“…a useful text either as preparation for a second year course, or as a text for a fi rst year fi nancial F Fundamentals of management course that provides a ‘fi rst sweep’ of the major fi nancial management topics. Not many texts u cover this ground well.” n Financial Management Brian Wright, Exeter d a Do you want to understand how fi nancial decisions impact the value m of a company? If you are new to fi nancial management or studying 13th Edition for a professional qualifi cation, this user-friendly textbook makes the Ideal for introductory courses challenges facing today’s rapidly changing business world easier to in fi nancial management, for a e James C. Van Horne understand. professional qualifi cation and as n John M. Wachowicz, Jr. a reference for practitioners. t Now in its 13th edition, Fundamentals of Financial Management maintains a its dedication to the fi nancial decision-making process and the On the reading list for Association l analysis of value creation, but develops a more international scope and s of Chartered Certifi ed Accountants introduces new topics into the debate. Current discussions on corporate governance, ethical dilemmas, globalization of fi nance, strategic (ACCA) Qualifi cation Paper (F9) o alliances and the growth of outsourcing have been added with examples Financial Management. f and boxed features to aid understanding and provide a more global F perspective of fi nancial management. Suggested reading for Certifi ed Management Accountant (CMA) i n What’s New? examination. • Chapter 1 - Expanded coverage of Corporate Social Responsibility a including the concept of Sustainability. Translated into over ten languages n • Chapter 6 – The discussion of fi nancial statement analysis includes and received fi rst place among c the push for convergence of accounting standards around the world. business academic texts in i • Chapter 9 – Cash and marketable securities management material Pearson’s top 50 best seller’s a expanded and updated. translation list. l • Chapter 24 - The updated chapter on International Financial M Management includes discussion of Islamic sukuk bonds. a n a “This is the best book I have found so far.” Visit www.pearsoned.co.uk/wachowicz to access free g student resources including: Jean Bellemans, Free University of Brussels e • Self-test multiple-choice, true/false and essay m questions. “The book provides the reader with • Link to author’s award-winning website for even more information about the current e online testing material, along with exercises and ‘hot-topics’ in fi nance and has a clear n regularly updated links to additional support material. emphasis on the basic principles of t • Online glossary to explain key terms. fi nancial management without repetition. • Excel templates for spread-sheet approach to Furthermore, as simple language is used, 13th end-of-chapter problem solving. the book can be easily understood by Edition • New for this edition! Link to PowerPoint slides on students that are not native speakers of key chapters and learn how to use Excel to solve English.” problems. Axel-Adam Müller, Lancaster W V a a n c h H Authors: o o w r James C. Van Horne, Professor of Banking and Finance at Stanford University is also the i n author of Financial Management and Policy, a Pearson Education text. c e z John M. Wachowicz, Jr., Professor of Finance at The University of Tennessee. www.pearson-books.com an imprint of Front cover image: © Getty Images CVR_VANH3630_13_SE_CVR.indd 1 23/9/08 10:35:34 FUNO_A01.qxd 9/19/08 13:56 Page i Fundamentals of Financial Management Visit the Van Horne and Wachowicz: Fundamentals of Financial Management thirteenth editionCompanion Website at www.pearsoned.co.uk/wachowicz to find valuable student learning material including: l Learning objectives for each chapter l Multiple choice, true/false and essay questions to test your understanding l PowerPoint presentations for each chapter to remind you of key concepts l An online glossary to explain key terms and flash cards to test your knowledge of key terms and definitions in each chapter l Excel templates for end of chapter problems to help you model a spread sheet approach to solving the problem l Link to author’s own award-winning website with even more multiple choice and true/false questions, as well as web-based exercises and regularly updated links to additional support material l New to this edition, PowerPoint presentations for key chapters integrating and demonstrating how Excel can be used to solve calculations. •• FUNO_A01.qxd 9/19/08 13:56 Page ii We work with leading authors to develop the strongest educational materials in business and finance, bringing cutting-edge thinking and best learning practice to a global market. Under a range of well-known imprints, including Financial Times Prentice Hall, we craft high quality print and electronic publications which help readers to understand and apply their content, whether studying or at work. To find out more about the complete range of our publishing, please visit us on the World Wide Web at: www.pearsoned.co.uk •• FUNO_A01.qxd 9/19/08 13:56 Page iii Fundamentals of Financial Management thirteenth edition James C. Van Horne Stanford University John M. Wachowicz, Jr. The University of Tennessee •• FUNO_A01.qxd 4/18/09 10:23 AM Page iv Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk Previous editions published under the Prentice Hall imprint Thirteenth edition published 2008 © Pearson Education Limited 2009, 2005 © 2001, 1998 by Prentice-Hall, Inc. The rights of James C. Van Horne and John M. Wachowicz, Jr. to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. ISBN: 978-0-273-71363-0 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloguing-in-Publication Data Van Horne, James C. Fundamentals of financial management / James C. Van Horne, John M. Wachowicz. – 13th ed. p. cm. Includes bibliographical references and index. ISBN 978-0-273-71363-0 (pbk. : alk. paper) 1. Corporations–Finance. 2. Business enterprises–Finance. I. Wachowicz, John Martin. II. Title. HG4026.V36 2008 658.15—dc22 2008027365 10 9 8 7 6 5 4 3 12 11 10 09 Typeset in 10/12pt Minion by 35 Printed and bound by Ashford Colour Press Ltd., Gosport The publisher’s policy is to use paper manufactured from sustainable forests. •• FUNO_A01.qxd 9/19/08 13:56 Page v To Mimi, Drew, Stuart, and Stephen James C. Van Horne To Emerson, John, June, Lien, and Patricia John M. Wachowicz, Jr. •• FUNO_A01.qxd 9/19/08 13:56 Page vi •• FUNO_A01.qxd 9/19/08 13:56 Page vii Brief Contents l l l Part 1 Introduction to Financial Management 1 The Role of Financial Management 1 2 The Business, Tax and Financial Environments 17 l l l Part 2 Valuation 3 The Time Value of Money 41 4 The Valuation of Long-Term Securities 73 5 Risk and Return 97 Appendix A Measuring Portfolio Risk 117 Appendix B Arbitrage Pricing Theory 119 l l l Part 3 Tools of Financial Analysis and Planning 6 Financial Statement Analysis 127 Appendix Deferred Taxes and Financial Analysis 158 7 Funds Analysis, Cash-Flow Analysis, and Financial Planning 169 Appendix Sustainable Growth Modeling 190 l l l Part 4 Working Capital Management 8 Overview of Working Capital Management 205 9 Cash and Marketable Securities Management 221 10 Accounts Receivable and Inventory Management 249 11 Short-Term Financing 281 l l l Part 5 Investment in Capital Assets 12 Capital Budgeting and Estimating Cash Flows 307 13 Capital Budgeting Techniques 323 Appendix A Multiple Internal Rates of Return 341 Appendix B Replacement Chain Analysis 343 14 Risk and Managerial (Real) Options in Capital Budgeting 353 vii •• FUNO_A01.qxd 9/19/08 13:56 Page viii Brief Contents l l l Part 6 The Cost of Capital, Capital Structure, and Dividend Policy 15 Required Returns and the Cost of Capital 381 Appendix A Adjusting the Beta for Financial Leverage 407 Appendix B Adjusted Present Value 408 16 Operating and Financial Leverage 419 17 Capital Structure Determination 451 18 Dividend Policy 475 l l l Part 7 Intermediate and Long-Term Financing 19 The Capital Market 505 20 Long-Term Debt, Preferred Stock, and Common Stock 527 Appendix Refunding a Bond Issue 544 21 Term Loans and Leases 553 Appendix Accounting Treatment of Leases 567 l l l Part 8 Special Areas of Financial Management 22 Convertibles, Exchangeables, and Warrants 577 Appendix Option Pricing 589 23 Mergers and Other Forms of Corporate Restructuring 603 Appendix Remedies for a Failing Company 630 24 International Financial Management 647 Appendix 679 Glossary 689 Commonly Used Symbols 705 Index 707 viii •• FUNO_A01.qxd 9/19/08 13:56 Page ix Contents Acknowledgements xix Preface xxi l l l Part 1 Introduction to Financial Management 1 The Role of Financial Management 1 Objectives 1 Introduction 2 What Is Financial Management? 2 The Goal of the Firm 3 Corporate Governance 8 Organization of the Financial Management Function 8 Organization of the Book 10 Key Learning Points 13 Questions 14 Selected References 14 2 The Business, Tax, and Financial Environments 17 Objectives 17 The Business Environment 18 The Tax Environment 20 The Financial Environment 27 Key Learning Points 35 Questions 36 Self-Correction Problems 37 Problems 37 Solutions to Self-Correction Problems 38 Selected References 39 l l l Part 2 Valuation 3 The Time Value of Money 41 Objectives 41 The Interest Rate 42 Simple Interest 43 Compound Interest 43 Compounding More Than Once a Year 59 Amortizing a Loan 62 Summary Table of Key Compound Interest Formulas 63 Key Learning Points 63 ix ••