Principles of Managerial Finance. Lawrence J. Gitman Chad J. Zutter

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1 Global edition Principles of Managerial Finance Fourteenth edition Lawrence J. Gitman Chad J. Zutter

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3 Principles of Managerial Finance, Global Edition Table of Contents Cover Dedication Brief Contents Contents About the Authors Preface Supplements to the Fourteenth Edition Acknowledgments Part 1: Introduction to Managerial Finance Chapter 1: The Role of Managerial Finance Facebook: Not Much to "Like" about IPO 1.1 Finance and Business What is Finance? Career Opportunities in Finance Legal Forms of Business Organization Focus on Practice: Professional Certifications in Finance Why Study Managerial Finance? 1.2 Goal of the Firm Maximize Shareholder Wealth Maximize Profit? What about Stakeholders? The Role of Business Ethics Ethics and Share Price Focus on Ethics: Critics See Ethical Dilemmas in Google Glass? 1.3 Managerial Finance Function Organization of the Finance Function Relationship to Economics Relationship to Accounting Primary Activities of the Financial Manager 1.4 Governance and Agency Corporate Governance The Agency Issue Self-Test Problem

4 Chapter 2: The Financial Market Environment A Crisis in Housing Finance: Under Water in the Desert 2.1 Financial Institutions and Markets Financial Institutions Commercial Banks, Investment Banks and the Shadow Banking System Financial Markets The Relationship between Institutions and Markets The Money Market The Capital Market Focus on Practice: Berkshire Hathaway: Can Buffett Be Replaced? Focus on Ethics: The Ethics of Insider Trading 2.2 The Financial Crisis Financial Institutions and Real Estate Finance Falling Home Prices and Delinquent Mortgages Crisis of Confidence in Banks Spillover Effects and the Great Recession 2.3 Regulation of Financial Institutions and Markets Regulations Governing Financial Institutions Regulations Governing Financial Markets 2.4 Business Taxes Ordinary Income Capital Gains Self-Test Problem Integrative Case 1: Merit Enterprise Corp. Part 2: Financial Tools Chapter 3: Financial Statements and Ratio Analysis General Dynamics: Ratios Tell the Story of a Well-Managed Firm 3.1 The Stockholders' Report The Letter to Stockholders Global Focus: More Countries Adopt International Financial Reporting Standards The Four Key Financial Statements Focus on Ethics: Taking Earnings Reports at Face Value Notes to the Financial Statements

5 Consolidating International Financial Statements 3.2 Using Financial Ratios Interested Parties Types of Ratio Comparisons Cautions about Using Ratio Analysis Categories of Financial Ratios 3.3 Liquidity Ratios Current Ratio Quick (Acid-Test) Ratio 3.4 Activity Ratios Inventory Turnover Average Collection Period Average Payment Period Total Asset Turnover 3.5 Debt Ratios Debt Ratio Debt-to-Equity Ratio Times Interest Earned Ratio Fixed-Payment Coverage Ratio 3.6 Profitability Ratios Common-Size Income Statements Gross Profit Margin Operating Profit Margin Net Profit Margin Earnings Per Share (EPS) Return on Total Assets (ROA) Return on Equity (ROE) 3.7 Market Ratios Price/Earnings (P/E) Ratio Market/Book (M/B) Ratio 3.8 A Complete Ratio Analysis Summarizing All Ratios Dupont System of Analysis Self-Test

6 Chapter 4: Cash Flow and Financial Planning European Aeronautic Defense and Space Co.: Making a Profit While Bleeding Cash 4.1 Analyzing the Firm's Cash Flow Depreciation Depreciation Methods Developing the Statement of Cash Flows Free Cash Flow Focus on Practice: Free Cash Flow at Cisco Systems 4.2 The Financial Planning Process Long-Term (Strategic) Financial Plans Short-Term (Operating) Financial Plans Focus on Ethics: How Much is a CEO Worth? 4.3 Cash Planning: Cash Budgets The Sales Forecast Preparing the Cash Budget Evaluating the Cash Budget Coping with Uncertainty in the Cash Budget Cash Flow within the Month 4.4 Profit Planning: Pro Forma Statements Preceding Year's Financial Statements Sales Forecast 4.5 Preparing the Pro Forma Income Statement Considering Types of Costs and Expenses 4.6 Preparing the Pro Forma Balance Sheet 4.7 Evaluation of Pro Forma Statements Self-Test Chapter 5: Time Value of Money City of Cincinnati: Pay Me Now or Pay Me Later 5.1 The Role of Time Value in Finance Future Value Versus Present Value Computational Tools Basic Patterns of Cash Flow

7 5.2 Single Amounts Future Value of a Single Amount Present Value of a Single Amount Excel 5.3 Annuities Types of Annuities Finding the Future Value of an Ordinary Annuity Finding the Present Value of an Ordinary Annuity Finding the Future Value of an Annuity Due Finding the Present Value of an Annuity Due Finding the Present Value of a Perpetuity Excel 5.4 Mixed Streams Future Value of a Mixed Stream Present Value of a Mixed Stream Excel 5.5 Compounding Interest More Frequently Than Annually Semiannual Compounding Quarterly Compounding A General Equation for Compounding More Frequently Than Annually Using Computational Tools for Compounding More Frequently Than Annually Continuous Compounding Nominal and Effective Annual Rates of Interest Excel Focus on Ethics: How Fair Is "Check Into Cash"? 5.6 Special Applications of Time Value Determining Deposits Needed to Accumulate a Future Sum Loan Amortization Focus on Practice: New Century Brings Trouble for Subprime Mortgages Finding Interest or Growth Rates Finding an Unknown Number of Periods Excel Self-Test Integrative Case 2: Track Software, Inc. Part 3: Valuation of Securities

8 Chapter 6: Interest Rates and Bond Valuation The Federal Debt: A Huge Appetite for Money 6.1 Interest Rates and Required Returns Interest Rate Fundamentals Focus on Practice: Bond Valuation and Interest Rate Risk Term Structure of Interest Rates Risk Premiums: Issuer and Issue Characteristics 6.2 Corporate Bonds Legal Aspects of Corporate Bonds Cost of Bonds to the Issuer General Features of a Bond Issue Bond Yields Bond Prices Bond Ratings Common Types of Bonds Focus on Ethics: Can We Trust the Bond Raters? International Bond Issues 6.3 Valuation Fundamentals Key Inputs Basic Valuation Model 6.4 Bond Valuation Bond Fundamentals Basic Bond Valuation Bond Value Behavior Yield to Maturity (YTM) Semiannual Interest and Bond Values Excel Self-Test Chapter 7: Stock Valuation Tesla Motors: Going Green to Find Value 7.1 Differences between Debt and Equity Voice in Management Claims on Income and Assets Maturity Tax Treatment

9 7.2 Common and Preferred Stock Common Stock Preferred Stock Issuing Common Stock 7.3 Common Stock Valuation Market Efficiency The Efficient-Market Hypothesis Basic Common Stock Valuation Equation Focus on Practice: Understanding Human Behavior Helps Us Understand Investor Behavior Free Cash Flow Valuation Model Other Approaches to Common Stock Valuation Focus on Ethics: Psst! Have You Heard Any Good Quarterly Earnings Forecasts Lately? 7.4 Decision Making and Common Stock Value Changes in Expected Dividends Changes in Risk Combined Effect Self-Test Integrative Case 3: Encore International Part 4: Risk and the Required Rate of Return Chapter 8: Risk and Return Legg Mason Global Asset Management: Miller's Time 8.1 Risk and Return Fundamentals Risk Defined Focus on Ethics: If It Seems Too Good to Be True, It Probably is Return Defined Risk Preferences 8.2 Risk of a Single Asset Risk Assessment Risk Measurement 8.3 Risk of a Portfolio Portfolio Return and Standard Deviation Correlation Diversification

10 Correlation, Diversification, Risk and Return International Diversification Global Focus: An International Flavor to Risk Reduction 8.4 Risk and Return: The Capital Asset Pricing Model (CAPM) Types of Risk The Model: CAPM Self-Test Chapter 9: The Cost of Capital Alcoa: Falling Short of Expectations 9.1 Overview of the Cost of Capital Focus on Ethics: The Ethics of Profit The Basic Concept Sources of Long-Term Capital 9.2 Cost of Long-Term Debt Net Proceeds Before-Tax Cost of Debt After-Tax Cost of Debt Excel 9.3 Cost of Preferred Stock Preferred Stock Dividends Calculating the Cost of Preferred Stock 9.4 Cost of Common Stock Finding the Cost of Common Stock Equity Cost of Retained Earnings Cost of New Issues of Common Stock 9.5 Weighted Average Cost of Capital Calculating Weighted Average Cost of Capital (WACC) Focus on Practice: Uncertain Times Make for an Uncertain Weighted Average Cost of Capital Weighting Schemes Self-Test Problem

11 Integrative Case 4: Eco Plastics Company Part 5: Long-Term Investment Decisions Chapter 10: Capital Budgeting Techniques Waffles and More: TreatsWaffles and More, Cairo Capital Budgeting TechniquesWork at Treats 10.1 Overview of Capital Budgeting Motives for Capital Expenditure Steps in the Process Basic Terminology Capital Budgeting Techniques 10.2 Payback Period Decision Criteria Pros and Cons of Payback Analysis Focus on Practice: Limits on Payback Analysis 10.3 Net Present Value (NPV) Decision Criteria NPV and the Profitability Index NPV and Economic Value Added Excel 10.4 Internal Rate of Return (IRR) Decision Criteria Calculating the IRR Excel 10.5 Comparing NPV and IRR Techniques Net Present Value Profiles Conflicting Rankings Which Approach is Better? Focus on Ethics: Nonfinancial Considerations in Project Selection Self-Test Problem Chapter 11: Capital Budgeting Cash Flows Diamond Comic Distributors: A Superhero for Retailers

12 11.1 Relevant Cash Flows Major Cash Flow Components Focus on Ethics: A Question of Accuracy Expansion Versus Replacement Decisions Sunk Costs and Opportunity Costs International Capital Budgeting and Long-Term Investments Global Focus: Changes May Influence Future Investments in China 11.2 Finding the Initial Investment Installed Cost of New Asset After-Tax Proceeds from Sale of Old Asset Change in Net Working Capital Calculating the Initial Investment 11.3 Finding the Operating Cash Flows Interpreting the Term After-Tax Interpreting the Term Cash Flows Interpreting the Term Incremental 11.4 Finding the Terminal Cash Flow Proceeds from Sale of Assets Taxes on Sale of Assets Change in Net Working Capital 11.5 Summarizing the Relevant Cash Flows Self-Test Chapter 12: Risk and Refinements in Capital Budgeting YPF: Argentina Seizes Oil Company from Spanish Owners 12.1 Introduction to Risk in Capital Budgeting 12.2 Behavioral Approaches for Dealing with Risk Breakeven Analysis Scenario Analysis Simulation Focus on Practice: The Monte Carlo Method: The Forecast is for Less Uncertainty Excel 12.3 International Risk Considerations

13 12.4 Risk-Adjusted Discount Rates Determining Risk-Adjusted Discount Rates (RADRs) Focus on Ethics: Ethics and the Cost of Capital Applying RADRs Portfolio Effects RADRs in Practice 12.5 Capital Budgeting Refinements Comparing Projects with Unequal Lives Recognizing Real Options Capital Rationing Excel Self-Test Problem Integrative Case 5: Lasting Impressions Company Part 6: Long-Term Financial Decisions Chapter 13: Leverage and Capital Structure Lowe's: Lowe's Builds Leverage 13.1 Leverage Breakeven Analysis Operating Leverage Focus on Practice: Adobe's Leverage Financial Leverage Total Leverage Focus on Ethics: Repo The Firm's Capital Structure Types of Capital External Assessment of Capital Structure Capital Structure of NonU.S. Firms Capital Structure Theory Optimal Capital Structure 13.3 EBITEPS Approach to Capital Structure Presenting a Financing Plan Graphically Comparing Alternative Capital Structures Considering Risk in EBITEPS Analysis Basic Shortcoming of EBITEPS Analysis 13.4 Choosing the Optimal Capital Structure

14 Linkage Estimating Value Maximizing Value Versus Maximizing EPS Some Other Important Considerations Self-Test Chapter 14: Payout Policy Whirlpool Corporation: Increasing Dividends 14.1 The Basics of Payout Policy Elements of Payout Policy Trends in Earnings and Dividends Trends in Dividends and Share Repurchases Focus on Ethics: Are Buybacks Really a Bargain? 14.2 The Mechanics of Payout Policy Cash Dividend Payment Procedures Share Repurchase Procedures Tax Treatment of Dividends and Repurchases Focus on Practice: Capital Gains and Dividend Tax Treatment Extended to 2012 and Beyond for Some Dividend Reinvestment Plans Stock Price Reactions to Corporate Payouts 14.3 Relevance of Payout Policy Residual Theory of Dividends The Dividend Irrelevance Theory Arguments for Dividend Relevance 14.4 Factors Affecting Dividend Policy Legal Constraints Contractual Constraints Growth Prospects Owner Considerations Market Considerations 14.5 Types of Dividend Policies Constant-Payout-Ratio Dividend Policy Regular Dividend Policy Low-Regular-and-Extra Dividend Policy 14.6 Other Forms of Dividends

15 Stock Dividends Stock Splits Self-Test Problem Integrative Case 6: O'Grady Apparel Company Part 7: Short-Term Financial Decisions Chapter 15: Working Capital and Current Assets Management Treasury Risk Survey 2013: Worries about Liquidity Occupy the Minds of Treasury Managers 15.1 Net Working Capital Fundamentals Working Capital Management Net Working Capital Trade-Off between Profitability and Risk 15.2 Cash Conversion Cycle Calculating the Cash Conversion Cycle Funding Requirements of the Cash Conversion Cycle Strategies for Managing the Cash Conversion Cycle 15.3 Inventory Management Differing Viewpoints about Inventory Level Common Techniques for Managing Inventory Focus on Practice: RFID: The Wave of the Future? International Inventory Management 15.4 Accounts Receivable Management Credit Selection and Standards Credit Terms Credit Monitoring 15.5 Management of Receipts and Disbursements Float Speeding Up Collections Slowing Down Payments Focus on Ethics: Stretching Accounts Payable: Is It a Good Policy? Cash Concentration Zero-Balance Accounts Investing in Marketable Securities

16 Self-Test Chapter 16: Current Liabilities Management FastPay: Getting Cash into the Hands of Online Media Companies 16.1 Spontaneous Liabilities Accounts Payable Management Accruals Focus on Ethics: Accruals Management 16.2 Unsecured Sources of Short-Term Loans Bank Loans Commercial Paper Focus on Practice: The Ebb and Flow of Commercial Paper International Loans 16.3 Secured Sources of Short-Term Loans Characteristics of Secured Short-Term Loans Use of Accounts Receivable as Collateral Use of Inventory as Collateral Self-Test Problem Integrative Case 7: Casa de Diseño Part 8: Special Topics in Managerial Finance Chapter 17: Hybrid and Derivative Securities Nokia Corporation: Nokia Calls on Convertible Bond Market for Help 17.1 Overview of Hybrids and Derivatives 17.2 Leasing Types of Leases Leasing Arrangements Focus on Practice: Leases to Airlines End on a Sour Note Lease-Versus-Purchase Decision Effects of Leasing on Future Financing Advantages and Disadvantages of Leasing 17.3 Convertible Securities

17 Types of Convertible Securities General Features of Convertibles Financing with Convertibles Determining the Value of a Convertible Bond 17.4 Stock Purchase Warrants Key Characteristics Implied Price of an Attached Warrant Values of Warrants 17.5 Options Calls and Puts Options Markets Options Trading Role of Call and Put Options in Fund Raising Focus on Ethics: Options Backdating Hedging Foreign-Currency Exposures with Options Self-Test Chapter 18: Mergers, LBOs, Divestitures and Business Failure Dell, Inc.: Carl Icahn and Founder Michael Dell Fight for Computer Maker 18.1 Merger Fundamentals Terminology Motives for Merging Types of Mergers 18.2 LBOs and Divestitures Leveraged Buyouts (LBOs) Divestitures 18.3 Analyzing and Negotiating Mergers Valuing the Target Company Stock Swap Transactions Merger Negotiation Process Holding Companies International Mergers Global Focus: International Mergers 18.4 Business Failure Fundamentals Types of Business Failure

18 Major Causes of Business Failure Focus on Ethics: Too Big to Fail? Voluntary Settlements 18.5 Reorganization and Liquidationin Bankruptcy Bankruptcy Legislation Reorganization in Bankruptcy (Chapter 11) Liquidation in Bankruptcy (Chapter 7) Self-Test Chapter 19: International Managerial Finance Air New Zealand: Kiwis Flying High on Currency Gains 19.1 The Multinational Company and Its Environment Key Trading Blocs GATT and the WTO Legal Forms of Business Organization Taxes Financial Markets 19.2 Financial Statements Subsidiary Characterization and Functional Currency Translation of Individual Accounts 19.3 Risk Exchange Rate Risks Political Risks Focus on Ethics: Chiquita's Slippery Situation 19.4 Long-Term Investment and Financing Decisions Foreign Direct Investment Investment Cash Flows and Decisions Capital Structure Global Focus: Take an Overseas Assignment to Take a Step Up the Corporate Ladder Long-Term Debt Equity Capital 19.5 Short-Term Financial Decisions Cash Management Credit and Inventory Management

19 Appendix Glossary Credits Index 19.6 Mergers and Joint Ventures Self-Test Problem Integrative Case 8: Organic Solutions

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This page intentionally left blank Financial Management: International Edition Table of Contents Cover Contents Part 1 Fundamental Concepts and Basic Tools of Finance 1 Financial Management 1.1 The Cycle