Exchange Risk and International Investment Decisions

Suppose that the Swiss pharmaceutical company, Roche, is evaluating a proposal to build a new plant in the United States. To calculate the project’s net present value, Roche forecasts the following dollar cash flows from the project: These cash flows are stated in dollars. So to calculate their net present value Roche discounts them

2 Comments

Political Risk

So far, we have focused on the management of exchange rate risk, but managers also worry about political risk. By this they mean the threat that a government will change the rules of the game—that is, break a promise or understanding—after the investment is made. Of course political risks are not confined to overseas

3 Comments

Financial Ratios

Financial ratios are usually easy to calculate. That’s the good news. The bad news is that there are so many of them. To make it worse, the ratios are often presented in long lists that seem to require memorization rather than understanding. We can mitigate the bad news by taking a moment to preview

4 Comments

Financial Statements

Public companies have a variety of stakeholders, such as shareholders, bondholders, bankers, suppliers, employees, and management. All these stakeholders need to monitor the firm and to ensure that their interests are being served. They rely on the company’s financial statements to provide the necessary information. Public companies in the United States report to their

1 Comments

Home Depot’s Financial Statements

Your task is to assess the financial standing of Home Depot, the home improvement company. Perhaps you are a mutual fund manager trying to decide whether to allocate $25 million of new money to Home Depot stock. You could be an investment banker seeking business from the company or a bondholder concerned with its

1 Comments

Measuring Home Depot’s Performance

You want to use Home Depot’s financial statements to assess its financial performance and current standing. Where do you start? At the close of fiscal 2017, Home Depot’s common stock was priced at $204.92 per share. There were 1,170 million shares outstanding, so total market capitalization was 1,170 X $204.92 = $239,756 million. This

1 Comments

Measuring Efficiency

We began our analysis of Home Depot by calculating how much value the company has added for its shareholders and how much profit it is earning after deducting the cost of the capital that it employs. We examined the company’s rates of return on capital, equity, and total assets and found that its return

Analyzing the Return on Assets: The Du Pont System

We have seen that every dollar of Home Depot’s assets generates $2.35 of sales. But a com­pany’s success depends not only on the volume of its sales but also on how profitable those sales are. This is measured by the profit margin. Profit Margin The profit margin measures the proportion of sales that finds

1 Comments

Measuring Leverage

When a firm borrows money, it promises to make a series of interest payments and then to repay the amount that it has borrowed. If profits rise, the debtholders continue to receive only the fixed interest payment, so all the gains go to the shareholders. Of course, the reverse happens if profits fall. In

1 Comments

Measuring Liquidity

If you are extending credit to a customer or making a short-term bank loan, you are interested in more than the company’s leverage. You want to know whether the company can lay its hands on the cash to repay you. That is why credit analysts and bankers look at several mea­sures of liquidity. Liquid

1 Comments

Interpreting Financial Ratios

We have shown how to calculate some common summary measures of Home Depot’s per­formance and financial condition. Now you need some way to judge whether they are high or low. In some cases, there may be a natural benchmark. For example, if a firm has negative economic value added or a return on capital

2 Comments

Links between Short-Term and Long-Term Financing Decisions

Short-term financial decisions differ in two ways from long-term decisions such as the purchase of plant and equipment or the choice of capital structure. First, they generally involve short-lived assets and liabilities, and, second, they are usually easily reversed. Compare, for example, a 60-day bank loan with an issue of 20-year bonds. The bank

1 Comments

Tracing Changes in Cash

Table 29.1 shows the 2018 income statement for Dynamic Mattress Company, and Table 29.2 compares the firm’s 2017 and 2018 year-end balance sheets. You can see that Dynamic’s cash balance increased from $20 million to $30.4 million in 2018. What caused this increase? Did the extra cash come from Dynamic’s issue of long-term debt,

1 Comments

Cash Budgeting

Table 29.3 showed why Dynamic’s cash balance rose in 2018. But its financial manager also needs to forecast the company’s cash needs in 2019 and ensure that the company will be able to pay its upcoming bills. These forecasts are set out in the firm’s cash budget and are then used to draw up

1 Comments

Dynamic’s Short-Term Financial Plan

Our next task is to develop a short-term financial plan that covers the forecasted requirements in the most economical way. We move on to that topic after two general observations: The large cash outflows in the first two quarters do not necessarily spell trouble for Dynamic Mattress. In part, they reflect the capital investment

1 Comments

Long-Term Financial Planning

It’s been said that a camel looks like a horse designed by a committee. If a firm made every decision piecemeal, it would end up with a financial camel. That is why smart financial managers also need to plan for the long term and to consider the financial actions that will be needed to

1 Comments

Growth and External Financing

We started this chapter by noting that financial plans force managers to be consistent in their goals for growth, investment, and financing. Before leaving the topic of financial planning, we should look at some general relationships between a firm’s growth objectives and its financing needs. We saw in Table 29.9 that with a 20%

2 Comments

The Composition of Working Capital

The financial manager cannot freely choose the amount of investment in inventories or accounts receivable or the size of accounts payable; the amounts will depend in large part on the nature of the firm’s operations and the industry it is in. Figure 30.1 shows the relative importance of working capital in different industries. For

1 Comments

Inventories and Working Capital Management

Most firms keep inventories of raw materials, work in process, or finished goods awaiting sale and shipment. But they are not obliged to do so. For example, they could buy materials day by day, as needed. But then they would pay higher prices for ordering in small lots, and they would risk production delays

2 Comments

Credit Management

We continue our tour of current assets with the firm’s accounts receivable. When one com­pany sells goods to another, it does not usually expect to be paid immediately. These unpaid bills, or trade credit, compose the bulk of accounts receivable. The remainder is made up of consumer credit, that is, bills that are awaiting

1 Comments