Principles of Managerial Finance, Sixteenth Edition
By Chad J. Zutter and Scott B. Smart
Contents:
About the Authors 29
Preface 31
Acknowledgments 41
PART 1 Introduction to Managerial Finance 45
1 The Role of Managerial Finance 46
1.1 Finance and the Firm 48
What Is Finance? 48
What Is a Firm? 49
What Is the Goal of the Firm? 49
FOCUS ON ETHICS:
Do Corporate Executives Have a Social Responsibility? 50
The Role of Business Ethics 54
FOCUS ON PRACTICE:
Must Search Engines Screen Out Fake News? 55
➔ REVIEW QUESTIONS 56
1.2 Managing the Firm 56
The Managerial Finance Function 57
➔ REVIEW QUESTIONS 64
1.3 Organizational Forms, Taxation, and the Principal–Agent Relationship 65
Le gal Forms of Business Organization 65
FOCUS ON PEOPLE, PLANET/ PROFITS: The Business Roundtable
Revisits the Goal of a Corporation 68
Agency Problems and Agency Costs 73
Corporate Governance 74
➔ REVIEW QUESTIONS 78
1.4 Developing Skills for Your Career 78
Critical Thinking 78
Communication and Collaboration 78
Financial Computing Skills 79
Summary 79
Opener-In-Review 80
Self-Test Problem 81
Problems 82
Spreadsheet Exercise 86
2 The Financial Market Environment 87
2.1 Financial Institutions 89
Commercial Banks, Investment Banks, and the Shadow Banking System 89
➔ REVIEW QUESTIONS 91
2.2 Financial Markets 91
Th e Relationship Between Institutions and Markets 91
The Money Market 92
The Capital Market 93
FOCUS ON PRACTICE:
Berkshire Hathaway: Can Buffett Be Replaced? 94
The Efficient Markets Hypothesis 98
FOCUS ON ETHICS:
Should Insider Trading Be Legal? 102
➔ REVIEW QUESTIONS 103
2.3 Regulation of Financial Markets and Institutions 103
Regulations Governing Financial Institutions 103
Regulations Governing Financial Markets 104
➔ REVIEW QUESTIONS 105
2.4 The Securities Issuing Process 105
Issuing Common Stock 105
➔ REVIEW QUESTIONS 112
2.5 Financial Markets in Crisis 112
Financial Institutions and Real Estate Finance 112
Spillover Effects and Recovery from the Great Recession 114
Pandemic Effects on Financial Markets 115
FOCUS ON PEOPLE/PLANET/ PROFITS: Financial Institutions Pressure
Companies on ESG Scores 115
➔ REVIEW QUESTIONS 116
Summary 116
Opener-In-Review 118
Self-Test Problem 118
Warm-Up Exercises 118
Problems 119
Spreadsheet Exercise 121
INTEGRATIVE CASE 1 South Trading Ltd. 122
PART 2 Financial Tools 123
3 Financial Statements and Ratio Analysis 124
3.1 Mandatory Financial Reports of Public Companies 126
The Letter to Stockholders 126
The Four Key Financial Statements 126
FOCUS ON PRACTICE:
More Countries Adopt International Financial Reporting Standards 127
FOCUS ON ETHICS:
Earnings Shenanigans 130
Notes to the Financial Statements 133
Consolidating International Financial Statements 134
➔ REVIEW QUESTIONS 135
3.2 Using Financial Ratios 135
Interested Parties 135
Types of Ratio Comparisons 135
Cautions About Using Ratio Analysis 138
➔ REVIEW QUESTIONS 139
3.3 Liquidity Ratios 139
Current Ratio 140
Quick (Acid-Test) Ratio 141
➔ REVIEW QUESTIONS 142
3.4 Activity Ratios 143
Inventory Turnover Ratio 143
Average Collection Period 144
Average Payment Period 145
Total Asset Turnover 146
➔ REVIEW QUESTION 146
3.5 Debt Ratios 147
Debt Ratio 148
Debt-to-Equity Ratio 149
Times Interest Earned Ratio 150
Fixed-Payment Coverage Ratio 150
➔ REVIEW QUESTIONS 151
3.6 Profitability Ratios 151
Common-Size Income Statements 151
Gross Profit Margin 152
Operating Profit Margin 154
Net Profit Margin 154
Earnings per Share (EPS) 155
Return on Total Assets (ROA) 156
Return on Equity (ROE) 156
➔ REVIEW QUESTIONS 158
3.7 Market Ratios 158
Price/Earnings (P/E) Ratio 158
Market/Book (M/B) Ratio 160
➔ REVIEW QUESTION 161
3.8 A Complete Ratio Analysis 161
Summary of Target’s Financial Condition 162
DuPont System of Analysis 163
➔ REVIEW QUESTIONS 166
Summary 166
Opener-In-Review 168
Self-Test Problems 168
Warm-Up Exercises 169
Problems 170
Spreadsheet Exercise 187
4 Long- and Short- Term Financial Planning 189
4.1 The Financial Planning Process 191
Long-Term (Strategic) Financial Plans 191
Short-Term (Operating) Financial Plans 192
➔ REVIEW QUESTIONS 193
4.2 Measuring the Firm’s Cash Flow 193
Depreciation 193
Depreciation Methods 194
Developing the Statement of Cash Flows 196
Free Cash Flow 201
FOCUS ON ETHICS:
Is Excess Cash Always a Good Thing? 202
FOCUS ON PRACTICE:
Free Cash Flow at Abercrombie & Fitch 203
➔ REVIEW QUESTIONS 203
4.3 Cash Planning: Cash Budgets 204
The Sales Forecast 204
Preparing the Cash Budget 205
Evaluating the Cash Budget 210
Coping with Uncertainty in the Cash Budget 211
➔ REVIEW QUESTIONS 212
4.4 Profit Planning: Pro Forma Statements 212
Current Year’s Financial Statements 212
Sales Forecast 214
➔ REVIEW QUESTION 214
4.5 Preparing the Pro Forma Income Statement 214
Considering Types of Costs and Expenses 215
➔ REVIEW QUESTIONS 216
4.6 Preparing the Pro Forma Balance Sheet 216
FOCUS ON PEOPLE/PLANET/
PROFITS: Financial Planning and Financial Sustainability 218
➔ REVIEW QUESTIONS 219
4.7 Evaluation of Pro Forma Statements 219
➔ REVIEW QUESTIONS 220
Summary 220
Opener-In-Review 221
Self-Test Problems 222
Warm-Up Exercises 223
Problems 224
Spreadsheet Exercise 237
5 Time Value of Money 238
5.1 The Role of Time Value in Finance 240
Future Value Versus Present Value 240
Computational Tools 241
Basic Patterns of Cash Flow 243
➔ REVIEW QUESTIONS 244
5.2 Single Amounts 244
Future Value of a Single Amount 244
Present Value of a Single Amount 248
➔ REVIEW QUESTIONS 251
➔ EXCEL REVIEW QUESTIONS 251
5.3 Annuities 252
Types of Annuities 252
Finding the Future Value of an Ordinary
Annuity 253
Finding the Present Value of an Ordinary Annuity 254
Finding the Future Value of an Annuity Due 256
Finding the Present Value of an Annuity Due 257
Finding the Present Value of a Perpetuity 259
FOCUS ON PEOPLE/PLANET/
PROFITS: The Time Value of Money Heats Up
Climate Change Debate 260
➔ REVIEW QUESTIONS 261
➔ EXCEL REVIEW QUESTIONS 261
5.4 Mixed Streams 261
Future Value of a Mixed Stream 261
Present Value of a Mixed Stream 263
➔ REVIEW QUESTION 264
➔ EXCEL REVIEW QUESTION 264
5.5 Compounding Interest More
Frequently Than Annually 265
Semiannual Compounding 265
Quarterly Compounding 265
A General Equation for Compounding 266
Using Computational Tools for Compounding 267
Continuous Compounding 268
Nominal and Effective Annual Rates of Interest 268
➔ REVIEW QUESTIONS 271
FOCUS ON ETHICS:
Was the Deal for Manhattan a Swindle? 271
➔ EXCEL REVIEW QUESTIONS 272
5.6 Special Applications of Time Value 272
Determining Deposits Needed to Accumulate a Future Sum 272
Loan Amortization 273
Finding Interest or Growth Rates 275
FOCUS ON PRACTICE:
New Century Brings Trouble for Subprime Mortgages 276
Finding an Unknown Number of Periods 278
➔ REVIEW QUESTIONS 279
➔ EXCEL REVIEW QUESTIONS 280
Summary 280
Opener-In-Review 281
Self-Test Problems 282
Warm-Up Exercises 283
Problems 284
Spreadsheet Exercise 301
INTEGRATIVE CASE 2 Epix Ltd. 302
PART 3 Valuation of Securities 307
6 Interest Rates and Bond Valuation 308
6.1 Interest Rates and Required Returns 310
Interest Rate Fundamentals 310
Term Structure of Interest Rates 315
FOCUS ON PRACTICE:
I-Bonds Adjust for Inflation 316
Risk Premiums: Issuer and Issue
Characteristics 321
➔ REVIEW QUESTIONS 322
6.2 Government and Corporate Bonds 322
Legal Aspects of Corporate Bonds 323
Cost of Bonds to the Issuer 324
General Features of a Bond Issue 325
Bond Yields 325
Bond Prices 326
Bond Ratings 326
Common Types of Bonds 327
International Bond Issues 327
FOCUS ON ETHICS:
“Can Bond Ratings Be Trusted?” 329
FOCUS ON PEOPLE/PLANET/ PROFITS: How Do I Love Thee? Let Me Count the Yield 330
➔ REVIEW QUESTIONS 331
6.3 Valuation Fundamentals 331
Key Inputs 331
Basic Valuation Model 332
➔ REVIEW QUESTIONS 333
6.4 Bond Valuation 334
Bond Fundamentals 334
Bond Values for Annual Coupons 334
Bond Values for Semiannual Coupons 336
Changes in Bond Prices 338
Yield to Maturity (YTM) 343
➔ REVIEW QUESTIONS 347
➔ EXCEL REVIEW QUESTIONS 347
Summary 347
Opener-In-Review 349
Self-Test Problems 349
Warm-Up Exercises 350
Problems 351
Spreadsheet Exercise 361
7 Stock Valuation 362
7.1 Differences Between Debt and Equity 364
Voice in Management 364
Claims on Income and Assets 364
Maturity 364
Tax Treatment 365
➔ REVIEW QUESTION 365
7.2 Common and Preferred Stock 365
Common Stock 365
FOCUS ON PEOPLE/PLANET/
PROFITS: Shrinking and Growing at the Same Time 366
Preferred Stock 370
➔ REVIEW QUESTIONS 372
7.3 Common Stock Valuation 372
Market Efficiency and Stock Valuation 372
Common Stock Dividend Valuation Model 374
FOCUS ON PRACTICE:
Understanding Human Behavior Helps Us Understand Investor Behavior 375
Free Cash Flow Stock Valuation Model 380
Ot her Approaches to Common Stock Valuation 383
FOCUS ON ETHICS:
Index Funds and Corporate Governance 385
➔ REVIEW QUESTIONS 386
7.4 Decision Making and Common Stock Value 387
Changes in Expected Dividends 387
Changes in Risk 388
Combined Effect 388
➔ REVIEW QUESTIONS 389
Summary 389
Opener-In-Review 391
Self-Test Problems 392
Warm-Up Exercises 392
Problems 393
Spreadsheet Exercise 401
IN TEGRATIVE CASE 3 Meyer Bargains AG 402
PART 4 Risk and the Required Rate of Return 403
8 Risk and Return 404
8.1 Risk and Return Fundamentals 406
FOCUS ON ETHICS:
If It Seems Too Good to Be True, It Probably Is 406
What Is Risk? 407
What Is Return? 407
Risk Preferences 409
➔ REVIEW QUESTIONS 409
8.2 Risk of a Single Asset 410
Risk Assessment 410
Risk Measurement 413
➔ REVIEW QUESTIONS 418
8.3 Risk of a Portfolio 419
Portfolio Return and Standard Deviation 419
Correlation 422
Diversification and Efficient Portfolios 424
Summary of the Effect of Correlation on Risk and Return 430
FOCUS ON GLOBAL FINANCE:
An International Flavor to Diversification 431
➔ REVIEW QUESTIONS 432
8.4 Risk and Return: The Capital
Asset Pricing Model (CAPM) 432
Types of Risk 432
The Model: CAPM 433
FOCUS ON PEOPLE/PLANET/
PROFITS: Happy Employees Signal High Stock Returns 443
➔ REVIEW QUESTIONS 443
Summary 443
Opener-In-Review 445
Self-Test Problems 445
Warm-Up Exercises 446
Problems 447
Spreadsheet Exercise 461
9 The Cost of Capital 463
9.1 Overview of the Cost of Capital 465
FOCUS ON ETHICS:
The Cost of Capital Also Rises 465
The Basic Concept 466
Sources of Long-Term Capital 468
➔ REVIEW QUESTIONS 469
9.2 Cost of Long-Term Debt 469
Net Proceeds 469
Before-Tax Cost of Debt 470
After-Tax Cost of Debt 471
➔ REVIEW QUESTIONS 473
9.3 Cost of Preferred Stock 473
Preferred Stock Dividends 473
Calculating the Cost of Preferred Stock 473
➔ REVIEW QUESTION 474
9.4 Cost of Common Stock 474
Finding the Cost of Common Stock Equity 474
Cost of Retained Earnings 478
➔ REVIEW QUESTIONS 479
9.5 Weighted Average Cost of
Capital 479
Calculating the Weighted Average Cost
of Capital (WACC) 479
FOCUS ON PRACTICE:
Uncertain Times Make for an
Un certain Weighted Average Cost of Capital 481
Capital Structure Weights 482
WACC as a Hurdle Rate 482
FOCUS ON PEOPLE/PLANET/
PROFITS: Diverse Boards Borrow Less 483
➔ REVIEW QUESTIONS 484
Summary 484
Opener-In-Review 485
Self-Test Problem 485
Warm-Up Exercises 486
Problems 487
Spreadsheet Exercise 496
INTEGRATIVE CASE 4 Finch Interiors PLC 497
PART 5 Long-Term Investment Decisions 499
10 Capital Budgeting Techniques 500
10.1 Overview of Capital Budgeting 502
The Capital Budgeting Process 502
Terminology 503
Capital Budgeting Techniques 503
➔ REVIEW QUESTION 505
10.2 Payback Period 505
Decision Criteria 505
Pros and Cons of Payback Analysis 506
FOCUS ON PEOPLE/PLANET/
PROFITS: Payback from the Sun 508
Discounted Payback 509
➔ REVIEW QUESTIONS 510
10.3 Net Present Value (NPV) 510 Decision Criteria 511
NPV and the Profitability Index 513
NPV and Economic Value Added 514
➔ REVIEW QUESTIONS 517
10.4 Internal Rate of Return (IRR) 517
Decision Criteria 517
➔ REVIEW QUESTIONS 520
10.5 Comparing NPV and IRR Techniques 520
Net Present Value Profiles 521
Conflicting Rankings 522
Other Problems with IRR 524
Modified IRR 526
Is NPV or IRR Better? 528
FOCUS ON ETHICS:
Ba by You Can Drive My Car—Just Not
a VW Diesel 529
➔ REVIEW QUESTIONS 529
Summary 530
Opener-In-Review 531
Self-Test Problem 531
Warm-Up Exercises 532
Problems 533
Spreadsheet Exercise 545
11Capital Budgeting Cash Flows 546
11.1 Project Cash Flows 548
Incremental Cash Flows 549
Sunk Costs and Opportunity Costs 550
FOCUS ON ETHICS:
Fumbling Sunk Costs 551
Financing Costs 552
➔ REVIEW QUESTIONS 553
11.2 Finding the Initial Cash Flow 553
Installed Cost of the New Asset 554
After-Tax Proceeds from the Sale of the Old Asset 554
Change in Net Working Capital 557
Summary: Calculating the Initial Cash Flow 558
➔ REVIEW QUESTIONS 559
11.3 Finding the Periodic Cash Flows 559
➔ REVIEW QUESTIONS 565
11.4 Finding the Terminal Cash Flow 565
After-Tax Proceeds from the Sale of New and Old Assets 565
Change in Net Working Capital 566
➔ REVIEW QUESTION 568
11.5 Putting It All Together 568
➔ REVIEW QUESTION 570
Summary 570
Opener-In-Review 572
Self-Test Problems 572
Warm-Up Exercises 573
Problems 574
Spreadsheet Exercise 586
12 Risk and Refinements in Capital Budgeting 588
12.1 Assessing Risk in Capital Budgeting 590
Break-Even Analysis 590
Operating Leverage 595
FOCUS ON PRACTICE:
Operating Leverage and Steel 598
Sensitivity Analysis 599
Scenario Analysis 600
Simulation 602
FOCUS ON PRACTICE:
The Monte Carlo Method: The Forecast
Is for Less Uncertainty 604
➔ REVIEW QUESTIONS 604
➔ EXCEL REVIEW QUESTION 604
12.2 International Risk
Considerations 605
➔ REVIEW QUESTION 606
12.3 Risk-Adjusted Discount Rates 606
Determining Risk-Adjusted Discount
Rates (RADRS) 606
FOCUS ON ETHICS:
Remain Calm—All Is Well 609
Estimating RADRS 610
Portfolio Effects 611
➔ REVIEW QUESTIONS 611
12.4 Capital Budgeting Refinements 612
Comparing Projects with Unequal Lives 612
Recognizing Real Options 615
FOCUS ON PEOPLE/PLANET/
PROFITS: Operating Leverage, Real Options, and Green Energy Investments 617
Capital Rationing 617
➔ REVIEW QUESTIONS 620
➔ EXCEL REVIEW QUESTION 620
Summary 620
Opener-In-Review 622
Self-Test Problem 622
Warm-Up Exercises 622
Problems 624
Spreadsheet Exercise 636
INTEGRATIVE CASE 5 Eco Media Limited 637
PART 6 Long-Term Financial Decisions 639
13 Capital Structure 640
13.1 Financial Leverage and Its Effects 642
FOCUS ON ETHICS:
Repo 105 Man 647
➔ REVIEW QUESTIONS 648
13.2 Capital Structure Irrelevance in Perfect Markets 648
Proposition One: Value Is Independent of Financing Mix 648
Proposition Two: WACC Is Independent of Financing Mix 652
➔ REVIEW QUESTIONS 655
13.3 M&M and Taxes 655
Corporate Taxes 655
FOCUS ON PEOPLE/PLANET/
PROFITS: Green Apple 658
Personal Taxes 658
➔ REVIEW QUESTIONS 661
13.4 Trading Off Debt’s Benefits and Costs 661
Th e Declining Marginal Tax Benefit of Debt 663
Th e Increasing Marginal Cost of Debt: Bankruptcy 664
A Capital Structure Tradeoff Model 666
As set Characteristics and Bankruptcy Costs 668
➔ REVIEW QUESTIONS 668
13.5 Other Factors That Influence
Capital Structure Choices 669
Agency Costs 669
Asymmetric Information 672
FOCUS ON PRACTICE:
Evidence from a CFO Survey 674
➔ REVIEW QUESTIONS 674
Summary 675
Opener-In-Review 677
Self-Test Problems 678
Warm-Up Exercises 678
Problems 679
Spreadsheet Exercise 684
14 Payout Policy 685
14.1 The Basics of Payout Policy 687
Elements of Payout Policy 687
Trends in Earnings and Dividends 688
Trends in Dividends and Share Repurchases 689
➔ REVIEW QUESTIONS 692
FOCUS ON ETHICS:
Buyback Mountain 693
14.2 The Mechanics of Payout Policy 693
Cash Dividend Payment Procedures 695
Share Repurchase Procedures 696
Tax Treatment of Dividends and Repurchases 698
FOCUS ON PRACTICE:
Capital Gains and Dividend Tax Treatment
Extended to 2012 and Beyond for Some 699
Dividend Reinvestment Plans 699
Stock Price Reactions to Corporate Payouts 700
➔ REVIEW QUESTIONS 702
14.3 Value Relevance of Payout Policy 702
The Dividend Irrelevance Theory 702
Th e Impact of Dividends in Imperfect Markets 705
Why Payout Policy Matters 705
Residual Theory of Dividends 706
➔ REVIEW QUESTIONS 707
14.4 Factors Affecting Payout Policy 708
Legal Constraints 708
Contractual Constraints 709
Growth Prospects 709
Owner Considerations 709
Market Considerations 710
➔ REVIEW QUESTION 710
14.5 Types of Dividend Policies 710
Constant-Payout-Ratio Dividend Policy 710
Regular Dividend Policy 711
Low-Regular-and-Extra Dividend Policy 712
➔ REVIEW QUESTION 713
14.6 Other Forms of Dividends 713
Stock Dividends 713
Stock Splits 714
➔ REVIEW QUESTIONS 717
14.7 Criticisms of Payout Policy 717
➔ REVIEW QUESTION 719
Summary 720
Opener-In-Review 721
Self-Test Problem 721
Warm-Up Exercises 722
Problems 723
Spreadsheet Exercise 730
INTEGRATIVE CASE 6 O’Grady
Apparel Company 731
PART 7 Short-Term Financial Decisions 735
15 Working Capital and Current Assets Management 736
15.1 Net Working Capital Fundamentals 738
Working Capital Management 738
Net Working Capital 739
Tradeoff Between Profitability and Risk 739
➔ REVIEW QUESTIONS 741
15.2 Cash Conversion Cycle 741
Calculating the Cash Conversion Cycle 742
Funding Requirements of the Cash Conversion Cycle 744
Strategies for Managing the Cash Conversion Cycle 747
➔ REVIEW QUESTIONS 748
15.3 Inventory Management 748
Differing Viewpoints About Inventory Level 748
Common Techniques for Managing Inventory 749
FOCUS ON PRACTICE:
In Bed with RFID 753
➔ REVIEW QUESTIONS 753
15.4 Accounts Receivable
Management 754
Credit Selection and Standards 754
FOCUS ON ETHICS:
If You Can Bilk It, They Will Come 755
Credit Terms 757
Credit Monitoring 759
➔ REVIEW QUESTIONS 761
15.5 Management of Receipts and Disbursements 761
Float 761
Speeding Up Collections 762
Slowing Down Payments 763
Cash Concentration 763
Zero-Balance Accounts 764
Investing in Marketable Securities 765
➔ REVIEW QUESTIONS 767
Summary 767
Opener-In-Review 769
Self-Test Problems 769
Warm-Up Exercises 769
Problems 770
Spreadsheet Exercise 773
16 Current Liabilities Management 774
16.1 Spontaneous Liabilities 776
Accounts Payable Management 776
Accruals 781
➔ REVIEW QUESTIONS 781
16.2 Unsecured Sources of Short-
Term Loans 781
FOCUS ON ETHICS:
Bank Loans and Shareholder
Wealth 782
Bank Loans 782
FOCUS ON PEOPLE/
PLANET/PROFITS: Banks Transmit Values
Through Loans 785
Commercial Paper 788
FOCUS ON PRACTICE:
The Ebb and Flow of Commercial Paper 789
International Loans 790
➔ REVIEW QUESTIONS 791
16.3 Secured Sources of Short-
Term Loans 792
Characteristics of Secured Short-Term Loans 792
Us e of Accounts Receivable as Collateral 793
Use of Inventory as Collateral 796
➔ REVIEW QUESTIONS 797
Summary 797
Opener-In-Review 799
Self-Test Problem 799
Warm-Up Exercises 799
Problems 800
Spreadsheet Exercise 806
INTEGRATIVE CASE 7 Sums Metal
Casting 807
PART 8 Special Topics in Managerial Finance 809
17 Hybrid and Derivative Securities 810
17.1 Overview of Hybrids and Derivatives 812
➔ REVIEW QUESTION 812
17.2 Leasing 812
Types of Leases 812
FOCUS ON PRACTICE:
I’d Like to Return This (Entire Store), Please 814
Leasing Arrangements 814
Lease-Versus-Purchase Decision 815
Advantages of Leasing 819
➔ REVIEW QUESTIONS 820
17.3 Convertible Securities 820
Types of Convertible Securities 820
General Features of Convertibles 821
FOCUS ON PEOPLE/PLANET/
PROFITS: Green CoCo Bonds 823
Financing with Convertibles 823
Determining the Value of a Convertible Bond 825
➔ REVIEW QUESTIONS 827
17.4 Stock Purchase Warrants 827
Key Characteristics 827
Implied Price of an Attached Warrant 828
Values of Warrants 829
➔ REVIEW QUESTIONS 832
17.5 Options 832
Calls and Puts 832
Options Markets 833
Options Trading 833
Role of Call and Put Options in Fund Raising 834
FOCUS ON ETHICS:
Banking on Options 835
Hedging Foreign-Currency Exposures with Options 836
➔ REVIEW QUESTIONS 836
Summary 836
Opener-In-Review 838
Self-Test Problems 839
Warm-Up Exercises 840
Problems 840
Spreadsheet Exercise 846
18 Mergers, LBOs, Divestitures, and Business Failure 848
18.1 Merger Fundamentals 850
Terminology 850
Motives for Merging 852
FOCUS ON ETHICS:
Is There Any Good in Greed? 853
Types of Mergers 855
➔ REVIEW QUESTIONS 856
18.2 LBOs and Divestitures 856
Leveraged Buyouts (LBOS) 856
Divestitures 857
➔ REVIEW QUESTIONS 859
18.3 Analyzing and Negotiating Mergers 859
Valuing the Target Company 859
Stock Swap Transactions 861
Merger Negotiation Process 867
Holding Companies 868
International Mergers 870
➔ REVIEW QUESTIONS 871
FOCUS ON GLOBAL FINANCE:
International Mergers 872
18.4 Business Failure
Fundamentals 873
Types of Business Failure 873
Major Causes of Business Failure 873
Voluntary Settlements 874
➔ REVIEW QUESTIONS 875
18.5 Reorganization and
Liquidation in Bankruptcy 876
Bankruptcy Legislation 876
Re organization in Bankruptcy
(Chapter 11) 877
Liquidation in Bankruptcy
(Chapter 7) 879
➔ REVIEW QUESTIONS 880
Summary 881
Opener-In-Review 882
Self-Test Problems 883
Warm-Up Exercises 883
Problems 884
Spreadsheet Exercise 891
19 International Managerial Finance 892
19.1 The Multinational Company and Its Environment 894
Key Trading Blocs 894
GATT and the WTO 896
Legal Forms of Business Organization 897
Taxes 898
Financial Markets 899
➔ REVIEW QUESTIONS 899
19.2 Financial Statements 900
Subsidiary Characterization and Functional Currency 900
Translation of Individual Accounts 900
➔ REVIEW QUESTION 902
19.3 Risk 902
Exchange Rate Risks 902
Political Risks 910
FOCUS ON ETHICS:
Is Fair-Trade Coffee Fair? 911
➔ REVIEW QUESTIONS 912
19.4 Long-Term Investment and Financing Decisions 912
Foreign Direct Investment 912
In vestment Cash Flows and Decisions 912
Capital Structure 913
Long-Term Debt 914
FOCUS ON GLOBAL FINANCE:
Take an Overseas Assignment to Take a Step Up the Corporate Ladder 915
Equity Capital 916
➔ REVIEW QUESTIONS 917
19.5 Short-Term Financial Decisions 918
Cash Management 920
Credit and Inventory Management 922
➔ REVIEW QUESTIONS 923
Summary 923
Opener-In-Review 925
Self-Test Problem 925
Warm-Up Exercises 926
Problems 926
Spreadsheet Exercise 929
INTEGRATIVE CASE 8 Organic Solutions 930
Appendix A-1
Glossary G-1
Index I-1