**Financial Management: Principles and Applications 13th Edition by Sheridan Titman, ISBN-13: 978-0134417219**

[PDF eBook eTextbook]

- Publisher: Pearson; 13th edition (January 12, 2017)
- Language: English
- 720 pages
- ISBN-10: 0134417216
- ISBN-13: 978-0134417219

**For undergraduate courses in corporate finance and financial management.**

Develop and begin to apply financial principles.

People often struggle to see how financial concepts relate to their personal lives and prospective careers. * Financial Management: Principles and Applications *gives readers a big picture perspective of finance and how it is important in their personal and professional lives. Utilizing five key principles, the

*provides an approachable introduction to financial decision-making, weaving in real world issues to demonstrate the practical applications of critical financial concepts.*

**13th Edition****Table of Contents:**

Financial Management Principles and Applications

Financial Management Principles and Applications

Brief Contents

Contents

Teaching Students the of Finance

Preface

Our Approach to Financial Management

New to This Edition

A Total Learning Package

Learning Aids in the Text

Content Updating

Learning Aids Supplemental to the Text

Financial Management Principles and Applications

Part 1 Introduction to Financial Management

Chapter 1 Getting Started Principles of Finance

Chapter Outline

Principles , , , , and Applied

1.1 Finance: An Overview

What Is Finance?

Why Study Finance?

Concept Check 1.1

1.2 Three Types of Business Organizations

Sole Proprietorship

Partnership

Corporation

How Does Finance Fit into the Firm’s Organizational Structure?

Concept Check 1.2

1.3 The Goal of the Financial Manager

Maximizing Shareholder Wealth

Ethical Considerations in Corporate Finance

Regulation Aimed at Making the Goal of the Firm Work: The Sarbanes–Oxley Act

Concept Check 1.3

1.4 The Five Basic Principles of Finance

Principle 1: Money Has a Time Value

Principle 2: There Is a Risk-Return Tradeoff

Principle 3: Cash Flows Are the Source of Value

Principle 4: Market Prices Reflect Information

Principle 5: Individuals Respond to Incentives

Concept Check 1.4

Chapter Summaries

1.1 Understand the importance of finance in your personal and professional lives and identify the three primary business decisions that financial managers make. (pgs. 4–5)

Summary:

Key Terms

Concept Check 1.1

1.2 Identify the key differences among the three major legal forms of business. (pgs. 5–9)

Summary:

Key Terms

Concept Check 1.2

1.3 Understand the role of the financial manager within the firm and the goal for making financial choices. (pgs. 9–11)

Summary:

Concept Check 1.3

1.4 Explain the five principles of finance that form the basis of financial management for both businesses and individuals. (pgs. 11–14)

Summary:

Key Terms

Concept Check 1.4

Study Questions

Chapter 2 Firms and the Financial Markets

Chapter Outline

Principles ,, and Applied

2.1 The Basic Structure of the U.S. Financial Markets

2.2 The Financial Marketplace: Financial Institutions

Commercial Banks: Everyone’s Financial Marketplace

Nonbank Financial Intermediaries

Financial Services Corporations

Insurance Companies

Investment Banks

Investment Companies

Mutual Funds and Exchange-Traded Funds (ETFs)

Hedge Funds

Private Equity Firms

Concept Check 2.2

2.3 The Financial Marketplace: Securities Markets

How Securities Markets Bring Corporations and Investors Together

Types of Securities

Debt Securities

Equity Securities

Common Stock

Preferred Stock

Stock Markets

Reading Stock Price Quotes

Other Financial Instruments

The Financial Markets and the Financial Crisis

Concept Check 2.3

Chapter Summaries

2.1 Describe the structure and functions of financial markets. (pg. 20)

Summary:

Key Terms

2.2 Distinguish between commercial banks and other financial institutions in the financial marketplace. (pgs. 20–25)

Summary:

Key Terms

Concept Check 2.2

2.3 Describe the different securities markets for bonds and stocks. (pgs. 25–33)

Summary:

Key Terms

Concept Check 2.3

Study Questions

Chapter 3 Understanding Financial Statements

Chapter Outline

Principles , , , and Applied

3.1 An Overview of the Firm’s Financial Statements

Basic Financial Statements

Why Study Financial Statements?

What Are the Accounting Principles Used to Prepare Financial Statements?

Concept Check 3.1

3.2 The Income Statement

The Income Statement of H. J. Boswell, Inc.

Reading and Interpreting Boswell’s Income Statement

Evaluating Boswell’s per Share Earnings and Dividends

Connecting the Income Statement and Balance Sheet

Interpreting Firm Profitability Using the Income Statement

GAAP and Earnings Management

Concept Check 3.2

3.3 Corporate Taxes

Computing Taxable Income

Federal Income Tax Rates for Corporate Income

Marginal and Average Tax Rates

Dividend Exclusion for Corporate Stockholders

Concept Check 3.3

3.4 The Balance Sheet

The Balance Sheet of H. J. Boswell, Inc.

Assets: The Left-Hand Side of the Balance Sheet

Current Assets

Fixed Assets

Liabilities and Stockholders’ Equity: The Right-Hand Side of the Balance Sheet

Firm Liquidity and Net Working Capital

Debt and Equity Financing

Book Values, Historical Costs, and Market Values

Concept Check 3.4

3.5 The Cash Flow Statement

Sources and Uses of Cash

H. J. Boswell’s Cash Flow Statement

Evaluating the Cash Flow Statement

Quality of Earnings—Evaluating Cash Flow from Operations

Sustainable Capital Expenditures—Evaluating Investment Activities

Concept Check 3.5

Chapter Summaries

3.1 Describe the content of the four basic financial statements and discuss the importance of financial statement analysis to the financial manager. (pgs. 40–42)

Summary:

Key Terms

Concept Check 3.1

3.2 Evaluate firm profitability using the income statement. (pgs. 42–47)

Summary:

Key Terms

Key Equation

Concept Check 3.2

3.3 Estimate a firm’s tax liability using the corporate tax schedule and distinguish between the average and marginal tax rates. (pgs. 47–49)

Summary:

Key Terms

Concept Check 3.3

3.4 Use the balance sheet to describe a firm’s investments in assets and the way it has financed them. (pgs. 49–57)

Summary:

Key Terms

Key Equations

Concept Check 3.4

3.5 Identify the sources and uses of cash for a firm using the firm’s cash flow statement. (pgs. 58–66)

Summary:

Key Terms

Key Equations

Concept Check 3.5

Study Questions

Study Problems

The Income Statement

Corporate Income Tax

The Balance Sheet

Cash Flow Statement

Chapter 4 Financial Analysis Sizing Up Firm Performance

Chapter Outline

Principles and Applied

4.1 Why Do We Analyze Financial Statements?

Concept Check 4.1

4.2 Common-Size Statements: Standardizing Financial Information

The Common-Size Income Statement: H. J. Boswell, Inc.

The Common-Size Balance Sheet: H. J. Boswell, Inc.

Concept Check 4.2

4.3 Using Financial Ratios

Liquidity Ratios

Measuring the Overall Liquidity of a Firm

Current Ratio.

Acid-Test (Quick) Ratio.

Measuring the Liquidity of Individual Asset Categories

How Long Does It Take to Convert the Firm’s Accounts Receivable to Cash?

Average Collection Period.

Accounts Receivable Turnover.

How Long Does It Take to Convert the Firm’s Inventory to Cash?

Inventory Turnover.

Days’ Sales in Inventory.

Can a Firm Have Too Much Liquidity?

Capital Structure Ratios

Asset Management Efficiency Ratios

Profitability Ratios

Cost Control: Is the Firm Earning Reasonable Profit Margins?

Return on Invested Capital

Is the Firm Providing a Reasonable Return on the Owners’ Investment?

Market Value Ratios

Price-Earnings Ratio

Summing Up the Financial Analysis of H. J. Boswell, Inc.

Concept Check 4.3

4.4 Selecting a Performance Benchmark

Trend Analysis

Peer-Firm Comparisons

Industry Average Financial Ratios

Concept Check 4.4

4.5 Limitations of Ratio Analysis

Concept Check 4.5

Chapter Summaries

4.1 Explain what we can learn by analyzing a firm’s financial statements. (pg. 80)

Summary:

Concept Check 4.1

4.2 Use common-size financial statements as a tool of financial analysis. (pgs. 81–83)

Summary:

Concept Check 4.2

4.3 Calculate and use a comprehensive set of financial ratios to evaluate a company’s performance. (pgs. 83–107)

Summary:

Key Terms

Key Equations

Concept Check 4.3

4.4 Select an appropriate benchmark for use in performing a financial ratio analysis. (pgs. 107–109)

Summary:

Key Term

Concept Check 4.4

4.5 Describe the limitations of financial ratio analysis. (pgs. 109–110)

Summary:

Concept Check 4.5

Study Questions

Study Problems

Common-Size Statements

Using Financial Ratios

Selecting a Performance Benchmark

Part 2 Valuation of Financial Assets

Chapter 5 The Time Value of Money The Basics

Chapter Outline

Principle Applied

5.1 Using Timelines to Visualize Cash Flows

Concept Check 5.1

5.2 Compounding and Future Value

Compound Interest and Time

Compound Interest and the Interest Rate

Techniques for Moving Money Through Time

Applying Compounding to Things Other Than Money

Compound Interest with Shorter Compounding Periods

Concept Check 5.2

5.3 Discounting and Present Value

The Mechanics of Discounting Future Cash Flows

Two Additional Types of Discounting Problems

Solving for the Number of Periods

The Rule of 72

Solving for the Rate of Interest

Concept Check 5.3

5.4 Making Interest Rates Comparable

Calculating the Interest Rate and Converting It to an EAR

To the Extreme: Continuous Compounding

Concept Check 5.4

Chapter Summaries

5.1 Construct cash flow timelines to organize your analysis of problems involving the time value of money. (pgs. 130–131)

Summary:

Key Term

Concept Check 5.1

5.2 Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet. (pgs. 132–139)

Summary:

Key Terms

Key Equations

Concept Check 5.2

5.3 Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet. (pgs. 139–144)

Summary:

Key Terms

Key Equations

Concept Check 5.3

5.4 Understand how interest rates are quoted and know how to make them comparable. (pgs. 145–149)

Summary:

Key Terms

Key Equations

Concept Check 5.4

Study Questions

Study Problems

Compound Interest

Discounting and Present Value

Making Interest Rates Comparable

Questions

Chapter 6 The Time Value of Money Annuities and Other Topics

Chapter Outline

Principles and Applied

6.1 Annuities

Ordinary Annuities

The Future Value of an Ordinary Annuity

The Formula for the Future Value of an Ordinary Annuity

Using the Mathematical Formulas.

Using a Financial Calculator.

Using an Excel Spreadsheet.

Solving for the Payment in an Ordinary Annuity

Solving for the Interest Rate in an Ordinary Annuity

Using the Mathematical Formulas.

Using a Financial Calculator.

Using an Excel Spreadsheet.

Solving for the Number of Periods in an Ordinary Annuity

Using a Financial Calculator.

Using an Excel Spreadsheet.

The Present Value of an Ordinary Annuity

Amortized Loans

Amortized Loans with Monthly Payments

Computing Your Outstanding Balance

Annuities Due

Concept Check 6.1

6.2 Perpetuities

Calculating the Present Value of a Level Perpetuity

Calculating the Present Value of a Growing Perpetuity

Concept Check 6.2

6.3 Complex Cash Flow Streams

Concept Check 6.3

Chapter Summaries

6.1 Distinguish between an ordinary annuity and an annuity due, and calculate the present and future values of each. (pgs. 160–173)

Summary:

Key Terms

Concept Check 6.1

Key Equations

6.2 Calculate the present value of a level perpetuity and a growing perpetuity. (pgs. 173–175)

Summary:

Key Terms

Key Equations

Concept Check 6.2

6.3 Calculate the present and future values of complex cash flow streams. (pgs. 176–179)

Summary:

Concept Check 6.3

Study Questions

Study Problems

Annuities

Perpetuities

Complex Cash Flow Streams

Questions

Chapter 7 An Introduction to Risk and Return History of Financial Market Returns

Chapter Outline

Principles and Applied

7.1 Realized and Expected Rates of Return and Risk

Calculating the Realized Return from an Investment

Calculating the Expected Return from an Investment

Measuring Risk

Calculating the Variance and Standard Deviation of the Rate of Return on an Investment

Concept Check 7.1

7.2 A Brief History of Financial Market Returns

U.S. Financial Markets: Domestic Investment Returns

Lessons Learned

U.S. Stocks Versus Other Categories of Investments

Global Financial Markets: International Investing

Concept Check 7.2

7.3 Geometric Versus Arithmetic Average Rates of Return

Computing the Geometric or Compound Average Rate of Return

Choosing the Right “Average”

Concept Check 7.3

7.4 What Determines Stock Prices?

The Efficient Markets Hypothesis

Do We Expect Financial Markets to Be Perfectly Efficient?

The Behavioral View

Market Efficiency: What Does the Evidence Show?

Concept Check 7.4

Chapter Summaries

7.1 Calculate realized and expected rates of return and risk. (pgs. 194–202)

Summary:

Key Terms

Key Equations

Concept Check 7.1

7.2 Describe the historical pattern of financial market returns. (pgs. 202–207)

Summary:

Key Terms

Concept Check 7.2

7.3 Compute geometric (or compound) and arithmetic average rates of return. (pgs. 207–211)

Summary:

Key Terms

Key Equations

Concept Check 7.3

7.4 Explain the efficient market hypothesis and why it is important to stock prices. (pgs. 211–214)

Summary:

Key Terms

Concept Check 7.4

Study Questions

Study Problems

Realized and Expected Rates of Return and Risk

Geometric vs. Arithmetic Average Rates of Return

Questions

Chapter 8 Risk and Return Capital Market Theory

Chapter Outline

Principles and Applied

8.1 Portfolio Returns and Portfolio Risk

Calculating the Expected Return of a Portfolio

Evaluating Portfolio Risk

Portfolio Diversification

Diversification Lessons

Calculating the Standard Deviation of a Portfolio’s Returns

Concept Check 8.1

8.2 Systematic Risk and the Market Portfolio

Diversification and Unsystematic Risk

Diversification and Systematic Risk

Systematic Risk and Beta

Calculating the Portfolio Beta

Concept Check 8.2

8.3 The Security Market Line and the CAPM

Using the CAPM to Estimate Expected Rates of Return

Concept Check 8.3

Chapter Summaries

8.1 Calculate the expected rate of return and volatility for a portfolio of investments and describe how diversification affects the returns of a portfolio of investments. (pgs. 224–233)

Summary:

Key Terms

Key Equations

Concept Check 8.1

8.2 Understand the concept of systematic risk for an individual investment and calculate portfolio systematic risk (beta). (pgs. 233–238)

Summary:

Key Terms

Key Equations

Concept Check 8.2

8.3 Estimate an investor’s expected rate of return using the Capital Asset Pricing Model. (pgs. 238–242)

Summary:

Key Terms

Key Equations

Concept Check 8.3

Study Questions

Study Problems

Portfolio Returns and Portfolio Risk

Systematic Risk and the Market Portfolio

The Security Market Line and the CAPM

Chapter 9 Debt Valuation and Interest Rates

Chapter Outline

Principles , , and Applied

9.1 Overview of Corporate Debt

Borrowing Money in the Private Financial Market

Private Debt Placements

Floating-Rate Loans

Borrowing Money in the Public Financial Market

Corporate Bonds

Basic Bond Features

Bond Indenture

Claims on Assets and Income

Par or Face Value

“Clean Price” and “Dirty Price”

Coupon Interest Rate

Maturity and Repayment of Principal

Call Provisions and Conversion Features

Bond Ratings and Default Risk

Concept Check 9.1

9.2 Valuing Corporate Debt

Valuing Bonds by Discounting Future Cash Flows

Step 1: Determine Bondholder Cash Flows

Step 2: Estimate the Appropriate Discount Rate

Calculating a Bond’s Yield to Maturity

Using Market-Yield-to-Maturity Data

Promised or Contractual Versus Expected Yield to Maturity

Quoted Yields to Maturity for Corporate Bonds

Step 3: Calculate the Present Value Using the Discounted Cash Flow

Semiannual Interest Payments

Concept Check 9.2

9.3 Bond Valuation: Four Key Relationships

Relationship 1

Relationship 2

Relationship 3

Relationship 4

Concept Check 9.3

9.4 Types of Bonds

Secured Versus Unsecured

Priority of Claims

Initial Offering Market

Abnormal Risk

Coupon Level

Amortizing or Non-amortizing

Convertibility

Concept Check 9.4

9.5 Determinants of Interest Rates

Inflation and Real Versus Nominal Interest Rates

Fisher Effect: The Nominal and Real Rates of Interest

Interest Rate Determinants—Breaking It Down

Real Risk-Free Interest Rate and Risk-Free Interest Rate

Inflation Premium

Default-Risk Premium

Maturity-Risk Premium

Liquidity-Risk Premium

The Maturity-Risk Premium and the Term Structure of Interest Rates

The Shape of the Yield Curve

Shifts in the Yield Curve

Concept Check 9.5

Chapter Summaries

9.1 Identify the key features of bonds and describe the difference between private and public debt markets. (pgs. 256–265)

Summary:

Key Terms

Key Equation

Concept Check 9.1

9.2 Calculate the value of a bond and relate it to the yield to maturity on the bond. (pgs. 265–273)

Summary:

Key Terms

Key Equations

Concept Check 9.2

9.3 Describe the four key bond valuation relationships. (pgs. 273–277)

Summary:

Key Terms

Concept Check 9.3

9.4 Identify the major types of corporate bonds. (pgs. 278–280)

Summary:

Key Terms

Concept Check 9.4

9.5 Explain the effects of inflation on interest rates and describe the term structure of interest rates. (pgs. 280–289)

Summary:

Key Terms

Key Equations

Concept Check 9.5

Study Questions

Study Problems

Overview of Corporate Debt

Valuing Corporate Debt

Bond Valuation: Four Key Relationships

Determinants of Interest Rates

Chapter 10 Stock Valuation

Chapter Outline

Principles , , , , and Applied

10.1 Common Stock

Characteristics of Common Stock

Claim on Income

Claim on Assets

Voting Rights

Agency Costs and Common Stock

Valuing Common Stock Using the Discounted Dividend Model

Three-Step Procedure for Valuing Common Stock

Basic Concept of the Stock Valuation Model

The Constant Dividend Growth Rate Model

What Causes Stock Prices to Go Up and Down?

Determinants of the Investor’s Required Rate of Return

Determinants of the Growth Rate of Future Dividends

Concept Check 10.1

10.2 The Comparables Approach to Valuing Common Stock

Defining the P/E Ratio Valuation Model

What Determines the P/E Ratio for a Stock?

An Aside on Managing for Shareholder Value

A Word of Caution About P/E Ratios

Concept Check 10.2

10.3 Preferred Stock

Features of Preferred Stock

Multiple Classes

Claim on Assets and Income

Preferred Stock as a Hybrid Security

Valuing Preferred Stock

Dealing with Reality: Promised Versus Expected Returns for Preferred Stock

A Quick Review: Valuing Bonds, Preferred Stock, and Common Stock

Concept Check 10.3

Chapter Summaries

10.1 Identify the basic characteristics and features of common stock and use the discounted cash flow model to value common shares. (pgs. 302–311)

Summary:

Key Terms

Concept Check 10.1

Key Equations

10.2 Use the price/earnings (P/E) ratio to value common stock. (pgs. 311–315)

Summary:

Key Term

Key Equations

Concept Check 10.2

10.3 Identify the basic characteristics and features of preferred stock and value preferred shares. (pgs. 315–320)

Summary:

Key Terms

Key Equations

Concept Check 10.3

Study Questions

Study Problems

Common Stock

Comparables Approach to Valuing Common Stock

Preferred Stock

Part 3 Capital Budgeting

Chapter 11 Investment Decision Criteria

Chapter Outline

Principles , , , and Applied

11.1 An Overview of Capital Budgeting

The Typical Capital-Budgeting Process

What Are the Sources of Good Investment Projects?

Types of Capital Investment Projects

Revenue-Enhancing Investments

Cost-Reducing Investments

Mandated Investments

Concept Check 11.1

11.2 Net Present Value

Why Is the NPV the Right Criterion?

Calculating an Investment’s NPV

Independent Versus Mutually Exclusive Investment Projects

Evaluating an Independent Investment Opportunity

Evaluating Mutually Exclusive Investment Opportunities

Choosing Between Mutually Exclusive Investments

Concept Check 11.2

11.3 Other Investment Criteria

Profitability Index

Internal Rate of Return

Complications with the IRR: Multiple Rates of Return

Using the IRR with Mutually Exclusive Investments

Modified Internal Rate of Return

Payback Period

Discounted Payback Period

Summing Up the Alternative Decision Rules

Concept Check 11.3

11.4 A Glance at Actual Capital-Budgeting Practices

Concept Check 11.4

Chapter Summaries

11.1 Understand how to identify the sources and types of profitable investment opportunities. (pgs. 330–332)

Summary:

Concept Check 11.1

11.2 Evaluate investment opportunities using the net present value and describe why it is the best measure to use. (pgs. 332–340)

Summary:

Concept Check 11.2

Key Terms

Key Equations

11.3 Use the profitability index, internal rate of return, and payback criteria to evaluate investment opportunities. (pgs. 340–355)

Summary:

Key Terms

Key Equations

Concept Check 11.3

11.4 Understand current business practice with respect to the use of capital-budgeting criteria. (pgs. 355–357)

Summary:

Concept Check 11.4

Study Questions

Study Problems

Net Present Value

Other Investment Criteria

Questions

Chapter 12 Analyzing Project Cash Flows

Chapter Outline

Principles and Applied

12.1 Project Cash Flows

Incremental Cash Flows Are What Matters

Guidelines for Forecasting Incremental Cash Flows

Sunk Costs Are Not Incremental Cash Flows

Overhead Costs Are Generally Not Incremental Cash Flows

Look for Synergistic Effects

Don’t Overlook Positive Synergies

Beware of Cash Flows Diverted from Existing Products

Account for Opportunity Costs

Work in Working-Capital Requirements

Ignore Interest Payments and Other Financing Costs

Concept Check 12.1

12.2 Forecasting Project Cash Flows

Dealing with Depreciation Expense, Taxes, and Cash Flow

Four-Step Procedure for Calculating Project Cash Flows

Step 1: Estimate the Project’s Operating Cash Flows

Step 2: Calculate the Project’s Working-Capital Requirements

Step 3: Calculate the Project’s Capital Expenditure Requirements

Step 4: Calculate the Project’s Free Cash Flow

Computing Project NPV

Concept Check 12.2

12.3 Inflation and Capital Budgeting

Estimating Nominal Cash Flows

Concept Check 12.3

12.4 Replacement Project Cash Flows

Category 1: Initial Outlay, CF0

Category 2: Annual Cash Flows

Changes in Depreciation and Taxes

Changes in Working Capital

Changes in Capital Spending

Replacement Example

Concept Check 12.4

Chapter Summaries

12.1 Identify incremental cash flows that are relevant to project valuation. (pgs. 374–377)

Summary:

Key Terms

Key Equation

Concept Check 12.1

12.2 Calculate and forecast project cash flows for expansion-type investments. (pgs. 377–383)

Summary:

Key Term

Key Equations

Concept Check 12.2

12.3 Evaluate the effect of inflation on project cash flows. (pg. 384)

Summary:

Key Terms

Concept Check 12.3

12.4 Calculate the incremental cash flows for replacement-type investments. (pgs. 385–390)

Summary:

Key Terms

Concept Check 12.4

Study Questions

Study Problems

Forecasting Project Cash Flows

Inflation and Capital Budgeting

Replacement Project Cash Flows

Appendix: The Modified Accelerated Cost Recovery System

What Does All of This Mean?

Study Problems

Chapter 13 Risk Analysis and Project Evaluation

Chapter Outline

Principles , , and Applied

13.1 The Importance of Risk Analysis

Concept Check 13.1

13.2 Tools for Analyzing the Risk of Project Cash Flows

Key Concepts: Expected Values and Value Drivers

Expected Values

Value Drivers

Sensitivity Analysis

Scenario Analysis

Simulation Analysis

Concept Check 13.2

13.3 Break-Even Analysis

Accounting Break-Even Analysis

Fixed Costs

Variable Costs

Total Revenues or Volume of Output

Calculating the Accounting Break-Even Point

Cash Break-Even Analysis

NPV Break-Even Analysis

Operating Leverage and the Volatility of Project Cash Flows

Concept Check 13.3

13.4 Real Options in Capital Budgeting

The Option to Delay the Launch of a Project

The Option to Expand a Project

The Option to Reduce the Scale and Scope of a Project

Concept Check 13.4

Chapter Summaries

13.1 Explain the importance of risk analysis in the capital-budgeting decision-making process. (pg. 410)

Summary:

Concept Check 13.1

13.2 Use sensitivity, scenario, and simulation analyses to investigate the determinants of project cash flows. (pgs. 411–421)

Summary:

Concept Check 13.2

Key Terms

13.3 Use break-even analysis to evaluate project risk. (pgs. 422–432)

Summary:

Key Terms

Concept Check 13.3

Key Equations

13.4 Describe the types of real options. (pgs. 432–434)

Summary:

Key Term

Concept Check 13.4

Study Questions

Study Problems

Tools for Analyzing the Risk of Project Cash Flows

Break-Even Analysis

Options in Capital Budgeting

Chapter 14 The Cost of Capital

Chapter Outline

Principles , , , , and Applied

14.1 The Cost of Capital: An Overview

Investor’s Required Return and the Firm’s Cost of Capital

WACC Equation

Three-Step Procedure for Estimating the Firm’s WACC

Concept Check 14.1

14.2 Determining the Firm’s Capital Structure Weights

Concept Check 14.2

14.3 Estimating the Cost of Individual Sources of Capital

The Cost of Debt

The Cost of Preferred Equity

The Cost of Common Equity

The Dividend Growth Model: Discounted Cash Flow Approach

Estimating the Rate of Growth, g

Pros and Cons of the Constant Dividend Growth Rate Model Approach

The Capital Asset Pricing Model

Advantages of the CAPM Approach

Disadvantages of the CAPM Approach

Concept Check 14.3

14.4 Summing Up: Calculating the Firm’s WACC

Use Market-Based Weights

Use Market-Based Costs of Capital

Use Forward-Looking Weights and Opportunity Costs

Weighted Average Cost of Capital in Practice

Concept Check 14.4

14.5 Estimating Project Costs of Capital

The Rationale for Using Multiple Discount Rates

Why Don’t Firms Typically Use Project Costs of Capital?

Estimating Divisional WACCs

Using Pure Play Firms to Estimate Divisional WACCs

Divisional WACC: Estimation Issues and Limitations

Concept Check 14.5

14.6 Flotation Costs and Project NPV

WACC, Flotation Costs, and the NPV

Concept Check 14.6

Chapter Summaries

14.1 Understand the concepts underlying the firm’s overall cost of capital and the purpose for its calculation. (pgs. 446–449)

Summary:

Key Terms

Key Equation

Concept Check 14.1

14.2 Evaluate a firm’s capital structure and determine the relative importance (weight) of each source of financing. (pgs. 449–452)

Summary:

Concept Check 14.2

14.3 Calculate the after-tax cost of debt, preferred stock, and common equity. (pgs. 453–462)

Summary:

Key Terms

Key Equations

Concept Check 14.3

14.4 Calculate a firm’s weighted average cost of capital. (pgs. 463–464)

Summary:

Concept Check 14.4

14.5 Discuss the pros and cons of using multiple, risk-adjusted discount rates and describe the divisional cost of capital as a viable alternative for firms with multiple divisions. (pgs. 465–469)

Summary:

Key Term

Concept Check 14.5

14.6 Adjust the NPV for the costs of issuing new securities when analyzing new investment opportunities. (pgs. 469–471)

Summary:

Key Term

Key Equation

Concept Check 14.6

Study Questions

Study Problems

Determining the Firm’s Capital Structure Weights

Estimating the Cost of Individual Sources of Capital

Calculating the Firm’s WACC

Flotation Costs

Part 4 Capital Structure and Dividend Policy

Chapter 15 Capital Structure Policy

Chapter Outline

Principles , , and Applied

15.1 A Glance at Capital Structure Choices in Practice

Defining a Firm’s Capital Structure

Financial Leverage

How Do Firms in Different Industries Finance Their Assets?

Concept Check 15.1

15.2 Capital Structure Theory

A First Look at the Modigliani and Miller Capital Structure Theorem

Yogi Berra and the M&M Capital Structure Theory

Capital Structure, the Cost of Equity, and the Weighted Average Cost of Capital

Why Capital Structure Matters in Reality

Violations of Assumption 2

Violations of Assumption 1

Corporate Taxes and Capital Structure

Corporate Taxes and the WACC.

Bankruptcy and Financial Distress Costs

The Tradeoff Theory and the Optimal Capital Structure

Capital Structure Decisions and Agency Costs

Making Financing Choices When Managers Are Better Informed than Shareholders

Managerial Implications

Concept Check 15.2

15.3 Why Do Capital Structures Differ Across Industries?

Concept Check 15.3

15.4 Making Financing Decisions

Benchmarking the Firm’s Capital Structure

Evaluating the Effect of Financial Leverage on Firm Earnings per Share

Financial Leverage and the Level of EPS

Financial Leverage and the Volatility of EPS

Using the EBIT-EPS Chart to Analyze the Effect of Capital Structure on EPS

Computing EPS Indifference Points for Capital Structure Alternatives

Can the Firm Afford More Debt?

Survey Evidence: Factors That Influence CFO Debt Policy

Lease Versus Buy

How Does Buying Differ from Leasing?

Why Would a Firm Choose Leasing Versus Buying?

Residual Value

Tax Consequences

Operating and Maintenance Expenses

Concept Check 15.4

Chapter Summaries

15.1 Describe a firm’s capital structure. (pgs. 484–488)

Summary:

Key Terms

Key Equations

Concept Check 15.1

15.2 Explain why firms have different capital structures and how capital structure influences a firm’s weighted average cost of capital. (pgs. 488–499)

Summary:

Key Terms

Key Equations

Concept Check 15.2

15.3 Describe some fundamental differences in industries that drive differences in the way they finance their investments. (pgs. 499–500)

Summary:

Concept Check 15.3

15.4 Use the basic tools of financial analysis to analyze a firm’s financing decisions. (pgs. 500–513)

Summary:

Key Terms

Key Equations

Concept Check 15.4

Study Questions

Study Problems

Capital Structure Policies

Capital Structure Theory

Making Financing Decisions

Appendix: Demonstrating the Modigliani and Miller Theorem

Arbitrage and the Valuation of Levered and Unlevered Firms

Summing Up

Chapter 16 Dividend and Share Repurchase Policy

Chapter Outline

Principles , , and Applied

16.1 How Do Firms Distribute Cash to Their Shareholders?

Cash Dividends

Dividend Payment Procedures

Stock Repurchases

How Do Firms Repurchase Their Shares?

Personal Tax Considerations: Dividend Versus Capital Gains Income

Noncash Distributions: Stock Dividends and Stock Splits

Rationale for a Stock Dividend or Split

Concept Check 16.1

16.2 Does Dividend Policy Matter?

The Irrelevance of the Distribution Choice

The Timing of Dividends Is Irrelevant

The Form of Payment (Cash Dividends Versus Share Repurchases) Is Irrelevant

Individual Investor Wealth Effects: No Personal Taxes

Individual Investor Wealth Effects: Personal Taxes

Tax Treatment: Dividends and Capital Gains Taxed at 15 Percent

Tax Treatment: What Happens if Dividends Are Taxed at a Higher Rate than Capital Gains

Why Dividend Policy Is Important

Transactions are Costly

The Information Conveyed by Dividend and Share Repurchase Announcements

The Information Conveyed by Stock Dividend and Stock Split Announcements

Concept Check 16.2

16.3 Cash Distribution Policies in Practice

Stable Dividend Payout Policy

Residual Dividend Payout Policy

Other Factors Playing a Role in How Much to Distribute

Liquidity Position

Lack of Other Sources of Financing

Earnings Predictability

Concept Check 16.3

Chapter Summaries

16.1 Distinguish between the use of cash dividends and share repurchases. (pgs. 528–532)

Summary:

Key Terms

Concept Check 16.1

16.2 Understand the tax treatment of dividends and capital gains, and the conditions under which dividend policy is an important determinant of stock value. (pgs. 532–541)

Summary:

Key Term

Concept Check 16.2

16.3 Describe corporate dividend policies that are commonly used in practice. (pgs. 541–545)

Summary:

Key Term

Concept Check 16.3

Study Questions

Study Problems

How Do Firms Distribute Cash?

Does Dividend Policy Matter?

Part 5 Liquidity Management and Special Topics in Finance

Chapter 17 Financial Forecasting and Planning

Chapter Outline

Principle Applied

17.1 An Overview of Financial Planning

Concept Check 17.1

17.2 Developing a Long-Term Financial Plan

Financial Forecasting Example: Ziegen, Inc.

Sources of Spontaneous Financing: Accounts Payable and Accrued Expenses

Sources of Discretionary Financing

Summarizing Ziegen’s Financial Forecast

Analyzing the Effects of Profitability and Dividend Policy on the Firm’s DFN (Discretionary Financing Needs)

Analyzing the Effects of Sales Growth on a Firm’s DFN

Concept Check 17.2

17.3 Developing a Short-Term Financial Plan

Cash Budget Example: Melco Furniture, Inc.

Uses of the Cash Budget

Concept Check 17.3

Chapter Summaries

17.1 Understand the goals of financial planning. (pgs. 554–555)

Summary:

Key Terms

Concept Check 17.1

17.2 Use the percent-of-sales method to forecast the financing requirements of a firm, including its discretionary financing needs. (pgs. 555–564)

Summary:

Key Terms

Key Equation

Concept Check 17.2

17.3 Prepare a cash budget and use it to evaluate the amount and timing of a firm’s short-term financing requirements. (pgs. 564–566)

Summary:

Concept Check 17.3

Study Questions

Study Problems

Developing a Long-Term Financial Plan

Developing a Short-Term Financial Plan

Chapter 18 Working-Capital Management

Chapter Outline

Principle Applied

18.1 Working-Capital Management and the Risk-Return Tradeoff

Measuring Firm Liquidity

Managing Firm Liquidity

Risk-Return Tradeoff

Concept Check 18.1

18.2 Working-Capital Policy

The Principle of Self-Liquidating Debt

Permanent and Temporary Asset Investments

Spontaneous, Temporary, and Permanent Sources of Financing

A Graphic Illustration of the Principle of Self-Liquidating Debt

Concept Check 18.2

18.3 Operating and Cash Conversion Cycles

Measuring Working-Capital Efficiency

Calculating the Operating and Cash Conversion Cycles

Concept Check 18.3

18.4 Managing Current Liabilities

Calculating the Cost of Short-Term Financing

Evaluating the Cost of Trade Credit

Credit Terms and Cash Discounts

Evaluating the Cost of Bank Loans

Concept Check 18.4

18.5 Managing the Firm’s Investment in Current Assets

Managing Cash and Marketable Securities

Costs of Managing Cash and Marketable Securities

Problem 1: Maintaining a Sufficient Cash Balance

Problem 2: Managing the Composition of the Firm’s Marketable Securities Portfolio

Managing Accounts Receivable

Determinants of the Size of a Firm’s Investment in Accounts Receivable

Terms of Sale

Customer Quality

Collection Efforts

Managing Inventories

Concept Check 18.5

Chapter Summaries

18.1 Describe the risk-return tradeoff involved in managing a firm’s working capital. (pgs. 578–579)

Summary:

Concept Check 18.1

18.2 Explain the principle of self-liquidating debt as a tool for managing firm liquidity. (pgs. 579–582)

Summary:

Key Terms

Concept Check 18.2

18.3 Use the cash conversion cycle to measure the efficiency with which a firm manages its working capital. (pgs. 582–587)

Summary:

Key Terms

Key Equations

Concept Check 18.3

18.4 Evaluate the cost of financing as a key determinant of the management of a firm’s use of current liabilities. (pgs. 587–591)

Summary:

Key Terms

Concept Check 18.4

18.5 Understand the factors underlying a firm’s investment in cash and marketable securities, accounts receivable, and inventory. (pgs. 591–597)

Summary:

Key Terms

Key Equation

Concept Check 18.5

Study Questions

Study Problems

Working-Capital Management and the Risk-Return Tradeoff

Working-Capital Policy

Operating and Cash Conversion Cycles

Managing Current Liabilities

Chapter 19 International Business Finance

Chapter Outline

Principles and Applied

19.1 Foreign Exchange Markets and Currency Exchange Rates

What a Change in the Exchange Rate Means for Business

Foreign Exchange Rates

Reading Exchange Rate Quotes

Exchange Rates and Arbitrage

Asked and Bid Rates

Cross Rates

Types of Foreign Exchange Transactions

Concept Check 19.1

19.2 Interest Rate and Purchasing-Power Parity

Interest Rate Parity

Purchasing-Power Parity and the Law of One Price

The International Fisher Effect

Concept Check 19.2

19.3 Capital Budgeting for Direct Foreign Investment

Foreign Investment Risks

Political Risk

Exchange Rate Risk

Concept Check 19.3

Chapter Summaries

19.1 Understand the nature and importance of the foreign exchange market and learn to read currency exchange rate quotes. (pgs. 608–615)

Summary:

Key Terms

Key Equations

Concept Check 19.1

19.2 Describe interest rate and purchasing-power parity. (pgs. 616–619)

Summary:

Key Terms

Key Equations

Concept Check 19.2

19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign investments. (pgs. 619– 624)

Summary:

Key Terms

Concept Check 19.3

Key Equation

Study Questions

Study Problems

Foreign Exchange Markets and Currency Exchange Rates

Interest Rate and Purchasing-Power Parity

Capital Budgeting for Direct Foreign Investment

Chapter 20 Corporate Risk Management

Chapter Outline

Principles and Applied

20.1 Five-Step Corporate Risk Management Process1

Step 1 : Identify and Understand the Firm’s Major Risks

Step 2 : Decide Which Types of Risks to Keep and Which to Transfer

Step 3 : Decide How Much Risk to Assume

Step 4 : Incorporate Risk into All the Firm’s Decisions and Processes

Step 5 : Monitor and Manage the Firm’s Risk Exposures

Concept Check 20.1

20.2 Managing Risk with Insurance Contracts

Types of Insurance Contracts

Why Purchase Insurance?

Concept Check 20.2

20.3 Managing Risk by Hedging with Forward Contracts

Hedging Commodity Price Risk Using Forward Contracts

Hedging Currency Risk Using Forward Contracts

Limitations of Forward Contracts

Concept Check 20.3

20.4 Managing Risk with Exchange-Traded Financial Derivatives

Futures Contracts

Managing Default Risk in Futures Markets

Hedging with Futures Contracts

Option Contracts

A Graphical Look at Option Pricing Relationships

Reading Option Price Quotes

Concept Check 20.4

20.5 Valuing Options and Swaps

The Black-Scholes Option Pricing Model

Key Variables in the Black-Scholes Option Pricing Equation

The Black-Scholes Option Pricing Equation

Swap Contracts

Credit Default Swaps

Concept Check 20.5

Chapter Summaries

20.1 Define risk management in the context of the five-step risk management process. (pgs. 634–637)

Summary:

Key Term

Concept Check 20.1

20.2 Understand how insurance contracts can be used to manage risk. (pgs. 637–638)

Summary:

Key Terms

Concept Check 20.2

20.3 Use forward contracts to hedge commodity price risk. (pgs. 638–643)

Summary:

Key Terms

Concept Check 20.3

20.4 Understand the advantages and disadvantages of using exchange-traded futures and option contracts to hedge price risk. (pgs. 643–651)

Summary:

Key Terms

Concept Check 20.4

20.5 Understand how to value options and how swaps work. (pgs. 651–658)

Summary:

Key Terms

Key Equation

Concept Check 20.5

Study Questions

Study Problems

Managing Risk by Hedging with Forward Contracts

Managing Risk with Exchange-Traded Financial Derivatives

Valuing Options and Swaps

Glossary

Organization Index

* Sheridan Titman* holds the McAllister Centennial Chair in Financial Services at the

*He has a BS from the University of Colorado and an MS and PhD from Carnegie Mellon University. Prior to joining the faculty at the University of Texas, Professor Titman was a Professor at UCLA, the Hong Kong University of Science and Technology, and Boston College, and spent the 1988 to 1989 academic year in Washington, DC as the special assistant to the Assistant Secretary of the Treasury for Economic Policy. In addition, he has consulted for a variety of financial institutions and corporations. He has served on the editorial boards of the leading academic finance and real estate journals, was an editor of the Review of Financial Studies, and was the founding editor of the International Review of Finance. Titman has served as both Presidents and Vice Presidents of the American Finance Association and the Western Finance Association and has served as a director of the American Finance Association, the Asia Pacific Finance Association, the Western Finance Association, and the Financial Management Association. He has published more than 50 articles in both academic and professional journals and has co-authored 2 additional books, Financial Markets and Corporate Strategy, and Valuation. He has received a number of awards for his research excellence and is a Fellow of the Financial Management Association and a Research Associate of the National Bureau of Economic Research.*

**University of Texas.**Sheridan and Meg live with their 3 sons and dog (Mango) in Austin, Texas.

* Arthur J. Keown* is the R. B. Pamplin Professor of Finance and Finance Department Head at

*He received his bachelor’s degree from Ohio Wesleyan University, his MBA from the University of Michigan and his doctorate from Indiana University. An award-winning teacher, he is a member of the Academy of Teaching Excellence at Virginia Tech, and he has received 5 certificates of Teaching Excellence, the W.E. Wine Award for Teaching Excellence, and the Alumni Teaching Excellence Award. In 1999, he received the Outstanding Faculty Award from the State of Virginia. Professor Keown is widely published in academic journals. His work has appeared in the Journal of Finance, Journal of Financial Economics, Journal of Financial and Quantitative Analysis, Journal of Financial Research, Journal of Banking and Finance, Financial Management, Journal of Portfolio Management, and many others. Two of his books are widely used in college finance classes all over the country: Foundations of Finance: The Logic and Practice of Financial Management and Personal Finance, Turning Money into Wealth. Professor Keown is a Fellow of Decision Sciences Institute and head of the Finance Department. In addition, he has served as the co-editor of both the Journal of Financial Research and the Financial Management Association’s Survey and Synthesis Series. He was recently inducted into Ohio Wesleyan’s Hall of Fame for wrestling. His daughter and son are both married and live in Madison, Wisconsin, and Dubai, while he and his wife live in Blacksburg, Virginia, where he collects original art from Mad Magazine.*

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