Table of Contents Chapter 1 Introduction to Financial Management... 1 22 Importance of Financial Management 2 Finance in the Organizational Structure of the Firm 3 Nature and Functions of Financial Management: Finance Functions in Business 6 Development of Financial Management 7 Financial Management and Related Disciplines 8 Goal of Financial Management 9 The Agency Problem 12 Business Practices 15 Summary 16 Self-Test Questions 17 Questions 18 Test Questions 18 World Wide Web Exercises 19 References 20 Chapter 2 Financial Statements, Cash Flows and Taxes... 23 50 Understanding Financial Statements 24 The Role of Financial Statements 24 Summary 38 Self-Test Questions 38 Questions 39 Test Questions 40 Self-Test Problems 41 Problems 45 World Wide Web Exercises 48 References 48 Chapter 3 Financial Analysis... 51 84 Common Size Statements 52 Financial Ratio Analysis 54 Types of Financial Ratios 55 The Du Pont Identity 61 Limitations of Ratio Analysis 63 Empirical Evidence: Prediction of Corporate Bankruptcy 64 Business Practices 65 Summary 69 Self-Test Questions 69 Questions 71
Test Questions 71 Self-Test Problems 72 Problems 77 World Wide Web Exercises 82 References 83 Chapter 4 Risk and Return: Theory... 85 124 Mean Variance Indifference Curves 86 The Mean and Variance of Single Asset 87 The Mean Variance of Portfolios of Assets 88 The Expected Return on a Portfolio of Assets 89 The Variance of a Portfolio 90 Correlation and Covariance 92 The Portfolio Opportunity Set and the Efficient Set 94 Optimal Choice: The Individual s Point of View 95 Market Equilibrium: The Capital Market Line 96 The Opportunity Set with One Risky and One Risk less Asset 96 The Equilibrium Price of Risk 97 Pricing Inefficient Portfolios 98 The Capital Asset Pricing Model (CAPM) and Security Market Line (SML) 102 Summary 106 Self-Test Questions 107 Questions 109 Test Questions 109 Self-Test Problems 111 Problems 119 World Wide Web Exercises 122 References 123 Chapter 5 The Time Value of Money... 125 150 Time Line 126 Future Value and Compounding 127 Future Value and Annuity 129 Uneven Cash Flows 132 Present Value and Discounting 133 Finding Out the Discount Rate 136 Finding the Number of Periods 139 Summary 141 Self-Test Questions 141 Questions 142 Test Questions 142 Self-Test Problems 143 Problems 147 World Wide Web Exercises 147
References 149 Chapter 6 Bond Valuation... 151 168 Meaning of a Bond 152 Key Features of a Bond 152 Advantages of Bond 153 Disadvantages of Bond 153 Financial Asset Valuation 154 Cash Flows for Regular Bond and Bond Valuation 154 Yield to Maturity 156 Current Yield 158 Yield to Call 159 Semi-annual Bonds 159 Summary 160 Self-Test Questions 161 Questions 162 Test Questions 162 Self-Test Problems 163 Problems 166 World Wide Web Exercises 167 References 167 Chapter 7 Stocks and Their Valuation... 169 190 Features of Common Stock 170 Classified Stock 171 Initial Public Offering (IPO) 171 Financial Asset Valuation 171 Expansion Plan: Valuing the Entire Firm 176 Preferred Stock 177 Summary 179 Self-Test Questions 179 Questions 180 Test Questions 181 Self-Test Problems 181 Problems 185 World Wide Web Exercises 187 References 187 Appendix 188 Chapter 8 Cost of Capital... 191 220 Cost of Capital Components 192 Component of Cost of Debt 193 Component Cost of Preferred Stock 193 Component Cost of Equity 194
Some Additional Considerations in Calculating WACC 198 Marginal Cost of Capital 200 Break in MCC Schedule 201 Other Breaks in MCC Schedule 202 Some Mistakes to Avoid 204 Factors Affecting WACC 204 Some Problem Areas in Cost of Capital 205 Business Practices 206 Summary 208 Self-Test Questions 208 Questions 210 Test Questions 210 Self-Test Problems 211 Problems 215 World Wide Web Exercises 219 References 219 Chapter 9 Capital Budgeting... 221 252 Payback Period 222 Discounted Cash Payback 224 Accounting Rate of Return (ARR) 225 Net Present Value (NPV) 226 Internal Rate of Return (IRR) 227 Further Issues in Capital Budgeting 230 Modified Internal Rate of Return 233 Profitability Index 234 Business Practices 234 Summary 237 Self-Test Questions 238 Questions 239 Test Questions 240 Self-Test Problems 241 Problems 248 World Wide Web Exercises 251 References 251 Chapter 10 Cash Flow Estimation... 253 274 Consideration in Estimating Cash Flows 254 Modified Accelerated Cost Recovery System (MACRS) 255 Evaluating Capital Budgeting Projects 257 Estimating Cash Flows for Expansion Project 257 Estimating Cash Flows for Replacement Project 260 Comparing Projects with Unequal Lives 262 Summary 264
Self-Test Questions 265 Questions 266 Test Questions 266 Self-Test Problems 267 Problems 273 World Wide Web Exercises 273 References 274 Chapter 11 Capital Structure and Leverage... 275 304 Business Risk and Financial Risk 276 Breakeven Analysis 276 Calculation of BEP 277 Limitations of Breakeven Analysis 279 Operating Leverage 280 Degree of Operating Leverage 283 Degree of Financial Leverage (DFL) 285 Combining Operating and Financial Leverage (DTL) 287 Impact of Financial Leverage 288 Use of EBIT EPS Indifference Point Chart 290 Summary 291 Self-Test Questions 292 Questions 293 Test Questions 294 Self-Test Problems 294 Problems 302 World Wide Web Exercises 303 References 304 Chapter 12 Current Assets Management... 305 322 The Concept of Working Capital 306 Circulating Capital 308 The Concept of Zero Working Capital 308 Permanent and Variable Working Capital 309 Size of Investment in Current Assets by Nepalese Enterprises 309 Importance of Working Capital Management 310 Factors Affecting of Working Capital 311 The Working Capital Cash Flow Cycle or Cash Conversion Cycle 312 Alternative Financing Policies for Current Assets 314 Business Practices 316 Summary 316 Self-Test Questions 317 Questions 318 Test Questions 318 Self-Test Problems 319
Problems 321 World Wide Web Exercises 322 References 322 Chapter 13 Cash Management... 323 352 Significance of Cash Management 325 Motives of Holding Cash 325 Advantages of Adequate Cash 327 The Function of Cash Management 327 The Cash Budget 328 Cash Management Techniques 330 Business Practices 336 Summary 338 Self-Test Questions 338 Questions 339 Test Questions 340 Self-Test Problems 341 Problems 347 World Wide Web Exercises 350 References 351 Chapter 14 Receivables Management... 353 376 Significance of Receivables Management 354 Costs of Maintaining Receivables 355 Determinants of Receivables 355 Elements of Credit Policy 355 Evaluating Proposed Changes in Credit Policy 358 Control of Receivables 359 Use of Linear Discriminant Analysis in Credit Scoring 361 Business Practices 364 Summary 366 Self-Test Questions 367 Questions 369 Test Questions 369 Self-Test Problems 370 Problems 373 World Wide Web Exercises 374 References 375 Chapter 15 Inventory Management... 377 402 Significance of Inventory Management 378 Inventory Decision Models 379 Quantity Discounts 387 Determinants of the Size of Investment in Inventories 387
Inventory Control System 389 Inventory and the Financial Manager 390 Business Practices 391 Summary 392 Self-Test Questions 393 Questions 393 Test Questions 394 Self-Test Problems 394 Problems 399 World Wide Web Exercises 401 References 401 Chapter 16 Dividend Policy... 403 430 Dividend Payments 404 Payments Procedure 404 Factors Influencing Dividend Policy 404 General Dividend Patterns in the Economy 406 Types of Dividend Payout Schemes 407 Dividends as a Residual 408 Modigliani and Miller (MM) Position 408 Irrelevance under Uncertainty 410 Arguments for Relevance: A Critic of MM s Hypothesis 411 Share Repurchases 412 Stock Dividends and Stock Splits 413 Business Practices 416 Summary 417 Self-Test Questions 418 Questions 419 Test Questions 420 Self-Test Problems 421 Problems 427 World Wide Web Exercises 429 References 430 Appendix A: Interest Tables 431 Appendix B: Suggested Answers to Chapter-end Problems 444