Preface v
Acknowledgements xii
Part I: Basic Financial Principles
1 Introduction to Finance 1
Introduction 2
1.1 Why Study Finance?
1.2 What Is Finance? 3
1.3 Four Principles of Finance 5
1.4 The Financial System 9
1.5 Financial Functions 12
1.6 Types of Financial Institutions 15
1.7 Types of Financial Markets 18
1.8 Types of Securities 20
1.9 International Securities and Markets 24
2 Money and Interest Rates 37
Introduction 38
2.1 Overview of the Monetary System 38
2.2 The Federal Reserve System 40
2.3 The Development of Money in the United States 47
2.4 U.S. Money Supply Today 49
2.5 Money Supply and Economic Activity 53
2.6 Interest: The Cost of Money 56
2.7 Structure of Interest Rates 60
2.8 The Yield Curve 63
3 Time Value of Money 80
Introduction 81
3.1 The Math of Finance 81
3.2 Compounding to Determine Future Values 83
3.3 Inflation or Purchasing Power Implications 87
3.4 Discounting to Determine Present Value 88
3.5 Finding Interest Rates and Time Requirements 89
3.6 Future Value of an Annuity 92
3.7 Future Value of an Annuity Due 97
3.8 Frequent Compounding or Discounting Intervals 99
3.9 APR Versus EAR 100
3.10 Cost of Consumer Credit 102
4 Financial Statements, Cash Flow and Taxes 110
Introduction 111
4.1 Overview of Financial Statements 111
4.2 U.S. Business Organizations 112
4.3 Starting a Business 116
4.4 Annual Reports 117
4.5 Balance Sheet 119
4.6 Income Statement 124
4.7 Cash Flow Statement 126
4.8 Financial Statements of Different Companies 129
4.9 Our Federal Tax System 133
5 Analysis of Financial Statements 150
Introduction 151
5.1 Financial Statement Analysis 151
5.2 Ratio Analysis 152
5.3 Types of Financial Ratios 154
5.4 Du Pont Method of Ratio Analysis 174
5.5 Long-Term Financial Planning 177
5.6 Cost-Volume-Profit Analysis 178
Part II: Using Financial Principles in Business
6 The Basics of Capital Budgeting 189
Introduction 190
6.1 Overview of Capital Budgeting 190
6.2 Capital Budgeting Decisions 191
6.3 Capital Budgeting Techniques 196
7 Cash Flow Estimation and Risk Analysis 210
Introduction 211
7.1 Cash Flows and Competitive Advantage 211
7.2 Isolating Project Cash Flows 212
7.3 Approaches to Estimating Project Cash Flows 212
7.4 Risk-Related Considerations 219
7.5 Strategic Analysis 221
7.6 Real-Opinion Analysis 223
8 Managing Working Capital 232
Introduction 233
8.1 Identifying Working Capital 233
8.2 Operating Cash and conversion Cycles 234
8.3 Working Capital Requirements 239
8.4 Cash Budgets 243
8.5 Seasonal Versus Level Production 248
8.6 Management of Current Assets 251
8.7 Getting-and Keeping-the Cash 258
8.8 Accounts Receivable Management and Credit Analysis 261
8.9 Inventory Management 265
8.10 Technology and Managing Working Capital 267
9 Short-Term Business Financing 280
9.1 Strategies for Financing Working Capital 281
9.2 Factors Affecting Short-Term Financing 285
9.3 Short-Term Financing Sources 289
9.4 Computing Interest Rates 298
9.5 Asset-Based Lending for Short-Term Financing 299
9.6 Other Forms of Security 305
9.7 The Cost of Short-Term Financing 306
10 Risk and Rate of Return 316
Introduction 317
10.1 Historical Return and Risk for a Single Asset 317
10.2 Expected Measures of Return and Risk Self-Check 327
10.3 Historical Returns and Risk of Different Assets 328
10.4 Efficient Capital Markets 330
10.5 Portfolio Returns and Risk 333
10.6 Diversification 337
10.7 Portfolio Risk and the Number of Investments 339
10.8 Capital Asset Pricing Model 341
11 Capital Structure and the Cost of Capital 352
Introduction 353
11.1 Capital Structure 353
11.2 Required Rate of Return and the Cost of Capital 357
11.3 Weighted Average Cost of Capital 363
11.4 Making Capital Structure Decisions 366
11.5 Planning Growth Rates 367
11.6 EBIT/EPS Analysis 371
11.7 Combined Operating and Financial Leverage Effects 375
11.8 Other Costs and Risks 379
11.9 Debt and Equity 381
Part III: Stocks, Bonds, and the International Market
12 Stocks and the Markets: Trading Securities 388
12.1 Types of Common Stock 389
12.2 Preferred Stock 392
12.3 The New York Stock Exchange 394
12.4 Stock Transactions 398
12.5 Initial Public Offerings (IPOs) 402
12.6 Direct and Indirect Costs of Going Public 408
12.7 Trading Securities - Secondary Securities Markets 409
12.8 A Word on Commissions 413
12.9 Security Market Indexes 414
12.10 Inside Information and Other Ethical Issues 416
13 Distributions to Stockholders 431
Introduction 432
13.1 Dividends versus Capital Gains 432
13.2 Estimating future Dividends 433
13.3 Dividend Stability and Dividend Policy 434
13.4 Constant Growth Stocks 435
13.5 Reading Stock Quotes 438
13.6 Tracking Stocks 440
13.7 Evaluating the Corporation 441
13.8 Stock Options 444
13.9 Dividend Reinvestment Plans 447
14 Annuities, Bonds, Futures and Options 456
14.1 Annuities 457
14.2 Bonds 458
14.3 Bondholder Security 464
14.4 Other Types of Bonds 466
14.5 Bond Income and Strategies 469
14.6 Global Bond Market 471
14.7 Reading Bond Quotes 472
14.8 Futures and Options 473
15 International Trade and Finance 487
15.1 International Monetary System 488
15.2 European Unification 491
15.3 Currency Exchange Markets and Rates 493
15.4 Investing Overseas 496
15.5 Arbitrage 498
15.6 Exchange Rate Developments for the U.S. Dollar 498
15.7 Conducting Business Internationally 500
15.8 Financing International Trade 502
15.9 Other Aids to International Trade 511
15.10 Balance in International Trade 511
Appendices 523
Glossary 533
Index 555
