TITLE : BASIC FINANCIAL MANAGEMENT. 8TH ED.

PREFACE

Over the past 30 years, the teaching of finance has evolved from a descriptive presentation of ill-defined decision rules, taught through the use of case examples, to a science where the logic and decision rules spring from basic economic principles. Today, finance continues to change and develop at an ever-increasing pace. Sparked by the changing business environment and developments in the academic world, new financing and risk management techniques seem to appear on almost a daily basis.

To prepare for a field as dynamic as finance you must go beyond the answers and understand the logic that drives them. For this reason the presentation in this text has been crafted around 10 basic axioms. Using these axioms, we provide an introduction to financial decision making that is rooted both in current financial theory and in the current state of world economic conditions. Our objective is to provide the student with a theory-based and relevant understanding of financial decision making.

OUR APPROACH TO BASIC FINANCIAL MANAGEMENT

The first-time student of finance will find that corporate finance builds upon both accounting and economics. Economics provides much of the theory that underlies our techniques, whereas accounting provides the input or data on which decision making is based. Unfortunately, it is all too easy for students to lose sight of the logic that drives finance and to focus instead on memorizing formulas and procedures. As a result, students have a difficult time understanding the interrelationships between the topics covered. Moreover, later in life when the problems encountered do not fit neatly into the textbook presentation, the student may have problems abstracting from what was learned. 9 overcome this problem, the opening chapter presents 10 basic principles or axioms of finance that are woven throughout the book. What results is a text tightly bound around these guiding principles. In essence, the student is presented with a cohesive, interrelated subject from which future, as yet unknown, problems can be approached.

Teaching an introductory finance class while faced with an ever-expanding discipline puts additional pressures on the instructor. What to cover, what to omit, and how to do this while maintaining a cohesive presentation are inescapable questions. In dealing with these questions, we have attempted to present the chapters in a stand-alone fashion so that they could be easily rearranged to fit almost any desired course structure and course length. Because the axioms are woven into every chapter, the presentation of the text remains tight regardless of whether or not the chapters are rearranged. Again, our goal is to provide an enduring understanding of the basic tools and fundamental principles upon which finance is based. This foundation will give a student beginning his or her studies in finance a strong base on which to build future studies and give the student who will take only one finance class a lasting understanding of the basics of finance.

Although historical circumstances continue to serve as the driving force behind the development and practice of finance, the underlying principles that guide our discipline remain the same. These principles are presented in an intuitively appealing In manner in chapter 1 and thereafter are tied to all that follows. With a focus upon the big picture, we provide an introduction to financial decision making rooted in current financial theory and in the current state of world economic conditions. This focus can be seen in a number of ways, perhaps most obvious being the attention paid both to valuation and to the capital markets and their influence on corporate financial decisions. What results is an introductory treatment of a discipline rather than the treatment of a series of isolated finance problems. The goal of this text is to go beyond teaching the tools of a discipline or a trade, and help students gain a complete understanding of the subject. This will give them the ability to apply what he or she has learned to new and yet unforeseen problems-in short, to educate students in finance.

A TOTAL LEARNING PACKAGE

Basic Financial Management is not simply another introductory finance text. It is a total learning package and reflects the vitality and ever-expanding nature of the discipline. Finance has grown too complex not to teach with an eye on the big picture, focusing on the interrelationships between the materials that are covered. Listed below are some of the distinctive pedagogical features that assist the student in understanding how concepts in finance link to the big picture of finance.

LEARNING AIDS IN THE TEXT

Ten Axioms of Finance

The fundamental principles that drive the practice of corporate finance are presented in the form of 10 axioms. These axioms first appear in chapter 1 and there-after appear in in-text inserts called "Relate to the Big Picture." These inserts serve to refocus the student's attention on the underlying principles behind what is being done. In effect, they serve to keep the student from becoming so wrapped up in specific calculations that the interrelationships and overall scheme is lost.

Wtegrative End-of-Chapter Problems

An Integrative Problem is provided at the end of each chapter and covers all the major topics included in that chapter. This comprehensive problem can be used as a lecture or review tool by the professor. To aid the instructor in presenting this material, the solution is provided to the instructor in Microsoft PowerPoint format. For students, the integrative end-of-chapter problems provide an opportunity to apply all the concepts presented within the chapter in a realistic setting, thereby strengthening their understanding of the material.

Stop and Think

In-text inserts titled "Stop and Think" appear throughout the text to allow the student to take time out and reflect upon the meaning of what has just been presented. The use of these "Stop and Think" inserts, coupled with the use of the 10 axioms, keeps the student from losing sight of the interrelationships and motivating factors behind what is being done.

Basic Financial Management in Practice

Strong emphasis is also placed upon practice, where practice is used to demonstrate both the relevance of the topics discussed and the implementation of theory. Moreover, to add life to the discussion, "Basic Financial Management in Practice" boxed inserts are provided throughout the text. These boxes are largely taken from the popular press with analysis and implications provided following each box. In this way, the subject matter comes to life with added relevance to the student.

Introductory Examples

Each chapter opens with an introductory example of the related experiences of an actual company and sets the stage for what is to follow. In this way, the relevance, use, and importance of the material to be presented can be easily understood by the student.

Unique Treatment of Value-Based Management

An important addition to the eighth edition of Basic Financial Management is the discussion of value-based management (VBM). Value-based management is the generic term used to refer to the set of management tools designed to help firms manage their operations in such a way as to enhance shareholder value. In principle, VBM applies the methods of discounted cash flow analysis that have long been advocated as the basis for analyzing new investments to the analysis of the performance of the firm's existing assets or assets already in place. Traditionally, the finance profession has had relatively little to say about performance appraisal of the firm as an entity. As a result, firms have typically used a variety of accounting- based performance metrics such as earnings per share, growth in earnings, and various financial ratios like return on net assets to monitor firm performance. These methods have a number of widely recognized deficiencies related to the fact that they focus on the results of a single year's operations and ignore the opportunity cost of capital employed by the firm. Currently available materials that discuss VBM have been prepared by the various consulting firms, each of whom is promoting its particular method. Furthermore, no book has yet undertaken the task of synthesizing these seemingly unrelated tools within a common valuation framework.

International Financial Management

In view of the continued globalization of world markets, we have integrated examples of international finance throughout the text. In addition, recognizing the fact that many of us approach the teaching of international finance in different ways, a separate chapter on international financial management is also provided.

Chapter Learning Objectives and KeyTerms

Each chapter begins by setting out the learning objectives for that chapter, and setting in mind what that chapter will enable the student to do. In addition, at the end of each chapter, key terms and their locations in the text are identified, making for an easy review for the student.

Financial Calculators

The use of financial calculators has been integrated through this text, especially with respect to the presentation of the time value of money. Where appropriate, calculator solutions appear in the margin. Extensive Use of Real-World Examples

In this edition we have greatly expanded the illustrative use of examples of problems facing real firms. This adds to student interest both by showing the relevance of the subjects covered and by providing an exciting framework within which to discuss financial concepts.

How Financial Managers Use This Material

A new section entitled "How Financial Managers Use This Material" has been added to close each chapter. This section ties the material presented in the chapter both to the student's future job setting and to real-world companies, thereby enhancing the student's interest and displaying the relevance of the material covered.

NEW TO THIS EDITION

The following list includes the major additions that are new to Basic Financial Management, eighth edition:

* New, relatively simple problems have been added to almost every chapter to give the professor more choice in homework assignments. Changes in the tax environment, for example, the changes in the net operating loss carryback and carryforward resulting from the 1997 Taxpayer Relief Act, are reflected in the presentation.

* We have substantially revised and streamlined chapter 2 with regard to both organization and content in order to provide a more useful and teachable introduction to the financial markets. Several new sections are included in the chapter dealing with (1) the financial manager and financing flexibility, (2) analyzing interest rates by use of risk premiums, and (3) analyzing real and nominal interest rates from a financial analyst's viewpoint. In addition, interest rate determinants are given special attention and explanation.

* The movement of "Evaluating Financial Performance" from chapter 12 in the previous edition to chapter 3 in this edition reflects the fundamental importance of basic accounting concepts to all facets of the study of corporate finance. In addition to changing this,chapter's location in the text, we have completely re-written it in an effort to simplify and open up the presentation. We recognize that the purpose of much of this material is to refresh the concepts in the minds of the student and set forth basic concepts that will be used throughout the text.

* Chapters 3 and 4 Were revised to smooth and simplify the flow while increasing the use of real-world examples and thereby highlighting the relevance and imporTance of the material being presented. For example, we used McDonald's in chapter 3 to illustrate the financial analysis of a real-world firm. Real-world companies were also used in some of the end-of-chapter problems.

* In discussing the use of accounting information to evaluate a firm's financial performance in chapter 3, we note that such an approach fails to connect performance directly to the goal of enhancing shareholde,r value. For this reason, we now include a section entitled "Measuring Firm Performance the EVA Way," which explains the use of EVA as a way to evaluate management's performance in terms of their contribution to increased shareholder value.

* Our revision of chapter 5 involved both a title change to "The Time Value of Money" and a dramatic increase in the use of examples to intuitively demonstrate the power of compounding.

* We have updated the risk-return and valuation chapters using new examples of actual companies to illustrate the concepts presented.

* The capital budgeting chapters, chapters 9, 10, and 11, now contain a pleth ora of examples using companies like McDonald's and GM to illustrate the concepts presented. In addition, chapter 9 now contains a section on net present value profiles.

* With respect to chapter 12, "Cost of Capital," we simplified the presentation by eliminating the discussion of breaks in tithe cost-of-capital schedule. In addition, we added a discussion of Briggs and Stratton's computation of the cost of capital and include a section on market value added and economic profit. We aplso include a discussion of why a firm might choose to go public and an internation al box discussing differences in capital costs across national boundaries.

* In chapter 13, we expanded the real-world discussions to include: The Coca-Cola Company, Chevron Corporation, IBM, and Archer Daniels Midland Corporation. The distinction between operating leverage and financial leverage is sharpened by using examples from these actual firms.

* Chapter 14, "Planning the Firm's Financing Mix," was revised with a totally new introduction that draws upon policies at the Georgia-Pacific Corporation. Actual examples of how firms design their capital structures and what influences their debt capacities are now included. Further, we stress the relationship between financial strategy and operating (commercial) strategy.

* In chapter 15, we provide a new introduction that relates dividend policy to the risk-return trade-off (Axiom 1). The changes in corporate dividend policies induced by extraordinarily high equity market returns over the 1995-1997 period are discussed. Dividend policies from firms like the Coca-Cola Company and the Walt Disney Company are examined.

* The focus of chapter 16, "Working-Capital Management and Short-Term Finance," was sharpened and more tightly focused on the issues that arise in the management of working capital and the choice of a source of short-term credit.

* Chapter 17, "Cash and Marketable Securities Management," has been shortened and includes updated data on interest rate levels on popular liquid asset invest ments. We stress the concept of cash management as a system.

* Coverage of the concept of supply chain management which is a company-wide systems approach to quality, is now provided in chapter 18. Supply chain man agement is actually the greater umbrella under which inventory management and TQM fall. Supply chain management deals with any activity aimed at provid ing customers with prompt and reliable service or products at the lowest cost, and, as such, includes not only inventory management, but also management of plants, warehouses, distribution centers, ansl retail operations.

* Chapter 19, "Term Loans and Leases" has been updated and has additional prob lems. New problems emphasize the basic calculations underlying the analysis of financial leases and term loans.

* A basic introduction to LEAPS is now provided in chapter 20.

* Chapter 21, "Corporate Restructuring: Combinations and Divestitures," has been streamlined by eliminating the discussion of '80s LBO restructuring. A section was also added to discuss the agency problem arising out of the separation of ownership and management and the various approaches that can be taken to deal with it. This discussion includes incentive-based compensation, external oversight or monitoring, and the use of financial policies designed to minimize managerial choice.

* In chapter 22, we emphasize the influence of the global economy on firm-level activity. Financial management no longer ends at the borders. The financial economic crisis that affected the so-called "Asian tigers" is discussed and put in the context of efficient capital markets (Axiom 6). Examples from actual firms on the management of foreign exchange rate risk are provided and discussed.

As a final, but important, comment to the teacher, we know how frustrating errors in a textbook or instructor's manual can be. Thus we have worked diligently to provide you with as error-free a book as possible. Not only did we check and recheck the answers ourselves, but Prentice Hall hired faculty members at other universities to check the accuracy of the problem solutions. We therefore make the following offer to users of Basic Financial Management.

Any professor or student identifying an error of substance (e.g., an incorrect number in an example or problem) in Basic Financial Management, in the text, that has not been previously reported to the authors, will receive a $10 reward. If a series of related errors occurs resulting from an original error, the reward will be limited to a maximum of $20 for the group of errors. Please report any errors to Dave Scott at the following address:

Dave Scott College of Business Administration, 427 University of Central Florida Orlando, FL 32816-1400

LEARNING AIDS SUPPLEMENTAL TO THE TEXT

Basic Financial Management integrates the most advanced technology available to assist the student and the instructor. Not only does it make their financial management come alive with the most current information, but also enhances a total understanding of all tools and concepts necessary in mastering the course.

FOR THE STUDENT

THE PRENTICE HALL FINANCE CENTER CD

Contained in the inside back cover of this text is the Prentice Hall Finance Center CD, referred to in the text as the FinanceLearningand Development CD. This robust learning tool contains the following features all designed to increase student awareness of what finance professionals do, ensure comprehension and mastery of the financial mathematics contained in the text, and supply a direct link to PHLIP-the Prentice Hall Learning on the Internet Partnership.

Careers Center

This Web site introduces the student to a vast array of professional opportunities in finance through video interviews with professionals and insights into what they do on the job in an average day. Here the student will meet an options trader, a mutual fund rnanager, investment analysts, a CFO, and others. Also accessible are features for personal development, resume writing, interviewing techniques, and career planning information.

FINCOACH-The Financial Math Practice Center

The Financial Math Practice Center contains more than 5 million problems and self-tests in virtually all math areas covered in this text and financial management. Save problems, review them, print them. This is a step-by-step guide to solving any corporate finance mathematics problem and allows the student to rapidly gain mastery in all mathematical challenges.

PHLIP-The Basic Financial Management Web Center

PHLIP (Prentice Hall Learning on the Internet Partnership) can be accessed either directlywfrom the CD or remotely at www.prenhall.comlbfm. Here's what the student can do on PHLIP:

* Read current news items from the popular business press that are directly related to chapters and use chapter terminology and providing links to more related information, discussion questions, and projects for assignment by the instructor

* Download Excel spreadsheet templates related to specific chapter problems.

* Access additional careers information.

* Learn study skills, writing skills, and engage in conferences with other students who are studying financial management.

Case Connect

Also linked through the PHLIP Web site and applicable to specific chapters in the text are cases using interactive and linked features to provide the student and the instructor with a means of understanding concepts through real-world applications. Generally, these cases focus on a broad area of corporate finance and are appropriate for the level of this text.

On-Line Study Guide CompanionWeb Site

The Prentice Hall Companion Web site is another feature accessible by the student on the PHLIP site and designed specifically for this text. This Companion Web site allows the student to test their understanding of concepts within each chapter and relay via e-mail their answers to their instructor. Instructors will find this custom site useful for allocating student assignments and on-line quizzes; and its built-in grading feature can grade exams and provide students with immediate feedback.

Student Lecture Notes

Accessible through PHLIP, the PowerPoint Lecture Notes can be downloaded and printed as a handy lecture aid for the student with per chapter PowerPoints and space on the page for lecture note taking of material covered by the instructor.

OTHER SUPPLEMENTS AVAIABLE FOR THE STUDENT

StudentWorkbook-Available for purchase at the bookstore, this workbook is written by the authors of the text and contains innovative features to help the student using Basic Financial Management, eighth edition. Each chapter begins with an overview of the key points in its respective text chapter and serves as a useful review. Additional problems with detailed solutions and self-tests can be used as an aid in preparing for examinations or for preparation of outside assignments.

FOR THE INSTRUCTORS

Instructor's Manual with Solutions

Prepared by the authors of the text, this manual contains concise chapter orientations, detailed chapter outlines, complete answers to end-of-chapter questions, and worked out solutions to all problems in the text. An Instructor's Guide to using PHLIP and a Guide to Using the Prentice Hall Finance Center are also contained in this manual.

Test Item File

Completely revised and updated by Professor Philip Thames of California State University, Fullerton, the eighth edition test bank contains over 5,000 true/false, multiple choice, and short answer quFstions.

PH Custom Tests

Available for both Windows and Macintosh, PH Custom is the computerized version of the test item file. It permits the instructor to edit, add, or delete questions from the test item file and generate his or her own custom exams.

FINCOACH Test Manager and FINCOACH Instructor's Manual

Test Manager software has been developed to allow instructors to generate tests based on FINCOACH-The Financial Management Math Practice Program contained within the Prentice Hall Finance Center CD, referred to in the text as the Finance Learning and Development CD, available to all students using Basic Financial Management, eighth edition. In addition, an Instructor's Manual for using FINCOACH Test Manager and FINCOACH in the course has been developed and is available to all snstructors.

PowerPoint Presentation

Over 50 slides per chapter of new lecture notes have been prepared by Professor Anthony Byrd of the University of Central Florida. These electronic transparencies allow the instructor to make full-color presentations coordinated with the Basic Financial Management, eighth edition Student Lecture Notes. To encourage more active learning, the slides include sample problems for students to solve in class. The PowerPoints are available from the Prentice Hall PHLIP Web site ( www.prenhall.com/bfm ) by clicking "faculty site" for Basic Financial Management, eighth edition. ID and Password designations are available from the local Prentice dall representative.

PHILIP FacultyWeb Site (Go to: http://www.prenhall.com/bfm)

Instructors will need to acquire a password and ID code from their local Prentice Hall representative in order to open the faculty site and gain access to the following materials:

* Downloadable PowerPoint Presentations with an average of 50 per chapter.

* Downloadable per chapter Instructor's Manual.

* Downloadable Excel spreadsheet Solutions to selected end-of-chapter problems, including solutions to Integrated Problems.

* "Talk To Team" faculty chat room.

* "Teaching Archive" resources for enhancing lecture materials and doing research on the Web.

* "Help With Computers" provides tips andacce'ss to getting answers to tricky computer problems.

* Solutions and Answers to all Cases on the Case Connect Web site.

* Basic Financial Management, eighth edition On-Line CompanionWeb Site for creating syllabuses and assignments and assessing student progress via e-mail relay of answers given on the On-Line Study Guide available to all students using the text.

Color Transparencies

All figures and tables from the text are available as full-color images on 81/2 x 11 acetate transparencies.