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### Summary

### Summary

Here in its ninth edition, this classic text returns to its roots as a clear and concise introduction to investment decision-making. In this edition, Bierman and Smidt have expanded the theme of adjusting for uncertainty and added a new chapter exploring the use of real options. Retaining the authority and reputation of previous editions, it now covers in depth several under-explored topics, including: distribution policy and capital budgeting; a firm investing in a second firm; investing in current assets. Easily understandable, and covering the essentials of capital budgeting, this book will help readers to make intelligent capital budgeting decisions for corporations of every type. Book jacket.

### Author Notes

Harold Bierman, Jr. is the Nicholas H. Noyes Professor of Business Administration at the Johnson Graduate School of Management, Cornell University

Seymour Smidt is Professor Emeritus at the Johnson Graduate School of Management, Cornell University

### Table of Contents

List of illustrations |

Preface |

Extracts from preface to the first edition |

1 Investment Decisions And Corporate Objectives |

Investment decisions |

The limitations of quantification |

The state of business practice |

Time, risk, and the risk-return trade-off |

Three basic generalizations |

Relevance of cash flows |

Cash flows versus earnings |

The capital market |

The weighted average cost of capital Tactical and strategic decisions |

The role of strategic planning |

The two capital budgeting revolutions |

Conclusions |

Pop quiz |

Problems |

Answer to pop quiz |

Bibliography |

2 The Time Value Of Money |

Time discounting Future value Present value |

Computing present value factors |

Annual equivalent amounts |

A growing annuity |

A constant interest bond Present value factors derived from market prices |

Conclusions |

Pop quiz Review problem |

Problems |

Answer to pop quiz |

Solution to review problem |

Bibliography |

Appendix A |

Appendix B |

3 Capital Budgeting: The Traditional Solutions |

A capital budgeting decision Rate of discount |

Classification of cash flows |

Classifying investments |

Measures of investment worth |

Two discounted cash flow methods |

Net present value profile Payback period |

Return on investment |

What firms do Cash flows |

Working capital |

Excluding interest payment |

Conclusions |

Pop quiz |

Review problems |

Problems |

Answers to pop quiz |

Solutions to review problems |

Bibliography |

4 Mutually Exclusive Investments Accept or reject decision |

Mutually exclusive investment Incremental benefits: the scale problem Timing |

Reinvestment assumption |

Reinvestment rate of return Loan-type flows |

Multiple internal rates of return |

Interpretation of multiple IRRs A "paradox" |

Converting multiple IRRs to a single IRR |

Significance of nonconventional cash flows |

Ranking independent investments |

Mutually exclusinve alternatives with different risks |

Duration: a sensitivity measure |

Why the internal rate of return method is popular |

Choosing the required rate of return |

Conclusions |

Review problem |

Problems |

Solution to review problem |

Bibliography |

5 Annual equivalent costs and replacement decisions Annual equivalent cost Make or buy decision Comparability |

Mutually exclusive alternatives with different lives |

Annual equivalent cost Lowest common multiple life |

A perpetuity |

Components of unequal lives |

Cost of excess capacity |

The equal cost assumption |

The replacement decision |

Replacement chains |

Conclusions |

Review problem |

Problems |

Solution to review problem |

Bibliography |

6 Capital Budgeting Under |

Capital Rationing |

External capital rationing |

Internal capital rationing |

Internal capital rationing and dividend policy |

Ranking of investments |

Index of present value (or profitability index) |

Programming solutions |

Capital rationing and risk |

Conclusions |

Problems |

Bibliography |

7 The Use Of The Weighted Average Cost Of Capital And Other Rates Of Discount |

The sources of cash |

The cost of retained earnings |

A theory of stock values |

Changes in stock prices |

Accumulated depreciation and the cost of capital |

Issuing common stock |

Cost of retained earnings: with investor taxes |

Cost of new equity capital |

Issuing common stock: the element of timing |

Delaying the investment |

Cost of long-term debt |

Cost of short-term debt |

Debt and income taxes |

Weighted average cost of capital |

The optimum capital structure |

Summary of weighted average cost of capital |

Default-free rate of discount |

Adjusting the default-free rate |

Comparing average and marginal returns |

Conclusions |

Problems |

Bibliogra |