Professional Documents
Culture Documents
THIRTEENTH EDITION
STANLEY B. BLOCK
Texas Christian University
GEOFFREY A. HIRT
DePaul University
BARTLEY R. DANIELSEN
North Carolina State University
McGraw-Hill Irwln
Boston Burr Ridge, IL Dubuque, IA New York San Francisco St. Louis : Bangkok Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei ' Toronto
Contents
PART1 ! INTRODUCTION 1 The Goals and Functions of Financial Management 4
The Field of Finance 5 Evolution of the Field of Finance 5 Modern Issues in Finance 6 The Impact of the Internet 6 Functions of Financial Management 7 Forms of Organization 8 Sole Proprietorship 8 Partnership 8 Corporation 9 Corporate Governance 10 Sarbanes-Oxley Act 11 Goals of Financial Management 11 A Valuation Approach 12 Maximizing Shareholder Wealth 12 Management and Stockholder Wealth 13 Social Responsibility and Ethical Behavior 13 The Role of the Financial Markets 75 Structure and Functions of the Financial Markets 15 Allocation of Capital 16 Institutional Pressure on Public Companies to Restructure 17 Internationalization of the Financial Markets 17 The Internet and Changes in the Capital Markets 18 Format of the Text 19 Parts 19 1. Introduction 19 2. Financial Analysis and Planning 19 3. Working Capital Management 19 4. The Capital Budgeting Process 20 5. hong-Term Financing 20 6. Expanding the Perspective of Corporate Finance 20 List of Terms 20 Discussion Questions 21 Web Exercise 21
3 Financial Analysis 55
Ratio Analysis 56 Classification System 57 The Analysis 58 A. Profitability Ratios 58 B. Asset Utilization Ratios 61 C. Liquidity Ratios 62D. Debt Utilization Ratios 62
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Contents Trend Analysis 63 Impact of Inflation on Financial Analysis 67 An Illustration 67 Disinflation Effect 68 Deflation 69 Other Elements of Distortion in Reported Income 69 Explanation of Discrepancies 69 Sales 70 Cost of Goods Sold 70 Extraordinary Gains/Losses 70 Net Income 71 Summary 72 List of Terms 72 Discussion Questions 72 Practice Problems and Solutions 73 Problems 76 Comprehensive Problems 87 Web Exercise 92 S&P Problems 92
4 Financial Forecasting 94
Constructing Pro Forma Statements 95 Pro Forma Income Statement 95 Establish a Sales Projection 96 Determine a Production Schedule and the Gross Profit 96 Cost of Goods Sold 98 Other Expense Items 99 Actual Pro Forma Income Statement 99 Cash Budget 100 Cash Receipts 100 Cash Payments 101 Actual Budget 102 Pro Forma Balance Sheet 103 Explanation of Pro Forma Balance Sheet 105 Analysis of Pro Forma Statement 106 Percent-of-Sales Method 706 Summary 108 List of Terms 109 Discussion Questions 109 Practice Problems and Solutions 109 Problems 111 Comprehensive Problems 118 Web Exercise 121
PART 3 ! WORKING CAPITAL MANAGEMENT 6 Working Capital and the Financing Decision 156
The Nature of Asset Growth 158 Controlling AssetsMatching Sales and Production 755 Temporary Assets under Level ProductionAn Example 762 Patterns of Financing 767 Alternative Plans 168 Long-Term Financing 765 Short-Term Financing (Opposite Approach) 769 The Financing Decision 769 Term Structure of Interest Rates 7 77
Contents A Decision Process 774 Introducing Varying Conditions 175 Expected Value 775 Shifts in Asset Structure 7 76 Toward an Optimal Policy 777 Summary 179 List of Terms 179 Discussion Questions 180 Practice Problems and Solutions 180 Problems 181 Web Exercise 187 S&P Problems 187 Discussion Questions 216 Practice Problems and Solutions Problems 217 Comprehensive Problem 222 Web Exercise 223
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Contents A 13 Percent Discount Rate 293 A 12 Percent Discount Rate 294 Formula for Bond Yield 294 Semiannual Interest and Bond Prices 295 Valuation and Preferred Stock 296 Determining the Required Rate of Return (Yield) from the Market Price 298 Valuation of Common Stock 298 No Growth in Dividends 299 Constant Growth in Dividends 299 Stock Valuation Based on Future Stock Value 301 Determining the Required Rate of Return from the Market Price 507 The Price-Earnings Ratio Concept and Valuation 302 Variable Growth in Dividends 305 Summary and Review of Formulas 306 Bonds 306 Preferred Stock 307 Common Stock 307 List of Terms 308 Discussion Questions 308 Practice Problems and Solutions 309 Problems 310 Comprehensive Problem 316 Web Exercise 317 Appendix 10A The Bond Yield to Maturity Using Interpolation 318 Appendix 10B Using Calculators for Financial Analysis 319 Appendix IOC Valuation of a Supernormal Growth Firm 328
PART 4 I THE CAPITAL BUDGETING PROCESS 9 The Time Value of Money 255
Relationship to the Capital Outlay Decision 256 Future ValueSingle Amount 256 Present ValueSingle Amount 257 Future ValueAnnuity 258 Present ValueAnnuity 260 Graphical Presentation of Time Value Relationships 262 The Relationship between Present Value and Future Value 262 The Relationship between the Present Value of a Single Amount and the Present Value of an Annuity 265 Future Value Related to the Future Value of an Annuity 267 Determining the Annuity Value 268 Annuity Equaling a Future Value 268 Annuity Equaling a Present Value 268 Determining the Yield on an Investment 270 YieldPresent Value of a Single Amount 270 YieldPresent Value of an Annuity ' 277 Special Considerations in Time Value Analysis 272 Patterns of Payment 272 Special Review of the Chapter 274 List of Terms 276 Discussion Questions 276 Practice Problems and Solutions 277 Problems 278 Comprehensive Problem 284
Contents Capital Acquisition and Investment Decision Making 342 Cost of Capital in the Capital Budgeting Decision 342 The Marginal Cost of Capital 344 Summary 349 Review of Formulas 350 List of Terms 350 Discussion Questions 351 Practice Problems and Solutions 351 Problems 354 Comprehensive Problems 361 Web Exercise 363 S&P Problems 363 Appendix 11A Cost of Capital and the Capital Asset Pricing Model (Optional) 364
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Administrative Considerations 372 Accounting Flows versus Cash Flows 372 Methods of Ranking Investment Proposals 375 Payback Method 375 Internal Rate of Return 376 Net Present Value 378 Selection Strategy 379 Reinvestment Assumption 380 Modified Internal Rate of Return 381 Capital Rationing 382 Net Present Value Profile 383 Characteristics of Investment C 384 Combining Cash Flow Analysis and Selection Strategy 386 The Rules of Depreciation 386 The Tax Rate 388 Actual Investment Decision 388 The Replacement Decision 389 Sale of Old Asset 390 Incremental Depreciation 391 Cost Savings 392 Elective Expensing 394 Summary 394 List of Terms 394 Discussion Questions 394 Practice Problems and Solutions 395 Problems 396 Comprehensive Problem 405 Web Exercise 405 S&P Problems 406
PARTS
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Contents Electronic Communication Networks (ECNs) 452 The New York Stock Exchange 453 The NASDAQ Market 453 Foreign Exchanges 454 Market Efficiency 455 The Efficient Market Hypothesis 456 Regulation of the Security Markets 456 Securities Act of 1933 456 Securities Exchange Act of 1934 457 Securities Acts Amendments of 1975 458 Sarbanes-OxleyActof2002 458 Summary 460 List of Terms 460 Discussion Questions 461 Web Exercise 461 15 Investment Banking: Public and Private Placement 462 The Role of Investment Banking 463 Concentration of Capital 463 The Gramm-Leach-Bliley Act Repeals the Glass-Steagall Act 465 Investment Banking Competitors 466 Enumeration of Functions 466 Underwriter 466 Market Maker 467 Advisor 467 Agency Functions 467 The Distribution Process 467 The Spread 468 Pricing the Security 469 Dilution 470 Market Stabilization 477 Aftermarket 477 Shelf Registration 472 Public versus Private Financing 472 Advantages of Being Public 472 Disadvantages of Being Public 473 Public Offerings 473 A Classic Example of Instant Wealth EDS Goes Public 473 Internet Capital GroupA Second Example 474 Private Placement 478 Going Private and Leveraged Buyouts 478 International Investment Banking Deals 479 Privatization 479 Summary 480 List of Terms 480 Discussion Questions 481 Practice Problems and Solutions Problems 482 Comprehensive Problem 488 Web Exercise 489 S&P Problems 489
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16 Long-Term Debt and Lease Financing The Expanding Role of Debt 492 The Debt Contract 492 Par Value 492 Coupon Rate 493 Maturity Date 493 Security Provisions 493 Unsecured Debt 493 Methods of Repayment 494 Serial Payments 494 Sinking-Fund Provision 495 Conversion 495 Call Feature 495
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An Example: Kerr McGee's 7.875 Percent Bond 495 Bond Prices, Yields, and Ratings 495 Bond Yields 498 Coupon Rate (Nominal Yield) 498 Current Yield 499 Yield to Maturity 499 Bond Ratings 499 Examining Actual Bond Ratings 500 The Refunding Decision 507 A Capital Budgeting Problem 507 Step AOutflow Considerations 502 Step BInflow Considerations 503 Step CNet Present Value 504 Other Forms of Bond Financing 505 Advantages and Disadvantages of Debt 506 Benefits of Debt 507 Drawbacks of Debt 507 Eurobond Market 507 Leasing as a Form of Debt 508 Capital Lease versus Operating Lease Income Statement Effect 570 Advantages of Leasing 570 Summary 511 List of Terms 511 Discussion Questions 511 Practice Problems and Solutions 512 Problems 515 Comprehensive Problem 519 Web Exercise 520 509
Contents S&P Problems 520 Appendix 16A Financial Alternatives for Distressed Firms 521 Out-of-Court Settlement 527 In-Court SettlementsFormal Bankruptcy 522 Reorganization 522 Liquidation 522 List of Terms 525 Discussion Questions 526 Problems 526 Appendix 16B Lease versus Purchase Decision 527 Problems 529
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Contents Accounting Considerations with Warrants 597 Derivative Securities 598 Options 598 Futures 599 Summary 600 Review of Formulas 600 List of Terms 601 Discussion Questions 601 Practice Problems and Solutions 602 Problems 603 Comprehensive Problems 607 Web Exercise 608 Inflation 639 Interest Rates 639 Balance of Payments 639 Government Policies 640 Other Factors 640 Spot Rates and Forward Rates 640 Cross Rates 642 Managing Foreign Exchange Risk 642 Forward Exchange Market Hedge 644 Money Market Hedge 644 Currency Futures Market Hedge 645 Foreign Investment Decisions 646 Analysis of Political Risk 648 Financing International Business Operations 649 Funding of Transactions 650 Eximbank (Export-Import Bank) 650 Loans from the Parent Company or a Sister Affiliate 650 Eurodollar Loans 652 Eurobond Market 653 International Equity Markets 653 The International Finance Corporation 655 Some Unsettled Issues in International Finance 656 Summary 656 List of Terms 657 Discussion Questions 658 Practice Problems and Solutions 658 Problems 659 Web Exercise 660 S&P Problems 661 Appendix 21A Cash Flow Analysis and the Foreign Investment Decision 661
PART 6 i EXPANDING THE PERSPECTIVE OF CORPORATE FINANCE 20 External Growth through Mergers 612
Motives for Business Combinations 613 Financial Motives 613 Nonfinancial Motives 675 Motives of Selling Stockholders 675 Terms of Exchange 67 7 Cash Purchases 677 Stock-for-Stock Exchange 618 Portfolio Effect 679 Accounting Considerations in Mergers and Acquisitions 620 Negotiated versus Tendered Offers 627 Premium Offers and Stock Price Movements 623 Two-Step Buyout 624 Summary 625 List of Terms 625 Discussion Questions 625 Practice Problems and Solutions 626 Problems 627 Web Exercise 631 S&P Problems 632
Appendixes A-1
Appendix A Future Value of$l, FVIF A-2 Appendix B Present Value of$l, PVIF A-4 Appendix C Future Value of an Annuity of $1,FVIFA A-6 Appendix D Present Value of an Annuity of $1,PVIFA A-8