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F ou nd a tion s of

F inancia l M anagem en t

THIRTEENTH EDITION

S T A N L E Y B B L O C K

Texas

Christ ian Universi ty

G E O F F R E Y A H I R T

DeP aul Univers i ty

B A R T L E Y

R

D A N I E L S E N

North Carol ina Sta te U nivers ity

McGraw-Hill

I rwln

Boston Burr Ridg e, IL Du buq ue, IA New York San Francisco St. Louis

:

Bangkok Bogota Caracas Kuala Lumpur Lisbon London Mad rid Mexico City

Milan Montreal New Delhi S antiago Seoul S ingapore Sydney

•

Taipei ' Toronto

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Conten t s

PART1

INTRODUCTION

1 The Goals and Functions of Financial

Management

4

The Field of Finance 5

Evolution of the Field of Finance 5

M o d e r n Is s u e s i n F in a n c e 6

T h e Im p a c t o f t h e I n t e rn e t 6

Functions of Financial M anagement 7

F o rm s o f O r g a n i z a ti o n 8

Sole Proprietorship 8

Partnership 8

Corporation 9

Corporate G overnance

10

S a r ba ne s - O xl e y A c t

11

Goals of Financial M anagement 11

A V a l ua t ion A p p roa c h 12

M a x i m i z ing S h a r e h o l de r We a l t h 12

M a n a g e m e n t a n d S t o c k ho l d e r W e a l th 13

S oc i a l Re s p ons i b i l i t y a nd Et h i c a l

Be h a v i or 13

The Role of the Financial Markets 75

S tru c t u r e a n d F u n c t i o n s o f t he F i n a n c i a l

M a r ke t s 15

A l l oc a t i on o f Ca p i t a l 16

I n s t it u t i o n a l P r e s s u r e o n P u b l i c C o m p a n i e s

t o Re s t r uc t ur e 17

I n t e rn a t i o n a l i z a t io n o f t he F i n a n c i a l

M a r ke t s 17

Th e I n t e r ne t a nd Ch a nge s i n t h e Ca p i t a l

M a r ke t s

18

Format of the Text 19

Parts 19

1.

Introduction 19

2.

Financial Analysis and

Planning 19

3.

Working Capital Mana gement 19

4. The Capital Budgeting Process 20

5. hong-Term Financing 20

6. Expanding the Perspective of

Corporate Finance 20

List of Terms 20

Discussion Questions 21

W eb

Exercise 21

1 FINANCIAL ANALYSIS AND PLANNING

2 Review of Accounting

26

Income Statement

27

Re t ur n t o Ca p i t a l 28

P ri c e - Ea r n i ngs Ra t i o A pp l ie d t o Ea r n i ngs

per Share 28

L i m i t a t i o n s o f t he In c o m e S t a te m e n t 29

Balance Sheet 30

I n t e r p r e t a t i on o f Ba l a nc e S h e e t I t e m s 30

Con c e p t o f N e t Wor t h 32

L i m i t a t i o n s o f t h e B a l a n c e S he e t 32

Statement of Cash Flows

33

D e v e lo p i n g a n A c t u a l S ta t e m e n t 34

D e t e r m i n i ng Ca s h F l ow s f rom O p e ra t i ng

Act ivi t i es 34

D e t e rm i n i n g C a s h F l o w s f ro m In v e s t in g

Act ivi t i es 36

D e t e rm i n i n g C a s h F l o w s f ro m F i n a n c i n g

Act ivi t i es

36

Com b i n i ng t h e Thr e e S e c t i ons o f t h e

S t a t e m e n t 38

Depreciation and Fund s Flow 39

Free Cash Flow

39

Income Tax Considerations

40

Cor p or a t e Ta x Ra t e s

41

Cos t o f a Ta x - De du c t i b le Ex pe ns e 42

D e p r e c i a t i on a s a Ta x S h ie l d 42

Summary 43

List of Terms 44


Practice Prob lems and Solutions 44

Problems 45

W eb Exercise 53

S P Problems

53

3 Financial Analysis

55

Ratio Analysis

5 6

Cl a s s i f ic a t i on S ys t e m 57

Th e A na l y s is 58

A.

Profitability Ratios 58

B.

Asset Utilization Ratios 61

C. Liquidity Ratios 62-

D .

D ebt Utilization Ratios 62

X IX

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XX

Contents

Trend Analysis 63

Impact of Inflation on Financial

Analysis

67

An I l lus t ra t ion 67

Disinf la t ion Effec t 68

D eflation 69

Other Elements of Distortion in Reported

Income

69

Ex p l a na t i on o f D i s c r e p a nc i e s 69

Sales 70

Cost of Goods Sold 70

Extraordinary Gains/Losses 70

N e t In c o m e 71

Summary 72

List of Terms 72



Problems 76

Comprehensive Prob lems 87

W e b Exercise 92

S P Problems

92

4 F i n a n c i a l F o r e c a s t in g 94

Constructing Pro Forma

Statements

95

Pro Forma Income Statement 95

Establ i sh a Sales Projec t ion 96

D e t e rm i n e a P ro d u c t io n S c he d u l e a n d t h e

Gross Profi t 96

Cost of Goods Sold 98

O t he r Ex pe ns e I t e m s

99

A c t u a l P r o F o r m a I n c o m e S t a t e m e n t 99

Cash Budget

10 0

Ca s h Re c e i p ts

10 0

Ca s h P a y m e n t s 10 1

A c t u a l B u d g e t 10 2

Pro Forma Balance Sheet

10 3

E xp la n a t i o n o f P ro F o r m a B a l a n c e

Sheet 10 5

A n a l ys i s o f P ro F o r m a S ta t e m e n t

10 6

Percent-of-Sales Method 70 6

Summary 108

List of

Terms

10 9



Problems

11 1

Comprehensive Prob lems

118

W e b Exercise

12 1

5 O p e r a tin g a n d F i n a n c ia l L e v e r a g e 122

Leverage in a Business 12 3

Operating Leverage

12 3

Bre a k - Ev e n A na l y s i s

12 3

A M or e Cons e r va t i ve A p pr oa c h 7 2 5

Th e Ri s k Fa c t or 7 2 7

Cash Break-Even Ana lys i s 727

D e gr e e o f O p e r a t ing Le v e r a ge 7 2S

Leveraged Firm 128

Conservative Firm 129

Li m i t a t i ons o f A na l y s i s 7 29

Financial Leverage 13 0

Im p a c t o n E a r n i n g s 13 1

D e gr e e o f F i n a n c i a l Le v e r a ge 7 37

Plan A Leveraged) 133

Plan B Conservative) 134

L i m i t a t io n s t o Us e o f F i n a n c i a l

Le v e r a ge 13 4

Combining Op erating and Financial

Leverage 13 4

Degree of Com bined Leverage 756

A W ord of

Ca u t i on 13 8

Summary

13 8

Review of Formulas

13 8

List of Term s 139

Discussion Questions

13 9


Problems 141

Comprehensive Prob lem 149

W e b Exercise

15 1

S P Problems

15 1

P A R T

3

W O R K I N G C A P IT A L M A N A G E M E N T

6 W o r k in g C a p i ta l a n d th e F i n a n c in g

D e c i s i o n

156

The Nature of Asset Growth

15 8

Controlling Assets—Matching Sales and

Production

75 5

Te m p ora r y A s s e t s u nd e r Le ve l

P ro d u c t i o n — A n E x a m p l e 7 62

Patterns of Financing

767

A l t e rna t i ve P l a n s 16 8

L o n g - Te rm F i n a n c i n g 7 65

S hor t -Te rm F i na n c i ng

(Opposi te Approa ch) 769

The Financing Decision 76 9

Term Struc ture of Interes t Rates 7 77

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Contents

X X I

A Decision Process 77 4

I n t ro d u c i n g V a ry in g C o n d i t io n s 17 5

Ex pe c t e d V a l ue 7 75

Shifts in Asset Structure 7

76

Toward an Optimal Policy 77 7

Summary 179

List of Terms

17 9


18 0

Practice Problems and Solutions

18 0

Problems

18 1

W e b Exercise 187

S P Problems

18 7

7 C u r r e n t A s s e t M a n a g e m e n t 189

Cash Management

19 0

R e a s o n s f o r H o l d i n g C a s h B a l a n c e s 7 90

Ca s h F l o w Cy c l e 7 9 0

Collections and Disbursements

19 3

Fl oa t 7 9 4

I m p r ov i ng Co l l e c t i on s 7 94

E x te n d i n g D i s bu r s e m e n t s 7 94

Cost-Bene f i t Ana lys i s 795

E l e c t ro n i c F u n d s T ra n s f e r 7 95

I n te r n a t io n a l C a s h M a n a g e m e n t 7 97

Marketable Securities 79 8

Management of Accounts Receivable 20 2

A c c o u n t s R e c e i va b le a s a n

I n v e s t m e n t 20 2

Cr e d i t P o l ic y A dm i n i s t r a t ion 20 2

Credit Standards 202

Terms of Trade 204

Collection Policy 206

A n A c t ua l Cr e d i t D e c i s i on 20 7

Inventory Managem ent

20 8

Le v e l v e r s us S e a s ona l P r oduc t i on 20 8

I nv e n t or y Po l i c y i n I n f l a t ion ( a nd

D e f l a t i on) 20 9

T h e In v e n t o ry D e c i s io n M o d e l 20 9

Carrying Costs 20 9

Ordering Costs 20 9

E c o n o m i c O rd e r in g Q u a n t i ty 2 7 0

S a f e ty S t oc k a nd St oc k ou t s 2 77

J u s t -i n -T i m e In v e n t o ry M a n a g e m e n t 2 72

Cost Savings from Lower Inventory 21 2

Other Benefits 213

The D ownside of JIT 213

Summary

21 4

List of Terms

21 5


216


21 6

Problems

21 7

Comprehensive Problem

22 2

W e b Exercise

22 3

8 S o u r c e s o f S h o r t- T e r m F in a n c i n g

224

Trade Credit 22 5

P a y m e n t P e r i od 22 5

C a s h D i s c o u n t P o l ic y 22 5

N e t Cr e d i t P os i t i on

22 6

Bank Credit 22 6

P r i m e Ra t e a nd LI BO R 22 7

C o m p e n s a t in g B a la n c e s 22 8

M a t ur i t y P rov i s i ons

22 9

C o s t o f C o m m e r c i a l B a n k F i n a n c i n g 23 0

I n t e r e s t Cos t s w i t h Com p e ns a t i ng

B a l a n c e s

23 0

R a t e o n In s t a l l m e n t L o a n s 23 1

A n n u a l P e r c e n t a g e R a t e 23 1

T he C r e d i t C ru n c h P he n o m e n o n 23 2

Financing through Comm ercial Paper 23 3

A d v a n t a g e s o f C o m m e r c i a l P a p e r 23 4

L i m i t a t i o n s o n t he Is s u a n c e o f C o m m e r c ia l

P a p e r 23 5

Foreign Borrowing 23 6

Use of Collateral in Short-Term

Financing 23 6

Accounts Receivable Financing 23 7

P le d g i n g A c c o u n t s R e c e i va b le 23 7

Fa c t or i ng Re c e i v a b l e s 23 7

A s s e t - Ba c k e d P ub l i c O f f e ri ngs 23 8

Inventory Financing 23 9

S ta g e s o f P ro d u c t i o n 24 0

N a t u r e o f L e n d e r C o n t ro l 24 0

Blanket Inventory Liens 240

Trust Receipts 240

Warehousing 240

Appraisa l of Inventory Control

D e v i c e s 24 0

Hedging to Reduce Borrowing Risk 247

Summary 243

List of

Terms

24 4


24 4

Practice Prob lems and Solutions

24 5

Problems 246


25 0

W e b Exercise

25 1

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XX11

Contents

P A R T 4 I T H E C A P I T A L B U D G E T IN G P R O C E S S

9 T h e

T im e V a lu e

o f

M o n e y 255

Relationship to the C apital Outlay

Decision 25 6

Future Value—Single Amou nt

25 6

Present Value—Single Amoun t

25 7

Future Value—Annuity

25 8

Present Value—Annuity 260

Graphical Presentation of Time V alue

Relationships

26 2

T he R e la t io n s h ip be twe e n Pre s e n t Va lu e

a n d F u tu re Va lu e

26 2

T he R e la t io n s h ip be twe e n the Pre s e n t

V a lu e o f a S in g l e A m o u n t a n d t he P re s e n t

Value o f

n

A n n u i t y 26 5

F u t u r e

alue

R e la t e d t o t h e F u t u r e V a lu e

o f a n An n u i ty 26 7

Determining the Annuity Value 26 8

An n u i ty E qu a l in g a F u tu re Va lu e 26 8

An n u i ty E qu a l in g a Pre s e n t Va lu e 26 8

Determining th Yield on an

Investment 27 0

Yie ld — Pre s e n t Va lu e o f a S in g le

A m o u n t 270

Yie ld — Pre se n t Va lu e o f a n An n u i ty 277

Special Considerations in Time Value

Analysis 27 2

P a t t e rn s o f P a ym e n t 27 2

Special Review of the Chapter 274

List of Terms 276


Practice Prob lems and Solutions 27 7

Problems 278


1 0 V a l u a tio n a n d R a t e s o f R e tu rn

285

Valuation Concepts 28 6

Valuation of Bonds 28 6

Present Value of Interest

Payments 287

Present

Value

of Principal

Payment

Par Value at Ma turity 287

C o n c e p t o f Y ie l d t o M a t u r it y 288

C ha n g in g the Yie ld to M a tu r i ty a n d the

I m p a c t o n B o n d V a l u a t io n 290

Increase in Inflation Prem ium 290

D ecrease in Inflation Premium 290

T im e t o M a t u r i ty 292

D e t e rm i n i n g Y i e ld t o M a t u r i ty f ro m t he

B o n d Pr ic e

29 2

A 13 Percent D iscount Rate 293

A 12 Percent D iscount Rate 294

Formula for Bond Yield 29 4

S e m i a n n u a l I n t e r e s t a n d B o n d

Pr ic e s 295

Valuation and Preferred Stock 29 6

D e t e rm i n i n g t he R e q u i re d R a t e

o f R e tu rn (Yie ld ) f ro m the M a rke t

Price 29 8

Valuation of Com mon Stock 29 8

No Gro wth in Divid e n d s 29 9

C o n s ta n t Gro wth in Divid e n d s 299

Stock Valuation Based o n Future

Stock Value 30 1

D e t e r m i n i n g t h e Re q u i r e d R a t e o f R e t u r n

fro m the M a rke t Pr ic e 507

T he Pr ic e -E a rn in g s R a t io C o n c e pt a n d

Va lu a t io n 302

Va r ia ble Gro wth in Divid e n d s 30 5

Summary and Review of Formulas 30 6

B o n d s 30 6

Preferred Stock 307

C o m m o n S to c k 307

List of

Terms

30 8

Discussion Questions 30 8

Practice Problems and Solutions 309

Problems 310


W e b Exercise 317

Appendix 10A The Bond Yield to Maturity

Using Interpolation 318

Appendix 10B Using Calculators for

Financial Analysis 319

Appendix IOC

Valuation

of a Supernormal

Growth Firm 32 8

1 1

C o s t

o f

C a p i ta l 331

The Overall Concept

33 2

Cost of Debt

33 2

Costs of Preferred Stock 33 5

Cost of Common Equity

33 5

Va lu a t io n Appro a c h 336

R e q u i r e d R e t u r n o n C o m m o n

Sto c k Us in g the C a pi t a l As s e t

P ri c i n g M o d e l 33 6

C o s t o f R e t a in e d E a rn i n g s

33 7

C o s t o f N e w Co m m o n S to c k 33 9

O v e rv i e w o f C o m m o n S t o c k C o s t s 33 9

Optimal Capital Structure—Weighting

Costs 34 0

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Contents xxiii

Capital Acquisition and Investment

Decision M aking 34 2

C o s t o f C a p i t a l i n t he C a p i t a l B u d g e t i n g

D e c i s i o n 34 2

The Marginal Cost of Capital

34 4

Summary 349

Review of Formulas 350

List of Terms 350


Practice Problems and Solutions 35 1

Problems 354

Comprehensive Prob lems 36 1

W eb Exercise 36 3

S P Problems 36 3

Appendix 11A Cost of Capital and

the Capital Asset Pricing M odel

(Optional) 36 4

12 The Capital Budge ting Decision 371

Administrative Considerations

372

Accounting Flows versus Cash Flows

37 2

Methods of Ranking Investment

Proposals 375

P a y ba c k M e t h o d 37 5

In te rn a l R a te o f R e tu rn

37 6

Ne t Pre s e n t Va lu e 378

Selection Strategy

379

R e i n v e s t m e n t A s s u m p t i o n 380

Modified Internal Rate of Return 38 1

Capital Rationing 38 2

Net Present Value Profile

383

C ha ra c te r i s t i c s o f In ve s tm e n t C

38 4

Combining Cash Flow Analysis and

Selection Strategy

38 6

T h e R u l e s o f D e p re c i a t i o n 38 6

T he T a x R a te 38 8

Actual Investment Decision

388

The R eplacement Decision

389

Sa le o f Old As s e t 390

I n c r e m e n t a l D e p re c i a t i o n 391

C o s t Sa vin g s 39 2

Elective Expensing

394

Summary 394

List of Terms 39 4



Problems 396

Comprehensive P roblem 405

W eb

Exercise 40 5

S P Problems

40 6

13 Risk

and

Capital Budgeting 4 7

Definition of Risk in C apital

Budgeting

408

The Concept of Risk-Averse

40 9

Actual Measurement of Risk 409

Risk and the Capital Budgeting

Process

47 2

R is k-Ad j u s te d Dis c o u n t R a te 413

I n c r e a s i n g R i s k o v e r T i m e 4 7 4

Q u a l i t a ti v e M e a s u r e s 4 7 4

Example— Risk-Adjusted D iscount

Rate 41 5

Simulation M odels

476

D e c i s i o n T re e s 4 7 7

The P ortfolio Effect

418

Po r t fo l io R is k 479

E v a l u a t i o n o f C o m b i n a t i o n s

42 2

The Share Price Effect 42 3

Summary 42 3

Review of Formulas 423

List of

Terms

42 4



Problems 426


W eb Exercise 43 9

PARTS

i

LO NG-TERM FINANCING

1 4 Capital Markets 4 4 2

International Capital Markets 44 3

Competition for Funds in the U.S. Capital

Markets

44 5

G o v e rn m e n t S e c u r it i e s

44 6

U.S. Government Securities 446

Federally Sponsored Credit

Agencies 446

State and Local Securities 446

C o rpo ra te Se c u r i t i e s 446

Corporate Bonds 446

Preferred Stock 447

Comm on Stock 447

Internal versus External Sources

ofFunds 447

The Supply of Capital Funds

44 8

T he R o le o f the Se c u r i ty M a rke t s 450

The Organization of the Security

Markets

45 7

T ra d i t io n a l Org a n iz e d E xc ha n g e s 457

Listing Requirem ents for Firms 452

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xxiv

Contents

E l e c t r o n i c C o m m u n i c a t i o n N e t w o r k s

(ECNs) 45 2

The New York Stock Exchange 45 3

The NASDAQ M arket

45 3

F o r e i g n E x c h a n g e s 45 4

Market Efficiency

45 5

The Eff ic ient M arket Hypothes i s 45 6

Regulation of the Security Markets 45 6

Secu r i ti es Act of 1933 45 6

Secur i t i es Exchange Act of 1934 45 7

S e c ur i t i e s A c t s A m e ndm e n t s o f 1 9 7 5 45 8

S a r b a n e s - O x l e y A c t o f 2 0 0 2 45 8

Summary

46 0

List of Terms

46 0


46 1

Web

Exercise

46 1

1 5 Investment Banking: P ublic and Private

Placement 46 2

The Role of Investment Banking

46 3

Concentration of Capital 463

Th e Gramm-Leach-Bliley Act Repeals

the Glass-Steagall Act 465

Investment Banking Comp etitors 466

Enumeration of Functions

46 6

Underwriter 466

Market Maker 467

Advisor 467

Agency Functions 467

The Distribution Process 46 7

The Spread 468

Pricing the Security

46 9

D i l u t i on 47 0

M arket Stabi l iza t ion 477

Afterma rket 477

Shel f Regis t ra t ion 47 2

Public versus Private Financing 47 2

A d v a n t a g e s o f B e i n g P u b l i c 47 2

D i s a dv a n t a ge s o f Be i ng P ub l i c 47 3

Public Offerings 47 3

A Cla s s i c Ex a m p l e o f I n s t a n t We a l t h—

EDS Goes Publ ic 47 3

Internet Capi ta l Group—A Second

Exam ple 47 4

Private Placement

47 8

Going Pr ivate and Leveraged

Buy ou t s 47 8

International Investment Banking Deals

47 9

Privatizat ion 47 9

Summary

48 0

List of

Terms

48 0


48 1


48 1

Problems

48 2


48 8

Web Exercise

489

S P Problems 48 9

1 6 Long-Term Debt and Lease Financing 49 1

The Expanding R ole of Debt 49 2

The Debt C ontract

49 2

Par Value 49 2

Coupon Rate 493

Maturity D ate 493

Secur i ty Provis ions 49 3

U n s e c u r e d D e b t 49 3

M e t ho d s o f R e p a ym e n t 49 4

Serial Payme nts 494

Sinking-Fund Provision 495

Conversion 495

Call Feature 49 5

A n E x a m p l e : K e rr M c G e e s 7 875 P e r c e n t

B o n d

49 5

Bond Prices, Yields, and Ratings 49 5

Bond Y i e l d s 49 8

Coupon Rate Nominal Yield 49 8

Current Yield 49 9

Yield to Maturity 499

B o n d R a t i n g s 49 9

E x a m i n i n g A c t u a l B o n d R a t i n g s 50 0

The Refunding Decision

507

A Ca p i t a l Bud ge t i ng P rob l e m 5 07

S t e p A — O ut f l ow Cons i de r a t i ons 50 2

Step

B—Inflow

C o n s i d e r a t i o n s 50 3

Step C—Net P r e s e n t V a l ue 50 4

Other Forms of Bond F inancing 50 5

Advantages and Disadvantages of Debt

50 6

Be ne f i t s o f D e b t 50 7

D r a w ba c k s o f D e b t 50 7

E u ro b o n d M a r ke t

50 7

Leasing as a Form of Debt 50 8

Ca p i t a l Le a s e v e r s us O p e r a t i ng Le a s e 50 9

I n c o m e S ta t e m e n t E ff e c t 5 7 0

A d v a n t a g e s o f L e a s i n g 5 70

Summary

51 1

List of Terms

51 1


51 1


51 2

Problems

51 5


51 9

Web

Exercise

52 0

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Contents

XX V

S P Problems 520

Appendix 16A Financial Alternatives for

Distressed Firms 52 1

O ut - o f -Cou r t S e t t le m e n t 5 27

I n -C o u r t S e t tl e m e n t s — F o r m a l

Ba nk r up t c y 52 2

Reorganization 522

Liquidation 522

List of Terms 52 5


Problems 52 6

Appendix 16B Lease versus Purchase

Decision 52 7

Problems 52 9

1 7 C o m m o n a n d P r e fe r re d S to c k F in a n c in g 5 3 0

Common Stockholders' Claim to Income

53 1

The Voting Right 53 2

Cum ul a t i v e V ot ing 53 3

The Right to Purchase New Shares 53 5

T h e U se o f R i g h t s i n F i n a n c i n g 53 6

Rights Required 536

Monetary Value of a Right 536

Ef fe c t o f Ri gh t s on S t oc k h o l d e r s

P os i t i on 53 8

D e s i r a bl e F e a t ur e s o f Ri gh t s O f f e ri ngs

54 0

P oi s on P i l l s 54 0

American Depository Receipts

547

Preferred Stock Financing 54 7

Jus t i f i ca t ion for Preferred Stock 54 2

Investor Interest 542

Summary of Tax Considerations 543

Provisions Associated with Preferred

Stock 54 3

Cumulative D ividends 543

2 Conversion Feature 544

3 Call Feature 54 4

4. Participation Provision 544

5. Floating Rate 544

6. D utch Auction Preferred Stock 544

7. Par Value 54 5

Comparing Features of Common and

Preferred Stock and Debt

54 5

Summary 54 6

Review of Formulas 54 7

List of

Terms

54 8



Problems 55 0


W e b

Exercise 55 6

1 8 D i v id e n d P o lic y a n d R e t a i n e d E a r n i n g s 557

The Marginal Principle of Retained

Earnings 55 8

Li f e Cy c l e G r ow t h a nd D i v i de nds 55 8

D i v ide nd s a s a P a s s i v e V a ri a b le 55 9

A n I n c o m p le t e T h e o ry 55 9

A rg u m e n t s f o r t h e R e le v a n c e o f

D i v i d e n d s 56 0

Dividend Stability

56 7

Other Factors Influencing Dividend

Policy

567

Le ga l Ru l e s 5 67

Ca s h P os i t i on o f t h e F i r m 56 3

A c c e s s t o C a p it a l M a r ke t s 56 3

D e s i r e f o r Con t r o l 56 4

Ta x P os i t i on o f S h a r e h o l de r s 56 4

Dividend Payment Procedures

56 4

Stock Dividend 56 6

A c c o u n t in g C o n s i d e r a t i o n s f o r a St o c k

D i v i de nd 56 6

V a l ue t o t h e I nv e s t or 56 6

P os s i b l e V a l ue o f S t oc k D i vi de n ds 56 7

U s e o f S t oc k D i v i de nds 56 8

Stock Splits

56 8

Reverse Stock Spl i t s 56 9

Repurcha se of Stock as an Alternative to

Dividends 56 9

O t h e r Re a s o ns f or Re p ur c h a s e 5 77

Dividend Reinvestment Plans 57 2

Summary 57 2

List of Terms 57 3


Practice Problems and Solutions 57 3

Problems 57 4

Comprehensive Problem 58 2

W e b Exercise 58 2

S P Problems 583

1 9 C o n v e r t ib l e s W a r ra n t s a n d D e r iv a t iv e s

584

Convertible Securities

58 5

V a l ue o f t h e Con v e rt i bl e Bon d 58 5

I s T h is F o o l s G o l d ? 58 8

A d v a n t a g e s a n d D i s a d v a n t a g e s t o th e

Cor p or a t i on 58 9

F o r c in g C o n v e rs i o n 59 0

A c c o u n t i n g C o n s i d e r a t i o n s w i t h

Conver t ibles 597

Financing through Warrants 59 3

V a l ua t i on o f Wa r ra n t s 59 4

Use of Warrants in Corporate

F i n a n c e 59 6

8/17/2019 57114585X.pdf

9/9

XXVI

Contents

A c c o u n t in g C o n s i d e r a t io n s w it h

Warrants 597

Derivative Securities 598

O p t i ons 598

F u t u r e s 599

Summary

600

Review of Formulas

600

List of Terms 601



Problems

603

Comprehensive Prob lems

607

W e b Exercise

608

P A R T

6

E X P A N D I N G T H E P E R S P E C T I V E O F

C O R P O R A T E F I N A N C E

2 0 E x te r n a l G r o w th t h r o u g h M e r g e r s 6 2

Motives for Business Combinations 613

F i n a n c i a l M o t i ve s 613

N o n f in a n c i a l M o t i ve s

675

M o t i ve s

of

S e l li ng S t oc k h o l de r s

675

Terms

of

Exchange

67 7

Ca s h P ur c h a s e s 677

Stock-for-Stock Exchange 618

Port fol io Effec t 679

Accounting Considerations

in

Mergers

nd

Acquisitions 620

Negotiated versus Tendered Offers 627

Premium O ffers and Stock P rice

Movements 623

Two-Step Buyout 624

Summary 625

List of Terms

625


625

Practice Prob lems and Solutions

626

Problems 627

W e b

Exercise

631

S Problems

632

2 1 In t e rn a t io n a l F i n a n c ia l M a n a g e m e n t

633

The Multinational Corporation: Nature

nd

Environment

636

Exporter 636

Licensing Agreement 636

Joint Venture 636

Fully Owned Foreign Subsidiary 636

Foreign Exchange Rates 637

Fa c t or s I n f l ue nc i ng Ex c h a nge Ra t e s

639

Inflation 639

Interest Rates 639

Balance of Payments 639

Government Policies 640

Other Factors 640

S po t R a t e s a n d F o rw a rd R a t e s 640

Cr os s Ra t e s 642

Managing Foreign Exchange Risk 642

Forward Exchange Market

Hedge

644

Money Market Hedge

644

Currency Futures M arket

Hedge 645

Foreign Investment D ecisions

646

A na l y s i s of P o l i t ic a l Ri s k 648

Financing International Business

Operations

649

F u n d i n g of T r a n s a c t i o n s 650

Eximbank Export-Import Bank) 650

Loans from the Parent Company

or a

Sister Affiliate

650

Eurodollar Loans

652

Eurobond Market 653

International Equity Markets 653

The International Finance

Corporation 655

Some Un settled Issues

in

International

Finance

656

Summary

656

List of Terms

657


658


Problems 659

W e b Exercise 660

S P Problems

661

Appendix 21A Cash

low

Analysis and the

Foreign Investment Decision 661

Appendixes

A 1

Appendix A Future

Value of l, FV

IF

A-2

Appendix

B

Present

Value of l, PV

IF

A-4

Appendix

C

Future

Value

of an Annuity

of

1,FV

IFA

A-6

Appendix D Present Value of an Annuity of

1,PV

IFA

A 8

Glossary G

Indexes

1 1

57114585x.pdf

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