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Introduction to Finance: Markets, Investments, and Financial Management, Fourteenth Edition

Book Description

Business managers will gain a basic understanding of the complex world of finance with this engaging book. It presents a balanced survey of the three main areas of finance: institutions and markets, investments, and financial management. The examples have been completely updated throughout to provide the most relevant information. Discussions of small business practice help them gain a better understanding of small business applications. More focus is placed on ethics to reflect the headlines in today's news. Additional end-of-chapter questions and career-profile features also enable business managers to connect the material to the real world.

Table of Contents

  1. Copyright
  2. PREFACE
    1. LEARNING AND TEACHING AIDS
    2. ACKNOWLEDGMENTS
  3. AUTHOR BIOS
  4. 1. INSTITUTIONS AND MARKETS
    1. 1. The Financial Environment
      1. 1.1. WHAT IS FINANCE?
        1. 1.1.1. TWO THEMES
      2. 1.2. WHY STUDY FINANCE?
      3. 1.3. SIX PRINCIPLES OF FINANCE
        1. 1.3.1. TIME VALUE OF MONEY
        2. 1.3.2. RISK VERSUS RETURN
        3. 1.3.3. DIVERSIFICATION OF RISK
        4. 1.3.4. FINANCIAL MARKETS ARE EFFICIENT
        5. 1.3.5. MANAGEMENT VERSUS OWNER OBJECTIVES
        6. 1.3.6. REPUTATION MATTERS
      4. 1.4. OVERVIEW OF THE FINANCIAL SYSTEM
        1. 1.4.1. CHARACTERISTICS AND REQUIREMENTS
        2. 1.4.2. FINANCIAL SYSTEM COMPONENTS AND FINANCIAL FUNCTIONS
          1. 1.4.2.1. Creating Money
          2. 1.4.2.2. Transferring Money
          3. 1.4.2.3. Accumulating Savings
          4. 1.4.2.4. Lending and Investing Savings
          5. 1.4.2.5. Marketing Financial Assets
          6. 1.4.2.6. Transferring Financial Assets
      5. 1.5. FINANCIAL MARKETS CHARACTERISTICS
        1. 1.5.1. MONEY AND CAPITAL MARKETS
        2. 1.5.2. PRIMARY AND SECONDARY MARKETS
      6. 1.6. MAJOR TYPES OF FINANCIAL MARKETS
      7. 1.7. MORTGAGE MARKETS
        1. 1.7.1. TYPES OF MORTGAGES AND MORTGAGE-BACKED SECURITIES
        2. 1.7.2. CREDIT RATINGS AND SCORES
        3. 1.7.3. MAJOR PARTICIPANTS IN THE SECONDARY MORTGAGE MARKETS
      8. 1.8. THE 2007–09 FINANCIAL CRISIS
      9. 1.9. CAREERS IN FINANCE
      10. 1.10. THE PLAN OF STUDY
      11. 1.11. SUMMARY
      12. 1.12. KEY TERMS
      13. 1.13. DISCUSSION QUESTIONS
      14. 1.14. EXERCISES
    2. 2. Money and the Monetary System
      1. 2.1. PROCESS OF MOVING SAVINGS INTO INVESTMENTS
      2. 2.2. OVERVIEW OF THE MONETARY SYSTEM
      3. 2.3. IMPORTANCE AND FUNCTIONS OF MONEY
      4. 2.4. DEVELOPMENT OF MONEY IN THE UNITED STATES
        1. 2.4.1. PHYSICAL MONEY (COIN AND PAPER CURRENCY)
          1. 2.4.1.1. U.S. Coins
          2. 2.4.1.2. Paper Currency
        2. 2.4.2. DEPOSIT MONEY
      5. 2.5. MONEY MARKET SECURITIES
      6. 2.6. MEASURES OF THE U.S. MONEY SUPPLY
        1. 2.6.1. M1 MONEY SUPPLY
        2. 2.6.2. M2 MONEY SUPPLY
        3. 2.6.3. M3 MONEY SUPPLY
        4. 2.6.4. EXCLUSIONS FROM THE MONEY SUPPLY
      7. 2.7. MONEY SUPPLY AND ECONOMIC ACTIVITY
      8. 2.8. INTERNATIONAL MONETARY SYSTEM
      9. 2.9. SUMMARY
      10. 2.10. KEY TERMS
      11. 2.11. DISCUSSION QUESTIONS
      12. 2.12. EXERCISES
      13. 2.13. PROBLEMS
    3. 3. Banks and Other Financial Institutions
      1. 3.1. TYPES AND ROLES OF FINANCIAL INSTITUTIONS
        1. 3.1.1. DEPOSITORY INSTITUTIONS
        2. 3.1.2. CONTRACTUAL SAVINGS ORGANIZATIONS
        3. 3.1.3. SECURITIES FIRMS
        4. 3.1.4. FINANCE FIRMS
      2. 3.2. OVERVIEW OF THE BANKING SYSTEM
        1. 3.2.1. COMMERCIAL, INVESTMENT, AND UNIVERSAL BANKING
        2. 3.2.2. FUNCTIONS OF BANKS AND THE BANKING SYSTEM
      3. 3.3. HISTORICAL DEVELOPMENT OF THE U.S. BANKING SYSTEM
        1. 3.3.1. BEFORE THE CIVIL WAR
          1. 3.3.1.1. Early Chartered Banks
          2. 3.3.1.2. First Bank of the United States
          3. 3.3.1.3. Second Bank of the United States
          4. 3.3.1.4. State Banks from 1836 to the Civil War
        2. 3.3.2. ENTRY OF THRIFT INSTITUTIONS
      4. 3.4. REGULATION OF THE BANKING SYSTEM
        1. 3.4.1. GENERAL BANKING LEGISLATION
          1. 3.4.1.1. National Banking Act of 1864
          2. 3.4.1.2. Federal Reserve Act of 1913
          3. 3.4.1.3. Depository Institutions Deregulation and Monetary Control Act of 1980
          4. 3.4.1.4. Depository Institutions Deregulation
          5. 3.4.1.5. Monetary Control
          6. 3.4.1.6. Garn–St. Germain Depository Institutions Act of 1982
        2. 3.4.2. THE SAVINGS AND LOAN CRISIS
        3. 3.4.3. PROTECTION OF DEPOSITORS' FUNDS
      5. 3.5. STRUCTURE OF BANKS
        1. 3.5.1. BANK CHARTERS
        2. 3.5.2. DEGREE OF BRANCH BANKING
        3. 3.5.3. BANK HOLDING COMPANIES
      6. 3.6. THE BANK BALANCE SHEET
        1. 3.6.1. ASSETS
          1. 3.6.1.1. Cash and Balances Due from Depository Institutions
          2. 3.6.1.2. Securities
          3. 3.6.1.3. Loans
          4. 3.6.1.4. Other Bank Assets
        2. 3.6.2. LIABILITIES AND OWNERS' CAPITAL
          1. 3.6.2.1. Deposits
          2. 3.6.2.2. Other Liabilities
          3. 3.6.2.3. Owners' Capital
      7. 3.7. BANK MANAGEMENT
        1. 3.7.1. LIQUIDITY MANAGEMENT
          1. 3.7.1.1. Asset Management
          2. 3.7.1.2. Liability Management
        2. 3.7.2. CAPITAL MANAGEMENT
        3. 3.7.3. 2007–09 FINANCIAL CRISIS
      8. 3.8. INTERNATIONAL BANKING AND FOREIGN SYSTEMS
      9. 3.9. SUMMARY
      10. 3.10. KEY TERMS
      11. 3.11. DISCUSSION QUESTIONS
      12. 3.12. EXERCISES
      13. 3.13. PROBLEMS
    4. 4. Federal Reserve System
      1. 4.1. THE U.S. BANKING SYSTEM PRIOR TO THE FED
        1. 4.1.1. WEAKNESSES OF THE NATIONAL BANKING SYSTEM
        2. 4.1.2. THE MOVEMENT TO CENTRAL BANKING
      2. 4.2. STRUCTURE OF THE FEDERAL RESERVE SYSTEM
        1. 4.2.1. MEMBER BANKS
        2. 4.2.2. FEDERAL RESERVE DISTRICT BANKS
          1. 4.2.2.1. Directors and Officers
          2. 4.2.2.2. Federal Reserve Branch Banks
        3. 4.2.3. BOARD OF GOVERNORS
        4. 4.2.4. FEDERAL OPEN MARKET COMMITTEE
        5. 4.2.5. ADVISORY COMMITTEES
        6. 4.2.6. ROLE OF THE CHAIR OF THE FED BOARD OF GOVERNORS
      3. 4.3. MONETARY POLICY FUNCTIONS AND INSTRUMENTS
        1. 4.3.1. OVERVIEW OF RESPONSIBILITIES
        2. 4.3.2. RESERVE REQUIREMENTS
        3. 4.3.3. DISCOUNT RATE POLICY
        4. 4.3.4. OPEN-MARKET OPERATIONS
        5. 4.3.5. IMPLEMENTATION OF MONETARY POLICY
      4. 4.4. FED SUPERVISORY AND REGULATORY FUNCTIONS
        1. 4.4.1. SPECIFIC SUPERVISORY RESPONSIBILITIES
        2. 4.4.2. SPECIFIC REGULATORY RESPONSIBILITIES
      5. 4.5. FED SERVICE FUNCTIONS
        1. 4.5.1. THE PAYMENTS MECHANISM
          1. 4.5.1.1. Coin and Currency
          2. 4.5.1.2. Check Clearance and Collection
          3. 4.5.1.3. Check Clearance among Federal Reserve Districts
          4. 4.5.1.4. Check Clearance through Federal Reserve Branch Banks
          5. 4.5.1.5. Check Routing
        2. 4.5.2. TRANSFER OF CREDIT
        3. 4.5.3. OTHER SERVICE ACTIVITIES
      6. 4.6. CENTRAL BANKS IN OTHER COUNTRIES
      7. 4.7. SUMMARY
      8. 4.8. KEY TERMS
      9. 4.9. DISCUSSION QUESTIONS
      10. 4.10. EXERCISES
      11. 4.11. PROBLEMS
    5. 5. Policy Makers and the Money Supply
      1. 5.1. NATIONAL ECONOMIC POLICY OBJECTIVES
        1. 5.1.1. ECONOMIC GROWTH
        2. 5.1.2. HIGH EMPLOYMENT
        3. 5.1.3. PRICE STABILITY
        4. 5.1.4. BALANCE IN INTERNATIONAL TRANSACTIONS
        5. 5.1.5. THE PERFECT FINANCIAL STORM
      2. 5.2. FOUR POLICY MAKER GROUPS
        1. 5.2.1. ETHICAL BEHAVIOR IN GOVERNMENT
        2. 5.2.2. POLICY MAKERS IN THE EUROPEAN ECONOMIC UNION
      3. 5.3. GOVERNMENT INFLUENCE ON THE ECONOMY
      4. 5.4. POLICY INSTRUMENTS OF THE U.S. TREASURY
        1. 5.4.1. MANAGING THE TREASURY'S CASH BALANCES
          1. 5.4.1.1. Treasury Tax and Loan Accounts
          2. 5.4.1.2. Treasury Receipts and Outlays
        2. 5.4.2. POWERS RELATING TO THE FEDERAL BUDGET AND TO SURPLUSES OR DEFICITS
          1. 5.4.2.1. General Economic Effects of Fiscal Policy
          2. 5.4.2.2. Effects of Tax Policy
          3. 5.4.2.3. Effects of Deficit Financing
        3. 5.4.3. RECENT FINANCIAL CRISIS-RELATED ACTIVITIES
      5. 5.5. DEBT MANAGEMENT
      6. 5.6. CHANGING THE MONEY SUPPLY
        1. 5.6.1. CHECKABLE DEPOSIT EXPANSION
        2. 5.6.2. OFFSETTING OR LIMITING FACTORS
        3. 5.6.3. CONTRACTION OF DEPOSITS
      7. 5.7. FACTORS AFFECTING BANK RESERVES
        1. 5.7.1. CHANGES IN THE DEMAND FOR CURRENCY
        2. 5.7.2. FEDERAL RESERVE SYSTEM TRANSACTIONS
          1. 5.7.2.1. Open-Market Operations
          2. 5.7.2.2. Depository Institution Transactions
          3. 5.7.2.3. Federal Reserve Float
          4. 5.7.2.4. Treasury Transactions
      8. 5.8. THE MONETARY BASE AND THE MONEY MULTIPLIER
      9. 5.9. SUMMARY
      10. 5.10. KEY TERMS
      11. 5.11. DISCUSSION QUESTIONS
      12. 5.12. EXERCISES
      13. 5.13. PROBLEMS
    6. 6. International Finance and Trade
      1. 6.1. GLOBAL OR INTERNATIONAL MONETARY SYSTEM
        1. 6.1.1. DEVELOPMENT OF INTERNATIONAL FINANCE
        2. 6.1.2. HOW THE INTERNATIONAL MONETARY SYSTEM EVOLVED
          1. 6.1.2.1. Before World War I
          2. 6.1.2.2. World War I through World War II: 1915–1944
          3. 6.1.2.3. Bretton Woods Fixed Exchange Rate System: 1945–1972
          4. 6.1.2.4. Flexible Exchange Rate System: 1973–Present
      2. 6.2. EUROPEAN UNIFICATION
        1. 6.2.1. EUROPEAN UNION
        2. 6.2.2. EUROPEAN MONETARY UNION
        3. 6.2.3. THE EURO
      3. 6.3. CURRENCY EXCHANGE MARKETS AND RATES
        1. 6.3.1. CURRENCY EXCHANGE MARKETS
        2. 6.3.2. EXCHANGE RATE QUOTATIONS
        3. 6.3.3. FACTORS THAT AFFECT CURRENCY EXCHANGE RATES
          1. 6.3.3.1. Supply and Demand Relationships
          2. 6.3.3.2. Inflation, Interest Rates, and Other Factors
        4. 6.3.4. CURRENCY EXCHANGE RATE APPRECIATION AND DEPRECIATION
        5. 6.3.5. ARBITRAGE
        6. 6.3.6. EXCHANGE RATE DEVELOPMENTS FOR THE U.S. DOLLAR
      4. 6.4. CONDUCTING BUSINESS INTERNATIONALLY
        1. 6.4.1. MANAGING FOREIGN EXCHANGE RISK
        2. 6.4.2. ETHICAL CONSIDERATIONS
      5. 6.5. FINANCING INTERNATIONAL TRADE
        1. 6.5.1. FINANCING BY THE EXPORTER
          1. 6.5.1.1. Sight and Time Drafts
          2. 6.5.1.2. Bank Assistance in the Collection of Drafts
          3. 6.5.1.3. Financing Through the Exporter's Bank
        2. 6.5.2. FINANCING BY THE IMPORTER
          1. 6.5.2.1. Financing Through the Importer's Bank
          2. 6.5.2.2. Importer Bank Financing—An Example
        3. 6.5.3. BANKERS' ACCEPTANCES
        4. 6.5.4. OTHER AIDS TO INTERNATIONAL TRADE
          1. 6.5.4.1. The Export-Import Bank
          2. 6.5.4.2. Traveler's Letter of Credit
          3. 6.5.4.3. Traveler's Checks
      6. 6.6. BALANCE IN INTERNATIONAL TRANSACTIONS GOAL
        1. 6.6.1. NATURE OF THE PROBLEM
        2. 6.6.2. BALANCE-OF-PAYMENTS ACCOUNTS
      7. 6.7. SUMMARY
      8. 6.8. KEY TERMS
      9. 6.9. DISCUSSION QUESTIONS
      10. 6.10. EXERCISES
      11. 6.11. PROBLEMS
  5. 2. INVESTMENTS
    1. 7. Savings and Investment Process
      1. 7.1. GROSS DOMESTIC PRODUCT AND CAPITAL FORMATION
        1. 7.1.1. GDP COMPONENTS
        2. 7.1.2. IMPLICATIONS OF INTERNATIONAL PAYMENT IMBALANCES
        3. 7.1.3. LINK BETWEEN SAVING AND INVESTMENT
      2. 7.2. FEDERAL GOVERNMENT RECEIPTS AND EXPENDITURES
        1. 7.2.1. THE BUDGET
        2. 7.2.2. FISCAL POLICY MAKERS
        3. 7.2.3. DEBT FINANCING
      3. 7.3. HISTORICAL ROLE AND CREATION OF SAVINGS
        1. 7.3.1. FOREIGN SOURCES OF SAVINGS
        2. 7.3.2. DOMESTIC SUPPLY OF SAVINGS
        3. 7.3.3. CREATION OF SAVINGS
      4. 7.4. MAJOR SOURCES OF SAVINGS
        1. 7.4.1. PERSONAL SAVINGS
        2. 7.4.2. CORPORATE SAVINGS
      5. 7.5. FACTORS AFFECTING SAVINGS
        1. 7.5.1. LEVELS OF INCOME
        2. 7.5.2. ECONOMIC EXPECTATIONS
        3. 7.5.3. ECONOMIC CYCLES
        4. 7.5.4. LIFE STAGES OF THE INDIVIDUAL SAVER
        5. 7.5.5. LIFE STAGES OF THE CORPORATION
      6. 7.6. CAPITAL MARKET SECURITIES
      7. 7.7. A FURTHER LOOK AT THE 2007-09 FINANCIAL CRISIS
        1. 7.7.1. EARLY FACTORS
        2. 7.7.2. A BORROWING-RELATED CULTURAL SHIFT
      8. 7.8. SUMMARY
      9. 7.9. KEY TERMS
      10. 7.10. DISCUSSION QUESTIONS
      11. 7.11. EXERCISES
      12. 7.12. PROBLEMS
    2. 8. Interest Rates
      1. 8.1. SUPPLY AND DEMAND FOR LOANABLE FUNDS
        1. 8.1.1. HISTORICAL CHANGES IN U.S. INTEREST RATE LEVELS
        2. 8.1.2. LOANABLE FUNDS THEORY
          1. 8.1.2.1. Sources of Loanable Funds
          2. 8.1.2.2. Factors Affecting the Supply of Loanable Funds
          3. 8.1.2.3. Effect of Interest Rates on the Demand for Loanable Funds
          4. 8.1.2.4. Roles of the Banking System and of the Government
          5. 8.1.2.5. International Factors Affecting Interest Rates
      2. 8.2. DETERMINANTS OF MARKET INTEREST RATES
      3. 8.3. RISK-FREE SECURITIES: U.S. TREASURY DEBT OBLIGATIONS
        1. 8.3.1. MARKETABLE OBLIGATIONS
          1. 8.3.1.1. Treasury Bills
          2. 8.3.1.2. Treasury Notes
          3. 8.3.1.3. Treasury Bonds
        2. 8.3.2. DEALER SYSTEM
        3. 8.3.3. TAX STATUS OF FEDERAL OBLIGATIONS
        4. 8.3.4. OWNERSHIP OF PUBLIC DEBT SECURITIES
        5. 8.3.5. MATURITY DISTRIBUTION OF MARKETABLE DEBT SECURITIES
      4. 8.4. TERM OR MATURITY STRUCTURE OF INTEREST RATES
        1. 8.4.1. RELATIONSHIP BETWEEN YIELD CURVES AND THE ECONOMY
        2. 8.4.2. TERM STRUCTURE THEORIES
      5. 8.5. INFLATION PREMIUMS AND PRICE MOVEMENTS
        1. 8.5.1. HISTORICAL INTERNATIONAL PRICE MOVEMENTS
          1. 8.5.1.1. Ancient Rome
          2. 8.5.1.2. The Middle Ages Through Modern Times
        2. 8.5.2. INFLATION IN THE UNITED STATES
          1. 8.5.2.1. Revolutionary War
          2. 8.5.2.2. War of 1812
          3. 8.5.2.3. Civil War
          4. 8.5.2.4. World War I
          5. 8.5.2.5. World War II and the Postwar Period
          6. 8.5.2.6. Recent Decades
        3. 8.5.3. TYPES OF INFLATION
          1. 8.5.3.1. Price Changes Initiated by a Change in Costs
          2. 8.5.3.2. Price Changes Initiated by a Change in the Money Supply
          3. 8.5.3.3. Speculation and Administrative Inflation
      6. 8.6. DEFAULT RISK PREMIUMS
      7. 8.7. SUMMARY
      8. 8.8. KEY TERMS
      9. 8.9. DISCUSSION QUESTIONS
      10. 8.10. EXERCISES
      11. 8.11. PROBLEMS
    3. 9. Time Value of Money
      1. 9.1. BASIC CONCEPTS
      2. 9.2. COMPOUNDING TO DETERMINE FUTURE VALUES
        1. 9.2.1. INFLATION OR PURCHASING POWER IMPLICATIONS
      3. 9.3. DISCOUNTING TO DETERMINE PRESENT VALUES
      4. 9.4. EQUATING PRESENT VALUES AND FUTURE VALUES
      5. 9.5. FINDING INTEREST RATES AND TIME REQUIREMENTS
        1. 9.5.1. SOLVING FOR INTEREST RATES
        2. 9.5.2. SOLVING FOR TIME PERIODS
        3. 9.5.3. RULE OF 72
      6. 9.6. FUTURE VALUE OF AN ANNUITY
      7. 9.7. PRESENT VALUE OF AN ANNUITY
      8. 9.8. INTEREST RATES AND TIME REQUIREMENTS FOR ANNUITIES
        1. 9.8.1. SOLVING FOR INTEREST RATES
        2. 9.8.2. SOLVING FOR TIME PERIODS
      9. 9.9. DETERMINING PERIODIC ANNUITY PAYMENTS
        1. 9.9.1. EXAMPLES INVOLVING ANNUAL PAYMENTS
        2. 9.9.2. REAL ESTATE MORTGAGE LOANS WITH MONTHLY PAYMENTS
      10. 9.10. MORE FREQUENT COMPOUNDING OR DISCOUNTING INTERVALS
      11. 9.11. COST OF CONSUMER CREDIT
        1. 9.11.1. UNETHICAL LENDERS
        2. 9.11.2. APR VERSUS EAR
      12. 9.12. SUMMARY
      13. 9.13. KEY TERMS
      14. 9.14. DISCUSSION QUESTIONS
      15. 9.15. EXERCISES
      16. 9.16. PROBLEMS
    4. LE9. LEARNING EXTENSION 9: Annuity Due Problems
      1. LE9.1. FUTURE VALUE OF AN ANNUITY DUE
      2. LE9.2. PRESENT VALUE OF AN ANNUITY DUE
      3. LE9.3. INTEREST RATES AND TIME REQUIREMENTS FOR ANNUITY DUE PROBLEMS
      4. LE9.4. QUESTIONS AND PROBLEMS
    5. 10. Bonds and Stocks: Characteristics and Valuations
      1. 10.1. LONG-TERM EXTERNAL FINANCING SOURCES FOR BUSINESSES
      2. 10.2. DEBT CAPITAL
        1. 10.2.1. WHO BUYS BONDS?
        2. 10.2.2. BOND COVENANTS
        3. 10.2.3. BOND RATINGS
        4. 10.2.4. BONDHOLDER SECURITY
        5. 10.2.5. TIME TO MATURITY
        6. 10.2.6. INCOME FROM BONDS
        7. 10.2.7. GLOBAL BOND MARKET
        8. 10.2.8. READING BOND QUOTES
      3. 10.3. CORPORATE EQUITY CAPITAL
        1. 10.3.1. COMMON STOCK
        2. 10.3.2. PREFERRED STOCK
        3. 10.3.3. READING STOCK QUOTES
      4. 10.4. DIVIDENDS AND STOCK REPURCHASES
        1. 10.4.1. HOW DO FIRMS DECIDE ON THE DOLLAR AMOUNT OF DIVIDENDS?
        2. 10.4.2. STOCK DIVIDENDS AND STOCK SPLITS
        3. 10.4.3. SHARE REPURCHASES
      5. 10.5. VALUATION PRINCIPLES
      6. 10.6. VALUATION OF BONDS
        1. 10.6.1. DETERMINING A BOND'S PRESENT VALUE
        2. 10.6.2. CALCULATING THE YIELD TO MATURITY
        3. 10.6.3. RISK IN BOND VALUATION
          1. 10.6.3.1. Credit Risk
          2. 10.6.3.2. Interest Rate Risk
          3. 10.6.3.3. Reinvestment Rate Risk
          4. 10.6.3.4. Risks of Nondomestic Bonds
      7. 10.7. VALUATION OF STOCKS
        1. 10.7.1. VALUING STOCKS WITH CONSTANT DIVIDENDS
        2. 10.7.2. VALUING STOCKS WITH CONSTANT DIVIDEND GROWTH RATES
        3. 10.7.3. RISK IN STOCK VALUATION
      8. 10.8. VALUATION AND THE FINANCIAL ENVIRONMENT
        1. 10.8.1. GLOBAL ECONOMIC INFLUENCES
        2. 10.8.2. DOMESTIC ECONOMIC INFLUENCES
        3. 10.8.3. INDUSTRY AND COMPETITION
      9. 10.9. SUMMARY
      10. 10.10. KEY TERMS
      11. 10.11. DISCUSSION QUESTIONS
      12. 10.12. PROBLEMS
    6. LE10. LEARNING EXTENSION 10: Annualizing Rates of Return
      1. LE10.1. HOLDING PERIOD RETURNS
      2. LE10.2. ANNUALIZED RATES OF RETURN
      3. LE10.3. PROBLEMS
    7. 11. Securities Markets
      1. 11.1. ISSUING SECURITIES: PRIMARY SECURITIES MARKETS
        1. 11.1.1. PRIMARY MARKET FUNCTIONS OF INVESTMENT BANKERS
          1. 11.1.1.1. Originating
          2. 11.1.1.2. Underwriting
            1. 11.1.1.2.1. Shelf Registration
            2. 11.1.1.2.2. Sell Securities to a Private Party
            3. 11.1.1.2.3. Rights Offerings
            4. 11.1.1.2.4. Competitive Bidding
          3. 11.1.1.3. Selling
        2. 11.1.2. COST OF GOING PUBLIC
          1. 11.1.2.1. Innovations Among Investment Banking Firms
        3. 11.1.3. OTHER FUNCTIONS OF INVESTMENT BANKING FIRMS
      2. 11.2. INVESTMENT BANKING REGULATION
      3. 11.3. TRADING SECURITIES—SECONDARY SECURITIES MARKETS
        1. 11.3.1. ORGANIZED SECURITY EXCHANGES
        2. 11.3.2. STRUCTURE OF THE NEW YORK STOCK EXCHANGE
          1. 11.3.2.1. Listing Securities
        3. 11.3.3. SECURITY TRANSACTIONS
          1. 11.3.3.1.
            1. 11.3.3.1.1. Market Order
            2. 11.3.3.1.2. Limit Order
            3. 11.3.3.1.3. Stop-Loss Order
            4. 11.3.3.1.4. Short Sale
            5. 11.3.3.1.5. Buying on Margin
            6. 11.3.3.1.6. Record Keeping
          2. 11.3.3.2. Over-the-Counter Market
          3. 11.3.3.3. Third and Fourth Security Markets
      4. 11.4. WHAT MAKES A GOOD MARKET?
      5. 11.5. A WORD ON COMMISSIONS
      6. 11.6. SECURITY MARKET INDEXES
      7. 11.7. FOREIGN SECURITIES
      8. 11.8. INSIDE INFORMATION AND OTHER ETHICAL ISSUES
      9. 11.9. CHANGES IN THE STRUCTURE OF THE STOCK MARKET
      10. 11.10. SUMMARY
      11. 11.11. KEY TERMS
      12. 11.12. DISCUSSION QUESTIONS
      13. 11.13. PROBLEMS
    8. LE11. LEARNING EXTENSION 11: Introduction to Futures and Options
      1. LE11.1. WHY DO DERIVATIVES EXIST?
      2. LE11.2. FUTURES CONTRACTS
      3. LE11.3. OPTIONS
      4. LE11.4. OPTION PAYOFF DIAGRAMS
      5. LE11.5. SUMMARY
      6. LE11.6. KEY TERMS
      7. LE11.7. DISCUSSION QUESTIONS
      8. LE11.8. PROBLEMS
    9. 12. Financial Return and Risk Concepts
      1. 12.1. HISTORICAL RETURN AND RISK FOR A SINGLE FINANCIAL ASSET
        1. 12.1.1. ARITHMETIC AVERAGE ANNUAL RATES OF RETURN
        2. 12.1.2. VARIANCE AS A MEASURE OF RISK
        3. 12.1.3. STANDARD DEVIATION AS A MEASURE OF RISK
      2. 12.2. WHERE DOES RISK COME FROM?
      3. 12.3. EXPECTED MEASURES OF RETURN AND RISK
      4. 12.4. HISTORICAL RETURNS AND RISK OF DIFFERENT ASSETS
      5. 12.5. EFFICIENT CAPITAL MARKETS
      6. 12.6. PORTFOLIO RETURNS AND RISK
        1. 12.6.1. EXPECTED RETURN ON A PORTFOLIO
        2. 12.6.2. VARIANCE AND STANDARD DEVIATION OF RETURN ON A PORTFOLIO
        3. 12.6.3. TO DIVERSIFY OR NOT TO DIVERSIFY?
        4. 12.6.4. PORTFOLIO RISK AND THE NUMBER OF INVESTMENTS IN THE PORTFOLIO
        5. 12.6.5. SYSTEMATIC AND UNSYSTEMATIC RISK
      7. 12.7. CAPITAL ASSET PRICING MODEL
      8. 12.8. ETHICS AND JOB OPPORTUNITIES IN INVESTMENTS
      9. 12.9. SUMMARY
      10. 12.10. KEY TERMS
      11. 12.11. DISCUSSION QUESTIONS
      12. 12.12. PROBLEMS
    10. LE12. LEARNING EXTENSION 12: Estimating Beta
      1. LE12.1. SECURITY MARKET LINE
      2. LE12.2. QUESTIONS AND PROBLEMS
  6. 3. FINANCIAL MANAGEMENT
    1. 13. Business Organization and Financial Data
      1. 13.1. STARTING A BUSINESS
        1. 13.1.1. STRATEGIC PLAN WITH A VISION OR MISSION
        2. 13.1.2. BUSINESS AND FINANCIAL GOALS
      2. 13.2. FORMS OF BUSINESS ORGANIZATION IN THE UNITED STATES
        1. 13.2.1. PROPRIETORSHIP
          1. 13.2.1.1. Corporation
      3. 13.3. THE ANNUAL REPORT
      4. 13.4. ACCOUNTING PRINCIPLES
      5. 13.5. INCOME STATEMENT
      6. 13.6. THE BALANCE SHEET
        1. 13.6.1. ASSETS
        2. 13.6.2. LIABILITIES
        3. 13.6.3. OWNERS' EQUITY
      7. 13.7. STATEMENT OF CASH FLOWS
        1. 13.7.1.
          1. 13.7.1.1. Sources
          2. 13.7.1.2. Uses
      8. 13.8. FINANCIAL STATEMENTS OF DIFFERENT COMPANIES
      9. 13.9. GOAL OF A FIRM
        1. 13.9.1. MEASURING SHAREHOLDER WEALTH
        2. 13.9.2. LINKING STRATEGY AND FINANCIAL PLANS
        3. 13.9.3. CRITERION FOR NONPUBLIC FIRMS
        4. 13.9.4. WHAT ABOUT ETHICS?
      10. 13.10. CORPORATE GOVERNANCE
        1. 13.10.1. PRINCIPAL-AGENT PROBLEM
        2. 13.10.2. REDUCING AGENCY PROBLEMS
      11. 13.11. FINANCE IN THE ORGANIZATION CHART
      12. 13.12. SUMMARY
      13. 13.13. KEY TERMS
      14. 13.14. DISCUSSION QUESTIONS
      15. 13.15. PROBLEMS
    2. LE13. LEARNING EXTENSION 13: Federal Income Taxation
      1. LE13.1. DEPRECIATION BASICS
      2. LE13.2. A FEW WORDS ON DEPRECIATION METHODS
      3. LE13.3. QUESTIONS AND PROBLEMS
    3. 14. Financial Analysis and Long-Term Financial Planning
      1. 14.1. FINANCIAL STATEMENT ANALYSIS
      2. 14.2. RATIO ANALYSIS OF BALANCE SHEET AND INCOME STATEMENT
      3. 14.3. TYPES OF FINANCIAL RATIOS
        1. 14.3.1. LIQUIDITY RATIOS AND ANALYSIS
        2. 14.3.2. ASSET MANAGEMENT RATIOS AND ANALYSIS
        3. 14.3.3. FINANCIAL LEVERAGE RATIOS AND ANALYSIS
        4. 14.3.4. PROFITABILITY RATIOS AND ANALYSIS
        5. 14.3.5. MARKET VALUE RATIOS AND ANALYSIS
      4. 14.4. SUMMARY OF RATIO ANALYSIS FOR WALGREENS
      5. 14.5. DU PONT METHOD OF RATIO ANALYSIS
      6. 14.6. LONG-TERM FINANCIAL PLANNING
        1. 14.6.1. PERCENTAGE OF SALES TECHNIQUE
          1. 14.6.1.1. Asset Investment Requirements
          2. 14.6.1.2. Internally Generated Financing
          3. 14.6.1.3. External Financing Requirements
        2. 14.6.2. COST-VOLUME-PROFIT ANALYSIS
        3. 14.6.3. DEGREE OF OPERATING LEVERAGE
      7. 14.7. SUMMARY
      8. 14.8. KEY TERMS
      9. 14.9. DISCUSSION QUESTIONS
      10. 14.10. PROBLEMS
    4. 15. Managing Working Capital
      1. 15.1. OPERATING AND CASH CONVERSION CYCLES
        1. 15.1.1. OPERATING CYCLE
        2. 15.1.2. CASH CONVERSION CYCLE
        3. 15.1.3. DETERMINING THE LENGTH OF THE OPERATING CYCLE AND CASH CONVERSION CYCLE
          1. 15.1.3.1. Inventory Period
          2. 15.1.3.2. Accounts Receivable Period
          3. 15.1.3.3. Average Payment Period
        4. 15.1.4. WORKING CAPITAL REQUIREMENTS
      2. 15.2. CASH BUDGETS
        1. 15.2.1. MINIMUM DESIRED CASH BALANCE
        2. 15.2.2. CASH INFLOWS
        3. 15.2.3. CASH OUTFLOWS
        4. 15.2.4. CONSTRUCTING THE CASH BUDGET
        5. 15.2.5. SEASONAL VERSUS LEVEL PRODUCTION
      3. 15.3. MANAGEMENT OF CURRENT ASSETS
        1. 15.3.1. CASH AND MARKETABLE SECURITIES MANAGEMENT
          1. 15.3.1.1. U.S. Treasury Bills
          2. 15.3.1.2. Federal Funds
          3. 15.3.1.3. Commercial Paper
          4. 15.3.1.4. Negotiable Certificates of Deposit
          5. 15.3.1.5. Bankers' Acceptances
          6. 15.3.1.6. Eurodollars
          7. 15.3.1.7. Municipal Securities
          8. 15.3.1.8. Short-term Investment Policy Statement
          9. 15.3.1.9. The Financial Crisis and Its Impact on Short-term Firm Financing
        2. 15.3.2. GETTING—AND KEEPING—THE CASH
      4. 15.4. ACCOUNTS RECEIVABLE MANAGEMENT
        1. 15.4.1. CREDIT ANALYSIS
        2. 15.4.2. CREDIT-REPORTING AGENCIES
        3. 15.4.3. CREDIT TERMS AND COLLECTION EFFORTS
      5. 15.5. INVENTORY MANAGEMENT
      6. 15.6. TECHNOLOGY AND WORKING CAPITAL MANAGEMENT
        1. 15.6.1. CASH MANAGEMENT
        2. 15.6.2. PROCESSING INVOICES AND FLOAT
        3. 15.6.3. TRACKING INVENTORY
      7. 15.7. SUMMARY
      8. 15.8. KEY TERMS
      9. 15.9. DISCUSSION QUESTIONS
      10. 15.10. PROBLEMS
    5. 16. Short-Term Business Financing
      1. 16.1. STRATEGIES FOR FINANCING WORKING CAPITAL
        1. 16.1.1. MATURITY-MATCHING APPROACH
        2. 16.1.2. AGGRESSIVE APPROACH
        3. 16.1.3. CONSERVATIVE APPROACH
      2. 16.2. FACTORS AFFECTING SHORT-TERM FINANCING
        1. 16.2.1. OPERATING CHARACTERISTICS
          1. 16.2.1.1. Mix of Current and Fixed Assets
          2. 16.2.1.2. Size and Age of the Firm
          3. 16.2.1.3. Growth and Profitability
          4. 16.2.1.4. Seasonal Variation
          5. 16.2.1.5. Sales Trend
          6. 16.2.1.6. Cyclical Variations
        2. 16.2.2. OTHER INFLUENCES IN SHORT-TERM FINANCING
      3. 16.3. PROVIDERS OF SHORT-TERM FINANCING
        1. 16.3.1. COMMERCIAL BANK LENDING
          1. 16.3.1.1. Bank Lines of Credit
          2. 16.3.1.2. Computing Interest Rates
          3. 16.3.1.3. Revolving Credit Agreements
          4. 16.3.1.4. Small Business Administration
        2. 16.3.2. TRADE CREDIT FROM SUPPLIERS
          1. 16.3.2.1. Terms for Trade Credit
          2. 16.3.2.2. Cost of Trade Credit
        3. 16.3.3. COMMERCIAL FINANCE COMPANIES
        4. 16.3.4. COMMERCIAL PAPER
      4. 16.4. ADDITIONAL VARIETIES OF SHORT-TERM FINANCING
        1. 16.4.1. ACCOUNTS RECEIVABLE FINANCING
          1. 16.4.1.1. Pledging Accounts Receivable
          2. 16.4.1.2. Factoring Accounts Receivable
        2. 16.4.2. INVENTORY LOANS
        3. 16.4.3. LOANS SECURED BY STOCKS AND BONDS
        4. 16.4.4. OTHER FORMS OF SECURITY FOR BANK LOANS
          1. 16.4.4.1. Life Insurance Loans
          2. 16.4.4.2. Co-maker Loans
          3. 16.4.4.3. Acceptances
      5. 16.5. THE COST OF SHORT-TERM FINANCING
      6. 16.6. SUMMARY
      7. 16.7. KEY TERMS
      8. 16.8. DISCUSSION QUESTIONS
      9. 16.9. PROBLEMS
    6. 17. Capital Budgeting Analysis
      1. 17.1. MANAGEMENT OF FIXED ASSETS
      2. 17.2. IDENTIFYING POTENTIAL CAPITAL BUDGET PROJECTS
      3. 17.3. CAPITAL BUDGETING PROCESS
      4. 17.4. CAPITAL BUDGETING TECHNIQUES
        1. 17.4.1. NET PRESENT VALUE
          1. 17.4.1.1. Using Spreadsheet Functions
        2. 17.4.2. INTERNAL RATE OF RETURN
        3. 17.4.3. NPV AND IRR
      5. 17.5. MODIFIED INTERNAL RATE OF RETURN
      6. 17.6. PROFITABILITY INDEX
      7. 17.7. CONFLICTS BETWEEN DISCOUNTED CASH FLOW TECHNIQUES
        1. 17.7.1. DIFFERENT CASH FLOW PATTERNS
        2. 17.7.2. DIFFERENT TIME HORIZONS
        3. 17.7.3. DIFFERENT SIZES
      8. 17.8. PAYBACK PERIOD
      9. 17.9. DIFFERENCE BETWEEN THEORY AND PRACTICE
        1. 17.9.1. SAFETY MARGIN
        2. 17.9.2. MANAGERIAL FLEXIBILITY AND OPTIONS
      10. 17.10. ESTIMATING PROJECT CASH FLOWS
        1. 17.10.1. ISOLATING PROJECT CASH FLOWS
          1. 17.10.1.1. Irrelevant Cash Flows
      11. 17.11. APPROACHES TO ESTIMATING PROJECT CASH FLOWS
        1. 17.11.1. CASH FLOW FROM OPERATIONS
        2. 17.11.2. CASH FLOW FROM INVESTMENT ACTIVITIES
        3. 17.11.3. CASH FLOW FROM FINANCING ACTIVITIES
        4. 17.11.4. AN EXAMPLE
        5. 17.11.5. DEPRECIATION AS A TAX SHIELD
      12. 17.12. KEEPING MANAGERS HONEST
      13. 17.13. RISK-RELATED CONSIDERATIONS
      14. 17.14. SUMMARY
      15. 17.15. KEY TERMS
      16. 17.16. DISCUSSION QUESTIONS
      17. 17.17. PROBLEMS
    7. LE17. LEARNING EXTENSION 17: ESTIMATING PROJECT CASH FLOWS
      1. LE17.1. PROJECT STAGES AND CASH FLOW ESTIMATION
        1. LE17.1.1. INITIAL OUTLAY
        2. LE17.1.2. CASH FLOWS DURING THE PROJECT'S OPERATING LIFE
        3. LE17.1.3. SALVAGE VALUE AND NWC RECOVERY AT PROJECT TERMINATION
      2. LE17.2. APPLICATIONS
        1. LE17.2.1. CASH FLOW ESTIMATION FOR A REVENUE EXPANDING PROJECT
        2. LE17.2.2. CASH FLOW ESTIMATION FOR A COST-SAVING PROJECT
        3. LE17.2.3. SETTING A BID PRICE
      3. LE17.3. SUMMARY
      4. LE17.4. DISCUSSION QUESTIONS
      5. LE17.5. PROBLEMS
    8. 18. Capital Structure and the Cost of Capital
      1. 18.1. WHY CHOOSE A CAPITAL STRUCTURE?
        1. 18.1.1. TRENDS IN CORPORATE USE OF DEBT
      2. 18.2. REQUIRED RATE OF RETURN AND THE COST OF CAPITAL
      3. 18.3. COST OF CAPITAL
        1. 18.3.1. COST OF DEBT
        2. 18.3.2. COST OF PREFERRED STOCK
        3. 18.3.3. COST OF COMMON EQUITY
          1. 18.3.3.1. Cost of Retained Earnings: Security Market Line Approach
          2. 18.3.3.2. Cost of Retained Earnings: Constant Dividend Growth Model
        4. 18.3.4. COST OF NEW COMMON STOCK
      4. 18.4. WEIGHTED AVERAGE COST OF CAPITAL
        1. 18.4.1. CAPITAL STRUCTURE WEIGHTS
        2. 18.4.2. MEASURING THE TARGET WEIGHTS
        3. 18.4.3. WHAT DO BUSINESSES USE AS THEIR COST OF CAPITAL?
      5. 18.5. DIFFICULTY OF MAKING CAPITAL STRUCTURE DECISIONS
      6. 18.6. PLANNING GROWTH RATES
        1. 18.6.1. INTERNAL GROWTH RATE
        2. 18.6.2. SUSTAINABLE GROWTH RATE
        3. 18.6.3. EFFECTS OF UNEXPECTEDLY HIGHER (OR LOWER) GROWTH
      7. 18.7. EBIT/EPS ANALYSIS
        1. 18.7.1. INDIFFERENCE LEVEL
      8. 18.8. COMBINED OPERATING AND FINANCIAL LEVERAGE EFFECTS
        1. 18.8.1. UNIT VOLUME VARIABILITY
        2. 18.8.2. PRICE-VARIABLE COST MARGIN
        3. 18.8.3. FIXED COSTS
        4. 18.8.4. DEGREE OF FINANCIAL LEVERAGE
        5. 18.8.5. TOTAL RISK
      9. 18.9. INSIGHTS FROM THEORY AND PRACTICE
        1. 18.9.1. TAXES AND NONDEBT TAX SHIELDS
        2. 18.9.2. BANKRUPTCY COSTS
        3. 18.9.3. AGENCY COSTS
        4. 18.9.4. A FIRM'S ASSETS AND ITS FINANCING POLICY
        5. 18.9.5. THE PECKING ORDER HYPOTHESIS
        6. 18.9.6. MARKET TIMING
        7. 18.9.7. BEYOND DEBT AND EQUITY
      10. 18.10. GUIDELINES FOR FINANCING STRATEGY
        1. 18.10.1.
          1. 18.10.1.1. Business Risk
          2. 18.10.1.2. Taxes and Nondebt Tax Shields
          3. 18.10.1.3. Mix of Tangible and Intangible Assets
          4. 18.10.1.4. Financial Flexibility
          5. 18.10.1.5. Control of the Firm
          6. 18.10.1.6. Profitability
          7. 18.10.1.7. Financial Market Conditions
          8. 18.10.1.8. Management's Attitude Toward Debt and Risk
      11. 18.11. SUMMARY
      12. 18.12. KEY TERMS
      13. 18.13. DISCUSSION QUESTIONS
      14. 18.14. PROBLEMS
  7. A. APPENDIX
  8. GLOSSARY