Managerial Finance Week 2 Assignment

The Assignment: Barry Computer Company

Prepare a performance report on Barry Computer Company. (Problem 4-23 on pages 140-141 of the course text provides a balance sheet and an income statement for the company.)

  • Prepare your performance report to show calculations for the 14 ratios listed on page 141, as well as a comparison of your computed ratios with the listed industry averages.
  • Write a short memo to your supervisor explaining your findings and your recommendations for improvement.
  • Suggest some ways in which the company can plan to improve below industry average ratio performance.
  • Explain why your recommendations would be effective.
  • Be sure to list your computations in an appendix to your report.

General Guidance on Application Length:

The memo portion of this assignment will typically be 2 pages in length as a general expectation/estimate. You can show your calculations of financial ratios in a supplemental appendix to your memo.

APA format

Course text attached

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15e

Australia ● Brazil ● Mexico ● Singapore ● United Kingdom ● United States

EugEnE F. Brigham University of Florida

JoEl F. houston University of Florida

Fundamentals of FinanCial

managEmEnt

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Printed in the United States of America Print Number: 01 Print Year: 2018

Fundamentals of Financial Management, Fifteenth edition Eugene F. Brigham and Joel F. Houston

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MindTap for Fundamentals of Financial Management MindTap, featuring all-new Excel Online integration powered by Microsoft, is a complete

digital solution for the corporate finance course. It has enhancements that take students

from learning basic financial concepts to actively engaging in critical-thinking applications,

while learning valuable Excel skills for their future careers.

EvErything you nEEd in onE placE. Cut prep time with MindTap preloaded, organized course materials. Teach more efficiently with interactive multimedia, assignments, quizzes, and more.

EmpowEr your studEnts to rEach thEir potEntial. Built-in metrics provide insight into student engagement. Identify topics needing extra instruction. Instantly communicate with struggling students to speed progress.

your coursE. your contEnt. MindTap gives you complete control over your course. You can rearrange textbook chapters, add your own notes, and embed a variety of content—including Open Educational Resources (OER).

a dEdicatEd tEam, whEnEvEr you nEEd it. MindTap is backed by a personalized team eager to help you every step of the way. We’ll help set up your course, tailor it to your specific objectives, and stand by to provide support.

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practicE problEms All of the end-of-chapter problems are available in algorithmic format for either student practice of applying content presented in the chapter or alternative graded assignment. MindTap is a highly customizable assessment delivery platform, so you can pick and choose from a large bank of algorithmic problem sets to assign to your students.

bluEprint practicE problEms Blueprint Practice Problems combine conceptual and application-driven problems with a tutorial emphasis. Students will know with certainty their level of competency for every chapter, which will improve course outcomes.

Elevate Critical thinking through a variety of unique assessment tools

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gradEd homEwork MindTap offers an assignable, algorithmic homework tool that is based on our proven and popular Aplia product for Finance. These homework problems include rich explanations and instant grading, with opportunities to try another algorithmic version of the

problem to bolster confidence with problem solving.

FinancE in action casEs MindTap offers a series of Finance in Action analytical cases that assess students’ ability to perform higher-

level problem solving and critical thinking/ decision making.

tEsting Mindtap offers the ability to modify existing assignments and to create new assignments by adding questions from the Test Bank.

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Cengage Learning and Microsoft have partnered in MindTap to provide students with a

uniform, authentic Excel assignment experience. It provides instant feedback, built-in video

tips, and easily accessible spreadsheet work. These features allow you to spend more time

teaching finance applications and less time teaching and troubleshooting Excel.

These new algorithmic activities offer pre-populated data directly in Microsoft Excel Online, which runs seamlessly on all major platforms and browsers. Students each receive their own version of the problem data in order to use Excel Online to perform the necessary financial analysis calculations. Their work is constantly saved in Cengage cloud storage as part of homework assignments in MindTap. It’s easily retrievable so students can review their answers without cumbersome file management and numerous downloads/uploads.

Access to Excel Online as used in these activities is completely free for students as part of the MindTap course for Fundamentals of Financial Management, 15e. It is not in any way connected to personal Office 365 accounts/ local versions of Excel, nor are Microsoft accounts required to complete these activities in MindTap.

Microsoft Excel Online activities are aimed at meeting students where they are with unparalleled support and immediate feedback.

Building valuable Excel skills for future business careers while making data-driven decisions

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ExcEl vidEo tips Each activity includes a walk- through video of a similar problem being worked in Excel Online to offer suggested formulas to use for solving the problem. It also offers tips and strategies, which assist in understanding the underlying financial concepts while working within Excel.

calculation stEps and ExcEl solutions Each activity offers configurable displays that include the correct answers, the manual calculation steps, and an Excel solution (with suggested formulas) that matches the exact version of the problem the student received. Students can check their work against the correct solution to identify improvement areas. Instructors always have access to review the student’s answers and Excel work from the MindTap progress app to better assist in error analysis and troubleshooting.

Microsoft Excel Online activities aimed at meeting students where they are with unparalleled

support and immediate feedback

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Encouraging those ‘aha!’ moments with all new Exploring Finance visualizations

All-new in MindTap for Fundamentals of Financial Management, 15e, Exploring Finance

activities offer instructors and students interactive visualizations that engage with

“lean forward” interactivity. Exploring Finance activities provide instructors visual,

interactive tools that can be used to help students “see” the statistical concept being

presented directly within MindTap.

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Exploring Finance visualizations are found at the chapter level of the MindTap learning path for easy retrieval in class to show on projector screens.

Exploring Finance visualizations have a pre-built activity in the learning path within MindTap that allows students to manipulate the values and then respond to questions that reinforce their understanding of the concept being conveyed. These activities can be assigned as practice or for a grade and often offer an interactive, conceptual activity immediately reinforcing student understanding.

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adaptivE whErE it counts The new Adaptive Test Prep App helps students prepare for test success by allowing them to generate multiple practice tests across chapters until they have confidence they have mastered the material.

The adaptive test program grades practice tests and indicates the areas that have or have not been mastered. Students are presented with an

Adaptive Study Plan that takes them directly to the pertinent pages in the text where the practice question materials are referenced.

help students prepare for exam success with adaptive test Prep, only available in mindtap

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FEEdback is kEy Students also receive robust explanations of the problems to assist in further understanding. Many of the quantitative test questions feature video feedback that offers students step-by- step instruction to reinforce their understanding and bolster their confidence.

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getting Down the Basics is important

In order for you to take students further into the applications of finance, it’s important

that they have a firm handle on the basic concepts and methods used. In MindTap for

Fundamentals of Financial Management, we provide students with just-in-time tools

that—coupled with your guidance—ensure that

they build a solid foundation.

prEparing For FinancE Students are more confident and prepared when they have the opportunity to brush up on their knowledge of the prerequisite concepts required to be successful in finance. Tutorials/problems to review prerequisite concepts that students should know. Topics covered include Accounting, Economics, Mathematics, and Statistics, as well as coverage of various Financial Calculators and Excel.

WHY IS THIS IMPORTANT TO ME? For many students, the idea of taking finance is intimidating. Beyond that, students report that they become more engaged with the course material when they see its relevance in business. The “Why is this important to me?” activity asks the student to complete a short self-assessment activity to demonstrate how they may already have personal knowledge about the important finance concepts they will learn in the chapter material. It is intended to help the student, especially the non-finance major, better understand the relevance in the financial concepts they will learn.

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problEm walk-through vidEos Embedded in the interactive MindTap Reader and linked to select problems in MindTap, Problem Walk-Through Videos provide step-by-step instructions designed to walk students through solving a problem from start to finish. Students can play and replay the tutorials as they work through homework assignments or prepare for quizzes and tests—almost as though they had you by their side the whole time. Ideal for homework, study outside the classroom, or distance learning, Problem Walk- Through Videos extend your reach to give students extra instructional help whenever and wherever it’s most useful.

concEpt clips Embedded throughout the new interactive MindTap Reader, Concept Clips present key finance topics to students in an entertaining and memorable way via short animated video clips. These video animations provide students with auditory and visual representation of the important terminology for the course.

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Customizable Course and mobile on-the-go study tools based on Your needs MindTap for Fundamentals of Financial Management, 15e offers features that allow you to

customize your course based on the topics you cover.

lEarning path customization The learning path is structured by chapter so you can easily hide activities you wish to not cover, or change the order to better align with your course syllabus. RSS feeds and YouTube links can easily be added to the learning path or embedded directly within the MindTap Reader.

mindtap ErEadEr Provides Convenience Students can read their full course eBook on their smartphone. This means they can complete reading assignments anyplace, anytime. They can take notes, highlight important passages, and have their text read aloud, whether they are on- or off-line.

MindTap

Mobile Empower

students to

learn on their

terms—anyti me,

anywhere,

on- or off-line .

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thE gradEbook Keep Students Motivated Students can instantly see their grades and how they are doing in the course. If they didn’t do well on an assignment, they can implement the flashcards and practice quizzes for that chapter.

notiFications Keep Students Connected Students want their smartphones to help them remember important dates and milestones— for both the social and academic parts of their lives. The MindTap Mobile App pushes course notifications directly to them, making them more aware of what’s ahead with:

Due date reminders Changes to activity due dates, score

updates, and instructor comments Messages from their instructor Technical announcements about

the platform

Flashcards and Quizzing Cultivate Confidence and Elevate Outcomes Students have instant access to readymade flashcards specific to their course. They can also create flashcards tailored to their own learning needs. Study games present a fun and engaging way to encourage recall of key concepts. Students can use pre-built quizzes or generate a self-quiz from any flashcard deck.

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crEatE a sEamlEss usEr ExpEriEncE With LMS Integration, your students are ready to learn on the first day of class. In just a few simple steps, both you and your students can access Cengage resources using a LMS login.

contEnt customization with dEEp linking Focus student attention on what matters most. Use our Content Selector to create a unique learning path that blends your content with links to learning activities, assignments, and more.

automatic gradE synchronization* Need to have your course grades recorded in your LMS gradebook? No problem. Simply select the activities you want synched, and grades will automatically be recorded in your LMS gradebook.

* Grade synchronization is currently available with Blackboard, BrightSpace (powered by D2L), Canvas, and Angel 8.

LMS Integration

Cengage’s LMS

Integration is designed

to help you seamlessly

integrate our digital

resources within your

institution’s Learning

Management System.

LMS integration is available with the Learning

Management Systems instructors use most. Our integrations work with

any LMS that supports IMS Basic LTI Open Standards. Enhanced features,

including grade synchronization, are the result of active collaborations

with our LMS partners.

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Brief Contents

xvii

Preface xxviii About the Authors xxxviii

Part 1 Introduction to Financial Management 1 Chapter 1 An Overview of Financial Management 2 Chapter 2 Financial Markets and Institutions 27

Part 2 Fundamental Concepts in Financial Management 61 Chapter 3 Financial Statements, Cash Flow,

and Taxes 62 Chapter 4 Analysis of Financial Statements 105 Chapter 5 Time Value of Money 148

Part 3 Financial Assets 193 Chapter 6 Interest Rates 194 Chapter 7 Bonds and Their Valuation 228 Chapter 8 Risk and Rates of Return 270 Chapter 9 Stocks and Their Valuation 316

Part 4 Investing in Long-Term Assets: Capital Budgeting 355 Chapter 10 The Cost of Capital 356 Chapter 11 The Basics of Capital Budgeting 385 Chapter 12 Cash Flow Estimation and Risk Analysis 417 Chapter 13 Real Options and Other Topics in Capital

Budgeting 453

Part 5 Capital Structure and Dividend Policy 473 Chapter 14 Capital Structure and Leverage 474 Chapter 15 Distributions to Shareholders: Dividends

and Share Repurchases 517

Part 6 Working Capital Management and Financial Forecasting 551 Chapter 16 Working Capital Management 552 Chapter 17 Financial Planning and Forecasting 592

Part 7 Special Topics in Financial Management 619 Chapter 18 Derivatives and Risk Management 620 Chapter 19 Multinational Financial Management 664

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xviii Brief Contents

Chapter 20 Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles 700

Chapter 21 Mergers and Acquisitions 734

Appendixes APPENDIX A Solutions to Self-Test Questions

and Problems A-1 APPENDIX B Answers to Selected

End-of-Chapter Problems B-1 APPENDIX C Selected Equations and Tables C-1

Index I-1

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xix

Contents Preface xxviii About the Authors xxxviii

Part 1 Introduction to Financial Management 1

ChaPtEr 1 an overview of Financial management 2 Striking the Right Balance 2

PUTTING THINGS IN PERSPECTIVE 4 1-1 What Is Finance? 4

1-1A Areas of Finance 4 1-1B Finance Within an Organization 5 1-1C Finance Versus Economics and

Accounting 5 1-2 Jobs in Finance 6 1-3 Forms of Business Organization 7 1-4 The Main Financial Goal: Creating Value

for Investors 9 1-4A Determinants of Value 9 1-4B Intrinsic Value 10 1-4C Consequences of Having a Short-Run

Focus 12 1-5 Stockholder–Manager Conflicts 13

1-5A Compensation Packages 13 1-5B Direct Stockholder Intervention 13 Are CEOs Overpaid? 14 1-5C Managers’ Response 15

1-6 Stockholder–Debtholder Conflicts 16 1-7 Balancing Shareholder Interests and the

Interests of Society 18 Investing In Socially Responsible Funds 18

1-8 Business Ethics 20 1-8A What Companies Are Doing 21 1-8B Consequences of Unethical Behavior 21 1-8C How Should Employees Deal With

Unethical Behavior? 23

TYING IT ALL TOGETHER 24

ChaPtEr 2 Financial markets and institutions 27 The Economy Depends on a Strong Financial System 27

PUTTING THINGS IN PERSPECTIVE 28 2-1 The Capital Allocation Process 29 2-2 Financial Markets 31

2-2A Types of Markets 31 2-2B Recent Trends 32

2-3 Financial Institutions 37 Lower Fees Motivate Investors to Move Toward Index Funds 40

Securitization Has Dramatically Transformed the Banking Industry 43

2-4 The Stock Market 43 2-4A Physical Location Stock Exchanges 44 Global Perspectives: The NYSE and NASDAQ Go Global 45 2-4B Over-the-Counter (OTC) and the Nasdaq

Stock Markets 45 2-5 The Market for Common Stock 46

2-5A Types of Stock Market Transactions 47 Initial Buzz Surrounding IPOs Doesn’t Always Translate Into Long-Lasting Success 48

2-6 Stock Markets and Returns 49 2-6A Stock Market Reporting 49 Measuring the Market 51 2-6B Stock Market Returns 52

2-7 Stock Market Efficiency 52 2-7A Behavioral Finance Theory 54 2-7B Conclusions About Market Efficiency 56

TYING IT ALL TOGETHER 57

intEgratED CasE smyth Barry & Company 58

Part 2 Fundamental Concepts in Financial Management 61

ChaPtEr 3 Financial statements, Cash Flow, and taxes 62 Unlocking the Valuable Information in Financial Statements 62

PUTTING THINGS IN PERSPECTIVE 63 3-1 Financial Statements and Reports 64

Global Perspectives: Global Accounting Standards: Will It Ever Happen? 65

3-2 The Balance Sheet 65 3-2A Allied’s Balance Sheet 67 The Balance Sheet of an Average American Household 72

3-3 The Income Statement 73 3-4 Statement of Cash Flows 75 3-5 Statement of Stockholders’ Equity 79

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xx Contents

3-6 Uses and Limitations of Financial Statements 80

3-7 Free Cash Flow 81 Free Cash Flow Is Important for Businesses Both Small and Large 83

3-8 MVA and EVA 84 3-9 Income Taxes 86

Congress Considers Significant Changes to the Tax Code 86 3-9A Individual Taxes 87 3-9B Corporate Taxes 90

TYING IT ALL TOGETHER 94

intEgratED CasE D’leon inc., Part i 101

taking a Closer look Exploring Dunkin’ Brands Group’s Financial Statements 104

ChaPtEr 4 analysis of Financial statements 105 Can You Make Money Analyzing Stocks? 105

PUTTING THINGS IN PERSPECTIVE 106 4-1 Ratio Analysis 107 4-2 Liquidity Ratios 108

4-2A Current Ratio 108 Financial Analysis on the Internet 109 4-2B Quick, or Acid Test, Ratio 110

4-3 Asset Management Ratios 111 4-3A Inventory Turnover Ratio 111 4-3B Days Sales Outstanding 112 4-3C Fixed Assets Turnover Ratio 113 4-3D Total Assets Turnover Ratio 113

4-4 Debt Management Ratios 114 4-4A Total Debt to Total Capital 116 4-4B Times-Interest-Earned Ratio 116 Household Debt Burdens have Declined in Recent Years 117

4-5 Profitability Ratios 118 4-5A Operating Margin 118 4-5B Profit Margin 118 4-5C Return on Total Assets 119 4-5D Return on Common Equity 119 4-5E Return on Invested Capital 119 4-5F Basic Earning Power (BEP) Ratio 120

4-6 Market Value Ratios 121 4-6A Price/Earnings Ratio 121 4-6B Market/Book Ratio 122 4-6C Enterprise Value/EBITDA Ratio 123

4-7 Tying the Ratios Together: The DuPont Equation 124 Microsoft Excel: A Truly Essential Tool 125

4-8 Potential Misuses of ROE 126 Economic Value Added (EVA) Versus Net Income 127

4-9 Using Financial Ratios to Assess Performance 128

4-9A Comparison to Industry Average 128 4-9B Benchmarking 128 4-9C Trend Analysis 130

4-10 Uses and Limitations of Ratios 131 Looking for Warning Signs within the Financial Statements 133

4-11 Looking Beyond the Numbers 133

TYING IT ALL TOGETHER 135

intEgratED CasE D’leon inc., Part ii 144

taking a Closer look Conducting A Financial Ratio Analysis on HP Inc. 147

WEB aPPEnDiX 4a Common Size and Percent Change Analyses

ChaPtEr 5 time Value of money 148 Will You Be Able to Retire? 148

PUTTING THINGS IN PERSPECTIVE 149 5-1 Time Lines 150 5-2 Future Values 151

5-2A Step-By-Step Approach 152 5-2B Formula Approach 152 Simple Versus Compound Interest 152 5-2C Financial Calculators 153 5-2D Spreadsheets 153 5-2E Graphic View of the Compounding

Process 155 5-3 Present Values 157

5-3A Graphic View of the Discounting Process 159

5-4 Finding the Interest Rate, I 160 5-5 Finding the Number of Years, N 161 5-6 Annuities 161 5-7 Future Value of an Ordinary Annuity 162 5-8 Future Value of an Annuity Due 165 5-9 Present Value of an Ordinary Annuity 166

5-10 Finding Annuity Payments, Periods, and Interest Rates 168 5-10A Finding Annuity Payments, PMT 168 5-10B Finding the Number of Periods, N 169 5-10C Finding the Interest Rate, I 169

5-11 Perpetuities 170 5-12 Uneven Cash Flows 171 5-13 Future Value of an Uneven

Cash Flow Stream 173 5-14 Solving for I with Uneven Cash Flows 174 5-15 Semiannual and Other

Compounding Periods 175 5-16 Comparing Interest Rates 177 5-17 Fractional Time Periods 180 5-18 Amortized Loans 180

Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

 

 

xxiContents

TYING IT ALL TOGETHER 182

intEgratED CasE First national Bank 190

WEB aPPEnDiX 5a Continuous Compounding and Discounting

WEB aPPEnDiX 5B Growing Annuities

Part 3 Financial Assets 193

ChaPtEr 6 interest rates 194 The Fed Contemplates an Increase in Interest Rates as the U.S. Economy Shows Signs of a Strong Rebound 194

PUTTING THINGS IN PERSPECTIVE 195 6-1 The Cost of Money 196 6-2 Interest Rate Levels 197 6-3 The Determinants of Market

Interest Rates 201 6-3A The Real Risk-Free Rate of Interest, r* 201 Global Perspectives: European Banks Confront the Reality of Negative Interest Rates 202 6-3B The Nominal, or Quoted, Risk-Free Rate

of Interest, rRF 5 r* 1 IP 203 6-3C Inflation Premium (IP) 203 6-3D Default Risk Premium (DRP) 204 6-3E Liquidity Premium (LP) 204 6-3F Interest Rate Risk and the Maturity

Risk Premium (MRP) 205 An Almost Riskless Treasury Bond 206

6-4 The Term Structure of Interest Rates 208 6-5 What Determines the Shape of the Yield

Curve? 210 The Links Between Expected Inflation and Interest Rates: A Closer Look 212

6-6 Using the Yield Curve to Estimate Future Interest Rates 214

6-7 Macroeconomic Factors that Influence Interest Rate Levels 217 6-7A Federal Reserve Policy 217 6-7B Federal Budget Deficits or Surpluses 217 6-7C International Factors 218 6-7D Business Activity 218

6-8 Interest Rates and Business Decisions 219

TYING IT ALL TOGETHER 220

intEgratED CasE morton handley & Company 226

taking a Closer look Using the New York Times Bond Market Page to Understand Interest Rates 227

ChaPtEr 7 Bonds and their Valuation 228 Sizing Up Risk in the Bond Market 228

PUTTING THINGS IN PERSPECTIVE 229 7-1 Who Issues Bonds? 230 7-2 Key Characteristics of Bonds 231

7-2A Par Value 231 7-2B Coupon Interest Rate 231 7-2C Maturity Date 232 7-2D Call Provisions 232 7-2E Sinking Funds 233 7-2F Other Features 234

7-3 Bond Valuation 234 7-4 Bond Yields 238

7-4A Yield to Maturity 239 7-4B Yield to Call 240

7-5 Changes in Bond Values over Time 242 7-6 Bonds with Semiannual Coupons 245 7-7 Assessing a Bond’s Riskiness 247

7-7A Price Risk 248 7-7B Reinvestment Risk 249 7-7C Comparing Price Risk and Reinvestment

Risk 250 7-8 Default Risk 252

7-8A Various Types of Corporate Bonds 252 7-8B Bond Ratings 253 7-8C Bankruptcy and Reorganization 258

7-9 Bond Markets 259 Accrued Interest and the Pricing of Coupon Bonds 260

TYING IT ALL TOGETHER 262

intEgratED CasE Western money management inc. 268

taking a Closer look Using Online Resources to Understand the Impact of Interest Rates on Bond Valuation 269

WEB aPPEnDiX 7a Zero Coupon Bonds

WEB aPPEnDiX 7B Bond Risk and Duration

WEB aPPEnDiX 7C Bankruptcy and Reorganization

ChaPtEr 8 risk and rates of return 270 Managing Risk in Difficult Times 270

PUTTING THINGS IN PERSPECTIVE 271 8-1 The Risk-Return Trade-Off 272 8-2 Stand-Alone Risk 274

8-2A Statistical Measures of Stand-Alone Risk 275

Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

 

 

xxii Contents

8-2B Measuring Stand-Alone Risk: The Standard Deviation 277

8-2C Using Historical Data to Measure Risk 279 8-2D Other Measures of Stand-Alone Risk: The

 
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