Financial Management and Policy

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This book is highly respected for its effective integration of financial theory and practice. This classic book explores the rapidly evolving and exciting theory of finance as it relates to a corporation's investment in assets, financing, and dividends. It explains the ways in which analytical techniques are brought to bear on financial decision making, and supplies the institutional material necessary for a solid understanding of the environment in which financial decisions are made. For anyone interested in the...
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More About This Book

Overview

This book is highly respected for its effective integration of financial theory and practice. This classic book explores the rapidly evolving and exciting theory of finance as it relates to a corporation's investment in assets, financing, and dividends. It explains the ways in which analytical techniques are brought to bear on financial decision making, and supplies the institutional material necessary for a solid understanding of the environment in which financial decisions are made. For anyone interested in the world of finance.
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Editorial Reviews

Booknews
Enables students in an introductory MBA course in finance to see how analytical techniques are brought to bear on financial decision making and to evaluate how close a firm's investment, financing, and dividend decisions come to an objective of maximizing shareholder wealth. Three new cases deal with setting up cash flows for capital budgeting along with payback, IRR, and NPV calculations; comprehensive long-term financing; and financial rations. A laminated calculator guide for financial management is included. Annotation c. by Book News, Inc., Portland, Or.
Booknews
This text shows how financial theory can be applied to corporate decision making. It contains sections on foundations of finance, investment assets and required returns, financing and dividend policies, tools of financial analysis and control, liquidity and working capital management, capital market financing and risk management, and expansion and contraction. Learning features include chapter summaries, problems, and answers. This 12th edition contains nine new boxed readings on international issues, and three new cases, as well as material updated to reflect changes since 1998. Annotation c. Book News, Inc., Portland, OR (booknews.com)
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Product Details

  • ISBN-13: 9780137512232
  • Publisher: Simon & Schuster Adult Publishing Group
  • Publication date: 8/8/1997
  • Edition description: Older Edition
  • Edition number: 11
  • Pages: 780
  • Product dimensions: 8.35 (w) x 10.32 (h) x 1.41 (d)

Table of Contents

Preface xix
Part 1 Foundations Of Finance 1
Vignette: Problems at Gillette 1
1 Goals and Functions of Finance 3
Creation of Value 3
Investment Decision 6
Financing Decision 7
Dividend/Share Repurchase Decision 7
Bringing It All Together 8
2 Concepts in Valuation 11
The Time Value of Money 11
Present Values 16
Internal Rate of Return or Yield 21
Bond Returns 23
Return from a Stock Investment 27
Dividend Discount Models 30
Measuring Risk: Standard Deviation 37
3 Market Risk and Returns 49
Efficient Financial Markets 49
Security Portfolios 51
Multiple Security Portfolio Analysis and Selection 57
Capital Asset Pricing Model 62
Expected Return for Individual Security 68
Certain Issues with the CAPM 72
4 Multivariable and Factor Valuation 85
Extended CAPM 85
Factor Models in General 90
Arbitrage Pricing Theory 93
5 Option Valuation 103
Expiration Date Value of an Option 103
Valuation with One Period to Expiration General Consideration 104
Binomial Option Pricing of a Hedged Position 109
The Black-Scholes Option Model 112
American Options 118
Debt and Other Options 121
Appendix Put-Call Parity 122
Part 2 Investment In Assets And Required Returns 129
Case: Fazio Pump Corporation 129
6 Principles of Capital Investment 133
Administrative Framework 133
Methods for Evaluation 138
NPV versus IRR 143
Depreciation and Other Refinements in Cash-Flow Information 146
What Happens When Capital Is Rationed? 148
Inflation and Capital Budgeting 150
Information to Analyze an Acquisition 152
Appendix Multiple Internal Rates of Return 155
7 Risk and Real Options in Capital Budgeting 165
Quantifying Risk and its Appraisal 165
Total Risk for Multiple Investments 174
Real Options in Capital Investments 177
8 Creating Value through Required Returns 199
Foundations of Value Creation 199
Required Market-Based Return for a Single Project 202
Modification for Leverage 206
Weighted Average Required Return 208
Adjusted Present Value 214
Divisional Required Returns 217
Company's Overall Cost of Capital 221
Diversification of Assets and Total Risk Analysis 223
Evaluation of Acquisitions 227
Case: National Foods Corporation 241
Part 3 Financing And Dividend Policies 249
Case: Restructuring the Capital Structure at Marriott 249
9 Theory of Capital Structure 253
Introduction to the Theory 253
Modigliani-Miller Position 257
Taxes and Capital Structure 261
Effect of Bankruptcy Costs 268
Other Imperfections 270
Incentive Issues and Agency Costs 271
Financial Signaling 278
10 Making Capital Structure Decisions 289
EBIT-EPS Analysis 289
Cash-Flow Ability to Service Debt 292
Effect on Debt Ratios 296
Effect on Security Rating 268
Timing and Flexibility 297
A Pecking Order of Financing? 298
Checklist when it Comes to Financing 299
11 Dividends and Share Repurchase: Theory and Practice 309
Procedural Aspects of Paying Dividends 309
Dividend Payout Irrelevance 310
Arguments for Dividend Payout Mattering 313
Financial Signaling 316
Empirical Testing and Implications for Payout 317
Share Repurchase 320
Stock Dividends and Stock Splits 324
Managerial Considerations as to Dividend/Share-Repurchase Policy 328
Part 4 Tools Of Financial Analysis And Control 343
Case: Morley Industries, Inc. 343
12 Financial Ratio Analysis 349
Introduction to Financial Analysis 349
Liquidity Ratios 351
Debt Ratios 357
Coverage Ratios 358
Profitability Ratios 360
Market-Value Ratios 363
Predictive Power of Financial Ratios 365
Common Size and Index Analysis 367
Case: Financial Ratios and Industries 383
13 Financial Planning 387
Methods of Analysis 387
Source and Use of Funds 388
Cash Budgeting 393
Pro Forma Statements 398
Sustainable Growth Modeling 403
Part 5 Liquidity And Working Capital Management 421
Case: Caceres Semilla S.A. de C.V. 421
14 Liquidity, Cash, and Marketable Securities 429
Liquidity and its Role 429
Cash Management and Collections 431
Control of Disbursements 434
Investment in Marketable Securities 436
15 Management of Accounts Receivable and Inventories 449
Credit Policies 449
Collection Policy 455
Evaluating the Credit Applicant 459
Inventory Management and Control 463
Uncertainty and Safety Stock 467
Inventory and the Financial Manager 470
Appendix Application of Discriminant Analysis to the Selection of Accounts 472
16 Liability Management and Short/Medium-Term Financing 483
Liability Structure of a Company 483
Trade Credit Financing 488
Accrual Accounts as Spontaneous Financing 492
Unsecured Short-Term Loans 493
Secured Lending Arrangements 496
Intermediate-Term Debt 503
Protective Covenants and Loan Agreements 506
Part 6 Capital Market Financing And Risk Management 521
Case: Douglas & Gilligan Global Agency 521
17 Foundations for Longer-Term Financing 529
Purpose and Function of Financial Markets 529
Yield Curves and Their Use 533
Pricing Default Risk Off Treasuries 537
18 Lease Financing 543
Features of a Lease 543
Accounting and Tax Treatments of Leases 545
Return to the Lessor 548
After-Tax Analysis of Lease versus Buy/Borrow 549
Sources of Value in Leasing 556
19 Issuing Securities 565
Public Offering of Securities 565
Government Regulations 568
Selling Common Stock through a Rights Issue 570
Financing a Fledgling 575
Information Effects 580
20 Fixed-Income Financing and Pension Liability 589
Features of Debt 589
Types of Debt Financing 593
Call Feature and Refunding 595
Private Placements 601
Preferred Stock 602
Pension Fund Liability 605
21 Hybrid Financing through Equity-Linked Securities 615
Use of Warrants 615
Convertible Securities 619
Valuation of Convertible Securities 623
Exchangeable Debt 627
Other Hybrid Securities 629
Appendix Valuing Convertible Bonds in the Face of Firm Volatility, Default Risks, and Fluctuating Interest Rates 634
22 Managing Financial Risk 645
Derivative Securities 645
Hedging Risk 646
Futures Markets 648
Forward Contracts 652
Option Contracts 654
Interest-Rate Swaps 659
Credit Derivatives 664
Commodity Contracts 666
Part 7 Expansion And Contraction 673
Case: Rayovac Corporation 673
23 Mergers and the Market for Corporate Control 687
What Is Control Worth? 687
Features of a Merger 688
Strategic Acquisitions Involving Stock 690
Sources or Rearrangements of Value 695
Corporate Voting and Control 699
Tender Offers and Company Resistance 701
Empirical Evidence on Mergers and Takeovers 705
24 Corporate and Distress Restructuring 719
Divestitures in General 719
Voluntary Liquidation and Sell-Offs 721
Spin-Offs 721
Equity Carve-Outs 723
Going Private and Leveraged Buyouts 724
Leveraged Recapitalizations 729
Distress Restructuring 730
Gaming with the Rule of Absolute Priority 735
25 International Financial Management 747
Some Background 747
Types of Exposure 752
Economic Exposure 753
Exposure of Expected Future Cash Flows 756
Currency Market Hedges 761
Should Exposure Be Managed? 766
Macro Factors Governing Exchange-Rate Behavior 767
Structuring International Trade Transactions 773
Appendix Translation Exposure 778
Appendix Present-Value Tables and Normal Probability Distribution Table 787
Index 797
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