Fundamentals of Corporate Finance Standard Edition (Mcgraw-Hill/Irwin Series in Finance, Insurance, and Real Estate)

"The best-selling Fundamentals of Corporate Finance (FCF) has three basic themes that are the central focus of the book: 1) An emphasis on intuition--the authors separate and explain the principles at work on a common sense, intuitive level before launching into any specifics. 2) A unified valuation approach--net present value (NPV) is treated as the basic concept underlying corporate finance. 3) A managerial focus--the authors emphasize the role of the financial manager as decision maker, and they stress the need for managerial input and judgment. The Tenth Edition continues the tradition of excellence that has earned Fundamentals of Corporate Finance its status as market leader. Every chapter has been updated to provide the most current examples that reflect corporate finance in today's world. The supplements package has been updated and improved, and with the enhanced Connect Finance and Excel Master, student and instructor support has never been stronger."--Publisher's website Cover Page 1 connect 2 Half Title Page 6 The McGraw-Hill/Irwin Series in Finance, Insurance, and Real Estate 7 Title Page 8 Copyright Page 9 Dedication 10 About the Author 12 Preface from the Authors 14 Coverage 15 In-Text Study Features 20 Comprehensive Teaching and Learning Package 27 Acknowledgments 31 Brief Contents 34 Table of Content 36 In Their Own Words Boxes 46 Part 1 Overview of Corporate Finance 48 CHAPTER 1 INTRODUCTION TO CORPORATE FINANCE 48 1.1 Corporate Finance and the Financial Manager 49 What Is Corporate Finance? 49 The Financial Manager 49 Financial Management Decisions 49 Capital Budgeting 49 Capital Structure 50 Working Capital Management 51 Conclusion 51 1.2 Forms of Business Organization 51 Sole Proprietorship 51 Partnership 52 Corporation 52 A Corporation by Another Name . . . 54 1.3 The Goal of Financial Management 54 Possible Goals 55 The Goal of Financial Management 55 A More General Goal 56 Sarbanes-Oxley 56 1.4 The Agency Problem and Control of the Corporation 57 Agency Relationships 57 Management Goals 57 Do Managers Act in the Stockholders’ Interests? 58 Managerial Compensation 58 Control of the Firm 59 Conclusion 59 Stakeholders 59 1.5 Financial Markets and the Corporation 60 Cash Flows to and from the Firm 61 Primary versus Secondary Markets 61 Primary Markets 61 Secondary Markets 62 Dealer versus Auction Markets 62 Trading in Corporate Securities 62 Listing 63 1.6 Summary and Conclusions 63 CHAPTER 2 FINANCIAL STATEMENTS, TAXES, AND CASH FLOW 67 2.1 The Balance Sheet 68 Assets: The Left Side 68 Liabilities and Owners’ Equity: The Right Side 68 Net Working Capital 69 Liquidity 70 Debt versus Equity 71 Market Value versus Book Value 71 2.2 The Income Statement 72 GAAP and the Income Statement 73 Noncash Items 74 Time and Costs 74 2.3 Taxes 76 Corporate Tax Rates 77 Average versus Marginal Tax Rates 77 2.4 Cash Flow 79 Cash Flow from Assets 79 Operating Cash Flow 80 Capital Spending 80 Change in Net Working Capital 81 Conclusion 81 A Note about “Free” Cash Flow 82 Cash Flow to Creditors and Stockholders 82 Cash Flow to Creditors 82 Cash Flow to Stockholders 82 An Example: Cash Flows for Dole Cola 84 Operating Cash Flow 84 Net Capital Spending 85 Change in NWC and Cash Flow from Assets 85 Cash Flow to Stockholders and Creditors 85 2.5 Summary and Conclusions 86 PART 2 Financial Statements and Long-Term Financial Planning 95 CHAPTER 3 WORKING WITH FINANCIAL STATEMENTS 95 3.1 Cash Flow and Financial Statements: A Closer Look 96 Sources and Uses of Cash 96 The Statement of Cash Flows 98 3.2 Standardized Financial Statements 100 Common-Size Statements 100 Common-Size Balance Sheets 100 Common-Size Income Statements 101 Common-Size Statements of Cash Flows 102 Common–Base Year Financial Statements: Trend Analysis 102 Combined Common-Size and Base Year Analysis 102 3.3 Ratio Analysis 103 Short-Term Solvency, or Liquidity, Measures 104 Current Ratio 104 The Quick (or Acid-Test) Ratio 105 Other Liquidity Ratios 106 Long-Term Solvency Measures 106 Total Debt Ratio 106 A Brief Digression: Total Capitalization versus Total Assets 107 Times Interest Earned 107 Cash Coverage 108 Asset Management, or Turnover, Measures 108 Inventory Turnover and Days’ Sales in Inventory 108 Receivables Turnover and Days’ Sales in Receivables 109 Asset Turnover Ratios 110 Profitability Measures 110 Profit Margin 111 Return on Assets 111 Return on Equity 111 Market Value Measures 112 Price–Earnings Ratio 112 Price–Sales Ratio 112 Market-to-Book Ratio 113 Enterprise Value–EBITDA Ratio 113 Conclusion 114 3.4 The DuPont Identity 115 A Closer Look at ROE 115 An Expanded DuPont Analysis 116 3.5 Using Financial Statement Information 118 Why Evaluate Financial Statements? 118 Internal Uses 119 External Uses 119 Choosing a Benchmark 119 Time Trend Analysis 119 Peer Group Analysis 119 Problems with Financial Statement Analysis 124 3.6 Summary and Conclusions 125 CHAPTER 4 LONG-T ERM FINANCIAL PLANNING AND GROWTH 137 4.1 What Is Financial Planning? 139 Growth as a Financial Management Goal 139 Dimensions of Financial Planning 139 What Can Planning Accomplish? 140 Examining Interactions 140 Exploring Options 140 Avoiding Surprises 140 Ensuring Feasibility and Internal Consistency 141 Conclusion 141 4.2 Financial Planning Models: A First Look 141 A Financial Planning Model: The Ingredients 141 Sales Forecast 141 Pro Forma Statements 142 Asset Requirements 142 Financial Requirements 142 The Plug 142 Economic Assumptions 143 A Simple Financial Planning Model 143 4.3 The Percentage of Sales Approach 144 The Income Statement 144 The Balance Sheet 145 A Particular Scenario 147 An Alternative Scenario 148 4.4 External Financing and Growth 151 EFN and Growth 151 Financial Policy and Growth 153 The Internal Growth Rate 153 The Sustainable Growth Rate 154 Determinants of Growth 155 A Note about Sustainable Growth Rate Calculations 157 4.5 Some Caveats regarding Financial Planning Models 158 4.6 Summary and Conclusions 159 PART 3 Valuation of Future Cash Flows 169 CHAPTER 5 INTRODUCTION TO VALUATION: THE TIME VALUE OF MONEY 169 5.1 Future Value and Compounding 170 Investing for a Single Period 170 Investing for More Than One Period 170 A Note about Compound Growth 176 5.2 Present Value and Discounting 177 The Single-Period Case 177 Present Values for Multiple Periods 178 5.3 More about Present and Future Values 180 Present versus Future Value 181 Determining the Discount Rate 181 Finding the Number of Periods 185 5.4 Summary and Conclusions 188 CHAPTER 6 DISCOUNTED CASH FLOW VALUATION 194 6.1 Future and Present Values of Multiple Cash Flows 195 Future Value with Multiple Cash Flows 195 Present Value with Multiple Cash Flows 198 A Note about Cash Flow Timing 201 6.2 Valuing Level Cash Flows: Annuities and Perpetuities 202 Present Value for Annuity Cash Flows 202 Annuity Tables 203 Finding the Payment 205 Finding the Rate 206 Future Value for Annuities 208 A Note about Annuities Due 209 Perpetuities 210 Growing Annuities and Perpetuities 212 6.3 Comparing Rates: The Effect of Compounding 212 Effective Annual Rates and Compounding 213 Calculating and Comparing Effective Annual Rates 213 EARS and APRS 215 Taking It to the Limit: A Note about Continuous Compounding 217 6.4 Loan Types and Loan Amortization 218 Pure Discount Loans 218 Interest-Only Loans 219 Amortized Loans 219 6.5 Summary and Conclusions 224 CHAPTER 7 INTEREST RATES AND BOND VALUATION 239 7.1 Bonds and Bond Valuation 240 Bond Features and Prices 240 Bond Values and Yields 240 Interest Rate Risk 244 Finding the Yield to Maturity: More Trial and Error 245 7.2 More about Bond Features 250 Is It Debt or Equity? 250 Long-Term Debt: The Basics 250 The Indenture 252 Terms of a Bond 252 Security 253 Seniority 253 Repayment 253 The Call Provision 254 Protective Covenants 254 7.3 Bond Ratings 255 7.4 Some Different Types of Bonds 256 Government Bonds 256 Zero Coupon Bonds 257 Floating-Rate Bonds 258 Other Types of Bonds 259 Sukuk 261 7.5 Bond Markets 262 How Bonds Are Bought and Sold 263 Bond Price Reporting 263 A Note about Bond Price Quotes 264 7.6 Inflation and Interest Rates 266 Real versus Nominal Rates 266 The Fisher Effect 267 Inflation and Present Values 268 7.7 Determinants of Bond Yields 269 The Term Structure of Interest Rates 269 Bond Yields and the Yield Curve: Putting It All Together 270 Conclusion 272 7.8 Summary and Conclusions 273 CHAPTER 8 STOCK VALUATION 281 8.1 Common Stock Valuation 282 Cash Flows 282 Some Special Cases 284 Zero Growth 284 Constant Growth 284 Nonconstant Growth 287 Two-Stage Growth 289 Components of the Required Return 290 Stock Valuation Using Multiples 291 8.2 Some Features of Common and Preferred Stocks 293 Common Stock Features 293 Shareholder Rights 293 Proxy Voting 294 Classes of Stock 294 Other Rights 295 Dividends 295 Preferred Stock Features 296 Stated Value 296 Cumulative and Noncumulative Dividends 296 Is Preferred Stock Really Debt? 296 8.3 The Stock Markets 297 Dealers and Brokers 297 Organization of the NYSE 298 Members 298 Operations 299 Floor Activity 299 NASDAQ Operations 300 ECNs 301 Stock Market Reporting 301 8.4 Summary and Conclusions 303 PART 4 Capital Budgeting 313 CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA 313 9.1 Net Present Value 314 The Basic Idea 314 Estimating Net Present Value 315 9.2 The Payback Rule 318 Defining the Rule 318 Analyzing the Rule 319 Redeeming Qualities of the Rule 320 Summary of the Rule 321 9.3 The Discounted Payback 321 9.4 The Average Accounting Return 324 9.5 The Internal Rate of Return 326 Problems with the IRR 330 Nonconventional Cash Flows 330 Mutually Exclusive Investments 332 Investing or Financing? 334 Redeeming Qualities of the IRR 335 The Modified Internal Rate of Return (MIRR) 336 Method #1: The Discounting Approach 336 Method #2: The Reinvestment Approach 336 Method #3: The Combination Approach 336 MIRR or IRR: Which Is Better? 337 9.6 The Profitability Index 337 9.7 The Practice of Capital Budgeting 338 9.8 Summary and Conclusions 341 CHAPTER 10 MAKING CAPITAL INVESTMENT DECISIONS 352 10.1 Project Cash Flows: A First Look 353 Relevant Cash Flows 353 The Stand-Alone Principle 353 10.2 Incremental Cash Flows 354 Sunk Costs 354 Opportunity Costs 354 Side Effects 355 Net Working Capital 355 Financing Costs 355 Other Issues 356 10.3 Pro Forma Financial Statements and Project Cash Flows 356 Getting Started: Pro Forma Financial Statements 356 Project Cash Flows 357 Project Operating Cash Flow 357 Project Net Working Capital and Capital Spending 358 Projected Total Cash Flow and Value 358 10.4 More about Project Cash Flow 359 A Closer Look at Net Working Capital 359 Depreciation 362 Modifi ed ACRS Depreciation (MACRS) 362 Book Value versus Market Value 363 An Example: The Majestic Mulch and Compost Company (MMCC) 365 Operating Cash Flows 365 Change in NWC 365 Capital Spending 368 Total Cash Flow and Value 368 Conclusion 368 10.5 Alternative Definitions of Operating Cash Flow 369 The Bottom-Up Approach 370 The Top-Down Approach 370 The Tax Shield Approach 370 Conclusion 371 10.6 Some Special Cases of Discounted Cash Flow Analysis 371 Evaluating Cost-Cutting Proposals 371 Setting the Bid Price 373 Evaluating Equipment Options with Different Lives 375 10.7 Summary and Conclusions 377 CHAPTER 11 PROJECT ANALYSIS AND EVALUATION 390 11.1 Evaluating NPV Estimates 391 The Basic Problem 391 Projected versus Actual Cash Flows 391 Forecasting Risk 391 Sources of Value 392 11.2 Scenario and Other What-If Analyses 393 Getting Started 393 Scenario Analysis 394 Sensitivity Analysis 396 Simulation Analysis 397 11.3 Break-Even Analysis 398 Fixed and Variable Costs 398 Variable Costs 398 Fixed Costs 400 Total Costs 400 Accounting Break-Even 401 Accounting Break-Even: A Closer Look 402 Uses for the Accounting Break-Even 403 11.4 Operating Cash Flow, Sales Volume, and Break-Even 404 Accounting Break-Even and Cash Flow 404 The Base Case 404 Calculating the Break-Even Level 405 Payback and Break-Even 405 Sales Volume and Operating Cash Flow 405 Cash Flow, Accounting, and Financial Break-Even Points 406 Accounting Break-Even Revisited 406 Cash Break-Even 407 Financial Break-Even 407 Conclusion 407 11.5 Operating Leverage 409 The Basic Idea 409 Implications of Operating Leverage 409 Measuring Operating Leverage 409 Operating Leverage and Break-Even 411 11.6 Capital Rationing 411 Soft Rationing 412 Hard Rationing 412 11.7 Summary and Conclusions 412 PART 5 Risk and Return 421 CHAPTER 12 SOME LESSONS FROM CAPITAL MARKET HISTORY 421 12.1 Returns 422 Dollar Returns 422 Percentage Returns 424 12.2 The Historical Record 426 A First Look 426 A Closer Look 428 12.3 Average Returns: The First Lesson 432 Calculating Average Returns 432 Average Returns: The Historical Record 432 Risk Premiums 433 The First Lesson 433 12.4 The Variability of Returns: The Second Lesson 434 Frequency Distributions and Variability 434 The Historical Variance and Standard Deviation 435 The Historical Record 437 Normal Distribution 438 The Second Lesson 439 2008: The Bear Growled and Investors Howled 439 Using Capital Market History 441 More on the Stock Market Risk Premium 441 12.5 More about Average Returns 443 Arithmetic versus Geometric Averages 443 Calculating Geometric Average Returns 443 Arithmetic Average Return or Geometric Average Return? 446 12.6 Capital Market Efficiency 447 Price Behavior in an Efficient Market 447 The Efficient Markets Hypothesis 448 Some Common Misconceptions about the EMH 449 The Forms of Market Efficiency 450 12.7 Summary and Conclusions 451 CHAPTER 13 RETURN, RISK, AND THE SECURITY MARKET LINE 459 13.1 Expected Returns and Variances 460 Expected Return 460 Calculating the Variance 462 13.2 Portfolios 463 Portfolio Weights 464 Portfolio Expected Returns 464 Portfolio Variance 465 13.3 Announcements, Surprises, and Expected Returns 467 Expected and Unexpected Returns 467 Announcements and News 467 13.4 Risk: Systematic and Unsystematic 469 Systematic and Unsystematic Risk 469 Systematic and Unsystematic Components of Return 469 13.5 Diversifi cation and Portfolio Risk 470 The Effect of Diversification: Another Lesson from Market History 470 The Principle of Diversification 471 Diversification and Unsystematic Risk 472 Diversification and Systematic Risk 473 13.6 Systematic Risk and Beta 473 The Systematic Risk Principle 474 Measuring Systematic Risk 474 Portfolio Betas 476 13.7 The Security Market Line 477 Beta and the Risk Premium 477 The Reward-to-Risk Ratio 478 The Basic Argument 479 The Fundamental Result 481 The Security Market Line 482 Market Portfolios 482 The Capital Asset Pricing Model 482 13.8 The SML and the Cost of Capital: A Preview 485 The Basic Idea 485 The Cost of Capital 485 13.9 Summary and Conclusions 486 PART 6 Cost of Capital and Long-Term Financial Policy 496 CHAPTER 14 COST OF CAPITAL 496 14.1 The Cost of Capital: Some Preliminaries 497 Required Return versus Cost of Capital 497 Financial Policy and Cost of Capital 498 14.2 The Cost of Equity 498 The Dividend Growth Model Approach 498 Implementing the Approach 498 Estimating g 499 Advantages and Disadvantages of the Approach 500 The SML Approach 500 Implementing the Approach 501 Advantages and Disadvantages of the Approach 501 14.3 The Costs of Debt and Preferred Stock 502 The Cost of Debt 502 The Cost of Preferred Stock 503 14.4 The Weighted Average Cost of Capital 504 The Capital Structure Weights 504 Taxes and the Weighted Average Cost of Capital 505 Calculating the WACC for Eastman Chemical 506 Eastman’s Cost of Equity 506 Eastman’s Cost of Debt 508 Eastman’s WACC 509 Solving the Warehouse Problem and Similar Capital Budgeting Problems 509 Performance Evaluation: Another Use of the WACC 512 14.5 Divisional and Project Costs of Capital 513 The SML and the WACC 514 Divisional Cost of Capital 515 The Pure Play Approach 515 The Subjective Approach 516 14.6 Flotation Costs and the Weighted Average Cost of Capital 517 The Basic Approach 518 Flotation Costs and NPV 519 Internal Equity and Flotation Costs 520 14.7 Summary and Conclusions 521 CHAPTER 15 RAISING CAPITAL 530 15.1 The Financing Life Cycle of a Firm: Early-Stage Financing and Venture Capital 531 Venture Capital 531 Some Venture Capital Realities 532 Choosing a Venture Capitalist 532 Conclusion 533 15.2 Selling Securities to the Public: The Basic Procedure 533 15.3 Alternative Issue Methods 534 15.4 Underwriters 536 Choosing an Underwriter 537 Types of Underwriting 537 Firm Commitment Underwriting 537 Best Efforts Underwriting 538 Dutch Auction Underwriting 538 The Aftermarket 538 The Green Shoe Provision 539 Lockup Agreements 539 The Quiet Period 539 15.5 IPOs and Underpricing 540 IPO Underpricing: The 1999–2000 Experience 540 Evidence on Underpricing 540 Why Does Underpricing Exist? 545 15.6 New Equity Sales and the Value of the Firm 546 15.7 The Costs of Issuing Securities 547 The Costs of Selling Stock to the Public 547 The Costs of Going Public: A Case Study 551 15.8 Rights 551 The Mechanics of a Rights Offering 551 Number of Rights Needed to Purchase a Share 552 The Value of a Right 553 Ex Rights 555 The Underwriting Arrangements 556 Effects on Shareholders 556 15.9 Dilution 557 Dilution of Proportionate Ownership 557 Dilution of Value: Book versus Market Values 557 A Misconception 558 The Correct Arguments 559 15.10 Issuing Long-Term Debt 559 15.11 Shelf Registration 560 15.12 Summary and Conclusions 561 CHAPTER 16 FINANCIAL LEVERAGE AND CAPITAL STRUCTURE POLICY 568 16.1 The Capital Structure Question 569 Firm Value and Stock Value: An Example 569 Capital Structure and the Cost of Capital 570 16.2 The Effect of Financial Leverage 571 The Basics of Financial Leverage 571 Financial Leverage, EPS, and ROE: An Example 571 EPS versus EBIT 572 Corporate Borrowing and Homemade Leverage 574 16.3 Capital Structure and the Cost of Equity Capital 575 M&M Proposition I: The Pie Model 575 The Cost of Equity and Financial Leverage: M&M Proposition II 576 Business and Financial Risk 578 16.4 M&M Propositions I and II with Corporate Taxes 579 The Interest Tax Shield 580 Taxes and M&M Proposition I 580 Taxes, the WACC, and Proposition II 581 Conclusion 582 16.5 Bankruptcy Costs 584 Direct Bankruptcy Costs 585 Indirect Bankruptcy Costs 585 16.6 Optimal Capital Structure 586 The Static Theory of Capital Structure 586 Optimal Capital Structure and the Cost of Capital 587 Optimal Capital Structure: A Recap 588 Capital Structure: Some Managerial Recommendations 590 Taxes 590 Financial Distress 590 16.7 The Pie Again 590 The Extended Pie Model 591 Marketed Claims versus Nonmarketed Claims 592 16.8 The Pecking-Order Theory 592 Internal Financing and the Pecking Order 592 Implications of the Pecking Order 593 16.9 Observed Capital Structures 594 16.10 A Quick Look at the Bankruptcy Process 596 Liquidation and Reorganization 596 Bankruptcy Liquidation 596 Bankruptcy Reorganization 597 Financial Management and the Bankruptcy Process 598 Agreements to Avoid Bankruptcy 599 16.11 Summary and Conclusions 600 CHAPTER 17 DIVIDENDS AND PAYOUT POLICY 607 17.1 Cash Dividends and Dividend Payment 608 Cash Dividends 608 Standard Method of Cash Dividend Payment 608 Dividend Payment: A Chronology 609 More about the Ex-Dividend Date 609 17.2 Does Dividend Policy Matter? 611 An Illustration of the Irrelevance of Dividend Policy 611 Current Policy: Dividends Set Equal to Cash Flow 612 Alternative Policy: Initial Dividend Greater Than Cash Flow 612 Homemade Dividends 612 A Test 613 17.3 Real-World Factors Favoring a Low Dividend Payout 614 Taxes 614 Flotation Costs 614 Dividend Restrictions 614 17.4 Real-World Factors Favoring a High Dividend Payout 615 Desire for Current Income 615 Tax and Other Benefits from High Dividends 616 Corporate Investors 616 Tax-Exempt Investors 616 Conclusion 616 17.5 A Resolution of Real-World Factors? 616 Information Content of Dividends 616 The Clientele Effect 618 17.6 Stock Repurchases: An Alternative to Cash Dividends 618 Cash Dividends versus Repurchase 620 Real-World Considerations in a Repurchase 621 Share Repurchase and EPS 622 17.7 What We Know and Do Not Know about Dividend and Payout Policies 622 Dividends and Dividend Payers 622 Corporations Smooth Dividends 625 Putting It All Together 625 Some Survey Evidence on Dividends 627 17.8 Stock Dividends and Stock Splits 629 Some Details about Stock Splits and Stock Dividends 629 Example of a Small Stock Dividend 629 Example of a Stock Split 630 Example of a Large Stock Dividend 630 Value of Stock Splits and Stock Dividends 630 The Benchmark Case 631 Popular Trading Range 631 Reverse Splits 631 17.9 Summary and Conclusions 632 PART 7 Short-Term Financial Planning and Management 640 CHAPTER 18 SHORT-TERM FINANCE AND PLANNING 640 18.1 Tracing Cash and Net Working Capital 641 18.2 The Operating Cycle and the Cash Cycle 642 Defining the Operating and Cash Cycles 643 The Operating Cycle 643 The Cash Cycle 643 The Operating Cycle and the Firm’s Organizational Chart 644 Calculating the Operating and Cash Cycles 645 The Operating Cycle 646 The Cash Cycle 647 Interpreting the Cash Cycle 648 18.3 Some Aspects of Short-Term Financial Policy 648 The Size of the Firm’s Investment in Current Assets 649 Alternative Financing Policies for Current Assets 650 An Ideal Case 650 Different Policies for Financing Current Assets 650 Which Financing Policy Is Best? 653 Current Assets and Liabilities in Practice 654 18.4 The Cash Budget 655 Sales And Cash Collections 655 Cash Outflows 656 The Cash Balance 656 18.5 Short-Term Borrowing 657 Unsecured Loans 658 Compensating Balances 658 Cost of a Compensating Balance 658 Letters of Credit 659 Secured Loans 659 Accounts Receivable Financing 659 Inventory Loans 660 Other Sources 660 18.6 A Short-Term Financial Plan 661 18.7 Summary and Conclusions 662 CHAPTER 19 CASH AND LIQUIDITY MANAGEMENT 673 19.1 Reasons for Holding Cash 674 The Speculative and Precautionary Motives 674 The Transaction Motive 674 Compensating Balances 674 Costs of Holding Cash 674 Cash Management versus Liquidity Management 675 19.2 Understanding Float 675 Disbursement Float 675 Collection Float and Net Float 676 Float Management 677 Measuring Float 677 Some Details 678 Cost of the Float 678 Ethical and Legal Questions 680 Electronic Data Interchange and Check 21: The End of Float? 681 19.3 Cash Collection and Concentration 682 Components of Collection Time 682 Cash Collection 682 Lockboxes 682 Cash Concentration 684 Accelerating Collections: An Example 685 19.4 Managing Cash Disbursements 686 Increasing Disbursement Float 686 Controlling Disbursements 687 Zero-Balance Accounts 687 Controlled Disbursement Accounts 688 19.5 Investing Idle Cash 688 Temporary Cash Surpluses 688 Seasonal or Cyclical Activities 688 Planned or Possible Expenditures 688 Characteristics of Short-Term Securities 689 Maturity 689 Default Risk 689 Marketability 689 Taxes 689 Some Different Types of Money Market Securities 690 19.6 Summary and Conclusions 691 19A Determining the Target Cash Balance 696 The Basic Idea 696 The BAT Model 697 The Opportunity Costs 698 The Trading Costs 699 The Total Cost 699 The Solution 699 Conclusion 701 The Miller–Orr Model: A More General Approach 701 The Basic Idea 701 Using the Model 701 Implications of the BAT and Miller–Orr Models 702 Other Factors Influencing the Target Cash Balance 703 CHAPTER 20 CREDIT AND INVENTORY MANAGEMENT 706 20.1 Credit and Receivables 707 Components of Credit Policy 707 The Cash Flows from Granting Credit 707 The Investment in Receivables 708 20.2 Terms of the Sale 708 The Basic Form 709 The Credit Period 709 The Invoice Date 709 Length of the Credit Period 709 Cash Discounts 710 Cost of the Credit 711 Trade Discounts 711 The Cash Discount and the ACP 711 Credit Instruments 712 20.3 Analyzing Credit Policy 712 Credit Policy Effects 712 Evaluating a Proposed Credit Policy 713 NPV of Switching Policies 713 A Break-Even Application 715 20.4 Optimal Credit Policy 715 The Total Credit Cost Curve 715 Organizing the Credit Function 716 20.5 Credit Analysis 717 When Should Credit Be Granted? 717 A One-Time Sale 717 Repeat Business 718 Credit Information 719 Credit Evaluation and Scoring 719 20.6 Collection Policy 720 Monitoring Receivables 720 Collection Effort 721 20.7 Inventory Management 721 The Financial Manager and Inventory Policy 721 Inventory Types 722 Inventory Costs 722 20.8 Inventory Management Techniques 723 The ABC Approach 723 The Economic Order Quantity Model 723 Inventory Depletion 725 The Carrying Costs 725 The Restocking Costs 726 The Total Costs 726 Extensions to the EOQ Model 728 Safety Stocks 728 Reorder Points 728 Managing Derived-Demand Inventories 728 Materials Requirements Planning 730 Just-in-Time Inventory 730 20.9 Summary and Conclusions 730 20A More about Credit Policy Analysis 737 Two Alternative Approaches 737 The One-Shot Approach 737 The Accounts Receivable Approach 738 Discounts and Default Risk 739 NPV of the Credit Decision 740 A Break-Even Application 740 PART 8 Topics in Corporate Finance 744 CHAPTER 21 INTERNATIONAL CORPORATE FINANCE 744 21.1 Terminology 745 21.2 Foreign Exchange Markets and Exchange Rates 746 Exchange Rates 747 Exchange Rate Quotations 747 Cross-Rates and Triangle Arbitrage 748 Types of Transactions 750 21.3 Purchasing Power Parity 751 Absolute Purchasing Power Parity 751 Relative Purchasing Power Parity 753 The Basic Idea 753 The Result 753 Currency Appreciation and Depreciation 754 21.4 Interest Rate Parity, Unbiased Forward Rates, and the International Fisher Effect 755 Covered Interest Arbitrage 755 Interest Rate Parity 756 Forward Rates and Future Spot Rates 757 Putting It All Together 757 Uncovered Interest Parity 758 The International Fisher Effect 758 21.5 International Capital Budgeting 759 Method 1: The Home Currency Approach 759 Method 2: The Foreign Currency Approach 760 Unremitted Cash Flows 761 21.6 Exchange Rate Risk 761 Short-Run Exposure 761 Long-Run Exposure 762 Translation Exposure 763 Managing Exchange Rate Risk 764 21.7 Political Risk 764 21.8 Summary and Conclusions 765 APPENDIX A MATHEMATICAL TABLES 774 APPENDIX B KEY EQUATIONS 784 APPENDIX C ANSWERS TO SELECTED END-OF-CHAPTER PROBLEMS 789 APPENDIX D USING THE HP 10B AND TI BA II PLUS FINANCIAL CALCULATORS 793 Index 797 Pedagogical Use of Color 822 Back Cover 824 Part 1: Overview Of Corporate Finance. Introduction To Corporate Finance ; Financial Statements, Taxes, And Cash Flow -- Part 2: Financial Statements And Long-term Financial Planning. Working With Financial Statements ; Long-term Financial Planning And Growth -- Part 3: Valuation Of Future Cash Flows. Introduction To Valuation : The Time Value Of Money ; Discounted Cash Flow Valuation ; Interest Rates And Bond Valuation ; Stock Valuation -- Part 4: Capital Budgeting ; Net Present Value And Other Investment Criteria ; Making Capital Investment Decisions ; Project Analysis And Evaluation -- Part 5: Risk And Return. Some Lessons From Capital Market History ; Return, Risk, And The Security Market Line -- Part 6: Cost Of Capital And Long-term Financial Policy. Cost Of Capital ; Raising Capital ; Financial Leverage And Capital Structure Policy ; Dividends And Payout Policy -- Part 7: Short-term Financial Planning And Management. Short-term Finance And Planning ; Cash And Liquidity Management ; Credit And Inventory Management -- Part 8: Topics In Corporate Finance. International Corporate Finance. Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan. Includes Index.