Wiley Pathways Finance Reprint

How do financial markets and institutions affect businesses and individuals? How do firms raise funds? How can an individual use markets and institutions to meet their own personal goals? In order to answer these questions, a reader must have a strong understanding of financial markets and institutions. This concise book provides the necessary information, presenting the general principles of finance and showing how they are applied in the field.

Preface v Acknowledgements xii Part I: Basic Financial Principles 1 Introduction to Finance 1 Introduction 2 1.1 Why Study Finance? 1.2 What Is Finance? 3 1.3 Four Principles of Finance 5 1.4 The Financial System 9 1.5 Financial Functions 12 1.6 Types of Financial Institutions 15 1.7 Types of Financial Markets 18 1.8 Types of Securities 20 1.9 International Securities and Markets 24 2 Money and Interest Rates 37 Introduction 38 2.1 Overview of the Monetary System 38 2.2 The Federal Reserve System 40 2.3 The Development of Money in the United States 47 2.4 U.S. Money Supply Today 49 2.5 Money Supply and Economic Activity 53 2.6 Interest: The Cost of Money 56 2.7 Structure of Interest Rates 60 2.8 The Yield Curve 63 3 Time Value of Money 80 Introduction 81 3.1 The Math of Finance 81 3.2 Compounding to Determine Future Values 83 3.3 Inflation or Purchasing Power Implications 87 3.4 Discounting to Determine Present Value 88 3.5 Finding Interest Rates and Time Requirements 89 3.6 Future Value of an Annuity 92 3.7 Future Value of an Annuity Due 97 3.8 Frequent Compounding or Discounting Intervals 99 3.9 APR Versus EAR 100 3.10 Cost of Consumer Credit 102 4 Financial Statements, Cash Flow and Taxes 110 Introduction 111 4.1 Overview of Financial Statements 111 4.2 U.S. Business Organizations 112 4.3 Starting a Business 116 4.4 Annual Reports 117 4.5 Balance Sheet 119 4.6 Income Statement 124 4.7 Cash Flow Statement 126 4.8 Financial Statements of Different Companies 129 4.9 Our Federal Tax System 133 5 Analysis of Financial Statements 150 Introduction 151 5.1 Financial Statement Analysis 151 5.2 Ratio Analysis 152 5.3 Types of Financial Ratios 154 5.4 Du Pont Method of Ratio Analysis 174 5.5 Long-Term Financial Planning 177 5.6 Cost-Volume-Profit Analysis 178 Part II: Using Financial Principles in Business 6 The Basics of Capital Budgeting 189 Introduction 190 6.1 Overview of Capital Budgeting 190 6.2 Capital Budgeting Decisions 191 6.3 Capital Budgeting Techniques 196 7 Cash Flow Estimation and Risk Analysis 210 Introduction 211 7.1 Cash Flows and Competitive Advantage 211 7.2 Isolating Project Cash Flows 212 7.3 Approaches to Estimating Project Cash Flows 212 7.4 Risk-Related Considerations 219 7.5 Strategic Analysis 221 7.6 Real-Opinion Analysis 223 8 Managing Working Capital 232 Introduction 233 8.1 Identifying Working Capital 233 8.2 Operating Cash and conversion Cycles 234 8.3 Working Capital Requirements 239 8.4 Cash Budgets 243 8.5 Seasonal Versus Level Production 248 8.6 Management of Current Assets 251 8.7 Getting-and Keeping-the Cash 258 8.8 Accounts Receivable Management and Credit Analysis 261 8.9 Inventory Management 265 8.10 Technology and Managing Working Capital 267 9 Short-Term Business Financing 280 9.1 Strategies for Financing Working Capital 281 9.2 Factors Affecting Short-Term Financing 285 9.3 Short-Term Financing Sources 289 9.4 Computing Interest Rates 298 9.5 Asset-Based Lending for Short-Term Financing 299 9.6 Other Forms of Security 305 9.7 The Cost of Short-Term Financing 306 10 Risk and Rate of Return 316 Introduction 317 10.1 Historical Return and Risk for a Single Asset 317 10.2 Expected Measures of Return and Risk Self-Check 327 10.3 Historical Returns and Risk of Different Assets 328 10.4 Efficient Capital Markets 330 10.5 Portfolio Returns and Risk 333 10.6 Diversification 337 10.7 Portfolio Risk and the Number of Investments 339 10.8 Capital Asset Pricing Model 341 11 Capital Structure and the Cost of Capital 352 Introduction 353 11.1 Capital Structure 353 11.2 Required Rate of Return and the Cost of Capital 357 11.3 Weighted Average Cost of Capital 363 11.4 Making Capital Structure Decisions 366 11.5 Planning Growth Rates 367 11.6 EBIT/EPS Analysis 371 11.7 Combined Operating and Financial Leverage Effects 375 11.8 Other Costs and Risks 379 11.9 Debt and Equity 381 Part III: Stocks, Bonds, and the International Market 12 Stocks and the Markets: Trading Securities 388 12.1 Types of Common Stock 389 12.2 Preferred Stock 392 12.3 The New York Stock Exchange 394 12.4 Stock Transactions 398 12.5 Initial Public Offerings (IPOs) 402 12.6 Direct and Indirect Costs of Going Public 408 12.7 Trading Securities – Secondary Securities Markets 409 12.8 A Word on Commissions 413 12.9 Security Market Indexes 414 12.10 Inside Information and Other Ethical Issues 416 13 Distributions to Stockholders 431 Introduction 432 13.1 Dividends versus Capital Gains 432 13.2 Estimating future Dividends 433 13.3 Dividend Stability and Dividend Policy 434 13.4 Constant Growth Stocks 435 13.5 Reading Stock Quotes 438 13.6 Tracking Stocks 440 13.7 Evaluating the Corporation 441 13.8 Stock Options 444 13.9 Dividend Reinvestment Plans 447 14 Annuities, Bonds, Futures and Options 456 14.1 Annuities 457 14.2 Bonds 458 14.3 Bondholder Security 464 14.4 Other Types of Bonds 466 14.5 Bond Income and Strategies 469 14.6 Global Bond Market 471 14.7 Reading Bond Quotes 472 14.8 Futures and Options 473 15 International Trade and Finance 487 15.1 International Monetary System 488 15.2 European Unification 491 15.3 Currency Exchange Markets and Rates 493 15.4 Investing Overseas 496 15.5 Arbitrage 498 15.6 Exchange Rate Developments for the U.S. Dollar 498 15.7 Conducting Business Internationally 500 15.8 Financing International Trade 502 15.9 Other Aids to International Trade 511 15.10 Balance in International Trade 511 Appendices 523 Glossary 533 Index 555