PART 1
INTRODUCTION TO FINANCIAL MANAGEMENT 1
Chapter 1 An Overview of Financial Management 2
Putting Things in Perspective 4
Career Opportunities in Finance 4
Financial Management in the New Millennium 6
Alternative Forms of Business Organization 9
Finance in the Organizational Structure of the Firm 12
The Financial Staff's Responsibilities 13
The Goals of the Corporation 14
Industry Practice Investing in Socially Responsible Funds 16
Business Ethics 17
Agency Relationships 19
Industry Practice Are CEOs Overpaid? 20
Managerial Actions to Maximize Shareholder Wealth 23
Does It Make Sense to Try to Maximize Earnings per Share? 24
The Financial Markets 25
Financial Institutions 28
The Stock Market 31
Modifying Accounting Data for Managerial Decisions 33
MVAAND EVA 35
Tying It Art Together 37
PART 2
FUNDAMENTAL CONCEPTS IN FINANCIAL MANAGEMENT 47
Chapter 2 Risk and Rates of Return 48
Putting Things in Perspective 50
Investment Returns 51
Stand-Alone Risk 52
Industry Practice The Trade-Off between Risk and Return 60
Riskin a Portfolio Context 61
The Relationship between Risk and Rates of Return 74
Physical Assets versus Securities 79
Tying It Art Together 81
Chapter 3 Time Value of Money 92
Putting Things in Perspective 94
Time Lines 94
Future Value 95
Present Value 100
Industry Practice The Power of Compound Interest 101
Solving for Interest Rate and Time 103
Future Value of an Annuity 105
Present Value of an Annuity 107
Perpetuities 109
Uneven Cash Flow Streams 110
Semiannual and Other Compounding Periods 114
Comparison of Different Types of Interest Rates 118
Fractional Time Periods 120
Amortized Loans t21
Tying It Alt Together 123
Web Appendix 6A Using Interest Factor Tables
Web Appendix 6B Continuous Compounding and Discounting
PART 3
FINANCIAL ASSETS 137
Chapter 4 Bonds and Their VaLuation 138
Putting Things In Perspective 140
Who Issues Bonds? 140
Key Characteristics of Bonds 141
Bond Valuation 145
Bond Yields 148
Bonds with Semiannual Coupons 150
Assessing the Riskiness of a Bond 152
Default Risk 155
Bond Markets 163
Tying It All Together 165
Web Appendix 7A Zero Coupon Bonds
Chapter 5 Stocks and Their VaLuation 172
Putting Things in Perspective 174
Legal Rights and Privileges of Common Stockholders 174
The Market for Common Stock 176
Common Stock Valuation 179
Constant Growth Stocks 182
Expected Rate of Return on a Constant Growth Stock 185
Industry Practice Other Approaches to Valuing Common Stocks 186
Valuing Stocks That Have a Nonconstant Growth Rate 188
Valuing the Entire Corporation 191
Stock Market Equilibrium 196
Industry Practice Evaluating Stocks That Don't Pay Dividends 197
Preferred Stock 205
Tying It All Together 206
PART /4
INVESTING IN LONG-TERH ASSETS:
CAPITAL BUDGETING 217
Chapter 6 The Cost of Capital 218
Putting Things in Perspective 220
The Logic of the Weighted Average Cost of Capital 221
Basic Definitions 221
Cost of Debt, kd(1-T) 222
Cost of Preferred Stock, kp 223
Cost of Retained Earnings, ks 224
CostofNew Common Stock, ke 228
Composite, or Weighted Average, Cost of Capital, WACC 231
Industry Practice WACC Estimates for Some Large U.S. Corporations 232
Factors That Affect the Composite Cost of Capital 233
Adjusting the Cost of Capital for Risk 235
Estimating Project Risk 238
Tying It At|Together 239
Web Appendix 9A Using the CAPM to Estimate the Risk-Adjusted Cost of Capital
Chapter 7 The Basics of Capital Budgeting 248
PutfingThlngs in Perspective 250
Importance of Capital Budgeting 250
Generating Ideas for Capital Projects 251
Project Classifications 252
Sintilarities between Capital Budgeting and Security Valuation 253
Capital Budgeting Decision Rules 254
Comparison of the NPV and IRR Methods 261
Conclusions on Capital Budgeting Methods 265
The Post-Audit 266
Industry Practice Techniques Firms Use to Evaluate Corporate Projects 267
Using Capital Budgeting Techniques in Other Contexts 268
Tying It At[ Together 268
Chapter 8 Cash Ftow Estimation and Risk AnaLysis 276
Putting Things in Perspective 278
Estimating Cash Flows 278
Identifying the Relevant Cash Flows 279
Evaluating Capital Budgeting Proiects 283
Introduction to Project Risk Analysis 289
Techniques for Measuring Stand-Alone Risk 290
Project Risk Conclusions 294
Incorporating Project Risk and Capital Structure into Capital Budgeting 295
Tying It All Together 296
Web ADoendix llB Reolacement Project Analysis
PART 5
CAPITAL STRUCTURE AND DIVIDEND POLICY 307
Chapter 9 CapitaL Structure and Leverage 308
Putting Things in Perspective 310
The Target Capital Structure 310
Business and Financial Risk 311
Determining the Optimal Capital Structure 324
Capital Structure Theory 330
Checklist for Capital Structure Decisions 336
Variations in Capital Structures 338
Tying It AU Together 339
Web Appendix 13A Degree of Leverage
Chapter 10 Distributions to SharehoLders: Dividends and Share Repurchases 350
Putting Things in Perspective 352
Dividends versus Capital Gains: What Do Investors Prefer? 352
Other Dividend Policy Issues 356
Dividend Stability 357
Establishing the Dividend Policy in Practice 359
Summary of Factors Influencing Dividend PoIicy 368
Overview of the Dividend Policy Decision 370
Stock Dividends and Stock Splits 371
Stock Repurchases 373
Industry Practice Buybacks Have Lowered Dividend Yields 374
Tying It All Together 378
PART 6
WORKING CAPITAL MANAGEMENT 387
Chapter 11 Managing Current Assets 388
Putting Things in Perspective 390
Working Capital Terminology 391
The Cash Conversion Cycle 392
The Concept of Zero Working Capital 396
Alternative Current Asset Investment Policies 397
Industry Practice Free Cash Flow, EVA, and Working Capital 399
Cash Management 400
The Cash Budget 402
Marketable Securities 406
Inventory 407
Inventory Costs 408
Receivables Management 409
Credit Policy 414
Setting the Credit Period and Standards 414
Setting the Collection Policy 415
Cash Discounts 416
Other Factors Influencing Credit Policy 416
Tying It AtITogether 417
Chapter 12 Financing Current Assets 426
Putting Things in Perspective 428
Alternative Current Asset Financing Policies 428
Advantages and Disadvantages of Short-Term Financing 431
Sources of Short-Term Financing 432
Accrued Liabilities 432
Accounts Payable (Trade Credit) 433
Short-Term BankLoans 438
Commercial Paper 440
Use of Security in Short-Term Financing 441
Tying It AU Together 442
Web Appendix 16A Secured Short-Term Financing
Appendixes
Appendix A Mathematical Tables A-I