Financial Management: Principles and Applications
9th Edition
Australian version
Sheridan Titman, Bomikazi Zeka, Arthur J. Keown and John D. Martin
Contents
Front matter
Cover
Title page
Copyright
Dedication
Pearson's Commitment to Diversity,
Equity, and Inclusion
Australian Adapting Author
Acknowledgements
Teaching students the Logic of Finance
Preface
New to this edition
A total learning package
Reviewer acknowledgment
Making the most of your resources
PART 1: INTRODUCTION TO
FINANCIAL MANAGEMENT
Chapter 1: Getting started—Principles of
finance
Introduction: Getting started—Principles of
finance
Learning objectives
Principles of finance
Finance Spotlight: Your money
1.1: Finance—An overview
What is finance?
Why study finance?
1.2: Three types of business organisation
Sole proprietorship
Partnership
Corporation
How does finance fit into a firm's
organisational structure?
1.3: The goal of the financial manager
Maximising shareholder wealth
Ethical considerations in corporate finance
1.4: The five basic principles of finance
The five principles explained
Summary: Getting started - Principles of
finance
Applying the principles of finance to
Chapter 1
Mind map summary
Summary of chapter objectives
Study questions
Chapter 2: Firms and the financial market
Introduction: Firms and the financial market
Learning objectives
Principles of finance
Finance Spotlight: Your money
2.1: The basic structure of the Australian
financial markets
2.2 The financial marketplace—Financial
institutions
Commercial banks: Everyone's financial
marketplace
Non-bank financial intermediaries
Investment companies
2.3: The financial marketplace—Securities
markets
How securities markets bring corporations
and investors together
Types of security
Stock markets
Financial markets and the Global Financial
Crisis (GFC)
Summary: Firms and the financial market
Applying the principles of finance to
Chapter 2
Mind map summary
Summary of chapter objectives
Study questions
Chapter 3: Understanding financial
statements, taxes and cash flows
Introduction: Understanding financial
statements, taxes and cash flows
Learning objectives
Principles of finance
Finance Spotlight: Your money
3.1: An overview of the firm's financial
statements
Basic financial statements
Why study financial statements?
What are the accounting principles used to
prepare financial statements?
3.2: The income statement
Income statement of H. J. Boswell Ltd
Connecting the income statement and the
balance sheet
Interpreting firm profitability using the
income statement
IFRS and earnings management
3.3: Corporate tax, personal tax and dividend
imputation
Calculating taxable income and company
tax payable
Personal income tax
Capital gains tax
Other taxes
Dividend imputation
3.4 The balance sheet
The balance sheet of H. J. Boswell Ltd
Firm liquidity and net working capital
Debt and equity financing
Book values, historical costs and market
values
Finance spotlight: Your money
3.5 The cash flow statement
Sources and uses of cash
H. J. Boswell's cash flow statement
Tools of financial analysis
Summary: Understanding financial
statements, taxes and cash flows
Applying the principles of finance to
Chapter 3
Mind map summary
Summary of chapter objectives
Study questions
Study problems
Mini-case
Chapter 4: Financial analysis: Sizing up
firm performance
Introduction: Financial analysis: Sizing up firm
performance
Learning objectives
Principles of finance
Finance Spotlight
4.1: Why do we analyse financial statements?
4.2: Common-size statements—Standardising
financial information
The common-size income statement: H. J.
Boswell Ltd
The common-size balance sheet: H. J.
Boswell Ltd
4.3: Using financial ratios
Liquidity ratios
Capital structure ratios
Asset management efficiency ratios
Profitability ratios
Market value ratios
Summing up the financial analysis of H. J.
Boswell Ltd
4.4: Selecting a performance benchmark
Trend analysis
Peer-firm comparisons
4.5: Limitations of ratio analysis
Summary: Financial analysis: Sizing up firm
performance
Applying the principles of finance to
Chapter 4
Mind map summary
Summary of chapter objectives
Study questions
Study problems
Mini-case
PART 2: VALUATION OF FINANCIAL
ASSETS
Chapter 5: The time value of money—The
Basics
Introduction: The time value of money—The
Basics
Learning objectives
Principles of finance
Finance Spotlight: Your money
5.1: Using timelines to visualise cash flows
5.2: Compounding and future value
Compound interest and time
Compound interest and the interest rate
Techniques for valuing cash flows at
different points in time
Applying compounding to things other
than money
Compound interest with shorter
compounding periods
Finance Spotlight: Your money
5.3: Discounting and present value
The mechanics of discounting future cash
flows
Discounting with shorter discounting
periods
Two additional types of discounting
problem
The Rule of 72
5.4: Making interest rates comparable
Calculating the interest rate and
converting it to an EAR
To the extreme: Continuous compounding
Summary: The time value of money—The
Basics
Applying the principles of finance to
Chapter 5
Mind map summary
Summary of chapter objectives
Study questions
Study problems
Mini-case
Chapter 6: The time value of money—
Annuities and other topics
Introduction: The time value of money—
Annuities and other topics
Learning objectives
Principles of finance
Finance Spotlight: Your money
6.1 Annuities
Ordinary annuities
Annuities due
6.2 Perpetuities
Calculating the present value of a level
perpetuity
Calculating the present value of a growing
perpetuity
6.3 Complex cash-flow streams
Summary: The time value of money—
Annuities and other topics
Applying the principles of finance to
Chapter 6
Mind map summary
Summary of chapter objectives
Study questions
Study problems
Mini-case
Chapter 7: Risk and return—An
introduction: History of financial market
returns
Introduction: Risk and return—An
introduction: History of financial market
returns
Learning objectives
Principles of finance
Finance Spotlight
7.1: Realised and expected rates of return and
risk
Calculating the realised return from an
investment
Calculating the expected return from an
investment
7.2: A brief history of financial market returns
Australian financial markets: Domestic
investment returns
Lessons learned
Australian shares versus other categories
of investment
Global financial markets: International
investing
7.3: Geometric versus arithmetic average
rates of return
Calculating the geometric or compound
average rate of return
Choosing the right 'average'
7.4: What determines share prices?
The efficient markets hypothesis
Do we expect financial markets to be
perfectly efficient?
Market efficiency: What does the evidence
show?
Summary: Risk and return—An introduction
History of financial market returns
Applying the principles of finance to
Chapter 7
Mind map summary
Summary of chapter objectives
Study questions
Study problems
Mini-case
Chapter 8: Risk and return—Capital
market theory
Introduction: Risk and return—Capital market
theory
Learning objectives
Principles of finance
Finance Spotlight: Your money
8.1 Portfolio returns and portfolio risk
Calculating the expected return of a
portfolio
Evaluating portfolio risk
Calculating the standard deviation of a
portfolio's returns
8.2 Systematic risk and the market portfolio
Diversification and unsystematic risk
Systematic risk and beta
Calculating the portfolio beta
Tools of financial analysis
8.3 The security market line and the CAPM
Using the CAPM to estimate expected
rates of return
Tools of financial analysis
Summary: Risk and return—Capital market
theory
Applying the principles of finance to
Chapter 8
Mind map summary
Summary of chapter objectives
Study questions
Study problems
Mini-case
Chapter 9: Share valuation
Introduction: Share valuation
Learning objectives
Principles of finance
Finance spotlight: Your money
9.1: Ordinary shares
Characteristics of ordinary shares
Finance Spotlight: Your money
Agency costs and ordinary shares
Valuing ordinary shares using the
discounted dividend model
Determinants of the investor’s required
rate of return
Determinants of the growth rate of future
dividends
9.2: The comparables approach to valuing
ordinary shares
Defining the price/earnings (P/E) ratio
valuation model
What determines the P/E ratio for a share?
An aside on managing for shareholder
value
9.3: Preference shares
Features of preference shares
Valuing preference shares
A quick review: Valuing bonds, preference
shares and ordinary shares
Summary: Share valuation
Applying the principles of finance to
Chapter 9
Mind map summary
Summary of chapter objectives
Study questions
Study problems
Mini-case
Chapter 10: Debt valuation and interest
rates
Introduction: Debt valuation and interest rates
Learning objectives
Principles of finance
Finance Spotlight: Your money
10.1: Overview of government and corporate
debt
Borrowing money in the private financial
market
Borrowing money in the public financial
market
Basic bond features
Finance Spotlight: Your money
10.2: Valuing bonds
Step 1: Determine bondholder cash flows
Step 2: Estimate the appropriate discount
rate
Step 3: Calculate the present value using
the discounted cash flow
10.3: Bond valuation—Four key relationships
First relationship
Second relationship
Third relationship
Fourth relationship
10.4: Types of bond
Basic bond attributes
10.5: Determinants of interest rates
Inflation and real versus nominal interest
rates
Interest rate determinants: Breaking it
down
The maturity-risk premium and the term
structure of interest rates
Summary: Debt valuation and interest rates
Applying the principles of finance to
Chapter 10
Mind map summary
Summary of chapter objectives
Study questions
Study problems
PART 3: CAPITAL BUDGETING
Chapter 11: Investment decision criteria
Introduction: Investment decision criteria
Learning objectives
Principles of finance
Finance Spotlight: Your money
11.1 An overview of capital budgeting
The typical capital budgeting process
What are the sources of good investment
projects?
Types of capital investment project
11.2 Net present value
Why is NPV the right criterion?
Calculating an investment's NPV
Independent versus mutually exclusive
investment projects
11.3 Other investment criteria
Internal rate of return
Modified internal rate of return
Payback period
Discounted payback period
Summarising the alternative decision rules
11.4 A glance at actual capital budgeting
practices
Summary: Investment decision criteria
Applying the principles of finance to
Chapter 11
Mind map summary
Summary of chapter objectives
Study questions
Study problems
Mini-cases
Chapter 12: Analysing project cash flows
Introduction: Analysing project cash flows
Learning objectives
Principles of finance
Finance Spotlight
12.1 Project cash flows
Incremental cash flows are what matters
Guidelines for forecasting incremental cash
flows
12.2 Forecasting project cash flows
Dealing with depreciation expense, tax and
cash flow
Four-step procedure for calculating project
cash flows
Calculating project NPV
12.3 Inflation and capital budgeting
12.4 Replacement project cash flows
Identifying cash flows for replacement
projects
Replacement example
Finance Spotlight: International
Summary: Analysing project cash flows
Applying the principles of finance to
Chapter 12
Mind map summary
Summary of chapter objectives
Study questions
Study problems
Mini-cases
Appendix: The diminishing value
depreciation method
Chapter 13: Risk analysis and project
evaluation
Introduction: Risk analysis and project
evaluation
Learning objectives
Principles of finance
Finance Spotlight: Your money
13.1: The importance of risk analysis
13.2: Relevant measures of risk in capital
budgeting
Measuring risk for capital budgeting
purposes, and a dose of reality
Finance Spotlight: International
13.3: Incorporating risk into the capitalbudgeting process
Risk-adjusted discount rates
Certainty-equivalent approach
Certainty-equivalent versus risk-adjusted
discount rate methods
Risk-adjusted discount rate and
measurement of a project's systematic
risk
13.4: Tools for analysing the risk of project
cash flows
Key concepts: Expected values and value
drivers
Sensitivity analysis
Scenario analysis
Simulation analysis
Probability trees
13.5: Real options in capital budgeting
Summary: Risk analysis and project evaluation
Applying the principles of finance to
Chapter 13
Mind map summary
Summary of chapter objectives
Study questions
Study problems
Mini-case
Chapter 14: The cost of capital
Introduction: The cost of capital
Learning objectives
Principles of finance
Finance Spotlight: Your money
14.1: The cost of capital - An overview
Investor's required return and the firm's
cost of capital
WACC equation
Three-step procedure for estimating the
firm's WACC
14.2 Determining the firm's capital-structure
weights
14.3 Estimating the cost of individual sources
of capital
The cost of debt
The cost of preference shares
The cost of ordinary shares
Estimating the rate of growth
14.4 Summing up—Calculating the firm’s
weighted average cost of capital
14.5 Estimating project costs of capital
The rationale for using multiple discount
rates
Why don’t firms typically use project costs
of capital?
Estimating divisional WACCs
14.6 Flotation costs and project NPV
Summary: The cost of capital
Applying the principles of finance to
Chapter 14
Mind map summary
Summary of chapter objectives
Study questions
Study problems
Mini-case
PART 4: CAPITAL-STRUCTURE AND
DIVIDEND POLICY
Chapter 15: Analysis and impact of
leverage
Introduction: Analysis and impact of leverage
Learning objectives
Principles of finance
Finance Spotlight: Your money
15.1: Business and financial risk
15.2: Break-even analysis
Accounting break-even analysis
NPV break-even analysis
Limitations of break-even analysis
15.3: Operating and financial leverage
Operating leverage
Financial leverage
Combination of operating leverage and
financial leverage
Implications of leverage analysis
15.4: EBIT—EPS analysis
Evaluating the effect of financial leverage
on firm earnings per share
Summary: Analysis and impact of leverage
Applying the principles of finance to
Chapter 15
Mind map summary
Summary of chapter objectives
Study questions
Study problems
Mini-case
Chapter 16: Capital-structure policy
Introduction: Capital-structure policy
Learning objectives
Principles of finance
Finance Spotlight: Your money
16.1: A glance at capital-structure choices in
practice
Defining a firm's capital structure
Financial leverage
How do firms in different industries
finance their assets?
16.2: Capital-structure theory
Yogi Berra and the M&M capital-structure
theorem
Capital structure, the cost of equity and
the weighted average cost of capital
Why capital structure matters in reality
The trade-off theory and the optimal
capital structure
Capital-structure decisions and agency
costs
Making financing choices when managers
are better informed than shareholders
Managerial implications
16.3: Why do capital structures differ across
industries?
16.4: Making financing decisions
Benchmarking the firm's capital structure
Can the firm afford more debt?
Survey evidence: Factors that influence
CFO debt policy
Summary: Capital-structure policy
Applying the principles of finance to
Chapter 16
Mind map summary
Summary of chapter objectives
Study questions
Study problems
Mini-case
Appendix: Demonstrating the Modigliani
and Miller theorem
Chapter 17: Dividend and share-buyback
policy
Introduction: Dividend and share-buyback
policy
Learning objectives
Principles of finance
Finance Spotlight: Your money
17.1: How do firms distribute cash to their
shareholders?
Cash dividends
Share buybacks
Personal tax considerations: Dividend
versus capital gains income
Non-cash distributions: Bonus shares and
share splits
17.2: Does dividend policy matter?
Why dividend policy is important
17.3: Cash-distribution policies in practice
Stable payout
Residual dividend payout policy
Other factors playing a role in how much
to distribute
Summary: Dividend and share-buyback policy
Applying the principles of finance to
Chapter 17
Mind map summary
Summary of chapter objectives
Study questions
Study problems
Mini-case
PART 5: LIQUIDITY MANAGEMENT
AND SPECIAL TOPICS IN FINANCE
Chapter 18: Financial forecasting and
planning
Introduction: Financial forecasting and
planning
Learning objectives
Principles of finance
Finance Spotlight: Your money
18.1: An overview of financial planning
18.2: Developing a long-term financial plan
Financial forecasting example: Ziegen Ltd
18.3 Developing a short-term financial plan
Example cash budget: Melco Furniture Ltd
Uses of the cash budget
Summary: Financial forecasting and planning
Applying the principles of finance to
Chapter 18
Mind map summary
Summary of chapter objectives
Study questions
Study problems
Mini-case
Chapter 19: Working capital management
Introduction: Working capital management
Learning objectives
Principles of finance
Finance Spotlight: Your money
19.1: Working capital management and the
risk-return trade-off
Measuring firm liquidity
Managing firm liquidity
Risk—return trade-off
19.2: Working capital policy
The principle of self-liquidating debt
A graphic illustration of the principle of
self-liquidating debt
19.3: Operating cycle and cash conversion
cycle
Measuring working capital efficiency
Calculating the operating cycle and cash
conversion cycle
19.4: Managing current liabilities
Calculating the cost of short-term financing
Evaluating the cost of trade credit
Evaluating the cost of bank loans
19.5 Managing the firm's investment in
current assets
Cash and marketable securities
Managing accounts receivable
Managing inventories
Summary: Working capital management
Applying the principles of finance to
Chapter 19
Mind map summary
Summary of chapter objectives
Study questions
Study problems
Mini-case
Chapter 20: Corporate risk management
Introduction: Corporate risk management
Learning objectives
Principles of finance
Finance Spotlight
20.1: Five-step corporate risk-management
process
Step 1: Identify and understand the firm's
major risks
Step 2: Decide which types of risk to keep
and which to transfer
Step 3: Decide how much risk to assume
Step 4: Incorporate risk into all the firm's
decisions and processes
Step 5: Monitor and manage the risks the
firm assumes
20.2: Managing risk with insurance contracts
Types of insurance contract
Why purchase insurance?
20.3: Managing risk by hedging with forward
contracts
Hedging commodity-price risk using
forward contracts
Hedging currency risk using forward
contracts
20.4: Managing risk with exchange-traded
financial derivatives
Futures contracts
Options contracts
20.5: Valuing options and swaps
The Black-Scholes option pricing model
Swap contracts
Credit default swaps
Summary: Corporate risk management
Applying the principles of finance to
Chapter 20
Mind map summary
Summary of chapter objectives
Study questions
Study problems
Mini-case
Financial Calculator
Financial Calculator
Financial Calculator Tutorials
Tutorial 1: Learning the General TVM
Buttons
Tutorial 2: Future Value of a Lump Sum
(Annual Compounding)
Tutorial 3: Future Value of an Annuity
Tutorial 4: Present Value of a Lump Sum
(Annual Compounding)
Tutorial 5: Present Value of a Lump Sum
(Monthly Compounding)
Tutorial 6: Present Value of an Annuity
Tutorial 7: Present Value of a Lease with
Residual Value
Tutorial 8: Bond Valuation (Semi-annual
Interest)
Tutorial 9: Yield to Call of a Bond
Tutorial 10: Yield to Maturity of a Bond
Tutorial 11: Internal Rate of Return (IRR) of
a Series of Cash Flows
Tutorial 12: Net Present Value (NPV) of a
Series of Uneven Cash Flows
Tutorial 13: Loan Payments (Monthly
Compounding)
Tutorial 14: Mortgage Payments and
Amortisation Schedule
Tutorial 15: Computing Payment, Interest
and Loan Balance after a Specific
Payment
Glossary
Footnotes