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Foundations of Financial Management, 18th Edition
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Foundations of Financial Management, 18th Edition by Stanley Block, Geoffrey Hirt, Bartley Danielsen
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Foundations of Financial Management, 18th Edition by Stanley Block, Geoffrey Hirt, Bartley Danielsen
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, page iFoundations
of
Financial
Management
SEVENTEENTH EDITION
Stanley B. Block
Texas Christian University
Geoffrey A. Hirt
DePaul University
Bartley R. Danielsen
North Carolina State University
2
, page ii
FOUNDATIONS OF FINANCIAL MANAGEMENT, SEVENTEENTH EDITION
Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2019 by McGraw-Hill
Education. All rights reserved. Printed in the United States of America. Previous editions © 2017, 2014, and 2011.
No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database
or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in
any network or other electronic storage or transmission, or broadcast for distance learning.
Some ancillaries, including electronic and print components, may not be available to customers outside the United
States.
This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 LWI/LWI 21 20 19 18
ISBN 978-1-260-01391-7
MHID 1-260-01391-X
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Compositor: SPi Global
All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.
Library of Congress Cataloging-in-Publication Data
Names: Block, Stanley B., author. | Hirt, Geoffrey A., author. | Danielsen, Bartley R., author.
Title: Foundations of financial management / Stanley B. Block, Texas Christian University,
Geoffrey A. Hirt, DePaul University, Bartley R. Danielsen, North Carolina State University.
Description: Seventeenth Edition. | Dubuque : McGraw-Hill Education, [2018] | Revised
edition of the authors’ Foundations of financial management, [2017]
Identifiers: LCCN 2018023101 | ISBN 9781260013917 (alk. paper)
Subjects: LCSH: Corporations—Finance.
Classification: LCC HG4026 .B589 2018 | DDC 658.15—dc23 LC record available at
https://lccn.loc.gov/2018023101
The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does
not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not
guarantee the accuracy of the information presented at these sites.
3
,mheducation.com/highered
4
, page iii
About the Authors
Stanley B. Block
Texas Christian University
Geoffrey A. Hirt
DePaul University
5
,Bartley R. Danielsen
North Carolina State University
6
, page iv
Preface
Forty-two years have passed since we began writing the first edition of this text,
and many things have changed during that time including the author team.
First of all, the field of finance has become much more analytical, with the
emphasis on decision-oriented approaches to problems rather than the old,
descriptive approach. We have increased the use of analytical approaches to
financial problems in virtually every chapter of the book. But we also have stayed
with our basic mission of making sure students are able to follow us in our
discussions throughout the text. While the 17th edition is considerably more
sophisticated than the initial edition, it is still extremely “reader friendly.” As the
analytical skills demanded of students have increased, so has the authors’ care in
presenting the material.
Using computers and calculators has become considerably more important over
the last quarter century, and this is also reflected in the 17th edition where we have
added Excel tables and calculator keystroke solutions within key chapters. We
offer Web Exercises at the end of every chapter, URL citations throughout the text,
a library of course materials for students and faculty, computerized testing software
and PowerPoint® for the faculty, Connect, an online assignment and assessment
solution, and LearnSmart with SmartBook, a truly innovative adaptive study tool
and eBook.
Throughout the past 42 years, this text has been a leader in bringing the real
world into the classroom, and this has never been more apparent than in the 17th
edition. Each chapter opens with a real-world vignette, and the Finance in Action
boxes (found in virtually every chapter) describe real-world activities and decisions
made by actual businesses. We are also up-to-date on the latest tax and financial
reporting legislation including the 2017 Tax Cuts and Jobs Act.
The international world of finance has become much more important and the
text has expanded its international coverage tenfold since the first edition. Where
there is an international application for a financial issue, you are very likely to find
it in this text.
7
, Furthermore, the 17th edition continues to give modest coverage to the
recession and liquidity crisis that has engulfed the U.S. and world economies in the
latter part of the 2000–2009 decade (and into the current decade). Special attention
is given to the banking sector and the critical need for funding that almost all
businesses face. The issue of changing regulations is also covered.
However, there is one thing that has not changed over the last 42 years—we
still write the entire book and all of the problems ourselves! We believe our
devotion of time, energy, and commitment over these years is the reason for our
reputation for having produced a high-quality and successful text—edition after
edition.
page v
Reinforcing Prerequisite Knowledge
Employers of business graduates report that the most successful analysts, planners,
and executives are both effective and confident in their financial skills. We concur.
One of the best ways to increase your facility in finance is to integrate your
knowledge from prerequisite courses. Therefore, the text is designed to build on
your basic knowledge from courses in accounting and economics. By applying
tools learned in these courses, you can develop a conceptual and analytical
understanding of financial management.
We realize, however, that for some students time has passed since you have
completed your accounting courses. Therefore, we have included Chapter 2, a
thorough review of accounting principles, finance terminology, and financial
statements. With a working knowledge of Chapter 2, you will have a more
complete understanding of the impact of business decisions on financial
statements. Furthermore, as you are about to begin your career you will be much
better prepared when called upon to apply financial concepts.
Content Improvements
In general, tables and figures with real-world numbers have been updated or
replaced, and the discussions concerning those tables and figures have been
rewritten accordingly.
Chapter-by-Chapter Changes
Chapter 1 Coverage of behavioral finance has been enhanced with the
inclusion of Richard Thaler’s Nobel Prize in Economic Sciences as well as
Eugene Fama’s Nobel Prize for his work on the efficient market hypothesis.
The section “Forms of Organization” includes the impact of the 2017 Tax
Cuts and Jobs Act on all types of organizations, including C corporations, S
corporations, and all forms of pass-through structures such as sole
proprietorships, partnerships, and limited liability companies. Both the
8
, Finance in Action box on endangered public companies and the FIA box on
3M were revised. The Web Exercise was also revised to make it consistent
with the current website.
Chapter 2 All of the tables have been updated or revised. The discussion of
how depreciation, taxes, and cash flows are linked has been clarified. The
Finance in Action box describing corporate “tax inversions” has been
significantly revised with reference to the 2017 Tax Cuts and Jobs Act and
includes a graphic of worldwide corporate tax rates from the OECD. The
section “Income Tax Considerations” includes an updated discussion of the
2017 Tax Cuts and Jobs Act, including its impact on the cost of a tax-
deductible expense, depreciation as a tax shield, and the resultant cash flow.
The PepsiCo Web Exercise has been updated.
Chapter 3 The introduction comparing Colgate-Palmolive with Procter &
Gamble has been revised and updated. Tables 3-4, 3-5, 3-6, and 3-8 have
been revised to be more consistent with the new corporate tax rates.
Abercrombie & Fitch has been replaced with Target in the Du Pont model
and in the comparison to Walmart Stores Inc. The discussion of liquidity
ratios has been revised. The Apple and IBM ratio comparisons have been
updated with new numbers. The discussion on deflation has been revised to
bring it up to date with the current economic environment. The IBM Web
Exercise has been revised.
Chapter 4 The introduction has been updated as well as the page vi
Finance in Action box describing the interaction of Tesla’s
marketing and financial forecasting activities. The section “Percentage-of-
Sales Method” has been slightly revised to bring more clarity to the
discussion. The Web Exercise on Barnes & Noble has been updated and
revised.
Chapter 5 The introduction discussing the airline industry and the cost of oil
has been updated with new data. The discussion of the degree of operating
leverage replaces Dow Chemical with American Airlines. A new Finance in
Action box using Apple to demonstrate leverage replaces the old FIA box on
the Intel Corporation. The Web Exercise on United Airlines has been
updated and revised.
Chapter 6 The FIA box on RFID technology has been updated. Figure 6-2
featuring Briggs & Stratton has been revised with new data and the
discussion describing the cyclicality has been modified. Figure 6-3
comparing seasonal sales and earnings per share of Macy’s and Target has
been updated with new data and the analysis is revised to be consistent with
the new figure. Figures 6-9, 6-10, and 6-11 and all of the data and discussion
about yield curves, interest rates, working capital, and current ratios have
been updated, including the Web Exercise at the end of the problem set.
Chapter 7 The FIA box on working capital has been updated. The section
discussing a lockbox system has been expanded. Figure 7-4 and the
discussion of SWIFT have been revised. Table 7-1 has been updated with
9
, 2018 data. For a change of pace and a little fun, a new FIA box features the
inventory control system in the International Space Station. The Web
Exercise has been revised to work with the new website at the B2B company
Perfect Commerce.
Chapter 8 The chapter introduction featuring Yum! Brands credit agreements
has been updated to reflect new agreements. Figures 8-1 and 8-2 as well as
Table 8-1 have been revised with new data and discussion of interest rates
and commercial paper. The Finance in Action box on the LIBOR price-
fixing scandal has been revised, as has the FIA box on LendingClub’s initial
public offering. The Web Exercise on General Electric Capital has been
significantly revised, given GE’s exit from many of its previous activities.
Chapter 9 The calculator appendix previously found at the end of Chapter 10
has been moved to Chapter 9 and is Appendix 9C. The FIA box has been
rewritten to include the August 2017 Powerball jackpot winner of $758
million.
Chapter 10 The introduction to the chapter featuring Coca-Cola has been
revised. Table 10-4 has been updated and the discussion describing the table
has been revised. The Web Exercise featuring ExxonMobil has been revised
to coincide with changes to the website.
Chapter 11 Table 11-2 and the corresponding financial page vii
calculator example on yield to maturity has been revised with
new numbers using the Goal Seek function in Excel’s RATE function. The
information in Table 11-3 has been replaced with new data. And the cost of
debt capital example has been changed to be more consistent with a lower
tax rate. Table 11-4 on long-term debt has been updated. The numbers in the
cost of common equity have changed. The practice problems and most of the
homework problems have been revised to reflect 25 percent and 21 percent
tax rates. The Web Exercise has been changed to be consistent with changes
in Intel’s website.
Chapter 12 The section on accounting versus cash flows has been updated to
reflect the impact of lower tax rates. The section on the rules of depreciation
is new with a discussion of how the 2017 Tax Cuts and Jobs Act modified
the rules. The section “The Tax Rate” is new and includes the impact of the
2017 Tax Cuts and Jobs Act and how state tax rates can affect the average
tax rate. Table 12-14 on cash flow related to the purchase of machinery has
been revised as well as Table 12-15 on net present value. The whole section
on the replacement decision now reflects lower tax rates and has been
comprehensively revised, including all tables. The section on elective
expensing has been rewritten to reflect the new 2018 tax code. The practice
problem sets and many of the homework problems have been updated with
lower tax rates. The Web Exercise featuring Texas Instruments has been
updated.
Chapter 13 The introduction on Apache Corp. has been updated. Table 13-2
has been updated with new information and the Web Exercise is changed to
10
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