Financial Statements and Analysis
Review the contents of the stockholders report and the procedures for consolidating international
Understand who uses financial ratios, and how.
Use ratios to analy
Time Value of Money
Discuss the role of time value in finance, the use of computational aids, and the basic patterns of
Understand the concept of future value and present value, their calculation for single amoun
Working Capital and Current
Understand short-term financial management, net working capital, and the related tradeoff between
profitability and risk.
Describe the cash conversion cycle, its funding requir
Hybrid and Derivative Securities
Differentiate between hybrid and derivative securities and their roles in the corporation.
Review the types of leases, leasing arrangements, the lease-versus-purchase decision, the effects
The Cost of Capital
Understand the key assumptions, the basic concept, and the specific sources of capital associated
with the cost of capital.
Determine the cost of long-term debt and the cost of preferred stock.
Cash Flow and Financial Planning
Understand tax depreciation procedures and the effect of depreciation on the firms cash flows.
Discuss the firms statement of cash flows, operating cash flow, and free cash flow.
Leverage and Capital Structure
Discuss leverage, capital structure, breakeven analysis, the operating breakeven point, and the effect
of changing costs on it.
Understand operating, financial, and total leverage and the rel
Current Liabilities Management
Review the key components of credit terms, accounts payable, and the procedures for analyzing
Understand the effects of stretching accounts payable on their cost and on the use of accru
Capital Budgeting Cash Flows
Understand the motives for key capital expenditure and the steps in the capital budgeting process.
Define basic capital budgeting terminology.
Discuss relevant cash flows, expansion versus re
Understand cash dividend payment procedures, the tax treatment of dividends, and the role of
dividend reinvestment plans.
Describe the residual theory of dividends and the key arguments with regard to divid
Figure 13.23. We will assume for simplicity that negotiations involve only two
offers and that Andrew makes the first offer, which is denoted as P1. This is
indicated as the first branch of the decision tree.After Andrew has made the
offer,Adam can either
the two wagers, s1 2 and s2 2 are Since s2 2 > s1 2 , then the second wager is
riskier than the first. An alternative way to express the riskiness of a set of random
outcomes is the standard deviation. The standard deviation is simply the square
root of t
that is less than $100. Moreover, accepting the offer ignores the fact that Adam
has the ability to make a more advantageous (to him) counteroffer in the next
round of negotiations. What all this means is that no matter what Andrews initial
offer was, he
matrix reflects managements desire for labor to work hard and labors desire to
take it easy. Management has two options. Managers can either secretly monitor
614 introduction to game theory Firm B Dont cheat Cheat Firm A Dont cheat (10,
10) ( 5, 20) Cheat
without impatience. extended bargaining process. Similarly, if Adam has the first
move and there are an even number of rounds of negotiations, it will in both
parties interest for Andrew to accept Adams initial offer $100. In this case, Adam
the difference between a strictly dominant strategy and a weakly dominated
strategy. 13.10 It is not possible to have multiple Nash equilibria in the presence
of a subgame perfect equilibrium. Do you agree with this statement? If not, why
not? 13.11 In a
axis. The three total utility of money functions in Figure 14.1 illustrate the
concepts of constant marginal utility of money (CMUM), increasing marginal
utility of money (IMUM), and diminishing marginal utility of money (DMUM).
When conditions of increas
discount rates and 50 negotiating rounds Adam received $26.33 and Andrew
received $23.67. b. qA = 1 - dA = 0.90; qB = 1 - dB = 0.95. Substituting these values
into expression (13.15) we obtain The amount of the surplus that Adam should
offer Andrew is The
players possible strategies and payoffs from alternative strategies in a
simultaneous-move game. Simultaneous-move games may be either
noncooperative or cooperative. In contrast to noncooperative games, players of
cooperative games engage in collusive beh
game theory 14 621 We have assumed throughout most of this book that the
economic decisions were made under conditions of complete certainty. It was
assumed that the decisions of both consumers and producers were based on
complete and accurate knowledge o
process is continued, eventually Andrew and Adam will evenly divide the surplus;
but as long as Adam moves last, he will enjoy an advantage, however slight, over
Andrew. BARGAINING WITH ASYMMETRIC IMPATIENCE Suppose that instead of
maintaining an even kee
exercise 13.4. form game shown in Figure E13.6. What is the Nash equilibrium for
this game? 13.7 Suppose that the simultaneous move game in Exercise 13.6 was
modeled as a sequential-move game, with Magna moving first. a. Illustrate the
extensive form of t
planning to buy another car anyway, the theft has the introduced a higher than
usual level of anxiety into the situation. Failure to quickly come to terms on the
purchase price of a replacement car may result not only in high psychological
each room and asks the player to reveal his or her hand. After inspecting the hand
of each player, the referee declares a winner. Both versions of this game may be
called simultaneous-move games. Do you agree? If not, then why not? 13.2 A
Web Chapter: Financial Institutions and Markets
LG1. Explain how financial institutions serve as intermediaries between investors and
LG2. Provide an overview of financial markets.
LG3. Explain how firms and investors trade money ma
for either player and the optimal strategy for either player depends on what each
player believes to be the strategy of the other players, the result is a nonstrictly
dominant strategy. Normal-form game A game in which each player is aware of
firm can offer the product, at least initially, at a lower price to compensate the
consumer for the risk of trying the new brand, or the firm can adopt an
advertising campaign designed to convince the consumer that the new brand is
superior. Either market
Econometrica, 18 (1950a), pp. 155162. . Equilibrium Points in n-Person
Games. Proceedings of the National Academy of Sciences, USA, 36 (1950b), pp.
4849. . A Simple Three-Person Poker Game (with Lloyd S. Shapley).
Annals of Mathematics Study, 24 (1950c).
out branch should be disregarded in future moves. In the resulting extensiveform
game, diagrammed in Figure 13.19, we see that the optimal strategy for
Microcorp is (Enter, Enter). The final optimal strategy profile is cfw_Simple, (Enter,
Enter), which yi