Table of contents for Foundations of financial management / Stanley B. Block, Geoffrey A. Hirt, Bartley R. Danielsen.

Bibliographic record and links to related information available from the Library of Congress catalog.

Note: Contents data are machine generated based on pre-publication provided by the publisher. Contents may have variations from the printed book or be incomplete or contain other coding.


Counter
Contents 
PART 1 | INTRODUCTION 
 1 The Goals and Functions of Financial 
Management 4 The Field of Finance 5 
 Evolution of the Field of Finance 5 
 Recent Issues in Finance 6 
 The Impact of the Internet 6 
 Functions of Financial Management 7 
Forms of Organization 8 
 Sole Proprietorship 8 
 Partnership 8 
 Corporation 9 
 Corporate Governance 10 
 Sarbanes-Oxley Act 11 
 Goals of Financial Management 11 
 A Valuation Approach 12 
 Maximizing Shareholder Wealth 12 
 Management and Stockholder Wealth 13 Social Responsibility and Ethical 
Behavior 13 
 The Role of the Financial Markets 15 
 Structure and Functions of the Financial Markets 15 
 Allocation of Capital 16 
 Institutional Pressure on Public Companies to Restructure 17 
 Internationalization of the Financial Markets 17 
 The Internet and Changes in the Capital Markets 18 
 Format of the Text 18 
 Parts 19 
 1. Introduction 19 2. Financial Analysis and Planning 19 3. Working 
Capital Management 
19 4. The Capital Budgeting Process 19 5. Long-Term Financing 19 6. 
Expanding the 
Perspective of Corporate Finance 20 List of Terms 20 
 Discussion Questions 20 
 Web Exercise 21 
PART 2 | FINANCIAL ANALYSIS AND PLANNING 
 2 Review of Accounting 24 
 Income Statement 25 
 Return to Capital 26 
 Price-Earnings Ratio Applied to Earnings per Share 26 
 Limitations of the Income Statement 27 
 Balance Sheet 28 
 Interpretation of Balance Sheet Items 28 
 Concept of Net Worth 30 
 Limitations of the Balance Sheet 30 Statement of Cash Flows 31 
 Developing an Actual Statement 32 
 Determining Cash Flows from Operating Activities 32 
 Determining Cash Flows from Investing Activities 34 
 Determining Cash Flows from Financing Activities 34 
 Combining the Three Sections of the Statement 36 
 Depreciation and Funds Flow 37 
 Free Cash Flow 37 
 Income Tax Considerations 38 
 Corporate Tax Rates 40 
 Cost of a Tax-Deductible Expense 40 Depreciation as a Tax Shield 40 
 Summary 42 
 List of Terms 42 
 Discussion Questions 43 
 Practice Problems and Solutions 43 
 Problems 44 
 Web Exercise 51 
 S&P Problems 52 
 3 Financial Analysis 53 
 Ratio Analysis 54 
 Classi?cation System 54 
 The Analysis 56 
 A. Pro? tability Ratios 56 
 B. Asset Utilization Ratios 59 
 C. Liquidity Ratios 60 
 D. Debt Utilization Ratios 60 Trend Analysis 61 
 Impact of In?ation on Financial Analysis 65 
 An Illustration 65 
 Disin?ation Effect 66 
 De? ation 67 
 Other Elements of Distortion in Reported Income 67 
 Explanation of Discrepancies 67 
 Sales 68 
 Cost of Goods Sold 68 
 Extraordinary Gains/Losses 68 
 Net Income 69 
 Summary 70 
 List of Terms 70 
 Discussion Questions 70 
 Practice Problems and Solutions 71
 Problems 74 
 Comprehensive Problems 85 
 Web Exercise 90 
 S&P Problems 90 
 4 Financial Forecasting 92 
 Constructing Pro Forma Statements 93 
 Pro Forma Income Statement 93 
 Establish a Sales Projection 94 
 Determine a Production Schedule and the Gross Pro?t 94 
 Cost of Goods Sold 96 
 Other Expense Items 97 
 Actual Pro Forma Income Statement 97 
 Cash Budget 97 
 Cash Receipts 98 
 Cash Payments 98 
 Actual Budget 100 
 Pro Forma Balance Sheet 101 
 Explanation of Pro Forma Balance Sheet 101 
 Analysis of Pro Forma Statement 104 
 Percent-of-Sales Method 104 Summary 106 
 List of Terms 106 
 Discussion Questions 107 
 Practice Problems and Solutions 107
 Problems 108 
 Comprehensive Problems 116 
 Web Exercise 118 
 5 Operating and Financial Leverage 119 
 Leverage in a Business 120 Operating Leverage 120 
 Break-Even Analysis 120 
 A More Conservative Approach 122 The Risk Factor 123 
 Cash Break-Even Analysis 124 
 Degree of Operating Leverage 124 
 Leveraged Firm 125 
 Conservative Firm 125 
 Limitations of Analysis 126 
 Financial Leverage 127 
 Impact on Earnings 128 
 Degree of Financial Leverage 128 
 Plan A (Leveraged) 130 
 Plan B (Conservative) 130 
 Limitations to Use of Financial Leverage 131 
 Combining Operating and Financial Leverage 131 
 Degree of Combined Leverage 133 
 A Word of Caution 135 
 Summary 135 
 Review of Formulas 135 
 List of Terms 136 
 Discussion Questions 136 
 Practice Problems and Solutions 137
 Problems 138 
 Comprehensive Problem 147 
 Web Exercise 148 
 S&P Problems 149 
PART 3 | WORKING CAPITAL MANAGEMENT 
 6 Working Capital and the Financing 
Decision 152 
 The Nature of Asset Growth 154 
 Controlling Assets?Matching Sales and Production 154 
 Temporary Assets under Level Production?An Example 158 Patterns of 
Financing 163 
 Alternative Plans 164 
 Long-Term Financing 164 
 Short-Term Financing (Opposite Approach) 165 
 The Financing Decision 165 
 Term Structure of Interest Rates 167 
 A Decision Process 170 
 Introducing Varying Conditions 171 Expected Value 171 
 Shifts in Asset Structure 172 
 Toward an Optimal Policy 173 Summary 175 
 List of Terms 175 
 Discussion Questions 175 
 Practice Problems and Solutions 176
 Problems 183 
 Web Exercise 183 
 S&P Problems 183 
 7 Current Asset Management 185 
 Cash Management 186 
Reasons for Holding Cash Balances 186 Cash Flow Cycle 186 
 Collections and Disbursements 189 
 Float 190 
 Improving Collections 191 
 Extending Disbursements 192 
 Cost-Bene?t Analysis 192 
 Electronic Funds Transfer 193 
 International Cash Management 196 
 Marketable Securities 196 
 Management of Accounts Receivable 201 
 Accounts Receivable as an Investment 201 Credit Policy Administration 201 
 Credit Standards 201 
 Terms of Trade 205 
 Collection Policy 205 
 An Actual Credit Decision 206 
 Inventory Management 207 
 Level versus Seasonal Production 207 Inventory Policy in In?ation (and 
De?ation) 208 
 
 The Inventory Decision Model 208 
 Carrying Costs 208 
 Ordering Costs 209 
 Economic Ordering Quantity 209 
 Safety Stock and Stock Outs 211 
 Just-in-Time Inventory Management 211 
 Cost Savings from Lower Inventory 212 
 Other Bene? ts 212 
 The Downside of JIT 212 
 Summary 214 
 List of Terms 214 
 Discussion Questions 215 
 Practice Problems and Solutions 215
 Problems 216 
 Comprehensive Problem 221 
 Web Exercise 222 
 8 Sources of Short-Term Financing 223 
 Trade Credit 224 
 Payment Period 224 
 Cash Discount Policy 224 Net Credit Position 225 
 Bank Credit 225 
 Prime Rate and LIBOR 226 
 Compensating Balances 227 
 Maturity Provisions 228 
 Cost of Commercial Bank Financing 229 Interest Costs with Compensating 
Balances 229 
 Rate on Installment Loans 230 
 Annual Percentage Rate 230 
 The Credit Crunch Phenomenon 231 
 Financing through Commercial Paper 231 
 Advantages of Commercial Paper 233 
 Limitations on the Issuance of Commercial Paper 234 
 Foreign Borrowing 234 
 Use of Collateral in Short-Term Financing 235 
 Accounts Receivable Financing 235 
 Pledging Accounts Receivable 235 
 Factoring Receivables 236 
 Asset-Backed Public Offerings 236 Inventory Financing 238 
 Stages of Production 239 
 Nature of Lender Control 239 
 Blanket Inventory Liens 239 
 Trust Receipts 239 
 Warehousing 239 
 Appraisal of Inventory Control Devices 239 
 Hedging to Reduce Borrowing Risk 240 Summary 241 
 List of Terms 242 
 Discussion Questions 242 
 Practice Problems and Solutions 243
 Problems 244 
 Web Exercise 248 
 PART 4 | THE CAPITAL BUDGETING PROCESS 
 9 The Time Value of Money 253 
Relationship to the Capital Outlay Decision 254 
 Future Value?Single Amount 254 
 Present Value?Single Amount 255 
 Future Value?Annuity 256 
 Present Value?Annuity 258 
 Graphical Presentation of Time Value Relationships 260 
 The Relationship between Present Value and Future Value 260 
 The Relationship between the Present Value of a Single Amount and the Present 
Value of an 
Annuity 263 
 Future Value Related to the Future Value of an Annuity 265 
 Determining the Annuity Value 266 
 Annuity Equaling a Future Value 266 
 Annuity Equaling a Present Value 266 
 Determining the Yield on an Investment 268 
 Yield?Present Value of a Single Amount 268 
 Yield?Present Value of an Annuity 269 Special Considerations in Time Value 
Analysis 
270 
 Patterns of Payment 270 
 Special Review of the Chapter 272 
 List of Terms 274 
 Discussion Questions 274 
 Practice Problems and Solutions 275
 Problems 276 
 Comprehensive Problem 281 
10 Valuation and Rates of Return 282 
 Valuation Concepts 283 Valuation of Bonds 283 
 Present Value of Interest Payments 284 
 Present Value of Principal Payment (Par Value) at Maturity 284 
 Concept of Yield to Maturity 285 
 Changing the Yield to Maturity and the Impact on Bond Valuation 286 
 Increase in In? ation Premium 287 
 Decrease in In? ation Premium 287 
 Time to Maturity 289 
 Determining Yield to Maturity from the Bond Price 289 
 A 13 Percent Discount Rate 290 
 A 12 Percent Discount Rate 291 
 Formula for Bond Yield 291 
 Semiannual Interest and Bond Prices 292 Valuation and Preferred Stock 293 
 Determining the Required Rate of Return (Yield) from the Market Price 294 
 Valuation of Common Stock 295 
 No Growth in Dividends 295 
 Constant Growth in Dividends 296 
 Stock Valuation Based on Future Stock Value 298 
 Determining the Required Rate of Return from the Market Price 298 
 The Price-Earnings Ratio Concept and Valuation 299 
 Variable Growth in Dividends 300 
 Summary and Review of Formulas 302 
 Bonds 303 
 Preferred Stock 303 
 Common Stock 304 
 List of Terms 304 
 Discussion Questions 304 
 Practice Problems and Solutions 305
 Problems 306 
 Comprehensive Problem 312 
 Web Exercise 313 
 Appendix 10A The Bond Yield to Maturity Using Interpolation 314 
 Appendix 10B Using Calculators for Financial Analysis 315 
 Appendix 10C Valuation of a Supernormal Growth Firm 324 
11 Cost of Capital 327 
 The Overall Concept 328 
 Cost of Debt 328 
 Costs of Preferred Stock 331 Cost of Common Equity 331 
 Valuation Approach 332 
 Required Return on Common Stock Using the Capital Asset Pricing Model 332 
 Cost of Retained Earnings 333 
Cost of New Common Stock 335 
 Overview of Common Stock Costs 335 
 Optimal Capital Structure?Weighting Costs 336 
 Capital Acquisition and Investment Decision Making 338 
 Cost of Capital in the Capital Budgeting Decision 338 
 The Marginal Cost of Capital 340 
 Summary 345 
 Review of Formulas 345 
 List of Terms 346 
 Discussion Questions 346 
 Practice Problems and Solutions 347 
 Problems 349 
 Comprehensive Problems 356 
 Web Exercise 358 
 S&P Problems 358 
 Appendix 11A Cost of Capital and the Capital Asset Pricing Model (Optional) 
359 
12 The Capital Budgeting Decision 367 
 Administrative Considerations 368 
 Accounting Flows versus Cash Flows 368 Methods of Ranking Investment 
Proposals 371 
 Payback Method 371 
 Internal Rate of Return 372 Net Present Value 374 
 Selection Strategy 375 
 Reinvestment Assumption 376 
 Modi? ed Internal Rate of Return 377 Capital Rationing 378 
 Net Present Value Pro?le 379 
 Characteristics of Investment C 380 
 Combining Cash Flow Analysis and Selection Strategy 382 
 The Rules of Depreciation 382 
 The Tax Rate 384 
 Actual Investment Decision 384 
 The Replacement Decision 385 
 Sale of Old Asset 386 
 Incremental Depreciation 387 Cost Savings 388 
 Elective Expensing 390 Summary 390 
 List of Terms 390 
 Discussion Questions 390 
 Practice Problems and Solutions 391
 Problems 392 
 Comprehensive Problem 400 
 Web Exercise 401 
 S&P Problems 401 
13 Risk and Capital Budgeting 403 
 De?nition of Risk in Capital Budgeting 404 
 Simulation Models 412 
 Decision Trees 413 
 The Portfolio Effect 415 
 Portfolio Risk 415 
 Evaluation of Combinations 418 The Share Price Effect 419 Summary 
419 
 Review of Formulas 419 
 List of Terms 420 
 Discussion Questions 420 
 Practice Problems and Solutions 420
 Problems 422 
 Comprehensive Problems 431 
 Web Exercise 433 
 
PART 5 | LONG-TERM FINANCING 
14 Capital Markets 436 
 International Capital Markets 437 
 Competition for Funds in the U.S. Capital Markets 439 
 Government Securities 439 
 U.S. Government Securities 439 
 Federally Sponsored Credit Agencies 440 
 State and Local Securities 440 
 Corporate Securities 440 
 Corporate Bonds 440 
 Preferred Stock 440 
 Common Stock 440 
 Internal versus External Sources of Funds 441 The Supply of Capital Funds 
442 
 The Role of the Security Markets 444 
 The Organization of the Security Markets 445 
 The New York Stock Exchange 445 
 Size and Liquidity 445 
 Listing Requirements 447 
 Decimalization 447 
 Electronic Trading 447 
International Merger 447 The NASDAQ Market 448 
 The National Market and Small-Cap Market 448 
 The American Stock Exchange 448 
 Regional Stock Exchanges 448 
 Foreign Exchanges 449 
 
 The Concept of Risk-Averse 405 
 Actual Measurement of Risk 405 
 Risk and the Capital Budgeting Process 408 
 Risk-Adjusted Discount Rate 409 Increasing Risk over Time 410 
 Qualitative Measures 411 
 Example?Risk-Adjusted Discount Rate 411 
 Electronic Communication Networks (ECNs) 449 
 National Association of Securities Dealers (NASD) 450 Market Ef?ciency 450 
 The Ef?cient Market Hypothesis 450 
 Regulation of the Security Markets 451 
 Securities Act of 1933 451 
 Securities Exchange Act of 1934 452 
 Securities Acts Amendments of 1975 452 Sarbanes-Oxley Act of 2002 453 
Summary 454 
 List of Terms 454 
 Discussion Questions 455 
 Web Exercise 455 
 S&P Problems 456 
15 Investment Banking: Public and Private 
Placement 457 
 The Role of Investment Banking 458 
 Concentration of Capital 458 The Gramm-Leach-Bliley Act Repeals the Glass-
Steagal Act 460 
Investment Banking Competitors 461 Enumeration of Functions 461 
 Underwriter 461 
 Market Maker 461 
 Advisor 461 
 Agency Functions 462 
 The Distribution Process 462 
 The Spread 462 
 Pricing the Security 465 
 Dilution 465 
 Market Stabilization 465 
 Aftermarket 466 
 Shelf Registration 466 
Public versus Private Financing 467 
 Advantages of Being Public 467 
 Disadvantages of Being Public 468 Public Offerings 468 
 A Classic Example of Instant Wealth? EDS Goes Public 468 
 Internet Capital Group?A Second Example 469 
 Private Placement 473 
 Going Private and Leveraged Buyouts 473 
 
 International Investment Banking Deals 474 
 Privatization 474 
 Summary 477 
 List of Terms 477 
 Discussion Questions 477 
 Practice Problems and Solutions 478 
 Problems 479 
 Comprehensive Problem 484 
 Web Exercise 486 
 S&P Problems 486 
16 Long-Term Debt and Lease Financing 488 
 The Expanding Role of Debt 489 
 The Debt Contract 489 
 Par Value 489 
 Coupon Rate 490 
 Maturity Date 490 
 Security Provisions 490 
 Unsecured Debt 490 
 Methods of Repayment 491 Serial Payments 491 
 Sinking-Fund Provision 492 
 Conversion 492 
 Call Feature 492 
 An Example: Dillard?s 7.875 Percent Bond 492 
 Bond Prices, Yields, and Ratings 492 
 Bond Yields 495 
 Coupon Rate (Nominal Yield) 495 
 Current Yield 496 
 Yield to Maturity 496 
 Bond Ratings 496 
 Examining Actual Bond Ratings 497 The Refunding Decision 498 
 A Capital Budgeting Problem 498 
 Step A?Out?ow Considerations 499 
 Step B?In?ow Considerations 500 
 Step C?Net Present Value 501 
 Other Forms of Bond Financing 502 
 Advantages and Disadvantages of Debt 503 
 Bene?ts of Debt 504 
 Drawbacks of Debt 504 
 Eurobond Market 504 
 Leasing as a Form of Debt 505 
 Capital Lease versus Operating Lease 506 Income Statement Effect 507 
 Advantages of Leasing 507 
 Summary 508 
 List of Terms 508 
 Discussion Questions 508 
 Practice Problems and Solutions 509
 Problems 512 
 Comprehensive Problem 516 
 Web Exercise 517 
 S&P Problems 517 
 Appendix 16A Financial Alternatives for Distressed Firms 518 
 Out-of-Court Settlement 518 
 In-Court Settlements?Formal Bankruptcy 519 
 Reorganization 519 
 Liquidation 519 
 List of Terms 522 
 Discussion Questions 523 
 Problem 523 
 Appendix 16B Lease versus Purchase Decision 524 
17 Common and Preferred Stock 
Financing 527 
 Common Stockholders? Claim to Income 528 
 The Voting Right 529 
 Cumulative Voting 530 
 The Right to Purchase New Shares 532 
 The Use of Rights in Financing 533 
 Rights Required 533 
 Monetary Value of a Right 533 
 Effect of Rights on Stockholder?s Position 535 
 Desirable Features of Rights Offerings 536 
 Poison Pills 536 
 American Depository Receipts 537 Preferred Stock Financing 538 
 Justi?cation for Preferred Stock 539 
 Investor Interest 539 
 Summary of Tax Considerations 540 Provisions Associated with Preferred 
Stock 540 
 1. Cumulative Dividends 540 
 2. Conversion Feature 540 
 3. Call Feature 541 
 4. Participation Provision 541 
 5. Floating Rate 541 
 6. Dutch Auction Preferred Stock 541 
 7. Par Value 541 
 Comparing Features of Common and Preferred Stock and Debt 542 Summary 
543 
 Review of Formulas 544 
 List of Terms 544 
 Discussion Questions 545 
 Practice Problems and Solutions 546 
 Problems 547 
 Comprehensive Problems 551 
 Web Exercise 553 
 18 Dividend Policy and Retained Earnings 554 
 The Marginal Principle of Retained Earnings 555 
 Life Cycle Growth and Dividends 555 Dividends as a Passive Variable 556 
 An Incomplete Theory 556 
 Arguments for the Relevance of Dividends 557 
 Dividend Stability 558 
 Other Factors In?uencing Dividend Policy 558 
 Legal Rules 558 
 Cash Position of the Firm 560 
 Access to Capital Markets 560 
 Desire for Control 561 
 Tax Position of Shareholders 561 
 Dividend Payment Procedures 561 Stock Dividend 563 
 Accounting Considerations for a Stock Dividend 563 
 Value to the Investor 563 
 Possible Value of Stock Dividends 564 Use of Stock Dividends 565 
 Stock Splits 565 
 Reverse Stock Splits 566 
 Repurchase of Stock as an Alternative to Dividends 566 
 Other Reasons for Repurchase 568 
 Dividend Reinvestment Plans 568 
 Summary 569 
 List of Terms 569 
 Discussion Questions 569 
 Practice Problems and Solutions 570 
 Problems 571 
 Comprehensive Problem 578 
 Web Exercise 578 
 S&P Problems 579 
19 Convertibles, Warrants, and Derivatives 580 
 Convertible Securities 581 
 Value of the Convertible Bond 581 
 Is This Fool?s Gold? 584 
 Advantages and Disadvantages to the Corporation 584 
 Forcing Conversion 586 
 Accounting Considerations with Convertibles 587 
 Financing through Warrants 589 
 Valuation of Warrants 590 
 Use of Warrants in Corporate Finance 592 
 
 Accounting Considerations with Warrants 592 
 Derivative Securities 593 
 Options 593 
 Futures 594 Summary 595 
 Review of Formulas 595 
 List of Terms 596 
 Discussion Questions 596 
 Practice Problems and Solutions 597 
 Problems 598 
 Comprehensive Problems 602 
 Web Exercise 603 
 
PART 6 | EXPANDING THE PERSPECTIVE OF CORPORATE FINANCE 
20 External Growth through Mergers 606 
 Motives for Business Combinations 607 
 Financial Motives 608 
 Non?nancial Motives 609 
 Motives of Selling Stockholders 609 Terms of Exchange 611 
 Cash Purchases 611 
 Stock-for-Stock Exchange 612 
 Portfolio Effect 613 
 Accounting Considerations in Mergers and Acquisitions 614 
 Negotiated versus Tendered Offers 615 
 Premium Offers and Stock Price Movements 617 
 Two-Step Buyout 618 Summary 619 
 List of Terms 619 
 Discussion Questions 619 
 Practice Problems and Solutions 620 
 Problems 621 
 Web Exercise 625 
 S&P Problems 626 
21 International Financial Management 627 
 The Multinational Corporation: Nature and Environment 630 
 Exporter 630 
 Licensing Agreement 630 
 Joint Venture 630 
 Fully Owned Foreign Subsidiary 630 
 Foreign Exchange Rates 631 
 Factors In?uencing Exchange Rates 632 
 In? ation 633 
 Interest Rates 633 
 Balance of Payments 633 
 Government Policies 634 
 Other Factors 634 
 Spot Rates and Forward Rates 634 
 Cross Rates 636 
 Managing Foreign Exchange Risk 636 
 Forward Exchange Market Hedge 637 
 Money Market Hedge 638 
 Currency Futures Market Hedge 639 Foreign Investment Decisions 639 
 Analysis of Political Risk 641 
 Financing International Business Operations 643 
 Funding of Transactions 643 
 Eximbank (Export-Import Bank) 643 
 Loans from the Parent Company or a Sister Af? liate 643 Eurodollar Loans 
645 
 Eurobond Market 646 
 International Equity Markets 646 
 The International Finance Corporation 648 
 Some Unsettled Issues in International Finance 649 Summary 649 
 List of Terms 650 
 Discussion Questions 651 
 Practice Problems and Solutions 651 
 Problems 652 
 Web Exercise 654 
S&P Problems 654 Appendix 21A Cash Flow Analysis and the Foreign Investment 
Decision 
655 
Appendixes A-1 
 Appendix A Future Value of $1, FV IF A-2 
 Appendix B Present Value of $1, PV IF A-4 
 Appendix C Future Value of an Annuity of $1, FV IFA A-6 
 Appendix D Present Value of an Annuity of $1, PV IFA A-8 
Selected References R Glossary G
Indexes I-1 

Library of Congress Subject Headings for this publication:

Corporations -- Finance.