, Selected material from
Fundamentals of Corporate Finance
Third Edition
Richard A. Brealey
Bank of England and London Business School
Stewart C. Myers
Sloan School of Management
Massachusetts Institute of Technology
Alan J. Marcus
Wallace E. Carroll School of Management
Boston College
with additional material from
Fundamentals of Corporate Finance, Alternate Fifth Edition
Essentials of Corporate Finance, Second Edition
Stephen A. Ross, Massachusetts Institute of Technology
Randolph W. Westerfield, University of Southern California
Bradford D. Jordan, University of Kentucky
UNIVERSITY OF PHOENIX
Boston Burr Ridge, IL Dubuque, IA Madison, WI New York San Francisco St. Louis
Bangkok Bogotá Caracas Lisbon London Madrid
Mexico City Milan New Delhi Seoul Singapore Sydney Taipei Toronto
,Selected material from
FUNDAMENTALS OF CORPORATE FINANCE, Third Edition
with additional material from
FUNDAMENTALS OF CORPORATE FINANCE, Alternate Fifth Edition
ESSENTIALS OF CORPORATE FINANCE, Second Edition
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Printed in the United States of America. Ex-
cept as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distrib-
uted in any form or by any means, or stored in a data base retrieval system, without prior written permission of the pub-
lisher.
This book contains select material from:
Fundamentals of Corporate Finance, Third Edition by Richard A. Brealey, Stewart C. Myers, and Alan J. Marcus. Copyright
© 2001, 1999, 1995, by The McGraw-Hill Companies, Inc.
Fundamentals of Corporate Finance, Alternate Fifth Edition by Stephen A. Ross, Randolph W. Westerfield, and Bradford D.
Jordan. Copyright © 2000, 1998, 1995, 1993, 1991 by The McGraw-Hill Companies, Inc.
Essentials of Corporate Finance, Second Edition by Stephen A. Ross, Randolph W. Westerfield, and Bradford D. Jordan.
Copyright © 1999 by The McGraw-Hill Companies, Inc. Previous edition © 1996 by Richard D. Irwin, a Times Mirror
Higher Education Group, Inc. company.
All reprinted with permission of the publisher.
ISBN 0-07-553109-7
Sponsoring Editor: Christian Perlee
Production Editor: Nina Meyer
, Contents
SECTION 1 1
The Firm and the Financial How to Value Perpetuities 50
How to Value Annuities 51
Manager 3 Annuities Due 54
Organizing a Business 4 Future Value of an Annuity 57
Sole Proprietorships 4
Inflation and the Time Value of Money 61
Partnerships 5
Real versus Nominal Cash Flows 61
Corporations 5
Inflation and Interest Rates 63
Hybrid Forms of Business Organization 6
Valuing Real Cash Payments 65
The Role of the Financial Manager 7 Real or Nominal? 67
The Capital Budgeting Decision 8 Effective Annual Interest Rates 67
The Financing Decision 9
Summary 69
Financial Institutions and Markets 10 Related Web Links 69
Financial Institutions 10 Key Terms 70
Financial Markets 11 Quiz 70
Other Functions of Financial Markets and Practice Problems 72
Institutions 12 Challenge Problems 75
Who Is the Financial Manager? 13 Solutions to Self-Test Questions 77
Careers in Finance 15 Minicase 79
Goals of the Corporation 17 Financial Planning 81
Shareholders Want Managers to Maximize What Is Financial Planning? 82
Market Value 17 Financial Planning Focuses on the Big Picture 83
Ethics and Management Objectives 19 Financial Planning Is Not Just Forecasting 84
Do Managers Really Maximize Firm Value? 21 Three Requirements for Effective Planning 84
Snippets of History 25
Financial Planning Models 86
Summary 25 Components of a Financial Planning Model 87
Related Web Links 28 An Example of a Planning Model 88
Key Terms 28 An Improved Model 89
Quiz 28
Practice Problems 29 Planners Beware 93
Solutions to Self-Test Questions 31 Pitfalls in Model Design 93
The Assumption in Percentage of Sales Models 94
The Time Value of Money 33 The Role of Financial Planning Models 95
Future Values and Compound Interest 34 External Financing and Growth 96
Present Values 38 Summary 100
Finding the Interest Rate 44 Related Web Links 101
Multiple Cash Flows 46 Key Terms 101
Future Value of Multiple Cash Flows 46 Quiz 101
Present Value of Multiple Cash Flows 49 Practice Problems 102
Challenge Problems 106
Level Cash Flows: Perpetuities and Annuities 50 Solutions to Self-Test Questions 106
iii
Fundamentals of Corporate Finance
Third Edition
Richard A. Brealey
Bank of England and London Business School
Stewart C. Myers
Sloan School of Management
Massachusetts Institute of Technology
Alan J. Marcus
Wallace E. Carroll School of Management
Boston College
with additional material from
Fundamentals of Corporate Finance, Alternate Fifth Edition
Essentials of Corporate Finance, Second Edition
Stephen A. Ross, Massachusetts Institute of Technology
Randolph W. Westerfield, University of Southern California
Bradford D. Jordan, University of Kentucky
UNIVERSITY OF PHOENIX
Boston Burr Ridge, IL Dubuque, IA Madison, WI New York San Francisco St. Louis
Bangkok Bogotá Caracas Lisbon London Madrid
Mexico City Milan New Delhi Seoul Singapore Sydney Taipei Toronto
,Selected material from
FUNDAMENTALS OF CORPORATE FINANCE, Third Edition
with additional material from
FUNDAMENTALS OF CORPORATE FINANCE, Alternate Fifth Edition
ESSENTIALS OF CORPORATE FINANCE, Second Edition
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Printed in the United States of America. Ex-
cept as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distrib-
uted in any form or by any means, or stored in a data base retrieval system, without prior written permission of the pub-
lisher.
This book contains select material from:
Fundamentals of Corporate Finance, Third Edition by Richard A. Brealey, Stewart C. Myers, and Alan J. Marcus. Copyright
© 2001, 1999, 1995, by The McGraw-Hill Companies, Inc.
Fundamentals of Corporate Finance, Alternate Fifth Edition by Stephen A. Ross, Randolph W. Westerfield, and Bradford D.
Jordan. Copyright © 2000, 1998, 1995, 1993, 1991 by The McGraw-Hill Companies, Inc.
Essentials of Corporate Finance, Second Edition by Stephen A. Ross, Randolph W. Westerfield, and Bradford D. Jordan.
Copyright © 1999 by The McGraw-Hill Companies, Inc. Previous edition © 1996 by Richard D. Irwin, a Times Mirror
Higher Education Group, Inc. company.
All reprinted with permission of the publisher.
ISBN 0-07-553109-7
Sponsoring Editor: Christian Perlee
Production Editor: Nina Meyer
, Contents
SECTION 1 1
The Firm and the Financial How to Value Perpetuities 50
How to Value Annuities 51
Manager 3 Annuities Due 54
Organizing a Business 4 Future Value of an Annuity 57
Sole Proprietorships 4
Inflation and the Time Value of Money 61
Partnerships 5
Real versus Nominal Cash Flows 61
Corporations 5
Inflation and Interest Rates 63
Hybrid Forms of Business Organization 6
Valuing Real Cash Payments 65
The Role of the Financial Manager 7 Real or Nominal? 67
The Capital Budgeting Decision 8 Effective Annual Interest Rates 67
The Financing Decision 9
Summary 69
Financial Institutions and Markets 10 Related Web Links 69
Financial Institutions 10 Key Terms 70
Financial Markets 11 Quiz 70
Other Functions of Financial Markets and Practice Problems 72
Institutions 12 Challenge Problems 75
Who Is the Financial Manager? 13 Solutions to Self-Test Questions 77
Careers in Finance 15 Minicase 79
Goals of the Corporation 17 Financial Planning 81
Shareholders Want Managers to Maximize What Is Financial Planning? 82
Market Value 17 Financial Planning Focuses on the Big Picture 83
Ethics and Management Objectives 19 Financial Planning Is Not Just Forecasting 84
Do Managers Really Maximize Firm Value? 21 Three Requirements for Effective Planning 84
Snippets of History 25
Financial Planning Models 86
Summary 25 Components of a Financial Planning Model 87
Related Web Links 28 An Example of a Planning Model 88
Key Terms 28 An Improved Model 89
Quiz 28
Practice Problems 29 Planners Beware 93
Solutions to Self-Test Questions 31 Pitfalls in Model Design 93
The Assumption in Percentage of Sales Models 94
The Time Value of Money 33 The Role of Financial Planning Models 95
Future Values and Compound Interest 34 External Financing and Growth 96
Present Values 38 Summary 100
Finding the Interest Rate 44 Related Web Links 101
Multiple Cash Flows 46 Key Terms 101
Future Value of Multiple Cash Flows 46 Quiz 101
Present Value of Multiple Cash Flows 49 Practice Problems 102
Challenge Problems 106
Level Cash Flows: Perpetuities and Annuities 50 Solutions to Self-Test Questions 106
iii
