XXXXXXXXXXpdf
FREQUENTLY USED SYMBOLS
ACP Average collection period
ADR American Depository Receipt
APR Annual percentage rate
AR Accounts receivable
Beta coefficient, a measure of an asset’s market risk
L Levered beta
U Unlevered beta
BEP Basic earning powe
BVPS Book value per share
CAPM Capital Asset Pricing Model
CCC Cash conversion cycle
CF Cash flow; CFt is the cash flow in Period t
CFPS Cash flow per share
CR Conversion ratio
CV Coefficient of variation
Δ Difference, or change (uppercase delta)
Dps Dividend of prefe
ed stock
Dt Dividend in Period t
DCF Discounted cash flow
D/E Debt-to-equity ratio
DPS Dividends per share
DRIP Dividend reinvestment plan
DRP Default risk premium
DSO Days sales outstanding
EAR Effective annual rate, EFF%
EBIT Earnings before interest and taxes; net operating income
EBITDA Earnings before interest, taxes, depreciation, and amortization
EPS Earnings per share
EVA Economic Value Added
F (1) Fixed operating costs
(2) Flotation cost
FCF Free cash flow
FVN Future value for Year N
FVAN Future value of an annuity for N years
g Growth rate in earnings, dividends, and stock prices
I Interest rate; also denoted by
I/YR Interest rate key on some calculators
INT Interest payment in dollars
IP Inflation premium
IPO Initial public offering
IRR Internal rate of return
LP Liquidity premium
M (1) Maturity value of a bond
(2) Margin (profit margin)
M/B Market-to-book ratio
MIRR Modified Internal Rate of Return
MRP Maturity risk premium
MVA Market Value Added
n Number of shares outstanding
N Calculator key denoting number of periods
N(di) Represents area under a standard normal distribution function
NOPAT Net operating profit after taxes
NOWC Net operating working capital
NPV Net present value
P (1) Price of a share of stock in Period t; P0 = price of the stock today
(2) Sales price per unit of product sold
Pc Conversion price
Pf Price of good in foreign country
Ph Price of good in home country
PN A stock’s horizon, or terminal, value
P/E Price/earnings ratio
PMT Payment of an annuity
PPP Purchasing power parity
PV Present value
PVAN Present value of an annuity for N years
Q Quantity produced or sold
QBE Breakeven quantity
(1) A percentage discount rate, or cost of capital; also denoted by i
(2) Nominal risk-adjusted required rate of return
̄ “r bar,” historic, or realized, rate of return
̂ “r hat,” an expected rate of return
* Real risk-free rate of return
d Before-tax cost of debt
e Cost of new common stock (outside equity)
f Interest rate in foreign country
h Interest rate in home country
i Required return for an individual firm or security
M Return for “the market” or for an “average” stock
NOM Nominal rate of interest; also denoted by iNOM
ps (1) Cost of prefe
ed stock
(2) Portfolio’s return
PER Periodic rate of return
RF Rate of return on a risk-free security
s (1) Required return on common stock
(2) Cost of old common stock (inside equity)
ρ Co
elation coefficient (lowercase rho); also denoted by R when using historical data
ROA Return on assets
ROE Return on equity
RP Risk premium
RPM Market risk premium
RR Retention rate
S (1) Sales
(2) Estimated standard deviation for sample data
(3) Intrinsic value of stock (i.e., all common equity)
SML Security Market Line
∑ Summation sign (uppercase sigma)
σ Standard deviation (lowercase sigma)
σ2 Variance
t Time period
T Marginal income tax rate
TVN A stock’s horizon, or terminal, value
TIE Times interest earned
V Variable cost per unit
VB Bond value
VL Total market value of a levered firm
Vop Value of operations
Vps Value of prefe
ed stock
VU Total market value of an unlevered firm
VC Total variable costs
w Proportion or weight
wd Weight of debt
wps Weight of prefe
ed stock
ws Weight of common equity raised internally by retaining earnings
wce Weight of common equity raised externally by issuing stock
WACC Weighted averaged cost of capital
X Exercise price of option
YTC Yield to call
YTM Yield to maturity
Financial Management:
Theory and Practice
THIRTEENTH EDITION
M ICHAE L C . EHRHARDT
University of Tennessee
EUGENE F . B R I GHAM
University of Florida
Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States
Financial Management: Theory and Practice,
Thirteen Edition
Michael C. Ehrhardt and Eugene F. Brigham
VP/Editorial Director:
Jack W. Calhoun
Publisher:
Joe Sabatino
Executive Editor:
Mike Reynolds
Developmental Editor:
Michael Guendelsberge
Senior Editorial Assistant:
Adele Scholtz
Marketing Manager:
Nathan Anderson
Marketing Coordinator:
Suellen Ruttkay
Content Project Manager:
Jacquelyn K Featherly
Technology Production Analyst:
Sta
att Alexande
Senior Manufacturing Coordinator:
Kevin Kluck
Production House/Compositor:
Integra Software Services Pvt. Ltd.
Senior Art Director:
Michelle Kunkle
Cover and Internal Designer:
Rokusek Design
Cover Images:
© Lael Henderson/Stock Illustration
Source/Getty Images, Inc.
©2011, 2009 South-Western, a part of Cengage Learning
ALL RIGHTS RESERVED. No part of this work covered by the copyright herein
may be reproduced, transmitted, stored or used in any form or by any means
graphic, electronic, or mechanical, including but not limited to photocopying,
ecording, scanning, digitizing, taping, Web distribution, information networks,
or information storage and retrieval systems, except as permitted under Sec-
tion 107 or 108 of the 1976 United States Copyright Act, without the prio
written permission of the publisher.
For product information and technology assistance, contact us at
Cengage Learning Customer & Sales Support, XXXXXXXXXX
For permission to use material from this text or product,
submit all requests online at www.cengage.com/permissions
Further permissions questions can be emailed to
XXXXXXXXXX
ExamView® and ExamView Pro® are registered trademarks of FSCreations, Inc.
Windows is a registered trademark of the Microsoft Corporation used herein
under license. Macintosh and Power Macintosh are registered trademarks of
Apple Computer, Inc. used herein under license.
Li
ary of Congress Control Number: XXXXXXXXXX
Student Edition ISBN 13: XXXXXXXXXX
Student Edition ISBN 10: XXXXXXXXXX
Package Student Edition ISBN 13: XXXXXXXXXX
Package Student Edition ISBN 10: XXXXXXXXXX
South-Western Cengage Learning
5191 Natorp Boulevard
Mason, OH 45040
USA
Cengage Learning products are represented in Canada by
Nelson Education, Ltd.
For your course and learning solutions, visit www.cengage.com
Purchase any of our products at your local college store or at our prefe
ed
online store www.CengageBrain.com
Printed in the United States of America
XXXXXXXXXX XXXXXXXXXX
www.cengage.com/permissions
www.cengage.com
www.CengageBrain.com
Brief Contents
Preface xix
PART 1 Fundamental Concepts
of Corporate Finance 1
CHAPTER 1 An Overview of Financial
Management and the Financial
Environment 3
Web Extensions 1A: An Overview of Derivatives
1B: A Closer Look at the Stock
Markets
CHAPTER 2 Financial Statements, Cash Flow,
and Taxes 47
Web Extensions 2A: The Federal Income Tax
System for Individuals
CHAPTER 3 Analysis of Financial
Statements 87
PART 2 Fixed Income
Securities 121
CHAPTER 4 Time Value of Money 123
Web Extensions 4A: The Tabular Approach
4B: Derivation of Annuity Formulas
4C: Continuous Compounding
CHAPTER 5 Bonds, Bond Valuation, and
Interest Rates 173
Web Extensions 5A: A Closer Look at Zero
Coupon Bonds
5B: A Closer Look at TIPS:
Treasury Inflation-Protected
Securities
5C: A Closer Look at Bond Risk:
Duration
5D: The Pure Expectations Theory
and Estimation of Forward Rates
PART 3 Stocks and Options 215
CHAPTER 6 Risk, Return, and the Capital
Asset Pricing Model 217
Web Extensions 6A: Continuous Probability
Distributions
6B: Estimating Beta with
a Financial Calculato
CHAPTER 7 Stocks, Stock Valuation,
and Stock Market
Equili
ium 267
Web Extensions 7A: Derivation of Valuation
Equations
CHAPTER 8 Financial Options and Applications
in Corporate Finance 305
PART 4 Projects and Thei
Valuation 333
CHAPTER 9 The Cost of Capital 335
Web Extensions 9A: The Required Return
Assuming Nonconstant Dividends
and Stock Repurchases
CHAPTER 10 The Basics of Capital Budgeting:
Evaluating Cash Flows 379
Web Extensions 10A: The Accounting Rate of
Return (ARR)
CHAPTER 11 Cash Flow Estimation and Risk
Analysis 423
Web Extensions 11A: Certainty Equivalents
and Risk-Adjusted Discount
Rates
i i i
PART 5 Corporate Valuation
and Governance 471
CHAPTER 12 Financial Planning and
Forecasting Financial
Statements 473
Web Extensions 12A: Advanced Techniques fo
Forecasting Financial Statements
Accounts
CHAPTER 13 Corporate Valuation,
Value-Based Management
and Corporate Governance 511
PART 6 Cash Distributions and
Capital Structure 557
CHAPTER 14 Distributions to Shareholders:
Dividends and Repurchases 559
CHAPTER 15 Capital Structure
Decisions 599
Web Extensions 15A: Degree of Leverage
PART 7 Managing Global
Operations 639
CHAPTER 16 Working Capital
Management 641
Web Extensions 16A: Secured Short-Term
Financing
CHAPTER 17 Multinational Financial
Management 691
PART 8 Tactical Financing
Decisions 731
CHAPTER 18 Lease Financing 733
Web Extensions 18A: Leasing Feedback
18B: Percentage Cost Analysis
18C: Leveraged Leases
CHAPTER 19 Hy
id Financing: Prefe
ed
Stock, Wa
ants, and
Convertibles 759
Web Extensions 19A: Calling Convertible
Issues
CHAPTER 20 Initial Public Offerings,
Investment Banking,
and Financial
Restructuring 787
Web Extensions 20A: Rights Offerings
PART 9 Special Topics 825
CHAPTER 21 Mergers, LBOs, Divestitures, and
Holding Companies 827
Web Extensions 21A: Projecting Consistent Debt
and Interest Expenses
CHAPTER 22 Bankruptcy, Reorganization, and
Liquidation 869
Web Extensions 22A: Multiple Discriminant
Analysis
CHAPTER 23 Derivatives and Risk
Management 899
Web Extensions 23A: Risk Management with
Insurance
PART 10 Advanced Issues 929
CHAPTER 24 Portfolio Theory, Asset Pricing
Models, and Behavioral
Finance 931
CHAPTER 25 Real Options 971
Web Extensions 25A: The Abandonment Real
Option
25B: Risk-Neutral Valuation
CHAPTER 26 Analysis of Capital Structure
Theory 995
iv Brief Contents
Appendixes
Appendix A Solutions to Self-Test
Problems 1029
Appendix B Answers to End-of-Chapte
Problems 1063
Appendix C Selected Equations and
Data 1071
Appendix D Values of the Areas under the
Standard Normal Distribution
Function 1085
Glossary 1087
Name Index 1113
Subject Index 1119
Web Chapters
CHAPTER 27 Providing and Obtaining Credit
CHAPTER 28 Advanced Issues in Cash
Management and Inventory
Control
CHAPTER 29 Pension Plan Management
CHAPTER 30 Financial Management in
Not-for-Profit Businesses
Brief Contents v
Contents
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXXXXXXXXXxix
PART 1 Fundamental Concepts of Corporate Finance 1
C H A P T E R 1
An Overview of Financial Management and the Financial Environment 3
The Five-Minute MBA 4
Box: Say Hello to the Global Economic Crisis! 5
The Corporate Life Cycle 5
Box: Columbus Was Wrong—the World Is Flat! And Hot, and Crowded! 6
The Primary Objective of the Corporation: Value Maximization 9
Box: Ethics for Individuals and Businesses 10
Box: Corporate Scandals and Maximizing Stock Price 13
An Overview of the Capital Allocation Process 13
Financial Securities 15
The Cost of Money 19
Financial Institutions 23
Financial Markets 27
Trading Procedures in Financial Markets 29
Types of Stock Market Transactions 30
Box: Rational Exuberance? 31
The Secondary Stock Markets 31
Box: Measuring the Market 33
Stock Market Returns 34
The Global Economic Crisis 36
The Big