Financial Times Handbook of Corporate Finance: A Business Companion to Financial Markets, Decisions & Techniques

Cover......Page 1
Handbook of Corporate Finance......Page 2
Contents......Page 6
About the author......Page 14
Acknowledgments......Page 15
Author’s acknowledgments......Page 20
What’s new in the second edition......Page 21
Introduction......Page 22
What is the firm’s objective?......Page 28
 A common purpose......Page 29
 The assumed objective for finance......Page 34
 Profit maximization is not the same as shareholder wealth-maximization......Page 40
 Corporate governance......Page 42
 What happens if control over directors is weak?......Page 53
 Conclusion......Page 55
 Notes......Page 56
Section I: Investing in Projects......Page 58
 State-of-the-art project appraisal techniques......Page 60
  Introduction......Page 61
  How do you know whether an investment generates value for shareholders?......Page 62
  State-of-the-art technique 1: net present value......Page 67
  State-of-the-art technique 2: internal rate of return......Page 77
  Choosing between NPV and IRR......Page 85
  Conclusion......Page 87
  Appendix 2.1 Mathematical tools for finance......Page 88
 Traditional appraisal techniques......Page 98
  Payback......Page 99
  Accounting rate of return......Page 104
  Internal rate of return: reasons for continued popularity......Page 107
  Conclusion......Page 108
 Investment decision-making in companies......Page 110
  Introduction......Page 111
  The managerial art of investment selection......Page 112
  More tricky issues in real-world project appraisal......Page 118
  Taxation and investment appraisal......Page 122
  The stages of investment decision-making......Page 125
  Conclusion......Page 134
 Allowing for risk in project appraisal......Page 136
  What is risk?......Page 138
  Sensitivity analysis......Page 141
  Scenario analysis......Page 147
  Probability analysis......Page 149
  Evidence of risk analysis in practice......Page 155
  Real options (managerial options)......Page 156
  Notes......Page 163
Section II: Shareholder Value......Page 164
 Value managed vs earnings managed companies......Page 166
  The pervasiveness of the value approach......Page 167
  Case study: Compass Group......Page 170
  Why shareholder value?......Page 172
  Earnings-based management’s failings......Page 174
  Return on capital employed (ROCE) has failings......Page 181
  Focusing on earnings is not the same as value......Page 182
  How a business creates value......Page 183
  The five actions for creating value......Page 186
  Conclusion......Page 192
  Notes......Page 193
 Value through strategy......Page 194
  The firm’s objective......Page 195
  Strategic business unit management......Page 197
  Strategic assessment......Page 199
  Strategic choice......Page 207
  What use is the head office?......Page 208
  Targets and motivation......Page 214
  Notes......Page 215
 Measures of value creation......Page 216
  Using cash flow to measure value......Page 217
  Shareholder value analysis......Page 223
  Economic profit......Page 232
  Economic value added (EVA®)......Page 240
  Notes......Page 242
 Entire firm value measurement......Page 246
  Introduction......Page 247
  Total shareholder return (TSR)......Page 248
  Wealth Added Index (WAI)......Page 251
  Market Value Added (MVA)......Page 254
  Excess return (ER)......Page 258
  Market to book ratio (MBR)......Page 259
  Notes......Page 261
 What is the company’s cost of capital?......Page 262
  A word of warning......Page 263
  The required rate of return......Page 264
  Two sides of the same coin......Page 265
  The weighted average cost of capital (WACC)......Page 266
  The cost of equity capital......Page 272
  The cost of debt capital......Page 284
  The cost of preference share capital......Page 287
  Calculating the weights......Page 288
  Classic error......Page 289
  Applying the WACC to projects and SBUs......Page 290
  What do managers actually do?......Page 291
  Pre-tax and post-tax WACC......Page 295
  Implementation issues......Page 298
  Which risk-free rate?......Page 300
  Fundamental beta......Page 303
  Some thoughts on the cost of capital......Page 304
  Notes......Page 306
 Mergers: impulse, regret and success......Page 308
  The merger decision......Page 309
  You say acquisition, I say merger......Page 310
  Merger statistics......Page 312
  What drives firms to merge?......Page 315
  Do the shareholders of acquiring firms gain from mergers?......Page 329
  Managing mergers......Page 332
  Notes......Page 341
 The merger process......Page 344
  The City Code on Takeovers and Mergers......Page 345
  Action before the bid......Page 347
  After the bid......Page 353
  Defence tactics......Page 354
  Paying for the target’s shares......Page 356
  Websites......Page 362
  Notes......Page 363
 Valuing companies......Page 364
  The two skills......Page 365
  Valuation using net asset value (NAV)......Page 366
  Income flow is the key......Page 371
  Dividend valuation methods......Page 372
  How do you estimate future growth?......Page 379
  Price–earnings ratio (PER) model......Page 381
  Valuation using cash flow......Page 389
  Valuing unquoted shares......Page 397
  Unusual companies......Page 398
  Managerial control changes the valuation......Page 399
  Notes......Page 408
 What pay-outs should we make to shareholders?......Page 410
  Defining the problem......Page 411
  Theorists in their hypothetical world......Page 412
  What about the world in which we live?......Page 415
  Some muddying factors......Page 418
  Scrip dividends......Page 425
  Share buy-backs and special dividends......Page 426
  A round-up of the arguments......Page 429
  Conclusion......Page 431
  Notes......Page 432
Section III: Finance Raising......Page 434
 Debt finance available to firms of all sizes......Page 436
  Introduction......Page 437
  Contrasting debt finance with equity......Page 438
  Bank borrowing......Page 441
  Overdraft......Page 445
  Term loans......Page 449
  Trade credit......Page 451
  Factoring......Page 456
  Hire purchase......Page 461
  Leasing......Page 463
  Bills of exchange......Page 470
  Acceptance credits (bank bills or banker’s acceptance)......Page 471
  Conclusion......Page 472
  Notes......Page 473
 Debt finance from the financial markets......Page 474
  Introduction......Page 475
  Bonds......Page 476
  Syndicated loans......Page 481
  Credit rating......Page 482
  Mezzanine debt and high-yield (junk) bonds......Page 486
  Convertible bonds......Page 490
  Valuing bonds......Page 494
  International sources of debt finance......Page 498
  Medium-term notes (MTNs)......Page 505
  Commercial paper......Page 508
  Project finance......Page 509
  Sale and leaseback......Page 512
  Securitisation......Page 514
  Conclusion......Page 516
  Notes......Page 517
 Raising equity capital......Page 518
  Introduction......Page 520
  What is equity capital?......Page 521
  Preference shares......Page 524
  Floating on the Main Market (Official List)......Page 526
  What managers need to consider......Page 527
  Methods of issue......Page 533
  Timetable for a new issue (initial public offering, IPO)......Page 536
  How does an alternative investment market (AIM) flotation differ from one on the Official List?......Page 539
  The costs of new issues......Page 542
  Rights issues......Page 545
  Other equity issues......Page 551
  Scrip issues......Page 554
  Equity finance for unquoted firms......Page 555
  Private equity categories......Page 561
  Conclusion......Page 563
  Notes......Page 565
Section IV: Managing Risk......Page 568
 The financial risks managers have to deal with......Page 570
  Introduction......Page 571
  Types of risk......Page 572
  Risk in the financial structure......Page 577
  The dangers of gearing......Page 585
  What do we mean by gearing?......Page 586
  Agency costs......Page 598
  Pecking order......Page 599
  Some further thoughts on debt finance......Page 603
  Rounding up the capital structure arguments......Page 605
  Websites......Page 608
  Notes......Page 609
 Options......Page 610
  What is a derivative?......Page 611
  A long history......Page 612
  Share options......Page 613
  Index options......Page 624
  Corporate uses of options......Page 626
  Real options......Page 627
  Conclusion......Page 628
  Notes......Page 629
 Using futures, forwards and swaps to manage risk......Page 630
  Futures......Page 631
  Short-term interest rate futures......Page 641
  Forwards......Page 647
  Forward rate agreements (FRAs)......Page 648
  Caps......Page 649
  Swaps......Page 652
  Derivatives users......Page 656
  Over-the-counter (OTC) and exchange-traded derivatives......Page 658
  Websites......Page 660
  Notes......Page 661
 Managing exchange-rate risk......Page 662
  Introduction......Page 663
  The impact of currency rate changes on the firm......Page 664
  Volatility in foreign exchange......Page 665
  The currency markets......Page 667
  Exchange rates......Page 668
  Covering in the forward market......Page 672
  Types of foreign-exchange risk......Page 675
  Transaction risk strategies......Page 677
  Managing translation risk......Page 691
  Managing economic risk......Page 692
  Conclusion......Page 693
  Notes......Page 694
Appendix I Future value of £1 at compound interest......Page 696
Appendix II Present value of £1 at compound interest......Page 697
Appendix III Present value of an annuity of £1 at compound interest......Page 698
Appendix IV Future value of an annuity of £1 at compound interest......Page 699
Glossary......Page 700
Further reading......Page 770
Index......Page 798