book

Introduction to Finance: Markets, Investments, and Financial Management, Fourteenth Edition

Name: Introduction to Finance: Markets, Investments, and Financial Management, Fourteenth Edition
ISBN: 9780470561072

by Ronald W. Melicher, Edgar A. Norton

January 2011

Beginner

609 pages

29h 4m

English

Wiley

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Copyright
PREFACE
LEARNING AND TEACHING AIDSACKNOWLEDGMENTS
AUTHOR BIOS
1. INSTITUTIONS AND MARKETS
1. The Financial Environment
1.1. WHAT IS FINANCE?1.1.1. TWO THEMES1.2. WHY STUDY FINANCE?1.3. SIX PRINCIPLES OF FINANCE1.3.1. TIME VALUE OF MONEY1.3.2. RISK VERSUS RETURN1.3.3. DIVERSIFICATION OF RISK1.3.4. FINANCIAL MARKETS ARE EFFICIENT1.3.5. MANAGEMENT VERSUS OWNER OBJECTIVES1.3.6. REPUTATION MATTERS1.4. OVERVIEW OF THE FINANCIAL SYSTEM1.4.1. CHARACTERISTICS AND REQUIREMENTS1.4.2. FINANCIAL SYSTEM COMPONENTS AND FINANCIAL FUNCTIONS1.4.2.1. Creating Money1.4.2.2. Transferring Money1.4.2.3. Accumulating Savings1.4.2.4. Lending and Investing Savings1.4.2.5. Marketing Financial Assets1.4.2.6. Transferring Financial Assets1.5. FINANCIAL MARKETS CHARACTERISTICS1.5.1. MONEY AND CAPITAL MARKETS1.5.2. PRIMARY AND SECONDARY MARKETS1.6. MAJOR TYPES OF FINANCIAL MARKETS1.7. MORTGAGE MARKETS1.7.1. TYPES OF MORTGAGES AND MORTGAGE-BACKED SECURITIES1.7.2. CREDIT RATINGS AND SCORES1.7.3. MAJOR PARTICIPANTS IN THE SECONDARY MORTGAGE MARKETS1.8. THE 2007–09 FINANCIAL CRISIS1.9. CAREERS IN FINANCE1.10. THE PLAN OF STUDY1.11. SUMMARY1.12. KEY TERMS1.13. DISCUSSION QUESTIONS1.14. EXERCISES
2. Money and the Monetary System
2.1. PROCESS OF MOVING SAVINGS INTO INVESTMENTS2.2. OVERVIEW OF THE MONETARY SYSTEM2.3. IMPORTANCE AND FUNCTIONS OF MONEY2.4. DEVELOPMENT OF MONEY IN THE UNITED STATES2.4.1. PHYSICAL MONEY (COIN AND PAPER CURRENCY)2.4.1.1. U.S. Coins2.4.1.2. Paper Currency2.4.2. DEPOSIT MONEY2.5. MONEY MARKET SECURITIES2.6. MEASURES OF THE U.S. MONEY SUPPLY2.6.1. M1 MONEY SUPPLY2.6.2. M2 MONEY SUPPLY2.6.3. M3 MONEY SUPPLY2.6.4. EXCLUSIONS FROM THE MONEY SUPPLY2.7. MONEY SUPPLY AND ECONOMIC ACTIVITY2.8. INTERNATIONAL MONETARY SYSTEM2.9. SUMMARY2.10. KEY TERMS2.11. DISCUSSION QUESTIONS2.12. EXERCISES2.13. PROBLEMS
3. Banks and Other Financial Institutions
3.1. TYPES AND ROLES OF FINANCIAL INSTITUTIONS3.1.1. DEPOSITORY INSTITUTIONS3.1.2. CONTRACTUAL SAVINGS ORGANIZATIONS3.1.3. SECURITIES FIRMS3.1.4. FINANCE FIRMS3.2. OVERVIEW OF THE BANKING SYSTEM3.2.1. COMMERCIAL, INVESTMENT, AND UNIVERSAL BANKING3.2.2. FUNCTIONS OF BANKS AND THE BANKING SYSTEM3.3. HISTORICAL DEVELOPMENT OF THE U.S. BANKING SYSTEM3.3.1. BEFORE THE CIVIL WAR3.3.1.1. Early Chartered Banks3.3.1.2. First Bank of the United States3.3.1.3. Second Bank of the United States3.3.1.4. State Banks from 1836 to the Civil War3.3.2. ENTRY OF THRIFT INSTITUTIONS3.4. REGULATION OF THE BANKING SYSTEM3.4.1. GENERAL BANKING LEGISLATION3.4.1.1. National Banking Act of 18643.4.1.2. Federal Reserve Act of 19133.4.1.3. Depository Institutions Deregulation and Monetary Control Act of 19803.4.1.4. Depository Institutions Deregulation3.4.1.5. Monetary Control3.4.1.6. Garn–St. Germain Depository Institutions Act of 19823.4.2. THE SAVINGS AND LOAN CRISIS3.4.3. PROTECTION OF DEPOSITORS' FUNDS3.5. STRUCTURE OF BANKS3.5.1. BANK CHARTERS3.5.2. DEGREE OF BRANCH BANKING3.5.3. BANK HOLDING COMPANIES3.6. THE BANK BALANCE SHEET3.6.1. ASSETS3.6.1.1. Cash and Balances Due from Depository Institutions3.6.1.2. Securities3.6.1.3. Loans3.6.1.4. Other Bank Assets3.6.2. LIABILITIES AND OWNERS' CAPITAL3.6.2.1. Deposits3.6.2.2. Other Liabilities3.6.2.3. Owners' Capital3.7. BANK MANAGEMENT3.7.1. LIQUIDITY MANAGEMENT3.7.1.1. Asset Management3.7.1.2. Liability Management3.7.2. CAPITAL MANAGEMENT3.7.3. 2007–09 FINANCIAL CRISIS3.8. INTERNATIONAL BANKING AND FOREIGN SYSTEMS3.9. SUMMARY3.10. KEY TERMS3.11. DISCUSSION QUESTIONS3.12. EXERCISES3.13. PROBLEMS
4. Federal Reserve System
4.1. THE U.S. BANKING SYSTEM PRIOR TO THE FED4.1.1. WEAKNESSES OF THE NATIONAL BANKING SYSTEM4.1.2. THE MOVEMENT TO CENTRAL BANKING4.2. STRUCTURE OF THE FEDERAL RESERVE SYSTEM4.2.1. MEMBER BANKS4.2.2. FEDERAL RESERVE DISTRICT BANKS4.2.2.1. Directors and Officers4.2.2.2. Federal Reserve Branch Banks4.2.3. BOARD OF GOVERNORS4.2.4. FEDERAL OPEN MARKET COMMITTEE4.2.5. ADVISORY COMMITTEES4.2.6. ROLE OF THE CHAIR OF THE FED BOARD OF GOVERNORS4.3. MONETARY POLICY FUNCTIONS AND INSTRUMENTS4.3.1. OVERVIEW OF RESPONSIBILITIES4.3.2. RESERVE REQUIREMENTS4.3.3. DISCOUNT RATE POLICY4.3.4. OPEN-MARKET OPERATIONS4.3.5. IMPLEMENTATION OF MONETARY POLICY4.4. FED SUPERVISORY AND REGULATORY FUNCTIONS4.4.1. SPECIFIC SUPERVISORY RESPONSIBILITIES4.4.2. SPECIFIC REGULATORY RESPONSIBILITIES4.5. FED SERVICE FUNCTIONS4.5.1. THE PAYMENTS MECHANISM4.5.1.1. Coin and Currency4.5.1.2. Check Clearance and Collection4.5.1.3. Check Clearance among Federal Reserve Districts4.5.1.4. Check Clearance through Federal Reserve Branch Banks4.5.1.5. Check Routing4.5.2. TRANSFER OF CREDIT4.5.3. OTHER SERVICE ACTIVITIES4.6. CENTRAL BANKS IN OTHER COUNTRIES4.7. SUMMARY4.8. KEY TERMS4.9. DISCUSSION QUESTIONS4.10. EXERCISES4.11. PROBLEMS
5. Policy Makers and the Money Supply
5.1. NATIONAL ECONOMIC POLICY OBJECTIVES5.1.1. ECONOMIC GROWTH5.1.2. HIGH EMPLOYMENT5.1.3. PRICE STABILITY5.1.4. BALANCE IN INTERNATIONAL TRANSACTIONS5.1.5. THE PERFECT FINANCIAL STORM5.2. FOUR POLICY MAKER GROUPS5.2.1. ETHICAL BEHAVIOR IN GOVERNMENT5.2.2. POLICY MAKERS IN THE EUROPEAN ECONOMIC UNION5.3. GOVERNMENT INFLUENCE ON THE ECONOMY5.4. POLICY INSTRUMENTS OF THE U.S. TREASURY5.4.1. MANAGING THE TREASURY'S CASH BALANCES5.4.1.1. Treasury Tax and Loan Accounts5.4.1.2. Treasury Receipts and Outlays5.4.2. POWERS RELATING TO THE FEDERAL BUDGET AND TO SURPLUSES OR DEFICITS5.4.2.1. General Economic Effects of Fiscal Policy5.4.2.2. Effects of Tax Policy5.4.2.3. Effects of Deficit Financing5.4.3. RECENT FINANCIAL CRISIS-RELATED ACTIVITIES5.5. DEBT MANAGEMENT5.6. CHANGING THE MONEY SUPPLY5.6.1. CHECKABLE DEPOSIT EXPANSION5.6.2. OFFSETTING OR LIMITING FACTORS5.6.3. CONTRACTION OF DEPOSITS5.7. FACTORS AFFECTING BANK RESERVES5.7.1. CHANGES IN THE DEMAND FOR CURRENCY5.7.2. FEDERAL RESERVE SYSTEM TRANSACTIONS5.7.2.1. Open-Market Operations5.7.2.2. Depository Institution Transactions5.7.2.3. Federal Reserve Float5.7.2.4. Treasury Transactions5.8. THE MONETARY BASE AND THE MONEY MULTIPLIER5.9. SUMMARY5.10. KEY TERMS5.11. DISCUSSION QUESTIONS5.12. EXERCISES5.13. PROBLEMS
6. International Finance and Trade
6.1. GLOBAL OR INTERNATIONAL MONETARY SYSTEM6.1.1. DEVELOPMENT OF INTERNATIONAL FINANCE6.1.2. HOW THE INTERNATIONAL MONETARY SYSTEM EVOLVED6.1.2.1. Before World War I6.1.2.2. World War I through World War II: 1915–19446.1.2.3. Bretton Woods Fixed Exchange Rate System: 1945–19726.1.2.4. Flexible Exchange Rate System: 1973–Present6.2. EUROPEAN UNIFICATION6.2.1. EUROPEAN UNION6.2.2. EUROPEAN MONETARY UNION6.2.3. THE EURO6.3. CURRENCY EXCHANGE MARKETS AND RATES6.3.1. CURRENCY EXCHANGE MARKETS6.3.2. EXCHANGE RATE QUOTATIONS6.3.3. FACTORS THAT AFFECT CURRENCY EXCHANGE RATES6.3.3.1. Supply and Demand Relationships6.3.3.2. Inflation, Interest Rates, and Other Factors6.3.4. CURRENCY EXCHANGE RATE APPRECIATION AND DEPRECIATION6.3.5. ARBITRAGE6.3.6. EXCHANGE RATE DEVELOPMENTS FOR THE U.S. DOLLAR6.4. CONDUCTING BUSINESS INTERNATIONALLY6.4.1. MANAGING FOREIGN EXCHANGE RISK6.4.2. ETHICAL CONSIDERATIONS6.5. FINANCING INTERNATIONAL TRADE6.5.1. FINANCING BY THE EXPORTER6.5.1.1. Sight and Time Drafts6.5.1.2. Bank Assistance in the Collection of Drafts6.5.1.3. Financing Through the Exporter's Bank6.5.2. FINANCING BY THE IMPORTER6.5.2.1. Financing Through the Importer's Bank6.5.2.2. Importer Bank Financing—An Example6.5.3. BANKERS' ACCEPTANCES6.5.4. OTHER AIDS TO INTERNATIONAL TRADE6.5.4.1. The Export-Import Bank6.5.4.2. Traveler's Letter of Credit6.5.4.3. Traveler's Checks6.6. BALANCE IN INTERNATIONAL TRANSACTIONS GOAL6.6.1. NATURE OF THE PROBLEM6.6.2. BALANCE-OF-PAYMENTS ACCOUNTS6.7. SUMMARY6.8. KEY TERMS6.9. DISCUSSION QUESTIONS6.10. EXERCISES6.11. PROBLEMS

2. INVESTMENTS
7. Savings and Investment Process
7.1. GROSS DOMESTIC PRODUCT AND CAPITAL FORMATION7.1.1. GDP COMPONENTS7.1.2. IMPLICATIONS OF INTERNATIONAL PAYMENT IMBALANCES7.1.3. LINK BETWEEN SAVING AND INVESTMENT7.2. FEDERAL GOVERNMENT RECEIPTS AND EXPENDITURES7.2.1. THE BUDGET7.2.2. FISCAL POLICY MAKERS7.2.3. DEBT FINANCING7.3. HISTORICAL ROLE AND CREATION OF SAVINGS7.3.1. FOREIGN SOURCES OF SAVINGS7.3.2. DOMESTIC SUPPLY OF SAVINGS7.3.3. CREATION OF SAVINGS7.4. MAJOR SOURCES OF SAVINGS7.4.1. PERSONAL SAVINGS7.4.2. CORPORATE SAVINGS7.5. FACTORS AFFECTING SAVINGS7.5.1. LEVELS OF INCOME7.5.2. ECONOMIC EXPECTATIONS7.5.3. ECONOMIC CYCLES7.5.4. LIFE STAGES OF THE INDIVIDUAL SAVER7.5.5. LIFE STAGES OF THE CORPORATION7.6. CAPITAL MARKET SECURITIES7.7. A FURTHER LOOK AT THE 2007-09 FINANCIAL CRISIS7.7.1. EARLY FACTORS7.7.2. A BORROWING-RELATED CULTURAL SHIFT7.8. SUMMARY7.9. KEY TERMS7.10. DISCUSSION QUESTIONS7.11. EXERCISES7.12. PROBLEMS
8. Interest Rates
8.1. SUPPLY AND DEMAND FOR LOANABLE FUNDS8.1.1. HISTORICAL CHANGES IN U.S. INTEREST RATE LEVELS8.1.2. LOANABLE FUNDS THEORY8.1.2.1. Sources of Loanable Funds8.1.2.2. Factors Affecting the Supply of Loanable Funds8.1.2.3. Effect of Interest Rates on the Demand for Loanable Funds8.1.2.4. Roles of the Banking System and of the Government8.1.2.5. International Factors Affecting Interest Rates8.2. DETERMINANTS OF MARKET INTEREST RATES8.3. RISK-FREE SECURITIES: U.S. TREASURY DEBT OBLIGATIONS8.3.1. MARKETABLE OBLIGATIONS8.3.1.1. Treasury Bills8.3.1.2. Treasury Notes8.3.1.3. Treasury Bonds8.3.2. DEALER SYSTEM8.3.3. TAX STATUS OF FEDERAL OBLIGATIONS8.3.4. OWNERSHIP OF PUBLIC DEBT SECURITIES8.3.5. MATURITY DISTRIBUTION OF MARKETABLE DEBT SECURITIES8.4. TERM OR MATURITY STRUCTURE OF INTEREST RATES8.4.1. RELATIONSHIP BETWEEN YIELD CURVES AND THE ECONOMY8.4.2. TERM STRUCTURE THEORIES8.5. INFLATION PREMIUMS AND PRICE MOVEMENTS8.5.1. HISTORICAL INTERNATIONAL PRICE MOVEMENTS8.5.1.1. Ancient Rome8.5.1.2. The Middle Ages Through Modern Times8.5.2. INFLATION IN THE UNITED STATES8.5.2.1. Revolutionary War8.5.2.2. War of 18128.5.2.3. Civil War8.5.2.4. World War I8.5.2.5. World War II and the Postwar Period8.5.2.6. Recent Decades8.5.3. TYPES OF INFLATION8.5.3.1. Price Changes Initiated by a Change in Costs8.5.3.2. Price Changes Initiated by a Change in the Money Supply8.5.3.3. Speculation and Administrative Inflation8.6. DEFAULT RISK PREMIUMS8.7. SUMMARY8.8. KEY TERMS8.9. DISCUSSION QUESTIONS8.10. EXERCISES8.11. PROBLEMS
9. Time Value of Money
9.1. BASIC CONCEPTS9.2. COMPOUNDING TO DETERMINE FUTURE VALUES9.2.1. INFLATION OR PURCHASING POWER IMPLICATIONS9.3. DISCOUNTING TO DETERMINE PRESENT VALUES9.4. EQUATING PRESENT VALUES AND FUTURE VALUES9.5. FINDING INTEREST RATES AND TIME REQUIREMENTS9.5.1. SOLVING FOR INTEREST RATES9.5.2. SOLVING FOR TIME PERIODS9.5.3. RULE OF 729.6. FUTURE VALUE OF AN ANNUITY9.7. PRESENT VALUE OF AN ANNUITY9.8. INTEREST RATES AND TIME REQUIREMENTS FOR ANNUITIES9.8.1. SOLVING FOR INTEREST RATES9.8.2. SOLVING FOR TIME PERIODS9.9. DETERMINING PERIODIC ANNUITY PAYMENTS9.9.1. EXAMPLES INVOLVING ANNUAL PAYMENTS9.9.2. REAL ESTATE MORTGAGE LOANS WITH MONTHLY PAYMENTS9.10. MORE FREQUENT COMPOUNDING OR DISCOUNTING INTERVALS9.11. COST OF CONSUMER CREDIT9.11.1. UNETHICAL LENDERS9.11.2. APR VERSUS EAR9.12. SUMMARY9.13. KEY TERMS9.14. DISCUSSION QUESTIONS9.15. EXERCISES9.16. PROBLEMS
LE9. LEARNING EXTENSION 9: Annuity Due Problems
LE9.1. FUTURE VALUE OF AN ANNUITY DUELE9.2. PRESENT VALUE OF AN ANNUITY DUELE9.3. INTEREST RATES AND TIME REQUIREMENTS FOR ANNUITY DUE PROBLEMSLE9.4. QUESTIONS AND PROBLEMS
10. Bonds and Stocks: Characteristics and Valuations
10.1. LONG-TERM EXTERNAL FINANCING SOURCES FOR BUSINESSES10.2. DEBT CAPITAL10.2.1. WHO BUYS BONDS?10.2.2. BOND COVENANTS10.2.3. BOND RATINGS10.2.4. BONDHOLDER SECURITY10.2.5. TIME TO MATURITY10.2.6. INCOME FROM BONDS10.2.7. GLOBAL BOND MARKET10.2.8. READING BOND QUOTES10.3. CORPORATE EQUITY CAPITAL10.3.1. COMMON STOCK10.3.2. PREFERRED STOCK10.3.3. READING STOCK QUOTES10.4. DIVIDENDS AND STOCK REPURCHASES10.4.1. HOW DO FIRMS DECIDE ON THE DOLLAR AMOUNT OF DIVIDENDS?10.4.2. STOCK DIVIDENDS AND STOCK SPLITS10.4.3. SHARE REPURCHASES10.5. VALUATION PRINCIPLES10.6. VALUATION OF BONDS10.6.1. DETERMINING A BOND'S PRESENT VALUE10.6.2. CALCULATING THE YIELD TO MATURITY10.6.3. RISK IN BOND VALUATION10.6.3.1. Credit Risk10.6.3.2. Interest Rate Risk10.6.3.3. Reinvestment Rate Risk10.6.3.4. Risks of Nondomestic Bonds10.7. VALUATION OF STOCKS10.7.1. VALUING STOCKS WITH CONSTANT DIVIDENDS10.7.2. VALUING STOCKS WITH CONSTANT DIVIDEND GROWTH RATES10.7.3. RISK IN STOCK VALUATION10.8. VALUATION AND THE FINANCIAL ENVIRONMENT10.8.1. GLOBAL ECONOMIC INFLUENCES10.8.2. DOMESTIC ECONOMIC INFLUENCES10.8.3. INDUSTRY AND COMPETITION10.9. SUMMARY10.10. KEY TERMS10.11. DISCUSSION QUESTIONS10.12. PROBLEMS
LE10. LEARNING EXTENSION 10: Annualizing Rates of Return
LE10.1. HOLDING PERIOD RETURNSLE10.2. ANNUALIZED RATES OF RETURNLE10.3. PROBLEMS
11. Securities Markets
11.1. ISSUING SECURITIES: PRIMARY SECURITIES MARKETS11.1.1. PRIMARY MARKET FUNCTIONS OF INVESTMENT BANKERS11.1.1.1. Originating11.1.1.2. Underwriting11.1.1.2.1. Shelf Registration11.1.1.2.2. Sell Securities to a Private Party11.1.1.2.3. Rights Offerings11.1.1.2.4. Competitive Bidding11.1.1.3. Selling11.1.2. COST OF GOING PUBLIC11.1.2.1. Innovations Among Investment Banking Firms11.1.3. OTHER FUNCTIONS OF INVESTMENT BANKING FIRMS11.2. INVESTMENT BANKING REGULATION11.3. TRADING SECURITIES—SECONDARY SECURITIES MARKETS11.3.1. ORGANIZED SECURITY EXCHANGES11.3.2. STRUCTURE OF THE NEW YORK STOCK EXCHANGE11.3.2.1. Listing Securities11.3.3. SECURITY TRANSACTIONS11.3.3.1.11.3.3.1.1. Market Order11.3.3.1.2. Limit Order11.3.3.1.3. Stop-Loss Order11.3.3.1.4. Short Sale11.3.3.1.5. Buying on Margin11.3.3.1.6. Record Keeping11.3.3.2. Over-the-Counter Market11.3.3.3. Third and Fourth Security Markets11.4. WHAT MAKES A GOOD MARKET?11.5. A WORD ON COMMISSIONS11.6. SECURITY MARKET INDEXES11.7. FOREIGN SECURITIES11.8. INSIDE INFORMATION AND OTHER ETHICAL ISSUES11.9. CHANGES IN THE STRUCTURE OF THE STOCK MARKET11.10. SUMMARY11.11. KEY TERMS11.12. DISCUSSION QUESTIONS11.13. PROBLEMS
LE11. LEARNING EXTENSION 11: Introduction to Futures and Options
LE11.1. WHY DO DERIVATIVES EXIST?LE11.2. FUTURES CONTRACTSLE11.3. OPTIONSLE11.4. OPTION PAYOFF DIAGRAMSLE11.5. SUMMARYLE11.6. KEY TERMSLE11.7. DISCUSSION QUESTIONSLE11.8. PROBLEMS
12. Financial Return and Risk Concepts
12.1. HISTORICAL RETURN AND RISK FOR A SINGLE FINANCIAL ASSET12.1.1. ARITHMETIC AVERAGE ANNUAL RATES OF RETURN12.1.2. VARIANCE AS A MEASURE OF RISK12.1.3. STANDARD DEVIATION AS A MEASURE OF RISK12.2. WHERE DOES RISK COME FROM?12.3. EXPECTED MEASURES OF RETURN AND RISK12.4. HISTORICAL RETURNS AND RISK OF DIFFERENT ASSETS12.5. EFFICIENT CAPITAL MARKETS12.6. PORTFOLIO RETURNS AND RISK12.6.1. EXPECTED RETURN ON A PORTFOLIO12.6.2. VARIANCE AND STANDARD DEVIATION OF RETURN ON A PORTFOLIO12.6.3. TO DIVERSIFY OR NOT TO DIVERSIFY?12.6.4. PORTFOLIO RISK AND THE NUMBER OF INVESTMENTS IN THE PORTFOLIO12.6.5. SYSTEMATIC AND UNSYSTEMATIC RISK12.7. CAPITAL ASSET PRICING MODEL12.8. ETHICS AND JOB OPPORTUNITIES IN INVESTMENTS12.9. SUMMARY12.10. KEY TERMS12.11. DISCUSSION QUESTIONS12.12. PROBLEMS
LE12. LEARNING EXTENSION 12: Estimating Beta
LE12.1. SECURITY MARKET LINELE12.2. QUESTIONS AND PROBLEMS
3. FINANCIAL MANAGEMENT
13. Business Organization and Financial Data
13.1. STARTING A BUSINESS13.1.1. STRATEGIC PLAN WITH A VISION OR MISSION13.1.2. BUSINESS AND FINANCIAL GOALS13.2. FORMS OF BUSINESS ORGANIZATION IN THE UNITED STATES13.2.1. PROPRIETORSHIP13.2.1.1. Corporation13.3. THE ANNUAL REPORT13.4. ACCOUNTING PRINCIPLES13.5. INCOME STATEMENT13.6. THE BALANCE SHEET13.6.1. ASSETS13.6.2. LIABILITIES13.6.3. OWNERS' EQUITY13.7. STATEMENT OF CASH FLOWS13.7.1.13.7.1.1. Sources13.7.1.2. Uses13.8. FINANCIAL STATEMENTS OF DIFFERENT COMPANIES13.9. GOAL OF A FIRM13.9.1. MEASURING SHAREHOLDER WEALTH13.9.2. LINKING STRATEGY AND FINANCIAL PLANS13.9.3. CRITERION FOR NONPUBLIC FIRMS13.9.4. WHAT ABOUT ETHICS?13.10. CORPORATE GOVERNANCE13.10.1. PRINCIPAL-AGENT PROBLEM13.10.2. REDUCING AGENCY PROBLEMS13.11. FINANCE IN THE ORGANIZATION CHART13.12. SUMMARY13.13. KEY TERMS13.14. DISCUSSION QUESTIONS13.15. PROBLEMS
LE13. LEARNING EXTENSION 13: Federal Income Taxation
LE13.1. DEPRECIATION BASICSLE13.2. A FEW WORDS ON DEPRECIATION METHODSLE13.3. QUESTIONS AND PROBLEMS
14. Financial Analysis and Long-Term Financial Planning
14.1. FINANCIAL STATEMENT ANALYSIS14.2. RATIO ANALYSIS OF BALANCE SHEET AND INCOME STATEMENT14.3. TYPES OF FINANCIAL RATIOS14.3.1. LIQUIDITY RATIOS AND ANALYSIS14.3.2. ASSET MANAGEMENT RATIOS AND ANALYSIS14.3.3. FINANCIAL LEVERAGE RATIOS AND ANALYSIS14.3.4. PROFITABILITY RATIOS AND ANALYSIS14.3.5. MARKET VALUE RATIOS AND ANALYSIS14.4. SUMMARY OF RATIO ANALYSIS FOR WALGREENS14.5. DU PONT METHOD OF RATIO ANALYSIS14.6. LONG-TERM FINANCIAL PLANNING14.6.1. PERCENTAGE OF SALES TECHNIQUE14.6.1.1. Asset Investment Requirements14.6.1.2. Internally Generated Financing14.6.1.3. External Financing Requirements14.6.2. COST-VOLUME-PROFIT ANALYSIS14.6.3. DEGREE OF OPERATING LEVERAGE14.7. SUMMARY14.8. KEY TERMS14.9. DISCUSSION QUESTIONS14.10. PROBLEMS
15. Managing Working Capital
15.1. OPERATING AND CASH CONVERSION CYCLES15.1.1. OPERATING CYCLE15.1.2. CASH CONVERSION CYCLE15.1.3. DETERMINING THE LENGTH OF THE OPERATING CYCLE AND CASH CONVERSION CYCLE15.1.3.1. Inventory Period15.1.3.2. Accounts Receivable Period15.1.3.3. Average Payment Period15.1.4. WORKING CAPITAL REQUIREMENTS15.2. CASH BUDGETS15.2.1. MINIMUM DESIRED CASH BALANCE15.2.2. CASH INFLOWS15.2.3. CASH OUTFLOWS15.2.4. CONSTRUCTING THE CASH BUDGET15.2.5. SEASONAL VERSUS LEVEL PRODUCTION15.3. MANAGEMENT OF CURRENT ASSETS15.3.1. CASH AND MARKETABLE SECURITIES MANAGEMENT15.3.1.1. U.S. Treasury Bills15.3.1.2. Federal Funds15.3.1.3. Commercial Paper15.3.1.4. Negotiable Certificates of Deposit15.3.1.5. Bankers' Acceptances15.3.1.6. Eurodollars15.3.1.7. Municipal Securities15.3.1.8. Short-term Investment Policy Statement15.3.1.9. The Financial Crisis and Its Impact on Short-term Firm Financing15.3.2. GETTING—AND KEEPING—THE CASH15.4. ACCOUNTS RECEIVABLE MANAGEMENT15.4.1. CREDIT ANALYSIS15.4.2. CREDIT-REPORTING AGENCIES15.4.3. CREDIT TERMS AND COLLECTION EFFORTS15.5. INVENTORY MANAGEMENT15.6. TECHNOLOGY AND WORKING CAPITAL MANAGEMENT15.6.1. CASH MANAGEMENT15.6.2. PROCESSING INVOICES AND FLOAT15.6.3. TRACKING INVENTORY15.7. SUMMARY15.8. KEY TERMS15.9. DISCUSSION QUESTIONS15.10. PROBLEMS
16. Short-Term Business Financing
16.1. STRATEGIES FOR FINANCING WORKING CAPITAL16.1.1. MATURITY-MATCHING APPROACH16.1.2. AGGRESSIVE APPROACH16.1.3. CONSERVATIVE APPROACH16.2. FACTORS AFFECTING SHORT-TERM FINANCING16.2.1. OPERATING CHARACTERISTICS16.2.1.1. Mix of Current and Fixed Assets16.2.1.2. Size and Age of the Firm16.2.1.3. Growth and Profitability16.2.1.4. Seasonal Variation16.2.1.5. Sales Trend16.2.1.6. Cyclical Variations16.2.2. OTHER INFLUENCES IN SHORT-TERM FINANCING16.3. PROVIDERS OF SHORT-TERM FINANCING16.3.1. COMMERCIAL BANK LENDING16.3.1.1. Bank Lines of Credit16.3.1.2. Computing Interest Rates16.3.1.3. Revolving Credit Agreements16.3.1.4. Small Business Administration16.3.2. TRADE CREDIT FROM SUPPLIERS16.3.2.1. Terms for Trade Credit16.3.2.2. Cost of Trade Credit16.3.3. COMMERCIAL FINANCE COMPANIES16.3.4. COMMERCIAL PAPER16.4. ADDITIONAL VARIETIES OF SHORT-TERM FINANCING16.4.1. ACCOUNTS RECEIVABLE FINANCING16.4.1.1. Pledging Accounts Receivable16.4.1.2. Factoring Accounts Receivable16.4.2. INVENTORY LOANS16.4.3. LOANS SECURED BY STOCKS AND BONDS16.4.4. OTHER FORMS OF SECURITY FOR BANK LOANS16.4.4.1. Life Insurance Loans16.4.4.2. Co-maker Loans16.4.4.3. Acceptances16.5. THE COST OF SHORT-TERM FINANCING16.6. SUMMARY16.7. KEY TERMS16.8. DISCUSSION QUESTIONS16.9. PROBLEMS
17. Capital Budgeting Analysis
17.1. MANAGEMENT OF FIXED ASSETS17.2. IDENTIFYING POTENTIAL CAPITAL BUDGET PROJECTS17.3. CAPITAL BUDGETING PROCESS17.4. CAPITAL BUDGETING TECHNIQUES17.4.1. NET PRESENT VALUE17.4.1.1. Using Spreadsheet Functions17.4.2. INTERNAL RATE OF RETURN17.4.3. NPV AND IRR17.5. MODIFIED INTERNAL RATE OF RETURN17.6. PROFITABILITY INDEX17.7. CONFLICTS BETWEEN DISCOUNTED CASH FLOW TECHNIQUES17.7.1. DIFFERENT CASH FLOW PATTERNS17.7.2. DIFFERENT TIME HORIZONS17.7.3. DIFFERENT SIZES17.8. PAYBACK PERIOD17.9. DIFFERENCE BETWEEN THEORY AND PRACTICE17.9.1. SAFETY MARGIN17.9.2. MANAGERIAL FLEXIBILITY AND OPTIONS17.10. ESTIMATING PROJECT CASH FLOWS17.10.1. ISOLATING PROJECT CASH FLOWS17.10.1.1. Irrelevant Cash Flows17.11. APPROACHES TO ESTIMATING PROJECT CASH FLOWS17.11.1. CASH FLOW FROM OPERATIONS17.11.2. CASH FLOW FROM INVESTMENT ACTIVITIES17.11.3. CASH FLOW FROM FINANCING ACTIVITIES17.11.4. AN EXAMPLE17.11.5. DEPRECIATION AS A TAX SHIELD17.12. KEEPING MANAGERS HONEST17.13. RISK-RELATED CONSIDERATIONS17.14. SUMMARY17.15. KEY TERMS17.16. DISCUSSION QUESTIONS17.17. PROBLEMS
LE17. LEARNING EXTENSION 17: ESTIMATING PROJECT CASH FLOWS
LE17.1. PROJECT STAGES AND CASH FLOW ESTIMATIONLE17.1.1. INITIAL OUTLAYLE17.1.2. CASH FLOWS DURING THE PROJECT'S OPERATING LIFELE17.1.3. SALVAGE VALUE AND NWC RECOVERY AT PROJECT TERMINATIONLE17.2. APPLICATIONSLE17.2.1. CASH FLOW ESTIMATION FOR A REVENUE EXPANDING PROJECTLE17.2.2. CASH FLOW ESTIMATION FOR A COST-SAVING PROJECTLE17.2.3. SETTING A BID PRICELE17.3. SUMMARYLE17.4. DISCUSSION QUESTIONSLE17.5. PROBLEMS
18. Capital Structure and the Cost of Capital
18.1. WHY CHOOSE A CAPITAL STRUCTURE?18.1.1. TRENDS IN CORPORATE USE OF DEBT18.2. REQUIRED RATE OF RETURN AND THE COST OF CAPITAL18.3. COST OF CAPITAL18.3.1. COST OF DEBT18.3.2. COST OF PREFERRED STOCK18.3.3. COST OF COMMON EQUITY18.3.3.1. Cost of Retained Earnings: Security Market Line Approach18.3.3.2. Cost of Retained Earnings: Constant Dividend Growth Model18.3.4. COST OF NEW COMMON STOCK18.4. WEIGHTED AVERAGE COST OF CAPITAL18.4.1. CAPITAL STRUCTURE WEIGHTS18.4.2. MEASURING THE TARGET WEIGHTS18.4.3. WHAT DO BUSINESSES USE AS THEIR COST OF CAPITAL?18.5. DIFFICULTY OF MAKING CAPITAL STRUCTURE DECISIONS18.6. PLANNING GROWTH RATES18.6.1. INTERNAL GROWTH RATE18.6.2. SUSTAINABLE GROWTH RATE18.6.3. EFFECTS OF UNEXPECTEDLY HIGHER (OR LOWER) GROWTH18.7. EBIT/EPS ANALYSIS18.7.1. INDIFFERENCE LEVEL18.8. COMBINED OPERATING AND FINANCIAL LEVERAGE EFFECTS18.8.1. UNIT VOLUME VARIABILITY18.8.2. PRICE-VARIABLE COST MARGIN18.8.3. FIXED COSTS18.8.4. DEGREE OF FINANCIAL LEVERAGE18.8.5. TOTAL RISK18.9. INSIGHTS FROM THEORY AND PRACTICE18.9.1. TAXES AND NONDEBT TAX SHIELDS18.9.2. BANKRUPTCY COSTS18.9.3. AGENCY COSTS18.9.4. A FIRM'S ASSETS AND ITS FINANCING POLICY18.9.5. THE PECKING ORDER HYPOTHESIS18.9.6. MARKET TIMING18.9.7. BEYOND DEBT AND EQUITY18.10. GUIDELINES FOR FINANCING STRATEGY18.10.1.18.10.1.1. Business Risk18.10.1.2. Taxes and Nondebt Tax Shields18.10.1.3. Mix of Tangible and Intangible Assets18.10.1.4. Financial Flexibility18.10.1.5. Control of the Firm18.10.1.6. Profitability18.10.1.7. Financial Market Conditions18.10.1.8. Management's Attitude Toward Debt and Risk18.11. SUMMARY18.12. KEY TERMS18.13. DISCUSSION QUESTIONS18.14. PROBLEMS
A. APPENDIX
GLOSSARY

Content preview from Introduction to Finance: Markets, Investments, and Financial Management, Fourteenth Edition

Chapter LE17. LEARNING EXTENSION 17: ESTIMATING PROJECT CASH FLOWS

How are cash flow estimates developed? In this section we present a practical overview of how an analyst develops the data to estimate cash flows.

PROJECT STAGES AND CASH FLOW ESTIMATION

A typical project encompasses three stages. First there is the initial outlay or investment. Second is the operating life of the project, be it market expansion, a building, or technology. The final stage is at the end of the project's useful life. For projects involving fixed assets or business lines, this can involve selling assets and reclaiming working capital. But for projects that have an indefinite life—such as business expansion—a few years of careful cash flow estimations may give way in the third stage to an estimate of terminal value—that is, what the present value of project cash flows might be far into the future. We'll examine each of the three stages below.

INITIAL OUTLAY

The first cash flow estimate is the initial investment in the project. Engineering estimates may be available for projects that require designing or modifying equipment and buildings. Engineers will examine preliminary designs or architectural sketches and estimate the quantities of various materials needed. Estimates of purchases, transportation costs, and construction expenses can be developed based on current market prices.

Another means of estimating the acquisition or construction cost of a project is to solicit bids from various construction or equipment ...

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