Essentials of Corporate Finance, 9th Edition PDF by Stephen A Ross, Randolph W Westerfield and Bradford D Jordan

Contents:
Part one overview of financial management
1 Introduction to Financial
Management 1
1.1 Finance: A Quick Look 1
The Four Basic Areas 2
Corporate Finance 2
Investments 2
Financial Institutions 2
International Finance 3
Why Study Finance? 3
Marketing and Finance 3
Accounting and Finance 3
Management and Finance 3
You and Finance 4
1.2 Business Finance and the Financial Manager 4
What Is Business Finance? 4
The Financial Manager 4
Financial Management Decisions 5
Capital Budgeting 5
Capital Structure 6
Working Capital Management 6
Conclusion 6
1.3 Forms of Business Organization 6
Sole Proprietorship 6
Partnership 7
Corporation 7
A Corporation by Another Name . . . 8
1.4 The Goal of Financial Management 9
Profit Maximization 9
The Goal of Financial Management in a Corporation 9
A More General Financial Management Goal 10
Sarbanes-Oxley Act 10
1.5 The Agency Problem and Control of
the Corporation 12
Agency Relationships 12
Management Goals 12
Do Managers Act in the Stockholders’ Interests? 13
Managerial Compensation 13
Control of the Firm 13
Conclusion 14
Stakeholders 15
1.6 Financial Markets and the Corporation 15
Cash Flows to and from the Firm 15
Primary versus Secondary Markets 15
Primary Markets 16
Secondary Markets 16
Summary and Conclusions 18
Critical Thinking and Concepts Review 18
What’s on the Web? 20

CHAPTER CASE: The McGee Cake Company 21
2 Financial Statements, Taxes,
and Cash Flow 22
2.1 The Balance Sheet 22
Assets: The Left-Hand Side 23
Liabilities and Owners’ Equity: The Right-Hand Side 23
Net Working Capital 24
Liquidity 25
Debt versus Equity 25
Market Value versus Book Value 25
2.2 The Income Statement 27
GAAP and the Income Statement 28
Noncash Items 28
Time and Costs 28
Earnings Management 30
2.3 Taxes 30
Corporate Tax Rates 30
Average versus Marginal Tax Rates 31
2.4 Cash Flow 33
Cash Flow from Assets 34
Operating Cash Flow 34
Capital Spending 35
Change in Net Working Capital 35
Conclusion 36
A Note on “Free” Cash Flow 36
Cash Flow to Creditors and Stockholders 36
Cash Flow to Creditors 36
Cash Flow to Stockholders 37
Conclusion 37
An Example: Cash Flows for Dole Cola 37
Operating Cash Flow 37
Net Capital Spending 38
Change in NWC and Cash Flow from Assets 38
Cash Flow to Creditors and Stockholders 39
Summary and Conclusions 40
Chapter Review and Self-Test Problem 40
Answer to Chapter Review and Self-Test Problem 41
Critical Thinking and Concepts Review 43
Questions and Problems 43
What’s on the Web? 48
Excel Master It! Problem 48
CHAPTER CASE: Cash Flows and Financial Statements at
Sunset Boards, Inc. 50
3 Working with Financial Statements 51
3.1 Standardized Financial Statements 52
Common-Size Balance Sheets 53
Common-Size Income Statements 54
3.2 Ratio Analysis 55
Short-Term Solvency, or Liquidity, Measures 56
Current Ratio 56
Quick (or Acid-Test) Ratio 57
Cash Ratio 58
Long-Term Solvency Measures 58
Total Debt Ratio 58
Times Interest Earned 58
Cash Coverage 59
Asset Management, or Turnover, Measures 59
Inventory Turnover and Days’ Sales in Inventory 59
Receivables Turnover and Days’ Sales in Receivables 60
Total Asset Turnover 61
Profitability Measures 61
Profit Margin 62
Return on Assets 62
Return on Equity 62
Market Value Measures 63
Price–Earnings Ratio 63
Price–Sales Ratio 63
Market-to-Book Ratio 63
Enterprise Value–EBITDA Ratio 63
3.3 The DuPont Identity 65
An Expanded DuPont Analysis 67
3.4 Internal and Sustainable Growth 69
Dividend Payout and Earnings Retention 69
ROA, ROE, and Growth 70
The Internal Growth Rate 70
The Sustainable Growth Rate 70
Determinants of Growth 71
A Note on Sustainable Growth Rate Calculations 73
3.5 Using Financial Statement Information 73
Why Evaluate Financial Statements? 73
Internal Uses 74
External Uses 74
Choosing a Benchmark 74
Time-Trend Analysis 74
Peer Group Analysis 74
Problems with Financial Statement Analysis 79
Summary and Conclusions 81
Chapter Review and Self-Test Problems 82
Answers to Chapter Review and Self-Test Problems 83
Critical Thinking and Concepts Review 84
Questions and Problems 86
What’s on the Web? 93
Excel Master It! Problem 94
CHAPTER CASE: Ratios and Financial Planning
at S&S Air, Inc. 95
4 Introduction to Valuation: The Time
Value of Money 97
4.1 Future Value and Compounding 98
Investing for a Single Period 98
Investing for More than One Period 98
4.2 Present Value and Discounting 105
The Single-Period Case 105
Present Values for Multiple Periods 106
4.3 More on Present and Future Values 108
Present versus Future Value 108
Determining the Discount Rate 109
Finding the Number of Periods 112
Summary and Conclusions 115
Chapter Review and Self-Test Problems 116
Answers to Chapter Review and Self-Test Problems 116
Critical Thinking and Concepts Review 117
Questions and Problems 118
What’s on the Web? 121
Excel Master It! Problem 121
5 Discounted Cash Flow Valuation 122
5.1 Future and Present Values of Multiple Cash Flows 123
Future Value with Multiple Cash Flows 123
Present Value with Multiple Cash Flows 126
A Note on Cash Flow Timing 130
5.2 Valuing Level Cash Flows: Annuities and Perpetuities 131
Present Value for Annuity Cash Flows 132
Annuity Tables 133
Finding the Payment 134
Finding the Rate 136
Future Value for Annuities 137
A Note on Annuities Due 137
Perpetuities 138
5.3 Comparing Rates: The Effect of Compounding Periods 140
Effective Annual Rates and Compounding 140
Calculating and Comparing Effective Annual Rates 141
EARs and APRs 142
EARs, APRs, Financial Calculators, and Spreadsheets 144
5.4 Loan Types and Loan Amortization 145
Pure Discount Loans 145
Interest-Only Loans 145
Amortized Loans 146
Summary and Conclusions 150
Chapter Review and Self-Test Problems 151
Answers to Chapter Review and Self-Test Problems 152
Critical Thinking and Concepts Review 154
Questions and Problems 154
What’s on the Web? 162
Excel Master It! Problem 163
CHAPTER CASE: S&S Air’s Mortgage 164
6 Interest Rates and Bond
Valuation 165
6.1 Bonds and Bond Valuation 166
Bond Features and Prices 166
Bond Values and Yields 166
Interest Rate Risk 169
Finding the Yield to Maturity: More Trial and Error 171
6.2 More on Bond Features 175
Is It Debt or Equity? 176
Long-Term Debt: The Basics 176
The Indenture 177
Terms of a Bond 178
Security 178
Seniority 179
Repayment 179
The Call Provision 179
Protective Covenants 180
6.3 Bond Ratings 180
6.4 Some Different Types of Bonds 182
Government Bonds 182
Zero Coupon Bonds 183
Floating-Rate Bonds 184
Other Types of Bonds 185
6.5 Bond Markets 186
How Bonds Are Bought and Sold 186
Bond Price Reporting 187
A Note on Bond Price Quotes 188
6.6 Inflation and Interest Rates 190
Real versus Nominal Rates 190
The Fisher Effect 190
6.7 Determinants of Bond Yields 192
The Term Structure of Interest Rates 192
Bond Yields and the Yield Curve: Putting It All Together 193
Conclusion 195
Summary and Conclusions 196
Chapter Review and Self-Test Problems 196
Answers to Chapter Review and Self-Test Problems 197
Critical Thinking and Concepts Review 197
Questions and Problems 199
What’s on the Web? 202
Excel Master It! Problem 203
CHAPTER CASE: Financing S&S Air’s Expansion Plans with
a Bond Issue 204
7 Equity Markets and Stock
Valuation 205
7.1 Common Stock Valuation 206
Cash Flows 206
Some Special Cases 207
Zero Growth 208
Constant Growth 208
Nonconstant Growth 211
Components of the Required Return 213
Stock Valuation Using Comparables, or Comps 214
7.2 Some Features of Common and Preferred Stock 216
Common Stock Features 216
Shareholder Rights 216
Proxy Voting 217
Classes of Stock 217
Other Rights 218
Dividends 218
Preferred Stock Features 219
Stated Value 219
Cumulative and Noncumulative Dividends 219
Is Preferred Stock Really Debt? 219
7.3 The Stock Markets 220
Dealers and Brokers 220
Organization of the NYSE 220
Members 220
Operations 221
Floor Activity 221
NASDAQ Operations 223
ECNs 223
Stock Market Reporting 225
Summary and Conclusions 227
Chapter Review and Self-Test Problems 227
Answers to Chapter Review and Self-
Test Problems 228
Critical Thinking and Concepts Review 228
Questions and Problems 229
What’s on the Web? 234
Excel Master It! Problem 234
CHAPTER CASE: Stock Valuation at
Ragan, Inc. 235
8 Net Present Value and Other
Investment Criteria 236
8.1 Net Present Value 237
The Basic Idea 237
Estimating Net Present Value 238
8.2 The Payback Rule 241
Defining the Rule 241
Analyzing the Rule 243
Redeeming Qualities of the Rule 243
Summary of the Rule 244
8.3 The Average Accounting Return 245
8.4 The Internal Rate of Return 247
Problems with the IRR 250
Nonconventional Cash Flows 250
Mutually Exclusive Investments 252
Redeeming Qualities of the IRR 254
The Modified Internal Rate of Return (MIRR) 255
Method 1: The Discounting Approach 255
Method 2: The Reinvestment Approach 255
Method 3: The Combination Approach 255
MIRR or IRR: Which Is Better? 256
8.5 The Profitability Index 256
8.6 The Practice of Capital Budgeting 257
Summary and Conclusions 260
Chapter Review and Self-Test Problems 261
Answers to Chapter Review and Self-Test Problems 261
Critical Thinking and Concepts Review 262
Questions and Problems 265
What’s on the Web? 271
Excel Master It! Problem 271
CHAPTER CASE: Bullock Gold Mining 273
9 Making Capital Investment
Decisions 274
9.1 Project Cash Flows: A First Look 275
Relevant Cash Flows 275
The Stand-Alone Principle 275
9.2 Incremental Cash Flows 276
Sunk Costs 276
Opportunity Costs 276
Side Effects 277
Net Working Capital 277
Financing Costs 277
Other Issues 278
9.3 Pro Forma Financial Statements and
Project Cash Flows 278
Getting Started: Pro Forma Financial
Statements 278
Project Cash Flows 279
Project Operating Cash Flow 279
Project Net Working Capital and
Capital Spending 280
Projected Total Cash Flow and Value 280
The Tax Shield Approach 281
9.4 More on Project Cash Flow 282
A Closer Look at Net Working Capital 282
Depreciation 283
Modified ACRS (MACRS) Depreciation 284
Book Value versus Market Value 285
An Example: The Majestic Mulch
and Compost Company (MMCC) 286
Operating Cash Flows 287
Changes in NWC 288
Capital Spending 288
Total Cash Flow and Value 288
Conclusion 290
9.5 Evaluating NPV Estimates 290
The Basic Problem 290
Forecasting Risk 291
Sources of Value 292
9.6 Scenario and Other What-If Analyses 292
Getting Started 292
Scenario Analysis 293
Sensitivity Analysis 294
9.7 Additional Considerations in Capital Budgeting 296
Managerial Options and Capital Budgeting 296
Contingency Planning 296
Strategic Options 298
Conclusion 298
Capital Rationing 298
Soft Rationing 298
Hard Rationing 299
Summary and Conclusions 299
Chapter Review and Self-Test Problems 300
Answers to Chapter Review and Self-Test Problems 300
Critical Thinking and Concepts Review 301
Questions and Problems 302
Excel Master It! Problem 307
CHAPTER CASE: Conch Republic Electronics 308
10 Some Lessons from Capital Market
History 309
10.1 Returns 310
Dollar Returns 310
Percentage Returns 312
10.2 The Historical Record 314
A First Look 315
A Closer Look 315
10.3 Average Returns: The First Lesson 320
Calculating Average Returns 320
Average Returns: The Historical Record 320
Risk Premiums 321
The First Lesson 321
10.4 The Variability of Returns: The Second Lesson 322
Frequency Distributions and Variability 322
The Historical Variance and Standard Deviation 323
The Historical Record 325
Normal Distribution 326
The Second Lesson 327
2008: The Bear Growled and Investors Howled 328
Using Capital Market History 329
More on the Stock Market Risk Premium 331
10.5 More on Average Returns 333
Arithmetic versus Geometric Averages 333
Calculating Geometric Average Returns 333
Arithmetic Average Return
or Geometric Average Return? 335
10.6 Capital Market Efficiency 336
Price Behavior in an Efficient Market 336
The Efficient Markets Hypothesis 337
Some Common Misconceptions about the EMH 338
The Forms of Market Efficiency 339
Summary and Conclusions 340
Chapter Review and Self-Test Problems 340
Answers to Chapter Review and
Self-Test Problems 341
Critical Thinking and Concepts Review 341
Questions and Problems 342
What’s on the Web? 346
Excel Master It! Problem 346
CHAPTER CASE: A Job at S&S Air 347
11 Risk and Return 349
11.1 Expected Returns and Variances 350
Expected Return 350
Calculating the Variance 352
11.2 Portfolios 354
Portfolio Weights 354
Portfolio Expected Returns 354
Portfolio Variance 356
11.3 Announcements, Surprises, and
Expected Returns 357
Expected and Unexpected Returns 358
Announcements and News 358
11.4 Risk: Systematic and Unsystematic 360
Systematic and Unsystematic Risk 360
Systematic and Unsystematic Components of Return 360
11.5 Diversification and Portfolio Risk 361
The Effect of Diversification: Another Lesson from Market
History 361
The Principle of Diversification 362
Diversification and Unsystematic Risk 362
Diversification and Systematic Risk 363
11.6 Systematic Risk and Beta 364
The Systematic Risk Principle 364
Measuring Systematic Risk 364
Portfolio Betas 367
11.7 The Security Market Line 368
Beta and the Risk Premium 368
The Reward-to-Risk Ratio 369
The Basic Argument 369
The Fundamental Result 370
The Security Market Line 372
Market Portfolios 372
The Capital Asset Pricing Model 373
11.8 The SML and the Cost of Capital: A Preview 375
The Basic Idea 375
The Cost of Capital 375
Summary and Conclusions 376
Chapter Review and Self-Test Problems 377
Answers to Chapter Review and
Self-Test Problems 377
Critical Thinking and Concepts Review 379
Questions and Problems 380
What’s on the Web? 384
Excel Master It! Problem 385
CHAPTER CASE: The Beta for FLIR Systems 387
12 Cost of Capital 388
12.1 The Cost of Capital: Some Preliminaries 389
Required Return versus Cost of Capital 389
Financial Policy and Cost of Capital 390
12.2 The Cost of Equity 391
The Dividend Growth Model Approach 391
Implementing the Approach 391
Estimating g 392
Advantages and Disadvantages of the Approach 392
The SML Approach 393
Implementing the Approach 393
Advantages and Disadvantages of the Approach 394
12.3 The Costs of Debt and Preferred Stock 394
The Cost of Debt 395
The Cost of Preferred Stock 395
12.4 The Weighted Average Cost of Capital 396
The Capital Structure Weights 396
Taxes and the Weighted Average Cost of Capital 397
Solving the Warehouse Problem and Similar Capital Budgeting
Problems 399
Calculating the WACC for Eastman Chemical 400
Eastman’s Cost of Equity 402
Eastman’s Cost of Debt 403
Eastman’s WACC 404
12.5 Divisional and Project Costs of Capital 406
The SML and the WACC 407
Divisional Cost of Capital 408
The Pure Play Approach 408
The Subjective Approach 409
12.6 Company Valuation with the WACC 410
Summary and Conclusions 413
Chapter Review and Self-Test Problems 413
Answers to Chapter Review and Self-Test Problems 413
Critical Thinking and Concepts Review 414
Questions and Problems 415
What’s on the Web? 421
Excel Master It! Problem 421

CHAPTER CASE: Cost of Capital for Layton Motors 422
13 Leverage and Capital Structure 423
13.1 The Capital Structure Question 424
13.2 The Effect of Financial Leverage 425
The Impact of Financial Leverage 425
Financial Leverage, EPS, and ROE: An Example 425
EPS versus EBIT 426
Corporate Borrowing and Homemade Leverage 428
13.3 Capital Structure and the Cost of
Equity Capital 430
M&M Proposition I: The Pie Model 430
The Cost of Equity and Financial Leverage:
M&M Proposition II 430
Business and Financial Risk 432
13.4 Corporate Taxes and Capital Structure 433
The Interest Tax Shield 433
Taxes and M&M Proposition I 434
Conclusion 434
13.5 Bankruptcy Costs 436
Direct Bankruptcy Costs 436
Indirect Bankruptcy Costs 436
13.6 Optimal Capital Structure 437
The Static Theory of Capital Structure 437
Optimal Capital Structure and the Cost of Capital 438
Capital Structure: Some Managerial Recommendations 440
Taxes 440
Financial Distress 440
13.7 Observed Capital Structures 441
13.8 A Quick Look at the Bankruptcy Process 443
Liquidation and Reorganization 443
Bankruptcy Liquidation 443
Bankruptcy Reorganization 444
Financial Management and the Bankruptcy Process 446
Agreements to Avoid Bankruptcy 447
Summary and Conclusions 447
Chapter Review and Self-Test Problems 448
Answers to Chapter Review and
Self-Test Problems 448
Critical Thinking and Concepts Review 449
Questions and Problems 450
What’s on the Web? 453
Excel Master It! Problem 453

CHAPTER CASE: Stephenson Real Estate
Recapitalization 454
14 Dividends and Dividend Policy 455
14.1 Cash Dividends and Dividend Payment 456
Cash Dividends 456
Standard Method of Cash Dividend Payment 457
Dividend Payment: A Chronology 457
More on the Ex-Dividend Date 458
14.2 Does Dividend Policy Matter? 460
An Illustration of the Irrelevance of
Dividend Policy 460
Current Policy: Dividends Set Equal to
Cash Flow 460
Alternative Policy: Initial Dividend Greater than
Cash Flow 460
A Test 461
Some Real-World Factors Favoring a Low Payout 461
Taxes 461
Flotation Costs 462
Dividend Restrictions 462
Some Real-World Factors Favoring a High Payout 462
Desire for Current Income 462
Tax and Legal Benefits from High Dividends 463
Clientele Effects: A Resolution of Real-World Factors? 464
14.3 Stock Repurchases: An Alternative to
Cash Dividends 464
Cash Dividends versus Repurchase 466
Real-World Considerations in a Repurchase 467
Share Repurchase and EPS 468
14.4 What We Know and Do Not Know about Dividend and
Payout Policies 469
Dividends and Dividend Payers 469
Corporations Smooth Dividends 471
Putting It All Together 472
Some Survey Evidence on Dividends 474
14.5 Stock Dividends and Stock Splits 475
Value of Stock Splits and Stock Dividends 476
The Benchmark Case 476
Popular Trading Range 476
Reverse Splits 476
Summary and Conclusions 477
Chapter Review and Self-Test Problem 478
Answer to Chapter Review and Self-Test Problem 479
Critical Thinking and Concepts Review 479
Questions and Problems 480
What’s on the Web? 483

CHAPTER CASE: Electronic Timing, Inc. 484
15 Raising Capital 485
15.1 The Financing Life Cycle of a Firm: Early-Stage Financing
and Venture Capital 486
Venture Capital 486
Some Venture Capital Realities 487
Choosing a Venture Capitalist 487
Conclusion 488
15.2 Selling Securities to the Public:
The Basic Procedure 488
Crowdfunding 489
15.3 Alternative Issue Methods 491
15.4 Underwriters 492
Choosing an Underwriter 492
Types of Underwriting 492
Firm Commitment Underwriting 492
Best Efforts Underwriting 493
Dutch Auction Underwriting 493
The Green Shoe Provision 494
The Aftermarket 494
Lockup Agreements 494
The Quiet Period 495
15.5 IPOS and Underpricing 495
Evidence on Underpricing 496
IPO Underpricing: The 1999–2000 Experience 497
The Partial Adjustment Phenomenon 501
Why Does Underpricing Exist? 502
15.6 New Equity Sales and the Value of the Firm 504
15.7 The Cost of Issuing Securities 505
15.8 Issuing Long-Term Debt 509
15.9 Shelf Registration 510
Summary and Conclusions 511
Chapter Review and Self-Test Problem 512
Answer to Chapter Review and Self-Test Problem 512
Critical Thinking and Concepts Review 512
Questions and Problems 515
What’s on the Web? 516

CHAPTER CASE: S&S Air Goes Public 517
16 Short-Term Financial Planning 518
16.1 Tracing Cash and Net Working Capital 519
16.2 The Operating Cycle and the Cash Cycle 521
Defining the Operating and Cash Cycles 521
The Operating Cycle 521
The Cash Cycle 522
The Operating Cycle and the Firm’s
Organizational Chart 522
Calculating the Operating and Cash Cycles 523
The Operating Cycle 524
The Cash Cycle 524
Interpreting the Cash Cycle 525
16.3 Some Aspects of Short-Term Financial Policy 527
The Size of the Firm’s Investment in Current Assets 527
Alternative Financing Policies for Current Assets 529
Which Financing Policy Is Best? 531
Current Assets and Liabilities in Practice 532
16.4 The Cash Budget 533
Sales and Cash Collections 533
Cash Outflows 534
The Cash Balance 534
16.5 Short-Term Borrowing 536
Unsecured Loans 536
Secured Loans 536
Accounts Receivable Financing 536
Inventory Loans 537
Other Sources 537
16.6 A Short-Term Financial Plan 538
Summary and Conclusions 539
Chapter Review and Self-Test Problems 539
Answers to Chapter Review and
Self-Test Problems 540
Critical Thinking and Concepts Review 541
Questions and Problems 542
What’s on the Web? 548
Excel Master It! Problem 548
CHAPTER CASE: Piepkorn Manufacturing Working Capital
Management, Part 1 549
17 Working Capital Management 550
17.1 Float and Cash Management 550
Reasons for Holding Cash 551
The Speculative and Precautionary Motives 551
The Transaction Motive 551
Benefits of Holding Cash 551
Understanding Float 552
Disbursement Float 552
Collection Float and Net Float 552
Float Management 553
Ethical and Legal Questions 554
Electronic Data Interchange and Check 21: The End of
Float? 554
17.2 Cash Management: Collection, Disbursement, and
Investment 555
Cash Collection and Concentration 555
Components of Collection Time 555
Cash Collection 556
Lockboxes 556
Cash Concentration 556
Managing Cash Disbursements 557
Increasing Disbursement Float 558
Controlling Disbursements 558
Investing Idle Cash 559
Temporary Cash Surpluses 560
Characteristics of Short-Term Securities 560
Some Different Types of Money Market Securities 561
17.3 Credit and Receivables 562
Components of Credit Policy 562
Terms of Sale 563
The Basic Form 563
The Credit Period 563
Cash Discounts 564
Credit Instruments 565
Optimal Credit Policy 566
The Total Credit Cost Curve 566
Organizing the Credit Function 566
Credit Analysis 567
Credit Information 567
Credit Evaluation and Scoring 568
Collection Policy 568
Monitoring Receivables 568
Collection Effort 569
17.4 Inventory Management 570
The Financial Manager and Inventory Policy 570
Inventory Types 570
Inventory Costs 571
17.5 Inventory Management Techniques 571
The ABC Approach 571
The Economic Order Quantity Model 572
Inventory Depletion 573
Carrying Costs 573
Shortage Costs 574
Total Costs 574
Extensions to the EOQ Model 576
Safety Stocks 576
Reorder Points 576
Managing Derived-Demand Inventories 576
Materials Requirements Planning 577
Just-in-Time Inventory 578
Summary and Conclusions 579
Chapter Review and Self-Test Problems 579
Answers to Chapter Review and Self-Test Problems 580
Critical Thinking and Concepts Review 580
Questions and Problems 582
What’s on the Web? 584
CHAPTER CASE: Piepkorn Manufacturing Working Capital
Management, Part 2 585
18 International Aspects of Financial
Management 586
18.1 Terminology 587
18.2 Foreign Exchange Markets and Exchange Rates 588
Exchange Rates 589
Exchange Rate Quotations 590
Cross-Rates and Triangle Arbitrage 590
Types of Transactions 592
18.3 Purchasing Power Parity 593
Absolute Purchasing Power Parity 593
Relative Purchasing Power Parity 595
The Basic Idea 595
The Result 596
Currency Appreciation and Depreciation 597
18.4 Exchange Rates and Interest Rates 597
Covered Interest Arbitrage 597
Interest Rate Parity 598
18.5 Exchange Rate Risk 599
Short-Run Exposure 599
Long-Run Exposure 600
Translation Exposure 601
Managing Exchange Rate Risk 602
18.6 Political Risk 602
Summary and Conclusions 603
Chapter Review and Self-Test Problems 604
Answers to Chapter Review and Self-Test Problems 604
Critical Thinking and Concepts Review 605
Questions and Problems 607
What’s on the Web? 609
Excel Master It! Problem 610
CHAPTER CASE: S&S Air Goes International 611
Appendix A Mathematical Tables 612
Appendix B Key Equations 620
Appendix C Answers to Selected End-of-Chapter Problems 623
Appendix D Using the HP-10B and TI BA II Plus Financial
Calculators 627
Name Index 630
Subject Index 631