Corporate Finance: The Core

Welcome
	Welcome
Part 1: Introduction
	Part 1: Introduction
1: The Corporation and Financial Markets
	Introduction: The Corporation and Financial Markets
	1.1: The Four Types of Firms
		1.1.2: Partnerships
		1.1.3: Limited Liability Companies
		1.1.4: Corporations
		1.1.5: Tax Implications for Corporate Entities
	1.2: Ownership Versus Control of Corporations
		1.2.2: The Financial Manager
		1.2.3: The Goal of the Firm
		1.2.4: The Firm and Society
		1.2.5: Ethics and Incentives within Corporations
	1.3: The Stock Market
		1.3.2: Traditional Trading Venues
		1.3.3: New Competition and Market Changes
		1.3.4: Dark Pools
	1.4: FinTech: Finance and Technology
		1.4.2: Security and Verification
		1.4.3: Automation of Banking Services
		1.4.4: Big Data and Machine Learning
		1.4.5: Competition
	Summary: The Corporation and Financial Markets
		Key Terms
		Further Reading
		Problems
2: Introduction to Financial Statement Analysis
	Introduction: Introduction to Financial Statement Analysis
	2.1: Firms’ Disclosure of Financial Information
		2.1.2: Types of Financial Statements
	2.2: The Balance Sheet
		2.2.2: Liabilities
		2.2.3: Stockholders’ Equity
		2.2.4: Market Value Versus Book Value
		2.2.5: Enterprise Value
	2.3: The Income Statement
	2.4: The Statement of Cash Flows
		2.4.2: Investment Activity
		2.4.3: Financing Activity
	2.5: Other Financial Statement Information
		2.5.2: Management Discussion and Analysis
		2.5.3: Notes to the Financial Statements
	2.6: Financial Statement Analysis
		2.6.2: Liquidity Ratios
		2.6.3: Working Capital Ratios
		2.6.4: Interest Coverage Ratios
		2.6.5: Leverage Ratios
		2.6.6: Valuation Ratios
		2.6.7: Operating Returns
		2.6.8: The DuPont Identity
	2.7: Financial Reporting in Practice
		2.7.2: WorldCom
		2.7.3: Sarbanes-Oxley Act
		2.7.4: Dodd-Frank Act
	Summary: Introduction to Financial Statement Analysis
		Key Terms
		Further Reading
		Problems
		Data Case
3: Financial Decision Making and the Law of One Price
	Introduction: Financial Decision Making and the Law of One Price
	3.1: Valuing Decisions
		3.1.2: Using Market Prices to Determine Cash Values
	3.2: Interest Rates and the Time Value of Money
		3.2.2: The Interest Rate: An Exchange Rate Across Time
	3.3: Present Value and the NPV Decision Rule
		3.3.2: The NPV Decision Rule
		3.3.3: NPV and Cash Needs
	3.4: Arbitrage and the Law of One Price
		3.4.2: Law of One Price
	3.5: No-Arbitrage and Security Prices
		3.5.2: The NPV of Trading Securities and Firm Decision Making
		3.5.3: Valuing a Portfolio
		3.5.4: Where Do We Go from Here?
	Summary: Financial Decision Making and the Law of One Price
		Key Terms
		Further Reading
		Problems
		Data Case
3 Appendix: The Price of Risk
	Introduction: The Price of Risk
	3A.1: Risky Versus Risk-Free Cash Flows
		3A.1.2: The No-Arbitrage Price of a Risky Security
		3A.1.3: Risk Premiums Depend on Risk
		3A.1.4: Risk Is Relative to the Overall Market
		3A.1.5: Risk, Return, and Market Prices
	3A.2: Arbitrage with Transactions Costs
	Summary: The Price of Risk
		Key Terms
		Problems
Part 2: Time, Money, and Interest Rates
	Part 2: Time, Money, and Interest Rates
4: The Time Value of Money
	Introduction: The Time Value of Money
	4.1: The Timeline
	4.2: The Three Rules of Time Travel
		4.2.2: Rule 2: Moving Cash Flows Forward in Time
		4.2.3: Rule 3: Moving Cash Flows Back in Time
		4.2.4: Applying the Rules of Time Travel
	4.3: Valuing a Stream of Cash Flows
	4.4: Calculating the Net Present Value
	4.5: Perpetuities and Annuities
		4.5.2: Annuities
		4.5.3: Growing Cash Flows
	4.6: Using an Annuity Spreadsheet or Calculator
	4.7: Non-Annual Cash Flows
	4.8: Solving for the Cash Payments
	4.9: The Internal Rate of Return
	Summary: The Time Value of Money
		Key Terms
		Further Reading
		Problems
		Data Case
4 Appendix: Solving for the Number of Periods
	Introduction: Solving for the Number of Periods
	Summary: Solving for the Number of Periods
5: Interest Rates
	Introduction: Interest Rates
	5.1: Interest Rate Quotes and Adjustments
		5.1.2: Annual Percentage Rates
	5.2: Application: Discount Rates and Loans
	5.3: The Determinants of Interest Rates
		5.3.2: Investment and Interest Rate Policy
		5.3.3: The Yield Curve and Discount Rates
		5.3.4: The Yield Curve and the Economy
	5.4: Risk and Taxes
		5.4.2: After-Tax Interest Rates
	5.5: The Opportunity Cost of Capital
	Summary: Interest Rates
		Key Terms
		Further Reading
		Problems
		Data Case
5 Appendix: Continuous Rates and Cash Flows
	Introduction: Continuous Rates and Cash Flows
	5A.1: Discount Rates for a Continuously Compounded APR
	5A.2: Continuously Arriving Cash Flows
6: Valuing Bonds
	Introduction: Valuing Bonds
	6.1: Bond Cash Flows, Prices, and Yields
		6.1.2: Zero-Coupon Bonds
		6.1.3: Coupon Bonds
	6.2: Dynamic Behavior of Bond Prices
		6.2.2: Time and Bond Prices
		6.2.3: Interest Rate Changes and Bond Prices
	6.3: The Yield Curve and Bond Arbitrage
		6.3.2: Valuing a Coupon Bond Using Zero-Coupon Yields
		6.3.3: Coupon Bond Yields
		6.3.4: Treasury Yield Curves
	6.4: Corporate Bonds
		6.4.2: Bond Ratings
		6.4.3: Corporate Yield Curves
	6.5: Sovereign Bonds
	Summary: Valuing Bonds
		Key Terms
		Further Reading
		Problems
		Data Case
		Case Study
6 Appendix: Forward Interest Rates
	Introduction: Forward Interest Rates
	6A.1: Computing Forward Rates
	6A.2: Computing Bond Yields from Forward Rates
	6A.3: Forward Rates and Future Interest Rates
	Summary: Forward Interest Rates
		Key Terms
		Problems
Part 3: Valuing Projects and Firms
	Part 3: Valuing Projects and Firms
7: Investment Decision Rules
	Introduction: Investment Decision Rules
	7.1: NPV and Stand-Alone Projects
		7.1.2: The NPV Profile and IRR
		7.1.3: Alternative Rules Versus the NPV Rule
	7.2: The Internal Rate of Return Rule
		7.2.2: Pitfall #1: Delayed Investments
		7.2.3: Pitfall #2: Multiple IRRs
		7.2.4: Pitfall #3: Nonexistent IRR
	7.3: The Payback Rule
		7.3.2: Payback Rule Pitfalls in Practice
	7.4: Choosing between Projects
		7.4.2: IRR Rule and Mutually Exclusive Investments
		7.4.3: The Incremental IRR
	7.5: Project Selection with Resource Constraints
		7.5.2: Profitability Index
		7.5.3: Shortcomings of the Profitability Index
	Summary: Investment Decision Rules
		Key Terms
		Further Reading
		Problems
		Data Case
7 Appendix: Computing the NPV Profile Using Excel’s Data Table Function
	7 Appendix: Computing the NPV Profile Using Excel’s Data Table Function
8: Fundamentals of Capital Budgeting
	Introduction: Fundamentals of Capital Budgeting
	8.1: Forecasting Earnings
		8.1.2: Incremental Earnings Forecast
		8.1.3: Indirect Effects on Incremental Earnings
		8.1.4: Sunk Costs and Incremental Earnings
		8.1.5: Real-World Complexities
	8.2: Determining Free Cash Flow and NPV
		8.2.2: Calculating Free Cash Flow Directly
		8.2.3: Calculating the NPV
	8.3: Choosing among Alternatives
		8.3.2: Comparing Free Cash Flows for Cisco’s Alternatives
	8.4: Further Adjustments to Free Cash Flow
	8.5: Analyzing the Project
		8.5.2: Sensitivity Analysis
		8.5.3: Scenario Analysis
	Summary: Fundamentals of Capital Budgeting
		Key Terms
		Further Reading
		Problems
		Data Case
8 Appendix: MACRS Depreciation
	8 Appendix: MACRS Depreciation
9: Valuing Stocks
	Introduction: Valuing Stocks
	9.1: The Dividend-Discount Model
		9.1.2: Dividend Yields, Capital Gains, and Total Returns
		9.1.3: A Multiyear Investor
		9.1.4: The Dividend-Discount Model Equation
	9.2: Applying the Dividend-Discount Model
		9.2.2: Dividends Versus Investment and Growth
		9.2.3: Changing Growth Rates
		9.2.4: Limitations of the Dividend-Discount Model
	9.3: Total Payout and Free Cash Flow Valuation Models
		9.3.2: The Discounted Free Cash Flow Model
	9.4: Valuation Based on Comparable Firms
		9.4.2: Limitations of Multiples
		9.4.3: Comparison with Discounted Cash Flow Methods
		9.4.4: Stock Valuation Techniques: The Final Word
	9.5: Information, Competition, and Stock Prices
		9.5.2: Competition and Efficient Markets
		9.5.3: Lessons for Investors and Corporate Managers
		9.5.4: The Efficient Markets Hypothesis Versus No Arbitrage
	Summary: Valuing Stocks
		Key Terms
		Further Reading
		Problems
		Data Case
Part 4: Risk and Return
	Part 4: Risk and Return
10: Capital Markets and the Pricing of Risk
	Introduction: 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
		10.2.2: Expected Return
		10.2.3: Variance and Standard Deviation
	10.3: Historical Returns of Stocks and Bonds
		10.3.2: Average Annual Returns
		10.3.3: The Variance and Volatility of Returns
		10.3.4: Estimation Error: Using Past Returns to Predict the Future
	10.4: The Historical Tradeoff Between Risk and Return
		10.4.2: The Returns of Individual Stocks
	10.5: Common Versus Independent Risk
		10.5.2: The Role of Diversification
	10.6: Diversification in Stock Portfolios
		10.6.2: No Arbitrage and the Risk Premium
	10.7: Measuring Systematic Risk
		10.7.2: Sensitivity to Systematic Risk: Beta
	10.8: Beta and the Cost of Capital
		10.8.2: The Capital Asset Pricing Model
	Summary: Capital Markets and the Pricing of Risk
		Key Terms
		Further Reading
		Problems
		Data Case
11: Optimal Portfolio Choice and the Capital Asset Pricing Model
	Introduction: 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
		11.2.2: Determining Covariance and Correlation
		11.2.3: Computing a Portfolio’s Variance and Volatility
	11.3: The Volatility of a Large Portfolio
		11.3.2: Diversification with an Equally Weighted Portfolio
		11.3.3: Diversification with General Portfolios
	11.4: Risk Versus Return: Choosing an Efficient Portfolio
		11.4.2: The Effect of Correlation
		11.4.3: Short Sales
		11.4.4: Efficient Portfolios with Many Stocks
	11.5: Risk-Free Saving and Borrowing
		11.5.2: Borrowing and Buying Stocks on Margin
		11.5.3: Identifying the Tangent Portfolio
	11.6: The Efficient Portfolio and Required Returns
		11.6.2: Expected Returns and the Efficient Portfolio
	11.7: The Capital Asset Pricing Model
		11.7.2: Supply, Demand, and the Efficiency of the Market Portfolio
		11.7.3: Optimal Investing: The Capital Market Line
	11.8: Determining the Risk Premium
		11.8.2: The Security Market Line
		11.8.3: Beta of a Portfolio
		11.8.4: Summary of the Capital Asset Pricing Model
	Summary: Optimal Portfolio Choice and the Capital Asset Pricing Model
		Key Terms
		Further Reading
		Problems
		Data Case
11 Appendix: The CAPM with Differing Interest Rates
	Introduction: The CAPM with Differing Interest Rates
	11A.1: The Efficient Frontier with Differing Saving and Borrowing Rates
	11A.2: The Security Market Line with Differing Interest Rates
12: Estimating the Cost of Capital
	Introduction: Estimating the Cost of Capital
	12.1: The Equity Cost of Capital
	12.2: The Market Portfolio
		12.2.2: Market Indexes
		12.2.3: The Market Risk Premium
	12.3: Beta Estimation
		12.3.2: Identifying the Best-Fitting Line
		12.3.3: Using Linear Regression
	12.4: The Debt Cost of Capital
		12.4.2: Debt Betas
	12.5: A Project’s Cost of Capital
		12.5.2: Levered Firms as Comparables
		12.5.3: The Unlevered Cost of Capital
		12.5.4: Industry Asset Betas
	12.6: Project Risk Characteristics and Financing
		12.6.2: Financing and the Weighted Average Cost of Capital
	12.7: Final Thoughts on Using the CAPM
	Summary: Estimating the Cost of Capital
		Key Terms
		Further Reading
		Problems
		Data Case
12 Appendix: Practical Considerations When Forecasting Beta
	Introduction: Practical Considerations When Forecasting Beta
	12A.1: Time Horizon
	12A.2: The Market Proxy
	12A.3: Beta Variation and Extrapolation
	12A.4: Outliers
	12A.5: Other Considerations
	Summary: Practical Considerations When Forecasting Beta
		Data Case
13: Investor Behavior and Capital Market Efficiency
	Introduction: Investor Behavior and Capital Market Efficiency
	13.1: Competition and Capital Markets
		13.1.2: Profiting from Non-Zero Alpha Stocks
	13.2: Information and Rational Expectations
		13.2.2: Rational Expectations
	13.3: The Behavior of Individual Investors
		13.3.2: Excessive Trading and Overconfidence
		13.3.3: Individual Behavior and Market Prices
	13.4: Systematic Trading Biases
		13.4.2: Investor Attention, Mood, and Experience
		13.4.3: Herd Behavior
		13.4.4: Implications of Behavioral Biases
	13.5: The Efficiency of the Market Portfolio
		13.5.2: The Performance of Fund Managers
		13.5.3: The Winners and Losers
	13.6: Style-Based Techniques and the Market Efficiency Debate
		13.6.2: Momentum
		13.6.3: Implications of Positive-Alpha Trading Strategies
	13.7: Multifactor Models of Risk
		13.7.2: Smart Beta
		13.7.3: Long-Short Portfolios
		13.7.4: Selecting the Portfolios
		13.7.5: The Cost of Capital with Fama-French-Carhart Factor Specification
	13.8: Methods Used in Practice
		13.8.2: Investors
	Summary: Investor Behavior and Capital Market Efficiency
		Key Terms
		Further Reading
		Problems
13 Appendix: Building a Multifactor Model
	Introdcution: Building a Multifactor Model
Part 5: Capital Structure
	Part 5: Capital Structure
14: Capital Structure in a Perfect Market
	Introduction: Capital Structure in a Perfect Market
	14.1: Equity Versus Debt Financing
		14.1.2: Financing a Firm with Debt and Equity
		14.1.3: The Effect of Leverage on Risk and Return
	14.2: Modigliani-Miller I: Leverage, Arbitrage, and Firm Value
		14.2.2: Homemade Leverage
		14.2.3: The Market Value Balance Sheet
		14.2.4: Application: A Leveraged Recapitalization
	14.3: Modigliani-Miller II: Leverage, Risk, and the Cost of Capital
		14.3.2: Capital Budgeting and the Weighted Average Cost of Capital
		14.3.3: Computing the WACC with Multiple Securities
		14.3.4: Levered and Unlevered Betas
	14.4: Capital Structure Fallacies
		14.4.2: Equity Issuances and Dilution
	14.5: MM: Beyond the Propositions
	Summary: Capital Structure in a Perfect Market
		Key Terms
		Further Reading
		Problems
		Data Case
15: Debt and Taxes
	Introduction: Debt and Taxes
	15.1: The Interest Tax Deduction
	15.2: Valuing the Interest Tax Shield
		15.2.2: The Interest Tax Shield with Permanent Debt
		15.2.3: The Weighted Average Cost of Capital with Taxes
		15.2.4: The Interest Tax Shield with a Target Debt-Equity Ratio
	15.3: Recapitalizing to Capture the Tax Shield
		15.3.2: The Share Repurchase
		15.3.3: No Arbitrage Pricing
		15.3.4: Analyzing the Recap: The Market Value Balance Sheet
	15.4: Personal Taxes
		15.4.2: Determining the Actual Tax Advantage of Debt
		15.4.3: Valuing the Interest Tax Shield with Personal Taxes
	15.5: Optimal Capital Structure with Taxes
		15.5.2: Limits to the Tax Benefit of Debt
		15.5.3: Growth and Debt
		15.5.4: Other Tax Shields
		15.5.5: The Low Leverage Puzzle
	Summary: Debt and Taxes
		Key Terms
		Further Reading
		Problems
		Data Case
16: Financial Distress, Managerial Incentives, and Information
	Introduction: Financial Distress, Managerial Incentives, and Information
	16.1: Default and Bankruptcy in a Perfect Market
		16.1.2: Bankruptcy and Capital Structure
	16.2: The Costs of Bankruptcy and Financial Distress
		16.2.2: Direct Costs of Bankruptcy
		16.2.3: Indirect Costs of Financial Distress
	16.3: Financial Distress Costs and Firm Value
		16.3.2: Who Pays for Financial Distress Costs?
	16.4: Optimal Capital Structure: The Tradeoff Theory
		16.4.2: Optimal Leverage
	16.5: Exploiting Debt Holders: The Agency Costs of Leverage
		16.5.2: Debt Overhang and Under-Investment
		16.5.3: Agency Costs and the Value of Leverage
		16.5.4: The Leverage Ratchet Effect
		16.5.5: Debt Maturity and Covenants
	16.6: Motivating Managers: The Agency Benefits of Leverage
		16.6.2: Reduction of Wasteful Investment
		16.6.3: Leverage and Commitment
	16.7: Agency Costs and the Tradeoff Theory
		16.7.2: Debt Levels in Practice
	16.8: Asymmetric Information and Capital Structure
		16.8.2: Issuing Equity and Adverse Selection
		16.8.3: Implications for Equity Issuance
		16.8.4: Implications for Capital Structure
	16.9: Capital Structure: The Bottom Line
	Summary: Financial Distress, Managerial Incentives, and Information
		Key Terms
		Further Reading
		Problems
17: Payout Policy
	Introduction: Payout Policy
	17.1: Distributions to Shareholders
		17.1.2: Share Repurchases
	17.2: Comparison of Dividends and Share Repurchases
		17.2.2: Alternative Policy 2: Share Repurchase (No Dividend)
		17.2.3: Alternative Policy 3: High Dividend (Equity Issue)
		17.2.4: Modigliani-Miller and Dividend Policy Irrelevance
		17.2.5: Dividend Policy with Perfect Capital Markets
	17.3: The Tax Disadvantage of Dividends
		17.3.2: Optimal Dividend Policy with Taxes
	17.4: Dividend Capture and Tax Clienteles
		17.4.2: Tax Differences Across Investors
		17.4.3: Clientele Effects
	17.5: Payout Versus Retention of Cash
		17.5.2: Taxes and Cash Retention
		17.5.3: Adjusting for Investor Taxes
		17.5.4: Issuance and Distress Costs
		17.5.5: Agency Costs of Retaining Cash
	17.6: Signaling with Payout Policy
		17.6.2: Dividend Signaling
		17.6.3: Signaling and Share Repurchases
	17.7: Stock Dividends, Splits, and Spin-Offs
		17.7.2: Spin-Offs
	Summary: Payout Policy
		Key Terms
		Further Reading
		Problems
		Data Case
Part 6: Advanced Valuation
	Part 6: Advanced Valuation
18: Capital Budgeting and Valuation with Leverage
	Introduction: Capital Budgeting and Valuation with Leverage
	18.1: Overview of Key Concepts
	18.2: The Weighted Average Cost of Capital Method
		18.2.2: Summary of the WACC Method
		18.2.3: Implementing a Constant Debt-Equity Ratio
	18.3: The Adjusted Present Value Method
		18.3.2: Valuing the Interest Tax Shield
		18.3.3: Summary of the APV Method
	18.4: The Flow-to-Equity Method
		18.4.2: Valuing Equity Cash Flows
		18.4.3: Summary of the Flow-to-Equity Method
	18.5: Project-Based Costs of Capital
		18.5.2: Project Leverage and the Equity Cost of Capital
		18.5.3: Determining the Incremental Leverage of a Project
	18.6: APV with Other Leverage Policies
		18.6.2: Predetermined Debt Levels
		18.6.3: A Comparison of Methods
	18.7: Other Effects of Financing
		18.7.2: Security Mispricing
		18.7.3: Financial Distress and Agency Costs
	18.8: Advanced Topics in Capital Budgeting
		18.8.2: Leverage and the Cost of Capital
		18.8.3: The WACC or FTE Method with Changing Leverage
		18.8.4: Personal Taxes
	Summary: Capital Budgeting and Valuation with Leverage
		Key Terms
		Further Reading
		Problems
		Data Case
18 Appendix: Foundations and Further Details
	Introduction: Foundations and Further Details
	18A.1: Deriving the WACC Method
	18A.2: The Levered and Unlevered Cost of Capital
	18A.3: Solving for Leverage and Value Simultaneously
	18A.4: The Residual Income and Economic Value Added Valuation Methods
19: Valuation and Financial Modeling: A Case Study
	Introduction: Valuation and Financial Modeling: A Case Study
	19.1: Valuation Using Comparables
	19.2: The Business Plan
		19.2.2: Capital Expenditures: A Needed Expansion
		19.2.3: Working Capital Management
		19.2.4: Capital Structure Changes: Levering Up
	19.3: Building the Financial Model
		19.3.2: Working Capital Requirements
		19.3.3: Forecasting Free Cash Flow
		19.3.4: The Balance Sheet and Statement of Cash Flows (Optional)
	19.4: Estimating the Cost of Capital
		19.4.2: Unlevering Beta
		19.4.3: Ideko’s Unlevered Cost of Capital
	19.5: Valuing the Investment
		19.5.2: The Discounted Cash Flow Approach to Continuation Value
		19.5.3: APV Valuation of Ideko’s Equity
		19.5.4: A Reality Check
		19.5.5: IRR and Cash Multiples
	19.6: Sensitivity Analysis
	Summary: Valuation and Financial Modeling: A Case Study
		Key Terms
		Further Reading
		Problems
19 Appendix: Compensating Management
	19 Appendix: Compensating Management
Copyright Page and Preface
	Section 1: Dedication and Copyright
	Section 2: Bridging Theory and Practice
	Section 3: Teaching Students to Think Finance
	Section 4: MyLab Finance
	Section 5: Improving Results
	Section 6: About the Authors
	Section 7: Preface
	Section 8: Common Symbols and Notation
	Section 9: Features by Chapter
Glossary
	Glossary