GLOBAL EDITION. Financial Management. Principles and Applications THIRTEENTH EDITION. Sheridan Titman Arthur J. Keown John D.

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1 GLOBAL EDITION Financial Management Principles and Applications THIRTEENTH EDITION Sheridan Titman Arthur J. Keown John D. Martin

2 The Pearson Series in Finance Berk/DeMarzo Corporate Finance* Corporate Finance: The Core* Berk/DeMarzo/Harford Fundamentals of Corporate Finance* Brooks Financial Management: Core Concepts* Copeland/Weston/Shastri Financial Theory and Corporate Policy Dorfman/Cather Introduction to Risk Management and Insurance Eakins/McNally Corporate Finance Online* Eiteman/Stonehill/Moffett Multinational Business Finance* Fabozzi Bond Markets: Analysis and Strategies Foerster Financial Management: Concepts and Applications* Frasca Personal Finance Gitman/Zutter Principles of Managerial Finance* Principles of Managerial Finance--- Brief Edition* Haugen The Inefficient Stock Market: What Pays Off and Why Modern Investment Theory Holden Excel Modeling in Corporate Finance Excel Modeling in Investments Hughes/MacDonald International Banking: Text and Cases Hull Fundamentals of Futures and Options Markets Options, Futures, and Other Derivatives Keown Personal Finance: Turning Money into Wealth* Keown/Martin/Petty Foundations of Finance: The Logic and Practice of Financial Management* Madura Personal Finance* Marthinsen Risk Takers: Uses and Abuses of Financial Derivatives McDonald Derivatives Markets Fundamentals of Derivatives Markets Mishkin/Eakins Financial Markets and Institutions Moffett/Stonehill/Eiteman Fundamentals of Multinational Finance Pennacchi Theory of Asset Pricing Rejda/McNamara Principles of Risk Management and Insurance Smart/Gitman/Joehnk Fundamentals of Investing* Solnik/McLeavey Global Investments Titman/Keown/Martin Financial Management: Principles and Applications* Titman/Martin Valuation: The Art and Science of Corporate Investment Decisions Weston/Mitchell/Mulherin Takeovers, Restructuring, and Corporate Governance *denotes titles with MyLab Finance. Log onto to learn more. denotes the availability of a Global Edition

3 Financial Management: Principles and Applications, Global Edition - PDF - PDF Table of Contents Cover Title Page Copyright Page Dedication Brief Contents Contents Teaching Students the Logic of Finance Preface Acknowledgments Chapter 1: Getting Started: Principles of Finance 1.1. Finance: An Overview What Is Finance? Why Study Finance? 1.2. Three Types of Business Organizations Sole Proprietorship Partnership Corporation How Does Finance Fit into the Firms Organizational Structure? 1.3. The Goal of the Financial Manager Maximizing Shareholder Wealth Ethical Considerations in Corporate Finance Regulation Aimed at Making the Goal of the Firm Work: The SarbanesOxley Act 1.4. The Five Basic Principles of Finance

4 Chapter 2: Firms and the Financial Markets 2.1. The Basic Structure of the U.S. Financial Markets 2.2. The Financial Marketplace: Financial Institutions Commercial Banks: Everyones Financial Marketplace Nonbank Financial Intermediaries Finance for Life: Controlling Costs in Mutual Funds 2.3. The Financial Marketplace: Securities Markets How Securities Markets Bring Corporations and Investors Together Types of Securities Finance in a Flat World: Wheres the Money Around the World Chapter 3: Understanding Financial Statements 3.1. An Overview of the Firms Financial Statements Basic Financial Statements Why Study Financial Statements? What Are the Accounting Principles Used to Prepare Financial Statements? 3.2. The Income Statement The Income Statement of H. J. Boswell, Inc. Connecting the Income Statement and Balance Sheet Interpreting Firm Profitability Using the Income Statement GAAP and Earnings Management 3.3. Corporate Taxes Computing Taxable Income Federal Income Tax Rates for Corporate Income Marginal and Average Tax Rates Dividend Exclusion for Corporate Stockholders 3.4. The Balance Sheet The Balance Sheet of H. J. Boswell, Inc. Firm Liquidity and Net Working Capital Debt and Equity Financing Book Values, Historical Costs, and Market Values Finance for Life: Your Personal Balance Sheet and Income Statement

5 3.5. The Cash Flow Statement Sources and Uses of Cash H. J. Boswells Cash Flow Statement Finance in a Flat World: GAAP vs. IFRS Chapter 4: Financial Analysis: Sizing Up Firm Performance 4.1. Why Do We Analyze Financial Statements? 4.2. Common-Size Statements: Standardizing Financial Information The Common-Size Income Statement: H. J. Boswell, Inc. The Common-Size Balance Sheet: H. J. Boswell, Inc Using Financial Ratios Liquidity Ratios Capital Structure Ratios Asset Management Efficiency Ratios Profitability Ratios Market Value Ratios Finance for Life: Your Cash Budget and Personal Savings Ratio Summing Up the Financial Analysis of H. J. Boswell, Inc. Finance in a Flat World: Ratios and International Accounting Standards 4.4. Selecting a Performance Benchmark Trend Analysis Peer-Firm Comparisons 4.5. Limitations of Ratio Analysis Chapter 5: The Time Value of Money: The Basics 5.1. Using Timelines to Visualize Cash Flows 5.2. Compounding and Future Value Compound Interest and Time Compound Interest and the Interest Rate

6 Techniques for Moving Money Through Time Applying Compounding to Things Other Than Money Compound Interest with Shorter Compounding Periods Finance for Life: Saving for Your First House 5.3. Discounting and Present Value The Mechanics of Discounting Future Cash Flows Two Additional Types of Discounting Problems The Rule of Making Interest Rates Comparable Calculating the Interest Rate and Converting It to an EAR To the Extreme: Continuous Compounding Finance in a Flat World: Financial Access at Birth Chapter 6: The Time Value of Money: Annuities and Other Topics 6.1. Annuities Ordinary Annuities Amortized Loans Annuities Due Finance for Life: Saving for Retirement 6.2. Perpetuities Calculating the Present Value of a Level Perpetuity Calculating the Present Value of a Growing Perpetuity 6.3. Complex Cash Flow Streams Chapter 7: An Introduction to Risk and Return: History of Financial Market Returns 7.1. Realized and Expected Rates of Return and Risk Calculating the Realized Return from an Investment Calculating the Expected Return from an Investment

7 Measuring Risk 7.2. A Brief History of Financial Market Returns U.S. Financial Markets: Domestic Investment Returns Lessons Learned U.S. Stocks Versus Other Categories of Investments Global Financial Markets: International Investing Finance for Life: Determining Your Tolerance for Risk 7.3. Geometric Versus Arithmetic Average Rates of Return Computing the Geometric or Compound Average Rate of Return Choosing the Right Average 7.4. What Determines Stock Prices? The Efficient Markets Hypothesis Do We Expect Financial Markets to Be Perfectly Efficient? Market Efficiency: What Does the Evidence Show? Chapter 8: Risk and Return: Capital Market Theory 8.1. Portfolio Returns and Portfolio Risk Calculating the Expected Return of a Portfolio Evaluating Portfolio Risk Calculating the Standard Deviation of a Portfolios Returns Finance in a Flat World: International Diversification 8.2. Systematic Risk and the Market Portfolio Diversification and Unsystematic Risk Diversification and Systematic Risk Systematic Risk and Beta Calculating the Portfolio Beta 8.3. The Security Market Line and the CAPM Using the CAPM to Estimate Expected Rates of Return Chapter 9: Debt Valuation and Interest Rates

8 9.1. Overview of Corporate Debt Borrowing Money in the Private Financial Market Borrowing Money in the Public Financial Market Basic Bond Features Finance for Life: Adjustable-Rate Mortgages 9.2. Valuing Corporate Debt Valuing Bonds by Discounting Future Cash Flows Step 1: Determine Bondholder Cash Flows Step 2: Estimate the Appropriate Discount Rate Step 3: Calculate the Present Value Using the Discounted Cash Flow 9.3. Bond Valuation: Four Key Relationships Relationship 1 Relationship 2 Relationship 3 Relationship Types of Bonds Secured Versus Unsecured Priority of Claims Initial Offering Market Abnormal Risk Coupon Level Amortizing or Non-amortizing Convertibility Finance in a Flat World: International Bonds 9.5. Determinants of Interest Rates Inflation and Real Versus Nominal Interest Rates Interest Rate DeterminantsBreaking It Down The Maturity-Risk Premium and the Term Structure of Interest Rates Chapter 10: Stock Valuation Principle 2: There Is a Risk-Reward Tradeoff

9 10.1. Common Stock Characteristics of Common Stock Finance for Life: Herd Mentality Agency Costs and Common Stock Valuing Common Stock Using the Discounted Dividend Model The Comparables Approach to Valuing Common Stock Defining the P/E Ratio Valuation Model What Determines the P/E Ratio for a Stock? An Aside on Managing for Shareholder Value A Word of Caution About P/E Ratios Preferred Stock Features of Preferred Stock Valuing Preferred Stock A Quick Review: Valuing Bonds, Preferred Stock, and Common Stock Chapter 11: Investment Decision Criteria An Overview of Capital Budgeting The Typical Capital-Budgeting Process What Are the Sources of Good Investment Projects? Types of Capital Investment Projects Net Present Value Why Is the NPV the Right Criterion? Calculating an Investments NPV Independent Versus Mutually Exclusive Investment Projects Other Investment Criteria Profitability Index Internal Rate of Return Modified Internal Rate of Return Finance for Life: Higher Education as an Investment in Yourself Payback Period Discounted Payback Period Summing Up the Alternative Decision Rules A Glance at Actual Capital-Budgeting Practices

10 s Chapter 12: Analyzing Project Cash Flows Project Cash Flows Incremental Cash Flows Are What Matters Guidelines for Forecasting Incremental Cash Flows Forecasting Project Cash Flows Dealing with Depreciation Expense, Taxes, and Cash Flow Four-Step Procedure for Calculating Project Cash Flows Computing Project NPV Inflation and Capital Budgeting Estimating Nominal Cash Flows Replacement Project Cash Flows Category 1: Initial Outlay, CF0 Category 2: Annual Cash Flows Replacement Example Finance in a Flat World: Entering New Markets s Appendix: The Modified Accelerated Cost Recovery System Chapter 13: Risk Analysis and Project Evaluation The Importance of Risk Analysis Tools for Analyzing the Risk of Project Cash Flows Key Concepts: Expected Values and Value Drivers Sensitivity Analysis Scenario Analysis Simulation Analysis Finance in a Flat World: Currency Risk Break-Even Analysis Accounting Break-Even Analysis

11 Cash Break-Even Analysis NPV Break-Even Analysis Operating Leverage and the Volatility of Project Cash Flows Real Options in Capital Budgeting The Option to Delay the Launch of a Project The Option to Expand a Project The Option to Reduce the Scale and Scope of a Project Chapter 14: The Cost of Capital The Cost of Capital: An Overview Investors Required Return and the Firms Cost of Capital WACC Equation Three-Step Procedure for Estimating the Firms WACC Determining the Firms Capital Structure Weights Estimating the Cost of Individual Sources of Capital The Cost of Debt The Cost of Preferred Equity The Cost of Common Equity Summing Up: Calculating the Firms WACC Use Market-Based Weights Use Market-Based Costs of Capital Use Forward-Looking Weights and Opportunity Costs Weighted Average Cost of Capital in Practice Estimating Project Costs of Capital The Rationale for Using Multiple Discount Rates Why Dont Firms Typically Use Project Costs of Capital? Estimating Divisional WACCs Divisional WACC: Estimation Issues and Limitations Finance in a Flat World: Why Do Interest Rates Differ Among Countries? Flotation Costs and Project NPV WACC, Flotation Costs, and the NPV

12 Chapter 15: Capital Structure Policy A Glance at Capital Structure Choices in Practice Defining a Firms Capital Structure Financial Leverage How Do Firms in Different Industries Finance Their Assets? Capital Structure Theory A First Look at the Modigliani and Miller Capital Structure Theorem Yogi Berra and the M&M Capital Structure Theory Capital Structure, the Cost of Equity, and the Weighted Average Cost of Capital Why Capital Structure Matters in Reality Making Financing Choices When Managers Are Better Informed than Shareholders Managerial Implications Why Do Capital Structures Differ Across Industries? Making Financing Decisions Benchmarking the Firms Capital Structure Evaluating the Effect of Financial Leverage on Firm Earnings per Share Using the EBIT-EPS Chart to Analyze the Effect of Capital Structure on EPS Can the Firm Afford More Debt? Survey Evidence: Factors That Influence CFO Debt Policy Finance in a Flat World: Capital Structures Around the World Lease Versus Buy Finance for Life: Leasing or Buying Your Next Car Appendix: Demonstrating the Modigliani and Miller Theorem Chapter 16: Dividend and Share Repurchase Policy How Do Firms Distribute Cash to Their Shareholders? Cash Dividends

13 Stock Repurchases How Do Firms Repurchase Their Shares? Personal Tax Considerations: Dividend Versus Capital Gains Income Noncash Distributions: Stock Dividends and Stock Splits Does Dividend Policy Matter? The Irrelevance of the Distribution Choice Why Dividend Policy Is Important Finance for Life: The Importance of Dividends Cash Distribution Policies in Practice Stable Dividend Payout Policy Residual Dividend Payout Policy Other Factors Playing a Role in How Much to Distribute Chapter 17: Financial Forecasting and Planning An Overview of Financial Planning Developing a Long-Term Financial Plan Financial Forecasting Example: Ziegen, Inc. Finance for Life: Your Personal Budget Developing a Short-Term Financial Plan Cash Budget Example: Melco Furniture, Inc. Uses of the Cash Budget Chapter 18: Working-Capital Management Working-Capital Management and the Risk-Return Tradeoff Measuring Firm Liquidity Managing Firm Liquidity Risk-Return Tradeoff Working-Capital Policy The Principle of Self-Liquidating Debt A Graphic Illustration of the Principle of Self-Liquidating Debt Operating and Cash Conversion Cycles

14 Measuring Working-Capital Efficiency Calculating the Operating and Cash Conversion Cycles Managing Current Liabilities Calculating the Cost of Short-Term Financing Evaluating the Cost of Trade Credit Evaluating the Cost of Bank Loans Managing the Firms Investment in Current Assets Managing Cash and Marketable Securities Managing Accounts Receivable Finance for Life: Credit Scoring Managing Inventories Chapter 19: International Business Finance Foreign Exchange Markets and Currency Exchange Rates What a Change in the Exchange Rate Means for Business Foreign Exchange Rates Types of Foreign Exchange Transactions Interest Rate and Purchasing-Power Parity Interest Rate Parity Purchasing-Power Parity and the Law of One Price The International Fisher Effect Capital Budgeting for Direct Foreign Investment Finance for Life: International Investing Foreign Investment Risks Chapter 20: Corporate Risk Management Five-Step Corporate Risk Management Process Step 1: Identify and Understand the Firms Major Risks Step 2: Decide Which Types of Risks to Keep and Which to Transfer

15 Step 3: Decide How Much Risk to Assume Step 4: Incorporate Risk into All the Firms Decisions and Processes Step 5: Monitor and Manage the Firms Risk Exposures Managing Risk with Insurance Contracts Types of Insurance Contracts Why Purchase Insurance? Finance for Life: Do You Need Life Insurance? Managing Risk by Hedging with Forward Contracts Hedging Commodity Price Risk Using Forward Contracts Hedging Currency Risk Using Forward Contracts Managing Risk with Exchange-Traded Financial Derivatives Futures Contracts Option Contracts Valuing Options and Swaps The Black-Scholes Option Pricing Model Swap Contracts Credit Default Swaps Glossary Organization Index Subject Index Back Cover

The Pearson Series in Finance

The Pearson Series in Finance Berk/DeMarzo Corporate Finance* Corporate Finance: The Core* Berk/DeMarzo/Harford Fundamentals of Corporate Finance* Brooks Financial Management: Core Concepts* Copeland/Weston/Shastri