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Fundamentals of Financial Management Concise 8Th Edition PDF Full Chapter
Fundamentals of Financial Management Concise 8Th Edition PDF Full Chapter
Copyright 201 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Contents v
3-5 Statement of Stockholders’ Equity 73 4-10 Uses and Limitations of Ratios 121
3-6 Uses and Limitations of Financial Looking for Warning Signs Within the Financial
Statements 74 Statements 123
4-11 Looking beyond the Numbers 123
3-7 Free Cash Flow 75
Free Cash Flow Is Important for Businesses Both TYING IT ALL TOGETHER 125
Small and Large 77 INTEGRATED CASE D’Leon Inc., Part II 133
3-8 MVA and EVA 78 Thomson ONE: Business School Edition Problem
3-9 Income Taxes 80 Conducting a Financial Ratio Analysis on Hewlett
3-9a Individual Taxes 80 Packard Co. 136
3-9b Corporate Taxes 82 WEB APPENDIX 4A
TYING IT ALL TOGETHER 86 Common Size and Percent Change Analyses
INTEGRATED CASE D’Leon Inc., Part I 93
Thomson ONE: Business School Edition Problem CHAPTER 5
Exploring Starbucks’ Financial Statements 96 TIME VALUE OF MONEY 138
Will You Be Able to Retire? 138
Copyright 201 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
vi Contents
Copyright 201 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Contents ix
13-4 Capital Structure Theory 465 14-6 Stock Dividends and Stock Splits 505
Yogi Berra on the MM Proposition 466 14-6a Stock Splits 505
14-6b Stock Dividends 506
13-4a The Effect of Taxes 466 14-6c Effect on Stock Prices 506
13-4b The Effect of Potential Bankruptcy 467
13-4c Trade-Off Theory 468 14-7 Stock Repurchases 507
13-4d Signaling Theory 469 14-7a The Effects of Stock Repurchases 508
13-4e Using Debt Financing to Constrain 14-7b Advantages of Repurchases 509
Managers 470 14-7c Disadvantages of Repurchases 510
13-4f Pecking Order Hypothesis 471 14-7d Conclusions on Stock Repurchases 510
13-4g Windows of Opportunity 472
TYING IT ALL TOGETHER 511
13-5 Checklist for Capital Structure
INTEGRATED CASE Southeastern Steel
Decisions 472 Company 516
13-6 Variations in Capital Structures 475 Thomson ONE: Business School Edition
TYING IT ALL TOGETHER 476 Apple’s Dividend Policy 517
INTEGRATED CASE Campus Deli Inc. 483 WEB APPENDIX 14A
Thomson ONE: Business School Edition The Residual Dividend Model: An Example
Exploring the Capital Structures for Four Restaurant
Companies 485
WEB APPENDIX 13A PART 6
Degree of Leverage
WORKING CAPITAL MANAGEMENT,
FORECASTING, AND MULTINATIONAL
CHAPTER 14 FINANCIAL MANAGEMENT 519
DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS
AND SHARE REPURCHASES 487
Apple Shifts Gears and Begins to Unload Part of Its
CHAPTER 15
Vast Cash Hoard 487 WORKING CAPITAL MANAGEMENT 520
Successful Firms Efficiently Manage Their Working
PUTTING THINGS IN PERSPECTIVE 488 Capital 520
14-1 Dividends Versus Capital Gains: What Do
PUTTING THINGS IN PERSPECTIVE 521
Investors Prefer? 489
14-1a Dividend Irrelevance Theory 489 15-1 Background on Working Capital 521
14-1b Reasons Some Investors Prefer Dividends
15-2 Current Assets Investment Policies 522
490
14-1c Reasons Some Investors Prefer Capital 15-3 Current Assets Financing Policies 524
Gains 490 15-3a Maturity Matching, or “Self-Liquidating,”
14-2 Other Dividend Policy Issues 491 Approach 524
14-2a Information Content, or Signaling, 15-3b Aggressive Approach 524
Hypothesis 491 15-3c Conservative Approach 526
14-2b Clientele Effect 492 15-3d Choosing Between the Approaches 526
14-3 Establishing the Dividend Policy in 15-4 The Cash Conversion Cycle 527
Practice 493 15-4a Calculating the Targeted CCC 527
15-4b Calculating the CCC from Financial
14-3a Setting the Target Payout Ratio: The Statements 528
Residual Dividend Model 493
Some Real World Examples of the Cash
Global Perspectives: Dividend Yields Around the Conversion Cycle 529
World 498
15-5 The Cash Budget 531
14-3b Earnings, Cash Flows, and
Dividends 499 15-6 Cash and Marketable Securities 535
14-3c Payment Procedures 499 15-6a Currency 535
14-4 Dividend Reinvestment Plans 502 15-6b Demand Deposits 535
15-6c Marketable Securities 536
14-5 Summary of Factors Influencing Dividend
15-7 Inventories 538
Policy 503
14-5a Constraints 503 15-8 Accounts Receivable 539
14-5b Investment Opportunities 504 15-8a Credit Policy 539
14-5c Alternative Sources of Capital 504 15-8b Setting and Implementing the Credit Policy 540
14-5d Effects of Dividend Policy on rs 504 15-8c Monitoring Accounts Receivable 541
Copyright 201 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
x Contents
15-12 Accruals (Accrued Liabilities) 550 17-1 Multinational, or Global, Corporations 586
15-13 Use of Security in Short-Term Financing 17-2 Multinational Versus Domestic Financial
550 Management 589
TYING IT ALL TOGETHER 551 17-3 The International Monetary System 591
17-3a International Monetary Terminology 591
INTEGRATED CASE Ski Equipment Inc. 556 17-3b Current Monetary Arrangements 592
WEB APPENDIX 15A The Debt Crisis Hits Europe 593
Inventory Management 17-4 Foreign Exchange Rate Quotations 595
WEB APPENDIX 15B 17-4a Cross Rates 595
17-4b Interbank Foreign Currency Quotations
Short-Term Loans and Bank Financing
597
17-5 Trading in Foreign Exchange 597
CHAPTER 16 17-5a Spot Rates and Forward Rates 598
FINANCIAL PLANNING AND FORECASTING 559 17-6 Interest Rate Parity 599
Effective Forecasting Is Even More Important During 17-7 Purchasing Power Parity 601
Volatile Times 559 Hungry for a Big Mac? Go to Hong Kong! 603
PUTTING THINGS IN PERSPECTIVE 560 17-8 Inflation, Interest Rates, and Exchange
Rates 605
16-1 Strategic Planning 560
17-9 International Money and Capital
16-2 The Sales Forecast 562 Markets 606
16-3 The AFN Equation 563 17-9a International Credit Markets 606
16-3a Excess Capacity Adjustments 566 17-9b International Stock Markets 607
Stock Market Indexes Around the world 607
16-4 Forecasted Financial Statements 569
16-4a Part I. Inputs 571 17-10 Investing Overseas 609
16-4b Part II. Forecasted Income
Statement 571 Global Perspectives: Measuring Country Risk 609
16-4c Part III. Forecasted Balance Sheet 572 Global Perspectives: Investing in
16-4d Part IV. Ratios and EPS 572 International Stocks 610
16-4e Using the Forecast to Improve 17-11 International Capital Budgeting 612
Operations 573
17-12 International Capital Structures 613
16-5 Using Regression to Improve Forecasts 573
TYING IT ALL TOGETHER 615
16-6 Analyzing the Effects of Changing
Ratios 574 INTEGRATED CASE Citrus Products Inc. 619
16-6a Modifying Accounts Receivable 575
16-6b Modifying Inventories 575
16-6c Other “Special Studies” 575 APPENDIXES
TYING IT ALL TOGETHER 576 APPENDIX A Solutions to Self-Test
INTEGRATED CASE New World Chemicals Inc. 581 Questions and Problems A-1
Thomson ONE: Business School Edition APPENDIX B Answers to Selected
Forecasting the Future Performance of Abercrombie End-of-Chapter Problems B-1
& Fitch 584 APPENDIX C Selected Equations and
Tables C-1
WEB APPENDIX 16A
Forecasting Financial Requirements When Financial
Ratios Change INDEX I-1
Copyright 201 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
P R E F A C E
When the first edition of Fundamentals was published 36 years ago, we wanted to
provide an introductory text that students would find interesting and easy to
understand. Fundamentals immediately became the leading undergraduate finance
text, and it has maintained that position ever since. However, over the years as
Fundamentals got larger and larger, we heard more and more often that it was
difficult to cover the entire book in a single term. These concerns led us to create
Fundamentals of Financial Management Concise 18 years ago. When designing Con-
cise, we had in mind those instructors who wanted to retain Fundamentals’ depth
and level but eliminate some less essential topics. As is the case with Fundamentals,
our continuing goal is to produce a book and ancillary package that sets a new
standard for finance textbooks.
Finance is an exciting and continually changing field. Since the last edition,
many important changes have occurred within the global financial environment.
In the midst of this changing environment, it is certainly an interesting time to be a
finance student. In this latest edition, we highlight and analyze the events leading
to these changes from a financial perspective. While the financial environment is
ever-changing, the tried-and-true principles that the book has emphasized over
the past three decades are now more important than ever.
Copyright 201 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
xii Preface
help them make better investment decisions. Moreover, students who plan to go
into the business world soon realize that their own success requires that their firms
be successful, and the topics covered in Chapters 10 through 17 will be helpful
here. For example, good capital budgeting decisions require accurate forecasts
from people in sales, marketing, production, and human resources, and non-
financial people need to understand how their actions affect the firm’s profits
and future performance.
Copyright 201 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Preface xiii
accounting, production, and so on. Thus, while a topic such as capital budgeting
can be thought of as a financial issue, marketing people provide inputs on likely
unit sales and sales prices, manufacturing people provide inputs on costs, and so
on. Moreover, capital budgeting decisions influence the size of the firm, its
products, its profits, and its stock price, and those factors affect all of the firm’s
employees, from the CEO to the mail room staff.
Copyright 201 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
xiv Preface
6. In Chapter 3, we also added a box about how excess cash holdings affect the
calculation of net operating working capital.
7. In Chapter 4, we revised the definition of the debt ratio. We calculate it as
interest-bearing debt divided by the sum of interest-bearing debt and equity.
This revision is more consistent with our discussions in the capital budgeting,
capital structure, and forecasting chapters.
8. We have added more “Quick Questions” that are designed to keep students
actively involved and focused as they read the text. Here, in a separate box,
we pose a question and then show students how to answer it. These “Quick
Questions” go through examples to make the finance concepts more concrete,
and in that sense they mimic what effective instructors often do in a classroom
setting. Additional “Quick Questions” have been included in Chapters 3, 4, 6,
8, 13, and 17.
9. In Chapter 13, we changed the Bigbee illustration (that works through the
calculations to determine the optimal capital structure) to reflect lower interest
rates.
When revising the text, we always rely heavily on a team of reviewers who offer
suggestions for making the text more readable and relevant to students. We give
special thanks to these reviewers later in the preface; their comments and recom-
mendations certainly helped us improve this 8th edition.
MINDTAP™
MindTap™, Cengage Learning’s fully online, highly personalized learning experi-
ence combines readings, multimedia activities, and assessments into a singular
Learning Path. MindTap™ guides students through their course with ease and
engagement with a learning path that includes an Interactive Chapter Reading,
Problem Demonstrations, Blueprint Problems, and the Online Homework Assign-
ment. Instructors can personalize the Learning Path for their students by custo-
mizing the robust suite of the Concise Eighth Edition resources and adding their
own content via apps that integrate into the MindTap™ framework seamlessly
with Learning Management Systems.
Copyright 201 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Preface xv
NEW! CONCEPTCLIPS
Embedded throughout the new interactive eReader, finance ConceptClips present
fundamental key topics to students in an entertaining and memorable way via
short animated video clips. Developed by Mike Brandl of The Ohio State Uni-
versity, these vocabulary animations provide students with a memorable auditory
and visual representation of the important terminology for the course.
APLIA™
Engage, prepare and educate your students with this ideal online learning solu-
tion. Aplia™ Finance improves comprehension and outcomes by increasing stu-
dent effort and engagement. Students stay on top of coursework with regularly
scheduled homework assignments while automatic grading provides detailed,
immediate feedback. Aplia™ assignments match the language, style, and struc-
ture of the text which allows your students to apply what they learn directly to
homework. Some of the features of Aplia™ include:
• MindTap™ eReader
• Auto-Graded Problem Sets
• Grade It Now
• Preparing for Finance Tutorials
• Finance in Action Modules
• Access to End-of-Chapter Problems, Blueprint Problems, and Test Bank
• Course Management System
• My Practice Reviews
For more information on how Aplia™ could benefit you, visit www.aplia.com/
finance today!
CENGAGENOW™
Designed by instructors for instructors, CengageNOW™ mirrors your natural
workflow and provides time-saving, performance-enhancing tools for you and
your students—all in one program! CengageNOW™ takes the best of current
technology tools including online homework management; fully customizable
algorithmic end-of chapter problems and test bank; and course support mate-
rials such as online quizzing, videos, and tutorials to support your goals. With
CengageNOW™, you can:
• Plan student assignments with an easy online homework management
component
• Manage your grade book with ease
• Reinforce student comprehension with Personalized Study
• Grade automatically for seamless, immediate results
Copyright 201 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
xvi Preface
ACKNOWLEDGMENTS
The book reflects the efforts of a great many people, both those who worked on
Concise and our related books in the past and those who worked specifically on
this 8th edition. First, we would like to thank Dana Aberwald Clark, who worked
closely with us at every stage of the revision—her assistance was absolutely
invaluable. Second, Susan Whitman provided great typing and logistical support.
Our colleagues John Banko, Roy Crum, Jim Keys, Andy Naranjo, M. Nima-
lendran, Jay Ritter, Mike Ryngaert, Craig Tapley, and Carolyn Takeda Brown
have given us many useful suggestions over the years regarding the ancillaries
and many parts of the book, including the integrated cases. We also benefited
from the work of Mike Ehrhardt and Phillip Daves of the University of Tennessee,
who worked with us on companion books.
We would also like to thank the following professors, whose reviews and
comments on our earlier books contributed to this edition:
Copyright 201 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Preface xvii
Copyright 201 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
xviii Preface
Special thanks are due to Shirley Love, Idaho State University, who wrote
some chapter boxes relating to small-business issues; to Emery Trahan and Paul
Bolster, Northeastern University, for their contributions; to Dilip Shome, Virginia
Polytechnic Institute, who helped greatly with the capital structure chapter; to
Dave Brown and Mike Ryngaert, University of Florida, who helped us with the
bankruptcy material; to Roy Crum, Andy Naranjo, and Subu Venkataraman, who
worked with us on the international materials; to Scott Below, East Carolina
University, who developed the website information and references; to Laurie
and Stan Eakins of East Carolina, who developed the Excel tutorial materials on
the website; to Larry Wolken, Texas A&M University, who offered his hard work
and advice for the development of the Lecture Presentation Software; and to Chris-
topher Buzzard who helped us develop the Excel models, the website, and the
PowerPoint presentations. Finally, we also want to acknowledge the contributions
of the late Chris Barry who wrote some of the chapter boxes in earlier editions.
Copyright 201 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Preface xix
Finally, the Cengage Learning staff, especially Mike Reynolds, Kendra Brown,
Jana Lewis, Jessica Robbe, Scott Fidler, Adele Scholtz, and Heather Mooney
helped greatly with all phases of the book’s development and production.
CONCLUSION
Finance is, in a real sense, the cornerstone of the enterprise system—good financial
management is vitally important to the economic health of all firms and hence to
the nation and the world. Because of its importance, finance should be widely and
thoroughly understood, but this is easier said than done. The field is complex, and
it undergoes constant change due to shifts in economic conditions. All of this
makes finance stimulating and exciting, but challenging and sometimes perplex-
ing. We sincerely hope that this 8th Edition of Concise will meet its own challenge
by contributing to a better understanding of our financial system.
EUGENE F. BRIGHAM
JOEL F. HOUSTON
4723 N.W. 53rd Ave., Suite A
Gainesville, Florida 32653
November 2013
Copyright 201 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
A B O U T T H E A U T H O R S
XX
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
INTRODUCTION TO
FINANCIAL MANAGEMENT
1
CHAPTER
1 An Overview of Financial
Management
Copyright 201 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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