## Analysis for Financial Management, Thirteenth Edition

By Robert C. Higgins, Jennifer L. Koski and Todd Mitton

**Contents:**

Preface xii

PART ONE

ASSESSING THE FINANCIAL HEALTH OF THE FIRM 1

Chapter 1

Interpreting Financial Statements 3

The Cash Flow Cycle 3

Overview of Financial Statements 6

The Balance Sheet 9

Current Assets and Liabilities 10

Shareholders’ Equity 11

The Income Statement 11

Measuring Earnings 12

Sources and Uses Statements 16

The Two-Finger Approach 17

The Cash Flow Statement 18

Financial Statements and the Value Problem 22

Market Value vs. Book Value 22

Economic Income vs. Accounting Income 26

Imputed Costs 27

Summary 30

Additional Resources 31

Problems 32

Chapter 2

Evaluating Financial Performance 37

The Levers of Financial Performance 37

Return on Equity 38

The Three Determinants of ROE 38

The Profit Margin 40

Asset Turnover 42

Financial Leverage 48

Is ROE a Reliable Financial Yardstick? 53

The Timing Problem 54

The Risk Problem 54

The Value Problem 56

ROE or Market Price? 58

Ratio Analysis 60

Using Ratios Effectively 61

Ratio Analysis of Polaris Inc. 62

Summary 69

Additional Resources 70

Problems 71

PART TWO

PLANNING FUTURE FINANCIAL PERFORMANCE 77

Chapter 3

Financial Forecasting 79

Pro Forma Statements 79

Percent-of-Sales Forecasting 80

Interest Expense 86

Seasonality 86

Pro Forma Statements and Financial

Planning 87

Forecasting with Spreadsheets 89

Coping with Uncertainty 92

Sensitivity Analysis 92

Scenario Analysis 93

Simulation 93

Cash Flow Forecasts 95

Cash Budgets 96

The Techniques Compared 100

Summary 101

Additional Resources 102

Problems 103

Chapter 4

Managing Growth 111

Sustainable Growth 112

The Sustainable Growth Equation 112

Too Much Growth 114

Balanced Growth 115

DLH Holdings’ Sustainable Growth Rate 116

“What If” Questions 118

What to Do When Actual Growth Exceeds

Sustainable Growth 118

Sell New Equity 119

Increase Leverage 121

Reduce the Payout Ratio 121

Profitable Pruning 122

Outsourcing 122

Pricing 123

Is Merger the Answer? 123

Too Little Growth 123

What to Do When Sustainable Growth Exceeds

Actual Growth 124

Ignore the Problem 125

Return the Money to Shareholders 126

Buy Growth 127

Sustainable Growth and Pro Forma

**Forecasts** 127

New Equity Financing 128

Why Don’t U.S. Corporations Issue

More Equity? 131

Summary 132

Additional Resources 133

Problems 134

PART THREE

FINANCING OPERATIONS 139

Chapter 5

Financial Instruments and

Markets 141

Financial Instruments 142

Bonds 143

Common Stock 149

Preferred Stock 153

Financial Markets 155

Venture Capital Financing 155

Private Equity 157

Initial Public Offerings 158

Seasoned Issues 160

Issue Costs 164

Efficient Markets 166

What Is an Efficient Market? 166

Implications of Efficiency 169

Appendix

Using Derivatives to Manage Risks 170

Forward Markets 172

Hedging with Forward Contracts 172

Hedging with Futures Contracts 173

Types of Forwards and Futures 174

Hedging with Swaps 175

Interest Rate Swaps 176

Currency Swaps 177

Hedging with Options 178

Limitations of Financial Market Hedging 181

Valuing Options 182

Summary 185

Additional Resources 187

Problems 188

Chapter 6

The Financing Decision 193

Financial Leverage 195

Measuring the Effects of Leverage on a

Business 199

Leverage and Risk 201

Leverage and Earnings 203

How Much to Borrow 206

Irrelevance 206

Tax Benefits 208

Distress Costs 208

Flexibility 213

Market Signaling 216

Management Incentives 219

The Financing Decision and

Growth 219

Selecting a Maturity Structure 222

Inflation and Financing Strategy 223

Appendix

The Irrelevance Proposition 223

No Taxes 224

Taxes 226

Summary 227

Additional Resources 228

Problems 230

PART FOUR

EVALUATING INVESTMENT OPPORTUNITIES 235

Chapter 7

Discounted Cash Flow Techniques 237

Figures of Merit 238

The Payback Period and the Accounting

Rate of Return 239

The Time Value of Money 240

Equivalence 245

The Net Present Value 246

The Benefit-Cost Ratio 248

The Internal Rate of Return 248

Uneven Cash Flows 252

A Few Applications and Extensions 253

Mutually Exclusive Alternatives and

Capital Rationing 256

The IRR in Perspective 257

Determining the Relevant Cash Flows 258

Depreciation 260

Working Capital and Spontaneous

Sources 262

Sunk Costs 263

Allocated Costs 264

Cannibalization 265

Excess Capacity 266

Financing Costs 267

Appendix

Mutually Exclusive Alternatives and

Capital Rationing 269

What Happened to the Other $578,000? 270

Unequal Lives 271

Capital Rationing 274

The Problem of Future Opportunities 275

A Decision Tree 276

Summary 277

Additional Resources 278

Problems 278

Chapter 8

Risk Analysis in Investment Decisions 285

Risk Defined 287

Risk and Diversification 289

Estimating Investment Risk 291

Three Techniques for Estimating

Investment Risk 292

Including Risk in Investment

Evaluation 293

Risk-Adjusted Discount Rates 293

The Cost of Capital 294

The Cost of Capital Defined 295

The Cost of Capital for Polaris 296

The Cost of Capital in Investment

Appraisal 304

Multiple Hurdle Rates 304

Four Pitfalls in the Use of Discounted

Cash Flow Techniques 307

The Enterprise Perspective vs. the Equity

Perspective 307

Inflation 310

Real Options 311

Excessive Risk Adjustment 316

A Cautionary Note 318

Appendix

Asset Beta and Adjusted Present

Value 318

Calculating Asset Beta 319

Using Asset Beta to Estimate Equity

Beta 320

Asset Beta and Adjusted Present Value 321

Summary 325

Additional Resources 326

Problems 327

Chapter 9

Business Valuation and Corporate Restructuring 335

Valuing a Business 337

Assets or Equity? 338

Dead or Alive? 338

Minority Interest or Control? 340

Discounted Cash Flow Valuation 341

Free Cash Flow 342

The Terminal Value 343

A Numerical Example 346

Problems with Present Value

Approaches to Valuation 348

Valuation Based on Comparable Trades 349

Lack of Marketability 353

The Market for Control 354

The Premium for Control 354

Financial Reasons for Restructuring 357

The Empirical Evidence 364

The LinkedIn Buyout 366

Appendix

The Venture Capital Method of Valuation 368

The Venture Capital Method—One Financing Round 369

The Venture Capital Method—Multiple Financing Rounds 372

Why Do Venture Capitalists Demand Such High Returns? 374

Summary 375

Additional Resources 376

Problems 378

Glossary 385

Suggested Answers to Odd-Numbered Problems 397

Index 429