Does it feel impossible to really know what investments will prove to be valuable--and which you should avoid at all costs? This award-winning guide provides leaders the tools they need to make important financial decisions that protect the bottom line.

Contents Preface xi Introduction xv Part 1. Introduction to Financial Risk 1 Chapter 1. Categorizing Financial Risks 3 The Enterprise Risk Management Framework 3 Risk Categories 5 Financial Risk Management 14 Conclusion 16 Part 2. Accounting, Cash Flow, and Budget Exposures 17 Chapter 2. Risks from Financial Accounting 19 Overview of Accounting 19 Accounting Principles 19 Categories of Accounts 21 Trial Balance 24 Financial Statements 25 Conclusion 28 Chapter 2 Appendixes 28 Chapter 3. Managing Operating Cash Flows 33 The Cash Flow Statement 33 Cash Flow Exposures 37 Conclusion 40 Chapter 3 Appendixes 40 Chapter 4. Operating Budgets 53 Nature of Budgeting 53 Forecasting Revenues 54 Life-Cycle Stages in Budgeting 57 Risks in Revenue Forecasting 60 Expense Allocations 63 Accounting Budgets 66 Cash Budgeting 67 Details of Budgeting 70 Conclusion 72 Chapter 4 Appendixes 73 Part 3. Analyzing Operating Risks 85 Chapter 5. Profit Planning 87 Planning 87 Breakeven Analysis 89 Profit-Volume Analysis 92 Marginal Analysis 93 Future Earnings per Share 95 Conclusion 99 Chapter 5 Appendixes 99 Chapter 6. Leverage 111 Return on Investment Leverage 111 Operating Leverage 116 Financial Leverage 118 Weaknesses of Profit Planning 121 Conclusion 121 Chapter 6 Appendixes 122 Chapter 7. Financial Analysis 129 Ratio Analysis 129 Liquidity Ratios 132 Profitability Ratios 136 Other Ratios 138 Determining Financial Norms 142 Conclusion 142 Chapter 7 Appendixes 143 Part 4. Relationship of Risk and Return 149 Chapter 8. Time Value of Money 151 Short-Term Financing 151 Intermediate-Term Financing 155 The Amortization Schedule 157 Conclusion 161 Chapter 8 Appendixes 162 Chapter 9. Risk and Required Return 171 Nature of Risk 171 Capital Asset Theory 178 Risk and Required Return 181 Financial and Operational Risks 183 Conclusion 186 Chapter 9 Appendixes 186 Part 5. Nature of a Capital Investment Decision 193 Chapter 10. Capital Budgeting Cash Flows 195 Foundation of Capital Budgeting 196 Cash Flows 201 Conclusion 207 Chapter 10 Appendix 208 Chapter 11. Capital Budgeting Returns 211 Payback Method 211 Present Value Techniques 212 Internal Rate of Return Method 213 Net Present Value (NPV) Method 215 Midyear Discount Factors for Cash Flows 217 Conclusion 221 Chapter 11 Appendixes 221 Part 6. Factors That Affect the Value of a Firm 233 Chapter 12. Valuation of Common Stock 235 Common Stock and Equity Markets 235 Valuation Concepts 237 Value of Common Stock 240 Comparative Approaches to Valuation 244 Conclusion 245 Chapter 12 Appendixes 245 Chapter 13. Capital Structure of the Firm 253 Capital Structure 253 Weighted Average Cost of Capital (WACC) 254 Required Return at the Margin 257 Contribution of Miller and Modigliani 260 Optimal Capital Structure 263 Conclusion 266 Chapter 13 Appendixes 266 Chapter 14. Valuation of Business Combinations 271 Business Combinations 271 Pyramiding 273 Takeover Strategies 276 Conclusion 280 Chapter 14 Appendixes 280 Index 293

If you’re involved in the financial management of your organization, you know that every decision you make involves taking careful consideration of what factors are at stake, and protecting your bottom line.In short . . . managing risk. Proper risk management entails knowing when to go after opportunities that can open up new realms of profit for your business . . . but if you fail to account for the possible, often hidden, pitfalls that can accompany each decision, the consequences could be tremendous. Filled with strategies, principles, and measurement techniques, this book provides you with the tools you need for dealing with the most important areas of financial decision making. You’ll learn how to reduce a complex business environment into workable concepts and models, and quantify an enormous, constantly changing playing field in a way that allows you to understand and predict possible outcomes and determine how your organization should proceed in any situation. Providing both explanations and practical applications, the book shows you how to: • Understand the interrelationship of risk and return • Manage risks in capital investment decisions • Categorize financial risks • Analyze operating risks • Reduce risks from cash flow and budget exposures • Determine the value of common stock • Optimize debt in the capital structure This comprehensive guide gives you the essential tools and insights you need for managing risk in financial statements, profits, cash flows, capital investments, value of the firm, and capital structure management. The book provides definitions of key terms, examines all the major ideas and concepts necessary to proper financial risk management, and provides step-by-step directions for determining risk and applying proven techniques to achieve favorable outcomes in any given situation. Packed with examples and “how-to” analyses, each chapter contains financial models you can use to make sense of the numbers and provide a framework for making smart decisions. Authoritative, comprehensive, and clear, The AMA Handbook of Financial Risk Management is the one book that those who make organizational financial decisions should have on their bookshelves.