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1. An Introduction to the Foundations of Financial Management --The Ties That Bind.
2. The Financial Markets and Interest Rates.
3. Understanding Financial Statements and Cash Flows.
4. Evaluating a Firm's Financial Performance.
II. VALUATION OF FINANCIAL ASSETS.
5. The Time Value of Money.
6. The Meaning and Measurement of Risk and Return.
7. Valuation and Characteristics of Bonds.
8. Valuation and Characteristics of Stock.
III. INVESTMENT IN LONG-TERM ASSETS.
9. Capital-Budgeting Techniques and Practice.
10. Cash Flows and Other Topics in Capital Budgeting.
11. Cost of Capital.
IV. CAPITAL STRUCTURE AND DIVIDEND POLICY.
12. Determining the Financing Mix.
13. Dividend Policy and Internal Financing.
V. WORKING CAPITAL MANAGEMENT AND INTERNATIONAL BUSINESS FINANCE.
14. Financial Forecasting, Planning, and Budgeting.
15. Introduction to Working-Capital Management.
16. Liquid Asset Management.
17. International Business Finance.
In finance, our goal is to create wealth. This is done by providing customers with the best product and service possible, and it is the market response that determines whether we reach our goal. We are very proud of the market reaction to Foundations of Finance; the market's response has been overwhelming. With its success comes an even greater responsibility to deliver the finest possible textbook and supplementary package possible. We have done this with a 2-pronged approach of refinement, based upon users' comments, and of remaining the innovative leaders in the field, focusing on value-added innovations.
Foundations of Finance has gained the reputation for being 'intuitive'—allowing the reader 'to see the forest through the trees'—and'lively and easy to read.' In the fourth edition of Foundations of Finance, we have tried to build upon these strengths, introducing the latest concepts and developments in finance in a practical and intuitive manner.
This book provides students with a conceptual understanding of the financial decision-making process, rather than just an introduction to the tools and techniques of finance. For the student, it is all too easy to lose sight of the logic that drives finance and focus instead on memorizing formulas and procedures. As a result, students have a difficult time understanding the interrelationships among the topics covered. Moreover, later in life when the problems encountered do not match the textbook presentation, students may find themselves unprepared to abstract from what they learned. To overcome this problem, the opening chapter presents 10 underlyingprinciples of finance, which serve as a springboard for the chapters and topics that follow. In essence, the student is presented with a cohesive, interrelated perspective from which future problems can be approached.
With a focus on the big picture, we provide an introduction to financial decision making rooted in current financial theory and in the current state of world economic conditions. This focus is perhaps most apparent in the attention given to the capital markets and their influence on corporate financial decisions. What results is an introductory treatment of a discipline rather than the treatment of a series of isolated problems that face the financial manager. The goal of this text is not merely to teach the tools of a discipline or trade but also to enable students to abstract what is learned to new and yet unforeseen problems—in short, to educate the student in finance.
These give students in-the-trenches insights into the application of theory to practice in the real world and provide perspective for anyone who is planning a career in business.
Three new boxes have been introduced in Chapter 1, along with boxes in Chapters 3, 6, and 11, dealing with lessons learned from the downfall of Enron.
Excel spreadsheets have been introduced to move money through time, deal with valuation of financial assets, and evaluate capital budgeting projects. These spreadsheet solutions are integrated throughout the text with spreadsheet problems now appearing at the end of various chapters, where appropriate.
A new section on options in capital budgeting has been added to Chapter 10.
The text is organized around the learning objectives that appear at the beginning of each chapter to provide the instructor and student with an easy-to-use integrated learning system. Numbered icons identifying each objective appear next to the related material throughout the text and in the summary, allowing easy location of material related to each objective.
Each chapter begins with a story about a current, real-world company faced with a financial decision related to the chapter material that follows. These vignettes have been carefully prepared to stimulate student interest in the topic to come and can be used-as a lecture tool to provoke class discussion.
These features allow students to preview what's coming up in the chapter. They include real-world examples to help students understand the relevance of the concepts to the financial world.
In-text inserts appear throughout and focus the student's attention on 'the big picture.' These inserts help students identify the interrelationships and motivating factors behind core concepts.
These provide students with real-world examples to help them apply the concepts presented in each chapter.
Ethics is covered as a core principle and Ethics in Financial Management boxes appear throughout. These show students that ethical behavior is doing the right thing and that ethical dilemmas are everywhere in finance.
At the end of most major sections, concept checks highlight the key ideas just presented and allow students to test their understanding of the material.
These in-text inserts appear throughout to allow the student to take time out and reflect upon the meaning of the material just presented. The use of these inserts, coupled with the use of the 10 principles, keeps the student focused on the interrelationships and motivating factors behind the concepts.
A comprehensive problem appears at the end of almost every chapter, covering all the major topics included in that chapter. This comprehensive problem can be used as a lecture or review tool by the professor. For the student, it provides an opportunity to apply all the concepts presented within the chapter in a realistic setting, thereby strengthening their understanding of the material.
Key terms are called out in the margin and highlighted in the text. They can also be found in the glossary in the back of the book with definitions, making it easier for the student to check their understanding of key terms. At the end of each chapter, key terms are listed along with page numbers as a study checklist for students.
The use of financial calculators has been integrated throughout this text, especially with respect to the presentation of the time value of money. Where appropriate, calculator solutions appear in the margin.
In response to both the continued development of financial thought and reviewer comments, changes have been made in the text. Some of these changes include:
Chapter 1: An Introduction to the Foundations of Financial Management—The Ties That Bind
This chapter was revised to reflect the impact in the carry-back, carry-forward change that resulted from the passage of the 2002 Economic Stimulus Plan. Chapter 1 also has three boxes that focus on the impact and lessons learned from the downfall of Enron. In addition, it has a new section that examines the impact of the tragedies of September 11th on corporate finance.
Chapter 2: The Financial Markets and Interest Rates
Several changes are spread throughout this chapter in response to suggestions from reviewers. The chapter opens with a review of the past five interest-rate cycles and puts this in the context of the immediate past recession that began in March 2001. It also examines how Federal Reserve monetary policy is related to the cost of capital through the opportunity cost of funds concept. The relationship between risk and return (Principle 1) is clarified with the incorporation of sharper and more complete graphics.
Interest rate levels and inflation rates over the 1981-2001 period are studied within the context of explaining interest rate determinants. Total returns on large-cap equities are reviewed over recent periods and are compared with returns on fixed-income securities. The significant difference between real and nominal interest rates is put into the context of a financial analyst's viewpoint on the subject. Building nominal interest rates through the technique of risk premiums is illustrated and reviewed through a comprehensive end-of-chapter problem. The difference between internal and external corporate financing patterns is reviewed via recent updated data.
Chapter 3: Understanding Financial Statements and Cash Flows
At the request of adopters, the presentation of free cash flows was significantly revised to break the computations into smaller bite sizes to help the student grasp this important but somewhat difficult concept. The result was a more intuitive presentation of the meaning and calculation of free cash flows.
Chapter 4: Evaluating a Firm's Financial Performance
In the discussion on how to measure a firm's liquidity and its efficient use of working capital, a section on understanding and computing a firm's cash conversion period was added.
Chapter 5: The Time Value of Money
The major changes in Chapter 5 revolve around the introduction of Excel spreadsheets to move money through time. Now, in addition to presenting solutions to time value of money problems with financial calculators and tabular solutions, the student is introduced to a spreadsheet approach to solving time value of money problems.
Chapter 6: The Meaning and Measurement of Risk and Return
To make it more relevant and interesting to students, we used a firm they would be familiar with—The Gap—to illustrate the concepts and computations regarding market risk.
Chapters 7: Valuation and Characteristics of Bonds and 8: Valuation and Characteristics of Stock
At the suggestion of practitioner reviewers, a new section on valuing a firm based on the present value of free cash flows has been added. This is an approach that is frequently used by investment bankers to value a company.
Chapter 9: Capital-Budgeting Techniques and Practice
The use of Excel spreadsheets to solve capital budgeting problems is introduced in Chapter 9. In addition, the trial and error approach to solving IRR problems with uneven free cash flows is deemphasized, and focus is now on the spreadsheet and financial calculator approaches. A new ethics box has been introduced, as well, that deals with the financial downside of poor ethical behavior, focusing on Johns Manville, Dow Corning, Beech-Nut, Ford, and Firestone.
Chapter 10: Cash Flows and Other Topics in Capital Budgeting
Chapter 10 underwent a major revision. At the request of adopters, the calculation of free cash flows now uses a more intuitive approach. The purpose of this change is to make it easier for both the student to understand and the professor to teach. In addition, a new section was added on options in capital budgeting.
Chapter 11: The Cost of Capital
The discussion of the cost of capital has been streamlined to increase student understanding and focus on the key issues that arise in evaluating a firm's hurdle rate for new investments. We provide additional emphasis on the growing importance of the cost of capital as an element in the calculation of periodic firm performance measures like Economic Value Added.
Chapter 12: Determining the Financing Mix
At the request of reviewers the chapter has been streamlined in several places, but still retains the proper emphasis on the relationship between financial leverage use and capital structure design. A quick but complete overview of capital structure theory is included that does not stress the student and at the same time appeals to practicing managers. Real-world discussions have been added that involve the CocaCola Company, Harley-Davidson, Georgia-Pacific, and The Walt Disney Company.
Chapter 13: Dividend Policy and Internal Financing
This chapter adds more actual company examples and discussions. These include Starbucks Corporation, whose dividend choices are related to the "residual theory of dividend policy"; Coca-Cola Company; a new example that focuses upon Harley-Davidson's dividend policy; Ford Motor Company; and The Walt Disney Company. Several examples of stock repurchases are put forth.
Chapter 14: Financial Forecasting, Planning, and Budgeting
This is a new chapter placement for the materials covering financial forecasting, planning, and budgeting. It is now the first of three chapters that discuss working-capital management issues.
Chapter 15: Introduction to Working-Capital Management
The working-capital management chapter has been shortened and focuses on the risk-return tradeoff and the analysis of current liabilities. The discussion of the cash conversion cycle was moved up in the book to the chapter on financial statement analysis.
Chapter 16: Liquid Asset Management
The current asset management chapter has been shortened through the streamlining of the discussion of cash management. This change makes the chapter much more accessible for beginner students and provides them with an appreciation of the treasury function.
Chapter 17: International Business Finance
This chapter has been thoroughly revised to reflect changes in the international setting, including changes in the European Union resulting from the introduction of the Euro.
Study Guide. Provides the following: An orientation of each chapter, along with an outline of the important topics being addressed; sample problems for the student to complete, with worked-out solutions; self-test questions (true/false and multiple choice) with answers; a tutorial on understanding the internal rate of return; and an in-depth self-teaching supplement on capital-budgeting techniques.
Companion Web Site. The Web site includes: online quizzes for each chapter that enable students to test their skills and receive immediate scoring; current events articles to help students see the relevance of text topics to today's news; and downloadable resources including PowerPoint presentations and virtual financial calculators.
A Test Item File provides more than 1,400 multiple-choice, true/false, and short-answer questions with complete and detailed answers. It is designed for use with the Prentice Hall Custom Test, a computerized package that allows users to custom design, save, and generate classroom exams.
NEW! TestGen EQ Testing Software. This user-friendly program allows instructors to custom design, save, and generate classroom tests. The software also permits instructors to edit, add, or delete questions from the test bank; edit and create graphics; analyze test results; and organize a database of tests and student results. This new software provides many options for organizing and displaying tests along with a search and sort feature. The software can prepare 25 versions of a single test.
Companion Web Site offers academic support for faculty adopting this text. From the Web site, you can download supplements and lecture aids such as instructor's manuals, lecture notes, PowerPoint presentations, problem and case solutions, and chapter outlines. Call your 'Prentice Hall representative to get the necessary username and password to access these digital supplements.
An Instructor's Manual containing chapter orientations, prepared by the text authors, which provide a useful point of departure for lectures; chapter outlines; and solutions to all end-of-chapter questions.
PowerPoint Lecture Notes to accompany PowerPoint graphics. These provide individual lecture outlines to accompany Foundations of Finance. They are class tested and can be used as is or can be easily modified to reflect your specific presentation needs.
An Instructor's Resource CD-ROM. This resource contains print and media supplements including the Instructor's Manual, Test Item File, and PowerPoints. This enables faculty to customize supplements quickly and enjoy maximum portability and accessibility.
For any teacher wanting information about the supplements, please contact the Prentice Hall representative for your area. Also, feel free to call any of the authors with any questions you may have.