Principles of Managerial Finance Global Edition Fourteenth Edition Lawrence J. Gitman San Diego State University Chad J. Zutter University of Pittsburgh PEARSON Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Säo Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
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Principles of
Managerial Finance
Global Edition
Fourteenth Edition
Lawrence J. Gitman
San Diego State University
Chad J. Zutter
University of Pittsburgh
PEARSON
Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto
Delhi Mexico City Säo Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
Contents
About the Authors 35 Preface 37 Supplements to the Fourteenth Edition 41 Acknowledgments 43
Introduction to Managerial Finance 47
1 The Role ol Managerial Finance page 48
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Facebook— Not Much to "Like" about IPO page 49
III Finance and Business 50
What Is Finance? 50
Career Opportunities in Finance 50
Legal Forms of Business Organization 51 OSSSiE Focus on Practice: Professional Certifications in Finance 51
Why Study Managerial Finance? 55
-» REVIEW ÖUESTIONS 56
BEI Goal of the Firm 56
Maximize Shareholder Wealth 56
Maximize Profit? 57 What About Stakeholders? 59
The Role of Business Ethics 59
Ethics and Share Price 60
-» REVIEW ÖUESTIONS 60 GEZ2SB Focus on Ethics: Critics See Ethical Dilemmas in Google Glass? 61
IBI Managerial Finance Function 61 Organization of the Finance Function 62
A Crisis in Housing Finance—Under Water in the Desert page 77
EU Financial Institutions and Markets 78
Financial Institutions 78 Commercial Banks, Investment Banks, and the Shadow Banking System 79
Financial Markets 80 The Relationship between Institutions and Markets 80
The Money Market 81
The Capital Market 81 vÜSäaäSB Focus on Practica: Berkshire Hathaway: Can Buffett Be Replaced? 83 GEESSe Focus on Ethics: The Ethics of Insider Trading 86
-» REVIEW QUESTIONS 87
E&fl The Financial Crisis 87 Financial Institutions and Real Estate Finance 87 Fölling Home Prices And Delinquent Mortgages 88
Crisis of Confidence in Banks 89 Spillover Effects and the Great Recession 90
BEI Regulation of Financial Institutions and Markets 90 Regulations Governing Financial Institutions 91 Regulations Governing Financial Markets 91
City of Cincinnati — Pay Me Now or Pay Me Laier page 209
EU The Role of Time Value in Finance 210
Future Value Versus Present Value 210
Computational Tools 211
Basic Patterns of Cash Flow 212
-» REVIEW ÖUESTIONS 213
M3BSM Single Amounts 213
Future Value of a Single Amount 213
Present Value of a Single Amount 217
-» REVIEW ÖUESTIONS 219
-» EXCEL REVIEW ÖUESTIONS 220
ESI Annuities 220
Types of Annuities 220 Finding the Future Value of an Ordinary Annuity 221 Finding the Present Value of an Ordinary Annuity 222 Finding the Future Value of an Annuity Due 224 Finding the Present Value of an Annuity Due 225 Finding the Present Value of a Perpetuity 227
-> REVIEW ÖUESTIONS 228
-» EXCEL REVIEW ÖUESTIONS 228
ESI Mixed Streams 228
Future Value of a Mixed Stream 228
Present Value of a Mixed Stream 230
-» REVIEW ÖUESTION 231
-» EXCEL REVIEW ÖUESTION 231
BEI Compounding Interest More Frequently Than Annually 231
Semiannual Compounding 232
Quarterly Compounding 232 A General Equation for Compounding More Frequently Than Annually 233
Using Computational Tools for Compounding More Frequently than Annually 234
Continuous Compounding 234 Nominal and Effective Annual Rates of Interest 235
-» REVIEW ÖUESTIONS 237
-» EXCEL REVIEW ÖUESTIONS 237 in practice Focus on Ethics: How Fair is
"Check into Cash"? 238
ESI Special Applications of Time Value 238 Determining Deposits Needed to Accumulate a Future Sum 239
Loan Amortization 240 Focus on Practice: New
Century Brings Trouble for Subprime Mortgages 242
Finding Interest or Growth Rates 242 Finding an Unknown Number of Periods 243
KsSl EBIT—EPS Approach to Capital Structure 589 Presenting a Financing Plan Graphically 589 Comparing Alternative Capital Structures 591 Considering Risk in EBIT-EPS Analysis 591 Basic Shortcoming of EBIT-EPS Analysis 592
Trends in Earnings and Dividends 614 Trends in Dividends and Share Repurchases 616 GEESSB Focus on Ethics: Ars Buybacks Really a Bargain? 617
-» REVIEW aUESTIONS 618
IEB The Mechanics of Payout Policy 618
Cash Dividend Payment Procedures 619
Share Repurchase Procedures 620 Tax Treatment of Dividends and Repurchases 622 63223233 Focus on Practice: Capital Gains and Dividend Fax Treatment Extended to 2012 and Beyond for Soine 623
15 Working Capital and Current Assets Management page 6J2
Treasury Risk Survey 201 3-Worries about Liquidity Occupy the Minds of Treasury Managers page 653
IESI Net Working Capital Fundamentals 654
Working Capital Management 654
Net Working Capital 655 Trade-Off between Profitability and Risk 655
-» REVIEW QUESTIONS 657
IEKI Cash Conversion Cycle 657 Calculating the Cash Conversion Cycle 657 Funding Requirements of the Cash Conversion Cycle 658 Strategies for Managing the Cash Conversion Cycle 661
-» REVIEW QUESTIONS 662
Usfii lnventory Management 662 Differing Viewpoints about lnventory Level 662 Common Techniques for Managing lnventory 663 £33^2233 Focus on Practice: RFID: The Wave of the Futune? 667
International lnventory Management 668
-»REVIEW QUESTIONS 668
IsBsl Management of Receipts and Disbursements 678
Float 678
Speeding Up Collections 679
Slowing Down Payments 680 fSEEäSB FOCUS on Ethics: Stretching
i£EJ Secured Sources of Short-Term Loans 712 Characteristics of Secured Short-Term Loans 712 Use of Accounts Receivable as Collateral 713 Use of lnventory as Collateral 715
-» REVIEW QUESTIONS 717 Summary 717 Opener-in-Review 718 Self-Test Problem 719 Warm-Up Exercises 719 Problems 720 Spreadsheet Exercise 726 Integrative Case 7 Cosa de Diseno 727
Contents 31
Special Topics in Managerial Finance 729
17 Hybrid and Derivative Securities page 730
Nokia Corporation —Nokia Calls on Convertible Bond Market for Help page 731
UBJ Overview of Hybrids and Derivatives 732
-» REVIEW QUESTION 732
Uni Leasing 732
Types of Leases 732
Leasing Arrangements 733 in practice I Focus on Practice: Leases
to Airlines End on a Sour Note 734
Lease-Versus-Purchase Decision 735 Effects of Leasing on Future Financing 739 Advantages and Disadvantages of Leasing 740
-> REVIEW QUESTIONS 741
UBI Convertible Securities 741
Types of Convertible Securities 741
General Features of Convertibles 742
Financing with Convertibles 743 Determining the Value of a Convertible Bond 745
REVIEW QUESTIONS 747
U&3 Stock Purchase Warrants 747
Key Characteristics 747 Implied Price of an Attached Warrant 748
Values of Warrants 749
-» REVIEW QUESTIONS 751
UBI Options 752
Calls and Puts 752
Options Markets 752
Options Trading 753 Role of Call and Put Options in Fund Raising 754
Focus on Ethics: Options Backdating 755
Hedging Foreign-Currency Exposures with Options 755