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Ordinary annuity: An annuity that pays installments at the end of each time interval. Organization chart: A diagram illustrating the structure of an organization and positions within the organization. Other comprehensive income: A set of unrealized income elements that are added to conventional net income to arrive at comprehensive income. The key other comprehensive income items are foreign currency translation adjustments, unrealized gains and losses on certain securities, and adjustments related to defined benefit pension plans. Outsourcing: The subcontracting of a manufacture, process, design, or function to a third-party company. Override: The noncompliance or bypassing or subversion of internal controls by top management. Payment per period (PMT): Payment based on constant periodic amounts and a constant interest rate. Pecking order theory: A theory of capital structure that holds that financial managers finance companies in a particular order: internal funds first, followed by safer debt securities, followed by riskier equity securities. Perpetuity: A series of cash flows that go on forever. Political risk: Risk arising from political change within a foreign country. This may include seizing the assets of a foreign company, changes in tax policy, changes in environmental and work regulations, or demands for bribes or other payments. Pooling of interests method: A method not used since June 2001 in which after an acquisition the bidder and target firm balance sheets were combined simply by adding book values. Portfolio: A collection of stocks or assets. Investors hold their stocks or assets in portfolios to reduce the overall risk of their investments. Premise of value: An assumption regarding the most likely set of transactional circumstances that may be applicable to the subject valuation (e.g., going concern, liquidation). Premium: The amount over current market price paid to the target to execute an acquisition. Present value (PV): Value today of a future amount of money. Primary target audience (PTA): A group of potential customers identified by demographic and psychographic data that will be the focus of the company‟s early marketing and sales efforts. Proxy contest: An attempt to gain control of a corporation by soliciting shareholder votes.
Psychographic data: Information that categorizes customers based on their personalities, psychological traits, lifestyles, values, and social memberships. Purchase method: After the acquisition, the target firm‟s assets are put on the bidder‟s balance sheet at their fair market value; often creates the intangible asset goodwill. PVA N : Present value of an annuity. Quick ratio: (Current Assets - Inventories)/Current Liabilities. Also known as the acid test ratio. Rate of return: An amount of income (loss) and/or change in value realized or anticipated on an investment, expressed as a percentage of that investment. Regulation D: Under the Securities Act of 1933, all offers to sell securities must either be registered with the SEC or meet an exemption. Regulation D contains three rules (Rules 504, 505, and 506) offering exemptions from registration requirements, allowing smaller companies to offer and sell securities without having to register the securities with the SEC. Repatriation risk: The risk that governments will not allow money to flow out of a country. Request for proposal (RFP): A request made by a company to a vendor or supplier to submit a proposal for a specific product or service. Required return: The return required by a corporation to invest in a project. It is weighted average cost of capital (WACC), adjusted for risk. Residual value: The prospective value as of the end of the discrete projection period in a discounted benefit streams model. Restatements: Corrected financial statements, usually to replace financial statements that have been materially misstated—or more rarely to allow for mergers or other legitimate factors (as opposed to error or fraud). Restructuring charges: Expenses typically recognized in conjunction with downsizings, reengineerings, reorganizations, and comparable activities. The expenses are usually made up of cash costs, accruals of obligations for future expenditures, as well as the write-down of assets. Risk premium: A rate of return in addition to a risk-free rate to compensate the investor for accepting risk. Risk-free rate: The rate of return available in the market on an investment free of default risk. Secondary target audience (STA): A group of potential customers identified by demographic and psychographic data that will be a secondary or alternative focus of the company‟s early marketing and sales efforts. See also Primary target audience.
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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
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speculator would suffer losses equa
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American manufacturer will suffer l
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The ease with which futures facilit
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Exhibit 15.1 Call option payoff dia
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Exhibit 15.2 Payoff diagram for a w
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Notice that the put option payoff r
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Bank, owns a large block of NASDAQ
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can be tailored so that the money r
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Finally, the last step is to choose
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3 Fischer Black, who co-invented th
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not include assets that the firm ha
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Thus, a business valuation will usu
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Negative • Acme is highly depende
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Exhibit 16.3 Acme Manufacturing, In
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Profitability ratios reflect the re
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When we talk about the value of a b
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This example illustrates that with
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Income Approach: Discounted Cash Fl
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Exhibit 16.5 Acme Manufacturing, In
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Victoria explains that the second p
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Victoria analyzes Acme‟s audited
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In summary, the discounted cash flo
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Adjustment for Illiquidity As previ
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51% position sells for a higher pri
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examples. The proper application of
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The subject of this chapter is grow
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Finally, an acquisition can be effe
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M&A activity has been the focus of
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companies continue to make the same
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equals was taking on a distinctive
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Anatomy of a Successful Acquirer: T
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employees kept their original jobs
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where ΔCF t is the incremental cas
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where it‟s ultimately buried. Suc
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The following example summarizes th
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make sure that you are at least awa
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acquisition, there is no immediate
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its vascular business, which was so
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While all employees should be part
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makes strategic and financial sense
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Bhagat, Sanjai, Ming Dong, David Hi
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The 2008 financial crisis underscor
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Source: Plunkett’s Outsourcing &
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To summarize: Trends • Large numb
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Companies are becoming increasingly
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What steps should a company follow
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• Results of meetings with vendor
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• Breach of contract and remedies
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Assuming the project or service rev
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The answer is: profits. The company
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19 Information Technology and You D
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People‟s lives have been turned u
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its self-contained rechargeable bat
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Random-Access Memory (RAM) Random-a
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On laptop computers and PDAs, the s
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Operating System An operating syste
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the spreadsheet software together w
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Exhibit 19.5 Pro forma sales and in
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Database Software A database is a c
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Internet e-mail addresses often con
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Personal Finance Software There are
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There are several different approac
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One of the major attractions of the
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While not a new version of the Web
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industrial revolution, and has occu
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Dummies Inc. has a series of books
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organization. This chapter is desig
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As technology has evolved, the term
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While the software mentioned earlie
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Most of the focus of the investor c
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Data Access and OLAP Before the lat
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Exhibit 20.5 illustrates a differen
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Productivity Tools Workers expect t
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Client-server technology is based o
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Today, most programmers write in C+
Page 577 and 578: Exhibit 20.6 is a model of a typica
Page 579 and 580: No treatment of relational database
Page 581 and 582: Online analytical processing (OLAP)
Page 583 and 584: server) and the rest on the users
Page 585 and 586: the other operational departments w
Page 587: The world of business has changed d
Page 591: Chaffey, Dave, E-Commerce and E-Com
Page 595 and 596: According to the results of the sur
Page 597 and 598: understand the financial situation
Page 599 and 600: MBA graduates who are hoping to ent
Page 601 and 602: Summary Financial services opportun
Page 603 and 604: Let‟s begin with the “I left it
Page 605 and 606: MBA student: “Well, I go to [Grea
Page 607 and 608: Aiming for Your Goals For career ch
Page 609 and 610: Networking is generally regarded as
Page 611 and 612: Let‟s begin with some key assumpt
Page 613 and 614: like, or moving ahead in the compan
Page 618 and 619: Accrual accounting: An accounting m
Page 620 and 621: Cash flow: Cash that is spent or re
Page 622 and 623: Distribution channel: A chain of in
Page 624 and 625: Goodwill: As it relates to valuatio
Page 626 and 627: Management’s discussion and analy
Page 630 and 631: Securities and Exchange Commission
Page 632 and 633: Vertical merger: A merger in which
Page 634 and 635: about activity-based costing progre
Page 636 and 637: Application systems ARPAnet Arthur
Page 638 and 639: Bell Labs Benefit measurement Beta
Page 640 and 641: goal orientation legal and contract
Page 642 and 643: segment information note share-base
Page 644 and 645: process of purpose of real world us
Page 646 and 647: uy/build decision capital budget in
Page 648 and 649: written resume Careers in corporate
Page 650 and 651: Cell Center for Research in Securit
Page 652 and 653: Compensation and ownership Competit
Page 654 and 655: Corporate culture Corporate debt in
Page 656 and 657: profit planning from an internal pe
Page 658 and 659: Data Data access and OLAP Database
Page 660 and 661: Askin Capital Management Barings Ba
Page 662 and 663: market approach publicly traded gui
Page 664 and 665: Electronic data interchange (EDI) E
Page 666 and 667: Extensible markup language (XML) Ex
Page 668 and 669: short term liquidity users and uses
Page 670 and 671: Fourth generation programming (4GL)
Page 672 and 673: Going private Going private transac
Page 674 and 675: Hypertext links Hypertext markup la
Page 676 and 677: Information technology and the firm
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International Accounting Standards
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Last-in-first out (LIFO) vs. curren
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Long call option payoff Longer-term
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Market risks Market size and struct
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Motivation to outsource Multiple IR
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Nonrecurring items defined disclosu
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Operational complexity Operational
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Outsourcing metrics Overhead Over-t
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Personal end game Personal expense
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Price competition Price decreases P
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Projected cash flow statements Proj
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Relevant range Relevant range assum
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Risk sharing Risk transfer Risk vs.
Page 704 and 705:
Short call option payoff Short part
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Spot price Spreadsheet software Spr
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Summarizing nonrecurring items and
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acquisition the business dividends
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Timmon‟s Model of Opportunity Rec
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U.S. immigration quotas U.S. Intern
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discounting with discount rate form
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