Financial ManagementAdair Excel Applications for Corporate Finance First Edition Benninga and Sarig Corporate Finance: A Valuation Approach Block and Hirt Foundations of Financial Manage
Trang 2FUNDAMENTALS OF
CORPORATE FINANCE
Standard Edition
Trang 3Financial Management
Adair
Excel Applications for Corporate Finance
First Edition
Benninga and Sarig
Corporate Finance: A Valuation Approach
Block and Hirt
Foundations of Financial Management
Twelfth Edition
Brealey, Myers, and Allen
Principles of Corporate Finance
Eighth Edition
Brealey, Myers, and Marcus
Fundamentals of Corporate Finance
Fifth Edition
Brooks
FinGame Online 4.0
Bruner
Case Studies in Finance: Managing for
Corporate Value Creation
Chew and Gillan
Corporate Governance at the Crossroads:
Grinblatt and Titman
Financial Markets and Corporate Strategy
Kester, Ruback, and Tufano
Case Problems in Finance
Twelfth Edition
Ross, Westerfi eld, and Jaffe
Corporate Finance
Eighth Edition
Ross, Westerfi eld, Jaffe, and Jordan
Corporate Finance: Core Principles and Applications
First Edition
Ross, Westerfi eld, and Jordan
Essentials of Corporate Finance Fifth Edition
Ross, Westerfi eld, and Jordan
Fundamentals of Corporate Finance Eighth Edition
Bodie, Kane, and Marcus
Investments Seventh Edition
Hirt and Block
Fundamentals of Investment Management Eighth Edition
Hirschey and Nofsinger
Investments: Analysis and Behavior First Edition
Jordan and Miller
Fundamentals of Investments: Valuation and Management
Fourth Edition
Financial Institutions and Markets
Rose and Hudgins
Bank Management and Financial Services Seventh Edition
Rose and Marquis
Money and Capital Markets: Financial Institutions and Instruments in a Global Marketplace
Ninth Edition
Saunders and Cornett
Financial Institutions Management: A Risk Management Approach
Fifth Edition
Saunders and Cornett
Financial Markets and Institutions: An duction to the Risk Management Approach Third Edition
Intro-International Finance
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fi nancial skills First Edition
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Personal Finance Eighth Edition
The McGraw-Hill/Irwin Series in Finance, Insurance, and Real Estate
Stephen A Ross
Franco Modigliani Professor of Finance and Economics
Sloan School of Management
Massachusetts Institute of Technology
Consulting Editor
Trang 4FUNDAMENTALS OF
CORPORATE FINANCE
Stephen A Ross
Massachusetts Institute of Technology
Randolph W Westerfi eld
University of Southern California
Trang 5FUNDAMENTALS OF CORPORATE FINANCE
Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020
Copyright © 2008 by The McGraw-Hill Companies, Inc All rights reserved No part of this publication may be reproduced or distributed in
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Some ancillaries, including electronic and print components, may not be available to customers outside the United States
This book is printed on acid-free paper
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ISBN 978-0-07-328212-1 (annotated instructor’s edition)
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Library of Congress Cataloging-in-Publication DataRoss, Stephen A
Fundamentals of corporate fi nance/Stephen A Ross, Randolph W Westerfi eld,
Bradford D Jordan 8th ed., Standard ed
p cm (The McGraw-Hill/Irwin series in fi nance, insurance and real estate)
Includes index
ISBN-13: 978-0-07-353062-8 (standard edition : alk paper)
ISBN-10: 0-07-353062-X (standard edition : alk paper)
ISBN-13: 978-0-07-328211-4 (alternate edition : alk paper)
ISBN-10: 0-07-328211-1 (alternate edition : alk paper)
Trang 6To our families and friends with love and gratitude.
S A R R W W B D J
Trang 7fi nance and economics, Professor Ross is recognized for his work in developing the Arbitrage Pricing Theory and his substantial contribu-tions to the discipline through his research in signaling, agency theory, option pricing, and the theory of the term structure of interest rates, among other topics A past president of the American Finance Asso-ciation, he currently serves as an associate editor of several academic and practitioner journals He is a trustee of CalTech and Freddie Mac
RANDOLPH W WESTERFIELD
Marshall School of Business, University of Southern California
Randolph W Westerfi eld is Dean Emeritus of the University of ern California’s Marshall School of Business and is the Charles B
South-Thornton Professor of Finance
He came to USC from the Wharton School, University of vania, where he was the chairman of the fi nance department and a member of the fi nance faculty for 20 years He is a member of several public company boards of directors including Health Management Associates, Inc., and the Nicholas Applegate growth fund His areas of expertise include corporate fi nancial policy, investment management, and stock market price behavior
Pennsyl-BRADFORD D JORDAN
Gatton College of Business and Economics, University of Kentucky
Bradford D Jordan is Professor of Finance and holder of the Richard
W and Janis H Furst Endowed Chair in Finance at the University of Kentucky He has a long-standing interest in both applied and theoret-ical issues in corporate fi nance and has extensive experience teaching all levels of corporate fi nance and fi nancial management policy Pro-fessor Jordan has published numerous articles on issues such as cost
of capital, capital structure, and the behavior of security prices He is
a past president of the Southern Finance Association, and he is
coau-thor of Fundamentals of Investments: Valuation and Management, 4e,
a leading investments text, also published by McGraw-Hill/Irwin
vi
Trang 8When the three of us decided to write a book, we were united by one strongly held principle: Corporate
fi nance should be developed in terms of a few integrated, powerful ideas We believed that the subject was
all too often presented as a collection of loosely related topics, unifi ed primarily by virtue of being bound
together in one book, and we thought there must be a better way
One thing we knew for certain was that we didn’t want to write a “me-too” book So, with a lot of help,
we took a hard look at what was truly important and useful In doing so, we were led to eliminate topics
of dubious relevance, downplay purely theoretical issues, and minimize the use of extensive and elaborate
calculations to illustrate points that are either intuitively obvious or of limited practical use
As a result of this process, three basic themes became our central focus in writing Fundamentals of
Corporate Finance:
AN EMPHASIS ON INTUITION
We always try to separate and explain the principles at work on a commonsense, intuitive level before
launch-ing into any specifi cs The underlylaunch-ing ideas are discussed fi rst in very general terms and then by way of
ex-amples that illustrate in more concrete terms how a fi nancial manager might proceed in a given situation
A UNIFIED VALUATION APPROACH
We treat net present value (NPV) as the basic concept underlying corporate fi nance Many texts stop well
short of consistently integrating this important principle The most basic and important notion, that NPV
represents the excess of market value over cost, often is lost in an overly mechanical approach that
em-phasizes computation at the expense of comprehension In contrast, every subject we cover is fi rmly
root-ed in valuation, and care is taken throughout to explain how particular decisions have valuation effects
A MANAGERIAL FOCUS
Students shouldn’t lose sight of the fact that fi nancial management concerns management We emphasize the
role of the fi nancial manager as decision maker, and we stress the need for managerial input and judgment
We consciously avoid “black box” approaches to fi nance, and, where appropriate, the approximate, pragmatic
nature of fi nancial analysis is made explicit, possible pitfalls are described, and limitations are discussed
In retrospect, looking back to our 1991 fi rst edition IPO, we had the same hopes and fears as any preneurs How would we be received in the market? At the time, we had no idea that just 16 years later, we
entre-would be working on an eighth edition We certainly never dreamed that in those years we entre-would work with
friends and colleagues from around the world to create country-specifi c Australian, Canadian, and South African
editions, an International edition, Chinese, French, Polish, Portuguese, Thai, Russian, Korean, and Spanish
language editions, and an entirely separate book, Essentials of Corporate Finance, now in its fi fth edition.
Today, as we prepare to once more enter the market, our goal is to stick with the basic principles that have brought us this far However, based on an enormous amount of feedback we have received from you and your
colleagues, we have made this edition and its package even more fl exible than previous editions We offer
fl exibility in coverage, by continuing to offer a variety of editions, and fl exibility in pedagogy, by providing a wide
variety of features in the book to help students to learn about corporate fi nance We also provide fl exibility in
package options by offering the most extensive collection of teaching, learning, and technology aids of any
cor-porate fi nance text Whether you use just the textbook, or the book in conjunction with our other products, we
believe you will fi nd a combination with this edition that will meet your current as well as your changing needs
Stephen A Ross Randolph W Westerfi eld Bradford D Jordan
vii
Preface from the Authors
Trang 9viii P A R T 1 Part Title Goes Here on Verso Page
viii
Coverage
viii
This book was designed and developed explicitly for a fi rst course in business or corporate fi nance, for
both fi nance majors and non-majors alike In terms of background or prerequisites, the book is nearly
self- contained, assuming some familiarity with basic algebra and accounting concepts, while still
review-ing important accountreview-ing principles very early on The organization of this text has been developed to give
instructors the fl exibility they need
Just to get an idea of the breadth of coverage in the eighth edition of Fundamentals, the following grid
presents, for each chapter, some of the most signifi cant new features as well as a few selected chapter
highlights Of course, in every chapter, opening vignettes, boxed features, in-chapter illustrated examples
using real companies, and end-of-chapter material have been thoroughly updated as well
PART 1 Overview of Corporate Finance
Chapter 1
Introduction to Corporate
Finance
New section: Sarbanes–Oxley.
Goal of the fi rm and agency problems Stresses value creation as the most fundamental
aspect of management and describes agency issues that can arise
Ethics, fi nancial management, and executive compensation
Brings in real-world issues concerning confl icts
of interest and current controversies surrounding ethical conduct and management pay
Chapter 2
Financial Statements, Taxes,
and Cash Flow
Mini-case: Cash Flows and Financial
Statements at Sunset Boards, Inc
Cash fl ow vs earnings
Market values vs book values
New case written for this edition reinforces key cash fl ow concepts in a small-business setting
Clearly defi nes cash fl ow and spells out the differences between cash fl ow and earnings
Emphasizes the relevance of market values over book values
PART 2 Financial Statements and Long-Term Financial Planning
equa-tion to better explore the interrelaequa-tion ships between operating and fi nancial performance
New material: Du Pont analysis for
real companies using data from S&P
Market Insight.
New analysis shows students how to get and use real-world data, thereby applying key chapter ideas
Ratio and fi nancial statement analysis using smaller fi rm data
Uses fi rm data from RMA to show students
how to actually get and evaluate fi nancial statements benchmarks
Mini-case: Planning for Growth at S&S Air.
New case written for this edition illustrates the importance of fi nancial planning in a small fi rm
Explanation of alternative formulas for sustainable and internal growth rates
Explanation of growth rate formulas clears
up a common misunderstanding about these formulas and the circumstances under which alternative formulas are correct
Thorough coverage of sustainable growth as a planning tool
Provides a vehicle for examining the ships between operations, fi nancing, and growth
Trang 10PART 3 Valuation of Future Cash Flows
Chapter 5
Introduction to Valuation:
The Time Value of Money
First of two chapters on time value of money
Relatively short chapter introduces just the basic ideas on time value of money to get stu-dents started on this traditionally diffi cult topic
New minicase: The MBA Decision.
Covers more advanced time value topics with numerous examples, calculator tips, and Excel spreadsheet exhibits Contains many real-world examples
Chapter 7
Interest Rates and Bond Valuation
New section: Infl ation and present values.
“Clean” vs “dirty” bond prices and accrued interest
Clears up the pricing of bonds between coupon payment dates and also bond market quoting conventions
NASD’s new TRACE system and transparency in the corporate bond market
Up-to-date discussion of new developments
in fi xed income with regard to price, volume, and transactions reporting
of call provision that has become very common
Chapter 8
Stock Valuation
New minicase: Stock Valuation at Ragan, Inc.
Minicase: Financing S&S Air’s Expansion
Plans with a Bond Issue
New case written for this edition examines the debt issuance process for a small fi rm
non-constant growth models
New minicase: Bullock Gold Mining.
First of three chapters on capital budgeting
Relatively short chapter introduces key ideas
on an intuitive level to help students with this traditionally diffi cult topic
NPV, IRR, payback, discounted payback, and accounting rate of return
Consistent, balanced examination of tages and disadvantages of various criteria
advan-Chapter 10
Making Capital Investment Decisions
Projected cash fl ow
Alternative cash fl ow defi nitions
Special cases of DCF analysis
Thorough coverage of project cash fl ows and the relevant numbers for a project analysis
Emphasizes the equivalence of various formulas, thereby removing common misunderstandings
Considers important applications of chapter tools
Chapter 11
Project Analysis and Evaluation
Minicase: Conch Republic Electronics.
Trang 11x P A R T 1 Part Title Goes Here on Verso Page
PART 5 Risk and Return
Chapter 12
Some Lessons from
Capital Market History
New minicase: A Job at S&S Air.
Expanded discussion of geometric vs
arithmetic returns
Capital market history
Market effi ciency
Discusses calculation and interpretation of geometric returns Clarifi es common mis-conceptions regarding appropriate use of arithmetic vs geometric average returns
Extensive coverage of historical returns, volatilities, and risk premiums
Effi cient markets hypothesis discussed along with common misconceptions
Chapter 13
Return, Risk, and the
Security Market Line
New minicase: The Beta for American
Standard
Diversifi cation, systematic and unsystematic risk
Beta and the security market line
Illustrates basics of risk and return in a straightforward fashion
Develops the security market line with an intuitive approach that bypasses much of the usual portfolio theory and statistics
Chapter 14
Options and Corporate
Finance
Minicase: S&S Air’s Convertible Bond.
New discussion in ESO backdating
Stock options, employee stock options, and real options
New section: Internal equity and fl otation costs.
Geometric vs arithmetic growth rates
Cost of capital estimation
Both approaches are used in practice Clears
up issues surrounding growth rate estimates
Contains a complete, Web-based illustration
of cost of capital for a real company
Chapter 16
Raising Capital
New minicase: S&S Air Goes Public.
Dutch auction IPOs
IPO “quiet periods.”
Rights vs warrants
IPO valuation
Explains uniform price auctions using recent Google IPO as an example
Explains the SEC’s quiet period rules
Clarifi es the option-like nature of rights prior
to their expiration dates
Extensive, up-to-date discussion of IPOs, including the 1999–2000 period
Chapter 17
Financial Leverage and
Capital Structure Policy
New section:The pecking-order theory of capital structure
New minicase:Stephenson Real Estate Capitalization
Basics of fi nancial leverage
Optimal capital structure
Financial distress and bankruptcy
Illustrates effect of leverage on risk and return
Describes the basic trade-offs leading to an optimal capital structure
Briefl y surveys the bankruptcy process
x
Trang 12Chapter 18
Dividends and Dividend Policy
New minicase: Electronic Timing, Inc.
Minicase: Piepkorn Manufacturing
Working Capital Management
Very recent survey evidence on dividend policy
Effect of new tax laws
Dividends and dividend policy
New case written for this edition analyzes cost of capital estimation for a non-public
fi rm
New survey results show the most important (and least important) factors considered by
fi nancial managers in setting dividend policy
Discusses implications of new, lower dend, and capital gains rates
divi-Describes dividend payments and the factors favoring higher and lower payout policies
PART 7 Short-Term Financial Planning and Management
Chapter 19
Short-Term Finance and Planning
Operating and cash cycles
Short-term fi nancial planning
Stresses the importance of cash fl ow timing
Illustrates creation of cash budgets and potential need for fi nancing
Cash collection and disbursement
Thorough coverage of fl oat management and potential ethical issues
Examination of systems used by fi rms to handle cash infl ows and outfl ows
Analysis of credit policy and implementation
Brief overview of important inventory concepts
xi
PART 8 Topics in Corporate Finance
Chapter 22
International Corporate Finance
New minicase: S&S Air Goes
Interna-tional
determination
handle exchange rates
sovereign risk
Trang 13xii P A R T 1 Part Title Goes Here on Verso Page
In-Text Study Features
In addition to illustrating pertinent concepts and presenting up-to-date coverage, Fundamentals of
Cor-porate Finance strives to present the material in a way that makes it coherent and easy to understand
To meet the varied needs of its intended audience, Fundamentals of Corporate Finance is rich in valuable
learning tools and support
CHAPTER-OPENING VIGNETTES
Vignettes drawn from real-world events introduce students to the chapter concepts Questions about these
vignettes are posed to the reader to ensure understanding of the concepts in the end-of-chapter material For
examples, see Chapter 4, page 89; Chapter 5, page 21
PEDAGOGICAL USE OF COLOR
This learning tool continues to be an
important feature of Fundamentals of
Corporate Finance In almost every
chapter, color plays an extensive, schematic, and largely self-evident role
non-A guide to the functional use of color
is found on the endsheets of both the Annotated Instructor’s Edition (AIE) and student version For examples of this technique, see Chapter 5, page 130
IN THEIR OWN
WORDS BOXES
This series of boxes are the
popular articles updated
from previous editions
written by a distinguished
scholar or practitioner
on key topics in the text
Boxes include essays by
Merton Miller on capital
structure, Fischer Black
on dividends, and Roger
Ibbotson on capital
market history A
com-plete list of “In Their Own
Words” boxes appears on
page xxxvii
xii
This approach works just fi ne However, we will often encounter situations in which the
number of cash fl ows is quite large For example, a typical home mortgage calls for monthly
payments over 30 years, for a total of 360 payments If we were trying to determine the
present value of those payments, it would be useful to have a shortcut
Because the cash fl ows of an annuity are all the same, we can come up with a handy
variation on the basic present value equation The present value of an annuity of C dollars
per period for t periods when the rate of return or interest rate is r is given by:
Annuity present value C ( 1 Present value factor r )
Sustainable growth is often used by bankers and other external analysts to assess a company’s credit worthiness They are aided in this exercise by several sophisticated computer software packages that provide detailed analyses of the company’s past fi nancial performance, including its annual sustainable growth rate.
Bankers use this information in several ways Quick comparison of a company’s actual growth rate to its sustainable rate tells the banker what issues will be at the top of management’s fi nancial agenda If actual growth consistently exceeds sustainable growth, management’s problem will be where to get the cash to
fi nance growth The banker thus can anticipate interest in loan products Conversely, if sustainable growth consistently exceeds actual, the banker had best be prepared to talk about investment products, because management’s problem will be what to do with all the cash that keeps piling up in the till.
Trang 14C H A P T E R 1 Chapter Title Goes Here on Recto Page xiii
xiii
ENHANCED! REAL-WORLD EXAMPLES
Actual events are integrated throughout the text, tying chapter concepts to real life through
illus-tration and reinforcing the relevance of the material Some examples tie into the chapter opening
vignette for added reinforcement See example in Chapter 5, page 135
WORK THE WEB
These boxes in the chapter
material show students how
to research fi nancial issues
using the Web and how to
use the information they fi nd
to make business decisions
See examples in Chapter 4,
page 103; Chapter 5,
page 140
SPREADSHEET STRATEGIES
This feature either introduces students to Excel or helps them brush up on their Excel spread-sheet skills, particularly as they relate to corporate fi nance This feature appears in self-contained sections and shows students how to set up spreadsheets
to analyze common fi nancial problems—a vital part of every business student’s education
For examples, see Chapter 5, page 139; Chapter 6, page 153
Calculating company growth rates can involve detailed research, and a major part of a stock analyst’s job is to
estimate them One place to fi nd earnings and sales growth rates on the Web is Yahoo! Finance at fi nance.yahoo.
com We pulled up a quote for Minnesota Mining & Manufacturing (MMM, or 3M as it is known) and followed the
“Analyst Estimates” link Here is an abbreviated look at the results:
As shown, analysts expect, on average, revenue (sales) of $22.77 billion in 2006, growing to $24.27 billion
in 2007, an increase of 6.6 percent We also have the following table comparing MMM to some benchmarks:
Using a Spreadsheet for Time Value of Money Calculations
More and more, businesspeople from many different areas (not just fi nance and accounting) rely on spreadsheets
to do all the different types of calculations that come up in the real world As a result, in this section, we will show you how to use a spreadsheet to handle the various time value of money problems we presented in this chapter
We will use Microsoft Excel™, but the commands are similar for other types of software We assume you are already familiar with basic spreadsheet operations.
As we have seen, you can solve for any one of the following four potential unknowns: future value, present value, the discount rate, or the number of periods With a spreadsheet, there is a separate formula for each In Excel, these are shown in a nearby box.
In these formulas, pv and fv are present and future value, nper is the number of periods, and rate is the discount, or interest, rate.
Two things are a little tricky here First, unlike a
fi nancial calculator, the spreadsheet requires that the rate be entered as a decimal Second, as with most
fi nancial calculators, you have to put a negative sign
on either the present value or the future value to solve for the rate or the number of periods For the same reason, if you solve for a present value, the answer will have
a negative sign unless you input a negative future value The same is true when you compute a future value.
To illustrate how you might use these formulas, we will go back to an example in the chapter If you invest
$25,000 at 12 percent per year, how long until you have $50,000? You might set up a spreadsheet like this:
SPREADSHEET STRATEGIES
To Find Enter This Formula
Future value FV (rate,nper,pmt,pv) Present value PV (rate,nper,pmt,fv) Discount rate RATE (nper,pmt,pv,fv) Number of periods NPER (rate,pmt,pv,fv)
1 3 5 7 8
Trang 15CALCULATOR HINTS
These brief calculator tutorials
have been added in selected
chapters to help students learn
or brush up on their fi nancial
cal-culator skills These complement
the just-mentioned Spreadsheet
Strategies For examples, see
Chapter 5, page 136; Chapter 6,
page 152
CONCEPT BUILDING
Chapter sections are intentionally kept short to promote a step-by-step, building block approach to learning Each section is then followed by a series of short concept questions that highlight the key ideas just presented Students use these questions to make sure they can identify and understand the most important concepts as they read See Chapter 5, page 133; Chapter 6, page 154 for examples
SUMMARY TABLES
These tables succinctly restate key principles, results, and equations They appear whenever it is useful
to emphasize and summarize a group of related concepts For examples, see Chapter 6, page 163
LABELED EXAMPLES
Separate numbered and titled
examples are extensively integrated
into the chapters as indicated below
These examples provide detailed
applications and illustrations of
the text material in a step-by-step
format Each example is
com-pletely self-contained so students
don’t have to search for additional
information Based on our
class-room testing, these examples are
among the most useful learning aids
because they provide both detail
and explanation See Chapter 6,
page 163; Chapter 7, page 196
How to Calculate Present Values with Multiple FutureCash Flows Using a Financial Calculator
To calculate the present value of multiple cash fl ows with a fi nancial calculator, we will simply discount the vidual cash fl ows one at a time using the same technique we used in our previous chapter, so this is not really new However, we can show you a shortcut We will use the numbers in Example 6.3 to illustrate.
indi-To begin, of course we fi rst remember to clear out the calculator! Next, from Example 6.3, the fi rst cash fl ow
is $200 to be received in one year and the discount rate is 12 percent, so we do the following:
Next we value the second cash fl ow We need to change N to 2 and FV to 400 As long as we haven’t changed anything else, we don’t have to reenter I/Y or clear out the calculator, so we have:
Preferred Stock EXAMPLE 6.7
Preferred stock (or preference stock) is an important example of a perpetuity When a
corporation sells preferred stock, the buyer is promised a fi xed cash dividend every period (usually every quarter) forever This dividend must be paid before any dividend can be paid
to regular stockholders—hence the term preferred.
Suppose the Fellini Co wants to sell preferred stock at $100 per share A similar issue
of preferred stock already outstanding has a price of $40 per share and offers a dividend
of $1 every quarter What dividend will Fellini have to offer if the preferred stock is going to sell?
The issue that is already out has a present value of $40 and a cash fl ow of $1 every quarter forever Because this is a perpetuity:
Present value $40 $1 (1兾r)
r 2.5%
To be competitive, the new Fellini issue will also have to offer 2.5 percent per quarter; so if
the present value is to be $100, the dividend must be such that:
Present value $100 C (1兾.025)
C $2.50 (per quarter)
Trang 16HIGHLIGHTED CONCEPTS
Throughout the text, important
ideas are pulled out and presented
in a highlighted box—signaling
to students that this material is
particularly relevant and critical for
their understanding See Chapter 4,
page 107
KEY EQUATIONS
Called out in the text, key equations are identifi ed by an equation number The list in Appendix B
shows the key equations by chapter, providing students with a convenient reference For examples,
see Chapter 4, page 97; Chapter 5, page 123
EXPLANATORY WEB LINKS
These Web links are provided in the margins of the text They are specifi cally selected
to accompany text material and provide students and instructors with a quick way to
check for additional information using the Internet See Chapter 4, page 91; Chapter 5,
page 123
KEY TERMS
Key Terms are printed in bold type and defi ned within the text the fi rst time they appear They also
appear in the margins with defi nitions for easy location and identifi cation by the student See
Chapter 4, page 91; Chapter 7, page 199 for examples
Amazon.com, the big online retailer, is another example At one time, Amazon’s motto seemed to be “growth at any cost.” Unfortunately, what really grew rapidly for the com-pany were losses Amazon refocused its business, explicitly sacrifi cing growth in the hope
of achieving profi tability The plan seems to be working as Amazon.com turned a profi t for the fi rst time in the third quarter of 2003
As we discussed in Chapter 1, the appropriate goal is increasing the market value of the owners’ equity Of course, if a fi rm is successful in doing this, then growth will usually result Growth may thus be a desirable consequence of good decision making, but it is not
an end unto itself We discuss growth simply because growth rates are so commonly used
in the planning process As we will see, growth is a convenient means of summarizing various aspects of a fi rm’s fi nancial and investment policies Also, if we think of growth as growth in the market value of the equity in the fi rm, then goals of growth and increasing the market value of the equity in the fi rm are not all that different
You can fi nd growth rates under the research links at
www.investor.reuters.com
and fi nance.yahoo.com.
Given values for all four of these, there is only one growth rate that can be achieved
This is an important point, so it bears restating:
If a fi rm does not wish to sell new equity and its profi t margin, dividend policy,
fi nancial policy, and total asset turnover (or capital intensity) are all fi xed, then there is only one possible growth rate.
As we described early in this chapter, one of the primary benefi ts of fi nancial planning
is that it ensures internal consistency among the fi rm’s various goals The concept of the sustainable growth rate captures this element nicely Also, we now see how a fi nancial planning model can be used to test the feasibility of a planned growth rate If sales are to grow at a rate higher than the sustainable growth rate, the fi rm must increase profi t margins, increase total asset turnover, increase fi nancial leverage, increase earnings retention, or sell new shares
Trang 17CHAPTER SUMMARY AND CONCLUSIONS
Every chapter ends with a concise, but thorough, summary of the important ideas—helping students review the key points and providing closure to the chapter See Chapter 4, page 111; Chapter 5, page 141
CHAPTER REVIEW AND SELF-TEST PROBLEMS
Appearing after the Summary and Conclusion, each chapter includes a Chapter Review and Self-Test Problem section
These questions and answers allow students to test their abilities in solving key problems related to the chapter content and provide instant reinforce-ment See Chapter 5, page 141;
Chapter 6, page 177
CONCEPTS REVIEW AND
CRITICAL THINKING
QUESTIONS
This successful end-of-chapter
section facilitates your students’
knowledge of key principles, as
well as intuitive understanding of
the chapter concepts A number
of the questions relate to the
chapter-opening vignette—
reinforcing student
critical-think-ing skills and the learncritical-think-ing of
chapter material For examples,
see Chapter 6, page 180;
Chapter 7, page 228
CHAPTER REVIEW AND SELF-TEST PROBLEMS 5.1 Calculating Future Values Assume you deposit $10,000 today in an account that
pays 6 percent interest How much will you have in fi ve years?
5.2 Calculating Present Values Suppose you have just celebrated your 19th birthday
A rich uncle has set up a trust fund for you that will pay you $150,000 when you turn
30 If the relevant discount rate is 9 percent, how much is this fund worth today?
5.3 Calculating Rates of Return You’ve been offered an investment that will double
your money in 10 years What rate of return are you being offered? Check your
answer using the Rule of 72.
5.4 Calculating the Number of Periods You’ve been offered an investment that
will pay you 9 percent per year If you invest $15,000, how long until you have
$30,000? How long until you have $45,000?
ANSWERS TO CHAPTER REVIEW AND SELF-TEST PROBLEMS 5.1 We need to calculate the future value of $10,000 at 6 percent for fi ve years The
future value factor is:
1.06 5 1.3382
The future value is thus $10,000 1.3382 $13,382.26.
5.2 We need the present value of $150,000 to be paid in 11 years at 9 percent The
discount factor is:
1 兾1.09 11 1兾2.5804 3875
The present value is thus about $58,130.
CONCEPTS REVIEW AND CRITICAL THINKING QUESTIONS
1 Annuity Factors There are four pieces to an annuity present value What are they?
2 Annuity Period As you increase the length of time involved, what happens to the
present value of an annuity? What happens to the future value?
3 Interest Rates What happens to the future value of an annuity if you increase the
rate r? What happens to the present value?
4 Present Value What do you think about the Tri-State Megabucks lottery discussed
in the chapter advertising a $500,000 prize when the lump sum option is $250,000?
Is it deceptive advertising?
5 Present Value If you were an athlete negotiating a contract, would you want a
big signing bonus payable immediately and smaller payments in the future, or vice versa? How about looking at it from the team’s perspective?
6 Present Value Suppose two athletes sign 10-year contracts for $80 million In one
case, we’re told that the $80 million will be paid in 10 equal installments In the other case, we’re told that the $80 million will be paid in 10 installments, but the installments will increase by 5 percent per year Who got the better deal?
7 APR and EAR Should lending laws be changed to require lenders to report EARs
instead of APRs? Why or why not?
Trang 18END-OF-CHAPTER QUESTIONS AND PROBLEMS
We have found that many students learn better when they have plenty
of opportunity to practice; therefore,
we provide extensive end-of-chapter questions and problems The end-of-chapter support greatly exceeds typical introductory textbooks
The questions and problems are segregated into three learning levels: Basic, Intermediate, and Challenge
All problems are fully annotated so that students and instructors can readily identify particular types
Answers to selected end-of-chapter material appear in Appendix C
Also, all problems are available
in McGraw-Hill’s Homework Manager—see page xxi for details
See Chapter 6, page 181; Chapter 7, page 229
WEB EXERCISES
These end-of-chapter activities show students how to use and learn
from the vast amount of fi nancial resources available on the Internet
See examples in Chapter 6, page 190; Chapter 7, page 233
QUESTIONS AND PROBLEMS
1 Interpreting Bond Yields Is the yield to maturity on a bond the same thing
as the required return? Is YTM the same thing as the coupon rate? Suppose today a 10 percent coupon bond sells at par Two years from now, the required return on the same bond is 8 percent What is the coupon rate on the bond then?
The YTM?
2 Interpreting Bond Yields Suppose you buy a 7 percent coupon, 20-year bond
today when it’s fi rst issued If interest rates suddenly rise to 15 percent, what pens to the value of your bond? Why?
3 Bond Prices Carpenter, Inc., has 8 percent coupon bonds on the market that have
10 years left to maturity The bonds make annual payments If the YTM on these bonds is 9 percent, what is the current bond price?
4 Bond Yields Linebacker Co has 7 percent coupon bonds on the market with nine
years left to maturity The bonds make annual payments If the bond currently sells for $1,080, what is its YTM?
5 Coupon Rates Hawk Enterprises has bonds on the market making annual
payments, with 16 years to maturity, and selling for $870 At this price, the bonds yield 7.5 percent What must the coupon rate be on the bonds?
6 Bond Prices Cutler Co issued 11-year bonds a year ago at a coupon rate of
7.8 percent The bonds make semiannual payments If the YTM on these bonds is 8.6 percent, what is the current bond price?
7 Bond Yields Ngata Corp issued 12-year bonds 2 years ago at a coupon rate of
9.2 percent The bonds make semiannual payments If these bonds currently sell for 104 percent of par value, what is the YTM?
8 Coupon Rates Wimbley Corporation has bonds on the market with 14.5 years to
maturity, a YTM of 6.8 percent, and a current price of $1,136.50 The bonds make semiannual payments What must the coupon rate be on these bonds?
BASIC
(Questions 1–14)
WEB EXERCISES
7.1 Bond Quotes You can fi nd the current bond quotes for many companies at www.
nasdbondinfo.com Go to the site and fi nd the bonds listed for Georgia Pacifi c
What is the shortest-maturity bond listed for Georgia Pacifi c? What is the maturity bond? What are the credit ratings for each bond? Do each of the bonds have the same credit rating? Why do you think this is?
longest-7.2 Yield Curves You can fi nd information regarding the most current bond yields at
money.cnn.com Graph the yield curve for U.S Treasury bonds What is the general shape of the yield curve? What does this imply about the expected future infl ation?
Now graph the yield curve for AAA, AA, and A rated corporate bonds Is the rate yield curve the same shape as the Treasury yield curve? Why or why not?
corpo-7.3 Default Premiums The St Louis Federal Reserve Board has fi les listing historical
interest rates on their Web site: www.stls.frb.org Find the link for “FRED II” data, then “Interest Rates.” You will fi nd listings for Moody’s Seasoned Aaa Corporate Bond Yield and Moody’s Seasoned Baa Corporate Bond Yield A default premium can be calculated as the difference between the Aaa bond yield and the Baa bond yield
Calculate the default premium using these two bond indexes for the most recent 36 months Is the default premium the same for every month? Why do you think this is?
Trang 19NEW END-OF-CHAPTER CASES
Located at the end of the book’s chapters, these minicases focus on real-life company situations that embody important
corporate fi nance topics Each case presents a new scenario, data, and a dilemma Several questions at the end of each
case require students to analyze and focus on all of the material they learned from each chapter See examples in
Chapter 6, page 191; Chapter 7, page 233
MINICASE
The MBA Decision
Ben Bates graduated from college six years ago with a fi nance
undergraduate degree Although he is satisfi ed with his
cur-rent job, his goal is to become an investment banker He feels
that an MBA degree would allow him to achieve this goal
After examining schools, he has narrowed his choice to either
Wilton University or Mount Perry College Although
intern-ships are encouraged by both schools, to get class credit for
the internship, no salary can be paid Other than internships,
neither school will allow its students to work while enrolled
in its MBA program
Ben currently works at the money management fi rm of
Dewey and Louis His annual salary at the fi rm is $50,000 per
year, and his salary is expected to increase at 3 percent per
year until retirement He is currently 28 years old and expects
to work for 35 more years His current job includes a fully
paid health insurance plan, and his current average tax rate is
26 percent Ben has a savings account with enough money to
cover the entire cost of his MBA program
The Ritter College of Business at Wilton University is one
of the top MBA programs in the country The MBA degree
requires two years of full-time enrollment at the university
The annual tuition is $60,000, payable at the beginning of
each school year Books and other supplies are estimated to
cost $2,500 per year Ben expects that after graduation from
Wilton, he will receive a job offer for about $95,000 per year,
with a $15,000 signing bonus The salary at this job will
increase at 4 percent per year Because of the higher salary,
his average income tax rate will increase to 31 percent
The Bradley School of Business at Mount Perry College
began its MBA program 16 years ago The Bradley School is
smaller and less well known than the Ritter College Bradley offers an accelerated one-year program, with a tuition cost of
$75,000 to be paid upon matriculation Books and other plies for the program are expected to cost $3,500 Ben thinks that he will receive an offer of $78,000 per year upon gradua-tion, with a $10,000 signing bonus The salary at this job will increase at 3.5 percent per year His average tax rate at this level of income will be 29 percent
sup-Both schools offer a health insurance plan that will cost
$3,000 per year, payable at the beginning of the year Ben also estimates that room and board expenses will cost $20,000 per year at both schools The appropriate discount rate is 6.5 percent
1 How does Ben’s age affect his decision to get an MBA?
2 What other, perhaps nonquantifi able, factors affect Ben’s decision to get an MBA?
3 Assuming all salaries are paid at the end of each year, what is the best option for Ben from a strictly fi nancial standpoint?
4 Ben believes that the appropriate analysis is to calculate the future value of each option How would you eva-luate this statement?
5 What initial salary would Ben need to receive to make him indifferent between attending Wilton University and staying in his current position?
6 Suppose, instead of being able to pay cash for his MBA, Ben must borrow the money The current borrowing rate is 5.4 percent How would this affect his decision?