Foundations of Finance, 10th Edition
- Length: 9998 pages
- Edition: 1
- Language: English
- Publisher: Pearson
- Publication Date: 2019-06-13
- ISBN-10: 0135160618
- ISBN-13: 9780135160619
- Sales Rank: #1142423 (See Top 100 Books)
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The five key principles for the foundations of finance
Foundations of Finance retains its foundational approach to the key concepts of finance, bolstered by real-world vignettes, cases, and problem exercises. Utilizing five principles, which are presented at the beginning of the book and applied throughout, the authors introduce a multi-step approach to financial problem solving that appeals to students’ (at all levels) math and numerical skills. As with previous editions, the 10th Edition focuses on valuation and opens every chapter with a vignette based on financial decisions faced by contemporary, real-world companies and firms. Revised and updated, the text features new lecture videos, financial thinking, user feedback, and changes inspired by the passage of the Tax Cuts and Jobs Act of 2017, so students are well equipped to effectively deal with financial problems in an ever-changing financial environment.
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By combining trusted author content with digital tools and a flexible platform, MyLab personalizes the learning experience and improves results for each student. For example, auto-graded Excel Projects give students the opportunity to use Microsoft Excel as a tool to solve business problems.
Front Cover Title Page Copyright Page Dedication Brief Contents Contents Preface Part 1 The Scope and Environment of Financial Management 1 An Introduction to the Foundations of Financial Management The Goal of the Firm Five Principles That Form the Foundations of Finance Principle 1: Cash Flow Is What Matters Principle 2: Money Has a Time Value Principle 3: Risk Requires a Reward Principle 4: Market Prices Are Generally Right Principle 5: Conflicts of Interest Cause Agency Problems The Essential Elements of Ethics and Trust The Role of Finance in Business Why Study Finance? The Role of the Financial Manager The Legal Forms of Business Organization Sole Proprietorships Partnerships Corporations Organizational Form and Taxes: The Double Taxation on Dividends and Pass-Through Entities S-Corporations and Limited Liability Companies (LLCs) Which Organizational Form Should Be Chosen? Finance and the Multinational Firm: The New Role Developing Skills for Your Career Chapter Summaries Review Questions Mini Case 2 The Financial Markets and Interest Rates Financing of Business: The Movement of Funds Through the Economy Public Offerings Versus Private Placements Primary Markets Versus Secondary Markets The Money Market Versus the Capital Market Spot Markets Versus Futures Markets Stock Exchanges: Organized Security Exchanges Versus Over-the-Counter Markets, a Blurring Difference Selling Securities to the Public Functions Distribution Methods Private Debt Placements Flotation Costs Regulation Aimed at Making the Goal of the Firm Work: The Sarbanes-Oxley Act Rates of Return in the Financial Markets Rates of Return over Long Periods Interest Rate Levels in Recent Periods Interest Rate Determinants in a Nutshell Estimating Specific Interest Rates Using Risk Premiums Real Risk-Free Interest Rate and the Risk-Free Interest Rate Real and Nominal Rates of Interest Inflation and Real Rates of Return: The Financial Analyst’s Approach The Term Structure of Interest Rates Shifts in the Term Structures of Interest Rates What Explains the Shape of the Term Structure? Chapter Summaries Review Questions Study Problems Mini Case 3 Understanding Financial Statements and Cash Flows The Income Statement The Makeup of an Income Statement Walmart’s Income Statement Restating Walmart’s Income Statement The Balance Sheet Types of Assets Types of Financing Walmart’s Balance Sheet Working Capital Measuring Cash Flows Profits Versus Cash Flows The Beginning Point: Changes in the Balance Sheet and Cash Flows Statement of Cash Flows Concluding Suggestions for Computing Cash Flows What Have We Learned about Walmart? The Limitations of Financial Statements and Accounting Malpractice Chapter Summaries Review Questions Study Problems Mini Case Appendix 3A: Free Cash Flows 4 Evaluating a Firm’s Financial Performance The Purpose of Financial Analysis Measuring Key Financial Relationships Question 1: How Liquid Is the Firm—Can It Pay Its Bills? Question 2: Are the Firm’s Managers Generating Adequate Operating Profits on the Company’s Assets? Managing Operations Managing Assets Question 3: How Is the Firm Financing Its Assets? Question 4: Are the Firm’s Managers Providing a Good Return on the Capital Provided by the Company’s Shareholders? Question 5: Are the Firm’s Managers Creating Shareholder Value? The Limitations of Financial Ratio Analysis Chapter Summaries Review Questions Study Problems Mini Case Part 2 The Valuation of Financial Assets 5 The Time Value of Money Compound Interest, Future Value, and Present Value Using Timelines to Visualize Cash Flows Techniques for Moving Money Through Time Two Additional Types of Time Value of Money Problems Applying Compounding to Things Other Than Money Present Value Annuities Compound Annuities The Present Value of an Annuity Annuities Due Amortized Loans Making Interest Rates Comparable Calculating the Interest Rate and Converting It to an EAR Finding Present and Future Values With Nonannual Periods Amortized Loans With Monthly Compounding The Present Value of an Uneven Stream and Perpetuities Perpetuities Chapter Summaries Review Questions Study Problems Mini Case 6 The Meaning and Measurement of Risk and Return Expected Return Defined and Measured Risk Defined and Measured Rates of Return: The Investor’s Experience Risk and Diversification Diversifying Away the Risk Measuring Market Risk Measuring a Portfolio’s Beta Risk and Diversification Demonstrated The Investor’s Required Rate of Return The Required Rate of Return Concept Measuring the Required Rate of Return Chapter Summaries Review Questions Study Problems Mini Case 7 The Valuation and Characteristics of Bonds Types of Bonds Debentures Subordinated Debentures Mortgage Bonds Eurobonds Convertible Bonds Terminology and Characteristics of Bonds Claims on Assets and Income Par Value Coupon Interest Rate Maturity Call Provision Indenture Bond Ratings Defining Value What Determines Value? Valuation: The Basic Process Valuing Bonds Bond Yields Yield to Maturity Current Yield Bond Valuation: Three Important Relationships Chapter Summaries Review Questions Study Problems Mini Case 8 The Valuation and Characteristics of Stock Preferred Stock The Characteristics of Preferred Stock Valuing Preferred Stock Common Stock The Characteristics of Common Stock Valuing Common Stock The Expected Rate of Return of Stockholders The Expected Rate of Return of Preferred Stockholders The Expected Rate of Return of Common Stockholders Chapter Summaries Review Questions Study Problems Mini Case 9 The Cost of Capital The Cost of Capital: Key Definitions and Concepts Capital Structure Opportunity Costs, Required Rates of Return, and the Cost of Capital Determining the Costs of the Individual Sources of Capital The Cost of Debt The Cost of Preferred Stock The Cost of Common Equity The Dividend Growth Model and the Implied Cost of Equity Issues in Implementing the Dividend Growth Model The Capital Asset Pricing Model Issues in Implementing the CAPM The Weighted Average Cost of Capital Capital Structure Weights Calculating the Weighted Average Cost of Capital Calculating Divisional Costs of Capital Estimating Divisional Costs of Capital Using Pure Play Firms to Estimate Divisional WACCs Using a Firm’s Cost of Capital to Evaluate New Capital Investments Chapter Summaries Review Questions Study Problems Mini Cases Part 3 Investment in Long-Term Assets 10 Capital-Budgeting Techniques and Practice Finding Profitable Projects Capital-Budgeting Decision Criteria The Payback Period The Net Present Value Using Spreadsheets to Calculate the Net Present Value The Profitability Index (Benefit–Cost Ratio) The Internal Rate of Return Computing the IRR for Uneven Cash Flows with a Financial Calculator Viewing the NPV–IRR Relationship: The Net Present Value Profile Complications with the IRR : Multiple Rates of Return The Modified Internal Rate of Return (MIRR)2 Using Spreadsheets to Calculate the MIRR A Last Word on the MIRR Capital Rationing The Rationale for Capital Rationing Capital Rationing and Project Selection Ranking Mutually Exclusive Projects The Size-Disparity Problem The Unequal-Lives Problem Chapter Summaries Review Questions Study Problems Mini Case 11 Cash Flows and Other Topics in Capital Budgeting Guidelines for Capital Budgeting Use Free Cash Flows Rather Than Accounting Profits Think Incrementally Beware of Cash Flows Diverted from Existing Products Look for Incidental or Synergistic Effects Work in Working-Capital Requirements Consider Incremental Expenses Remember That Sunk Costs Are Not Incremental Cash Flows Account for Opportunity Costs Decide If Overhead Costs Are Truly Incremental Cash Flows Ignore Interest Payments and Financing Flows Calculating a Project’s Free Cash Flows What Goes into the Initial Outlay What Goes into the Annual Free Cash Flows over the Project’s Life What Goes into the Terminal Cash Flow Calculating the Free Cash Flows A Comprehensive Example: Calculating Free Cash Flows Options in Capital Budgeting The Option to Delay a Project The Option to Expand a Project The Option to Abandon a Project Options in Capital Budgeting: The Bottom Line Risk and the Investment Decision What Measure of Risk Is Relevant in Capital Budgeting? Measuring Risk for Capital-Budgeting Purposes with a Dose of Reality—Is Systematic Risk All There Is? Incorporating Risk into Capital Budgeting Risk-Adjusted Discount Rates Measuring a Project’s Systematic Risk Using Accounting Data to Estimate a Project’s Beta The Pure Play Method for Estimating Beta Examining a Project’s Risk Through Simulation Conducting a Sensitivity Analysis Through Simulation Chapter Summaries Review Questions Study Problems Mini Case Appendix 11A: The Modified Accelerated Cost Recovery System Part 4 Capital Structure and Dividend Policy 12 Determining the Financing Mix Understanding the Difference Between Business and Financial Risk Business Risk Operating Risk Break-Even Analysis Essential Elements of the Break-Even Model Finding the Break-Even Point The Break-Even Point in Sales Dollars Sources of Operating Leverage Financial Leverage Combining Operating and Financial Leverage Capital Structure Theory A Quick Look at Capital Structure Theory The Importance of Capital Structure Independence Position The Moderate Position Firm Value and Agency Costs Agency Costs, Free Cash Flow, and Capital Structure Managerial Implications The Basic Tools of Capital Structure Management EBIT-EPS Analysis Comparative Leverage Ratios Industry Norms Net Debt and Balance-Sheet Leverage Ratios A Glance at Actual Capital Structure Management Chapter Summaries Review Questions Study Problems Mini Cases 13 Dividend Policy and Internal Financing How do Firms Distribute Firm Profits to their Stockholders? Does Dividend Policy Matter to Stockholders? Three Basic Views Making Sense of Dividend Policy Theory What Are We to Conclude? The Dividend Decision in Practice Legal Restrictions Liquidity Constraints Earnings Predictability Maintaining Ownership Control Alternative Dividend Policies Dividend Payment Procedures Stock Dividends and Stock Splits Stock Repurchases A Share Repurchase as a Dividend Decision The Investor’s Choice A Financing Decision or an Investment Decision? Practical Considerations—The Stock Repurchase Procedure Chapter Summaries Review Questions Study Problems Mini Case Part 5 Working-Capital Management and International Business Finance 14 Short-Term Financial Planning Financial Forecasting The Sales Forecast Forecasting Financial Variables The Percent of Sales Method of Financial Forecasting Analyzing the Effects of Profitability and Dividend Policy on DFN Analyzing the Effects of Sales Growth on a Firm’s DFN Limitations of the Percent of Sales Forecasting Method Constructing and Using a Cash Budget Budget Functions The Cash Budget Chapter Summaries Review Questions Study Problems 15 Working-Capital Management Managing Current Assets and Liabilities The Risk–Return Trade-Off The Advantages of Current versus Long-term Liabilities: Return The Disadvantages of Current versus Long-term Liabilities: Risk Determining the Appropriate Level of Working Capital The Hedging Principle Permanent and Temporary Assets Temporary, Permanent, and Spontaneous Sources of Financing The Hedging Principle: A Graphic Illustration Using the Cash Conversion Cycle Estimating the Cost of Short-Term Credit Using the Approximate Cost-of-Credit Formula Evaluating Sources of Short-Term Credit Unsecured Sources: Accrued Wages and Taxes Unsecured Sources: Trade Credit Unsecured Sources: Bank Credit Finance at Work Unsecured Sources: Commercial Paper Secured Sources: Accounts-Receivable Loans Secured Sources: Inventory Loans Chapter Summaries Review Questions Study Problems 16 International Business Finance The Globalization of Product and Financial Markets Foreign Exchange Markets and Currency Exchange Rates Foreign Exchange Rates What a Change in the Exchange Rate Means for Business Exchange Rates and Arbitrage Asked and Bid Rates Cross Rates Types of Foreign Exchange Transactions Exchange Rate Risk Interest Rate Parity Purchasing-Power Parity and the Law of One Price The International Fisher Effect Capital Budgeting for Direct Foreign Investment Repatriation of Profits and Taxation of Profits Abroad Foreign Investment Risks Chapter Summaries Review Questions Study Problems Mini Case 17 Cash, Receivables, and Inventory Management Available online at www.pearson.com/mylab/finance Web Appendix A Using a Calculator Available online at www.pearson.com/mylab/finance Glossary Indexes Back Cover
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