Finance for Executives Managing for Value Creation,9780324274318

Finance for Executives Managing for Value Creation

by ;
Edition: 3rd
ISBN13: 9780324274318
ISBN10: 0324274319
Format: Hardcover
Pub. Date: 2006-04-12
Publisher(s): South-Western College Pub
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Summary

FINANCE FOR EXECUTIVES: MANAGING FOR VALUE CREATION, 3e is ideal for the future manager or experienced executive who recognizes the importance of using financial information to maximize firm value. Respected authors Gabriel Hawawini and Claude Viallet have translated their wealth of experience into a concise, analytically sound introduction to financial management that is neither too simplistic nor too theoretical. Based on modern finance principles, the book presents the most recent financial data and latest references with a level of practicality and rigorous analysis appropriate for today's experienced executive - without complicated formulas that have no direct application to decision making. Each chapter is self-contained - providing ultimate flexibility for teaching and making the book an excellent source for reference or self-learning beyond the traditional classroom. This book is perfect for executive education, executive MBA courses, or any course where you want to translate theory into practice or use a case approach. A strong problem-scenario approach presents concepts within the context of financial management problems that executives commonly face. In addition, consistent case studies analyze the same set of companies throughout the text to provide a common thread that reinforces learning.

Table of Contents

PART I: INTRODUCTION
Financial Management and Value Creation: An Overview
1(32)
The Key Question: Will Your Decision Create Value?
2(3)
The Importance of Managing for Value Creation
3(1)
The Saturn Story
4(1)
The Fundamental Finance Principle
5(3)
Measuring Value Creation with Net Present Value
5(1)
Only Cash Matters
6(1)
Discount Rates
7(1)
A Proposal's Cost of Capital
7(1)
Applying the Fundamental Finance Principle
8(5)
The Capital Budgeting Decision
9(1)
The Capital Structure Decision
10(2)
The Business Acquisition Decision
12(1)
The Foreign Investment Decision
13(1)
The Role of Financial Markets
13(5)
The Equity Market
14(1)
What Is Bad for General Motors Is Good for Volkswagen . . . and Vice Versa
15(1)
The Vioxx Recall
16(1)
External Versus Internal Financing
17(1)
The Business Cycle
18(2)
HLC's Financial Statements
20(5)
The Balance Sheet
20(2)
A Variant of the Standard Balance Sheet: The Managerial Balance Sheet
22(1)
The Income Statement
23(2)
How Profitable is a Firm?
25(1)
The Profitability of Equity Capital
25(1)
The Profitability of Invested Capital
25(1)
How Much Cash Does a Firm Generate?
26(1)
Sources and Uses of Cash
26(1)
The Statement of Cash Flows
26(1)
How Risky is a Firm?
27(2)
Is Value Created?
29(2)
Summary
31(1)
Further Reading
32(1)
Understanding Balance Sheets and Income Statements
33(34)
Financial Accounting Statements
33(3)
The Balance Sheet
36(9)
Current, or Short-Term, Assets
37(3)
Noncurrent, or Fixed, Assets
40(3)
Current, or Short-Term, Liabilities
43(1)
Noncurrent Liabilities
44(1)
Owners' Equity
45(1)
The Income Statement
45(4)
Net Sales
46(1)
Gross Profit
47(1)
Operating Profit
48(1)
Earnings Before Interest and Tax (EBIT)
48(1)
Earnings Before Tax (EBT)
49(1)
Earnings After Tax (EAT)
49(1)
Reconciling Balance Sheets and Income Statements
49(1)
The Structure of the Owners' Equity Account
50
Summary
5(55)
Appendix 2.1 Financial Reporting Reforms
55(1)
Appendix 2.2 Specimen Financial Statements
56(1)
Polo Ralph Lauren's Balance Sheets and Income Statements
56(1)
Polo Ralph Lauren Balance Sheets
56(3)
Polo Ralph Lauren Income Statements
59(1)
Further Reading
60(1)
Self-Test Problems
60(2)
Review Problems
62(5)
PART II: FINANCIAL DIAGNOSIS AND MANAGEMENT
Assessing Liquidity and Operational Efficiency
67(46)
The Managerial Balance Sheet
68(7)
The Three Components of a Firm's Invested Capital
71(4)
The Components of Capital Employed
75(2)
The Structure of the Managerial Balance Sheet
76(1)
The Matching Strategy
77(2)
A Measure of Liquidity Based on the Funding Structure of Working Capital Requirement
79(3)
Improving Liquidity Through Better Management of the Operating Cycle
82(7)
The Effect of the Firm's Economic Sector on Its Working Capital Requirement
83(1)
The Effect of Managerial Efficiency on Working Capital Requirement
84(3)
The Effect of Sales Growth on Working Capital Requirement
87(2)
Traditional Measures of Liquidity
89(2)
Net Working Capital
89(1)
The Current Ratio
90(1)
The Acid Test or Quick Ratio
91(1)
Summary
91(11)
Appendix 3.1 Financing Strategies
93(3)
Appendix 3.2 Polo Ralph Lauren's Liquidity and Operational Efficiency
96(1)
RL Managerial Balance Sheets
96(2)
RL's Liquidity Position
98(2)
RL's Management of the Operating Cycle
100(2)
Further Reading
102(1)
Self-Test Problems
102(2)
Review Problems
104(9)
Measuring Cash Flows
113(40)
Cash Flows and Their Sources
114(3)
Preparing a Detailed Cash-Flow Statement
117(11)
Net Cash Flow from Operating Activities
118(5)
Net Cash Flow from Investing Activities
123(1)
Net Cash Flow from Financing Activities
124(1)
The Cash-Flow Statement
124(1)
The Statement of Cash Flow According to FASB 95
125(3)
Net Operating Cash Flow Versus Free Cash Flow Versus Bankers' Cash Flow
128(3)
Free Cash Flow
128(1)
Bankers' Cash Flow
129(2)
Managerial Implications
131(1)
Summary
132(7)
Appendix 4.1 Obtaining the Net Operating Cash Flow From Balance Sheet and Income Statement Accounts
134(1)
Measuring Cash Inflow from Operations
134(1)
Measuring Cash Outflow from Operations
135(2)
Net Operating Cash Flow
137(2)
Appendix 4.2 Polo Ralph Lauren's Cash Flows
139(1)
Restructuring RL's Cash Flow Statements
139(5)
RL's Cash Flows from Operating Activities
140(1)
RL's Cash Flows from Investing Activities
141(1)
RL's Cash Flows from Financing Activities
142(2)
Further Reading
144(1)
Self-Test Problems
144(1)
Review Problems
145(8)
Diagnosing Profitability, Risk, and Growth
153(48)
Measures of Profitability
154(1)
Return on Equity
155(14)
Measuring Return on Equity
155(1)
The Effect of Operating Decisions on Return on Equity
155(6)
The Effect of Financing Decisions on Return on Equity
161(4)
The Incidence of Taxation on Return on Equity
165(1)
Putting It All Together: The Structure of a Firm's Profitability
166(2)
The Structure of Return on Equity Across Industries
168(1)
Other Measures of Profitability
169(1)
Earnings Per Share (EPS)
169(1)
The Price-To-Earnings Ratio (P/E)
170(1)
The Market-To-Book Ratio
170(1)
Financial Leverage and Risk
170(4)
How Does Financial Leverage Work?
172(1)
Two Related Caveats: Risk and the Ability to Create Value
173(1)
Self-Sustainable Growth
174(4)
Summary
178(13)
Appendix 5.1 Factors Affecting a Firm's Operating Profitability
181(1)
Market Share
182(1)
Perceived Product Quality
182(1)
Asset and Cost Structures
183(2)
Appendix 5.2 The Relationship Between a Firm's ROE and Its After--Tax ROIC
185(1)
Appendix 5.3 Polo Ralph Lauren's Profitability
186(1)
RL's Profitability Structure
186(1)
The Effect of RL's Operating Profitability on Its Return on Equity
187(3)
The Effect of RL's Financial Policy on Its Return on Equity
190(1)
The Effect of Taxation on RL's Return on Equity
191(1)
Further Reading
191(1)
Self-Test Problems
192(3)
Review Problems
195(6)
PART III: INVESTMENT DECISIONS
Using the Net Present Value Rule to Make Value-Creating Investment Decisions
201(40)
The Capital Investment Process
202(2)
Would You Buy This Parcel of Land?
204(2)
The Alternative Investment
204(1)
The Opportunity Cost of Capital
205(1)
The Net Present Value Rule
206(8)
A One-Period Investment
206(2)
A Two-Period Investment without an Intermediate Cash Flow
208(1)
A Two-Period Investment with an Intermediate Cash Flow
209(1)
Multiple-Period Investments
210(2)
Applying the Net Present Value Rule to a Capital Investment Decision
212(2)
Why the NPV Rule is a Good Investment Rule
214(1)
A Measure of Value Creation
214(9)
Adjustment for the Timing of the Project's Cash Flows
215(3)
Adjustment for the Risk of the Project's Cash Flows
218(2)
Additive Property
220(3)
Special Cases of Capital Budgeting
223(5)
Comparing Projects of Unequal Size
223(2)
Comparing Projects with Unequal Life Spans
225(3)
Limitations of the Net Present Value Criterion
228(3)
Managerial or Real Options Embedded in Investment Projects
228(2)
Dealing with Managerial Options
230(1)
Summary
231(5)
Appendix 6.1 Calculation of the Present Value of an Annuity and the Constant Annual-Equivalent Cash Flow of a Project's Cash-Flow Stream
233(1)
Present Value of an N-Period Annuity
233(2)
Present Value of an Infinite Annuity or Perpetuity
235(1)
Constant Annual-Equivalent Cash Flow
235(1)
Further Reading
236(1)
Self-Test Problems
236(2)
Review Problems
238(3)
Alternatives to the Net Present Value Rule
241(28)
The Payback Period
242(5)
The Payback Period Rule
244(2)
Why Do Managers Use the Payback Period Rule?
246(1)
The Discounted Payback Period
247(3)
The Discounted Payback Rule
248(2)
The Discounted Payback Period Rule Versus the Ordinary Payback Period Rule
250(1)
The Internal Rate of Return (IRR)
250(7)
The IRR Rule
251(3)
The IRR Rule May Be Unreliable
254(2)
Why Do Managers Usually Prefer the IRR Rule to the NPV Rule?
256(1)
The Profitability Index (PI)
257(3)
The Profitability Index Rule
258(2)
Use of the Profitability Index Rule
260(1)
The Average Accounting Return
260(2)
The Average Accounting Return Rule
261(1)
Summary
262(2)
Further Reading
264(1)
Self-Test Problems
264(1)
Review Problems
265(4)
Identifying and Estimating a Project's Cash Flows
269(152)
The Actual Cash-Flow Principle
269(1)
The With/Without Principle
270(2)
The Designer Desk Lamp Project
272(3)
Identifying a Project's Relevant Cash Flows
275(5)
Sunk Costs
275(1)
Opportunity Costs
275(1)
Costs Implied by Potential Sales Erosion
276(1)
Allocated Costs
276(1)
Depreciation Expenses
277(1)
Tax Expenses
277(1)
Financing Costs
278(1)
Inflation
279(1)
Estimating a Project's Relevant Cash Flows
280(7)
Measuring the Cash Flows Generated by a Project
281(1)
Estimating the Project's Initial Cash Outflow
282(3)
Estimating the Project's Intermediate Cash Flows
285(1)
Estimating the Project's Terminal Cash Flow
286(1)
Should SMC Launch the New Product?
287(127)
Sensitivity of the Project's NPV to Changes in the Lamp Price
288(1)
Sensitivity of NPV to Sales Erosion
289(125)
Summary
414(1)
Further Reading
415(1)
Self-Test Problems
416(1)
Review Problems
417(4)
PART V: BUSINESS DECISIONS
Valuing and Acquiring a Business
421(50)
Alternative Valuation Methods
422(2)
Valuing a Firm's Equity Using Comparables
424(6)
Estimating the Comparable Value of OS Distributors' Equity
424(5)
Factors that Determine Earnings and Cash-Flow Multiples
429(1)
Valuing a Firm's Assets and Equity Using the Discounted Cash-Flow Approach
430(5)
Estimating the DCF Value of a Firm's Assets
431(3)
Estimating the DCF Value of a Firm's Equity
434(1)
Estimating the DCF Value of OS Distributors' Assets and Equity
435(7)
Step 1: Estimation of OS Distributors' Cash Flow From Assets
435(4)
Step 2: Estimation of OS Distributors' Weighted Average Cost of Capital
439(1)
Step 3: Estimation of the DCF Value of OS Distributors' Assets
440(1)
Step 4: Estimation of the DCF Value of OS Distributors' Equity
441(1)
Comparison of DCF Valuation and Valuation by Comparables
441(1)
Estimating the Acquisition Value of OS Distributors
442(9)
Identifying the Potential Sources of Value Creation in an Acquisition
442(3)
Why Conglomerate Mergers are Unlikely to Create Lasting Value Through Acquisitions
445(3)
The Acquisition Value of OS Distributors' Equity
448(3)
Estimating the Leveraged Buyout Value of OS Distributors
451(9)
Estimating the Leveraged Buyout Value of OS Distributors' Equity
453(7)
Summary
460(4)
Appendix 12.1 The Dividend Discount Model Approach to the Valuation of a Firm's Equity
463(1)
Further Reading
464(1)
Self-Test Problems
464(2)
Review Problems
466(5)
Making Value--Creating Decisions in an International Environment
471(50)
The Firm's Risk Exposure from Foreign Operations
472(3)
Accounting, or Translation, Exposure
472(1)
Economic Exposure
473(1)
Country, or Political, Risk
474(1)
The Foreign Exchange Market
475(2)
The Organization of the Foreign Exchange Market
475(1)
Spot Transactions Versus Forward Contracts
476(1)
Hedging Contractual Exposure to Currency Risk
477(10)
Hedging with Forward Contracts
477(3)
Hedging with Futures Contracts
480(2)
Hedging with Option Contracts
482(4)
Which Hedging Technique to Choose?
486(1)
Hedging Long-Term Contractual Exposure to Currency Risk with SWAPs
487(2)
The Relationships among Exchange Rates, Inflation Rates, and Interest Rates
489(6)
Exchange Rates and Inflation Rates: The Purchasing Power Parity Relation
489(2)
Inflation Rates and Interest Rates
491(1)
Exchange Rates and Interest Rates: The Interest Rate Parity Relation
492(1)
Forward Rates and Future Spot Rates
493(1)
Putting It All Together
493(2)
Analyzing an International Investment Project
495(8)
The Net Present Value Rule: A Brief Review
495(1)
Surf'n Zap Cross-Border Alternative Investment Projects
496(7)
Managing Country Risk
503(1)
Invest in Projects with Unique Features
503(1)
Use Local Sourcing
503(1)
Choose a Low-Risk Financial Strategy
503(1)
Design a Remittance Strategy
504(1)
Consider Buying Insurance against Political Risk
504(1)
Summary
504(3)
Appendix 13.1 Translating Financial Statements with the Monetary/Nonmonetary Method and the Current Method
507(1)
The Monetary/Nonmonetary Method
507(1)
The Current Method
508(1)
Which Method is Better?
508(7)
Appendix 13.2 The Parity Relations
511(1)
The Law of One Price
511(1)
The Purchasing Power Parity (PPP) Relation
511(1)
The International Fisher Effect
512(1)
The Interest Rate Parity Relation (IRP)
513(2)
Further Reading
515(1)
Self-Test Problems
516(1)
Review Problems
517(4)
Managing for Value Creation
521(42)
Measuring Value Creation
522(6)
Estimating Market Value Added
523(2)
Interpreting Market Value Added
525(2)
A Look at the Evidence
527(1)
Identifying the Drivers of Value Creation
528(6)
Linking Value Creation to Operating Profitability, the Cost of Capital, and Growth Opportunities
530(2)
Linking Value Creation to Its Fundamental Determinants
532(2)
Linking Operating Performance and Remuneration to Value Creation
534(7)
Mr. Thomas Hires a General Manager
534(2)
Has the General Manager Achieved His Objectives?
536(2)
Economic Profits versus Accounting Profits
538(2)
Designing Compensation Plans that Induce Managers to Behave Like Owners
540(1)
Linking the Capital Budgeting Process to Value Creation
541(3)
The Present Value of an Investment's Future EVAs Is Equal to Its MVA
541(1)
Maximizing MVA Is the Same as Maximizing NPV
542(2)
Putting It All Together: The Financial Strategy Matrix
544(3)
The Business Is a Value Creator but Is Short of Cash
546(1)
The Business Is a Value Creator with a Cash Surplus
546(1)
The Business Is a Value Destroyer with a Cash Surplus
547(1)
The Business Is a Value Destroyer that Is Short of Cash
547(1)
Summary
547(6)
Appendix 14.1 Adjusting Book Values to Estimate the Amount of Invested Equity Capital and Operating Profit
549(1)
Adjusting the Book Value of Equity Capital
549(2)
Adjusting Earnings before Interest and Tax (EBIT)
551(1)
Appendix 14.2 Estimating Market Value Added (MVA) when Future Cash Flows Are Expected to Grow at a Constant Rate in Perpetuity
552(1)
Further Reading
553(1)
Self-Test Problems
554(2)
Review Problems
556(7)
Answers to Review Problems 563(38)
Glossary 601(22)
Index 623

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