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.n...1 " ir-S. 1 if Tnli -nV i I I I iv I
Managerial FinanceG L O B A L E D I T1
Thirteenth Edition
Lawrence J. GitmanSan Diego State University
Chad J. ZutterUniversity of Pittsburgh
Boston Columbus Indianapolis New York San Francisco Upper Saddle River
Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto
Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
Managerial FinanceG L O B A L E B I T f
Thirteenth Edition
Lawrence J. GitmanSan Diego State University
Chad J. ZutterUniversity of Pittsburgh
Boston Columbus Indianapolis New York San Francisco Upper Saddle River
Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto
Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
Contents
About the Authors xxxv
Preface xxxvii
Supplements to the Thirteenth Edition xh
Acknowledgments xlvii
To the Student li
Introduction to Managerial Finance 1
The Role ofManagerialFinancepage 2
facebookFacebook—In No Hurry To
Go Public page 3
RBI Finance and Business 4What is Finance? 4
Career Opportunities in Finance 4
Legal Forms of Business Organization
Focus on Practice:Professional Certifications in Finance 5
Why Study Managerial Finance? 9
* REVIEW aUESTIONS 9
U 3 Goal of the Firm 10Maximize Shareholder Wealth
Maximize Profit? 11
What about Stakeholders? 13
The Role of Business Ethics 13•* REVIEW aUESTIONS 14
10
Focus on Ethics: Will GoogleLive Up to Its Motto? 15
Relationship to Accounting 17
Primary Activities of the FinancialManager 19
•> REVIEW aUESTIONS 19
Bfil Governance and Agency 20Corporate Governance 20
The Agency Issue 21
•» REVIEW QUESTIONS 24
Summary 24
Opener-in-Review 25
Self-Test Problem 25
Warm-Up Exercises 26
Problems 27
Spreadsheet Exercise 29
U S ! Managerial FinanceFunction 15Organization of the FinanceFunction 16
Relationship to Economics 16
XV
xvi Contents
The FinancialMarketEnvironmentpage 30
JPMorgan Chase & Co.—
Cut to the Chase page 31
Financial Institutions andMarkets 32
Financial Institutions 32
Commercial Banks, Investment Banks,and the Shadow Banking System 33
Financial Markets 34
The Relationship between Institutionsand Markets 34
The Money Market 35
The Capital Market 35
M Focus on Practice: BerkshireHathaway—Can Buffett Be Replaced? 37
fjjf°g°BBSll Focus on Ethics: The Ethicsof Insider Trading 40
* REVIEW QUESTIONS 40
Efi l The Financial Crisis 41
Financial Institutions and RealEstate Finance 41
Falling Home Prices and DelinquentMortgages 41
Crisis of Confidence in Banks 42
Spillover Effects and the GreatRecession 43
•» REVIEW QUESTIONS 44
E S I Regulation of FinancialInstitutions 44
Regulations Governing FinancialInstitutions 44
Regulations Governing FinancialMarkets 45
-» REVIEW QUESTIONS 45
46E&l Business Taxes
Ordinary Income 46
Capital Gains 48
-» REVIEW QUESTIONS 49
Summary 49
Opener-in-Review 50
Self-Test Problem 51
Warm-Up Exercises 51
Problems 51
Spreadsheet Exercise 53
Integrative Case 1 Merit EnterpriseCorp. 54
Contents xvii
Parti! Financial Tools 55
3FinancialStatements andRatio Analysispage 56
Aberaombie & Fitch—The Value of Casual Luxurypage 57
58E U The Stockholders' ReportThe Letter to Stockholders 58
O ^ ^ J ^ Global Focus: More CountriesAdopt International Financial ReportingStandards 58
The Four Key Financial Statements 59
fiBMSffiSSlI Focus on Ethics: TakingEarnings Reports at Face Value 59
Notes to the Financial Statements 65
Consolidating International FinancialStatements 65
•* REVIEW QUESTIONS 66
E 8 9 Using Financial Ratios 67Interested Parties 67
Types of Ratio Comparisons 67
Cautions about Using RatioAnalysis 70
Categories of Financial Ratios 70
•> REVIEW QUESTIONS 70
Efi l Liquidity Ratios 71Current Ratio 7i
Quick (Acid-Test) Ratio 72
•• REVIEW QUESTIONS 73
E S I Activity Ratios 73Inventory Turnover 73
Average Collection Period 74
Average Payment Period 75
Total Asset Turnover 75
•> REVIEW QUESTION 76
Fixed-Payment Coverage Ratio 78
-> REVIEW QUESTIONS 79
E&3 Profitability Ratios 79Common-Size Income Statements 79
Gross Profit Margin 79
Operating Profit Margin 80
Net Profit Margin 80
Earnings Per Share (EPS) 81
Return on Total Assets (ROA) 81
Return on Common Equity (ROE) 82
-* REVIEW QUESTIONS 82
Bfi l Market Ratios 82Price/Earnings (P/E) Ratio 82
Market/Book (M/B) Ratio 83
•> REVIEW QUESTION 83
E B A Complete RatioAnalysis 84Summarizing All Ratios 84
Dupont System of Analysis 85
•» REVIEW QUESTIONS 90
Summary 90
Opener-in-Review 92
Self-Test Problems 92
Warm-Up Exercises 93
Problems 94 .
Spreadsheet Exercise 110
KSa Debt Ratios 76Debt Ratio 77
Times Interest Earned Ratio 78
xviii Contents
Cash Flow andFinancial Planningpage 1 13
Apple—Investors Want Apple
to Take a Bite Out of Its Cash
Hoard page 1 14
Analyzing the Firm'sCash Flow 115
Depreciation 115
Depreciation Methods" 116
Developing the Statement ofCash Flows 117
Free Cash Flow 122
J Focus on Practice: Free CashFlow at Cisco Systems 123
•• REVIEW QUESTIONS 124
E S The Financial PlanningProcess 124Long-Term (Strategic) FinancialPlans 124
Short-Term (Operating) FinancialPlans 125
(8B/gBSStBg# Focus on Ethics: How MuchIs a CEO Worth? 125
•> REVIEW QUESTIONS 127
S S I Cash Planning:Cash Budgets 127The Sales Forecast 127
Preparing the Cash Budget 128
Evaluating the Cash Budget 132
Coping with Uncertainty in theCash Budget 133
Cash Flow within the Month 134
•» REVIEW QUESTIONS 135
• S I Profit Planning: Pro FormaStatements 135
Preceding Year's FinancialStatements 135
Sales Forecast 135
"• REVIEW QUESTION 135
ES3 Preparing the Pro FormaIncome Statement 137
Considering Types of Costs andExpenses 137
•> REVIEW QUESTIONS 139
E2d Preparing the Pro FormaBalance Sheet 139
•• REVIEW QUESTIONS 141
mam Evaluation of Pro FormaStatements 141
•> REVIEW QUESTIONS 141
Summary 142
Opener-in-Review 143
Self-Test Problems 144
Warm-Up Exercises 145
Problems 146
Spreadsheet Exercise 157
Contents xix
5Time Valueof Moneypage 159
Eli Lilly and Company—
Riding the Pipeline page 160
ESI The Role of Time Value inFinance 161Future Value versus Present Value 161
Computational Tools 162
Basic Patterns of Cash Flow 163
•> REVIEW QUESTIONS 164
ESI Single Amounts 164Future Value of a Single Amount 164
Present Value of a Single Amount 168
•• REVIEW QUESTIONS 170
E S I Annuities 171Types of Annuities 171Finding the Future Value of an OrdinaryAnnuity 172
Finding the Present Value of an OrdinaryAnnuity 173
Finding the Future Value of anAnnuity Due 175
Finding the Present Value of anAnnuity Due 176
Finding the Present Value of aPerpetuity 178
•* REVIEW QUESTIONS 178
ESI Mixed Streams 178Future Value of a Mixed Stream 179
Present Value of a Mixed Stream 180
•» REVIEW QUESTION 181
ESI Compounding Interest MoreFrequently Than Annually 181Semiannual Compounding 181
Quarterly Compounding 182
A General Equation for CompoundingMore Frequently Than Annually 183
Using Computational Tools forCompounding More Frequently ThanAnnually 184
Continuous Compounding 184
Nominal and Effective Annual Rates ofInterest 185
gB§ Focus on Ethics: How Fair Is187"Check into Cash"?
REVIEW QUESTIONS 187
ESI Special Applications of TimeValue 188Determining Deposits Needed toAccumulate a Future Sum 188
Loan Amortization 189
Focus on Practice: NewCentury Brings Trouble for SubprimeMortgages 191
Finding Interest or Growth Rates 191
Finding an Unknown Number ofPeriods 192
•» REVIEW QUESTIONS 194
Summary 194
Opener-in-Review 195
Self-Test Problems 196
Warm-Up Exercises 197
Problems 198
Spreadsheet Exercise 214
Integrative Case 2 Track Software,Inc. 215
XX Contents
> Valuation of Securities 219
Interest Rates andBond Valuationpage 220
Asian Development Bank—
Renminbi-Denominated
International Bonds Are
Finally Out page 221
Interest Rates and RequiredReturns 222Interest Rate Fundamentals 222
6BffS333IEiE Focus on Practice: Bond'sValuation and Interest Rate Risk 225
Term Structure of Interest Rates 226
Risk Premiums: Issuer and IssueCharacteristics 229
•* REVIEW QUESTIONS 230
E S I Corporate Bonds 231Legal Aspects of Corporate Bonds 232
Cost of Bonds to the Issuer 233
General Features of a Bond Issue 233
Bond Yields 234
Bond Prices 234
Bond Ratings 235
I 1 S B @ Focus on Ethics: Can WeTrust the Bond Raters? 236
Common Types of Bonds 236
International Bond Issues 237
•* REVIEW QUESTIONS 238
E S I Valuation Fundamentals 239Key Inputs 239
Basic Valuation Model 240
•» REVIEW QUESTIONS 241
E S I Bond Valuation 241Bond Fundamentals 241
Basic Bond Valuation 242
Bond Value Behavior 243
Yield to Maturity (YTM) 247
Semiannual Interest andBond Values 248
* REVIEW QUESTIONS 249
Summary 250
Opener-in-Review 251
Self-Test Problems 252
Warm-Up Exercises 252
Problems 254
Spreadsheet Exercise 263
Contents xxi
Stock Valuationpage 264
Air Asia—Jewel in the
Skies? page 265
I f i l Differences between Debtand Equity 266
Voice in Management 266
Claims on Income and Assets 266
Maturity 267
Tax Treatment 267
•* REVIEW QUESTION 267
EE1 Common and PreferredStock 267
Common Stock 268
Preferred Stock 271
Issuing Common Stock 272
•• REVIEW QUESTIONS 276
• n i l Common StockValuation 277
Market Efficiency 277
The Efficient-Market Hypothesis 278O' iSi iB l§ Focus on Practice:Understanding Human Behavior Helps UsUnderstand Investor Behavior 279
Basic Common Stock ValuationEquation 279
Free Cash Flow Valuation Model 284
Other Approaches to CommonStock Valuation 287
Focus on Ethics: Psst—HaveYou Heard Any Good Quarterly EarningsForecasts Lately? 288
•» REVIEW QUESTIONS 289
Kfil Decision Making andCommon Stock Value 290
Changes in Expected Dividends 290
Changes in Risk 291
Combined Effect 291
•> REVIEW QUESTIONS 292
Summary 292
Opener-in-Review 294
Self-Test Problems 294
Warm-Up Exercises 295
Problems 296
Spreadsheet Exercise 303
Integrat ive Case 3 Encore International304
xxii Contents
Risk and the Required Rate of Return 307
Risk and Returnpage 308
Mutual Funds—Fund's Returns
Not Even Close to Average
page 309
l i U Risk and ReturnFundamentals 310Risk Defined 310
W Focus on Ethics: If ItSeems Too Good to Be True Then ItProbably Is 310
Return Defined 311
Risk Preferences 312
•* REVIEW QUESTIONS 313
E S I Risk of a Single Asset 313Risk Assessment 313
Risk Measurement 315
•» REVIEW QUESTIONS 320
E S I Risk of a Portfolio 321Portfolio Return and StandardDeviation 321
Correlation 323
Diversification 323
Correlation, Diversification, Risk,and Return 326
International Diversification 327
International Flavor to RiskReduction 328
•» REVIEW QUESTIONS 328
E S I Risk and Return: The CapitalAsset Pricing Model (CAPM) 329Types of Risk 329
The Model: CAPM 330
•* REVIEW QUESTIONS 339
Summary 339
Opener-in-Review 340
Self-Test Problems 341
Warm-Up Exercises 342
Problems 343
Spreadsheet Exercise 355
Contents xxiii
The Cost of Capitalpage 356
General Electric—FallingShort of Expectationspage 357
H a l Overview of theCost of Capital 358
The Basic Concept 358
$ Focus on Ethics: The Ethicsof Profit 358
Sources of Long-Term Capital 359
•> REVIEW QUESTIONS 360
KEfl Cost of Long-Term Debt 360
Net Proceeds 360
Before-Tax Cost of Debt 361
After-Tax Cost of Debt 363
"• REVIEW QUESTIONS 364
KSI Cost of Preferred Stock 364
Preferred Stock Dividends 364
Calculating the Cost ofPreferred Stock 364
* REVIEW QUESTION 365
ISSI Cost of Common Stock 365
Finding the Cost of CommonStock Equity 365
Cost of Retained Earnings 367
Cost of New Issues ofCommon Stock 368
"• REVIEW QUESTIONS 369
BEI Weighted Average Costof Capital 369
Calculating Weighted Average Cost ofCapital (WACC) 369
Focus on Practice: UncertainTimes Make for an Uncertain WeightedAverage Cost of Capital 371
Weighting Schemes 372
•> REVIEW QUESTIONS 373
Summary 373
Opener-in-Review 374
Self-Test Problem 374
Warm-Up Exercises 375 -
Problems 376
Spreadsheet Exercise 383
Integrat ive Case 4 Eco PlasticsCompany 385
XXIV Contents
Long-Term Investment Decisions 387
Capital BudgetingTechniquespage 388
Treats—Waffles and More,
Cairo—Capital Budgeting
Techniques Work a Treat
page 389
Overview of CapitalBudgeting 390
Motives for Capital Expenditure 390
Steps in the Process 390
Basic Terminology 391
Capital Budgeting Techniques 392
•> REVIEW QUESTION 393
393KBU Payback PeriodDecision Criteria 393
Pros and Cons of PaybackAnalysis 394
B B f t Focus on Practice: Limits onPayback Analysis 395
•> REVIEW QUESTIONS 397
U!SI Net Present Value (NPV) 397
Decision Criteria 397
NPV and the Profitability Index 399
NPV and Economic Value Added 400
•> REVIEW QUESTIONS 401
li!SI Internal Rate of Return(IRR) 401
Decision Criteria 401
Calculating the IRR 402
•» REVIEW QUESTIONS 404
U!£] Comparing NPV and IRRTechniques 404
Net Present Value Profiles 404
Conflicting Rankings 406
Which Approach Is Better? 409feliStSigi Focus on Ethics: NonfinancialConsiderations in Project Selection 411
•» REVIEW QUESTIONS 411
Summary 412Opener-in-Review 413Self-Test Problems 414Warm-Up Exercises 414Problems 415Spreadsheet Exercise 425
Contents XXV
11Capital BudgetingCash Flowspage 426
ExxonMobil—Maintaining Its
Project Inventory page 427
l l f l l Relevant Cash Flows 428Major Cash Flow Components 428
$3is%sS8!£k Focus on Ethics: A Questionof Accuracy 428
Expansion versus ReplacementDecisions 429
Sunk Costs and OpportunityCosts 429
International Capital Budgeting andLong-Term Investments 430
* REVIEW QUESTIONS 431
@j23s^& Global Focus: ChangesMay Influence Future Investments inChina 432
UEJ Finding the InitialInvestment 432Installed Cost of New Asset 433
After-Tax Proceeds from Sale ofOld Asset 433
Change in Net Working Capital 436
Calculating the Initial Investment 437
•> REVIEW QUESTIONS 438
Interpreting the Term Cash Inflows 439
Interpreting the Term Incremental 441
-> REVIEW QUESTIONS 443
443
Finding the TerminalCash Flow 443Proceeds from Sale of Assets
Taxes on Sale of Assets 443
Change in Net Working Capital 444
•• REVIEW QUESTION 445
1183 Summarizing the RelevantCash Flows 445•» REVIEW QUESTION 447
Summary 447
Opener-in-Review 448
Self-Test Problems 449
Warm-Up Exercises 449
Problems 450
Spreadsheet Exercise 461
U t t l Finding the OperatingCash Inflows 438Interpreting the Term After-Tax 438
xxvi Contents
Risk andRefinements inCapital Budgetingpage 463
BP—Worst Case Scenario
page 464
HSU Introduction to Risk inCapital Budgeting 465•• REVIEW QUESTION 465
IE£i Behavioral Approaches forDealing with Risk 466Risk and Cash Inflows 466
Scenario Analysis 467
Simulation 468
S Focus on Practice: TheMonte Carlo Method: The Forecast Is forLess Uncertainty 470
• REVIEW QUESTIONS 470
USSI International RiskConsiderations 470•> REVIEW QUESTION 471
IESI Risk-Adjusted DiscountRates 472Determining Risk-Adjusted DiscountRates (RADRs) 472
§ Focus on Ethics: Ethics and475
Portfolio Effects 478
RADRs in Practice 478
* REVIEW QUESTIONS 480
EEsi Capital BudgetingRefinements 480Comparing Projects withUnequal Lives 480
Recognizing Real Options 483
Capital Rationing 485
•• REVIEW QUESTIONS 487
Summary 488
Opener-in-Review 489
Self-Test Problems 490
Warm-Up Exercises 490
Problems 492
Spreadsheet Exercise 502
Integrat ive Case 5 Lasting ImpressionsCompany 503
the Cost of Capital
Applying RADRs 475
Contents xxvii
Long-Term Financial Decisions 505
13Leverage andCapital Structurepage 506
Genzyme Corp.—Trading
Equity for Debt page 507
IE8I Leverage 508
Breakeven Analysis 509
Operating Leverage 513
CSigjjfeifBs^ Focus on Practice: Adobe'sLeverage 515
Financial Leverage 516
Total Leverage 520
§> Focus on Ethics:522Repo 105
•* REVIEW QUESTIONS 523
Ufifl The Firm's CapitalStructure 523Types of Capital 523
External Assessment of CapitalStructure 524
Capital Structure of Non-U.S.Firms 525
Capital Structure Theory 526
Optimal Capital Structure 535
•» REVIEW QUESTIONS 536
IES1 EBIT-EPS Approach toCapital Structure 537Presenting a Financing PlanGraphically 537
Comparing Alternative CapitalStructures 539
Considering Risk in EBIT-EPSAnalysis 539
Basic Shortcoming of EBIT-EPSAnalysis 540
•* REVIEW QUESTION 540
U f i l Choosing the OptimalCapital Structure 540
Linkage 540
Estimating Value 541
Maximizing Value versusMaximizing EPS 543
Some Other ImportantConsiderations 543
•> REVIEW QUESTIONS 544
Summary 544
Opener-in-Review 546
Self-Test Problems 546
Warm-Up Exercises 547
Problems 548
Spreadsheet Exercise 558
xxviii Contents
Payout Policypage 559
Global Investment House—
The Payback Time page 560
The Basics of PayoutPolicy 561
Elements of Payout Policy 561
Trends in Earnings and Dividends
Trends in Dividends and ShareRepurchases 563
W Focus on Ethics: AreBuybacks Really a Bargain? 564
•> REVIEW QUESTIONS 565
562
• £ £ ] The Mechanics of PayoutPolicy 565
Cash Dividend PaymentProcedures 565
Share Repurchase Procedures 567
Tax Treatment of Dividends andRepurchases 568
® Focus on Practice: CapitalGains and Dividend Tax TreatmentExtended to 2010 569
Dividend Reinvestment Plans 570
Stock Price Reactions to CorporatePayouts 570
•> REVIEW QUESTIONS 571
| £ £ ] Relevance of PayoutPolicy 571
Residual Theory of Dividends 571
The Dividend Irrelevance Theory 572
Arguments for Dividend Relevance 573
"> REVIEW QUESTIONS 574
IE&1 Factors Affecting Dividend
Policy 574
Legal Constraints 574
Contractual Constraints 576
Growth Prospects 576
Owner Considerations 576
Market Considerations 576
•> REVIEW QUESTION 577
EES Types of DividendPolicies 577
Constant-Payout-Ratio DividendPolicy 577
Regular Dividend Policy 578
Low-Regular-and-Extra DividendPolicy 579
•* REVIEW QUESTION 579
EES Other Forms ofDividends 579
Stock Dividends 579
Stock Splits 581
•» REVIEW QUESTIONS 583
Summary 583
Opener-in-Review 584
Self-Test Problems 585
Warm-Up Exercises 585
Problems 586
Spreadsheet Exercise 593
Integrat ive Case 6 O'Grady ApparelCompany 594
Contents xxix
Short-Term Financial Decisions 597
15Working Capitaland Current AssetsManagementpage 598
Hing Yiap—Focusing on
Working Capital page 599
Net Working CapitalFundamentals 600Working Capital Management 600
Net Working Capital 601
Trade-Off between Profitabilityand Risk 601
•> REVIEW QUESTIONS 603
UsEi Cash Conversion Cycle 603
Calculating the Cash ConversionCycle 604
Funding Requirements of the CashConversion Cycle 605
Strategies for Managing the CashConversion Cycle 607
•» REVIEW QUESTIONS 608
IfiSI Inventory Management 608
Differing Viewpoints about InventoryLevel 608
Common Techniques for ManagingInventory 609
Focus on Practice: RFID: The613Wave of the Future7
International InventoryManagement 614
•* REVIEW QUESTIONS
IfsBJ Accounts ReceivableManagement 615
Credit Selection and Standards 615
Credit Terms 619
Credit Monitoring 622
-* REVIEW QUESTIONS 623
UsSsI Management of Receiptsand Disbursements 624
Float 624
Speeding Up Collections 625
Slowing Down Payments 625§f> Focus on Ethics: Stretching
Accounts Payable—Is It aGood Policy? 626
Cash Concentration 626
Zero-Balance Accounts 627
Investing in Marketable Securities 629
•* REVIEW QUESTIONS 630
Summary 630
Opener-in-Review 632
Self-Test Problems 632
Warm-Up Exercises 633
Problems 634
Spreadsheet Exercise 639614
XXX Contents
16Current LiabilitiesManagementpage 640
Memorial Sloan-Kettering
Cancer Center—Reducing
Accounts Payable Expenses
page 641
Spontaneous Liabilities 642
Accounts Payable Management 642
Accruals 647
®a?°sasgisti Focus on Ethics: AccrualsManagement 647
•* REVIEW QUESTIONS 648
IESI Unsecured Sources ofShort-Term Loans 648Bank Loans 648
Commercial Paper 654
(BMSZSslS&k Focus on Practice: The Ebband Flow of Commercial Paper 654
International Loans 655
•> REVIEW QUESTIONS 656
IfiSI Secured Sources ofShort-Term Loans 657Characteristics of Secured Short-TermLoans 657
Use of Accounts Receivable asCollateral 658
Use of Inventory as Collateral 660
-> REVIEW QUESTIONS 662
Summary 662
Opener-in-Review 663
Self-Test Problems 664
Warm-Up Exercises 664
Problems 665
Spreadsheet Exercise 671
Integrative Case 7 Casa de Diseno 672
Contents xxxi
Special Topics in Managerial Finance 675
17Hybrid andDerivativeSecuritiespage 676
Boeing—"We'll Buy It,
You Fly It" page 677
U S 1 Overview of Hybrids andDerivatives 678•> REVIEW QUESTION 678
U S I Leasing 678Types of Leases 678
Leasing Arrangements 679
@3%SS@(83̂ Focus on Practice: Leases toAirlines End on a Sour Note 680
Lease-versus-Purchase Decision 681
Effects of Leasing on FutureFinancing 685
Advantages and Disadvantages ofLeasing 686
•» REVIEW QUESTIONS 687
EQBJ Convertible Securities 687Types of Convertible Securities 687
General Features of Convertibles 688
Financing with Convertibles 689
Determining the Value of a ConvertibleBond 691
•» REVIEW QUESTIONS 693
Implied Price of an AttachedWarrant 694
Values of Warrants 695
•* REVIEW QUESTIONS 697
U f i l Options 698Calls and Puts 698
Options Markets 698
Options Trading 699
Role of Call and Put Options inFund Raising 700
(8a®3S&83& Focus on Ethics: OptionsBackdating 701
Hedging Foreign-Currency Exposureswith Options 701
+ REVIEW QUESTIONS 702
Summary 702
Opener-in-Review 704
Self-Test Problems 705
Warm-Up Exercises 705
Problems 706
Spreadsheet Exercise 712
U H I Stock PurchaseWarrants 693Key Characteristics 693
xxxii Contents
Mergers, LBOs,Divestitures, andBusiness Failurepage 714
IMS Health, Inc.—Creating
Value by Going Private
page 715
Merger Fundamentals 716Terminology 716
Motives for Merging 718
Types of Mergers 720
"> REVIEW QUESTIONS 721
UiSI LBOs and Divestitures 721Leveraged Buyouts (LBOs) 721
Divestitures 722
•> REVIEW QUESTIONS 723
UsSI Analyzing and NegotiatingMergers 723Valuing the Target Company 724
Stock Swap Transactions 726
Merger Negotiation Process 731
Holding Companies 733
International Mergers 735
-» REVIEW QUESTIONS 736C 3 2 * 5 ^ D Global Focus: InternationalMergers 737
Ui&J Business FailureFundamentals 737Types of Business Failure 737
Major Causes of Business Failure 738
@iffS3giSg$i Focus on Ethics: Too Big toFail? 739
Voluntary Settlements 739
"> REVIEW QUESTIONS 740
Uifil Reorganization andLiquidation in Bankruptcy 741Bankruptcy Legislation 741
Reorganization in Bankruptcy(Chapter 11) 742
Liquidation in Bankruptcy(Chapter 7) 744
"• REVIEW QUESTIONS 744
Summary 745
Opener-in-Review 747
Self-Test Problems 748
Warm-Up Exercises 748
Problems 749
Spreadsheet Exercise 755
Contents xxxiii
19InternationalManagerialFinancepage 757
General Electric—Establishinga Presence in China page758
I E U The Multinational Companyand Its Environment 759
Key Trading Blocs 759
GATT and the WTO 761
Legal Forms of BusinessOrganization 761
Taxes 762
Financial Markets 764
+ REVIEW QUESTIONS 765
liSSI Financial Statements 765
Subsidiary Characterization andFunctional Currency 766
Translation of Individual Accounts 766
•> REVIEW QUESTION 767
IKfil Risk 767
Exchange Rate Risks 767
Political Risks 773
•> REVIEW QUESTIONS 774
(HffliMfsisimsl Focus on Ethics: Chiquita'sSlippery Situation 775
IKfil Long-Term Investment andFinancing Decisions 775
Foreign Direct Investment 775
Investment Cash Flows andDecisions 776
Capital Structure 777
Global Focus: Take anOverseas Assignment to Take a Step Up theCorporate Ladder 778
Long-Term Debt 779
Equity Capital 780
•> REVIEW QUESTIONS 781
USfisl Short-Term FinancialDecisions 781
Cash Management 783
Credit and Inventory Management 786
* REVIEW QUESTIONS 787
IKflsl Mergers and JointVentures 787
•» REVIEW QUESTION 788
Summary 788
Opener-in-Review 790
Self-Test Problems 790
Warm-Up Exercises 791
Problems 791
Spreadsheet Exercise 794
Integrative Case 8 OrganicSolutions 795
Appendix A-i
Glossary G-i
Index i i