Introduction to Corporate Finance

Ross et al.: Fundamentals

of Corporate Finance, Sixth

Edition, Alternate Edition

Front Matter Preface © The McGraw−Hill^29

Companies, 2002

CONTENTS xxix

The Investment in Receivables 708
21.2 Terms of the Sale 709
The Basic Form 709
The Credit Period 710
The Invoice Date 710
Length of the Credit Period 710
Cash Discounts 711
Cost of the Credit 712
Trade Discounts 712
The Cash Discount and the ACP 712
Credit Instruments 712
21.3 Analyzing Credit Policy 713
Credit Policy Effects 713
Evaluating a Proposed Credit Policy 714
NPV of Switching Policies 714
A Break-Even Application 716
21.4 Optimal Credit Policy 716
The Total Credit Cost Curve 716
Organizing the Credit Function 717
21.5 Credit Analysis 718
When Should Credit Be Granted? 718
A One-Time Sale 719
Repeat Business 719
Credit Information 720
Credit Evaluation and Scoring 721
21.6 Collection Policy 721
Monitoring Receivables 721
Collection Effort 723
21.7 Inventory Management 724
The Financial Manager and Inventory Policy 724
Inventory Types 724
Inventory Costs 725
21.8 Inventory Management Techniques 726
The ABC Approach 726
The Economic Order Quantity Model 727
Inventory Depletion 727
The Carrying Costs 728
The Shortage Costs 728
The Total Costs 729
Extensions to the EOQ Model 731
Safety Stocks 731
Reorder Points 731
Managing Derived-Demand Inventories 731
Materials Requirements Planning 731
Just-in-Time Inventory 731
21.9 Summary and Conclusions 733

Appendix 21A More on Credit Policy

Analysis 738

Two Alternative Approaches 739

The One-Shot Approach 739

The Accounts Receivable Approach 739

Discounts and Default Risk 740

NPV of the Credit Decision 741

A Break-Even Application 742

PART EIGHT

Topics in Corporate Finance 747

Chapter 22

International Corporate Finance 749

22.1 Terminology 750

22.2 Foreign Exchange Markets and Exchange

Rates 751

Exchange Rates 753

Exchange Rate Quotations 753

Cross-Rates and Triangle Arbitrage 754

Types of Transactions 755

22.3 Purchasing Power Parity 756

Absolute Purchasing Power Parity 757

Relative Purchasing Power Parity 758

The Basic Idea 758

The Result 758

Currency Appreciation and Depreciation 759

22.4 Interest Rate Parity, Unbiased Forward Rates,

and the International Fisher Effect 760

Covered Interest Arbitrage 760

Interest Rate Parity 761

Forward Rates and Future Spot Rates 762

Putting It All Togethe r763

Uncovered Interest Parity 763

The International Fisher Effect 763

22.5 International Capital Budgeting 764

Method 1: The Home Currency Approach 764

Method 2: The Foreign Currency Approach 765

Unremitted Cash Flows 766

22.6 Exchange Rate Ris k766

Short-Run Exposure 766

Long-Run Exposure 767

Translation Exposure 768

Managing Exchange Rate Risk 769

22.7 Political Ris k770

22.8 Summary and Conclusions 770

Chapter 23

Risk Management: An Introduction to Financial

Engineering 777

23.1 Hedging and Price Volatility 777

Price Volatility: A Historical Perspective 778

Interest Rate Volatility 779

Exchange Rate Volatility 779

Commodity Price Volatility 780

The Impact of Financial Risk: The U.S. Savings and

Loan Industry 780

23.2 Managing Financial Ris k783

The Risk Profile 783