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Financial management principles and applications pdf

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CHAPTER 1 AN INTRODUCTION TO FINANCIAL MANAGEMENT 5 weighted average .. DOWNLOAD FULL PDF EBOOK here { vitecek.info }. . Financial management principles and applications 10th. 1. Financial Management Principles Applications 6th Edition pdf, Free Financial 1 test bank financial management principles and applications 12th edition. Financial Management Principles Applications 10th Edition pdf, Free Financial 1 test bank financial management principles and applications 12th edition.

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Pdf Financial Management Principles And Applications 10th Edition Download. Financial And Grants Management Basics management financial and grants . Principles And Applications [PDF] [EPUB] Corporate Finance Core Applications 3rd Edition Corporate Finance Core Principles and. Financial Management shows students the reasoning behind financial decisions and connects all of the topics in the book to the Five Key Principles of Finance.

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In contrast, the unlimited liabili: Between the extremes, the limited partnership does provide limited liability for limited partners, which has a tendency to attract wealthy investors.

Woodward, 4 Wheaton Enrons failure provides a sober warning to From the shareholders perspective one might ask what is employees and investors and a valuable set of lessons for wrong with achieving a higher stock price?

The problem is students of business. The lessons we offer below reach far that this can lead to a situation where investor expectations beyond corporate finance and touch on fundamental become detached from what is feasible for the firm.

Maximizing Share Value Is Not Always Thus, maximizing share value where the firms underlying the BeSt Thing to Do fundamentals do not support such valuations is dangerous If there is a disconnect between current market prices and business. In fact, it is not clear which is worse, having an the intrinsic worth of a firm then attempts to manipulate over- or an undervalued stock price. The problems associated with ma. These circumstances can economists.

Therefore, when developing our decision models, we will assume that weare dealing with the corporate form. The taxes incorporated in these models will dealonly with the corporate tax codes. Because our goal is to develop an understanding of themanagement, measurement, and creation of wealth, and not to become tax experts, in thefollowing chapter we will only focus on those characteristics of the corporate tax codethat will affect our financial decisions.

In a smaller firm, the same person mayfill both roles, with just one office handling all the du. The Treasurer generally han-dles the firms financial activities, including cash and credit management, making capitalexpenditure decisions, raising funds, financial planning, and managing any foreign cur-rency received by the firm. The Controller is responsible for managing the firmsaccounting duties, including producing financial swtements, cost accounting, payingtaxes, and gathering and monitoring the data necessary to oversee the firms financialwell-being.

In this class, we focus on the duties generally associated with the Treasurerand on how investment decisions are made. Oversee financial planning Corporate strategic planning Control corporate cash flow Treasurer Controller Duties: What are the primary differences among a sole proprietorship, a partnership, and a corporation?

Explain why large and growing firms tend to choose the corporate I form. What are the duties of the Corporate Treasurer? Of the Corporate Controller? While we will look at the process of raising capital in some detail in Chapter 14, lets spend a moment looking at the flow of capital through the financial mar- kets among the corporation, individuals, and the government. Figure examines these flows. The corporation receives cash in return for securities- stocks and debt.

The Interaction1. Initially, the corporation raises funds in the financial markets by selling securities-stocks and bonds; 2. Thecorporation then invests this cash in return-generating assets-new project; 3. The cash flow from those assets is eitherreinvested in the corporation, given back to the investors, or paid to the government in the form of taxes. Corporation Cash reinvested invests in the corporation in return- Securities traded generating 3.

One distinction that is important to understand is the difference between primaryand secondary markets. Again, we will reexamine raising capital and the differencebetween primary and secondary markets in some detail in Chapter To begin with, asecurities market is simply a place where you can buy or sell securities.

These markets cantake the form of anything from an actual building on Wall Street in New York City to anelectronic hookup among security dealers all over the world. Securities markets aredivided into primary and secondary markets. Lets take a look at what these terms mean.

A primary market is a market in which new, as opposed to previously issued, securi- Primary marketties are traded. For example, if Nike issues a new batch of stock, this issue would be considered a securities are traded. In this case, Nike would issue new shares of stock and receive Initial public offering lPO money from investors. An initial stock is sold to the public. Once the newly issued stock is in the pub- that already have commonlics hands, it then begins trading in the secondary market.

Securities that have previ- stock traded. For example, if you Secondary marketbought shares of stock in an IPO and then wanted to resell them, you would be The market in which stock previously issued by the firmreselling them in the secondary markets.

The proceeds from the sale of a share of IBM trades. That isbecause the only time IBM ever receives money from the sale of one of its securities is inthe primary markets. In our interview with Mr. Bleustein, paid on the firms large amounts of debt. Much of what he had to say related directly to the and stay illYolved with the company.

At the end of , main topics of this book. Specifically, he talked about the we had nearly , members. We also began a pro- companys strategies in the areas of investment decisions, gram of carefully managing the licensing of the Harley- working-capital management, financing decisions, marketing Davidson name.

He employees. We needed to let everyone in the organization insists that there is more to business than crunching the num- know what was expected of him or her, which led us to the bers; it is people that make the difference. Bleusteins development of our corporate vision and statement ofval- remarks can be summarized as follows: I strongly believe that the only sustainable corporate advantage a company can have is its people.

The extremely high level of debt incurred Today our two unions participate fully with the firms to finance the purchase placed the company in a very frail management in a wide range of decision making, includ- financial condition. The downturn in the economy, com- ing the firms strategies. To add to the prob- the use of a team structure at our vice president level of lems, the firms principal lender, Citibank, announced in management to make the decisions.

As a result, we elim- that it wanted out of its creditor position for the inated a whole layer from top management. We established a management team ruptcy. Specifically, they reflect nificant capital investments in new product lines, such as financing choices, investment decisions, and working- the Evolution engine, the Softail motorcycle, and most capital management. So, we invite you to join us in our study recently, the Twin Cam 88 engine, one of our current of finance and, in the process, learn about a company that engine designs.

Also, in we invested in new manu- has accomplished in real terms what few others have been facturing facilities in Kansas City, Missouri, and able to eLl.

The firms value state- As Needed. Objective ! To the first-time student of finance, the subject matter may seem like a col- lection of unrelated decision rules. This could not be further from the truth. In fact, our However, while it is not necessary to under-standfinance in order to understand these priluiples, it is necessary to understand these principlesin order to understand finance.

Keep in mind that although these principles may at firstappear simple or even trivial, they will provide the driving force behind all that follows. These principles will weave together concepts and techniques presented in this text,thereby allowing us to focus on the logic underlying the practice of financial manage-ment. In order to make the learning process easier for you as a student, we will keepreturning to these principles throughout the book in the form of "Back to the Principles"boxes-tying the material together and letting you son the "forest from the trees.

Why have we done this? The answer issimple: We are able to invest those savings and earn a return on our dollarsbecause some people would rather forgo future consumption opportunities to consumemore now-maybe theyre borrowing money to open a new business or a company isborrowing money to build a new plant. Assuming there are a lot of different people thatwould like to use our savings, how do we decide where to put our money? First, investors demand a minimum return for delaying conswnption that must begreater than the anticipated rate of inflation.

If they didnt receive enough to compensatefor anticipated inflation, investors would purchase whatever goods they desired ahead oftime or invest in assets that were subject to inflation and earn the rate of inflation onthose assets. There isnt much incentive to postpone conswnption if your savings aregoing to decline in terms of purchasing power. Investment alternatives have different amounts of risk and expected returns.

Investors sometimes choose to put their money in risky investments because theseinvestments offer higher expected returns.

The more risk an investment has, the higherwill be its expected return. This relationship between risk and expected return is shownin Figure We may have expectations of what the returns from investing will be, but we cant peer into the future and see what those rerurns are actually going to be. If investors could see into the future, no one would have invested money in the software maker Citrix, whose stock dropped 46 percent on June 13, Citrixs stock dropped when it announced that unexpected problems in its sales channels would cause second-quarter profits to be about half what Wall Street expected.

Until after the fact, you are never sure what the return on an investment will be. That is why General Motors bonds pay more interest than U. Treasury bonds of the same maturity. The additional interest convinces some investors to take on the added risk of purchasing a General Motors bond.

This risk-return relationship will be a key concept as we value stocks, bonds, and proposed new projects throughout this text. We will also spend some time determining how to measure risk. Interestingly, much of the work for which the Nobel Prize for Economics was awarded centered on the graph in Figure and how to measure risk.

Applications principles pdf financial management and

Both the graph and the risk-return relationship it depicts will reappear often in this text. A dol- lar received today is worth more than a dollar received a year from now. Because we can earn interest on money received today, it is better to receive money earlier rather than later. In your economics courses, this concept of the time value of money is referred to as the opporrunity cost of passing up the earning potential of a dollar today. In this text, we focus on the creation and measurement of wealth.

To measure wealth or value, we will use the concept of the time value of money to bring the future benefits and costs of a project back to the present. Then, if the benefits outweigh the costs, the project creates wealth and should be accepted; if the costs outweigh the benefits, the pro- ject does not create wealth and should be rejected.

Financial management principles and applications 10th

Without recognizing the existence of the time value of money, it is impossible to evaluate projects with future benefits and costs in a meaningful way. To bring future benefits and costs of a project back to the present, we must assume a specific opportunity cost of money, or interest rate. Exactly what interest rate to use is determined by Principle 1: The Risk-Return Trade-Off, which states investors demand higher returns for taking on more risky projects.

Thus, when we determine the present value of future benefits and costs, we take into account that investors demand a higher return for taking on added risk. That is, we will be concerned with when the money hits our hand, when we can invest it and start earning interest on it, and when we can give it back to the shareholders in the form of dividends.

Remember, it is the cash flows, not profits, that are actually received by the firm and can be reinvested. Accounting profits, however, appear when they are earned rather than when the money is actually in hand. As a result, a firms cash flows and accounting profits may not be the same. For example, a capital expense, such as the purchase of new equipment or a building, is depreciated over sev- eral years, wjth the annual depreciation subtracted from profits. However, the cash flow, or actual dollars, associated with this expense generally occurs immediately.

Therefore As a result, cash flows correctly reflect the timing of thebenefits and costs. Certainly some of the sales dollars that ended up with Cinna Crunch Pebbles wouldhave been spent on other Pebbles and Post products if Cinna Crunch Pebbles had notbeen available.

Although Post was targeting younger consumers with this sweetenedcereal, there is no question that Post sales bit into-actually cannibalized-sales fromPebbles and other Post lines.

Realistically, theres only so much cereal anyone can eat. The difference between revenues Post generated after introducing Cinna Crunch Pebblesversus simply maintaining its existing line of cereals is the incremental cash flows. Thisdifference reflects the true impact of the decision. In making business decisions, we are concerned with the results of those decisions: What happens if we say yes versus what happens if we say no?

Principle 3 states that weshould use cash flows to measure the benefits that accrue from taking on a new project. We are now fine tuning our evaluation process so that we only consider incremental cashflows. The incremental cash flow is the difference between the cash flows if the project istaken on versus what they will be if the project is not taken on.

And applications management principles pdf financial

What is important is that we think incrementally. Our guiding rule in decidingwhether a cash flow is incremental is to look at the company with and without the newproduct. In fact, we will take this incremental concept beyond cash flows and look at allconsequences from all decisions on an incremental basis.

Therefore, we will look closely at themechanics of valuation and decision making. We will focus on estimating cash flows,determining what the investment earns, and valuing assets and new projects. But it will beeasy to get caught up in the mechanics of valuation and lose sight of the process of creat-ing wealth.

Why is it so hard to find projects and investments that are exceptionally prof-itable? Where do profitable projects come from? The answers to these questions tell us alot about how competitive markets operate and where to look for profitable projects.

In reality, it is much easier evaluating profitable projects than finding them. If anindustry is generating large profits, new entrants are usually attracted. The additionalcompetition and added capacity can result in profits being driven down to the requiredrate of return.

Conversely, if an industry is returning profits below the required rate ofreturn, then some participants in the market drop out, reducing capacity and competi-tion. In turn, prices are driven back up. This is precisely what happened in the VCR videorental market in the mids.

This market developed suddenly with the opportunityfor extremely large profits. Because there were no barriers to entry, the market quicklywas flooded with new entries. By , the competition and price cutting produced lossesfor many firms in the industry, forcing them to flee the market.

As the competition less-ened with firms moving out of the video rental industry, profits again rose to the pointwhere the required rate of return could be earned on invested capital. Given that somewhat bleak scenario, how can we find good projects-that is, projects that return more than their expected rate of return given their risk level remember Principle 1. Although competition makes them difficult to find, we have to invest in mar- kets that are not perfectly competitive.

The two most common ways of making markets less competitive are to differentiate the product in some key way or to achieve a cost advantage over competitors.

Product differentiation insulates a product from competition, thereby allowing a company to charge a premium price. If products are differentiated, consumer choice is no longer made by price alone.

For example, many people are willing to pay a prernium for Starbucks coffee. They simply want Starbucks and price is not important. In the pharma- ceutical industry, patents create competitive barriers. Schering-Ploughs Claritin, an allergy relief medicine, and Hoffman-La Roches Valium, a tranquilizer, are protected from direct competition by patents.

Service and quality are also used to differentiate products. For example, Levis has long prided itself on the quality of its jeans. As a result, it has been able to maintain its market share. Similarly, much of Toyota and Hondas brand loyalty is based on quality Service can also create product differentiation, as shown by McDonalds fast service, cleanliness, and consistency of product that brings customers back.

Whether product differentiation occurs because of advertising, patents, service, or quality, the more the product is differentiated from competing products, the less compe- tition it will face and the greater the possibility of large profits.

Econornies of scale and the ability to produce at a cost below competition can effec- tively deter new entrants to the market and thereby reduce competition.

Wal-Mart is one such case. For Wal-Mart, the fixed costs are largely independent of the stores size. For example, inventory costs, advertising expenses, and managerial salaries are essentially the same regardless of annual sales. Therefore, the more sales that can be built up, the lower the per-sale dollar cost of inventory, advertising, and management.

Restocking from warehouses also becomes more efficient as delivery trucks can be used to full potential. Regardless of how the cost advantage is created-by econornies of scale, proprietary technology, or monopolistic control of raw materials-the cost advantage deters new market entrants while allowing production at below industry cost.

This cost advantage has the potential of creating large profits.

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The key to locating profitable investment projects is to first understand how and where they exist in competitive markets. Then the corporate philosophy must be aimed at creating or taking advantage of some imperfection in these markets, either through product differentiation or creation of a cost advantage, rather than looking to new mar- kets or industries that appear to provide large profits. Any perfectly competitive indus- try that looks too good to be true wont be for long.

It is necessary to understand this to know where to look for good projects and to accurately measure the projects cash flows. We can do this better if we recognize how wealth is created and how difficult it is to create it.

How do weEfficient market measure shareholder wealth? It is the value of the shares that the shareholders hold. ToA market in which the values ofall assets and securities at any understand what causes stocks to change in price, as well as how securities such as bondsinstant in time fully reflect all and stocks are valued or priced in the financial markets, it is necessary to have an under-available public information.

An efficient market is characterized by a large numberof profit-driven individuals who act independently. In addition, new information regard-ing securities arrives in the market in a random manner.

Given this setting, investorsadjust to new information immediately and buy and sell the security until they feel themarket price correctly reflects the new information. Under the efficient market hypothe-sis, information is reflected in security prices with such speed that there are no opportu-nities for investors to profit from publicly available information.

Investors competing forprofits ensure that security prices appropriately reflect the expected earnings and risksinvolved and thus the true value of the firm. What are the implications of efficient markets for us? First, the price is right. Stockprices reflect all publicly available information regarding the value of the company.

Thismeans we can implement our goal of maximization of shareholder wealth by focusing onthe effect each decision should have on the stock price if everything else were held con-stant.

Principles and pdf financial management applications

That is, over time good decisions will result in higher stock prices and bad ones,lower stock prices. Second, earnings manipulations through accounting changes will notresult in price changes. Stock splits and other changes in accounting methods that do notaffect cash flows are not reflected in prices. Market prices reflect expected cash flowsavailable to shareholders. Thus, our preoccupation with cash flows to measure the timingof the benefits is justified.

As we will see, it is indeed reassuring that prices reflect value. It allows us to look atprices and see value reflected in them. While it may make investing a bit less exciting, itmakes corporate finance much less uncertain. PRINCIPLE The Agency Problem-Managers wont work for owners unless its in their best interestAlthough the goal of the firm is the maximization of shareholder wealth, in reality, theagency problem may interfere with the implementation of tllis goal.

The agency prob- Agency problemlem results from the separation of management and the ownership of the firm. For exam- Problem resulting fromple, a large firm may be nm by professional managers who have little or no ownership in conflicts of interest between the manager the stockholdersthe firm.

Because of this separation of the decision makers and owners, managers may agent and the stockholders. They may approach work less energetically and attempt to benefit themselves in terms ofsalary and perquisites at the expense of shareholders.

To begin with, an agent is someone who is given the authority to act on behalf ofanother, referred to as the principal. In the corporate setting, the shareholders are theprincipals, because they are the actual owners of the firm.

The board of directors, theCEO, the corporate executives, and all others with decision-making power are agents ofthe shareholders. Unfortunately, the board of directors, the CEO, and the other corpo-rate executives dont always do whats in the best interest of the shareholders. Not only might tlley benefit themselves interms of salary and perquisites, but they might also avoid any projects that have risk asso-ciated with them-even if theyre great projects witll huge potential returns and a smallchance of failure.

Why is this so? Because if tlle project doesnt turn out, these agents ofthe shareholders may lose their jobs. The costs associated with the agency problem are difficult to measure, but occasionallywe see the problems effeCt in the marketplace. For example, if the market feels manage-ment of a firm is damaging shareholder wealth, we might see a positive reaction in stockprice to the removal of that management.

In , on the day following the death ofJohnDorrance, Jr. There was also speculation that Dorrance was the major obstacle to a possible positive reorganization. If the management of the firm works for the owners, who are the shareholders, why doesnt the management get fired if it doesnt act in the shareholders best interest?

In the- ory, the shareholders pick the corporate board of directors and the board of directors in turn picks the management. You have successfully signed out and will be required to sign back in should you need to download more resources.

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