Practical Financial Management with Thomson ONE

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ISBN: 9780324260762 | 0324260768
Cover: Hardcover
Copyright: 1/5/2004

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A text that offers clear, concise, and practical real world treatment of key financial management topics with the assumption readers have little knowledge of financial concepts. Advanced math is eliminated from the theory sections and everyday math is geared towards making the material useful yet understandable, supported by numerous worked-out examples and graphical and intuitive presentations of math where appropriate. Written by a former CFO, the book offers practical, real-world discussion of key topics, including cross-functional coverage of the agendas and biases decision-makers across the firm may bring to a financial proposal.

PART 1 Introduction to Financial Management

(150)

Foundations

(23)

An Overview of Finance

(4)

Financial Assets

(1)

Financial Markets

(1)

Raising Money

(1)

Financial Management

(1)

The Price of Securities---A Link between the Firm and the Market

(1)

Finance and Accounting

(2)

The Importance of Cash Flow

(1)

The Language of Finance

(1)

Financial Theory---The Relationship with Economics

(1)

Forms of Business Organization and Their Financial Impact

(5)

The Proprietorship Form

(1)

The Corporate Form

(2)

The Truth about Limited Liability

(1)

S-Type Corporations and Limited Liability Companies

(1)

Insights: The Limited Liability Company (LLC): An Alternative to the S-Type Corporation

(1)

The Goals of Management

(1)

Stakeholders and Conflicts of Interest

(1)

Conflicts of Interest---An Illustration

(1)

Management---A Privileged Stakeholder Group

(1)

The Agency Problem

(1)

Insights: Ethics and Ethical Investing

(2)

Creditors versus Stockholders---A Financially Important Conflict of Interest

(1)

Thomson One

(1)

Questions

(1)

Business Analysis

(1)

Problems

(1)

Internet Problem

(1)

Thomson One

(2)

Financial Background: A Review of Accounting, Financial Statements, and Taxes

(90)

Accounting Systems and Financial Statements

(4)

The Nature of Financial Statements

(1)

The Accounting System

(2)

The Income Statement

(2)

Presentation

(2)

The Balance Sheet

(10)

Presentation

(1)

Assets

(5)

Liabilities

(3)

Equity

(1)

The Tax Environment

(4)

Taxing Authorities and Tax Bases

(1)

Income Taxes---The Total Effective Tax Rate

(1)

Progressive Tax Systems, Marginal and Average Rates

(1)

Capital Gains and Losses

(1)

Income Tax Calculations

(8)

Personal Taxes

(4)

Corporate Taxes

(4)

Questions

(1)

Problems

(6)

Internet Problem

(1)

Computer Problems

(3)

Cash Flows and Financial Analysis

Financial Information---Where Does It Come From, Who Uses It, and What Are We Looking For?

(4)

Users of Financial Information

(1)

Sources of Financial Information

(3)

Insights: The Devil Is in the Details

(1)

The Orientation of Financial Analysis

(1)

Insights: The Ethics of Presenting Financial Information

(2)

The Statement of Cash Flows

(10)

How the Statement of Cash Flows Works---Preliminary Examples

(3)

Business Cash Flows

(2)

Constructing the Statement of Cash Flows

(4)

Free Cash Flows

(1)

Ratio Analysis

(14)

Comparisons

(1)

Common Size Statements

(1)

Ratios

(1)

Liquidity Ratios

(1)

Asset Management Ratios

(3)

Debt Management Ratios

(2)

Profitability Ratios

(2)

Market Value Ratios

(1)

Du Pont Equations

(2)

Insights: New Ideas in Financial Analysis: MVA and EVA

(4)

Using the Du Pont Equations

(1)

Sources of Comparative Information

(1)

Limitations and Weaknesses of Ratio Analysis

(1)

Questions

(1)

Business Analysis

(1)

Problems

(10)

Internet Problem

109

(1)

Computer Problems

109

(4)

Thomson One

113

(2)

The Financial System and Interest

115

(36)

The Financial System

115

(6)

Cash Flows Between the Sectors

116

(1)

Savings and Investment

116

(2)

Financial Markets

118

(3)

The Stock Market and Stock Exchanges

121

(5)

Overview

121

(1)

Trading---The Role of Brokers

121

(1)

Exchanges

122

(1)

Private, Public, and Listed Companies, and the Nasdaq Market

123

(3)

Insights: It's All in the Timing---IPOs Are a Risky Business

126

(2)

Reading Stock Quotations

127

(1)

Insights: Efficient Financial Markets

128

(1)

Interest

129

(4)

The Relationship Between Interest and the Stock Market

129

(1)

Interest and the Economy

130

(1)

Debt Markets

130

(3)

The Components of an Interest Rate

133

(9)

Components of the Base Rate

133

(1)

Risk Premiums

134

(2)

Putting the Pieces Together

136

(1)

Federal Government Securities, Risk-Free and Real Rates

137

(3)

Yield Curves---The Term Structure of Interest Rates

140

(2)

Questions

142

(1)

Business Analysis

143

(1)

Problems

144

(3)

Internet Problem

147

(1)

Appendix 4A: Can There Be Interest Without Money? The Desert Island

147

(4)

PART 2 Discounted Cash Flow and the Value of Securities

151

(204)

Time Value of Money

153

(50)

Outline of Approach

154

(1)

Amount Problems

155

(7)

The Future Value of an Amount

156

(3)

Financial Calculators

159

(1)

The Expression for the Present Value of an Amount

160

(2)

Annuity Problems

162

(16)

Annuities

163

(1)

The Future Value of an Annuity---Developing a Formula

163

(3)

The Future Value of an Annuity---Solving Problems

166

(3)

Compound Interest and Non-Annual Compounding

169

(6)

The Present Value of an Annuity---Developing a Formula

175

(1)

The Present Value of an Annuity---Solving Problems

176

(2)

Insights: The Lottery: Congratulations, Youire Rich---But Not As Rich As You Thought

178

(16)

The Annuity Due

183

(3)

Perpetuities

186

(3)

Multipart Problems

189

(3)

Uneven Streams and Imbedded Annuities

192

(2)

Questions

194

(1)

Business Analysis

195

(1)

Problems

195

(5)

Internet Problem

200

(1)

Computer Problems

200

(3)

The Valuation and Characteristics of Bonds

203

(61)

The Basis of Value

203

(2)

Investing

204

(1)

Return

204

(1)

Bond Valuation

205

(13)

Bond Terminology and Practice

205

(1)

Bond Valuation---Basic Ideas

206

(1)

Determining the Price of a Bond

207

(6)

Maturity Risk Revisited

213

(1)

Finding the Yield at a Given Price

214

(3)

Call Provisions

217

(1)

Insights: Can a Bond Be a Bond Without Paying Interest?

218

(5)

Risky Issues

222

(1)

Convertible Bonds

223

(9)

Advantages of Convertible Bonds

225

(1)

Forced Conversion

225

(1)

Valuation (Pricing) Convertibles

226

(3)

Effect of Earnings per Share---Diluted EPS

229

(3)

Other Convertible Securities

232

(1)

Institutional Characteristics of Bonds

232

(4)

Registration, Transfer Agents, and Owners of Record

232

(1)

Kinds of Bonds

232

(1)

Bond Ratings---Assessing Default Risk

233

(3)

Insights: Even the Safest Companies Can Default on Bonds---The Perils of Utility Deregulation in California

236

(2)

Bond Indentures---Controlling Default Risk

236

(2)

Insights: Ethical Debt Management

238

(1)

Questions

238

(1)

Business Analysis

239

(1)

Problems

240

(3)

Internet Problem

243

(1)

Computer Problems

243

(2)

Appendix 6A: Lease Financing

245

(19)

The Valuation and Characteristics of Stock

264

(42)

Common Stock

264

(4)

The Return on an Investment in Common Stock

264

(1)

The Nature of Cash Flows from Common Stock Ownership

265

(2)

The Basis of Value

267

(1)

Growth Models of Common Stock Valuation

268

(10)

Developing Growth-Based Models

269

(2)

The Constant Growth Model

271

(2)

The Expected Return

273

(1)

Two-Stage Growth

274

(2)

Practical Limitations of Pricing Models

276

(2)

Insights: Reconciling Valuation Theory and Practice

278

(1)

Some Institutional Characteristics of Common Stock

279

(1)

Corporate Organization and Control

279

(1)

Insights: Corporate Governance in Large Companies: The Role of Boards of Directors

280

(3)

Voting Rights and Issues

281

(1)

Stockholders' Claims on Income and Assets

282

(1)

Preferred Stock

283

(2)

Valuation of Preferred Stock

283

(1)

Characteristics of Preferred Stock

284

(1)

Securities Analysis

285

(2)

Options and Warrants

287

(12)

Options in General

287

(1)

Stock Options

287

(1)

Call Options

288

(1)

Intrinsic Value

289

(1)

Options and Leverage

290

(2)

Trading in Options

292

(1)

Writing Options

292

(2)

Put Options

294

(2)

Option Pricing Models

296

(1)

Warrants

296

(1)

Employee Stock Options

297

(2)

Questions

299

(1)

Business Analysis

299

(1)

Problems

300

(3)

Internet Problem

303

(1)

Computer Problems

303

(2)

Thomson One

305

(1)

Risk and Return

306

(49)

Why Study Risk and Return?

306

(5)

The General Relationship between Risk and Return

307

(1)

The Return on an Investment

308

(2)

Risk---A Preliminary Definition

310

(1)

Portfolio Theory

311

(18)

Review of the Concept of a Random Variable

311

(4)

The Return on a Stock Investment as a Random Variable

315

(2)

Risk Redefined as Variability

317

(2)

Risk Aversion

319

(3)

Decomposing Risk---Systematic (Market) and Unsystematic (Business-Specific) Risk

322

(1)

Portfolios

323

(1)

Diversification---How Portfolio Risk Is Affected When Stocks Are Added

324

(3)

Measuring Market Risk---The Concept of Beta

327

(2)

Insights: Is It Investing or Gambling?

329

(3)

Insights: Just How Risky Is AT&T---Really? A Problem With Betas

332

(10)

Using Beta---The Capital Asset Pricing Model (Capm)

333

(9)

The Validity and Acceptance of the Capm and Its Sml

342

(1)

Insights: Beta in Practice

342

(1)

Questions

343

(1)

Business Analysis

344

(1)

Problems

344

(6)

Internet Problem

350

(1)

Computer Problems

351

(2)

Thomson One

353

(2)

PART 3 Business Investment Decisions---Capital Budgeting

355

(132)

Capital Budgeting

357

(36)

Characteristics of Business Projects

357

(3)

Project Types and Risk

357

(1)

Stand-Alone and Mutually Exclusive Projects

358

(1)

Project Cash Flows

358

(1)

The Cost of Capital

359

(1)

Capital Budgeting Techniques

360

(17)

Payback Period

360

(2)

Net Present Value (Npv)

362

(4)

Internal Rate of Return (Irr)

366

(5)

Comparing IRR and NPV

371

(2)

NPV and IRR Solutions Using Financial Calculators and Spreadsheets

373

(1)

Projects with a Single Outflow and Regular Inflows

374

(1)

Profitability Index (PI)

375

(2)

Insights: Which Methods Do Businesses Prefer?

377

(5)

Comparing Projects with Unequal Lives

378

(3)

Capital Rationing

381

(1)

Questions

382

(2)

Business Analysis

384

(1)

Problems

384

(6)

Internet Problem

390

(1)

Computer Problems

390

(3)

Cash Flow Estimation

393

(28)

Cash Flow Estimation

393

(1)

Capital Budgeting Processes

393

(1)

Project Cash Flows---An Overview and Some Specifics

394

(4)

The General Approach to Cash Flow Estimation

394

(1)

A Few Specific Issues

395

(3)

Estimating New Venture Cash Flows

398

(7)

Terminal Values

402

(1)

Accuracy and Estimates

402

(2)

Macrs---A Note on Depreciation

404

(1)

Estimating Cash Flows for Replacement Projects

405

(4)

Insights: Ethics in Cash Flow Estimation

409

(1)

Question

410

(1)

Business Analysis

410

(2)

Problems

412

(6)

Internet Problem

418

(1)

Computer Problems

418

(3)

Risk Topics and Real Options in Capital Budgeting

421

(32)

Risk in Capital Budgeting---General Considerations

421

(3)

Cash Flows as Random Variables

421

(1)

The Importance of Risk in Capital Budgeting

422

(2)

Incorporating Risk into Capital Budgeting---Numerical and Computer Methods

424

(9)

Scenario/Sensitivity Analysis

424

(2)

Computer (Monte Carlo) Simulation

426

(2)

Decision Tree Analysis

428

(5)

Real Options

433

(4)

Real Options in Capital Budgeting

433

(3)

Valuing Real Options

436

(1)

Insights: Volatile Energy Prices and Real Options, Thinking Can Lead to Big Profits on Inefficient Facilities

437

(2)

Designing Real Options into Projects

438

(1)

Incorporating Risk into Capital Budgeting---The Theoretical Approach and Risk-Adjusted Rates of Return

439

(6)

Estimating Risk-Adjusted Rates Using Capm

440

(3)

Problems with the Theoretical Approach---Finding the Right Beta and Concerns About the Appropriate Risk Definition

443

(2)

Questions

445

(1)

Business Analysis

446

(1)

Problems

447

(6)

Cost of Capital

453

(34)

The Purpose of the Cost of Capital

453

(1)

Cost of Capital Concepts

454

(1)

Capital Components

454

(1)

Capital Structure

454

(1)

Insights: The Cost of Capital---Intuitively

455

(4)

Returns on Investments and the Costs of Capital Components

455

(1)

The Weighted Average Calculation---the WACC

456

(1)

Capital Structure and Cost---Book vs. Market Value

457

(2)

Calculating the WACC

459

(8)

Developing Market-Value-Based Capital Structure

459

(1)

Calculating Component Costs of Capital

460

(7)

Putting the Weights and Costs Together

467

(1)

The Marginal Cost of Capital (MCC)

467

(3)

The Break in MCC When Retained Earnings Run Out

467

(1)

The MCC Schedule

468

(2)

The Cost of Capital---A Comprehensive Example

470

(5)

A Potential Mistake---Handling Separately Funded Projects

475

(1)

Insights: Revisiting Eva

476

(1)

Questions

477

(1)

Business Analysis

478

(1)

Problems

479

(6)

Internet Problem

485

(2)

PART 4 Long-Term Financing Issues

487

(78)

Capital Structure and Leverage

489

(50)

Background

489

(4)

The Central Issue

490

(1)

Risk in the Context of Leverage

490

(2)

Leverage and Risk---Two Kinds of Each

492

(1)

Our Approach to Leverage

492

(1)

Financial Leverage

493

(9)

The Effect of Financial Leverage

493

(5)

Financial Leverage and Financial Risk

498

(1)

Putting the Ideas Together---The Effect on Stock Price

499

(3)

Insights: AOL Time Warner: The Perils of Leverage

502

(5)

The Degree of Financial Leverage (DFL)---A Measurement

503

(2)

Ebit--Eps Analysis

505

(2)

Operating Leverage

507

(11)

Terminology and Definitions

508

(1)

Breakeven Analysis

509

(1)

Breakeven Diagrams

509

(3)

The Effect of Operating Leverage

512

(2)

The Degree of Operating Leverage (DOL)---A Measurement

514

(1)

Comparing Operating and Financial Leverage

515

(2)

The Compounding Effect of Operating and Financial Leverage

517

(1)

Capital Structure Theory

518

(1)

Background---The Value of the Firm

518

(1)

Insights: Leverage and Business Strategy

519

(11)

The Early Theory by Modigliani and Miller

521

(4)

Relaxing the Assumptions---More Insights

525

(4)

An Insight into Mergers and Acquisitions

529

(1)

Questions

530

(1)

Business Analysis

531

(2)

Problems

533

(4)

Internet Problem

537

(1)

Thomson One

538

(1)

Dividends

539

(26)

Background

539

(2)

Dividends as a Basis for Value

539

(1)

Understanding the Dividend Decision

540

(1)

The Dividend Controversy

541

(6)

Dividend Irrelevance

541

(3)

Dividend Preference

544

(1)

Dividend Aversion

544

(1)

Other Theories and Ideas

545

(1)

Conclusion

546

(1)

Insights: Microsoft Shocks the High-Tech World By Declaring a Dividend

547

(1)

Practical Considerations

548

(1)

Legal and Contractual Restrictions on Dividends

548

(1)

Insights: The Painful Decision to Cut Dividends

549

(6)

Dividend Policy

549

(1)

The Mechanics of Dividend Payments

550

(2)

Stock Splits and Dividends

552

(3)

Stock Repurchases

555

(3)

Repurchase as an Alternative to a Dividend

555

(2)

Other Repurchase Issues

557

(1)

Questions

558

(1)

Business Analysis

559

(1)

Problems

560

(3)

Internet Problem

563

(2)

PART 5 Operations Issues---Working Capital Management and Planning

565

(102)

The Management of Working Capital

567

(48)

Working Capital Basics

567

(1)

Working Capital, Funding Requirements, and the Current Accounts

568

(1)

Insights: Going Broke Profitably

568

(8)

The Objective of Working Capital Management

570

(1)

Operations---The Cash Conversion Cycle

570

(2)

Permanent and Temporary Working Capital

572

(1)

Financing Net Working Capital

572

(4)

Working Capital Policy

576

(1)

Sources of Short-Term Financing

576

(9)

Spontaneous Financing

576

(2)

Unsecured Bank Loans

578

(1)

Revolving Credit Agreement

579

(2)

Commercial Paper

581

(1)

Short-Term Credit Secured by Current Assets

582

(3)

Cash Management

585

(7)

Definitions and Objectives

586

(1)

Marketable Securities

587

(1)

Check Disbursement and Collection Procedures

587

(2)

Accelerating Cash Receipts

589

(2)

Managing Cash Outflow

591

(1)

Evaluating the Cost of Cash Management Services

591

(1)

Insights: Ethical Cash Management

592

(1)

Managing Accounts Receivable

593

(2)

Objectives and Policy

593

(1)

Determinants of the Receivables Balance

593

(2)

Insights: A Practical Management Warning

595

(2)

Insights: How Lafarge's Western Region Controls Receivables---Sharing Responsibility for Collections with Sales

597

(1)

Inventory Management

598

(7)

Who Is Responsible for Inventories?

598

(1)

The Benefits and Costs of Carrying Inventory

598

(2)

Inventory Control and Management

600

(1)

The Economic Order Quantity (EOQ) Model

600

(3)

Safety Stocks, Reorder Points, and Lead Times

603

(1)

Tracking Inventories---The ABC System

604

(1)

Just in Time (JIT) Inventory Systems

604

(1)

Questions

605

(2)

Business Analysis

607

(1)

Problems

608

(5)

Internet Problem

613

(2)

Financial Planning

615

(52)

Business Planning

615

(8)

Component Parts of a Business Plan

616

(1)

The Purpose of Planning and Plan Information

616

(2)

Credibility and Supporting Detail

618

(1)

Four Kinds of Business Plan

619

(4)

The Financial Plan as a Component of a Business Plan

623

(1)

Making Financial Projections

623

(28)

Planning for New and Existing Businesses

623

(1)

The General Approach, Assumptions, and the Debt/Interest Problem

624

(6)

Plans with Simple Assumptions

630

(2)

Forecasting Cash Needs

632

(1)

The Percentage of Sales Method---A Formula Approach

632

(3)

The Sustainable Growth Rate

635

(1)

Plans with More Complicated Assumptions

636

(3)

A Comprehensive Example---A Complex Plan for an Existing Business

639

(7)

Planning at the Department Level

646

(1)

The Cash Budget

647

(4)

Management Issues in Financial Planning

651

(3)

The Financial Plan as a Set of Goals

651

(1)

Risk in Financial Planning in General

652

(2)

Insights: Judgment Calls and Ethics in Business Planning

654

(2)

Financial Planning and Computers

655

(1)

Questions

656

(1)

Business Analysis

657

(2)

Problems

659

(6)

Internet Problem

665

(2)

PART 6 Current Topics in Financial Management

667

(60)

Corporate Restructuring

669

(38)

Mergers and Acquisitions

669

(17)

Basic Definitions, Terminology, and Procedure

669

(4)

The Antitrust Laws

673

(1)

The Reasons Behind Mergers

674

(2)

Holding Companies

676

(1)

The History of Merger Activity in the United States

676

(3)

Merger Analysis and the Price Premium

679

(7)

Insights: How A Trendy Soft Drink Gave Cereal Giant Quaker Oats a $1.4 Billion Case of Indigestion

686

(3)

Defensive Tactics

687

(2)

Other Kinds of Takeovers---LBOs and Proxy Fights

689

(2)

Leveraged Buyouts (LBOs)

689

(1)

Proxy Fights

690

(1)

Divestitures

691

(1)

The Reasons for Divestitures

691

(1)

Methods of Divesting Operations

691

(1)

Bankruptcy and the Reorganization of Failed Businesses

692

(4)

Failure and Insolvency

692

(1)

Bankruptcy---Concept and Objectives

693

(1)

Bankruptcy Procedures---Reorganization, Restructuring, Liquidation

693

(3)

Insights: Is Bankruptcy Too Easy---What About Ethics and Fraud

696

(2)

Questions

698

(1)

Business Analysis

699

(2)

Problems

701

(4)

Internet Problem

705

(1)

Thomson One

706

(1)

International Finance

707

(20)

Currency Exchange

708

(9)

The Foreign Exchange Market

708

(1)

Exchange Rates

708

(2)

Changing Exchange Rates and Exchange Rate Risk

710

(2)

European Currencies in the Twenty-First Century---The Euro

712

(1)

Supply and Demand---The Source of Exchange Rate Movement

712

(3)

Governments and the International Monetary System

715

(2)

International Capital Markets

717

(2)

The Eurodollar Market

718

(1)

The International Bond Market

718

(1)

Political Risk

719

(1)

Transaction and Translation Risks

720

(2)

Questions

722

(1)

Business Analysis

722

(1)

Problems

723

(1)

Internet Problems

724

(3)

Appendix A Financial Tables

727

(9)

Appendix B Answers to Selected Problems

736

(4)

Glossary

740

(9)

Index

749

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Practical Financial Management with Thomson ONE

Summary

Table of Contents

Supplemental Materials