Part One Introduction 1
1 The Firm and the Financial Manager 1
2 The Financial Environment 26
3 Accounting and Finance 44
Part Two Value 66
4 The Time Value of Money 66
5 Valuing Bonds 114
6 Valuing Stocks 140
7 Net Present Value and Other Investment Criteria 178
8 Using Discounted Cash-Flow Analysis to Make Investment Decisions 210
9 Project Analysis 238
Part Three Risk 266
10 Introduction to Risk，Return，and the Opportunity Cost of Capital 266
11 Risk，Return，and Capital Budgeting 292
12 The Cost of Capital 318
Part Four Financing 344
13 An Overview of Corporate Financing 344
14 How Corporations Issue Securities 366
Part Five Debt and Dividend Policy 392
15 Debt Policy 392
16 Dividend Policy 424
Part Six Financial Planning 448
17 Financial Statement Analysis 448
18 Financial Planning 480
19 Working Capital Management and Short Term Planning 506
Part Seven Short-Term Financial Decisions 538
20 Cash and Inventory Management 538
21 Credit Management and Bankruptcy 562
Part Eight Special Topics 585
22 Mergers，Acquisitions，and Corporate Control 585
23 International Financial Management 614
24 Options 640
25 Risk Management 664
Part Nine Conclusion 686
26 What We Do and Do Not Know about Finance 686
Appendix A：Present Value Tables 699
Appendix B：Solutions to Selected End-of-Chapter Problems 709
Glossary 722
Global Index 727
Index 729
Part One Introduction 1
Chapter 1 The Firm and the Financial Manager 2
1.1 Organizing a Business 4
Sole Proprietorships 4
Partnerships 4
Corporations 4
Hybrid Forms of Business Organization 5
1.2 The Role of the Financial Manager 6
The Capital Budgeting Decision 7
The Financing Decision 8
1.3 Who Is the Financial Manager？ 8
Careers in Finance 9
1.4 Goals of the Corporation 12
Shareholders Want Managers to Maximize Market Value 12
Ethics and Management Objectives 13
Do Managers Really Maximize Value？ 16
1.5 Topics Covered in This Book 18
Snippets of History 21
1.6 Summary 21
Quiz 22
Practice Problems 23
Solutions to Self-Test Questions 24
Chapter 2 The Financial Environment 26
2.1 The Flow of Savings to Corporations 28
The Stock Market 29
Other Financial Markets 30
Financial Intermediaries 31
Financial Institutions 33
Total Financing of U.S.Corporations 35
2.2 Functions of Financial Markets and Intermediclries 36
Transporting Cash across Time 36
Liquidity 36
The Payment Mechanism 37
Reducing Risk 37
Information Provided by Financial Markets 37
The Opportunity Cost of Capital 39
2.3 Summary 40
Quiz 41
Practice Problems 41
Solutions to Self-Test Questions 42
Chapter 3 Accounting and Finance 44
3.1 The Balance Sheet 46
Book Values and Market Values 48
3.2 The Income Statement 50
Profits versus Cash Flow 51
3.3 The Statement of Cash Flows 53
3.4 Accounting Practice and Accounting Malpractice 55
3.5 Taxes 57
Corporate Tax 57
Personal Tax 58
3.6 Summary 59
Quiz 60
Practice Problems 60
Challenge Problems 63
S＆P Problems 63
Solutions to Self-Test Questions 64
Part Two Value 66
Chapter 4 The Time Value of Money 66
4.1 Future Values and Compound Interest 68
4.2 Present Values 71
Finding the Interest Rate 76
4.3 Multiple Cash Flows 80
Future Value of Multiple Cash Flows 80
Present Value of Multiple Cash Flows 81
4.4 Level Cash Flows：Perpetuities and Annuities 82
How to Value Perpetuities 83
How to Value Annuities 84
Annuities Due 89
Future Value of an Annuity 90
4.5 Inflation and the Time Value of Money 93
Real versus Nominal Cash Flows 93
Inflation and Interest Rates 96
Valuing Real Cash Payments 98
Real or Nominal？ 99
4.6 Effective Annual Interest Rates 100
4.7 Summary 102
Quiz 103
Practice Problems 104
Challenge Problems 108
S＆P Problems 109
Solutions to Self-Test Questions 109
Minicase 112
Chapter 5 Valuing Bonds 114
5.1 Bond Characteristics 116
Reading the Financial Pages 116
5.2 Bond Prices and Yields 118
How Bond Prices Vary with Interest Rates 119
Yield to Maturity versus Current Yield 120
Rate of Return 124
Interest Rate Risk 127
The Yield Curve 128
Nominal and Real Rates of Interest 129
Default Risk 131
Variations in Corporate Bonds 133
5.3 Summary 135
Quiz 136
Practice Problems 136
Challenge Problem 138
S＆P Problems 138
Solutions to Self-Test Questions 138
Chapter 6 Valuing Stocks 140
6.1 Stocks and the Stock Market 142
Reading the Stock Market Listings 142
6.2 Book Values，Liquidation Values，and Market Values 144
6.3 Valuing Common Stocks 147
Today’s Price and Tomorrow’s Price 147
The Dividend Discount Model 149
6.4 Simplifying the Dividend Discount Model 152
The Dividend Discount Model with No Growth 152
The Constant-Growth Dividend Discount Model 152
Estimating Expected Rates of Return 154
Nonconstant Growth 155
6.5 Growth Stocks and Income Stocks 156
The Price-Earnings Ratio 158
Valuing Entire Businesses 159
6.6 There Are No Free Lunches on Wall Street 160
Method 1：Technical Analysis 161
Method 2：Fundamental Analysis 163
A Theory to Fit the Facts 165
Some Puzzles and Anomalies 165
6.7 Behavioral Finance and the Rise and Fall of the Dot.Coms 166
6.8 Summary 167
Quiz 168
Practice Problems 169
Challenge Problems 172
S＆P Problems 172
Solutions to Self-Test Questions 173
Minicase 175
Chapter 7 Net Present Value and Other Investment Criteria 178
7.1 Net Present Value 180
A Comment on Risk and Present Value 181
Valuing Long-Lived Projects 182
7.2 Other Investment Criteria 185
Payback 185
Internal Rate of Return 188
A Closer Look and the Rate of Return Rule 189
Calculating the Rate of Return for Long-Lived Projects 189
A Word of Caution 191
Some Pitfalls with the Internal Rate of Return Rule 191
7.3 Mutually Exclusive Projects 194
Investment Timing 195
Long- versus Short-Lived Equipment 196
Replacing an Old Machine 197
Mutually Exclusive Projects and the IRR Rule 198
7.4 Capital Rationing 200
Soft Rationing 200
Hard Rationing 200
Pitfalls of the Profitability Index 201
7.5 A Last Look 202
7.6 Summary 203
Quiz 204
Practice Problems 204
Challenge Problems 207
Solutions to Self-Test Questions 208
Chapter 8 Using Discounted Cash-Flow Analysis to Make Investment Decisions 210
8.1 Discount Cash Flows，Not Profits 212
8.2 Discount Incremental Cash Flows 214
Include All Indirect Effects 214
Forget Sunk Costs 215
Include Opportunity Costs 215
Recognize the Investment in Working Capital 216
Beware of Allocated Overhead Costs 216
8.3 Discount Nominal Cash Flows by the Nominal Cost of Capital 217
8.4 Separate Investment and Financing Decisions 219
8.5 Calculating Cash Flow 219
Capital Investment 219
Investment in Working Capital 219
Cash Flow from Operations 220
8.6 An Example：Blooper Industries 222
Calculating Blooper’s Project Cash Flows 223
Calculating the NPV of Blooper’s Project 224
Further Notes and Wrinkles Arising from Blooper’s Project 225
8.7 Summary 230
Quiz 230
Practice Problems 231
Challenge Problems 233
S＆P Problems 234
Solutions to Spreadsheet Model Questions 234
Solutions to Self-Test Questions 235
Minicase 237
Chapter 9 Project Analysis 238
9.1 How Firms Organize the Investment Process 240
Stage 1：The Capital Budget 240
Stage 2：Project Authorizations 240
Problems and Some Solutions 241
9.2 Some “What-If” Questions 242
Sensitivity Analysis 242
Scenario Analysis 245
9.3 Break-Even Analysis 246
Accounting Break-Even Analysis 246
Economic Value Added and Break-Even Analysis 247
Operating Leverage 251
9.4 Real Options and the Value of Flexibility 253
The Option to Expand 253
A Second Real Option：The Option to Abandon 254
A Third Real Option：The Timing Option 255
A Fourth Real Option：Flexible Production Facilities 256
9.5 Summary 256
Quiz 257
Practice Problems 257
Challenge Problems 260
S＆P Problems 260
Solutions to Self-Test Questions 260
Minicase 263
Part Three Risk 266
Chapter 10 Introduction to Risk，Return，and the Opportunity Cost of Capital 266
10.1 Rates of Return：A Review 268
10.2 A Century of Capital Market History 269
Market Indexes 269
The Historical Record 270
Using Historical Evidence to Estimate Today’s Cost of Capital 272
10.3 Measuring Risk 274
Variance and Standard Deviation 275
A Note on Calculating Variance 277
Measuring the Variation in Stock Returns 277
10.4 Risk and Diversification 279
Diversification 279
Asset versus Portfolio Risk 280
Market Risk versus Unique Risk 283
10.5 Thinking about Risk 284
Message 1：Some Risks Look Big and Dangerousbut Really Are Diversifiable 285
Message 2：Market Risks Are Macro Risks 286
Message 3：Risk Can Be Measured 287
10.6 Summary 287
Quiz 288
Practice Problems 289
S＆P Problems 290
Solutions to Self-Test Questions 291
Chapter 11 Risk，Return，and Capital Budgeting 292
11.1 Measuring Market Risk 294
Measuring Beta 294
Betas for Amazon.com and ExxonMobil 296
Portfolio Betas 298
11.2 Risk and Return 300
Why the CAPM Works 302
The Security Market Line 303
How Well Does the CAPM Work？ 304
Using the CAPM to Estimate Expected Returns 306
11.3 Capital Budgeting and Project Risk 308
Company versus Project Risk 308
Determinants of Project Risk 309
Don’t Add Fudge Factors to Discount Rates 310
11.4 Summary 311
Quiz 311
Practice Problems 312
Challenge Problem 316
S＆P Problems 317
Solutions to Self-Test Questions 317
Chapter 12 The Cost of Capital 318
12.1 Geothermal’s Cost of Capital 320
12.2 The Weighted-Average Cost of Capital 321
Calculating Company Cost of Capital as a Weighted Average 322
Market versus Book Weights 324
Taxes and the Weighted-Average Cost of Capital 325
What If There Are Three （or More） Sources of Financing？ 325
Wrapping Up Geothermal 326
Checking Our Logic 327
12.3 Measuring Capital Structure 328
12.4 Calculating Required Rates of Return 330
The Expected Return on Bonds 330
The Expected Return on Common Stock 330
The Expected Return on Preferred Stock 331
12.5 Calculating the Weighted-Average Cost of Capital 332
Real Company WACCs 332
12.6 Interpreting the Weighted-Average Cost of Capital 333
When You Can and Can’t Use WACC 333
Some Common Mistakes 333
How Changing Capital Structure Affects Expected Returns 334
What Happens When the Corporate Tax Rate Is Not Zero 335
12.7 Flotation Costs and the Cost of Capital 335
12.8 Summary 336
Quiz 337
Practice Problems 337
Challenge Problems 339
S＆P Problems 339
Solutions to Self-Test Questions 340
Minicase 341
Part Four Financing 344
Chapter 13 An Overview of Corporate Financing 344
13.1 Creating Value with Financing Decisions 346
13.2 Common Stock 347
Ownership of the Corporation 348
Voting Procedures 349
Classes of Stock 350
Corporate Governance in the United States and Elsewhere 350
13.3 Preferred Stock 351
13.4 Corporate Debt 352
Debt Comes in Many Forms 353
Innovation in the Debt Market 357
13.5 Convertible Securities 358
13.6 Patterns of Corporate Financing 359
Do Firms Rely Too Heavily on Internal Funds？ 359
External Sources of Capital 360
13.7 Summary 362
Quiz 362
Practice Problems 363
S＆P Problems 364
Solutions to Self-Test Questions 364
Chapter 14 How Corporations Issue Securities 366
14.1 Venture Capital 368
14.2 The Initial Public Offering 370
Arranging a Public Issue 370
14.3 The Underwriters 375
14.4 General Cash Offers by Public Companies 376
General Cash Offers and Shelf Registration 377
Costs of the General Cash Offer 378
Market Reaction to Stock Issues 378
14.5 The Private Placement 379
14.6 Summary 380
Quiz 381
Practice Problems 381
Challenge Problem 383
S＆P Problems 383
Solutions to Self-Test Questions 384
Minicase 385
Appendix：Hotch Pot’s New-Issue Prospectus 386
Part Five Debt and Dividend Policy 392
Chapter 15 Debt Policy 392
15.1 How Borrowing Affects Value in a Tax-Free Economy 394
MM’s Argument 395
How Borrowing Affects Earnings per Share 396
How Borrowing Affects Risk and Return 398
Debt and the Cost of Equity 400
15.2 Capital Structure and Corporate Taxes 403
Debt and Taxes at River Cruises 403
How Interest Tax Shields Contribute to the Value of Stockholders’ Equity 404
Corporate Taxes and the Weighted-Average Cost of Capital 405
The Implications of Corporate Taxes for Capital Structure 406
15.3 Costs of Financial Distress 407
Bankruptcy Costs 408
Financial Distress without Bankruptcy 409
Costs of Distress Vary with Type of Asset 411
15.4 Explaining Financing Choices 412
The Trade-off Theory 412
A Pecking Order Theory 413
The Two Faces of Financial Slack 414
15.5 Summary 416
Quiz 417
Practice Problems 418
Challenge Problems 420
S＆P Problems 421
Solutions to Self-Test Questions 421
Minicase 423
Chapter 16 Dividend Policy 424
16.1 How Dividends Are Paid 426
Cash Dividends 426
Some Legal Limitations on Dividends 427
Stock Dividends and Stock Splits 427
16.2 Share Repurchase 428
The Role of Share Repurchases 429
Repurchases and Share Valuation 430
16.3 How Do Companies Decide on Dividend Payments？ 431
16.4 Why Dividend Policy Should Not Matter 432
Dividend Policy Is Irrelevant in Competitive Markets 433
The Assumptions behind Dividend Irrelevance 435
16.5 Why Dividends May Increase Firm Value 436
Market Imperfections 436
Dividends as Signals 437
16.6 Why Dividends May Reduce Firm Value 439
Why Pay Any Dividends at All？ 439
Taxation of Dividends and Capital Gains under Current Tax Law 440
16.7 Summary 441
Quiz 442
Practice Problems 443
Challenge Problem 445
S＆P Problems 445
Solutions to Self-Test Questions 445
Part Six Financial Planning 448
Chapter 17 Financial Statement Analysis 448
17.1 Financial Ratios 450
Leverage Ratios 452
Liquidity Ratios 454
Efficiency Ratios 456
Profitability Ratios 457
17.2 The Du Pont System 459
Other Financial Ratios 461
17.3 Using Financial Ratios 461
Accounting Principles and Financial Ratios 461
Choosing a Benchmark 463
17.4 Measuring Company Performance 466
17.5 The Role of Financial Ratios 469
17.6 Summary 470
Quiz 471
Practice Problems 472
Challenge Problem 474
S＆P Problems 475
Solutions to Self-Test Questions 475
Minicase 477
Chapter18 Financial Planning 480
18.1 What Is Financial Planning 482
Financial Planning Focuses on the Big Picture 482
Why Build Financial Plans？ 482
18.2 Financial Planning Models 484
Components of a Financial Planning Model 484
An Example of a Planning Model 485
An Improved Model 487
18.3 Planners Beware 491
Pitfalls in Model Design 491
The Assumption in Percentage of Sales Models 491
The Role of Financial Planning Models 493
18.4 External Financing and Growth 493
18.5 Summary 497
Quiz 498
Practice Problems 499
Challenge Problems 502
S＆P Problems 503
Solutions to Self-Test Questions 503
Minicase 504
Chapter19 Working Capital Management and Short-Term Planning 506
19.1 Working Capital 508
The Components of Working Capital 508
Working Capital and the Cash Conversion Cycle 509
The Working Capital Trade-off 512
19.2 Links between Long-Term and Short-Term Financing 513
19.3 Tracing Changes in Cash and Working Capital 515
19.4 Cash Budgeting 517
Forecast Sources of Cash 517
Forecast Uses of Cash 518
The Cash Balance 519
19.5 A Short-Term Financing Plan 520
Options for Short-Term Financing 520
Evaluating the Plan 522
19.6 Sources of Short-Term Financing 523
Bank Loans 523
Commercial Paper 524
Secured Loans 524
19.7 The Cost of Bank Loans 526
Simple Interest （APR） 526
Discount Interest 526
Interest with Compensating Balances 527
19.8 Summary 528
Quiz 529
Practice Problems 530
Challenge Problem 532
S＆P Problems 532
Solutions to Self-Test Questions 532
Minicase 535
Part Seven Short-term Financial Decisions 538
Chapter 20 Cash and Inventory Management 538
20.1 Cash Collection，Disbursement，and Float 540
Float 540
Valuing Float 541
20.2 Managing Float 542
Speeding Up Collections 543
Controlling Disbursements 545
Electronic Funds Transfer 547
20.3 Inventories and Cash Balances 548
Managing Inventories 548
Just-in-Time Inventory Management 551
Managing Inventories of Cash 551
Uncertain Cash Flows 553
Cash Management in the Largest Corporations 554
Investing Idle Cash：The Money Market 555
20.4 Summary 556
Quiz 557
Practice Problems 558
Challenge Problem 560
S＆P Problems 560
Solutions to Self-Test Questions 560
Chapter 21 Credit Management and Bankruptcy 562
21.1 Terms of Sale 564
21.2 Credit Agreements 566
21.3 Credit Analysis 566
Financial Ratio Analysis 567
Numerical Credit Scoring 567
When to Stop Looking for Clues 568
21.4 The Credit Decision 569
Credit Decisions with Repeat Orders 571
Some General Principles 572
21.5 Collection Policy 573
21.6 Bankruptcy 574
Bankruptcy Procedures 574
The Choice between Liquidation and Reorganization 576
21.7 Summary 578
Quiz 579
Practice Problems 580
Challenge Problems 581
S＆P Problems 582
Solutions to Self-Test Questions 582
Minicase 584
Part Eight Special Topics 585
Chapter 22 Mergers，Acquisitions，and Corporate Control 585
22.1 The Market for Corporate Control 588
Method 1：Proxy Contests 589
Method 2：Mergers and Acquisitions 589
Method 3：Leveraged Buyouts 590
Method 4：Divestitures and Spin-offs 590
22.2 Sensible Motives for Mergers 591
Economies of Scale 592
Economies of Vertical Integration 593
Combining Complementary Resources 593
Mergers as a Use for Surplus Funds 594
22.3 Dubious Reasons for Mergers 594
Diversification 594
The Bootstrap Game 595
22.4 Evaluating Mergers 596
Mergers Financed by Cash 596
Mergers Financed by Stock 598
A Warning 600
Another Warning 600
22.5 Merger Tactics 600
22.6 Leveraged Buyouts 602
Barbarians at the Gate？ 603
22.7 The Benefits and Costs of Mergers 605
22.8 Summary 607
Quiz 608
Practice Problems 608
Challenge Problems 609
S＆P Problems 610
Solutions to Self-Test Questions 610
Minicase 612
Chapter 23 International Financial Management 614
23.1 Foreign Exchange Markets 616
23.2 Some Basic Relationships 618
Exchange Rates and Inflation 619
Inflation and Interest Rates 622
Interest Rates and Exchange Rates 624
The Forward Rate and the Expected Spot Rate 625
Some Implications 626
23.3 Hedging Exchange Rate Risk 627
23.4 International Capital Budgeting 628
Net Present Value Analysis 628
The Cost of Capital for Foreign Investment 630
Avoiding Fudge Factors 631
23.5 Summary 632
Quiz 633
Practice Problems 633
Challenge Problem 635
S＆P Problems 635
Solutions to Self-Test Questions 635
Minicase 638
Chapter24 Options 640
24.1 Calls and Puts 642
Selling Calls and Puts 644
Financial Alchemy with Options 646
24.2 What Determines Option Values？ 647
Upper and Lower Limits on Option Values 648
The Determinants of Option Value 649
Option-Valuation Models 651
24.3 Spotting the Option 653
Options on Real Assets 654
Options on Financial Assets 655
24.4 Summary 657
Quiz 658
Practice Problems 659
Challenge Problems 661
S＆P Problems 661
Solutions to Self-Test Questions 662
Chapter25 Risk Management 664
25.1 Why Hedge？ 666
25.2 Reducing Risk with Options 666
25.3 Futures Contracts 668
The Mechanics of Futures Trading 670
Commodity and Financial Futures 672
25.4 Forward Contracts 673
25.5 Swaps 674
25.6 Innovation in the Derivatives Market 677
25.7 Is “Derivative” a Four-Letter Word？ 677
25.8 Summary 679
Quiz 679
Practice Problems 680
Challenge Problem 681
S＆P Problems 681
Solutions to Self-Test Questions 681
Part Nine Conclusion 686
Chapter 26 What We Do and Do Not Know about Finance 686
26.1 What We Do Know：The Six Most Important Ideas in Finance 688
Net Present Value 688
Risk and Return 688
Efficient Capital Markets 689
MM’s Irrelevance Propositions 689
Option Theory 689
Agency Theory 690
26.2 What We Do Not Know：Seven Unsolved Problems in Finance 690
What Determines Project Risk and Present Value？ 690
Risk and Return—Have We Missed Something？ 690
Are There Important Exceptions to the Efficient-Market Theory？ 691
How Can We Explain Capital Structure？ 692
How Can We Resolve the Dividend Controversy？ 692
How Can We Explain Merger Waves？ 692
What Is the Value of Liquidity？ 692
26.3 A Final Word 693
Quiz 694
Answers to Quiz 697
Appendix A：Present Value Tables 699
Appendix B：Solutions to Selected End-of-Chapter Problems 709
Glossary 722
Global Index 727
Index 729