Analysis for Financial Management 11th Edition Chapter 4
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
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 4
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