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Pratt, Shannon P., and Alina V. Niculita, Valuing a Business, 5th ed. (New York: McGraw-Hill, 2007). Trugman, Gary R., Understanding Business Valuation: A Practical Guide to Valuing Small to Medium Sized Businesses, 3rd ed. (New York: American Institute of Certified Public Accountants, 2008). 17 Profitable Growth by Acquisition Richard T. Bliss
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Table of Contents Title Page Copyri
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Chapter 6 - Planning Capital Expend
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For Further Reading Part IV - Manag
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Successful Postmerger Implementatio
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This book is printed on acid-free p
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Syllabus How Chapter Topics in This
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Some of these experts are full-time
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About the Contributors Richard T. B
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Advances in Quantitative Analysis o
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enterprise development. Dr. Zachara
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The left side shows Nutrimin‟s in
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Gail, let‟s go over this balance
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Gail, do you have any questions abo
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11. Not all expenses are cash outfl
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Financial Statements: Who Uses Them
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profitability to keep investing for
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Financial Accounting Standards It i
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Downloadable Resources for this cha
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Next, we explain each of these thre
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liquidity. Or, more simply, achievi
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If these ratios are seriously defic
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The debt-to-equity ratio is evaluat
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year 1 to year 3. The net effect wa
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to rate of return on the equity. Th
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Other types of comparisons of finan
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income/sales), asset turnover (sale
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successful businesspeople should ha
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More than a decade ago, a special c
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companies is used for illustration.
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The identification of nonrecurring
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The Dow Chemical single-step income
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is a pretax measure, but income fro
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Sources: Companies‟ annual report
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Exhibit 3.11 Examples of discontinu
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amortization purposes, the Company
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Examples of nonrecurring items disc
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During Fiscal 2006, inventory quant
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The nonrecurring items of Boston Sc
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The disclosure presented earlier in
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gains or losses that appear as part
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ecurring as for Kimberly-Clark, the
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Summarizing Nonrecurring Items and
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This example of using the SEB works
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Exhibit 3.27 Other income (expense)
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Source: Pfizer, Inc., annual report
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Exhibit 3.30 Acquisitions note: Pfi
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Source: Pfizer, Inc., annual report
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Exhibit 3.33 Cost-reduction initiat
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Exhibit 3.36 Share-based payment no
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The Pfizer Worksheet Analysis: Down
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Some Further Points on the Pfizer W
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• It is common to treat items as
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FedEx Corporation (2007) First Sola
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1 The American Institute of Certifi
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28 These alternative translation me
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If you need some instruction in Exc
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To solve using Excel, open your Exc
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As you can see from the previous ex
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C6 = 5 • Now enter the “=” si
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Ordinary Annuity An ordinary annuit
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To confirm that the number of payme
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The FV of this first payment into t
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Exhibit 4.15 Finding the future val
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Exhibit 4.18 Finding the present va
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From Exhibit 4.20, we see that as t
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Exhibit 4.22 Amortization schedule
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Exhibit 4.25 Regular cash flows wit
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Internet Links For Further Reading
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Investors who are risk averse will
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considering the risk of a single as
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Portfolio Risk Stand-alone risk is
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In spite of unique or diversifiable
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If a particular stock is highly sus
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The formula tells us that, to begin
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for the entire market of stocks sin
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The dividend per share for preferre
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If you are able to determine the cu
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Debt finance is the lower-cost meth
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We don‟t observe many firms whose
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Capital Structure in Practice Finan
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are able to observe regularities in
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dividends and capital gains. We wil
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where EBIT is earnings before inter
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Since long-term debt holders have a
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accept more investment projects. Re
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A beer company is considering build
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accounts receivable, and tabulates
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profit by the tax rate determines t
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Accounting profit often mixes varia
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The concept that future cash flows
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Like project A, project C also cost
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The after-tax interest rate is the
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equal mix of debt and equity, its d
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The payback period rule stipulates
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The IRR rule is appealing in that i
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complete with its real options is g
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What does it matter that one invest
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Exhibit 7.3 Time line in dollars an
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There are a number of countries in
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eturn of 10% on its investments in
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Exhibit 7.12 Summary of exchange ra
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and so will the value of the liabil
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Source: CIA, World Factbook, availa
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Exhibit 7.18 Net present value of c
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equired interest payments to be pai
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So if the assistant treasurer was r
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This theory is far from perfect, as
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The Consulting Firm Jennifer, Jean,
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part by a statute, the Uniform Limi
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formation in Delaware (or any state
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purpose of requiring qualification.
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Phil‟s death may terminate the bu
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the transfer. This means that if Br
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These rules extend to tort liabilit
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In the absence of a meeting, stockh
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A more detailed discussion on the b
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Partnerships If possible, the resul
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associated with this arrangement ar
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Partnerships are also not separate
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For most start-up businesses, howev
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form, even at the risk of some unli
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likely that our consultants will be
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Thus, the corporation and LLC, with
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It is not possible to fully describ
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usiness corporation for all purpose
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a cash-basis taxpayer to be taxed a
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The Tax Reform Act of 1986 substant
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limit is the product of the value o
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he would have spent anyway. In fact
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protect Brad from the scenario of h
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paying for the privilege. If the st
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The second tax scenario attaches to
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include that nullity in his taxable
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then the capital gain to be taxed h
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Most relevant to Morris is Section
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To begin with, the ESOP will have t
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general partner of a limited partne
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small businesses) is also subject t
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oth Lisa and Brad would be free to
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Assume that a limited liability com
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corporations, and had been audited
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There is plenty of blame from the c
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• An important study about top ma
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• The federal government made at
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$79.7 million for other services, a
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Budgets offer a variety of benefits
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determine the impact of specific pr
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Exhibit 11.2 Budget variance report
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udget, we just add more to it next
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income statement. The financial bud
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For a manufacturing company, cost o
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C&G‟s Gift Shop has a policy to m
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Meeting cash obligations as they co
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was unusually low, say, due to the
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A fixed budget, sometimes called a
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A large part of the budget selling
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• Centralized resource allocation
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Merewitz, Leonard, and Stephen H. S
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This chapter starts with a discussi
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Interestingly the numbers for quart
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Exhibit 12.4 Scenarion analysis.
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Pitfalls Although this analytic tec
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Exhibit 12.6 Variable cost element
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Variable Cost as a Function of Outp
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If scenario 2 yields a lower profit
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Microsoft certainly does not price
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If it is determined that dumping ha
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Leaving government agencies and not
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transaction processing. Each proces
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Exhibit 13.3 E-commerce transaction
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To summarize the analysis, the busi
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Capacity costs are probably the mos
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which it was, but for the inventory
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They called this strategic cost man
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A closer study, however, revealed s
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the benefits of business planning.
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The last type of plan is called a d
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The Business Plan We will progress
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Hook the Reader That means having t
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Industry The goal of this section i
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upscale suburban client who wants p
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Company and Product Description Com
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Exhibit 14.8 shows the competitive
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Exhibit 14.9a Advertising schedule.
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Scope of Operations What is the pro
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Development Time Line A development
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By law, most organization types req
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As mentioned in the development pla
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that can be depreciated, you should
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1 Special thanks to Matt Feczko, Mi
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For better or worse, the business e
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Leeson bet and lost. Japanese stock
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Between February and April 1994, Da
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LTCM could be picky when it came to
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An investor who wished to invest in
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Similarly, the swaps market has rev
Page 417 and 418: speculator would suffer losses equa
Page 419 and 420: American manufacturer will suffer l
Page 421 and 422: The ease with which futures facilit
Page 423 and 424: Exhibit 15.1 Call option payoff dia
Page 425 and 426: Exhibit 15.2 Payoff diagram for a w
Page 427 and 428: Notice that the put option payoff r
Page 429 and 430: Bank, owns a large block of NASDAQ
Page 431 and 432: can be tailored so that the money r
Page 433 and 434: Finally, the last step is to choose
Page 435: 3 Fischer Black, who co-invented th
Page 439 and 440: not include assets that the firm ha
Page 441 and 442: Thus, a business valuation will usu
Page 443 and 444: Negative • Acme is highly depende
Page 445 and 446: Exhibit 16.3 Acme Manufacturing, In
Page 447 and 448: Profitability ratios reflect the re
Page 449 and 450: When we talk about the value of a b
Page 451 and 452: This example illustrates that with
Page 453 and 454: Income Approach: Discounted Cash Fl
Page 455 and 456: Exhibit 16.5 Acme Manufacturing, In
Page 457 and 458: Victoria explains that the second p
Page 459 and 460: Victoria analyzes Acme‟s audited
Page 461 and 462: In summary, the discounted cash flo
Page 463 and 464: Adjustment for Illiquidity As previ
Page 465 and 466: 51% position sells for a higher pri
Page 467: examples. The proper application of
Page 472 and 473: As we can see, acquisitions may occ
Page 474 and 475: Recent Trends and the Performance R
Page 476 and 477: 2. Returns to bidders have fallen o
Page 478 and 479: Exhibit 17.7 Disaster deal #3: AT&T
Page 480 and 481: equipment were third-world regions.
Page 482 and 483: When Chambers felt comfortable that
Page 484 and 485: V AB - (V A + V B ), is the increme
Page 486 and 487: Finally, the acquisition of a compe
Page 488 and 489: Example 4: Consider two firms, A an
Page 490 and 491: The total value created by the acqu
Page 492 and 493: investors may anticipate this and v
Page 494 and 495: Lean‟s equity has increased by th
Page 496 and 497: 3. Inability to implement change. 4
Page 498 and 499: Summary and Conclusions Mergers and
Page 500 and 501: 8 “Cisco Changes Tack in Takeover
Page 502: Outsourcing Theodore Grossman
Page 506 and 507: increase margins. The last thing a
Page 508 and 509: Of companies outsourcing, 44% repor
Page 510 and 511: work long hours in subhuman conditi
Page 512 and 513: Companies and their outsourced part
Page 514 and 515: IBM, and Accenture are willing to a
Page 516 and 517: Beware of companies that do not wan
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The specification of the project is
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contract through poor performance o
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2 Ibid. 3 Ibid. For Further Reading
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Of all the chapters in this book, t
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and smaller devices. Over the past
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Today‟s PDAs have a touch screen
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drives. These portable storage devi
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(LAN) so that they can share printe
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PowerPoint (presentation graphics),
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Exhibits 19.3 Pro forma income stat
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elative addressing (change cell add
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Most current tools also offer the u
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Instant messaging (IM) (AIM is one
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Often, a manager is faced with the
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within a corporate network are usua
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Web browsers do have the ability to
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Multimedia By the latter half of th
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Note 1 Updated—based on work done
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The information technology (IT) and
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These systems are focused on how ef
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point-of-sale transactions are ente
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E-commerce (electronic commerce) ha
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generated queries against a databas
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Consider a BI model for a chain of
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Source: Information Builders. An ex
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have taken this evolution to a new
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through interconnected networks. Th
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However, the customer relinquishes
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The following scenario depicts what
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Field names are shown with syntax o
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in the early 1970s. The network was
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Controls Because the initial softwa
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of data privacy. Organizations need
Page 590 and 591:
Note 1 Updated from a previous chap
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Unless you picked up this book at t
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The corporate finance role is inten
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a class invest in a broad range of
Page 600 and 601:
Within commercial real estate, MBAs
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the power of the brand. As you thin
Page 604 and 605:
Shift your resume from “This is w
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In many ways the cover letter can b
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considering a career in investment
Page 610 and 611:
First Stage Key Contacts These are
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In this case, you will be speaking
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3 http://hedgeweek.com (HedgeMedia
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financial expertise. The purpose of
Page 621 and 622:
Cost approach: A general way of est
Page 623 and 624:
Fair market value: The price, expre
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Internal control: The policies and
Page 627 and 628:
Multistep income statement: An inco
Page 629 and 630:
Psychographic data: Information tha
Page 631 and 632:
Tax-adjusted nonrecurring items: Pr
Page 633 and 634:
Accounting systems Accounts payable
Page 635 and 636:
American Institute of Certified Pub
Page 637 and 638:
Audit firms‟ conflict of interest
Page 639 and 640:
udgeted accounts payable budgeted a
Page 641 and 642:
Buildup method Built-in gain Burn r
Page 643 and 644:
taxation transferability of interes
Page 645 and 646:
standards three approaches to value
Page 647 and 648:
Capital structure bond valuation ca
Page 649 and 650:
Cash-basis taxpayer, accounts recei
Page 651 and 652:
Classification Clayton Act of 1914,
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limited liability companies limited
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Cost of capital Cost of debt Cost o
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Cross-border deals Cross-docking Cr
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Decision rules Decision support sys
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Discontinued operations note Discou
Page 663 and 664:
Domain name servers (DNS) Domestic
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uy-sell agreements family limited p
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Financial advisor position Financia
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Forecasting Forecasts Forecasts and
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Gain vs. loss Gantt chart Gap analy
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central processing unit (CPU) hard
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Independent CPA Index of Economic F
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estatements of previously published
Page 679 and 680:
Irregular cash flow IRS Form 1040 S
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control conversion to formation, of
Page 683 and 684:
hardware software Margin analysis M
Page 685 and 686:
Microsoft Outlook Microsoft PowerPo
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associations careers in finance e-c
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Objectives Object-oriented programm
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Other income (expense) note Out-of-
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Payback period Payment card industr
Page 695 and 696:
Pooling of interest method Porter
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Private wealth management Privilege
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Quantify the material Quantity vari
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Revenue enhancement Revenue growth
Page 703 and 704:
Security market line (SML) Segment
Page 705 and 706:
networks and communication open sou
Page 707 and 708:
Stock transfer Story model Straddle
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Takeovers Tangible goals Target Tar
Page 711 and 712:
Tax savings Tax shelters Tax shield
Page 713 and 714:
centralized resource allocation fin
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private wealth management. venture
Page 717:
World Factbook (CIA) World Wide Web
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