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You can browse or download additional books there. ii Table of Contents Chapter 1: Why Finance?..................................................................................................... 1 Finance in the World.....................................................................................................................................2 Finance in Business........................................................................................................................................3 Role of Managerial Finance...........................................................................................................................4 Objective of the Firm.....................................................................................................................................5 Chapter 2: Review of Math and Accounting Concepts .................................................. 6 What Do You Know? Math Pre-test..............................................................................................................7 Review of Helpful Math Concepts................................................................................................................8 What Do You Know? Accounting Pre-test...................................................................................................9 Review of Basic Accounting Concepts........................................................................................................10 Chapter 3: Ethics and Finance.......................................................................................... 11 Ethics Foundations.......................................................................................................................................12 Ethics in Finance..........................................................................................................................................16 Ethics in Management.................................................................................................................................18 International Considerations......................................................................................................................21 The Bigger Picture.......................................................................................................................................23 End-of-Chapter Exercises............................................................................................................................25 Chapter 4: Financial Statements and Ratio Analysis .................................................. 27 Income Statement........................................................................................................................................28 The Balance Sheet........................................................................................................................................31 Cash Flow Statement...................................................................................................................................34 Other Statements.........................................................................................................................................36 Ratio Analysis...............................................................................................................................................39 Final Thoughts on Ratio Analysis...............................................................................................................48 Worked Problem: CABS Inc.........................................................................................................................51 End-of-Chapter Assessment........................................................................................................................58 Chapter 5: Pro Forma Statements................................................................................... 60 Pro Forma Income Statement.....................................................................................................................61 Pro Forma Balance Sheet............................................................................................................................64 Assessment of Pro Forma Statements........................................................................................................67 The Bigger Picture.......................................................................................................................................69 End-of-Chapter Problems............................................................................................................................71 iii Chapter 6: Time Value of Money: One Cash Flow......................................................... 72 Present Value and Future Value.................................................................................................................73 Interest..........................................................................................................................................................76 Simple Interest.............................................................................................................................................79 Compound Interest......................................................................................................................................81 Solving Compound Interest Problems.......................................................................................................84 Effective Interest Rates................................................................................................................................93 End-of-Chapter Assessment........................................................................................................................95 Chapter 7: Time Value of Money: Multiple Flows........................................................ 97 Multiple Cash Flows.....................................................................................................................................98 Perpetuities.................................................................................................................................................101 Annuities.....................................................................................................................................................105 Loan Amortization.....................................................................................................................................109 End-of-Chapter Assessment......................................................................................................................111 Chapter 8: Securities Markets........................................................................................ 113 Financial Environment: Institutions and Markets.................................................................................114 Regulation of Financial Institutions.........................................................................................................117 Modern History of Financial Crises..........................................................................................................119 Types of Financial and Other Traded Assets...........................................................................................121 The Bigger Picture.....................................................................................................................................124 End-of-Chapter Exercises..........................................................................................................................126 Chapter 9: Interest Rates and Bond Valuation........................................................... 127 Bonds and Interest Rates...........................................................................................................................128 Credit Risk...................................................................................................................................................131 Bond Yield...................................................................................................................................................134 Bond Valuation...........................................................................................................................................138 The Bigger Picture.....................................................................................................................................142 End-of-Chapter Problems..........................................................................................................................144 Chapter 10: Stock Valuation........................................................................................... 146 Common and Preferred Stocks.................................................................................................................147 Dividend Discount Model..........................................................................................................................150 Market Multiples Approach......................................................................................................................155 Free Cash Flow Approach..........................................................................................................................157 The Bigger Picture.....................................................................................................................................160 End-of-Chapter Problems..........................................................................................................................162 iv Chapter 11: Assessing Risk.............................................................................................. 165 Risk and Return Basics..............................................................................................................................166 Portfolios.....................................................................................................................................................169 Market Efficiency.......................................................................................................................................171 Standard Deviation....................................................................................................................................174 Market History...........................................................................................................................................178 The Capital Asset Pricing Model (CAPM).................................................................................................180 The Bigger Picture.....................................................................................................................................185 End-of-Chapter Exercises..........................................................................................................................187 Chapter 12: Cost of Capital.............................................................................................. 188 The Cost of Capital Overview....................................................................................................................189 Cost of Debt.................................................................................................................................................191 Cost of Preferred Stock..............................................................................................................................193 Cost of Common Stock...............................................................................................................................195 Weighted Average Cost of Capital (WACC)..............................................................................................199 WACC and Investment Decisions..............................................................................................................203 Bigger Picture.............................................................................................................................................206 End-of-Chapter Problems..........................................................................................................................208 Chapter 13: Capital Budgeting Decision Making........................................................ 209 Introduction to Capital Budgeting Techniques......................................................................................210 Payback Period...........................................................................................................................................212 Net Present Value......................................................................................................................................216 Internal Rate of Return.............................................................................................................................220 Other Methods............................................................................................................................................224 Comparing Projects with Unequal Lives..................................................................................................227 Approaches for Dealing with Risk............................................................................................................229 The Bigger Picture.....................................................................................................................................232 End-of-Chapter Assessment Problems.....................................................................................................234 Chapter 14: Capital Budgeting Cash Flows.................................................................. 235 Which Cash Flows Should I Include?........................................................................................................236 Capital Spending and Salvage Value........................................................................................................237 Operating Cash Flows................................................................................................................................238 Changes in Net Working Capital...............................................................................................................239 Making the Investment Decision..............................................................................................................240 v Chapter 15: Raising Capital and Capital Structure.................................................... 241 Life Cycle of a Firm.....................................................................................................................................242 Leverage......................................................................................................................................................245 Capital Structure........................................................................................................................................248 Choosing the Optimal Capital Structure..................................................................................................250 The Bigger Picture.....................................................................................................................................253 End-of-Chapter Problems..........................................................................................................................255 Chapter 16: Dividend Policy ........................................................................................... 256 Dividend Basics...........................................................................................................................................257 Dividend Policy...........................................................................................................................................258 Other Forms of Dividends.........................................................................................................................259 Chapter 17: Cash and Cash Conversion Cycle ............................................................. 260 Cash Budgets...............................................................................................................................................263 Net Working Capital Basics.......................................................................................................................266 Cash Conversion Cycle...............................................................................................................................271 The Bigger Picture.....................................................................................................................................278 End-of-Chapter Problems..........................................................................................................................280 Chapter 18: Current Liabilities Management ............................................................. 281 Accounts Payable Management................................................................................................................282 Accruals Management...............................................................................................................................283 Short-term Loans.......................................................................................................................................284 Secured Sources of Funds..........................................................................................................................285 Chapter 19: International Considerations................................................................... 286 Multinational Corporations and their Environments............................................................................287 Multinational vs. Domestic Financial Management...............................................................................288 Exchange Rate Risk....................................................................................................................................289 Other Risk Factors......................................................................................................................................290 Investment Decisions.................................................................................................................................291 International Mergers and Joint Ventures..............................................................................................292 Chapter 20: Derivatives and Hedging........................................................................... 293 Convertible Securities...............................................................................................................................294 Futures........................................................................................................................................................295 Options........................................................................................................................................................296 Hedging Risk...............................................................................................................................................297 vi Chapter 21: Mergers, Acquisitions, and Divestitures ............................................... 298 Mergers and Acquisitions..........................................................................................................................299 LBOs and Divestitures................................................................................................................................300 Reorganization and Bankruptcy...............................................................................................................301 Chapter 22: Self-Test Exam............................................................................................. 302 Self-Test Exam Part I.................................................................................................................................303 Self-Test Exam Part II................................................................................................................................304 vii Chapter 1 Why Finance? PLEASE NOTE: This book is currently in draft form; material is not final. 1 Chapter 1 Why Finance? 1.1 Finance in the World PLEASE NOTE: This book is currently in draft form; material is not final. 2 Chapter 1 Why Finance? 1.2 Finance in Business PLEASE NOTE: This book is currently in draft form; material is not final. 3