Finance Forum

Essential Activities: 

Reading Chapter 19 and 20 in the textbook (attached below) will assist in writing this discussion forum.

Watching the videos Forms of Global Business will assist you in writing this discussion forum.

  1. Please make it not detected as AI writing.
  2. Please use at least 2 outside sources.

Final PDF to printer finance applications & theory cor01589_fm_i-1.indd i 10/09/21 03:03 PM Final PDF to printer The McGraw-Hill Series in Finance, Insurance and Real Estate FINANCIAL MANAGEMENT Block, Hirt, and Danielsen Foundations of Financial Management Eighteenth Edition Brealey, Myers, and Allen Principles of Corporate Finance Fourteenth Edition Brealey, Myers, and Marcus Fundamentals of Corporate Finance Eleventh Edition Brooks FinGame Online 5.0 Bruner Case Studies in Finance: Managing for Corporate Value Creation Eighth Edition Cornett, Adair, and Nofsinger Finance: Applications and Theory Sixth Edition Cornett, Adair, and Nofsinger M: Finance Fifth Edition DeMello Cases in Finance Third Edition Higgins Analysis for Financial Management Thirteenth Edition Ross, Westerfield, Jaffe, and Jordan Corporate Finance Thirteenth Edition Ross, Westerfield, Jaffe, and Jordan Corporate Finance: Core Principles and Applications Sixth Edition Ross, Westerfield, and Jordan Essentials of Corporate Finance Eleventh Edition cor01589_fm_i-1.indd ii Ross, Westerfield, and Jordan Fundamentals of Corporate Finance Thirteenth Edition Shefrin Behavioral Corporate Finance: Concepts and Cases for Teaching Behavioral Finance Second Edition INVESTMENTS Bodie, Kane, and Marcus Essentials of Investments Twelfth Edition Bodie, Kane, and Marcus Investments Twelfth Edition INTERNATIONAL FINANCE Eun and Resnick International Financial Management Ninth Edition REAL ESTATE Brueggeman and Fisher Real Estate Finance and Investments Seventeenth Edition Ling and Archer Real Estate Principles: A Value Approach Fifth Edition FINANCIAL PLANNING AND INSURANCE Jordan, Miller, and Dolvin Fundamentals of Investments: Valuation and Management Ninth Edition Allen, Melone, Rosenbloom, and Mahoney Retirement Plans: 401(k)s, IRAs, and Other Deferred Compensation Approaches Eleventh Edition Sundaram and Das Derivatives: Principles and Practice Second Edition Altfest Personal Financial Planning Second Edition FINANCIAL INSTITUTIONS AND MARKETS Kapoor, Dlabay, and Hughes Focus on Personal Finance: An Active Approach to Help You Develop Successful Financial Skills Seventh Edition Rose and Hudgins Bank Management and Financial Services Ninth Edition Rose and Marquis Financial Institutions and Markets Eleventh Edition Saunders and Cornett Financial Institutions Management: A Risk Management Approach Tenth Edition Kapoor, Dlabay, and Hughes Personal Finance Fourteenth Edition Walker and Walker Personal Finance: Building Your Future Second Edition Saunders and Cornett Financial Markets and Institutions Eighth Edition 10/09/21 03:03 PM Final PDF to printer finance applications & theory sixth edition Marcia Millon Cornett Bentley University Troy A. Adair Jr. Lehigh University John Nofsinger University of Alaska Anchorage cor01589_fm_i-1.indd iii 10/09/21 03:03 PM Final PDF to printer FINANCE: APPLICATIONS AND THEORY, SIXTH EDITION Published by McGraw Hill LLC, 1325 Avenue of the Americas, New York, NY 10019. Copyright ©2023 by McGraw Hill LLC. All rights reserved. Printed in the United States of America. Previous editions ©2020, 2018, and 2015. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw Hill LLC, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. 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. 1 2 3 4 5 6 7 8 9 LWI 27 26 25 24 23 22 ISBN 978-1-264-10158-0 (bound edition) MHID 1-264-10158-9 (bound edition) ISBN 978-1-266-49456-7 (loose-leaf edition) MHID 1-266-49456-1 (loose-leaf edition) Portfolio Director: Charles Synovec Senior Product Developer: Christina Kouvelis Executive Marketing Manager: Trina Maurer Lead Content Project Managers: Ann Courtney (core) and Jamie Koch (assessment) Buyer: Susan K. Culbertson Design: Beth Blech Content Licensing Specialist: Jacob Sullivan Cover Image: ©Shutterstock/Lucky Team Studio Compositor: Straive All credits appearing on page are considered to be an extension of the copyright page. Library of Congress Cataloging-in-Publication Data Names: Cornett, Marcia Millon, author. | Adair, Troy A. (Troy Alton), 1964author. | Nofsinger, John R., author. Title: Finance : applications & theory / Marcia Millon Cornett, Bentley University, Troy A. Adair, Jr., Lehigh University, John Nofsinger, University of Alaska Anchorage. Description: Sixth edition. | New York, NY : McGraw Hill, [2023] | Series: The McGraw-Hill education series in finance, insurance, and real estate | Includes index. Identifiers: LCCN 2021045971 | ISBN 9781264101580 (hardcover) Subjects: LCSH: Finance. Classification: LCC HG173 .C679 2023 | DDC 332–dc23 LC record available at https://lccn.loc.gov/2021045971 The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw Hill, and McGraw Hill does not guarantee the accuracy of the information presented at these sites. mheducation.com/highered cor01589_fm_i-1.indd iv 10/09/21 03:03 PM Final PDF to printer dedicated to my parents, Tom and Sue—Marcia Millon Cornett to Max, my son and my inspiration—Troy A. Adair Jr. to Anna, my wife and best friend—John Nofsinger cor01589_fm_i-1.indd v 10/09/21 03:03 PM Final PDF to printer about the authors Marcia Millon Cornett Robert A. and Julia E. Dorn Professor of Finance at Bentley Courtesy of Marcia Millon Cornett University. She received her BS degree in economics from Knox College in Galesburg, Illinois, and her MBA and PhD degrees in finance from Indiana University in Bloomington, Indiana. Dr. Cornett has written and published several articles in the areas of bank performance, bank regulation, corporate finance, and investments. Articles authored by Dr. Cornett have appeared in such academic journals as the Journal of Finance; Journal of Money, Credit, and Banking; Journal of Financial Economics; Financial Management; and Journal of Banking and Finance. She was recently ranked the 124th most published out of more than 17,600 authors and the number five female author in finance literature over the last 50 years. Along with Anthony Saunders and Otgontsetseg Erhemjamts, Dr. Cornett has recently completed work on the tenth edition of Financial Institutions Management (McGraw Hill Education) and the seventh edition of Financial Markets and Institutions (McGraw Hill Education). Professor Cornett serves as an associate editor for the Journal of Banking and Finance, Journal of Financial Services Research, Review of Financial Economics, Financial Review, and Multinational Finance Journal. Dr. Cornett has served as a member of the board of directors, the executive committee, and the finance committee of the SIU Credit Union. Dr. Cornett has also taught at Southern Illinois University at Carbondale, the University of Colorado, Boston College, and Southern Methodist University. She is a member of the Financial Management Association, the American Finance Association, and the Western Finance Association. Troy Alton Adair Jr. Professor of Practice at Lehigh University and Founder and CEO Courtesy of Troy Alton Adair Jr of dataDicts, Inc. He received his BS degree in computers/information science from the University of Alabama at Birmingham, his MBA from the University of North Dakota, and his PhD in finance from Indiana University. Dr. Adair serves Lehigh as the Co-Director of the Computer Science and Business (CSB) Program, the FinTech Minor, and the Business Analytics Certificate Program. He also manages a data science consulting business specializing in providing customized data analytics assessments and training. He previously managed research computing infrastructure and support services for Harvard Business School and has written articles on bank regulator self-interest, analyst earnings per share forecasting, and capital budgeting in continuous time. He is the author of Corporate Finance Demystified, Excel Applications in Corporate Finance, and Excel Applications in Investments (all McGraw Hill Education). He has also served as a consultant on financial data information systems and business intelligence to a number of international banks and insurance companies and as the faculty representative to the board of trustees investments committee at Alma College. Dr. Adair has also taught at the University of Michigan, Alma College, Hofstra University, Indiana University, and the University of North Carolina at Chapel Hill. He is a member of the Financial Management Association, the American Finance Association, and the Southern Finance Association. vi cor01589_fm_i-1.indd vi 10/09/21 03:03 PM Final PDF to printer John Nofsinger Dean, Professor, and William H. Seward Endowed Chair of Inter- national Finance at the University of Alaska Anchorage. He earned his BS degree in electrical engineering from Washington State University, his MBA degree from Chapman University, and his PhD degree in finance from Washington State University. Dr. Nofsinger has written over 70 articles in the areas of investments, corporate finance, and behavioral finance. These papers have appeared in the scholarly journals Journal of Finance, Journal of Business, Journal of Financial and Quantitative Analysis, Financial Management, Journal of Corporate Finance, Journal of Banking and Finance, and Journal of Behavioral Decision Making, among others. Dr. Nofsinger has also authored (or coauthored) fourteen trade books, scholarly books, and textbooks that have been translated into eleven different languages. The most prominent of these books is the industry book The Psychology of Investing. Dr. Nofsinger is a leading expert in behavioral finance and is a frequent speaker on this topic at industry conferences, universities, and academic conferences. He is frequently quoted or appears in the financial media, including The Wall Street Journal, Financial Times, Fortune, Bloomberg Business Week, Smart Money, The Washington Post, and CNBC, and other media from The Dolans to The Street.com. Courtesy of John Nofsinger vii cor01589_fm_i-1.indd vii 10/09/21 03:03 PM Final PDF to printer a note from the authors “There is a lot to cover in this course so I focus on the core concepts, theories, and problems.” “I like to teach the course by using examples from their own individual lives.” “My students come into this course with varying levels of math skills.” How many of these quotes might you have said while teaching the undergraduate corporate finance course? Our many years of teaching certainly reflect such sentiments, and, as we prepared to write this book, we conducted many market research studies that confirm just how much these statements—or ones similar—are common across the country. This critical course covers so many crucial topics that instructors need to focus on core ideas to ensure that students are getting the preparation they need for future classes—and for their lives beyond college. We did not set out to write this book to change the way finance is taught, but rather to parallel and support the way that instructors from across the country currently teach finance. Well over 600 instructors teaching this course have shared their class experiences and ideas via a variety of research methods that we used to develop the framework for this text. We are excited to have authored a book that we think you will find fits your classroom style perfectly. KEY THEMES This book’s framework emphasizes three themes. See the next section in this preface for a description of features in our book that support these themes. • Finance is about connecting core concepts. We all struggle with fitting so many topics into this course, so this text strives to make it easier for you by getting back to the core concepts, key research, and current topics. We realize that today’s students expect to learn more in class from lectures than in closely studying their textbooks, so we’ve created brief chapters that clearly lead students to crucial material that they need to review if they are to understand how to approach core financial concepts. The text is also organized around learning goals, making it easier for you to prep your course and for students to study the right topics. • Finance can be taught using a personal perspective. Most long-term finance instructors have often heard students ask “How is this course relevant to me?” on the first day of class. We no longer teach classes dedicated solely to finance majors; many of us now must teach the first finance course to a mix of business majors. We need to give finance majors the rigor they need while not overwhelming class members from other majors. For years, instructors have used individual examples to help teach these concepts, but this is the first text to integrate this personal way of teaching into the chapters. • Finance focuses on solving problems and decision making. This isn’t to say that concepts and theories aren’t important, but students will typically need to solve some kind of mathematical problem—or at least understand the impact of different viii cor01589_fm_i-1.indd viii 10/09/21 03:03 PM Final PDF to printer numerical scenarios—to make the right decision on common finance issues. If you, as an instructor, either assign problems for homework or create exams made up almost entirely of mathematical material, you understand the need for good problems (and plenty of them). You also understand from experience the number of office hours you spend tutoring students and grading homework. Students have different learning styles, and this text aims to address that challenge to allow you more time in class to get through the critical topics. CHANGES IN THE SIXTH EDITION The global pandemic greatly impacted business and global trade. As a financial response, central banks around the world eased monetary policy and made money more easily available. The resulting impact on a firm’s cost of capital affected the estimation of project cash flows, valuations, and more. As capital budgeting is an important part of this book, we have quickly incorporated the new environment into our theory and applications. In addition, we have updated every chapter. Below are the changes we made for this sixth edition, broken out by chapter. Overall • Increased the focus on using spreadsheets to solve financial problems • Added Spreadsheet Tip boxes where appropriate • Increased the number of spreadsheet-oriented end-of-chapter problems • Updated data, company names, and scenarios to reflect the latest available data and real-world changes • Removed the Research It! assignments in all chapters • Removed the “twin” problems in the End of Chapter Problem sets as they duplicate online assessment assignments. These deleted problem twins are still available as assignable content via McGraw Hill Connect. Chapter 1: Introduction to Financial Management • Updated the Personal Application with information on firms that have filed for bankruptcy more recently • Updated the data in Example 1-2 on executive compensation • Edited Section 1.7: Big Picture Environment to discuss the ramifications of COVID-19 and the Tax Cuts and Jobs Act of 2017 Chapter 2: Reviewing Financial Statements • Added Spreadsheet Tip box for working with cells • Added Excel to some examples • Added Excel problems • Deleted the second twin in the Problems • Deleted Research It! Chapter 3: Analyzing Financial Statements • Added Spreadsheet Tip box for using functions • Added Excel problems • Added Chapter Spreadsheet Functions section to the end-of-chapter material   • Deleted the second twin in the Problems cor01589_fm_i-1.indd ix a note from the authors ix 10/09/21 03:03 PM Final PDF to printer Chapter 4: Time Value of Money 1: Analyzing Single Cash Flows • Added Spreadsheet Tip box for TVM Functions • Updated the data in Figure 4.5 on gold prices • Increased the number of Excel problems and added Excel to Examples • Added Chapter Spreadsheet Functions section • Included a short paragraph to mention the TVM tables • Added Excel Solutions to Self-Test problems • Deleted the second twin in the Problems • Deleted Research It! • Updated the gold return data in the Mini-Case Chapter 5: Time Value of Money 2: Analyzing Annuity Cash Flows • Added Spreadsheet Tip box for principal and interest portions of a payment • Added Excel to examples and in text • Updated Finance at Work box • Added Chapter Spreadsheet Functions section • Added Excel Solutions to Self-Test problems • Added Excel problems • Deleted the second twin in the Problems • Deleted Research It! Chapter 6: Understanding Financial Markets and Institutions • Added Spreadsheet Tip box for creating a line graph • Increased the number of Excel problems and added Excel to examples • Updated Figures 6.4, 6.5, 6.8, 6.9, 6.13, 6.14 • Added Excel Solutions to Self-Test problems • Deleted the second twin in the Problems • Deleted Research It! Chapter 7: Valuing Bonds • Changed a Math Coach to a Spreadsheet Tip box • Updated Figures 7.1–7.5 on bond issuance, interest rate path, yield to maturities, new bond quotes, and a summary of the bond market • Updated Table 7.2, Time Out 7.2, and associated discussions • Changed the subject of a Finance at Work box to negative interest rates • Changed the subject of a Finance at Work box to COVID-19 and the credit market • Increased the number of Excel problems and added Excel to examples • Added Excel Solutions to Self-Test problems • Deleted the second twin in the Problems • Deleted Research It! Chapter 8: Valuing Stocks • Updated all table and figure values in the body of the chapter • Added a Spreadsheet Tip box on using the NPV function for stock valuation • Rewrote the introduction of the Variable-Growth Technique section x   a note from the authors cor01589_fm_i-1.indd x 10/09/21 03:03 PM Final PDF to printer • Updated market and stock index discussions • Changed Finance at Work box on psychology to focus on the GameStop event • Revised examples to include new McDonald’s and Coca-Cola’s firm data and figures • Increased the number of Excel problems and added Excel to examples • Added Excel Solutions to Self-Test problems • Deleted the second twin in the Problems • Deleted Research It! • Changed Mini-Case to Walmart valuation Chapter 9: Characterizing Risk and Return • Added a Spreadsheet Tip box on using statistics functions • Updated all table and figure values in the body of the chapter • Updated Time Out 9.1 and 9.2 • Added ETF popularity discussion to motivate diversification • Updated the International Finance at Work box • Updated the Google and GE text running examples • Increased the number of Excel problems and added Excel to examples • Added Chapter Spreadsheet Functions section • Added Excel Solutions to Self-Test problems • Deleted the second twin in the Problems • Deleted Research It! • Updated the data in the Mini-Case problem Chapter 10: Estimating Risk and Return • Added a Spreadsheet Tip box on using SLOPE to estimate beta • Updated values and data in Tables 1.01 to 10.3 • Changed discussion and Figure 10.2 • Added discussion in Behavioral Finance section about market reaction and COVID • Updated data for end-of-chapter Excel problem • Increased the number of Excel problems and added Excel to examples • Added Chapter Spreadsheet Functions section • Added Excel Solutions to Self-Test problems • Deleted the second twin in the Problems • Deleted Research It! • Updated the data in the Mini-Case problem Chapter 11: Calculating the Cost of Capital • Updated Viewpoints example to use a streaming device rather than MP3 • Added a Spreadsheet Tip box on calculating weighted average cost of capital • Added a Spreadsheet Tip box on calculating an average • Increased the number of Excel problems and added Excel to most examples • Added Chapter Spreadsheet Functions section • Deleted the second twin in the Problems   • Deleted Research It! cor01589_fm_i-1.indd xi a note from the authors xi 10/09/21 03:03 PM Final PDF to printer Chapter 12: Estimating Cash Flows on Capital Budgeting Projects • Added a Spreadsheet Tip box on calculating straight-line depreciation • Added a Spreadsheet Tip box on calculating OCF • Added a Spreadsheet Tip box on calculating FCF • Added a Spreadsheet Tip box on using tables to reference depreciation • Added a Spreadsheet Tip box on calculating EAC • Added Chapter Spreadsheet Functions section • A majority of the Problems were turned into Excel problems • Deleted Research It! Chapter 13: Weighing Net Present Value and Other Capital Budgeting Criteria • Added Excel to most of the examples • Added a Spreadsheet Tip box on calculating the crossover rate • Added Chapter Spreadsheet Functions section • Deleted the second twin in the Problems and added more Excel problems • Deleted Research It! Chapter 14: Working Capital Management and Policies • Added Excel to the examples • Added Chapter Spreadsheet Functions section • Deleted the second twin in the Problems and added more Excel problems • Deleted Research It! Chapter 15: Financial Planning and Forecasting • Added Excel to most of the examples • Added Chapter Spreadsheet Functions section • Deleted the second twin in the Problems and added more Excel problems • Deleted Research It! Chapter 16: Assessing Long-Term Debt, Equity, and Capital Structure • Added Excel to most of the examples • Added Chapter Spreadsheet Functions section • Most of the end-of-chapter Problems were turned into Excel problems • Deleted Research It! Chapter 17: Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts • Added Excel to the examples • Added Chapter Spreadsheet Functions section • Deleted the second twin in the Problems and added more Excel problems • Deleted Research It! Chapter 18: Issuing Capital and the Investment Banking Process • Added Excel to the examples • Added material on the CARES Act passed into law in April 2020 as a response to the COVID-19 pandemic xii   a note from the authors cor01589_fm_i-1.indd xii 10/09/21 03:03 PM Final PDF to printer • Added Chapter Spreadsheet Functions section • Deleted the second twin in the Problems and added more Excel problems • Deleted Research It! Chapter 19: International Corporate Finance • Revised the chapter running discussion of Starbucks • Updated Tables 19.1, 19.2, 19.3, 19.4, and discussion • Updated Figures 19.1, 19.2, 19.3, 19.4, and discussion • Triangular arbitrage example shown in spreadsheet • Increased the number of Excel problems and added Excel to examples • Added Excel Solutions to Self-Test problems • Deleted the second twin in the Problems • Deleted Research It! Chapter 20: Mergers and Acquisitions and Financial Distress • Added Excel to the examples • Added Chapter Spreadsheet Functions section • Deleted the second twin in the Problems   • Deleted Research It! cor01589_fm_i-1.indd xiii a note from the authors xiii 10/09/21 03:03 PM Final PDF to printer Stuart Monk/Shutterstock W Unique Features e explained basic timevalue computations in the previous chapter. Those TVM equations covered moving a single cash flow from one point in time to another. While this circumCONNECTING CORE CONCEPTS stance does describe some problems that businesses and individuals face, most debt and investment applications of time value of money feature multiple cash flows. In fact, most situations require many equal payments over time. Since these situations require a bit more compliLearning Goals appear at thecated beginning of each chapanalysis, this chapter continues the ter and are indicated throughout theTVM texttopic nextfortoapplications headthat require many equal payments ings, examples, summary, andover end-of-chapter problems time. For example, car loans to which they relate. These outcomes help instructors and home mortgage loans require the borrower to make the same structure their classes and assign readings and homemonthly payment for many months work. The accompanying testorbank instructors years.provides People save for the future with hundreds of questions organized by levelcontributions and learn- to through monthly theireven pension portfolios. People in ing goals to make customization easier! retirement must convert their savings into monthly income. Companies also make regular payments. Johnson & Johnson (ticker: JNJ) will pay level semiannual interest payments through 2033 on money it borrowed. The Boeing Company (ticker: BA) paid a $2.055 per share quarterly dividend to stockholders in 2020, an increase from the $1.71 quarterly dividend paid in 2018. These examples require payments (and compounding) over different time intervals (monthly for car loans and semiannually for company debt). How are we to value these payments into common or comparable terms? In this chapter, we illustrate how to value multiple cash flows over time, including equal and uneven payments, and how to incorporate different compounding frequencies. Learning Goals LG5-1 Compound multiple cash flows to the future. LG5-7 Discount multiple cash flows to the present. Explain the impact of compound frequency and the difference between the annual percentage rate and the effective annual rate. LG5-2 Compute the future value of frequent, level cash flows. LG5-3 LG5-8 LG5-4 Compute the present value of an annuity. Compute the interest rate of annuity payments. LG5-9 LG5-5 Figure cash flows and present value of a perpetuity. Compute payments and amortization schedules for car and mortgage loans. LG5-6 Adjust values for beginningof-period annuity payments. LG5-10 Calculate the number of payments on a loan. 145 Confirming Pages cor01589_ch05_144-183.indd finance at work 145 07/31/21 10:20 PM markets JP MORGAN’S $9 BILLION BLUNDER To this day, possibly one of the largest derivative trading losses was endured by JP Morgan Chase & Co. A huge trading bet backfired and left the bank with at least $9 billion in losses from the bad trade. The bank’s chief investment officer (CIO), responsible for managing the New York company’s risk, placed a series of risky bets and trades. An article published in The Wall Street Journal reported that “large positions taken in that office by a trader nicknamed ‘the London whale’ had roiled a sector of the debt markets. The bank, betting on a continued economic recovery with a complex web of trades tied to the values of corporate bonds, was hit hard when prices moved against it starting last month, causing losses in many of its derivatives positions. The losses occurred while J.P. Morgan tried to scale back that trade.” In April of 2012, The Wall Street Journal reported that investors and hedge funds were trying to take advantage of trades made by Chase’s London whale, Bruno Iksil, who worked out of the CIO, by making bets in the market on credit default swaps (CDSs). The CIO group previously had stopgaps in place to protect and prevent the company from significant losses during periods of downturn in the economy. However, the Journal reports that earlier in 2012, “it began reducing that position, [taking] a bullish stance on the financial health of certain companies and selling protection that would compensate buyers if those companies defaulted on debts. Mr. Iksil was a heavy seller of CDS contracts tied to a basket, or index, ! Want to Know More? of companies.” In April of 2012, these protection costs began to go up, which further contributed to the bank’s losses. According to JP Morgan Chase company filings, Mr. Iksil’s group had approximately $350 billion in investment securities, about 15% of the bank’s total assets, on December 31, 2011. Mr. Dimon (the CEO) said the bank has an extensive review under way of what went wrong. “These were grievous mistakes, they were self-inflicted, we were accountable and we happened to violate our own standards and principles by how we want to operate the company. This is not how we want to run a business.” Mr. Dimon held a conference call with investors and analysts on May 10, stating, “In hindsight, the . . . strategy was flawed, complex, poorly reviewed, poorly executed, and poorly monitored. The portfolio has proven to be riskier, more volatile and less effective . . . than we thought.” Dimon resolves, “We will learn from it, we will fix it, we will move on, hopefully in the end, it will make us a better company.” Though JP Morgan Chase came through the financial crisis better off than many other financial institutions, this trading loss certainly tarnishes its reputation. Mr. Dimon reported that the loss is “slightly more than $2 billion” in the second quarter of this year. Less than two months later, losses were estimated to be as much as $9 billion. Source: Dan Fitzpatrick, Gregory Zuckerman, and Liz Rappaport, “J.P. Morgan’s $2 Billion Blunder,” The Wall Street Journal Online, May 11, 2012. JP Morgan Chase & Co. Business Update Call, May 10, 2012. Key Words to Search for Updates: JPMorgan, London whale, derivative trading losses Derivative securities traders can be either users of derivative contracts (for hedging and other purposes) or dealers (such as banks) that act as counterparties in customer trades for fees. An example of hedging involves commodities such as corn, wheat, or soybeans. For example, suppose you run a flour mill and will need to buy either soft wheat (Chicago) or hard red winter wheat (Kansas City) in the future. If you are concerned that the price of wheat will rise, you might lock in a price today to meet your needs six months from now by buying wheat futures on a commodities exchange. If you are correct and wheat prices rise over the six months, you may purchase the wheat by closing out your futures positions, buying the wheat at the futures price rather than the higher market price. Likewise, if you know that you will be delivering a large shipment to, say, Europe in three months, you might take an offsetting position in euro futures contracts to lock in the exchange rate between the dollar and the euro as it stands today—and (you hope) eliminate foreign exchange risk from the transaction. Derivative securities markets are the newest—and potentially the riskiest—of the financial security markets. Losses associated with off-balance-sheet mortgage-backed securities created and held by FIs were at the very heart of the financial crisis. Signs of significant problems in the U.S. economy first appeared in late 2006 and early 2007 when home prices plummeted and defaults began to affect the mortgage lending industry as a whole, as well as other parts of the economy noticeably. Mortgage delinquencies, particularly on subprime mortgages, surged in the last quarter of 2006 through 2008 as homeowners who had stretched themselves to buy or refinance a home in the early 2000s Time Out boxes, featured at the end of sections, test students’ understanding of the key terms and core concepts just presented. Answers to the Time Out questions appear at the end of each chapter. 192 part four Valuing of Bonds and Stocks 1.25 times $24m Sales toCash working capital ratio = ______ = 0.20 times Total asset turnover 4.00 times Industry average = 0.15 times $123m 0.50 times Capital intensity 2.00 All three liquidity ratios show that DPH Tree Farm, Inc., has more liquidity ontimes its balance Debt ratio sheet than the industry average (we discuss the process used to develop 50.00% an industry aver1.00 times age in section 3.8). Thus, DPH Tree Farm has more cash and other liquid assets (or current times assets) available to pay its bills (or current liabilities) as they come due than2.00 does the averTimes interest earned 7.25 times age firm in the tree farm industry. Debt-to-equity Equity multiplier (common equity) Cash coverage 8.00 times ProfitSimilar marginto Problems 3-1, 3-13, Self-Test Problem 1 18.75% Gross profit margin 49.16% Operating profit margin 42.02% Basic earnings power 19.90% ROA 9.38% TIME OUT ROE 18.75% Dividend payout 35.00% Market-to-book ratio times 3-1 What are the three major liquidity ratios used in evaluating financial 1.30 statements? PE ratio 4.10 times 3-2 How do the three major liquidity ratios used in evaluating financial statements differ? 3-3 Does a firm generally want to have high or low liquidity ratios? Why? • TIME OUT 3.2ANSWERS AssetTO Management Ratios LG3-2 AssetThe management ratios measure howratios efficiently a firmratio, usesthe itsquick assets 3-1 three most commonly used liquidity are the current (or (inventory, acidaccounts receivable, test) ratio, and theand cashfixed ratio. assets), as well as how efficiently the firm manages its asset management ratios accounts payable. The specificthe ratios allow managers and investors to evaluate whether a 3-2 The current ratio measures dollars of current assets available to pay each dollar firm is a reasonable amount each type assetofand whether management uses of holding current liabilities. The quick ratio of measures the of dollars more liquid assets (cash, securities, and accounts receivable) available pay each dollar current each marketable type of asset to effectively generate sales. The mosttofrequently usedofasset managecashinratio dollars of cash andbymarketable securities availment liabilities. ratios areThe listed the measures followingthe sections, grouped type of asset. able to pay each dollar of current liabilities. 3-3 The more liquid assets a firm holds, the less likely it is that the firm will experience Inventory Management financial distress. Thus, the higher the liquidity ratios, the less liquidity risk a firm has. But liquid assets generate little, if any, profits for the firm. In contrast, fixed assets are As they decide the optimal inventory level to hold on the balance sheet, managers must illiquid but generate revenue for the firm. Thus, extremely high levels of liquidity guard consider the liquidity trade-off between advantages holding sufficient levels of inventory to against crises but at the the cost of lower of returns on assets. keep the production process going versus the costs of holding large amounts of inventory. 3-4 The major asset management ratios are the inventory turnover, the days’ sales in Two frequently used ratios are the inventory turnover and days’ sales in (ACP), inventory. inventory, the accounts receivable turnover, the average collection period the 3-5 192 cor01589_fm_i-1.indd xiv 08/05/21 05:21 PM Confirming Pages $205m − $111m Garners’ Platoon Health Care, Inc. Industry Quick ratio (acid-test ratio)Mental = _____________ = 0.76 times Industry average = 0.50 times $123m Fixed asset turnover accounts payable turnover, the or average payment Sales Cost of goodsperiod sold (APP), the fixed asset turnInventory turnover = _______________________ over, the sales to working capital, the total asset turnover, and the capital intensity. xiv cor01589_ch06_184-233.indd Finance at Work boxes highlight current events and hot topics noted in the news. The Want to Know More? feature in each box contains suggested words to use for searching the Internet for updates. These features are great to use for class discussion or as Confirming Pages homework assignments. Inventory (3-4) In general, a firm wants to produce a high level of sales per dollar of inventory. That The inventory ratio measures the number of dollars of sales is, it wants turnover to turn inventory over as quickly as possible. However, if the produced inventory per dollar of inventory. goods sold used the numerator when ismanagers to emphaturnover Cost ratio isofextremely highisand theindays’ sales in inventory extremelywant low, the size that listed sufficient on the balance sheet at cost,running that is,out theofcost generated firm inventory may not beisholding inventory to prevent the of rawsales materials needed to keep the production process going. per dollar of inventory. In general, a firm wants to collect its accounts receivable as quickly as possible. Inventory × 365 days However, if the receivable turnover ratio is extremely high and the ACP is Days’ sales inaccounts inventory = ______________________ Sales or Costpolicy of goods extremely low, the firm’s accounts receivable may sold be so strict that customers prefer to do business with competing365 firms. days ________________ = In general, a firm wants to pay for its purchases as slowly as possible. Thus, a high (3-5) Inventory turnover 03:03 PM APP or a low accounts payable turnover is generally a sign of good 10/09/21 management. However, if the is extremely and thethe accounts payable turnover extremelyis held The days’ sales in APP inventory ratio high measures number of days that is inventory Measure how efficiently a firm uses its assets (inventory, accounts receivable, and fixed assets), as well as its accounts payable. Final PDF to printer TIME OUT 2-9 PERSONAL PERSPECTIVE Viewpoints, a unique feature presented at the beginning of each chapter, pose both a business and a personal problem using key chapter topics. These Viewpoints scenarios immediately set a context for the chapter and allow instructors to take class discussion in multiple directions to make key concepts clearer. Viewpoints Revisited at the end of the chapter show how these problems are solved. Viewpoints Extended leverage a variety of media to provide an extended look at each personal application raised. These are accessible online in Connect or at www.mhhe.com/Cornett6e. What is earnings management? viewpoints REVISITED Business Application Solution If the managers of DPH Tree Farm increase the firm’s fixed assets by $27 million and net working capital by $8 million in 2025, the balance sheet would look like the one below (Table 2.5). That is, gross fixed assets increase by $27 million, to $395 million; cash, accounts receivable, and inventory would increase by $1 million, $5 million, and $6 million, respectively. DPH Tree Farm’s total assets will thus grow by $39 million to $609 million by year-end 2025. This growth in assets would be financed with $4 million in accounts payable, and the remaining $35 million will be financed with 40 percent long-term debt (0.4 × $35m = $14m) and 60 percent with common stock (0.6 × $35m = $21m). Personal Application Solution As Chris Ryan examines the 2024 financial statements for DPH Tree Farm, Inc., she needs to remember that the balance sheet reports a firm’s assets, liabilities, and equity at a particular point in time, the income statement reports the total revenues and expenses over a specific period of time, the statement of cash flows shows the firm’s cash flows over a period of time, and the statement of retained earnings reconciles net income earned during a given period and any cash dividends paid with the change in retained earnings over the period. GAAP procedures dictate how each financial statement is prepared. GAAP requires that the firm recognizes revenue when the firm sells the product, which is not necessarily when the firm receives the cash. Likewise, under GAAP, Confirming Pages expenses appear on the income statement as they match sales. That is, the income statement recognizes production and other expenses associated with sales when the firm sells the product. Again, the actual cash outflow associated with producing the goods may actually occur at a very different time than that reported. In addition, the income statement contains several noncash items, the largest of which is depreciation. As a result, figures shown on an income statement may not be representative of the actual cash inflows and outflows for a firm during any particular period. $100 cash flow that you would receive in 25 years is worth less than $10 today, as shown) (continued at point B in the figure. With a 15 percent discount rate, the $100 payment to be received TABLE 2.5 Revised Balance Sheet DPH Tree Farm, Inc. less than $1 today. in 33 for years, at point C, is worth PROBLEM-SOLVING AND LEARNING STYLES EXAMPLE 4-3 Assets For interactive versions of this example, log in to Current assets: Cash Connect or go to mhhe.com/Cornett6e. Accounts receivable Inventory Total Fixed assets: Gross plant and equipment Less: Accumulated depreciation Net plant and equipment DPH TREE FARM, INC. Balance Sheet as of December 31, 2025 (in millions of dollars) 2025 LG4-4 2025 Liabilities and Equity Buy Now and Don’t Pay for Two Years Current liabilities: Suppose that a marketing manager a retail proposes a sale. Custom$ 25 ($24 + $1) Accrued for wages andfurniture taxes company $ 20 ers75 can buy ($70 now + but don’t have to pay for their furniture purchases time $5) Accounts payable 59for two years. From ($55a + $4) value selling furniture at full price with payment 117 of money ($111perspective, + $6) Notes payable 45 in two years is equivalent or discounted, price with immediate $ 217to selling furniture at a sale, Total $124 payment. If interest rates Numbered examples in each chapter feature various perspectives, so students gain practice in solving are 7.5 percent per year, what is the equivalent sale price of a $1,000 sleeper-sofa when the customer takes + the full two years to debt: pay for it? $ 395 ($368 $27) Long-term 209 [$195 + 0.4($39 − $4)] problems in both business and individual contexts. 53 Stockholders’ equity: SOLUTION: The time line for this problem is: $ 342 Preferred stock (5 million shares) $ 5 Most examples now also contain solutions using Common stock and paid-in [$40 + 0.6($39 − $4)] surplus (20 million shares) 61 Excel. Each example contains a list of end-of-chapter Other long-term assets 50 Retained earnings 210 $392 Total $276 problems that are similar, in order to better model the TotalTotal assets $ 609 equation ($570 + $39) Total liabilities and equity is $609 ($570 + $39) Using 4-5, the present value computation solution process. 54 part two Financial Statements FV $ 1,000 $1,000 PV = = = $865.33 = Period CALCULATOR HINTS N =2 I = 7.5 PMT = 0 FV = 1000 CPT PV = −865.33 cor01589_ch02_032-073.indd 7.5% 0 Cash flow 1 2 years PV = ? N ______ (1 + i) N FV = 1,000 _______ ______ 1 . 075 2 1.1556 In this case, the marketing proposal for delaying payment for two years is equivalent to selling the $1,000 sleeper-sofa for a sale price of $865.33, or a 13.5 percent discount. When stores promote such sales, they often believe that customers will not be able to pay the full amount 07/31/21 10:17 PM at the end of the two years and then must pay high interest rate charges and late fees. Customers who do pay on time are getting a good deal. The spreadsheet solution is: 54 Microsoft Excel Similar to Problems 4-5, 4-6, Self-Test Problem 2 LG4-4 DISCOUNTING WITH MULTIPLE RATES We can also discount a future cash flow at different interest rates per period. We find the general form of the equation for present value with multiple discount rates by rearranging equation 4-3: Present value with different discount rates = Future cash flow Each numbered example is accompanied by video guided ÷ Each period’s discountingexamFV ________________________________________________ PV = ples. These exciting, unique features detail the )solution to) a (4-6) key × ⋯ × (1 + i (1 + i ) × (1 + i ) × (1 + i problem or concept within the chapter. For eachoverexample, students Suppose that we expect interest rates to increase the next few years, from 7 percent this year, to 8 percent next year, to 8.5 percent in the third year. In this environment, can click or tap within theweeBook follow to3?find how would work out theor present value of athe futuredirect $2,500 cashURL flow in year The time line for this problem is the following additional support. N period 1 LG4-1 126 part three • The exact example in the book is worked out in a visual, narrated format. Period Cash flow period 2 0 PV = ? 7% period 3 1 8% 2 period N 8.5% 3 years FV = 2,500 Valuing of Future Cash Flows • A similar example is presented in a video format, which stops at decision points in the problem and asks the students to identify the next step. The video continues, explaining why the student is correct or incorrect, and continues solving the problem. This feature allows students to apply and check their learning before doing homework. cor01589_ch04_114-143.indd 126 07/31/21 10:19 PM • The solution to the example in the book is demonstrated using multiple calculator formats—reducing the class time needed to teach students how to use their calculators. • The solution to the example in the book is demonstrated using Excel, to help you and your students get a basic understanding of how to set up the spreadsheets. xv   Unique Features cor01589_fm_i-1.indd xv 10/09/21 03:03 PM compounding Th process of adding interest earned every period on both the original investment and the reinvested earnings. LG4-1 simple interest Interest earned only on the original deposit. input. For this illustration, -100 is the annual cash flow, so =FV(0.08,5,-100,0) = $586.66. first year, which would be a simple total of $110. The extra 25 cents earned in the second We can show these deposits and future value on a time line as year is interest on interest that was earned in the first year. We call this process of earning Period 0 2 8% 3 4 5 years interest both on the original deposit and on the1 earlier interest payments compounding. flow made for two –100 years –100 –100in the following –100 –100 So, let’s illustrate a $100 Cash deposit at 5 percent time line: Final PDF to printer FV = 586.66 Period 0 5% 1 5% 2 years Five deposits of $100 each were made, so the $586.66 future value represents $86.66 of interest paid. with almost any TVM problem, Cash flow FV the = ? length of time of the annuPV =As –100 ity and the interest rate for compounding are very important factors in accumulating wealth the within the annuity. Consider the examples in Table 5.1. A $50 deposit made The question mark denotes amount we want to solve for. As with all TVM problems, we every year for 20 years will grow to $1,839.28 with a 6 percent interest rate. Doubling simply have to identify what element we’re solving for; in this case, we’re looking for the FV. the annual deposits to $100 also doubles the future value to $3,678.56. However, makTo compute the two-year compounded future simply use the 1-yearmore equation 4-1 twice.the ing $100 deposits for twice value, the amount of time, 40 years, than quadruples future value to $15,476.20! Longer time periods lead to more total compounding and 0.05)Interest = $110.25 $100 × (1 + 0.05 ) ×more (1 +wealth. much rates also have this effect. Doubling the interest rate from 12 percent on the 40-year annuity results in nearly So the future value of $100 deposited today at 6a5to percent interest is $110.25 in period 2. fivefold increase in the future value to $76,709.14. You can see that this represents $10 of interest payments from original Think aboutgenerated it: Depositing onlythe $100 per year$100 (about MATH COACH 25 second lattes peryear year)on canpreviously generate some seriousintermoney ($5 each year) and $0.25 of interest earned in the earned Annuities and the Financial Calculator overon time. Figure deposit 5.1. Howismuch would $2,000 est payments. The $5 of interest earned every year theSee original called simple In the previous chapter, the level payment button (PMT) in the annual deposits generate? Math Coach boxes are featured in many chapters to help avoid the most common mathematical mistakes in a particular problem. interest. Anywasamount interest the $5 in any given year comes from comfinancial calculator always set of to zero because earned no constantabove payments were made every period. use the PMTinterest button to input the pounding. Over time,Wethe new payments earned from compounding can become Future Value of Multiple Annuities annuity amount. For calculators, the present value is of the opposite substantial. The multiyear form of equation 4-1 is the future value in year N, shown as: sign (positive versus negative) from the future value. This is also the At times, multiple annuities can occur in both busi- case with annuities. The level cash flow will be of the opposite sign ness and personal life. For example, you may find that Future value inlineNpresented years = Present as the future value, as the time earlier shows. value can increase the amount of money you save each You would use the financial calculator to solve the problem of for Nyou × Growth years of compounding (4-2) year because of a promotion or a new and better job. depositing $100 for five years via the following inputs: N = 5, I = 8, N PV = 0, PMT = –100. In this case, theF input V Nfor=present PV value × (1is + i) As an illustration, reconsider the annual $100 deposits made for five years at 8 percent per year. This time, the zero because no deposit is made today. The result of computing the deposit can be increasedusing to $150equation for the fourth4-2 and as fifth We solve the two-year deposit problem more directly future valuecan is 586.66. 2 years. How can we use the annuity equation to compute $110.25 = $100 × (1.05) . Here, solving for FV in the equation requires solving for only one unknown. In fact, all TVM equations that you will encounter only require figuring Magnitude of Periodic Payments, Number of Years Invested, out what is unknownTABLE in the 5.1 situation and solving for that one unknown factor. and Interest Rate on FV of Annuity We can easily adapt equation 4-2 to many different future value problems. What is A C D the future value in 30 years of that $100 earningB5 percent per year? Using equation 4-2, 1 Annuity Cash Flow Number of Years Interest Rate Future Value we see that the future value is $100 × (1.05)30 = $432.19. The money has increased sub2 $ 50 20 6% $ 1,839.28 stantially! You have made a profit of $332.19 over and above your original $100. Of this 3 100 20 6% 3,678.56 4 100 40 6% 15,476.20 5 100 40 12% 76,709.14 Spreadsheet Tip Spreadsheet Tip boxes are featured in most chapters providing helpful guidance with formulas and Excel functions. 6 =FV(C5, B5, −A5, 0) 7 148 Excel Time Value ofMicrosoft Money Functions part three Valuing of Future Cash Flows The Spreadsheet Tip box in Chapter 3 discussed the use of spreadsheet functions. There are several commonly used time value of money (TVM) functions. TVM computations typically involve five inputs (number of periods, interest rate, present value, payment, and future value). If you know four of them, then you can solve for the fifth one. 07/31/21 10:20 PM cor01589_ch05_144-183.indd 148 There is a spreadsheet function for each: Future Value: FV(rate,nper,pmt,pv,type) Present Value: PV(rate,nper,pmt,fv,type) Interest Rate: RATE(nper,pmt,pv,fv,type) Rev.Confirming Pages Payment: PMT(rate,nper,pv,fv,type) Number of Periods: NPER(rate,pmt,pv,fv,type) Note that each solution involves the other four inputs. Those inputs inside the parentheses can be numbers, cells, cell ranges, and equations. The parameter type denotes whether payments areLG7-7 made at the endbond or beginning eachassess time period. chapter usesLG7-8 the end of the bond market performance. Investors Assess Find ratingsofand creditThis risk’s period, or type =on 0 or blank.yields. ChapterCredit 5 will discuss use the beginningcan of the period, follow the bond market through prevailing market effects bond qualitywhen risk to measures or type = 1. possibility The examples in this and Chapter 5 illustrate functions. interest rates because interest rates and bond prices the that thechapter bond issuer will fail to makethe use of these 118 part three cor01589_ch04_114-143.indd timely interest and principal payments or that the issuer may even default on the debt. Credit rating agencies grade bond risks and report bond ratings. High-quality corporate bonds are considered investment grade, while higher credit risk bonds are speculative, also called junk bonds and high-yield bonds. Valuing of Future Cash Flows 118 move in the opposite direction. Bond indexes track specific segments of the bond market. Popular bond segments are short-term bonds, long-term bonds, Treasuries, high-grade corporate bonds, high-yield bonds, and municipal bonds. chapter equations 07/31/21 10:19 PM List of equations and spreadsheet functions are featured at the end of each chapter, as applicable, to provide a quick summary of the key equations and spreadsheet functions used within a particular chapter. ⎡ 1 ⎤ 1 − _______ $1,000 (1 + i)N 7-1 Present value of bond = PMT × __________ + _______ ⎣ ⎦ (1 + i)N i ⎢ ⎥ 7-2 Bond price = PV of annuity (PMT, i, N) + PV(FV, i, N) ⎡ 1 ⎤ 1 − _______ (1 + i)N Call price 7-3 Price of a callable bond = PMT × __________ + _________ ⎣ ⎦ i (1 + i)N ⎢ ⎥ Muni yield 7-4 Equivalent taxable yield = ___________ 1 − Tax rate chapter spreadsheet functions Confirming Pages Present Value: PV(rate,nper,pmt,fv,type) Yield to Maturity: RATE(nper,pmt,pv,fv,type) Price of $100 face value security that pays periodic interest: PRICE(settlement,maturity, rate,yld,redemption,frequency,basis) key terms Yield to Maturity on a security that pays periodic interest: YIELD(settlement,maturity, add-on interest A calculation of the amount of interest annuity due An annuity in which cash flows are paid at rate,pr,redemption,frequency,basis) determined at the beginning of the loan and then added to the beginning of each time period. p. 158 the principal. p. 168 consols Investment assets structured as perpetuities. Date: DATE(year,month,day) amortization schedule A table detailing the periodic p. 157 loan payment, interest payment, and debt balance over effective annual rate (EAR) An interest rate that reflects the life of the loan. p. 165 annualizing with compounding figured in. p. 162 amortized loan A loan in which the borrower pays inter- loan principal The balance yet to be paid on a loan. est and principal over time. p. 164 p. 165 annual percentage rate (APR) The interest rate per perpetuity An annuity with cash flows that continue period times the number of periods in a year. p. 161 forever. p. 157 bonds Bonds cash issued by U.S. government bond rating A grade of credit quality as reported by annuity A agency stream of level and frequent flows paid at the end agencies. of each timep.period—often referred to as an credit rating agencies. p. 236 240 ordinary annuity. p. 147 asset-backed securities Debt securities whose payments call An issuer redeeming the bond before the scheduled key terms originate from other loans, such as credit card debt, auto maturity date. p. 236 loans, and home equity loans. p. 240 call premium The amount in addition to the par value paid by the issuer when calling a bond. p. 236 bond Publicly traded form of debt. p. 255 self-test problems with bond price Current pricesolutions that the bond sells for in the convertible bond A debt security that can be converted to shares of stock or another type of security. p. 241 bond p. 237 1 Future Valuemarket. and Annuity Payments Chandler and Monica are trying to decide if they will 262 have enough money to retire early in 12 years, at age 60. Their current assets are $300,000 in retirement plans and they have $100,000 in other investments. Together, they contribute $28,000 per year to their retirement plans and another $6,000 to other investments. If their assets grow at 8 percent per year, how much money will they have when they turn 60? After they retire, they will invest their wealth more conservatively and it will earn 5 percent per year. Is this enough to fund a $100,000 per year retirement for 40 years? cor01589_ch07_234-271.indd Self-Test Problems with Solutions appear before the gradable problem sets so students can test themselves before diving into their homework. Select self-test problems also feature worked out solutions using Excel. LG5-2, LG5-9 262 08/27/21 09:23 PM Solution: Chandler and Monica’s current assets of $400,000 will grow to $1,007,268 (= $400,000 × 1.0812) in 12 years. Their annuity contributions of $34,000 (= $28,000 + $6,000) will add another: (1 + 0.08) 12 − 1 FV A 12 = $34,000 × ____________ = $34,000 × 18.977126 = $645,222 0.08 So their total retirement wealth is $1,652,490 (= $1,007,268 + $645,222). To determine the income this wealth generates over 40 years, compute the annual annuity payments as: PMT 40 = $1,652,490 × xvi ⎤ ⎡____________________ 0.05 1 ⎢1 − _____________ ⎥ = $1,652,490 × 0.058278 ⎣ (1 + 0.05) 40 ⎦ = $96,304 Unique Features The spreadsheet solution is: CALCULATOR HINTS Future wealth: N = 12 I=8 PV = −400000 PMT = −34000 CPT FV = 1,652,490 Income annuity: Microsoft Excel N = 40 I=5 PV = −1652490 FV = 0 CPT PMT = 96,304 173 cor01589_fm_i-1.indd xvi 10/09/21 03:03 PM b. sells 50,000 bonds. Final PDF to printer why bond ratings are important to firms issuing capital debt. Spreadsheet Problems have been expanded in this edition to provide more opportunity in solving problems that utilize Excel. These are denoted with a spreadsheet icon and are available as assignable content within Connect utilizing our exciting new Integrated Excel tool to provide opportunities for mastery in working with Excel c. Consider that interest rates in the economy increased in the first half of this year. If the firm would have issued the bonds in January of this year, then the coupon rate would have only been 5.40 percent. How much extra money per year is the firm paying because it issued the bonds in June instead of January? 7-26 Spreadsheet Problem: Interest Rate Changes and Maturity You have a portfolio of three bonds. The long bond will mature in 19 years and has a 5.5 percent coupon rate. The midterm bond matures in 9 years and has a 6.6 percent coupon rate. The short bond matures in only 2 years and has a 4 percent coupon rate. (LG7-5) a. Construct a spreadsheet that shows the value of these three bonds and the portfolio when the discount rate is 5 percent. The spreadsheet can look something like this: Microsoft Excel b. Illustrate what happens when the discount rate increases by 0.5 percent. What do you notice about the changes in price between the three bonds? c. Show the bond prices when the discount rate decreases by 0.5 percent from the discount rate in part a. What do you notice about the price change between parts b and c? NEW! Integrated Excel: A live seamless experience The power of Microsoft Excel meets the power of McGraw Hill Connect® in our allConfirming Pages new Integrated Excel assignments. In this cor01589_ch07_234-271.indd 269 new assignment type, Excel opens seam® lessly inside Connect , percent. with need fillfor $8.4 million, and the firm’s tax rate was 21 Usingno this information, in the blanks on Vinny’s income statement below. (LG2-5) uploading or downloading any additional files or software. Instructors choose their preferred auto-graded solution, with the option for either grading for formula accuracy or for the solution value. 269 08/27/21 09:23 PM Source: Microsoft Excel Integrated Mini-Cases at the end of each chapter combine the chapter’s key concepts into a more complex problem to help students understand how concepts and methods tie together. integrated mini-case Working with Financial Statements Shown below are the partial financial statements for Garners’ Platoon Mental Health Care, Inc. Fill in the blanks on the four income statements. GARNERS’ PLATOON MENTAL HEALTH CARE, INC. Balance Sheet as of December 31, 2024 and 2023 (in millions of dollars) 2024 2023 Assets 2024 2023 $ 316 $ 242 Liabilities and Equity Current assets: Current liabilities: Cash and marketable securities $ 421 Accrued wages and taxes $ Accounts receivable _____ 1,020 Accounts payable Inventory 1,760 1,581 Notes payable Total $ 3,290 $ $ _____ $ 4,743 840 640 Long-term debt: Gross plant and equipment Less: Accumulated depreciation Net plant and equipment $ $ 5,864 $ 4,893 $ $ 7,889 Other long-term assets Total Total assets $ 1,747 $ 3,090 $ $ $ Stockholders’ equity: Preferred stock (30 million shares) Common stock and paid-in surplus (200 million shares) $ 4,972 791 $ 2,055 714 Total Fixed assets: 867 790 Retained earnings Total Total liabilities and equity 60 60 637 3,312 2,440 $ 4,009 $ 3,137 $ 9,154 $ 7,889 GARNERS’ PLATOON MENTAL HEALTH CARE, INC. Income Statement for Years Ending December 31, 2024 and 2023 (in millions of dollars) Net sales 2024 2023 $ 4,980 $ $ 2,734 $ 2,313 2,035 Less: Cost of goods sold Gross profits Less: Other operating expenses Earnings before interest, taxes, depreciation, and amortization (EBITDA) 125 100 $ 2,609 $ 2,213 200 Less: Depreciation Earnings before interest and taxes (EBIT) $ 2,409 191 $ (continued) 71 xvii   Unique Features cor01589_ch02_032-073.indd 71 cor01589_fm_i-1.indd xvii 07/31/21 10:17 PM 10/09/21 03:03 PM Final PDF to printer Supplements INSTRUCTOR LIBRARY A wealth of information is available online through McGraw Hill Connect. In the ­Connect Instructor Library, you will have access to supplementary materials specifically created for this text, such as: • Test Bank Revised by Leslie Rush, University of Hawaii West O’ahu, the test bank contains hundreds of questions that complement the material presented in the book. The Test Bank is tagged by level of difficulty, learning goal, AACSB knowledge categories, and Bloom’s taxonomy—making it easy for instructors to customize exams to reflect the material stressed in class. The test bank is available in Word files, and tests can also be created in Test Builder. • Test Builder in Connect Available within Connect, Test Builder is a cloud-based tool that enables instructors to format tests that can be printed or administered within an LMS. Test Builder offers a modern, streamlined interface for easy content configuration that matches course needs, without requiring a download. Test Builder allows you to: • access all test bank content from a particular title. • easily pinpoint the most relevant content through robust filtering options. • manipulate the order of questions or scramble questions and/or answers. • pin questions to a specific location within a test. • determine your preferred treatment of algorithmic questions. • choose the layout and spacing. • add instructions and configure default settings. Test Builder provides a secure interface for better protection of content and allows for just-in-time updates to flow directly into assignments. • Solutions Manual Developed by authors Marcia Cornett, Troy Adair, and John Nofsinger, this resource contains the worked-out solutions to all the end-of-chapter problems, in the consistent voice and method of the book. The solutions have been class-tested and checked by multiple instructors to ensure accuracy. • PowerPoint Presentations The PowerPoint presentations have been carefully updated for the sixth edition by Courtney Baggett. These slides contain lecture notes, which closely follow the book content, enhanced with the tables and figures from the chapters. Several chapters are also supplemented with additional presentations that contain notes and examples using financial calculators. Instructors can easily customize these slides to suit their classroom needs and various presentation styles. REMOTE PROCTORING & BROWSER-LOCKING CAPABILITIES New remote proctoring and bro­ wser-locking capabilities, hosted by Proctorio within Connect, provide control of the assessment environment by enabling security options and verifying the identity of the student. Seamlessly integrated within Connect, these services allow instructors to control students’ assessment experience by restricting browser activity, recording students’ activity, and verifying students are doing their own work. Instant and detailed reporting gives instructors an at-a-glance view of potential academic integrity concerns, thereby avoiding personal bias and supporting evidence-based claims. xviii cor01589_fm_i-1.indd xviii 10/09/21 03:03 PM Final PDF to printer ASSURANCE OF LEARNING Many educational institutions today are focused on the notion of assurance of learning, an important element of some accreditation standards. Finance: Applications and Theory is designed specifically to support your assurance of learning initiatives with a simple, yet powerful, solution. Each test bank and end-of-chapter question for Finance: Applications and Theory maps to a specific chapter learning goal listed in the text. You can use the test bank software to easily query for learning goals that directly relate to the learning objectives for your course. You can then use the reporting features of the software to aggregate student results in a similar fashion, making the collection and presentation of assurance of learning data simple and easy. AACSB STATEMENT McGraw Hill is a proud corporate member of AACSB International. Understanding the importance and value of AACSB accreditation, Finance: Applications and Theory has sought to recognize the curricula guidelines detailed in the AACSB standards for business accreditation by connecting selected questions in the test bank to the general knowledge and skill guidelines found in the AACSB standards. The statements contained in Finance: Applications and Theory are provided only as a guide for the users of this text. The AACSB leaves content coverage and assessment within the purview of individual schools, the mission of the school, and the faculty. While Finance: Applications and Theory and the teaching package make no claim of any specific AACSB qualification or evaluation, we have, within Finance: Applications and Theory, labeled selected questions according to the six general knowledge and skills areas. STUDENT STUDY CENTER In Connect, students will receive access to all of their assignments, the eBook, and McGraw Hill’s adaptive study tools in SmartBook. The Connect Student Study Center is the place for students to access additional resources. Students will have access to study materials specifically created for this text, such as: • Guided Examples Each numbered example featured within the book has a series of five different tutorials that accompany it: a narrated example, a related example with interactive solutions and decision points that need to be made by the student, an example using the BA II Plus calculator, another example using the TI-83 calculator, and an example using Excel. • Viewpoints Extended Each chapter features an extended analysis of the Viewpoints feature from the beginning of that chapter. • Online Appendixes Students will have easy access to the additional materials presented in the appendixes. Instructors have access to all the material that students can view but will also have password-protected access to the teaching support materials. MCGRAW HILL CUSTOMER CARE CONTACT INFORMATION At McGraw Hill, we understand that getting the most from new technology can be challenging. That’s why our services don’t stop after you purchase our products. You can e-mail our Product Specialists 24 hours a day to get product training online. Or you can search our knowledge bank of Frequently Asked Questions on our support website. For Customer Support, call 800-331-5094 or visit www.mhhe.com/support. One of our Technical Support Analysts will be able to assist you in a timely fashion.   FOR MORE INFORMATION ABOUT CONNECT AND ITS AVAILABLE RESOURCES, REFER TO THE PAGES THAT FOLLOW. cor01589_fm_i-1.indd xix supplements xix 10/09/21 03:03 PM Final PDF to printer Instructors: Student Success Starts with You Tools to enhance your unique voice Want to build your own course? No problem. Prefer to use an OLC-aligned, prebuilt course? Easy. Want to make changes throughout the semester? Sure. And you’ll save time with Connect’s auto-grading too. 65% Less Time Grading Study made personal Incorporate adaptive study resources like SmartBook® 2.0 into your course and help your students be better prepared in less time. Learn more about the powerful personalized learning experience available in SmartBook 2.0 at www.mheducation.com/highered/connect/smartbook Laptop: McGraw Hill; Woman/dog: George Doyle/Getty Images Affordable solutions, added value Solutions for your challenges Make technology work for you with LMS integration for single sign-on access, mobile access to the digital textbook, and reports to quickly show you how each of your students is doing. And with our Inclusive Access program you can provide all these tools at a discount to your students. Ask your McGraw Hill representative for more information. A product isn’t a solution. Real solutions are affordable, reliable, and come with training and ongoing support when you need it and how you want it. Visit www. supportateverystep.com for videos and resources both you and your students can use throughout the semester. Padlock: Jobalou/Getty Images Checkmark: Jobalou/Getty Images cor01589_fm_i-1.indd xx 10/09/21 03:03 PM Final PDF to printer Students: Get Learning that Fits You Effective tools for efficient studying Connect is designed to help you be more productive with simple, flexible, intuitive tools that maximize your study time and meet your individual learning needs. Get learning that works for you with Connect. Study anytime, anywhere Download the free ReadAnywhere app and access your online eBook, SmartBook 2.0, or Adaptive Learning Assignments when it’s convenient, even if you’re offline. And since the app automatically syncs with your Connect account, all of your work is available every time you open it. Find out more at www.mheducation.com/readanywhere “I really liked this app—it made it easy to study when you don’t have your textbook in front of you.” – Jordan Cunningham, Eastern Washington University Everything you need in one place Your Connect course has everything you need—whether reading on your digital eBook or completing assignments for class, Connect makes it easy to get your work done. Calendar: owattaphotos/Getty Images Learning for everyone McGraw Hill works directly with Accessibility Services Departments and faculty to meet the learning needs of all students. Please contact your Accessibility Services Office and ask them to email accessibility@mheducation.com, or visit www.mheducation.com/about/accessibility for more information. Top: Jenner Images/Getty Images, Left: Hero Images/Getty Images, Right: Hero Images/Getty Images cor01589_fm_i-1.indd xxi 10/09/21 03:03 PM Final PDF to printer acknowledgments Development of the first edition of this book series started with a course survey that was completed by 400 instructors across the country. The following is a list of the reviewers that became part of the many review stages, focus groups, and class-testing for the revisions that followed—all of which were invaluable to us during the development of this book. Rebecca Abraham Nova Southeastern University Eli Beracha East Carolina University Benjamin Abugri Southern Connecticut State University Robert Boldin Indiana University of Pennsylvania Paul Adams University of Cincinnati Denis Boureaux University of Louisiana Pankaj Agrrawal University of Maine David Bourff Boise State University Aigbe Akhigbe University of Akron Lyle Bowlin Southeastern University Mfon Akpan Methodist University Walter Boyle Fayetteville Tech Community College Anne Anderson Lehigh University Joe Bracato Tarleton State University Murat Aydogdu Bryant University Ileana Brooks Aurora University Robert Balik Western Michigan University Cheryl A. Broyler Preston University Marvin Ball East Oregon University Celso Brunetti Johns Hopkins University Brian Barczyk University of Akron Sarah K. Bryant Shippensburg University Laura Beal University of Nebraska, Omaha James Buck East Carolina University Jaclyn Beierlein East Carolina University Steven Burris Kennedy-King College Ronald Benson University of Maryland University College Steven Byers Idaho State University xxii cor01589_fm_i-1.indd xxii 10/09/21 03:03 PM Final PDF to printer Cynthia Campbell Iowa State University Anne Drougas Dominican University Cameron Gordon University of Canberra Joel Jankowski University of Tampa Stephen Caples University of Houston, Clear Lake David Dumpe Kent State University Ed Graham University of North Carolina, Wilmington Jeff Jewell Lipscomb University Bob Castaneda Robert Morris University Su-Jane Chen Metro State College of Denver Samuel Chinnis Guilford Tech Community College Andreas Christofi Monmouth University Ting-Heng Chu East Tennessee State University, Johnson City Cetin Ciner University of North Carolina, Wilmington Thomas Coe Quinnipiac University Bob Curtis Biola University Julie Dahlquist University of Texas, San Antonio Kenneth Daniels Virginia Commonwealth University Maria De Boyrie Florida International University, Miami Natalya Delcoure Sam Houston State University James DeLoach Troy University Michael Devaney Southeast Missouri State University Alan Eastman Indiana University of Pennsylvania Scott Ehrhorn Liberty University Zekeriya Eser Eastern Kentucky University Angelo Esposito University of North Florida Omar Esqueda Tarleton State University Joe Farinella University of North Carolina, Wilmington John Farlin Ohio Dominican University John Fay Santa Clara University David Fehr Southern New Hampshire University Calvin Fink Bethune-Cookman College Barbara Fischer Cardinal Stritch University Susan Flaherty Towson University Greg Gregoriou SUNY, Plattsburgh Richard Gregory East Tennessee State University, Johnson City Keshav Gupta Kutztown University Neeraj Gupta Elon University Matthew Haertzen Northern Arizona University Christine Harrington State University of New York, Oneonta James Harriss Campbell University Travis Hayes Chattanooga State University Susan He Washington State University, Pullman Heikki Heino Governors State University Susan Hendrickson Robert B. Miller College Frank Flanegin Robert Morris University Steve Henry Sam Houston State University Sharon Garrison University of Arizona Rodrigo Hernandez Radford University Victoria Geyfman Bloomsburg University James Howard University of Maryland Charmaine Glegg East Carolina University Bharat Jain Towson University Domingo Joaquin Illinois State University Steve Johnson Sam Houston State University Jacqueline Griffith Jonnard Berkeley College Daniel Jubinski Saint Joseph’s University Dongmin Ke Kean University Jaemin Kim San Diego State University Marek Kolar Trine University Lynn Kugele University of Mississippi Francis E. Laatsch Bowling Green State University Stephen Lacewell Murray State University Miranda Lam Salem State University Baeyong Lee Fayetteville State University Adam Lei Midwestern State University Fei Leng University of Washington, Tacoma Denise Letterman Robert Morris University Quin Li Midwestern State University xxiii   acknowledgments cor01589_fm_i-1.indd xxiii 10/09/21 03:03 PM Final PDF to printer Ralph Lim Sacred Heart University Tarun Mukherjee University of New Orleans Bing-Xuan Lin University of Rhode Island Elisa Muresan Long Island University Leng Ling Georgia College and State University James Nelson East Carolina University Scott W. Lowe James Madison University Davinder Malhotra Philadelphia University Balasundram Maniam Sam Houston State University Kelly Manley Gainesville State College Peter Martino Johnson & Wales University Mario Mastrandrea Cleveland State University Leslie Mathis University of Memphis Christine McClatchey University of Northern Colorado Jennifer McCune Western Iowa Tech Community College Bruce L. McManis Nicholls State University Kathleen S. McNichol LaSalle University James A. Milanese University of North Carolina, Greensboro William Miller Dallas Baptist University Banamber Mishra McNeese State University Helen Moser St. Cloud State University Anastasios Moysidis Florida International University Tom Nelson University of Colorado, Boulder Terry Nixon Miami University of Ohio, Oxford Vivian Okere Providence College Brett Olsen University of Northern Iowa Jennifer O’Sullivan Hardin-Simmons University Elisabeta Pana Illinois Wesleyan University Jeff Parsons California State University, Fullerton Robert Pavlik Elon University Ivelina Pavlova University of Houston, Clear Lake Anil Pawar San Diego State University Glenn Pettengill Grand Valley State University Ted Pilger Southern Illinois University, Carbondale Wendy Pirie Valparaiso University Gary E. Porter John Carroll University Franklin Potts Baylor University Eric Powers University of South Carolina Robert Prati East Carolina University Lora Reinholz Marquette University Nivine Richie University of North Carolina, Wilmington Tammy Rogers University of Central Arkansas Philip Romero University of Oregon Gerald Root Lake Superior State University Philip Russel Philadelphia University Benito Sanchez Kean University Atul Saxena Georgia Gwinnett College Victoria Scalise University of Pittsburgh, Johnstown Oliver Schnusenberg University of North Florida Andrew Spieler Hofstra University Jim Sprow Corban College Martin S. St. John Westmoreland County Community College Tanja Steigner Emporia State University Gikenn L. Stevens Franklin & Marshall College Gordon Stringer University of Colorado, Colorado Springs Don Stuhlman Wilmington University Mike Sullivan University of Nevada, Las Vegas Janikan Supanvanji St. Cloud State University Arun Tandon University of South Florida, Lakeland Heidi Toprac University of Texas, Austin Kudret Topyan Manhattan College Michael Toyne Northeastern State University Anca Traian East Tennessee State University Bill Trainor East Tennessee State University, Johnson City Jack Trifts Bryant University Gary Tripp Southern New Hampshire University Demetri Tsanacas William Paterson University Kuo-Cheng Tseng California State University, Fresno James A. Turner Weber State University Arun Upadhyay Florida International University, Miami John Upstrom Loras College Victor Wakeling Kennesaw State University xxiv   acknowledgments cor01589_fm_i-1.indd xxiv 10/09/21 03:03 PM Final PDF to printer Michael C. Walker University of Cincinnati Kyle Wells University of New Mexico Kainan Wang University of Toledo John B. White Georgia Southern University Peggy Ward Wichita State University Gwendolyn Webb Baruch College Paul Weinstock The Ohio State University Mela Wyeth Charleston Southern University Feifei Zhu Hawaii Pacific University, Honolulu George Young Liberty University Emily Norman Zietz Middle Tennessee State University Susan White University of Maryland Nafeesa Yunus University of Baltimore David J. Wozniak University of North Texas, Dallas Zhong-Guo Zhou California State University, Northridge We are also indebted to the talented staff at McGraw Hill for their expertise and guidance, specifically Christina Kouvelis, senior product developer; Chuck Synovec, portfolio director; Trina Maurer, executive marketing manager; Kevin Moran, director of digital content; and Ann Courtney and Jamie Koch, content and assessment project managers. We would also like to thank Blerina Reca, Weicheng Wang, and Hongyan Fang. We hope you like the outcome of this text. Research and development is always ongoing, and we are interested in your feedback on how this text has worked for you! Marcia Millon Cornett Troy A. Adair Jr. John Nofsinger xxv   acknowledgments cor01589_fm_i-1.indd xxv 10/09/21 03:03 PM Final PDF to printer brief table of contents PART ONE: INTRODUCTION 1 2 Introduction to Financial Management 2 PART TWO: FINANCIAL STATEMENTS 2 3 32 Reviewing Financial Statements 32 Analyzing Financial Statements 74 PART THREE: VALUING OF FUTURE CASH FLOWS 4 5 Time Value of Money 1: Analyzing Single Cash Flows 114 Time Value of Money 2: Analyzing Annuity Cash Flows 144 PART FOUR: VALUING OF BONDS AND STOCKS 6 7 8 184 Understanding Financial Markets and Institutions 184 Valuing Bonds 234 Valuing Stocks 272 PART FIVE: RISK AND RETURN 9 10 114 306 Characterizing Risk and Return 306 Estimating Risk and Return 340 PART SIX: CAPITAL BUDGETING 372 11 Calculating the Cost of Capital 372 12 Estimating Cash Flows on Capital Budgeting Projects 406 Appendix 12A: MACRS Depreciation Tables 438 13 Weighing Net Present Value and Other Capital Budgeting Criteria 442 PART SEVEN: WORKING CAPITAL MANAGEMENT AND FINANCIAL PLANNING 480 14 Working Capital Management and Policies 480 Appendix 14A: The Cash Budget 509 15 Financial Planning and Forecasting 516 xxvi cor01589_fm_i-1.indd xxvi 10/09/21 03:03 PM Final PDF to printer PART EIGHT: CAPITAL STRUCTURE ISSUES 16 17 18 548 Assessing Long-Term Debt, Equity, and Capital Structure 548 Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts 584 Issuing Capital and the Investment Banking Process 608 PART NINE: OTHER TOPICS IN FINANCE 634 19 20 International Corporate Finance 634 Mergers and Acquisitions and Financial Distress 662 Appendix 700 Index 704 xxvii   brief table of contents cor01589_fm_i-1.indd xxvii 10/09/21 03:03 PM Final PDF to printer table of contents PART ONE : Introduction 2 1 Introduction to Financial Management 2 1.1 Finance in Business and in Life 4 What Is Finance? 4 Subareas of Finance 6 Application and Theory for Financial Decisions 8 Finance versus Accounting 10 1.2 The Financial Function 10 The Financial Manager 10 Finance in Other Business Functions 10 Finance in Your Personal Life 11 1.3 Business Organization 12 Sole Proprietorships 12 Partnerships 12 Corporations 13 Hybrid Organizations 13 1.4 Firm Goals 14 1.5 Agency Theory 16 Agency Problem 16 Corporate Governance 17 The Role of Ethics 19 1.6 Financial Markets, Intermediaries, and the Firm 20 1.7 Big Picture Environment 21 Reductions in Individual Income Tax Rates 21 Corporate Tax Rates Reduced 22 New Deduction for “Pass-Through” Business Income 22 Liberalized Asset Expensing and Depreciation Provisions 23 New Limits on Business Interest Deductions 23 Stricter Rules for Deducting Losses 24 Reduced or Eliminated Deductions for Business Entertainment and Some Employee Fringe Benefits 24 Change to R&D Expense Deduction 24 Viewpoints Revisited 24 Summary of Learning Goals 25 Key Terms 26 Self-Test Problem with Solution 27 xxviii cor01589_fm_i-1.indd xxviii 10/09/21 03:03 PM Final PDF to printer Questions 28 Integrated Mini-Case 29 Answers to Time Out 30 PART TWO : Financial Statements 32 2 Reviewing Financial Statements 32 2.1 Balance Sheet 34 Assets 34 Liabilities and Stockholders’ Equity 34 Managing the Balance Sheet 35 2.2 Income Statement 39 Debt versus Equity Financing 41 Corporate Income Taxes 42 2.3 Statement of Cash Flows 46 GAAP Accounting Principles 46 Noncash Income Statement Entries 46 Sources and Uses of Cash 47 2.4 Free Cash Flow 50 2.5 Statement of Retained Earnings 51 2.6 Cautions in Interpreting Financial Statements 53 Viewpoints Revisited 54 Summary of Learning Goals 55 Chapter Equations 56 Key Terms 56 Self-Test Problems with Solutions 57 Questions 62 Problems 63 Integrated Mini-Case 71 Answers to Time Out 73 3 Analyzing Financial Statements 74 3.1 Liquidity Ratios 76 3.2 Asset Management Ratios 77 Inventory Management 77 Accounts Receivable Management 78 Accounts Payable Management 78 Fixed Asset and Working Capital Management 79 Total Asset Management 80 3.3 Debt Management Ratios 81 Debt versus Equity Financing 81   Coverage Ratios 82 cor01589_fm_i-1.indd xxix table of contents xxix 10/09/21 03:03 PM Final PDF to printer 3.4 Profitability Ratios 84 3.5 Market Value Ratios 86 3.6 DuPont Analysis 88 3.7 Other Ratios 91 Spreading the Financial Statements 91 Internal and Sustainable Growth Rates 92 3.8 Time Series and Cross-Sectional Analyses 93 3.9 Cautions in Using Ratios to Evaluate Firm Performance 95 Viewpoints Revisited 96 Summary of Learning Goals 97 Chapter Equations 98 Chapter Spreadsheet Functions 99 Key Terms 100 Self-Test Problems with Solutions 100 Questions 102 Problems 103 Integrated Mini-Case 108 Answers to Time Out 110 PART THREE : Valuing of Future Cash Flows 114 4 Time Value of Money 1: Analyzing Single Cash Flows 114 4.1 Organizing Cash Flows 116 4.2 Future Value 116 Single-Period Future Value 117 Compounding and Future Value 117 4.3 Present Value 124 Discounting 124 4.4 Using Present Value and Future Value 127 Moving Cash Flows 127 4.5 Computing Interest Rates 129 Return Asymmetries 130 4.6 Solving for Time 131 Using TVM Tables 132 Viewpoints Revisited 132 Summary of Learning Goals 133 Chapter Equations 134 Chapter Spreadsheet Functions 134 Key Terms 135 Self-Test Problems with Solutions 135 xxx   table of contents cor01589_fm_i-1.indd xxx 10/09/21 03:03 PM Final PDF to printer Questions 137 Problems 138 Integrated Mini-Case 141 Answers to Time Out 142 5 Time Value of Money 2: Analyzing Annuity Cash Flows 144 5.1 Future Value of Multiple Cash Flows 146 Finding the Future Value of Several Cash Flows 146 Future Value of Level Cash Flows 147 Future Value of Multiple Annuities 148 5.2 Present Value of Multiple Cash Flows 152 Finding the Present Value of Several Cash Flows 152 Present Value of Level Cash Flows 153 Present Value of Multiple Annuities 156 Perpetuity—A Special Annuity 157 5.3 Ordinary Annuities versus Annuities Due 158 5.4 Compounding Frequency 159 Effect of Compounding Frequency 160 5.5 Annuity Loans 163 What Is the Interest Rate? 163 Finding Payments on an Amortized Loan 164 Viewpoints Revisited 169 Summary of Learning Goals 170 Chapter Equations 172 Chapter Spreadsheet Functions 172 Key Terms 173 Self-Test Problems with Solutions 173 Questions 176 Problems 177 Combined chapter 4 and chapter 5 problems 180 Integrated Mini-Case 181 Answers to Time Out 182 PART FOUR : Valuing of Bonds and Stocks 184 6 Understanding Financial Markets and Institutions 184 6.1 Financial Markets 186 Primary Markets versus Secondary Markets 186 Money Markets versus Capital Markets 188 Other Markets 191 6.2 Financial Institutions 193   Unique Economic Functions Performed by Financial Institutions 195 cor01589_fm_i-1.indd xxxi table of contents xxxi 10/09/21 03:03 PM Final PDF to printer 6.3 Interest Rates and the Loanable Funds Theory 197 Supply of Loanable Funds 199 Demand for Loanable Funds 200 Equilibrium Interest Rate 201 Factors That Cause the Supply and Demand Curves for Loanable Funds to Shift 202 Movement of Interest Rates over Time 206 6.4 Factors That Influence Interest Rates for Individual Securities 206 Inflation 206 Real Risk-Free Rate 207 Default or Credit Risk 208 Liquidity Risk 209 Special Provisions or Covenants 210 Term to Maturity 210 6.5 Theories Explaining the Shape of the Term Structure of Interest Rates 212 Unbiased Expectations Theory 213 Liquidity Premium Theory 215 Market Segmentation Theory 218 6.6 Forecasting Interest Rates 219 Viewpoints Revisited 220 Summary of Learning Goals 221 Chapter Equations 222 Key Terms 223 Self-Test Problems with Solutions 223 Questions 226 Problems 226 Integrated Mini-Case 230 Answers to Time Out 231 7 Valuing Bonds 234 7.1 Bond Market Overview 236 Bond Characteristics 236 Bond Issuers 237 Other Bonds and Bond-Based Securities 239 Reading Bond Quotes 241 7.2 Bond Valuation 244 Present Value of Bond Cash Flows 244 Bond Prices and Interest Rate Risk 246 7.3 Bond Yields 248 Current Yield 248 Yield to Maturity 249 Yield to Call 250 Municipal Bonds and Yield 252 Summarizing Yields 253 xxxii   table of contents cor01589_fm_i-1.indd xxxii 10/09/21 03:03 PM Final PDF to printer 7.4 Credit Risk 255 Bond Ratings 255 Credit Risk and Yield 256 7.5 Bond Markets 258 Following the Bond Market 258 Viewpoints Revisited 260 Summary of Learning Goals 261 Chapter Equations 262 Chapter Spreadsheet Functions 262 Key Terms 262 Self-Test Problems with Solutions 263 Questions 266 Problems 267 Integrated Mini-Case 270 Answers to Time Out 270 8 Valuing Stocks 272 8.1 Common Stock 274 8.2 Stock Markets 274 Tracking the Stock Market 277 Trading Stocks 279 8.3 Basic Stock Valuation 280 Cash Flows 280 Dividend Discount Models 283 Preferred Stock 284 Expected Return 286 8.4 Additional Valuation Methods 287 Variable-Growth Techniques 287 The P/E Model 290 Estimating Future Stock Prices 292 Viewpoints Revisited 294 Summary of Learning Goals 295 Chapter Equations 296 Chapter Spreadsheet Functions 297 Key Terms 297 Self-Test Problems with Solutions 297 Questions 300 Problems 300 Integrated Mini-Case 303   Answers to Time Out 303 cor01589_fm_i-1.indd xxxiii table of contents xxxiii 10/09/21 03:03 PM Final PDF to printer PART FIVE : Risk and Return 306 9 Characterizing Risk and Return 306 9.1 Historical Returns 308 Computing Returns 308 Performance of Asset Classes 311 9.2 Historical Risks 312 Computing Volatility 312 Risk of Asset Classes 315 Risk versus Return 316 9.3 Forming Portfolios 317 Diversifying to Reduce Risk 317 Modern Portfolio Theory 319 Viewpoints Revisited 326 Summary of Learning Goals 327 Chapter Equations 328 Chapter Spreadsheet Functions 328 Key Terms 328 Self-Test Problems with Solutions 329 Questions 331 Problems 332 Integrated Mini-Case 337 Answers to Time Out 339 10 Estimating Risk and Return 340 10.1 Expected Returns 342 Expected Return and Risk 342 Risk Premiums 344 10.2 Market Risk 345 The Market Portfolio 345 Beta, a Measure of Market Risk 347 The Security Market Line 347 Finding Beta 350 Concerns about Beta 352 10.3 Capital Market Efficiency 353 Efficient Market Hypothesis 354 Behavioral Finance 355 10.4 Implications for Financial Managers 356 Using the Constant-Growth Model for Required Return 357 Viewpoints Revisited 359 Summary of Learning Goals 360 xxxiv   table of contents cor01589_fm_i-1.indd xxxiv 10/09/21 03:03 PM Final PDF to printer Chapter Equations 361 Chapter Spreadsheet Functions 361 Key Terms 361 Self-Test Problems with Solutions 362 Questions 364 Problems 365 Integrated Mini-Case 369 Answers to Time Out 370 PART SIX : Capital Budgeting 372 11 Calculating the Cost of Capital 372 11.1 The WACC Formula 374 Calculating the Component Cost of Equity 375 Calculating the Component Cost of Preferred Stock 378 Calculating the Component Cost of Debt 378 Calculating the Weights 380 11.2 Firm WACC versus Project WACC 382 Project Cost Numbers to Take from the Firm 383 Project Cost Numbers to Find Elsewhere: The Pure-Play Approach 384 11.3 Divisional WACC 387 Pros and Cons of a Divisional WACC 387 Subjective versus Objective Approaches 390 11.4 Flotation Costs 393 Adjusting the WACC 394 Viewpoints Revisited 395 Summary of Learning Goals 396 Chapter Equations 397 Chapter Spreadsheet Functions 398 Key Terms 398 Self-Test Problems with Solutions 398 Questions 401 Problems 401 Integrated Mini-Case 403 Answers to Time Out 404 12 Estimating Cash Flows on Capital Budgeting Projects 406 12.1 Sample Project Description 408 12.2 Guiding Principles for Cash Flow Estimation 408 Opportunity Costs 408   Sunk Costs 409 cor01589_fm_i-1.indd xxxv table of contents xxxv 10/09/21 03:03 PM Final PDF to printer Substitutionary and Complementary Effects 409 Stock Dividends and Bond Interest 410 12.3 Total Project Cash Flow 410 Calculating Depreciation 411 Calculating Operating Cash Flow 411 Calculating Changes in Gross Fixed Assets 413 Calculating Changes in Net Working Capital 414 Bringing It All Together 416 12.4 Accelerated Depreciation and the Half-Year Convention 417 MACRS Depreciation Calculation 417 Bonus Depreciation and Section 179 Deductions 418 Impact of Accelerated Depreciation 421 12.5 “Special” Cases Aren’t Really That Special 421 12.6 Choosing between Alternative Assets with Differing Lives: EAC 423 12.7 Flotation Costs Revisited 427 Viewpoints Revisited 428 Summary of Learning Goals 429 Chapter Equations 430 Chapter Spreadsheet Functions 430 Key Terms 430 Self-Test Problems with Solutions 431 Questions 433 Problems 433 Integrated Mini-Case 436 Answers to Time Out 436 Appendix 12A: MACRS Depreciation Tables 438 13 eighing Net Present Value and Other Capital Budgeting W Criteria 442 13.1 The Set of Capital Budgeting Techniques 444 13.2 The Choice of Decision Statistic Format 445 13.3 Processing Capital Budgeting Decisions 446 13.4 Payback and Discounted Payback 446 Payback Statistic 447 Payback Benchmark 447 Discounted Payback Statistic 448 Discounted Payback Benchmark 449 Payback and Discounted Payback Strengths and Weaknesses 450 13.5 Net Present Value 451 NPV Statistic 452 NPV Benchmark 452 NPV Strengths and Weaknesses 455 xxxvi   table of contents cor01589_fm_i-1.indd xxxvi 10/09/21 03:03 PM Final PDF to printer 13.6 Internal Rate of Return and Modified Internal Rate of Return 455 Internal Rate of Return Statistic 456 Internal Rate of Return Benchmark 456 Problems with Internal Rate of Return 458 IRR and NPV Profiles with Non-normal Cash Flows 458 Differing Reinvestment Rate Assumptions of NPV and IRR 459 Modified Internal Rate of Return Statistic 460 IRRs, MIRRs, and NPV Profiles with Mutually Exclusive Projects 462 MIRR Strengths and Weaknesses 466 13.7 Profitability Index 467 Profitability Index Statistic 467 Profitability Index Benchmark 467 Viewpoints Revisited 468 Summary of Learning Goals 469 Chapter Equations 471 Chapter Spreadsheet Functions 472 Key Terms 472 Self-Test Problem with Solution 473 Questions 474 Problems 475 Integrated Mini-Case 477 Answers to Time Out 477 PART SEVEN : Working Capital Management and Financial Planning 480 14 Working Capital Management and Policies 480 14.1 Revisiting the Balance-Sheet Model of the Firm 482 14.2 Tracing Cash and Net Working Capital 483 The Operating Cycle 483 The Cash Cycle 483 14.3 Some Aspects of Short-Term Financial Policy 485 The Size of the Current Assets Investment 485 Alternative Financing Policies for Current Assets 486 14.4 The Short-Term Financial Plan 488 Unsecured Loans 488 Secured Loans 489 Other Sources 489 14.5 Cash Management 490 Reasons for Holding Cash 490   Determining the Target Cash Balance: The Baumol Model 491 cor01589_fm_i-1.indd xxxvii table of contents xxxvii 10/09/21 03:03 PM Final PDF to printer Determining the Target Cash Balance: The Miller-Orr Model 492 Other Factors Influencing the Target Cash Balance 495 14.6 Float Control: Managing the Collection and Disbursement of Cash 496 Accelerating Collections 496 Delaying Disbursements 497 Ethical and Legal Questions 497 14.7 Investing Idle Cash 498 Why Firms Have Surplus Cash 498 What to Do with Surplus Cash 498 14.8 Credit Management 498 Credit Policy: Terms of the Sale 499 Credit Analysis 499 Collection Policy 499 Viewpoints Revisited 500 Summary of Learning Goals 501 Chapter Equations 502 Chapter Spreadsheet Functions 502 Key Terms 502 Self-Test Problems with Solutions 503 Questions 505 Problems 506 Integrated Mini-Case 507 Answers to Time Out 507 Appendix 14A: The Cash Budget 509 15 Financial Planning and Forecasting 516 15.1 Financial Planning 518 15.2 Forecasting Sales 518 The Naïve Approach 518 The Average Approach 520 Estimating Sales with Systematic Variations: Adjusting for Trends and Seasonality 523 15.3 External Financing 525 The Simple Approach to Estimating Necessary External Financing: Additional Funds Needed 523 Forecasting Financial Statements 529 Viewpoints Revisited 537 Summary of Learning Goals 538 Chapter Equations 538 Chapter Spreadsheet Functions 539 Key Terms 539 Self-Test Problems with Solutions 539 Questions 543 Problems 544 Integrated Mini-Case 546 Answers to Time Out 547 xxxviii  table of contents cor01589_fm_i-1.indd xxxviii 10/09/21 03:03 PM Final PDF to printer PART EIGHT : Capital Structure Issues 548 16 ssessing Long-Term Debt, Equity, and A Capital Structure 548 16.1 Active versus Passive Capital Structure Changes 550 16.2 Capital Structure Theory: The Effect of Financial Leverage 551 Modigliani and Miller’s “Perfect World” 551 M&M with Corporate Taxes 556 The Choice to Re-leverage 559 Break-Even EBIT and EBIT Expectations 563 16.3 M&M with Corporate Taxes and Bankruptcy 566 Types of Bankruptcies in the United States 566 Costs of Financial Distress 567 The Value of the Firm with Taxes and Bankruptcy 570 16.4 Capital Structure Theory versus Reality 572 Optimal Theoretical Capital Structure 572 Observed Capital Structures 572 Viewpoints Revisited 573 Summary of Learning Goals 573 Chapter Equations 574 Chapter Spreadsheet Function 574 Key Terms 575 Self-Test Problems with Solutions 575 Questions 578 Problems 579 Integrated Mini-Case 582 Answers to Time Out 583 17 haring Firm Wealth: Dividends, Share Repurchases, S and Other Payouts 584 17.1 Dividends versus Capital Gains 586 Dividend Irrelevance Theorem 586 Why Some Investors Favor Dividends 587 Why Some Investors Favor Capital Gains 587 17.2 Other Dividend Policy Issues 588 The Information Effect 588 The Clientele Effect 589 Corporate Control Issues 589 17.3 Real-World Dividend Policy 590 The Residual Dividend Model 590   Extraordinary Dividends 591 cor01589_fm_i-1.indd xxxix table of contents xxxix 10/09/21 03:03 PM Final PDF to printer 17.4 Dividend Payment Logistics 593 Payment Procedures 593 Effect of Dividends on Stock Prices 593 17.5 Stock Dividends and Stock Splits 597 Stock Dividends 597 Stock Splits 597 Effect of Splits and Stock Dividends on Stock Prices 598 17.6 Stock Repurchases 599 Advantages of Repurchases 600 Disadvantages of Repurchases 600 Effect of Repurchases on Stock Prices 600 Viewpoints Revisited 601 Summary of Learning Goals 601 Chapter Equations 602 Chapter Spreadsheet Functions 602 Key Terms 603 Self-Test Problems with Solutions 603 Questions 604 Problems 605 Integrated Mini-Case 606 Answers to Time Out 606 18 Issuing Capital and the Investment Banking Process 608 18.1 Sources of Capital for New and Small Firms 610 Debt Financing 610 Equity Financing and Expertise 614 The Choice to Go Public 615 18.2 Public Firms’ Capital Sources 618 Debt Financing 618 Equity Financing 622 Viewpoints Revisited 627 Summary of Learning Goals 627 Chapter Spreadsheet Functions 628 Key Terms 628 Self-Test Problems with Solutions 629 Questions 630 Problems 630 Integrated Mini-Case 632 Answers to Time Out 633 xl   table of contents cor01589_fm_i-1.indd xl 10/09/21 03:03 PM Final PDF to printer PART NINE : Other Topics in Finance 634 19 International Corporate Finance 634 19.1 Global Business 636 International Opportunities 636 Corporate Expansion into Other Countries 638 19.2 Foreign Currency…

Finance Forum

We offer the best custom writing paper services. We have answered this question before and we can also do it for you.

GET STARTED TODAY AND GET A 20% DISCOUNT coupon code DISC20

Why Choose Us

  • 100% non-plagiarized Papers
  • 24/7 /365 Service Available
  • Affordable Prices
  • Any Paper, Urgency, and Subject
  • Will complete your papers in 6 hours
  • On-time Delivery
  • Money-back and Privacy guarantees
  • Unlimited Amendments upon request
  • Satisfaction guarantee

How it Works

  • Click on the “Place Order” tab at the top menu or “Order Now” icon at the bottom and a new page will appear with an order form to be filled.
  • Fill in your paper’s requirements in the "PAPER DETAILS" section.
  • Fill in your paper’s academic level, deadline, and the required number of pages from the drop-down menus.
  • Click “CREATE ACCOUNT & SIGN IN” to enter your registration details and get an account with us for record-keeping and then, click on “PROCEED TO CHECKOUT” at the bottom of the page.
  • From there, the payment sections will show, follow the guided payment process and your order will be available for our writing team to work on it.