Concept Check 14.2
14.3 Estimating the Cost of Individual Sources of Capital
The Cost of DebtThe Cost of Preferred EquityThe Cost of Common EquityThe Dividend Growth Model: Discounted Cash Flow ApproachEstimating the Rate of Growth, gPros and Cons of the Constant Dividend Growth Rate Model ApproachThe Capital Asset Pricing ModelAdvantages of the CAPM ApproachDisadvantages of the CAPM ApproachConcept Check 14.3
14.4 Summing Up: Calculating the Firm’s WACC
Use Market-Based WeightsUse Market-Based Costs of CapitalUse Forward-Looking Weights and Opportunity CostsWeighted Average Cost of Capital in PracticeConcept Check 14.4
14.5 Estimating Project Costs of Capital
The Rationale for Using Multiple Discount RatesWhy Don’t Firms Typically Use Project Costs of Capital?Estimating Divisional WACCsUsing Pure Play Firms to Estimate Divisional WACCsDivisional WACC: Estimation Issues and LimitationsConcept Check 14.5
14.6 Flotation Costs and Project NPV
WACC, Flotation Costs, and the NPVConcept Check 14.6
Chapter Summaries
14.1 Understand the concepts underlying the firm’s overall cost of capital and the purpose for its calculation. (pgs. 446–449)Summary:Key TermsKey EquationConcept Check 14.114.2 Evaluate a firm’s capital structure and determine the relative importance (weight) of each source of financing. (pgs. 449–452)Summary:Concept Check 14.214.3 Calculate the after-tax cost of debt, preferred stock, and common equity. (pgs. 453–462)Summary:Key TermsKey EquationsConcept Check 14.314.4 Calculate a firm’s weighted average cost of capital. (pgs. 463–464)Summary:Concept Check 14.414.5 Discuss the pros and cons of using multiple, risk-adjusted discount rates and describe the divisional cost of capital as a viable alternative for firms with multiple divisions. (pgs. 465–469)Summary:Key TermConcept Check 14.514.6 Adjust the NPV for the costs of issuing new securities when analyzing new investment opportunities. (pgs. 469–471)Summary:Key TermKey EquationConcept Check 14.6
Study Questions
Study Problems
Determining the Firm’s Capital Structure WeightsEstimating the Cost of Individual Sources of CapitalCalculating the Firm’s WACCFlotation Costs
Part 4 Capital Structure and Dividend Policy
Chapter 15 Capital Structure PolicyChapter OutlinePrinciples , , and Applied
15.1 A Glance at Capital Structure Choices in Practice
Defining a Firm’s Capital StructureFinancial LeverageHow Do Firms in Different Industries Finance Their Assets?Concept Check 15.1
15.2 Capital Structure Theory
A First Look at the Modigliani and Miller Capital Structure TheoremYogi Berra and the M&M Capital Structure TheoryCapital Structure, the Cost of Equity, and the Weighted Average Cost of CapitalWhy Capital Structure Matters in RealityViolations of Assumption 2Violations of Assumption 1Corporate Taxes and Capital StructureCorporate Taxes and the WACC.Bankruptcy and Financial Distress CostsThe Tradeoff Theory and the Optimal Capital StructureCapital Structure Decisions and Agency CostsMaking Financing Choices When Managers Are Better Informed than ShareholdersManagerial ImplicationsConcept Check 15.2
15.3 Why Do Capital Structures Differ Across Industries?
Concept Check 15.3
15.4 Making Financing Decisions
Benchmarking the Firm’s Capital StructureEvaluating the Effect of Financial Leverage on Firm Earnings per ShareFinancial Leverage and the Level of EPSFinancial Leverage and the Volatility of EPSUsing the EBIT-EPS Chart to Analyze the Effect of Capital Structure on EPSComputing EPS Indifference Points for Capital Structure AlternativesCan the Firm Afford More Debt?Survey Evidence: Factors That Influence CFO Debt PolicyLease Versus BuyHow Does Buying Differ from Leasing?Why Would a Firm Choose Leasing Versus Buying?Residual ValueTax ConsequencesOperating and Maintenance ExpensesConcept Check 15.4
Chapter Summaries
15.1 Describe a firm’s capital structure. (pgs. 484–488)Summary:Key TermsKey EquationsConcept Check 15.115.2 Explain why firms have different capital structures and how capital structure influences a firm’s weighted average cost of capital. (pgs. 488–499)Summary:Key TermsKey EquationsConcept Check 15.215.3 Describe some fundamental differences in industries that drive differences in the way they finance their investments. (pgs. 499–500)Summary:Concept Check 15.315.4 Use the basic tools of financial analysis to analyze a firm’s financing decisions. (pgs. 500–513)Summary:Key TermsKey EquationsConcept Check 15.4
Study Questions
Study Problems
Capital Structure PoliciesCapital Structure TheoryMaking Financing Decisions
Appendix: Demonstrating the Modigliani and Miller Theorem
Arbitrage and the Valuation of Levered and Unlevered FirmsSumming Up
Chapter 16 Dividend and Share Repurchase Policy
Chapter OutlinePrinciples , , and Applied
16.1 How Do Firms Distribute Cash to Their Shareholders?
Cash DividendsDividend Payment ProceduresStock RepurchasesHow Do Firms Repurchase Their Shares?Personal Tax Considerations: Dividend Versus Capital Gains IncomeNoncash Distributions: Stock Dividends and Stock SplitsRationale for a Stock Dividend or SplitConcept Check 16.1
16.2 Does Dividend Policy Matter?
The Irrelevance of the Distribution ChoiceThe Timing of Dividends Is IrrelevantThe Form of Payment (Cash Dividends Versus Share Repurchases) Is IrrelevantIndividual Investor Wealth Effects: No Personal TaxesIndividual Investor Wealth Effects: Personal TaxesTax Treatment: Dividends and Capital Gains Taxed at 15 PercentTax Treatment: What Happens if Dividends Are Taxed at a Higher Rate than Capital GainsWhy Dividend Policy Is ImportantTransactions are CostlyThe Information Conveyed by Dividend and Share Repurchase AnnouncementsThe Information Conveyed by Stock Dividend and Stock Split AnnouncementsConcept Check 16.2
16.3 Cash Distribution Policies in Practice
Stable Dividend Payout PolicyResidual Dividend Payout PolicyOther Factors Playing a Role in How Much to DistributeLiquidity PositionLack of Other Sources of FinancingEarnings PredictabilityConcept Check 16.3
Chapter Summaries
16.1 Distinguish between the use of cash dividends and share repurchases. (pgs. 528–532)Summary:Key TermsConcept Check 16.116.2 Understand the tax treatment of dividends and capital gains, and the conditions under which dividend policy is an important determinant of stock value. (pgs. 532–541)Summary:Key TermConcept Check 16.216.3 Describe corporate dividend policies that are commonly used in practice. (pgs. 541–545)Summary:Key TermConcept Check 16.3
Study Questions
Study Problems
How Do Firms Distribute Cash?Does Dividend Policy Matter?
Part 5 Liquidity Management and Special Topics in Finance
Chapter 17 Financial Forecasting and PlanningChapter OutlinePrinciple Applied
17.1 An Overview of Financial Planning
Concept Check 17.1
17.2 Developing a Long-Term Financial Plan
Financial Forecasting Example: Ziegen, Inc.Sources of Spontaneous Financing: Accounts Payable and Accrued ExpensesSources of Discretionary FinancingSummarizing Ziegen’s Financial ForecastAnalyzing the Effects of Profitability and Dividend Policy on the Firm’s DFN (Discretionary Financing Needs)Analyzing the Effects of Sales Growth on a Firm’s DFNConcept Check 17.2
17.3 Developing a Short-Term Financial Plan
Cash Budget Example: Melco Furniture, Inc.Uses of the Cash BudgetConcept Check 17.3
Chapter Summaries
17.1 Understand the goals of financial planning. (pgs. 554–555)Summary:Key TermsConcept Check 17.117.2 Use the percent-of-sales method to forecast the financing requirements of a firm, including its discretionary financing needs. (pgs. 555–564)Summary:Key TermsKey EquationConcept Check 17.217.3 Prepare a cash budget and use it to evaluate the amount and timing of a firm’s short-term financing requirements. (pgs. 564–566)Summary:Concept Check 17.3
Study Questions
Study Problems
Developing a Long-Term Financial PlanDeveloping a Short-Term Financial Plan
Chapter 18 Working-Capital Management
Chapter OutlinePrinciple Applied
18.1 Working-Capital Management and the Risk-Return Tradeoff
Measuring Firm LiquidityManaging Firm LiquidityRisk-Return Tradeoff Concept Check 18.1
18.2 Working-Capital Policy
The Principle of Self-Liquidating DebtPermanent and Temporary Asset InvestmentsSpontaneous, Temporary, and Permanent Sources of FinancingA Graphic Illustration of the Principle of Self-Liquidating DebtConcept Check 18.2
18.3 Operating and Cash Conversion Cycles
Measuring Working-Capital EfficiencyCalculating the Operating and Cash Conversion CyclesConcept Check 18.3
18.4 Managing Current Liabilities
Calculating the Cost of Short-Term FinancingEvaluating the Cost of Trade CreditCredit Terms and Cash DiscountsEvaluating the Cost of Bank LoansConcept Check 18.4
18.5 Managing the Firm’s Investment in Current Assets
Managing Cash and Marketable SecuritiesCosts of Managing Cash and Marketable SecuritiesProblem 1: Maintaining a Sufficient Cash BalanceProblem 2: Managing the Composition of the Firm’s Marketable Securities PortfolioManaging Accounts ReceivableDeterminants of the Size of a Firm’s Investment in Accounts ReceivableTerms of SaleCustomer QualityCollection EffortsManaging InventoriesConcept Check 18.5
Chapter Summaries
18.1 Describe the risk-return tradeoff involved in managing a firm’s working capital. (pgs. 578–579)Summary:Concept Check 18.118.2 Explain the principle of self-liquidating debt as a tool for managing firm liquidity. (pgs. 579–582)Summary:Key TermsConcept Check 18.218.3 Use the cash conversion cycle to measure the efficiency with which a firm manages its working capital. (pgs. 582–587)Summary:Key TermsKey EquationsConcept Check 18.318.4 Evaluate the cost of financing as a key determinant of the management of a firm’s use of current liabilities. (pgs. 587–591)Summary:Key TermsConcept Check 18.418.5 Understand the factors underlying a firm’s investment in cash and marketable securities, accounts receivable, and inventory. (pgs. 591–597)Summary:Key TermsKey EquationConcept Check 18.5
Study Questions
Study Problems
Working-Capital Management and the Risk-Return TradeoffWorking-Capital PolicyOperating and Cash Conversion CyclesManaging Current Liabilities
Chapter 19 International Business Finance
Chapter OutlinePrinciples and Applied
19.1 Foreign Exchange Markets and Currency Exchange Rates
What a Change in the Exchange Rate Means for BusinessForeign Exchange RatesReading Exchange Rate QuotesExchange Rates and ArbitrageAsked and Bid RatesCross RatesTypes of Foreign Exchange TransactionsConcept Check 19.1
19.2 Interest Rate and Purchasing-Power Parity
Interest Rate ParityPurchasing-Power Parity and the Law of One PriceThe International Fisher EffectConcept Check 19.2
19.3 Capital Budgeting for Direct Foreign Investment
Foreign Investment RisksPolitical RiskExchange Rate RiskConcept Check 19.3
Chapter Summaries
19.1 Understand the nature and importance of the foreign exchange market and learn to read currency exchange rate quotes. (pgs. 608–615)Summary:Key TermsKey EquationsConcept Check 19.119.2 Describe interest rate and purchasing-power parity. (pgs. 616–619)Summary:Key TermsKey EquationsConcept Check 19.219.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign investments. (pgs. 619– 624)Summary:Key TermsConcept Check 19.3Key Equation
Study Questions
Study Problems
Foreign Exchange Markets and Currency Exchange RatesInterest Rate and Purchasing-Power ParityCapital Budgeting for Direct Foreign Investment
Chapter 20 Corporate Risk Management
Chapter OutlinePrinciples and Applied
20.1 Five-Step Corporate Risk Management Process1
Step 1 : Identify and Understand the Firm’s Major RisksStep 2 : Decide Which Types of Risks to Keep and Which to TransferStep 3 : Decide How Much Risk to AssumeStep 4 : Incorporate Risk into All the Firm’s Decisions and ProcessesStep 5 : Monitor and Manage the Firm’s Risk ExposuresConcept Check 20.1
20.2 Managing Risk with Insurance Contracts
Types of Insurance ContractsWhy Purchase Insurance?Concept Check 20.2
20.3 Managing Risk by Hedging with Forward Contracts
Hedging Commodity Price Risk Using Forward ContractsHedging Currency Risk Using Forward ContractsLimitations of Forward ContractsConcept Check 20.3
20.4 Managing Risk with Exchange-Traded Financial Derivatives
Futures ContractsManaging Default Risk in Futures MarketsHedging with Futures ContractsOption ContractsA Graphical Look at Option Pricing RelationshipsReading Option Price QuotesConcept Check 20.4
20.5 Valuing Options and Swaps
The Black-Scholes Option Pricing ModelKey Variables in the Black-Scholes Option Pricing EquationThe Black-Scholes Option Pricing EquationSwap ContractsCredit Default SwapsConcept Check 20.5
Chapter Summaries
20.1 Define risk management in the context of the five-step risk management process. (pgs. 634–637)Summary:Key TermConcept Check 20.120.2 Understand how insurance contracts can be used to manage risk. (pgs. 637–638)Summary:Key TermsConcept Check 20.220.3 Use forward contracts to hedge commodity price risk. (pgs. 638–643)Summary:Key TermsConcept Check 20.320.4 Understand the advantages and disadvantages of using exchange-traded futures and option contracts to hedge price risk. (pgs. 643–651)Summary:Key TermsConcept Check 20.420.5 Understand how to value options and how swaps work. (pgs. 651–658)Summary:Key TermsKey EquationConcept Check 20.5
Study Questions
Study Problems
Managing Risk by Hedging with Forward ContractsManaging Risk with Exchange-Traded Financial DerivativesValuing Options and Swaps
Glossary
Organization Index
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Subject Index
A
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Content preview from Financial Management: Principles and Applications, 13/e

15.2 Capital Structure Theory

We open our discussion of capital structure choices in a hypothetical environment where financing choices do not affect firm value. In this setting, the financial manager should not be concerned about capital structure policy. Although the assumptions required for capital structure irrelevance are not realistic, they provide a good starting point for understanding the factors that financial managers should consider when determining their capital structure policy. We then relax these unrealistic assumptions and examine how they influence a firm’s incentives to use debt and equity financing.

A First Look at the Modigliani and Miller Capital Structure Theorem

Franco Modigliani and Merton Miller’s (M&M) analysis of ...

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Principles of Managerial Finance, 15th Edition

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Financial Management: Principles and Applications, 13/e

by Sheridan Titman, Arthur J. Keown, John D. Martin

15.2 Capital Structure Theory

A First Look at the Modigliani and Miller Capital Structure Theorem

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