Analysis for Financial Management, Thirteenth Edition
By Robert C. Higgins, Jennifer L. Koski and Todd Mitton
Contents:
Preface xii
PART ONE
ASSESSING THE FINANCIAL HEALTH OF THE FIRM 1
Chapter 1
Interpreting Financial Statements 3
The Cash Flow Cycle 3
Overview of Financial Statements 6
The Balance Sheet 9
Current Assets and Liabilities 10
Shareholders’ Equity 11
The Income Statement 11
Measuring Earnings 12
Sources and Uses Statements 16
The Two-Finger Approach 17
The Cash Flow Statement 18
Financial Statements and the Value Problem 22
Market Value vs. Book Value 22
Economic Income vs. Accounting Income 26
Imputed Costs 27
Summary 30
Additional Resources 31
Problems 32
Chapter 2
Evaluating Financial Performance 37
The Levers of Financial Performance 37
Return on Equity 38
The Three Determinants of ROE 38
The Profit Margin 40
Asset Turnover 42
Financial Leverage 48
Is ROE a Reliable Financial Yardstick? 53
The Timing Problem 54
The Risk Problem 54
The Value Problem 56
ROE or Market Price? 58
Ratio Analysis 60
Using Ratios Effectively 61
Ratio Analysis of Polaris Inc. 62
Summary 69
Additional Resources 70
Problems 71
PART TWO
PLANNING FUTURE FINANCIAL PERFORMANCE 77
Chapter 3
Financial Forecasting 79
Pro Forma Statements 79
Percent-of-Sales Forecasting 80
Interest Expense 86
Seasonality 86
Pro Forma Statements and Financial
Planning 87
Forecasting with Spreadsheets 89
Coping with Uncertainty 92
Sensitivity Analysis 92
Scenario Analysis 93
Simulation 93
Cash Flow Forecasts 95
Cash Budgets 96
The Techniques Compared 100
Summary 101
Additional Resources 102
Problems 103
Chapter 4
Managing Growth 111
Sustainable Growth 112
The Sustainable Growth Equation 112
Too Much Growth 114
Balanced Growth 115
DLH Holdings’ Sustainable Growth Rate 116
“What If” Questions 118
What to Do When Actual Growth Exceeds
Sustainable Growth 118
Sell New Equity 119
Increase Leverage 121
Reduce the Payout Ratio 121
Profitable Pruning 122
Outsourcing 122
Pricing 123
Is Merger the Answer? 123
Too Little Growth 123
What to Do When Sustainable Growth Exceeds
Actual Growth 124
Ignore the Problem 125
Return the Money to Shareholders 126
Buy Growth 127
Sustainable Growth and Pro Forma
Forecasts 127
New Equity Financing 128
Why Don’t U.S. Corporations Issue
More Equity? 131
Summary 132
Additional Resources 133
Problems 134
PART THREE
FINANCING OPERATIONS 139
Chapter 5
Financial Instruments and
Markets 141
Financial Instruments 142
Bonds 143
Common Stock 149
Preferred Stock 153
Financial Markets 155
Venture Capital Financing 155
Private Equity 157
Initial Public Offerings 158
Seasoned Issues 160
Issue Costs 164
Efficient Markets 166
What Is an Efficient Market? 166
Implications of Efficiency 169
Appendix
Using Derivatives to Manage Risks 170
Forward Markets 172
Hedging with Forward Contracts 172
Hedging with Futures Contracts 173
Types of Forwards and Futures 174
Hedging with Swaps 175
Interest Rate Swaps 176
Currency Swaps 177
Hedging with Options 178
Limitations of Financial Market Hedging 181
Valuing Options 182
Summary 185
Additional Resources 187
Problems 188
Chapter 6
The Financing Decision 193
Financial Leverage 195
Measuring the Effects of Leverage on a
Business 199
Leverage and Risk 201
Leverage and Earnings 203
How Much to Borrow 206
Irrelevance 206
Tax Benefits 208
Distress Costs 208
Flexibility 213
Market Signaling 216
Management Incentives 219
The Financing Decision and
Growth 219
Selecting a Maturity Structure 222
Inflation and Financing Strategy 223
Appendix
The Irrelevance Proposition 223
No Taxes 224
Taxes 226
Summary 227
Additional Resources 228
Problems 230
PART FOUR
EVALUATING INVESTMENT OPPORTUNITIES 235
Chapter 7
Discounted Cash Flow Techniques 237
Figures of Merit 238
The Payback Period and the Accounting
Rate of Return 239
The Time Value of Money 240
Equivalence 245
The Net Present Value 246
The Benefit-Cost Ratio 248
The Internal Rate of Return 248
Uneven Cash Flows 252
A Few Applications and Extensions 253
Mutually Exclusive Alternatives and
Capital Rationing 256
The IRR in Perspective 257
Determining the Relevant Cash Flows 258
Depreciation 260
Working Capital and Spontaneous
Sources 262
Sunk Costs 263
Allocated Costs 264
Cannibalization 265
Excess Capacity 266
Financing Costs 267
Appendix
Mutually Exclusive Alternatives and
Capital Rationing 269
What Happened to the Other $578,000? 270
Unequal Lives 271
Capital Rationing 274
The Problem of Future Opportunities 275
A Decision Tree 276
Summary 277
Additional Resources 278
Problems 278
Chapter 8
Risk Analysis in Investment Decisions 285
Risk Defined 287
Risk and Diversification 289
Estimating Investment Risk 291
Three Techniques for Estimating
Investment Risk 292
Including Risk in Investment
Evaluation 293
Risk-Adjusted Discount Rates 293
The Cost of Capital 294
The Cost of Capital Defined 295
The Cost of Capital for Polaris 296
The Cost of Capital in Investment
Appraisal 304
Multiple Hurdle Rates 304
Four Pitfalls in the Use of Discounted
Cash Flow Techniques 307
The Enterprise Perspective vs. the Equity
Perspective 307
Inflation 310
Real Options 311
Excessive Risk Adjustment 316
A Cautionary Note 318
Appendix
Asset Beta and Adjusted Present
Value 318
Calculating Asset Beta 319
Using Asset Beta to Estimate Equity
Beta 320
Asset Beta and Adjusted Present Value 321
Summary 325
Additional Resources 326
Problems 327
Chapter 9
Business Valuation and Corporate Restructuring 335
Valuing a Business 337
Assets or Equity? 338
Dead or Alive? 338
Minority Interest or Control? 340
Discounted Cash Flow Valuation 341
Free Cash Flow 342
The Terminal Value 343
A Numerical Example 346
Problems with Present Value
Approaches to Valuation 348
Valuation Based on Comparable Trades 349
Lack of Marketability 353
The Market for Control 354
The Premium for Control 354
Financial Reasons for Restructuring 357
The Empirical Evidence 364
The LinkedIn Buyout 366
Appendix
The Venture Capital Method of Valuation 368
The Venture Capital Method—One Financing Round 369
The Venture Capital Method—Multiple Financing Rounds 372
Why Do Venture Capitalists Demand Such High Returns? 374
Summary 375
Additional Resources 376
Problems 378
Glossary 385
Suggested Answers to Odd-Numbered Problems 397
Index 429