Cover table of contents fundamentals of corporate finance; standard edition (8th edition)

Standard Edition

FUNDAMENTALS OF
CORPORATE FINANCE

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The McGraw-Hill/Irwin Series in Finance, Insurance, and Real Estate
Stephen A. Ross
Franco Modigliani Professor of Finance and Economics
Sloan School of Management
Massachusetts Institute of Technology
Consulting Editor
Financial Management
Adair
Excel Applications for Corporate Finance
First Edition
Benninga and Sarig
Corporate Finance: A Valuation Approach
Block and Hirt
Foundations of Financial Management
Twelfth Edition
Brealey, Myers, and Allen
Principles of Corporate Finance
Eighth Edition
Brealey, Myers, and Marcus
Fundamentals of Corporate Finance

Fifth Edition
Brooks
FinGame Online 4.0
Bruner
Case Studies in Finance: Managing for
Corporate Value Creation
Fifth Edition
Chew
The New Corporate Finance: Where Theory
Meets Practice
Third Edition
Chew and Gillan
Corporate Governance at the Crossroads:
A Book of Readings
First Edition
DeMello
Cases in Finance
Second Edition
Grinblatt and Titman
Financial Markets and Corporate Strategy
Second Edition
Helfert
Techniques of Financial Analysis: A Guide to
Value Creation
Eleventh Edition
Higgins
Analysis for Financial Management
Eighth Edition
Kester, Ruback, and Tufano
Case Problems in Finance

Twelfth Edition
Ross, Westerfield, and Jaffe
Corporate Finance
Eighth Edition

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Ross, Westerfield, Jaffe, and Jordan
Corporate Finance: Core Principles and
Applications
First Edition
Ross, Westerfield, and Jordan
Essentials of Corporate Finance
Fifth Edition
Ross, Westerfield, and Jordan
Fundamentals of Corporate Finance
Eighth Edition
Shefrin
Behavioral Corporate Finance: Decisions
that Create Value
First Edition

Saunders and Cornett
Financial Institutions Management: A Risk
Management Approach
Fifth Edition
Saunders and Cornett
Financial Markets and Institutions: An Introduction to the Risk Management Approach
Third Edition
International Finance

White
Financial Analysis with an Electronic
Calculator
Sixth Edition

Eun and Resnick
International Financial Management
Fourth Edition
Kuemmerle
Case Studies in International Entrepreneurship: Managing and Financing Ventures in
the Global Economy
First Edition

Investments

Real Estate

Adair
Excel Applications for Investments
First Edition

Brueggeman and Fisher
Real Estate Finance and Investments
Thirteenth Edition
Corgel, Ling, and Smith
Real Estate Perspectives: An Introduction to
Real Estate
Fourth Edition
Ling and Archer

Real Estate Principles: A Value Approach
Second Edition

Bodie, Kane, and Marcus
Essentials of Investments
Sixth Edition
Bodie, Kane, and Marcus
Investments
Seventh Edition
Hirt and Block
Fundamentals of Investment Management
Eighth Edition
Hirschey and Nofsinger
Investments: Analysis and Behavior
First Edition
Jordan and Miller
Fundamentals of Investments: Valuation and
Management
Fourth Edition
Financial Institutions and Markets
Rose and Hudgins
Bank Management and Financial Services
Seventh Edition
Rose and Marquis
Money and Capital Markets: Financial
Institutions and Instruments in a Global
Marketplace
Ninth Edition

Financial Planning and Insurance

Allen, Melone, Rosenbloom, and Mahoney
Pension Planning: Pension, Profit-Sharing,
and Other Deferred Compensation Plans
Ninth Edition
Altfest
Personal Financial Planning
First Edition
Harrington and Niehaus
Risk Management and Insurance
Second Edition
Kapoor, Dlabay, and Hughes
Focus on Personal Finance: An active
approach to help you develop successful
financial skills
First Edition
Kapoor, Dlabay, and Hughes
Personal Finance
Eighth Edition

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Standard Edition

Eighth Edition

FUNDAMENTALS OF
CORPORATE FINANCE
Stephen A. Ross
Massachusetts Institute of Technology

Randolph W. Westerfield
University of Southern California

Bradford D. Jordan
University of Kentucky

Boston Burr Ridge, IL Dubuque, IA New York San Francisco St. Louis
Bangkok Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City
Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto
iii

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FUNDAMENTALS OF CORPORATE FINANCE
Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020.
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. No part of this publication may be reproduced or distributed in
any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc.,
including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.
Some ancillaries, including electronic and print components, may not be available to customers outside the United States.
This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 0 WCK/WCK 0 9 8 7
ISBN
MHID
ISBN
MHID
ISBN

MHID

978-0-07-353062-8 (standard edition)
0-07-353062-X (standard edition)
978-0-07-328211-4 (alternate edition)
0-07-328211-1 (alternate edition)
978-0-07-328212-1 (annotated instructor’s edition)
0-07-328212-X (annotated instructor’s edition)

Editorial director: Brent Gordon
Executive editor: Michele Janicek
Developmental editor II: Jennifer Rizzi
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Library of Congress Cataloging-in-Publication Data
Ross, Stephen A.
Fundamentals of corporate finance/Stephen A. Ross, Randolph W. Westerfield,
Bradford D. Jordan. -- 8th ed., Standard ed.
p. cm. -- (The McGraw-Hill/Irwin series in finance, insurance and real estate)
Includes index.
ISBN-13: 978-0-07-353062-8 (standard edition : alk. paper)

ISBN-10: 0-07-353062-X (standard edition : alk. paper)
ISBN-13: 978-0-07-328211-4 (alternate edition : alk. paper)
ISBN-10: 0-07-328211-1 (alternate edition : alk. paper)
[etc.]
1. Corporations--Finance. I. Westerfield, Randolph. II. Jordan, Bradford D.
HG4026.R677 2008
658.15--dc22
2007002136
www.mhhe.com

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To our families and friends with love and gratitude.
S.A.R. R.W.W. B.D.J.

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About the Authors

3

STEPHEN A. ROSS
Sloan School of Management, Franco Modigliani Professor of Finance and Economics,
Massachusetts Institute of Technology

Stephen A. Ross is the Franco Modigliani Professor of Finance and
Economics at the Sloan School of Management, Massachusetts
Institute of Technology. One of the most widely published authors in
finance and economics, Professor Ross is recognized for his work in
developing the Arbitrage Pricing Theory and his substantial contributions to the discipline through his research in signaling, agency theory,
option pricing, and the theory of the term structure of interest rates,
among other topics. A past president of the American Finance Association, he currently serves as an associate editor of several academic
and practitioner journals. He is a trustee of CalTech and Freddie Mac.
RANDOLPH W. WESTERFIELD
Marshall School of Business, University of Southern California

Randolph W. Westerfield is Dean Emeritus of the University of Southern California’s Marshall School of Business and is the Charles B.
Thornton Professor of Finance.
He came to USC from the Wharton School, University of Pennsylvania, where he was the chairman of the finance department and a
member of the finance faculty for 20 years. He is a member of several
public company boards of directors including Health Management
Associates, Inc., and the Nicholas Applegate growth fund. His areas of
expertise include corporate financial policy, investment management,
and stock market price behavior.
BRADFORD D. JORDAN
Gatton College of Business and Economics, University of Kentucky

Bradford D. Jordan is Professor of Finance and holder of the Richard
W. and Janis H. Furst Endowed Chair in Finance at the University of
Kentucky. He has a long-standing interest in both applied and theoretical issues in corporate finance and has extensive experience teaching

all levels of corporate finance and financial management policy. Professor Jordan has published numerous articles on issues such as cost
of capital, capital structure, and the behavior of security prices. He is
a past president of the Southern Finance Association, and he is coauthor of Fundamentals of Investments: Valuation and Management, 4e,
a leading investments text, also published by McGraw-Hill/Irwin.

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Preface from the Authors
When the three of us decided to write a book, we were united by one strongly held principle: Corporate
finance should be developed in terms of a few integrated, powerful ideas. We believed that the subject was
all too often presented as a collection of loosely related topics, unified primarily by virtue of being bound
together in one book, and we thought there must be a better way.
One thing we knew for certain was that we didn’t want to write a “me-too” book. So, with a lot of help,
we took a hard look at what was truly important and useful. In doing so, we were led to eliminate topics
of dubious relevance, downplay purely theoretical issues, and minimize the use of extensive and elaborate
calculations to illustrate points that are either intuitively obvious or of limited practical use.
As a result of this process, three basic themes became our central focus in writing Fundamentals of
Corporate Finance:

AN EMPHASIS ON INTUITION
We always try to separate and explain the principles at work on a commonsense, intuitive level before launching into any specifics. The underlying ideas are discussed first in very general terms and then by way of examples that illustrate in more concrete terms how a financial manager might proceed in a given situation.

A UNIFIED VALUATION APPROACH
We treat net present value (NPV) as the basic concept underlying corporate finance. Many texts stop well
short of consistently integrating this important principle. The most basic and important notion, that NPV

represents the excess of market value over cost, often is lost in an overly mechanical approach that emphasizes computation at the expense of comprehension. In contrast, every subject we cover is firmly rooted in valuation, and care is taken throughout to explain how particular decisions have valuation effects.

A MANAGERIAL FOCUS
Students shouldn’t lose sight of the fact that financial management concerns management. We emphasize the
role of the financial manager as decision maker, and we stress the need for managerial input and judgment.
We consciously avoid “black box” approaches to finance, and, where appropriate, the approximate, pragmatic
nature of financial analysis is made explicit, possible pitfalls are described, and limitations are discussed.
In retrospect, looking back to our 1991 first edition IPO, we had the same hopes and fears as any entrepreneurs. How would we be received in the market? At the time, we had no idea that just 16 years later, we
would be working on an eighth edition. We certainly never dreamed that in those years we would work with
friends and colleagues from around the world to create country-specific Australian, Canadian, and South African
editions, an International edition, Chinese, French, Polish, Portuguese, Thai, Russian, Korean, and Spanish
language editions, and an entirely separate book, Essentials of Corporate Finance, now in its fifth edition.
Today, as we prepare to once more enter the market, our goal is to stick with the basic principles that have
brought us this far. However, based on an enormous amount of feedback we have received from you and your
colleagues, we have made this edition and its package even more flexible than previous editions. We offer
flexibility in coverage, by continuing to offer a variety of editions, and flexibility in pedagogy, by providing a wide
variety of features in the book to help students to learn about corporate finance. We also provide flexibility in
package options by offering the most extensive collection of teaching, learning, and technology aids of any corporate finance text. Whether you use just the textbook, or the book in conjunction with our other products, we
believe you will find a combination with this edition that will meet your current as well as your changing needs.
Stephen A. Ross
Randolph W. Westerfield
Bradford D. Jordan
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Coverage
This book was designed and developed explicitly for a first course in business or corporate finance, for
both finance majors and non-majors alike. In terms of background or prerequisites, the book is nearly
self-contained, assuming some familiarity with basic algebra and accounting concepts, while still reviewing important accounting principles very early on. The organization of this text has been developed to give
instructors the flexibility they need.
Just to get an idea of the breadth of coverage in the eighth edition of Fundamentals, the following grid
presents, for each chapter, some of the most significant new features as well as a few selected chapter
highlights. Of course, in every chapter, opening vignettes, boxed features, in-chapter illustrated examples
using real companies, and end-of-chapter material have been thoroughly updated as well.
Chapters

PART 1

Selected Topics of Interest

Overview of Corporate Finance

Chapter 1
Introduction to Corporate
Finance

Chapter 2
Financial Statements, Taxes,
and Cash Flow

PART 2

Benefits to You

New section: Sarbanes–Oxley.
Goal of the firm and agency problems.

Stresses value creation as the most fundamental
aspect of management and describes agency
issues that can arise.

Ethics, financial management, and
executive compensation.

Brings in real-world issues concerning conflicts
of interest and current controversies surrounding
ethical conduct and management pay.

Mini-case: Cash Flows and Financial
Statements at Sunset Boards, Inc.

New case written for this edition reinforces key
cash flow concepts in a small-business setting.

Cash flow vs. earnings.

Clearly defines cash flow and spells out the
differences between cash flow and earnings.

Market values vs. book values.

Emphasizes the relevance of market values
over book values.

Financial Statements and Long-Term Financial Planning

Chapter 3
Working with Financial
Statements

Chapter 4
Long-Term Financial Planning
and Growth

New ratios: PEG, price-to-sales, and
Tobin’s Q.
Expanded Du Pont analysis.

New section expands the basic Du Pont equation to better explore the interrelationships
between operating and financial performance.

New material: Du Pont analysis for
real companies using data from S&P
Market Insight.

New analysis shows students how to get
and use real-world data, thereby applying key
chapter ideas.

Ratio and financial statement analysis

using smaller firm data.

Uses firm data from RMA to show students
how to actually get and evaluate financial
statements benchmarks.

Expanded discussion on sustainable
growth calculations.

New case written for this edition illustrates the
importance of financial planning in a small firm.

Mini-case: Planning for Growth at S&S Air.
Explanation of alternative formulas for
sustainable and internal growth rates.

Thorough coverage of sustainable
growth as a planning tool.

Explanation of growth rate formulas clears
up a common misunderstanding about these
formulas and the circumstances under which
alternative formulas are correct.
Provides a vehicle for examining the interrelationships between operations, financing, and growth.

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Chapters

PART 3

Selected Topics of Interest

Benefits to You

Valuation of Future Cash Flows

Chapter 5
Introduction to Valuation:
The Time Value of Money

First of two chapters on time value of
money.

Relatively short chapter introduces just the
basic ideas on time value of money to get students started on this traditionally difficult topic.

Chapter 6
Discounted Cash Flow
Valuation

New section: Growing annuities and
perpetuities.
Second of two chapters on time value
of money.

New minicase: The MBA Decision.

Covers more advanced time value topics
with numerous examples, calculator tips,
and Excel spreadsheet exhibits. Contains
many real-world examples.

Chapter 7
Interest Rates and Bond
Valuation

New section: Inflation and present values.
“Clean” vs. “dirty” bond prices and
accrued interest.

Clears up the pricing of bonds between
coupon payment dates and also bond market
quoting conventions.

NASD’s new TRACE system and
transparency in the corporate bond
market.

Up-to-date discussion of new developments
in fixed income with regard to price, volume,
and transactions reporting.

“Make-whole” call provisions.

Up-to-date discussion of a relatively new type

of call provision that has become very common.

New minicase: Stock Valuation at Ragan, Inc.
Minicase: Financing S&S Air’s Expansion
Plans with a Bond Issue.

New case written for this edition examines the
debt issuance process for a small firm.

Stock valuation.

Thorough coverage of constant and nonconstant growth models.

NYSE and NASDAQ Market Operations.

Up-to-date description of major stock market
operations

Chapter 8
Stock Valuation

PART 4

Capital Budgeting

Chapter 9
Net Present Value and Other
Investment Criteria

Chapter 10

Making Capital Investment
Decisions

New section: Modified internal rate of
return (MIRR).
New minicase: Bullock Gold Mining.
First of three chapters on capital budgeting.

Relatively short chapter introduces key ideas
on an intuitive level to help students with this
traditionally difficult topic.

NPV, IRR, payback, discounted payback,
and accounting rate of return.

Consistent, balanced examination of advantages and disadvantages of various criteria.

Projected cash flow.

Thorough coverage of project cash flows and
the relevant numbers for a project analysis.
Emphasizes the equivalence of various formulas,
thereby removing common misunderstandings.
Considers important applications of chapter
tools.

Alternative cash flow definitions.
Special cases of DCF analysis.

Chapter 11

Project Analysis and Evaluation

Minicase: Conch Republic Electronics.
Sources of value.
Scenario and sensitivity “what-if” analyses.
Break-even analysis.

Case analyzes capital budgeting issues and
complexities.
Stresses the need to understand the economic basis for value creation in a project.
Illustrates how to actually apply and interpret these tools in a project analysis.
Covers cash, accounting, and financial
break-even levels.

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Coverage
Chapters

PART 5

(continued)
Selected Topics of Interest

Benefits to You

Risk and Return

Chapter 12
Some Lessons from
Capital Market History

Chapter 13
Return, Risk, and the
Security Market Line

Chapter 14
Options and Corporate
Finance

PART 6

Part Title Goes Here on Verso Page

New minicase: A Job at S&S Air.
Expanded discussion of geometric vs.
arithmetic returns.

Discusses calculation and interpretation of
geometric returns. Clarifies common misconceptions regarding appropriate use of
arithmetic vs. geometric average returns.

Capital market history.

Extensive coverage of historical returns,
volatilities, and risk premiums.

Market efficiency.

Efficient markets hypothesis discussed
along with common misconceptions.

New minicase: The Beta for American
Standard.
Diversification, systematic and unsystematic
risk.
Beta and the security market line.

Illustrates basics of risk and return in a
straightforward fashion.

Minicase: S&S Air’s Convertible Bond.
New discussion in ESO backdating.
Stock options, employee stock options, and
real options.
Option-embedded securities.

New case written for this edition examines
security issuance issues for a small firm.
Discusses the basics of these important
option types.

Describes the different types of option found
in corporate securities.

Develops the security market line with an
intuitive approach that bypasses much of the
usual portfolio theory and statistics.

Cost of Capital and Long-Term Financial Policy

Chapter 15
Cost of Capital

New section: Internal equity and flotation costs.
Geometric vs. arithmetic growth rates.
Cost of capital estimation.

Both approaches are used in practice. Clears
up issues surrounding growth rate estimates.
Contains a complete, Web-based illustration
of cost of capital for a real company.

Chapter 16
Raising Capital

Chapter 17
Financial Leverage and
Capital Structure Policy

New minicase: S&S Air Goes Public.
Dutch auction IPOs.

IPO “quiet periods.”
Rights vs. warrants.

Explains uniform price auctions using recent
Google IPO as an example.

IPO valuation.

Extensive, up-to-date discussion of IPOs,
including the 1999–2000 period.

Explains the SEC’s quiet period rules.
Clarifies the option-like nature of rights prior
to their expiration dates.

New section: The pecking-order theory of
capital structure.
New minicase: Stephenson Real Estate
Capitalization.
Basics of financial leverage.
Optimal capital structure.
Financial distress and bankruptcy.

Illustrates effect of leverage on risk and return.
Describes the basic trade-offs leading to an
optimal capital structure.
Briefly surveys the bankruptcy process.

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Chapters
Chapter 18
Dividends and Dividend Policy

PART 7

Selected Topics of Interest

Benefits to You

New minicase: Electronic Timing, Inc.
Minicase: Piepkorn Manufacturing
Working Capital Management.

New case written for this edition analyzes
cost of capital estimation for a non-public
firm.

Very recent survey evidence on dividend
policy.

New survey results show the most important
(and least important) factors considered by
financial managers in setting dividend policy.

Effect of new tax laws.

Discusses implications of new, lower dividend, and capital gains rates.

Dividends and dividend policy.

Describes dividend payments and the
factors favoring higher and lower payout
policies.

Short-Term Financial Planning and Management

Chapter 19
Short-Term Finance
and Planning

Operating and cash cycles.

Stresses the importance of cash flow timing.

Short-term financial planning.

Illustrates creation of cash budgets and
potential need for financing.

Chapter 20
Cash and Liquidity Management

New material on Check Clearing Act of
the 21st century.

Chapter 21
Credit and Inventory
Management

PART 8

New minicase: Cash Management at
Webb Corporation.
Float management.

Thorough coverage of float management
and potential ethical issues.

Cash collection and disbursement.

Examination of systems used by firms to
handle cash inflows and outflows.

New minicase: Credit Policy at Howlett
Industries.

New case written for this edition evaluates
working capital issues for a small firm.

Credit management.

Analysis of credit policy and implementation.

Inventory management.

Brief overview of important inventory
concepts.

Topics in Corporate Finance

Chapter 22
International Corporate Finance

New minicase: S&S Air Goes International.
Foreign exchange.

Covers essentials of exchange rates and their
determination.

International capital budgeting.

Shows how to adapt basic DCF approach to
handle exchange rates.

Exchange rate and political risk.

Discusses hedging and issues surrounding
sovereign risk.

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In-Text Study Features
In addition to illustrating pertinent concepts and presenting up-to-date coverage, Fundamentals of Corporate Finance strives to present the material in a way that makes it coherent and easy to understand.
To meet the varied needs of its intended audience, Fundamentals of Corporate Finance is rich in valuable
learning tools and support.

CHAPTER-OPENING VIGNETTES
Vignettes drawn from real-world events introduce students to the chapter concepts. Questions about these
vignettes are posed to the reader to ensure understanding of the concepts in the end-of-chapter material. For
examples, see Chapter 4, page 89; Chapter 5, page 21.

This approach works just fine. However, we will often encounter situations in which the
number of cash flows is quite large. For example, a typical home mortgage calls for monthly
payments over 30 years, for a total of 360 payments. If we were trying to determine the
present value of those payments, it would be useful to have a shortcut.
Because the cash flows of an annuity are all the same, we can come up with a handy
variation on the basic present value equation. The present value of an annuity of C dollars
per period for t periods when the rate of return or interest rate is r is given by:
1 Ϫ Present value factor
Annuity present value ϭ C ϫ ____________________
r
[6.1]
1 Ϫ [1͞(1 ϩ r)t]

______________
ϭCϫ
r

(

{

)

}

PEDAGOGICAL USE OF COLOR
This learning tool continues to be an
important feature of Fundamentals of
Corporate Finance. In almost every
chapter, color plays an extensive, nonschematic, and largely self-evident role.
A guide to the functional use of color
is found on the endsheets of both the
Annotated Instructor’s Edition (AIE) and
student version. For examples of this
technique, see Chapter 5, page 130.

IN THEIR OWN
WORDS BOXES
This series of boxes are the
popular articles updated
from previous editions
written by a distinguished
scholar or practitioner

on key topics in the text.
Boxes include essays by
Merton Miller on capital
structure, Fischer Black
on dividends, and Roger
Ibbotson on capital
market history. A complete list of “In Their Own
Words” boxes appears on
page xxxvii.

IN THEIR OWN WORDS . . .
Robert C. Higgins on Sustainable Growth
Most financial officers know intuitively that it takes money to make money. Rapid sales growth
requires increased assets in the form of accounts receivable, inventory, and fixed plant, which, in
turn, require money to pay for assets. They also know that if their company does not have the money
when needed, it can literally “grow broke.” The sustainable growth equation states these intuitive truths
explicitly.
Sustainable growth is often used by bankers and other external analysts to assess a company’s credit
worthiness. They are aided in this exercise by several sophisticated computer software packages that
provide detailed analyses of the company’s past financial performance, including its annual sustainable
growth rate.
Bankers use this information in several ways. Quick comparison of a company’s actual growth rate to its
sustainable rate tells the banker what issues will be at the top of management’s financial agenda. If actual
growth consistently exceeds sustainable growth, management’s problem will be where to get the cash to
finance growth. The banker thus can anticipate interest in loan products. Conversely, if sustainable growth
consistently exceeds actual, the banker had best be prepared to talk about investment products, because
management’s problem will be what to do with all the cash that keeps piling up in the till.

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CHAPTER 1

WORK THE WEB

Chapter Title Goes Here on Recto Page

ORK THE WEB

These boxes in the chapter
material show students how
to research financial issues
using the Web and how to
use the information they find
to make business decisions.
See examples in Chapter 4,
page 103; Chapter 5,
page 140.

xiii

WORK THE WEB

Calculating company growth rates can involve detailed research, and a major part of a stock analyst’s job is to
estimate them. One place to find earnings and sales growth rates on the Web is Yahoo! Finance at finance.yahoo.
com. We pulled up a quote for Minnesota Mining & Manufacturing (MMM, or 3M as it is known) and followed the

“Analyst Estimates” link. Here is an abbreviated look at the results:

As shown, analysts expect, on average, revenue (sales) of $22.77 billion in 2006, growing to $24.27 billion
in 2007, an increase of 6.6 percent. We also have the following table comparing MMM to some benchmarks:

ENHANCED! REAL-WORLD EXAMPLES
Actual events are integrated throughout the text, tying chapter concepts to real life through illustration and reinforcing the relevance of the material. Some examples tie into the chapter opening
vignette for added reinforcement. See example in Chapter 5, page 135.
SPREADSHEET STRATEGIES
Using a Spreadsheet for Time Value of Money Calculations
More and more, businesspeople from many different areas (not just finance and accounting) rely on spreadsheets
to do all the different types of calculations that come up in the real world. As a result, in this section, we will show
you how to use a spreadsheet to handle the various time value of money problems we presented in this chapter.
We will use Microsoft Excel™, but the commands are similar for other types of software. We assume you are
already familiar with basic spreadsheet operations.
As we have seen, you can solve for any one of the following four potential unknowns: future value, present
value, the discount rate, or the number of periods. With a spreadsheet, there is a separate formula for each. In
Excel, these are shown in a nearby box.
In these formulas, pv and fv are present and future
To Find
Enter This Formula
value, nper is the number of periods, and rate is the
Future value
ϭ FV (rate,nper,pmt,pv)
discount, or interest, rate.
Present value
ϭ PV (rate,nper,pmt,fv)
Two things are a little tricky here. First, unlike a
financial calculator, the spreadsheet requires that the
Discount rate

ϭ RATE (nper,pmt,pv,fv)
rate be entered as a decimal. Second, as with most
Number of periods
ϭ NPER (rate,pmt,pv,fv)
financial calculators, you have to put a negative sign
on either the present value or the future value to solve
for the rate or the number of periods. For the same reason, if you solve for a present value, the answer will have
a negative sign unless you input a negative future value. The same is true when you compute a future value.
To illustrate how you might use these formulas, we will go back to an example in the chapter. If you invest
$25,000 at 12 percent per year, how long until you have $50,000? You might set up a spreadsheet like this:
A
1
2
3
4
5
6
7
8
9
10
11
12
13
14

B

C

D

E

F

G

SPREADSHEET
STRATEGIES
This feature either introduces
students to Excel or helps them
brush up on their Excel spreadsheet skills, particularly as they
relate to corporate finance. This
feature appears in self-contained
sections and shows students
how to set up spreadsheets
to analyze common financial
problems—a vital part of every
business student’s education.
For examples, see Chapter 5,
page 139; Chapter 6, page 153.

H

Using a spreadsheet for time value of money calculations
If we invest $25,000 at 12 percent, how long until we have $50,000? We need to solve
for the unknown number of periods, so we use the formula NPER(rate, pmt, pv, fv).
Present value (pv):
Future value (fv):

Rate (rate):

$25,000
$50,000
0.12

Periods: 6.1162554
The formula entered in cell B11 is =NPER(B9,0,-B7,B8); notice that pmt is zero and that pv
has a negative sign on it. Also notice that rate is entered as a decimal, not a percentage.

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CALCULATOR HINTS

CALCULATOR HINTS

These brief calculator tutorials
have been added in selected
chapters to help students learn
or brush up on their financial calculator skills. These complement
the just-mentioned Spreadsheet
Strategies. For examples, see
Chapter 5, page 136; Chapter 6,
page 152.

How to Calculate Present Values with Multiple Future
Cash Flows Using a Financial Calculator
To calculate the present value of multiple cash flows with a financial calculator, we will simply discount the individual cash flows one at a time using the same technique we used in our previous chapter, so this is not really
new. However, we can show you a shortcut. We will use the numbers in Example 6.3 to illustrate.
To begin, of course we first remember to clear out the calculator! Next, from Example 6.3, the first cash flow
is $200 to be received in one year and the discount rate is 12 percent, so we do the following:

Enter

1

12

N

I/Y

200
PMT

PV

FV

Ϫ178.57

Solve for

Now, you can write down this answer to save it, but that’s inefficient. All calculators have a memory where you
can store numbers. Why not just save it there? Doing so cuts way down on mistakes because you don’t have to

write down and/or rekey numbers, and it’s much faster.
Next we value the second cash flow. We need to change N to 2 and FV to 400. As long as we haven’t
changed anything else, we don’t have to reenter I/Y or clear out the calculator, so we have:

Enter

2
N

Solve for

400
I/Y

PMT

PV

FV

Ϫ318.88

You save this number by adding it to the one you saved in our first calculation, and so on for the remaining two
calculations.
As we will see in a later chapter, some financial calculators will let you enter all of the future cash flows at once,
but we’ll discuss that subject when we get to it.

CONCEPT BUILDING
Chapter sections are intentionally kept short to promote a step-by-step, building block approach to
learning. Each section is then followed by a series of short concept questions that highlight the key

ideas just presented. Students use these questions to make sure they can identify and understand the
most important concepts as they read. See Chapter 5, page 133; Chapter 6, page 154 for examples.

SUMMARY TABLES
These tables succinctly restate key principles, results, and equations. They appear whenever it is useful
to emphasize and summarize a group of related concepts. For examples, see Chapter 6, page 163.

LABELED EXAMPLES
Separate numbered and titled
examples are extensively integrated
into the chapters as indicated below.
These examples provide detailed
applications and illustrations of
the text material in a step-by-step
format. Each example is completely self-contained so students
don’t have to search for additional
information. Based on our classroom testing, these examples are
among the most useful learning aids
because they provide both detail
and explanation. See Chapter 6,
page 163; Chapter 7, page 196.

Preferred Stock

EXAMPLE 6.7

Preferred stock (or preference stock) is an important example of a perpetuity. When a
corporation sells preferred stock, the buyer is promised a fixed cash dividend every period
(usually every quarter) forever. This dividend must be paid before any dividend can be paid
to regular stockholders—hence the term preferred.

Suppose the Fellini Co. wants to sell preferred stock at $100 per share. A similar issue
of preferred stock already outstanding has a price of $40 per share and offers a dividend
of $1 every quarter. What dividend will Fellini have to offer if the preferred stock is going to
sell?
The issue that is already out has a present value of $40 and a cash flow of $1 every
quarter forever. Because this is a perpetuity:
Present value ϭ $40 ϭ $1 ϫ (1͞r)
r ϭ 2.5%
To be competitive, the new Fellini issue will also have to offer 2.5 percent per quarter; so if
the present value is to be $100, the dividend must be such that:
Present value ϭ $100 ϭ C ϫ (1͞.025)
C ϭ $2.50 (per quarter)

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KEY TERMS
Key Terms are printed in bold type and defined within the text the first time they appear. They also
appear in the margins with definitions for easy location and identification by the student. See
Chapter 4, page 91; Chapter 7, page 199 for examples.

EXPLANATORY WEB LINKS
These Web links are provided in the margins of the text. They are specifically selected
to accompany text material and provide students and instructors with a quick way to
check for additional information using the Internet. See Chapter 4, page 91; Chapter 5,
page 123.

p y
y
g
p
p
Amazon.com, the big online retailer, is another example. At one time, Amazon’s motto
seemed to be “growth at any cost.” Unfortunately, what really grew rapidly for the company were losses. Amazon refocused its business, explicitly sacrificing growth in the hope
of achieving profitability. The plan seems to be working as Amazon.com turned a profit for
the first time in the third quarter of 2003.
As we discussed in Chapter 1, the appropriate goal is increasing the market value of the
owners’ equity. Of course, if a firm is successful in doing this, then growth will usually
result. Growth may thus be a desirable consequence of good decision making, but it is not
an end unto itself. We discuss growth simply because growth rates are so commonly used
in the planning process. As we will see, growth is a convenient means of summarizing
various aspects of a firm’s financial and investment policies. Also, if we think of growth as
growth in the market value of the equity in the firm, then goals of growth and increasing
the market value of the equity in the firm are not all that different.

You can find
growth rates under the
research links at
www.investor.reuters.com
and finance.yahoo.com.

KEY EQUATIONS
Called out in the text, key equations are identified by an equation number. The list in Appendix B
shows the key equations by chapter, providing students with a convenient reference. For examples,
see Chapter 4, page 97; Chapter 5, page 123.

HIGHLIGHTED CONCEPTS
Throughout the text, important
ideas are pulled out and presented
in a highlighted box—signaling
to students that this material is
particularly relevant and critical for
their understanding. See Chapter 4,
page 107.

y
q y
Given values for all four of these, there is only one growth rate that can be achieved.
This is an important point, so it bears restating:

If a firm does not wish to sell new equity and its profit margin, dividend policy,
financial policy, and total asset turnover (or capital intensity) are all fixed, then
there is only one possible growth rate.

As we described early in this chapter, one of the primary benefits of financial planning
is that it ensures internal consistency among the firm’s various goals. The concept of the
sustainable growth rate captures this element nicely. Also, we now see how a financial
planning model can be used to test the feasibility of a planned growth rate. If sales are to
grow at a rate higher than the sustainable growth rate, the firm must increase profit margins,
increase total asset turnover, increase financial leverage, increase earnings retention, or sell
new shares.

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CHAPTER SUMMARY AND CONCLUSIONS
Every chapter ends with a concise, but thorough, summary of the important ideas—helping students
review the key points and providing closure to the chapter. See Chapter 4, page 111; Chapter 5,
page 141.

CHAPTER REVIEW AND SELF-TEST PROBLEMS
5.1
5.2

5.3

5.4

Calculating Future Values Assume you deposit $10,000 today in an account that
pays 6 percent interest. How much will you have in five years?
Calculating Present Values Suppose you have just celebrated your 19th birthday.
A rich uncle has set up a trust fund for you that will pay you $150,000 when you turn
30. If the relevant discount rate is 9 percent, how much is this fund worth today?
Calculating Rates of Return You’ve been offered an investment that will double
your money in 10 years. What rate of return are you being offered? Check your
answer using the Rule of 72.
Calculating the Number of Periods You’ve been offered an investment that
will pay you 9 percent per year. If you invest $15,000, how long until you have
$30,000? How long until you have $45,000?

CHAPTER REVIEW AND
SELF-TEST PROBLEMS

Appearing after the Summary
and Conclusion, each chapter
includes a Chapter Review
and Self-Test Problem section.
These questions and answers
allow students to test their
abilities in solving key problems
related to the chapter content
and provide instant reinforcement. See Chapter 5, page 141;
Chapter 6, page 177.

ANSWERS TO CHAPTER REVIEW AND SELF-TEST PROBLEMS
5.1

5.2

We need to calculate the future value of $10,000 at 6 percent for five years. The
future value factor is:
1.065 ϭ 1.3382
The future value is thus $10,000 ϫ 1.3382 ϭ $13,382.26.
We need the present value of $150,000 to be paid in 11 years at 9 percent. The
discount factor is:
1͞1.0911 ϭ 1͞2.5804 ϭ .3875
The present value is thus about $58,130.

CONCEPTS REVIEW AND
CRITICAL THINKING
QUESTIONS
This successful end-of-chapter
section facilitates your students’

knowledge of key principles, as
well as intuitive understanding of
the chapter concepts. A number
of the questions relate to the
chapter-opening vignette—
reinforcing student critical-thinking skills and the learning of
chapter material. For examples,
see Chapter 6, page 180;
Chapter 7, page 228.

CONCEPTS REVIEW AND CRITICAL THINKING QUESTIONS
1.
2.
3.
4.

5.

6.

7.

Annuity Factors There are four pieces to an annuity present value. What are they?
Annuity Period As you increase the length of time involved, what happens to the
present value of an annuity? What happens to the future value?
Interest Rates What happens to the future value of an annuity if you increase the
rate r? What happens to the present value?
Present Value What do you think about the Tri-State Megabucks lottery discussed
in the chapter advertising a $500,000 prize when the lump sum option is $250,000?
Is it deceptive advertising?

Present Value If you were an athlete negotiating a contract, would you want a
big signing bonus payable immediately and smaller payments in the future, or vice
versa? How about looking at it from the team’s perspective?
Present Value Suppose two athletes sign 10-year contracts for $80 million. In one
case, we’re told that the $80 million will be paid in 10 equal installments. In the
other case, we’re told that the $80 million will be paid in 10 installments, but the
installments will increase by 5 percent per year. Who got the better deal?
APR and EAR Should lending laws be changed to require lenders to report EARs
instead of APRs? Why or why not?

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QUESTIONS AND PROBLEMS
1.

2.

3.

4.

5.

6.

7.

8.

Interpreting Bond Yields Is the yield to maturity on a bond the same thing
as the required return? Is YTM the same thing as the coupon rate? Suppose
today a 10 percent coupon bond sells at par. Two years from now, the required
return on the same bond is 8 percent. What is the coupon rate on the bond then?
The YTM?
Interpreting Bond Yields Suppose you buy a 7 percent coupon, 20-year bond
today when it’s first issued. If interest rates suddenly rise to 15 percent, what happens to the value of your bond? Why?
Bond Prices Carpenter, Inc., has 8 percent coupon bonds on the market that have
10 years left to maturity. The bonds make annual payments. If the YTM on these
bonds is 9 percent, what is the current bond price?
Bond Yields Linebacker Co. has 7 percent coupon bonds on the market with nine
years left to maturity. The bonds make annual payments. If the bond currently sells
for $1,080, what is its YTM?
Coupon Rates Hawk Enterprises has bonds on the market making annual
payments, with 16 years to maturity, and selling for $870. At this price, the bonds
yield 7.5 percent. What must the coupon rate be on the bonds?
Bond Prices Cutler Co. issued 11-year bonds a year ago at a coupon rate of
7.8 percent. The bonds make semiannual payments. If the YTM on these bonds is
8.6 percent, what is the current bond price?
Bond Yields Ngata Corp. issued 12-year bonds 2 years ago at a coupon rate of
9.2 percent. The bonds make semiannual payments. If these bonds currently sell
for 104 percent of par value, what is the YTM?
Coupon Rates Wimbley Corporation has bonds on the market with 14.5 years to
maturity, a YTM of 6.8 percent, and a current price of $1,136.50. The bonds make
semiannual payments. What must the coupon rate be on these bonds?

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BASIC
(Questions 1–14)

END-OF-CHAPTER
QUESTIONS AND
PROBLEMS
We have found that many students
learn better when they have plenty
of opportunity to practice; therefore,
we provide extensive end-of-chapter
questions and problems. The endof-chapter support greatly exceeds
typical introductory textbooks.
The questions and problems are
segregated into three learning levels:
Basic, Intermediate, and Challenge.
All problems are fully annotated so
that students and instructors can
readily identify particular types.
Answers to selected end-of-chapter
material appear in Appendix C.
Also, all problems are available
in McGraw-Hill’s Homework
Manager—see page xxi for details.
See Chapter 6, page 181; Chapter 7,
page 229.

2/8/07 4:36:33 AM

WEB EXERCISES
These end-of-chapter activities show students how to use and learn
from the vast amount of financial resources available on the Internet.
See examples in Chapter 6, page 190; Chapter 7, page 233.

WEB EXERCISES
7.1

7.2

7.3

Bond Quotes You can find the current bond quotes for many companies at www.
nasdbondinfo.com. Go to the site and find the bonds listed for Georgia Pacific.
What is the shortest-maturity bond listed for Georgia Pacific? What is the longestmaturity bond? What are the credit ratings for each bond? Do each of the bonds
have the same credit rating? Why do you think this is?
Yield Curves You can find information regarding the most current bond yields at
money.cnn.com. Graph the yield curve for U.S. Treasury bonds. What is the general
shape of the yield curve? What does this imply about the expected future inflation?
Now graph the yield curve for AAA, AA, and A rated corporate bonds. Is the corporate yield curve the same shape as the Treasury yield curve? Why or why not?
Default Premiums The St. Louis Federal Reserve Board has files listing historical
interest rates on their Web site: www.stls.frb.org. Find the link for “FRED II” data,
then “Interest Rates.” You will find listings for Moody’s Seasoned Aaa Corporate
Bond Yield and Moody’s Seasoned Baa Corporate Bond Yield. A default premium
can be calculated as the difference between the Aaa bond yield and the Baa bond yield.
Calculate the default premium using these two bond indexes for the most recent 36
months. Is the default premium the same for every month? Why do you think this is?

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NEW END-OF-CHAPTER CASES
Located at the end of the book’s chapters, these minicases focus on real-life company situations that embody important
corporate finance topics. Each case presents a new scenario, data, and a dilemma. Several questions at the end of each
case require students to analyze and focus on all of the material they learned from each chapter. See examples in
Chapter 6, page 191; Chapter 7, page 233.

The MBA Decision
Ben Bates graduated from college six years ago with a finance
undergraduate degree. Although he is satisfied with his current job, his goal is to become an investment banker. He feels
that an MBA degree would allow him to achieve this goal.
After examining schools, he has narrowed his choice to either
Wilton University or Mount Perry College. Although internships are encouraged by both schools, to get class credit for
the internship, no salary can be paid. Other than internships,
neither school will allow its students to work while enrolled
in its MBA program.
Ben currently works at the money management firm of
Dewey and Louis. His annual salary at the firm is $50,000 per
year, and his salary is expected to increase at 3 percent per
year until retirement. He is currently 28 years old and expects
to work for 35 more years. His current job includes a fully
paid health insurance plan, and his current average tax rate is
26 percent. Ben has a savings account with enough money to
cover the entire cost of his MBA program.
The Ritter College of Business at Wilton University is one
of the top MBA programs in the country. The MBA degree

requires two years of full-time enrollment at the university.
The annual tuition is $60,000, payable at the beginning of
each school year. Books and other supplies are estimated to
cost $2,500 per year. Ben expects that after graduation from
Wilton, he will receive a job offer for about $95,000 per year,
with a $15,000 signing bonus. The salary at this job will
increase at 4 percent per year. Because of the higher salary,
his average income tax rate will increase to 31 percent.
The Bradley School of Business at Mount Perry College
began its MBA program 16 years ago. The Bradley School is

smaller and less well known than the Ritter College. Bradley
offers an accelerated one-year program, with a tuition cost of
$75,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $3,500. Ben thinks
that he will receive an offer of $78,000 per year upon graduation, with a $10,000 signing bonus. The salary at this job will
increase at 3.5 percent per year. His average tax rate at this
level of income will be 29 percent.
Both schools offer a health insurance plan that will cost
$3,000 per year, payable at the beginning of the year. Ben
also estimates that room and board expenses will cost $20,000
per year at both schools. The appropriate discount rate is
6.5 percent.
1.

How does Ben’s age affect his decision to get an MBA?

2.

What other, perhaps nonquantifiable, factors affect Ben’s
decision to get an MBA?

3.

Assuming all salaries are paid at the end of each year,
what is the best option for Ben from a strictly financial
standpoint?

4.

Ben believes that the appropriate analysis is to calculate
the future value of each option. How would you evaluate this statement?

5.

What initial salary would Ben need to receive to make
him indifferent between attending Wilton University
and staying in his current position?

6.

Suppose, instead of being able to pay cash for his MBA,
Ben must borrow the money. The current borrowing
rate is 5.4 percent. How would this affect his decision?

Visit us at www.mhhe.com/rwj

MINICASE

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Comprehensive Teaching
and Learning Package
CHAPTER 1

Chapter Title Goes Here on Recto Page

xix

This edition of Fundamentals has more options than ever in terms of the textbook, instructor supplements,
student supplements, and multimedia products. Mix and match to create a package that is perfect for
your course!

TEXTBOOK
As with the previous editions, we are offering two versions of this text, both of which are packaged with an
exciting student CD-ROM (see description under “Student Supplements”),
• Standard Edition (22 Chapters)
• Alternate Edition (26 Chapters)

INSTRUCTOR SUPPLEMENTS
Annotated Instructor’s Edition (AIE) ISBN 007328212X
All your teaching resources are tied together here! This handy resource contains extensive references to
the Instructor’s Manual regarding lecture tips, ethics notes, Internet references, international notes, and
the availability of teaching PowerPoint slides. The lecture tips vary in content and purpose—providing an
alternative perspective on a subject, suggesting important points to be stressed, giving further examples,
or recommending other readings. The ethics notes present background on topics that motivate classroom discussion of finance-related ethical issues. Other annotations include notes for the Real-World Tips,

Concept Questions, Self-Test Problems, End-of-Chapter Problems, Videos, and answers to the end-ofchapter problems.

Instructor’s CD-ROM ISBN 0073282138
Keep all the supplements in one place! This CD contains all the necessary supplements—Instructor’s
Manual, Solutions, Test Bank, Computerized Test Bank, and PowerPoint—all in one useful product in an
electronic format.
• Instructor’s Manual (IM)
prepared by Kent Ragan, Missouri State University and Joseph Smolira, Belmont University
A great place to find new lecture ideas! The IM has three main sections. The first section contains a
chapter outline and other lecture materials designed for use with the Annotated Instructor’s Edition.
The annotated outline for each chapter includes lecture tips, real-world tips, ethics notes, suggested
PowerPoint slides, and, when appropriate, a video synopsis. Detailed solutions for all end-of-chapter
problems appear in section two.
• Test Bank
prepared by Kay Johnson, Penn State University—Erie
Great format for a better testing process! All questions closely link with the text material. Each chapter
is divided into four parts. Part I contains questions that test the understanding of the key terms in the
book. Part II includes questions patterned after the learning objectives, concept questions, chapteropening vignettes, boxes, and highlighted phrases. Part III contains multiple-choice and true/false problems patterned after the end-of-chapter questions, in basic, intermediate, and challenge levels. Part IV
provides essay questions to test problem-solving skills and more advanced understanding of concepts.
Also included are ready-made quizzes to hand out in class.

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• Computerized Test Bank (Windows)
Create your own tests in a snap! These additional questions are found in a computerized test bank

utilizing McGraw-Hill’s EZ Test testing software to quickly create customized exams. This user-friendly
program allows instructors to sort questions by format; edit existing questions or add new ones; and
scramble questions for multiple versions of the same test.
• PowerPoint Presentation System
prepared by Kent Ragan, Missouri State University
Customize our content for your course! This presentation has been thoroughly revised to include
more lecture-oriented slides, as well as exhibits and examples both from the book and from outside
sources. Applicable slides have Web links that take you directly to specific Internet sites, or a spreadsheet link to show an example in Excel. You can also go to the Notes Page function for more tips in
presenting the slides. If you already have PowerPoint installed on your PC, you have the ability to edit,
print, or rearrange the complete presentation to meet your specific needs.

Videos (DVD Format) ISBN 0073282111
Current set of videos on hot topics! McGraw-Hill/Irwin produced a series of finance videos that are
10-minute case studies on topics such as Financial Markets, Careers, Rightsizing, Capital Budgeting, EVA
(Economic Value Added), Mergers and Acquisitions, and International Finance.

ONLINE SUPPORT
Online learning center at www.mhhe.com/rwj
The Online Learning Center (OLC) contains FREE access to additional Web-based study and teaching aids
created for this text, such as:
• Student Support
A great resource for those seeking additional practice, students can access self-grading quizzes,
Excel template problems, electronic flashcards, self-study software, Web Exercises, links to Corporate Finance Online questions, Finance Around the World problems, timely articles, and much more to
help master the fundamentals of corporate finance!
• Teaching Support
Along with having access to all of the same material your students can view on the book’s OLC, you
also have password protected access to the Instructor’s Manual, solutions to end-of-chapter problems and Excel, Instructor’s PowerPoint, Excel Template Solutions, Video clips, Video projects and
questions, and teaching notes to Corporate Finance Online, a Web extension with additional exercises and projects for your course.
• McGraw-Hill Investments Trader
Students receive free access to this Web-based portfolio simulation with a hypothetical $100,000

brokerage account to buy and sell stocks and mutual funds. Students can use the real data found at
this site in conjunction with the chapters on investments. They can also compete against students
around the United States. This site is powered by Stock-Trak, the leading provider of investment
simulation services to the academic community.

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ENHANCED CARTRIDGES
Enhanced WebCT and Blackboard course cartridges allow instructors to manage their course and administer online examinations. Some of the new features include:
• Narrated PowerPoint
Each chapter’s slides follow the chapter topics and provide steps and explanations for how to solve
those topics using real-life examples. Knowing that each student learns differently, a quick click on
each slide and the slide will “talk through” its contents with students! Students can view these slides
via computer or download them onto their video iPod (see details below).
• Interactive FinSims
Each module highlights a key concept of corporate finance from the book and simulates how to solve
it, asking the student to input certain variables. This hands-on approach guides students through difficult and important corporate finance topics.
• iPod Content
Harness the power of one of the most popular technology tools students use today, the Apple iPod®.
Our innovative approach enables students to download Narrated PowerPoints and quizzes right into
their iPod and take learning materials with them wherever they go. This makes review and study time
as easy as putting on headphones!
• Chapter Overviews
Concise recap of what students should learn from each chapter. A great reading prep assignment.
• Pretest and Posttest Question Banks

Administer comprehensive and chapter-specific pretest and posttests to evaluate student understanding.
• Online Glossary
Key terms and their definitions in a ready to use format. Distribute to students for a study tool, or mix
and match to create a quiz.
Ask your McGraw-Hill representative for more details about Enhanced Cartridges today!

McGraw-Hill’s Homework Manager and Homework Manager Plus
Are you looking for a way to spend less time grading and to have more flexibility with the problems you
assign as homework and tests? McGraw-Hill’s Homework Manager is an exciting new package option developed for this text! Homework Manager is a Web-based tool for instructors and students for delivering,
answering, and grading end-of-chapter problems and tests, and providing a limitless supply of self-graded
practice for students.
All of the book’s end-of-chapter Questions and Problems are loaded into Homework Manager, and
instructors can choose to assign the exact problems as stated in the book, or algorithmic versions of them
so each student has a unique set of variables for the problems. You create the assignments and control
parameters such as do you want your students to receive hints, is this a graded assignment or practice,
etc. The test bank is also available in Homework Manager, giving you the ability to use those questions
for online tests. Both the problems and the tests are automatically graded and the results are stored in a
private grade book, which is created when you set up your class. Detailed results let you see at a glance
how each student does on an assignment or an individual problem—you can even see how many tries it

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took them to solve it. If you order this special package, students will receive a Homework Manager User’s
Guide and an access code packaged with their text.
There is also an enhanced version of McGraw-Hill’s Homework Manager through the Homework Manager Plus package option. If you order the text packaged with Homework Manager Plus, your students

will receive Homework Manager as described above, but with an integrated online text included. When
students are in Homework Manager and need more help to solve a problem, there will be a link that takes
them to the section of the text online that explains the concept they are struggling with. All of McGraw-Hill’s
media assets, such as videos, narrated lectures, and additional online quizzing, are also integrated at the
appropriate places of the online text to provide students with a full learning experience. If you order this
special package, students will receive the Homework Manager Plus card packaged with their text, which
gives them access to all of these products.
McGraw-Hill’s Homework Manager is powered by Brownstone.

AVAILABLE FOR PURCHASE & PACKAGING
Student Problem Manual ISBN 0073282154
prepared by Thomas Eyssell, University of Missouri—St. Louis
Need additional reinforcement of the concepts? This valuable resource provides students with additional problems for practice. Each chapter begins with Concepts for Review, followed by Chapter Highlights. These re-emphasize the key terms and concepts in the chapter. A short Concept Test, averaging
10 questions and answers, appears next. Each chapter concludes with additional problems for the
student to review. Answers to these problems appear at the end of the Student Problem Manual.

BusinessWeek Subscription
Your students can subscribe to BusinessWeek for a specially priced rate of $20.00 in addition to the
price of the text. Students will receive a passcode card shrink-wrapped with their new text by ordering
this special package. The card directs students to a Web site where they enter the code and then gain
access to BusinessWeek’s registration page to enter address info and set up their print and online subscription for a 15-week period.

Financial Times Subscription
Your students can subscribe to the Financial Times for 15 weeks at a specially priced rate of $10 in
addition to the price of the text by ordering this special package. Students will receive a subscription
card shrink-wrapped with their new text to fill in and send to the Financial Times to start receiving their
subscription. Instructors, once you order, make sure you contact your sales representative to receive a
complimentary one-year subscription.

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Acknowledgments
To borrow a phrase, writing an introductory finance textbook is easy—all you do is sit down at a word
processor and open a vein. We never would have completed this book without the incredible amount of
help and support we received from literally hundreds of our colleagues, students, editors, family members,
and friends. We would like to thank, without implicating, all of you.
Clearly, our greatest debt is to our many colleagues (and their students) who, like us, wanted to try an
alternative to what they were using and made the decision to change. Needless to say, without this support, we would not be publishing an eighth edition!
A great many of our colleagues read the drafts of our first and subsequent editions. The fact that this
book has so little in common with our earliest drafts, along with the many changes and improvements we
have made over the years, is a reflection of the value we placed on the many comments and suggestions
that we received. To the following reviewers, then, we are grateful for their many contributions:
Ibrahim Affeneh
Sung C. Bae
Robert Benecke
Gary Benesh
Scott Besley
Sanjai Bhaghat
Vigdis W. Boasson
Elizabeth Booth
Denis Boudreaux
William Brent
Ray Brooks
Charles C. Brown
Mary Chaffin

Fan Chen
Raju Chenna
Barbara J. Childs
Charles M. Cox
Natalya Delcoure
Michael Dorigan
David A. Dumpe
Michael Dunn
Alan Eastman
Adrian C. Edwards
Steve Engel
Angelo V. Esposito
Cheri Etling
Thomas H. Eyssell
Michael Ferguson
Deborah Ann Ford
Jim Forjan
Micah Frankel

Jennifer R. Frazier
Deborah M. Giarusso
Devra Golbe
A. Steven Graham
Darryl E. J. Gurley
Wendy D. Habegger
David Harraway
John M. Harris, Jr.
R. Stevenson Hawkey
Delvin D. Hawley
Robert C. Higgins

Karen Hogan
Steve Isberg
James Jackson
Pankaj Jain
James M. Johnson
Randy Jorgensen
Jarl G. Kallberg
Terry Keasler
David N. Ketcher
Jim Keys
Kee Kim
Robert Kleinman
David Kuipers
Morris A. Lamberson
Qin Lan
Adam Y.C. Lei
George Lentz
John Lightstone
Jason Lin
Robert Lutz

Pawan Madhogarhia
Timothy Manuel
David G. Martin
Dubos J. Masson
John McDougald
Bob McElreath
Gordon Melms
Richard R. Mendenhall
Wayne Mikkelson

Lalatendu Misra
Karlyn Mitchell
Sunil Mohanty
Scott Moore
Frederick H. Mull
Michael J. Murray
Randy Nelson
Bulent Parker
Megan Partch
Samuel Penkar
Pamela P. Peterson
Robert Phillips
George A. Racette
Charu G. Raheja
Narendar V. Rao
Russ Ray
Ron Reiber
Thomas Rietz
Jay R. Ritter
Ricardo J. Rodriguez
Kenneth Roskelley
Gary Sanger
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Travis Sapp

Martha A. Schary
Robert Schwebach
Roger Severns
Dilip K. Shome
Neil W. Sicherman
Timothy Smaby
Michael F. Spivey
Vic Stanton
Charlene Sullivan
George S. Swales, Jr.
Philip Swensen

Philip Swicegood
John G. Thatcher
Harry Thiewes
A. Frank Thompson
Joseph Trefzger
Michael R. Vetsuypens
Joe Walker
Jun Wang
James Washam
Alan Weatherford
Marsha Weber
Jill Wetmore

Mark White
Annie Wong
David J. Wright
Steve B. Wyatt
Tung-Hsiao Yang

Morris Yarmish
Michael Young
Mei Zhang
J. Kenton Zumwalt
Tom Zwirlein

Several of our most respected colleagues contributed original essays for this edition, which are entitled “In
Their Own Words,” and appear in selected chapters. To these individuals we extend a special thanks:
Edward I. Altman
New York University
Fischer Black
Robert C. Higgins
University of Washington
Roger Ibbotson
Yale University,
Ibbotson Associates
Erik Lie
University of Iowa

Robert C. Merton
Harvard University
Merton H. Miller
Jay R. Ritter
University of Florida
Richard Roll
University of California at
Los Angeles

Jeremy Siegel
University of Pennsylvania

Bennett Stewart
Stern Stewart & Co.
Samuel C. Weaver
Lehigh University

We owe a special thanks to Kent Ragan of Missouri State University. Kent worked on the many supplements that accompany this book, including the Instructor’s Manual and PowerPoint Presentation System.
Kent also worked with us to develop the Annotated Instructor’s Edition of the text which, along with the
Instructor’s Manual, contains a wealth of teaching notes.
We also thank Joseph C. Smolira of Belmont University for his work on this edition. Joe worked closely
with us to develop portions of the Instructor’s Manual, along with the many vignettes and real-world
examples we have added to this edition. We owe a special thank you to Thomas H. Eyssell of the University of Missouri. Tom has continued his exceptional work on our supplements by creating the Student Problem Manual for this edition. In addition, we would like to thank Kay Johnson, Penn State University—Erie,
for creating the self-study questions, as well as revising, reorganizing, and expanding the very extensive
testbank available with Fundamentals and creating the Student PowerPoints.
The following University of Kentucky doctoral students did outstanding work on this edition of Fundamentals: Hinh Khieu, T. J. Phillips, and Qun Wu. To them fell the unenviable task of technical proofreading,
and in particular, careful checking of each calculation throughout the text and Instructor’s Manual.
Finally, in every phase of this project, we have been privileged to have had the complete and unwavering
support of a great organization, McGraw-Hill/Irwin. We especially thank the McGraw-Hill/Irwin sales

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