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

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

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  • 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 13th Edition provides an approachable introduction to financial decision-making, weaving in real world issues to demonstrate the practical applications of critical financial concepts.

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 University of Texas. 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.

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 Virginia Polytechnic Institute and State University. 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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