BRIEF CONTENTS

Preface iii
PART 1 Introduction to Financial Management 1
CHAPTER 1 An Overview of Financial Management 2

PART 2 Fundamental Concepts in Financial Management 25

CHAPTER 2 Financial Markets and Institutions 26
CHAPTER 3 Financial Statements, Cash Flow, and Taxes 53
CHAPTER 4 Analysis of Financial Statements 84
CHAPTER 5 Time Value of Money 122

PART 3 Financial Assets 161

CHAPTER 6 Interest Rates 162
CHAPTER 7 Bonds and Their Valuation 194
CHAPTER 8 Risk and Rates of Return 229
CHAPTER 9 Stocks and Their Valuation 269

PART 4 Investing in Long-Term Assets: Capital Budgeting 305

CHAPTER 10 The Cost of Capital 306
CHAPTER 11 The Basics of Capital Budgeting 335
CHAPTER 12 Cash Flow Estimation and Risk Analysis 364
CHAPTER 13 Real Options and Other Topics in Capital Budgeting 398

PART 5 Capital Structure and Dividend Policy 415

CHAPTER 14 Capital Structure and Leverage 416
CHAPTER 15 Distributions to Shareholders: Dividends and Share Repurchases 456

PART 6 Working Capital Management and Financial

Forecasting 487
CHAPTER 16 Working Capital Management 488
CHAPTER 17 Financial Planning and Forecasting 525

PART 7 Special Topics in Financial Management 551

CHAPTER 18 Derivatives and Risk Management 552
CHAPTER 19 Multinational Financial Management 592
CHAPTER 20 Hybrid Financing: Preferred Stock, Leasing, Warrants,
and Convertibles 623
CHAPTER 21 Mergers and Acquisitions 655

xii
 Brief Contents xiii

Appendixes
APPENDIX A Solutions to Self-Test Questions and Problems A-1
APPENDIX B Answers to Selected End-of-Chapter Problems A-28
APPENDIX C Selected Equations and Tables A-32

Index I-1
 CONTENTS

Preface iii CHAPTER 2

Financial Markets and Institutions 26
PART 1 Efficient Financial Markets Are Necessary for a
Growing Economy 26
Introduction to Financial Management 1 PUTTING THINGS IN PERSPECTIVE 27
2-1 The Capital Allocation Process 28
CHAPTER 1 2-2 Financial Markets 30
An Overview of Financial Management 2 2-2a Types of Markets 30
Striking the Right Balance 2 2-2b Recent Trends 31
PUTTING THINGS IN PERSPECTIVE 3 2-3 Financial Institutions 34
1-1 What is Finance? 4 Citigroup Built to Compete in a Changing
1-1a Finance versus Economics and Environment 37
Accounting 4 2-4 The Stock Market 38
1-1b Finance within an Organization 4
Global Perspectives: The NYSE and NASDAQ
1-1c Corporate Finance, Capital Markets,
Go Global 38
and Investments 5
2-4a Physical Location Stock
1-2 Jobs in Finance 6 Exchanges 39
1-3 Forms of Business Organization 6 2-4b Over-the-Counter (OTC) and the
Nasdaq Stock Markets 39
1-4 Stock Prices and Shareholder Value 8
2-5 The Market for Common Stock 40
1-5 Intrinsic Values, Stock Prices, and
2-5a Types of Stock Market
Executive Compensation 10
Transactions 41
1-6 Important Business Trends 14
2-6 Stock Markets and Returns 43
Global Perspectives: Is Shareholder Wealth 2-6a Stock Market Reporting 43
Maximization a Worldwide Goal? 14
Measuring the Market 45
1-7 Business Ethics 15 2-6b Stock Market Returns 46
1-7a What Companies Are Doing 15
2-7 Stock Market Efficiency 46
1-7b Consequences of Unethical
Behavior 16 A Closer Look at Behavioral Finance Theory 49
1-7c How Should Employees Deal with 2-7a Conclusions about Market
Unethical Behavior? 17 Efficiency 50
Protection for Whistle-Blowers 17 TYING IT ALL TOGETHER 50
1-8 Conflicts between Managers, Stock- INTEGRATED CASE Smyth Barry & Company 52
holders, and Bondholders 18
1-8a Managers versus Stockholders 18
1-8b Stockholders versus CHAPTER 3
Bondholders 20 Financial Statements, Cash Flow, and Taxes 53
TYING IT ALL TOGETHER 21 The “Quality” of Financial Statements 53
PUTTING THINGS IN PERSPECTIVE 54
3-1 Financial Statements and Reports 54
3-2 The Balance Sheet 56
PART 2 3-2a Allied's Balance Sheet 57
3-3 The Income Statement 60
Fundamental Concepts in Financial 3-4 Statement of Cash Flows 62
Management 25 Massaging the Cash Flow Statement 65

xiv
 Contents xv

3-5 Statement of Stockholders' Equity 66 4-11 Benchmarking 104

Financial Analysis on the Internet 67 Looking for Warning Signs within the Financial
Statements 105
3-6 Free Cash Flow 67
4-12 Uses and Limitations of Ratios 105
Free Cash Flow Is Important for Small
Businesses 68 Economic Value Added (EVA) versus Net
Income 107
3-7 Income Taxes 69
3-7a Individual Taxes 69 4-13 Potential Misuses of ROE 107
3-7b Corporate Taxes 71 4-14 Looking Beyond the Numbers 108
TYING IT ALL TOGETHER 75 TYING IT ALL TOGETHER 109
INTEGRATED CASE D'Leon Inc., Part I 80 INTEGRATED CASE D'Leon Inc., Part II 117
THOMSON ONE: BUSINESS SCHOOL EDITION THOMSON ONE: BUSINESS SCHOOL EDITION
Exploring Starbucks' Financial Statements 83 Conducting a Financial Ratio Analysis on Ford Motor
Company 121

CHAPTER 4 CHAPTER 5
Analysis of Financial Statements 84 Time Value of Money 122
Can You Make Money Analyzing Stocks? 84 Will You Be Able to Retire? 122
PUTTING THINGS IN PERSPECTIVE 85 PUTTING THINGS IN PERSPECTIVE 123

4-1 Ratio Analysis 86 5-1 Time Lines 123

4-2 Liquidity Ratios 87 5-2 Future Values 124
4-2a Current Ratio 87 5-2a Step-by-Step Approach 125
4-2b Quick, or Acid Test, Ratio 88 Simple versus Compound Interest 125
4-3 Asset Management Ratios 88 5-2b Formula Approach 126
4-3a Inventory Turnover Ratio 89 5-2c Financial Calculators 126
4-3b Days Sales Outstanding 89 5-2d Spreadsheets 127
4-3c Fixed Assets Turnover Ratio 90 5-2e Graphic View of the Compounding
4-3d Total Assets Turnover Ratio 91 Process 129

4-4 Debt Management Ratios 91 5-3 Present Values 130

4-4a Total Debt to Total Assets 93 5-3a Graphic View of the Discounting
4-4b Times-Interest-Earned Ratio 94 Process 131

4-5 Profitability Ratios 95 5-4 Finding the Interest Rate, I 132

4-5a Operating Margin 95 5-5 Finding the Number of Years, N 133
4-5b Profit Margin 95 5-6 Annuities 133
Global Perspectives: Global Accounting 5-7 Future Value of an Ordinary
Standards: Can One Size Fit All? 96
Annuity 134
4-5c Return on Total Assets 96
4-5d Basic Earning Power (BEP) 5-8 Future Value of an Annuity Due 136
Ratio 97 5-9 Present Value of an Ordinary
4-5e Return on Common Equity 97 Annuity 137
4-6 Market Value Ratios 98 5-10 Finding Annuity Payments, Periods, and
4-6a Price/Earnings Ratio 98 Interest Rates 138
4-6b Market/Book Ratio 98 5-10a Finding Annuity Payments,
4-7 Trend Analysis 99 PMT 138
5-10b Finding the Number of Periods,
4-8 The DuPont Equation 100
N 138
4-9 Ratios in Different Industries 102 5-10c Finding the Interest Rate, I 139
4-10 Summary of Allied's Ratios 103 5-11 Perpetuities 140
xvi Contents

5-12 Uneven Cash Flows 142 The Links between Expected Inflation and
Interest Rates: A Closer Look 178
5-13 Future Value of an Uneven Cash Flow
Stream 143 6-6 Using the Yield Curve to Estimate
Future Interest Rates 180
5-14 Solving for I with Uneven Cash
Flows 144 6-7 Macroeconomic Factors That Influence
Interest Rate Levels 183
5-15 Semiannual and Other Compounding
6-7a Federal Reserve Policy 183
Periods 145
6-7b Federal Budget Deficits or
5-16 Comparing Interest Rates 147 Surpluses 184
5-17 Fractional Time Periods 149 6-7c International Factors 184
6-7d Business Activity 185
5-18 Amortized Loans 150
6-8 Interest Rates and Business
TYING IT ALL TOGETHER 151
Decisions 185
INTEGRATED CASE First National Bank 158 TYING IT ALL TOGETHER 187
WEB APPENDIX 5A INTEGRATED CASE Morton Handley
Continuous Compounding and Discounting & Company 192
WEB APPENDIX 5B
Growing Annuities CHAPTER 7
Bonds and Their Valuation 194
Sizing Up Risk in the Bond Market 194
PART 3 PUTTING THINGS IN PERSPECTIVE 195
7-1 Who Issues Bonds? 195
Financial Assets 161 7-2 Key Characteristics of Bonds 196
7-2a Par Value 197
CHAPTER 6 7-2b Coupon Interest Rate 197
Interest Rates 162 7-2c Maturity Date 197
Low Interest Rates Encourage Investment and 7-2d Call Provisions 198
Stimulate Consumer Spending 162 7-2e Sinking Funds 199
7-2f Other Features 199
PUTTING THINGS IN PERSPECTIVE 163
7-3 Bond Valuation 200
6-1 The Cost of Money 163
7-4 Bond Yields 203
6-2 Interest Rate Levels 165 7-4a Yield to Maturity 203
6-3 The Determinants of Market Interest 7-4b Yield to Call 204
Rates 168 7-5 Changes in Bond Values over Time 206
6-3a The Real Risk-Free Rate of Interest,
r* 169 7-6 Bonds with Semiannual Coupons 209
6-3b The Nominal, or Quoted, Risk-Free 7-7 Assessing a Bond’s Riskiness 210
Rate of Interest, rRF = r* + IP 170 7-7a Interest Rate Risk 210
6-3c Inflation Premium (IP) 170 7-7b Reinvestment Rate Risk 213
An Almost Riskless Treasury Bond 171 7-7c Comparing Interest Rate and
6-3d Default Risk Premium (DRP) 172 Reinvestment Rate Risk 213
6-3e Liquidity Premium (LP) 172 7-8 Default Risk 214
A 20% Liquidity Premium on a High-Grade 7-8a Various Types of Corporate
Bond 173 Bonds 215
6-3f Interest Rate Risk and the Maturity 7-8b Bond Ratings 215
Risk Premium (MRP) 173 7-8c Bankruptcy and
Reorganization 219
6-4 The Term Structure of Interest Rates 175
7-9 Bond Markets 220
6-5 What Determines the Shape of the Yield
Curve? 176 TYING IT ALL TOGETHER 222
 Contents xvii

INTEGRATED CASE Western Money THOMSON ONE: BUSINESS SCHOOL EDITION

Management Inc. 228 Using Past Information to Estimate Required
WEB APPENDIX 7A Returns 268
Zero Coupon Bonds WEB APPENDIX 8A
WEB APPENDIX 7B Calculating Beta Coefficients
Bankruptcy and Reorganization
CHAPTER 9
CHAPTER 8 Stocks and Their Valuation 269
Risk and Rates of Return 229 Searching for the Right Stock 269
A Tale of Three Markets—or Is It Four? 229 PUTTING THINGS IN PERSPECTIVE 270
PUTTING THINGS IN PERSPECTIVE 230 9-1 Legal Rights and Privileges of Common
8-1 Stock Prices over the Last 20 Years 231 Stockholders 270
9-1a Control of the Firm 271
8-2 Stand-Alone Risk 232 9-1b The Preemptive Right 272
8-2a Statistical Measures of Stand-Alone
Risk 233 9-2 Types of Common Stock 272
8-2b Measuring Stand-Alone Risk: The 9-3 Stock Price vs. Intrinsic Value 273
Standard Deviation 236 9-3a Why Do Investors and Companies
8-2c Using Historical Data to Measure Care About Intrinsic Value? 274
Risk 237 9-4 The Discounted Dividend Model 275
8-2d Measuring Stand-Alone Risk: The 9-4a Expected Dividends as the Basis for
Coefficient of Variation 238 Stock Values 277
8-2e Risk Aversion and Required
Returns 238 9-5 Constant Growth Stocks 278
9-5a Illustration of a Constant Growth
The Trade-Off between Risk and Return 239
Stock 279
8-3 Risk in a Portfolio Context: The 9-5b Dividends Versus Growth 280
CAPM 240 9-5c Which is Better: Current Dividends
8-3a Expected Portfolio Returns, ^rP 241 or Growth? 282
8-3b Portfolio Risk 242 9-5d Required Conditions for the
8-3c Risk in a Portfolio Context: The Beta Constant Growth Model 282
Coefficient 245
9-6 Valuing Nonconstant Growth
Global Perspectives: The Benefits of Diversifying Stocks 283
Overseas 250
9-7 Valuing the Entire Corporation 286
8-4 The Relationship between Risk and Rates
Evaluating Stocks That Don't Pay
of Return 251
Dividends 287
Estimating the Market Risk Premium 252 9-7a The Corporate Valuation Model 288
8-4a The Impact of Expected
Other Approaches to Valuing Common
Inflation 253 Stocks 290
8-4b Changes in Risk Aversion 255 9-7b Comparing the Corporate Valuation
8-4c Changes in a Stock’s Beta and Discounted Dividend
Coefficient 256 Models 290
8-5 Some Concerns about Beta and the 9-8 Preferred Stock 291
CAPM 257
TYING IT ALL TOGETHER 292
8-6 Some Concluding Thoughts: Implications
for Corporate Managers and INTEGRATED CASE Mutual of Chicago Insurance
Investors 258 Company 298
TYING IT ALL TOGETHER 259 THOMSON ONE: BUSINESS SCHOOL EDITION
INTEGRATED CASE Merrill Finch Inc. 266 Estimating ExxonMobil’s Intrinsic Stock Value 299
xviii Contents

APPENDIX 9A TYING IT ALL TOGETHER 326

Stock Market Equilibrium 301
INTEGRATED CASE Coleman Technologies
Inc. 333
PART 4 THOMSON ONE: BUSINESS SCHOOL EDITION
Calculating 3M's Cost of Capital 334
Investing in Long-Term Assets:
WEB APPENDIX 10A
Capital Budgeting 305 The Cost of New Common Stock and WACC

CHAPTER 10
CHAPTER 11
The Cost of Capital 306
Creating Value at GE 306 The Basics of Capital Budgeting 335
Competition in the Aircraft Industry: Airbus vs.
PUTTING THINGS IN PERSPECTIVE 307 Boeing 335
10-1 An Overview of the Weighted Average PUTTING THINGS IN PERSPECTIVE 336
Cost of Capital (WACC) 307
11-1 An Overview of Capital Budgeting 336
10-2 Basic Definitions 309
11-2 Net Present Value (NPV) 338
10-3 Cost of Debt, rd (1 − T) 310
11-3 Internal Rate of Return (IRR) 341
10-4 Cost of Preferred Stock, rp 312
Why NPV Is Better Than IRR 343
10-5 The Cost of Retained Earnings, rs 312
10-5a The CAPM Approach 314 11-4 Multiple Internal Rates of Return 344
10-5b Bond-Yield-plus-Risk-Premium 11-5 Reinvestment Rate Assumptions 346
Approach 315 11-6 Modified Internal Rate of Return
10-5c Dividend-Yield-plus-Growth- (MIRR) 347
Rate, or Discounted Cash Flow
(DCF), Approach 315 11-7 NPV Profiles 349
10-5d Averaging the Alternative 11-8 Payback Period 353
Estimates 317 11-9 Conclusions on Capital Budgeting
10-6 Cost of New Common Stock, re 318 Methods 355
10-6a Add Flotation Costs to a 11-10 Decision Criteria Used in Practice 356
Project’s Cost 318
10-6b Increase the Cost of Capital 318 TYING IT ALL TOGETHER 357
How Much Does It Cost to Raise External INTEGRATED CASE Allied Components
Capital? 319 Company 362
10-6c When Must External Equity Be
Used? 320 CHAPTER 12
10-7 Composite, or Weighted Average, Cash Flow Estimation and Risk
Cost of Capital, WACC 321 Analysis 364
10-8 Factors that Affect the WACC 321 Home Depot Keeps Growing 364
10-8a Factors the Firm Cannot
PUTTING THINGS IN PERSPECTIVE 365
Control 321
10-8b Factors the Firm Can Control 322 12-1 Conceptual Issues in Cash Flow
Estimation 365
Global Perspectives: Global Variations in the
Cost of Capital 322
12-1a Cash Flow versus Accounting
Income 365
10-9 Adjusting the Cost of Capital for 12-1b Timing of Cash Flows 366
Risk 323 12-1c Incremental Cash Flows 366
10-10 Some Other Problems with Cost of 12-1d Replacement Projects 366
Capital Estimates 325 12-1e Sunk Costs 366
 Contents xix

12-1f Opportunity Costs Associated 13-4 Investment Timing Options 403

with Assets the Firm Owns 367 13-5 Flexibility Options 405
12-1g Externalities 367
13-6 The Optimal Capital Budget 406
12-2 Analysis of an Expansion Project 369
12-2a Effect of Different Depreciation 13-7 The Post-Audit 408
Rates 371 TYING IT ALL TOGETHER 409
12-2b Cannibalization 371
12-2c Opportunity Costs 371 INTEGRATED CASE 21st Century Educational
12-2d Sunk Costs 371 Products 413
12-2e Other Changes to the Inputs 372
12-3 Replacement Analysis 372 PART 5
12-4 Risk Analysis in Capital Budgeting 374
Capital Structure and Dividend
12-5 Measuring Stand-Alone Risk 376
12-5a Sensitivity Analysis 376 Policy 415
12-5b Scenario Analysis 378
12-5c Monte Carlo Simulation 379 CHAPTER 14
Global Perspectives: Capital Budgeting Capital Structure and Leverage 416
Practices in the Asian/Pacific Region 380 Debt: Rocket Booster or Anchor? 416
12-6 Within-Firm and Beta Risk 381 PUTTING THINGS IN PERSPECTIVE 417
12-7 Unequal Project Lives 382 14-1 The Target Capital Structure 417
12-7a Replacement Chains 382
12-7b Equivalent Annual Annuities 14-2 Business and Financial Risk 419
(EAA) 383 14-2a Business Risk 419
12-7c Conclusions about Unequal 14-2b Operating Leverage 421
Lives 384 14-2c Financial Risk 424

TYING IT ALL TOGETHER 384 14-3 Determining the Optimal Capital

Structure 429
INTEGRATED CASE Allied Food Products 393 14-3a WACC and Capital Structure
Changes 430
APPENDIX 12A 14-3b The Hamada Equation 431
Tax Depreciation 396 14-3c The Optimal Capital
WEB APPENDIX 12B Structure 432
Refunding Operations
WEB APPENDIX 12C 14-4 Capital Structure Theory 435
Using the CAPM to Estimate the Risk-Adjusted Cost Yogi Berra on the MM Proposition 436
of Capital 14-4a The Effect of Taxes 436
WEB APPENDIX 12D 14-4b The Effect of Potential
Techniques for Measuring Beta Risk Bankruptcy 437
14-4c Trade-Off Theory 438
14-4d Signaling Theory 439
CHAPTER 13 14-4e Using Debt Financing to
Real Options and Other Topics in Capital Constrain Managers 440
Budgeting 398 14-5 Checklist for Capital Structure
Anheuser-Busch Used Real Options to Enhance Decisions 441
Its Value 398 14-6 Variations in Capital Structures 443
PUTTING THINGS IN PERSPECTIVE 399 Global Perspectives: Taking a Look at Global
13-1 Introduction to Real Options 399 Capital Structures 444

13-2 Growth (Expansion) Options 400 TYING IT ALL TOGETHER 445

13-3 Abandonment/Shutdown Options 402 INTEGRATED CASE Campus Deli Inc. 451
xx Contents

THOMSON ONE: BUSINESS SCHOOL EDITION 15-7d Conclusions on Stock

Exploring the Capital Structures for Four of the Repurchases 478
World's Leading Auto Companies 454 TYING IT ALL TOGETHER 479
WEB APPENDIX 14A INTEGRATED CASE Southeastern Steel
Degree of Leverage Company 484

THOMSON ONE: BUSINESS SCHOOL EDITION

CHAPTER 15 Microsoft's Dividend Policy 486
Distributions to Shareholders: Dividends and
WEB APPENDIX 15A
Share Repurchases 456 An Example: The Residual Dividend Model
Microsoft Shifts Gears and Begins to Unload Part of Its
Vast Cash Hoard 456
PUTTING THINGS IN PERSPECTIVE 457
15-1 Dividends versus Capital Gains: What PART 6
Do Investors Prefer? 457
15-1a Dividend Irrelevance Theory 458
Working Capital Management and
15-1b Reasons Some Investors Prefer Financial Forecasting 487
Dividends 458
15-1c Reasons Some Investors CHAPTER 16
Prefer Capital Gains 459
Working Capital Management 488
15-2 Other Dividend Policy Issues 460 Best Buy Manages Its Working Capital Well 488
15-2a Information Content, or Signaling,
Hypothesis 460 PUTTING THINGS IN PERSPECTIVE 489
15-2b Clientele Effect 461 16-1 Background on Working Capital 489
15-3 Establishing the Dividend Policy in 16-2 Current Asset Investment Policies 490
Practice 461 16-3 Current Asset Financing Policies 491
15-3a Setting the Target Payout Ratio: 16-3a Maturity Matching, or “Self-
The Residual Dividend Model 462 Liquidating,” Approach 492
Global Perspectives: Dividend Yields around 16-3b Aggressive Approach 492
the World 466 16-3c Conservative Approach 494
15-3b Earnings, Cash Flows, and 16-3d Choosing between the
Dividends 467 Approaches 494
15-3c Payment Procedures 469
16-4 The Cash Conversion Cycle 495
15-4 Dividend Reinvestment Plans 470 16-4a Calculating the Targeted CCC 495
15-5 Summary of Factors Influencing 16-4b Calculating the CCC from
Dividend Policy 471 Financial Statements 496
15-5a Constraints 472 Some Firms Operate with Negative Working
15-5b Investment Opportunities 472 Capital! 497
15-5c Alternative Sources of
16-5 The Cash Budget 498
Capital 472
15-5d Effects of Dividend Policy on rs 473 16-6 Cash and Marketable Securities 501
16-6a Currency 502
15-6 Stock Dividends and Stock Splits 473 16-6b Demand Deposits 502
15-6a Stock Splits 473 16-6c Marketable Securities 503
15-6b Stock Dividends 474
15-6c Effect on Stock Prices 474 16-7 Inventories 504
15-7 Stock Repurchases 475 Supply Chain Management 505
15-7a The Effects of Stock 16-8 Accounts Receivable 506
Repurchases 476 16-8a Credit Policy 506
15-7b Advantages of Repurchases 477 16-8b Setting and Implementing the
15-7c Disadvantages of Repurchases 478 Credit Policy 507
 Contents xxi

16-8c Monitoring Accounts THOMSON ONE: BUSINESS SCHOOL EDITION

Receivable 508 Forecasting the Future Performance of Abercrombie
16-9 Accounts Payable (Trade Credit) 509 & Fitch 549
16-10 Bank Loans 511
16-10a Promissory Note 511 WEB APPENDIX 17A
16-10b Line of Credit 512 Forecasting Financial Requirements When Financial
16-10c Revolving Credit Agreement 513 Ratios Change
16-10d Costs of Bank Loans 513
16-11 Commercial Paper 515
16-12 Accruals (Accrued Liabilities) 516
PART 7
16-13 Use of Security in Short-Term
Financing 516 Special Topics in Financial
TYING IT ALL TOGETHER 517 Management 551
INTEGRATED CASE Ski Equipment Inc. 522
CHAPTER 18
WEB APPENDIX 16A
Inventory Management
Derivatives and Risk Management 552
Using Derivatives to Manage Risk 552
WEB APPENDIX 16B
PUTTING THINGS IN PERSPECTIVE 553
Short-Term Loans and Bank Financing
18-1 Reasons to Manage Risk 553
CHAPTER 17 18-2 Background on Derivatives 556
Financial Planning and Forecasting 525 Global Perspectives: Barings and Sumitomo
The Miss That Hit Like a Bombshell 525 Suffer Large Losses in the Derivatives
Market 558
PUTTING THINGS IN PERSPECTIVE 526
18-3 Options 558
17-1 Strategic Planning 527 18-3a Option Types and Markets 558
17-2 The Sales Forecast 528 18-3b Factors That Affect the Value of a
17-3 The AFN Equation 530 Call Option 560
17-3a Excess Capacity Adjustments 533 18-3c Exercise Value versus Option
Price 561
17-4 Forecasted Financial Statements 534
17-4a Part I. Inputs 534 18-4 Introduction to Option Pricing
17-4b Part II. Forecasted Income Models 563
Statement 537 Expensing Executive Stock Options 565
17-4c Part III. Forecasted Balance 18-5 The Black-Scholes Option Pricing Model
Sheet 537 (OPM) 566
17-4d Part IV. Ratios and EPS 537 18-5a OPM Assumptions and
17-4e Using the Forecast to Improve Equations 567
Operations 538 18-5b OPM Illustration 568
17-5 Using Regression to Improve 18-6 Forward and Futures Contracts 571
Forecasts 539
18-7 Other Types of Derivatives 574
17-6 Analyzing the Effects of Changing 18-7a Swaps 574
Ratios 540 18-7b Structured Notes 575
17-6a Modifying Accounts 18-7c Inverse Floaters 576
Receivable 540
Credit Instruments Create New Opportunities
17-6b Modifying Inventories 540
and Risks 577
17-6c Other “Special Studies” 541
18-8 Using Derivatives to Reduce Risks 577
TYING IT ALL TOGETHER 541
18-8a Security Price Exposure 578
INTEGRATED CASE New World Chemicals Inc. 547 18-8b Futures 578
xxii Contents

18-8c Swaps 579 19-10 Investing Overseas 612

18-8d Commodity Price Exposure 580 Global Perspectives: Measuring Country
18-8e The Use and Misuse of Risk 613
Derivatives 581
Global Perspectives: Investing in International
18-9 Risk Management 581 Stocks 613
18-9a An Approach to Risk 19-11 International Capital Budgeting 614
Management 582
19-12 International Capital Structures 616
Microsoft’s Goal: Manage Every Risk! 584
TYING IT ALL TOGETHER 618
TYING IT ALL TOGETHER 585
INTEGRATED CASE Citrus Products Inc. 621
INTEGRATED CASE Tropical Sweets Inc. 587

APPENDIX 18A CHAPTER 20

Valuation of Put Options 590
Hybrid Financing: Preferred Stock, Leasing,
Warrants, and Convertibles 623
CHAPTER 19 Now Enticing: Convertible Securities 623
Multinational Financial Management 592 PUTTING THINGS IN PERSPECTIVE 624
U.S. Firms Look Overseas to Enhance Shareholder
Value 592 20-1 Preferred Stock 624
20-1a Basic Features 625
PUTTING THINGS IN PERSPECTIVE 593 20-1b Adjustable Rate Preferred
19-1 Multinational, or Global, Stock 627
Corporations 593 20-1c Advantages and Disadvantages
19-2 Multinational versus Domestic Financial of Preferred Stock 627
Management 596 A Good Idea That Went Bad: Auction
Rate Preferred Stock (ARPS) 628
19-3 The International Monetary
System 598 20-2 Leasing 629
19-3a International Monetary 20-2a Types of Leases 629
Terminology 598 20-2b Financial Statement Effects 630
19-3b Current Monetary 20-2c Evaluation by the Lessee 632
Arrangements 599 20-2d Other Factors That Affect
Leasing Decisions 635
19-4 Foreign Exchange Rate Quotations 600
19-4a Cross Rates 600 20-3 Warrants 635
19-4b Interbank Foreign Currency 20-3a Initial Market Price of a Bond
Quotations 601 with Warrants 636
20-3b Use of Warrants in
19-5 Trading in Foreign Exchange 602
Financing 637
19-5a Spot Rates and Forward
20-3c The Component Cost of Bonds
Rates 603
with Warrants 638
19-6 Interest Rate Parity 604 20-3d Problems with Warrant
19-7 Purchasing Power Parity 605 Issues 639
Hungry for a Big Mac? Go to China! 606 20-4 Convertibles 639
20-4a Conversion Ratio and Conversion
19-8 Inflation, Interest Rates, and Exchange
Price 640
Rates 608
20-4b The Component Cost of
19-9 International Money and Capital Convertibles 641
Markets 609 20-4c Use of Convertibles in
19-9a International Credit Markets 609 Financing 644
Stock Market Indices around the World 610 20-4d Convertibles Can Reduce Agency
19-9b International Stock Markets 611 Costs 645
 Contents xxiii

20-5 A Final Comparison of Warrants and 21-6b Developing Defensive

Convertibles 645 Tactics 669
20-6 Reporting Earnings When Warrants or 21-6c Establishing a Fair Value 670
Convertibles Are Outstanding 646 21-6d Financing Mergers 670
21-6e Arbitrage Operations 670
TYING IT ALL TOGETHER 647
21-7 Do Mergers Create Value? The
INTEGRATED CASE Fish & Chips, Inc., Part I 653 Empirical Evidence 671
The Track Record of Recent Large
INTEGRATED CASE Fish & Chips, Inc., Part II 653 Mergers 671
21-8 Corporate Alliances 672
CHAPTER 21 21-9 Private Equity Investments 673
Mergers and Acquisitions 655 21-10 Divestitures 674
Mergers: Reshaping the Corporate Landscape 655 21-10a Types of Divestitures 674
PUTTING THINGS IN PERSPECTIVE 656 21-10b Divestiture Illustrations 674
21-1 Rationale for Mergers 656 TYING IT ALL TOGETHER 676
21-1a Synergy 657
21-1b Tax Considerations 657 INTEGRATED CASE Smitty's Home Repair
21-1c Purchase of Assets below Their Company 679
Replacement Cost 657 WEB APPENDIX 21A
21-1d Diversification 657 Merger Regulation
21-1e Managers’ Personal Incentives 658 WEB APPENDIX 21B
21-1f Breakup Value 658 Holding Companies
21-2 Types of Mergers 659
21-3 Level of Merger Activity 659
APPENDIXES
21-4 Hostile versus Friendly Takeovers 660
APPENDIX A Solutions to Self-Test
21-5 Merger Analysis 661 Questions and Problems A-1
21-5a Valuing the Target Firm 662
APPENDIX B Answers to Selected End-of-
21-5b Setting the Bid Price 665
Chapter Problems A-28
More Than Just Financial Statements 667
APPENDIX C Selected Equations and
21-5c Post-Merger Control 667
Tables A-32
21-6 The Role of Investment Bankers 668
21-6a Arranging Mergers 669 INDEX I-1
This page intentionally left blank