Corporate Finance - A Focused Approach - 4th Edition (2010)

Front Cover......Page 1
Title Page......Page 6
Copyright......Page 7
Contents......Page 10
Preface......Page 19
PART 1 Fundamental Concepts of Corporate Finance......Page 32
CHAPTER 1 An Overview of Financial Management and the Financial Environment......Page 34
The Five-Minute MBA......Page 35
The Corporate Life Cycle......Page 36
The Primary Objective of the Corporation: Value Maximization......Page 40
An Overview of the Capital Allocation Process......Page 44
Financial Securities......Page 46
The Cost of Money......Page 50
Financial Institutions......Page 54
Financial Markets......Page 58
Trading Procedures in Financial Markets......Page 60
Types of Stock Market Transactions......Page 61
The Secondary Stock Markets......Page 62
Stock Market Returns......Page 65
The Global Economic Crisis......Page 67
The Big Picture......Page 73
e-Resources......Page 74
Summary......Page 75
CHAPTER 2 Financial Statements, Cash Flow, and Taxes......Page 78
Financial Statements and Reports......Page 79
The Balance Sheet......Page 80
The Income Statement......Page 83
Statement of Stockholders’ Equity......Page 84
Net Cash Flow......Page 85
Statement of Cash Flows......Page 86
Modifying Accounting Data for Managerial Decisions......Page 90
MVA and EVA......Page 98
The Federal Income Tax System......Page 102
Summary......Page 107
CHAPTER 3 Analysis of Financial Statements......Page 118
Financial Analysis......Page 119
Liquidity Ratios......Page 120
Asset Management Ratios......Page 123
Debt Management Ratios......Page 126
Profitability Ratios......Page 129
Market Value Ratios......Page 131
Trend Analysis, Common Size Analysis, and Percentage Change Analysis......Page 133
Tying the Ratios Together: The Du Pont Equation......Page 137
Comparative Ratios and Benchmarking......Page 138
Uses and Limitations of Ratio Analysis......Page 139
Summary......Page 141
PART 2 Fixed Income Securities......Page 152
CHAPTER 4 Time Value of Money......Page 154
Future Values......Page 156
Present Values......Page 164
Finding the Interest Rate, I......Page 167
Finding the Number of Years, N......Page 168
Future Value of an Ordinary Annuity......Page 169
Present Value of Ordinary Annuities and Annuities Due......Page 172
Finding Annuity Payments, Periods, and Interest Rates......Page 175
Perpetuities......Page 177
Uneven, or Irregular, Cash Flows......Page 179
Future Value of an Uneven Cash Flow Stream......Page 182
Solving for I with Irregular Cash Flows......Page 183
Semiannual and Other Compounding Periods......Page 184
Fractional Time Periods......Page 188
Amortized Loans......Page 189
Growing Annuities......Page 190
Summary......Page 193
CHAPTER 5 Bonds, Bond Valuation, and Interest Rates......Page 204
Who Issues Bonds?......Page 205
Key Characteristics of Bonds......Page 206
Bond Valuation......Page 211
Changes in Bond Values over Time......Page 215
Bonds with Semiannual Coupons......Page 218
Bond Yields......Page 219
The Pre-Tax Cost of Debt: Determinants of Market Interest Rates......Page 222
The Real Risk-Free Rate of Interest, r*......Page 223
The Inflation Premium (IP)......Page 224
The Default Risk Premium (DRP)......Page 226
The Maturity Risk Premium (MRP)......Page 232
The Term Structure of Interest Rates......Page 235
Financing with Junk Bonds......Page 236
Bankruptcy and Reorganization......Page 237
Summary......Page 238
PART 3 Stocks and Options......Page 246
CHAPTER 6 Risk, Return, and the Capital Asset Pricing Model......Page 248
Returns on Investments......Page 250
Stand-Alone Risk......Page 251
Risk in a Portfolio Context......Page 262
Calculating Beta Coefficients......Page 274
The Relationship between Risk and Return......Page 277
Some Concluding Thoughts: Implications for Corporate Managers and Investors......Page 284
Summary......Page 286
CHAPTER 7 Stocks, Stock Valuation, and Stock Market Equilibrium......Page 298
Legal Rights and Privileges of Common Stockholders......Page 299
Types of Common Stock......Page 300
The Market Stock Price versus Intrinsic Value......Page 301
Stock Market Reporting......Page 303
Valuing Common Stocks......Page 304
Valuing a Constant Growth Stock......Page 307
Expected Rate of Return on a Constant Growth Stock......Page 310
Valuing Nonconstant Growth Stocks......Page 312
Market Multiple Analysis......Page 316
Preferred Stock......Page 317
Stock Market Equilibrium......Page 318
The Efficient Markets Hypothesis......Page 321
Summary......Page 325
CHAPTER 8 Financial Options and Applications in Corporate Finance......Page 336
Overview of Financial Options......Page 337
The Single-Period Binomial Option Pricing Approach......Page 341
The Single-Period Binomial Option Pricing Formula......Page 345
The Multi-Period Binomial Option Pricing Model......Page 347
The Black-Scholes Option Pricing Model (OPM)......Page 350
The Valuation of Put Options......Page 356
Applications of Option Pricing in Corporate Finance......Page 357
Summary......Page 359
PART 4 Projects and Their Valuation......Page 364
CHAPTER 9 The Cost of Capital......Page 366
The Weighted Average Cost of Capital......Page 368
Basic Definitions......Page 369
Cost of Debt, r[Sub(d)](1 - T)......Page 371
Cost of Preferred Stock, r[Sub(ps)]......Page 373
Cost of Common Stock, r[Sub(s)]......Page 375
The CAPM Approach......Page 376
Dividend-Yield-Plus-Growth-Rate, or Discounted Cash Flow (DCF), Approach......Page 384
Over-Own-Bond-Yield-Plus-Judgmental-Risk-Premium Approach......Page 386
Comparison of the CAPM, DCF, and Over-Own-Bond-Yield-Plus-Judgmental-Risk- Premium Methods......Page 387
Adjusting the Cost of Equity for Flotation Costs......Page 388
Composite, or Weighted Average, Cost of Capital, WACC......Page 389
Factors That Affect the WACC......Page 392
Adjusting the Cost of Capital for Risk......Page 394
Privately Owned Firms and Small Businesses......Page 397
Four Mistakes to Avoid......Page 398
Summary......Page 399
CHAPTER 10 The Basics of Capital Budgeting: Evaluating Cash Flows......Page 410
An Overview of Capital Budgeting......Page 412
Net Present Value (NPV)......Page 414
Internal Rate of Return (IRR)......Page 418
Multiple Internal Rates of Return......Page 421
Reinvestment Rate Assumptions......Page 423
Modified Internal Rate of Return (MIRR)......Page 424
NPV Profiles......Page 427
Profitability Index (PI)......Page 431
Payback Period......Page 432
Conclusions on Capital Budgeting Methods......Page 434
Other Issues in Capital Budgeting......Page 436
Summary......Page 442
CHAPTER 11 Cash Flow Estimation and Risk Analysis......Page 454
Conceptual Issues......Page 455
Analysis of an Expansion Project......Page 460
Risk Analysis in Capital Budgeting......Page 466
Sensitivity Analysis......Page 467
Scenario Analysis......Page 470
Monte Carlo Simulation......Page 473
Project Risk Conclusions......Page 477
Replacement Analysis......Page 479
Real Options......Page 480
Phased Decisions and Decision Trees......Page 482
Summary......Page 485
Appendix 11A Tax Depreciation......Page 499
PART 5 Corporate Valuation and Governance......Page 502
CHAPTER 12 Financial Planning and Forecasting Financial Statements......Page 504
Overview of Financial Planning......Page 505
Sales Forecast......Page 507
Additional Funds Needed (AFN) Method......Page 509
Forecasted Financial Statements Method......Page 513
Forecasting When the Ratios Change......Page 527
Summary......Page 530
CHAPTER 13 Corporate Valuation, Value-Based Management and Corporate Governance......Page 542
Overview of Corporate Valuation......Page 544
The Corporate Valuation Model......Page 545
Value-Based Management......Page 552
Managerial Behavior and Shareholder Wealth......Page 561
Corporate Governance......Page 562
Employee Stock Ownership Plans (ESOPs)......Page 574
Summary......Page 577
PART 6 Cash Distributions and Capital Structure......Page 588
CHAPTER 14 Distributions to Shareholders: Dividends and Repurchases......Page 590
An Overview of Cash Distributions......Page 591
Procedures for Cash Distributions......Page 593
Cash Distributions and Firm Value......Page 595
Clientele Effect......Page 598
Information Content, or Signaling, Hypothesis......Page 599
Implications for Dividend Stability......Page 600
Setting the Target Distribution Level: The Residual Distribution Model......Page 601
The Residual Distribution Model in Practice......Page 603
A Tale of Two Cash Distributions: Dividends versus Stock Repurchases......Page 604
The Pros and Cons of Dividends and Repurchases......Page 613
Other Factors Influencing Distributions......Page 615
Summarizing the Distribution Policy Decision......Page 616
Stock Splits and Stock Dividends......Page 618
Dividend Reinvestment Plans......Page 621
Summary......Page 622
CHAPTER 15 Capital Structure Decisions......Page 630
A Preview of Capital Structure Issues......Page 631
Business Risk and Financial Risk......Page 634
Capital Structure Theory......Page 640
Capital Structure Evidence and Implications......Page 649
Estimating the Optimal Capital Structure......Page 652
Anatomy of a Recapitalization......Page 656
Summary......Page 661
PART 7 Managing Global Operations......Page 670
CHAPTER 16 Working Capital Management......Page 672
Current Asset Holdings......Page 674
Current Assets Financing Policies......Page 675
The Cash Conversion Cycle......Page 679
The Cash Budget......Page 685
Cash Management and the Target Cash Balance......Page 688
Cash Management Techniques......Page 690
Inventory Management......Page 692
Receivables Management......Page 694
Accruals and Accounts Payable (Trade Credit)......Page 698
Short-Term Marketable Securities......Page 701
Short-Term Bank Loans......Page 703
Commercial Paper......Page 707
Use of Security in Short-Term Financing......Page 708
Summary......Page 709
CHAPTER 17 Multinational Financial Management......Page 722
Multinational, or Global, Corporations......Page 723
Multinational versus Domestic Financial Management......Page 724
Exchange Rates......Page 725
Exchange Rates and International Trade......Page 729
The International Monetary System and Exchange Rate Policies......Page 730
Trading in Foreign Exchange......Page 734
Interest Rate Parity......Page 735
Purchasing Power Parity......Page 737
Inflation, Interest Rates, and Exchange Rates......Page 740
International Money and Capital Markets......Page 741
Multinational Capital Budgeting......Page 745
International Capital Structures......Page 749
Multinational Working Capital Management......Page 751
Summary......Page 754
Appendix A: Solutions to Self-Test Problems......Page 762
Appendix B: Answers to End-of-Chapter Problems......Page 784
Appendix C: Selected Equations and Data......Page 790
Appendix D: Values of the Areas under the Standard Normal Distribution Function......Page 802
Glossary......Page 804
Name Index......Page 822
Subject Index......Page 826