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 FREQUENTLY USED SYMBOLS/ABBREVIATIONS
This Book
ACP is Average
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collection period
ADR American depository receipt
AFN Additional funds needed
AMT Alternative minimum tax
APR Annual percentage rate
b Beta coefficient, a measure of an asset’s riskiness
bL Levered beta
bU Unlevered beta
BEP Basic earning power
BVPS Book value per share
CAPEX Capital expenditures
CAPM Capital Asset Pricing Model
CCC Cash conversion cycle
CF Cash flow; CFt is the cash flow in Period t
CV Coefficient of variation
Dp Dividend of preferred stock
Dt Dividend in Period t
DCF Discounted cash flow
D/E Debt-to-equity ratio
DEP Depreciation
D1/P0 Expected dividend yield
DPS Dividends per share
DRIP Dividend reinvestment plan
DRP Default risk premium
DSO Days sales outstanding
EAR Effective annual rate, EFF%
EBIT Earnings before interest and taxes; operating income
EBITDA Earnings before interest, taxes, depreciation, and amortization
EPS Earnings per share
EVA Economic value added
F (1) Fixed operating costs
(2) Flotation cost
FCF Free cash flow
FVN Future value for Year N
FVAN Future value of an annuity for N years
g Growth rate in earnings, dividends, and stock prices
GAAP U.S. Generally Accepted Accounting Principles
HVN Firm’s horizon value at t N
I Interest rate; also referred to as r
IFRS International Financial Reporting Standards
IPER Periodic interest rate
I/YR Interest rate key on some calculators
INT Interest payment in dollars
IP Inflation premium
IPO Initial public offering
IRR Internal rate of return
LIBOR London Interbank Offered Rate
LP Liquidity premium
M Maturity value of a bond
M/B Market-to-book ratio
MIRR Modified internal rate of return
MRP Maturity risk premium
MVA Market value added
N Calculator key denoting number of periods
NOPAT Net operating profit after taxes, EBIT(1 − T)
NOWC Net operating working capital
NPV Net present value
P Sales price per unit of product sold
Pf Price of good in foreign country
Ph Price of good in home country
Pt Price of a share of stock in Period t; P0 price of the stock today
P/E Price-to-earnings ratio

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PMT Payment of an annuity
PPP Purchasing power parity
PV Present value
PVAN Present value of an annuity for N years
Q Quantity produced or sold
QBE Break-even quantity
r (1) A percentage discount rate, or cost of capital; also referred to as I
(2) Nominal risk-adjusted required rate of return
r̄ “r bar,” historic, or realized, rate of return
r^ “r hat,” an expected rate of return
r* Real risk-free rate of return
rd Before-tax cost of debt
rd(1 − T) After-tax cost of debt
re Cost of new common stock (external equity)
rf Interest rate in foreign country
rh Interest rate in home country
ri Required return for an individual firm or security
rM Return on “the market,” or on an “average” stock
rNOM Nominal rate of interest; also referred to as INOM
rp (1) Cost of preferred stock
(2) Portfolio’s return
rRF Rate of return on a risk-free security, equal to r* IP
rs (1) Cost of retained earnings
(2) Required return on common stock
Correlation coefficient; also denoted as R when using historical data
ROA Return on assets
ROE Return on equity
ROIC Return on invested capital
RP Risk premium
RPM Market risk premium
S (1) Sales
(2) Estimated standard deviation for sample data
SML Security Market Line
∑ Summation sign
Standard deviation
t Time period
T Marginal income tax rate
TIE Times interest earned
V (1) Variable cost per unit
(2) Current value of a call option
VB Bond value
Vp Value of preferred stock
VC Total variable costs
WACC Weighted average cost of capital
wc Percentage of common stock in capital structure
wd Percentage of debt in capital structure
wp Percentage of preferred stock in capital structure
YTC Yield to call
YTM Yield to maturity

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Fundamentals of
FINANCIAL
MANAGEMENT
CONCISE
9e

EUGENE F. BRIGHAM
University of Florida

JOEL F. HOUSTON
University of Florida

Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States

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Fundamentals of Financial Management:
Concise, Ninth Edition WCN: 02-200-203
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Brief Contents
PREFACE xii

PART 1 INTRODUCTION TO FINANCIAL MANAGEMENT 1

Chapter 1 An Overview of Financial Management 2
Chapter 2 Financial Markets and Institutions 26

PART 2 FUNDAMENTAL CONCEPTS IN FINANCIAL MANAGEMENT 57

Chapter 3 Financial Statements, Cash Flow, and Taxes 58
Chapter 4 Analysis of Financial Statements 101
Chapter 5 Time Value of Money 142

PART 3 FINANCIAL ASSETS 187

Chapter 6 Interest Rates 188
Chapter 7 Bonds and Their Valuation 222
Chapter 8 Risk and Rates of Return 263
Chapter 9 Stocks and Their Valuation 308

PART 4 INVESTING IN LONG-TERM ASSETS: CAPITAL BUDGETING 347

Chapter 10 The Cost of Capital 348
Chapter 11 The Basics of Capital Budgeting 378
Chapter 12 Cash Flow Estimation and Risk Analysis 410

PART 5 CAPITAL STRUCTURE AND DIVIDEND POLICY 451

Chapter 13 Capital Structure and Leverage 452
Chapter 14 Distributions to Shareholders: Dividends
and Share Repurchases 495

PART 6 WORKING CAPITAL MANAGEMENT, FORECASTING, AND MULTINATIONAL

FINANCIAL MANAGEMENT 527
Chapter 15 Working Capital Management 528
Chapter 16 Financial Planning and Forecasting 568
Chapter 17 Multinational Financial Management 594

APPENDIXES
Appendix A Solutions to Self-Test Questions A-1
and Problems
Appendix B Answers to Selected End-of-Chapter B-1
Problems
Appendix C Selected Equations and Tables C-1

INDEX I-1

III

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Contents
PREFACE xii 2-1 The Capital Allocation Process 28
2-2 Financial Markets 30
2-2a Types of Markets 30
PART 1 2-2b Recent Trends 31
2-3 Financial Institutions 35
Introduction to Financial Securitization Has Dramatically Transformed
Management 1 the Banking Industry 40

2-4 The Stock Market 41

CHAPTER 1 2-4a Physical Location Stock Exchanges 41
2-4b Over-the-Counter (OTC) and the
An Overview of Financial NASDAQ Stock Markets 42
Management 2 Global Perspectives: The NYSE and NASDAQ
Striking the Right Balance 2 Go Global 42

2-5 The Market for Common Stock 43

PUTTING THINGS IN PERSPECTIVE 4
2-5a Types of Stock Market Transactions 43
1-1 What Is Finance? 4 Initial Buzz Surrounding IPOs Doesn’t Always
1-1a Areas of Finance 4 Translate Into Long-Lasting Success 45
1-1b Finance within an Organization 5
1-1c Finance versus Economics and 2-6 Stock Markets and Returns 46
Accounting 5 2-6a Stock Market Reporting 46
1-2 Jobs in Finance 6 2-6b Stock Market Returns 47
Measuring the Market 48
1-3 Forms of Business Organization 7
2-7 Stock Market Efficiency 49
1-4 The Main Financial Goal: Creating
2-7a Behavioral Finance Theory 51
Value for Investors 9 2-7b Conclusions about Market Efficiency 53
1-4a Determinants of Value 9
1-4b Intrinsic Value 10 TYING IT ALL TOGETHER 54
1-4c Consequences of Having a Short-Run INTEGRATED CASE Smyth Barry & Company 55
Focus 12
1-5 Stockholder–Manager Conflicts 13
1-5a Compensation Packages 13 PART 2
1-5b Direct Stockholder Intervention 13
Are CEOs Overpaid? 14 Fundamental Concepts in
1-5c Managers’ Response 15 Financial Management 57
1-6 Stockholder–Debtholder Conflicts 16
1-7 Balancing Shareholder Interests and the CHAPTER 3
Interests of Society 17 Financial Statements, Cash Flow, and
Investing in Socially Responsible Funds 18 Taxes 58
1-8 Business Ethics 20 Unlocking the Valuable Information in Financial
1-8a What Companies Are Doing 20 Statements 58
1-8b Consequences of Unethical Behavior 21
1-8c How Should Employees Deal with PUTTING THINGS IN PERSPECTIVE 59
Unethical Behavior? 22
3-1 Financial Statements and Reports 60
TYING IT ALL TOGETHER 23 Global Perspectives: Global Accounting
Standards: Will It Ever Happen? 61
CHAPTER 2 3-2 The Balance Sheet 61
Financial Markets and Institutions 26 3-2a Allied’s Balance Sheet 63
The Economy Depends on a Strong Financial Cash Holdings and Net Operating Working
Capital: A Closer Look 67
System 26
The Balance Sheet of an Average American
PUTTING THINGS IN PERSPECTIVE 27 Household 68
IV

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3-3 The Income Statement 69 4-9 Using Financial Ratios to Assess
3-4 Statement of Cash Flows 71 Performance 122
4-9a Comparison to Industry Average 122
Massaging the Cash Flow Statement 74 4-9b Benchmarking 122
4-9c Trend Analysis 124
3-5 Statement of Stockholders’ Equity 75
4-10 Uses and Limitations of Ratios 125
3-6 Uses and Limitations of Financial
Looking for Warning Signs within the Financial
Statements 76 Statements 127
3-7 Free Cash Flow 77
4-11 Looking Beyond the Numbers 127
Free Cash Flow Is Important for Businesses
Both Small and Large 79 TYING IT ALL TOGETHER 129
3-8 MVA and EVA 80 INTEGRATED CASE D’Leon Inc., Part II 138
Taking a Closer Look
3-9 Income Taxes 82
Conducting a Financial Ratio Analysis on Hewlett
3-9a Individual Taxes 82
Packard Co. 141
3-9b Corporate Taxes 85
TYING IT ALL TOGETHER 89 WEB APPENDIX 4A
Common Size and Percent Change Analyses
INTEGRATED CASE D’Leon Inc., Part I 96
Taking a Closer Look
Exploring Whole Foods’ Financial Statements 100
CHAPTER 5
Time Value of Money 142
Will You Be Able to Retire? 142
CHAPTER 4
Analysis of Financial Statements 101 PUTTING THINGS IN PERSPECTIVE 143
Can You Make Money Analyzing Stocks? 101 5-1 Time Lines 144
PUTTING THINGS IN PERSPECTIVE 102 5-2 Future Values 145
5-2a Step-by-Step Approach 145
4-1 Ratio Analysis 103 5-2b Formula Approach 146
4-2 Liquidity Ratios 104 Simple versus Compound Interest 146
4-2a Current Ratio 104 5-2c Financial Calculators 147
Financial Analysis on the Internet 105 5-2d Spreadsheets 147
4-2b Quick, or Acid Test, Ratio 106 5-2e Graphic View of the Compounding
Process 149
4-3 Asset Management Ratios 106
5-3 Present Values 151
4-3a Inventory Turnover Ratio 107
4-3b Days Sales Outstanding 107 5-3a Graphic View of the Discounting
4-3c Fixed Assets Turnover Ratio 108 Process 153
4-3d Total Assets Turnover Ratio 109 5-4 Finding the Interest Rate, I 154
4-4 Debt Management Ratios 109 5-5 Finding the Number of Years, N 155
4-4a Total Debt to Total Capital 111
4-4b Times-Interest-Earned Ratio 112 5-6 Annuities 155
4-5 Profitability Ratios 113 5-7 Future Value of an Ordinary
4-5a Operating Margin 113 Annuity 156
4-5b Profit Margin 113
4-5c Return on Total Assets 114 5-8 Future Value of an Annuity Due 159
4-5d Return on Common Equity 114 5-9 Present Value of an Ordinary
4-5e Return on Invested Capital 114
Annuity 160
4-5f Basic Earning Power (BEP) Ratio 115
4-6 Market Value Ratios 116 5-10 Finding Annuity Payments, Periods,
4-6a Price/Earnings Ratio 116 and Interest Rates 162
4-6b Market/Book Ratio 117 5-10a Finding Annuity Payments, PMT 162
5-10b Finding the Number of Periods, N 163
4-7 Tying the Ratios Together: The DuPont 5-10c Finding the Interest Rate, I 163
Equation 118
5-11 Perpetuities 164
Microsoft Excel: A Truly Essential Tool 119
5-12 Uneven Cash Flows 165
4-8 Potential Misuses of ROE 120
Economic Value Added (EVA) versus Net 5-13 Future Value of an Uneven Cash Flow
Income 121 Stream 167

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5-14 Solving for I with Uneven Cash Flows 168 6-7c International Factors 212
6-7d Business Activity 212
5-15 Semiannual and Other Compounding
Periods 169 6-8 Interest Rates and Business Decisions 213

5-16 Comparing Interest Rates 171 TYING IT ALL TOGETHER 214

INTEGRATED CASE Morton Handley &
5-17 Fractional Time Periods 174
Company 220
5-18 Amortized Loans 175 Taking a Closer Look
TYING IT ALL TOGETHER 176 Using Yahoo! Finance’s Bonds Center to Understand
Interest Rates 221
INTEGRATED CASE First National Bank 184
WEB APPENDIX 5A
CHAPTER 7
Continuous Compounding and Discounting
Bonds and Their Valuation 222
WEB APPENDIX 5B
Sizing Up Risk in the Bond Market 222
Growing Annuities
PUTTING THINGS IN PERSPECTIVE 223
PART 3 7-1 Who Issues Bonds? 224

Financial Assets 187 7-2 Key Characteristics of Bonds 225

7-2a Par Value 225
7-2b Coupon Interest Rate 225
CHAPTER 6 7-2c Maturity Date 226
7-2d Call Provisions 226
Interest Rates 188 7-2e Sinking Funds 227
The Fed Contemplates an Increase in Interest Rates 7-2f Other Features 228
as the U.S. Economy Shows Signs of a Strong 7-3 Bond Valuation 229
Rebound 188 7-4 Bond Yields 232
7-4a Yield to Maturity 233
PUTTING THINGS IN PERSPECTIVE 189 7-4b Yield to Call 234
6-1 The Cost of Money 190 7-5 Changes in Bond Values over Time 236
6-2 Interest Rate Levels 191 7-6 Bonds with Semiannual Coupons 239
6-3 The Determinants of Market Interest 7-7 Assessing a Bond’s Riskiness 241
7-7a Price Risk 242
Rates 195
7-7b Reinvestment Risk 243
6-3a The Real Risk-Free Rate of Interest, r* 195 7-7c Comparing Price Risk and
Global Perspectives: European Banks Confront Reinvestment Risk 244
the Reality of Negative Interest Rates 196
7-8 Default Risk 246
6-3b The Nominal, or Quoted, Risk-Free Rate 7-8a Various Types of Corporate Bonds 246
of Interest, rRF = r* + IP 197 7-8b Bond Ratings 247
6-3c Inflation Premium (IP) 197 7-8c Bankruptcy and Reorganization 252
6-3d Default Risk Premium (DRP) 198
6-3e Liquidity Premium (LP) 199 7-9 Bond Markets 253
6-3f Interest Rate Risk and the Maturity Risk Accrued Interest and the Pricing of Coupon
Premium (MRP) 199 Bonds 253
An Almost Riskless Treasury Bond 200
6-4 The Term Structure of Interest Rates 202 TYING IT ALL TOGETHER 255
INTEGRATED CASE Western Money
6-5 What Determines the Shape of the Yield
Management Inc. 261
Curve? 204
The Links between Expected Inflation and Taking a Closer Look
Interest Rates: A Closer Look 206 Using Yahoo! Finance’s Bonds Center to Understand
The Impact of Interest Rates on Bond Valuation 262
6-6 Using the Yield Curve to Estimate
WEB APPENDIX 7A
Future Interest Rates 208
Zero Coupon Bonds
6-7 Macroeconomic Factors That Influence WEB APPENDIX 7B
Interest Rate Levels 211 Bond Risk and Duration
6-7a Federal Reserve Policy 211
6-7b Federal Budget Deficits or WEB APPENDIX 7C
Surpluses 212 Bankruptcy and Reorganization

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