European Edition. Peter Moles, Robert Parrino and David Kidwell. WILEY A John Wiley and Sons, Ltd, Publication

Transcription

1 European Edition Peter Moles, Robert Parrino and David Kidwell WILEY A John Wiley and Sons, Ltd, Publication

2 Preface Organisation and coverage Proven pedagogical framework Instructor and student resources Acknowledgements xxvii xxix xxxii xxxvi xxxviii PART 1 intit@b>u TI@[N] H CHAPTER 1 The Financial Manager and the Firm 2 The Role of the Financial Manager, 4 Stakeholders, 4 It's All About Cash Flows, 5 Building Intuition: Cash Flows Matter Most to Investors, 7 Three Fundamental Decisions in Financial Management, 7 Building Intuition: Sound Investments are Those Where the Value of the Benefits Exceeds Their Costs, 8 Building Intuition: Financing Decisions Affect the Value of the Firm, 9 Forms of Business Organisation, 10 Sole Proprietorships, 10 Partnerships, 11 Companies, 11.' Hybrid Forms of Business Organisation, 13 Managing the Financial Function, 14 Organisational Structure, 14 Positions Reporting to the CFO, 14 External Auditors, 15 The Audit Committee, 16 The Goal of the Firm, 16 What Should Management Maximise?, 16 Why Not Maximise Profits?, 16 Building Intuition: The Timing of Cash Flows Affects Their Value, 17 Building Intuition: The Riskiness of Cash Flows Affects Their Value, 17 Maximise the Value of the Firm's Shares, 18 Building Intuition: The Financial Manager's Goal is to Maximise the Value of the Firm's Shares, 18 Can Management Decisions Affect Share Prices?, 18 Agency Conflicts: Separation of Ownership and Control, 20 Ownership and Control, 20

3 S FULL CONTENTS Agency Relationships, 20 Do Managers Really Want to Maximise the Share Price?, 20 Aligning the Interests of Management and Shareholders, 21 Corporate Governance Frameworks, 23 OECD Principles of Corporate Governance, 24 Sarbanes-Oxley and Other Regulatory Reforms in the United States, 24 The Importance of Ethics in Business, 26 Business Ethics, 26 Are Business Ethics Different from Everyday Ethics?, 27 Types of Ethical Conflicts in Business, 28 The Importance of an Ethical Business Culture, 29 Serious Consequences, 29 Summary of Learning Objectives, 31 Self-Study Problems, 32 Solutions to Self-Study Problems, 32 Critical Thinking Questions, 32 Questions and Problems, 33 Sample Test Problems, 34 2 The Financial Environment and the Level of Interest Rates 38 The Financial System, 41 The Financial System at Work, 41 How Funds Flow Through the Financial System, 42 Direct Financing, 43 A Direct Market Transaction, 43 Investment Banks and Direct Financing, 44 Types of Financial Markets, 45 Primary and Secondary Markets, 46 Exchanges and Over-the-Counter Markets, 47 Money and Capital Markets, 47 Public and Private Markets, 48 Futures and Options Markets, 49 The Stock Market, 49 Second Markets and Multilateral Trading Facilities, 50 Stock Market Indices, 50 Financial Institutions and Indirect Financing, 52 Indirect Market Transactions, 52 Financial Institutions and their Services, 53 Companies and the Financial System, 54

4 The Determinants of Interest Rate Levels, 55 The Real Rate of Interest, 56 Loan Contracts and Inflation, 58 The Fisher Equation and Inflation, 58 Cyclical and Long-Term Trends in Interest Rates, 60 Planning Ahead by Financial Managers, 62 Summary of Learning Objectives, 62 Summary of Key Equations, 64 Self-Study Problems, 64 Solutions to Self-Study Problems, 64 Critical Thinking Questions, 65 Questions and Problems, 65 Sample Test Problems, 67 CHAPTER 3 Financial Statements, Cash Flows and Taxes 69 Financial Statements and Accounting Principles, 71 Annual Reports, 71 Generally Accepted Accounting Principles, 72 Fundamental Accounting Principles, 73 The Balance Sheet, 75 Current Assets and Liabilities, 75 Non-Current Assets and Liabilities, 77 Equity, 78 Market Value versus Book Value, 81 A More Informative Balance Sheet, 81 A Market-Value Balance Sheet, 83 The Income Statement and the, Statement of Retained Earnings, 84 The Income Statement, 84 The Statement of Retained Earnings, 88 Cash Flows, 88 Net Income versus Cash Flows, 88 The Statement of Cash Flows, 89 Additional Cash Flow Calculations, 92 Tying the Financial Statements Together, 92 International Accounting Issues, 95 Information, Timeliness and Language, 95 Foreign Currency Issues, 95 Differences in Presentation and Accounting Standards, 95 Differences in the Business Environment, 96 Corporate Income Tax, 97 Corporate Income Taxes, 98 Average versus Marginal Tax Rates, 98 Unequal Treatment of Dividends and Interest Payments, 100

5 Summary of Learning Objectives, 102 Summary of Key Equations, 104 Self-Study Problems, 104 Solutions to Self-Study Problems, 105 Critical Thinking Questions, 106 Questions and Problems, 106 Sample Test Problems, 110 Analysing Financial Statements Background for Financial Statement Analysis, 114 Perspectives on Financial Statement Analysis, 114 Guidelines for Financial Statement Analysis, 115 Common-Size Financial Statements, 116 Common-Size Balance Sheets, 117 Common-Size Income Statements, 119 Financial Statement Analysis, 121 Why Ratios are Better Measures, 121 Short-Term Liquidity Ratios, 122 Efficiency Ratios, 125 Leverage Ratios, 128 Profitability Ratios, 132 Market-Value Indicators, 134 Concluding Comments on Ratios, 135 The DuPont System: A Diagnostic Tool, 136 An Overview of the DuPont System, 136 The ROA Equation, 136 The ROE Equation, 138 The DuPont System, 138 Applying.the DuPont System, 139 Is Maximising ROE an Appropriate Goal?, 140 Selecting a Benchmark, 141 Trend Analysis, 141 Industry Analysis, 141 Peer Group Analysis, 142 Using Financial Ratios, 144 Performance Analysis of Fabrique Aerospatiale, 144 Limitations of Financial Statement Analysis, 147 Summary of Learning Objectives, 148 Summary of Key Equations, 149 Self-Study Problems, 151 Solutions to Self-Study Problems, 152 Critical Thinking Questions, 154 Questions and Problems, 154 Sample Test Problems, 160

6 FUTURE CASH AMD CHAPTER 5 The Time Value of Money 162 The Time Value of Money, 164 Consuming Today or Tomorrow, 164 Building Intuition: The Value of Money Changes with Time, 165 Time Lines as Aids to Problem Solving, 165 Future Value versus Present Value, 166 Future Value and Compounding, 167 Single-Period Investment, 167 Two-Period Investment, 168 The Future Value Equation, 170 The Future Value Factor, 172 Applying the Future Value Formula, 173 Building Intuition: Compounding Drives Much of the Earnings on Long-Term Investments, 175 Present Value and Discounting, 179 Single-Period Investment, 179 Multiple-Period Investment, 180 The Present Value Equation, 181 Future and Present Value Equations are the Same, 181 Applying the Present Value Formula, 181 The Relations among Time, the Discount Rate and Present Value, 183 Additional Concepts and Applications, 185 Finding the Interest Rate, 186 The Rule of 72, 187.' Compound Growth Rates, 187 Concluding Comments, 189 Summary of Learning Objectives, 190 Summary of Key Equations, 191 Self-Study Problems, 191 Solutions to Self-Study Problems, 191 Critical Thinking Questions, 193 Questions and Problems, 193 Sample Test Problems, 196 CHAPTER 6 Discounted Cash Flows and Valuation 198 Multiple Cash Flows, 200 Future Value of Multiple Cash Flows, 200 Present Value of Multiple Cash Flows, 203 Level Cash Flows: Annuities and Perpetuities, 206 Present Value of an Annuity, 207 Future Value of an Annuity, 218

7 Perpetuities, 219 Annuities Due, 221 Cash Flows that Grow at a Constant Rate, 222 Growing Annuity, 223 Growing Perpetuity, 223 The Effective Annual Interest Rate, 224 Why the Confusion?, 225 Calculating the Effective Annual Interest Rate, 225 Comparing Interest Rates, 226 Consumer Protection and Interest Rate Disclosure, 227 The Appropriate Interest Rate Factor, 228 Summary of Learning Objectives, 229 Summary of Key Equations, 230 Self-Study Problems, 231 Solutions to Self-Study Problems, 231 Critical Thinking Questions, 232 Questions and Problems, 233 Sample Test Problems, 238 Appendix: Deriving the Formula for the Present "Value of an Ordinary Annuity, 238 Problem, Risk and Return 241 Risk and Return, 244 Building Intuition: More Risk Means a Higher Expected Return, 244 Quantitative Measures of Return, 244 Holding Period Returns, 244 Expected Returns, 246 The Variance and Standard Deviation as Measures of Risk, 250 Calculating the Variance and Standard Deviation, 250 Interpreting the Variance and Standard Deviation, 251 Other Measures of Risk, 255, Historical Market Performance, 255 Risk and Diversification, 259 Single-Asset Portfolios, 260 < Portfolios with More Than One Asset, 262 Building Intuition: Diversified Portfolios are Less Risky, 268 The Limits of Diversification, 268 Systematic Risk, 270 Why Systematic Risk is All that Matters, 270 Building Intuition: Systematic Risk is the Risk that Matters, 270 Measuring Systematic Risk, 270 Compensation for Bearing Systematic Risk, 274 The Capital Asset Pricing Model, 275 The Security Market Line, 276 The Capital Asset Pricing Model and Portfolio Returns, 277

8 Summary of Learning Objectives, 279 Summary of Key Equations, 280 Self-Study Problems, 281 Solutions to Self-Study Problems, 281 Critical Thinking Questions, 282 Questions and Problems, 283 Sample Test Problems, 286 CHAPTER 8 Bond Valuation and the Structure of Interest Rates 288 Capital Market Efficiency, 290 Efficient Market Hypotheses, 291 Corporate Bonds, 293 Market for Corporate Bonds, 293 Bond Price Information, 294 Types of Corporate Bonds, 294 Bond Valuation, 296 The Bond Valuation Formula, 297 Par, Premium and Discount Bonds, 298 Semi-annual Compounding, 301 Zero-Coupon Bonds, 303 Bond Yields, 305 Yield to Maturity, 305 Effective Annual Yield, 306 Realised Yield, 308 Interest Rate Risk, 309 Bond Theorems, 309. Bond Theorem Applications, 311 The Structure of Interest Rates, 312 Marketability, 313 Call Provision, 313 Default Risk, 313 The Term Structure of Interest Rates, 315 Summary of Learning Objectives, 318 Summary of Key Equations, 319 Self-Study Problems, 320 Solutions to Self-Study Problems, 320 Critical Thinking Questions, 322 Questions and Problems, 322 Sample Test Problems, 325 CHAPTER 9 Share Valuation 327 The Market for Shares, 329 Secondary Markets, 329 Secondary Markets and their Efficiency, 330 Reading the Stock Market Listings, 332

9 Ordinary and Preference Shares, 334 Preference Shares: Debt or Equity?, 335 Valuing Ordinary Shares, 335 A One-Period Model, 335 A Perpetuity Model, 336 The General Dividend Valuation Model, 337 The Growth Share Pricing Paradox, 338 Share Valuation: Some Simplifying Assumptions, 339 Zero-Growth Dividend Model, 339 Constant-Growth Dividend Model, 340 Computing Future Share Prices, 343 The Relationship between R and g, 344 Mixed (Supernormal) Growth Dividend Model, 345 Valuing Preference Shares, 348 Preference Shares with a Fixed Maturity, 349 Perpetual Preference Shares, 350 Summary of Learning Objectives, 351 Summary of Key Equations, 352 Self-Study Problems, 352 "Solutions to Self-Study Problems, 353 Critical Thinking Questions, 354 Questions and Problems, 355 Sample Test Problems, 358 The Fundamentals of Capital Budgeting 362 An Introduction to Capital Budgeting, 364 The Importance of Capital Budgeting, 364 The Capital Budgeting Process, 365 Sources of Information, 365 Classification of Investment Projects, 366 Basic Capital Budgeting Terms, 367 Building Intuition: Investment Decisions have Opportunity Costs, 368 Net Present Value, 368 Valuation of Real Assets, 369 NPV - The Basic Concept, 369 NPV and Value Creation, 370 Framework for Calculating NPV, 371 Net Present Value Techniques, 372 Concluding Comments on NPV, 376 The Payback Period, 377 Computing the Payback Period, 377

10 How the Payback Period Performs, 378 Discounted Payback Period, 380 Evaluating the Payback Rule, 381 The Accounting Rate of Return, 382 Internal Rate of Return, 382 Calculating the IRR, 383 When the IRR and NPV Methods Agree, 385 When the NPV and IRR Methods Disagree, 387 Modified Internal Rate of Return (MIRR), 391 IRR versus NPV: A Final Comment, 392 Capital Budgeting in Practice, 393 Practitioners' Methods of Choice, 394 Ongoing and Post-Audit Reviews, 394 Summary of Learning Objectives, 395 Summary of Key Equations, 396 Self-Study Problems, 397 Solutions to Self-Study Problems, 398 Critical Thinking Questions, 400 Questions and Problems, 401 ' Sample Test Problems, 407 CHAPTER 11 Cash Flows and Capital Budgeting 408 Calculating Project Cash Flows, 410 Building Intuition: Capital Budgeting is Forward Looking, 410 Incremental After-Tax Free Cash Flows, 411 The FCF Calculation, 411 Building Intuition: Incremental After-Tax Free Cash Flows are what Shareholders Care About, 413 Cash Flows from Operations, 414 Cash Flows Associated with Investments, 415 The FCF Calculation: An Example, 415 FCF versus Accounting Earnings, 419 Estimating Cash Flows in Practice, 420 Five General Rules for Incremental After-Tax Free Cash Flow Calculations, 420 Nominal versus Real Cash Flows, 424 Tax Rates and Depreciation, 426 Computing the Terminal-Year FCF, 431 Expected Cash Flows, 435 Building Intuition: We Discount Expected Cash Flows in an NPV Analysis, 436 Forecasting Free Cash Flows, 437 Cash Flows from Operations, 437 Investment Cash Flows, 438

11 Special Cases (Optional), 439 Projects with Different Lives, 439 When to Disinvest from an Asset, 442 When to Replace an Existing Asset, 443 The Cost of Using an Existing Asset, 444 Summary of Learning Objectives, 445 Summary of Key Equations, 446 Self-Study Problems, 446 Solutions to Self-Study Problems, 447 Critical Thinking Questions, 448 Questions and Problems, 449 Sample Test Problems, 453 H2 Evaluating Project Economics and Capital Rationing 456 Variable Costs, Fixed Costs and Project Risk, 458 Cost Structure and Sensitivity of EBITDA to Revenue Changes, 459 Cost Structure and Sensitivity of EBIT to Revenue Changes, 462 Building Intuition: High Fixed Costs Mean Larger Fluctuations in Cash Flows and Profits, 463 Calculating Operating Leverage, 466 Degree of Pre-tax Cash Flow Operating Leverage, 467 Degree of Accounting Operating Leverage, 467 Building Intuition: Revenue Changes Drive Profit Volatility through Operating Leverage, 469 Break-Even Analysis, 469 Pre-Tax Operating Cash Flow Break-Even, 470 Accounting Break-Even, 472 Risk Analysis, 474 Sensitivity Analysis, 475 Scenario Analysis, 476 Simulation Analysis, 477 Investment Decisions with Capital Rationing, 478 Capital Rationing in a Single Period, 478 Capital Rationing Across Multiple Periods, 481 Summary of Learning Objectives, 483 Summary of Key Equations, 484 Self-Study Problems, 485 Solutions to Self-Study Problems, 485 Critical Thinking Questions, 486 Questions and Problems, 487 Sample Test Problems, > The Cost of Capital 492 The Firm's Overall Cost of Capital, 494 The Market Value Balance Sheet, 495

12 Building Intuition: The Market Value of a Firm's Assets Equals the Market Value of the Claims on Those Assets, 496 How Firms Estimate their Cost of Capital, 497 Building Intuition: Firm's Cost of Capital is a Weighted Average of All its Financing Costs, 499 The Cost of Debt, 499 Key Concepts for Estimating the Cost of Debt, 500 Building Intuition: The Current Cost of Long-Term Debt is What Matters When Calculating WACC, 501 Estimating the Current Cost of a Bond or an Outstanding Loan, 501 Taxes and the Cost of Debt, 502 Estimating the Cost of Debt for a Firm, 503 The Cost of Equity, 505 Ordinary Shares, 505 Preference Shares, 512 Using the WACC in Practice, 514 Calculating WACC: An Example, 515 Limitations of WACC as a Discount Rate for Evaluating Projects, 517 Building Intuition: Why WACC Only Works for the Current Mix of Liabilities, 520 Alternatives to Using WACC for Evaluating Projects, 520 Summary of Learning Objectives, 522 Summary of Key Equations, 523 Self-Study Problems, 524 Solutions to Self-Study Problems, 524 Critical Thinking Questions, 525 Questions and Problems, 526 Sample Test Problems, 529' PART 5 AND CHAPTER 14 Working Capital Management 532 Working Capital Basics, 534 Working Capital Terms and Concepts, 535 Working Capital Accounts and Trade-Offs, 535 The Operating and Cash Conversion Cycles, 538 Operating Cycle, 539 Cash Conversion Cycle, 541 Working Capital Investment Strategies, 544 Flexible Current Asset Investment Strategy, 544 Restrictive Current Asset Investment Strategy, 544 Building Intuition: Consideration of the Working Capital Trade-offs, 545

13 The Working Capital Trade-Off, 545 Accounts Receivable, 546 Terms of Sale, 546 Aging Accounts Receivable, 548 / Inventory Management, 549 Economic Order Quantity, 549 Just-in-Time Inventory Management, 551 Cash Management and Budgeting, 551 Reasons for Holding Cash, 551 Cash Collection, 552 Financing Working Capital, 554 Strategies for Financing Working Capital, 554 Financing Working Capital in Practice, 556 Sources of Short-Term Financing, 557 Summary of Learning Objectives, 560 Summary of Key Equations, 562 Self-Study Problems, 562 Solutions to Self-Study Problems, 563 Critical Thinking Questions, 564 " "Questions and Problems, 564 Sample Test Problems, How Firms Raise Capital 571 Bootstrapping, 573 How New Businesses Get Started, 574 Initial Funding of the Firm, 574 Business Incubators, 574 Venture Capital, 575 The Venture Capital Industry, 575 Why Venture Capital Funding is Different, 576 The Venture Capital Funding Cycle, 577 Venture Capitalists Provide More Than Financing, 581 The Cost of Venture Capital Funding, 581 Initial Public Offering, 581 Advantages and Disadvantages of Going Public, 582 Building Intuition: Investors View Seasoned Securities as Less Risky than Unseasoned Securities, 583 Investment Banking Services, 583 Origination, 584 Underwriting, 585 Distribution, 587 The Proceeds, 587 IPO Pricing and Cost, 589 The Underpricing Debate, 589 IPOs are Consistently Underpriced, 589

14 2S38 The Cost of an IPO, 593 _- Seasoned Offerings by a Public Company, 594 Raising Seasoned Equity, 594 The Costs of a Seasoned Equity Issue, 599 y Issuing Bonds, -599 Private Markets and Bank Loans, 601 Private versus Public Markets, 601 Private Placements, 601 Competitive or Negotiated Sale, 602 Private Equity Firms, 603 Commercial Bank Lending, 604 Lease Finance, 606 Concluding Comments on Funding the Firm, 609 Summary of Learning Objectives, 610 Summary of Key Equations, 611 Self-Study Problems, 611 Solutions to Self-Study Problems, 612 Critical Thinking Questions, 612 Questions and Problems, 613 ' Sample Test Problems, 616 CHAPTER 16 Capital Structure Policy 618 Capital Structure and Firm Value, 620 The Optimal Capital Structure, 620 Building Intuition: The Optimal Capital Structure Minimises the Cost of Financing a Firm's Activities, 620 The Modigliani and Miller Propositions, 620 Building Intuition: Capital Structure Does Not Affect Firm Value If It Does Not Affect Total Cash Flows to Security Holders, 622 Building Intuition: The Cost of Equity Increases with Financial Leverage, 625 The Benefits and Costs of Using Debt, 630 The Benefits of Debt, 631 The Costs of Debt, 637 Building Intuition: People Behave Differently towards a Firm in Financial Distress and this Increases Bankruptcy Costs, 640 Two Theories of Capital Structure, 644 The Trade-Off Theory, 644 The Pecking-Order Theory, 645 The Empirical Evidence, 645 Practical Considerations in Choosing a Capital Structure, 647 Summary of Learning Objectives, 649 Summary of Key Equations, 650 Self-Study Problems, 650 Solutions to Self-Study Problems, 650

15 Critical Thinking Questions, 651. Questions and Problems, 652 Sample Test Problems, 655 CHAPTER 17 Dividends and Dividend Policy 658 Dividends, 660 Building Intuition: Dividends Reduce the Shareholders' Investment in a Firm, 661 Types of Dividends, 661 The Dividend Payment Process, 663 Building Intuition: Dividend Announcements Send Signals to Investors, 664 Share Repurchases, 667 How Share Buybacks Differ from Dividends, 667 How Shares are Repurchased, 669 Dividend Policy and Firm Value, 670 Benefits and Costs of Dividends, 671 Share Price Reactions to Dividend Announcements, 673 Dividends versus Share Repurchases, 674 Share Dividends and Share Splits, 675 Share Dividends, 675 Share Splits, 675 Reasons for Share Dividends and Splits, 676 Setting a Dividend Policy, 677 What Managers Tell Us, 677 Practical Considerations in Setting a Dividend Policy, 678 Summary of Learning Objectives, 678 Self-Study Problems, 680 Solutions to Self-Study Problems, 680 Critical Thinking Questions, 681 Questions and Problems, 681 Sample Test Problems, 684 & BUSINESS AND FINANCIAL CHAPTER 18 Business Formation, Growth and Valuation 688 Starting a Business, 690 Making the Decision to Proceed, 690 Choosing the Right Organisational Form, 691 Financial Considerations, 696 The Role of the Business Plan, 701 Why Business Plans are Important, 701

16 The Key Elements of a Business Plan, 702 Valuing a Business, 703 Fundamental Business Valuation Principles, 703 Building Intuition: The Value of a Business is Specific to a Point in Time, 704 \Business Valuation Approaches, 704 ^_J Building Intuition: The Value of a Business is Not the Same to All Investors, 705 Important Issues in Valuation, 720 Public versus Private Companies, 720 Young (Rapidly Growing) versus Mature Companies, 721 Controlling Interest versus Minority Interest, 722 Key People, 723 Summary of Learning Objectives, 723 Summary of Key Equations, 724 Self-Study Problems, 725 Solutions to Self-Study Problems, 726 Critical Thinking Questions, 727 Questions and Problems, 728 "-" Sample Test Problems, 732 CHAPTER 19 Financial Planning and Forecasting 734 Financial Planning, 736 The Planning Documents, 736 Building Intuition: A Firm's Strategy Drives its Business Decisions, 738 Concluding Comments, 739 Financial Planning Models, 739 The Sales Forecast, 740 Building a Financial Planning Model, 740 A Simple Planning Model, 742 A Better Financial Planning Model, 745 Travaux Maritime SA, 745 The Income Statement, 746 The Balance Sheet, 747 The Preliminary Projected Balance Sheet, 749 The Final Projected Balance Sheet, 751 Beyond the Basic Planning Models, 753 Improving Financial Planning Models, 753 Managing and Financing Growth, 755 External Funding Needed, 756 A Graphical View of Growth, 759 The Internal Growth Rate, 760 The Sustainable Growth Rate, 761 Growth Rates and Profits, 763 Growth as a Planning Goal, 764

17 Summary of Learning Objectives, 765 Summary of Key Equations, 766 Self-Study Problems, 767 Solutions to Self-Study Problems, 768 Critical Thinking Questions, 770 Questions and Problems, 770 Sample Test Problems, CORPOHATi KOSGC 20 Corporate Risk Management 778 Why Companies Manage Corporate Risks, 781 Building Intuition: Risk Management Can Help Firms Avoid Having to Raise Capital When it is Difficult to Do so, 782 The Risk Management Process, 782 Building Intuition: Risk Management Can Help Firms Address Capital Market Imperfections, 783 Managing Operational, Business and Financial Risks, 784 Operational and Business Risks, 784 Risk Management Methods, 785 Building Intuition: Financial Risk Management Allows Firms to Exploit their Comparative Advantages, 786 Building Intuition: Corporate Risk Management Decisions are Based on Cost-Benefit Trade-offs, 786 Forwards and Futures, 787 Valuing a Forward Contract, 787 The Value of a Forward Contract Prior to Maturity, 792 Futures Contracts, 793 Swaps, 794 Valuing Interest Rate Swaps, 797 Cross-Currency Swaps, 800 Valuing Cross-Currency Swaps, 801 Financial Options, 804 v Call Options, 804 Put Options, 806 American, European and Bermudan Options, 808 More on the Shape of Option Payoff Functions, 808 Building Intuition: Payoff Functions for Options are Not Linear, 808 Option Valuation, 809 Limits on Option Values, 809 Variables that Affect Option Values, 811 The Binomial Option Pricing Model, 812

18 Put-Call Parity, 816 Options and Risk Management, 817 Real Options, 818 Options to Defer Investment, 818 Options to Make Follow-On Investments, 819 Options to Change Operations, 819 Options to Abandon Projects, 820 Concluding Comments on NPV Analysis and Real Options, 820 Agency Costs, 821 Agency Costs of Debt, 822 Agency Costs of Equity, 824 Summary of Learning Objectives, 825 Summary of Key Equations, 827 Self-Study Problems, 827 Solutions to Self-Study Problems, 828 Critical Thinking Questions, 830 Questions and Problems, 831 Sample Test Problems, 835 CHAPTER 21 International Financial Management 837 Introduction to International Financial Management, 839 Globalisation of the World Economy, 839 The Rise of Multinational Corporations, 840 Factors Affecting International Financial Management, 841 Goals of International Financial Management, 845 Basic Principles Remain the Same, 845 Building Intuition: The Basic Principles of Finance Apply No Matter Where You Do Business, 846 Foreign Exchange Markets, 847 Market Structure and Major Participants, 847 Foreign Exchange Rates, 847 The Equilibrium Exchange Rate, 850 Foreign Currency Quotations, 850 Country Risk, 858 Country Risk Analysis, 859 Cost of Capital for International Projects, 862 Building Intuition: It is Best to Adjust the Cash Flows when Modelling Country Risk, 864 Country Risk Premium, 865 International Capital Budgeting, 868 Determining Cash Flows, 869 Exchange Rate Risk, 869 Country Risk, 870 The SOCAFI Brazil Example, 871

19 Islamic Finance, 875 Islamic Finance Instruments, 876 Summary of Learning Objectives, 877 Summary of Key Equations, 879 Self-Study Problems, 879 Solutions to Self-Study Problems, 880 Critical Thinking Questions, 881 Questions and Problems, 881 Sample Test Problems, 885 Present Value and Future Value Tables 887 Solutions to Selected Questions and Problems 892 Glossary 903 Subject Index 915 Company Index 931