Core principles and applications of corporate finance

Title
Contents
PART ONE OVERVIEW
	CHAPTER ONE Introduction to Corporate Finance
		1.1 What Is Corporate Finance?
			The Balance Sheet Model of the Firm
			The Financial Manager
		1.2 The Corporate Firm
			The Sole Proprietorship
			The Partnership
			The Corporation
			A Corporation by Another Name
		1.3 The Importance of Cash Flows
		1.4 The Goal of Financial Management
			Possible Goals
			The Goal of Financial Management
			A More General Goal
		1.5 The Agency Problem and Control of the Corporation
			Agency Relationships
			Management Goals
			Do Managers Act in the Stockholders’ Interests?
			Stakeholders
		1.6 Regulation
			The Securities Act of 1933 and the Securities Exchange Act of 1934
		Summary and Conclusions
		Closing Case: East Coast Yachts
	CHAPTER TWO Financial Statements and Cash Flow
		2.1 The Balance Sheet
			Accounting Liquidity
			Debt versus Equity
			Value versus Cost
		2.2 The Income Statement
			Generally Accepted Accounting Principles
			Noncash Items
			Time and Costs
		2.3 Taxes
			Corporate Tax Rates
			Average versus Marginal Tax Rates
		2.4 Net Working Capital
		2.5 Financial Cash Flow
		2.6 The Accounting Statement of Cash Flows
			Cash Flow from Operating Activities
			Cash Flow from Investing Activities
			Cash Flow from Financing Activities
		Summary and Conclusions
		Closing Case: Cash Flows at East Coast Yachts
	CHAPTER THREE Financial Statements Analysis and Financial Models
		3.1 Financial Statements Analysis
			Standardizing Statements
			Common-Size Balance Sheets
			Common-Size Income Statements
		3.2 Ratio Analysis
			Short-Term Solvency or Liquidity Measures
			Long-Term Solvency Measures
			Asset Management or Turnover Measures
			Profi tability Measures
			Market Value Measures
		3.3 The Du Pont Identity
			A Closer Look at ROE
			Problems with Financial Statement Analysis
		3.4 Financial Models
			A Simple Financial Planning Model
			The Percentage of Sales Approach
		3.5 External Financing and Growth
			EFN and Growth
			Financial Policy and Growth
			A Note about Sustainable Growth Rate Calculations
		3.6 Some Caveats Regarding Financial Planning Models
		Summary and Conclusions
		Closing Case: Ratios and Financial Planning at East Coast Yachts
PART TWO VALUATION AND CAPITAL BUDGETING
	CHAPTER FOUR Discounted Cash Flow Valuation
		4.1 Valuation: The One-Period Case
		4.2 The Multiperiod Case
			Future Value and Compounding
			The Power of Compounding: A Digression
			Present Value and Discounting
			The Algebraic Formula
		4.3 Compounding Periods
			Distinction between Stated Annual Interest Rate and Effective Annual Rate
			Compounding over Many Years
			Continuous Compounding
		4.4 Simplifi cations
			Perpetuity
			Growing Perpetuity
			Annuity
				Trick 1: A Delayed Annuity
				Trick 2: Annuity Due
				Trick 3: The Infrequent Annuity
				Trick 4: Equating Present Value of Two Annuities
			Growing Annuity
		4.5 Loan Types and Loan Amortization
			Pure Discount Loans
			Interest-Only Loans
			Amortized Loans
		4.6 What Is a Firm Worth?
		Summary and Conclusions
		Closing Case: The MBA Decision
	CHAPTER FIVE Interest Rates and Bond Valuation
		5.1 Bonds and Bond Valuation
			Bond Features and Prices
			Bond Values and Yields
			Interest Rate Risk
			Finding the Yield to Maturity: More Trial and Error
		5.2 More on Bond Features
			Long-Term Debt: The Basics
			The Indenture
				Terms of a Bond
				Security
				Seniority
				Repayment
				The Call Provision
				Protective Covenants
		5.3 Bond Ratings
		5.4 Some Different Types of Bonds
			Government Bonds
			Zero Coupon Bonds
			Floating-Rate Bonds
			Other Types of Bonds
		5.5 Bond Markets
			How Bonds Are Bought and Sold
			Bond Price Reporting
			A Note on Bond Price Quotes
		5.6 Infl ation and Interest Rates
			Real versus Nominal Rates
			The Fisher Effect
		5.7 Determinants of Bond Yields
			The Term Structure of Interest Rates
			Bond Yields and the Yield Curve: Putting It All Together
			Conclusion
		Summary and Conclusions
		Closing Case: Financing East Coast Yachts’ Expansion Plans with a Bond Issue
	CHAPTER SIX Stock Valuation
		6.1 The Present Value of Common Stocks
			Dividends versus Capital Gains
			Valuation of Different Types of Stocks
				Case 1 (Zero Growth)
				Case 2 (Constant Growth)
				Case 3 (Differential Growth)
		6.2 Estimates of Parameters in the Dividend Discount Model
			Where Does g Come From?
			Where Does R Come From?
			A Healthy Sense of Skepticism
			Total Payout
		6.3 Growth Opportunities
			Growth in Earnings and Dividends versus Growth Opportunities
			The No-Payout Firm
		6.4 Price-Earnings Ratio
		6.5 Some Features of Common and Preferred Stocks
			Common Stock Features
				Shareholder Rights
				Proxy Voting
				Classes of Stock
				Other Rights
				Dividends
			Preferred Stock Features
				Stated Value
				Cumulative and Noncumulative Dividends
				Is Preferred Stock Really Debt?
		6.6 The Stock Markets
			Dealers and Brokers
			Organization of the NYSE
				Members
				Operations
				Floor Activity
			NASDAQ Operations
				ECNs
			Stock Market Reporting
		Summary and Conclusions
		Closing Case: Stock Valuation at Ragan Engines
	CHAPTER SEVEN Net Present Value and Other Investment Rules
		7.1 Why Use Net Present Value?
		7.2 The Payback Period Method
			Defi ning the Rule
			Problems with the Payback Method
				Problem 1: Timing of Cash Flows within the Payback Period
				Problem 2: Payments after the Payback Period
				Problem 3: Arbitrary Standard for Payback Period
			Managerial Perspective
			Summary of Payback
		7.3 The Discounted Payback Period Method
		7.4 The Average Accounting Return Method
			Defi ning the Rule
				Step 1: Determining Average Net Income
				Step 2: Determining Average Investment
				Step 3: Determining AAR
			Analyzing the Average Accounting Return Method
		7.5 The Internal Rate of Return
		7.6 Problems with the IRR Approach
			Defi nition of Independent and Mutually Exclusive Projects
			Two General Problems Affecting Both Independent and Mutually Exclusive Projects
				Problem 1: Investing or Financing?
				Problem 2: Multiple Rates of Return
				NPV Rule
				Modified IRR
				The Guarantee against Multiple IRRs
				General Rules
			Problems Specifi c to Mutually Exclusive Projects
				The Scale Problem
				The Timing Problem
			Redeeming Qualities of IRR
			A Test
		7.7 The Profi tability Index
			Calculation of Profi tability Index
				Application of the Profitability Index
		7.8 The Practice of Capital Budgeting
		Summary and Conclusions
		Closing Case: Bullock Gold Mining
	CHAPTER EIGHT Making Capital Investment Decisions
		8.1 Incremental Cash Flows
			Cash Flows—Not Accounting Income
			Sunk Costs
			Opportunity Costs
			Side Effects
			Allocated Costs
		8.2 The Baldwin Company: An Example
			An Analysis of the Project
				Investments
				Income and Taxes
				Salvage Value
				Cash Flow
				Net Present Value
			Which Set of Books?
			A Note on Net Working Capital
			A Note on Depreciation
			Interest Expense
		8.3 Infl ation and Capital Budgeting
			Discounting: Nominal or Real?
		8.4 Alternative Defi nitions of Operating Cash Flow
			The Bottom-Up Approach
			The Top-Down Approach
			The Tax Shield Approach
			Conclusion
		8.5 Investments of Unequal Lives: The Equivalent Annual Cost Method
			The General Decision to Replace
		Summary and Conclusions
		Closing Cases: Expansion at East Coast Yachts
			Bethesda Mining Company
	CHAPTER NINE Risk Analysis, Real Options, and Capital Budgeting
		9.1 Decision Trees
			Warning
		9.2 Sensitivity Analysis, Scenario Analysis, and Break-Even Analysis
			Sensitivity Analysis and Scenario Analysis
				Revenues
				Costs
			Break-Even Analysis
				Accounting Profit
				Present Value
		9.3 Monte Carlo Simulation
			Step 1: Specify the Basic Model
				Step 2: Specify a Distribution for Each Variable in the Model
				Step 3: The Computer Draws One Outcome
				Step 4: Repeat the Procedure
				Step 5: Calculate NPV
		9.4 Real Options
			The Option to Expand
			The Option to Abandon
			Timing Options
		Summary and Conclusions
		Closing Case: Bunyan Lumber, LLC
PART THREE RISK AND RETURN
	CHAPTER TEN Risk and Return Lessons from Market History
		10.1 Returns
			Dollar Returns
			Percentage Returns
		10.2 Holding Period Returns
		10.3 Return Statistics
		10.4 Average Stock Returns and Risk-Free Returns
		10.5 Risk Statistics
			Variance
			Normal Distribution and Its Implications for Standard Deviation
		10.6 The U.S. Equity Risk Premium: Historical and International Perspectives 3 0
		10.7 2008: A Year of Financial Crisis
		10.8 More on Average Returns
			Arithmetic versus Geometric Averages
			Calculating Geometric Average Returns
			Arithmetic Average Return or Geometric Average Return?
		Summary and Conclusions
		Closing Case: A Job at East Coast Yachts, Part 1
	CHAPTER ELEVEN Return and Risk: The Capital Asset Pricing Model (CAPM)
		11.1 Individual Securities
		11.2 Expected Return, Variance, and Covariance
			Expected Return and Variance
			Covariance and Correlation
		11.3 The Return and Risk for Portfolios
			The Expected Return on a Portfolio
			Variance and Standard Deviation of a Portfolio
				The Variance
				Standard Deviation of a Portfolio
				The Diversification Effect
				An Extension to Many Assets
		11.4 The Effi cient Set
			The Two-Asset Case
			The Effi cient Set for Many Securities
		11.5 Riskless Borrowing and Lending
			The Optimal Portfolio
		11.6 Announcements, Surprises, and Expected Returns
			Expected and Unexpected Returns
			Announcements and News
		11.7 Risk: Systematic and Unsystematic
			Systematic and Unsystematic Risk
			Systematic and Unsystematic Components of Return
		11.8 Diversifi cation and Portfolio Risk
			The Effect of Diversifi cation: Another Lesson from Market History
			The Principle of Diversifi cation
			Diversifi cation and Unsystematic Risk
			Diversifi cation and Systematic Risk
		11.9 Market Equilibrium
			Defi nition of the Market Equilibrium Portfolio
			Defi nition of Risk When Investors Hold the Market Portfolio
			The Formula for Beta
			A Test
		11.10 Relationship between Risk and Expected Return (CAPM)
			Expected Return on Market
			Expected Return on Individual Security
		Summary and Conclusions
		Closing Case: A Job at East Coast Yachts, Part 2
	CHAPTER TWELVE Risk, Cost of Capital, and Capital Budgeting
		12.1 The Cost of Equity Capital
		12.2 Estimating the Cost of Equity Capital with the CAPM
			The Risk-Free Rate
			Market Risk Premium
				Method 1: Using Historical Data
				Method 2: Using the Dividend Discount Model (DDM)
		12.3 Estimation of Beta
			Real-World Betas
			Stability of Beta
			Using an Industry Beta
		12.4 Beta and Covariance
			Beta and Covariance
		12.5 Determinants of Beta
			Cyclicality of Revenues
			Operating Leverage
			Financial Leverage and Beta
		12.6 Dividend Discount Model
			Comparison of DDM and CAPM
			Can a Low-Dividend or a No-Dividend Stock Have a High Cost of Capital?
		12.7 Cost of Capital for Divisions and Projects
		12.8 Cost of Fixed Income Securities
			Cost of Debt
			Cost of Preferred Stock
		12.9 The Weighted Average Cost of Capital
		12.10 Estimating Eastman Chemical’s Cost of Capital
			Eastman’s Cost of Equity
				Eastman’s Cost of Debt
				Eastman’s WACC
		12.11 Flotation Costs and the Weighted Average Cost of Capital
			The Basic Approach
			Flotation Costs and NPV
			Internal Equity and Flotation Costs
		Summary and Conclusions
		Closing Case: The Cost of Capital for Goff Computer, Inc.
PART FOUR CAPITAL STRUCTURE AND DIVIDEND POLICY
	CHAPTER THIRTEEN Effi cient Capital Markets and Behavioral Challenges
		13.1 Can Financing Decisions Create Value?
		13.2 A Description of Effi cient Capital Markets
			Foundations of Market Effi ciency
				Rationality
				Independent Deviations from Rationality
				Arbitrage
		13.3 The Different Types of Effi ciency
			The Weak Form
			The Semistrong and Strong Forms
			Some Common Misconceptions about the Effi cient Market Hypothesis
				The Efficacy of Dart Throwing
				Price Fluctuations
				Stockholder Disinterest
		13.4 The Evidence
			The Weak Form
			The Semistrong Form
				Event Studies
				The Record of Mutual Funds
			The Strong Form
		13.5 The Behavioral Challenge to Market Effi ciency
			Rationality
				Independent Deviations from Rationality
				Arbitrage
		13.6 Empirical Challenges to Market Effi ciency
		13.7 Reviewing the Differences
			Representativeness
			Conservatism
		13.8 Implications for Corporate Finance
			1. Accounting Choices, Financial Choices, and Market Effi ciency
			2. The Timing Decision
			3. Speculation and Effi cient Markets
			4. Information in Market Prices
		Summary and Conclusions
		Closing Case: Your 401(K) Account at East Coast Yachts
	CHAPTER FOURTEEN Capital Structure: Basic Concepts
		14.1 The Capital Structure Question and the Pie Theory
		14.2 Maximizing Firm Value versus Maximizing Stockholder Interests
		14.3 Financial Leverage and Firm Value: An Example
			Leverage and Returns to Shareholders
			The Choice between Debt and Equity
			A Key Assumption
		14.4 Modigliani and Miller: Proposition II (No Taxes)
			Risk to Equityholders Rises with Leverage
			Proposition II: Required Return to Equityholders Rises with Leverage
			MM: An Interpretation
		14.5 Taxes
			The Basic Insight
			Present Value of the Tax Shield
			Value of the Levered Firm
			Expected Return and Leverage under Corporate Taxes
			The Weighted Average Cost of Capital RWACC and Corporate Taxes
			Stock Price and Leverage under Corporate Taxes
		Summary and Conclusions
		Closing Case: Stephenson Real Estate Recapitalization
	CHAPTER FIFTEEN Capital Structure: Limits to the Use of Debt
		15.1 Costs of Financial Distress
			Direct Bankruptcy Costs
			Indirect Bankruptcy Costs
			Agency Costs
				Summary of Selfish Strategies
		15.2 Can Costs of Debt Be Reduced?
			Protective Covenants
			Consolidation of Debt
		15.3 Integration of Tax Effects and Financial Distress Costs
			Pie Again
		15.4 Signaling
		15.5 Shirking, Perquisites, and Bad Investments: A Note on Agency Cost of Equity
			Effect of Agency Costs of Equity on Debt-Equity Financing
			Free Cash Flow
		15.6 The Pecking-Order Theory
			Rules of the Pecking Order
				Rule #1 Use Internal Financing
				Rule #2 Issue Safe Securities First
			Implications
		15.7 Growth and the Debt-Equity Ratio
			No Growth
			Growth
		15.8 How Firms Establish Capital Structure
		15.9 A Quick Look at the Bankruptcy Process
			Liquidation and Reorganization
				Bankruptcy Liquidation
				Bankruptcy Reorganization
			Financial Management and the Bankruptcy Process
			Agreements to Avoid Bankruptcy
		Summary and Conclusions
		Closing Case: McKenzie Corporation’s Capital Budgeting
	CHAPTER SIXTEEN Dividends and Other Payouts
		16.1 Different Types of Dividends
		16.2 Standard Method of Cash Dividend Payment
		16.3 The Benchmark Case: An Illustration of the Irrelevance of Dividend Policy
			Current Policy: Dividends Set Equal to Cash Flow
			Alternative Policy: Initial Dividend Is Greater than Cash Flow
			The Indifference Proposition
			Homemade Dividends
			A Test
			Dividends and Investment Policy
		16.4 Repurchase of Stock
			Dividend versus Repurchase: Conceptual Example
			Dividends versus Repurchases: Real-World Considerations
				1. Flexibility
				2. Executive Compensation
				3. Offset to Dilution
				4. Repurchase as Investment
				5. Taxes
		16.5 Personal Taxes, Issuance Costs, and Dividends
			Firms without Suffi cient Cash to Pay a Dividend
			Firms with Suffi cient Cash to Pay a Dividend
			Summary on Personal Taxes
		16.6 Real-World Factors Favoring a High-Dividend Policy
			Desire for Current Income
			Behavioral Finance
			Agency Costs
			Information Content of Dividends and Dividend Signaling
		16.7 The Clientele Effect: a Resolution of Real-World Factors?
		16.8 What We Know and Do Not Know about Dividend Policy
			Dividends and Dividend Payers
			Corporations Smooth Dividends
			Payouts Provide Information to the Market
			Putting It All Together
			Some Survey Evidence on Dividends
		16.9 Stock Dividends and Stock Splits
			Some Details on Stock Splits and Stock Dividends
				Example of a Small Stock Dividend
				Example of a Stock Split
				Example of a Large Stock Dividend
			Value of Stock Splits and Stock Dividends
				The Benchmark Case
				Popular Trading Range
			Reverse Splits
		Summary and Conclusions
		Closing Case: Electronic Timing, Inc.
PART FIVE SPECIAL TOPICS
	CHAPTER SEVENTEEN Options and Corporate Finance
		17.1 Options
		17.2 Call Options
			The Value of a Call Option at Expiration
		17.3 Put Options
			The Value of a Put Option at Expiration
		17.4 Selling Options
		17.5 Option Quotes
		17.6 Combinations of Options
		17.7 Valuing Options
			Bounding the Value of a Call
				Lower Bound
				Upper Bound
			The Factors Determining Call Option Values
				Exercise Price
				Expiration Date
				Stock Price
				The Key Factor: The Variability of the Underlying Asset
				The Interest Rate
			A Quick Discussion of Factors Determining Put Option Values
		17.8 An Option Pricing Formula
			A Two-State Option Model
				Determining the Delta
				Determining the Amount of Borrowing
				Risk-Neutral Valuation
			The Black–Scholes Model
		17.9 Stocks and Bonds as Options
			The Firm Expressed in Terms of Call Options
				The Stockholders
				The Bondholders
			The Firm Expressed in Terms of Put Options
				The Stockholders
				The Bondholders
			A Resolution of the Two Views
			A Note on Loan Guarantees
		17.10 Options and Corporate Decisions: Some Applications
			Mergers and Diversifi cation
			Options and Capital Budgeting
		17.11 Investment in Real Projects and Options
		Summary and Conclusions
		Closing Case: Exotic Cuisines Employee Stock Options
	CHAPTER EIGHTEEN Short-Term Finance and Planning
		18.1 Tracing Cash and Net Working Capital
		18.2 The Operating Cycle and the Cash Cycle
			Defi ning the Operating and Cash Cycles
				The Operating Cycle
				The Cash Cycle
			The Operating Cycle and the Firm’s Organization Chart
			Calculating the Operating and Cash Cycles
				The Operating Cycle
				The Cash Cycle
			Interpreting the Cash Cycle
		18.3 Some Aspects of Short-Term Financial Policy
			The Size of the Firm’s Investment in Current Assets
			Alternative Financing Policies for Current Assets
				An Ideal Case
				Different Policies for Financing Current Assets
			Which Financing Policy Is Best?
			Current Assets and Liabilities in Practice
		18.4 The Cash Budget
			Sales and Cash Collections
			Cash Outfl ows
			The Cash Balance
		18.5 Short-Term Borrowing
			Unsecured Loans
				Compensating Balances
				Cost of a Compensating Balance
				Letters of Credit
			Secured Loans
				Accounts Receivable Financing
				Inventory Loans
			Commercial Paper
			Trade Credit
				Understanding Trade Credit Terms
				Cash Discounts
		18.6 A Short-Term Financial Plan
		Summary and Conclusions
		Closing Case: Keafer Manufacturing Working Capital Management
	CHAPTER NINETEEN Raising Capital
		19.1 The Financing Life Cycle of a Firm: Early-Stage Financing and Venture Capital
			Venture Capital
			Some Venture Capital Realities
			Choosing a Venture Capitalist
			Conclusion
		19.2 Selling Securities to the Public: The Basic Procedure
		19.3 Alternative Issue Methods
		19.4 Underwriters
			Choosing an Underwriter
			Types of Underwriting
				Firm Commitment Underwriting
				Best Efforts Underwriting
				Dutch Auction Underwriting
			The Green Shoe Provision
			The Aftermarket
			Lockup Agreements
			The Quiet Period
		19.5 IPOs and Underpricing
			Evidence on Underpricing
			IPO Underpricing: The 1999–2000 Experience
			Why Does Underpricing Exist?
		19.6 What CFOs Say about the IPO Process
		19.7 CEOs and the Value of the Firm
		19.8 The Cost of Issuing Securities
		19.9 Rights
			The Mechanics of a Rights Offering
			Subscription Price
			Number of Rights Needed to Purchase a Share
			Effect of Rights Offering on Price of Stock
			Effects on Shareholders
			The Underwriting Arrangements
			The Rights Puzzle
		19.10 Dilution
			Dilution of Proportionate Ownership
			Dilution of Value: Book versus Market Values
				A Misconception
				The Correct Arguments
		19.11 Issuing Long-Term Debt
		19.12 Shelf Registration
		Summary and Conclusions
		Closing Case: East Coast Yachts Goes Public
	CHAPTER TWENTY International Corporate Finance
		20.1 Terminology
		20.2 Foreign Exchange Markets and Exchange Rates
			Exchange Rates
				Exchange Rate Quotations
				Cross-Rates and Triangle Arbitrage
				Types of Transactions
		20.3 Purchasing Power Parity
			Absolute Purchasing Power Parity
			Relative Purchasing Power Parity
				The Basic Idea
				The Result
				Currency Appreciation and Depreciation
		20.4 Interest Rate Parity, Unbiased Forward Rates, and the International Fisher Effect
			Covered Interest Arbitrage
			Interest Rate Parity
			Forward Rates and Future Spot Rates
			Putting It All Together
				Uncovered Interest Parity
				The International Fisher Effect
		20.5 International Capital Budgeting
			Method 1: The Home Currency Approach
			Method 2: The Foreign Currency Approach
			Unremitted Cash Flows
		20.6 Exchange Rate Risk
			Short-Run Exposure
			Long-Run Exposure
			Translation Exposure
			Managing Exchange Rate Risk
		20.7 Political Risk
		Summary and Conclusions
		Closing Case: East Coast Yachts Goes International
APPENDIX A Mathematical Tables
APPENDIX B Solutions to Selected End-of-Chapter Problems
APPENDIX C Using the HP 10B and TI BA II Plus Financial Calculators
NAME INDEX
COMPANY INDEX
SUBJECT INDEX