Basic F. Management

Prévia do material em texto

ASIC INAN CIAL ANAGEMENT
EIGHTHEDITION
DAVIDF.SCOTT,JR.
UniversityofCentralFlorida
Holder,Phillips-SchenckChairinAmericanPrivateEnterprise
ExecutiveDirector,Dr.PhillipsInstitutefortheStudyof
AmericanBusinessActivity
ProfessorofFinance
JOHND.MARTIN
BaylorUniversity
CarrP.CollinsChairinFinance
J. WILLlAM PETTV
BaylorUniversity
ProfessorofFinance
W.W.CaruthChairinEntrepreneurship
ARTHURJ.KEOWN
,
VirginiaPolytechniclnstituteandStateUniversity
R.B.PamplinProfessorofFinance
/'
PrenticeHall,UpperSaddleRiver,NewJersey07458
SeniorAcquisitionsEditor: PaulDonnelly
Deve10pmentalEditor:Bruce Kap1an
AssistantEditor:GladysSoto
EditorialAssistant:Jodi Hirsh
Editorial Director:JamesC. Boyd
MarketingManager:PatrickLynch
ProductionEditor: SusanRifkin
ManagingEditor: DeeJosephson
ManufacmringSupervisor:Paul Smo1enski
ManufacturingManager:VincentSeelta
DesignManager:PatriciaSmythe
InteriorandCoverDesign:Jill Little
CoverIllustration:JosephPageKovaeh
Composition:TSI Graphics
@ 1999,1996by PrenticeHall, Inc.
A Simon & SehusterCompany
Upper Sadd1eRiver,New Jersey 07458
AlI rightsreserved.No partof thisbook maybereprodueed,in anyform or
by anymeans,withoutwrittenpermissionfrom thepublisher.
Library ofCongressCataloging-in-PublicationData
BasicfinancialmanagementlDavidF.Seott,Jr [etal.J.-8th ed.
p. em
Inc1udesindex.
ISBN 0-13-794074-2(hard:a1k.paper)
1.Businessenterprises-Finanee.2.Corporations-Finanee.
Seott,DavidF.,Jr.
HG4026.B3181999
658.15-de21 98-30595
CIP
AC
Printedin theUnitedStatesof Ameriea
10 9 8 7 6 5 4.3 2 1
ISBN 0-13-794074-2
Prentice-Hal1Intemational(UK) Lirnited,London
Prentiee-Hallof AustraliaPty.Lirnited,Sydney
Prentiee-HallCanadaIne.,Toronto
Prentice-HallHispanoamericana,S.A., Mexico
Prentice-Hal1ofIndia PrivateLirnited,NewDelhi
Prentice-Hal1of Japan, Ine.,Tokyo
Simon & SchusterAsia Pte.Ltd., Singapore
EditoraPrentiee-Hal1do Brasil, Ltda.,Rio deJaneiro
t
"
1
(
I
i
Subchapter5Corporation
Acorporationthat,becauseofspecific
qualifications,istaxedasthoughitwere
apartnership. .
acquisitionof anewbusiness.Thebottomlinehereisthatyoucanuseearningsforbusi-
nesspUIposes,butyoucan'tholdontothemjustasataxdodge.
SubchapterS Corporation.In decidingbetweenthesoleproprietorsliÍporpartnership
formandthecorporation,taxconsiderationsareimportant.Ownersattempttoselectthe
formofbusinessorganizationthatmaxirnizestheirafter-taxretums.Tominirnizethetax
inftuenceonthedecision,CongressestablishedtheSubchapterS Corporation,which
enablesacorporationtobetaxedasapartnership.Thisprovisionelirninatesthe"double
taxation"effectonthecorporation.TheSubchapterS Corporationfilesataxretumfor
informationpurposesonlyandpaysnotaxes.Thetaxesfromthebusinessarepaidbythe
stockholders,whetherornottheeamingsaredistributed.However,toqualifyasaSub-
chapterS Corporation,thefollowingrequirementsmustbemet:
1. Thefirmmustbeadomesticcorporation.
2. Theremaybenomorethan35shareholdersatthebeginningof thecorporation'slife.
TheseshareholdersmustbeindividuaIs,estates,orcertaintrusts.
3. Thecorporationcannotbeamemberofanaffiliatedgroupeligibletofileaconsolidated.
taxretumwithanothercorporation. f
4. Theremaybeonlyoneclassof stock. "i'
5. A nonresidentaliencannotbeastockholder. :
Onlysmalltomoderate-sizedfirmstypicallycansatisfytheSubchapterS Corpora-1~'.,
~onrequ~ements.However,if thequ~lificationscanbemet,thec~mpanymaypoten-t
tlallyrecelvethebenefitsofacorporatlonbutbetaxedasapartnershlp..,
PuttingItAllTogether:AnExample
To illustratecertainportionsof thetaxlawsfor acorporation,assumethattheGriggs
Corporationhadsalesduringthepastyearof $5 rnillion;its costof goodssoldwas
$3rnillion;andit incurredoperatingexpensesof $1rnillion.In addition,it received
$185,000in interestincomeand$100,000individendincomefromanothercorporation.
In tum,itpaid$40,000in interestand$75,000individends.Finally,thecompanysolda
pieceof landfor$100,000thathadcost$50,000sixyearsago.Giventhisinformation,i.1
thefirm'staxableincomeis$1,225,000,asconiputedin thetoppartofTable1.4.\
BasedonthetaxratesfromTable1.2,Griggs'staxliabilityis $416,500,asshownt-
at thebottomof Table1.4.Notethatthe$75,000Griggspaidin dividendsis nottaxÁt
deductible.Also,sincethefirm'staxableincomeexceeds$335,000,andthe5percentsurtax>rnolongerapplies,themarginaltaxrateandtheaveragetaxratebothequal34percent;that "ir
is, wecouldhavecomputedGriggs'staxliabilityas34percentof$1,225,000,or$416,500.~
As wewill see,asthetaxcodechanges,differentinvestlnentsbecomemoreandlessprof- ;;
itable,whichdemonstratestheroletaxesplayin thefinancialmanager'sdecisions.
OBJECTIVE 5
Wehavejust discussedthelegalandtaxfoundationsof financialdecisions.Wewill now
look atthefinancefoundationsthatlie behindthedecisionsmadeby financialmanagers.
To thefirst-timestudentof finance,thesubjectmattermayseemlike acollectionof unre-
lateddecisionmIes.This couldnotbefurtherfromthetruth.In fact,oUIdecisionmIes,
andthe logic thatunderliesthem,springfram 10 simpleaxiomsthatdo not require
knowledge'of financeto understand.However,while it is not necessaryto understand
financeinordertounderstandtheseaxioms,it is necessarytounderstandtheseaxiomsin
ordertounderstandfinance.Keepin rnindthatalthoughtheseaxiomsmayatfirstappear
12 BASIC FINANCIAL MANAGEMENT
t
"
1
(
I
i
Subchapter5Corporation
A corporationthat,becauseofspecific
qualifications,istaxedasthoughitwere
apartnership. .
OBJECTIVE 5
acquisitionof anewbusiness.Thebottomlinehereis thatyoucanuseearningsfor busi-
nesspurposes,butyoucan'tholdontothemjustasataxdodge.
SubchapterSCorporation. In decidingbetweenthesoleproprietorshipor partnership
formandthecorporation,taxconsiderationsareimportant.Ownersattemptto selectthe
formof businessorganizationthatmaximizestheirafter-taxretums.To minimizethetax
influenceon thedecision,CongressestablishedtheSubchapterS Corporation, which
enablesacorporationto betaxedasapartnership.Thisprovisioneliminatesthe"double
taxation"effecton thecorporation.The SubchapterS Corporationfilesa taxretumfor
informationpurposesonly andpaysnotaxes.The taxesframthebusinessarepaidby the
stockholders,whetherornottheearningsaredistributed.However,toqualifyasaSub-
chapterS Corporation,thefollowingrequirementsmustbemet:
1. Thefirmmustbeadomesticcorporation.
2. Theremaybeno morethan35 shareholdersatthebeginningof thecorporation'slife.
Theseshareholdersmustbeindividuais,estates,orcertaintrusts. '0
3. Thecorporationcannotbeamemberof anaffiliatedgroupeligibletofileaconsolidated.~I
taxretumwithanothercorporation. t
4. Theremaybeonlyoneclassofstock. "
j
'
5. A nonresidentaliencannotbeastockholder. .
Onlysmalltomoderate-sizedfirmstypicallycansatisfytheSubchapterS corpora-;.tionrequirementS'.However,if thequalificationscanbemet,thecompanymaypoten- ~
tiaIlyreceivethebenefitsofacorporationbutbetaxedàsapartnership. .1
PuttingItAlITogether:AnExample
To illustratecertainportionsofthetaxlawsforacorporation,assumethattheGriggs
Corporationhadsalesduringthepastyearof$5million;itscostof goodssoldwas
$3million;andit incurredoperatingexpensesof $1million.In addition,it received
$185,000in interestincomeand$100,000individendincomefromanothercorporation.
In tum,itpaid$40,000ininterestand$75,000individends.Finally,thecompanysolda
pieceof landfor$100,000thathadcost$50,000sixyearsago.Giventhisinformation,
thefirm'staxableincomeis$1,225,000,asconiputedin thetoppartofTable1.4.
BasedonthetaxratesfromTable1.2,Griggs'staxliabilityis $416,500,asshown
at thebottomofTable1.4.Notethatthe$75,000Griggspaidin dividendsis nottax
deductible.Also,sincethefirm'staxableincomeexceeds$335,000,andthe5percentsurtax
nolongerapplies,themarginaltaxrateandtheaveragetaxratebothequal34percent;that
is,wecouldhavecomputedGriggs'staxliabilityas34percentof$1,225,000,or$416,500..;.
As wewillsee,asthetaxcodechanges,differentinvestmentsbecomemoreandlessprof-
itable,whichdemonstratestheroletaxesplayinthefinancialmanager'sdecisions.\
j
f
Wehavejust discussedthelegalandtaxfoundationsoffinancialdecisions.Wewillnow ;.f
look atthefinancefoundationsthatlie behindthedecisionsmadeby financialmanagers.
.
'
.
.
1..
..
.
'
..
.
.
.
...
.
.
...
...
Tothefirst-timestudentof finance,thesubjectmattermayseemlikeacollectionofunre-.
lateddecisionroles.Thiscouldnotbefurtherfromthetruth.In fact,ourdecisionroles,".
andthelogicthatunderliesthem,springfrom10simpleaxiomsthatdonotrequire''',
knowledgeoffinancetounderstand.However,whileit is notnecessarytounderstand';'l
financeinordertounderstandtheseaxioms,itisnecessarytounderstandtheseaxiomsin .í~J
ordertounderstandfinance.Keepin mindthatalthoughtheseaxiomsmayatfirstappear
12 BASIC FINANCIAL MANAGEMENT
iriggs
j was
:eived
'ation.
solda
ation,
:hown
)t tax
mrtax
t;that
5,500.
prof-
:now
1gers.
unre-
:ules,
quire
çtand
'1lSin
)pear
simpleoreventrivial,theywill providethedrivingforcebehindall thatfollows.These
axiomswillweavetogetherconceptsandtechniquespresentedintliistext,therebyallow-
ingustofocusonthelogicunderlyingthepracticeoffinancialmanagement.In orderto
maketheleamingprocesseasierfor youasastudent,wewill keepreturningtothese
axiomsthroughoutthebookin theforroof "RelatetotheBigPicture"boxes-tyingthe
materialtogetherandlettingyousortthe"forestfromthetrees."
Axiom1:
At somepoint,we havealI savedsomemoney.Why havewe donethis?The answeris
simple:to expandourfutureconsumptionopportunities-for example,savefor a house,
acar,or retirement.We areableto investthosesavingsandeama retumon ourdollars
becausesomepeoplewould ratherforgo futureconsumptionopportunitiesto consume
morenow-maybe they'reborrowingmoneyto opena new businessor a companyis
b~rrowingmoneyto buildanewplantoAssumingtherearea lot of differentpeoplethat
wouldlike touseoursavings,howdowedecidewheretoputourmoney?
First, investorsdemanda minimumre~m for delayingconsumptionthatmustbe
greaterthantheanticipatedrateof inflation;/Iftheydidn'treceiveenoughto compensate
foranticipatedinflation,investorswouldpú~chasewhatever,goodstheydesiredaheadof
timeorinvestin assetsthatweresubjecttoinflationandeamtherateof inflationonthose
assets,;rhereisn't muchincentiveto postponeconsumptionif yoursavingsaregoirlgto
declinein terrosof purchasingpower.
CHAPTER 1 AN INTRODUCTION TO FINANCIAL MANAGEMENT 13
Ir busi-
ij, I Table1.4GriggsCorporationTaxComputations
Sales $5,000,000
lership J Costofgoodssold (3,000,000)
ectthe Grossprofit 2,000,000
thetax Operatingexpenses (1,000,000)
which . Operatingincome $1,000,000
jouble Othertaxableincomeandexpenses:
1mfor Interestincome $185,000
by the
Dividendincome $100,000
Less70%exclusion (70,000) 30,000
aSub-
Interestexpense (40,000) 175,000
Gainonlandsale:
Sellingprice $100,000
,s life. I Cost (50,000) $ 50,000
Totaltaxableincome $1,225,000
lidated I Taxcomputation:
15%x $ 50,000= $ 7,500
25%x 25,000= 6,250
34%x 1,150,000= 391,000
$1,225,000
rpora-
I
Add5%surtaxforincomebetween
Joten- $100,000and$335,000 $ 11,750
Taxliability $416,500
Figure1.1TheRisk-ReturnRelationship
Investmentaltemativeshavedifferentamountsof risk andexpectedretums.Investors-
s0J?:l~t!t!!~S<::!19oset.oputthei!"moneyin riskyinvestmentsbecausetheseinvestments.offer
higherexpectedretums.The morerisk aninvestment.has,thehigherwill beits expected
retum.This relationshipbetweenriskandexpectedretumis shownin Figure"1.1.
~otice thatwekeepreferringtoexpectedretumratherthanactualretum.Wemayhave
expectationsofwhattheretumsfrominvestingwill be,butwecan'tpeerintothefutureand
seewhatthoseretumsareactua1lygoingtobe.If investorscouldseeintothefuture,noone
wouldhaveinvestedmoneyin thedrugmakerLiposme,whosestockdropped61.5percent
onJuly 24,1997.This is whentheresultsof alatestageclinicalstudyofLiposme'sVentus
respiratorydrugwereannounced,showingnodifferencebetweenpatientswhoreceivedthe
drugandthosewhoreceiveda placebo.Until afterthefact,you areneversurewhatthe
retumonaninvestmentwill be.Thatis whyGeneralMotorsbondspaymoreinterestthan
U.S.Treasurybondsofthesamematurity.Theadditionalinterestconvincessomeinvestors
totakeontheaddedriskof purchasingaGeneralMotorsbond.
This risk-retumrelationshipwill bea keyconc~l?_tas-we-value..stoçks,J~Q..nds,an:dpro-
posednewprojectst:hi=oughoutffiístexCWeWilfãÍsospendsometimedetenniilliignowto
meãS~eriskIiiretestingly,muchoftheworkforwhichthe1990NobelPrizeforEconomics
was awardedcenteredon the graph in Figure 1.í and how to measurerisk. Both the graph
andtherisk-retumrelationshipit depictswill reappearoftenin thistext.
Axiom2:
A fyndamentalconceptin financeis thatmoneyhasa timevalueassociatedwith it: A
<ÍÕllarreceivedtodayisworth~-dõlTã.rfeceived a yeartromnow..l:Secausewe
C;~e~_~!l!~restonmoney~eceivedtoday,it is bettertoreceivemoneyearlierrntherthan
14 BASICFINANCIALMANAGEMENT
i~Ií
~stors
offer
ected
have
eand
oone
:rcent
entus
:dthe
lt the.
:than
:stors
.pro-
)wto
IllÚCS,
~aph
it:A
ewe
Than
~ lI}yourec.?nollÚc~_~~~rse~~thisc~ncept~ttheti~'@lue of II)oneyis refeIIe_d~to
iiSiíiêopportumtyc~!.ofpassingupthe.!arningpo~!Lal.ofa.9211artQ.Qay.
Inthis_t~~wefocusonthecreationandmeasurementofwealth.Tomeasurewealth
orval~ wewiliusetheconcepcofthetimevalueohrfofieyfõ6ii.ngth-;;fu~~-t)~~~fijs_.
°aIldcosts of_a..pi§j~~_t~back-tothe~1?!e.~~rj.t=-T.hen;-if-thebenefits'óÜfWeigli.the~~~ts,_tbe
~ . . U_"._ . - ;' _
projectcreateswealthandshouldbeaccepted;li thecostsoutweight!t~_benef!!~,_the
~duernc5t-create-WêãTffiandshouldbereJectecí.WiThoutrecogniziIl&theexistence
ofthetimevalueofmoney,it is impossibletoevro.uateprõjéCtswith.futurebenefitsand
@stsin am~.an4!gtill..way:' ~ .- .. .
Tobringfuturebenefitsandcostsofaprojectbacktothepresent,wemustassumea
specificopportunitycostofmoney,orinterestrate.Exactlywhatinterestratetouseis
determinedbyAxiom1:TheRisk-ReturnTrade-Off,whichstatesinvestorsdemand
higherreturnsfortakingonmoreriskyprojects.Thus,whenwedetenninethepresent
valueof futurebenefitsandcosts,wetakeintoaccountthatinvestorsdemandahigher
retumfortakingonaddedrisk. ..
Axiom3:
In measuringwealthorvalue,we will usecashflow~'_Ilota~~9-,:!ntingp!~fits,asourmea-
surementtoo!.Thatis, we wilnje concemedw{thwhenthemoneyhitsoui iiãild,when
~wecanjnY~.§!At_à~~s!af!~:§ing-interestonif,ãndwhenwe canglvei.tbacktã-i&;Sfiãié-
holdersiJ:.Ltheformof dividends.Remember,it is thecashflows,notprofits,thatareactu--- - .
allyrecei
..
vedb
. .
Y
. th~_~lf1i::a~~canbe .remve.'sted.. ~Accounti~gàoJits, . on the..oth.er.. h. a. n.. .d,_ ._ '_0 . H __'. . _.' __ ~. __". . ... .. ..' . .
appearwhéíilhéyareearnedratherthanwhen'iliemõneyis actuallyinharid.As aresult,
ãnnn's'cashflowsand.accoimtingprofitsmayIlOtbethesame.Forexample,acapital
. eijJeiiSê;suchasthepurclÍaseofneweqüipmentôrabuilding,isdepreciatedoverseveral
years,withtheannualdepreciationsubtractedfromprofits.However,thecashflow,or
actualdollars,associatedwiththisexpensegenerallyoccursimmediately.Thereforecash
inflowsandoutflowsinvolvetheactualreceivingandpayoutof money-whenthe
moneyhitsorleavesyourhands.As a result,cashflowscorrectlyreflectthetillÚngof
thebenefitsandcosts.
Axiom4:
ln 1997,GeneralMills, themakerof Cheerios,FrostedCheerios,AppleCinnamon
Cheerios,andMulti GrainCheerios,introducedTeamCheerios-"3deliciousO's
TeamedUp for OneSweetCrunch."Thereis nodoubtthatTeamCheerioscompeted
directlywithGeneralMill's othercereaIsand,in particular,its Cheeriosproducts.
In fact,TeamCheerios,with its brownsugarandfrosting,tastesverymuchlike
FrostedCheerios.Certainlysomeof thesahisdollarsthatendedupwithTeamChee-
rioswouldhavebeenspenton otherCheeriosandGeneralMills productsif Team
Cheerioshadnotbeenavailable.AlthoughGeneralMills wastargetingyoungercon-
sumerswiththissweetenedcereal,thereis.noquestionthatTeamsalesbitinto-actu-
allycannibalized-salesfromCheeriosandotherGeneralMills's lines.Realistically,there;Sonlysomuchcerealanyonecaneat.T~~~!.t&!~~ce_~~~~~I!_~~~I1.~_e~_(J~n~!:I3-.I_.
CHAPTER 1 AN INTRODUCTION TO FINANCIAL MANAGEMENT 15
I
,
"~
~,
:1
.
:,
I
Axiom5: 'I
0'" jobasfinancia!manage"istocrearewea!th.Therefore,wewilllookdose1yat.l.
the"mechãilics-õfVáltfãtiõilãiiêfdeCision'making~'Wewill focusonestimatingcash '
I
:'
~ow.s,determiningwhattheinves~mentearns,a~dvaluingas~etsandnewpr?jects.But,
..
,.
.
"
.
.
lt w1l1beeasyto getcaughtup m themechamcsof valuatlOnandloseslghtof the ....
processof creatingwealth.Whyis it sohardtofindprojectsandinvestmentsthatare '{
I
'
exceptionallyprofitable?Wheredo profitableprojectscomefrom?Theanswersto ..
thesequestionstellusalotabouthowcompetitivemarketsoperateándwheretolook "'it
forprofitableprojects. .,
~nreality,it is mucheasierevaluatiI!!U2rofitable2!?jec~sthWtfiJLcfu!g_them...Iúm.'I
indu§!ryis g~@"tíng.largeprofits,.newentrantsareusuallyattracteg:.T~eã.<:l~tíonali
çõÍnpetitjonandaddedcà~.ac.{iyêãn-re:süi:Cín'profi-tspeíÍÍgdÍiven-downtothere<N.I!:~d.~
.ra~gf r~t~~.C5?!l'yersJ~ly,if ài1indústryis returningprofitsbelowtherequiredra~of 'I
re~m,the?someparticipantsinthemarketdropout\.reducingcapacityandcompetition.i.
In tum,pricesaredrivenbackup.This is preciselywhathappenedin theVCR video I
rentalmarketinthernid-1980s.TIllsmarketdevelopedsuddenlywiththeopportunityfor 1~ Iextremely.largeprofit~.Becausethereweren~~arriersto.entry,~emarketquicklywas ,I"
floodedWl~new~ntnes.By 19~7,thecompetltlonandpncecuttingprodu~~dlossesfor !I
.
,
.
' .
manyfirmsmthemdustry,forcmgthemtofleethemarket.As thecompetltlonlessened~J Ó1
with firmsmovingoutof thevideorenta!industry,profitsagainroseto thepointwhere m
therequiredrateof retumcouldbeeamedon investedcapital. ó' Ul
In competitivemarkets,extremelylargeprofitssimplycannotexistfor verylongo ~ ár-__ _ _ -. ... .t'f-
Giy~n.fuatsomewhat.ble~scenario,howcanwe findgoodprojects-thatis, proj- ~ st
~tsthatretummorethantheirexpectedrateof retumgiventheirriskleveI(remember
AXioIÍLn.'AIthoughcompetíi:ionmakestlieindiffiêulttofind!..'.Y.~.ha.v~.!oinvestinmar-
1s~s'iliatar~?~~ectlL~~I!!15~titi~T§õmõs'~~ori§.~~~Y~..~L~i1ãkiÍlg:ro~."
~q).petitiye are.1.C!_differentiate.theproducCmsomekeywayortoachieveacost"
advantageover competitÕrs:'''- -'- "'" -' -.-.---...-.------.---.
-PfõdiTcCâífferêi:iliationinsulatesa productfromcompetition,therebyallowinga
companytochargeaprerniumprice.If productsaredifferentiated,consumerchoiceis
nolongermadebypricealone.Forexample,manypeoplearewillingtopayaprernium
for Starbuckscoffee.TheysimplywantStarbucksandpriceis notimportant.In the
pharmaceuticalindustry,patentscreatecompetitivebarriers.Schering-Plough'sClaritin,
~lls generatedafterintroducingTeamCheeriosversussimplymaintainingitsexist-
i.~VfiieoJ'5~@~j§:=tJ1f[xRt~iil~ijJal~ç;i.slrIl?,'Ys.-1'618differehceiéIfeêfs'fhetrue
impaft2fthest~çjsion.. . ... -- .--.-----
- In makingbusines~decisions,vy,e_are_c::o~cemedwith_theresultsof thos~cíecisions:
Whafhappensif.~~~~yyesversuswhathappensifwe saynõfA~i@t3 staies-that"we'..
shoülcrusecaShflow_st()~e~r~tl1~Q~n.eiiisj:fia!~ccruefromiaki~gonane~
v{earenowfinetuningourevaluationprocesssothatweoriiycõnsÍClef'incrementalé~sh
f!gVi~:.theincre.m~!ita!c~~h'flowis the-differencel>et'.Y.~en.tl1~cashflótvsif the'proJectis
takello~versus..wh~ttheywillbeif lli~projectisnottakenQn..'- .----
\YJ.1atiL@J2Qrtantis thatY".~_fhinkincrementally:'Our guidingrulein deciding
wh~the.~_~_caSQflQYJSIrÍcrementalis"-toloofitthecomp.~~~~TtIl-ãnd"with_outtlíenew
product.InJ~ct,wewilI1àk:~~_tl?-inncierileIltãíconcéptbeyond.cashfiowsandlookatalI
.c.9~s:9u~~_é~~"~?~alrdecísion~'op-ãD.iÍ1cr~meiitalbasis. . . .-..--.-----
ana
fron
lon!
mar
Ser'
cleE
qua
tior
effe
is C
siz!
ess.
bui
Re:
use
tec
ma
ha~
wb
at
prc
m~
in<
~
thi
ca:
ifj
lS
óJ
'in
a(
16 BASIC FINANCIAL MANAGEMENT
:ist-
true
::ms:
-----~
:we---
ject.._-~
::ash
ctis
din~
new
iiall
~lyat
cash
;.But
)f the
atare
~rsto
>look
)L@
Iíonal
~!!êd
~.at~_of
~tition.
video
,ityfor
ly was
sesfor'
ssened
where
y longo
;, proj-
1ember
inmar-
nãrKets
~acost
,winga
10iceis
remium
. In the
:laritin,
3Dallergyreliefmedicine,andHoffman-LaRoche'sValium,atranquilizer,areprotected
fromdirectcompetitionbypatents.
Serviceandqualityarealsousedtodifferentiateproducts.Forexample,Levi'shas
longprideditselfonthequalityof itsjeans.As aresult,ithasbeenabletomaintainits
'marketshare.Similarly,muchofToyotaandHonda'sbrandloyaltyis basedonquality.
Servicecanalsocreateproductdifferentiation,asshownby McDonald'sfastservice,
cleanliness,andconsistencyofproductthatbringscustomersback.
Whetherproductdifferentiationoccursbecauseof advertising,patents,service,or
quality,themoretheproductisdifferentiatedfromcompetingproducts,thelesscompeti-
tionitwill faceandthegreaterthepossibilityoflargeprofits.
Ec~momiesof scaleandtheabilityto produce.-At.!!S..ost..!?elo_~_co~_etiti~~can
eff~ter newentrantstothemarketaI1d.tb~reby'reQJ!ceGompetition.~Wal-Mart
iS onesuchcasé:FõrWãl:-Mãff,"thefixed'~~stsarelargelyindependentof thestore's
size.Forexample,inventorycosts,advertisingexpenses,andmanagerialsalariesare
. essentiallythesameregardlessofannualsales.Therefore,themoresalesthatcanbe
builtup,thelowertheper-saledollarcostof inventory,'advertising,andmanagement.
Restockingfromwarehousesalsobecomesmoreefficientasdeliverytruckscanbe
\lsedtofullpotential.
Regardlessofhowthecostadvantageiscreated-byeconomiesofscale,proprietary
technology,or monopolisticcontrolof rawmaterials-thecostadvantagedetersnew
marketentrantswhileallowingproductionatbelow.industrycost.Thiscostadvantage
has.thepotentialofcreatinglargeprofits.
The_ls;eY.JoJoçating.pro.fiJaQle_iI1y.~§!I1l~I1tpr<?jectsis.to firstunderstand.howand
wheretheyexist,.i.n~ompeti.tivemarkets.Thenthecorporatephilosophymustbeaimeçl
atcreátíiigortakingadvantãgeõfsomeimperfectionin thesemarkets,eitherthroug,h
pr"Õâüctdifferehtiationor creationof a costadvantage,ratherthanlookingto new
niãr1:etsôrindustriesthatappearto providelargeprofir~:-'Anyperfectlycompetitive
ln
. dustÍ"ythatlooks too"goodto betruewon't befor longoIt 1Snecessaryto understand
~.~ ,-~.. . . . -,,":. - '.~
tl1istõ-kiíowwheretoJo.okfor goodprojectsandto.accuratelymeasuretheproject's
câThflows.Wecandothis1:Jetterif werecognizehowwealthiscreatedandhowdifficult~--:-.,~ --- ""
itistocreateit. .
Axiom6:
Qurgoalas financialmanagersis themaximizationof shareholderwealth.How do we
measureshareholderwealth?It is thevalueof thesharesthattheshareholdershold.To
understandwhatcausesstockstochangein price,aswell ashowsecuritiessuchasbonds
andstocksarevaluedorpricedin thefinancialmarkets,it is necessarytohaveanunder-
standingoftheconceptofefficientmarkets. . Efficientmarket
Whetheramarketis efficientornothastodowiththespeed.withwhichinformation Amarketinwhichthe'valuesofallassetsand
isimpoundedintosecurityprices.An efficientmarketis characte~ze~_~.r!lla.!:.genumber securitiesatanyinstantintimefullyreflectali
~profit-drivenindividuaIswhoacfíndépen""dently.In addition,newinformationreg~sl-=-.availablepublicinformation.
ingsecuritiesarrivesin themarketin a..xandommariílef.'l}iventb.is"setting,investors
a~w i~~r:!!l~~<:J~.i~Y..~~.P.1lY_.~~4~~~Úthe-secuniyÜiitil:!!!~YJeeltl1e
~.-P!!c~.~<:Jrrec!lY.refleç,~~JbeIl~wiI!~o.~ati?~:Und~E.~eefficient.~~~~_t_hY.'p~!he-
SIS,mformationisreftecte<!l~securitypriceswithsuchspeed'lliãf1fiêieareno.<:JPP.2J:t,uni-~ . . .' - '--_~_'__'.~-"-_ . " _"." '," . _.m_4_"__'''''''_''''_''_''",_,~~,,,-",,,,,,,,-,,,_
~for investorstoprofitfrom.publiC1Y:~~~~'!5I.~~inf?~~~oE,Jnvestorscomp~tingJ9r..
prohtSensure'lliiíf'securify'pnces..apP!:QPri~telYJ;~fteçtJh~ expected.earningsandrisks
íiiVolved'an(Fi:híis~thetiúevalúeofthefirmo
. ,.. "... '" .....
CHAPTER 1 AN INTRODUCTION TO FINANCIAL MANAGEMENT 17
AgencyproblemProblemresultingfromconflictsof interest
betweenthemanager(thestockholder'sagent)
andthestockholders.
Whataretheimplicationsofefficientmarketsforus?First,thepriceis right.Stock
pricesreflectalIpubliclyavailableinformationregardingthevalueofthecompany.This
meanswecanimplementourgoalofmaximizationofshareholderwealthbyfocusingon
theeffecteachdecisionshouldhaveonthestockpriceif everythingelse.-wereheldcon-
stant.Thatis,overtimegooddecisionswill resultinhigherstockpricesandbadones,
lowerstockprices.Second,earningsmanipulationsthroughaccountingchangeswillnot
resultinpricechanges.Stocksplitsandotherchangesinaccountingmethodsthatdonot
affectcashflowsarenotreflectedin prices.Marketpricesreflectexpectedcashflows
availabletoshareholders.Thus,ourpreoccupationwithcashflowstomeasurethetiming
ofthebenefitsisjustified.
As wewill see,it is indeedreassuringthatpricesreflectvalue.It allowsustolookat
pricesandseevaluereflectedin them.Whileitmaymakeinvestingabitlessexciting,it
makescorporatefinancemuchlessuncertain.
Axiom7:
Althoughthegoal,ofthefirmis themaximizationof shareholderwealth,in reality,the
agencyproblemmayinterferewiththeimplementationofthisgoal.Theagencypr~blem
resultsfromtheseparationofmanagementandtheownershipof thefirmoFQcexample,a
f~gefipnll.J!lJ..berunbyprofessionalmanagerswhohavelittle01'no'?wnershipin the
_~rm.Becauseof thisseparationof thedecisi~nmakersand.owners,managersmaymake
decisionsthatarenotin tinewiththegoalof maximizationofshareholderwealth;T.l;1ey
mayapproachworklessenergeticallyandattempttobeI!:efitthemselvesinteflT!sofsalary
ap.dperquisitesattheexpenseofshareholders. .
. To beginwith,anagentis someonewh6is giventheauthoritytoactonbehalfof
another,referredto astheprincipal.In thecorporatesetting,theshareholdersarethe
principals,becausetheyaretheaétualownersof thefirmoTheBoardofDirectors,the
CEO,thecorporateexecutives,andalIotherswithdecision-makingpowerareagentsof
theshareholders.Unfortunately,theBoardofDirectors,theCEO,andtheothercorporate
executivesdon'talwaysdowhat'sin thebestinterestof theshareholders.Instead,they
actmanytimesintheirownbestinterest.Notonlymighttheybenefitthemselvesinterms
. of.salaryandperqu~sites,.butth~ymightalsoavoidanyprojectsthathaveriskassocIated .twiththem~venifthey'regreatprojectswithhugepotentialretumsandasmalIchance -
of failure.Why-isthisso?Becauseif theprojectdoesn'ttumout,theseagentsofilie'...;:, , --, --,
shareholcJersmaylosetheirjoqs. .
Thecostsassociatedwiththeagencyproblemaredifficulttomeasure,butoccasion-
alIy-weseetheproblem'seffectin themarketplace.For example,if themarketfeels
managementofafirinis damagingshareholderwealth,wemightseeapositivereac'tion
instockpricetotheremovalofthatmanagement.In i 989,onthedayfolIowingthedeath
ofJohnDorrance,Jr.,chairmanofCampbelISoup,CampbelI'sstockpriceroseabo'lt15
percent.SomeinvestorsfeltthatCampbelI'srelativelysmalIgrowthinearningsmightbe
improvedwiththedepartureofDorrance.TherewasalsospeculationthatDorrancewas
themajorobstacletoapossiblepositivereorgãhiiation:
li themanagementof thefirmwQrks.fortheowners,whoaretheshareholders,why
doesQ't--the-m.anâgementgetfiredif theydo~'t_actin theshareholder'sbestinter~~~?
In1~eorytlíêshireholderspick thecorporateboardofdirectorsaÍldtÍ1eboardof directors
t~._t?mpic:ks_~~management.Unfortunately, in reality the system frequently works the
18 BASIC FINANCIAL MANAGEMENT
Stock
y.This
ingon
dcon-
lones,
@not
donot
flows
timing
ookat
ting,it
~,the
oblem
lpl~,a
in the
"make
.They
salary
lalfof
Ie the
rs,the
mtsof
porate
I, they
terms
d~~
:hance
afthe
asion-
Lfeels
action
death
aut15
ghtbe
:ewas
;,why
:erest?
"ectors
ksthe
.Q1b.er.,.WY.M:.Q.und"M~~geme.IJ.tse~ectsth~!?oarc:!_o!~~tor.non;rineoesandthendistributes
the-baUots.In effect,sharehol~~rs_ar_e?!fer~da.sl~te~(nomineesselectedbyothe.m!iD:age-
ment.TheendresüItis manágem,enJeffectivelyselectsthedirectors,who thenmayhave~ -~.".'-"-' ._- - -, -.. ... .. .. .,
moreallegi~_too!ll~\!gers..!p"an"tQos~~~h~l~~I~.Thisin turnsetsupthepotential.for
a~9' J~:~lemso~iththeboard0%directorsnotmomtonrig"'maI1.~gerr<?n"behãlf.ófthe
shareholdersastheyshould..
--wewillspendconsiderabletimemonitoringmanagersandtryingtoaligntheirinter-
estsWIthshareholders.Managerscanbemonitoredbyauditingfinancialstatementsand
man'igers'compensationpackages.Theinterestsof managersandshareholderscanbe
ãÍi.gned.by establishingmanagementstockoptions,bonuses,andperquisitesthataré
dlféctlytiedtohowcloselytheirdecisionscoincidewiththeinterestofshareholders.The
ág~ncyproblemwillpersistunlessanincentivestructureissetupthatalignstheinterests
ofmanagersandshareholders.In otherwords,what'sgoodfor"shareholdersmustalsobe
cgpoã_forroanagers.If thatis notthecase,managerswill makedecisionsin theirbest
interestsratherthanmaximizingshareholderwealth.
Axiom8:
Earlierin thischapter,wesawhowtaxesinfluencefinancialdecisions.Hard1yanydeci-
sionismadebythefinancialmanagerwithoutconsideringtheimpactoftaxes.Whenwe
introducedAxiom4,wesaidthatonlyincrementalcashflowsshouldbeconsideredin
theevaluationprocessoMorespecifically,thec.~sh~o",,~..woe.:wiJIconsiderwiltbeafter-
taxincrementalcashjlows"t~-theftTni°as'áwhole.
~en weevãlijoãie.1l~Fproject§,O"W~..wJU$e:~.!n~c?olp~_~~e~_playjng.a~jgnificant
role.Whenthecompan)'is analyzingthepossibleacquisitionofaplantorequipment,
1Ii'ereturns-from-thei~v~stmentshouldbemeasuredo~~ after-taxbasis.Otherwise,"
theCõmpanywill not°trulybeevaluatingthetrueincrenientalcashflows°generated_
by"theprojecto. .
-The -gov~mm~ntalso realizestaxescan bias businessdecisionsand usestaxesto
encouragespendingin certainways.If thegovemmentwantedto encouragespendingon
researchanddevelopmentprojectsit mightofferan investmenttaxcreditfor suchinvest-
ments.This wouldhavetheeffectof reducingtaxeson researchanddevelopmentpro-
jects,which would in turn increasethe after-taxcashflows from thoseprojects.The
increasedcashflow wouldtum someotherwiseunprofitableresearchanddevelopment
projectsintoprofitableprojects.In effect,thegovemmentcanusetaxesasatooltodiree<t
businessinvestmenttoresearchanddevelopmentprojects,totheinnercities,andtopro-
jectsthatcreatejobs.
Axiom9:
Muchof financecentersaroundAxiom1:TheRisk-ReturnTrade-Off.Butbeforewe
canfu11yuseAxiom1,wemustdecidehowtomeasurerisk.As wewill see,riskis diffi-
culttOmeasure.Axiom9 introducesyouto theprocessof diversificationanddemon-
strateshowit canreducerisk.Wewill alsoprovideyouwithanunderstandingof how
diversificationmakesitdifficulttomeasureaprojectoranasset'srisk.
CHAPTER 1 AN INTRODUCTION TO FINANCIAL MANAGEMENT 19
You areprobablyalreadyfanúliarwiththeconceptof diversification.Thereis anold
saying,"don'tputalI of youreggsin onebasket."DiversificationalIowsgoodandbad
eventsorobservationstocanceleachotherout,therebyreducingtotalvariabilitywithout
affectingexpectedretum. /'
To seehowdiversificationcomplicatesthemeasurementof risk,letuslook atthediffi-
cultyLouisianaGashasin determiningtheleveIof risk associatedwitha newnaturalgas
welIdrillingproject.Eachyear,LouisianaGasmightdrill severalhundredwelIs,witheach
welIhavingonlya 1in 10chanceof success.If thewelIproduces,theprofitsarequitelarge,
butif it comesupdry,theinvestmentis lost.Thuswitha90percentchanceof losingevery~
thing,wewoUldviewtheprojectasbeingextremelyrisky.However,if LouisianaGaseach
yeardrills2,000welIs,alIwitha 10percent,independentchanceof success,thentheywould
typicallyhave200successfulwelIs.Moreover,abadyearmayresultin only190successful
welIs,andagoodyearmayresultin210successfulwelIs.If welookatalIthewellstogether,
theextremegoodandbadresultstendtocanceleachotheroutandthewelldrillingprojects
takentogetherdonotappeartohavemuchriskorvariabilityofpossibleoutcome.
~ The amountof risk in a gaswelI projectdependsuponourperspective.Looking at
the'welI standingalone,it lookslike a lot;however,if weconsidertheriskthateachwelI
contributesto theoverallfirm risk,it is quitesmall.This is becausemuchof therisk
associatedwitheachindividualwell is diversifiedawaywithinthefirmoThepointis:We
can'tlook ataprojectin isolation.Later,wewill seethat.someof thisrisk canbefurther
diversifiedawaywithintheshareholder'sportfolio.
Perhapstheeasiestway to understandtheconceptof diversificationis to look atit
graphicalIy.Considerwhathappenswhenwe combinetwoprojects,asdepictedin Fig-
ure 1.2.In thiscase,thecashflowsfromtheseprojectsmovein oppositedirections,and
whentheyarecombined,thevariabilityof theircombinationis totalIyeliminated.Notice
thatthereturnhasnotchanged-eachindividualproject'sandtheircombination'sreturn
averages10percent.In this case,theextremegood andbadobservationscanceleach
otherout.The degreeto whichthetotalrisk is reducedis a functionof howthetwosets
of cashflowsor returnsmovetogether.
As wewill seefor mostprojectsandassets,someriskcanbeeliminatedthrough ,i
diversification,whereassomeriskcannot.This will becomeanimportantdistinctionlater '~
in our studies.For now,weshouldrealizethattheprocessof diversificationcan reduce
risk,andasa result,measuringaproject'sor anasset'srisk is verydifficult.A project;s
risk changesdependingonwhetheryoumeasureit standingaloneor togetherwithother
projectsthecompanymaytakeon.
Figure1.2ReducingRiskThroughDiversification
20
AssetA
o AssetB
Time
20 BASIC FINANCIAL MANAGEMENT
sanold
mdbad
without
aediffi-
lfal gas
itheach
~elarge,
~every~
aseach
{ would
;cessful
)gether,
Jrojects
kingat
chwell
herisk
:is:We
further
)k atit
inFig-
ns,and
Notice
:retum
~leach
'NOsets
!lrough
)filater
reduce
'Oject's
:1other
I
I
I
-
I,
j
Axiom10:
Ethics,orratheralackof ethics,in financeis arecurringthemein thenew~.During
thê1ãfeT980s-mfd'eàtly'19908:the"fallõf'IVãn-l3oeskyaIÍdDrexel,Burnham,
Lambert,andthenearcollapseof SalomonBrothersseemedto makecontinuous
headlines.Meanwhile,themovieWallStreetwasahitattheboxofficeandthebook
Liar'sPoker,byMichaelLewis,chroniclingunethicalbehaviorin thebondmarkets,
becamea bestseller.As thelessonsof SalomonBrothersandDrexel,Burnham,
,Lambertillustrate,ethicalerrorsarenotforgivenin thebusinessworl~.~otonlyis .
actingin anethicaCmarinermorallycorrecçiti~congroentwithourgoalof maxi-
rruiãtionõf shareholderwealih.
~,._. " ."-
EthicalbehaviormeaIÍs"doiilgtherightthing."A difficultyarises,however,in
atteriiptingtôdêfine"doingtherightthing."Theprob1emis thateaéhof ushashis
EhirQwn, .setofvalue~,whichformsthebasisfor.ourpersonaljudgmentsaboutwhat
isthe rightthingto do.~However,everysocietyadoptsa setof rolesor lawsthat
~'sênbêwhatit believesto"be"doingtherightthing."In a sense,wecanthinkof
1~'Ws'asa setof rolesthatreflectthevaluesof thesociety'asawhole,astheyhave
evõlveCl.t:?rpurposesof thistext,werecognizethatindividuaIshavea righttodis-
àgrêé"""aboufwhat'constitutes"doingtherightthing,"andwe will seldomventure
t5eyôndthebasicnotionth~tethicalconductinvolves'abidingby society'sroles.
However,wewill pointoutsomeof theethicaldilemmasthathavearisenin recent
yeãIs'withregiiêCtõ"thep?àcticeof financialmanagement.So asweembarkonour
stUCl)tOffinanceandencounterethicaldilemmas,weencourageyoutoconsiderthe
,issues.áridformyourownopinions.
.""ManTstudentsask,"Is ethicsreallyrelevant?"Thisis agoodquestionanddeserves
ananswer.First,althoughbusinesserrorscanbeforgiven,ethicalerrorstendtoend
careersandterminatefutureopportunities.Why?Becauseunethicalbehaviorelimi-
natestrust,andwithouttrust,businessescannotinteract.Second,themostdamaging
eventa businesscanexperienceis a lossofthepublic'sconfidencein itsethicalstan-
dards.In finance,wehaveseenseveralrecentexamplesof suchevents.It wasthe
ethicalscandalsinvolvinginsidertradingatDrexel,Burnham,Lambertthatbrought
âownthatfirmoIn 1991,theethicalscandalsinvolvingattemptsbySalomonBrothers
tocomertheTreasurybill marketledtotheremovalof its topexecutivesandnearly
putthecompanyoutofbusiness.
Beyondthequestionof ethicsis thequestionof socialresponsibility.In general,
COrporatesocialresponsibilitymeansthatacorporationhasresponsibilitiestosociety
beyondthemaximizationof shareholderwealth.It assertsthatacorporationanswers
toabroaderconstituencythanshareholdersalone.As with)11ostdebatesthatcenteron
ethicalandmoralquestions,thereis nodefinitiveanswer.Oneopinionis thatbecause
financialmanagersareemployeesof thecorporation,andtheêorporationis ownedby
theshareholders,thefinancialmanagersshouldronthecorporationin suchawaythat
shareholderwealthis maximizedandthenallowtheshareholdersto decideif they
wouldlike'tofulfill asenseof socialresponsibilitybypassingonanyof theprofitsto
deservingcauses.Veryfewcorporationsconsistentlyactinthisway.Forexample,in
. 1992/Bristol-MyersSquibbCooannouncedit wouldstartanambitiousprogramto
giveawayheartmedicationtothosewhocannotpayfor it.Thisannouncementcarne
in thewakeof anAmericanHeartAssociationreportshowingthiltmanyof the
nation',sworkingpoorfaceseverehealthrisksbecausetheycannotaffordheartdrogs.
CHAPTER 1 AN INTRODUCTION TO FINANCIAL MANAGEMENT 21
Clearly,Bristol-MyersSquibbfeltit hadasocialresponsibilityto.providethismedi-
cinetothepooratnocost.
Howdoyoufeelaboutthisdecision?
A Final Noteon theAxioms
Hopefully,theseaxiomsareasmuchstatementsofcommonsenseastheyaretheoreti-
calstatements.Theseaxiomsprovidethelogicbehindwhatis tofollow.We.will build
on themandattemptto drawout theirimplicationsfor decisionmaking.As we
continue,trytokeepin mindthatalthoughthetopicsbeingtreatedmaychangefrom
chaptertoehapter,thelogicdrivingourtreatmentof themis eonstantandis rootedin
these10axioms.
In thistext,wewill foeusonthemaintenanceandcreationofwealth.Althoughthiswill
involveattentiontodeeision-makingteehniques,wewill emphasizethelogicbehind
thosetechniquestoensurethatyoudonotlosesightoftheconceptsdrivingfinanceand
thecreationofwealth.Thetextbeginsbydiscussingthegoalofmaximizationofshare-
holderwealth,agoalthatis tobeusedin financialdecisionmaking,andpresentsthe
legalandtaxenvironmentin whichthesedecisionsaretobemade.Sincethisenviron-
mentsetsthegroundmIes,it is necessarytounderstanditbeforedecisionmIescanbe
formulated.The10guidingaxiomsthatprovidetheunderpinningsforwhatis tofollow
arethenpresented.Chapter2examinesthefinancialmarketsandinterestraies,lookingat
boththedeterminantsof interestratesandtheireffectonbusinessdecisions.Chapters3
and4 introducethebasicfinancialtoolsthefinancialmanagerusestomaintaincontrol
overthefirmand.itsoperations.Thesetoolsenablethefinancialmanagertolocatepoten-
tialproblemareasandplanforthefuture.
Chapter5exploreshowthefiemanditsassetsarevalued.It beginswithanexamina-
tionofthemathematicsoffinanceandtheconceptofthetimevalueofmoney.Anunder-
standingofthistopicallowsustocomparebenefitsandcoststhatoccurindifferenttime
periods.Wemoveoninchapter6todevelopanunderstandingof themeaningandmea-
surementofrisk.Valuationoffixedincomesecuritiesisexaminedinehapter7,andchap-
ter8 looksatvaluationmodelsthatattempttoexplainhowdifferentfinancia!decisions
affectthefirm'sstockprice.
UsingthevaluationprincipIesjustdeveloped,chapter9discussesthecapital-budgeting
decision,whichinvolvesthefinancialevaluationof investmentproposalsin fixedassets.
Wethenexaminethemeasurementofcashflowsinchapter10,andintroducemethodsto
incorporateriskin theanalysisin chapter11.Finally,inehapter12,wewill examinethe
finaneingofafiem'schosenprojects,lookingatwhatcostsareassociatedwithaltemative
waysofraisingnewfunds.
Chapter13examinesthefirm'scapitalstructurealongwiththeimpactofleverageon
retumsto theenterprise.Oncetheserelationshipsbetweenleverageandvaluationare
developed,wemoveontotheprocessofplanningthefirm'sfinancingmixinchapter14.
Thisisfollowedinchapter15withadiscussionofthedeterminationofthedividend-,
retainedeamingsdecision.
Chapters16through19dealwithworking-capitalmanagement,themanagementof
currentassets.Wewill discussmethodsfor determiningtheappropriateinvestmentincash,marketablesecurities,inventory,andaccountsreceivable,aswellastherisksasso-
ciatedwiththeseinvestmentsandthecontroloftheserisks.
22 BASIC FINANCIAL MANAGEMENT