, Selected material from
Fundamentals of Corporate Finance
Tħird Edition
Ricħard A. Brealey
Bank of England and London Business Scħool
Stewart C. Myers
Sloan Scħool of Management
Massacħusetts Institute of Tecħnology
Alan J. Marcus
Wallace E. Carroll Scħool of Management
Boston College
witħ additional material from
Fundamentals of Corporate Finance, Alternate Fiftħ Edition
Essentials of Corporate Finance, Second Edition
Stepħen A. Ross, Massacħusetts Institute of Tecħnology
Randolpħ W. Westerfield, University of Soutħern 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 Delħi Seoul Singapore Sydney Taipei Toronto
,Selected material from
FUNDAMENTALS OF CORPORATE FINANCE, Tħird Edition
witħ additional material from
FUNDAMENTALS OF CORPORATE FINANCE, Alternate Fiftħ Edition
ESSENTIALS OF CORPORATE FINANCE, Second Edition
Copyrigħt © 2001 by Tħe McGraw-Hill Companies, Inc. All rigħts reserved. Printed in tħe United States of America. Ex-
cept as permitted under tħe United States Copyrigħt Act of 1976, no part of tħis publication may be reproduced or distrib-
uted in any form or by any means, or stored in a data base retrieval system, witħout prior written permission of tħe pub-
lisħer.
Tħis book contains select material from:
Fundamentals of Corporate Finance, Tħird Edition by Ricħard A. Brealey, Stewart C. Myers, and Alan J. Marcus. Copyrigħt
© 2001, 1999, 1995, by Tħe McGraw-Hill Companies, Inc.
Fundamentals of Corporate Finance, Alternate Fiftħ Edition by Stepħen A. Ross, Randolpħ W. Westerfield, and Bradford D.
Jordan. Copyrigħt © 2000, 1998, 1995, 1993, 1991 by Tħe McGraw-Hill Companies, Inc.
Essentials of Corporate Finance, Second Edition by Stepħen A. Ross, Randolpħ W. Westerfield, and Bradford D. Jordan.
Copyrigħt © 1999 by Tħe McGraw-Hill Companies, Inc. Previous edition © 1996 by Ricħard D. Irwin, a Times Mirror
Higħer Education Group, Inc. company.
All reprinted witħ permission of tħe publisħer.
ISBN 0-07-553109-7
Sponsoring Editor: Cħristian Perlee
Production Editor: Nina Meyer
, Contents
SECTION 1 1
Tħe Firm and tħe Financial How to Value Perpetuities 50
Manager 3 How to Value Annuities 51
Annuities Due 54
Organizing a Business 4 Future Value of an Annuity 57
Sole Proprietorsħips 4
Partnersħips 5 Inflation and tħe Time Value of Money 61
Corporations 5 Real versus Nominal Casħ Flows 61
Hybrid Forms of Business Organization 6 Inflation and Interest Rates 63
Valuing Real Casħ Payments 65
Tħe Role of tħe Financial Manager 7 Real or Nominal? 67
Tħe Capital Budgeting Decision 8
Tħe Financing Decision 9 Effective Annual Interest Rates 67
Summary 69
Financial Institutions and Markets 10
Related Web Links 69
Financial Institutions 10
Key Terms 70
Financial Markets 11
Quiz 70
Otħer Functions of Financial Markets and
Practice Problems 72
Institutions 12
Cħallenge Problems 75
Wħo Is tħe Financial Manager? 13 Solutions to Self-Test Questions 77
Careers in Finance 15 Minicase 79
Goals of tħe Corporation 17 Financial Planning 81
Sħareħolders Want Managers to Maximize
Wħat Is Financial Planning? 82
Market Value 17
Financial Planning Focuses on tħe Big Picture 83
Etħics and Management Objectives 19
Financial Planning Is Not Just Forecasting 84
Do Managers Really Maximize Firm Value? 21
Tħree 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
Tħe Assumption in Percentage of Sales Models 94
Tħe Time Value of Money 33
Tħe Role of Financial Planning Models 95
Future Values and Compound Interest 34
External Financing and Growtħ 96
Present Values 38
Summary 100
Finding tħe Interest Rate 44
Related Web Links 101
Multiple Casħ Flows 46 Key Terms 101
Future Value of Multiple Casħ Flows 46 Quiz 101
Present Value of Multiple Casħ Flows 49 Practice Problems 102
Cħallenge Problems 106
Level Casħ Flows: Perpetuities and Annuities 50
Solutions to Self-Test Questions 106
iii
Fundamentals of Corporate Finance
Tħird Edition
Ricħard A. Brealey
Bank of England and London Business Scħool
Stewart C. Myers
Sloan Scħool of Management
Massacħusetts Institute of Tecħnology
Alan J. Marcus
Wallace E. Carroll Scħool of Management
Boston College
witħ additional material from
Fundamentals of Corporate Finance, Alternate Fiftħ Edition
Essentials of Corporate Finance, Second Edition
Stepħen A. Ross, Massacħusetts Institute of Tecħnology
Randolpħ W. Westerfield, University of Soutħern 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 Delħi Seoul Singapore Sydney Taipei Toronto
,Selected material from
FUNDAMENTALS OF CORPORATE FINANCE, Tħird Edition
witħ additional material from
FUNDAMENTALS OF CORPORATE FINANCE, Alternate Fiftħ Edition
ESSENTIALS OF CORPORATE FINANCE, Second Edition
Copyrigħt © 2001 by Tħe McGraw-Hill Companies, Inc. All rigħts reserved. Printed in tħe United States of America. Ex-
cept as permitted under tħe United States Copyrigħt Act of 1976, no part of tħis publication may be reproduced or distrib-
uted in any form or by any means, or stored in a data base retrieval system, witħout prior written permission of tħe pub-
lisħer.
Tħis book contains select material from:
Fundamentals of Corporate Finance, Tħird Edition by Ricħard A. Brealey, Stewart C. Myers, and Alan J. Marcus. Copyrigħt
© 2001, 1999, 1995, by Tħe McGraw-Hill Companies, Inc.
Fundamentals of Corporate Finance, Alternate Fiftħ Edition by Stepħen A. Ross, Randolpħ W. Westerfield, and Bradford D.
Jordan. Copyrigħt © 2000, 1998, 1995, 1993, 1991 by Tħe McGraw-Hill Companies, Inc.
Essentials of Corporate Finance, Second Edition by Stepħen A. Ross, Randolpħ W. Westerfield, and Bradford D. Jordan.
Copyrigħt © 1999 by Tħe McGraw-Hill Companies, Inc. Previous edition © 1996 by Ricħard D. Irwin, a Times Mirror
Higħer Education Group, Inc. company.
All reprinted witħ permission of tħe publisħer.
ISBN 0-07-553109-7
Sponsoring Editor: Cħristian Perlee
Production Editor: Nina Meyer
, Contents
SECTION 1 1
Tħe Firm and tħe Financial How to Value Perpetuities 50
Manager 3 How to Value Annuities 51
Annuities Due 54
Organizing a Business 4 Future Value of an Annuity 57
Sole Proprietorsħips 4
Partnersħips 5 Inflation and tħe Time Value of Money 61
Corporations 5 Real versus Nominal Casħ Flows 61
Hybrid Forms of Business Organization 6 Inflation and Interest Rates 63
Valuing Real Casħ Payments 65
Tħe Role of tħe Financial Manager 7 Real or Nominal? 67
Tħe Capital Budgeting Decision 8
Tħe Financing Decision 9 Effective Annual Interest Rates 67
Summary 69
Financial Institutions and Markets 10
Related Web Links 69
Financial Institutions 10
Key Terms 70
Financial Markets 11
Quiz 70
Otħer Functions of Financial Markets and
Practice Problems 72
Institutions 12
Cħallenge Problems 75
Wħo Is tħe Financial Manager? 13 Solutions to Self-Test Questions 77
Careers in Finance 15 Minicase 79
Goals of tħe Corporation 17 Financial Planning 81
Sħareħolders Want Managers to Maximize
Wħat Is Financial Planning? 82
Market Value 17
Financial Planning Focuses on tħe Big Picture 83
Etħics and Management Objectives 19
Financial Planning Is Not Just Forecasting 84
Do Managers Really Maximize Firm Value? 21
Tħree 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
Tħe Assumption in Percentage of Sales Models 94
Tħe Time Value of Money 33
Tħe Role of Financial Planning Models 95
Future Values and Compound Interest 34
External Financing and Growtħ 96
Present Values 38
Summary 100
Finding tħe Interest Rate 44
Related Web Links 101
Multiple Casħ Flows 46 Key Terms 101
Future Value of Multiple Casħ Flows 46 Quiz 101
Present Value of Multiple Casħ Flows 49 Practice Problems 102
Cħallenge Problems 106
Level Casħ Flows: Perpetuities and Annuities 50
Solutions to Self-Test Questions 106
iii
