Quantitative Corporate Finance

Why a Third Edition of Quantitative Corporate Finance?
Why a Second Edition of Quantitative Corporate Finance?
Contents
Chapter 1: Introduction: Capital Formation, Risk, and the Corporation
	1.1 Financial Mathematics and Theory
	1.2 Growth and Survival of the Firm
	1.3 Risk and Uncertainty Inherent in Finance
	1.4 Types of Business Risk
	1.5 Financial Risk
	1.6 Division of Risk, Income, and Control
	1.7 Profitability and Risk
	1.8 Areas Covered in This Book
	References
Chapter 2: The Corporation and Other Forms of Business Organization
	2.1 The Sole or Single Proprietorship
	2.2 The Partnership
	2.3 The Limited Partnership
	2.4 The Corporation, Its Basic Characteristics
		2.4.1 Chartering the Corporation
		2.4.2 Administrative Organization
	2.5 Major Rights of the Shareholders
	2.6 The Advantages of the Corporate Form
	2.7 The Corporation in 2020: Trying to Maintain Economic Growth in the COVID-19 Pandemic with the Payroll Protection Plan
	References
Chapter 3: The Corporation Balance Sheet
	3.1 The Balance Sheet
	3.2 Assets
	3.3 Liabilities and Stockholder Equity
	3.4 Book Value of Common Stock
	3.5 Summary and Conclusions
	References
Chapter 4: The Annual Operating Statements: The Income Statement and Cash Flow Statement
	4.1 Form and Content of the Income Statement
	4.2 Retained Earnings vs Dividends
	4.3 Income Statement in the World of Business: IBM, Boeing, and Dominion Energy
	4.4 Annual Cash Flow Statement
	4.5 US Firm Cash Flow Analysis, 1971-2020
	4.6 Summary
	References
Chapter 5: Financing Current Operations and Efficiency Ratio Analysis
	5.1 Working Capital Concepts
	5.2 Snapshots of Financial Ratios
	5.3 The Calculations of Financial Ratios and Their Implications for Stockholder Wealth Maximization
		5.3.1 The Dupont Analysis Return on Invested Capital
		5.3.2 Current Ratio
		5.3.3 Sales to Total Assets
		5.3.4 The Altman Z Model
	5.4 The Time Series of WRDS Ratios in the United States, 1970-2020
	5.5 Industry Production of Financial Ratios
	5.6 Limitations of Ratio Analysis
	5.7 A Summary of Ratio Analysis
	References
Chapter 6: Financing Current Operations and the Cash Budget
	6.1 Sources of Short-Term Financing
	6.2 Trade Credit
	6.3 Bank Credit
	6.4 Other Forms of Short-Term Financing
	6.5 Quantitative Working Capital Models: Cash Management
	6.6 The Cash Budget
	References
Chapter 7: Capital and New Issue Markets
	7.1 The Secondary Markets
	7.2 The Primary Market
	7.3 The Originating House
		7.3.1 The Underwriting Group
		7.3.2 The Selling Group
		7.3.3 Other Aspects of Investment Banking
	7.4 Initial Public Offerings (IPOs)
		7.4.1 Expansion of a Privately Held Firm into a Public Corporation
		7.4.2 The Problem of Control
		7.4.3 Promotion of a Subsidiary by Parent Corporations
	7.5 Formation of a Joint Subsidiary by Two or More Parent Companies
	7.6 The SEC and the Flotation of New Issues
		7.6.1 Secondary Floatations
	7.7 Issuing Securities Through Rights
	7.8 Stock Tenders
	7.9 Costs of Floating an Issue
	7.10 Regulation of the Capital Markets
	7.11 The Capital Market as a Source of Funds
	7.12 The Debate on the Optimal Organization of the Capital Market
	7.13 Capital Markets and Long-Term Economic Growth
	References
Chapter 8: The Equity of the Corporation: Common and Preferred Stock
	8.1 Common Stock
	8.2 Rewards of Common Shareholders
	8.3 The Corporate Sector: A Net Exporter of Funds
	8.4 Corporate Exports and the Maximization of Stockholder Wealth
	8.5 Definitions of the Value of Common Shares
		8.5.1 Book Value
		8.5.2 Market Value
		8.5.3 Intrinsic or ``Normal´´ Value
	8.6 Stock Splits and Stock Dividends
	8.7 Stock Prices and Dividends: An Example of Valuation
		8.7.1 Noncash-Paying Growth Shares
		8.7.2 Valuing a Dividend-Paying Super-Growth Stock
		8.7.3 Super Growth Cannot Be Infinite
		8.7.4 The Paradox of the Low Current Return on Growth Options
	8.8 Risk and Returns to Growth Investments
		8.8.1 The Cost of Capital to a Growth Firm
		8.8.2 The Cost of Common Stock Financing: The Norm
	8.9 Preferred Stock
		8.9.1 Features of Preferred Stock
		8.9.2 Rational for Preferred Stock Financing
		8.9.3 Convertible Preferred
		8.9.4 Protective Features on Preferred Shares
		8.9.5 Floating New Common Equity Issues
	8.10 Advantage of New Share Financing
	References
Chapter 9: Long-Term Debt
	9.1 Bonds
		9.1.1 Mortgage Agreement
		9.1.2 Subordinate Mortgages
		9.1.3 Net Working Capital Maintenance Requirements
		9.1.4 Restrictions on Creating New Debt
	9.2 Other Types of Long-Term Debt
		9.2.1 Term Loans
		9.2.2 Private Placements
		9.2.3 Equipment Trust Certificates
	9.3 Long-Term Lease
	9.4 Lease Accounting: Recent Changes
	9.5 The Cost of Debt Capital
	9.6 Level and Structure of the Interest Rates
	9.7 The Liquidity Preference Theory of the Term Structure
		9.7.1 The Pure Expectations Theory of the Term Structure
		9.7.2 The Market Segmentation Theory of the Term Structure
		9.7.3 Setting the Rate on a New Issue
	9.8 The Call Feature on Bonds
	9.9 Convertible Bonds and Bonds with Warrants Attached
	9.10 The Advantages and Disadvantages of Long-Term Debt
	9.11 Malkiel´s Bond Theorems
	9.12 Retirement of Debt
		9.12.1 Toward a More Conservative Capital Structure
		9.12.2 Decreasing the Level of Operations
		9.12.3 Methods for Retiring Specific Issues
		9.12.4 Repurchase on the Open Market
		9.12.5 Repayment or Refunding at Maturity
		9.12.6 Gradual Reduction of Debt Issue by Sinking Fund Purchase
		9.12.7 Reduction of Debt Through Serial Issues
		9.12.8 Debt Retirement and the Call Privilege
		9.12.9 Forced Conversion
	9.13 Summary
	References
Chapter 10: Debt, Equity, the Optimal Financial Structure, and the Cost of Funds
	10.1 Definition of Leverage: Profits and Financial Risk
	10.2 Illustrations of Leverage: Return and Risk
	10.3 Surrogate Evidence on the Development of ``Optimum´´ Financial Structure
	10.4 The Pure Theory of the Optimal Financial Structure
	10.5 Modigliani and Miller: Constant Capital Costs
	10.6 The Optimal Capital Structure and the M&M Hypothesis
	10.7 Empirical Factors Influencing Financial Structures
	10.8 Measures for Approximating Financial Risk
	10.9 Outside Financing Capacity
	References
Chapter 11: Investing in Assets: Theory of Investment Decision-Making
	11.1 Net Present Value and the Internal Rate of Return
	11.2 Mutually Exclusive Projects
	11.3 Difference in Project Size and Durations of Cash Flow
	11.4 Lowest Annualized Total Costs
	11.5 The Irrational Fixed Capital Budget
	11.6 Real Investments and the Cost of Funds
	11.7 The Adjusted Present Value (APV) Model
		11.7.1 Estimating Cash Flows
		11.7.2 Gathering Information
		11.7.3 Financial Statement: Pitfalls
		11.7.4 Anatomy of Core Financial Statements
		11.7.5 Definition of Cash Flows
	11.8 CFO Practice
	11.9 Current Costs of the ``Optimum´´ Financial Mix
	11.10 The Effect of Taxes on the Financial Structure
	11.11 Costing the Components of the Financial Mix
		11.11.1 Cost of Trade Credit
		11.11.2 Cost of Bank Credit
		11.11.3 Cost of Long-Term Debt
		11.11.4 Cost of Preferred Stock
			11.11.4.1 Cost of Common Stock
			11.11.4.2 Internal Funds
		11.11.5 The Cost of Retained Earnings
		11.11.6 Other Internal Funds-Depreciation, Depletion, etc.
	11.12 Investments Under Negative Interest Rates and Hyperinflation
		11.12.1 Negative Interest Rates
		11.12.2 Hyperinflationary Regime
	11.13 Summary
	Appendix A: Application of APV
		Basic Extensions of Valuation Theory
		Application of APV
	References
Chapter 12: Regression Analysis and Estimating Regression Models
	12.1 Estimating an Ordinary Least Squares Regression Line
	12.2 Autocorrelation
	12.3 Estimating Multiple Regression Lines
	12.4 Influential Observations and Possible Outliers and the Application of Robust Regression
	12.5 The Conference Board Composite Index of Leading Economic Indicators and Real US GDP Growth: A Regression Example Includin...
	12.6 The Conference Board Composite Index of Leading Economic Indicators and the US Unemployment Rate: Another Regression Exam...
	12.7 Summary and Conclusions
	Appendices
		Appendix A: Influential Observations and Outlier Detection
		The US Leading Economic Indicators
		Appendix C: Identifying Influential Observations in a Regression
	References
Chapter 13: Time Series Modeling and the Forecasting Effectiveness of the US Leading Economic Indicators
	13.1 Basic Statistical Properties of Economic Series
		13.1.1 The Autoregressive and Moving Average Processes
	13.2 ARMA Model Identification in Practice
	13.3 Estimating an ARIMA RWD for US GDP, 1959Q2-2020Q3
		13.3.1 Estimating an ARIMA RWD for DLGDP, 1959Q2-2020Q3
	13.4 Estimating a Transfer Function Time Series Model of US GDP with the US Leading Economic Indicator Time Series as Its Input
	13.5 Forecasting Effectiveness of Time Series Modeling Using Autometrics to Estimate Outliers and Breaks: Studies of the US Re...
	13.6 Automatic Time Series Modeling of the Unemployment Rate Using Leading Economic Indicators (LEI)
	13.7 Summary and Conclusions
	Appendix A: Granger Causality Modeling of the Change in the US Unemployment Rate with First-Differenced Changes in the LEI Tim...
	Append B: Autometrics and Saturation Variables
	References
Chapter 14: Risk and Return of Equity, the Capital Asset Pricing Model, and Stock Selection for Efficient Portfolio Constructi...
	14.1 Calculating Holding Period Returns
	14.2 An Introduction to Modern Portfolio Theory and Betas
	14.3 Expected Returns Versus Historic Mean Returns
	14.4 Fundamental Analysis and Stock Selection
	14.5 Modern Portfolio Theory and GPRD: An Example of Markowitz Analysis
	14.6 Further Estimations of a Composite Equity Valuation Model: The Roles of Analyst Forecasts and Momentum in Stock Selection
		14.6.1 REG8 Model
		14.6.2 REG9 Model
		14.6.3 REG10 Model
	14.7 Summary and Conclusions
	Appendices
		Appendix A: The Three-Asset Case
		Appendix B: ICs
		Appendix C: Matrix Algebra
			Matrix algebra in Excel
			Portfolio Statistics with Matrix Algebra
	References
Chapter 15: Multifactor Risk Models and Portfolio Construction and Management
	15.1 The Barra System
	15.2 Barra Model Mathematics
	15.3 The Barra Multifactor Model and Analysts´ Forecasts, Revisions, and Breadth
	15.4 Early Alternative Multi-Beta Risk Models
	15.5 APT Approach
	15.6 Applying the Blin and Blender APT Model
	15.7 Applying the Blin and Blender APT Model, BARRA, and Axioma: The McKinley Capital Management (MCM) Horse Race Tests
	15.8 Why Use the Axioma Statistical Model?
	15.9 Alpha Alignment Factor
	15.10 Financial Anomalies in Global Portfolio Management: Evidence Through COVID-19
	15.11 Summary and Conclusions
	Appendices
		Appendix A: US-E3 Descriptor Definitions
			1. Volatility
			2. Momentum
			3. Size
			4. Size Nonlinearity
			5. Trading Activity
			6. Growth
			7. Earnings Yield
			8. Value
			9. Earnings Variability
			10. Leverage
			11. Currency Sensitivity
			12. Dividend Yield
			13. Nonestimation Universe Indicator
		Appendix B: Factor Alignment Problems and Quantitative Portfolio Management
	Bibliography
	References
Chapter 16: Options
	16.1 The Malkiel-Quandt Notation
	16.2 The Binominal Option Pricing Model
	16.3 The More Traditional Black and Scholes Option Pricing Model Derivation
	16.4 Black and Scholes Model Calculation
	16.5 The OPM and Corporate Liabilities
	References
Chapter 17: Real Options
	17.1 The Option to Delay a Project
	17.2 Implications of Viewing the Right to Delay a Project as an Option
	17.3 Abandonment Value
	17.4 Options in Investment Analysis/Capital Budgeting
	References
Chapter 18: Mergers and Acquisitions
	18.1 Noneconomic Motives for Combinations
	18.2 Holding Companies
	18.3 A Merger History of the United States
	18.4 Using an Accounting Basis
	18.5 The Economic Basis for Acquisitions
	18.6 Theories of Conglomerate Mergers
	18.7 Combinations Correcting Economic or Financial Imbalances
	18.8 Combinations Increasing Market Dominance
	18.9 Combinations for Tax Advantages
	18.10 The Larson-Gonedes Exchange Ratio Model
	18.11 Valuation of a Merger Candidate
	18.12 Testing for Synergism: Do Mergers Enhance Stockholder Wealth?
	18.13 Divestment and Spinoff
	18.14 Summary and Conclusions
	References
Chapter 19: Liquidation, Failure, Bankruptcy, and Reorganization
	19.1 Voluntary Liquidation
	19.2 A Liquidation Example
	19.3 Remaining in Business
	19.4 Failure
	19.5 Informal Remedies
	19.6 Bankruptcy
		19.6.1 Bankruptcy Procedures
		19.6.2 Priorities in Liquidation
		19.6.3 Reorganization
		19.6.4 Analysis of the Reorganization
	19.7 Summary
	References
Chapter 20: Corporation Growth and Economic Growth and Stability
	20.1 Factors in Economic Growth
	20.2 Savings and Real Investment
	20.3 Corporation Investment Spending and Economic Stability
	20.4 Monetary Policy, the Cost of Capital, and the Firm Investment Process
	20.5 Economic Growth and Firm Growth
	20.6 Firm Growth and Economic Growth
	References
Chapter 21: International Business Finance
	21.1 Currency Exchange Rates
	21.2 International Diversification
	21.3 International Stock Selection and Portfolio Construction and Optimization
	21.4 International Corporate Finance Decisions
	References
Chapter 22: Management-Stockholder Relations: Is Optimal Behavior All That Is Necessary?
	22.1 General Agreement and Potential Conflicts in Management and Control
	22.2 Areas of Potential Conflict
		22.2.1 Managerial and Board of Directors Compensation
		22.2.2 Executive Compensation
		22.2.3 Board of Directors
		22.2.4 Stock Options
		22.2.5 Bonuses
		22.2.6 Dividends, Buy Backs, and Retained Earnings
		22.2.7 Excessively Conservative Financial or Asset Structures
		22.2.8 Liquidating or Selling the Firm
		22.2.9 Risky Acquisitions
	22.3 Turning Agents into Owners
	22.4 The Diseconomies of Financial Scams
	22.5 Insider Trading
	22.6 Conflict of Interests
	22.7 Stockholder Remedies
		22.7.1 Sell His Shares
		22.7.2 Institute a Stockholder Suit
		22.7.3 Organize a Proxy Fight to Vote Out the Management
	22.8 To Whom Is Management Responsible?
	22.9 Summary and Conclusions
	Appendix A
		From Raw to Normalized Score Definitions
			Raw Score
			Normalized Scores
		Fama and French-Weighted Portfolios
		A Return to Optimized Portfolio Construction and Management
			CTEF MVTaR with Normalized KLD Criteria
		The Interaction of Environmental Scores and Expected Return Models
		Summary of SRI/ESG Portfolio Construction and Analysis
	References
Index