Finance for Managers - 2012 Book Archive

311 Pages·2012·2.16 MB·English

Finance for Managers
v. 0.1
This is the bookFinance for Managers(v. 0.1).
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Table of Contents
Chapter 1: Why Finance?..................................................................................................... 1
Finance in the World.....................................................................................................................................2
Finance in Business........................................................................................................................................3
Role of Managerial Finance...........................................................................................................................4
Objective of the Firm.....................................................................................................................................5
Chapter 2: Review of Math and Accounting Concepts .................................................. 6
What Do You Know? Math Pre-test..............................................................................................................7
Review of Helpful Math Concepts................................................................................................................8
What Do You Know? Accounting Pre-test...................................................................................................9
Review of Basic Accounting Concepts........................................................................................................10
Chapter 3: Ethics and Finance.......................................................................................... 11
Ethics Foundations.......................................................................................................................................12
Ethics in Finance..........................................................................................................................................16
Ethics in Management.................................................................................................................................18
International Considerations......................................................................................................................21
The Bigger Picture.......................................................................................................................................23
End-of-Chapter Exercises............................................................................................................................25
Chapter 4: Financial Statements and Ratio Analysis .................................................. 27
Income Statement........................................................................................................................................28
The Balance Sheet........................................................................................................................................31
Cash Flow Statement...................................................................................................................................34
Other Statements.........................................................................................................................................36
Ratio Analysis...............................................................................................................................................39
Final Thoughts on Ratio Analysis...............................................................................................................48
Worked Problem: CABS Inc.........................................................................................................................51
End-of-Chapter Assessment........................................................................................................................58
Chapter 5: Pro Forma Statements................................................................................... 60
Pro Forma Income Statement.....................................................................................................................61
Pro Forma Balance Sheet............................................................................................................................64
Assessment of Pro Forma Statements........................................................................................................67
The Bigger Picture.......................................................................................................................................69
End-of-Chapter Problems............................................................................................................................71
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Chapter 6: Time Value of Money: One Cash Flow......................................................... 72
Present Value and Future Value.................................................................................................................73
Interest..........................................................................................................................................................76
Simple Interest.............................................................................................................................................79
Compound Interest......................................................................................................................................81
Solving Compound Interest Problems.......................................................................................................84
Effective Interest Rates................................................................................................................................93
End-of-Chapter Assessment........................................................................................................................95
Chapter 7: Time Value of Money: Multiple Flows........................................................ 97
Multiple Cash Flows.....................................................................................................................................98
Perpetuities.................................................................................................................................................101
Annuities.....................................................................................................................................................105
Loan Amortization.....................................................................................................................................109
End-of-Chapter Assessment......................................................................................................................111
Chapter 8: Securities Markets........................................................................................ 113
Financial Environment: Institutions and Markets.................................................................................114
Regulation of Financial Institutions.........................................................................................................117
Modern History of Financial Crises..........................................................................................................119
Types of Financial and Other Traded Assets...........................................................................................121
The Bigger Picture.....................................................................................................................................124
End-of-Chapter Exercises..........................................................................................................................126
Chapter 9: Interest Rates and Bond Valuation........................................................... 127
Bonds and Interest Rates...........................................................................................................................128
Credit Risk...................................................................................................................................................131
Bond Yield...................................................................................................................................................134
Bond Valuation...........................................................................................................................................138
The Bigger Picture.....................................................................................................................................142
End-of-Chapter Problems..........................................................................................................................144
Chapter 10: Stock Valuation........................................................................................... 146
Common and Preferred Stocks.................................................................................................................147
Dividend Discount Model..........................................................................................................................150
Market Multiples Approach......................................................................................................................155
Free Cash Flow Approach..........................................................................................................................157
The Bigger Picture.....................................................................................................................................160
End-of-Chapter Problems..........................................................................................................................162
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Chapter 11: Assessing Risk.............................................................................................. 165
Risk and Return Basics..............................................................................................................................166
Portfolios.....................................................................................................................................................169
Market Efficiency.......................................................................................................................................171
Standard Deviation....................................................................................................................................174
Market History...........................................................................................................................................178
The Capital Asset Pricing Model (CAPM).................................................................................................180
The Bigger Picture.....................................................................................................................................185
End-of-Chapter Exercises..........................................................................................................................187
Chapter 12: Cost of Capital.............................................................................................. 188
The Cost of Capital Overview....................................................................................................................189
Cost of Debt.................................................................................................................................................191
Cost of Preferred Stock..............................................................................................................................193
Cost of Common Stock...............................................................................................................................195
Weighted Average Cost of Capital (WACC)..............................................................................................199
WACC and Investment Decisions..............................................................................................................203
Bigger Picture.............................................................................................................................................206
End-of-Chapter Problems..........................................................................................................................208
Chapter 13: Capital Budgeting Decision Making........................................................ 209
Introduction to Capital Budgeting Techniques......................................................................................210
Payback Period...........................................................................................................................................212
Net Present Value......................................................................................................................................216
Internal Rate of Return.............................................................................................................................220
Other Methods............................................................................................................................................224
Comparing Projects with Unequal Lives..................................................................................................227
Approaches for Dealing with Risk............................................................................................................229
The Bigger Picture.....................................................................................................................................232
End-of-Chapter Assessment Problems.....................................................................................................234
Chapter 14: Capital Budgeting Cash Flows.................................................................. 235
Which Cash Flows Should I Include?........................................................................................................236
Capital Spending and Salvage Value........................................................................................................237
Operating Cash Flows................................................................................................................................238
Changes in Net Working Capital...............................................................................................................239
Making the Investment Decision..............................................................................................................240
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Chapter 15: Raising Capital and Capital Structure.................................................... 241
Life Cycle of a Firm.....................................................................................................................................242
Leverage......................................................................................................................................................245
Capital Structure........................................................................................................................................248
Choosing the Optimal Capital Structure..................................................................................................250
The Bigger Picture.....................................................................................................................................253
End-of-Chapter Problems..........................................................................................................................255
Chapter 16: Dividend Policy ........................................................................................... 256
Dividend Basics...........................................................................................................................................257
Dividend Policy...........................................................................................................................................258
Other Forms of Dividends.........................................................................................................................259
Chapter 17: Cash and Cash Conversion Cycle ............................................................. 260
Cash Budgets...............................................................................................................................................263
Net Working Capital Basics.......................................................................................................................266
Cash Conversion Cycle...............................................................................................................................271
The Bigger Picture.....................................................................................................................................278
End-of-Chapter Problems..........................................................................................................................280
Chapter 18: Current Liabilities Management ............................................................. 281
Accounts Payable Management................................................................................................................282
Accruals Management...............................................................................................................................283
Short-term Loans.......................................................................................................................................284
Secured Sources of Funds..........................................................................................................................285
Chapter 19: International Considerations................................................................... 286
Multinational Corporations and their Environments............................................................................287
Multinational vs. Domestic Financial Management...............................................................................288
Exchange Rate Risk....................................................................................................................................289
Other Risk Factors......................................................................................................................................290
Investment Decisions.................................................................................................................................291
International Mergers and Joint Ventures..............................................................................................292
Chapter 20: Derivatives and Hedging........................................................................... 293
Convertible Securities...............................................................................................................................294
Futures........................................................................................................................................................295
Options........................................................................................................................................................296
Hedging Risk...............................................................................................................................................297
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Chapter 21: Mergers, Acquisitions, and Divestitures ............................................... 298
Mergers and Acquisitions..........................................................................................................................299
LBOs and Divestitures................................................................................................................................300
Reorganization and Bankruptcy...............................................................................................................301
Chapter 22: Self-Test Exam............................................................................................. 302
Self-Test Exam Part I.................................................................................................................................303
Self-Test Exam Part II................................................................................................................................304
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Chapter 1
Why Finance?
PLEASE NOTE: This book is currently in draft form; material is not final.
1
Chapter 1 Why Finance?
1.1 Finance in the World
PLEASE NOTE: This book is currently in draft form; material is not final.
2
Chapter 1 Why Finance?
1.2 Finance in Business
PLEASE NOTE: This book is currently in draft form; material is not final.
3