contents
PARTl
CHAPTER l
Owervlew of Corporate
Flnance
Introduction to Corporate
Finance 2
l.l Corporate Finance and the Financial Manager
What Is Corporate Finance?
The Financial Manager
Financial Management Decisions
l.2 Forms of Business Organization
Sole Proprietorship
Partnership
Corporation
A Corporation by Another Name
l.3 The Goal of Financial Management
Possible Goals
The Ullimate Goal ofFinancial Management
A More General Goal
l.4 The Agency Problem and Control of the
Corporation
Agency Relationships
Management Goals
Do Managers Act in the Stockholders' Inlerests
Stakeholders
l.5 Financial Markets and the Corporation
Cash Fiows to andfrom the Firm
Primary versus Secondary Markets
l.6 Summary and Conclusions
CHAPTER 2 Financial Statements, Taxes, and
Cash Flow
2.1 The Balance Sheet
Assels: The Left-Hand Side
Liabililies and Owners'Equity: The Right-Hand
Side
Net Working Capital
Liquidity
Debl versus Equity
Market Value versus Book Value
2.2 The Income Statement
GAAP and the Income Statement
Noncash llems
Time and Costs
2.3 Taxes
Corporate Tax Rates
Average versus Marginal Tax Rates
2.4 Cash Flow
Cash Flowfrom Assets
Cash Flow to Creditors and Stockholders
An Example: Cash FlowsforDole Cola
2.5 Summary and Conclusions
PART II
CHAPTER 3
Flnanclal State
Long-TBrm Flnanclal
Plannlng
Working with Financial
Statements
3.l Cash Flow and Financial Statements:
A Closer Look
Sources and Uses ofCash
The Statement ofCash Flows
3.2 Standardized Financial Statements
Common-Size Statements
Common-Base Year Financial Statements
Trend Analysis
Combined Common-Size and Base-Year Analysis
3.3 Ratio Analysis
Short-Term Solvency, orLiquidity, Measures
Long-Term Solvency Measures
Asset Management, or Turnover, Measures
Profitability Measures
Market Value Measures
Conclusion
3.4 The Du Pont Identity
3.5 Using Financial Statement Infonnation
Why Evaluate Financial Statements?
Choosing a Benchmark
Pmblems with Financial Statement Analysis
3.6 Summary and Conclusions
CHAPTER 4
Long-Term Financial Planning
and Growth
4.l What Is Financial Planning?
Growth as a Financial Management Goal
Dimensions ofFinancial Planning
What Can Planning Acwmplish?
4.2 Financial Planning Models: A First Look
A Financial Planning Model: The ingredients
A Simple Financial Planning Model
4.3 The Pereentage of Sales Approach
The Income Statement
The Balance Sheet
A Particular Scenario
An Altemative Scenario
4.4 Extemal Financing and Growth
EFN and Gmwth
Financial Policy and Growth
4.5 Some Caveats Regarding Financial Planning
Models
4.6 Summary and Conclusions
PART Ⅲ
CHAPTER 5
Valuation of Future Cash
Introduction to Valuation: The
Time Value of Money
5.l Future Value and Compounding
Investing for a Single Period
InvestingforMore Than One Period ?
A Note on Compound Gmwth
5.2 Present Value and Discounting
The Single-Period Case
Present Valuesfor Multiple Periods
5.3 More on Present and Future Values
Present versus Fulure Value
Determining the Discount Rate
Finding the Number ofPeriods
5.4 Summary and Conclusions
CHAPTER 6
Discounted Cash Flow
Valuation 132
6.l Future and Present Values of Multiple Cash
Flows
Future Value with Multiple Cash Flows
Present Value with Multiple Cash Flows
A Note on Cash Flow Timing
6.2 Valuing Level Cash Flows: Annuities and
Perpetuities
Presenl Value for Annuity Cash Flows
Future Value for Amuities
A Nole on Annuities Due
Perpetuities
6.3 Comparing Rates: The Effect of Compounding
Effective Annual Rates and Compounding
Calculating and Comparing Effective Annual
Rates
EARsandAPRs
Taking it to the Limif A Nole on Continuous
Compounding
6.4 Loan Types and Loan Amortization
Pure Discount Loans
Interesl-Only Loans
Amortized Loans '.
6.5 Summary and Conclusions
CHAPTER 7
Interest Rates and Bond
Valuation
7.l Bonds and Bond Valuation
Bond Features and Prices
Bond Values and Yields
Inleresl Rate Risk
Finding the Vield to Maturity: More Trial and
Error
7.2 More on Bond Features
Is It Debt or Equity?
Long-Term Debt: The Basics
The Indenture
7.3 Bond Ratings
7.4 Some Different Types of Bonds
Govemment Bonds
Zero Coupon Bonds
Floafing-Rate Bonds
Other Types ofBonds
7.5 Bond Markets
How Bonds Are Bought and Sold
Bond Price Reportine
7.6 Inflation and Interest Rates
Real versus Nominal Rates
The Fisher Effect
7.7 Detenninants of Bond Yields
TheTeVrm Structure ofInterest Rates
Bond Yields and the Yield Curve: Putting ItAll
Together
Conclusion
7.8 Summary and Conclusions
CHAPTER 8
Stock Valuation
8.l Common Stock Valuation
Cash Flows
Some Special Cases
Components ofthe Required Return
8.2 Some Features of Common and Preferred
Stocks
Common Stock Features
Preferred Stock Features
8.3 The Stock Markets
Dealers and Brokers
Organiwlion ofthe NYSE
Nasdaq Operations
Slock Market Reporting
8.4 Summary and Conclusions
PARTlV Capltal Budgetlng 231
CHAPTER 9
NetPresentValueandOther
Investment Criteria
9.1 Net Present Value
The Basic Idea
Estimating Net Present Value
9.2 The Payback Rule
Defining the Rule
Analyzing the Rule
Redeeming Qualities ofthe Rule
Summary ofthe Rule
9.3 The Discounted Payback
9.4 The Average Accounting Retum
9.5 The Intemal Rate of Return
Problems with the IRR
Redeeming Qualilies ofthe IRR
9.6 The Profitability Index
9.7 The Practice of Capital Budgeting
9.8 Summary and Conclusions
CHAPTER lO
Making Capital Investment
Decisions
lO.l Project Cash Flows: A First Look
Relevant Cash Flows
The Stand-Alone Principle
10.2 Incremental Cash Flows
Sunk Costs
Opportunity Costs
Side Effects
Net Working Capital
Financing Costs
Other issues
10.3 Pro Forma Financial Statements and Prqject Cash
Flows
Gelting Started: Pro Forma Financial
Statements
Project Cash Flows
Projected Total Cash Flow and Value
10.4 More on Project Cash Flow
A Closer Look at Net Working Capital
Depreciation
An Example: The Majestic Mulch and Compost
Company (MMCC)
10.5 Alternative Definitions of Operating Cash Flow
The Bottom-Vp Approach
The Top-Down Approach
The Tax Shield Approach
Conclusion
10.6 Some Special Cases of Discounted Cash Flow
Analysis
Evaluating Cost-Culling Proposals
Setting the Bid Price
Evaluating Equipment Options with Different
Lives
10.7 Summary and Conclusions
CHAPTER11
Project Analysis and
Evaluation
ll.l Evaluating NPV Estimates
The Basic Problem
Projected versus Aclual Cash Flows
Forecasting Risk
Sources ofValue
ll.2 Scenario and Other What-lf Analyses
Getting Started
Scenario Analysis
Sensitivity Analysis
Simulation Analysis
l1.3 UBreak-Even Analysis
Fixed and Variable Costs
Accounting Break-Even
Accounting Break-Even: A Closer Look
Usesfor the Accounting Break-Even
ll.4 Operating Cash Flow, Sales Volume, and
Break-Even 31 5
Accounting Break-Even and Cash Flow
Sales Volume and Operating Cash Flow
Cash Flow, Accounting, and Financial Break-Even
Points
ll.5 Operating Leverage
The Basic ldea
Implkations ofOperating Leverage
Measuring Operating Leverage
Opemting Leverage and Break Even
ll.6 Additional Considerations in Capital Budgeting
Managerial Options
Capital Rationing
1l.7 Summary and Conclusions
PART V RIsk and Roturn
CHAPTER 12 Some Lesons from Capitel
Markt History
12.l Retums
Dollar Retums
Percentage Retums
12.2 The Historical Record
A First Look
A Closer Look
12.3 Average Retums: The First Lesson
Calculating Average Retums
Average Retums: The Hislorical Record
Risk Premiums
The First Lesson
l2.4 The Variability of Retums: The Second Lesson
Frequency Distributions and Variabilily
The Hislorical Variance and Standard
Deviation
The Historical Record
Nonnal Distribution
The Second Lesson
Using Capital Market Historv
12.5 Capital Market Efficiency
Price Behavior in an Efficient Market
The Efficient Markets Hypothesis
Some Common Misconceptions about the EMH
The Forms ofMarket Efficiencv
12.6 Summary and Conclusions
CHAPTER 13 Retum, Risk, and the Security
Market Une
l3.l Expected Retums and Variances
Expected Retum
Calculating the Variance
13.2 Portfolios
Portfolio Weights
Portfolio Expected Retums
Portfolio Variance
13.3 Announcements, Surprises, and Expected"
Retums
Expected and Unexpected Retums
Announcements and News
13.4 Risk: Systematic and Unsystematic
Systematic and Unsystematk Risk
Systematic and Unsystemalic Components of
Retum
13.5 Diversification and Portfolio Risk
The Effecf ofDiversificotion: AnotherLessonflom
Market Hislory
The Principle of Diversification
Diversification and Unsystematic Risk
Diversification and Systematic Risk
13.6 Systematic Risk and Beta
The Systematic Risk Principle
Measuring Systematic Risk
Portfolio Betas
13.7 The Security Market Line
Beta and the Risk Premium
The Security Market Line
13.8 TheSMLandtheCostofCapital:APreview
The Basic Idea
TheCostofCapital
13.9 Summary and Conclusions
PART Vl Cost of CapHal and Long-
Temn Flnanclal Pollcy
CHAPTER 14 Cost of Capital
14. l The Cost of Capital: Some Preliminaries
Required Retum versus Cost ofCapital
Financial Policy and Cost ofCapital
14.2 TheCostofEquity
The Dividend Growth Model Approach
The SML Approach
14.3 The Costs of Debt and Preferred Stock
The Cost ofDebt
The Cost ofPreferred Stock
14.4 The Weighted Average Cost of Capital
The Capital Structure Weights 4l0
Taxes and the Weighted Average Cost of
Capital
Calculating the WACCfor Eastman Chemical
Solving the Warehouse Prvblem and Similar Capital
Budgeting Problems
Performance Evaluation: Another Use ofthe
WACC
14.5 Divisional and Project Costs of Capital
TheSMLandtheWACC
Divisional Cost ofCapital
The Pure Play Approach
The Subjective Approach
14.6 Flotation Costs and the Weighted Average Cost of
Capital
The Basic Approach
Flotation Costs and NPV
14.7 Summary and Conclusions
CHAPTER l5
Raising Capital
15.1 The Financing Life Cycle of a Firm: Early-Stage
Financing and Venture Capital
Venture Capital
Some Venture Capilal Realities
Choosing a Venture Capitalist
Conclusion
15.2 Selling Securities to the Public: The Basic
Procedure
15.3 Altemative Issue Methods
15.4 Underwriters
Choosing an Underwriter
Types of Underwriting
The Aftermarket
The Green Shoe Provision
15.5 IPOs and Underpricing
Underpricing: The Case ofConrail
Evidence on Underpricing
Why Does Underpricing Exist?
l5.6 New Equity Sales and the Value of the Firm
15.7 The Costs of Issuing Securities
15.8 Rights
The Mechanics ofa Rights Offering
Number ofRights Needed to Purchase a Share
The Value ofa Righl
Ex Rights
The Underwriting Arrangements
Rights Offers: The Case ofTime Wamer
Effects on Shareholders
The Rights Offerings Puzzle
15.9 Dilution
Dilution of Proportionate Ownership
Dilution ofValue: Book versus Market Values
15.10 Issuing Long-Term Debt
15.11 ShelfRegistration
15.12 Summary and Conclusions
CHAPTER l6 Financial Leverage and Capital
Structure Policy
l6.l The Capital Structure Question
Firm Value and Stock Value: An Example
Capital Structure and the Cost of Capital
l6.2 The Effect of Financial Leverage
The Basics ofFinancial Leverage
Corporate Borrowing and Homemade
Leverage
l6.3 Capital Structure and the Cost of Equity
Capital
M&M Proposition l: The Pie Model
The Cost ofEquity and Financial Leverage: M&M
Proposition ll
Business and Financial Risk
16.4 M&M Propositions l and ll with Corporate
Taxes
The Interest Tax Shield
Taxes and M&M Proposition l
Taxes, the WACC, and Pmposition ll
Conclusion
16.5 Bankruptcy Costs
Direct Bankruptcy Costs
Indirect Bankruptcy Costs
16.6 Optimal Capital Structure
The Static Theory ofCapital Structure
Optimal Capital Structure and the Cost of
Capital
Optimal Capital Structure: A Recap
Capital Structure: Some Managerial
Recommendations
16.7 ThePieAgain
The Extended Pie Model
Marketed Claims versus Nonmarketed Claims
16.8 Observed Capital Structures
l6.9 A Quick Look at the Bankruptcy Process
Liquidation and Reorganization
Financial Management and the Bankruptcy
Process
Agreements to Avoid Bankruptcy
16.10 Summary and Conclusions
CHAPTER 17 Dlvldends and dividend
Pokly
17.l Cash Dividends and Dividend Payment
Cash Dividends
Standard Method ofCash Dividend Payment
Dividend Payment: A Chronology
More on the Ex-Dividend Date
17.2 Does Dividend Policy Matter?
An lllustration ofthe Irrelevance ofDividend
Policy
Homemade Dividends
ATest
17.3 Real-World Factors Favoring a Low Payout
Taxes
Expected Retum, Dividends and Personal Taxes
Flotation Costs
Dividend Restrictions
YlA Real-Worid Factors Favoring a High Payout
Desirefor Current income
Uncertainty Resolution
Tax and Legal Benefilsfrom High
Dividends Conclusion
17.4 Real-World Factors Favoring a High Payout
Desire for Current Income
Uncertainty resolution
Tax and Lega Benfits fromHigh Dividends
Condlusion
l7.5 A Resolution of Real-World Factors?
Information Content ofDividends
The Clientele Effect
17.6 Establishinga Dividend Policy
Residual Dividend Approach
Dividend Stability
l7.7 Stock Repurchase: An Alternative to Cash
Dividends
Cash Dividends versus Repurchase
Real-World Considerations in a Repurchase
Share Repurchase and EPS
17.8 Stock Dividends and Stock Splits
Some Details on Stock Splits cnd Stock Dividends
Value ofStock Splits and Stock Dividends
Reverse Splits
17.9 Summary and Conclusions
CHAPTER 18 Short-term Flnance and
Planning
l8.l Tracing Cash and Net Working Capital
l8.2 The Operating Cycle and the Cash Cycle
Defining the Operating and Cash Cycles
The Operating Cycle and the Firm's Organiwtional
Chart
Calculating the Operating and Cash Cycles
Interpreting the Cash Cycle
18.3 Some Aspects of Short-Term Financial Policy
The Size ofthe Firm's Investment in Current
Assets
Alternative Financing Policiesfor Current
Assets
Which Financing Policy is Best?
Current Assets and Liabilities in Practice
18.4 The Cash Budget
Sales and Cash Collections
Cash Outflows
The Cash Balance
18.5 Short-Term Borrowing
Unsecured Loans
Secured Loans
Other Sources
l8.6 A Shon-Term Financial Plan
18.7 Summary and Conclusions
CHAPTER 19
Cash and Uquidity
Management
19.l Reasons for Holding Cash
The Speculative and Precautionary Motives
The Transaction Motive
Compensating Balances
Costs ofHolding Cash
Cash Management versus Uquidity
Management
19.2 Understanding Float
Disbursement Float
Collection Float and Net Float
Float Management
Electronic Data Interchange: The End of
Float?
19.3 Cash Collection and Concentration
Components ofCollection Time
Cash Collection
Lockboxes
Cash Concentration
Accelerating Collections: An Example
19.4 Managing Cash Disbursements
Increasing Disbursement Float
Contivlling Disbursements
19.5 Investing Idle Cash
Temporary Cash Surpluses
Characteristics ofShort-Term Securities
Some Different Types ofMoney Market
Securities
19.6 Summary and Conclusions
APPENDIX 19A Determining the Target Cash
balance
The Basic ldea
The BAT Mode!
The Miller-Orr Model:A More General
Approang
Implications of the BAT and Miller Orr Mode!
Other Factors Intluencing the Target Cash
Balance
CHAPTER 20 Credit and lnventory
Management
20.1 Credit and Receivables
Components of Credir Policy
The Cash Flows from Granting
The lnvestment in Receivables
20.2 TennsoftheSale
The Basic Form
The Credit Period
Cash Discounts
Credit Instruments
20.3 Analyzing Credit Policy
Credit Policy Effects
Evaluating a Pmposed Credit Policy
20.4 OptimalCreditPolicy
The Total Credit Cost Curve
Organiting the Credit Function
20.5 CreditAnalysis
When Should Credit Be Granted?
Credit Information
Credit Evaluation and Scoring
20.6 Collection Policy
Monitoring Receivables
Collection Effort
20.7 Inventory Management
The Financial Manager and Inventory Policy
Imentory Types
lnventory Costs
20.8 Inventory Management Techniques
The ABC Approach
The Ecommic Order Quantity Model
Extensions to the EOQ Model
Managing Derived-Demand Inventories
20.9 Summary and Conclusions
APPENDlX 19A DetermininE the Target Cash
Balance
The Basic kdea
TheBATModel
The Miller-Orr Model- A More General
Approach
Implkations ofthe BAT and Miller-Orr Models
Other Factors Influencing the Target Cash
Balance
APPENDlX 20/A More on Credit Polic.v Analysi.s
Two Alternative Approaches
Discounts and Default Risk
CHAPTER 21
International Corporate
Finance
21.1 Terminology
2l.2 Foreign Exchange Markets and Exchange Rates
Contents
Exchange Rates
Types ofTransactions
21.3 Purchasing Power Parity
Absolute Purchasing Power Parity
Relative Purchasing Power Parity
21.4 Interest Rate Parity, Unbiased Forward Rates, and the
International Fisher Effect
Covered interest Arbitrage
Interest Rate Parity
Forward Rates and Future Spot Rates
Putting ItAll Together
21.5 Intemational Capital Budgeting
Method l: The Home Currency Approach
Melhod 2: The Foreign Currency Approach
Unremitted Cash Flows
21.6 Exchange Rate Risk
Short-Run Exposure
Long-Run Exposure
Translation Exposure
Managing Exchange Rate Risk
21.7 Political Risk
2l.8 Summary and Conclusions
APPENDlX A
APPENDlX B
APPENDlX C
Name Index
Subject Index
Mathematical Tables
Key Equations
Answers to Selected End-of-Chapter
Problems
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