Fundamentals of Financial Management, Concise Edition

692 Pages·2014·27.356 MB·English

by  Eugene F. Brigham, Joel F. Houston

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FREQUENTLY USED SYMBOLS/ABBREVIATIONS
ACP Averagecollectionperiod
ADR Americandepositoryreceipt
AFN Additionalfundsneeded
AMT Alternativeminimumtax
APR Annualpercentagerate
b Betacoefficient,ameasureofanasset’sriskiness
bL Leveredbeta
bU Unleveredbeta
BEP Basicearningpower
BVPS Bookvaluepershare
CAPEX Capitalexpenditures
CAPM CapitalAssetPricingModel
CCC Cashconversioncycle
CF Cashflow;CFtisthecashflowinPeriodt
CV Coefficientofvariation
Dp Dividendofpreferredstock
Dt DividendinPeriodt
DCF Discountedcashflow
D/E Debt-to-equityratio
DEP Depreciation
D1/P0 Expecteddividendyield
DPS Dividendspershare
DRIP Dividendreinvestmentplan
DRP Defaultriskpremium
DSO Dayssalesoutstanding
EAA Equivalentannualannuity
EAR Effectiveannualrate,EFF%
EBIT Earningsbeforeinterestandtaxes;operatingincome
EBITDA Earningsbeforeinterest,taxes,depreciation,andamortization
EPS Earningspershare
EVA Economicvalueadded
F (1)Fixedoperatingcosts
(2)Flotationcost
FCF Freecashflow
FVN FuturevalueforYearN
FVAN FuturevalueofanannuityforNyears
g Growthrateinearnings,dividends,andstockprices
GAAP U.S.GenerallyAcceptedAccountingStandards
HVN Firm’shorizonvalueatt N
I Interestrate;alsoreferredtoasr
IFRS InternationalFinancialReportingStandards
IPER Periodicinterestrate
I/YR Interestratekeyonsomecalculators
INT Interestpaymentindollars
IP Inflationpremium
IPO Initialpublicoffering
IRR Internalrateofreturn
LIBOR LondonInterbankOfferRate
LP Liquiditypremium
M Maturityvalueofabond
M/B Market-to-bookratio
MIRR Modifiedinternalrateofreturn
MRP Maturityriskpremium
MVA Marketvalueadded
N Calculatorkeydenotingnumberofperiods
NOPAT Netoperatingprofitaftertaxes,EBIT(1−T)
NOWC Netoperatingworkingcapital
NPV Netpresentvalue
P Salespriceperunitofproductsold
Pf Priceofgoodinforeigncountry
Ph Priceofgoodinhomecountry
Pt PriceofashareofstockinPeriodt;P0 priceofthestocktoday
P/E Price-to-earningsratio
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PMT Paymentofanannuity
PPP Purchasingpowerparity
PV Presentvalue
PVAN PresentvalueofanannuityforNyears
Q Quantityproducedorsold
QBE Break-evenquantity
r (1)Apercentagediscountrate,orcostofcapital;alsoreferredtoasI
(2)Nominalrisk-adjustedrequiredrateofreturn
r “rbar,”historic,orrealized,rateofreturn
r “rhat,”anexpectedrateofreturn
r* Realrisk-freerateofreturn
rd Before-taxcostofdebt
rd(1−T) After-taxcostofdebt
re Costofnewcommonstock(externalequity)
rf Interestrateinforeigncountry
rh Interestrateinhomecountry
ri Requiredreturnforanindividualfirmorsecurity
rM Returnon“themarket,”oronan“average”stock
rNOM Nominalrateofinterest;alsoreferredtoasINOM
rp (1)Costofpreferredstock
(2)Portfolio’sreturn
rRF Rateofreturnonarisk-freesecurity,equaltor* IP
rs (1)Costofretainedearnings
(2)Requiredreturnoncommonstock
Correlationcoefficient;alsodenotedasRwhenusinghistoricaldata
ROA Returnonassets
ROE Returnonequity
ROIC Returnoninvestedcapital
RP Riskpremium
RPM Marketriskpremium
S (1)Sales
(2)Estimatedstandarddeviationforsampledata
SML SecurityMarketLine
∑ Summationsign
Standarddeviation
t Timeperiod
T Marginalincometaxrate
TIE Timesinterestearned
V (1) Variablecostperunit
(2) Currentvalueofacalloption
VB Bondvalue
Vp Valueofpreferredstock
VC Totalvariablecosts
WACC Weightedaveragecostofcapital
wc Percentageofcommonstockincapitalstructure
wd Percentageofdebtincapitalstructure
wp Percentageofpreferredstockincapitalstructure
YTC Yieldtocall
YTM Yieldtomaturity
Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
F
UNDAMENTALS OF
F
INANCIAL
M
ANAGEMENT
Eugene F. Brigham
University of Florida
Joel F. Houston
University of Florida
Concise
Eighth Edition
Australia•Brazil•Japan•Korea•Mexico•Singapore•Spain•UnitedKingdom•UnitedStates
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B C
R I E F O N T E N T S
PREFACE xi
PART 1 INTRODUCTION TO FINANCIAL MANAGEMENT 1
CHAPTER 1 AN OVERVIEW OF FINANCIAL MANAGEMENT 2
CHAPTER 2 FINANCIAL MARKETS AND INSTITUTIONS 25
PART 2 FUNDAMENTAL CONCEPTS IN FINANCIAL MANAGEMENT 55
CHAPTER 3 FINANCIAL STATEMENTS, CASH FLOW, AND TAXES 56
CHAPTER 4 ANALYSIS OF FINANCIAL STATEMENTS 97
CHAPTER 5 TIME VALUE OF MONEY 138
PART 3 FINANCIAL ASSETS 183
CHAPTER 6 INTEREST RATES 184
CHAPTER 7 BONDS AND THEIR VALUATION 217
CHAPTER 8 RISK AND RATES OF RETURN 257
CHAPTER 9 STOCKS AND THEIR VALUATION 301
PART 4 INVESTING IN LONG-TERM ASSETS: CAPITAL BUDGETING 339
CHAPTER 10 THE COST OF CAPITAL 340
CHAPTER 11 THE BASICS OF CAPITAL BUDGETING 370
CHAPTER 12 CASH FLOW ESTIMATION AND RISK ANALYSIS 402
PART 5 CAPITAL STRUCTURE AND DIVIDEND POLICY 443
CHAPTER 13 CAPITAL STRUCTURE AND LEVERAGE 444
CHAPTER 14 DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS
AND SHARE REPURCHASES 487
PART 6 WORKING CAPITAL MANAGEMENT, FORECASTING, AND
MULTINATIONAL FINANCIAL MANAGEMENT 519
CHAPTER 15 WORKING CAPITAL MANAGEMENT 520
CHAPTER 16 FINANCIAL PLANNING AND FORECASTING 559
CHAPTER 17 MULTINATIONAL FINANCIAL MANAGEMENT 585
APPENDIXES
APPENDIX A SOLUTIONS TO SELF-TEST QUESTIONS
AND PROBLEMS A-1
APPENDIX B ANSWERS TO SELECTED END-OF-CHAPTER
PROBLEMS B-1
APPENDIX C SELECTED EQUATIONS AND TABLES C-1
INDEX I-1
III
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C
O N T E N T S
PREFACE XI 2-2aTypesofMarkets29
2-2bRecentTrends30
2-3 Financial Institutions 33
SecuritizationHasDramaticallyTransformedthe
P 1
ART BankingIndustry38
I F 2-4 The Stock Market 39
NTRODUCTION TO INANCIAL
2-4aPhysicalLocationStockExchanges39
M 1
ANAGEMENT GlobalPerspectives:TheNYSEandNASDAQ
GoGlobal39
C 1 2-4bOver-the-Counter(OTC)andthe
HAPTER
NASDAQStockMarkets40
A O F M 2
N VERVIEW OF INANCIAL ANAGEMENT
2-5 The Market for Common Stock 41
Striking the Right Balance 2 2-5aTypesofStockMarketTransactions41
2-6 Stock Markets and Returns 44
PUTTING THINGS IN PERSPECTIVE 3
2-6aStockMarketReporting45
1-1 What Is Finance? 4 2-6bStockMarketReturns46
1-1aAreasofFinance4
2-7 Stock Market Efficiency 46
1-1bFinanceWithinanOrganization5
1-1cFinanceVersusEconomicsand MeasuringtheMarket47
Accounting6 2-7aBehavioralFinanceTheory49
1-2 Jobs in Finance 6 2-7bConclusionsAboutMarketEfficiency51
TYING IT ALL TOGETHER 51
1-3 Forms of Business Organization 6
INTEGRATED CASE Smyth Barry & Company 53
1-4 The Main Financial Goal: Creating Value
for Investors 9
1-4aDeterminantsofValue9
1-4bIntrinsicValue10 P 2
ART
1-4cConsequencesofHavingaShort-Run
Focus11 F C
UNDAMENTAL ONCEPTS IN
1-5 Stockholder–Manager Conflicts 12 F M 55
INANCIAL ANAGEMENT
1-5aCompensationPackages13
1-5bDirectStockholderIntervention13
AreCEOsOverpaid?14 C 3
HAPTER
1-5cManagers’Response15
F S , C F ,
INANCIAL TATEMENTS ASH LOW
1-6 Stockholder–Debtholder Conflicts 15
T 56
AND AXES
1-7 Balancing Shareholder Interests and the
Unlocking the Valuable Information in Financial
Interests of Society 17
Statements 56
InvestinginSociallyResponsibleFunds18
1-8 Business Ethics 19 PUTTING THINGS IN PERSPECTIVE 57
1-8aWhatCompaniesAreDoing19
3-1 Financial Statements and Reports 58
1-8bConsequencesofUnethicalBehavior20
1-8cHowShouldEmployeesDealwith GlobalPerspectives:GlobalAccountingStandards:
UnethicalBehavior?21 WillItEverHappen?59
TYING IT ALL TOGETHER 22 3-2 The Balance Sheet 60
3-2aAllied’sBalanceSheet61
C 2 CashHoldingsandNetOperatingWorking
HAPTER
Capital:ACloserLook65
F M I 25
INANCIAL ARKETS AND NSTITUTIONS
TheBalanceSheetofan“Average”American
Rebuilding the Financial System after the Crisis 25 Household66
PUTTING THINGS IN PERSPECTIVE 26 3-3 The Income Statement 67
2-1 The Capital Allocation Process 26 3-4 Statement of Cash Flows 69
MassagingtheCashFlowStatement72
2-2 Financial Markets 28
IV
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Contents v
3-5 Statement of Stockholders’ Equity 73 4-10 Uses and Limitations of Ratios 121
3-6 Uses and Limitations of Financial LookingforWarningSignsWithintheFinancial
Statements123
Statements 74
4-11 Looking beyond the Numbers 123
3-7 Free Cash Flow 75
FreeCashFlowIsImportantforBusinessesBoth TYING IT ALL TOGETHER 125
SmallandLarge77 INTEGRATED CASE D’Leon Inc., Part II 133
3-8 MVA and EVA 78
ThomsonONE:BusinessSchoolEditionProblem
3-9 Income Taxes 80 Conducting a Financial Ratio Analysis on Hewlett
Packard Co. 136
3-9aIndividualTaxes80
3-9bCorporateTaxes82
WEB APPENDIX 4A
TYING IT ALL TOGETHER 86 Common Size and Percent Change Analyses
INTEGRATED CASE D’Leon Inc., Part I 93
C 5
HAPTER
ThomsonONE:BusinessSchoolEditionProblem
T V M 138
Exploring Starbucks’ Financial Statements 96 IME ALUE OF ONEY
Will You Be Able to Retire? 138
CHAPTER 4 PUTTING THINGS IN PERSPECTIVE 139
ANALYSIS OF FINANCIAL STATEMENTS 97 5-1 Time Lines 140
Can You Make Money Analyzing Stocks? 97 5-2 Future Values 141
5-2aStep-by-StepApproach141
PUTTING THINGS IN PERSPECTIVE 98 5-2bFormulaApproach142
4-1 Ratio Analysis 99 SimpleversusCompoundInterest142
5-2cFinancialCalculators143
4-2 Liquidity Ratios 100
5-2dSpreadsheets143
4-2aCurrentRatio100
HintsonUsingFinancialCalculators145
FinancialAnalysisontheInternet101
5-2eGraphicViewoftheCompounding
4-2bQuick,orAcidTest,Ratio102 Process146
4-3 Asset Management Ratios 102 5-3 Present Values 147
4-3aInventoryTurnoverRatio103 5-3aGraphicViewoftheDiscountingProcess149
4-3bDaysSalesOutstanding103
4-3cFixedAssetsTurnoverRatio104 5-4 Finding the Interest Rate, I 150
4-3dTotalAssetsTurnoverRatio105
5-5 Finding the Number of Years, N 151
4-4 Debt Management Ratios 105
5-6 Annuities 151
4-4aTotalDebttoTotalCapital107
4-4bTimes-Interest-EarnedRatio108 5-7 Future Value of an Ordinary Annuity 152
4-5 Profitability Ratios 109 5-8 Future Value of an Annuity Due 155
4-5aOperatingMargin109
5-9 Present Value of an Ordinary Annuity 156
4-5bProfitMargin109
4-5cReturnonTotalAssets110
5-10 Finding Annuity Payments, Periods, and
4-5dReturnonCommonEquity110
Interest Rates 158
4-5eReturnonInvestedCapital110
4-5fBasicEarningPower(BEP)Ratio111 5-10aFindingAnnuityPayments,PMT158
5-10bFindingtheNumberofPeriods,N159
4-6 Market Value Ratios 112
5-10cFindingtheInterestRate,I159
4-6aPrice/EarningsRatio112
5-11 Perpetuities 160
4-6bMarket/BookRatio113
4-7 Tying the Ratios Together: The DuPont 5-12 Uneven Cash Flows 161
Equation 114 5-13 Future Value of an Uneven Cash Flow
MicrosoftExcel:ATrulyEssentialTool115 Stream 163
4-8 Potential Misuses of ROE 116 5-14 Solving for I with Uneven Cash Flows 164
EconomicValueAdded(EVA)versus
5-15 Semiannual and Other Compounding
NetIncome117
Periods 165
4-9 Using Financial Ratios to Assess
Performance 118 5-16 Comparing Interest Rates 167
4-9aComparisontoIndustryAverage118 5-17 Fractional Time Periods 170
4-9bBenchmarking118
4-9cTrendAnalysis120 5-18 Amortized Loans 171
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vi Contents
TYING IT ALL TOGETHER 172 7-1 Who Issues Bonds? 219
INTEGRATED CASE First National Bank 180 7-2 Key Characteristics of Bonds 220
WEB APPENDIX 5A 7-2aParValue220
7-2bCouponInterestRate220
Continuous Compounding and Discounting
7-2cMaturityDate221
WEB APPENDIX 5B 7-2dCallProvisions221
Growing Annuities 7-2eSinkingFunds222
7-2fOtherFeatures223
7-3 Bond Valuation 224
P 3
ART 7-4 Bond Yields 227
F A 183 7-4aYieldtoMaturity228
INANCIAL SSETS
7-4bYieldtoCall229
7-5 Changes in Bond Values over Time 231
C 6
HAPTER
7-6 Bonds with Semiannual Coupons 234
I R 184
NTEREST ATES
7-7 Assessing a Bond’s Riskiness 236
Interest RatesRemain LowastheEconomy Recovers 7-7aPriceRisk237
from Recession and Financial Crisis 184 7-7bReinvestmentRisk238
7-7cComparingPriceRiskandReinvestment
PUTTING THINGS IN PERSPECTIVE 185 Risk239
6-1 The Cost of Money 186 7-8 Default Risk 241
7-8aVariousTypesofCorporateBonds241
6-2 Interest Rate Levels 187
7-8bBondRatings242
6-3 The Determinants of Market Interest 7-8cBankruptcyandReorganization246
Rates 191 7-9 Bond Markets 247
6-3aTheRealRisk-FreeRateofInterest,r*191 AccruedInterestandthePricingof
6-3bTheNominal,orQuoted,Risk-FreeRateof CouponBonds249
Interest,r =r*+IP192
RF
6-3cInflationPremium(IP)193 TYING IT ALL TOGETHER 249
6-3dDefaultRiskPremium(DRP)194
INTEGRATED CASE Western Money
6-3eLiquidityPremium(LP)194
Management Inc. 255
6-3fInterestRateRiskandtheMaturityRisk
Premium(MRP)194 WEB APPENDIX 7A
AnAlmostRisklessTreasuryBond195
Zero Coupon Bonds
6-4 The Term Structure of Interest Rates 197 WEB APPENDIX 7B
Bond Risk and Duration
6-5 What Determines the Shape of the Yield
Curve? 199 WEB APPENDIX 7C
Bankruptcy and Reorganization
TheLinksBetweenExpectedInflationandInterest
Rates:ACloserLook201
6-6 Using the Yield Curve to Estimate Future C 8
HAPTER
Interest Rates 203
R R R 257
ISK AND ATES OF ETURN
6-7 Macroeconomic Factors That Influence
Managing Risk in Difficult Times 257
Interest Rate Levels 206
6-7aFederalReservePolicy206
PUTTING THINGS IN PERSPECTIVE 258
6-7bFederalBudgetDeficitsorSurpluses207
6-7cInternationalFactors207 8-1 The Risk-Return Trade-Off 259
6-7dBusinessActivity208
8-2 Stand-Alone Risk 261
6-8 Interest Rates and Business Decisions 209
8-2aStatisticalMeasuresofStand-Alone
TYING IT ALL TOGETHER 210 Risk262
8-2bMeasuringStand-AloneRisk:The
INTEGRATED CASE Morton Handley &
StandardDeviation 264
Company 216 8-2cUsingHistoricalDatatoMeasureRisk 265
8-2dMeasuringStand-AloneRisk:The
C 7 CoefficientofVariation266
HAPTER
8-2eRiskAversionandRequiredReturns267
BONDS AND THEIR VALUATION 217 TheHistoricalTrade-OffBetween
RiskandReturn268
Sizing Up Risk in the Bond Market 217
8-3 RiskinaPortfolioContext:TheCAPM269
PUTTING THINGS IN PERSPECTIVE 218 8-3aExpectedPortfolioReturns,r 269
p
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