Table Of Contents:
Preface xv
About the Author xxi

Part I Markets and Institutions 1(124)

An Overview of Finance 2(17)

What Is Finance? 3(3)

Markets and Institutions 3(1)

Investments 4(1)

Corporate Finance 5(1)

Financial System 6(2)

Role of the Financial Manager 8(4)

Maximizing Profit Is Not Enough 8(1)

Shareholder Wealth Maximization Should Be the Goal 9(1)

Straying from the Wealth Maximization Goal 10(1)

What About Bondholders? 11(1)

Five Key Concepts of Finance 12(5)

Greater Returns Require Greater Risk 12(1)

Good Deals Disappear Fast 13(2)

The Value of Money Depends on When It Is Received 15(1)

Cash Is King 15(1)

Not Everyone Knows the Same Things 16(1)

Chapter Summary 17(1)

Key Words 17(1)

Discussion Questions 17(1)

Problems 18(1)

Financial Markets 19(32)

Why Financial Markets Are Important 19(5)

Financial Markets Establish Prices 20(2)

Financial Markets Provide Liquidity 22(1)

Financial Markets Minimize Transaction Costs 23(1)

Structure of Financial Markets 24(3)

Primary and Secondary Markets 24(1)

Organized and Over-the-Counter Markets 24(1)

How Trading in a Security Establishes Its Price 25(2)

Money Markets 27(9)

Purpose of the Money Markets 27(2)

Who Participates in the Money Markets? 29(6)

Interest Rate Comparison 35(1)

Capital Markets 36(13)

Capital Markets Defined 36(1)

Purpose of the Capital Markets 37(1)

Capital Market Securities 38(11)

Chapter Summary 49(1)

Key Words 49(1)

Discussion Questions 49(1)

Problems 50(1)

Web Exploration 50(1)

Mini Case 50(1)

Intermediaries 51(30)

Depository Institutions 51(16)

Commercial Banks 52(10)

Thrifts 62(5)

Nondepository Institutions 67(11)

Insurance Companies 67(3)

Brokerage Firms 70(2)

Investment Companies 72(3)

Pension Funds 75(3)

Chapter Summary 78(1)

Key Words 79(1)

Discussion Questions 79(1)

Problems 79(1)

Web Exploration 79(1)

Mini Case 80(1)

The Structure of Interest Rates 81(22)

Renting Money 82(1)

Factors That Determine the Level of Interest Rates 83(17)

Opportunities for Investment Affect Interest Rates 83(1)

Other Factors That Affect the Level of Interest Rates 84(7)

Term Structure of Interest Rates 91(7)

Effect of Interest Rates on Stock Prices 98(2)

Chapter Summary 100(1)

Key Words 101(1)

Discussion Questions 101(1)

Problems 101(1)

Web Exploration 101(1)

Mini Case 102(1)

The Federal Reserve and the Money Supply 103(22)

Responsibilities of the Federal Reserve 104(2)

Organization of the Fed 106(2)

Fed's Political Independence 108(2)

What Is Money? 110(2)

How Money Is Created 112(10)

Fed's Role in the Money Supply Process 114(1)

Money Multiplier 115(7)

Chapter Summary 122(1)

Key Words 123(1)

Discussion Questions 123(1)

Problems 124(1)

Web Exploration 124(1)

Mini Case 124(1)

Part II Investments 125(134)

The Time Value of Money 126(42)

Basics of the Time Value of Money 127(2)

Graphing Time 127(1)

Compound Interest 128(1)

Future Value of a Sum 129(11)

Annual Compounding 129(2)

Nonannual Compounding Periods 131(2)

Effective Interest Rates 133(1)

Using Financial Tables 134(1)

Using a Financial Calculator 135(1)

Accumulating a Future Balance 136(1)

Solving for Number of Periods and Interest Rates 137(2)

Intuition Behind Compounding 139(1)

Future Value of an Annuity 140(4)

What Is an Annuity? 140(1)

Computing the Future Value of an Ordinary Annuity 140(3)

Computing the Future Value of an Annuity Due 143(1)

Present Value of a Sum 144(6)

Present Value Equation 145(2)

Using PVIF Tables 147(1)

Intuition Behind Present Values 148(1)

Present Value of Mixed Streams 148(1)

Increasing the Compounding Periods 149(1)

Present Value of an Annuity 150(3)

Perpetuities 153(1)

Uneven Streams 154(6)

Is It Present Value or Future Value? 160(1)

Chapter Summary 161(1)

Key Words 162(1)

Discussion Questions 162(1)

Problems 162(2)

Self-Test Problems 164(2)

Web Exploration 166(1)

Mini Case 166(2)

Risk and Return 168(35)

Examining the Risk-Return Relationship 168(3)

Computing the Return on a Single Asset 171(3)

Computing Simple Returns 171(1)

Computing Expected Returns 172(2)

Evaluating the Risk of Holding a Single Asset 174(3)

Computing the Risk of a Single Asset 174(3)

Computing the Expected Return for a Portfolio of Assets 177(2)

How to Compute the Expected Return on a Portfolio 177(2)

Evaluating the Risk of a Portfolio of Assets 179(8)

Correlation 180(1)

Diversification 180(2)

Types of Risk 182(5)

Capital Asset Pricing Model 187(9)

Applying the Concepts 193(1)

Applications of the CAPM 193(3)

Does CAPM Work? 196(2)

Why CAPM Should Work 196(1)

Does the Evidence Support the Theory? 197(1)

Chapter Summary 198(1)

Key Words 198(1)

Discussion Questions 198(1)

Problems 199(2)

Self-Test Problems 201(1)

Web Exploration 202(1)

Mini Case 202(1)

Asset Valuation: Bonds 203(19)

Use Present Value to Price Any Business Asset 204(1)

Valuing Investments 204(1)

Finding the Price of Bonds 205(11)

Pricing of Bonds with Semiannual Compounding 208(2)

Interest Rate Risk 210(2)

Bond Price Changes over Time 212(1)

Computing the Yield to Maturity 213(2)

Comparing Yield to Maturity to Current Yield 215(1)

Investing in Bonds 216(2)

Chapter Summary 218(1)

Key Words 218(1)

Discussion Questions 218(1)

Problems 218(1)

Self-Test Problems 219(1)

Web Exploration 220(1)

Mini Case 220(2)

Asset Valuation: Stock and Market Efficiency 222(37)

Computing the Price of Preferred Stock 223(1)

Computing the Price of Common Stock 223(12)

One-Period Valuation Model 224(1)

Generalized Dividend Valuation Model 225(2)

Gordon Growth Model 227(8)

Price Earnings Valuation Method 235(1)

How the Market Sets Security Prices 235(2)

Errors in Valuation 237(15)

Problems with Estimating Growth 237(1)

Problems with Estimating Risk 238(1)

Problems with Forecasting Dividends 239(13)

Chapter Summary 252(1)

Key Words 253(1)

Discussion Questions 253(1)

Problems 254(1)

Self-Test Problems 255(1)

Web Exploration 255(1)

Mini Case 256(3)

Part III Foundations of Corporate Finance 259(204)

Capital Budgeting: Introduction and Techniques 260(26)

What Does Capital Budgeting Mean? 261(2)

Summary of Capital Budgeting 261(1)

Finding Investment Opportunities 262(1)

Steps in the Capital Budgeting Process 262(1)

Evaluating the Cash Flows 263(18)

Payback Period Method 264(2)

Net Present Value 266(5)

Profitability Index (Cost--Benefit Ratio) 271(2)

Internal Rate of Return 273(5)

NPV Versus IRR 278(3)

Chapter Summary 281(1)

Key Words 281(1)

Discussion Questions 281(1)

Problems 282(1)

Self-Test Problems 283(1)

Web Exploration 284(1)

Mini Case 285(1)

Estimating Cash Flows and Refinements to Capital Budgeting 286(30)

Rules for Estimating Cash Flows 287(2)

Estimating Cash Flows 289(11)

Estimating the Initial Cash Flow 289(4)

Estimating the Annual Cash Inflows 293(3)

Estimating the Terminal Cash Flow 296(4)

Capital Budgeting Refinements 300(9)

Sensitivity Analysis 307(2)

Appendix: Depreciation 309(1)

Chapter Summary 310(1)

Key Words 311(1)

Discussion Questions 311(1)

Problems 311(2)

Self-Test Problems 313(1)

Web Exploration 314(1)

Mini Case 315(1)

The Cost of Capital 316(25)

Why Compute a Weighted Average Cost of Capital? 318(1)

Computing Component Costs 318(9)

After-Tax Cost of Debts 318(4)

Cost of Preferred Stock 322(1)

Cost of Equity 322(5)

Weighted Average Cost of Capital (WACC) 327(2)

Using the WACC 329(8)

Calculating the Cost of New Equity 335(2)

Chapter Summary 337(1)

Key Words 337(1)

Discussion Questions 337(1)

Problems 338(1)

Self-Test Problems 339(1)

Web Exploration 340(1)

Mini Case 340(1)

The Theory of Capital Structure 341(22)

Determinants of the Debt- Equity Decision 341(19)

Leverage Is Important 342(2)

Target Capital Structure 344(1)

Early Theories 345(5)

There Is More Than One Type of Leverage 350(3)

Other Considerations (FRICTO) 353(1)

Did We Answer the Question? 354(6)

Chapter Summary 360(1)

Key Words 360(1)

Discussion Questions 360(1)

Problems 361(1)

Web Exploration 362(1)

Mini Case 362(1)

Financial Statement and Ratio Analysis 363(42)

Review of Financial Statements 364(5)

Balance Sheet 364(4)

Income Statement 368(1)

Statement of Cash Flows 368(1)

Goals of Financial Analysis 369(3)

Identify Company Problems 370(1)

Identify Company Strengths 370(1)

Cross-Sectional Analysis 370(2)

Time Series Analysis 372(1)

Common-Sized Financial Statements 372(1)

Common-Sized Balance Sheet 373(1)

Common-Sized Income Statement 373(1)

Financial Ratio Analysis 373(26)

Ratios 374(14)

Comprehensive Example: J. C. Penney 388(10)

Putting the Ratios to Work 398(1)

Chapter Summary 399(1)

Key Words 399(1)

Discussion Questions 400(1)

Problems 400(2)

Self-Test Problems 402(1)

Web Exploration 403(1)

Mini Case 403(2)

Financial Planning, Forecasting, and Cash Budgets 405(27)

Financial Planning Process 406(2)

Long-Term Strategic Goals 406(1)

Short-Term Operating Plans 407(1)

Sales Forecast 408(4)

Estimating Sales Using the Historical Average Growth Rate 408(2)

Estimating Sales Using Regression Analysis 410(2)

Estimating Sales Using Management Opinions 412(1)

Forecasting with the Percentage of Sales Method 412(4)

Additional Funds Needed: Tabular Approach 413(2)

Additional Funds Needed: Using the Equation Approach 415(1)

Projecting the Maximum Rate of Growth 416(3)

Maximum Internal Growth Rate 417(1)

Maximum Sustainable Growth Rate 417(1)

How to Influence the Growth Rate 418(1)

Cash Budget 419(8)

Compilation of the Cash Budget 419(2)

Uncertainty and the Cash Budget 421(6)

Chapter Summary 427(1)

Key Words 427(1)

Discussion Questions 427(1)

Problems 428(2)

Self-Test Problems 430(1)

Web Exploration 431(1)

Mini Case 431(1)

The Management of Working Capital 432(31)

How to Manage Inventory 433(6)

Reasons to Hold Inventories 433(1)

Costs of Holding Inventory 433(2)

Optimal Inventory Level 435(4)

Other Inventory Method 439(1)

How to Manage Cash 439(12)

Two Types of Float 439(2)

How to Manage Float 441(4)

Computing the Optimal Cash Balance 445(6)

How to Manage Accounts Receivable 451(5)

Why Credit Is Offered 451(1)

Developing a Credit Policy 451(2)

Cost of Credit 453(1)

Total Cost of Credit Curve and the Optimal Amount of Credit 453(1)

Five Cs of Credit Analysis 454(1)

Collection of Accounts Receivable (Monitoring) 455(1)

Short-Term Financing Alternatives 456(3)

Bank Loans 457(1)

Trade Credit 458(1)

Chapter Summary 459(1)

Key Words 459(1)

Discussion Questions 459(1)

Problems 460(1)

Self-Test Problems 461(1)

Web Exploration 461(1)

Mini Case 462(1)

Part IV Bringing It All Together 463(48)

International Finance 464(25)

Basics of Exchange Rates 465(13)

Role of Exchange Rates 466(1)

Reading Exchange Rate Quotes 466(2)

Foreign Exchange Markets 468(2)

Explaining the Level of Exchange Rates 470(8)

International Finance Risk 478(4)

Political Risk 480(2)

Foreign Investments 482(1)

Evaluating Foreign Investments 482(1)

How Foreign Investments Are Financed 482(1)

International Trade Agreements 483(2)

Chapter Summary 485(1)

Key Words 485(1)

Discussion Questions 485(1)

Problems 486(1)

Self-Test Problems 486(1)

Web Exploration 487(1)

Mini Case 487(2)

Applying Financial Concepts: A Case Study 489(22)

America's Coffee House 490(1)

Lease Versus Purchase Decisions 491(5)

Advantages to Leases 493(1)

Disadvantages to Leases 494(1)

Lease Review 495(1)

Valuing an Existing Private Company and Going Public 496(4)

Advantages of Going Public 495(1)

Disadvantages of Going Public 495(2)

Establishing its Value 497(2)

Review of Valuing a Privately Held Firm 499(1)

Evaluating a Possible Corporate Acquisition 500(2)

Estimating the Target Firm's Cash Flows 500(1)

Determining the Target's Value 501(1)

Review of Analyzing an Acquisition 502(1)

Personal Financial Planning 502(5)

Providing for Asset Accumulation 503(1)

Providing for Retirement Income 504(1)

Accumulating a Nest Egg 505(2)

Review of Financial Planning 507(1)

Chapter Summary 507(1)

Key Words 508(1)

Discussion Questions 508(1)

Problems 508(1)

Self-Test Problems 509(1)

Web Exploration 510(1)
Appendix A Financial Tables 511(4)
Appendix B Answers to End-of-Chapter Problems 515(9)
Glossary 524(13)
Index 537