Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate Edition(^22) Front Matter Preface © The McGraw−Hill
Companies, 2002
xxii CONTENTS
Common-Size Balance Sheets 59
Common-Size Income Statements 59
Common-Size Statements of Cash Flows 60
Common–Base Year Financial Statements: Trend
Analysis 60
Combined Common-Size and Base-Year
Analysis 61
3.3 Ratio Analysis 62
Short-Term Solvency, or Liquidity, Measures 63
Current Ratio 63
The Quick (or Acid-Test) Ratio 64
Other Liquidity Ratios 65
Long-Term Solvency Measures 65
Total Debt Ratio 65
A Brief Digression: Total Capitalization
versus Total Assets 66
Times Interest Earned 67
Cash Coverage 67
Asset Management, or Turnover, Measures 67
Inventory Turnover and Days’ Sales in Inventory 67
Receivables Turnover and Days’ Sales
in Receivables 68
Asset Turnover Ratios 69
Profitability Measures 70
Profit Margin 70
Return on Assets 70
Return on Equity 70
Market Value Measures 71
Price-Earnings Ratio 71
Market-to-Book Ratio 72
Conclusion 73
3.4 The Du Pont Identity 73
3.5 Using Financial Statement Information 75
Why Evaluate Financial Statements? 75
Internal Uses 75
External Uses 76
Choosing a Benchmark 76
Time-Trend Analysis 76
Peer Group Analysis 76
Problems with Financial Statement Analysis 79
3.6 Summary and Conclusions 82
Chapter 4
Long-Term Financial Planning and Growth 95
4.1 What Is Financial Planning? 96
Growth as a Financial Management Goal 97
Dimensions of Financial Planning 97
What Can Planning Accomplish? 98
Examining Interactions 98
Exploring Options 98
Avoiding Surprises 98
Ensuring Feasibility and Internal Consistency 98
Conclusion 99
4.2 Financial Planning Models: A First Loo k99
A Financial Planning Model: The Ingredients 99
Sales Forecast 99
Pro Forma Statements 100
Asset Requirements 100
Financial Requirements 100
The Plug 100
Economic Assumptions 100
A Simple Financial Planning Model 101
4.3 The Percentage of Sales Approach 102
The Income Statement 102
The Balance Sheet 104
A Particular Scenario 105
An Alternative Scenario 106
4.4 External Financing and Growth 109
EFN and Growth 109
Financial Policy and Growth 112
The Internal Growth Rate 112
The Sustainable Growth Rate 112
Determinants of Growth 114
4.5 Some Caveats Regarding Financial Planning
Models 116
4.6 Summary and Conclusions 117
PART THREE
Valuation of Future Cash Flows 127
Chapter 5
Introduction to Valuation: The Time Value
of Money 129
5.1 Future Value and Compounding 130
Investing for a Single Period 130
Investing for More Than One Period 130
A Note on Compound Growth 137
5.2 Present Value and Discounting 138
The Single-Period Case 138
Present Values for Multiple Periods 139
5.3 More on Present and Future Values 142
Present versus Future Value 142
Determining the Discount Rate 143
Finding the Number of Periods 146
5.4 Summary and Conclusions 150
Chapter 6
Discounted Cash Flow Valuation 157
6.1 Future and Present Values of Multiple
Cash Flows 158
Future Value with Multiple Cash Flows 158
Present Value with Multiple Cash Flows 161
A Note on Cash Flow Timing 165
6.2 Valuing Level Cash Flows: Annuities and
Perpetuities 166