FINANCIAL MANAGEMENT Principles and Applications FOURTEENTH GLOBAL EDITION Sheridan Titman Arthur J. Keown John D. Martin i rs ———— . ¥| Financial Management Principles and ApplicationsThe Pearson Series in Finance Beh DeMaren Corporate Fince} Corperate Finance: The Core? Rerk/DeMaren/larfort Fuaamenials of Corporate Finance" Brooks Finacial Mangement: Core Concepts* CopelandWestoniShastet Financial Theory anel Corporate Policy Docfman/Cather JInureduetion to Risk Management ‘ond Insurance EakinsMeNaly Corporate Finance Online? Eitear’Stonehill/MofTelt ‘Muhinotional Business Finance™? Faboni ‘Bund Markets: Analysis ana Swategies Foerster Fingncial Managersent: Concepts and Applicarions® Haugen “The fuecient Stock Markets Whut Pays Offend Why ‘Atxdera Investment Theory Holden Escel Modeling in Corporate Finance Excel Modeling in lavesnnents Hughes MacDonald dinernauional Banking: Text and Cases Halt Fandanentals of Futres ana Options Market Options, Funres, an Other Derivaiest Keown Personal Finance: Turning Maney ino Weatiit Keown/MartinvPetty Fourdasiou of Finance: The Logie id Practice of Financial Management™* Madura Personel Finance® Marthinsen Risk Takers: Uses and Abuses of Finreial Derivatives McDonald Derivatives Markets Fundamentals of Derivutiees Marteis MishkinvEakins Firwncial Markets end Institutions + ‘MotTetuSonehil¥/Eiteman Fundamentals of Multinational met Pennacchi There of Asset Pricing Rejda/MeNamara Principle of Risk Management and Insurance utter Fanclamentats of Investing ® Solnik/McLcavey Global lnvestments Titmun/Keown/Martin Financial Management: Principles and Applications imarvMatin Valuation: The Art and Science Gompanate Investmen! Deetsions Westor/Mitchell/Mutherin Taleuwers, Restructuring nd Corporate Gnernnee ‘AunteerSonvet Principles vf Managerial Fimance*t "denotes titles with MyLab Finance. Log onto mw.myfinaneelubcom (o lea more ‘eenotes the availablity of a Global Edition ‘Scanned with CamScannerFourteenth Global Edition Financial Management Principles and Applications Sheridan Titman University of Texasat Austin Walter W. Meallister Cencenial Chaitin Financial Serves Arthur J. Keown Virginia Polytechnic Iastiute sna S Alucunj Disinguished Professor apd R. B. Pan Professor of Finance John D. Martin Baylor University (Carr P. Collins Chair in Finance Pearson alow Eglaad + Landon + Now Yk Hexen Sun Pacis» Tonia Sydney = Dub “ebyo Sel Tae! = New Delis Cape Towa SPs Mecca Cy * Mt Ame» Munch + Pas Sian ‘Scanned with CamScannerwh Hoos nay Sek ste May Usk ates ei stn et cig ne er ear net oe SUT ne Ne MUA TLS ADA! ee pera A arr Sees svn nym mt et tt et intranet nt rr ic mle Draeseran damages wsener a sng oteforncrtecion nee ean emer net Ane Sr Spray ee jad ero Conese lity rineieed cree eH fen tpn he reese ae nm en oa Te am hc Tm nen Serum oven USA sularaoenrs Ts st heer posed Horta be Net Coven | choewntncmneLed deus biota ew wy ina ete Tn i Hann nb ei Po A 18 er abe inti ame: Pcs sn tin Bb SBN ec a ar nnn Sa lst eit en net opt passin aisle smomaaliptone met ay femora a eager ee tC dc pntine shane remeron me Leap my ian em Sn Sink Ses Lo EINES. pack ttt es in at br pebcpoeny of ezmpessernon Tar arb esanaterphn) Aiea naeecbren 8 Pek meron Fase er pea Daal id tn ‘eae erty imines tc oes tah bu naan ream any mace Us ok my LTS BS ite macs aarti tiakivmalal tra te DAbh Lb ‘Scanned with CamScanner‘Toe fomtconth Glo Editon ein of Fnoslal Managenten: Prniples and Applcarion i dicats 4 onliee—te anes wba ave us the most ny paren’ wife (Meg), wel sons (Fever, Ele, un Gram) ‘Sheridan Titman orb, Emily anal Arie ArtburJ. Keon To the Martin women (wife, Selly, ard dager’ Mel), men (ems Davi and Jess cad doops (grandsons Lake ad Burke) Johw D. Manin ‘Scanned with CamScannerBrief Contents Part 1 qnroduction (© financial Management art 1 warren? ocpinance 34 Gating giortedPe jnciples of Fin ren 2 toed Financial Markels 50 Firms and the CHAPTER 3 . . Fe tanding Financia Statements 70 cuapTER 4 . Financial AnalysisSizng Up Fie Performance 110 Part 2: Valuation of Financial Assets CHAPTER 5 ‘The Time Value of Money—The Basics 160 CHAPTER 6 ‘The Time Value of Money—Annuities and Other Topics 190 CHAPTER 7 An Introduction to Risk and Return—Hlistory of Fi Market Returns 224 a CHAPTER & Risk and Return—Capital Market Theory 254 CHaPter 9 Debt Valuation and Interest Rates 286 CHAPTER 10 Stock Valuation 332 ‘Scanned with CamScanneromer courcnts| 7 gpg Part 3: Capital Budgeting CHAPTER 14 Investment De sion Criteria 360) CHAPTER 12 Analyzing Project Cash Flows 404 CHAPTER 13 Risk Analysis and Project Evaluation 440 CHAPTER 14 ‘The Cost of Capital 476 Part 4: Capital Structure and Dividend Policy CHAPTER 15 Capital Structure Policy 514 CHAPTER 16 Dividend and Share Repurchase Policy 558 Part 5: Liquidity Management and Special Topics in Finance ——— CHAPTER 17 Financial Forecasting and Planning 584 CHAPTER 18 Working-Capital Management 608 CHAPTER 19 International Business Finance 638 CHAPTER 20 Corporate Risk Management 664 Appendices Available in MyLab Fi Glossary 698 Indexes 707 ‘Scanned with CamScannerblank This page is intentionally left ‘Scanned with CamScannerContents + Introduction to Financlal Management Part ec ee, Wapran 1 Ming Stated — Principles of Finance 34 Fis ose 1 Moy May Teme Vato 5 FD) yo Thera deo Risk: Retuen Tradaotl 35 TA) oy 90 Cash Flows Aro the Source of Vaiua 35 TR )sooni a Market Prices Metis Intormalion 3% Divo Indvidaals Respond to tncantives 35 1.1 Finance: An Overview 96 What is Finance? 36 Why Sted Finnnen? 35 1.2 Typesct Business Organizations 37 Sole Proprictarship 38 Partnerstig 38. Corporation 38 ‘Mot for Prot Crganizction 39 Co-perative 40 ow Does Finance FA ino the Firm's Orgeizatinal Stacie? 49 1.3 The Goal of the Firanctal Maruager 41 ‘Maximizing Stelle Wealth 41 Ethical Corsceratons in Corporate Finance 42 ‘Regulation Aimed at Mching ta Goal ofthe Frm lors 1.4 The Five Bas‘ Principles of Finance 43, Prinple 1: Money as a Time Value 43 Princple 2: There ga Fisk-Retur Traceeft 44 Principle 3: Cash Flows Are the Source of Value 44 Prine 4: Market Prices Reflect Information <5 Principle 5: Iniiduals Respond to Incentives 45 Chapter Summaries. 47 Study Questions 49 CHAPTER 2 Firms and the Financial Markets 50 ElPincpe 2: There isa Risk-Return Tradeot 51 EXPoncple 4: Market Prices Reflect Information 51 1 Poncpoto 5; Individuals Respond to Incentives 51 21 The Basic Stucture of Financial Markets 52 22 The Financial Marketplace: Financial Insitutions 53 Commercial Banks: Everyone's Financial Marketplace 54 Nonbank Financial Intermediaries 54 FINANCE FOR LIFE: Planning for Retirement 56 23. The Financial Marketplace: Securities Markets 57 How Securities Markets Bring Corporations and Investors Together 58 Types ol Securities 59 FINANCE IN A FLAT WORLD: Where's the Money Around the World 64 Chapter Summaries 66 Study Questions 68 ‘Scanned with CamScanner10 coments | BOAR TENT qanch SmveIno Understanding Fin 1 Earn en ne te! 7 eee ut to neertt¥O8 se neta ese ss Be aan ectracn snes ry ys ves 78 32 thalrcomestscnaa! 74 ay tcl Bae 8 Ramee eae Sea GaP one Earns wneganent 77 22° comorate faes 72 Corin Toco OTE 72 ae 79 Felina 1 ales CP Jang an Awa TX . tar en oe setrates 0 3A Me potoce Sheet 81 The alee Sato. Basu Bt Feta et vioin Cet ty Fac fete Halos ankle 7 FINANCE FOR LIFE: Preparing» Balance Shee a fera Basins OB 35 TmacashFlowsistonent 90 Sources and Uses of Gash $0 HJ. Boswell's Cash Flow Statement 92 FIMANCE INA FLAT WORLD: GAAP ¥s IFRS 93 Chapter Summaries £9 Study Questions 102 ‘Study Problems 103, Mini-coce 107 n jnenclal Statements? 73 nd an Income Statement CHAPTER 4 Financial Analysis—Sizing Up Firm Performance 110 EXPrrcice & Cash Flows Are the Source of Value 111 Bi Prope ¢: Market Prices Reflect Information 111 E1Proopio 8; Individuals Respond to Incentives 111 44 Why Do We Analyze Financial Statements? 112 42 Common-Size Statements: Standardizing Financial Information 113 ‘The Common-Size Income Statement: H..) Boswell, nc. 113 ‘The Common-Size Balance Sheet: H.J. Boswell Inc. 114 43° Using Financial Ratios 115 Uguitity Ratios 115 Capital Structure Ratios 121 ‘Asset Maragement Efciancy Ratios 122 Proftadility Ratios 125 ‘Market Value Ratios 133 FINANCE FOR LIFE: Making That PNANGENA FLAT WORLD: ain oat Accounting Standards 137 ‘Samming Up the Financial nziysts ol H, J. Boswell, Inc, 137 ‘Scanned with CamScanneri aol as omen | 44 14 fotecton 4 Pentre Menehonark 19 Arsen 18 oor Foes Copier 140 15 Lemans of ain Anatata HAL (napter Seren 14 ‘shat Oveaons 140 ‘aay Pyobieme 18 Mod Cove 180 ee nicial Assets Part 2: Valuation of Fin 2s chapTen S The Time Value of Moncy—The Basics 160 Dv scoe 1 Money Has @ Tee Vala 161 51. Usiop Tinlines to Visulea Cash Flows 162 52 Companifing and Future Value 164 Componnt ners! and Tima 165 Comin nerost and tho ntorest Mata 165 Techniques lr Moving Monoy Through Tima 165, ‘xpi Compaunira ta Things Othr Tan Money 167 Compound intrest wir Sterter Compound Periods. 167 FINANCE FO LIFE: Gelling on the Property Ladder 171 53. Discountingand Prosoa! Value 171 The Mechanics of Discounting Future Cash Flows 172 To Ataignal Types of Discounting rctlems 174, The Rule 072 175, SA Making Interest Rates Comparable 17 Cetclating the inlerest Rat end Converting oan EAR 179 To the Exreme: Continuous Compounding 180 FINANCE IN A FLAT WORLD: Financial Access at Bint 181 Chapter Summaries. 182 Study Questions 184 Study Problems 185, IMini-tase 189 CHAPTER 6 The Time Value of Money—Annuities and Other Topies 190 Bp eropis 1 Maney Rasa Tne Value 191 EXP irciole 3 Cash Flews Are the Source cf Value 191 6.41 Annuities 192 Ordinary Annuities 192 ‘Arerized Loans 200 ‘Annuities Due 201 FINANCE FOR LIFE: Saving for Retirement: Being an Exly Bird 204 62 Pempetulies 205 Catcutatng the Prosent Vato ofa Level Pergetuiy 205 Calculating te Present Valua ofa Growing Peretaty 205 63 Complex Cast Flow Streams 208 Ghapter Summaries 212 ‘Study Questions 213, Study Problems 214 Mini-Case ‘Scanned with CamScanner‘CONTENT | wy CHAPTER os Me a Intuction - A ignehietor Markel Returns xr wepio2 Brmcpet 1A We sey oF 12. ABfettsovttS Frnancal Rsk Tolerance 238 Fe Vet hverage Rates of Retum 209 7 cama Te NO Ne ‘average Ratect Return 239 German Areeae” 20 “1a What Dberines Stiles? 2 Tne ecient Mare HOO ge PertctyEficert? 244 Do We Expect Prancel Markets 10 8 sett eeretccency Wat oes neEweece Stew? 2 Croptersumrsies 247 ‘Study Questions 250 Study Probleras 250 Winitase 258 cHapTeR B Risk and Return—Capital Market Theory TBPmoxie 2 Theres a Rsk-RetrnTeadeott 245 Dirincgio-+ marie Pees Rect atcmation 386 LL Forte Reus andPctisio Rsk 258 Caleuitng teGpeced Rett a Pte 256 alaing Poo Rsk. 258 Caleiing te Standard Devon et Portales Mtns 200 FINANCE INA 82 Spslenati isk andthe Market Pertloo 265, Giversiicaton and Unyetamatc en 2, Diversion and Satomate Rs 267 ‘plemate Rskand Bea 267 aq, Tinie Paa Ba2es To Seeuity Market Line ad te CAPM m Using th CPA i Esfmate Exec Rt cg eet set neces as teen 272 Study Questions 277 Siuty Problems. 273 Mini-case 2a 254 lnucenatinest Diversification 364 CHAPTER 9 Debt Valuation and ‘Scanned with CamScannercomers | 19 8.1 Qvsrlow of Conporae Dobt 200 [ayo Ment th ala Fasc rk 200 ono Meni tho Pole hanchs Mskat 280 Thask Yond Feats 298 FANG: FONE: Doylagn House inthe United Kingdon | 205 92 YoWdng Corporat Debt 297 ahi Hones by counting Flu Cosh Flows 257 Sop 1: Oetonmin Hoooléer Cash floss 238 ‘Sle 2: Eslknaa te repro Discount ate 238 ‘Slop $; Cee he Present Va Lrg the Discosred Cash Flow 301 Valuation: Four Key Rlatonships 905 Aohionshp 1 3085 Fehtonstip2 307 Aelanstip3 307 Rehanstip# 300 94 Typesot Bonds 310 Secured VerssUesecured 310 Prerty of Cains 310 Ina ering Market 310 ‘Aerormal isk 310 Coupon Level 310 Amatizog oc Nawamating 310 Converity 311 FINANCE IN A FLAT WORLD: tatemational Bonds 312 95 Determinantsaf interest Rates 312 Inflion and Real Versus Nomi intrest Rates 312 Inttet Rate Dexeminar's—Breakrg NOown 31 ‘The Maturity Fisk Premium athe Team Stcture of hevest Rates 317 Chapter Summaries 322 ‘Study Questions 325 Study Problems 327 Minl-ase 301 aa CHAPTER 10 Stock Valuation 332 Diirncpe 1 Money tas a Time Value 13) [Dimope 2 There tsa Risk-Reward Tradeatt 33) BiPrecoe 5 Cash Flows Are the Source of Value 33 Diivrcie s Market Prices Reftettoformation 393 Dhropes indviduts Respond to incentives 335 101 Common Stock 334 Characenstes of Common Stock 34 HAUGRCE FOR LIFE Stak Valuation Practices Scientific Methods or Enutional Rextons 338 Agency Costs and Common Stack 338 Voting Common Stock Using te Osco Disitend adet 36 102 The Comparables Approach ta Valuing Common Stack 243 Dafiang tne PIE Ratio Valuation Model 343 ‘What Detomines ne PE Rate fr 2 Stack? 24 ‘AnAsce on Managing fot Saree’ Value 47 ‘Alor of Caution About PE Rates 347 10.3 Pretered Stock 347 Features ol Prelened Stuck 347 Valuing Prefered Stick 348 ‘A Quick Revew. Vating Bonds, Prefered Stok, and Commen Stock 350) ‘Scanned with CamScanner“ cones | Gina Chapter Sunes 959 Study Questions 958 Study Problems 950 ‘wicaso 959 Part 3: Capital Budgeting cHaAPTER 11 ‘5 360 Investment Decision Criteria a EXpincie 1; Money Has a Time Valve [Pincice 2: Theres 2 rist-Retare Troaeot! 361 DPincpes: cach Flows Aro the Souree of - pincise S: Individuals Respond to went 3 Typical Capital-Bedget Senge ae “Types of Capital Invostm2n! Projects 112 NetPresentVlue 364 Viste Pv ig Cer? 9 Cauda an vests WV , Tape vrs Matly Excuse eset eets$H6 113 Overtnvesiment Cerin 372 Proitailtyinex 372 Intemat Rate cf Retuin 374 Noi! ners a of Reture 389 FINANCE FOR LIFE: Higher Education Payback Ferd 384 Discounted Payback Period 365. ‘Summing Up the Aterative Decision Rules 387 414 Glance at Actual Gapital-Budgeling Practices 387 (Chapter Summaries 390 Study Cuestons 399, Study Problems 384 Minicases 401 an Investment in Yourself 384 CHaprer 12 Analyzing Project Cash Flows 404 Thence 3 casn Flaws re the Source of Valve 105 Ei) Prciple 5: Individuals Respond to Incentives 415, 124 Project Gash Flows 406 Incremental Cash Fows rena ters 07 Guetnes for Forecasting crenentl Cash Flows 407 122 Forecasting Project Cash Flows 409 Dealing wilh Depreciation Expense, Taxes, and Cesh How 409 Fou-Stap Procedure for Calculating Project Cash Flows 410 Computing Project NPY 414 123 inflation nd Capital Badgeting 416 Estimating Nominal Cash Flows 416 124 ReplacementPrject Casa Flows. 417 Category 1: Initial Outtay, OF, 417 Category 2 Annual Cash Flows 417 ‘Scanned with CamScannerbts |ramat coments) 45 Aeytocament Grange 418 FINA IN A FLAT WORLD: Eatering New Markets 422 tor Summaries, 423 Study Questors | 425 Shy Problems 425 intcasas 435 ‘Appendic. The Modified Aecolerated Cost Recovery System 433, CHAPTER 13 Risk Analysis and Project Evaluation 440 Dprcele 1: Maney es aTine Value 441 [iPinctie 2: teeretsa Risk-eturn Tradeott 441 Tlic 3: cash Flows Are the Source of Value 31 13:1 The Importance of isk Analysis 442 12 Tools for Arayzng he Risk of Prejct Cash Flows, 443 Koy Concaps: Expected Vabes and Vaue ives 433 SeisiyArayss 44S Scenario Rais 49 Sir Arcyis 452 FRANCE IN AFLAT WORLD: Cureney Risk 454 133 Broak-Even Anaysis 454 Accounting Beck Sren ass 485, CashBreat-ven drahsis 459 NEV eak-Even Anahs 459 ‘peratio Lverageard ne Vlaiy ct Proect Caen Flows 452 104 fieal Options in Capt Budgeting 464 Tha Open Doty aac ota Pct 464 Ta Option i Expand a Projet 465 The pt in Rete Scale and Scope ck Prject 485 Chapter Summaries, 667 ‘Study Queens. 469 Study Problems 470 Mioktase 475 CHAPTER 14 ‘The Cost of Capital 476 TDP ow 1 Maney Mas a Time Vatos 477 Divecoe 2 Tare ts a Risk-Return Tradeott 477 Direc ve 2 Cash Flows Are the Source ot Value 477 Divrcoe + ttartet Prices fetiect information 477 DPrcve > Individuals Respond to Incentives 477 1A The CostotCapitat An Overview 478 Anesta’s Requred Rtn and te Firm's Coat of Capital 479 WACE Eaten 479 Three-Stp Proce tr Estimating a Frm’s WAC 480 142 Determining the Firm's Capital Srecture Weights 481 143 Estimating the Cost of Individual Sources of Capital 425, The Costet Dett 435 The Coster retort Egaty 435 The Castel Common Equty 425 ‘Scanned with CamScannera ca PH a a a7 i ents HPT? 407 nro ons 400 ' ‘notation Costs ne ce Fata Om nape saronaies_ 604 stony tvetors 7 say Potiers 508 Mica 512 Part 4: Capital structure and Dividend Policy 15 CHAPTER jicy 514 . Capital Structure: Pol ae cle 2; There ts a Risk-Fet sig Prec Cash Flows Are the Source of Value ; ntives 515. Defining a Firm's Capital ‘Stuctre S16 oe turn Tradeott 515 182 Capt Structure Theory 620 ‘APbs! Lok tra Modglam and Miler Capital Structure Theorem 539 Negi Bera and the MMA Capital Structure Theory 522 Capel Sout to Cost of uy, andthe Weigted Average Casto Capi ‘Why Cantal Structure mate's in Feality 524 2 Wang Fnaneng Owls When Manapers Ate Bt normed han Seren Managoralingleatons £20 ia 15.3 Why Do Capital Structures Ditfer Across Industries? 531 154 Making Financing Decisions 532 Benchmarking te Frm’ Capital Structure 592 Evaluating te Ect of Financial Leverage on Frm Earnings per Share 599 Using ine EI-EPS Chatto nye tha Elec cf Capital Suture on

objective 2. tcantty the kay dttorences among tha Tivo mojrlogal forms o! business, Organizations (pgs. 37-3) The Goal of the Financial ————+ objective 3. Understand the role of the financial anager vétun the frm and the goal for makin Manager (pgs. 41-49) finanoal chowes. pi] The Five Basic Principles o| ————+ opjective 4. Expisin the fe principles of finance that form the bass of financial enanagement for both Dbusnesses and individuals, Finance (pgs. 43-46) ‘Scanned with CamScanneroa te a tae 5 ty na tet . on Wace (Dirorire 7 Weare teh Gate totooe : : - (ot hws be beso oe a jamie . thu Pom Peet Wate Ste re oem me: eon cle 1 ttt Bp nse Every year the Volkswagen Group, based in Wolfsburg, Germany, delivers over 10 million vehicles to its cus- tomers across the world, This group is the largest car- maker in Europe and owns 12 well-recognized brands, including Audi, SEAT, SKODA, Beniley, Bugatti, Lambo- = ‘ghini, Porsche, and Ducafi. In ordes to run such a diverse portolio of businesses, its menagement is, regulary faced with a number of significant decisions: it Hes to evaluate potential new products, invest in BD projects, scour new locations to Set up production oF RAD facilities, and so on. Each of these daci- sions will affect the future cost and revenue of the business, influencing the amount of cash it generates. Therefore, ve view these 2s financial decisions, Financial menagement isan integral part of any business and impacts almost every olher business function Like Volkswagen, you make financial decisions in your own life, Whether you're evaluating the terms of a banks loan for housing or deciding between 2 master’s degree right after graduation and working ful time (or a year or two, you wil find that thase decisions use the same fundamental principles that quide business decisions ‘Scanned with CamScanner36 Panty | Regardless of Your Major = 7 su ita, your va ba tnt eel al pid veil or tn fe you vt wwe re 0 Welcome to the cian aw es at mee § World of Finance nie ‘carvarnons mony wins oo nena Oe PM cry at or at at ge By sce lve gr IHS ra - fe 0 Ao ration sv0h 85 aid ur onowees or oorpora eelgrass OO ate Crp 2 SUERTE Pan nc 9080 a rat 22 verte ner yur omen. og ah vr a hate Chon’ ‘Rewaarch Hospital, Moroove eng orm mI ca > 9 ae altord a new car or 0 eve hat 0 mn ma ne fact that you wail Soran het en route On rend a et pow ower ingaeaa of your a note Mere ane ow ener evowgnou ou / _ = oe Ee Finance: An Overview ee i and define the owe psent an overview ofthe fe nd define a er acl sdy of business finance. We also discuss the motivation ice the five principles of finance: To jest cso 2rese by thes Raine nrc adi ino What Is Finance? ‘exon Fence is the say of how people ae businesses evaluate investment gai niet fun hem. Our iteration fan ineestment is ute bron. In 2016, when Ftbitiiodaced the Fat Blaze. an ety foused smart, ns cles making onto in The frm had to devote considerable expense to designing, producing, and markeling the smart- ‘slvr with the hope tha it Would evertully copture a sufficient amount of market share from the Apple Wate and Android Wear smartwatch to make the investment worthwhile. But Fitbit sso makes aninvesiment decision Whenever i iresa fresh new graduate, knowing that it will be payne salary fora east six months before the employee will have much to contribute. ‘Thus, three besic questions are addressed by the study of finance: 4. What long-term investments should the firm undertake? This area of finance is generally refered os capital budgeting, 2. How should the firm raise money to fund these investments? The firm's funding choices are gonensly referred to. capital structure devisions, 4 How can he fen best manage its ca flows as they arise in its day-o-duy operations? This area of Gnareis gencrally refered to as working capital management, We'll be looking at each of these three areas ‘pital seuctre, and working capital management Why Study Finance? of business finance—capital budgeting, (in the chapters ahead ‘erin bh your personal and your pofesionai ioe knowledge of finance wi ‘Those interes in mana rinagement will need to stud sonnel, organizational bet a nm aor a tiles aoe ee und human relations, all of which inven ree say ‘Sonne mene ne fe Forexnpts ne Senne ey +n 2019 Paypal and ‘Scanned with CamScannerCHAFEE | Oteg en a7 swe ele! SHU non 46 lave (Tale! rile wipe start-up, Hat mikes LAT Veen he oe S70on neerage—t0 informal sector workers In evelopragerurenes ‘ine paca aoe acces fo malsteam fnancol yervies ye ta lack ene es rae fincts ema satel declaw lp Paypot penetrate previ ungrateae funky sopuete" Aner example i ha of Volks ¥iges. wc in 2919 declled vo sree (vv ones at unveil for yours eveloen range fete vhicen "his is amar ing lo clue la apsaional pels des the Funcpean Urn fuse et intcral comsustion enpies ine anticipated competition. Sw ersten bow i pice proses, when to price therm a. naverisng ther, Because appressbve marketing cert rey tna Tt pncotes rears athe fire, should be vewed asan insestnem a te iss finance. Produetlon und operaions managervent major wil need Wo understand hs fest to tnamage Me's proton ar! conte ts inventory ad supply chin, All hese cs involv sky cokes tha late fo the management of monay overtime, which i the ental fs of finan ‘Anihongh finance fs primarily abou! the muragement of money, a key comperent of finunce iste mumagerent and interpretation of information. Indeed, i you pursue a carer in ‘rangement infornlion systems or aeccumting, Fiance managers ae likely tobe your most imparat liens For he student with entrepreneurial aspirations,an imlerstaning of finance fs essential — ‘afterall if you eat manage your finances, you wan't bein business very Long. Finally. an understanding of finence is important t9 you as an individ. The Fact that you are rein this book indicates that you undetstanl the impertance of investing in your- SA. By obtaining a enllege degree. you are clearly making sacrifices in the hope of making ‘yourself mare employable and improving your charces of having 2 rewarding and ctalleng- ing carcer, Some of you are relying on your own earings ard the carings of your parents 0 finance your education, whereas ober: are sing money of borrowing it from the Financial ‘markets, institutions tha facilitate financial ansactions. ‘Finacial decisions are everywhere, bh in your persona life and in your career. Although «he primary fics of this bock ison developnz the corpora franc= tools and techniques itt are used inthe business word you wil find tht much ofthe logic and many ofthe ons we develop and cxplcre along the way wll elo opply to decisions you will be waking in your personal if. n the utr, ech yeusrbsines and your personales willbe spentin the world of finance. Becatse you're going tbe living in tht world, iste to leam abou itsbesic principles. ‘We will take an in-depth look at these principles atthe end of this chapter. A you wil see, you do not need an extensive knowledge of finance to understand these principles, and, ‘once you know and understand them, they will help you anderstand the res of the concepts presented in this book. When you are lcoking at more complex financial concepts, think of these principles ss taking you back to the roots of Finance Concept Check | Aa 44 What ane te tr9e basis tyes ol sues Pal anes n business bal ae adstesged by the stidy of bashes fnarce? | 2 itienanirecncooie towne the ety of nance es. \ BB Types of Business Organizations "Although mumesous and diverse, the legal forms of business organization around the world have evolved around thre structural themes: the sole proprictorship, the partnership, and the Timited company. We will also discuss the charity and the cooperative inthis section, igo ii sonia ankn fronted eines nig Lbyiprveutrevaticesbow/PO7NELL cmos hip ne dconert 9940 Leal Lease ‘Scanned with CamScanner¥ ea What the 4% avn he en 9 age hey 08 et ny etal assets soe pro s Forming sole proprcgt*n fring msl pope eto Mp ti tet 8 sta et ae er nn ; rene Ta gre cometh mig je set me ny Bei ace yg « ee reptsnipABHCY IS money hy yc reo oo me 8 HEF Hae, cae there nae arc by HRW HAE HOY eg erence between prsinal a? b tine anni gsm Tbe rhe op roe ht ee nea bar wt Sassen are taxed at ie anrcexof financing for 80 Proprictorshins Se sare a et fe na ene the ee 197 i fesenads and family are | : (Sant eet nace tp Tantestrbiroopirpea rent of bosieses in Te acti Fira So ceo hin an nd umpire ite BUSSES dao apy” Sec ae Potent Partrarohip ‘ 1 mors persons who come tozethe A reel prey on sation 210 mo ese cat co-owner forthe purpose oF OTA goneral partnership and its owners with respec fy Bi here a Ts primary point cf distinction fom aso propos bene abt for df oe raore than one ove. Just ike with 3 “sole proprietorship ye ‘pewonal income. An importa advantage of the yorge vs ownership. as well as financing from mule is that the partnership has more I pris ofthe partnership are taxed 35 San ess toequily, stipis that it provides access 0 equi sat in eum for paren shares, orvnits of ones ete In a Fimited partnership, tiere are wo classes of part limited. The 1 partner actually runs the business an faces unlimited liubiity forthe firm's debi, Jira he lined partners ble only up to he amount the mite parner invested, Mg i jst as that OF the sole propri 'e partnership is tied to the life of the generu! partner, just as crop cousiptceea the life of te owner. In addition iis dificult to transfer ownership of he partner’ i i es the formation of a new part. al partner's interest in the business—this generally requires t ah iced to dissolve the partnership, although finding a buyer may be difficult, Corporation very large sums of money are needed to build a business, then the typical organizational form chosen isthe corporation. The major boost for this type of business organization Was during the curly 1800s when steam engines made lucrative business options out of large railrocds und shipping companies. The corporation legully functions separately and apart from its owners (he shareholders, also referred to as the stockholders), As such, the corporation can indiv dually sueand be sued and car purchase, sell, or awn property. and its personnel are subject to criminal Punishment for erimes commited in the name of the corporation. Sine ate Mee primary advantages of this separate Tegal status. First, the owners’ Habiliy is confined! to te amount of their investment in the company. In other words i ‘aprietoships-continuc-to-incrcasc-in-aumbery ipdeasrsoiness cums fats ha al status-oFsale-prupricorship-wb-at hm ‘prilonship-vb datum | Sap “aap wib nik satus hepstheatngscomsiscomhnspccen ot try “hups:ftredingecun omic rumfindia/percent-ol-firms-with Ice. “afvale ‘Scanned with CamScannerCHAPHEN YF cowen Stites 99) 1h ater tapen enn ee ai sepal sta for the corporation Is that te Ife of the bostess fe mat uo have heen operating antar thle etracture since sixth century and are teow years cht Finally, these Wo nlvnptnges result In w thi oatvantage, the ease of iveh easter to eamviaice inves thelr money Ie a corporation hey can Tove 1x what they Hnvest nnd thut they eum easity soit svt they Arne Aha he Hyon stow La they wish 40 lo 30, ‘he compotion is Kull owned by Is current set of etackholiers, or onners, who elect soul neatnere.Thealretor ten appoint mangers who ste responsible or determining the sear nwetnr and pices. Abhough even very smal firms can be organized as corporations, ray the fag firms tha nec orate lange sums of money for investment and expan se that thiserganiational form, Ax il, ths isthe legal form of busines that we wil be examining mist frequently im his textbook. “neat d-vthacks of the conparate form ithe dovble taxation of eamings that ae paid cut ne form of diiends, Whcn tcomportion ears a profit it pays taxes on that profi (ne nt tasaion ef earnings) ond pays some ofthat profit back to the shareholders in te form of dewemts Then the shareholders pay personal income taxes on those dividends (the second eration fearing), Ia contrast the eamings of propritorships and partnerships are rot subject to double tation, Needless to say this i 8 major disadvantage of corporations. Th the United States, an altastve altetive © the corporation fora small business the timited ability company (LLC), « cross beoween 3 partnership and a corporation. An LLC embines the ax benefits of a parnership (no double taxation of earnings) with the limited Tabily benefit of = coxporation tae owners alti limited to what they invested), Bexinse LLCs operate under sate las, boi the states and the Internal Revenve Service (IRS) have rales for what qualifies i an LLC, and differem states have diferent res. Further, tee i a distinction betveen a private limited company and a public limited company. A private Fimited company is net registred on any stock exchange and therefore ste chares are not publicly traded. They can only be traded under private arrangements with infu agreement, Family owned firms tend to be private Himited! companies. By contrast 8 public limited company is registered ona stock exchunge and its shares can be bousit and woud by anyone. This resulis in roguation to protect sharcholders’ interests, which adds to ont. For example, a company listed onthe main lis: ofthe London Stock Exchange can be Expected to spendat feast an additional £1 milion on accounting and disclosure related ocuvt ties to meet these legal requirements “The corporation isthe most successfel form of busines organization across the wort. is the business form that provides the casist secess to capital. Asa result its the most common hosice for fies tha are growing and nee to raise money. Por example, the market value of Mi- «rose in ist quarter of 2020 was above S13 tlio, Acconding to the Work! Bank's estimate this is higher than the GDP of 170 countries in the world, Not-for-Profit Organization A not-for-profit orgs ition (NPO) is created cause, NPOs come in all shapes and sizes: they Nations, Oxfam, and Missionaries of Charity ani ih specific abjectives of promoting w social can be global organizations like the United agains crest mata a ty that goes against the interest of shareholders and even ae fiaee ancept Check | 1.4 Hiat e te tne principles oF inane? funder guisrg princi of ine of vest teh ie draketim tatenship, HOE TNS "at do we mean vtten we say tet merket pcos else v0 eagle Cb ‘haps tunw thst Seton tanpet te cu Ure few Wsoumeat ht _ Vanish 748393 UB T-facc-cwut-5S0elkom fash wc ‘Scanned with CamScannertort ae eoveign Enea Mata vee tt lations lems Mony tenn ran Witt sre a ey wen cea ate seer eate ea eee eh a lo re easnearmnate how or va Eaninawe? There fs a Risk-Ratum Tradoalf Ww" OF ngngh f Indlvidunls Respond to Incentives Lag firs aioe ek ans we pues bere ee ke ins iy prescient He of a es {g. Cash Flows Are the Source of Vale sgt. rm cick wedi of Poe managers are oem resid ty ga cans tetheSes a sar 0 tery me tng ha he Muy mann a earn whe it we es tm om MN applying the Principles of Finance 10 Chap Chapter Summaries Understand the importance of finance in your personal and professional = lives and identify the three primary business decisions that financial managers make. (pos. 26-27) SUMMARY. France is the study of how individanls and businesses allocate money over sime, Mretacecivises tt involve spending or eceiving money Row versus sometime inthe future What joss Tea ins bow ep yout ter undersandbow to make hase choices, both in your personal life anda a financial manager, ee eretsnmenaking process of planning and nranaging a firm's Yongatesm investments is called copia! baptng, Then of loog-tenm sources of funds used by frm to finance its op- caer eid iv eapital suucture. Working capital management involves managing the firm's SFevcterm invesiment ir assets an Fabltes and ensuring that tbe Fim has sufficient resources to maintain its day-to-day business operations Key TERMS Concept Grek 4.4 Capital budgeting, page 46 The Uesision- Working eapital management, page sabe reces sed analyze potest ives 36 Managemsn of day-rday operations and snus in fined asses deision related to working coptl nd short- Capital structure, page 36 The mic ong. 7 Omancing. term sources of funds used by te fm, Financial markets, page 37 Mechanisms thar allow people wo easily buy and self Financial clair. re Pat oreo 4 CUSTESS seigesecby the oy wes tere? fesgperarance careers ‘panchmestay of ace 08s FEE taentity tne key aitterences among the three major legal forms of business. (2o3.26-81) 1 SUMMARY: The sole propcictoship is a business operation owned and managed by a single | individual. Initiating this form of business is simple and generally does not involve any substantial } organizational costs The proprietor has complete court of te finn but rst be willing o assume full esponsibility [or its outcomes. ‘Srila othe Sole proprietorship. a general partnership i simply a coming together of two or snore individaals who lace untimited lability for their involvement in he partnership. The lined partershipis another form of partnership sanctioned by states to permit all bat one ofthe partners to have limited lability if this is agreeable toll pariners. The one partner with unlimited Viability isthe general pare. "A business takes the form ofa corporation when it has an increased need to raise capital from public invests. Although greater organizational cos and regulations are impose on this legal Entity, the corporation is more conducive to raising large amounts of capital. Limited licbitty, Coniinuty of life, and ease of transfer in ownership. all of which increase the marketability of the investment, have greatly contributed to attracting large numbers of investors 10 the corporate environment. The formal contol of the corporation is vested in the parties who evn the greatest ‘Scanned with CamScanner