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Introduction to Finance: Markets, Investments, and Financial Management, 15th Edition

Book Description

The fifteenth edition of Introduction to Finance: Markets, Investments, and Financial Management builds upon the successes of its earlier editions while maintaining a fresh and up-to-date coverage of the field of finance.

Distinguished authors Ron Melicher and Edgar Norton continue to cover the three major financial areas: institutions and markets, investments, and financial management. Their effective structure equips instructors with maximum flexibility for how the course is taught, and students with an integrated perspective of the different foundations of finance.

This survey of the basic knowledge, concepts, and terms of the discipline is appropriate for all students. For those who do not plan to take additional courses in finance, it provides a valuable overview. For those who want to take additional coursework in finance, it provides a solid foundation for their future studies and careers.

Table of Contents

  1. Cover Page
  2. Title Page
  3. Dedication
  4. Copyright
  5. PREFACE
    1. LEARNING AND TEACHING AIDS
    2. ACKNOWLEDGMENTS
    3. FEATURES OF THIS BOOK
  6. AUTHOR BIOS
  7. Brief Contents
  8. Contents
  9. PART 1: INSTITUTIONS AND MARKETS
    1. CHAPTER 1: The Financial Environment
      1. HOW HAS THE FINANCIAL ENVIRONMENT CHANGED?
      2. WHAT IS FINANCE?
      3. WHY STUDY FINANCE?
      4. CAREERS IN FINANCE
      5. SIX PRINCIPLES OF FINANCE
      6. OVERVIEW OF THE FINANCIAL SYSTEM
      7. FINANCIAL MARKETS CHARACTERISTICS
      8. MAJOR TYPES OF FINANCIAL MARKETS
      9. THE PLAN OF STUDY
      10. SUMMARY
      11. KEY TERMS
      12. DISCUSSION QUESTIONS
      13. EXERCISES
    2. CHAPTER 2: Money and the Monetary System
      1. THE 2007–2008 FINANCIAL CRISIS
      2. PROCESS OF MOVING SAVINGS INTO INVESTMENTS
      3. OVERVIEW OF THE MONETARY SYSTEM
      4. IMPORTANCE AND FUNCTIONS OF MONEY
      5. DEVELOPMENT OF MONEY IN THE UNITED STATES
      6. MONEY MARKET SECURITIES
      7. MEASURES OF THE U.S. MONEY SUPPLY
      8. MONEY SUPPLY AND ECONOMIC ACTIVITY
      9. INTERNATIONAL MONETARY SYSTEM
      10. SUMMARY
      11. KEY TERMS
      12. DISCUSSION QUESTIONS
      13. EXERCISES
      14. PROBLEMS
    3. CHAPTER 3: Banks and Other Financial Institutions
      1. FINANCIAL INSTITUTION DISTRESS DURING THE FINANCIAL CRISIS
      2. TYPES AND ROLES OF FINANCIAL INSTITUTIONS
      3. OVERVIEW OF THE BANKING SYSTEM
      4. HISTORICAL DEVELOPMENT OF THE U.S. BANKING SYSTEM
      5. REGULATION OF THE BANKING SYSTEM
      6. STRUCTURE OF BANKS
      7. THE BANK BALANCE SHEET
      8. BANK MANAGEMENT
      9. INTERNATIONAL BANKING AND FOREIGN SYSTEMS
      10. SUMMARY
      11. KEY TERMS
      12. DISCUSSION QUESTIONS
      13. EXERCISES
      14. PROBLEMS
    4. CHAPTER 4: The Federal Reserve System
      1. U.S. CENTRAL BANK RESPONSE TO THE FINANCIAL CRISIS AND GREAT RECESSION
      2. THE U.S. BANKING SYSTEM PRIOR TO THE FED
      3. STRUCTURE OF THE FEDERAL RESERVE SYSTEM
      4. MONETARY POLICY FUNCTIONS AND INSTRUMENTS
      5. FED SUPERVISORY AND REGULATORY FUNCTIONS
      6. FED SERVICE FUNCTIONS
      7. CENTRAL BANKS IN OTHER COUNTRIES
      8. SUMMARY
      9. KEY TERMS
      10. DISCUSSION QUESTIONS
      11. EXERCISES
      12. PROBLEMS
    5. CHAPTER 5: Policy Makers and the Money Supply
      1. NATIONAL ECONOMIC POLICY OBJECTIVES
      2. FOUR POLICY MAKER GROUPS
      3. GOVERNMENT REACTION TO THE PERFECT FINANCIAL STORM
      4. GOVERNMENT INFLUENCE ON THE ECONOMY
      5. POLICY INSTRUMENTS OF THE U.S. TREASURY
      6. AMOUNT OF NATIONAL DEBT AND DEBT MANAGEMENT
      7. CHANGING THE MONEY SUPPLY
      8. FACTORS AFFECTING BANK RESERVES
      9. THE MONETARY BASE AND THE MONEY MULTIPLIER
      10. SUMMARY
      11. KEY TERMS
      12. DISCUSSION QUESTIONS
      13. EXERCISES
      14. PROBLEMS
    6. CHAPTER 6: International Finance and Trade
      1. GLOBAL OR INTERNATIONAL MONETARY SYSTEM
      2. EUROPEAN UNIFICATION
      3. CURRENCY EXCHANGE MARKETS AND RATES
      4. CONDUCTING BUSINESS INTERNATIONALLY
      5. FINANCING INTERNATIONAL TRADE
      6. BALANCE IN INTERNATIONAL TRANSACTIONS GOAL
      7. SUMMARY
      8. KEY TERMS
      9. DISCUSSION QUESTIONS
      10. EXERCISES
      11. PROBLEMS
  10. PART 2: INVESTMENTS
    1. CHAPTER 7: Savings and the Investment Process
      1. GROSS DOMESTIC PRODUCT AND CAPITAL FORMATION
      2. FEDERAL GOVERNMENT RECEIPTS AND EXPENDITURES
      3. HISTORICAL ROLE AND CREATION OF SAVINGS
      4. MAJOR SOURCES OF SAVINGS
      5. FACTORS AFFECTING SAVINGS
      6. CAPITAL MARKET SECURITIES
      7. MORTGAGE MARKETS
      8. A FURTHER LOOK AT THE 2007–2008 FINANCIAL CRISIS
      9. SUMMARY
      10. KEY TERMS
      11. DISCUSSION QUESTIONS
      12. EXERCISES
      13. PROBLEMS
    2. CHAPTER 8: Interest Rates
      1. SUPPLY AND DEMAND FOR LOANABLE FUNDS
      2. DETERMINANTS OF MARKET INTEREST RATES
      3. RISK-FREE SECURITIES: U.S. TREASURY DEBT OBLIGATIONS
      4. TERM OR MATURITY STRUCTURE OF INTEREST RATES
      5. INFLATION PREMIUMS AND PRICE MOVEMENTS
      6. DEFAULT RISK PREMIUMS
      7. SUMMARY
      8. KEY TERMS
      9. DISCUSSION QUESTIONS
      10. EXERCISES
      11. PROBLEMS
    3. CHAPTER 9: Time Value of Money
      1. PRINCIPLES OF FINANCE
      2. BASIC CONCEPTS
      3. COMPOUNDING TO DETERMINE FUTURE VALUES
      4. DISCOUNTING TO DETERMINE PRESENT VALUES
      5. EQUATING PRESENT VALUES AND FUTURE VALUES
      6. FINDING INTEREST RATES AND TIME REQUIREMENTS
      7. FUTURE VALUE OF AN ANNUITY
      8. PRESENT VALUE OF AN ANNUITY
      9. INTEREST RATES AND TIME REQUIREMENTS FOR ANNUITIES
      10. DETERMINING PERIODIC ANNUITY PAYMENTS
      11. MORE FREQUENT COMPOUNDING OR DISCOUNTING INTERVALS
      12. COST OF CONSUMER CREDIT
      13. SUMMARY
      14. KEY TERMS
      15. DISCUSSION QUESTIONS
      16. EXERCISES
      17. PROBLEMS
    4. LEARNING EXTENSION 9: Annuity Due Problems
      1. FUTURE VALUE OF AN ANNUITY DUE
      2. PRESENT VALUE OF AN ANNUITY DUE
      3. INTEREST RATES AND TIME REQUIREMENTS FOR ANNUITY DUE PROBLEMS
      4. PROBLEMS
    5. CHAPTER 10: Bonds and Stocks: Characteristics and Valuations
      1. LONG-TERM EXTERNAL FINANCING SOURCES FOR BUSINESSES
      2. DEBT CAPITAL
      3. CORPORATE EQUITY CAPITAL
      4. READING STOCK QUOTES
      5. DIVIDENDS AND STOCK REPURCHASES
      6. STOCK DIVIDENDS AND STOCK SPLITS
      7. VALUATION PRINCIPLES
      8. VALUATION OF BONDS
      9. VALUATION OF STOCKS
      10. VALUATION AND THE FINANCIAL ENVIRONMENT
      11. SUMMARY
      12. KEY TERMS
      13. DISCUSSION QUESTIONS
      14. EXERCISES
    6. LEARNING EXTENSION 10: Annualizing Rates of Return
      1. HOLDING PERIOD RETURNS
      2. ANNUALIZED RATES OF RETURN
      3. PROBLEMS
    7. CHAPTER 11: Securities and Markets
      1. ISSUING SECURITIES: PRIMARY SECURITIES MARKETS
      2. THE FACEBOOK IPO
      3. TRADING SECURITIES—SECONDARY SECURITIES MARKETS
      4. STRUCTURE OF THE NEW YORK STOCK EXCHANGE
      5. WHAT MAKES A GOOD MARKET?
      6. A WORD ON COMMISSIONS
      7. SECURITY MARKET INDEXES
      8. FOREIGN SECURITIES
      9. INSIDE INFORMATION AND OTHER ETHICAL ISSUES
      10. CHANGES IN THE STRUCTURE OF THE STOCK MARKET
      11. SUMMARY
      12. KEY TERMS
      13. DISCUSSION QUESTIONS
      14. PROBLEMS
    8. LEARNING EXTENSION 11: Introduction to Futures and Options
      1. WHY DO DERIVATIVES EXIST?
      2. FUTURES CONTRACTS
      3. OPTIONS
      4. OPTION PAYOFF DIAGRAMS
      5. SUMMARY
      6. KEY TERMS
      7. DISCUSSION QUESTIONS
      8. PROBLEMS
    9. CHAPTER 12: Financial Returns and Risk Concepts
      1. HISTORICAL RETURN AND RISK FOR A SINGLE FINANCIAL ASSET
      2. WHERE DOES RISK COME FROM?
      3. EXPECTED MEASURES OF RETURN AND RISK
      4. HISTORICAL RETURNS AND RISK OF DIFFERENT ASSETS
      5. EFFICIENT CAPITAL MARKETS
      6. PORTFOLIO RETURNS AND RISK
      7. CAPITAL ASSET PRICING MODEL (CAPM)
      8. ETHICS AND JOB OPPORTUNITIES IN INVESTMENTS
      9. SUMMARY
      10. KEY TERMS
      11. DISCUSSION QUESTIONS
      12. PROBLEMS
    10. LEARNING EXTENSION 12: Estimating Beta
      1. SECURITY MARKET LINE
      2. QUESTIONS AND PROBLEMS
  11. PART 3: FINANCIAL MANAGEMENT
    1. CHAPTER 13: Business Organization and Financial Data
      1. STARTING A BUSINESS
      2. FORMS OF BUSINESS ORGANIZATION IN THE UNITED STATES
      3. THE ANNUAL REPORT
      4. ACCOUNTING PRINCIPLES
      5. INCOME STATEMENT
      6. THE BALANCE SHEET
      7. STATEMENT OF CASH FLOWS
      8. FINANCIAL STATEMENTS OF DIFFERENT COMPANIES
      9. THE AUTO BAILOUT AND FINANCIAL STATEMENTS
      10. GOAL OF A FIRM
      11. CORPORATE GOVERNANCE
      12. FINANCE IN THE ORGANIZATION CHART
      13. SUMMARY
      14. KEY TERMS
      15. DISCUSSION QUESTIONS
      16. PROBLEMS
    2. LEARNING EXTENSION 13: Federal Income Taxation
      1. DEPRECIATION BASICS
      2. A FEW WORDS ON DEPRECIATION METHODS
      3. QUESTIONS AND PROBLEMS
    3. CHAPTER 14: Financial Analysis and Long-Term Financial Planning
      1. FINANCIAL STATEMENT ANALYSIS
      2. RATIO ANALYSIS OF BALANCE SHEET AND INCOME STATEMENT
      3. TYPES OF FINANCIAL RATIOS
      4. SUMMARY OF RATIO ANALYSIS FOR WALGREENS
      5. DUPONT METHOD OF RATIO ANALYSIS
      6. LONG-TERM FINANCIAL PLANNING
      7. SUMMARY
      8. KEY TERMS
      9. DISCUSSION QUESTIONS
      10. PROBLEMS
    4. CHAPTER 15: Managing Working Capital
      1. OPERATING AND CASH CONVERSION CYCLES
      2. CASH BUDGETS
      3. MANAGEMENT OF CURRENT ASSETS
      4. ACCOUNTS RECEIVABLE MANAGEMENT
      5. INVENTORY MANAGEMENT
      6. TECHNOLOGY AND WORKING CAPITAL MANAGEMENT
      7. SUMMARY
      8. KEY TERMS
      9. DISCUSSION QUESTIONS
      10. PROBLEMS
    5. CHAPTER 16: Short-Term Business Financing
      1. STRATEGIES FOR FINANCING WORKING CAPITAL
      2. FACTORS AFFECTING SHORT-TERM FINANCING
      3. PROVIDERS OF SHORT-TERM FINANCING
      4. ADDITIONAL VARIETIES OF SHORT-TERM FINANCING
      5. THE COST OF SHORT-TERM FINANCING
      6. SUMMARY
      7. KEY TERMS
      8. DISCUSSION QUESTIONS
      9. PROBLEMS
    6. CHAPTER 17: Capital Budgeting Analysis
      1. MANAGEMENT OF FIXED ASSETS
      2. IDENTIFYING POTENTIAL CAPITAL BUDGET PROJECTS
      3. CAPITAL BUDGETING PROCESS
      4. CAPITAL BUDGETING TECHNIQUES
      5. MODIFIED INTERNAL RATE OF RETURN
      6. PROFITABILITY INDEX
      7. CONFLICTS BETWEEN DISCOUNTED CASH FLOW TECHNIQUES
      8. PAYBACK PERIOD
      9. DIFFERENCES BETWEEN THEORY AND PRACTICE
      10. ESTIMATING PROJECT CASH FLOWS
      11. APPROACHES TO ESTIMATING PROJECT CASH FLOWS
      12. KEEPING MANAGERS HONEST
      13. RISK-RELATED CONSIDERATIONS
      14. SUMMARY
      15. KEY TERMS
      16. DISCUSSION QUESTIONS
      17. PROBLEMS
    7. LEARNING EXTENSION 17: Estimating Project Cash Flows
      1. PROJECT STAGES AND CASH FLOW ESTIMATION
      2. APPLICATIONS
      3. SUMMARY
      4. DISCUSSION QUESTIONS
      5. PROBLEMS
    8. CHAPTER 18: Capital Structure and the Cost of Capital
      1. WHY CHOOSE A CAPITAL STRUCTURE?
      2. REQUIRED RATE OF RETURN AND THE COST OF CAPITAL
      3. COST OF CAPITAL
      4. WEIGHTED AVERAGE COST OF CAPITAL (WACC)
      5. DIFFICULTY OF MAKING CAPITAL STRUCTURE DECISIONS
      6. PLANNING GROWTH RATES
      7. EBIT/EPS ANALYSIS
      8. COMBINED OPERATING AND FINANCIAL LEVERAGE EFFECTS
      9. INSIGHTS FROM THEORY AND PRACTICE
      10. GUIDELINES FOR FINANCING STRATEGY
      11. SUMMARY
      12. KEY TERMS
      13. DISCUSSION QUESTIONS
      14. PROBLEMS
  12. APPENDIX
  13. GLOSSARY
  14. INDEX