Corporate Finance, 5th edition

Front Cover
Title Page
Copyright Page
Brief Contents
Detailed Contents
About the Authors
Preface
Part 1 Introduction
	Chapter 1 The Corporation and Financial Markets
		1.1 The Four Types of Firms
			Sole Proprietorships
			Partnerships
			Limited Liability Companies
			Corporations
			Tax Implications for Corporate Entities
			Corporate Taxation Around the
World
		1.2 Ownership Versus Control of Corporations
			The Corporate Management Team
			Interview with David Viniar
			The Financial Manager
			Global Financial Crisis The Dodd-Frank Act
			The Goal of the Firm
			The Firm and Society
			Ethics and Incentives Within Corporations
			Global Financial Crisis The Dodd- Frank Act on Corporate Compensation and Governance
			Citizens United v. Federal Election
Commission
			Airlines in Bankruptcy
		1.3 The Stock Market
			Primary and Secondary Stock Markets
			Traditional Trading Venues
			Interview with Frank Hatheway
			New Competition and Market Changes
			Dark Pools
		1.4 Fintech: Finance and Technology
			Telecommunications
			Security and Verification
			Automation of Banking Services
			Big Data and Machine Learning
			Competition
		MyLab Finance
		Key Terms
		Further Reading
		Problems
	Chapter 2 Introduction to Financial Statement Analysis
		2.1 Firms’ Disclosure of Financial Information
			Preparation of Financial Statements
			International Financial Reporting
Standards
			Interview with Ruth Porat
			Types of Financial Statements
		2.2 The Balance Sheet
			Assets
			Liabilities
			Stockholders’ Equity
			Market Value Versus Book Value
			Enterprise Value
		2.3 The Income Statement
			Earnings Calculations
		2.4 The Statement of Cash Flows
			Operating Activity
			Investment Activity
			Financing Activity
		2.5 Other Financial Statement Information
			Statement of Stockholders’ Equity
			Management Discussion and Analysis
			Notes to the Financial Statements
		2.6 Financial Statement Analysis
			Profitability Ratios
			Liquidity Ratios
			Working Capital Ratios
			Interest Coverage Ratios
			Leverage Ratios
			Valuation Ratios
			Common Mistake Mismatched
Ratios
			Operating Returns
			The Dupont Identity
		2.7 Financial Reporting in Practice
			Enron
			Worldcom
			Sarbanes-Oxley Act
			Global Financial Crisis Bernard Madoff’s Ponzi Scheme
			Dodd-Frank Act
		MyLab Finance
		Key Terms
		Further Reading
		Problems
		Data Case
	Chapter 3 Financial Decision Making and the Law of One Price
		3.1 Valuing Decisions
			Analyzing Costs and Benefits
			Using Market Prices to Determine Cash Values
			When Competitive Market Prices Are Not
Available
		3.2 Interest Rates and the Time Value of Money
			The Time Value of Money
			The Interest Rate: An Exchange Rate Across Time
		3.3 Present Value and the Npv Decision Rule
			Net Present Value
			The NPV Decision Rule
			NPV and Cash Needs
		3.4 Arbitrage and the Law of One Price
			Arbitrage
			Law of One Price
		3.5 No-Arbitrage and Security Prices
			Valuing a Security with the Law of One Price
			An Old Joke
			The NPV of Trading Securities and Firm Decision Making
			Valuing a Portfolio
			Global Financial Crisis Liquidity and the Informational Role of Prices
			Arbitrage in Markets
			Where Do We Go from Here?
		Appendix The Price of Risk
			Risky Versus Risk-Free Cash Flows
			Arbitrage with Transactions Costs
		MyLab Finance
		Key Terms
		Further Reading
		Problems
		Data Case
Part 2 Time, Money, and Interest Rates
	Chapter 4 The Time Value of Money
		4.1 The Timeline
		4.2 The Three Rules of Time Travel
			Rule 1: Comparing and Combining Values
			Rule 2: Moving Cash Flows Forward in Time
			Rule 3: Moving Cash Flows Back in Time
			Rule of 72
			Applying the Rules of Time Travel
		4.3 Valuing a Stream of Cash Flows
		4.4 Calculating the Net Present Value
			Using Excel Calculating Present Values in Excel
		4.5 Perpetuities and Annuities
			Perpetuities
			Historical Examples of Perpetuities
			Common Mistake Discounting One
Too Many Times
			Annuities
			Formula for an Annuity Due
			Growing Cash Flows
		4.6 Using an Annuity Spreadsheet or Calculator
		4.7 Non-Annual Cash Flows
		4.8 Solving for the Cash Payments
			Using Excel Excel’s IRR Function
		4.9 The Internal Rate of Return
		Appendix Solving for the Number of Periods
		MyLab Finance
		Key Terms
		Further Reading
		Problems
		Data Case
	Chapter 5 Interest Rates
		5.1 Interest Rate Quotes and Adjustments
			The Effective Annual Rate
			Common Mistake Using the Wrong Discount Rate in the Annuity Formula
			Annual Percentage Rates
		5.2 Application: Discount Rates and Loans
		5.3The Determinants of Interest Rates
			Global Financial Crisis Teaser Rates and Subprime Loans
			Inflation and Real Versus Nominal Rates
			Investment and Interest Rate Policy
			The Yield Curve and Discount Rates
			The Yield Curve and the Economy
			Common Mistake Using the Annuity Formula When Discount Rates Vary by Maturity
			Interview with Dr. Janet Yellen
		5.4 Risk and Taxes
			Risk and Interest Rates
			After Tax Interest Rates
		5.5 The Opportunity Cost of Capital
			Common Mistake States Dig a Multi- Trillion Dollar Hole by Discounting at the Wrong Rate
		Appendix Continuous Rates and Cash Flows
			Discount Rates for a Continuously Compounded APR
			Continuously Arriving Cash Flows
		MyLab Finance
		Key Terms
		Further Reading
		Problems
		Data Case
	Chapter 6 Valuing Bonds
		6.1 Bond Cash Flows, Prices, and Yields
			Bond Terminology
			Zero-Coupon Bonds
			Global Financial Crisis Negative Bond Yields
			Coupon Bonds
		6.2 Dynamic Behavior of Bond Prices
			Discounts and Premiums
			Time and Bond Prices
			Interest Rate Changes and Bond Prices
			Clean and Dirty Prices for Coupon
Bonds
		6.3 The Yield Curve and Bond Arbitrage
			Replicating a Coupon Bond
			Valuing a Coupon Bond Using Zero-Coupon Yields
			Coupon Bond Yields
			Treasury Yield Curves
		6.4 Corporate Bonds
			Corporate Bond Yields
			Are Treasuries Really Default-Free
Securities?
			Bond Ratings
			Corporate Yield Curves
		6.5 Sovereign Bonds
			Global Financial Crisis The Credit Crisis and Bond Yields
			Global Financial Crisis European Sovereign Debt Yields: A Puzzle
			Interview with Carmen M. Reinhart
		Appendix Forward Interest Rates
			Computing Forward Rates
			Computing Bond Yields from Forward Rates
			Forward Rates and Future Interest Rates
		MyLab Finance
		Key Terms
		Further Reading
		Problems
		Data Case
		Case Study
Part 3 Valuing Projects and Firms
	Chapter 7 Investment Decision Rules
		7.1 NPV and Stand-Alone Projects
			Applying the NPV Rule
			The NPV Profile and IRR
			Alternative Rules Versus the NPV Rule
			Interview with Dick Grannis
		7.2 The Internal Rate of Return Rule
			Applying the IRR Rule
			Pitfall #1: Delayed Investments
			Pitfall #2: Multiple IRRs
			Common Mistake IRR Versus the IRR Rule
			Pitfall #3: Nonexistent IRR
		7.3 The Payback Rule
			Applying the Payback Rule
			Payback Rule Pitfalls in Practice
			Why Do Rules Other Than the NPV Rule Persist?
		7.4 Choosing Between Projects
			NPV Rule and Mutually Exclusive Investments
			IRR Rule and Mutually Exclusive Investments
			The Incremental IRR
			When Can Returns Be Compared?
			Common Mistake IRR and Project Financing
		7.5 Project Selection with Resource Constraints
			Evaluating Projects with Different Resource Requirements
			Profitability Index
			Shortcomings of the Profitability Index
		Appendix Computing the NPV Profile Using Excel’s
Data Table Function
		MyLab Finance
		Key Terms
		Further Reading
		Problems
		Data Case
	Chapter 8 Fundamentals of Capital Budgeting
		8.1 Forecasting Earnings
			Revenue and Cost Estimates
			Incremental Earnings Forecast
			Indirect Effects on Incremental Earnings
			Common Mistake The Opportunity Cost of an Idle Asset
			Sunk Costs and Incremental Earnings
			Common Mistake The Sunk Cost Fallacy
			Real-World Complexities
		8.2 Determining Free Cash Flow and NPV
			Calculating Free Cash Flow from Earnings
			Calculating Free Cash Flow Directly
			Calculating the NPV
			Using Excel Capital Budgeting Using Excel
		8.3 Choosing Among Alternatives
			Evaluating Manufacturing Alternatives
			Comparing Free Cash Flows for Cisco’s Alternatives
		8.4 Further Adjustments to Free Cash Flow
			Interview with David Holland
		8.5 Analyzing the Project
			Break-Even Analysis
			Common Mistakes Corporate Tax Rates and Investment
			Sensitivity Analysis
			Scenario Analysis
			Using Excel Project Analysis Using Excel
		Appendix MACRS Depreciation
			MyLab Finance
			Key Terms
			Further Reading
			Problems
			Data Case
	Chapter 9 Valuing Stocks
		9.1 The Dividend-Discount Model
			A One-Year Investor
			Dividend Yields, Capital Gains, and Total Returns
			The Mechanics of a Short Sale
			A Multiyear Investor
			The Dividend-Discount Model Equation
		9.2 Applying the Dividend-Discount Model
			Constant Dividend Growth
			Dividends Versus Investment and Growth
			John Burr Williams’s Theory of Investment Value
			Changing Growth Rates
			Limitations of the Dividend-Discount Model
		9.3 Total Payout and Free Cash Flow Valuation Models
			Share Repurchases and the Total Payout Model
			The Discounted Free Cash Flow Model
		9.4 Valuation Based on Comparable Firms
			Valuation Multiples
			Limitations of Multiples
			Comparison with Discounted Cash Flow Methods
			Stock Valuation Techniques: The Final Word
			Kenneth Cole Productions—What Happened?
			Cryptocurrencies and Price Bubbles
			Interview with Susan Athey
		9.5 Information, Competition, and Stock Prices
			Information in Stock Prices
			Competition and Efficient Markets
			Lessons for Investors and Corporate Managers
			The Efficient Markets Hypothesis Versus No Arbitrage
		MyLab Finance
		Key Terms
		Further Reading
		Problems
		Data Case
Part 4 Risk and Return
	Chapter 10 Capital Markets and the Pricing of Risk
		10.1 Risk and Return: Insights from 92 Years of Investor History
		10.2 Common Measures of Risk and Return
			Probability Distributions
			Expected Return
			Variance and Standard Deviation
		10.3 Historical Returns of Stocks and Bonds
			Computing Historical Returns
			Average Annual Returns
			The Variance and Volatility of Returns
			Estimation Error: Using Past Returns to Predict the Future
			Arithmetic Average Returns Versus Compound Annual Returns
		10.4 the Historical Tradeoff Between Risk and Return
			The Returns of Large Portfolios
			The Returns of Individual Stocks
		10.5 Common Versus Independent Risk
			Theft Versus Earthquake Insurance: An Example
			The Role of Diversification
		10.6 Diversification in Stock Portfolios
			Firm-Specific Versus Systematic Risk
			No Arbitrage and the Risk Premium
			Global Financial Crisis Diversification Benefits During Market Crashes
			Common Mistake A Fallacy of Long-Run Diversification
		10.7 Measuring Systematic Risk
			Identifying Systematic Risk: The Market Portfolio
			Sensitivity to Systematic Risk: Beta
		10.8 Beta and the Cost of Capital
			Estimating the Risk Premium
			Common Mistake Beta Versus Volatility
			The Capital Asset Pricing Model
		MyLab Finance
		Key Terms
		Further Reading
		Problems
		Data Case
	Chapter 11 Optimal Portfolio Choice and the Capital Asset Pricing Model
		11.1 The Expected Return of a Portfolio
		11.2 The Volatility of a Two-Stock Portfolio
			Combining Risks
			Determining Covariance and Correlation
			Common Mistake Computing Variance, Covariance, and Correlation in Excel
			Computing a Portfolio’s Variance and Volatility
		11.3 The Volatility of a Large Portfolio
			Large Portfolio Variance
			Diversification with an Equally Weighted Portfolio
			Interview with Anne Martin
			Diversification with General Portfolios
		11.4 Risk Versus Return: Choosing an Efficient Portfolio
			Efficient Portfolios with Two Stocks
			The Effect of Correlation
			Short Sales
			Efficient Portfolios with Many Stocks
			Nobel Prize Harry Markowitz and James Tobin
		11.5 Risk-Free Saving and Borrowing
			Investing in Risk-Free Securities
			Borrowing and Buying Stocks on Margin
			Identifying the Tangent Portfolio
		11.6 The Efficient Portfolio and Required Returns
			Portfolio Improvement: Beta and the Required Return
			Expected Returns and the Efficient Portfolio
		11.7 The Capital Asset Pricing Model
			The CAPM Assumptions
			Supply, Demand, and the Efficiency of the Market Portfolio
			Optimal Investing: The Capital Market Line
		11.8 Determining the Risk Premium
			Market Risk and Beta
			Nobel Prize William Sharpe on the CAPM
			The Security Market Line
			Beta of a Portfolio
			Summary of the Capital Asset Pricing Model
		Appendix The CAPM with Differing Interest Rates
			The Efficient Frontier with Differing Saving and Borrowing Rates
			The Security Market Line with Differing Interest Rates
		MyLab Finance
		Key Terms
		Further Reading
		Problems
		Data Case
	Chapter 12 Estimating the Cost of Capital
		12.1 The Equity Cost of Capital
		12.2 The Market Portfolio
			Constructing the Market Portfolio
			Market Indexes
			Value-Weighted Portfolios and Rebalancing
			The Market Risk Premium
		12.3 Beta Estimation
			Using Historical Returns
			Identifying the Best-Fitting Line
			Using Linear Regression
			Why Not Estimate Expected Returns Directly?
		12.4 The Debt Cost of Capital
			Debt Yields Versus Returns
			Common Mistake Using the Debt Yield as Its Cost of Capital
			Debt Betas
		12.5 A Project’s Cost of Capital
			All-Equity Comparables
			Levered Firms as Comparables
			The Unlevered Cost of Capital
			Industry Asset Betas
		12.6 Project Risk Characteristics and Financing
			Differences in Project Risk
			Common Mistake Adjusting for Execution Risk
			Financing and the Weighted Average Cost of Capital
			Interview with Shelagh Glaser
		12.7 Final Thoughts on Using the Capm
		Appendix Practical Considerations When Forecasting
Beta
			Time Horizon
			The Market Proxy
			Beta Variation and Extrapolation
			Outliers
			Common Mistake Changing the Index to Improve the Fit
			Using Excel Estimating Beta Using Excel
			Other Considerations
		MyLab Finance
		Key Terms
		Further Reading
		Problems
		Data Case
	Chapter 13 Investor Behavior and Capital Market Efficiency
		13.1 Competition and Capital Markets
			Identifying a Stock’s Alpha
			Profiting from Non-Zero Alpha Stocks
		13.2 Information and Rational Expectations
			Informed Versus Uninformed Investors
			Rational Expectations
		13.3 The Behavior of Individual Investors
			Underdiversification and Portfolio Biases
			Excessive Trading and Overconfidence
			Individual Behavior and Market Prices
		13.4 Systematic Trading Biases
			Hanging on to Losers and the Disposition Effect
			Nobel Prize Prospect Theory, Mental Accounting, and Nudges
			Investor Attention, Mood, and Experience
			Herd Behavior
			Implications of Behavioral Biases
		13.5 The Efficiency of the Market Portfolio
			Trading on News or Recommendations
			Nobel Prize The 2013 Prize: An Enigma?
			The Performance of Fund Managers
			The Winners and Losers
		13.6 Style-Based Techniques and the Market Efficiency Debate
			Size Effects
			Interview with Jonathan Clements
			Momentum
			Market Efficiency and the Efficiency of the
Market Portfolio
			Implications of Positive-alpha Trading Strategies
		13.7 Multifactor Models of Risk
			Using Factor Portfolios
			Smart Beta
			Long-Short Portfolios
			Selecting the Portfolios
			The Cost of Capital with Fama-french-carhart Factor Specification
		13.8 Methods Used in Practice
			Financial Managers
			Investors
		Appendix Building a Multifactor Model
		MyLab Finance
		Key Terms
		Further Reading
		Problems
Part 5 Capital Structure
	Chapter 14 Capital Structure in a Perfect Market
		14.1 Equity Versus Debt Financing
			Financing a Firm with Equity
			Financing a Firm with Debt and Equity
			The Effect of Leverage on Risk and Return
		14.2 Modigliani-Miller I: Leverage, Arbitrage, and Firm Value
			MM and the Law of One Price
			Homemade Leverage
			MM and the Real World
			The Market Value Balance Sheet
			Application: a Leveraged Recapitalization
		14.3 Modigliani-miller II: Leverage, Risk, and the Cost of Capital
			Leverage and the Equity Cost of Capital
			Capital Budgeting and the Weighted Average Cost of Capital
			Common Mistake Is Debt Better Than
Equity?
			Computing the WACC with Multiple Securities
			Levered and Unlevered Betas
			Nobel Prize Franco Modigliani and Merton Miller
		14.4 Capital Structure Fallacies
			Leverage and Earnings per Share
			Global Financial Crisis Bank Capital Regulation and the ROE Fallacy
			Equity Issuances and Dilution
		14.5 MM: Beyond the Propositions
		MyLab Finance
		Key Terms
		Further Reading
		Problems
		Data Case
	Chapter 15 Debt and Taxes
		15.1 The Interest Tax Deduction
		15.2 Valuing the Interest Tax Shield
			The Interest Tax Shield and Firm Value
			Pizza and Taxes
			The Interest Tax Shield with Permanent Debt
			The Weighted Average Cost of Capital with Taxes
			The Repatriation Tax: Why Some Cash-
Rich Firms Borrowed
			The Interest Tax Shield with a Target Debt-equity Ratio
		15.3 Recapitalizing to Capture the Tax Shield
			The Tax Benefit
			The Share Repurchase
			No Arbitrage Pricing
			Analyzing the Recap: the Market Value Balance Sheet
		15.4 Personal Taxes
			Including Personal Taxes in the Interest Tax Shield
			Determining the Actual Tax Advantage of Debt
			Valuing the Interest Tax Shield with Personal Taxes
			Common Mistake How to Save for
Retirement
		15.5 Optimal Capital Structure with Taxes
			Do Firms Prefer Debt?
			Limits to the Tax Benefit of Debt
			Growth and Debt
			Interview with Andrew Balson
			Other Tax Shields
			The Low Leverage Puzzle
			Employee Stock Options
		MyLab Finance
		Key Terms
		Further Reading
		Problems
		Data Case
	Chapter 16 Financial Distress, Managerial Incentives, and Information
		16.1 Default and Bankruptcy in a Perfect Market
			Armin Industries: Leverage and the Risk of Default
			Bankruptcy and Capital Structure
		16.2 The Costs of Bankruptcy and Financial Distress
			The Bankruptcy Code
			Direct Costs of Bankruptcy
			Indirect Costs of Financial Distress
			Global Financial Crisis The Chrysler Prepack
		16.3 Financial Distress Costs and Firm Value
			Armin Industries: the Impact of Financial Distress Costs
			Who Pays for Financial Distress Costs?
		16.4 Optimal Capital Structure: the Tradeoff Theory
			The Present Value of Financial Distress Costs
			Optimal Leverage
		16.5 Exploiting Debt Holders: the Agency Costs of Leverage
			Excessive Risk-Taking and Asset Substitution
			Debt Overhang and Under-Investment
			Global Financial Crisis Bailouts, Distress Costs, and Debt Overhang
			Agency Costs and the Value of Leverage
			The Leverage Ratchet Effect
			Debt Maturity and Covenants
			Why Do Firms Go Bankrupt?
		16.6 Motivating Managers: the Agency Benefits of Leverage
			Concentration of Ownership
			Reduction of Wasteful Investment
			Excessive Perks and Corporate
Scandals
			Global Financial Crisis Moral Hazard, Government Bailouts, and the Appeal of Leverage
			Leverage and Commitment
			Nobel Prize Contract Theory
		16.7 Agency Costs and the Tradeoff Theory
			The Optimal Debt Level
			Debt Levels in Practice
		16.8 Asymmetric Information and Capital Structure
			Leverage as a Credible Signal
			Issuing Equity and Adverse Selection
			Nobel Prize Markets with Asymmetric
Information and Adverse Selection
			Implications for Equity Issuance
			Implications for Capital Structure
		16.9 Capital Structure: the Bottom Line
		MyLab Finance
		Key Terms
		Further Reading
		Problems
	Chapter 17 Payout Policy
		17.1 Distributions to Shareholders
			Dividends
			Share Repurchases
		17.2 Comparison of Dividends and Share Repurchases
			Alternative Policy 1: Pay Dividend with Excess Cash
			Alternative Policy 2: Share Repurchase (No Dividend)
			Common Mistake Repurchases and the
Supply of Shares
			Alternative Policy 3: High Dividend (Equity Issue)
			Modigliani-Miller and Dividend Policy Irrelevance
			Common MistakeThe Bird in the Hand
Fallacy
			Dividend Policy with Perfect Capital Markets
		17.3 The Tax Disadvantage of Dividends
			Taxes on Dividends and Capital Gains
			Optimal Dividend Policy with Taxes
		17.4 Dividend Capture and Tax Clienteles
			The Effective Dividend Tax Rate
			Tax Differences Across Investors
			Clientele Effects
			Interview with John Connors
		17.5 Payout Versus Retention of Cash
			Retaining Cash with Perfect Capital Markets
			Taxes and Cash Retention
			Adjusting for Investor Taxes
			Issuance and Distress Costs
			Agency Costs of Retaining Cash
		17.6 Signaling with Payout Policy
			Dividend Smoothing
			Dividend Signaling
			Royal & SunAlliance’s Dividend
Cut
			Signaling and Share Repurchases
		17.7 Stock Dividends, Splits, and Spin-Offs
			Stock Dividends and Splits
			Spin-offs
			Berkshire Hathaway’s A & B Shares
		MyLab Finance
		Key Terms
		Further Reading
		Problems
		Data Case
Part 6 Advanced Valuation
	Chapter 18 Capital Budgeting and Valuation with Leverage
		18.1 Overview of Key Concepts
		18.2 The Weighted Average Cost of Capital Method
			Interview with Zane Rowe
			Using the WACC to Value a Project
			Summary of the WACC Method
			Implementing a Constant Debt-Equity Ratio
		18.3 The Adjusted Present Value Method
			The Unlevered Value of the Project
			Valuing the Interest Tax Shield
			Summary of the APV Method
		18.4 The Flow-to-Equity Method
			Calculating the Free Cash Flow to Equity
			Valuing Equity Cash Flows
			What Counts as “Debt”?
			Summary of the Flow-to-Equity Method
		18.5 Project-Based Costs of Capital
			Estimating the Unlevered Cost of Capital
			Project Leverage and the Equity Cost of Capital
			Determining the Incremental Leverage of a Project
			Common Mistake Re-Levering the WACC
		18.6 APV with Other Leverage Policies
			Constant Interest Coverage Ratio
			Predetermined Debt Levels
			A Comparison of Methods
		18.7 Other Effects of Financing
			Issuance and Other Financing Costs
			Security Mispricing
			Financial Distress and Agency Costs
			Global Financial Crisis Government Loan Guarantees
		18.8 Advanced Topics in Capital Budgeting
			Periodically Adjusted Debt
			Leverage and the Cost of Capital
			The WACC or FTE Method with Changing Leverage
			Personal Taxes
		MyLab Finance
		Key Terms
		Further Reading
		Problems
		Data Case
		Appendix Foundations and Further Details
			Deriving the WACC Method
			The Levered and Unlevered Cost of Capital
			Solving for Leverage and Value
Simultaneously
			The Residual Income and Economic Value
Added Valuation Methods
	Chapter 19 Valuation and Financial Modeling: a Case Study
		19.1 Valuation Using Comparables
		19.2 The Business Plan
			Operational Improvements
			Capital Expenditures: a Needed Expansion
			Working Capital Management
			Capital Structure Changes: Levering Up
		19.3 Building the Financial Model
			Forecasting Earnings
			Interview with Joseph L.
Rice, III
			Working Capital Requirements
			Forecasting Free Cash Flow
			Using Excel Summarizing Model Outputs
			The Balance Sheet and Statement of Cash Flows (optional)
			Using Excel Auditing Your Financial Model
		19.4 Estimating the Cost of Capital
			CAPM -Based Estimation
			Unlevering Beta
			Ideko’s Unlevered Cost of Capital
		19.5 Valuing the Investment
			The Multiples Approach to Continuation Value
			The Discounted Cash Flow Approach to Continuation Value
			Common Mistake Continuation Values
and Long-Run Growth
			APV Valuation of Ideko’s Equity
			A Reality Check
			Common Mistake Missing Assets or
Liabilities
			IRR and Cash Multiples
		19.6 Sensitivity Analysis
		MyLab Finance
		Key Terms
		Further Reading
		Problems
		Appendix Compensating Management
Part 7 Options
	Chapter 20 Financial Options
		20.1 Option Basics
			Understanding Option Contracts
			Interpreting Stock Option Quotations
			Options on Other Financial Securities
		20.2 Option Payoffs at Expiration
			Long Position in an Option Contract
			Short Position in an Option Contract
			Profits for Holding an Option to Expiration
			Returns for Holding an Option to Expiration
			Combinations of Options
		20.3 Put-Call Parity
		20.4 Factors Affecting Option Prices
			Strike Price and Stock Price
			Arbitrage Bounds on Option Prices
			Option Prices and the Exercise Date
			Option Prices and Volatility
		20.5 Exercising Options Early
			Non-Dividend-Paying Stocks
			Dividend-Paying Stocks
		20.6 Options and Corporate Finance
			Equity as a Call Option
			Debt as an Option Portfolio
			Global Financial Crisis Credit Default Swaps
			Pricing Risky Debt
			Agency Conflicts
		MyLab Finance
		Key Terms
		Further Reading
		Problems
		Data Case
	Chapter 21 Option Valuation
		21.1 The Binomial Option Pricing Model
			A Two-State Single-Period Model
			The Binomial Pricing Formula
			A Multiperiod Model
			Making the Model Realistic
		21.2 The Black-Scholes Option Pricing Model
			The Black-Scholes Formula
			Interview with Myron S. Scholes
			Implied Volatility
			Global Financial Crisis The VIX Index
			The Replicating Portfolio
		21.3 Risk-Neutral Probabilities
			A Risk-Neutral Two-State Model
			Implications of the Risk-Neutral World
			Risk-Neutral Probabilities and Option Pricing
		21.4 Risk and Return of an Option
		21.5 Corporate Applications of Option Pricing
			Beta of Risky Debt
			Common Mistake Valuing Employee Stock Options
			Nobel Prize Pricing Financial Options
			Agency Costs of Debt
		MyLab Finance
		Key Terms
		Further Reading
		Problems
	Chapter 22 Real Options
		22.1 Real Versus Financial Options
		22.2 Decision Tree Analysis
			Representing Uncertainty
			Real Options
			Solving Decision Trees
		22.3 The Option to Delay: Investment as a Call Option
			An Investment Option
			Why Are There Empty Lots in Built-Up
Areas of Big Cities?
			Factors Affecting the Timing of Investment
			Investment Options and Firm Risk
			Global Financial Crisis Uncertainty, Investment, and the Option to Delay
		22.4 Growth and Abandonment Options
			Valuing Growth Potential
			The Option to Expand
			Interview with Scott Mathews
			The Option to Abandon
		22.5 Investments with Different Lives
			Equivalent Annual Benefit Method
		22.6 Optimally Staging Investments
		22.7 Rules of Thumb
			The Profitability Index Rule
			The Hurdle Rate Rule
			The Option to Repay a Mortgage
		22.8 Key Insights from Real Options
		MyLab Finance
		Key Terms
		Further Reading
		Problems
Part 8 Long-Term Financing
	Chapter 23 Raising Equity Capital
		23.1 Equity Financing for Private Companies
			Sources of Funding
			Crowdfunding: The Wave of the
Future?
			Interview with Kevin Laws
			Venture Capital Investing
			Venture Capital Financing Terms
			Common Mistake Misinterpreting Start-Up Valuations
			From Launch to Liquidity
			Exiting an Investment in a Private Company
		23.2 The Initial Public Offering
			Advantages and Disadvantages of Going Public
			Types of Offerings
			The Mechanics of an IPO
			Google’s IPO
			An Alternative to the Traditional IPO:
Spotify’s Direct Listing
		23.3 Ipo Puzzles
			Underpricing
			Cyclicality and Recent Trends
			Global Financial Crisis Worldwide IPO Deals in 2008–2009
			Cost of an IPO
			Long-Run Underperformance
		23.4 The Seasoned Equity Offering
			The Mechanics of an Seo
			Price Reaction
			Issuance Costs
		MyLab Finance
		Key Terms
		Further Reading
		Problems
		Data Case
	Chapter 24 Debt Financing
		24.1 Corporate Debt
			Public Debt
			Private Debt
		24.2 Other Types of Debt
			Sovereign Debt
			Municipal Bonds
			Detroit’s Art Museum at Risk
			Asset-Backed Securities
			Global Financial Crisis CDOs, Subprime Mortgages, and the Financial Crisis
		24.3 Bond Covenants
		24.4 Repayment Provisions
			Call Provisions
			New York City Calls Its Municipal
Bonds
			Sinking Funds
			Convertible Provisions
		MyLab Finance
		Key Terms
		Further Reading
		Problems
		Data Case
	Chapter 25 Leasing
		25.1 The Basics of Leasing
			Examples of Lease Transactions
			Lease Payments and Residual Values
			Leases Versus Loans
			Calculating Auto Lease Payments
			End-of-Term Lease Options
			Other Lease Provisions
		25.2 Accounting, Tax, and Legal Consequences of Leasing
			Lease Accounting
			Operating Leases at Alaska Air
Group
			The Tax Treatment of Leases
			Leases and Bankruptcy
			Synthetic Leases
		25.3 The Leasing Decision
			Cash Flows for a True Tax Lease
			Lease Versus Buy (An Unfair Comparison)
			Lease Versus Borrow (The Right Comparison)
			Evaluating a True Tax Lease
			Evaluating a Non-Tax Lease
		25.4 Reasons for Leasing
			Valid Arguments for Leasing
			Interview with Mark Long
			Suspect Arguments for Leasing
		MyLab Finance
		Key Terms
		Further Reading
		Problems
Part 9 Short-Term Financing
	Chapter 26 Working Capital Management
		26.1 Overview of Working Capital
			The Cash Cycle
			Firm Value and Working Capital
		26.2 Trade Credit
			Trade Credit Terms
			Trade Credit and Market Frictions
			Managing Float
		26.3 Receivables Management
			Determining the Credit Policy
			Monitoring Accounts Receivable
		26.4 Payables Management
			Determining Accounts Payable Days Outstanding
			Stretching Accounts Payable
		26.5 Inventory Management
			Benefits of Holding Inventory
			Costs of Holding Inventory
		26.6 Cash Management
			Motivation for Holding Cash
			Alternative Investments
			Hoarding Cash
		MyLab Finance
		Key Terms
		Further Reading
		Problems
		Data Case
	Chapter 27 Shor T-Term Financial Planning
		27.1 Forecasting Short-Term Financing Needs
			Seasonalities
			Negative Cash Flow Shocks
			Positive Cash Flow Shocks
		27.2 The Matching Principle
			Permanent Working Capital
			Temporary Working Capital
			Financing Policy Choices
		27.3 Short-Term Financing with Bank Loans
			Single, End-of-Period Payment Loan
			Line of Credit
			Bridge Loan
			Common Loan Stipulations and Fees
		27.4 Short-Term Financing with Commercial Paper
		27.5 Short-Term Financing with Secured Financing
			Accounts Receivable as Collateral
			A Seventeenth-Century Financing
Solution
			Inventory as Collateral
			Loan Guarantees: The Ex-Im Bank
Controversy
		MyLab Finance
		Key Terms
		Further Reading
		Problems
Part 10 Special Topics
	Chapter 28 Mergers and Acquisitions
		28.1 Background and Historical Trends
			Merger Waves
			Types of Mergers
		28.2 Market Reaction to a Takeover
		28.3 Reasons to Acquire
			Economies of Scale and Scope
			Vertical Integration
			Expertise
			Monopoly Gains
			Efficiency Gains
			Tax Savings from Operating Losses
			Diversification
			Earnings Growth
			Managerial Motives to Merge
			Valuation
		28.4 Valuation and the Takeover Process
			Valuation
			The Offer
			Merger “Arbitrage”
			Tax and Accounting Issues
			Board and Shareholder Approval
		28.5 Takeover Defenses
			Poison Pills
			Staggered Boards
			White Knights
			Golden Parachutes
			Recapitalization
			Other Defensive Strategies
			Regulatory Approval
			Weyerhaeuser’s Hostile Bid for Willamette
Industries
		28.6 Who Gets the Value Added from a Takeover?
			The Free Rider Problem
			Toeholds
			The Leveraged Buyout
			The Leveraged Buyout of RJR-Nabisco
by KKR
			The Freezeout Merger
			Competition
		MyLab Finance
		Key Terms
		Further Reading
		Problems
	Chapter 29 Corporate Governance
		29.1 Corporate Governance and Agency Costs
		29.2 Monitoring by the Board of Directors and Others
			Types of Directors
			Board Independence
			Common Mistake “Celebrity” Boards
			Board Size and Performance
			Other Monitors
		29.3 Compensation Policies
			Stock and Options
			Pay and Performance Sensitivity
		29.4 Managing Agency Conflict
			Direct Action by Shareholders
			Shareholder Activism at The New York
Times
			Management Entrenchment
			The Threat of Takeover
		29.5 Regulation
			The Sarbanes-Oxley Act
			Interview with Lawrence E.
Harris
			The Cadbury Commission
			Dodd-frank Act
			Insider Trading
			Martha Stewart and ImClone
		29.6 Corporate Governance Around the World
			Protection of Shareholder Rights
			Controlling Owners and Pyramids
			The Stakeholder Model
			Cross-Holdings
		29.7 the Tradeoff of Corporate Governance
		MyLab Finance
		Key Terms
		Further Reading
		Problems
	Chapter 30 Risk Management
		30.1 Insurance
			The Role of Insurance: an Example
			Insurance Pricing in a Perfect Market
			The Value of Insurance
			The Costs of Insurance
			The Insurance Decision
		30.2 Commodity Price Risk
			Hedging with Vertical Integration and Storage
			Hedging with Long-term Contracts
			Hedging with Futures Contracts
			Common Mistake
 Hedging Risk
			Differing Hedging Strategies
			Deciding to Hedge Commodity Price Risk
		30.3 Exchange Rate Risk
			Exchange Rate Fluctuations
			Hedging with Forward Contracts
			Cash-and-Carry and the Pricing of Currency Forwards
			Global Financial Crisis Arbitrage in Currency Markets?
			Hedging with Options
		30.4 Interest Rate Risk
			Interest Rate Risk Measurement: Duration
			Duration-Based Hedging
			The Savings and Loan Crisis
			Swap-Based Hedging
		MyLab Finance
		Key Terms
		Further Reading
		Problems
	Chapter 31 International Corporate Finance
		31.1 Internationally Integrated Capital Markets
		31.2 Valuation of Foreign Currency Cash Flows
			WACC Valuation Method in Domestic Currency
			Using the Law of One Price as a Robustness Check
		31.3 Valuation and International Taxation
			The TCJA: A New Approach to International Taxation
			Harmonizing the Tax Treatment of Exports: GILTI and FDII
			Avoiding Base Erosion: BEAT
		31.4 Internationally Segmented Capital Markets
			Differential Access to Markets
			Macro-Level Distortions
			Implications
		31.5 Capital Budgeting with Exchange Risk
			Interview with Bill Barrett
		MyLab Finance
		Key Terms
		Further Reading
		Problems
		Data Case
Glossary
Index