Fundamentals of Financial Management 15th Edition
When the first edition of Fundamentals was published 40 years ago, we wanted to provide an introductory text that students would find interesting and easy to understand. Fundamentals immediately became the leading undergraduate finance text, and it has maintained that position ever since. Our continuing goal with this edition is to produce a book and ancillary package that sets a new standard for finance textbooks.
Finance is an exciting and continually changing field. Since the last edition, many important changes have occurred within the global financial environment. In the midst of this changing environment, it is certainly an interesting time to be a finance student. In this latest edition, we highlight and analyze the events leading to these changes from a financial perspective. Although the financial environment is ever changing, the tried-and-true principles that the book has emphasized over the past four decades are now more important than ever.
Structure of the Book
Our target audience is a student taking his or her first, and perhaps only, finance course. Some of these students will decide to major in finance and go on to take courses in investments, money and capital markets, and advanced corporate finance. Others will choose marketing, management, or some other nonfinance business major. Still others will major in areas other than business and take finance plus a few other business courses to gain information that will help them in law, real estate, or other fields.
Our challenge has been to provide a book that serves all of these audiences well. We focus on the core principles of finance, including the basic topics of time value of money, risk analysis, and valuation. In each case, we address these topics from two points of view: (1) that of an investor who is seeking to make intelligent investment choices and (2) that of a business manager trying to maximize the value of his or her firm’s stock. Both investors and managers need to understand the same set of principles, so the core topics are important to students regardless of what they choose to do after they finish the course.
In planning the book’s structure, we first listed the core topics in finance that are important to virtually everyone. Included were an overview of financial markets, methods used to estimate the cash flows that determine asset values, the time value of money, the determinants of interest rates, the basics of risk analysis, and the basics of bond and stock valuation procedures. We cover these core topics in the first nine chapters. Next, because most students in the course will probably work for a business firm, we want to show them how the core ideas are implemented in practice. Therefore, we go on to discuss cost of capital, capital budgeting, capital structure, dividend policy, working capital management, financial forecasting, risk management, international operations, hybrids, and mergers and acquisitions.
Non-finance majors sometimes wonder why they need to learn finance. As we have structured the book, it quickly becomes obvious to everyone why they need to understand time value, risk, markets, and valuation. Virtually all students enrolled in the basic course expect at some point to have money to invest, and they quickly realize that the knowledge gained from Chapters 1 through 9 will help them make better investment decisions. Moreover, students who plan to go into the business world soon realize that their own success requires that their firms be successful, and the topics covered in Chapters 10 through 21 will be helpful here. For example, good capital budgeting decisions require accurate forecasts from people in sales, marketing, production, and human resources, and non-financial people need to understand how their actions affect the firm’s profits and future performance.
Organization of the Chapters:
A Valuation Focus
As we discuss in Chapter 1, in an enterprise system such as that of the United States, the primary goal of financial management is to maximize their firms’ values. At the same time, we stress that managers should not do “whatever it takes” to increase the firm’s stock price. Managers have a responsibility to behave ethically, and when striving to maximize value, they must abide by constraints such as not polluting the environment, not engaging in unfair labor practices, not breaking the antitrust laws, and the like. In Chapter 1, we discuss the concept of valuation, explain how it depends on future cash flows and risk, and show why value maximization is good for society in general. This valuation theme runs throughout the text.
Stock and bond values are determined in the financial markets, so an understanding of those markets is essential to anyone involved with finance. Therefore, Chapter 2 covers the major types of financial markets, the rates of return that investors have historically earned on different types of securities, and the risks inherent in these securities. This information is important for anyone working in finance, and it is also important for anyone who has or hopes to own any financial assets. In this chapter, we also highlight how this environment has changed in the aftermath of the financial crisis.
Asset values depend in a fundamental way on earnings and cash flows as reported in the accounting statements. Therefore, we review those statements in Chapter 3 and then, in Chapter 4, show how accounting data can be analyzed and used to measure how well a company has operated in the past and how well it is likely to perform in the future. Chapter 5 covers the time value of money (TVM), perhaps the most fundamental concept in finance. The basic valuation model, which ties together cash flows, risk, and interest rates, is based on TVM concepts, and these concepts are used throughout the remainder of the book. Therefore, students should allocate plenty of time to studying Chapter 5.
Chapter 6 deals with interest rates, a key determinant of asset values. We discuss how interest rates are affected by risk, inflation, liquidity, the supply of and demand for capital in the economy, and the actions of the Federal Reserve. The discussion of interest rates leads directly to the topics of bonds in Chapter 7 and stocks in Chapters 8 and 9, where we show how these securities (and all other financial assets) are valued using the basic TVM model.
The background material provided in Chapters 1 through 9 is essential to both investors and corporate managers. These are finance topics, not business or corporate finance topics as those terms are commonly used. Thus, Chapters 1 through 9 concentrate on the concepts and models used to establish values, whereas Chapters 10 through 21 focus on specific actions managers can take to maximize their firms’ values.
Because most business students don’t plan to specialize in finance, they might think the business finance chapters are not particularly relevant to them. This is most decidedly not true, and in the later chapters we show that all really important business decisions involve every one of a firm’s departments—marketing, accounting, production, and so on. Thus, although a topic such as capital budgeting can be thought of as a financial issue, marketing people provide inputs on likely unit sales and sales prices; manufacturing people provide inputs on costs; and so on. Moreover, capital budgeting decisions influence the size of the firm, its products, its profits, and its stock price, and those factors affect all of the firm’s employees, from the CEO to the mail room staff.
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|December 1, 2020|
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