FINANCE PRINCIPLES OF SCOTT BESLEY. .0 SOUTH-WESTERN <& CENGAGE Learning- EUGENE F. BRIGHAM University of Florida. University of South Florida

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1 PRINCIPLES OF FINANCE SCOTT BESLEY University of South Florida EUGENE F. BRIGHAM University of Florida.0 SOUTH-WESTERN <& CENGAGE Learning- Australia Brazil Japan Korea Mexico Singapore Spain United Kingdom United States

2 Coi Preface xiii CHAPTER 1 An Overview of Finance 3 What Is Finance? 4 General Areas of Finance 5 The Importance of Finance in Nonfinance Areas The Evolution of Modern Finance 7 The Importance of Managerial Finance 14 Financial Decisions and Value (Wealth) Maximization 14 Recent (Future) Developments in Business and Finance 16 Ethical Dilemma: Who Has the Money The Democrat or The Republican? 17 Chapter Principles Key Managerial Finance Concepts 18 Chapter Principles Personal Finance 19 Questions 19 Problem 20 \ CHAPTER 2 Financial Assets (Instruments) 21 Financial Instruments and the Firm's Balance Sheet 22 Debt 25 Bond Contract Features 32 Bond Ratings 34 Stock (Equity) 35 Derivatives 41 Rationale for Different Types of Securities 44 Which Financial Instrument Is Best? 45 Financial Instruments in International Markets 48 Ethical Dilemma: Should Maria Take a SINful Cruise? 51 Chapter Principles Key Financial Assets Concepts 52 Chapter Principles Personal Finance 53 Questions 54 Problems 56 Appendix 2A 60 CHAPTER 3 Financial Markets and the Investment Banking Process 61 What Are Financial Markets? 62 Importance of Financial Markets 63 Types of Financial Markets 66 The Investment Banking Process 74 Regulation of Securities Markets 78 International Financial Markets 79 Ethical Dilemma: Too High Tech ("Smoke and Mirrors" or Real Sales)? 82 Chapter Principles Key Financial Markets Concepts 82 Chapter Principles Personal Finance 83 Questions 84 Problems 84, Appendix 3A 87 CHAPTER 4 Financial Intermediaries and the Banking System 89 Roles of Financial Intermediaries 90 Types of Financial Intermediaries 93 Safety (Risk) of Financial Institutions 102 Banking Systems 104 International Banking 116 Ethical Dilemma: Anything for (a) BUC? 118 Chapter Principles Key Financial Intermediaries Concepts 119

3 viii Contents Chapter Principles Personal Finance 120 Questions 121 Problems 121 Appendix 4A 124 CHAPTER 5 The Cost of Money (Interest Rates) 125 Realized Returns (Yields) 126 Factors That Affect the Cost of Money 128 Interest Rate Levels 129 Determinants of Market Interest Rates 131 The Term Structure of Interest Rates 137 Why Do Yield Curves Differ? 138 Does the Yield Curve Indicate Future Interest Rates? 143 Other Factors That Influence Interest Rate Levels 146 Interest Rate Levels and Stock Prices 148 The Cost of Money as a Determinant of Value 148 Ethical Dilemma: Unadvertised Special: Is It a "Shark"? 149 Chapter Principles Key Cost of Money (Interest Rates) Concepts 150 Chapter Principles Personal Finance 150 Questions 151 Problems 152 Computer-Related Problem 156 Appendix 5A 157 CHAPTER 6 Business Organizations and the Tax Environment 161 Alternative Forms of Business Organization 163 Finance in the Organizational Structure of the Firm 167 What Goal(s) Should Businesses Pursue? 168 Managerial Actions to Maximize Shareholder Wealth 169 Should Earnings per Share (EPS) Be Maximized? 170 Managers' Roles as Agents of Stockholders 171 Stockholders' Roles as Agents of Creditors 174 Business Ethics 175 Corporate Governance 176 Forms of Businesses in Other Countries 176 Multinational Corporations 178 Multinational versus Domestic Managerial Finance 179 The Federal Income Tax System 181 Individual Income Taxes 181 Corporate Tax Rates in Other Countries 188 Ethical Dilemma: Chances Are, What They Don't Know Won't Hurt Them! 189 Chapter Principles Key Business Organizations Concepts 190 Chapter Principles Personal Finance 190 Questions 191 Problems 193 Computer-Related Problem 196 Appendix 6A 2011 Tax Rate Schedules 196 Appendix 6B 198 CHAPTER 7 Analysis of Financial Statements 199 Recording Business Activity Financial Statements 200 Financial Statements 202 Financial Statement (Ratio) Analysis 218 Summary of Ratio Analysis: The DuPont Analysis 229 Comparative Ratios (Benchmarking) 231 Uses and Limitations of Ratio Analysis 233 Ethical Dilemma: Hocus-Pocus Look, An Increase in Sales! 234 Chapter Principles Key Analysis of Financial Statement Analysis Concepts 235 Chapter Principles Personal Finance 236 Questions 236 Problems 238 Computer-Related Problem 247 Appendix 7A 248 CHAPTER 8 Financial Planning and Control 251 Sales Forecasts 252 Projected (Pro Forma) Financial Statements 254 Other Considerations in Forecasting 261

4 Contents ix Financial Control Budgeting and Leverage 262 Breakeven Analysis 263 Leverage 268 Using Leverage and Forecasting for Control 274 The Cash Budget 274 Ethical Dilemma: Competition-Based Planning Promotion or Payoff? 279 Chapter Principles Key Financial Planning and Control Concepts 280 ' ~~" Chapter Principles- Personal Finance 281 Questions 282 Problems 283 Computer-Related Problem 292 Appendix 8A Projected Financial Statements- Including Financing Feedbacks 293 Appendix 8B 294 CHAPTER 9 Time Value of Money 299 Cash Flow Timelines 301 Cash Flow Patterns 302 Future Value (FV) 302 Present Value (PV) 311 Comparison of Future Value with Present Value 320 Solving for Interest Rates (r), Time (n), or Annuity Payments (PMT) 321 Semiannual and Other Compounding Periods 323 Comparison of Different Interest Rates 324 Amortized Loans 326 Ethical Dilemma: It's All Chinese to Me 328 Chapter Principles Key TVM Concepts 329 Chapter Principles Personal Finance 329 Questions 330 Problems 331 * Computer-Related Problem 340 Appendix 9A Generating an Amortization Schedule Financial Calculator Solution and Spreadsheet Solution 340 Appendix 9B 342 CHAPTER 1 0 Valuation Concepts 345 Basic Valuation 346 Valuation of Bonds 347 Finding Bond Yields (Market Rates) 352 Interest Rates and Bond Values 354 Changes in Bond Values Over Time 356 Bond Values with Semiannual Compounding 359 Interest Rate Risk on a Bond 361 Bond Prices in Recent Years 363 Valuation of Equity (Stock) 365 Expected Dividends as the Basis for Stock Values 366 Actual Stock Prices and Returns in Recent Years 377 Ethical Dilemma: Which ARM Should You Choose The Left or the Right? 378 Chapter Principles Key Valuation Concepts 379 Chapter Principles Personal Finance 379 Questions 381 Problems 382 Computer-Related Problem 390 Appendix 10 A 390 CHAPTER 11 Risk and Rates of Return 393 Defining and Measuring Risk 395 Expected Rate of Return 397 Portfolio Risk Holding Combinations of Assets 406 The Concept of Beta 414 The Relationship between Risk and Rates of Return The Capital Asset Pricing Model (CAPM) 418 Stock Market Equilibrium 424 Changes in Equilibrium Stock Prices 426 Physical Assets versus Securities 427 Different Types of Risk 428 Ethical Dilemma: RIP Retire in Peace 431 Chapter Principles Key Risk and Rates of Return Concepts 431 Chapter Principles -Personal Finance 432- Questions 433 ' Problems 434 Computer-Related Problem 441 Appendix 11A 442

5 x Contents CHAPTER 12 The Cost of Capital 445 The Logic of the Weighted Average Cost of Capital (WACC) 447 Basic Definitions 447 Cost of Debt, r dt Cost of Preferred Stock, r ps 450 Cost of Retained Earnings (Internal Equity), r s 451 Cost of Newly Issued Common Stock (External Equity), r e 455 Weighted Average Cost of Capital (WACC) 457 The Marginal Cost of Capital (MCC) 458 Combining the MCC and Investment Opportunity Schedules (IOS) 469 Project Risk and WACC 472 WACC versus Required Rate of Return of Investors 474 Ethical Dilemma: How Much Should You Pay To Be "Green"? 477 Chapter Principles Key Cost of Capital Concepts 477 Chapter Principles Personal Finance 478 Questions 479 Problems 481 Computer-Related Problem 489 Appendix 12A 490 CHAPTER 13 Capital Budgeting 491 The Importance of Capital Budgeting 493 Project Classifications 493 Steps in the Valuation Process 494 Estimating a Project's Cash Flows 495 Cash Flow Estimation Illustrations of Expansion Projects and Replacement Projects 500 Capital Budgeting Evaluation Techniques 506 Comparison of the NPV and IRR Methods 513 Cash Flow Patterns and Multiple IRRs 518 Modified Internal Rate of Return 519 Conclusions on the Capital Budgeting Decision Methods 520 Incorporating Risk in Capital Budgeting Analysis 522 How Project Risk Is Considered in Capital Budgeting Decisions 525 Multinational Capital Budgeting 525 Ethical Dilemma: This Is a Good Investment Be Sure the Numbers Show That It Is! 527 Chapter Principles Key Capital Budgeting Concepts 527 Chapter Principles Personal Finance 528 Questions 529 Problems 532 Computer-Related Problem 543 Appendix 13A Depreciation 544 Problem 547 Appendix 13B Using a Spreadsheet to Compute NPV and IRR 547 Appendix 13C 551 CHAPTER 14 Capital Structure and Dividend Policy Decisions 553 The Target Capital Structure 554 Business and Financial Risk 556 Determining the Optimal Capital Structure 558 Liquidity and Capital Structure 567 Capital Structure Theory 568 Variations in Capital Structures Among Firms 572 Dividend Policy 573 Investors and Dividend Policy 574 Dividend Policy in Practice 575 Factors Influencing Dividend Policy 579 Stock Dividends and Stock Splits 580 Capital Structures and Dividend Policies Around the World 582 Ethical Dilemma: A Bond Is a Bond Is a Bond... Is a Stock... Is a Bondock? 584 Chapter Principles Key Capital Structure and Dividend Policy Concepts 584 Chapter Principles Personal Finance 586 Questions 587 Problems 589 Computer-Related Problems 596 Appendix 14 A 597

6 Contents xi CHAPTER 15 Working Capital Management 599 Working Capital Terminology 601 The Requirement for External Working Capital Financing 601 The Cash Conversion Cycle 603 Working Capital Investment and Financing Policies 606 Advantages and Disadvantages of Short-Term ~ " Financing 609 Sources of Short-Term Financing 610 Computing the Cost of Short-Term Credit 613 Managing Cash and Marketable Securities 616 Credit Management 620 Inventory Management 626 Multinational Working Capital Management 631 Ethical Dilemma: Money-Back Guarantee, No Questions Asked 633 Chapter Principles Key Working Capital Management Concepts 634 Chapter Principles-. Personal Finance. 635 Questions 636 Problems 637 Computer-Related Problem 645 Appendix ISA 646 CHAPTER 16 Investment Concepts 651 The Investment Process 652 Investment Alternatives 656 Securities Transactions 656 Investment Information 659 Computing Investment Returns 666 Indexes Measuring Market Returns 672 Alternative Investment Strategies 678 Ethical Dilemma: Drip, Drip, Drip... Should We Call a Plumber? 683 Chapter Principles Key Investment Concepts 684 Chapter Principles Personal Finance 685 Questions 686 \ Problems 687 Computer-Related Problem 692 Appendix 16 A 693 CHAPTER 17 Security Valuation and Selection 697 Fundamental Analysis versus Technical Analysis 699 Economic Analysis 700 Industry Analysis 705 Evaluating the Firm's Financial Position 708 Stock Valuation Techniques 710 Technical Analysis 716 Stock Selection Criteria 720 Investment Selection in Efficient Markets 724 Ethical Dilemma: Mary Mary Quite Contrary, What Makes Your Sales Forecasts Grow? 725 Chapter Principles Key Security Valuation and Selection Concepts 726 Chapter Principles Personal Finance 727 Questions 727 Problems 729 Computer-Related Problem 733 Appendix 17A 733 APPENDIX A Using Spreadsheets to Solve Financial Problems 735 APPENDIX B Answers to End-of-Chapter Problems 747 APPENDIX C Selected Equations Index

Al al- Bayt University. Course Syllabus Financial Management (3.0 cr ) 2015

Al al- Bayt University. Course Syllabus Financial Management (3.0 cr ) 2015 Al al- Bayt University Course Syllabus Financial Management (3.0 cr. 502331) 2015 Assistant Professor: Mari e Banikhaled. Office Phone: 2280 E-mail: mariebk191@gimal.com E-mail: mariebk191@aabu.edu.jo