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Analysis for Financial Management 11th Edition Chapter 3

PDF – Mc Graw Hill – ISBN: 0077861787 – Analysis for Financial Management, 11th edition  By Robert C. Higgins  # 11359


English |  | 2016 | 465 pages | PDF | 16 MB

ROBERT C. HIGGINS

Marguerite Reimers

Emeritus Professor of Finance

The University of Washington

JENNIFER L. KOSKI

John B. and Delores L. Fery

Faculty Fellow

Associate Professor of Finance

The University of Washington

TODD MITTON

Ned C. Hill Professor of Finance

Brigham Young University

only for show


Analysis for Financial Management, 11e presents standard techniques and modern developments in a practical and intuitive manner with an emphasis on the managerial applications of financial analysis. It is intended for non-financial managers and business students interested in the practice of financial management. New with the Eleventh Edition, Online McGraw-Hill's adaptive learning component, LearnSmart, provides assignable modules that help students master chapter core concepts and come to class more prepared.

PART ONE

Assessing the Financial Health of the Firm 1

1 Interpreting Financial Statements 3

2 Evaluating Financial Performance 39

PART TWO

Planning Future Financial Performance 79

3 Financial Forecasting 81

4 Managing Growth 115

PART THREE

Financing Operations 141

5 Financial Instruments and Markets 143

6 The Financing Decision 195

PART FOUR

Evaluating Investment Opportunities 237

7 Discounted Cash Flow Techniques 239

8 Risk Analysis in Investment Decisions 289

9 Business Valuation and Corporate

Restructuring 343

PART ONE

ASSESSING THE FINANCIAL

HEALTH OF THE FIRM 1

Chapter 1

Interpreting Financial Statements 3

The Cash Flow Cycle 3

The Balance Sheet 6

Current Assets and Liabilities 11

Shareholders' Equity 12

The Income Statement 12

Measuring Earnings 12

Sources and Uses Statements 17

The Two-Finger Approach 18

The Cash Flow Statement 19

Financial Statements and the

Value Problem 24

Market Value vs. Book Value 24

Economic Income vs. Accounting Income 27

Imputed Costs 28

Summary 31

Additional Resources 32

Problems 33

Chapter 2

Evaluating Financial Performance 39

The Levers of Financial Performance 39

Return on Equity 40

The Three Determinants of ROE 40

The Profit Margin 42

Asset Turnover 44

Financial Leverage 49

Is ROE a Reliable Financial Yardstick? 55

The Timing Problem 56

The Risk Problem 56

The Value Problem 58

ROE or Market Price? 59

Ratio Analysis 62

Using Ratios Effectively 62

Ratio Analysis of Stryker Corporation 63

Summary 71

Additional Resources 72

Problems 73

PART TWO

PLANNING FUTURE FINANCIAL

PERFORMANCE 79

Chapter 3

Financial Forecasting 81

Pro Forma Statements 81

Percent-of-Sales Forecasting 82

Interest Expense 88

Seasonality 89

Pro Forma Statements and Financial

Planning 89

Computer-Based Forecasting 90

Coping with Uncertainty 94

Sensitivity Analysis 94

Scenario Analysis 95

Simulation 96

Cash Flow Forecasts 98

Cash Budgets 99

The Techniques Compared 102

Planning in Large Companies 103

Summary 105

Additional Resources 106

Problems 108

Chapter 4

Managing Growth 115

Sustainable Growth 116

The Sustainable Growth Equation 116

vii

Contents

viii Contents

Too Much Growth 119

Balanced Growth 119

Under Armour's Sustainable Growth Rate 121

"What If" Questions 122

What to Do When Actual Growth Exceeds

Sustainable Growth 122

Sell New Equity 123

Increase Leverage 125

Reduce the Payout Ratio 125

Profitable Pruning 126

Outsourcing 127

Pricing 127

Is Merger the Answer? 127

Too Little Growth 128

What to Do When Sustainable Growth

Exceeds Actual Growth 129

Ignore the Problem 130

Return the Money to Shareholders 130

Buy Growth 131

Sustainable Growth and Pro Forma

Forecasts 132

New Equity Financing 132

Why Don't U.S. Corporations Issue More

Equity? 135

Summary 136

Additional Resources 137

Problems 138

PART THREE

FINANCING OPERATIONS 141

Chapter 5

Financial Instruments and

Markets 143

Financial Instruments 144

Bonds 145

Common Stock 152

Preferred Stock 156

Financial Markets 158

Venture Capital Financing 158

Private Equity 160

Initial Public Offerings 162

Seasoned Issues 163

Issue Costs 168

Efficient Markets 169

What Is an Efficient Market? 170

Implications of Efficiency 172

Appendix

Using Financial Instruments to Manage

Risks 174

Forward Markets 175

Speculating in Forward Markets 176

Hedging in Forward Markets 177

Hedging in Money and Capital Markets 180

Hedging with Options 180

Limitations of Financial Market Hedging 183

Valuing Options 185

Summary 188

Additional Resources 189

Problems 191

Chapter 6

The Financing Decision 195

Financial Leverage 197

Measuring the Effects of Leverage on a

Business 201

Leverage and Risk 203

Leverage and Earnings 206

How Much to Borrow 208

Irrelevance 208

Tax Benefits 210

Distress Costs 211

Flexibility 215

Market Signaling 217

Management Incentives 220

The Financing Decision and Growth 221

Selecting a Maturity Structure 224

Inflation and Financing Strategy 225

Appendix

The Irrelevance Proposition 225

No Taxes 226

Taxes 228

Summary 230

Additional Resources 231

Problems 232

Contents ix

PART FOUR

EVALUATING INVESTMENT

OPPORTUNITIES 237

Chapter 7

Discounted Cash Flow Techniques

239

Figures of Merit 240

The Payback Period and the Accounting

Rate of Return 241

The Time Value of Money 242

Equivalence 247

The Net Present Value 248

The Benefit-Cost Ratio 250

The Internal Rate of Return 250

Uneven Cash Flows 254

A Few Applications and Extensions 255

Mutually Exclusive Alternatives and Capital

Rationing 259

The IRR in Perspective 260

Determining the Relevant

Cash Flows 260

Depreciation 262

Working Capital and Spontaneous

Sources 264

Sunk Costs 265

Allocated Costs 266

Cannibalization 267

Excess Capacity 268

Financing Costs 270

Appendix

Mutually Exclusive Alternatives and

Capital Rationing 272

What Happened to the Other

$578,000? 273

Unequal Lives 274

Capital Rationing 277

The Problem of Future Opportunities 278

A Decision Tree 279

Summary 280

Additional Resources 281

Problems 282

Chapter 8

Risk Analysis in Investment

Decisions 289

Risk Defined 291

Risk and Diversification 293

Estimating Investment Risk 295

Three Techniques for Estimating Investment

Risk 296

Including Risk in Investment Evaluation 297

Risk-Adjusted Discount Rates 297

The Cost of Capital 298

The Cost of Capital Defined 299

Cost of Capital for Stryker Corporation 301

The Cost of Capital in Investment Appraisal 308

Multiple Hurdle Rates 309

Four Pitfalls in the Use of Discounted Cash

Flow Techniques 311

The Enterprise Perspective versus the Equity

Perspective 312

Inflation 314

Real Options 315

Excessive Risk Adjustment 321

Economic Value Added 322

EVA and Investment Analysis 323

EVA's Appeal 325

A Cautionary Note 326

Appendix

Asset Beta and Adjusted Present

Value 326

Beta and Financial Leverage 327

Using Asset Beta to Estimate Equity

Beta 328

Asset Beta and Adjusted Present Value 329

Summary 332

Additional Resources 333

Problems 335

Chapter 9

Business Valuation and Corporate

Restructuring 343

Valuing a Business 345

Assets or Equity? 346

x Contents

Dead or Alive? 346

Minority Interest or Control? 348

Discounted Cash Flow Valuation 349

Free Cash Flow 350

The Terminal Value 351

A Numerical Example 354

Problems with Present Value Approaches to

Valuation 357

Valuation Based on Comparable Trades 357

Lack of Marketability 361

The Market for Control 362

The Premium for Control 362

Financial Reasons for Restructuring 364

The Empirical Evidence 372

The Cadbury Buyout 374

Appendix

The Venture Capital Method of

Valuation 376

The Venture Capital Method—One

Financing Round 377

The Venture Capital Method—Multiple

Financing Rounds 380

Why Do Venture Capitalists Demand

Such High Returns? 382

Summary 384

Additional Resources 385

Problems 386

Analysis for Financial Management 11th Edition Chapter 3

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