Fundamentals of Financial Management, 11th Ed, Brigham & Houston, 2007 PDF - How To Download

Fundamentals of Financial Management, 11th Ed, Brigham & Houston, 2007 PDF
By:Thomson South-Western Corporation.
Published on 2007-07-07 by Bukupedia

PREFACE When the first edition of Fundamentals was published 28 years ago, we wanted to provide an introductory text that students would find interesting and understandable. Fundamentals immediately became the leading undergraduate finance text, and it has maintained that position ever since. Our goal with this edition has been to produce a book and ancillary package that will maintain its lead and set a new standard for finance textbooks. Important changes in the financial environment have occurred since the last edition. New technology and increased globalization continue to transform practices and markets. Continued improvements in communications and transportation have made it easier for businesses to operate on a worldwide basis—a company can be headquartered in New York; develop products in India; manufacture them in China; and sell them in the United States, Europe, and the rest of the world. This has led to major changes in the labor market, especially to an increase in outsourcing, which has resulted in generally lower consumer prices, but it has caused job losses for some U.S. workers and gains for others. There have also been dramatic rises and falls in the stock market, and interest rates have plunged to record lows even as energy prices hit historic highs. Corporate scandals have led to the downfall of such giants as Enron, WorldCom, and AT&T, and this has led to important changes in the laws governing corporate management and financial reporting, as well as to equally important changes in managerial compensation. These issues are discussed in this edition of Fundamentals, where we analyze them from financial and ethical perspectives. VALUATION FOCUS The primary goal of financial management is to help managers maximize their firms’ values. Therefore, the concept of valuation underlies everything in Fundamentals. In Chapter 1 we discuss the concept of valuation and explain its dependency on future cash flows and risk, and we show why value maximization is good for society in general. We also discuss the importance of ethical conduct and the consequences of unethical behavior, which include ruined businesses, financial losses for investors, and jail terms for guilty managers. We also explain how incentive compensation, along with the threat of takeovers, can be used to motivate managers to act in the interests of both stockholders and society at large. The valuation theme is continued throughout the text. In Chapter 2, we take up the time value of money (TVM), a fundamental concept that underlies all of finance. The basic valuation equation as developed in Chapter 2 requires inputs—a set of cash flows in the numerator and a discount rate in the denominator. Therefore, in Chapters 3 and 4 we review basic accounting, including a discussion of cash flows and ways to analyze financial statements. Of course, values are not established in a vacuum—stock and bond values are determined in the financial markets, so an understanding of those markets and the way they operate is essential to anyone working in finance. Therefore, in Chapter 5, we discuss the major types of financial markets, the returns that investors have historically earned in those markets, and the risks inherent in different securities. We then cover, in Chapter 6, interest rates and the factors that influence them—risk, inflation, liquidity, and the supply of and demand for capital. This leads directly into a discussion of bonds and bond valuation, in beginning with the risk of a stock held in isolation and then moving on to the risk of stocks held in portfolios. We then explain, in Chapter 9, how common stocks are valued. With this background, in subsequent chapters we explain the financial tools and techniques managers use to help maximize their firms’ values. Included are chapters on capital budgeting, the optimal capital structure, dividend policy, working capital, and financial forecasting. The final section of the book consists of four chapters that deal with derivatives, multinational finance, hybrid securities, and mergers. Our organization has four important advantages: 1. Covering TVM and valuation early helps students see how expected future cash flows, along with risk-adjusted discount rates, determine the value of the firm. Also, it takes time for students to digest TVM concepts and to learn how to do the required calculations, and providing this time is another benefit of early TVM coverage. 2. Structuring the book around markets and valuation enhances continuity and helps students see how the various topics are related to one another. 3. Most students—even those who do not plan to major in finance—are interested in stock and bond values, rates of return, and the like. Because the ability to learn is a function of individual interest and motivation, and because Fundamentals covers securities and security markets early, our organization is pedagogically sound. 4. Once the basic concepts have been established, it is easier for students to understand both how and why corporations make specific capital budgeting, financing, and working capital decisions. SIGNIFICANT CHANGES IN THE ELEVENTH EDITION A good working knowledge of finance is essential for success in business, regardless of one’s specific job, because everything from marketing to human services is related to financial issues. This makes it important for anyone who plans to work in business to learn the fundamentals of finance. However, reading a finance text is different from reading a novel—one must focus on essential concepts and then work related problems to see how things tie together. For example, inflation affects interest rates, which affect stock and bond prices, which affect the feasibility of capital expenditures. To understand these relationships one must learn some basic principles and then work through problems to see how the various factors interact with one another. Students sometimes find finance relatively abstract, and they don’t see its relevance to them. This makes it difficult for professors to get students to do the work necessary to see just how interesting and relevant it really is. Based on our own and others’ teaching experiences, in this edition we took a number of steps to alleviate this problem: ■ Increased student interest. Students learn a subject best if they find it interesting, so we need to get them excited about finance. To help here, we use examples that illustrate how successful corporations apply financial principles plus examples that show how firms sometimes go astray and fail. We also explain how financial concepts can help one make better personal decisions, ranging from choosing a job, to investing, to deciding whether to lease or buy a car. iv Preface Four important advantages of the Eleventh Edition’s organization. ■ Provided clear explanations. Students justifiably become frustrated and lose interest if a subject is not explained clearly. We have always tried to provide a clear, well-written text, but in this edition we used computer technology to help us make significant improvements. First, the entire book was put on electronic files, which enabled us to edit and re-edit to get the writing as clear as possible. Second, we solved all of the numerical examples with Excel, and this helped us tweak the numbers to make the examples more clear and consistent. Third, we shifted sections around to improve the flow both within the chapters and from one chapter to the next. In total, these changes will help students learn more in less time, which will reduce their stress and thus increase their interest and comprehension. ■ Provided timely within-chapter self-tests. Much of finance involves numerical problems, so students must learn a concept, then become familiar with formulas, and then learn how to apply the formulas to solve specific problems. In our earlier editions, we explained and illustrated the concepts within the chapters, then provided a set of end-of-chapter problems that students could use to practice and test their knowledge. Unfortunately, students learned the concepts and understood the examples when they read the text, but by the time they got to the end-of-chapter problems they had forgotten much and had to go back and re-read the text. With this edition, we provide questions and problems (with answers) immediately after each section, which permits students to work with the concepts while things are still fresh on their minds. Again, this facilitates the learning process. ■ Ranked end-of-chapter problems by difficulty. In past editions we arranged the end-of-chapter problems by topic, not by difficulty level. Students would often start working the problems, hit a difficult one relatively quickly, become frustrated, and give up. In this edition we arranged the problems by difficulty, identifying the first set as “Easy” ones that most students should be able to work without too much trouble; then “Intermediate” problems that are a bit harder; and then “Challenging” problems that are longer, more complex, and will perhaps require some help from the instructor. This new setup again reduces students’ stress and frustration. ■ Improved the Test Bank. The Test Bank has been improved substantially, and many questions and problems that resemble the easy and intermediate endof- chapter problems have been added. Moreover, as discussed later in this Preface, many of the problems can be algorithmically modified to create an almost infinite number of alternative versions, with different answers, for a given problem. Different instructors have different views on the way students should be tested, but the new Test Bank and related testing material can be used to provide students with a set of relatively straightforward problems that deal with all aspects of financial management to help them study for the exams. They will then see that if they work hard and learn how to solve the various types of problems, they will have a good grasp of finance and, consequently, should do well on exams that consist primarily of straightforward (easy and intermediate) problems. Most instructors also use a few “challenging” exam problems, where students must figure out how to apply finance concepts to deal with new and different situations they haven’t seen before. The “challenging” end-of-chapter problems are representative of this type of exam problem, and a number of them are provided in the Test Bank. ■ Coordinated the text, problems, and Test Bank. Students should be rewarded for their efforts, and they become frustrated if they study hard, learn how to answer most of the problems in the text, and then face an exam where the problems are different from what they have been studying. To alleviate this problem, we have consciously coordinated the text examples, within-chapter self-tests, end-of-chapter problems, and Test Bank questions and problems. If students read the text carefully and work the self-test problems, they should be able to work most of the easy end-of-chapter problems, which should prepare them for the intermediate problems, which should help with the challenging problems. Thus, students who work hard should do well on exams based on the Test Bank. ■ Improved coverage of the time value of money. As noted earlier, the time value of money is the most important concept in finance, as it underlies stock and bond valuation, capital budgeting, cost of capital, lease analysis, and other key topics. However, students often have trouble grasping the basics of TVM, and this makes it almost impossible to do well in the course. To help alleviate this problem, we have taken the following steps: • We moved TVM forward, from Chapter 6 to Chapter 2. This gives students time to digest TVM concepts before they must use them in the bond, stock, and capital budgeting chapters. • As noted earlier, we added self-test problems, with solutions, at the end of each section. This helps students check their understanding of each type of problem before moving on. • We explain the basic TVM functions using a five-step procedure: We show a time line setup, go through a numerical step-by-step solution, explain a formula that simplifies the step-by-step approach, explain how the formula is programmed into a calculator and how the inputs can be entered to solve the problem very efficiently, and then (as an optional exercise) show how the problem can be worked using Excel. This procedure helps students see exactly what each function does, understand the mathematics of the solution process, and see how calculators (and Excel) can be used to solve TVM problems. This procedure helps avoid the “black box” problem, where students get answers with a calculator but don’t really know what’s happening and consequently can’t work problems that deviate from those whose solutions they have memorized. • We also developed revised calculator tutorials for the most popular TI and HP calculators. The tutorial illustrations are identical to our withintext examples, so when a student reads about, say, the future value in the text, he or she can simultaneously learn from the tutorial how to find the FV with a calculator. Students tell us that learning how to use their calculators as they learn TVM concepts is much more efficient than studying the two separately. • The TVM chapter introduces concepts covered in the bond, stock, and capital budgeting chapters, and this makes coverage of those chapters more efficient. For example, we illustrate the present values in the TVM chapter with the same cash flows that are later used in the bond, stock, and capital budgeting chapters, so in those later chapters we can refer students back to TVM for a quick refresher on the concept and solution technique. ■ Clarified capital budgeting. This is another key concept, but again one that students have found difficult. In particular, they have trouble understanding the differences between ranking criteria such as the net present value and the internal rate of return methods. In this edition, we begin by discussing the NPV method, tie it back to the TVM chapter, explain why it’s the best ranking criterion, and then explain how the other criteria supplement the NPV. This structure reduces confusion students had in the past and gives them a better understanding of capital budgeting. ■ Reorganized the discussion of the financial environment. Chapter 4 in the last edition was too long to be covered in a reasonable length of time. In this edition, we divided the chapter into two segments, one on financial markets and institutions and a second one that deals with interest rates and their determinants. The second chapter leads us into bond valuation. • Streamlined the discussion of working capital. Current assets make up about half of the average firm’s assets, and most students’ first job after graduation is likely to deal with some aspect of working capital. However, this topic is often not covered in the introductory finance course, which means that nonfinance majors never cover it at all (and it may also be skipped in advanced finance courses). We concluded that our coverage was so long, detailed, and indeed boring that many instructors simply skipped it. We totally rewrote the working capital material and cover the key points in a logical and succinct manner. Reviewers unanimously agreed that the new chapter was considerably better than the two old ones, and two reviewers even said that they enjoyed reading the chapter! RELATIONSHIP TO OTHER THOMSON/SOUTH-WESTERN BOOKS The growing body of financial knowledge makes it impossible to include everything about financial management that one might desire in one textbook. This led Gene Brigham to coauthor two other texts that deal with materials that go beyond what can be covered in an introductory course. The first of these is a comprehensive book aimed primarily at MBAs, Financial Management: Theory and Practice, Eleventh Edition, coauthored with Michael C. Ehrhardt. The second is an upper-level undergraduate text, Intermediate Financial Management, Ninth Edition, coauthored with Phillip R. Daves. In addition, Brigham and Houston teamed up with Roy Crum to write a text focused on financial management in an international setting, Fundamentals of International Finance, published by Thomson in 2005. Also, some time ago a survey of professors indicated that some preferred a smaller, more streamlined text than Fundamentals. With that in mind, we created Fundamentals of Financial Management: Concise, which is 20 percent shorter than Fundamentals. Most of Concise’s chapters are identical to the corresponding ones in Fundamentals, but Fundamentals includes an additional chapter on capital budgeting plus chapters on derivatives, hybrid securities, and mergers. Although Concise has been well received, there are two significant advantages to a more complete book such as Fundamentals: 1. Fundamentals provides professors with more flexibility in designing their courses. 2. Fundamentals is a more complete reference book for students to use after completing the course. This is especially important for nonfinance majors, who will not otherwise have access to materials that are covered in Fundamentals but are omitted from Concise. In this regard, it should be noted that the chapters in Fundamentals are written in a modular, self-contained format that makes it easy for students to read them on their own. INTENDED MARKET Fundamentals is intended for use in an introductory finance course. The key chapters can be covered in one term, but if it is supplemented with cases and perhaps some outside readings, the book can also be used for a two-term course. When it is covered in one term, instructors generally assign only selected chapters, leaving the others for students to examine on their own or use for reference purposes in later courses and after graduation. Note also that the chapters are written in a flexible, modular format that helps instructors cover the material in whatever sequence they choose. ThomsonNOW: A NEW WEB-BASED COURSE RESOURCE PLATFORM ThomsonNOW is Thomson Publishing’s new Web-based delivery system, and it contains items that were in the past provided on a CD. Since ThomsonNOW is Web based, it can be changed to reflect new developments and can also operate interactively to create an unlimited number of unique test questions. ThomsonNOW includes the following items, with more to be added over time: Test Bank The Test Bank for Fundamentals has been enhanced in several ways. • Many new problems and questions have been added, and those new items are now contained in Part I of each Test Bank chapter, with Part II containing questions carried over from the old Test Bank. • The problems and questions are categorized by difficulty, and more relatively short items suitable for quizzes and time-limited exams were added. • Many of the problems are set up so that alternative versions can be algorithmically generated—one or more of the input parameters such as the interest rate or project cost is randomly changed and thus creates a similar problem but with a different answer. This feature enables an instructor to create unique exams and online quizzes ensure that each student does his or her own work. Practice Problems ThomsonNOW permits an instructor to generate sets of problems that can be used for • Graded or ungraded homework • Online or in-class quizzes. • Practice sets for students to use as a study aid. With the very large number of problems in the new Test Bank and the algorithmic feature, a virtually unlimited number of unique problems can be generated. Conscientious students can then work many problems and learn how to deal with most finance issues, but they can’t memorize answers to specific problems because each problem’s answer may be unique. Excel Models A set of new and improved models that go through the calculations in most chapters, plus additional models tied to the end-of-chapter integrated cases, are also provided on ThomsonNOW. These models are used to generate some of the text exhibits, including those used in the capital budgeting chapters. While we do not assume that students know Excel, we do set the models up so that those familiar with spreadsheets can get a better feel for how they are used in practice. We also provide, in the end-of-chapter materials for most chapters, an integrated spreadsheet problem with a model accessible from ThomsonNOW that does an analysis similar to that in the chapter, including data tables and graphs that give insights into the sensitivity of key outputs to input changes. Thomson ONE—Business School Edition I/B/E/S Consensus Estimates. Includes consensus estimates—averages, means, and medians; analyst-by-analyst earnings coverage; analysts’ forecasts based on 15 industry standard measures; current and historic coverage for the selected 500 companies. Current history is five years forward and historic history is from 1976 for U.S. companies and 1987 for international companies; current data are updated daily, and historic are updated monthly. Worldscope. Includes company profiles, financials, and accounting results and market per-share data for the selected 500 companies; annual information and monthly prices going back to 1980, all updated daily. Disclosure SEC Database. Includes company profiles, annual and quarterly company financials, pricing information, and earnings estimates for selected U.S. and Canadian companies: annually from 1987, quarterly data rolling 10 years, and monthly pricing—all updated weekly. DataStream Pricing. Daily international pricing, including share price (open, high, low, close, P/E), index, and exchange rate data. History is rolling 10 years. ILX Systems Delayed Quotes. Includes 20-minute delayed quotes of equities and indices from U.S. and global tickers covering 130 exchanges in 25 developed countries. Comtex Real-Time News. Includes current news releases. SEC Edgar Filings and Global Image Source Filings. Includes regulatory and nonregulatory filings for both corporate and individual entities. Edgar filings are real-time and go back 10 years; image filings are updated daily and go back 7 years. OTHER FEATURES OF THE ELEVENTH EDITION Recent Financial Events The past few years have witnessed great turmoil in the financial markets. We have seen an incredible rise and fall of the stock market and the stunning collapses of Enron, WorldCom, Arthur Andersen, and others. Some of these problems were caused by fraud and questionable accounting practices, which, in turn, stemmed largely from badly designed executive compensation programs. As we discuss in Chapter 1, the focus of many top executives shifted from maximizing their firms’ long-run stock prices to maximizing prices on the day the executives’ own stock options vested and could be sold. We consider the effects of this shift in focus, and ways to move the focus back to the long run and thus to benefit all parties, not just executives with stock options. We also updated Chapters 6, 7, 8, and 9 to reflect the many changes that have occurred in the stock and bond markets since the last edition. We also restructured these chapters to improve the flow, and we streamlined the coverage of yield curves. Revised Treatment of Financial Statements In the wake of the corporate scandals, we have taken steps to enhance our discussion of financial statements and accounting-related issues. In Chapter 3, we continue our emphasis on cash flow, and we expanded our discussion of the differences between net income, net cash flow, and free cash flow. We also streamlined the discussion of taxes, focusing on the major tax issues facing investors and corporations but leaving many details for a Web Appendix, which can be found on ThomsonNOW. Reworked Section on Market Efficiency and Behavioral Finance The events surrounding the stock market bubble have led many to reevaluate the efficiency of financial markets, which, in turn, generated new academic research in the area of behavioral finance. While most authorities still believe that market efficiency is a cornerstone of finance, market efficiency does have limitations. Consequently, we discuss the evidence regarding the extent of stock market efficiency, along with the implications of behavioral finance. Web Appendixes To make room for important new materials and to streamline the book, we moved certain interesting but secondary material to appendixes available through ThomsonNOW. References to these appendixes are provided in the relevant text chapters. Streamlined Discussion of the Time Value of Money As noted earlier, we took several steps to increase the readability of this critically important chapter. First, we moved it from Chapter 6 to Chapter 2 to give students more time to digest it before using it in the bond, stock, and capital budgeting chapters. We also added end-of-section self-tests to ensure that students can work with the function that was just discussed before moving on to the next one, and we provide (on ThomsonNOW) tutorials on the most popular calculators to help in this regard. The new setup helps students understand the fundamental issues in TVM and work problems efficiently, but without falling into the “black box trap” of knowing how to work specific problems but not understanding concepts well enough to deal with problems that are structured somewhat differently. Changes in the Working Capital Chapter As noted earlier, we totally rewrote the working capital material, reducing it from two chapters to one to cover the key points in a logical and succinct manner. Reviewers unanimously agreed that the new chapter was considerably better than the two old ones. A quote from one reviewer summarizes their conclusions: I like the abbreviated one-chapter approach. I looked at the old Tenth Edition chapter again, and I like the new one much better—it is more readable than the original two chapters, and I actually enjoyed reading it. The two-chapter approach provided too much extraneous and confusing information. The new and more concise presentation gives introductory students exactly what they need. Also, the new chapter is so much better than the previous two that I could assign it to students to read and learn on their own. I would, however, cover the cash budget in class because that is a bit more complicated, but even cash budgeting is much better presented here. Another reviewer stated that he has been skipping working capital in his class because, as it was presented, it would take too long to cover it, but that he planned to cover the chapter in its new format. We expect others to agree. Analyzing Financial Decisions with Spreadsheets We developed spreadsheet models for each chapter in the book except Chapters 1 and 5. Spreadsheet programs are ideally suited for analyzing many financial issues, and a knowledge of spreadsheets is rapidly becoming essential for people in business. Therefore, we indicate how spreadsheets are used to deal with the issues discussed in the text. However, we recognize that students need to understand basic finance concepts before going into computer modeling. Therefore, in the text chapters, we discuss finance concepts, provide examples, and explain how the concepts are used in the decision process. Where the analysis involves arithmetic, we assume that students are using calculators. However, if the problem is one that could be solved more efficiently with a computer, we briefly describe how the computer would be used. These explanations are short, easy to follow, and can be skipped without loss of continuity. Thus, students get an idea of how they could go from calculators to spreadsheets, but they don’t need to take that step. However, if an instructor wants to emphasize computers in the course, or if an individual student wants to learn more about spreadsheets on his or her own, the spreadsheet models available from ThomsonNOW make that relatively easy. Also, we provide on ThomsonNOW an Excel tutorial that explains the functions and procedures used in the models. The tutorial has an index that makes it relatively easy to find information about each function and feature, and students can use the models and tutorial to learn Excel on their own. Preface xi

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