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Principles of Managerial Finance Brief Gitman 7th Edition Solutions Manual

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This is completed downloadable of Principles of Managerial Finance Brief Gitman 7th Edition Solutions Manual

Product Details:

ISBN-10 ‏ : ‎ 0133546403
ISBN-13 ‏ : ‎ 978-0133546408
Author: Lawrence J. Gitman (Author), Chad J. Zutter (Author)

Guide students through complex material with a proven learning goal system. This system – a hallmark feature of Principles of Managerial Finance, Brief—weaves pedagogy into concepts and practice, giving students a roadmap to follow through the text and supplementary tools.

Table of Content:

Part 1 Introduction to Managerial Finance
Chapters in This Part
1 The Role of Managerial Finance
Learning Goals
Why This Chapter Matters to You
1.1 Finance and Business
WHAT IS FINANCE?
CAREER OPPORTUNITIES IN FINANCE
Financial Services
Managerial Finance
LEGAL FORMS OF BUSINESS ORGANIZATION
Sole Proprietorships
Partnerships
Matter of fact
BizStats.com Total Receipts by Type of U.S. Firm
TABLE 1.1 Strengths and Weaknesses of the Common Legal Forms of Business Organization
Corporations
FIGURE 1.1 Corporate Organization
Other Limited Liability Organizations
WHY STUDY MANAGERIAL FINANCE?
TABLE 1.2 Career Opportunities in Managerial Finance
REVIEW QUESTIONS
1.2 Goal of the Firm
MAXIMIZE SHAREHOLDER WEALTH
MAXIMIZE PROFIT?
FIGURE 1.2 Share Price Maximization
Example 1.1
Timing
Cash Flows
Risk
WHAT ABOUT STAKEHOLDERS?
THE ROLE OF BUSINESS ETHICS
Matter of fact
Considering Ethics
ETHICS AND SHARE PRICE
in practice focus on ETHICS: Critics See Ethical Dilemmas in Google Glass?
REVIEW QUESTIONS
1.3 Managerial Finance Function
ORGANIZATION OF THE FINANCE FUNCTION
RELATIONSHIP TO ECONOMICS
Example 1.2
RELATIONSHIP TO ACCOUNTING
Emphasis on Cash Flows
Example 1.3
Personal Finance Example 1.4
Decision Making
PRIMARY ACTIVITIES OF THE FINANCIAL MANAGER
FIGURE 1.3 Financial Activities
REVIEW QUESTIONS
1.4 Governance and Agency
CORPORATE GOVERNANCE
Individual versus Institutional Investors
Government Regulation
THE AGENCY ISSUE
The Agency Problem
Management Compensation Plans
Matter of fact
The Threat of Takeover
REVIEW QUESTIONS
Summary
FOCUS ON VALUE
REVIEW OF LEARNING GOALS
Self-Test Problem
Warm-up Exercises
Problems
Spreadsheet Exercise
TO DO
MyFinanceLab
2 The Financial Market Environment
Learning Goals
Why This Chapter Matters to You
2.1 Financial Institutions and Markets
FINANCIAL INSTITUTIONS
Key Customers of Financial Institutions
Major Financial Institutions
COMMERCIAL BANKS, INVESTMENT BANKS, AND THE SHADOW BANKING SYSTEM
Matter of fact
FINANCIAL MARKETS
THE RELATIONSHIP BETWEEN INSTITUTIONS AND MARKETS
FIGURE 2.1 Flow of Funds
THE MONEY MARKET
THE CAPITAL MARKET
Key Securities Traded: Bonds and Stocks
Example 2.1
Broker Markets and Dealer Markets
in practice focus on PRACTICE: Berkshire Hathaway: Can Buffett Be Replaced?
International Capital Markets
Matter of fact
The Role of Capital Markets
REVIEW QUESTIONS
2.2 The Financial Crisis
FINANCIAL INSTITUTIONS AND REAL ESTATE FINANCE
FALLING HOME PRICES AND DELINQUENT MORTGAGES
FIGURE 2.2 House Prices Soar and then Crash
CRISIS OF CONFIDENCE IN BANKS
FIGURE 2.3 Bank Stocks Plummet During Financial Crisis
SPILLOVER EFFECTS AND THE GREAT RECESSION
REVIEW QUESTIONS
2.3 Regulation of Financial Institutions and Markets
REGULATIONS GOVERNING FINANCIAL INSTITUTIONS
REGULATIONS GOVERNING FINANCIAL MARKETS
REVIEW QUESTIONS
2.4 Business Taxes
ORDINARY INCOME
Example 2.2
Marginal versus Average Tax Rates
TABLE 2.1 Corporate Tax Rate Schedule
Interest and Dividend Income
Tax-Deductible Expenses
Example 2.3
CAPITAL GAINS
Example 2.4
REVIEW QUESTIONS
Summary
THE ROLE OF FINANCIAL INSTITUTIONS AND MARKETS
REVIEW OF LEARNING GOALS
Self-Test Problem
Warm-Up Exercises
Problems
Spreadsheet Exercise
TO DO
MyFinanceLab
Part 2 Financial Tools
Chapters in This Part
3 Financial Statements and Ratio Analysis
Learning Goals
Why This Chapter Matters to You
3.1 The Stockholders’ Report
THE LETTER TO STOCKHOLDERS
THE FOUR KEY FINANCIAL STATEMENTS
Income Statement
in practice focus on ETHICS: Taking Earnings Reports at Face Value
TABLE 3.1 Bartlett Company Income Statements ($000)
Personal Finance Example 3.1
Balance Sheet
TABLE 3.2 Bartlett Company Balance Sheets ($000)
Personal Finance Example 3.2
Statement of Retained Earnings
TABLE 3.3 Bartlett Company Statement of Retained Earnings ($000) for the Year Ended December 31, 2015
Statement of Cash Flows
TABLE 3.4 Bartlett Company Statement of Cash Flows ($000) for the Year Ended December 31, 2015
NOTES TO THE FINANCIAL STATEMENTS
CONSOLIDATING INTERNATIONAL FINANCIAL STATEMENTS
REVIEW QUESTIONS
3.2 Using Financial Ratios
INTERESTED PARTIES
TYPES OF RATIO COMPARISONS
Cross-Sectional Analysis
TABLE 3.5 Financial Ratios for Select Firms and Their Industry Median Values
Example 3.3
Time-Series Analysis
Combined Analysis
CAUTIONS ABOUT USING RATIO ANALYSIS
FIGURE 3.1 Combined Analysis
CATEGORIES OF FINANCIAL RATIOS
REVIEW QUESTIONS
3.3 Liquidity Ratios
CURRENT RATIO
Matter of fact
Personal Finance Example 3.4
QUICK (ACID-TEST) RATIO
Matter of fact
REVIEW QUESTIONS
3.4 Activity Ratios
INVENTORY TURNOVER
AVERAGE COLLECTION PERIOD
Matter of fact
AVERAGE PAYMENT PERIOD
TOTAL ASSET TURNOVER
Matter of fact
REVIEW QUESTION
3.5 Debt Ratios
Example 3.5
TABLE 3.6 Financial Statements Associated with Patty’s Alternatives
DEBT RATIO
DEBT-TO-EQUITY RATIO
TIMES INTEREST EARNED RATIO
FIXED-PAYMENT COVERAGE RATIO
REVIEW QUESTIONS
3.6 Profitability Ratios
COMMON-SIZE INCOME STATEMENTS
GROSS PROFIT MARGIN
OPERATING PROFIT MARGIN
TABLE 3.7 Bartlett Company Common-Size Income Statements
NET PROFIT MARGIN
EARNINGS PER SHARE (EPS)
RETURN ON TOTAL ASSETS (ROA)
RETURN ON EQUITY (ROE)
REVIEW QUESTIONS
3.7 Market Ratios
PRICE/EARNINGS (P/E) RATIO
MARKET/BOOK (M/B) RATIO
REVIEW QUESTION
3.8 A Complete Ratio Analysis
SUMMARIZING ALL RATIOS
Liquidity
Activity
Debt
Profitability
Market
DUPONT SYSTEM OF ANALYSIS
DuPont Formula
TABLE 3.8 Summary of Bartlett Company Ratios (2010–2015, Including 2015 Industry Averages)
FIGURE 3.2 DuPont System of Analysis
Modified DuPont Formula
Matter of fact
Applying the DuPont System
Example 3.6
REVIEW QUESTIONS
Summary
FOCUS ON VALUE
REVIEW OF LEARNING GOALS
Self-Test Problems
Warm-Up Exercises
Problems
Spreadsheet Exercise
TO DO
MyFinanceLab
4 Cash Flow and Financial Planning
Learning Goals
Why This Chapter Matters to You
4.1 Analyzing the Firm’s Cash Flow
DEPRECIATION
Depreciable Value of an Asset
Example 4.1
Depreciable Life of an Asset
TABLE 4.1 First Four Property Classes under MACRS
DEPRECIATION METHODS
TABLE 4.2 Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes
Example 4.2
DEVELOPING THE STATEMENT OF CASH FLOWS
Classifying Inflows and Outflows of Cash
Matter of fact
TABLE 4.3 Inflows and Outflows of Cash
Preparing the Statement of Cash Flows
TABLE 4.4 Baker Corporation 2015 Income Statement ($000)
TABLE 4.5 Baker Corporation Balance Sheets ($000)
Interpreting the Statement
TABLE 4.6 Baker Corporation Statement of Cash Flows ($000) for the Year Ended December 31, 2015
Example 4.3
FREE CASH FLOW
Example 4.4
Example 4.5
REVIEW QUESTIONS
in practice focus on PRACTICE: Free Cash Flow at Cisco Systems
4.2 The Financial Planning Process
LONG-TERM (STRATEGIC) FINANCIAL PLANS
SHORT-TERM (OPERATING) FINANCIAL PLANS
FIGURE 4.1 Short-Term Financial Planning
Personal Finance Example 4.6
REVIEW QUESTIONS
4.3 Cash Planning: Cash Budgets
THE SALES FORECAST
PREPARING THE CASH BUDGET
TABLE 4.7 The General Format of the Cash Budget
Total Cash Receipts
Example 4.7
TABLE 4.8 A Schedule of Projected Cash Receipts for Coulson Industries ($000)
Total cash disbursements
Example 4.8
TABLE 4.9 A Schedule of Projected Cash Disbursements for Coulson Industries ($000)
Net Cash Flow, Ending Cash, Financing, and Excess Cash
Example 4.9
TABLE 4.10 A Cash Budget for Coulson Industries ($000)
EVALUATING THE CASH BUDGET
Personal Finance Example 4.10
COPING WITH UNCERTAINTY IN THE CASH BUDGET
Example 4.11
TABLE 4.11 A Scenario Analysis of Coulson Industries’ Cash Budget ($000)
CASH FLOW WITHIN THE MONTH
REVIEW QUESTIONS
4.4 Profit Planning: Pro Forma Statements
PRECEDING YEAR’S FINANCIAL STATEMENTS
SALES FORECAST
REVIEW QUESTIONS
TABLE 4.12 Vectra Manufacturing’s Income Statement for the Year Ended December 31, 2015
TABLE 4.13 Vectra Manufacturing’s Balance Sheet, December 31, 2015
TABLE 4.14 2016 Sales Forecast for Vectra Manufacturing
4.5 Preparing the Pro Forma Income Statement
CONSIDERING TYPES OF COSTS AND EXPENSES
TABLE 4.15 A Pro Forma Income Statement, Using the Percent-of-Sales Method, for Vectra Manufacturing for the Year Ended December 31, 2016
Example 4.12
REVIEW QUESTIONS
4.6 Preparing the Pro Forma Balance Sheet
TABLE 4.16 A Pro Forma Balance Sheet, Using the Judgmental Approach, for Vectra Manufacturing (December 31, 2016)
REVIEW QUESTIONS
4.7 Evaluation of Pro Forma Statements
REVIEW QUESTIONS
Summary
FOCUS ON VALUE
REVIEW OF LEARNING GOALS
Self-Test Problems
Warm-Up Exercises
Problems
Spreadsheet Exercise
TO DO
MyFinanceLab
5 Time Value of Money
Learning Goals
Why This Chapter Matters to You
5.1 The Role of Time Value in Finance
FUTURE VALUE VERSUS PRESENT VALUE
FIGURE 5.1 Time Line
FIGURE 5.2 Compounding and Discounting
COMPUTATIONAL TOOLS
Financial Calculators
FIGURE 5.3 Calculator Keys
Electronic Spreadsheets
Cash Flow Signs
BASIC PATTERNS OF CASH FLOW
REVIEW QUESTIONS
5.2 Single Amounts
FUTURE VALUE OF A SINGLE AMOUNT
The Concept of Future Value
Personal Finance Example 5.1
The Equation for Future Value
Personal Finance Example 5.2
Personal Finance Example 5.3
A Graphical View of Future Value
FIGURE 5.4 Future Value Relationship
PRESENT VALUE OF A SINGLE AMOUNT
The Concept of Present Value
Personal Finance Example 5.4
The Equation for Present Value
Personal Finance Example 5.5
A Graphical View of Present Value
REVIEW QUESTIONS
FIGURE 5.5 Present Value Relationship
EXCEL REVIEW QUESTIONS
5.3 Annuities
TYPES OF ANNUITIES
Personal Finance Example 5.6
TABLE 5.1 Comparison of Ordinary Annuity and Annuity Due Cash Flows ($1,000, 5 Years)
FINDING THE FUTURE VALUE OF AN ORDINARY ANNUITY
Personal Finance Example 5.7
FINDING THE PRESENT VALUE OF AN ORDINARY ANNUITY
Example 5.8
TABLE 5.2 Long Method for Finding the Present Value of an Ordinary Annuity
FINDING THE FUTURE VALUE OF AN ANNUITY DUE
Personal Finance Example 5.9
Comparison of an Annuity Due with an Ordinary Annuity Future Value
FINDING THE PRESENT VALUE OF AN ANNUITY DUE
Example 5.10
Comparison of an Annuity Due with an Ordinary Annuity Present Value
Matter of fact
FINDING THE PRESENT VALUE OF A PERPETUITY
Personal Finance Example 5.11
REVIEW QUESTIONS
EXCEL REVIEW QUESTIONS
5.4 Mixed Streams
FUTURE VALUE OF A MIXED STREAM
Example 5.12
PRESENT VALUE OF A MIXED STREAM
Example 5.13
REVIEW QUESTION
EXCEL REVIEW QUESTIONS
5.5 Compounding Interest More Frequently Than Annually
SEMIANNUAL COMPOUNDING
Personal Finance Example 5.14
TABLE 5.3 Future Value from Investing $100 at 8% Interest Compounded Semiannually over 24 Months (2 Years)
QUARTERLY COMPOUNDING
Personal Finance Example 5.15
TABLE 5.4 Future Value from Investing $100 at 8% Interest Compounded Quarterly over 24 Months (2 Years)
TABLE 5.5 Future Value at the End of Years 1 and 2 from Investing $100 at 8% Interest, Given Various Compounding Periods
A GENERAL EQUATION FOR COMPOUNDING MORE FREQUENTLY THAN ANNUALLY
Personal Finance Example 5.16
USING COMPUTATIONAL TOOLS FOR COMPOUNDING MORE FREQUENTLY THAN ANNUALLY
Personal Finance Example 5.17
CONTINUOUS COMPOUNDING
Personal Finance Example 5.18
NOMINAL AND EFFECTIVE ANNUAL RATES OF INTEREST
Personal Finance Example 5.19
REVIEW QUESTIONS
EXCEL REVIEW QUESTIONS
5.6 Special Applications of Time Value
DETERMINING DEPOSITS NEEDED TO ACCUMULATE A FUTURE SUM
Personal Finance Example 5.20
LOAN AMORTIZATION
Personal Finance Example 5.21
TABLE 5.6 Loan Amortization Schedule ($6,000 Principal, 10% Interest, 4-Year Repayment Period)
in practice focus on PRACTICE: New Century Brings Trouble for Subprime Mortgages
FINDING INTEREST OR GROWTH RATES
Personal Finance Example 5.22
Personal Finance Example 5.23
FINDING AN UNKNOWN NUMBER OF PERIODS
Personal Finance Example 5.24
Personal Finance Example 5.25
REVIEW QUESTIONS
EXCEL REVIEW QUESTIONS
Summary
FOCUS ON VALUE
REVIEW OF LEARNING GOALS
Self-Test Problems
Warm-Up Exercises
Problems
Spreadsheet Exercise
TO DO
MyFinanceLab
Part 3 Valuation of Securities
Chapters in This Part
6 Interest Rates and Bond Valuation
Learning Goals
Why This Chapter Matters to You
6.1 Interest Rates and Required Returns
INTEREST RATE FUNDAMENTALS
Matter of fact
The Real Rate of Interest
FIGURE 6.1 Supply–Demand Relationship
Nominal or Actual Rate of Interest (Return)
Personal Finance Example 6.1
FIGURE 6.2 Impact of Inflation
TERM STRUCTURE OF INTEREST RATES
Yield Curves
FIGURE 6.3 Treasury Yield Curves
Matter of fact
Theories of Term Structure
Expectations Theory
Example 6.2
Liquidity Preference Theory
Market Segmentation Theory
RISK PREMIUMS: ISSUER AND ISSUE CHARACTERISTICS
Example 6.3
TABLE 6.1 Debt-Specific Risk Premium Components
REVIEW QUESTIONS
6.2 Corporate Bonds
LEGAL ASPECTS OF CORPORATE BONDS
Bond Indenture
Standard Provisions
Restrictive Provisions
Sinking-Fund Requirements
Security Interest
Trustee
COST OF BONDS TO THE ISSUER
Impact of Bond Maturity
Impact of Offering Size
Impact of Issuer’s Risk
Impact of the Cost of Money
GENERAL FEATURES OF A BOND ISSUE
BOND YIELDS
BOND PRICES
TABLE 6.2 Data on Selected Bonds
BOND RATINGS
in practice focus on ETHICS: Can We Trust the Bond Raters?
TABLE 6.3 Moody’s and Standard & Poor’s Bond Ratings
COMMON TYPES OF BONDS
INTERNATIONAL BOND ISSUES
TABLE 6.4 Characteristics and Priority of Lender’s Claim of Traditional Types of Bonds
REVIEW QUESTIONS
TABLE 6.5 Characteristics of Contemporary Types of Bonds
6.3 Valuation Fundamentals
KEY INPUTS
Cash Flows (Returns)
Personal Finance Example 6.4
Timing
Risk and Required Return
Personal Finance Example 6.5
BASIC VALUATION MODEL
Personal Finance Example 6.6
REVIEW QUESTIONS
6.4 Bond Valuation
BOND FUNDAMENTALS
Example 6.7
BASIC BOND VALUATION
Personal Finance Example 6.8
BOND VALUE BEHAVIOR
Required Returns and Bond Values
Example 6.9
FIGURE 6.4 Bond Values and Required Returns
TABLE 6.6 Bond Values for Various Required Returns (Mills Company’s 10% Coupon Interest Rate, 10-Year Maturity, $1,000 Par, January 1, 2014, Issue Date, Paying Annual Interest)
Time to Maturity and Bond Values
Constant Required Returns
Example 6.10
FIGURE 6.5 Time to Maturity and Bond Values
Changing Required Returns
Example 6.11
YIELD TO MATURITY (YTM)
Personal Finance Example 6.12
SEMIANNUAL INTEREST AND BOND VALUES
Example 6.13
REVIEW QUESTIONS
EXCEL REVIEW QUESTIONS
Summary
FOCUS ON VALUE
REVIEW OF LEARNING GOALS
Self-Test Problems
Warm-Up Exercises
Problems
Spreadsheet Exercise
TO DO
MyFinanceLab
7 Stock Valuation
Learning Goals
Why This Chapter Matters to You
7.1 Differences between Debt and Equity
VOICE IN MANAGEMENT
CLAIMS ON INCOME AND ASSETS
Matter of fact
TABLE 7.1 Key Differences between Debt and Equity
MATURITY
TAX TREATMENT
REVIEW QUESTION
7.2 Common and Preferred Stock
COMMON STOCK
Ownership
Par Value
Preemptive Rights
Authorized, Outstanding, and Issued Shares
Example 7.1
Voting Rights
Dividends
International Stock Issues
Matter of fact
PREFERRED STOCK
Basic Rights of Preferred Stockholders
Features of Preferred Stock
Restrictive Covenants
Cumulation
Other Features
ISSUING COMMON STOCK
Venture Capital
Organization and Investment Stages
TABLE 7.2 Organization of Venture Capital Investors
Deal Structure and Pricing
Going Public
FIGURE 7.1 Cover of a Preliminary Prospectus for a Stock Issue
The Investment Banker’s Role
REVIEW QUESTIONS
FIGURE 7.2 The Selling Process for a Large Security Issue
7.3 Common Stock Valuation
MARKET EFFICIENCY
Matter of fact
THE EFFICIENT-MARKET HYPOTHESIS
The Behavioral Finance Challenge
BASIC COMMON STOCK VALUATION EQUATION
in practice focus on PRACTICE: Understanding Human Behavior Helps Us Understand Investor Behavior
Zero-Growth Model
Personal Finance Example 7.2
Preferred Stock Valuation
Constant-Growth Model
Example 7.3
Variable-Growth Model
Personal Finance Example 7.4
TABLE 7.3 Calculation of Present Value of Warren Industries Dividends (2016–2018)
FREE CASH FLOW VALUATION MODEL
Example 7.5
TABLE 7.4 Dewhurst, Inc.’s, Data for the Free Cash Flow Valuation Model
TABLE 7.5 Calculation of the Value of the Entire Company for Dewhurst, Inc.
OTHER APPROACHES TO COMMON STOCK VALUATION
Book Value
Example 7.6
Liquidation Value
Example 7.7
Price/Earnings (P/E) Multiples
Personal Finance Example 7.8
Matter of fact
REVIEW QUESTIONS
7.4 Decision Making and Common Stock Value
FIGURE 7.3 Decision Making and Stock Value
CHANGES IN EXPECTED DIVIDENDS
Example 7.9
CHANGES IN RISK
Example 7.10
COMBINED EFFECT
Example 7.11
REVIEW QUESTIONS
Summary
FOCUS ON VALUE
REVIEW OF LEARNING GOALS
Self-Test Problems
Warm-Up Exercises
Problems
Spreadsheet Exercise
TO DO
MyFinanceLab
Part 4 Risk and the Required Rate of Return
Chapters in This Part
8 Risk and Return
Learning Goals
Why This Chapter Matters to You
8.1 Risk and Return Fundamentals
RISK DEFINED
in practice focus on ETHICS: If It Seems Too Good to Be True, It Probably Is
RETURN DEFINED
Example 8.1
TABLE 8.1 Historical Returns on Selected Investments (1900–2011)
RISK PREFERENCES
REVIEW QUESTIONS
8.2 Risk of a Single Asset
RISK ASSESSMENT
Scenario Analysis
Example 8.2
TABLE 8.2 Assets A and B
Probability Distributions
Matter of fact
Example 8.3
FIGURE 8.1 Bar Charts
RISK MEASUREMENT
FIGURE 8.2 Continuous Probability Distributions
Standard Deviation
Example 8.4
TABLE 8.3 Expected Values of Returns for Assets A and B
Example 8.5
TABLE 8.4 The Calculation of the Standard Deviation of the Returns for Assets A and B
TABLE 8.5 Historical Returns and Standard Deviations on Selected Investments (1900–2011)
Historical Returns and Risk
Matter of fact
Normal Distribution
FIGURE 8.3 Bell-Shaped Curve
Example 8.6
Coefficient of Variation: Trading off Risk and Return
Example 8.7
Personal Finance Example 8.8
REVIEW QUESTIONS
8.3 Risk of a Portfolio
PORTFOLIO RETURN AND STANDARD DEVIATION
Example 8.9
Example 8.10
TABLE 8.6 Expected Return, Expected Value, and Standard Deviation of Returns for Portfolio XY
CORRELATION
DIVERSIFICATION
FIGURE 8.4 Correlations
FIGURE 8.5 Diversification
Example 8.11
TABLE 8.7 Forecasted Returns, Expected Values, and Standard Deviations for Assets X, Y, and Z and Portfolios XY and XZ
CORRELATION, DIVERSIFICATION, RISK, AND RETURN
Example 8.12
FIGURE 8.6 Possible Correlations
INTERNATIONAL DIVERSIFICATION
Returns from International Diversification
Risks of International Diversification
REVIEW QUESTIONS
8.4 Risk and Return: The Capital Asset Pricing Model (CAPM)
TYPES OF RISK
THE MODEL: CAPM
FIGURE 8.7 Risk Reduction
Beta Coefficient
Deriving Beta from Return Data
FIGURE 8.8 Beta Derivationa
TABLE 8.8 Selected Beta Coefficients and Their Interpretations
Interpreting Betas
TABLE 8.9 Beta Coefficients for Selected Stocks (May 20, 2013)
Portfolio Betas
Personal Finance Example 8.13
TABLE 8.10 Mario Austino’s Portfolios V and W
The Equation
Historical Risk Premiums
Example 8.14
The Graph: The Security Market Line (SML)
Example 8.15
FIGURE 8.9 Security Market Line
Shifts in the Security Market Line
Changes in Inflationary Expectations
Example 8.16
Changes in Risk Aversion
FIGURE 8.10 Inflation Shifts SML
Example 8.17
Some Comments on the CAPM
FIGURE 8.11 Risk Aversion Shifts SML
REVIEW QUESTIONS
Summary
FOCUS ON VALUE
REVIEW OF LEARNING GOALS
Self-Test Problems
Warm-up Exercises
Problems
Spreadsheet Exercise
To Do
MyFinanceLab
9 The Cost of Capital
Learning Goals
Why This Chapter Matters to You
9.1 Overview of the Cost of Capital
THE BASIC CONCEPT
Example 9.1
SOURCES OF LONG-TERM CAPITAL
REVIEW QUESTIONS
9.2 Cost of Long-Term Debt
NET PROCEEDS
Example 9.2
BEFORE-TAX COST OF DEBT
Using Market Quotations
Calculating the Cost
Example 9.3
Approximating the Cost
Example 9.4
AFTER-TAX COST OF DEBT
Example 9.5
Personal Finance Example 9.6
REVIEW QUESTIONS
EXCEL REVIEW QUESTION
9.3 Cost of Preferred Stock
PREFERRED STOCK DIVIDENDS
CALCULATING THE COST OF PREFERRED STOCK
Example 9.7
REVIEW QUESTION
9.4 Cost of Common Stock
FINDING THE COST OF COMMON STOCK EQUITY
Using the Constant-Growth Valuation (Gordon Growth) Model
Example 9.8
Using the Capital Asset Pricing Model (CAPM)
Example 9.9
Comparing Constant-Growth and CAPM Techniques
COST OF RETAINED EARNINGS
Example 9.10
Matter of fact
COST OF NEW ISSUES OF COMMON STOCK
Example 9.11
REVIEW QUESTIONS
9.5 Weighted Average Cost of Capital
CALCULATING WEIGHTED AVERAGE COST OF CAPITAL (WACC)
Example 9.12
WEIGHTING SCHEMES
Book Value versus Market Value
TABLE 9.1 Calculation of the Weighted Average Cost of Capital for Duchess Corporation
in practice focus on PRACTICE: Uncertain Times Make for an Uncertain Weighted Average Cost of Capital
Historical versus Target Weights
Personal Finance Example 9.13
REVIEW QUESTIONS
Summary
FOCUS ON VALUE
REVIEW OF LEARNING GOALS
Self-Test Problem
Warm-Up Exercises
Problems
Spreadsheet Exercise
TO DO
MyFinanceLab
Part 5 Long-Term Investment Decisions
Chapters in This Part
10 Capital Budgeting Techniques
Learning Goals
Why This Chapter Matters to You
10.1 Overview of Capital Budgeting
MOTIVES FOR CAPITAL EXPENDITURE
STEPS IN THE PROCESS
BASIC TERMINOLOGY
Independent versus Mutually Exclusive Projects
Unlimited Funds versus Capital Rationing
Accept–Reject versus Ranking Approaches
CAPITAL BUDGETING TECHNIQUES
Bennett Company’s Relevant Cash Flows
REVIEW QUESTION
10.2 Payback Period
TABLE 10.1 Capital Expenditure Data for Bennett Company
FIGURE 10.1 Bennett Company’s Projects A and B
DECISION CRITERIA
Example 10.1
PROS AND CONS OF PAYBACK ANALYSIS
Matter of fact
Personal Finance Example 10.2
TABLE 10.2 Relevant Cash Flows and Payback Periods for DeYarman man Enterprises’ Projects
Example 10.3
Example 10.4
TABLE 10.3 Calculation of the Payback Period for Rashid Company’s Two Alternative Investment Projects
REVIEW QUESTIONS
10.3 Net Present Value (NPV)
DECISION CRITERIA
Example 10.5
FIGURE 10.2 Calculation of NPVs for Bennett Company’s Capital Expenditure Alternatives
Project A
Project B
NPV AND THE PROFITABILITY INDEX
Example 10.6
NPV AND ECONOMIC VALUE ADDED
Example 10.7
REVIEW QUESTIONS
EXCEL REVIEW QUESTION
10.4 Internal Rate of Return (IRR)
DECISION CRITERIA
CALCULATING THE IRR
Example 10.8
FIGURE 10.3 Calculation of IRRs for Bennett Company’s Capital Expenditure Alternatives
Personal Finance Example 10.9
REVIEW QUESTIONS
EXCEL REVIEW QUESTION
10.5 Comparing NPV and IRR Techniques
NET PRESENT VALUE PROFILES
Example 10.10
TABLE 10.4 Discount Rate–NPV Coordinates for Projects A and B
FIGURE 10.4 NPV Profiles
CONFLICTING RANKINGS
Reinvestment Assumption
Example 10.11
TABLE 10.5 Reinvestment Rate Comparisons for a Project
TABLE 10.6 Project Cash Flows after Reinvestment
Timing of the Cash Flow
TABLE 10.7 Ranking Projects A and B Using IRR and NPV Methods
Magnitude of the Initial Investment
WHICH APPROACH IS BETTER?
Theoretical View
Practical View
Matter of fact
in practice focus on ETHICS: Nonfinancial Considerations in Project Selection
REVIEW QUESTIONS
Summary
FOCUS ON VALUE
REVIEW OF LEARNING GOALS
Self-Test Problem
Warm-up Exercises
Problems
Spreadsheet Exercise
TO DO
MyFinanceLab
11 Capital Budgeting Cash Flows and Risk Refinements
Learning Goals
Why This Chapter Matters to You
11.1 Relevant Cash Flows
in practice focus on ETHICS: A Question of Accuracy
MAJOR CASH FLOW COMPONENTS
EXPANSION VERSUS REPLACEMENT DECISIONS
FIGURE 11.1 Cash Flow Components
FIGURE 11.2 Relevant Cash Flows for Replacement Decisions
SUNK COSTS AND OPPORTUNITY COSTS
Example 11.1
Matter of fact
REVIEW QUESTIONS
11.2 Finding the Initial Investment
INSTALLED COST OF NEW ASSET
TABLE 11.1 The Basic Format for Determining Initial Investment
AFTER-TAX PROCEEDS FROM SALE OF OLD ASSET
Book Value
Example 11.2
Basic Tax Rules
Example 11.3
TABLE 11.2 Tax Treatment on Sales of Assets
The sale of the asset for more than its book value
FIGURE 11.3 Taxable Income from Sale of Asset
The sale of the asset for its book value
The sale of the asset for less than its book value
CHANGE IN NET WORKING CAPITAL
Matter of fact
Example 11.4
TABLE 11.3 Calculation of Change in Net Working Capital for Danson Company
CALCULATING THE INITIAL INVESTMENT
Example 11.5
REVIEW QUESTIONS
11.3 Finding the Operating Cash Flows
INTERPRETING THE TERM AFTER-TAX
INTERPRETING THE TERM CASH FLOWS
Example 11.6
TABLE 11.4 Powell Corporation’s Revenue and Expenses (Excluding Depreciation and Interest) for Proposed and Present Machines
TABLE 11.5 Depreciation Expense for Proposed and Present Machines for Powell Corporation
TABLE 11.6 Calculation of Operating Cash Flows Using the Income Statement Format
TABLE 11.7 Calculation of Operating Cash Flows for Powell Corporation’s Proposed and Present Machines
INTERPRETING THE TERM INCREMENTAL
TABLE 11.8 Incremental (Relevant) Operating Cash Flows for Powell Corporation
Example 11.7
REVIEW QUESTIONS
11.4 Finding the Terminal Cash Flow
PROCEEDS FROM SALE OF ASSETS
TAXES ON SALE OF ASSETS
TABLE 11.9 The Basic Format for Determining Terminal Cash Flow
CHANGE IN NET WORKING CAPITAL
Example 11.8
REVIEW QUESTION
11.5 Risk in Capital Budgeting (Behavioral Approaches)
TABLE 11.10 Relevant Cash Flows and NPVs for Bennett Company’s Projects
BREAKEVEN ANALYSIS
Example 11.9
SCENARIO ANALYSIS
Example 11.10
TABLE 11.11 Scenario Analysis of Treadwell’s Projects A and B
SIMULATION
FIGURE 11.4 NPV Simulation
REVIEW QUESTIONS
EXCEL REVIEW QUESTION MyFinanceLab
11.6 Risk-Adjusted Discount Rates
DETERMINING RISK-ADJUSTED DISCOUNT RATES (RADRS)
Personal Finance Example 11.11
Review of CAPM
Using CAPM to Find RADRs
FIGURE 11.5 CAPM and SML
Example 11.12
APPLYING RADRS
Example 11.13
FIGURE 11.6 Calculation of NPVS for Bennett Company’s Capital Expenditure Alternatives Using RADRs
PORTFOLIO EFFECTS
RADRS IN PRACTICE
TABLE 11.12 Bennett Company’s Risk Classes and RADRs
Example 11.14
REVIEW QUESTIONS
11.7 Capital Budgeting Refinements
COMPARING PROJECTS WITH UNEQUAL LIVES
The Problem
Example 11.15
Annualized Net Present Value (ANPV) Approach
Example 11.16
RECOGNIZING REAL OPTIONS
TABLE 11.13 Major Types of Real Options
Example 11.17
CAPITAL RATIONING
Internal Rate of Return Approach
Example 11.18
FIGURE 11.7 Investment Opportunities Schedule
Net Present Value Approach
Example 11.19
TABLE 11.14 Rankings for Tate Company Projects
REVIEW QUESTIONS
EXCEL REVIEW QUESTION MyFinanceLab
Summary
REVIEW OF LEARNING GOALS
Self-Test Problems
Warm-Up Exercises
Problems
Risk Classes and RADRs
Spreadsheet Exercise
TO DO
MyFinanceLab
Part 6 Long-Term Financial Decisions
Chapters in This Part
12 Leverage and Capital Structure
Learning Goals
Why This Chapter Matters to You
12.1 Leverage
TABLE 12.1 General Income Statement Format and Types of Leverage
BREAKEVEN ANALYSIS
Algebraic Approach
TABLE 12.2 Operating Leverage, Costs, and Breakeven Analysis
Example 12.1
FIGURE 12.1 Breakeven Analysis
Graphical Approach
Changing Costs and the Operating Breakeven Point
TABLE 12.3 Sensitivity of Operating Breakeven Point to Increases in Key Breakeven Variables
Example 12.2
Personal Finance Example 12.3
FIGURE 12.2 Operating Leverage
OPERATING LEVERAGE
Example 12.4
TABLE 12.4 The EBIT for Various Sales Levels
Measuring the Degree of Operating Leverage (DOL)
Example 12.5
Example 12.6
in practice focus on PRACTICE: Adobe’s Leverage
Fixed Costs and Operating Leverage
Example 12.7
FINANCIAL LEVERAGE
TABLE 12.5 Operating Leverage and Increased Fixed Costs
Example 12.8
TABLE 12.6 The EPS for Various EBIT Levelsa
Measuring the Degree of Financial Leverage (DFL)
Example 12.9
Personal Finance Example 12.10
Example 12.11
TOTAL LEVERAGE
Example 12.12
TABLE 12.7 The Total Leverage Effect
Measuring the Degree of Total Leverage (DTL)
Example 12.13
Example 12.14
Relationship of Operating, Financial, and Total Leverage
Example 12.15
REVIEW QUESTIONS
12.2 The Firm’s Capital Structure
TYPES OF CAPITAL
EXTERNAL ASSESSMENT OF CAPITAL STRUCTURE
TABLE 12.8 Median Debt Ratios for Selected Industries (Fiscal Year 2011)
Personal Finance Example 12.16
CAPITAL STRUCTURE OF NON–U.S. FIRMS
Matter of fact
CAPITAL STRUCTURE THEORY
Tax Benefits
Probability of Bankruptcy
Business Risk
Example 12.17
TABLE 12.9 Sales and Associated EBIT Calculations for Cooke Company ($000)
Total Risk
Example 12.18
TABLE 12.10 Capital Structures Associated with Alternative Debt Ratios for Cooke Company
TABLE 12.11 Level of Debt, Interest Rate, and Dollar Amount of Annual Interest Associated with Cooke Company’s Alternative Capital Structures
TABLE 12.12 Calculation of EPS for Selected Debt Ratios ($000) for Cooke Company
TABLE 12.13 Expected EPS, Standard Deviation, and Coefficient of Variation for Alternative Capital Structures for Cooke Company
FIGURE 12.3 Probability Distributions
FIGURE 12.4 Expected EPS and Coefficient of Variation of EPS
Agency Costs Imposed by Lenders
Asymmetric Information
Pecking Order Theory
Signaling Theory
OPTIMAL CAPITAL STRUCTURE
FIGURE 12.5 Cost Functions and Value
Cost Functions
Graphical View of Optimal Structure
REVIEW QUESTIONS
12.3 EbIT–EPS Approach to Capital Structure
PRESENTING A FINANCING PLAN GRAPHICALLY
Data Required
Example 12.19
Plotting the Data
FIGURE 12.6 EBIT–EPS Approach
COMPARING ALTERNATIVE CAPITAL STRUCTURES
Example 12.20
CONSIDERING RISK IN EBIT–EPS ANALYSIS
Example 12.21
BASIC SHORTCOMING OF EBIT–EPS ANALYSIS
REVIEW QUESTION
12.4 Choosing the Optimal Capital Structure
LINKAGE
TABLE 12.14 Required Returns for Cooke Company’s Alternative Capital Structures
Example 12.22
ESTIMATING VALUE
Example 12.23
TABLE 12.15 Calculation of Share Value Estimates Associated with Alternative Capital Structures for Cooke Company
MAXIMIZING VALUE VERSUS MAXIMIZING EPS
FIGURE 12.7 Estimating Value
Example 12.24
SOME OTHER IMPORTANT CONSIDERATIONS
TABLE 12.16 Important Factors to Consider in Making Capital Structure Decisions
REVIEW QUESTIONS
Summary
FOCUS ON VALUE
REVIEW OF LEARNING GOALS
Self-Test Problems
Warm-Up Exercises
Problems
Spreadsheet Exercise
TO DO
MyFinanceLab
13 Payout Policy
Learning Goals
Why This Chapter Matters to You
13.1 The Basics of Payout Policy
ELEMENTS OF PAYOUT POLICY
TRENDS IN EARNINGS AND DIVIDENDS
FIGURE 13.1 Per Share Earnings and Dividends of the S&P 500 Index
Matter of fact
TRENDS IN DIVIDENDS AND SHARE REPURCHASES
FIGURE 13.2 Aggregate Dividends and Repurchases for All U.S.–Listed Companies
in practice focus on ETHICS: Are Buybacks Really a Bargain?
Matter of fact
REVIEW QUESTIONS
13.2 The Mechanics of Payout Policy
FIGURE 13.3 U.S. Public Industrial Firms Increasing, Decreasing, or Maintaining Dividends
CASH DIVIDEND PAYMENT PROCEDURES
Example 13.1
FIGURE 13.4 Dividend Payment Time Line
SHARE REPURCHASE PROCEDURES
Example 13.2
TAX TREATMENT OF DIVIDENDS AND REPURCHASES
Personal Finance Example 13.3
DIVIDEND REINVESTMENT PLANS
STOCK PRICE REACTIONS TO CORPORATE PAYOUTS
REVIEW QUESTIONS
13.3 Relevance of Payout Policy
RESIDUAL THEORY OF DIVIDENDS
THE DIVIDEND IRRELEVANCE THEORY
ARGUMENTS FOR DIVIDEND RELEVANCE
REVIEW QUESTIONS
13.4 Factors Affecting Dividend Policy
LEGAL CONSTRAINTS
Example 13.4
Example 13.5
CONTRACTUAL CONSTRAINTS
GROWTH PROSPECTS
OWNER CONSIDERATIONS
MARKET CONSIDERATIONS
REVIEW QUESTION
13.5 Types of Dividend Policies
CONSTANT-PAYOUT-RATIO DIVIDEND POLICY
Example 13.6
REGULAR DIVIDEND POLICY
Example 13.7
LOW-REGULAR-AND-EXTRA DIVIDEND POLICY
REVIEW QUESTION
13.6 Other Forms of Dividends
STOCK DIVIDENDS
Accounting Aspects
Example 13.8
Shareholder’s Viewpoint
Example 13.9
The Company’s Viewpoint
STOCK SPLITS
Example 13.10
Personal Finance Example 13.11
REVIEW QUESTIONS
Summary
FOCUS ON VALUE
REVIEW OF LEARNING GOALS
Self-Test Problem
Warm-Up Exercises
Problems
Spreadsheet Exercise
TO DO
MyFinanceLab
Part 7 Short-Term Financial Decisions
Chapters in This Part
14 Working Capital and Current Assets Management
Learning Goals
Why This Chapter Matters to You
14.1 Net Working Capital Fundamentals
WORKING CAPITAL MANAGEMENT
Matter of fact
NET WORKING CAPITAL
TRADE-OFF BETWEEN PROFITABILITY AND RISK
Changes in Current Assets
TABLE 14.1 Effects of Changing Ratios on Profits and Risk
FIGURE 14.1 Yearly Medians for All U.S.–Listed Manufacturing Companies
Changes in Current Liabilities
REVIEW QUESTIONS
14.2 Cash Conversion Cycle
CALCULATING THE CASH CONVERSION CYCLE
Matter of fact
Example 14.1
FUNDING REQUIREMENTS OF THE CASH CONVERSION CYCLE
FIGURE 14.2 Time Line for Whirlpool’s Cash Conversion Cycle
Permanent versus Seasonal Funding Needs
Example 14.2
FIGURE 14.3 Semper Pump Company’s Total Funding Requirements
Aggressive versus Conservative Seasonal Funding Strategies
Example 14.3
STRATEGIES FOR MANAGING THE CASH CONVERSION CYCLE
REVIEW QUESTIONS
14.3 Inventory Management
DIFFERING VIEWPOINTS ABOUT INVENTORY LEVEL
COMMON TECHNIQUES FOR MANAGING INVENTORY
ABC System
Economic Order Quantity (EOQ) Model
Mathematical Development of EOQ
Personal Finance Example 14.4
Reorder Point
Example 14.5
Just-in-Time (JIT) System
in practice focus on PRACTICE: RFID: The Wave of the Future?
Computerized Systems for Resource Control
INTERNATIONAL INVENTORY MANAGEMENT
REVIEW QUESTIONS
14.4 Accounts Receivable Management
CREDIT SELECTION AND STANDARDS
Five C’s of Credit
Credit Scoring
Changing Credit Standards
Example 14.6
Making the Credit Standard Decision
Example 14.7
Managing International Credit
TABLE 14.2 Effects on Dodd Tool of a Relaxation of Credit Standards
CREDIT TERMS
Cash Discount
Example 14.8
TABLE 14.3 Analysis of Initiating a Cash Discount for MAX Company
Cash Discount Period
Credit Period
CREDIT MONITORING
Average Collection Period
Aging of Accounts Receivable
Example 14.9
Popular Collection Techniques
TABLE 14.4 Popular Collection Techniques
REVIEW QUESTIONS
14.5 Management of Receipts and Disbursements
FLOAT
SPEEDING UP COLLECTIONS
Matter of fact
SLOWING DOWN PAYMENTS
CASH CONCENTRATION
ZERO-BALANCE ACCOUNTS
Personal Finance Example 14.10
INVESTING IN MARKETABLE SECURITIES
REVIEW QUESTIONS
TABLE 14.5 Features of Popular Marketable Securities
Summary
FOCUS ON VALUE
REVIEW OF LEARNING GOALS
Self-Test Problems
Warm-Up Exercises
Problems
Spreadsheet Exercise
TO DO
MyFinanceLab
15 Current Liabilities Management
Learning Goals
Why This Chapter Matters to You
15.1 Spontaneous Liabilities
ACCOUNTS PAYABLE MANAGEMENT
Role in the Cash Conversion Cycle
Example 15.1
Analyzing Credit Terms
Taking the Cash Discount
Example 15.2
Giving Up the Cash Discount
FIGURE 15.1 Payment Options
Example 15.3
Using the Cost of Giving Up a Cash Discount in Decision Making
Example 15.4
TABLE 15.1 Cash Discounts and Associated Costs for Mason Products
Effects of Stretching Accounts Payable
Example 15.5
Personal Finance Example 16.6
ACCRUALS
in practice focus on ETHICS: Accruals Management
Example 15.7
REVIEW QUESTIONS
15.2 Unsecured Sources of Short-Term Loans
BANK LOANS
Loan Interest Rates
Fixed- and Floating-Rate Loans
Method of Computing Interest
Example 15.8
Single-Payment Notes
Example 15.9
Personal Finance Example 15.10
Lines of Credit
Interest Rates
Operating-Change Restrictions
Compensating Balances
Example 15.11
Annual Cleanups
Revolving Credit Agreements
Example 15.12
COMMERCIAL PAPER
Interest on Commercial Paper
Example 15.13
Matter of fact
INTERNATIONAL LOANS
International Transactions
Financing International Trade
Transactions between Subsidiaries
REVIEW QUESTIONS
15.3 Secured Sources of Short-Term Loans
CHARACTERISTICS OF SECURED SHORT-TERM LOANS
Collateral and Terms
Institutions Extending Secured Short-Term Loans
USE OF ACCOUNTS RECEIVABLE AS COLLATERAL
Pledging Accounts Receivable
The Pledging Process
Notification
Matter of fact
Pledging Cost
Factoring Accounts Receivable
Factoring Agreement
Matter of fact
Factoring Cost
USE OF INVENTORY AS COLLATERAL
Floating Inventory Liens
Trust Receipt Inventory Loans
Warehouse Receipt Loans
REVIEW QUESTIONS
Summary
FOCUS ON VALUE
REVIEW OF LEARNING GOALS
Self-Test Problem
Warm-Up Exercises
Problems
Spreadsheet Exercise
TO DO
MyFinanceLab
Back Matter
Appendix Solutions to Self-Test Problems
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Chapter 12
Chapter 13
Chapter 14
Chapter 15
Glossary
Index
FREQUENTLY USED SYMBOLS AND ABBREVIATIONS
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