Principles of Managerial Finance

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A01_ZUTT6315_15_SE_FM.indd 2 29/11/17 2:23 PM FIFTEENTH EDITION

Principles of Managerial Finance

Chad J. Zutter University of Pittsburgh

Scott B. Smart Indiana University

New York, NY

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Cataloging-in-Publication Data is available on file at the Library of Congress

ISBN 10: 0-13-447631-X 1 18 ISBN 13: 978-0-13-447631-5

A01_ZUTT6315_15_SE_FM.indd 4 29/11/17 2:23 PM Dedicated to our good friend and mentor, Dr. Lawrence J. Gitman, who trusted us as coauthors and successors of Principles of Managerial Finance. CJZ SBS

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Contents ix About the Authors xxix Preface xxxi Acknowledgments xliv

PART 1 Introduction to Managerial PART 6 Long-Term Financial Finance 1 Decisions 551

1 The Role of Managerial Finance 2 13 Leverage and 552 2 The Environment 41 14 Payout Policy 606

PART 2 Financial Tools 75 PART 7 Short-Term Financial Decisions 645 3 Financial Statements and Ratio Analysis 76 4 Long- and Short-Term Financial 15 and Current Planning 142 Management 646 5 Time Value of Money 189 16 Current Liabilities Management 689

PART 3 Valuation of Securities 255 PART 8 Special Topics in Managerial Finance 725 6 Interest Rates and Bond Valuation 256 7 Stock Valuation 305 17 Hybrid and Derivative Securities 726 18 Mergers, LBOs, Divestitures, and Business PART 4 Risk and the Required Rate of Failure 765 19 International Managerial Finance 809 Return 345

8 Risk and Return 346 9 The Cost of Capital 396

PART 5 Long-Term Investment Appendix A-1 Decisions 429 Glossary G-1 10 Techniques 430 Index I-1 11 Capital Budgeting Flows 471 12 Risk and Refinements in Capital Budgeting 509

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About the Authors xxix Preface xxxi Acknowledgments xliv

PART 1 Introduction to Managerial Finance 1

1 1.1 Finance and the Firm 4 1.4 Developing Skills for Your The Role of What Is Finance? 4 Career 32 Managerial What Is a Firm? 5 Critical Thinking 32 Finance 2 What Is the Goal of the Firm? 5 Communication and Collaboration 33 in practice FOCUS ON ETHICS: Financial Computing Skills 33 Do Corporate Executives Have a Social Responsibility? 6 Summary 33 The Role of 10 Opener-In-Review 35 ➔ REVIEW QUESTIONS 11 Self-Test Problem 35 Warm-Up Exercises 36 ▲ Brookdale Senior in practice FOCUS ON PRACTICE: Living––Is Brookdale’s Must Search Engines Screen Out Fake Problems 37 Management About to Be News? 12 Spreadsheet Exercise 40 Retired? 3 1.2 Managing The Firm 12 The Managerial Finance Function 13 ➔ REVIEW QUESTIONS 21

1.3 Forms, Taxation, and the Principal-Agent Relationship 21 Legal Forms of Business Organization 21 Agency Problems and Agency Costs 28 Corporate Governance 28 ➔ REVIEW QUESTIONS 32

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2 2.1 Financial Institutions 43 2.4 The Securities Issuing The Financial Commercial , Investment Banks, Process 57 Market and the Shadow Banking System 43 Issuing Common Stock 57 Environment 41 ➔ REVIEW QUESTIONS 45 ➔ REVIEW QUESTIONS 65

2.2 Financial Markets 45 2.5 Financial Markets in Crisis 65 The Relationship Between Institutions Financial Institutions and Real Estate and Markets 45 Finance 65 The Money Market 46 Spillover Effects and Recovery from the The Capital Market 47 Great Recession 68 ▲ Airbnb––Billions of VC in practice ➔ REVIEW QUESTIONS Funding Gives Airbnb FOCUS ON PRACTICE: 68 Plenty of Room 42 Berkshire Hathaway: Can Buffett Be Replaced? 48 Summary 69 The Role of Capital Markets 52 Opener-In-Review 70 in practice FOCUS ON ETHICS: Self-Test Problem 71 Should Insider Trading Be Legal? 54 Warm-Up Exercises 71 ➔ REVIEW QUESTIONS 55 Problems 72 Spreadsheet Exercise 73 2.3 Regulation of Financial Markets INTEGRATIVE CASE 1 Merit Enterprise and Institutions 55 Corp. 74 Regulations Governing Financial Institutions 55 Regulations Governing Financial Markets 56 ➔ REVIEW QUESTIONS 56

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PART 2 Financial Tools 75

Times Interest Earned Ratio 102 3 3.1 The Stockholders’ Report 78 Fixed-Payment Coverage Ratio 103 Financial The Letter to Stockholders 78 Statements and ➔ in practice GLOBAL FOCUS: REVIEW QUESTIONS 103 Ratio Analysis 76 More Countries Adopt International Financial Reporting Standards 78 3.6 Profitability Ratios 103 The Four Key Financial Statements 79 Common-Size Income Statements 103 in practice FOCUS ON ETHICS: Gross Profit Margin 104 Earnings Shenanigans 79 Operating Profit Margin 106 Notes to the Financial Statements 85 Net Profit Margin 106 ▲ Kroger––Ratios Point to Consolidating International Financial Earnings Per Share (EPS) 107 Statements 85 Trouble at Kroger 77 Return on Total Assets (ROA) 108 ➔ REVIEW QUESTIONS 86 Return on (ROE) 108 ➔ REVIEW QUESTIONS 110 3.2 Using Financial Ratios 87 Interested Parties 87 3.7 Market Ratios 110 Types of Ratio Comparisons 87 Price/Earnings (P/E) Ratio 111 Cautions About Using Ratio Analysis 90 Market/Book (M/B) Ratio 113 ➔ REVIEW QUESTIONS 91 ➔ REVIEW QUESTION 114

3.3 Liquidity Ratios 92 3.8 A Complete Ratio Analysis 114 Current Ratio 92 Summarizing of Whole Foods’ Financial Quick (Acid-Test) Ratio 94 Condition 114 ➔ REVIEW QUESTIONS 95 DuPont System of Analysis 118 ➔ REVIEW QUESTIONS 121 3.4 Activity Ratios 95 95 Summary 121 Average Collection Period 96 Opener-In-Review 123 Average Payment Period 98 Self-Test Problems 123 Total Asset Turnover 98 Warm-Up Exercises 124 ➔ REVIEW QUESTION 99 Problems 125 Spreadsheet Exercise 140 3.5 Debt Ratios 99 Debt Ratio 101 Debt-to-Equity Ratio 101

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4 4.1 The Financial Planning 4.4 Profit Planning: Pro Forma Long- and Short- Process 144 Statements 165 Term Financial Long-Term Strategic Financial Plans 144 Preceding Year’s Financial Statements 166 Planning 142 Short-Term (Operating) Financial Sales Forecast 166 Plans 145 ➔ REVIEW QUESTION 167 ➔ REVIEW QUESTIONS 146 4.5 Preparing the Pro Forma 4.2 Measuring the Firm’s Cash 167 Flow 146 Considering Types of Costs and 146 168 Depreciation Methods 147 ▲ Netflix Inc.––Not ➔ REVIEW QUESTIONS 169 Streaming at Netflix— Developing the Statement of Cash Cash Flow 143 Flows 149 4.6 Preparing the Pro Forma Free Cash Flow 154 169 in practice FOCUS ON ETHICS: ➔ REVIEW QUESTIONS 171 Is Excess Cash Always a Good Thing? 155 4.7 Evaluation of Pro Forma in practice FOCUS ON PRACTICE: Statements 171 Free Cash Flow at LinkedIn 156 ➔ REVIEW QUESTIONS 172 ➔ REVIEW QUESTIONS 157 Summary 172 4.3 Cash Planning: Cash Opener-In-Review 174 157 Self-Test Problems 174 The Sales Forecast 157 Warm-Up Exercises 176 Preparing the Cash 158 Problems 176 Evaluating the Cash Budget 163 Spreadsheet Exercise 187 Coping with Uncertainty in the Cash Budget 164 Cash Flow within the Month 165 ➔ REVIEW QUESTIONS 165

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5.1 The Role of Time Value in A General Equation for 5 Compounding 217 Time Value of Finance 191 Using Computational Tools for Future Value Versus Present Value 191 Money 189 Compounding 217 Computational Tools 192 Continuous Compounding 218 Basic Patterns of Cash Flow 194 Nominal and Effective Annual Rates of ➔ REVIEW QUESTIONS 194 Interest 219 ➔ REVIEW QUESTIONS 221 5.2 Single Amounts 195 in practice FOCUS ON ETHICS: ▲ Mega Millions Jackpot–– Future Value of a Single Amount 195 Was the Deal for Manhattan a Pay Me Now or Pay Me Present Value of a Single Amount 199 Swindle? 221 Later 190 ➔ REVIEW QUESTIONS 202 ➔ EXCEL REVIEW QUESTIONS 222 ➔ EXCEL REVIEW QUESTIONS 202 5.6 Special Applications of Time Value 222 5.3 Annuities 203 Determining Deposits Needed to Types of Annuities 203 Accumulate a Future Sum 222 Finding the Future Value of an Ordinary Loan Amortization 223 Annuity 204 Finding Interest or Growth Rates 225 Finding the Present Value of an Ordinary Annuity 205 in practice FOCUS ON PRACTICE: Finding the Future Value of an Annuity New Century Brings Trouble for Due 207 Subprime Mortgages 225 Finding the Present Value of an Annuity Finding an Unknown Number of Due 208 Periods 228 Finding the Present Value of a ➔ REVIEW QUESTIONS 230 Perpetuity 210 ➔ EXCEL REVIEW QUESTIONS 230 ➔ REVIEW QUESTIONS 211 Summary 230 ➔ EXCEL REVIEW QUESTIONS 211 Opener-In-Review 232 5.4 Mixed Streams 212 Self-Test Problems 232 Future Value of a Mixed Stream 212 Warm-Up Exercises 233 Present Value of a Mixed Stream 214 Problems 234 Spreadsheet Exercise 250 ➔ REVIEW QUESTION 215 INTEGRATIVE CASE 2 Track Software, ➔ EXCEL REVIEW QUESTION 215 Inc. 251

5.5 Compounding Interest More Frequently Than Annually 215 Semiannual Compounding 215 Quarterly Compounding 216

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PART 3 Valuation of Securities 255

6 6.1 Interest Rates and Required 6.3 Valuation Fundamentals 279 Interest Rates Returns 258 Key Inputs 279 and Bond Interest Rate Fundamentals 258 Basic Valuation Model 280 Valuation 256 Term Structure of Interest Rates 263 ➔ REVIEW QUESTIONS 281 in practice FOCUS ON PRACTICE: I-Bonds Adjust for Inflation 264 6.4 Bond Valuation 281 Risk Premiums: Issuer and Issue Bond Fundamentals 282 Characteristics 269 Bond Valuation 282 ➔ REVIEW QUESTIONS 270 Semiannual Interest Rates and Bond Values 284 ▲ Aston Martin Bond 6.2 Government and Corporate Issue––The Name Is Changes in Bond Values 286 Bonds 270 Bond—Junk Bond 257 Yield to Maturity (YTM) 289 Legal Aspects of Corporate Bonds 271 ➔ Cost of Bonds to the Issuer 272 REVIEW QUESTIONS 291 General Features of a Bond Issue 273 ➔ EXCEL REVIEW QUESTIONS 291 Bond Yields 274 Summary 291 Bond Prices 274 Opener-In-Review 293 Bond Ratings 275 Self-Test Problems 294 Common Types of Bonds 275 Warm-Up Exercises 294 International Bond Issues 276 Problems 296 in practice FOCUS ON ETHICS: “Can Bond Ratings Be Trusted?” 277 Spreadsheet Exercise 304 ➔ REVIEW QUESTIONS 278

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7 7.1 Differences Between Debt 7.4 Decision Making and Common Stock Valuation 305 and Equity 307 Stock Value 328 Voice in Management 307 Changes in Expected Dividends 329 Claims on Income and Assets 307 Changes in Risk 329 Maturity 308 Combined Effect 330 Tax Treatment 308 ➔ REVIEW QUESTIONS 330 ➔ REVIEW QUESTION 308 Summary 330 7.2 Common and Preferred Opener-In-Review 332 Stock 308 Self-Test Problems 333 Common Stock 309 Warm-Up Exercises 333 Preferred Stock 312 Problems 334 ▲ Tesla Inc.––Stock Prices Are All About the Future 306 ➔ REVIEW QUESTIONS 314 Spreadsheet Exercise 342 INTEGRATIVE CASE 3 Encore 7.3 Common Stock Valuation 314 International 343 Market Efficiency and Stock Valuation 314 Common Stock Dividend Valuation Model 316 in practice FOCUS ON PRACTICE: Understanding Human Behavior Helps Us Understand Investor Behavior 317 Free Cash Flow Valuation Model 321 Other Approaches to Common Stock Valuation 324 in practice FOCUS ON ETHICS: Index Funds and Corporate Governance 326 ➔ REVIEW QUESTIONS 328

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PART 4 Risk and the Required Rate of Return 345

8 8.1 Risk and Return 8.4 Risk and Return: The Capital Risk and Fundamentals 348 Asset Pricing Model (CAPM) 368 Return 346 What Is Risk? 348 Types of Risk 368 What Is Return? 348 The Model: CAPM 369 in practice FOCUS ON ETHICS: ➔ REVIEW QUESTIONS 378 If It Seems Too Good to Be True, It Probably Is 349 Summary 378 Risk Preferences 351 Opener-In-Review 380 ➔ REVIEW QUESTIONS 352 Self-Test Problems 380 ▲ Legg Mason Global 381 –– Warm-Up Exercises 8.2 352 Miller’s Time 347 Risk of a Single Asset Problems 382 Risk Assessment 352 Spreadsheet Exercise 394 Risk Measurement 355 ➔ REVIEW QUESTIONS 360

8.3 Risk of a Portfolio 360 Portfolio Return and Standard Deviation 360 Correlation 362 Diversification 363 Correlation, Diversification, Risk, and Return 365 International Diversification 366 in practice GLOBAL FOCUS: An International Flavor to Risk Reduction 367 ➔ REVIEW QUESTIONS 368

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9 9.1 Overview of the Cost of 9.5 Weighted Average Cost The Cost of Capital 398 of Capital 412 Capital 396 in practice FOCUS ON ETHICS: Calculating Weighted Average Cost of The Cost of Capital Also Rises 398 Capital (WACC) 412 The Basic Concept 399 in practice FOCUS ON PRACTICE: Sources of Long-Term Capital 401 Uncertain Times Make for an Uncertain Weighted Average Cost of Capital 414 ➔ REVIEW QUESTIONS 402 Capital Structure Weights 415 ➔ 9.2 Cost of Long-Term Debt 402 REVIEW QUESTIONS 415 ▲ J&J––Exceeding Net Proceeds 402 Expectations 397 Summary 416 Before-Tax Cost of Debt 403 Opener-In-Review 417 After-Tax Cost of Debt 405 Self-Test Problem 417 ➔ REVIEW QUESTIONS 406 Warm-Up Exercises 418 ➔ EXCEL REVIEW QUESTION 406 Problems 419 Spreadsheet Exercise 426 9.3 Cost of Preferred Stock 406 INTEGRATIVE CASE 4 Eco Plastics Preferred Stock Dividends 407 Company 427 Calculating the Cost of Preferred Stock 407 ➔ REVIEW QUESTION 407

9.4 Cost of Common Stock 407 Finding the Cost of Common Stock Equity 408 Cost of Retained Earnings 411 ➔ REVIEW QUESTIONS 412

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PART 5 Long-Term Investment Decisions 429

10 10.1 Overview of Capital 10.5 Comparing NPV and IRR Capital Budgeting Budgeting 432 Techniques 448 Techniques 430 Motives for Capital Expenditure 432 Net Present Value Profiles 448 Steps in the Process 432 Conflicting Rankings 449 Basic Terminology 433 Which Approach is Better? 453 Capital Budgeting Techniques 434 in practice FOCUS ON ETHICS: ➔ REVIEW QUESTION 435 Baby You Can Drive My Car—Just Not a VW Diesel 455

10.2 Payback Period 435 ➔ REVIEW QUESTIONS 455 Decision Criteria 436 ▲ Maritime Resources Summary 456 Corp.––The Gold Standard Pros and Cons of Payback Analysis 436 Opener-In-Review 457 for Evaluating Gold in practice FOCUS ON PRACTICE: Self-Test Problem 458 Mines 431 Limits on Payback Analysis 438 Warm-Up Exercises 458 ➔ REVIEW QUESTIONS 439 Problems 460 Spreadsheet Exercise 470 10.3 Net Present Value (NPV) 440 Decision Criteria 440 NPV and the 442 NPV and 443 ➔ REVIEW QUESTION 444 ➔ EXCEL REVIEW QUESTION 444

10.4 Internal Rate of Return (IRR) 444 Decision Criteria 445 Calculating the IRR 445 ➔ REVIEW QUESTIONS 447 ➔ EXCEL REVIEW QUESTION 447

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11 11.1 Project Cash Flows 473 11.4 Finding the Terminal Cash Capital Budgeting Major Cash Flow Types 473 Flow 489 Cash Flows 471 Replacement Versus Expansion After-Tax Proceeds from the Sale of New Decisions 474 and Old Assets 490 Sunk Costs and Opportunity Costs 475 Change in Net Working Capital 490 in practice FOCUS ON ETHICS: ➔ REVIEW QUESTION 491 Fumbling Sunk Costs 476 International Capital Budgeting and 11.5 Summarizing the Net Cash Long-Term Investments 477 Flows 491 ➔ REVIEW QUESTIONS 478 ➔ REVIEW QUESTION 493 in practice GLOBAL FOCUS: Changes May Influence Future Summary 493 Investments in China 478 Opener-In-Review 495 Self-Test Problems 495 11.2 Finding the Initial ▲ Moulson Coors Brewing Warm-Up Exercises 496 Investment 479 Company––Brewing Up a Problems 496 Installed Cost of the New Asset 479 Deal 472 Spreadsheet Exercise 508 After-Tax Proceeds from the Sale of the Old Asset 479 Change in Net Working Capital 482 Calculating the Initial Investment 483 ➔ REVIEW QUESTIONS 484

11.3 Finding the Operating Cash Flows 484 Interpreting the Term Cash Flows 485 Interpreting the Term After-Tax 485 Interpreting the Term Incremental 488 ➔ REVIEW QUESTIONS 489

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12 12.1 Introduction to Risk in Capital 12.5 Capital Budgeting Risk and Budgeting 511 Refinements 526 Refinements ➔ REVIEW QUESTION 511 Comparing Projects with Unequal in Capital Lives 526 Budgeting 509 12.2 Behavioral Approaches for Recognizing Real Options 529 Dealing with Risk 511 Capital Rationing 531 Breakeven Analysis 512 ➔ REVIEW QUESTIONS 533 Scenario Analysis 513 ➔ EXCEL REVIEW QUESTION 534 Simulation 514 in practice FOCUS ON PRACTICE: Summary 534 The Monte Carlo Method: The Forecast Opener-In-Review 535 ▲ General Motors–– Is for Less Uncertainty 516 Venezuelan Government Self-Test Problem 536 Seizes Factory Owned by ➔ REVIEW QUESTIONS 516 Warm-Up Exercises 536 GM 510 ➔ EXCEL REVIEW QUESTION 516 Problems 538 Spreadsheet Exercise 548 12.3 International Risk INTEGRATIVE CASE 5 Lasting Impressions Considerations 516 Company 549 ➔ REVIEW QUESTION 517

12.4 Risk-Adjusted Discount Rates 518 Determining Risk-Adjusted Discount Rates (RADRs) 518 in practice FOCUS ON ETHICS: Remain Calm—All Is Well 521 Applying RADRs 521 Portfolio Effects 524 RADRs in Practice 524 ➔ REVIEW QUESTIONS 526

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PART 6 Long-Term Financial Decisions 551

13 13.1 Leverage 554 13.4 Choosing the Optimal Capital Leverage Breakeven Analysis 555 Structure 587 and Capital Operating Leverage 558 Linkage 587 Structure 552 in practice FOCUS ON PRACTICE: Estimating Value 588 Qualcomm’s Leverage 561 Maximizing Value Versus Maximizing Financial Leverage 562 EPS 589 Total Leverage 565 Some Other Important Considerations 589 in practice FOCUS ON ETHICS: Repo 105 Man 568 ➔ REVIEW QUESTIONS 590 ➔ REVIEW QUESTIONS 569 ▲ Apple—Apple Leverages Summary 590 Its Brand 553 Opener-In-Review 592 13.2 The Firm’s Capital Structure 569 Self-Test Problems 593 Types of Capital 569 Warm-Up Exercises 594 External Assessment of Capital Problems 595 Structure 570 Spreadsheet Exercise 605 Capital Structure of Non–U.S. Firms 571 Capital Structure Theory 572 Optimal Capital Structure 581 ➔ REVIEW QUESTIONS 583

13.3 EBIT–EPS Approach to Capital Structure 583 Presenting a Financing Plan Graphically 584 Comparing Alternative Capital Structures 585 Considering Risk in EBIT–EPS Analysis 586 Basic Shortcoming of EBIT–EPS Analysis 587 ➔ REVIEW QUESTION 587

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14 14.1 The Basics of Payout Policy 608 14.5 Types of Dividend Policies 625 Payout Policy 606 Elements of Payout Policy 608 Constant-Payout-Ratio Dividend Trends in Earnings and Dividends 608 Policy 625 Trends in Dividends and Share Regular Dividend Policy 626 Repurchases 610 Low-Regular-and-Extra Dividend in practice FOCUS ON ETHICS: Policy 627 Buyback Mountain 612 ➔ REVIEW QUESTION 627 ▲ Whirlpool Corporation–– ➔ REVIEW QUESTIONS 612 Increasing Dividends 607 14.6 Other Forms of Dividends 627 14.2 The Mechanics of Payout Stock Dividends 627 Policy 612 Stock Splits 629 Cash Dividend Payment Procedures 613 ➔ REVIEW QUESTIONS 630 Share Repurchase Procedures 615 Tax Treatment of Dividends and Summary 631 Repurchases 616 Opener-In-Review 632 in practice FOCUS ON PRACTICE: Self-Test Problems 633 Capital Gains and Dividend Tax Warm-Up Exercises 633 Treatment Extended to 2012 and Beyond for Some 617 Problems 634 Dividend Reinvestment Plans 618 Spreadsheet Exercise 641 Stock Price Reactions to Corporate INTEGRATIVE CASE 6 O’Grady Apparel Payouts 618 Company 642 ➔ REVIEW QUESTIONS 619

14.3 Relevance of Payout Policy 619 Residual Theory of Dividends 619 The Dividend Irrelevance Theory 620 Arguments for Dividend Relevance 621 ➔ REVIEW QUESTIONS 622

14.4 Factors Affecting Dividend Policy 622 Legal Constraints 622 Contractual Constraints 624 Growth Prospects 624 Owner Considerations 624 Market Considerations 625 ➔ REVIEW QUESTION 625

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PART 7 Short-Term Financial Decisions 645

15 15.1 Net Working Capital 15.4 Accounts Receivable Working Fundamentals 648 Management 663 Capital and Working Capital Management 648 Credit Selection and Standards 664 Current Assets Net Working Capital 649 in practice FOCUS ON ETHICS: Management 646 Trade-Off between Profitability and If You Can Bilk It, They Will Come 665 Risk 649 Credit Terms 669 ➔ REVIEW QUESTIONS 651 Credit Monitoring 671 ➔ REVIEW QUESTIONS 673 15.2 651 Calculating the Cash Conversion 15.5 Management of Receipts and Cycle 652 Disbursements 673 Funding Requirements of the Cash Float 674 Conversion Cycle 653 Speeding Up Collections 674 ▲ The Hackett Group Strategies for Managing the Cash Slowing Down Payments 675 Conversion Cycle 656 Survey––Are CFOs Afraid Cash Concentration 675 of the Ghost of Financial ➔ REVIEW QUESTIONS 657 Zero-Balance Accounts 676 Crisis Past? 647 Investing in Marketable Securities 677 15.3 Inventory Management 657 ➔ REVIEW QUESTIONS 678 Differing Viewpoints about Inventory Level 657 Summary 679 Common Techniques for Managing Inventory 658 Opener-In-Review 681 in practice FOCUS ON PRACTICE: Self-Test Problems 681 In Bed with RFID 662 Warm-Up Exercises 682 International Inventory Management 663 Problems 683 ➔ REVIEW QUESTIONS 663 Spreadsheet Exercise 688

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Summary 712 16 16.1 Spontaneous Liabilities 691 Opener-In-Review 713 Current Liabilities Accounts Payable Management 691 Self-Test Problem 714 Management 689 696 Warm-Up Exercises 714 ➔ REVIEW QUESTIONS 696 Problems 715 16.2 Unsecured Sources of Spreadsheet Exercise 721 Short-Term Loans 696 INTEGRATIVE CASE 7 Casa de Diseño 723 in practice FOCUS ON ETHICS: Loans and Shareholder Wealth 697 ▲ FastPay––Getting Cash into the Hands of Online Bank Loans 697 Media Companies 690 Commercial Paper 703 in practice FOCUS ON PRACTICE: The Ebb and Flow of Commercial Paper 704 International Loans 705 ➔ REVIEW QUESTIONS 706

16.3 Secured Sources of Short-Term Loans 707 Characteristics of Secured Short-Term Loans 707 Use of Accounts Receivable as Collateral 708 Use of Inventory as Collateral 710 ➔ REVIEW QUESTIONS 712

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PART 8 Special Topics in Managerial Finance 725

17 17.1 Overview of Hybrids and 17.4 Stock Purchase Warrants 744 Hybrid and Derivatives 728 Key Characteristics 744 Derivative ➔ REVIEW QUESTION 728 Implied Price of an Attached Warrant 745 Securities 726 Values of Warrants 746 17.2 Leasing 728 ➔ REVIEW QUESTIONS 748 Types of Leases 728 Leasing Arrangements 729 17.5 Options 748 in practice FOCUS ON PRACTICE: Calls and Puts 748 I’d Like to Return This (Entire Store), Options Markets 749 Please 730 Options Trading 749 ▲ Advanced Micro Lease-Versus-Purchase Decision 731 Role of Call and Put Options in Fund Devices––AMD Taps the Effects of Leasing on Future Raising 751 Bond Market for Cash 727 Financing 735 Hedging Foreign-Currency Exposures with Advantages and Disadvantages of Options 751 Leasing 736 in practice FOCUS ON ETHICS: ➔ REVIEW QUESTIONS 736 Banking on Options 752 ➔ REVIEW QUESTIONS 753 17.3 Convertible Securities 737 Types of Convertible Securities 737 Summary 753 General Features of Convertibles 738 Opener-In-Review 755 Financing with Convertibles 740 Self-Test Problems 755 Determining the Value of a Convertible Warm-Up Exercises 756 Bond 741 Problems 757 ➔ REVIEW QUESTIONS 743 Spreadsheet Exercise 763

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18 18.1 Merger Fundamentals 767 18.4 Business Failure Mergers, LBOs, Terminology 767 Fundamentals 790 Divestitures, Motives for Merging 769 Types of Business Failure 790 and Business in practice FOCUS ON ETHICS: Major Causes of Business Failure 790 Failure 765 Is There Any Good in Greed? 770 Voluntary Settlements 791 Types of Mergers 772 ➔ REVIEW QUESTIONS 792 ➔ REVIEW QUESTIONS 773 18.5 Reorganization and Liquidation 18.2 LBOs and Divestitures 773 in Bankruptcy 793 Leveraged Buyouts (LBOs) 773 Bankruptcy Legislation 793 Reorganization in Bankruptcy ▲ Dell, Inc.––Carl Icahn Divestitures 774 (Chapter 11) 794 and Founder Michael ➔ REVIEW QUESTIONS 776 Dell Fight for Computer Liquidation in Bankruptcy (Chapter 7) 796 Maker 766 ➔ 18.3 Analyzing and Negotiating REVIEW QUESTIONS 797 Mergers 776 Summary 798 Valuing the Target Company 776 Opener-In-Review 799 Stock Swap Transactions 778 Self-Test Problems 800 Merger Negotiation Process 784 Warm-Up Exercises 800 Holding Companies 785 Problems 801 International Mergers 787 Spreadsheet Exercise 808 ➔ REVIEW QUESTIONS 788 in practice GLOBAL FOCUS: International Mergers 789

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19 19.1 The Multinational Company Capital Structure 829 International and Its Environment 811 Long-Term Debt 830 Managerial Key Trading Blocs 811 in practice GLOBAL FOCUS: Take an Overseas Assignment to Take a Finance 809 GATT and the WTO 813 Step Up the Corporate Ladder 831 Legal Forms of Business Organization 813 Equity Capital 832 Taxes 814 ➔ REVIEW QUESTIONS 833 Financial Markets 816 ➔ REVIEW QUESTIONS 817 19.5 Short-Term Financial Decisions 834 19.2 818 ▲ Mazda Motor Corp.–– Financial Statements Cash Management 836 Selling More Cars and Subsidiary Characterization and Functional Credit and Inventory Management 838 Making Less Money 810 Currency 818 ➔ REVIEW QUESTIONS 839 Translation of Individual Accounts 818 ➔ REVIEW QUESTION 820 19.6 Mergers and Joint Ventures 839 19.3 Risk 820 ➔ REVIEW QUESTION 840 Exchange Rate Risks 820 Political Risks 825 Summary 841 in practice FOCUS ON ETHICS: Opener-In-Review 843 Is Fair-Trade Coffee Fair? 827 Self-Test Problem 843 ➔ REVIEW QUESTIONS 828 Warm-Up Exercises 843 Problems 844 19.4 Long-Term Investment and Spreadsheet Exercise 846 Financing Decisions 828 INTEGRATIVE CASE 8 Organic Foreign Direct Investment 828 Solutions 847 Investment Cash Flows and Decisions 828

Appendix A-1 Glossary G-1 Index I-1

A01_ZUTT6315_15_SE_FM.indd 27 27/11/17 8:04 PM A01_ZUTT6315_15_SE_FM.indd 28 27/11/17 8:04 PM About the Authors

Chad J. Zutter is a finance professor and the Dean’s Excellence Faculty Fel- low at the Katz Graduate School of Business at the University of Pittsburgh. Dr. Zutter received his B.B.A. from the University of Texas at Arlington and his Ph.D. from Indiana University. His research has a practical, applied focus and has been the subject of feature stories in, among other prominent outlets, The Economist and CFO Magazine. His papers have been cited in arguments before the U.S. Supreme Court and in consultation with companies such as Google and Intel. Dr. Zutter won the prestigious Jensen Prize for the best paper published in the Journal of Financial Economics and a best paper award from the Journal of Corporate Finance. He has won teaching awards at the Kelley School of Business at Indiana University and the Katz Graduate School of Business at the University of Pittsburgh. Prior to his career in academics, Dr. Zutter was a submariner in the U.S. Navy. Dr. Zutter and his wife have four children and live in Pittsburgh, Pennsylvania. In his free time he enjoys horseback riding and downhill skiing.

Scott B. Smart is a finance professor and the Whirlpool Finance Faculty Fellow at the Kelley School of Business at Indiana University. Dr. Smart received his B.B.A. from Baylor University and his M.A. and Ph.D. from Stanford University. His research focuses primarily on applied corporate finance topics and has been published in journals such as the Journal of Finance, the Journal of Financial Economics, the Journal of Corporate Finance, Financial Management, and others. His articles have been cited by business publications including The Wall Street Journal, The Economist, and Business Week. Winner of more than a dozen teaching awards, Dr. Smart has been listed multiple times as a top busi- ness school teacher by Business Week. He has held Visiting Professor positions at the University of Otago and Stanford University, and he worked as a Visiting Scholar for Intel Corporation, focusing on that company’s mergers and acqui- sitions activity during the ‘‘Dot-com’’ boom in the late 1990s. As a volunteer, Dr. Smart currently serves on the boards of the Indiana University Credit Union and Habitat for Humanity. In his spare time he enjoys outdoor pursuits such as hiking and fly fishing.

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NEW TO THIS EDITION Finance is a dynamic discipline, as illustrated on this book’s cover by the evolu- tion of payment methods from coins and paper currency to bitcoin. Technology is rapidly reshaping finance, just as it has other industries. For example, in September 2017 Google introduced a new payment technology in India. Tez, a method of transferring money using sounds to connect two devices, was down- loaded by millions of consumers in a matter of days. As we made plans to publish the fifteenth edition, we were mindful of changes in managerial finance practices that have taken hold in recent years. We carefully assessed feedback from users of the fourteenth edition as well as instructors not currently using our text about content changes that would improve this teaching and learning tool. In every chapter, our changes were designed to make the material more up to date and more relevant for students. A number of new topics have been added at appropriate places, and new features appear in each chapter: • We replaced nearly all of the chapter-opening vignettes with stories gathered from the business press in recent years that illustrate key ideas in each chapter. Many of the chapter openers feature companies such as Airbnb, Kroger, Netflix, Apple, Tesla, General Motors, Whirlpool, and Dell that are familiar to students. We designed these opening vignettes to impress upon students that the material they will see in each chapter is relevant for business in the “real world.” • At the end of each chapter we return to the opening vignette with an Opener-In- Review question that asks students to apply a concept that they have learned in the chapter to the business situation described in the chapter opener. • We have rewritten all of the Focus on Ethics boxes, using new examples to highlight situations in which or individuals have engaged in unethi- cal behavior. The boxes explore the consequences of ethical lapses and the ways in which markets and governments play a role in enforcing ethical standards. • New in this edition are Chapter Introduction Videos and animations. In the introduction videos the authors explain the importance of the chapter content within the context of managerial finance. The animations for select in-chapter figures and examples allow students to manipulate inputs to determine out- puts in order to illustrate concepts and reinforce learning. MyLab Finance also offers new and updated Solution Videos that allow students to watch a video of the author discussing or solving in-chapter examples. We have also updated the financial calculator images that appear in the book to better match the financial calculator available on MyLab Finance. • The chapter-ending Spreadsheet Exercises as well as select end-of-chapter problems in the text are now offered in MyLab Finance as auto-graded Excel Projects. Using proven, field-tested technology, auto-graded Excel Projects allow instructors to seamlessly integrate Microsoft Excel content into their course without having to manually grade spreadsheets. Students have the opportunity to practice important finance skills in Excel, helping them to master key concepts and gain proficiency with the program. xxxi

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• We added new problems to each chapter, many of which require students to use real-world data to reach a solution. The chapter sequence is essentially unchanged from the prior edition, but there are some noteworthy changes within each chapter. This edition contains nineteen chapters divided into eight parts. Each part is introduced by a brief over- view, which is intended to give students an advance sense for the collective value of the chapters included in the part. Part 1 contains two chapters. Chapter 1 provides an overview of the role of managerial finance in a business enterprise. It contains new, expanded content focusing on the goal of the firm and the broad principles that financial managers use in their pursuit of that goal. Chapter 2 describes the financial market context in which firms operate, with new coverage focusing on the transactions costs investors face when trading in secondary markets. Part 2 contains three chapters focused on basic financial skills such as finan- cial statement analysis, cash flow analysis, and time-value-of-money calculations. Chapter 3 provides an in-depth ratio analysis using real data from Whole Foods just prior to its acquisition by Amazon. The ratios provide opportunities for interesting discussion about some of the possible motives for that acquisition. We reorganized the flow of material in Chapter 4 to emphasize first the broad goals of strategic and operational financial planning and then the importance of cash flow within any financial plan. In Chapter 5, we rewrote much of the discussion to make time-value-of-money concepts simpler and more intuitive. We also added new coverage of growing perpetuities. Part 3 focuses on bond and stock valuation. We placed these two chapters just ahead of the risk and return chapter to provide students with exposure to basic material on bonds and stocks that is easier to grasp than some of the more theoretical concepts in the next part. New in Chapter 6 is a discussion of the neg- ative interest rates prevailing on government bonds in Japan and some European countries, as well as an expanded discussion of the tendency of the yield curve to invert prior to a recession. Chapter 7 offers new coverage of the use of price-to- earnings multiples to value stocks. Part 4 contains the risk and return chapter as well as the chapter on the cost of capital. We believe that following the risk and return chapter with the cost of capital material helps students understand the important principle that the expectations of a firm’s investors shape how the firm should approach major investment decisions (which are covered in Part 5). In other words, Part 4 is designed to help students understand where a project “hurdle rate” comes from before they start using hurdle rates in capital budgeting problems. Updates to Chapter 8 include new historical data on stocks, bonds, and Treasury bills, as well as examples and problems featuring real data on companies such as Apple, Google, Coca-Cola, and Wal-Mart. Chapter 9 contains new material on the use of market-value-based weights in the cost of capital calculation featuring actual data on the capital structure of Netflix. Throughout the chapter we have revised examples and problems to reflect today’s low interest rate environment and the correspondingly low after-tax cost of debt faced by most public companies. Part 5 contains three chapters on various capital budgeting topics. The first chapter focuses on capital budgeting methods such as payback and net present value analysis. A new feature of this chapter is an updated discussion of eco- nomic value added using data from Exxon Mobil Corp. The second chapter in this part explains how financial analysts construct cash flow projections, which

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are a required component of net present value analysis. The final chapter in this section describes how firms analyze the risks associated with capital investments. Parts 6 deals with the topics of capital structure and payout policy. These two chapters contain updated material on trends in firms’ use of leverage and their payout practices. Chapter 13 provides a new Focus on Practice box dis- cussing how Qualcomm’s highly skilled labor force turns what often is thought of as a variable cost into a fixed cost and thereby creates operating leverage. The chapter also contains new expanded coverage of the role that expected bank- ruptcy costs play in capital structure decisions. A new discussion in Chapter 14 highlights how and why companies have shifted their payout policies away from dividends and toward share repurchases over time. Part 7 contains two chapters centered on working capital issues. A major development in business has been the extent to which firms have found new ways to economize on working capital investments. The first chapter in Part 7 explains why and how firms work hard to squeeze resources from their investments in current assets such as cash and inventory. The second chapter in this part focuses more on management of current liabilities. Finally, Part 8 has three chapters covering a variety of topics, including hybrid securities, mergers and other forms of restructurings, and international finance. These subjects are some of the most dynamic areas in financial prac- tice, and we have made a number of changes here to reflect current practices. Chapter 17 contains new examples of convertible securities issued by firms such as STMicroelectronics and Tesla. Chapter 18 covers important merger concepts with examples featuring recent transactions involving Anthem-Cigna, Fiat-Chrysler, Dow-DuPont, Berkshire Hathaway-Oncor, and Broadcom Ltd.-Maxlinear. Although the text content is sequential, instructors can assign almost any chapter as a self-contained unit, enabling instructors to customize the text to various teaching strategies and course lengths. Like the previous editions, the fifteenth edition incorporates a proven learning system, which integrates pedagogy with concepts and practical applica- tions. It concentrates on the knowledge that is needed to make keen financial decisions in an increasingly competitive business environment. The strong peda- gogy and generous use of examples—many of which use real data from markets or companies—make the text an easily accessible resource for in-class learning or out-of-class learning, such as online courses and self-study programs.

SOLVING TEACHING AND LEARNING CHALLENGES The desire to write Principles of Managerial Finance came from the experience of teaching the introductory managerial finance course. Those who have taught the introductory course many times can appreciate the difficulties that some stu- dents have absorbing and applying financial concepts. Students want a book that speaks to them in plain English and explains how to apply financial concepts to solve real-world problems. These students want more than just description; they also want demonstration of concepts, tools, and techniques. This book is written with the needs of students in mind, and it effectively delivers the resources that students need to succeed in the introductory finance course. Courses and students have changed since the first edition of this book, but the goals of the text have not changed. The conversational tone and wide use of examples set off in the text still characterize Principles of Managerial Finance.

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Building on those strengths, fifteen editions, numerous translations, and well over half a million U.S. users, Principles has evolved based on feedback from both instructors and students, from adopters, nonadopters, and practitioners. In this edition, we have worked to ensure that the book reflects contemporary thinking and pedagogy to further strengthen the delivery of the classic topics that our users have come to expect. Below are descriptions of the most important resources in Principles that help meet teaching and learning challenges. Users of Principles of Managerial Finance have praised the effectiveness of the book’s Teaching and Learning System, which they hail as one of its hall- marks. The system, driven by a set of carefully developed learning goals, has been retained and polished in this fifteenth edition. The “walkthrough” on the pages that follow illustrates and describes the key elements of the Teaching and Learning System. We encourage both students and instructors to acquaint them- selves at the start of the semester with the many useful features the book offers.

Six Learning Goals at the start of the chapter highlight the most impor- tant concepts and techniques in the

CHAPTER CHAPTER 1 chapter. Students are reminded to think about the learning goals while The Role of Managerial Finance working through the chapter by stra- tegically placed learning goal icons. LEARNING GOALS MyLab Finance Chapter Introduction Video

LG 1 Define finance and the managerial finance WHY THIS CHAPTER MATTERS TO YOU To help students understand the rel- function. In your professional life evance of a chapter within the over- LG 2 Describe the goal of the firm, and explain why You need to understand the relationships between the accounting arching framework of managerial maximizing the value of the and finance functions within the firm, how decision makers rely on the financial firm is an appropriate goal statements you prepare, why maximizing a firm’s value is not the same as for a business. maximizing its profits, and the ethical duty you have when reporting financial finance, every chapter has available in results to investors and other stakeholders. Identify the primary LG 3 INFORMATION SYSTEMS You need to understand why financial information is MyLab Finance a short chapter intro- activities of the financial important to managers in all functional areas, the documentation that firms must manager. produce to comply with various regulations, and how manipulating information for duction video by an author. personal gain can get managers into serious trouble. LG 4 Explain the key principles that financial managers use MANAGEMENT You need to understand the various legal forms of a business when making business organization, how to communicate the goal of the firm to employees and other Every chapter opens with a feature, decisions. stakeholders, the advantages and disadvantages of the agency relationship between a firm’s managers and its owners, and how compensation systems can titled Why This Chapter Matters LG 5 Describe the legal forms of align or misalign the interests of managers and investors. business organization. MARKETING You need to understand why increasing a firm’s or market to You, that helps motivate student LG 6 Describe the nature of the share is not always a good thing, how financial managers evaluate aspects of principal–agent relationship customer relations such as cash and credit management policies, and why a firm’s interest by highlighting both profes- between the owners and brands are an important part of its value to investors. managers of a corporation, OPERATIONS You need to understand the financial benefits of increasing a firm’s sional and personal benefits from and explain how various production efficiency, why maximizing profit by cutting costs may not increase the corporate governance firm’s value, and how managers have a duty to act on behalf of investors when achieving the chapter learning goals. mechanisms attempt to operating a corporation. manage agency problems. In your personal life Its first part, In Your Professional Many principles of managerial finance also apply to your personal life. Learning a few simple principles can help you manage your own money more effectively. Life, discusses the intersection of the finance topics covered in the chapter with the concerns of other major business disciplines. It encourages students majoring in accounting, information systems, management, marketing, and operations to appre- 2 ciate how financial acumen will help them achieve their professional goals.

M01B_ZUTT6315_15_SE_C01_pp002-040.indd 2 The second part, In Your Personal07/11/17 Life 2:53 PM, identifies topics in the chapter that will have particular application to personal finance. This feature also helps students appreciate the tasks performed in a business setting by pointing out that the tasks are not necessarily different from those that are relevant in their personal lives.

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Each chapter begins with a short opening vignette that describes a recent real-company event related to the chapter topic. These stories raise interest in the chapter by demonstrating its relevance in the business world. AIRBNB Most of these opening vignettes are entirely new to this Billions of VC Funding Gives Airbnb Plenty of Room edition. New! In MyLab Finance, users will find a brief he daughter of Chinese immigrants and founder of T the venture capital firm, Cowboy Ventures, Aileen Lee video providing an overview of each chapter’s content. added a new term to the business lexicon in her 2013 Russell Hart/Alamy Stock Photo blog post on Tech Crunch. Lee used the word unicorn to describe a privately held tech startup worth more than $1 billion. Prior to 2013, private companies with valuations that high were about as rare as the mythical one-horned equine creature. But by 2017, less than four years after Lee coined the term, more than 200 startups had achieved unicorn status around the world. Most of those called the United States home, with the greatest concentration in California’s Silicon Valley. One example was the room-sharing service, Airbnb. Founded in 2008, Airbnb received more than $3 billion in funding from venture capital firms, with the latest $1 billion arriving in 2017 and bringing the company’s total estimated value to $31 billion. The company’s rapid growth fueled speculation that it—along with other unicorns, such as the ride-sharing service Uber—would soon convert from a privately held company to a public corporation through an initial public offering (IPO) of common stock. Airbnb’s cofounder, Brian Chesky, noted that most companies raising money in an IPO do so because they need the money to finance new investment, want to create a more visible brand, wish to allow existing shareholders to liquidate some of their investments, or desire to use shares of stock as a currency to make new acquisitions. Chesky claimed that none of those situations applied to Airbnb. The company had plenty of money and was profitable, it was already well known among consumers, and its private investors had been patient. Most analysts believed that at some point in the near future, the venture capitalists and other investors who provided Airbnb with its early funding would want to cash out their investment, and an IPO proved 4 PART ONE Introduction to Managerialthe most Finance likely way to create that opportunity. Source: “Welcome to the Unicorn Club: Learning from Billion-dollar Startups,” by Aileen Lee, November 2, 2013, Tech Crunch.

earnings back to investors. The keys to good financial decisions are much the same LG 1 LG 2 1.1 Finance10 PART and ONE Introductionthe Firm to Managerial Finance for businesses and individuals, which is why most students will benefit from an understanding of finance regardless of their profession. Learning the techniques of The field of finance isTo broad illustrate, and consider dynamic. that in March Finance 2017, the influences online retailing everything giant Amazon that good will not only help you make better financial decisions as a firms do, from hiring reportedpersonnel that it toearned building a profit of factories $4.90 per share to launchingover the previous new 12 months.advertis- Another company, Clorox, reported almost identical earnings per share of $4.92. consumer but will also assist you in understanding the financial consequences of ing campaigns. BecauseYet the almost stock prices any of aspectthese two ofcompanies business could hasnot have important been more different. financial important business decisions, no matter what career path you follow. dimensions,42 many financiallyAmazon was trading oriented for $850 career per share, opportunities whereas Clorox stock await was thoseselling for who just $137. In other words, investors were willing to pay 6 times more for shares understand the principlesof Amazon of finance even though described it reported virtually in this the textbook. same EPS as Clorox. Even Why?if you Sev - see yourself pursuing a careereral factors in mayanother contribute, discipline but the most such plausible as answermarketing, is that investors operations, envi- WHAT IS A FIRM? sion rosier long-term prospects for Amazon. If the only matter of concern to 4M02_ZUTT6315_15_SE_C02_pp041-074.indd PART ONE Introduction 42 to Managerial Finance 07/11/17 4:00 PM accounting, supply chain,investors or was human short-term resources, profits, then you’llthe prices find of Amazon that andunderstanding Clorox should a What is a firm? Put simply, a firm is a business organization that sells goods or have been much closer because their profits, at least in the short term, were few crucial ideas in finance will enhance your professional success. Knowing Learning goal iconsearnings tie back chapter to investors. The content keysservices. to good financial However,to decisionsthe area more much the complete same answer attempts to explain why firms exist. LG LG 2 nearly identical. 1 1.1 Finance and the Firm for businesses and individuals, which is why most students will benefit from an how financial managers thinkThird, theis stakeholderimportant, perspective especially is intrinsically if you’re difficult not toone implement, yourself, They exist because investors want access to risky investment opportunities. In understanding of finance regardless of their profession. Learning the techniques of and advocates of the idea that managers should consider all stakeholders’ learning goals and appear next to related text sec- because they are oftenThe the field gatekeepers of finance is broad of corporate and dynamic. Financeresources. influences Fluency everything in thatthe lan- good financial analysis will not onlyother help you words, make better firms financial are decisionsrisky business as a that, if not for investors’ will- interests along with those of shareholders do not typically indicate how man- firms do, from hiring personnel to building factories to launching new advertis- consumer but will also assist you in understanding the financial consequences of guage of finance willagers improve should carry your it out. ability For example, to communicate how much emphasis the should value managers of your tions and again in the chapter-endingness summary, to bear risk, end- would have difficulty generating the necessary investment ing campaigns. Because almost any aspect of business has important financial important business decisions, no matter what career path you follow. ideas to your employer.dimensions,place Financial on the many interests financiallyknowledge of different oriented will stakeholder career also opportunities make groups? you Are await a the thosesmarter interests who ofcon- capital to operate. For example, most investors do not have the expertise or sumer and a wiser investorunderstandemployees with the more principles your or less own ofimportant finance money. describedthan the desiresin this oftextbook. customers? Even Should if you seemem - of-chapter problems and exercises, and supplements yourselfbers of pursuing the local a community career in another who do discipline no business such withas marketing, the firm haveoperations, an equal WHAT IS A FIRM? wealth required to start a personal computer company, so instead they invest in a accounting,say with the supply firm’s chain, suppliers? or human When resources, different you’ll stakeholder find that groupsunderstanding disagree a on such as the Test BankWhat is aand firm? Put MyLab. simply, a firmcompany is a business likeorganization Apple. that Even sells goods when or a few individuals, such as Steve Jobs, Steve Woz- fewthe crucial action ideasa firm in should finance take, will how enhance should your managers professional make important success. Knowing decisions? services. 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For example, most investors do not have the expertise or sumerincluding and a illegalwiser investor or unethical with your actions, own that money. increases the stock price. Even the wealth required to start a personalis computer today. company, So, ultimately, so instead they firms invest in are a intermediaries that bring together investors and viduals and firms raise, allocate, general rules that can guide managers in their decisions. The art of finance involves most ardent supporters of shareholder value maximization as the firm’s primary company like Apple. Even when a fewrisky individuals, investment such as Steve opportunities. Jobs, Steve Woz- Firms pool investment capital, make risky invest- and invest money. adapting theory to particularWHATgoal acknowledge IS FINANCE? business that managers situations must act with within their ethical ownand legal unique boundaries. circum- niak, and Ronald Wayne, had the requisite expertise and wealth to start Apple Computer in a garage in 1976, vastment amounts decisions, of additional and money manage (i.e., invest risky- investments all on behalf of investors who finance Finance is the science and art of how individuals and firms raise, allocate, and invest managerial finance stances. Managerial finance is concerned with the responsibilities of a financial ment capital) from investors were necessary for the firm to grow into what Apple The science and art of how indi- money.THE ROLEThe science OF BUSINESSof finance utilizes ETHICS financial theories and concepts to establish would otherwise not be able to do so effectively or efficiently on their own. For help in study andis today. review,So, ultimately, firms boldfaced are intermediaries thatkey bring termstogether investors and Concerns the duties of the managerviduals and firms working raise, allocate, in generala business. rules that canThough guide managers business in their finance decisions. Theis the art of primary finance involves focus of business ethics Business ethics are the standards of conduct or moral judgment that apply to risky investment opportunities. Firms pool investment capital, make risky invest- financial manager in a business. and invest money. adapting theory to particular business situations with their own unique circum- thisStandards book, of conduct the principles or moral persons of finance engaged inapply commerce. to both Violations personal of these andstandards professional involve a variety decision of and their definitionsment decisions,appear and managein the risky investmentsmargin all on where behalf of investors who managerial finance stances. Managerial finance is concerned with the responsibilities of a financial judgment that apply to persons actions: “,” , misleading financial fore- would otherwise not be able to do WHATso effectively IS or THEefficiently GOAL on their own. OF THE FIRM? making.Concerns the Atduties the of the personal manager level, working for in instance,a business. Though finance business helps finance individuals is the primary decidefocus of how engaged in commerce. casts, insider trading, fraud, excessive executive compensation, options backdat- financial manager in a business. this book, the principles of finance apply to both personal and professional decision they are first introduced. These terms are also bold- much of their earnings ing,to spend, bribery, how and kickbacks. much to The save, financial and presshow hasto invest reported their many savings. such making. At the personal level, for instance, finance helps individuals decide how WHAT IS THE GOAL OF THEWhat FIRM? goal should managers pursue? This question has no shortage of possible violations in recent years, involving such well-known companies as Wells Fargo, Financial thinking helpsmuch consumersof their earnings decideto spend, howwhen much borrowing to save, and how money to invest theiris appropriate savings. faced in the book’s index and appearanswers. in Somethe end-of- might argue that managers should focus entirely on satisfying where employees opened new accounts without authorization from customers, What goal should managers pursue? This question has no shortage of possible and enables them to criticallyFinancial thinking evaluate helps consumersloan offers decide with when differentborrowing money terms. is appropriate In a business and Volkswagen, where engineers set up elaborate deceptions to get around pol- answers. Some might argue that customers. managers should Firms focus entirelypursuing on satisfying this goal could measure their products’ market shares and enables them to critically evaluate loan offers with different terms. In a business context, finance involveslution the controls. same Intypes these andof decisions: similar cases, how the offending firms companiesraise money suffered from book glossary. customers. Firms pursuing this goal could measure their products’ market shares context, finance involves the same types of decisions: how firms raise money from to gauge progress. Others suggest that managers must first inspire and motivate various penalties, including fines levied by government agencies, damages paid to gauge progress. Others suggest that managers must first inspire and motivate investors, how firms investinvestors, moneyhow firms ininvest attempting money in attempting to create to create value value forfor their their investors, investors, employees; in that case, employeeemployees; turnover might inbe thethat key case,success metricemployee to turnover might be the key success metric to andto howplaintiffs firms in decide lawsuits, whether or lost to reinvestrevenues earnings from customers in the business who abandoned or distribute the and how firms decidefirms whether because toof their reinvest errant behavior. earnings Most in companies the business have adopted or distribute formal watch. Clearly, the goal or goals watch. that managers Clearly, select will the affect goal many or of goals the that managers select will affect many of the ethical standards, although clearly adherence to and enforcement of those stan- decisions they make, so choosing an objective is a critical determinant of how businesses operate. decisions they make, so choosing an objective is a critical determinant of how dards vary. The goal of suchMATTER standards OF is FACTto motivate business and market par- ticipants to adhere to both the letter and the spirit of laws and regulations businesses operate. Financeconcerned Professors withMATTER business Aren’t Like and OF Everyone professional FACT Else practice. Most business leaders believe Matter of Fact boxesMaximize provide Shareholder Wealthinteresting empirical Professionalsthat businesses who advise actually individual strengthen investors their know competitive that many people positions are more by willing maintaining to Finance teaches that the primary goal of managers should be to maximize the investhigh ethicalin the stock standards. market if it has been rising in the recent past and are less willing to do wealth of the firm’s owners—the stockholdersMaximize or shareholders. Shareholder Through theWealth years, Finance Professors Aren’tso if it hasLike been Everyone falling. Such “trend-chasing” Else behavior often leaves investors worse off facts, usually featuringthat recommendation recent has generateddata, a lot that of controversy. add The back- Economist magazine Professionals who advisethan individual if they had invested investors consistently know over that time. manyClassical people finance theory are suggests more thatwilling to once referred to shareholder valueFinance maximization teaches as “the most that powerful the primary idea in goal of managers should be to maximize the past performance of the stock market is a very poor predictor of future performance, ground and depth business,”to the but Jackmaterial Welch, the long-time covered Chief Executive in Officer the (CEO) of General invest in the stock marketand iftherefore it has individuals been rising should notin basethe investmentrecent past decisions and on arethe market’s less willing recent to do Electric and a man Fortune magazinewealth named of “Manager the firm’s of the owners—the Century,” once stockholders or shareholders. Through the years, so if it has been falling. history.Such A “trend-chasing” survey found that at least behavior one group ofoften investors leaves did not investors fall prey to trend worse off chapter. called maximizing shareholder valuethat “the recommendation dumbest idea in the world.” has generated Welch’s a lot of controversy. The Economist magazine chasing in the stock market. When deciding whether to invest in stocks, finance profes- assessment is particularly ironic because during his leadership, almost no company than if they had investedsors consistently were not influenced over by thetime. market’s Classical recent trend, finance presumably theory because suggests they know that generated more wealth for its shareholdersonce referredthan General toElectric. shareholder A $1,000 invest value- maximization as “the most powerful idea in past performance of thethat stock past performance market is does a verynot predict poor the predictor future. That’s justof futureone of the performance, lessons in this book that can help you make better choices with your own money. ment in GE stock made in 1981 whenbusiness,” Welch took but the reigns Jack as CEO Welch, would the have long-time Chief Executive Officer (CEO) of General M01B_ZUTT6315_15_SE_C01_pp002-040.inddand therefore individuals 10 should not base investment decisions on the market’s recent 07/11/17 2:53 PM grown to roughly $67,000 by the time he retired in 2001. The simplest and best Source: Hibbert, Lawrence, and Prakash, 2012, “Do finance professors invest like everyone else?” Financial Electric and a man Fortune magazine named “Manager of the Century,” once history. A survey found Analyststhat Journalat least. one group of investors did not fall prey to trend measure of stockholder wealth is the share price, so most finance textbooks (includ- ing ours) instruct managers to take calledactions that maximizing increase the firm’s shareholder share price. value “the dumbest idea in the world.” Welch’s chasing in the stock market. When deciding whether to invest in stocks, finance profes- assessment is particularly ironic because during his leadership, almost no company sors were not influenced by the market’s recent trend, presumably because they know generated more wealth for its shareholders than General Electric. A $1,000 invest- that past performance does not predict the future. That’s just one of the lessons in this book that can help you make better choices with your own money. ment in GE stock made in 1981 when Welch took the reigns as CEO would have grown to roughly $67,000 by the time he retired in 2001. The simplest and best Source: Hibbert, Lawrence, and Prakash, 2012, “Do finance professors invest like everyone else?” Financial M01B_ZUTT6315_15_SE_C01_pp002-040.inddAnalysts Journal. 4 07/11/17 2:53 PM measure of stockholder wealth is the share price, so most finance textbooks (includ- ing ours) instruct managers to take actions that increase the firm’s share price.

M01B_ZUTT6315_15_SE_C01_pp002-040.indd 4 07/11/17 2:53 PM

A01_ZUTT6315_15_SE_FM.indd 35 29/11/17 2:23 PM CHAPTER 5 Time Value of Money 209

period, we discount each annuity due cash flow 1 fewer period than an ordinary annuity. The algebraic formula for the present value of an annuity due is

CF0 1 PV0 = * 1 - * (1 + r) (5.6) r (1 + r)n a b c d Notice the similarity between this equation and Equation 5.4. The two equations are identical except that Equation 5.6 uses CF0 to indicate that the first cash flow arrives immediately in an annuity due, and Equation 5.6 has an extra term at the end, (1 + r). The reason for this extra term is the same as when we calculated the future value of the annuity due. In the annuity due, each payment arrives 1 xxxvi Prefaceyear earlier (compared to the ordinary annuity), so each payment has a higher present value. To be specific, each payment of the annuity due is discounted one less period so it’s worth r% more than each ordinary annuity payment.

IRF EXAMPLE 5.10 In Example 5.8 involving Braden Company, we found the present value of Braden’s Examples are an important component $700, 5-year ordinary annuity discounted at 4% to be $3,116.28. We now assume of the book’s learning system. Numbered MyLab Finance Animation that Braden’s $700 annual cash in flow occurs at the start of each year and is thereby an annuity due. The following timeline illustrates the new situation. and clearly set off from the text, they Timeline for present value Year provide an immediate and concrete of an annuity due ($700 0 1 2 3 4 5 beginning-of-year cash demonstration of how to apply financial flows, discounted at 4%, $700 $700 $700 $700 $700 over 5 years) concepts, tools, and techniques. Many of $ 700.00 673.08 these feature real-world data. 647.19 622.30 Examples illustrating time-value-of- 598.36 Present Value $3,240.93 money techniques often show the use of time lines, equations, financial cal- We can calculate its present value using a calculator or a spreadsheet. culators, and spreadsheets (with cell MyLab Finance Financial Calculator use Before using your calculator to find the present value of an annuity Calculator due, you must either switch it to BEGIN mode or use the DUE key, depending on formulas). For instructors who prefer Note: Switch calculator the specifics of your calculator. Then, using the inputs shown at the left, you will to BEGIN mode. find the present value of the annuity due to be $3,240.93 (Note: Because we nearly to use tables with interest rate fac- Input Function always assume end-of-period cash flows, be sure to switch your calculator back to 700 PMT tors, an IRF icon appearing with some 4 I/Y END mode when you have completed your annuity-due calculations.) 5 N CPT examples indicates that the example can PV Spreadsheet use The following spreadsheet shows how to calculate the present value of the annuity due. Solution –3,240.93 be solved using the interest rate factors. AB CPT RCL ENTER CPT CPT X CF NPV IRR DEL INS 1 PRESENT VALUE OF AN ANNUITY DUE The reader can access the Interest Rate NI/Y PV PMTFV MyLab C/Y P/YxP/YBGN AMORT 2 Annual annuity payment $700 1/x 7 8 9 / 3 Annual rate of interest 4% Factor Supplement in MyLab Finance. y x 4 5 6 * C/CE 4 Number of years 5 1 2 3 – RESET 5 Present value –$3,240.93 The Interest Rate Factor Supplement is a +/– 0 . = + Entry in Cell B5 is =PV(B3,B4,B2,0,1). The minus sign appears before the $3,240.93 self-contained supplement that explains in B5 because the annuity’s present value is a cost and therefore a cash outflow. how the reader should use the interest rate factors and documents how the in- chapter examples can be solved by using them.

M05_ZUTT6315_15_SE_C05_pp189-254.indd 209 10/11/17 4:07 PM MyLab Finance contains additional 204 PART TWO Financial Tools resources to demonstrate the examples.

FINDING THE FUTURE VALUE OF AN ORDINARY ANNUITY The MyLab Financial Calculator refer- One way to find the future value of an ordinary annuity is to calculate the future ence indicates that the reader can use value of each cash flow and then add up those figures. Fortunately, several short- cuts lead to the answer. You can calculate the future value after n years of an the finance calculator tool in MyLab ordinary annuity that makes n annual cash payments equal to CF1 by using Finance to find the solution for an Equation 5.3: example by inputting the keystrokes (1 + r)n - 1 FV CF (5.3) n = 1 * r shown in the calculator screenshot. The 3 4 e f MyLab Finance Solution Video refer- As before, in this equation r represents the interest rate, and n represents the number of payments in the annuity (or, equivalently, the number of years over ence indicates that the reader can go which the annuity is spread). The subscript 1 on the term CF1 highlights that with an ordinary annuity, the first payment comes after 1 year (or, more gener- to MyLab Finance to watch a video ally, after 1 period). The calculations required to find the future value of an ordi- nary annuity are illustrated in the following example. of the author discussing or solving the example. The MyLab Finance Video IRF PERSONAL FINANCE EXAMPLE 5.7 Fran Abrams wishes to determine how much money she will have after 5 years if she chooses annuity A, the ordi- reference indicates that the reader can MyLab Finance Animation nary annuity. She will deposit the $1,000 annual payments that the annuity pro- watch a video on related core topical vides at the end of each of the next 5 years into a savings account paying 7% annual interest. This situation is depicted on the following timeline. areas.

Timeline for future value of Year an ordinary annuity ($1,000 012345 Personal Finance Examples demonstrate end-of-year deposit, earning 7%, after 5 years) $1,000 $1,000 $1,000 $1,000 $1,000 how students can apply managerial $1,000.00 finance concepts, tools, and techniques 1,070.00 1,144.90 to their personal financial decisions. 1,225.04 1,310.80 $5,750.74 Future Value

MyLab Finance Financial Calculator As the figure shows, after 5 years, Fran will have $5,750.74 in her account. Note that because she makes deposits at the end of the year, the first deposit will earn Input Function –1000 PMT interest for 4 years, the second for 3 years, and so on. Plugging the relevant val- 7 I/Y 5 N ues into Equation 5.3, we have CPT FV (1 + 0.07)5 - 1 FV5 = $1,000 * = $5,750.74 Solution 5,750.74 0.07 CPT RCL ENTER CPT CPT 3 4 CF NPV IRR DEL INS e f NI/Y PV PMTFV Calculator use Using the calculator inputs shown at the left, you can confirm C/Y P/YxP/YBGN AMORT that the future value of the ordinary annuity equals $5,750.74. In this example, 1/x 7 8 9 / y x 4 5 6 * we enter the $1,000 annuity payment as a negative value, which in turn causes C/CE RESET 1 2 3 – the calculator to report the resulting future value as a positive value. You can +/– 0 . = + think of each $1,000 deposit that Fran makes into her investment account as

A01_ZUTT6315_15_SE_FM.indd 36 27/11/17 8:04 PM

M05_ZUTT6315_15_SE_C05_pp189-254.indd 204 10/11/17 4:00 PM 210 PART TWO Financial Tools

Comparison of an Annuity Due with an Ordinary Annuity Present Value The present value of an annuity due is always greater than the present value of an otherwise identical ordinary annuity. We can verify this statement by compar- ing the present values of the Braden Company’s two annuities: CHAPTER 5 Time Value of Money 211 Ordinary annuity = $3,116.28 versus Annuity due = $3,240.93 Becausethat begins the cashnext year,flows pays of the an annuityinitial cash due flow occur of CFat 1the, and beginning grows after of eachnext yearperiod at a constant rate g forever, the present value of the growing perpetuity is rather than at the end, their present values are greater. If we calculate the per- centage difference in the values of these two annuities, we will find that the annu- ity due is 4% more valuable than the annuityCF1 (remember that 4% is the discount PV0 = (5.8) rate that Braden uses): r - g a b ($3,240.93 $3,116.28) $3,116.28 0.04 4 Equation 5.8 applies only- when the discount, rate is greater= than= the, growth rate in cash flows (i.e., r > g). If the interest rate is less than or equal to the growth FINDINGrate, cash flows THE grow PRESENT so fast that VALUE the present OF A value PERPETUITY of the stream is infinite.

perpetuity A perpetuity is an annuity with an infinite life. In other words, it is an annuity An annuityPERSONAL with an infinite FINANCE life, thatEXAMPLE never stops 5.12 providingSuppose, a cash after flow consulting at the end with of his each alma year. mater, Ross Clark providing continual annual A number of businesslearns andthat personalthe university investment requires decisions the endowment involve topayouts provide that cash flow. occura $400,000 indefinitely cash flowinto nextthe futureyear, but and subsequent are therefore annual excellent cash flows applications must grow of by the 2% per year to keep up with inflation. How much does Ross need to donate idea of a perpetuity. Fortunately, the calculation for the present value of a perpe- today to cover this requirement? Plugging the relevant values into Equation 5.8, tuity is one of the easiest in finance. If a perpetuity pays an annual cash flow of Preface xxxvii we have: CF1, starting 1 year from now, the present value of the cash flow stream is $400,000 PV0 = = $13,333,333 0.05 - 0.02 Key Equations appear in green boxes PV0 = CF1 , r (5.7) Compared to the level perpetuity providing $400,000 per year, the growing throughout the text to help readers identify perpetuity requires Ross to make a much larger initial donation, $13.3 million the most important mathematical relation- versus $8 million. PERSONAL FINANCE EXAMPLE 5.11 Ross Clark wishes to endow a chair in finance at his alma ships. mater. In other words, Ross wants to make a lump sum dona- tion today that will provide an annual stream of cash flows to the university forever. Review Questions appear at the end of each ➔ REVIEW QUESTIONS MyLab Finance Solutions The university indicated that the annual cash flow required to support an endowed major text section. These questions chal- chair 5–10 is $400,000 What is andthe differencethat it will between invest money an ordinary Ross donates annuity todayand an in annuity assets earning a 5% return.due? If Which Ross wantsis more to valuable? give money Why? today so that the university will begin lenge readers to stop and test their under- receiving 5–11 annualWhat arecash the flows most next efficient year, wayshow largeto calculate must his the contribution present value be? of Toan deter- standing of key concepts, tools, techniques, mine the amountordinary Ross annuity? must give the university to fund the chair, we must calculate and practices before moving on to the next the present 5–12 How value can of thea $400,000 formula for perpetuity the future discounted value of an at annuity 5%. Using be modified Equation to 5.7, CHAPTER 5 Time Value of Money 225 we can determinefind the thatfuture this value present of an value annuity is $8 due? million when the interest rate is 5%: section. 5–13 How can the formula for the present value of an ordinary annuity be modified toPV findX the$400,000 presentA value0.05B of an annuity$8,000,000C due? D E 0 = 1 , LOAN =AMORTIZATION SCHEDULE NEW! Some sections have dedicated Excel MyLab 5–14 What is a perpetuity?2 Why is the present Loanvalue principal of a perpetuity$6,000 equal to In other words, to generate $400,000 every year for an indefinite period requires Review Questions that ask students to dem- the annual cash payment3 divided by Annualthe interestrate of interest rate? Why10% doesn’t this $8,000,000 today if Ross Clark’s4 alma mater can Number earn of 5% years on its4 investments. If the chapter provide an equation5 showingAnnual you annuity how payments to calculate the future onstrate their ability to solve a financial university earnsvalue of5% a interestperpetuity? annually on the $8,000,000, it can withdrawYear-End $400,000 problem using Excel. per year indefinitely without ever6 YeartouchingTotal the originalTo Interest $800,000To Principal donation.Principal 7 0 $6,000.00 8 1 –$1,892.82 –$600.00 –$1,292.82 $4,707.18 9 2 –$1,892.82 –$470.72 –$1,422.11 $3,285.07 ➔ EXCEL REVIEW QUESTIONS MyLabCHAPTER Finance 5 Time Value Solutions of Money 221 Many financial applications 10require3 analysts–$1,892.82 to calculate–$328.51 the–$1,564.32 present$1,720.75 value of a 5–15 Because tax time comes11 around4 –$1,892.82 every year,–$172.07 you smartly–$1,720.75 decide to$0.00 make cash flow stream that➔ REVIEW continues QUESTIONS forever MyLab (i.e., Financea perpetuity)Key Cell Solutions Entries and grows at a steady equal contributions to your IRA at the end of every year. Using the rate. Calculating the present 5–20 What value effect doesofCell acompounding B8growing is =PMT($D$3,$D$4,$D$2,0,0), interestperpetuity more frequently is copynot to thanmuch B9:B11 more com- information provided annually at have MyLab on (a) future CellFinance, C8 value is =-$D$3*E7, and calculate (b) the copy effective to the C9:C11 futureannual rate value of plicated than finding the present(EAR)? Why? value of a Celllevel D8 is perpetuity. =B8-C8, copy to D9:D11For a cash flow stream your IRA contributions 5–21 How does thewhen future you valueCell retire.of E8a deposit is =E7+D8, subject copy to to continuous E9:E11 com- 5–16 You have just graduatedpounding compare fromThe to theminuscollege value sign obtained appears and begunbeforeby annual the yourloan compounding? payments new career, because these are cash outflows for the borrower. and now it is 5–22 time Differentiate to buy between your a firstnominal home. annual rateUsing and anthe effective information annual rate (EAR). Define annual percentage rate (APR) and annual percent- provided at MyLabage yield Finance, (APY). determine how much you can spend To attract home buyers who could not afford fixed-rate 30-year mortgages for your new dreamrequiring equal home. monthly payments, lenders offered mortgages low “teaser” inter- est rates that adjusted over time. Recall from Chapter 2 that subprime mortgages are mortgage loans made to borrowers with lower incomes and poorer credit histories as compared to “prime” borrowers. The Focus on Practice box dis- In Practice boxes offer insights into impor- FOCUS ON ETHICS M05_ZUTT6315_15_SE_C05_pp189-254.indd 210 incusses practice how such mortgages have worked out for some “subprime” borrowers. 08/11/17 3:53 PM Was the Deal for Manhattan a Swindle? tant topics in managerial finance through FINDING INTEREST OR GROWTH RATES Most schoolchildren marvel when about 787 Euros today after adjusting to today, the sum would grow to the experiences of real companies, both hearing Manhattan was purchasedOne for offor the inflation. performance Based on the measures recent thatroughly investors 4 trillion and guilders corporate or $2 trillion. managers focus a song in 1626. As the story goes,on mostexchange is growth. rate between How thefast Euro a firm and canBased grow on Newits sales, York City’s earnings, Depart- or cash flows is large and small. There are three categories M05_ZUTT6315_15_SE_C05_pp189-254.indd 211 Peter Minuit of the Dutch West Indiaan importantthe U.S. dollar, signal that translates about its to competitivement of Finance position property in thetax assess- market. Similarly,15/11/17 4:52 PM Company gave the Lenape Native about $871. Now, the deal looks a bit ments, $2 trillion is roughly twice the of In Practice boxes: Americans beads and trinkets worth a better for the Lenape. But the surface value of all New York City real estate mere $24 for the island. area of Manhattan comprises 636,000 today! FOCUSBut wait. ON A letter PRACTICE written by Dutch square feet, and condos there sell for Of course, when the deal for merchant, Pieter Schage, on Novem- inan averagepractice of $1,700 per square foot. Manhattan was struck, the first asset Focus on Ethics boxes in every chapter help ber 5, 1626 to the directors of the So even after adjusting for price trading of any kind on a street called DutchNew West Century India Company Brings confirmed Trouble changes for since Subprime 1626, Minuit Mortgagesstill looks Wall lay over 80 years in the future, readers understand and appreciate impor- the transaction but valued the goods pretty sly. so the Lenape could not salt the As the housing market began to boom adjustable rate mortgage (ARM), Instead, borrowers in trouble could (which more likely were kettles, mus- Before closing theCHAPTER case, consider 19 International receipts away Managerial in stocks. Still,Finance the 831 at the end of the twentieth century and which featured a low introductory try to convince their lenders to allow tant ethical issues and problems related kets, powder, and axes) at 60 Dutch one more factor. The average annual- illustration makes the larger point–– guilders.into the earlyAccording twenty-first, to the Interna- the market ized returninterest on rateU.S. thatstocks reset over upwardthe last aftercompounding a a “short is a magicalsale,” in thing! which the borrower to managerial finance. Nearly all of these tionalshare Instituteof subprime of Social mortgages History, climbed200 yearspreset was period 6.6%. Ifof 60 time. Dutch Interest guil- ratesAnd givensells this themagic, home it is forless whatever clear the mar- GLOBAL60from Dutch near guilders 0% FOCUS in 1997in 1626 to areabout inworth 20%practice ofders beganwere invested a steady at 6.6% upward from trend 1626 beginwho -fleecedket whom.will bear and the lender agrees to boxes are brand new in this edition, and mortgage originations in 2006. Several ning in late 2004. In 2006, some $300 accept the proceeds from that sale as factorsTake People combinedan without Overseas financeto fuel thetraining Assignment rapid often fail tobillion appreciateto Takeworth the ofa poweradjustableStep of Upcompound ARMs the were interest.Corporate settlement Consider Ladder the for following the mortgage debt. those that are not brand new have been growthdata for of a lendingtypical credit to borrowers card: with tar- reset to higher rates. In a market with For lenders and borrowers alike, fore- There is nothing like an extended stay their importance to the success of a assignment (reported by 38% of sur- nishedOutstanding credit, Balance:including a low interest$5,000 rising home values, a borrower has closure is the last, worst option. in a foreign country to get a different firm. The 2016 survey found that 63% vey respondents) involved family con- Annual Percentage Rate (APR): 12% substantially revised. rateperspective environment, on world loose events, underwriting and ofthe firms option either to increased refinance or the held mortgage, cerns, such as children’s education, Minimum Payment: Larger of [(1% + APR 12) * balance] or $25 standards,there are sound and innovations career-enhancing in mortgage rea- steadyusing thesome number of the of equity international created by family adjustment,As a reaction partner to problems resistance, in the financingsons to work such abroad. as “affordability International pro - assignmentsthe home’sMinimum given increasing> Payment to employees Onlyvalue to $100 rela- reduce Paymentand language.Eachsubprime Month Thearea, second lenders most tightened com- Focus on Practice boxes take a corporate grams”experience to increase canMonthly give rates you Payments ofa competi- homeown to Zero- Balancetivethe to mortgage the prior year,payment.208 and 75% After of 2006, mon71 lendingreason (18%) standards. for refusing What aneffect do ershiptive edge among and lower-incomemayTotal beInterest vital Paidto borrowers. career firmshowever, said they home expected$4,242 prices thestarted number a $1,993assignmentyou think was this concern change for had a on the focus that relates a business event or situation advancement.Particularly Such attractive experience to new goes of3-year international slide, so assignments refinancing to was remain not anspouse’s housing career, market? not unlike the same The first minimum payment is $100, but that minimum will decline each month as the outstanding balance shrinks. home buyers was the hybrid option for many subprime borrowers. farMaking beyond the mastering minimum paymentcountry-specific every month the means same that or tothe increase borrower through takes 17 2017. years toconcern pay off the some card, employees paying more have about to a specific financial concept or technique. taxthan and $4,000 accounting in interest codes. along the way. By payingOn $100 arrival each in month,a foreign however, city, expa- the borrowera job repays that requires the debt a in cross-country one- thirdThat’s the time one andmessage at less fromthan halfthe the interesttriates cost. tend to live in a section of the transfer. 2016 GlobalHow much Mobility responsibility Trends doSurvey lenders havecity tofavored educate by borrowers? other visitors Does from the fact that theYet government as globalization requires has dis- pushed Global Focus boxes look specifically at the publishedclosure statements by BGRS, with a global a few standardizedhuman home. examples For illustratingsecurity reasons, the time some value of moneycompanies change your across answer? more borders, resources consulting company. The executives also travel everywhere CFOs with international experience managerial finance experiences of interna- survey indicated that 61% of respon- chauffeured by an English-speaking have found themselves in greater M05_ZUTT6315_15_SE_C05_pp189-254.indddents said their company 225 had com- driver. It is possible for U.S. execu- demand. Some chief executives value 08/11/17 3:54tional PM companies. municated to employees that an tives to live abroad for an extended international experience in their CFOs international assignment was impor- period without soaking up much of more highly than either mergers and tant to advance their careers. It’s no the local culture. Doing so may acquisitions or capital-raising All three types of In Practice boxes end with wonder that companies place so increase one’s comfort level, but at experience. much emphasis on international the loss of some of the valuable les- one or more critical thinking questions to M05_ZUTT6315_15_SE_C05_pp189-254.inddassignments, given 221 that 80% of the sons to be learned from living abroad. If going abroad for a full-immersion08/11/17 3:53 PM survey respondents said the main pur- Overseas assignments do not assignment is not possible, what are help readers broaden the lesson from the pose of having a globally mobile come without some sacrifices. Long some substitutes for a global assign- workforce was to facilitate important overseas postings can put stress on a ment that may provide some—albeit content of the box. global business initiatives. The volume family. The most common reason for limited—global experience? of international assignments reflected turning down an international

currencies other than the currency in which the bond is denominated, it is called a Eurobond Eurobond. Thus, an MNC based in the United States might float a Eurobond in A bond issued by an several European capital markets, underwritten by an international syndicate and international borrower and sold denominated in U.S. dollars. to investors in countries with The U.S. dollar and the euro are the most frequently used currencies for currencies other than the Eurobond issues, with the euro rapidly increasing in popularity relative to the currency in which the bond is U.S. dollar. In the foreign bond category, the U.S. dollar and the euro are major denominated. choices. Low interest rates, the general stability of the currency, and the overall efficiency of the European Union’s capital markets are among the primary rea- sons for the growing popularity of the euro. Eurobonds are much more popular than foreign bonds. These instruments are heavily used, especially in relation to Eurocurrency loans in recent years, by major market participants, including U.S. corporations. Equity-linked Euro- A01_ZUTT6315_15_SE_FM.indd 37 bonds (that is, Eurobonds convertible to equity), especially those offered by a 29/11/17 2:23 PM number of U.S. firms, have found strong demand among Euromarket partici- pants. It is expected that more of these innovative types of instruments will emerge on the international scene in the coming years. A final point concerns the levels of interest rates in international markets. In the case of foreign bonds, interest rates usually directly correlate with the

M19_ZUTT6315_15_SE_C19_pp809-848.indd 831 07/11/17 4:23 PM 230 PART TWO Financial Tools

➔ REVIEW QUESTIONS MyLab Finance Solutions 5–26 How can you determine the size of the equal, end-of-year deposits nec- essary to accumulate a certain future sum at the end of a specified future period at a given annual interest rate? 5–27 Describe the procedure used to amortize a loan into a series of equal periodic payments. 5–28 How can you determine the unknown number of periods when you know the present and future values—single amount or annuity—and the applicable rate of interest?

➔ EXCEL REVIEW QUESTIONS MyLab Finance Solutions 5–29 You want to buy a new car as a graduation present for yourself, but 230 PARTbefore TWO Financialfinalizing Tools a purchase you need to consider the monthly payment amount. Using the information provided at MyLab Finance, find the monthly payment➔ REVIEW amount QUESTIONS for the MyLab car you Finance are Solutionsconsidering. 5–30 As a finance 5–26major, How you can yourealize determine that the you size canof the quickly equal, end-of-year estimate deposits your nec- essary to accumulate a certain future sum at the end of a specified retirement age byfuture knowing period at how a given much annual you interest need rate? to retire, how much you can contribute 5–27 Describe each the month procedure to usedyour to amortizeretirement a loan account, into a series and of equal what rate of return youperiodic can earnpayments. on your retirement investments. With that 5–28 How can you determine the unknown number of periods when you information, youknow can thesolve present for and the future number values—single of years amount it will or annuity—and take to save the money you needthe applicable to retire. rate Using of interest? the information provided at MyLab Finance, estimate the age at which you will be able to retire. ➔ EXCEL REVIEW QUESTIONS MyLab Finance Solutions 5–29 You want to buy a new car as a graduation present for yourself, but before finalizing a purchase you need to consider the monthly payment amount. Using the information provided at MyLab Finance, find the monthly payment amount for the car you are considering. 5–30 As a finance major, you realize that you can quickly estimate your SUMMARY retirement age by knowing how much you need to retire, how much you can contribute each month to your retirement account, and what rate of return you can earn on your retirement investments. With that FOCUS ON VALUE information, you can solve for the number of years it will take to save the money you need to retire. Using the information provided at xxxviiiThe time valuePreface of money isMyLab an important Finance, estimate tool the that age atfinancial which you managerswill be able to and retire. other market participants use to compare cash inflows and outflows occurring at dif- ferent times. Because firms routinely make investments that produce cash inflows over long periods of time, the effective application of time-value-of- The end-of-chapter Summary con- moneySUMMARY techniques is extremely important. These techniques enable financial sists of two sections. The first sec- managers to compare the costs of investments they make today to the cash FOCUS ON VALUE tion, Focus on Value, explains how inflows those investments will generate in future years. Such comparisons help the chapter’s content relates to the managers achieve theThe firm’stime value overall of money goal is an of important share pricetool that maximization. financial managers It and will other market participants use to compare cash inflows and outflows occurring at dif- firm’s goal of maximizing owner become clear later inferent this times. text Because that thefirms application routinely make ofinvestments time-value that produce techniques cash is a key part of the valuationinflows overprocess long periods needed of time, to make the effective wealth-maximizing application of time-value-of- decisions. wealth. This feature helps reinforce money techniques is extremely important. These techniques enable financial managers to compare the costs of investments they make today to the cash understanding of the link between REVIEW OF LEARNINGinflows those GOALSinvestments will generate in future years. Such comparisons help the financial manager’s actions and managers achieve the firm’s overall goal of share price maximization. It will LG 1 become clear later in this text that the application of time-value techniques is a share value. Discuss the rolekey part of oftime the valuation value in process finance, needed the to make use wealth-maximizing of computational decisions. tools, and the basic patterns of cash flow. Financial managers and investors use time- The second part of the Summary, value-of-money techniquesREVIEW OF when LEARNING assessing GOALS the value of expected cash flow the Review of Learning Goals, streams. AlternativesLG 1can be assessed by either compounding to find future Discuss the role of time value in finance, the use of computational tools, restates each learning goal and value or discountingand to the find basic presentpatterns of value. cash flow. Financial Financial managersmanagers and relyinvestors primarily use time- on present-value techniques.value-of-money Financial techniques whencalculators assessing theand value electronic of expected spreadsheets cash flow summarizes the key material that streams. Alternatives can be assessed by either compounding to find future value or discounting to find present value. Financial managers rely primarily was presented to support mastery on present-value techniques. Financial calculators and electronic spreadsheets of the goal. This review provides students with an opportunity to reconcile what they have learned with the learning goal and to con-

M05_ZUTT6315_15_SE_C05_pp189-254.indd M05_ZUTT6315_15_SE_C05_pp189-254.indd 230 232 PART 230 TWO Financial Tools 10/11/1710/11/17 4:12firm PM 4:12 theirPM understanding before moving forward. 232 PART TWO Financial Tools OPENER-IN-REVIEW Opener-In-Review questions at OPENER-IN-REVIEWThe chapter opener described a lottery prize that could be taken as a $480 million lump sum payment or mixed stream of 30 payments, with the first payment of the end of each chapter revisit the The$11.42 chapter million opener coming described immediately, a lottery prize followed that couldby 29 beadditional taken as paymentsa $480 million growing opening vignette and ask students lumpat sum5% perpayment year. If or the mixed lottery stream winner of could 30 payments, earn 2% on with cash the invested first payment today, should of $11.42she milliontake the coming lump sumimmediately, or the mixed followed stream? by 29What additional if the ratepayments of return growing is 3%? to apply lessons from the chapter at 5%What per general year. If principlethe lottery do winner those calculationscould earn 2% illustrate? on cash invested today, should to that business situation. she take the lump sum or the mixed stream? What if the rate of return is 3%? What general principle do those calculations illustrate? Self-Test Problems, keyed to the SELF-TEST PROBLEMS (Solutions in Appendix) CHAPTER 5 Time Value of Money 233 learning goals, give readers an SELF-TESTLG 2 LG 5 PROBLEMSST5–1 Future values(Solutions for various in Appendix) compounding frequencies Delia Martin has $10,000 that opportunity to strengthen their she can deposit in any of three savings accounts for a 3-year period. Bank A com- IRF pounds interest on an annual basis, bankCash B compoundsflow stream interest twice each year, and understanding of topics by doing LG LG ST5–1 Future values for various compounding frequencies Delia Martin has $10,000 that 2 5 bank C compounds interestYear eachAlternative quarter. All A threeAlternative banks have B a stated annual she can deposit in any of three savings accounts for a 3-year period. Bank A com- interest rate of 4%. a sample problem. For reinforce- IRF pounds interest on an annual1 basis, bank$700 B compounds $1,100interest twice each year, and a. What amount would Ms. Martin have after 3 years, leaving all interest paid on bank C compounds interest2 each quarter.700 All three banks have900 a stated annual ment, solutions to the Self-Test deposit, in each bank? interest rate of 4%. 3 700 700 b. What effective annual rate (EAR) would she earn in each of the banks? Problems appear in the appendix at a. What amount would Ms.4 Martin have700 after 3 years, leaving500 all interest paid on c. On the basis of your findings in parts a and b, which bank should Ms. Martin deposit, in each bank?5 700 300 the back of the book. An IRF icon deal with? Why? b. What effective annual rate (EAR) would Singleshe earn amount in each of the banks? d. If a fourth bank (bank D), also with a 4% stated interest rate, compounds indicates that the Self-Test Problem c. On the basis of yourAt timefindings zero in parts$2,825 a and b, which$2,800 bank should Ms. Martin interest continuously, how much would Ms. Martin have after 3 years? deal with? Why? Does this alternative change your recommendation in part c ? Explain why or can be solved using the interest rate d. If a fourth bank (bank D), also with a 4% stated interest rate, compounds why not. LG 6 ST5–4 Depositsinterest needed continuously, to accumulate how mucha future would sum Judi Ms. Martin Janson havewishes after to accumulate 3 years? factors. The reader can access the Does this alternative change your recommendation in part c ? Explain why or LG ST5–2$8,000 Future by valuesmaking of equal, annuities end-of-year Ramesh deposits Abdul has over the the opportunity next 5 years. to investIf Judi in can either earn of IRF 3 Interest Rate Factor Supplement in 7%whytwo on herannuities,not. investments, each of how which much will must cost she$38,000 deposit today. at the Annuity end of Xeach is anyear annuity to meet due IRF thisthat goal? makes 6 cash payments of $9,000. Annuity Y is an ordinary annuity that makes MyLab Finance. ST5–2 Future values of annuities Ramesh Abdul has the opportunity to invest in either of LG 3 6 cash payments of $10,000. Assume that Ramesh can earn 15% on his investments. two annuities, each of which will cost $38,000 today. Annuity X is an annuity due a. On a purely intuitive basis (i.e., without doing any math), which annuity do you IRF that makes 6 cash payments of $9,000. Annuity Y is an ordinary annuity that makes think is more attractive? Why? 6 cash payments of $10,000. Assume that Ramesh can earn 15% on his investments. b. Find the future value after 6 years for both annuities. Warm-Up Exercises follow the a. On a purely intuitive basis (i.e., without doing any math), which annuity do you WARM-UP EXERCISESc. Use yourAll finding problems in part are b availableto indicate inwhich MyLab annuity Finance is more. attractive. Why? think is more attractive? Why? Compare your finding to your intuitive response in part a. Self-Test Problems. These short, b. Find the future value after 6 years for both annuities. LG E5–1 Assume that a firm makes a $2,500 deposit into a short-term investment account. If numerical exercises give students 2 ST5–3c. UsePresent your values finding of insingle part amounts b to indicate and streamswhich annuity You have is more a choice attractive. of accepting Why? either LG 2 LG 3 this account is currently paying 0.7% (yes, that’s right, less than 1%!), what will the Compareof two 5-year your cash finding flow to streams your intuitive or single response amounts. in Onepart a.cash flow stream is an ordi- account balance be after 1 year? practice in applying tools and tech- LG 4 nary annuity, and the other is a mixed stream. You may accept alternative A or B, LG 2 LG 3 ST5–3 Presenteither values as a cashof single flow amounts stream or and as streamsa single Youamount. have Given a choice the cashof accepting flow stream either and niques presented in the chapter. LG 2 LG 5 IRF E5–2 If Bob and Judy combine their savings of $1,260 and $975, respectively, and deposit of twosingle 5-year amounts cash flowassociated streams with or eachsingle (see amounts. the following One cash table), flow and stream assuming is an ordia 9%- LG 4 narythis amountannuity, into and an the account other is that a mixed pays stream.2% annual You interest, may accept compounded alternative monthly, A or B, whatopportunity will the account cost, which balance alternative be after 4(A years? or B) and in which form (cash flow stream or IRF eithersingle as a amount) cash flow would stream you or prefer? as a single amount. Given the cash flow stream and single amounts associated with each (see the following table), and assuming a 9% E5–3 Gabrielle just won $2.5 million in the state lottery. She is given the option of LG 3 opportunity cost, which alternative (A or B) and in which form (cash flow stream or receiving a lump sum of $1.3 million now, or she can elect to receive $100,000 at single amount) would you prefer? the end of each of the next 25 years. If Gabrielle can earn 5% annually on her investments, which option should she take?

LG 4 E5–4 Your firm has the option of making an investment in new software that will cost $130,000 today but will save the company money over several years. You estimate that the software will provide the savings shown in the following table over its 5-year life.

M05_ZUTT6315_15_SE_C05_pp189-254.indd 232 08/11/17 3:54 PM Year Savings estimate 1 $35,000 A01_ZUTT6315_15_SE_FM.inddM05_ZUTT6315_15_SE_C05_pp189-254.indd 38 232 2 50,000 08/11/17 3:54 PM 27/11/17 8:04 PM 3 45,000 4 25,000 5 15,000

Should the firm make this investment if it requires a minimum annual return of 9% on all investments?

M05_ZUTT6315_15_SE_C05_pp189-254.indd 233 08/11/17 3:54 PM 176 PART TWO Financial Tools

WARM-UP EXERCISES All problems are available in MyLab Finance

LG 2 E4–1 The installed cost of a new computerized controller was $65,000. Calculate the depreciation schedule by year assuming a recovery period of 5 years and using the appropriate MACRS depreciation percentages given in Table 4.2.

LG 3 E4–2 Classify the following changes in each of the accounts as either an inflow or an out- flow of cash. During the year (a) marketable securities increased, (b) land and build- ings decreased, (c) accounts payable increased, (d) vehicles decreased, (e) accounts receivable increased, and (f) dividends were paid.

LG 3 E4–3 Determine the operating cash flow (OCF) for Kleczka Inc., based on the following data. (All values are in thousands of dollars.) During the year the firm had sales of $2,500, totaled $1,800, operating expenses totaled $300, and depreciation expenses were $200. The firm is in the 35% tax bracket.

LG 3 E4–4 During the year, XeroCHAPTER Inc. experienced 4 Long- anand increase Short-Term in net Financial fixed assetsPlanning of $300,000179 and had depreciation of $200,000. It also experienced an increase in current assets of $150,000 and an increase in accounts payable and accruals of $75,000. If operat- P4–8 Cash receipts A firm has actual sales of $65,000 in April and $60,000 in May. It LG 4 ing cash flow (OCF) for the year was $700,000, calculate the firm’s free cash flow expects sales of $70,000 in June and $100,000 in July and in August. Assuming that (FCF) for the year. sales are the only source of cash inflows and that half of them are for cash and the remainder are collected evenly over the following 2 months, what are the firm’s LG 5 E4–5 Rimier Corp. forecasts sales of $650,000 for 2020. Assume that the firm has fixed expectedcosts of $250,000 cash receipts and forvariable June, costsJuly, amountingand August? to 35% of sales. Operating expenses are estimated to includeCHAPTER fixed 4 Long-costs of and $28,000 Short-Term and a Financial variable Planning portion 185 Cash disbursements schedule Maris Brothers Inc. needs a cash disbursement sched- LG 4 X P4–9 equal to 7.5% of sales. Interest expenses for the coming year are estimated to be ule for the months of April, May, and June. Use the format of Table 4.9 and the fol- Preface xxxix MyLab $20,000. Estimate Rimier’s net profits before taxes for 2020. lowing information in itsPeabody preparation. & Peabody Balance Sheet December 31, 2019 ($000)

Sales: FebruaryAssets= $500,000; March = $500,000;Liabilities April and= stockholders’$560,000; equity May = $610,000;Cash June = $650,000;$ 400July = Accounts$650,000 payable $1,400 Comprehensive Problems, keyed to Purchases: PurchasesMarketable are securities calculated as 20060% of Accruals the next month’sX sales, 10%400 of PROBLEMS Accounts receivableCHAPTER 4 1,200 Long- and Other Short-Term current liabilities Financial Planning 80 187 Allpurchases problems are are made available in cash, in 50% MyLab of purchases Finance. are Thepaid MyLabfor 1 month icon indicates after pur- the learning goals, are longer and problemschase, and in theExcel Inventoriesremaining format 40% available of purchases 1,800in MyLab are paid Finance Total for current 2 months. liabilities after purchase. $1,880 Total current assets $3,600 Long-term debt 2,000 more complex than the Warm-Up Provincial Imports Inc. LG P4–1 DepreciationRent: The On firm NetMarch pays fixed rent 20, assets of2019, $8,000 Norton per 4,000 month.Systems acquired Total liabilities two new assets.$3,880 Asset 2 Balance Sheet December 31, 2019 Exercises. In this section, instruc- A was research equipment costing $17,000 and having a 3-year recovery period. Wages and salaries:Total Base assets wage and $7,600salary costs Common are fixed equity at $6,000 per month 3,720 Asset B wasAssets duplicating equipment with an installedLiabilities cost of and$45,000 stockholders’ and a 5-yearequity plus a variable cost of 7% of the current month’sTotal sales. liabilities and tors will find multiple problems that recovery period.Cash Using the MACRS$ depreciation 200,000 percentages Accountsstockholders’ payable in Table equity 4.2, prepare $7,600$ a 700,000 depreciationTaxes: AMarketable taxschedule payment securitiesfor eachof $54,500 of these is 225,000 assets. due in June. Taxes payable 95,000 address the important concepts, tools, Accounts receivable 625,000 Notes payable 200,000 P4–2 DepreciationFixed asset In outlays: early 2019, New Sosaequipment Enterprises costing purchased $75,000 a will new be machine bought forand $10,000 paid for LG 2 Inventories 500,000 Other current liabilities 5,000 and techniques in the chapter. to makein April. cork stoppers for wine bottles. The machine has a 3-year recovery period Total current assets $1,550,000 Total current liabilities $1,000,000 and is expecteda. Prepare to havea pro a forma salvage balance value ofsheet $2,000. dated Develop December a depreciation 31, 2021. schedule Interest Netpayments: fixed assets An interest payment 1,400,000 of $30,000 Long-term is due debt in June. 500,000 for this b.asset Discuss using the financingMACRS depreciationchanges suggested percentages by the in statement Table 4.2. prepared in part a. New! Excel templates for many end- Total assets $2,950,000 Total liabilities $1,500,000 Cash dividends:CHAPTER Dividends 4 Long- andof $12,500Short-Term will Financial be paid Planning in April. 187 LG P4–20 Integrative: Pro forma statements Red QueenCommon Restaurants stock wishes to prepare finan-75,000 of-chapter problems are available in LG 2 5 P4–3 MACRS depreciation and accounting No principal cash flow repayments Pavlovich or Instruments retirements Principalcial plans. repayments Use the and financial retirements: statements and the Retainedother information earnings provided below 1,375,000 to Inc.,are a makerdue during of precision these months. telescopes, expects to report pretax income of $430,000 MyLab Finance. These templates do LG prepare the financialProvincial plans. Imports Inc. Total liabilities and equity $2,950,000 3 this year. The company’sBalance financial Sheet December manager 31, 2019 is considering the timing of a purchase of new computerized lens grinders. The grinders will have an installed cost of not solve problems for students, but LG 4 P4–10 AssetsCash budget: Basic Grenoble EnterprisesLiabilities and had stockholders’ sales of equity $50,000 in March and $80,000The and following a cost recovery financial period data areof 5also years. available: They will be depreciated using the Cash$60,000Information in April. Forecast$ related 200,000 sales to financial for Accounts May, payable projections June, and Julyfor theare$ year $70,000, 700,000 2020 $80,000, is as follows: and MACRS(1) schedule. The firm has estimated that its sales for 2020 will be $900,000. rather help students reach a solution Marketable$100,000, (2)securities(1) respectively.The Projected firm expects 225,000 Thesales firm toare pay Taxes$6,000,000.has $35,000 apayable cash balance in cash ofdividends $5,000 95,000inon 2020. May 1 and wishes Accountsto maintain receivable(3)(2) Thea Costminimum firm of wishes 625,000goods cash tosold balance maintain Notesin 2019 payableof $5,000.a includesminimum Given $1,000,000 cash the balance following200,000 in offixed $30,000. data, costs. prepare faster by inputting data for them Inventories 500,000 Other current liabilities 5,000 and interpret(4)(3) Accounts aOperating cash budget receivable expense for therepresent in months 2019 approximatelyincludes of May, $250,000 June, 18% and in July.of fixed annual costs. sales. Total current assets $1,550,000 Total current liabilities $1,000,000 (1) The(5) firm(4) The makesInterest firm’s 20% expense ending of sales willinventory for remain cash, will unchanged. 60% change are collected directly inwith the changes next month, in sales in or by organizing facts presented in Net fixedand assets the remaining 1,400,000 20% are collected Long-term debt in the second month 500,000 following sale. Total assets(5)2020. The firm$2,950,000 will pay cash Total dividends liabilities amounting $1,500,000to 40% of net profits after taxes. problems in a logical way. (2) The(6) firm(6) A receivesCashnew machine and other inventories costingincomeCommon $42,000willof $2,000 stockdouble. will per be month. purchased 75,000in 2020. Total depreciation M04_ZUTT6315_15_SE_C04_pp142-188.indd 176 08/11/17 2:03 PM (3) The firm’s(7)for Marketable actual2020 will or expectedbe securities, $17,000. purchases,Retained notes earnings payable, all made long-term for cash, 1,375,000 debt, are $50,000,and common stock will $70,000,(7) Accounts remainand $80,000 unchanged.payable for will the changemonthsTotal liabilities directly of May and in equitythrough response $2,950,000 July, to changesrespectively. in sales in 2020. A short descriptor identifies the (4) Rent(8) (8)is Taxes$3,000 Accounts payable per month.receivable, will equal accounts one-fourth payable, of the and tax otherliability current on the liabilities pro forma will income change (5) Wages and salaries are 10% of the previous month’s sales. Information relatedstatement. toin financialdirect response projections to for the the change year 2020 in sales. is as follows: essential concept or technique of (1) (6)Projected Cash(9) (9) salesdividends Marketable Aare new $6,000,000. of computer $3,000 securities, willsystem other be paid costing current in June. $356,000 liabilities, will long-term be purchased debt, and during common the year. the problem. Problems labeled as (2) (7)Cost Payment of goodsstock soldofTotal principal willin 2019depreciation remain includes and unchanged. interest $1,000,000expense of $4,000 for in thefixed isyear costs.due will in June. be $110,000. (3) (8)Operating A casha.(10) expensePrepare purchase The in taxa 2019 proof rate equipment formaincludes will remainincome $250,000 costing atstatement in40%. $6,000 fixed costs.for is scheduledthe year ended in July. December 31, 2020, Integrative tie together related topics. (4) (9)Interest Taxes expense usingof $6,000 will the remain percent-of-sales are due unchanged. in June. method. (5) The firm will pay cash dividends amounting to 40% of net profits after taxes. b.a. PreparePrepare a a pro pro forma forma balance income sheet statement dated forDecember the year 31, ended 2020, December using the 31, judgmen- 2020, (6) Cash and inventories will double. Personal Financetalusing approach. the Problem fixed cost data given to improve the accuracy of the percent-of-sales Personal Finance Problems specifi- (7) Marketable method.securities, notes payable, long-term debt, and common stock will Preparationremain unchanged.c. Analyze of cash thesebudget statements, Sam and Suzyand discussSizeman the need resulting to prepare external a cash financing budget LG 4 P4–11 b. Prepare a pro forma balance sheet as of December 31, 2020, using the informa- cally relate to personal finance situa- (8) forAccounts the last receivable, required.quarter accountsof 2020 payable,to make and sure other they current can cover liabilities their will expenditures change during tion given and the judgmental approach. Include a reconciliation of the retained thein directperiod. response Sam andto the Suzy change have in sales.been preparing budgets for the past several years and (9) A new computerearnings system account. costing $356,000 will be purchased during the year. tions and Personal Finance Examples have been able to identify the percentage of their income that they pay for most of Total depreciationc. Analyze expense these for statements, the year will and be $110,000.discuss the resulting external financing required. (10) The tax rate will remain at 40%. in each chapter. These problems will LG 1 a. PrepareP4–22 a proETHICS forma incomePROBLEM statement The for SEC the year is trying ended toDecember get companies 31, 2020, to notify the investment help students see how they can apply using the fixedcommunity cost data moregiven toquickly improve when the accuracy a “material of the change”percent-of-sales will affect their forthcoming method. financial results. In what sense might a financial manager be seen as “more ethical” the tools and techniques of manage- b. Prepare a proif he forma or she balance follows sheet this as of directive December and 31, issues2020, usinga press the release informa- indicating that sales will M04_ZUTT6315_15_SE_C04_pp142-188.indd 179 tion given notand thebe asjudgmental high as approach.previously Include anticipated? a reconciliation of the retained 08/11/17 2:03 PM rial finance in managing their own earnings account. c. Analyze these statements, and discuss the resulting external financing required. finances.

LG 1 P4–22 ETHICS PROBLEM The SEC is trying to get companies to notify the investment SPREADSHEETcommunity EXERCISE more quickly when a “material change” will affect their forthcoming All exercises and problems are avail- financial results. In what sense might a financial manager be seen as “more ethical” if he or she follows this directive and issues a press release indicating that sales will able in MyLab Finance. M04_ZUTT6315_15_SE_C04_pp142-188.inddnot 185 be as highYou as previously have been anticipated? assigned the task of putting together a statement for the ACME Com-08/11/17 2:03 PM pany that shows its expected inflows and outflows of cash over the months of July 2020 through December 2020. Every chapter includes a Spreadsheet Exercise. SPREADSHEET EXERCISE This exercise gives students an opportunity to use You have been assigned the task of putting together a statement for the ACME Com- pany that shows its expected inflows and outflows of cash over the months of July Excel software to create one or more spreadsheets 2020 through December 2020. with which to analyze a financial problem. The M04_ZUTT6315_15_SE_C04_pp142-188.indd 187 08/11/17 2:03 PM spreadsheet to be created is often modeled on a table or Excel screenshot located in the chapter. M04_ZUTT6315_15_SE_C04_pp142-188.indd 187 08/11/17 2:03 PMStudents can access working versions of the Excel Integrative Case 2 screenshots in MyLab Finance.

Track Software Inc. An Integrative Case at the end of each part of

even years ago, after 15 years in public accounting, Stanley Booker, CPA, re- S signed his position as manager of cost systems for Davis, Cohen, and O’Brien the book challenges students to use what they Public and started Track Software Inc. In the 2 years preceding his de- parture from Davis, Cohen, and O’Brien, Stanley had spent nights and weekends de- have learned over the course of several chapters. veloping a sophisticated cost-accounting software program that became Track’s ini- tial product offering. As the firm grew, Stanley planned to develop and expand the software product offerings, all of which would be related to streamlining the ac- Additional chapter resources, such as Chapter counting processes of medium- to large-sized manufacturers. Although Track experienced losses during its first 2 years of operation—2013 and 2014—its profit has increased steadily from 2015 to the year just ended (2019). Cases, Group Exercises, and numerous online The firm’s profit history, including dividend payments and contributions to retained earnings, is summarized in Table 1. resources, intended to provide further means for Stanley started the firm with a $100,000 investment: his savings of $50,000 as equity and a $50,000 long-term loan from the bank. He had hoped to main- tain his initial 100% ownership in the corporation, but after experiencing a student learning and assessment are available in $50,000 loss during the first year of operation (2013), he sold 60% of the stock to a group of investors to obtain needed funds. Since then, no other stock trans- actions have taken place. Although he owns only 40% of the firm, Stanley ac- MyLab Finance at www.pearson.com/mylab/finance. tively manages all aspects of its activities; the other stockholders are not active in its management. The firm’s stock was valued at $4.50 per share in 2018 and at $5.28 per share in 2019.

TABLE 1

Track Software Inc., Profit, Dividends, and Retained Earnings, 2013–2019

Net profits Dividends Contribution to retained Year after taxes paid earnings 2013 –$50,000 $ 0 -$50,000 - 0 = -$50,000 2014 –20,000 0 -20,000 - 0 = -20,000 2015 15,000 0 15,000 - 0 = 15,000 2016 35,000 0 35,000 - 0 = 35,000 2017 40,000 1,000 40,000 - 1,000 = 39,000 2018 43,000 3,000 43,000 - 3,000 = 40,000 2019 48,000 5,000 48,000 - 5,000 = 43,000

A01_ZUTT6315_15_SE_FM.indd 39 29/11/17 2:23 PM

251

M05_ZUTT6315_15_SE_C05_pp189-254.indd 251 08/11/17 3:54 PM xl Preface

MyLab FINANCE Reach Every Student by Pairing this Text with MyLab Finance MyLab is the teaching and learning platform that empowers you to reach every student. By combining trusted author content with digital tools and a flexible plat- form, MyLab personalizes the learning experience and improves results for each student. Learn more about MyLab Finance at www.pearson.com/mylab/finance.

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Improve Student Results When you teach with MyLab, student performance improves. That’s why instruc- tors have chosen MyLab for over 15 years, touching the lives of over 50 million students. MyLab opens the door to a powerful Web-based tutorial, testing, and diag- nostic learning system designed specifically for the Zutter/Smart, Principles of Managerial Finance. With MyLab, instructors can select an adaptable precon- figured course or create their own. Both options allow instructors to create, edit, and assign online homework, quizzes, and tests and track all student progress in the downloadable online gradebook. MyLab allows students to supplement and reinforce their in-class learning by taking advantage of a progress-driven Study Plan or self-selected practice problems, quizzes, and tests. For example, all end- of-chapter problems are assignable by instructors or selectable by students in MyLab, and because the problems have algorithmically generated values, no stu- dent will have the same homework as another or work the same problem twice; there is an unlimited opportunity for practice and testing. Students get the help they need, when they need it, from the robust tutorial options, including “View an Example” and “Help Me Solve This,” which breaks the problem into steps and links to the relevant textbook page. This fully integrated online system gives students the hands-on tutorial, prac- tice, and diagnostic help they need to ensure they are effectively learning finance in the most efficient manner. Utilization of the resources available in MyLab Finance saves instructors time by enabling students to more effectively learn on their own and providing instructors with a full account of student progress, auto grading, and an online gradebook that can seamlessly link with a Learning Management System (e.g., Blackboard Learn, Brightspace by D2L, Canvas, or Moodle) or be downloaded to Excel. The Multimedia Library in MyLab Finance provides students with access to a variety of chapter resources all intended to reinforce their learning and

A01_ZUTT6315_15_SE_FM.indd 40 29/11/17 2:23 PM Preface xli

understanding of the textbook content. For example, students can access a Chapter Introduction Video for every chapter and dozens of Solution Videos for select in-chapter examples. Students can also access dynamic animations for select figures and examples throughout the book that provide them with the ability to control inputs and drive outputs to better understand the concepts. The auto-graded Excel feature in MyLab Finance allows instructors to assign all Spreadsheet Exercises and select end-of-chapter problems without having to manually grade spreadsheets. Students have the opportunity to practice important finance skills in Excel and instructors have the ability to assess their learning without the hassle of time-consuming grading. Students simply download a spreadsheet, solve a finance problem in Excel, and then upload the file back to MyLab Finance. Students will receive personalized feedback on their work within minutes that allows them to pin- point where they went wrong on any step of the problem. Chapter Cases with automatically graded assessment are also provided in MyLab Finance. These cases have students apply the concepts they have learned to a more complex and realistic situation. These cases help strengthen practical application of financial tools and techniques. MyLab also has Group Exercises that students can work together in the context of an ongoing company. Each group creates a company and follows it through the various managerial finance topics and business activities presented in the textbook. MyLab Finance has an Interest Rate Factor Supplement that explains how to use the interest rate factors in time-value-of-moneyCHAPTER 5 Time problemsValue of Money and works seam205- lessly with the textbook. The student can go directly to the IRF Supplement and a paymentsee the in-chapter into the exampleaccount orsolved a cash using outflow, the interest and after rate 5 yearsfactors. the Allfuture examples value isthat the appearbalance in in the the IRF account, Supplement or the cashare indicated inflow that in theFran text receives with anas aIRF reward icon. for investing.Advanced reporting features in MyLab also allow you to easily report on AACSB accreditation and assessment in just a few clicks. Spreadsheet use To calculate the future value of an annuity in Excel, we will use An online glossary, digital flashcards, financial calculator tutorials, videos, the same future value function that we used to calculate the future value of a Spreadsheet Use examples from the text in Excel, and numerous other premium lump sum, but we will add two new input values. Recall that the future value resources are available in MyLab. function’s syntax is FV(rate,nper,pmt,pv,type). We have already explained the terms rate, nper, and pv in this function. The term pmt refers to the annual pay- mentDEVELOPING the annuity offers.EMPLOYABILITY The term type SKILLSis an input that lets Excel know whether theFor annuity students being to succeed valued in is aan rapidly ordinary changing annuity job (in market, which casethey theshould input be value aware for of typetheir is career 0 or omitted)options and or anhow annuity to go about due (in developing which case a variety the correct of skills. input In valuethis book for typeand inis 1).MyLab In this Finance, particular we focus problem, on developing the input thesevalue skillsfor pv in isa 0variety because of ways.there is no up-frontExcel modeling money received skills—Each that ischapter separate contains from thea Spreadsheet annuity. The Exercise only cash that flowsasks studentsare those to that build are anpart Excel of the model annuity to help stream. solve The a business following problem. Excel spread- Many sheet demonstrates how to calculate the future value of the ordinary annuity.

X AB 1 FUTURE VALUE OF AN ORDINARY ANNUITY MyLab 2 Annual annuity payment –$1,000 3 Annual rate of interest 7% 4 Number of years 5 5 Future value $5,750.74 Entry in Cell B5 is =FV(B3,B4,B2,0,0). The minus sign appears before the $1,000 in B2 because the annuity’s payments are cash outflows.

FINDING THE PRESENT VALUE OF AN ORDINARY ANNUITY Quite often in finance, we need to find the present value of a stream of cash flows spread over several future periods. An annuity is, of course, a stream of equal periodic cash flows. The method for finding the present value of an ordi- A01_ZUTT6315_15_SE_FM.indd 41 nary annuity is similar to the method just discussed. One approach is to calculate29/11/17 2:23 PM the present value of each cash flow in the annuity and then add up those present values. Alternatively, the algebraic shortcut for finding the present value of an ordinary annuity that makes an annual payment of CF1 for n years looks like

CF1 1 PV0 = * 1 - (5.4) r (1 + r)n a b c d Of course, the simplest approach is to solve problems like this one with a finan- cial calculator or spreadsheet program.

IRF EXAMPLE 5.8 Braden Company, a small producer of plastic toys, wants to determine the most it should pay for a particular ordinary annuity. The annuity consists of cash in MyLab Finance Solution flows of $700 at the end of each year for 5 years. The firm requires the annuity Video to provide a minimum return of 4%. The following timeline depicts this MyLab Finance Animation situation.

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chapters provide screenshots showing completed Excel models designed to solve in-chapter examples. Many chapters contain Excel Review Questions that prompt students to practice using Excel to solve specific types of problems. In addition, students can access the working Excel screenshots and solutions to the Excel Review Questions in MyLab Finance to further reenforce their learning and understanding. Also, in MyLab students will find dozens of Excel templates, marked in the text with a special icon, that help them model select end-of-chapter problems so they can reach a solution faster and with a deeper understanding of the underlying concepts. Finally, as mentioned above, every Excel Spreadsheet Exercise and select end-of-chapter problems can be assigned and auto graded. Ethical reasoning skills—The Focus on Ethics boxes appearing in each chapter describe situations in which business professionals have violated eth- ical (and in some cases even legal) standards and have suffered consequences as a result. These boxes will help students recognize the ethical temptations they are likely to face while pursuing a finance career and the consequences that they may suffer if they behave unethically. Each chapter ends with an Ethics Problem that asks students to consider the ethical dimensions of some business decision. Critical thinking skills—Nearly every significant financial decision requires critical thinking because making optimal decisions means weighing the marginal benefits and costs of alternative plans. To weigh those benefits and costs, one must first identify and quantify them. Nearly every chapter in this textbook dis- cusses how financial analysts place a value on the net benefits associated with a particular decision. Students who master this material will be prepared to ask the tough questions necessary to assess whether a particular course of action creates value for shareholders. Data analysis skills—Financial work is about data. Financial analysts have to identify the data that are relevant for a particular business problem, and they must know how to process that data in a way that leads to good decision making. In-chapter examples and end-of-chapter problems require students to sort out relevant from irrelevant data and to use the data that they have to make a clear recommendation about what course of action a firm should take.

TABLE OF CONTENTS OVERVIEW The text’s organization conceptually links the firm’s actions and its value as deter- mined in the financial market. We discuss every significant financial problem or decision in terms of both risk and return to assess the potential impact on owners’ wealth. A Focus on Value element in each chapter’s Summary helps reinforce the student’s understanding of the link between the financial manager’s actions and the firm’s share value. In organizing each chapter, we have adhered to a managerial decision-making perspective, relating decisions to the firm’s overall goal of wealth maximization. Once a particular concept has been developed, its application is illustrated by an example, which is a hallmark feature of this book. These examples demonstrate, and solidify in the student’s thought, financial decision-making considerations and their consequences.

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INSTRUCTOR TEACHING RESOURCES

Supplements available to instructors at www.pearsonhighered.com/irc Features of the Supplement Instructor’s Manual • Overview of key topics • Detailed answers and solutions to all Opener-In-Review Questions, Warm-Up Exercises, end-of-chapter Problems, and Chapter Cases • Suggested answers to all critical thinking questions in chapter boxes, Ethics Problems, and Group Exercises • Spreadsheet Exercises • Group Exercises • Integrative Cases Test Bank More than 3,000 multiple-choice, true/false, short-answer, and graphing questions with these annotations: • Difficulty level (1 for straight recall, 2 for some analysis, 3 for complex analysis) • Type (Multiple-choice, true/false, short-answer, essay • Topic (The term or concept the question supports) • Learning outcome • AACSB learning standard (Ethical Understanding and Reasoning; Analytical Thinking Skills; Information Technol- ogy; Diverse and Multicultural Work; Reflective Thinking; Application of Knowledge) Computerized TestGen TestGen allows instructors to: • Customize, save, and generate classroom tests • Edit, add, or delete questions from the Test Item Files • Analyze test results • Organize a database of tests and student results PowerPoints Slides include all the figures and tables from the textbook. PowerPoints meet accessibility standards for students with disabilities. Features include, but are not limited to: • Keyboard and Screen Reader access • Alternative text for images • High color contrast between background and foreground colors

A01_ZUTT6315_15_SE_FM.indd 43 27/11/17 8:04 PM Acknowledgments

TO OUR COLLEAGUES, FRIENDS, AND FAMILY Pearson sought the advice of a great many excellent reviewers, all of whom influ- enced the revisions of this book. The following individuals provided extremely thoughtful and useful comments for the preparation of the fifteenth edition:

Alan Blaylock, Henderson State University Hsing Fang, California State University, Los Angeles Carolyn Jarmon, Empire State College Jerry Johnson, Austin College

Our special thanks go to the following individuals who contributed to the manuscript in the current and previous editions:

Saul W. Adelman William Brunsen Ted Ellis M. Fall Ainina Samuel B. Bulmash F. Barney English Gary A. Anderson Francis E. Canda Greg Filbeck Ronald F. Anderson Omer Carey Ross A. Flaherty James M. Andre Patrick A. Casabona Rich Fortin Gene L. Andrusco Johnny C. Chan Timothy J. Gallagher Antonio Apap Robert Chatfield George W. Gallinger David A. Arbeit K. C. Chen Sharon Garrison Allen Arkins Roger G. Clarke Gerald D. Gay Saul H. Auslander Terrence M. Clauretie Deborah Giarusso Peter W. Bacon Mark Cockalingam R. H. Gilmer Richard E. Ball Kent Cofoid Anthony J. Giovino Thomas Bankston Boyd D. Collier Lawrence J. Gitman Alexander Barges Thomas Cook Michael Giuliano Charles Barngrover Maurice P. Corrigan Philip W. Glasgo Michael Becker Mike Cudd Jeffrey W. Glazer Omar Benkato Donnie L. Daniel Joel Gold Robert Benson Prabir Datta Ron B. Goldfarb Scott Besley Joel J. Dauten Dennis W. Goodwin Douglas S. Bible Lee E. Davis David A. Gordon Charles W. Blackwell Irv DeGraw J. Charles Granicz Russell L. Block Richard F. DeMong C. Ramon Griffin Calvin M. Boardman Peter A. DeVito Reynolds Griffith Paul Bolster R. Gordon Dippel Arthur Guarino Robert J. Bondi James P. D’Mello Lewell F. Gunter Jeffrey A. Born Carleton Donchess Melvin W. Harju Jerry D. Boswell Thomas W. Donohue John E. Harper Denis O. Boudreaux Lorna Dotts Phil Harrington Kenneth J. Boudreaux Vincent R. Driscoll George F. Harris Thomas J. Boulton Betty A. Driver George T. Harris Wayne Boyet David R. Durst John D. Harris Ron Braswell Dwayne O. Eberhardt Mary Hartman Christopher Brown Ronald L. Ehresman R. Stevenson Hawkey

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Roger G. Hehman John F. Marshall Patricia A. Ryan Harvey Heinowitz Linda J. Martin Murray Sabrin Glenn Henderson Stanley A. Martin Kanwal S. Sachedeva Russell H. Hereth Charles E. Maxwell R. Daniel Sadlier Kathleen T. Hevert Timothy Hoyt McCaughey Hadi Salavitabar J. Lawrence Hexter Lee McClain Gary Sanger Douglas A. Hibbert Jay Meiselman Mukunthan Roger P. Hill Vincent A. Mercurio Santhanakrishnan Linda C. Hittle Joseph Messina William L. Sartoris James Hoban John B. Mitchell William Sawatski Hugh A. Hobson Daniel F. Mohan Steven R. Scheff Keith Howe Charles Mohundro Michael Schellenger Kenneth M. Huggins Gene P. Morris Michael Schinski Jerry G. Hunt Edward A. Moses Tom Schmidt Mahmood Islam Tarun K. Mukherjee Carl J. Schwendiman James F. Jackson William T. Murphy Carl Schweser Stanley Jacobs Randy Myers Jim Scott Dale W. Janowsky Lance Nail John W. Settle Jeannette R. Jesinger Donald A. Nast Richard A. Shick Nalina Jeypalan Vivian F. Nazar A. M. Sibley Timothy E. Johnson G. Newbould Sandeep Singh Roger Juchau Charles Ngassam Surendra S. Singhvi Ashok K. Kapoor Alvin Nishimoto Stacy Sirmans Daniel J. Kaufman Jr. Gary Noreiko Barry D. Smith Joseph K. Kiely Dennis T. Officer Gerald Smolen Terrance E. Kingston Kathleen J. Oldfather Ira Smolowitz Raj K. Kohli Kathleen F. Oppenheimer Jean Snavely Thomas M. Krueger Richard M. Osborne Joseph V. Stanford Lawrence Kryzanowski Jerome S. Osteryoung John A. Stocker Harry R. Kuniansky Prasad Padmanabahn Lester B. Strickler William R. Lane Roger R. Palmer Gordon M. Stringer Richard E. La Near Don B. Panton Elizabeth Strock James Larsen John Park Donald H. Stuhlman Rick LeCompte Ronda S. Paul Sankar Sundarrajan B. E. Lee Bruce C. Payne Philip R. Swensen Scott Lee Gerald W. Perritt S. Tabriztchi Suk Hun Lee Gladys E. Perry John C. Talbott Michael A. Lenarcic Stanley Piascik Gary Tallman A. Joseph Lerro Gregory Pierce Harry Tamule Thomas J. Liesz Mary L. Piotrowski Richard W. Taylor Hao Lin D. Anthony Plath Rolf K. Tedefalk Alan Lines Jerry B. Poe Richard Teweles Larry Lynch Gerald A. Pogue Kenneth J. Thygerson Christopher K. Ma Suzanne Polley Robert D. Tollen James C. Ma Ronald S. Pretekin Emery A. Trahan Dilip B. Madan Fran Quinn Barry Uze Judy Maese Rich Ravichandran Pieter A. Vandenberg James Mallet David Rayone Nikhil P. Varaiya Inayat Mangla Walter J. Reinhart Oscar Varela Bala Maniam Jack H. Reubens Mark Vaughan Timothy A. Manuel Benedicte Reyes Kenneth J. Venuto Brian Maris William B. Riley Jr. Sam Veraldi Daniel S. Marrone Ron Rizzuto James A. Verbrugge William H. Marsh Gayle A. Russell Ronald P. Volpe

A01_ZUTT6315_15_SE_FM.indd 45 30/11/17 1:24 PM xlvi PART TWO Important Financial Concepts

John M. Wachowicz Jr. Howard A. Williams Richard H. Yanow Faye (Hefei) Wang Richard E. Williams Seung J. Yoon William H. Weber III Glenn A. Wilt Jr. Charles W. Young Herbert Weinraub Bernard J. Winger Philip J. Young Jonathan B. Welch Tony R. Wingler Joe W. Zeman Grant J. Wells Alan Wolk John Zietlow Larry R. White I. R. Woods J. Kenton Zumwalt Peter Wichert John C. Woods Tom Zwirlein C. Don Wiggins Robert J. Wright

Special thanks go to Alan Wolk of the University of Georgia for accuracy checking the quantitative content in the textbook. We are pleased by and proud of his efforts. A hearty round of applause also goes to the publishing team assembled by Pearson—including Donna Battista, Kate Fernandes, Meredith Gertz, Melissa Honig, Miguel Leonarte, Kathy Smith, and others who worked on the book—for the inspiration and the perspiration that define teamwork. Also, special thanks to the formidable Pearson sales force in finance, whose ongoing efforts keep the business fun! Finally, and most important, many thanks to our families for patiently pro- viding support, understanding, and good humor throughout the revision process. To them we will be forever grateful.

Chad J. Zutter Pittsburgh, Pennsylvania

Scott B. Smart Bloomington, Indiana

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