Managerial Finance BRIEF

Principles of Managerial Finance BRIEF

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A01_ZUTT6308_08_SE_FM.indd 2 02/01/18 5:45 PM EIGHTH EDITION

Principles of Managerial Finance BRIEF

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: 0-13-447630-1 1 18 ISBN 13: 978-0-13-447630-8

A01_ZUTT6308_08_SE_FM.indd 4 02/01/18 5:45 PM Dedicated to our good friend and mentor, Dr. Lawrence J. Gitman, who trusted us as coauthors and successors of Principles of Managerial Finance, Brief Edition. CJZ SBS

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Contents ix About the Authors xxv Preface xxvii Acknowledgments xl

PART 1 Introduction to Managerial PART 6 Long-Term Financial Finance 1 Decisions 505

1 The Role of Managerial Finance 2 12 Leverage and Capital Structure 506 2 The Financial Market Environment 39 13 Payout Policy 558

PART 2 Financial Tools 71 PART 7 Short-Term Financial Decisions 593 3 Financial Statements and Ratio Analysis 72 4 Long- and Short-Term Financial 14 Working Capital and Current Assets Planning 137 Management 594 5 Time Value of Money 183 15 Current Liabilities Management 636

PART 3 Valuation of Securities 243

6 Interest Rates and Bond Valuation 244 7 Stock Valuation 291 Appendix A-1 Glossary G-1 PART 4 Risk and the Required Rate of Index I-1 Return 327

8 Risk and Return 328 9 The Cost of Capital 376

PART 5 Long-Term Investment Decisions 405

10 Capital Budgeting Techniques 406 11 Capital Budgeting Cash Flows and Risk Refinements 445

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About the Authors xxv Preface xxvii Acknowledgments xl

PART 1 Introduction to Managerial Finance 1

1 1.1 Finance and the Firm 3 1.4 Developing Skills for Your The Role of What Is Finance? 3 Career 30 Managerial What Is a Firm? 4 Critical Thinking 30 Finance 2 What Is the Goal of the Firm? 4 Communication and Collaboration 31 The Role of Business Ethics 8 Financial Computing Skills 31 in practice FOCUS ON PRACTICE: Summary 31 Must Search Engines Screen Out Fake News? 10 Self-Test Problem 33 ➔ REVIEW QUESTIONS 10 Warm-Up Exercises 33 Problems 35 1.2 Managing the Firm 10 Spreadsheet Exercise 38 The Managerial Finance Function 11 ➔ REVIEW QUESTIONS 19

1.3 Organizational Forms, Taxation, and the Principal-Agent Relationship 19 Legal Forms of Business Organization 19 Agency Problems and Agency Costs 26 Corporate Governance 26 ➔ REVIEW QUESTIONS 30

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2 2.1 Financial Institutions 40 2.4 The Securities Issuing The Financial Commercial Banks, Investment Banks, Process 53 Market and the Shadow Banking System 40 Issuing Common Stock 53 Environment 39 ➔ REVIEW QUESTIONS 42 ➔ REVIEW QUESTIONS 61

2.2 Financial Markets 42 2.5 Financial Markets in Crisis 61 The Relationship Between Institutions Financial Institutions and Real Estate and Markets 42 Finance 62 The Money Market 43 Spillover Effects and Recovery from the The Capital Market 44 Great Recession 64 The Role of Capital Markets 48 ➔ REVIEW QUESTIONS 65 in practice FOCUS ON ETHICS: Should Insider Trading Be Legal? 50 Summary 65 Self-Test Problem 67 ➔ REVIEW QUESTIONS 51 Warm-Up Exercises 68 2.3 Regulation of Financial Markets Problems 68 and Institutions 51 Spreadsheet Exercise 70 Regulations Governing Financial Institutions 51 Regulations Governing Financial Markets 52 ➔ REVIEW QUESTIONS 53

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PART 2 Financial Tools 71

Times Interest Earned Ratio 97 3 3.1 The Stockholders’ Report 73 Fixed-Payment Coverage Ratio 98 Financial The Letter to Stockholders 73 Statements and The Four Key Financial Statements 73 ➔ REVIEW QUESTIONS 98 Ratio Analysis 72 in practice FOCUS ON ETHICS: 3.6 Earnings Shenanigans 74 Profitability Ratios 98 Notes to the Financial Statements 80 Common-Size Income Statements 98 Consolidating International Financial Gross Profit Margin 99 Statements 80 Operating Profit Margin 101 ➔ REVIEW QUESTIONS 81 Net Profit Margin 101 Earnings Per Share (EPS) 102 3.2 Using Financial Ratios 82 Return on Total Assets (ROA) 103 Interested Parties 82 Return on Equity (ROE) 103 Types of Ratio Comparisons 82 ➔ REVIEW QUESTIONS 105 Cautions About Using Ratio Analysis 85 3.7 ➔ REVIEW QUESTIONS 86 Market Ratios 105 Price/Earnings (P/E) Ratio 106 3.3 Liquidity Ratios 87 Market/Book (M/B) Ratio 108 Current Ratio 87 ➔ REVIEW QUESTION 109 Quick (Acid-Test) Ratio 89 3.8 ➔ REVIEW QUESTIONS 90 A Complete Ratio Analysis 109 Summary of Whole Foods’ Financial 3.4 Activity Ratios 90 Condition 109 Inventory Turnover 90 DuPont System of Analysis 113 Average Collection Period 91 ➔ REVIEW QUESTIONS 116 Average Payment Period 93 Summary 116 Total Asset Turnover 93 Self-Test Problems 118 ➔ REVIEW QUESTION 94 Warm-Up Exercises 119 Problems 120 3.5 Debt Ratios 94 Spreadsheet Exercise 135 Debt Ratio 96 Debt-to-Equity Ratio 96

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4 4.1 The Financial Planning 4.4 Profit Planning: Pro Forma Long- and Short- Process 138 Statements 159 Term Financial Long-Term (Strategic) Financial Plans 138 Preceding Year’s Financial Statements 160 Planning 137 Short-Term (Operating) Financial Sales Forecast 160 Plans 139 ➔ REVIEW QUESTION 161 ➔ REVIEW QUESTIONS 140 4.5 Preparing the Pro Forma 4.2 Measuring the Firm’s Cash Income Statement 161 Flow 140 Considering Types of Costs and Depreciation 140 Expenses 162 Depreciation Methods 141 ➔ REVIEW QUESTIONS 163 Developing the Statement of Cash Flows 143 4.6 Preparing the Pro Forma Free Cash Flow 148 Balance Sheet 163 in practice FOCUS ON ETHICS: ➔ REVIEW QUESTIONS 165 Is Excess Cash Always a Good Thing? 149 4.7 Evaluation of Pro Forma ➔ REVIEW QUESTIONS 150 Statements 165 ➔ REVIEW QUESTIONS 166 4.3 Cash Planning: Cash Budgets 151 Summary 166 The Sales Forecast 151 Self-Test Problems 168 Preparing the Cash Budget 151 Warm-Up Exercises 170 Evaluating the Cash Budget 156 Problems 170 Coping with Uncertainty in the Cash Spreadsheet Exercise 181 Budget 157 Cash Flow within the Month 159 ➔ REVIEW QUESTIONS 159

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5 5.1 The Role of Time Value in 5.5 Compounding Interest More Time Value of Finance 184 Frequently Than Annually 208 Money 183 Future Value Versus Present Value 184 Semiannual Compounding 208 Computational Tools 185 Quarterly Compounding 209 Basic Patterns of Cash Flow 187 A General Equation for Compounding 210 ➔ REVIEW QUESTIONS 187 Using Computational Tools for Compounding 210 5.2 Single Amounts 188 Continuous Compounding 211 Future Value of a Single Amount 188 Nominal and Effective Annual Rates of Present Value of a Single Amount 192 Interest 212 ➔ REVIEW QUESTIONS 195 ➔ REVIEW QUESTIONS 214 ➔ EXCEL REVIEW QUESTIONS 195 in practice FOCUS ON ETHICS: Was the Deal for Manhattan a 5.3 Annuities 196 Swindle? 214 Types of Annuities 196 ➔ EXCEL REVIEW QUESTIONS 215 Finding the Future Value of an Ordinary Annuity 197 5.6 Special Applications of Finding the Present Value of an Ordinary Time Value 215 Annuity 198 Determining Deposits Needed to Finding the Future Value of an Annuity Accumulate a Future Sum 215 Due 200 Loan Amortization 216 Finding the Present Value of an Annuity Finding Interest or Growth Rates 218 Due 201 Finding an Unknown Number of Finding the Present Value of a Periods 220 Perpetuity 203 ➔ REVIEW QUESTIONS 222 ➔ REVIEW QUESTIONS 204 ➔ EXCEL REVIEW QUESTIONS 222 ➔ EXCEL REVIEW QUESTIONS 204 Summary 223 5.4 Mixed Streams 205 Self-Test Problems 224 Future Value of a Mixed Stream 205 Warm-Up Exercises 225 Present Value of a Mixed Stream 207 Problems 226 ➔ REVIEW QUESTION 208 Spreadsheet Exercise 242 ➔ EXCEL REVIEW QUESTION 208

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PART 3 Valuation of Securities 243

6 6.1 Interest Rates and Required 6.3 Valuation Fundamentals 265 Interest Rates Returns 245 Key Inputs 265 and Bond Interest Rate Fundamentals 245 Basic Valuation Model 266 Valuation 244 Term Structure of Interest Rates 250 ➔ REVIEW QUESTIONS 267 Risk Premiums: Issuer and Issue Characteristics 255 6.4 Bond Valuation 267 ➔ REVIEW QUESTIONS 256 Bond Fundamentals 268 Bond Valuation 268 6.2 Government and Corporate Semiannual Interest Rates and Bond Bonds 257 Values 270 Legal Aspects of Corporate Bonds 257 Changes in Bond Values 272 Cost of Bonds to the Issuer 259 Yield to Maturity (YTM) 275 General Features of a Bond Issue 259 ➔ REVIEW QUESTIONS 277 Bond Yields 260 ➔ Bond Prices 260 EXCEL REVIEW QUESTIONS 277 Bond Ratings 261 Summary 277 Common Types of Bonds 261 Self-Test Problems 279 International Bond Issues 263 Warm-Up Exercises 280 in practice FOCUS ON ETHICS: Problems 281 “Can Bond Ratings Be Trusted?” 263 Spreadsheet Exercise 290 ➔ REVIEW QUESTIONS 264

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7 7.1 Differences Between Debt 7.4 Decision Making and Common Stock Valuation 291 and Equity 292 Stock Value 312 Voice in Management 292 Changes in Expected Dividends 313 Claims on Income and Assets 292 Changes in Risk 313 Maturity 293 Combined Effect 314 Tax Treatment 293 ➔ REVIEW QUESTIONS 314 ➔ REVIEW QUESTION 293 Summary 315 7.2 Common and Preferred Self-Test Problems 317 Stock 293 Warm-Up Exercises 317 Common Stock 294 Problems 318 Preferred Stock 297 Spreadsheet Exercise 326 ➔ REVIEW QUESTIONS 299

7.3 Common Stock Valuation 299 Market Efficiency and Stock Valuation 299 Common Stock Dividend Valuation Model 301 in practice FOCUS ON PRACTICE: Understanding Human Behavior Helps Us Understand Investor Behavior 302 Free Cash Flow Stock Valuation Model 306 Other Approaches to Common Stock Valuation 309 ➔ REVIEW QUESTIONS 312

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PART 4 Risk and the Required Rate of Return 327

8 8.1 Risk and Return 8.4 Risk and Return: The Capital Risk and Fundamentals 329 Asset Pricing Model (CAPM) 348 Return 328 What Is Risk? 329 Types of Risk 348 What Is Return? 329 The Model: CAPM 349 Risk Preferences 331 ➔ REVIEW QUESTIONS 358 ➔ REVIEW QUESTIONS 332 Summary 358 8.2 Risk of a Single Asset 332 Self-Test Problems 360 Risk Assessment 332 Warm-Up Exercises 361 Risk Measurement 335 Problems 362 ➔ REVIEW QUESTIONS 340 Spreadsheet Exercise 374

8.3 Risk of a Portfolio 340 Portfolio Return and Standard Deviation 340 Correlation 342 Diversification 343 Correlation, Diversification, Risk, and Return 345 International Diversification 346 in practice GLOBAL FOCUS: An International Flavor to Risk Reduction 347 ➔ REVIEW QUESTIONS 348

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9 9.1 Overview of the Cost of 9.4 Cost of Common Stock 386 The Cost of Capital 377 Finding the Cost of Common Stock Capital 376 in practice FOCUS ON ETHICS: Equity 387 The Cost of Capital Also Rises 377 Cost of Retained Earnings 390 The Basic Concept 378 ➔ REVIEW QUESTIONS 391 Sources of Long-Term Capital 380 ➔ REVIEW QUESTIONS 381 9.5 Weighted Average Cost of Capital 391 9.2 Cost of Long-Term Debt 381 Calculating the Weighted Average Cost of Net Proceeds 381 Capital (WACC) 391 Before-Tax Cost of Debt 382 Capital Structure Weights 393 After-Tax Cost of Debt 384 ➔ REVIEW QUESTIONS 394 ➔ REVIEW QUESTIONS 385 Summary 394 ➔ EXCEL REVIEW QUESTION 385 Self-Test Problem 395 Warm-Up Exercises 396 9.3 Cost of Preferred Stock 385 Problems 397 Preferred Stock Dividends 386 Spreadsheet Exercise 404 Calculating the Cost of Preferred Stock 386 ➔ REVIEW QUESTION 386

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PART 5 Long-Term Investment Decisions 405

10 10.1 Overview of Capital 10.5 Comparing NPV and IRR Capital Budgeting Budgeting 407 Techniques 422 Techniques 406 Motives for Capital Expenditure 407 Net Present Value Profiles 422 Steps in the Process 407 Conflicting Rankings 424 Basic Terminology 408 Which Approach Is Better? 427 Capital Budgeting Techniques 409 in practice FOCUS ON ETHICS: ➔ REVIEW QUESTION 410 Baby You Can Drive My Car—Just Not a VW Diesel 429

10.2 Payback Period 410 ➔ REVIEW QUESTIONS 429 Decision Criteria 411 Summary 430 Pros and Cons of Payback Analysis 411 Self-Test Problem 431 ➔ REVIEW QUESTIONS 414 Warm-Up Exercises 432 Problems 433 10.3 Net Present Value (NPV) 414 Spreadsheet Exercise 443 Decision Criteria 415 NPV and the Profitability Index 416 NPV and Economic Value Added 417 ➔ REVIEW QUESTIONS 418 ➔ EXCEL REVIEW QUESTION 418

10.4 Internal Rate of Return (IRR) 419 Decision Criteria 419 Calculating the IRR 419 ➔ REVIEW QUESTIONS 422 ➔ EXCEL REVIEW QUESTION 422

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11 11.1 Project Cash Flows 446 11.5 Risk in Capital Budgeting Capital Budgeting Major Cash Flow Types 446 (Behavioral Approaches) 463 Cash Flows Replacement Versus Expansion Breakeven Analysis 464 and Risk Decisions 447 Scenario Analysis 466 Refinements 445 Sunk Costs and Opportunity Costs 448 Simulation 467 in practice FOCUS ON ETHICS: ➔ REVIEW QUESTIONS 468 Fumbling Sunk Costs 449 ➔ EXCEL REVIEW QUESTION 468 ➔ REVIEW QUESTIONS 450 11.6 Risk-Adjusted Discount 11.2 Finding the Initial Rates 468 Investment 450 Determining Risk-Adjusted Discount Rates Installed Cost of the New Asset 451 (RADRs) 469 After-Tax Proceeds from the Sale of the Applying RADRs 471 Old Asset 451 Portfolio Effects 474 Change in Net Working Capital 454 RADRs in Practice 474 Calculating the Initial Investment 455 ➔ REVIEW QUESTIONS 476 ➔ REVIEW QUESTIONS 456 11.7 Capital Budgeting 11.3 Finding the Operating Cash Refinements 476 Flows 456 Comparing Projects with Unequal Interpreting the Term Cash Flows 456 Lives 476 Interpreting the Term After-Tax 457 Recognizing Real Options 479 Interpreting the Term Incremental 459 Capital Rationing 480 ➔ REVIEW QUESTIONS 461 ➔ REVIEW QUESTIONS 483 ➔ EXCEL REVIEW QUESTION 483 11.4 Finding the Terminal Cash Flow 461 Summary 483 After-Tax Proceeds from the Sale of New Self-Test Problems 485 and Old Assets 461 Warm-Up Exercises 487 Change in Net Working Capital 462 Problems 489 ➔ REVIEW QUESTION 463 Spreadsheet Exercises 504

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PART 6 Long-Term Financial Decisions 505

12 12.1 Leverage 507 12.4 Choosing the Optimal Capital Leverage Breakeven Analysis 508 Structure 539 and Capital Operating Leverage 511 Linkage 539 Structure 506 in practice FOCUS ON PRACTICE: Estimating Value 540 Qualcomm’s Leverage 514 Maximizing Value Versus Maximizing Financial Leverage 515 EPS 540 Total Leverage 519 Some Other Important Considerations 542 ➔ REVIEW QUESTIONS 521 ➔ REVIEW QUESTIONS 543 12.2 The Firm’s Capital Summary 543 Structure 521 Self-Test Problems 544 Types of Capital 522 Warm-Up Exercises 546 External Assessment of Capital Structure 522 Problems 546 Capital Structure of Non–U.S. Firms 524 Spreadsheet Exercise 557 Capital Structure Theory 525 Optimal Capital Structure 533 ➔ REVIEW QUESTIONS 535

12.3 EBIT–EPS Approach to Capital Structure 536 Presenting a Financing Plan Graphically 536 Comparing Alternative Capital Structures 537 Considering Risk in EBIT–EPS Analysis 538 Basic Shortcoming of EBIT–EPS Analysis 539 ➔ REVIEW QUESTION 539

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13 13.1 The Basics of Payout Policy 559 13.5 Types of Dividend Policies 575 Payout Policy 558 Elements of Payout Policy 559 Constant-Payout-Ratio Dividend Trends in Earnings and Dividends 559 Policy 575 Trends in Dividends and Share Regular Dividend Policy 576 Repurchases 561 Low-Regular-and-Extra Dividend Policy 577 ➔ REVIEW QUESTIONS 562 ➔ in practice FOCUS ON ETHICS: REVIEW QUESTION 577 Buyback Mountain 563 13.6 Other Forms of Dividends 577 13.2 The Mechanics of Payout Stock Dividends 578 Policy 563 Stock Splits 579 Cash Dividend Payment Procedures 564 ➔ REVIEW QUESTIONS 581 Share Repurchase Procedures 566 Tax Treatment of Dividends and Summary 581 Repurchases 567 Self-Test Problem 583 Dividend Reinvestment Plans 568 Warm-Up Exercises 583 Stock Price Reactions to Corporate Problems 584 Payouts 568 Spreadsheet Exercise 591 ➔ REVIEW QUESTIONS 569

13.3 Relevance of Payout Policy 569 Residual Theory of Dividends 569 The Dividend Irrelevance Theory 570 Arguments for Dividend Relevance 571 ➔ REVIEW QUESTIONS 572

13.4 Factors Affecting Dividend Policy 572 Legal Constraints 573 Contractual Constraints 574 Growth Prospects 574 Owner Considerations 574 Market Considerations 575 ➔ REVIEW QUESTION 575

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PART 7 Short-Term Financial Decisions 593

14 14.1 Net Working Capital 14.4 Accounts Receivable Working Fundamentals 595 Management 610 Capital and Working Capital Management 595 Credit Selection and Standards 611 Current Assets Net Working Capital 596 in practice FOCUS ON ETHICS: Management 594 Tradeoff between Profitability and If You Can Bilk It, They Will Come 612 Risk 596 Credit Terms 616 ➔ REVIEW QUESTIONS 598 Credit Monitoring 618 ➔ REVIEW QUESTIONS 620 14.2 Cash Conversion Cycle 598 Calculating the Cash Conversion 14.5 Management of Receipts and Cycle 599 Disbursements 620 Funding Requirements of the Cash Float 621 Conversion Cycle 600 Speeding Up Collections 621 Strategies for Managing the Cash Slowing Down Payments 622 Conversion Cycle 604 Cash Concentration 622 ➔ REVIEW QUESTIONS 604 Zero-Balance Accounts 623 Investing in Marketable Securities 624 14.3 Inventory Management 604 ➔ REVIEW QUESTIONS 625 Differing Viewpoints about Inventory Level 605 Summary 626 Common Techniques for Managing Inventory 605 Self-Test Problems 628 International Inventory Management 610 Warm-Up Exercises 628 Problems 629 ➔ REVIEW QUESTIONS 610 Spreadsheet Exercise 634

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15 15.1 Spontaneous Liabilities 637 15.3 Secured Sources of Short-Term Current Liabilities Accounts Payable Management 637 Loans 652 Management 636 Accruals 642 Characteristics of Secured Short-Term Loans 652 ➔ REVIEW QUESTIONS 642 Use of Accounts Receivable as Collateral 653 15.2 Unsecured Sources of Use of Inventory as Collateral 655 Short-Term Loans 642 ➔ Bank Loans 642 REVIEW QUESTIONS 657 Commercial Paper 648 Summary 657 in practice FOCUS ON PRACTICE: Self-Test Problem 658 The Ebb and Flow of Commercial Paper 649 Warm-Up Exercises 659 International Loans 650 Problems 659 Spreadsheet Exercise 666 ➔ REVIEW QUESTIONS 651

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

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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, where he was recently named Associate Editor. 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 business 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 downloaded by millions of consumers in a matter of days. As we made plans to publish the eighth 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 seventh 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 have rewritten all of the Focus on Ethics boxes, using new examples to highlight situations in which businesses or individuals have engaged in unethical 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 outputs 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. • 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 fifteen chapters divided into seven parts. Each part is introduced by a brief overview, which is intended to give students an advance sense for the collective value of the chapters included in the part.

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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 financial 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 negative 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 two 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 economic value added using data from Exxon Mobil Corp. The second chapter in this part explains how financial analysts construct cash flow projections, which are a required component of net present value analysis. It also describes how firms analyze the risks associated with capital investments. Part 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 12 provides a new Focus on Practice box discussing 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.

A01_ZUTT6308_08_SE_FM.indd 28 08/01/18 10:52 AM Preface xxix

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 13 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. 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 eighth edition incorporates a proven learning system, which integrates pedagogy with concepts and practical applications. It concentrates on the knowledge that is needed to make keen financial decisions in an increasingly competitive business environment. The strong pedagogy 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, Brief Edition came from the experience of teaching the introductory managerial finance course. Those who have taught the introductory course many times can appreciate the difficul- ties that some students 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, Brief Edition. Building on those strengths, eight editions, numerous transla- tions, 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, Brief Edition have praised the effectiveness of the book’s Teaching and Learning System, which they hail as one of its hallmarks. The system, driven by a set of carefully developed learning goals, has been retained and polished in this eighth 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.

A01_ZUTT6308_08_SE_FM.indd 29 08/01/18 2:46 PM xxx Preface

Six Learning Goals at the start of the chapter highlight the most important 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 ACCOUNTING 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 revenues 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 07/11/17 2:53 PM The second part, In Your Personal Life, 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.

4 PART ONE Introduction to Managerial Finance

Learning goal iconsearnings tie back chapter to investors. The content keys to good financial to decisionsthe are much the same LG LG 2 1 1.1 Finance and the Firm for businesses and individuals, which is why most students will benefit from an learning goals andunderstanding appear of finance next regardless to ofrelated their profession. text Learning sec the techniques- of The field of finance is broad and dynamic. Finance influences everything that good financial analysis will not only help you make better financial decisions as a firms do, from hiring personnel to building factories to launching new advertis- tions and again inconsumer the chapter-endbut will also assist you in understandingsummary, the financial end- consequences of ing campaigns. Because almost any aspect of business has important financial important business decisions, no matter what career path you follow. dimensions, many financially oriented career opportunities await those who understand the principles of finance described in this textbook. Even if you see of-chapter problems and exercises, and supplements yourself pursuing a career in another discipline such as marketing, operations, WHAT IS A FIRM? accounting, supply chain, or human resources, you’ll find that understanding a such as the Test BankWhat is aand firm? Put MyLab. simply, a firm is a business organization that sells goods or few crucial ideas in finance will enhance your professional success. Knowing services. However, a more complete answer attempts to explain why firms exist. how financial managers think is important, especially if you’re not one yourself, They exist because investors want access to risky investment opportunities. In because they are often the gatekeepers of corporate resources. Fluency in the lan- other words, firms are risky business organizations that, if not for investors’ will- guage of finance will improve your ability to communicate the value of your ingness to bear risk, would have difficulty generating the necessary investment ideas to your employer. Financial knowledge will also make you a smarter con- capital to operate. For example, most investors do not have the expertise or sumer and a wiser investor with your own money. wealth required to start a personal computer company, so instead they invest in a company like Apple. Even when a few individuals, such as Steve Jobs, Steve Woz- WHAT IS FINANCE? niak, and Ronald Wayne, had the requisite expertise and wealth to start Apple Computer in a garage in 1976, vast amounts of additional money (i.e., invest- finance Finance is the science and art of how individuals and firms raise, allocate, and invest ment capital) from investors were necessary for the firm to grow into what Apple The science and art of how indi- money. The science of finance utilizes financial theories and concepts to establish is today. So, ultimately, firms are 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 risky investment opportunities. Firms pool investment capital, make risky invest- and invest money. adapting theory to particular business situations with their own unique circum- ment decisions, and manage risky investments all on behalf of investors who managerial finance stances. Managerial finance is concerned with the responsibilities of a financial would otherwise not be able to do so effectively or efficiently on their own. Concerns the duties of the manager working in a business. Though business finance is the primary focus of financial manager in a business. this book, the principles of finance apply to both personal and professional decision making. At the personal level, for instance, finance helps individuals decide how WHAT IS THE GOAL OF THE FIRM? much of their earnings to spend, how much to save, and how to invest their savings. What goal should managers pursue? This question has no shortage of possible Financial thinking helps consumers decide when borrowing money is appropriate answers. Some might argue that managers should focus entirely on satisfying and enables them to critically evaluate loan offers with different terms. In a business 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 investors, how firms invest money in attempting to create value for their investors, employees; in that case, employee turnover might be the key success metric to and how firms decide whether to reinvest earnings in the business or distribute watch. Clearly, the goal or goals that managers select will affect many of the decisions they make, so choosing an objective is a critical determinant of how businesses operate. MATTER OF FACT

Finance Professors Aren’t Like Everyone Else Maximize Shareholder Wealth Professionals who advise individual investors know that many people are more willing to Finance teaches that the primary goal of managers should be to maximize the invest in the stock market if it has been rising in the recent past and are less willing to do wealth of the firm’s owners—the stockholders or shareholders. Through the years, so if it has been falling. Such “trend-chasing” behavior often leaves investors worse off that recommendation has generated a lot of controversy. The Economist magazine than if they had invested consistently over time. Classical finance theory suggests that once referred to shareholder value maximization as “the most powerful idea in past performance of the stock market is a very poor predictor of future performance, business,” but Jack Welch, the long-time Chief Executive Officer (CEO) of General and therefore individuals should not base investment decisions on the market’s recent Electric and a man Fortune magazine named “Manager of the Century,” once A01_ZUTT6308_08_SE_FM.indd 30history. A survey found that at least one group of investors did not fall prey to trend called maximizing shareholder value “the dumbest idea in the world.” Welch’s02/01/18 5:45 PM 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 Analysts Journal. measure of stockholder wealth is the share price, so most finance textbooks (including 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 4 PART ONE Introduction to Managerial Finance

10 PART ONE Introduction to Managerial Finance earnings back to investors. The keys to good financial decisions are much the same LG 1 LG 2 1.1 Finance and the Firm To illustrate, consider that in March 2017, the online retailing giant Amazon for businesses and individuals, which is why most students will benefit from an reported that it earned a profit of $4.90 per share over the previous 12 months. understanding of finance regardless of their profession. Learning the techniques of The field of finance isAnother broad company, and Clorox, dynamic. reported Finance almost identical influences earnings per everything share of $4.92. that good financial analysis will not only help you make better financial decisions as a firms do, from hiring Yetpersonnel the stock prices to buildingof these two factoriescompanies could to launchingnot have been morenew different. advertis - Amazon was trading for $850 per share, whereas Clorox stock was selling for consumer but will also assist you in understanding the financial consequences of ing campaigns. Becausejust $137. almost In other any words, aspect investors of were business willing to has pay important6 times more for financial shares important business decisions, no matter what career path you follow. dimensions, many financiallyof Amazon even oriented though it reported career virtually opportunities the same EPS as await Clorox. thoseWhy? Sev who- eral factors may contribute, but the most plausible answer is that investors envi- understand the principlession rosierof finance long-term described prospects for Amazon.in this Iftext the book only matter. Even of concern if you to see yourself pursuing a careerinvestors in was another short-term disciplineprofits, then thesuch prices as of marketing,Amazon and Clorox operations, should WHAT IS A FIRM? have been much closer because their profits, at least in the short term, were accounting, supply chain,nearly identical.or human resources, you’ll find that understanding a What is a firm? Put simply, a firm is a business organization that sells goods or few crucial ideas in financeThird, willthe stakeholder enhance perspective your professional is intrinsically difficult success. to implement, Knowing services. However, a more complete answer attempts to explain why firms exist. and advocates of the idea that managers should consider all stakeholders’ how financial managersinterests think along is withimportant, those of shareholders especially do notif you’re typically notindicate one how yourself, man- They exist because investors want access to risky investment opportunities. In because they are oftenagers the shouldgatekeepers carry it out. of For corporate example, how resources. much emphasis Fluency should inmanagers the lan - other words, firms are risky business organizations that, if not for investors’ will- guage of finance willplace improve on the interests your ability of different to stakeholder communicate groups? the Are the value interests of of your employees more or less important than the desires of customers? Should mem- ingness to bear risk, would have difficulty generating the necessary investment ideas to your employer.bers Financial of the local communityknowledge who dowill no alsobusiness make with theyou firm a havesmarter an equal con - capital to operate. For example, most investors do not have the expertise or sumer and a wiser investorsay with with the firm’s your suppliers? own money. When different stakeholder groups disagree on the action a firm should take, how should managers make important decisions? wealth required to start a personal computer company, so instead they invest in a In contrast, the goal of shareholder maximization clarifies what actions man- company like Apple. Even when a few individuals, such as Steve Jobs, Steve Woz- agers should take. WHAT IS FINANCE? Fourth, many people misinterpret the statement that managers should maxi- niak, and Ronald Wayne, had the requisite expertise and wealth to start Apple mize shareholder wealth as implying that managers should take any action, Computer in a garage in 1976, vast amounts of additional money (i.e., invest- finance Finance is the science and art of how individuals and firms raise, allocate, and invest Preface xxxi including illegal or unethical actions, that increases the stock price. Even the ment capital) from investors were necessary for the firm to grow into what Apple The science and art of how indi- money. The science ofmost finance ardent supportersutilizes offinancial shareholder theories value maximization and concepts as the firm’s to primaryestablish is today. So, ultimately, firms are intermediaries that bring together investors and viduals and firms raise, allocate, general rules that can guidegoal acknowledge managers that in managers their mustdecisions. act within The ethical art and of legal finance boundaries. involves risky investment opportunities. Firms pool investment capital, make risky invest- and invest money. adapting theory to particular business situations with their own unique circum- THE ROLE OF BUSINESS ETHICS For help in study and review, boldfacedment decisions, key terms and manage risky investments all on behalf of investors who managerial finance stances. Managerial finance is concerned with the responsibilities of a financial business ethics Business ethics are the standards of conduct or moral judgment that apply to would otherwise not be able to do so effectively or efficiently on their own. Concerns the duties of the managerStandards of workingconduct or moral in apersons business. engaged Though in commerce. business Violations finance of these standards is the involveprimary a variety focus of of and their definitions appear in the margin where financial manager in a business. thisjudgment book that, theapply toprinciples persons actions: of finance “creative applyaccounting,” to both earnings personal management, and misleading professional financial decision fore- engaged in commerce. casts, insider trading, fraud, excessive executive compensation, options backdat- they are first introduced. These terms are also bold- making. At the personaling, level, bribery, for and instance, kickbacks. Thefinance financial helps press individuals has reported manydecide such how WHAT IS THE GOAL OF THE FIRM? much of their earnings violationsto spend, in recent how years, much involving to save, such well-knownand how companies to invest as theirWells Fargo, savings. faced in the book’s index and appear in the end-of- where employees opened new accounts without authorization from customers, What goal should managers pursue? This question has no shortage of possible Financial thinking helpsand consumersVolkswagen, where decide engineers when set upborrowing elaborate deceptions money to getis aroundappropriate pol- book glossary. answers. Some might argue that managers should focus entirely on satisfying and enables them to criticallylution controls. evaluate In these loan and offers similar with cases, different the offending terms. companies In a suffered business various penalties, including fines levied by government agencies, damages paid customers. Firms pursuing this goal could measure their products’ market shares context, finance involvesto plaintiffs the same in lawsuits, types orof lost decisions: revenues from how customers firms whoraise abandoned money the from to gauge progress. Others suggest that managers must first inspire and motivate investors, how firms investfirms because money of theirin attempting errant behavior. to Mostcreate companies value havefor adoptedtheir investors, formal ethical standards, although clearly adherence to and enforcement of those stan- employees; in that case, employee turnover might be the key success metric to and how firms decidedards whether vary. The to goal reinvest of such standards earnings is to inmotivate the business and ormarket distribute par- watch. Clearly, the goal or goals that managers select will affect many of the ticipants to adhere to both the letter and the spirit of laws and regulations concerned with business and professional practice. Most business leaders believe decisions they make, so choosing an objective is a critical determinant of how that businesses actually strengthen their competitive positions by maintaining businesses operate. high ethicalMATTER standards. OF FACT Matter of Fact boxes provide interesting empirical Finance Professors Aren’t Like Everyone Else facts, usually featuring recent data,Maximize that add Shareholder back- Wealth Professionals who advise individual investors know that many people are more willing to Finance teaches that the primary goal of managers should be to maximize the CHAPTER 5 Time Value of Moneyground 209 and depth to the material covered in the invest in the stock market if it has been rising in the recent past and are less willing to do wealth of the firm’s owners—the stockholders or shareholders. Through the years, so if it has been falling. Such “trend-chasing” behavior often leaves investors worse off chapter. that recommendation has generated a lot of controversy. The Economist magazine than if they had invested consistentlyperiod, we over discount time. Classical each annuity finance due theory cash suggestsflow 1 fewer that period than an ordinary once referred to shareholder value maximization as “the most powerful idea in M01B_ZUTT6315_15_SE_C01_pp002-040.indd 10 annuity. The algebraic formula for the present value of an07/11/17 annuity 2:53 PM due is past performance of the stock market is a very poor predictor of future performance, business,” but Jack Welch, the long-time Chief Executive Officer (CEO) of General and therefore individuals should not base investment decisions on the market’s recent Electric and a man Fortune magazine named “Manager of the Century,” once history. A survey found that at least one group of investorsCF 0did not fall prey1 to trend PV0 = * 1 - * (1 + r) (5.6) called maximizing shareholder value “the dumbest idea in the world.” Welch’s r (1 r)n 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, presumablya b c because theyd know generated more wealth for its shareholders than General Electric. A $1,000 invest- that past performance does notNotice predict the similaritythe future. between That’s just this one equation of the lessonsand Equation in this 5.4. The two equations ment in GE stock made in 1981 when Welch took the reigns as CEO would have book that can help you makeare better identical choices except with thatyour Equation own money. 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 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 Analysts Journal. end, (1 + r). The reason for this extra term is the same as when we calculated measure of stockholder wealth is the share price, so most finance textbooks (includ- the future value of the annuity due. In the annuity due, each payment arrives 1 ing ours) instruct managers to take actions that increase the firm’s share price. year 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 M01B_ZUTT6315_15_SE_C01_pp002-040.indd 4 07/11/17 2:53 PM 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.

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A01_ZUTT6308_08_SE_FM.indd 31 02/01/18 5:45 PM xxxii Preface 204 PART TWO Financial Tools

FINDING THE FUTUREMyLab VALUE Finance OF AN ORDINARY contains ANNUITY additional resources to demonstrate the examples. One way to find the future value of an ordinary annuity is to calculate the future value of each cash flowThe and then MyLab add up those Financial figures. Fortunately, Calculator several short- reference indicates that the reader can use the cuts lead to the answer. You can calculate the future value after n years of an ordinary annuity thatfinance makes n annual calculator cash payments tool equal in to CFMyLab1 by using Finance to find the solution for an example by Equation 5.3: inputting the keystrokes shown in the calculator screenshot. The MyLab Finance PART TWO Financial Tools n 210 (1 + r) - 1 SolutionFV CF Video reference indicates(5.3) that the reader can go to MyLab Finance n = 1 * r to watch a3 video of4 the author discussing or solving the example. The MyLab Comparison of an Annuity Due with an Ordinarye Annuityf As before, in this equationFinance r represents Video the interest reference rate, and nindicates represents the that the reader can watch a video on related Present Value number of payments in the annuity (or, equivalently, the number of years over The present value of anwhich annuity the annuity due is coreisspread). always topical The greatersubscript areas. 1than on the the term present CF1 highlights value that of with an ordinary annuity, the first payment comes after 1 year (or, more gener- an otherwise identicalally, ordinary after 1 period annuity.). The calculationsWe can verify required this to find statement the future value by compar of an ordi-- ing the present values naryof the annuity Braden are illustrated Company’s in the following two annuities: example. CHAPTER 5 Time Value of Money 211 Ordinary annuity = $3,116.28 versus Annuity due = $3,240.93 IRF PERSONAL FINANCE EXAMPLE 5.7 Fran Abrams wishes to determine how much money she Personal Finance Examples demonstrate Becausethat begins the cashnext year,flows pays of the an annuityinitial cashwill due have flow occur after of 5CFat years 1the, and if beginning she grows chooses after annuityof eachnext A, yeartheperiod ordi - how students can apply managerial MyLabat a Financeconstant Animation rate g forever,nary annuity. the present She will deposit value theof $1,000the growing annual payments perpetuity that theis annuity pro- rather than at the end,vides their at the present end of each values of the arenext greater.5 years into If awe savings calculate account payingthe per 7%- finance concepts, tools, and techniques centage difference in theannual values interest. of This these situation two isannuities, depicted on wethe followingwill find timeline. that the annuity due is 4% more valuable than the annuityCF1 (remember that 4% is the discount to their personal financial decisions. PV0 = (5.8) rateTimeline that for futureBraden value uses)of : r - Yearg an ordinary annuity ($1,000 012345 end-of-year deposit, earning a b ($3,240.93 $$1,0003,116.2 $1,0008) $ $1,0003,116.2 $1,0008 0.0 $1,0004 4 7%,Equation after 5 years) 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$1,000.00 equal to the growth FINDINGrate, cash flows THE grow PRESENT so fast that VALUE the present OF A value PERPETUITY of the stream1,070.00 is infinite. 1,144.90 perpetuity A perpetuity is an annuity with an infinite life. In other words,1,225.04 it is an annuity Suppose, after consulting with his alma1,310.80 mater, Ross Clark An annuityPERSONAL with an infinite FINANCE life, thatEXAMPLE never stops 5.12 providing a cash flow at the end of each $5,750.74year. Future Value providing continual annual A number of businesslearns andthat personalthe university investment requires decisions the endowment involve topayouts provide that MyLab Finance Financial 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 Calculator2% per year to keepAs up the withfigure shows, inflation. after 5 How years, muchFran will does have $5,750.74 Ross need in her to account. donate Note idea of a perpetuity. Fortunately,that because she themakes calculation deposits at the for end the of the present year, the value first deposit of a willperpe earn- today toInput coverFunction this requirement? Plugging the relevant values into Equation 5.8, –1000 PMT interest for 4 years, the second for 3 years, and so on. Plugging the relevant val- tuity is one7 I/Yof the easiest in finance. If a perpetuity pays an annual cash flow of we have:5 N ues into Equation 5.3, we have CF1, startingCPT 1 year from now, the present value of the cash flow stream is FV (1 + 0.07)5 - 1 $400,000FV5 = $1,000 * = $5,750.74 0.07 Solution 5,750.74 PV0 = = $13,333,3333 4 CPT RCL ENTER CPT CPT 0.05 - 0.02 Key Equations appear in green boxes CF NPV IRR DEL INS PV CF e r f (5.7) NI/Y PV PMTFV Calculator use Using0 = the calculator1 , inputs shown at the left, you can confirm ComparedC/Y P/YxP/YB toGN AMO theRT levelthat perpetuitythe future value providing of the ordinary $400,000 annuity equals per $5,750.74. year, the In growingthis example, throughout the text to help readers identify 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 perpetuityC/CE requires Ross to make a much larger initial donation, $13.3 million the most important mathematical relation- RESET 1 2 3 – the calculator to report the resulting future value as a positive value. You can versus+/– 0$8 . million.= + think of each $1,000 deposit that Fran makes into her investment account as 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 donation 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- M05_ZUTT6315_15_SE_C05_pp189-254.indd 204 10/11/17 4:00 PM 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 present5–12 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, 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 toP Vfind0 = the$4 present00,000 value, 0. 0of5 an= annuity$8,000 ,due?000 NEW! Some sections have dedicated Excel 5–14 What is a perpetuity? Why is the present value of a perpetuity 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 payment divided by the interest rate? Why doesn’t this $8,000,000chapter today provideif Ross Clark’san equation alma showing mater can you earn how 5% to oncalculate its investments. the future If the onstrate their ability to solve a financial university earnsvalue of5% a interestperpetuity? annually on the $8,000,000, it can withdraw $400,000 problem using Excel. per year indefinitely without ever touching the original $800,000 donation.

➔ EXCEL REVIEW QUESTIONS MyLab Finance Solutions Many financial applications require analysts to calculate the present value of a cash 5–15flow Becausestream thattax timecontinues comes foreveraround (i.e.,every a year, perpetuity) you smartly and decidegrows toat makea steady rate. Calculatingequal contributions the present value to your of IRAa growing at the perpetuityend of every is year.not muchUsing morethe com- plicated thaninformation finding the provided present at value MyLab of a Finance, level perpetuity. calculate Forthe futurea cash valueflow streamof your IRA contributions when you retire. 5–16 You have just graduated from college and begun your new career, and now it is time to buy your first home. Using the information provided at MyLab Finance, determine how much you can spend for your new dream home.

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M05_ZUTT6315_15_SE_C05_pp189-254.indd 211 15/11/17 4:52 PM

A01_ZUTT6308_08_SE_FM.indd 32 02/01/18 5:45 PM CHAPTER 5 Time Value of Money 221

➔ REVIEW QUESTIONS MyLab Finance Solutions 230 PART TWO Financial Tools 5–20 What effect does compounding interest more frequently than annually have on (a) future value and (b) the effective annual rate (EAR)? Why? 5–21 How does the future value of a deposit subject to continuous com- ➔ REVIEW QUESTIONSpounding compare MyLab to the value Financeobtained by annual Solutions compounding? Differentiate between a nominal annual rate and an effective annual 514 PART SIX Long-Term 5–22 Financial Decisions 5–26 How can yourate (EAR).determine Define annual the percentage size of rate the (APR) equal, and annual end-of-year percent- deposits necessary to accumulateage yield (APY). a certain future sum at the end of a specified Preface xxxiii EXAMPLE 12.6 Substituting Q = 1,000, P = $10, VC = $5, and FC = $2,500 into Equation future period12.5 gives at us a given annual interest rate? 5–27 Describe the procedure used to1,000 amortize* ($10 - $5)a loan into$5,000 a series of equal DOL at 1,000 units = = = 2.0 In Practice boxes offer insights into impor- FOCUS ON ETHICSperiodic in payments.practice 1,000 * ($10 - $5) - $2,500 $2,500 5–28 How canAs before,you determine the DOL value theof 2.0 unknown means that at numberCheryl’s Posters of periodsa change in whensales youtant topics in managerial finance through Was the Deal for Manhattanvolume a resultsSwindle? in an EBIT change that is twice as large in percentage terms.6 Most schoolchildrenknow marvel when the presentabout 787 Euros and today future after adjusting values—single to today, the sum would amount grow to or annuity—andthe experiences of real companies, both hearing Manhattanthe was purchased applicable for Seefor theinflation. rate Focus Based of on oninterest? Practice the recent box forroughly a discussion 4 trillion guilders of operating or $2 trillion. leverage at the a song in 1626. As the story goes,semiconductor exchange rate company between theQualcomm. Euro and Based on New York City’s Depart- large and small. There are two categories Peter Minuit of the Dutch West India the U.S. dollar, that translates to ment of Finance property tax assess- 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 FOCUSmere➔ $24EXCEL forON the PRACTICEisland. REVIEW inarea practiceQUESTIONS of Manhattan comprises 636,000 MyLab today! Finance Solutions But wait. A letter written by Dutch square feet, and condos there sell for Of course, when the deal for Focus on Ethics boxes help readers under- merchant,Qualcomm’s Pieter Schage, Leverage on Novem- an average of $1,700 per square foot. Manhattan was struck, the first asset ber 5, 1626 5–29 to the directorsYou wantof the toSo buyeven after a adjustingnew forcar price as a graduationtrading of any kind on present a street called for yourself, but Dutch West India Company confirmed changes since 1626, Minuit still looks Wall lay over 80 years in the future, stand and appreciate important ethical Qualcomm Inc., one of the largest employees, is highly skilled. Many of Street analysts to question why the 230the transaction butPARTbefore valued TWO the goods Financialfinalizing pretty Tools sly. a purchase you needso the Lenape to considercould not salt the the monthly payment semiconductor companies in the the company’s workers have advanced company was not able to increase its (which more likely were kettles, mus- Before closing the case, consider receipts away in stocks. Still, the issues and problems related to managerial kets,United powder, States, and designs axes)amount. at and 60 Dutch sells Usingwire-one moredegrees the factor. ininformation technicalThe average fields annual- such providedasillustration elec- profits makes at faster the MyLab larger during point–– a period Finance, of rapid find the guilders.less telecommunications According to the Interna- chips. Unlike➔ izedREVIEW returntrical engineering. on U.S. QUESTIONS stocks Although over the lastwe oftenMyLabcompounding sales Finance is gains. a magical In Solutions 2015 thing! and 2016, Qual- finance. Nearly all of these boxes are brand tionalsome Instituteother chip of Social monthlymanufacturers, History, paymentsuch200 yearsthink wasof amountlabor 6.6%. as If 60a variable Dutch for guil- cost, the mostAnd car given youcomm this magic, fellare behind it isconsidering. less the clear leading edge of 60as Intel,Dutch 5–30 Qualcommguilders inAs 1626 is largelya are finance worth a fabless ders 5–26 major, companieswere How invested you docan at not 6.6% yourealize lay from offdetermine their1626 most thatwho the fleecedyou sizetechnology, whom. canof the quickly andequal, some end-of-year of estimateits core chips deposits your newnec- in this edition, and those that are not company, meaning that it does not skilledessary workers to due accumulate to a temporary a certainfor future cell phones sum were at the no longerend of com a -specified own People and operate withoutretirement financeits own training fabrication often age fail todecline byappreciatefuture knowing in sales. the period powerThus, ofat how compoundleast a given some much interest. annualof petitive. Consideryou interest Asneed the a followingrate?result, to sales retire, fell in 2 conhow- muchbrand new have been substantially revised. (i.e.,data manufacturing) for a typical credit plants, card: but rather Qualcomm’s payroll is best considered secutive years, and EBIT fell even 5–27 Describe the procedure used to amortize a loan into a series of equal outsourcesOutstanding the Balance: productionyou can of the contribute $5,000 a fixed cost, each at least month in the short to run. yourfaster. retirement In 2015 and 2016, account, Qualcomm’s and what devicesAnnual itPercentage sells to third Rate parties.(APR): This12% Toperiodic what extent payments. do Qualcomm’s degree of operating leverage roughly Minimum Payment:rate of returnLarger ofyou [(1% canAPR 12) earnbalance] on or your$25 retirement investments. With Focusthat on Practice boxes take a corporate strategy makes Qualcomm’s fixed 5–28fixed How costs+ givecan the*you company determine operat the- unknowndoubled what number it had been of periodsin the previ when- you costs lower than information,those of other firms youing leverage?know Minimumcan > thesolve As Payment presentdemonstrated Onlyfor and the $100 in future thePayment number values—singleous Each 4 Monthyears. of Qualcomm years amount itexperienced will or annuity—and take to focussave that relates a business event or situation that manufactureMonthlythe their Payments ownmoney products. to Zero you Balancefollowing needthe applicable table, to the208retire. company rate Using of experi interest?- the71the informationdownside of operating provided leverage in at Even so, someTotal of Interest Qualcomm’s Paid costs enced sales increases$4,242 in every year $1,9932015 and 2016 without benefiting from to a specific financial concept or technique. are fixed. The company invests heavily from 2011 to 2014, but the percentage it in the previous years when sales The first minimumMyLab payment is $100, Finance, but that minimum estimate will decline eachthe month age as atthe outstandingwhich balanceyou shrinks.will be able to retire. in research and development, and it increase in EBIT was significantly were on the rise. Making the minimum payment every➔ month EXCEL means that REVIEW the borrower QUESTIONS takes 17 years to pay offMyLab the card, Financepaying more Solutions incursthan $4,000those costsin interest well beforealong the it knowsway. By payinggreater $100 than each the month, gain however,in sales onlythe borrower in repays the debt in one- Both types of In Practice boxes end with whatthird the the demand time and forat lessnew than devices half thewill interest 5–292011. cost. You From want 2012 to 2014,buy Qualcomm’sa new car as a Summarizegraduation the presentpros and forcons yourself, of but be. In Howaddition, much Qualcomm’sresponsibility labordo lenders havedegree to beforeeducate of operating borrowers?finalizing leverage Does a purchasethe hovered fact that theyou operatinggovernment need to leverage. requires consider dis- the monthly paymentone or more critical thinking questions to force,closure numbering statements roughly with a few30,000 standardized examplesat or below illustrating 1.0, prompting the time value some of Wall money change your answer? amount. Using the information provided at MyLab Finance, find thehelp readers broaden the lesson from the Item FY2011monthly FY2012 payment FY2013 amount for FY2014 the car you FY2015 are considering. FY2016 5–30 As a finance major, you realize that you can quickly estimate your content of the box. SUMMARY Sales revenue (millions) $14,566 $19,121 $24,866 $26,487 $25,281 $23,554 EBIT (millions) $4,882retirement $5,705 age by $7,561 knowing how $8,034 much you $7,212 need to retire, $6,269 how much (1) Percent change in sales 32.4%you can 31.4% contribute 30.0% each month6.5% to your retirement-4.6% account,-6.8% and what (2) Percent change in EBIT 48.6%rate of 16.8% return you 32.5% can earn on 6.2%your retirement-10.2% investments.-13.1% With that FOCUSDOL [(2) , (1)] ON VALUE1.5 information,0.5 you can1.1 solve for the1.0 number of2.2 years it will1.9 take to save M05_ZUTT6315_15_SE_C05_pp189-254.indd 221 the money you need to retire. Using the information08/11/17 provided 3:53 PM at The time value of money isMyLab an important Finance, estimate tool the that age atfinancial which you managerswill be able to and retire. other

market participants6. When use total revenue to compare in dollars from sales—instead cash ofinflows unit sales—is available, and theoutflows following equation, occurring in whichTR = at dif- total revenue in dollars at a base level of sales and TVC = total variable operating costs in dollars, can be used: ferent times. Because firms routinely make investmentsTR - TVC that produce cash DOL at base dollar sales TR = inflows over long periods of time, the effective TRapplication- TVC - FC of time-value-of- The end-of-chapter Summary con- This formula is especially useful for finding the DOL for multiproduct firms. It should be clear that because in the SUMMARY case of a single-product firm, TR = Q * P and TVC = Q * VC, substitution of these values into Equation 12.5 money techniquesresults is in extremely the equation given here. 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 M12B_ZUTT6308_08_SE_C12.inddkey part 514 of the valuationinflows overprocess long periods needed of time, to make the effective wealth-maximizing application of time-value-of- decisions.04/01/18 11:19 AM 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 230 230 10/11/1710/11/17 4:12firm PM 4:12 theirPM understanding before moving forward.

A01_ZUTT6308_08_SE_FM.indd 33 08/01/18 10:54 AM 232 PART TWO Financial Tools

OPENER-IN-REVIEW

The 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 $11.42 million coming immediately, followed by 29 additional payments growing at 5% per year. If the lottery winner could earn 2% on cash invested today, should she take the lump sum or the mixed stream? What if the rate of return is 3%? xxxiv PrefaceWhat 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 opportunity to strengthen their LG 2 LG 5 ST5–1 Future values for various compounding frequencies Delia Martin has $10,000 that she can deposit in any of three savings accounts for a 3-year period. Bank A com- understanding of topics by doing IRF pounds interest on an annual basis, bank B Cashcompounds flow stream interest twice each year, and bank C compounds interestYear each quarter.Alternative All three A banksAlternative have aB stated annual a sample problem. For reinforce- interest rate of 4%. 1 $700 $1,100 176 PART TWO Financial Tools ment, solutions to the Self-Test a. What amount would Ms.2 Martin have700 after 3 years, leaving900 all interest paid on deposit, in each bank? 3 700 700 Problems appear in the appendix at b. What effective annual rate4 (EAR) would700 she earn in each500 of the banks? WARM-UP EXERCISES All problems are available in MyLab Finance c. On the basis of your findings5 in parts a700 and b, which bank300 should Ms. Martin the back of the book. An IRF icon deal with? Why? Single amount indicates that the Self-Test Problem LG 2 E4–1 Thed. installedIf a fourth cost bankof a new (bank computerized D), also with controller a 4% was stated $65,000. interest Calculate rate, compounds the At time zero $2,825 $2,800 depreciationinterest schedule continuously, by year assuminghow much a recovery would Ms.period Martin of 5 years have and after using 3 years? the can be solved using the interest rate appropriateDoes this MACRS alternative depreciation change percentages your recommendation given in Table 4.2. in part c ? Explain why or why not. factors. The reader can access the Classify the following changes in each of the accounts as either an inflow or an out- LG 36 E4–2ST5–4 Deposits needed to accumulate a future sum Judi Janson wishes to accumulate flow$8,000 of cash. by During making the equal, year (a)end-of-year marketable deposits securities over increased, the next (b) 5 years. land and If build Judi- can earn Interest Rate Factor Supplement in LG 3 ST5–2 Future values of annuities Ramesh Abdul has the opportunity to invest in either of IRF ings7% decreased, on her investments,(c) accounts payable how much increased, must (d)she vehicles deposit decreased, at the end (e) of accounts each year to meet receivabletwo annuities, increased, each and of (f) which dividends will costwere $38,000 paid. today. Annuity X is an annuity due MyLab Finance. IRF thatthis makesgoal? 6 cash payments of $9,000. Annuity Y is an ordinary annuity that makes 6 cash payments of $10,000. Assume that Ramesh can earn 15% on his investments. LG 3 E4–3 Determine the operating cash flow (OCF) for Kleczka Inc., based on the following data.a. On(All avalues purely are intuitive in thousands basis of(i.e., dollars.) without During doing the any year math), the firm which had salesannuity of do you $2,500,think cost is of more goods attractive? sold totaled Why? $1,800, operating expenses totaled $300, and depreciationb. Find the expenses future valuewere $200. after The6 years firm for is in both the 35%annuities. tax bracket. Warm-Up Exercises follow the WARM-UP EXERCISESc. Use your findingAll problems in part b areto indicate available which in MyLabannuity isFinance more attractive.. Why? During the year, Xero Inc. experienced an increase in net fixed assets of $300,000 Self-Test Problems. These short, LG 3 E4–4 Compare your finding to your intuitive response in part a. and had depreciation of $200,000. It also experienced an increase in current assets numerical exercises give students LG E5–1of $150,000Assume that and aan firm increase makes in aaccounts $2,500 payable deposit and into accruals a short-term of $75,000. investment If operat account.- If LG 2 LG ST5–3 Present values of single amounts and streams You have a choice of accepting either 2 3 ingthis cash account flow (OCF) is currently for the year paying was 0.7%$700,000, (yes, calculate that’s right, the firm’s less than free cash1%!), flow what will the of two 5-year cash flow streams or single amounts. One cash flow stream is an ordi- practice in applying tools and tech- (FCF)account for the balance year. be after 1 year? LG 4 nary annuity, and the other is a mixed stream. You may accept alternative A or B, niques presented in the chapter. Rimiereither Corp. as a cashforecasts flow sales stream of $650,000 or as a single for 2020. amount. Assume Given that the the cashfirm flowhas fixed stream and LG 52 LG IRF5 E4–5E5–2 If Bob and Judy combine their savings of $1,260 and $975, respectively, and deposit costssinglethis of amount $250,000amounts into andassociated an variable account with costs that each amounting pays (see 2% the toannual following 35% ofinterest, sales. table), Operating compounded and assuming monthly, a 9% CHAPTER 4 Long- and Short-Term Financial Planning 185 expensesopportunitywhat willare estimatedthe cost, account which to include balance alternative fixed be aftercosts (A or 4of B)years? $28,000 and in andwhich a variable form (cash portion flow stream or equalsingle to 7.5%amount) of sales. would Interest you prefer? expenses for the coming year are estimated to be $20,000. Estimate Rimier’s net profits before taxes for 2020. LG 3 E5–3 Gabrielle just won $2.5Peabody million & Peabody in the Balance state Sheet lottery. December She 31,is given2019 ($000) the option of receiving a lump sum of $1.3 million now, or she can elect to receive $100,000 at the end of eachAssets of the next 25 years. If GabrielleLiabilities can and earn stockholders’ 5% annually equity on her investments, whichCash option should$ she 400 take?Accounts payable $1,400 Comprehensive Problems, keyed to Marketable securities 200 Accruals X 400 PROBLEMS Accounts receivable 1,200 Other current liabilities 80 the learning goals, are longer and LG 4 E5–4 AllYour problems firm has are the available option of in making MyLab an Finance. investment The in newMyLab software icon indicates that will cost problems$130,000 in today ExcelInventories but format will saveavailable the company 1,800in MyLab money FinanceTotal over current several. liabilities years. $1,880You estimate that more complex than the Warm-Up the software will Totalprovide current the assets savings$3,600 shown inLong-term the following debt table over 2,000 its 5-year life. LG 2 P4–1 Depreciation On NetMarch fixed 20, assets 2019, Norton 4,000 Systems acquiredTotal liabilities two new assets.$3,880 Asset Exercises. In this section, instruc- A was research equipmentTotal assets costing $17,000$7,600 and havingCommon a 3-year equity recovery period. 3,720 M05_ZUTT6315_15_SE_C05_pp189-254.indd 232 08/11/17 3:54 PM Asset B was duplicating equipment withYear an installedSavings Totalcostestimate ofliabilities $45,000 and and a 5-year tors will find multiple problems that recovery period. Using the MACRS depreciation percentagesstockholders’ in Table equity 4.2, prepare$7,600 a 1 $35,000 depreciation schedule for each of these assets. address the important concepts, tools, 2 50,000 3 45,000 LG 2 P4–2 Depreciation In early 2019, Sosa Enterprises purchased a new machine for $10,000 and techniques in the chapter. to make cork stoppers for wine bottles.4 The machine25,000 has a 3-year recovery period and is expecteda. Prepare to havea pro a forma salvage balance value5 ofsheet $2,000. dated 15,000Develop December a depreciation 31, 2021. schedule 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-

LG P4–20 Integrative: Pro forma statements Red Queen Restaurants wishes to prepare finan- of-chapter problems are available in LG 2 5 P4–3 MACRS Should depreciation the firm make expense this andinvestment accounting if it cash requires flow Pavlovicha minimum Instruments annual return of 9% Inc.,on a all makercial investments? plans. of precision Use the financial telescopes, statements expects toand report the other pretax information income of provided $430,000 below to MyLab Finance. These templates do LG 3 this year.prepare The company’s the financial financial plans. manager 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 $80,000The and following a cost recovery financial period data areof 5also years. available: They will be depreciated using the MACRS(1) schedule. The firm has estimated that its sales for 2020 will be $900,000. rather help students reach a solution (2) The firm expects to pay $35,000 in cash dividends in 2020. (3) The firm wishes to maintain a minimum cash balance of $30,000. faster by inputting data for them (4) Accounts receivable represent approximately 18% of annual sales. (5) The firm’s ending inventory will change directly with changes in sales in or by organizing facts presented in M05_ZUTT6315_15_SE_C05_pp189-254.indd 233 2020. 08/11/17 problems 3:54 PM in a logical way. (6) A new machine costing $42,000 will be purchased in 2020. Total depreciation M04_ZUTT6315_15_SE_C04_pp142-188.indd 176 08/11/17 2:03 PM for 2020 will be $17,000. (7) Accounts payable will change directly in response to changes in sales in 2020. A short descriptor identifies the (8) Taxes payable will equal one-fourth of the tax liability on the pro forma income statement. essential concept or technique of (9) Marketable securities, other current liabilities, long-term debt, and common stock will remain unchanged. the problem. Problems labeled as a. Prepare a pro forma income statement for the year ended December 31, 2020, Integrative tie together related topics. using the percent-of-sales method. b. Prepare a pro forma balance sheet dated December 31, 2020, using the judgmental approach. c. Analyze these statements, and discuss the resulting external financing required.

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A01_ZUTT6308_08_SE_FM.indd 34 02/01/18 5:45 PM CHAPTER 4 Long- and Short-Term Financial Planning 179

LG 4 P4–8 Cash receipts A firm has actual sales of $65,000 in April and $60,000 in May. It expects sales of $70,000 in June and $100,000 in July and in August. Assuming that 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 expected cash receipts for June, July, and August?

LG 4 X P4–9 Cash disbursements schedule Maris Brothers Inc. needs a cash disbursement sched- MyLab ule for the months of April, May, and June. Use the format of Table 4.9 and the following information in its preparation.

Sales: February = $500,000; March = $500,000; April = $560,000; May = $610,000; June = $650,000; July = $650,000 Purchases: Purchases are calculated as 60% of the next month’s sales, 10% of CHAPTER 4 Long- and Short-Term Financial Planning 187 purchases are made in cash, 50% of purchases are paid for 1 month after purchase, and the remaining 40% of purchases are paid for 2 months after purchase. Rent: The firm pays rent of $8,000 perProvincial month. Imports Inc. Balance Sheet December 31, 2019 Wages and salaries: Base wage and salary costs are fixed at $6,000 per month Assets Liabilities and stockholders’ equity plus a variable cost of 7% of the current month’s sales. Cash $ 200,000 Accounts payable $ 700,000 Taxes: AMarketable tax payment securities of $54,500 is 225,000 due in June. Taxes payable 95,000 Fixed assetAccounts outlays: receivable New equipment625,000 costing $75,000 Notes payablewill be bought and paid for200,000 in April.Inventories 500,000 Other current liabilities 5,000 Total current assets $1,550,000 Total current liabilities $1,000,000 Interest Netpayments: fixed assets An interest payment 1,400,000 of $30,000 Long-term is due debt in June. 500,000 Cash dividends:Total assets Dividends of $12,500$2,950,000 will be paid Total in April. liabilities $1,500,000 Common stock 75,000 CHAPTER 4 Long- and Short-Term Financial Planning 187 Principal repayments and retirements: No principalRetained repayments earnings or retirements 1,375,000 are due during these months. Total liabilities and equity $2,950,000 Provincial Imports Inc. LG 4 P4–10 Cash budget: Basic GrenobleBalance Sheet Enterprises December 31, 2019had sales of $50,000 in March and Assets$60,000Information in April. Forecast related sales to financial forLiabilities May, andprojections June, stockholders’ and Julyfor equity theare year$70,000, 2020 $80,000, is as follows: and Cash$100,000,(1) respectively. Projected$ 200,000 Thesales firm are Accounts$6,000,000.has a cash payable balance of $5,000$ 700,000 on May 1 and wishes Marketableto maintain securities(2) a Costminimum of 225,000goods cash sold balance Taxesin 2019 payableof $5,000. includes Given $1,000,000 the following95,000 in fixed data, costs. prepare Accountsand interpret receivable(3) aOperating cash budget625,000 expense for the Notesin months 2019 payable includes of May, $250,000 June, and 200,000in July. fixed costs. Inventories(1) The firm(4) makesInterest 20% expense 500,000 of sales will Otherfor remain cash, current unchanged. 60% liabilities are collected 5,000 in the next month, Total current assets $1,550,000 Total current liabilities $1,000,000 and the(5) remainingThe firm 20%will pay are cashcollected dividends in the amounting second month to 40% following of net sale. profits after taxes. Net(2) fixed The assets firm receives 1,400,000 other income Long-term of $2,000 debt per month. 500,000 Total assets(6) Cash $2,950,000and inventories Totalwill liabilities double. $1,500,000 (3) The firm’s(7) Marketable actual or expected securities,Common purchases, notes stock payable, all made long-term for cash, 75,000debt, are $50,000,and common stock will $70,000, remainand $80,000 unchanged. for the monthsRetained earnings of May through July, 1,375,000 respectively. (4) Rent (8)is $3,000 Accounts per month.receivable, accountsTotal liabilities payable, and equity and other $2,950,000 current liabilities will change (5) Wages andin salariesdirect response are 10% to of the the change previous in month’ssales. sales. (6) Cash dividends of $3,000 will be paid in June. Information related(9) toA financialnew computer projections system for the costing year 2020 $356,000 is as follows: will be purchased during the year. Preface (1) (7)Projected Payment sales ofTotalare principal $6,000,000. depreciation and interest expense of $4,000 for the isyear due will in June. be $110,000. xxxv (2) (8)Cost A of cash goods(10) purchase soldThe in tax 2019 of rate equipment includes will remain $1,000,000 costing at 40%. $6,000in fixed costs.is scheduled in July. (3) (9)Operating Taxes expenseof $6,000 in 2019 are includesdue in June. $250,000 in fixed costs. (4) Interest expensea. Prepare will remain a pro unchanged.forma income statement for the year ended December 31, 2020, (5) The firm will pay cash dividends amounting to 40% of net profits after taxes. Personal Financeusing the Problem fixed cost data given to improve the accuracy of the percent-of-sales Personal Finance Problems specifi- (6) Cash and inventoriesmethod. will double. (7) PreparationMarketable securities, of cash budget notes payable, Sam and long-term Suzy Sizemandebt, and commonneed to preparestock will a cash 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- forremain the lastunchanged. quarter of 2020 to make sure they can cover their expenditures during tion given and the judgmental approach. Include a reconciliation of the retained (8) theAccounts period. receivable, Sam and accounts Suzy have payable, been and preparing other current budgets liabilities for the will past change several years and earnings account. tions and Personal Finance Examples havein direct been response able to to identify the change the in percentage sales. of their income that they pay for most of (9) A new computerc. Analyze system these costing statements, $356,000 andwill bediscuss purchased the duringresulting the externalyear. financing required. in each chapter. These problems will Total depreciation expense for the year will be $110,000. LG 1 (10)P4–22 The tax ETHICSrate will remain PROBLEM at 40%. The SEC is trying to get companies to notify the investment help students see how they can apply a. Prepare a procommunity forma income more statement quickly for when the year a “material ended December change” 31, will2020, affect their forthcoming using the fixedfinancial cost data results. given Into whatimprove sense the accuracymight a offinancial the percent-of-sales manager be seen as “more ethical” the tools and techniques of manage- method. if he or she follows this directive and issues a press release indicating that sales will M04_ZUTT6315_15_SE_C04_pp142-188.indd 179 b. Prepare a pronot forma be as balance high as sheet previously as of December anticipated? 31, 2020, using the informa- 08/11/17 2:03 PM rial finance in managing their own tion given and the judgmental approach. Include a reconciliation of the retained earnings account. finances. c. Analyze these statements, and discuss the resulting external financing required.

LG 1 SPREADSHEETP4–22 ETHICS PROBLEM EXERCISE The SEC is trying to get companies to notify the investment All exercises and problems are avail- community more quickly when a “material change” will affect their forthcoming financial results. In what sense might a financial manager be seen as “more ethical” able in MyLab Finance. if he or she followsYou havethis directive been assigned and issues the a press task release of putting indicating together that sales a statement will for the ACME Com- not be as highpany as previously that shows anticipated? 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 M04_ZUTT6315_15_SE_C04_pp142-188.indd2020 187 through December 2020. 08/11/17 2:03 PM with which to analyze a financial problem. The 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 screenshots in MyLab Finance.

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 platform, 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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A01_ZUTT6308_08_SE_FM.indd 35 08/01/18 10:55 AM xxxvi Preface

MyLab opens the door to a powerful Web-based tutorial, testing, and diagnostic learning system designed specifically for the Zutter/Smart, Principles of Managerial Finance, Brief Edition. With MyLab, instructors can select an adaptable preconfig- ured 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 down- loadable 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 student 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, practice, 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 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-money problems and works seamlessly with the textbook. The student can go directly to the IRF Supplement and see the in-chapter example solved using the interest rate factors. All examples that appear in the IRF Supplement are indicated in the text with an IRF icon.

A01_ZUTT6308_08_SE_FM.indd 36 08/01/18 10:56 AM Preface xxxvii

Advanced reporting features in MyLab also allow you to easily report on AACSB accreditation and assessment in just a few clicks. An online glossary, digital flashcards, financial calculator tutorials, videos, Spreadsheet Use examples from the text in Excel, and numerous other premium resources are available in MyLab.

CHAPTER 5 Time Value of Money 205 DEVELOPING EMPLOYABILITY SKILLS a paymentFor students into to thesucceed account in a orrapidly a cash changing outflow, job and market, after 5 they years should the future be aware value of istheir the balancecareer options in the account,and how orto gothe about cash inflowdeveloping that aFran variety receives of skills. as a Inreward this book for investing.and in MyLab Finance, we focus on developing these skills in a variety of ways. Excel modeling skills—Each chapter contains a Spreadsheet Exercise that Spreadsheetasks students use to T buildo calculate an Excel the futuremodel valueto help of solvean annuity a business in Excel, problem. we will Many use thechapters same futureprovide value screenshots function thatshowing we used completed to calculate Excel the models future designed value of ato lumpsolve sum,in-chapter but we examples. will add Manytwo new chapters input containvalues. RecallExcel Review that the Questions future value that function’sprompt students syntax tois FV(rate,nper,pmt,pv,type).practice using Excel to solve We specific have already types of explained problems. the In termsaddition, rate, students nper, and can pv access in this the function. working The Excel term screenshots pmt refers and to the solutions annual to pay the- mentExcel the Review annuity Questions offers. The in MyLabterm type Finance is an input to further that lets reenforce Excel know their whetherlearning theand annuity understanding. being valued Also, is in an MyLab ordinary students annuity will (in findwhich dozens case theof Excel input templates,value for typemarked is 0 inor theomitted) text with or an a special annuity icon, due that(in which help them case modelthe correct select input end-of-chapter value for typeproblems is 1). Inso thisthey particular can reach problem,a solution the faster input and value with for a deeperpv is 0 understandingbecause there isof nothe up-front underlying money concepts. received Finally, that isas separatementioned from above, the annuity.every Excel The Spreadsheet only cash flowsExercise are andthose select that end-of-chapterare part of the problemsannuity stream. can be Theassigned following and auto Excel graded. spreadsheet 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.

FINDINGEthical THE reasoning PRESENT skills— VALUEThe Focus OF ANon Ethics ORDINARY boxes describe ANNUITY situations in which business professionals have violated ethical (and in some cases even Quitelegal) oftenstandards in finance, and have we suffered need to findconsequences the present as valuea result. of aThese stream boxes of cash will flowshelp studentsspread over recognize several thefuture ethical periods. temptations An annuity they is, are of course,likely to a facestream while of equalpursuing periodic a finance cash flows. career The and method the consequences for finding thethat present they may value suffer of an if ordi they- narybehave annuity unethically. is similar Each to the chapter method ends just discussed.with an Ethics One approachProblem isthat to calculateasks stu- thedents present to consider value of the each ethical cash dimensionsflow in the annuityof some and business then add decision. up those present values.Critical Alternatively, thinking skillsthe algebraic—Nearly everyshortcut significant for finding financial the decisionpresent valuerequires of critan- ordinaryical thinking annuity because that making makes optimalan annual decisions payment means of CF weighing1 for n theyears marginal looks likebenefits and costs of alternative plans. To weigh those benefits and costs, one must first identify and quantify them. Nearly everyCF1 chapter in this1 textbook discusses how finan- PV0 = * 1 - (5.4) cial analysts place a value on the rnet benefits associated(1 + r)n with a particular decision. Students who master this materiala willb be preparedc to askd the tough questions neces- Ofsary course, to assess the whether simplest a approachparticular iscourse to solve of action problems creates like value this forone shareholders. with a financial 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 A01_ZUTT6308_08_SE_FM.indd 37 02/01/18 5:45 PM MyLab Finance Animation situation.

M05_ZUTT6315_15_SE_C05_pp189-254.indd 205 10/11/17 4:02 PM xxxviii Preface

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.

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 2,700 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)

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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_ZUTT6308_08_SE_FM.indd 39 02/01/18 5:45 PM Acknowledgments

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

David Bosch, Boyce College Thomas Flores, Hawaii Pacific University Rodney Hardcastle, Pacific Union College Renata Kochut, SUNY Empire State College Christopher Kubik, Colby-Sawyer 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

A01_ZUTT6308_08_SE_FM.indd 40 08/01/18 11:02 AM Acknowledgments xli

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_ZUTT6308_08_SE_FM.indd 41 02/01/18 5:45 PM xlii Acknowledgments

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 providing 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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