## Essentials of Corporate Finance, Ninth Edition

By Stephen A. Ross, Randolph W. Westerfield and Bradford D. Jordan

**Contents:**

Part one overview of financial management

1 Introduction to Financial

Management 1

1.1 Finance: A Quick Look 1

The Four Basic Areas 2

Corporate Finance 2

Investments 2

Financial Institutions 2

International Finance 3

Why Study Finance? 3

Marketing and Finance 3

Accounting and Finance 3

Management and Finance 3

You and Finance 4

1.2 Business Finance and the Financial Manager 4

What Is Business Finance? 4

The Financial Manager 4

Financial Management Decisions 5

**Capital Budgeting** 5

Capital Structure 6

Working Capital Management 6

Conclusion 6

1.3 Forms of Business Organization 6

Sole Proprietorship 6

Partnership 7

Corporation 7

A Corporation by Another Name . . . 8

1.4 The Goal of Financial Management 9

**Profit Maximization** 9

The Goal of Financial Management in a Corporation 9

A More General Financial Management Goal 10

Sarbanes-Oxley Act 10

1.5 The Agency Problem and Control of

the Corporation 12

Agency Relationships 12

Management Goals 12

Do Managers Act in the Stockholders’ Interests? 13

Managerial Compensation 13

Control of the Firm 13

Conclusion 14

Stakeholders 15

1.6 Financial Markets and the Corporation 15

Cash Flows to and from the Firm 15

Primary versus Secondary Markets 15

Primary Markets 16

Secondary Markets 16

Summary and Conclusions 18

Critical Thinking and Concepts Review 18

What’s on the Web? 20

2 Financial Statements, Taxes,

and Cash Flow 22

2.1 The Balance Sheet 22

Assets: The Left-Hand Side 23

Liabilities and Owners’ Equity: The Right-Hand Side 23

Net Working Capital 24

Liquidity 25

Debt versus Equity 25

Market Value versus Book Value 25

2.2 The Income Statement 27

GAAP and the Income Statement 28

Noncash Items 28

Time and Costs 28

Earnings Management 30

2.3 Taxes 30

Corporate Tax Rates 30

Average versus Marginal Tax Rates 31

2.4 Cash Flow 33

Cash Flow from Assets 34

Operating Cash Flow 34

Capital Spending 35

Change in Net Working Capital 35

Conclusion 36

A Note on “Free” Cash Flow 36

Cash Flow to Creditors and Stockholders 36

Cash Flow to Creditors 36

Cash Flow to Stockholders 37

Conclusion 37

An Example: Cash Flows for Dole Cola 37

Operating Cash Flow 37

Net Capital Spending 38

Change in NWC and Cash Flow from Assets 38

Cash Flow to Creditors and Stockholders 39

Summary and Conclusions 40

Chapter Review and Self-Test Problem 40

Answer to Chapter Review and Self-Test Problem 41

Critical Thinking and Concepts Review 43

Questions and Problems 43

What’s on the Web? 48

Excel Master It! Problem 48

CHAPTER CASE: Cash Flows and Financial Statements at

Sunset Boards, Inc. 50

3 Working with Financial Statements 51

3.1 Standardized Financial Statements 52

Common-Size Balance Sheets 53

Common-Size Income Statements 54

3.2 Ratio Analysis 55

Short-Term Solvency, or Liquidity, Measures 56

Current Ratio 56

Quick (or Acid-Test) Ratio 57

Cash Ratio 58

Long-Term Solvency Measures 58

Total Debt Ratio 58

Times Interest Earned 58

Cash Coverage 59

Asset Management, or Turnover, Measures 59

Inventory Turnover and Days’ Sales in Inventory 59

Receivables Turnover and Days’ Sales in Receivables 60

Total Asset Turnover 61

Profitability Measures 61

Profit Margin 62

Return on Assets 62

Return on Equity 62

Market Value Measures 63

Price–Earnings Ratio 63

Price–Sales Ratio 63

Market-to-Book Ratio 63

Enterprise Value–EBITDA Ratio 63

3.3 The DuPont Identity 65

An Expanded DuPont Analysis 67

3.4 Internal and Sustainable Growth 69

Dividend Payout and Earnings Retention 69

ROA, ROE, and Growth 70

The Internal Growth Rate 70

The Sustainable Growth Rate 70

Determinants of Growth 71

A Note on Sustainable Growth Rate Calculations 73

3.5 Using Financial Statement Information 73

Why Evaluate Financial Statements? 73

Internal Uses 74

External Uses 74

Choosing a Benchmark 74

Time-Trend Analysis 74

Peer Group Analysis 74

Problems with Financial Statement Analysis 79

Summary and Conclusions 81

Chapter Review and Self-Test Problems 82

Answers to Chapter Review and Self-Test Problems 83

Critical Thinking and Concepts Review 84

Questions and Problems 86

What’s on the Web? 93

Excel Master It! Problem 94

CHAPTER CASE: Ratios and Financial Planning

at S&S Air, Inc. 95

4 Introduction to Valuation: The Time

Value of Money 97

4.1 Future Value and Compounding 98

Investing for a Single Period 98

Investing for More than One Period 98

4.2 Present Value and Discounting 105

The Single-Period Case 105

Present Values for Multiple Periods 106

4.3 More on Present and Future Values 108

Present versus Future Value 108

Determining the Discount Rate 109

Finding the Number of Periods 112

Summary and Conclusions 115

Chapter Review and Self-Test Problems 116

Answers to Chapter Review and Self-Test Problems 116

Critical Thinking and Concepts Review 117

Questions and Problems 118

What’s on the Web? 121

Excel Master It! Problem 121

5 Discounted Cash Flow Valuation 122

5.1 Future and Present Values of Multiple Cash Flows 123

Future Value with Multiple Cash Flows 123

Present Value with Multiple Cash Flows 126

A Note on Cash Flow Timing 130

5.2 Valuing Level Cash Flows: Annuities and Perpetuities 131

Present Value for Annuity Cash Flows 132

Annuity Tables 133

Finding the Payment 134

Finding the Rate 136

Future Value for Annuities 137

A Note on Annuities Due 137

Perpetuities 138

5.3 Comparing Rates: The Effect of Compounding Periods 140

Effective Annual Rates and Compounding 140

Calculating and Comparing Effective Annual Rates 141

EARs and APRs 142

EARs, APRs, Financial Calculators, and Spreadsheets 144

5.4 Loan Types and Loan Amortization 145

Pure Discount Loans 145

Interest-Only Loans 145

Amortized Loans 146

Summary and Conclusions 150

Chapter Review and Self-Test Problems 151

Answers to Chapter Review and Self-Test Problems 152

Critical Thinking and Concepts Review 154

Questions and Problems 154

What’s on the Web? 162

Excel Master It! Problem 163

CHAPTER CASE: S&S Air’s Mortgage 164

6 Interest Rates and Bond

Valuation 165

6.1 Bonds and Bond Valuation 166

Bond Features and Prices 166

Bond Values and Yields 166

Interest Rate Risk 169

Finding the Yield to Maturity: More Trial and Error 171

6.2 More on Bond Features 175

Is It Debt or Equity? 176

Long-Term Debt: The Basics 176

The Indenture 177

Terms of a Bond 178

Security 178

Seniority 179

Repayment 179

The Call Provision 179

Protective Covenants 180

6.3 Bond Ratings 180

6.4 Some Different Types of Bonds 182

Government Bonds 182

Zero Coupon Bonds 183

Floating-Rate Bonds 184

Other Types of Bonds 185

6.5 Bond Markets 186

How Bonds Are Bought and Sold 186

Bond Price Reporting 187

A Note on Bond Price Quotes 188

6.6 Inflation and Interest Rates 190

Real versus Nominal Rates 190

The Fisher Effect 190

6.7 Determinants of Bond Yields 192

The Term Structure of Interest Rates 192

Bond Yields and the Yield Curve: Putting It All Together 193

Conclusion 195

Summary and Conclusions 196

Chapter Review and Self-Test Problems 196

Answers to Chapter Review and Self-Test Problems 197

Critical Thinking and Concepts Review 197

Questions and Problems 199

What’s on the Web? 202

Excel Master It! Problem 203

CHAPTER CASE: Financing S&S Air’s Expansion Plans with

a Bond Issue 204

7 Equity Markets and Stock

Valuation 205

7.1 Common Stock Valuation 206

Cash Flows 206

Some Special Cases 207

Zero Growth 208

Constant Growth 208

Nonconstant Growth 211

Components of the Required Return 213

Stock Valuation Using Comparables, or Comps 214

7.2 Some Features of Common and Preferred Stock 216

Common Stock Features 216

Shareholder Rights 216

Proxy Voting 217

Classes of Stock 217

Other Rights 218

Dividends 218

Preferred Stock Features 219

Stated Value 219

Cumulative and Noncumulative Dividends 219

Is Preferred Stock Really Debt? 219

7.3 The Stock Markets 220

Dealers and Brokers 220

Organization of the NYSE 220

Members 220

Operations 221

Floor Activity 221

NASDAQ Operations 223

ECNs 223

Stock Market Reporting 225

Summary and Conclusions 227

Chapter Review and Self-Test Problems 227

Answers to Chapter Review and Self-

Test Problems 228

Critical Thinking and Concepts Review 228

Questions and Problems 229

What’s on the Web? 234

Excel Master It! Problem 234

CHAPTER CASE: Stock Valuation at

Ragan, Inc. 235

8 Net Present Value and Other

Investment Criteria 236

8.1 Net Present Value 237

The Basic Idea 237

Estimating Net Present Value 238

8.2 The Payback Rule 241

Defining the Rule 241

Analyzing the Rule 243

Redeeming Qualities of the Rule 243

Summary of the Rule 244

8.3 The Average Accounting Return 245

8.4 The Internal Rate of Return 247

Problems with the IRR 250

Nonconventional Cash Flows 250

Mutually Exclusive Investments 252

Redeeming Qualities of the IRR 254

The Modified Internal Rate of Return (MIRR) 255

Method 1: The Discounting Approach 255

Method 2: The Reinvestment Approach 255

Method 3: The Combination Approach 255

MIRR or IRR: Which Is Better? 256

8.5 The Profitability Index 256

8.6 The Practice of Capital Budgeting 257

Summary and Conclusions 260

Chapter Review and Self-Test Problems 261

Answers to Chapter Review and Self-Test Problems 261

Critical Thinking and Concepts Review 262

Questions and Problems 265

What’s on the Web? 271

Excel Master It! Problem 271

CHAPTER CASE: Bullock Gold Mining 273

9 Making Capital Investment

Decisions 274

9.1 Project Cash Flows: A First Look 275

Relevant Cash Flows 275

The Stand-Alone Principle 275

9.2 Incremental Cash Flows 276

Sunk Costs 276

Opportunity Costs 276

Side Effects 277

Net Working Capital 277

Financing Costs 277

Other Issues 278

9.3 Pro Forma Financial Statements and

Project Cash Flows 278

Getting Started: Pro Forma Financial

Statements 278

Project Cash Flows 279

Project Operating Cash Flow 279

Project Net Working Capital and

Capital Spending 280

Projected Total Cash Flow and Value 280

The Tax Shield Approach 281

9.4 More on Project Cash Flow 282

A Closer Look at Net Working Capital 282

Depreciation 283

Modified ACRS (MACRS) Depreciation 284

Book Value versus Market Value 285

An Example: The Majestic Mulch

and Compost Company (MMCC) 286

Operating Cash Flows 287

Changes in NWC 288

Capital Spending 288

Total Cash Flow and Value 288

Conclusion 290

9.5 Evaluating NPV Estimates 290

The Basic Problem 290

Forecasting Risk 291

Sources of Value 292

9.6 Scenario and Other What-If Analyses 292

Getting Started 292

Scenario Analysis 293

Sensitivity Analysis 294

9.7 Additional Considerations in Capital Budgeting 296

Managerial Options and Capital Budgeting 296

Contingency Planning 296

Strategic Options 298

Conclusion 298

Capital Rationing 298

Soft Rationing 298

Hard Rationing 299

Summary and Conclusions 299

Chapter Review and Self-Test Problems 300

Answers to Chapter Review and Self-Test Problems 300

Critical Thinking and Concepts Review 301

Questions and Problems 302

Excel Master It! Problem 307

CHAPTER CASE: Conch Republic Electronics 308

10 Some Lessons from Capital Market

History 309

10.1 Returns 310

Dollar Returns 310

Percentage Returns 312

10.2 The Historical Record 314

A First Look 315

A Closer Look 315

10.3 Average Returns: The First Lesson 320

Calculating Average Returns 320

Average Returns: The Historical Record 320

Risk Premiums 321

The First Lesson 321

10.4 The Variability of Returns: The Second Lesson 322

Frequency Distributions and Variability 322

The Historical Variance and Standard Deviation 323

The Historical Record 325

Normal Distribution 326

The Second Lesson 327

2008: The Bear Growled and Investors Howled 328

Using Capital Market History 329

More on the Stock Market Risk Premium 331

10.5 More on Average Returns 333

Arithmetic versus Geometric Averages 333

Calculating Geometric Average Returns 333

Arithmetic Average Return

or Geometric Average Return? 335

10.6 Capital Market Efficiency 336

Price Behavior in an Efficient Market 336

The Efficient Markets Hypothesis 337

Some Common Misconceptions about the EMH 338

The Forms of Market Efficiency 339

Summary and Conclusions 340

Chapter Review and Self-Test Problems 340

Answers to Chapter Review and

Self-Test Problems 341

Critical Thinking and Concepts Review 341

Questions and Problems 342

What’s on the Web? 346

Excel Master It! Problem 346

CHAPTER CASE: A Job at S&S Air 347

11 Risk and Return 349

11.1 Expected Returns and Variances 350

Expected Return 350

Calculating the Variance 352

11.2 Portfolios 354

Portfolio Weights 354

Portfolio Expected Returns 354

Portfolio Variance 356

11.3 Announcements, Surprises, and

Expected Returns 357

Expected and Unexpected Returns 358

Announcements and News 358

11.4 Risk: Systematic and Unsystematic 360

Systematic and Unsystematic Risk 360

Systematic and Unsystematic Components of Return 360

11.5 Diversification and Portfolio Risk 361

The Effect of Diversification: Another Lesson from Market

History 361

The Principle of Diversification 362

Diversification and Unsystematic Risk 362

Diversification and Systematic Risk 363

11.6 Systematic Risk and Beta 364

The Systematic Risk Principle 364

Measuring Systematic Risk 364

Portfolio Betas 367

11.7 The Security Market Line 368

Beta and the Risk Premium 368

The Reward-to-Risk Ratio 369

The Basic Argument 369

The Fundamental Result 370

The Security Market Line 372

Market Portfolios 372

The Capital Asset Pricing Model 373

11.8 The SML and the Cost of Capital: A Preview 375

The Basic Idea 375

The Cost of Capital 375

Summary and Conclusions 376

Chapter Review and Self-Test Problems 377

Answers to Chapter Review and

Self-Test Problems 377

Critical Thinking and Concepts Review 379

Questions and Problems 380

What’s on the Web? 384

Excel Master It! Problem 385

CHAPTER CASE: The Beta for FLIR Systems 387

12 Cost of Capital 388

12.1 The Cost of Capital: Some Preliminaries 389

Required Return versus Cost of Capital 389

Financial Policy and Cost of Capital 390

12.2 The Cost of Equity 391

The Dividend Growth Model Approach 391

Implementing the Approach 391

Estimating g 392

Advantages and Disadvantages of the Approach 392

The SML Approach 393

Implementing the Approach 393

Advantages and Disadvantages of the Approach 394

12.3 The Costs of Debt and Preferred Stock 394

The Cost of Debt 395

The Cost of Preferred Stock 395

12.4 The Weighted Average Cost of Capital 396

The Capital Structure Weights 396

Taxes and the Weighted Average Cost of Capital 397

Solving the Warehouse Problem and Similar Capital Budgeting

Problems 399

Calculating the WACC for Eastman Chemical 400

Eastman’s Cost of Equity 402

Eastman’s Cost of Debt 403

Eastman’s WACC 404

12.5 Divisional and Project Costs of Capital 406

The SML and the WACC 407

Divisional Cost of Capital 408

The Pure Play Approach 408

The Subjective Approach 409

12.6 Company Valuation with the WACC 410

Summary and Conclusions 413

Chapter Review and Self-Test Problems 413

Answers to Chapter Review and Self-Test Problems 413

Critical Thinking and Concepts Review 414

Questions and Problems 415

What’s on the Web? 421

Excel Master It! Problem 421

13 Leverage and Capital Structure 423

13.1 The Capital Structure Question 424

13.2 The Effect of Financial Leverage 425

The Impact of Financial Leverage 425

Financial Leverage, EPS, and ROE: An Example 425

EPS versus EBIT 426

Corporate Borrowing and Homemade Leverage 428

13.3 Capital Structure and the Cost of

Equity Capital 430

M&M Proposition I: The Pie Model 430

The Cost of Equity and Financial Leverage:

M&M Proposition II 430

Business and Financial Risk 432

13.4 Corporate Taxes and Capital Structure 433

The Interest Tax Shield 433

Taxes and M&M Proposition I 434

Conclusion 434

13.5 Bankruptcy Costs 436

Direct Bankruptcy Costs 436

Indirect Bankruptcy Costs 436

13.6 Optimal Capital Structure 437

The Static Theory of Capital Structure 437

Optimal Capital Structure and the Cost of Capital 438

Capital Structure: Some Managerial Recommendations 440

Taxes 440

Financial Distress 440

13.7 Observed Capital Structures 441

13.8 A Quick Look at the Bankruptcy Process 443

Liquidation and Reorganization 443

Bankruptcy Liquidation 443

Bankruptcy Reorganization 444

Financial Management and the Bankruptcy Process 446

Agreements to Avoid Bankruptcy 447

Summary and Conclusions 447

Chapter Review and Self-Test Problems 448

Answers to Chapter Review and

Self-Test Problems 448

Critical Thinking and Concepts Review 449

Questions and Problems 450

What’s on the Web? 453

Excel Master It! Problem 453

Recapitalization 454

14 Dividends and Dividend Policy 455

14.1 Cash Dividends and Dividend Payment 456

Cash Dividends 456

Standard Method of Cash Dividend Payment 457

Dividend Payment: A Chronology 457

More on the Ex-Dividend Date 458

14.2 Does Dividend Policy Matter? 460

An Illustration of the Irrelevance of

Dividend Policy 460

Current Policy: Dividends Set Equal to

Cash Flow 460

Alternative Policy: Initial Dividend Greater than

Cash Flow 460

A Test 461

Some Real-World Factors Favoring a Low Payout 461

Taxes 461

Flotation Costs 462

Dividend Restrictions 462

Some Real-World Factors Favoring a High Payout 462

Desire for Current Income 462

Tax and Legal Benefits from High Dividends 463

Clientele Effects: A Resolution of Real-World Factors? 464

14.3 Stock Repurchases: An Alternative to

Cash Dividends 464

Cash Dividends versus Repurchase 466

Real-World Considerations in a Repurchase 467

Share Repurchase and EPS 468

14.4 What We Know and Do Not Know about Dividend and

Payout Policies 469

Dividends and Dividend Payers 469

Corporations Smooth Dividends 471

Putting It All Together 472

Some Survey Evidence on Dividends 474

14.5 Stock Dividends and Stock Splits 475

Value of Stock Splits and Stock Dividends 476

The Benchmark Case 476

Popular Trading Range 476

Reverse Splits 476

Summary and Conclusions 477

Chapter Review and Self-Test Problem 478

Answer to Chapter Review and Self-Test Problem 479

Critical Thinking and Concepts Review 479

Questions and Problems 480

What’s on the Web? 483

15 Raising Capital 485

15.1 The Financing Life Cycle of a Firm: Early-Stage Financing

and Venture Capital 486

Venture Capital 486

Some Venture Capital Realities 487

Choosing a Venture Capitalist 487

Conclusion 488

15.2 Selling Securities to the Public:

The Basic Procedure 488

Crowdfunding 489

15.3 Alternative Issue Methods 491

15.4 Underwriters 492

Choosing an Underwriter 492

Types of Underwriting 492

Firm Commitment Underwriting 492

Best Efforts Underwriting 493

Dutch Auction Underwriting 493

The Green Shoe Provision 494

The Aftermarket 494

Lockup Agreements 494

The Quiet Period 495

15.5 IPOS and Underpricing 495

Evidence on Underpricing 496

IPO Underpricing: The 1999–2000 Experience 497

The Partial Adjustment Phenomenon 501

Why Does Underpricing Exist? 502

15.6 New Equity Sales and the Value of the Firm 504

15.7 The Cost of Issuing Securities 505

15.8 Issuing Long-Term Debt 509

15.9 Shelf Registration 510

Summary and Conclusions 511

Chapter Review and Self-Test Problem 512

Answer to Chapter Review and Self-Test Problem 512

Critical Thinking and Concepts Review 512

Questions and Problems 515

What’s on the Web? 516

16 Short-Term Financial Planning 518

16.1 Tracing Cash and Net Working Capital 519

16.2 The Operating Cycle and the Cash Cycle 521

Defining the Operating and Cash Cycles 521

The Operating Cycle 521

The Cash Cycle 522

The Operating Cycle and the Firm’s

Organizational Chart 522

Calculating the Operating and Cash Cycles 523

The Operating Cycle 524

The Cash Cycle 524

Interpreting the Cash Cycle 525

16.3 Some Aspects of Short-Term Financial Policy 527

The Size of the Firm’s Investment in Current Assets 527

Alternative Financing Policies for Current Assets 529

Which Financing Policy Is Best? 531

Current Assets and Liabilities in Practice 532

16.4 The Cash Budget 533

Sales and Cash Collections 533

Cash Outflows 534

The Cash Balance 534

16.5 Short-Term Borrowing 536

Unsecured Loans 536

Secured Loans 536

Accounts Receivable Financing 536

Inventory Loans 537

Other Sources 537

16.6 A Short-Term Financial Plan 538

Summary and Conclusions 539

Chapter Review and Self-Test Problems 539

Answers to Chapter Review and

Self-Test Problems 540

Critical Thinking and Concepts Review 541

Questions and Problems 542

What’s on the Web? 548

Excel Master It! Problem 548

CHAPTER CASE: Piepkorn Manufacturing Working Capital

Management, Part 1 549

17 Working Capital Management 550

17.1 Float and Cash Management 550

Reasons for Holding Cash 551

The Speculative and Precautionary Motives 551

The Transaction Motive 551

Benefits of Holding Cash 551

Understanding Float 552

Disbursement Float 552

Collection Float and Net Float 552

Float Management 553

Ethical and Legal Questions 554

Electronic Data Interchange and Check 21: The End of

Float? 554

17.2 Cash Management: Collection, Disbursement, and

Investment 555

Cash Collection and Concentration 555

Components of Collection Time 555

Cash Collection 556

Lockboxes 556

Cash Concentration 556

Managing Cash Disbursements 557

Increasing Disbursement Float 558

Controlling Disbursements 558

Investing Idle Cash 559

Temporary Cash Surpluses 560

Characteristics of Short-Term Securities 560

Some Different Types of Money Market Securities 561

17.3 Credit and Receivables 562

Components of Credit Policy 562

Terms of Sale 563

The Basic Form 563

The Credit Period 563

Cash Discounts 564

Credit Instruments 565

Optimal Credit Policy 566

The Total Credit Cost Curve 566

Organizing the Credit Function 566

Credit Analysis 567

Credit Information 567

Credit Evaluation and Scoring 568

Collection Policy 568

Monitoring Receivables 568

Collection Effort 569

17.4 Inventory Management 570

The Financial Manager and Inventory Policy 570

Inventory Types 570

Inventory Costs 571

17.5 Inventory Management Techniques 571

The ABC Approach 571

The Economic Order Quantity Model 572

Inventory Depletion 573

Carrying Costs 573

Shortage Costs 574

Total Costs 574

Extensions to the EOQ Model 576

Safety Stocks 576

Reorder Points 576

Managing Derived-Demand Inventories 576

Materials Requirements Planning 577

Just-in-Time Inventory 578

Summary and Conclusions 579

Chapter Review and Self-Test Problems 579

Answers to Chapter Review and Self-Test Problems 580

Critical Thinking and Concepts Review 580

Questions and Problems 582

What’s on the Web? 584

CHAPTER CASE: Piepkorn Manufacturing Working Capital

Management, Part 2 585

18 International Aspects of Financial

Management 586

18.1 Terminology 587

18.2 Foreign Exchange Markets and Exchange Rates 588

Exchange Rates 589

Exchange Rate Quotations 590

Cross-Rates and Triangle Arbitrage 590

Types of Transactions 592

18.3 Purchasing Power Parity 593

Absolute Purchasing Power Parity 593

Relative Purchasing Power Parity 595

The Basic Idea 595

The Result 596

Currency Appreciation and Depreciation 597

18.4 Exchange Rates and Interest Rates 597

Covered Interest Arbitrage 597

Interest Rate Parity 598

18.5 Exchange Rate Risk 599

Short-Run Exposure 599

Long-Run Exposure 600

Translation Exposure 601

Managing Exchange Rate Risk 602

18.6 Political Risk 602

Summary and Conclusions 603

Chapter Review and Self-Test Problems 604

Answers to Chapter Review and Self-Test Problems 604

Critical Thinking and Concepts Review 605

Questions and Problems 607

What’s on the Web? 609

Excel Master It! Problem 610

CHAPTER CASE: S&S Air Goes International 611

Appendix A Mathematical Tables 612

Appendix B Key Equations 620

Appendix C Answers to Selected End-of-Chapter Problems 623

Appendix D Using the HP-10B and TI BA II Plus Financial

Calculators 627

Name Index 630

Subject Index 631