Corporate Finance - European Edition

Title......Page 5
Copyright......Page 6
Dedication......Page 8
Brief table of contents......Page 9
Detailed table of contents......Page 11
Preface......Page 26
Guided Tour......Page 27
Connect Page......Page 30
About the Author......Page 36
Acknowledgements......Page 37
Half Title......Page 2
Part 1: Overview......Page 43
1 Introduction to Corporate Finance......Page 45
1.1 What is Corporate Finance?......Page 46
1.2 The Goal of Financial Management......Page 54
1.3 Financial Markets......Page 57
1.4 Corporate Finance in Action: The Case of Google......Page 65
Questions and Problems......Page 69
Practical Case Study......Page 74
Additional Reading......Page 75
Endnote......Page 76
2 Corporate Governance......Page 77
2.1 The Corporate Firm......Page 79
2.2 The Agency Problem and Control of the Corporation......Page 87
2.3 The Governance Structure of Corporations......Page 100
2.4 The OECD Principles of Corporate Governance......Page 104
2.5 International Corporate Governance......Page 111
2.6 Corporate Governance in Action: Starbucks......Page 115
Questions and Problems......Page 117
Mini Case......Page 120
Additional Reading......Page 121
Part 2: Value and Capital Budgeting......Page 131
3 Financial Statement Analysis......Page 132
3.1 The Statement of Financial Position......Page 133
3.2 The Income Statement......Page 136
3.3 Taxes......Page 137
3.5 Cash Flow......Page 140
3.6 Financial Statement Analysis......Page 143
3.7 Ratio Analysis......Page 144
3.8 The Du Pont Identity......Page 154
3.9 Using Financial Statement Information......Page 156
Summary and Conclusions......Page 159
Questions and Problems......Page 160
Exam Question (45 minutes)......Page 166
Mini Case......Page 167
Additional Reading......Page 170
Endnote......Page 171
4 Discounted Cash Flow Valuation......Page 172
4.1 Valuation: The One-period Case......Page 173
4.2 Valuation: The Multi-period Case......Page 177
4.3 Compounding Periods......Page 185
4.4 Simplifications......Page 189
Summary and Conclusions......Page 199
Questions and Problems......Page 201
Exam Question (45 minutes)......Page 205
Mini Case......Page 206
Endnotes......Page 207
5 Bond, Equity and Firm Valuation......Page 208
5.1 Definition and Example of a Bond......Page 209
5.2 How to Value Bonds......Page 211
5.3 Bond Concepts......Page 213
5.4 The Present Value of Equity......Page 215
5.5 Estimates of Parameters in the Dividend Growth Model......Page 220
5.6 Growth Opportunities......Page 225
5.7 The Dividend Growth Model and the NPVGO Model......Page 229
5.8 Stock Market Reporting......Page 231
5.9 Firm Valuation......Page 233
Summary and Conclusions......Page 238
Questions and Problems......Page 239
Mini Case......Page 245
Additional Reading......Page 247
Endnotes......Page 248
6 Net Present Value and Other Investment Rules......Page 249
6.1 Why Use Net Present Value?......Page 250
6.2 The Payback Period Method......Page 252
6.3 The Discounted Payback Period Method......Page 256
6.4 The Average Accounting Return Method......Page 257
6.5 The Internal Rate of Return......Page 260
6.6 Problems with the IRR Approach......Page 262
6.7 The Profitability Index......Page 270
6.8 The Practice of Capital Budgeting......Page 273
Summary and Conclusions......Page 274
Questions and Problems......Page 275
Exam Question (45 minutes)......Page 282
Mini Case......Page 283
Additional Reading......Page 284
Endnotes......Page 285
7 Making Capital Investment Decisions......Page 286
7.1 Incremental Cash Flows......Page 287
7.2 Energy Renewables Ltd: An Example......Page 290
7.3 Inflation and Capital Budgeting......Page 299
7.4 Alternative Definitions of Operating Cash Flow......Page 303
7.5 Investments of Unequal Lives: The Equivalent Annual Cost Method......Page 305
Questions and Problems......Page 310
Mini Case......Page 319
Practical Case Study......Page 320
Additional Reading......Page 322
Endnote......Page 323
8 Risk Analysis, Real Options and Capital Budgeting......Page 324
8.1 Sensitivity Analysis, Scenario Analysis and Break-even Analysis......Page 325
8.2 Monte Carlo Simulation......Page 334
8.3 Real Options......Page 339
8.4 Decision Trees......Page 343
Summary and Conclusions......Page 345
Questions and Problems......Page 346
Exam Question (45 minutes)......Page 355
Mini Case......Page 356
Practical Case Study......Page 357
Relevant Accounting Standards......Page 358
Endnotes......Page 359
Part 3: Risk......Page 360
9 Risk and Return: Lessons from Market History......Page 362
9.1 Returns......Page 363
9.2 Holding Period Returns......Page 367
9.3 Return Statistics......Page 369
9.4 Average Stock Returns and Risk-free Returns......Page 372
9.5 Risk Statistics......Page 373
9.6 More on Average Returns......Page 377
Summary and Conclusions......Page 380
Questions and Problems......Page 381
Mini Case......Page 385
Practical Case Study......Page 387
Additional Reading......Page 388
Endnotes......Page 389
10 Risk and Return: The Capital Asset Pricing Model......Page 390
10.1 Individual Securities......Page 391
10.2 Expected Return, Variance and Covariance......Page 392
10.3 The Return and Risk for Portfolios......Page 399
10.4 The Efficient Set for Two Assets......Page 404
10.5 The Efficient Set for Many Securities......Page 408
10.6 Diversification: An Example......Page 411
10.7 Riskless Borrowing and Lending......Page 414
10.8 Market Equilibrium......Page 418
10.9 The Capital Asset Pricing Model......Page 423
10.10 Criticisms of the CAPM......Page 427
10.11 Variations of the CAPM......Page 429
Summary and Conclusions......Page 430
Questions and Problems......Page 431
Exam Question (45 minutes)......Page 438
Mini Case......Page 439
References......Page 440
Additional Reading......Page 441
Endnotes......Page 442
11 Factor Models and the Arbitrage Pricing Theory......Page 444
11.1 Factor Models: Announcements, Surprises and Expected Returns......Page 445
11.2 Risk: Systematic and Unsystematic......Page 447
11.3 Systematic Risk and Betas......Page 448
11.4 Portfolios and Factor Models......Page 452
11.5 Betas and Expected Returns......Page 456
11.6 The Capital Asset Pricing Model and the Arbitrage Pricing Theory......Page 459
Summary and Conclusions......Page 460
Questions and Problems......Page 461
Mini Case......Page 469
Additional Reading......Page 470
Endnotes......Page 471
12 Risk, Cost of Capital and Capital Budgeting......Page 472
12.1 The Cost of Equity Capital......Page 473
12.2 Estimation of Beta......Page 476
12.3 Determinants of Beta......Page 480
12.4 Extensions of the Basic Model......Page 483
12.5 Estimating Carrefour Group’s Cost of Capital......Page 487
12.6 Reducing the Cost of Capital......Page 490
12.7 How Do Corporations Estimate Cost of Capital in Practice?......Page 495
12.8 Economic Value Added and the Measurement of Financial Performance......Page 496
Summary and Conclusions......Page 499
Questions and Problems......Page 500
Mini Case......Page 506
References......Page 507
Additional Reading......Page 508
Endnotes......Page 509
13 Efficient Capital Markets and Behavioural Finance......Page 510
13.1 Can Financing Decisions Create Value?......Page 511
13.2 A Description of Efficient Capital Markets......Page 513
13.3 The Different Types of Efficiency......Page 516
13.4 The Evidence......Page 520
13.5 The Behavioural Challenge to Market Efficiency......Page 527
13.6 Empirical Challenges to Market Efficiency......Page 529
13.7 Reviewing the Differences......Page 533
13.8 Implications for Corporate Finance......Page 535
Summary and Conclusions......Page 541
Questions and Problems......Page 542
Mini Case......Page 548
Practical Case Study......Page 549
References......Page 550
Additional Reading......Page 552
Endnotes......Page 553
14.1 Ordinary Shares......Page 555
14.2 Corporate Long-term Debt: The Basics......Page 560
14.3 Preference Shares......Page 564
14.4 Patterns of Financing......Page 566
14.5 Hierarchies in Long-term Financing......Page 569
14.6 Long-term Islamic Financing......Page 571
Questions and Problems......Page 575
Mini Case......Page 579
Additional Reading......Page 580
Endnote......Page 581
Part 4: Capital Structure and Dividend Policy......Page 582
15 Capital Structure: Basic Concepts......Page 583
15.1 The Capital Structure Question and the Pie Theory......Page 584
15.2 Maximizing Firm Value versus Maximizing Shareholder Interests......Page 585
15.3 Financial Leverage and Firm Value: An Example......Page 587
15.4 Modigliani and Miller: Proposition II (No Taxes)......Page 592
15.5 Corporate Taxes......Page 602
15.6 Personal Taxes......Page 609
Questions and Problems......Page 613
Exam Question (45 minutes)......Page 620
Mini Case......Page 621
Additional Reading......Page 622
Endnotes......Page 623
16 Capital Structure: Limits to the Use of Debt......Page 627
16.2 Description of Financial Distress Costs......Page 628
16.3 Can Costs of Debt Be Reduced?......Page 635
16.4 Integration of Tax Effects and Financial Distress Costs......Page 637
16.5 Signalling......Page 640
16.6 Shirking, Perquisites and Bad Investments: A Note on Agency Cost of Equity......Page 642
16.7 The Pecking Order Theory......Page 645
16.8 Growth and the Debt–Equity Ratio......Page 648
16.9 Market Timing Theory......Page 650
16.10 How Firms Establish Capital Structure......Page 651
Summary and Conclusions......Page 655
Questions and Problems......Page 657
Exam Question (45 minutes)......Page 661
Mini Case......Page 662
References......Page 663
Additional Reading......Page 665
Endnotes......Page 666
17 Valuation and Capital Budgeting for the Levered Firm......Page 669
17.1 Adjusted Present Value Approach......Page 671
17.2 Flow to Equity Approach......Page 673
17.3 Weighted Average Cost of Capital Method......Page 674
17.4 A Comparison of the APV, FTE and WACC Approaches......Page 676
17.5 Capital Budgeting When the Discount Rate Must Be Estimated......Page 679
17.6 APV Example......Page 681
17.7 Beta and Leverage......Page 685
Summary and Conclusions......Page 688
Questions and Problems......Page 689
Mini Case......Page 696
Endnotes......Page 698
18 Dividends and Other Payouts......Page 701
18.2 Standard Method of Cash Dividend Payment......Page 702
18.3 The Benchmark Case: An Illustration of the Irrelevance of Dividend Policy......Page 705
18.4 Share Repurchases......Page 710
18.5 Personal Taxes and Dividends......Page 713
18.6 Real-world Factors Favouring a High-dividend Policy......Page 718
18.7 The Clientele Effect......Page 722
18.8 A Catering Theory of Dividends......Page 724
18.9 What We Know and Do Not Know about Dividend Policy......Page 725
18.10 Stock Dividends and Stock Splits......Page 731
Summary and Conclusions......Page 733
Questions and Problems......Page 734
Mini Case......Page 741
Practical Case Study......Page 742
References......Page 743
Additional Reading......Page 744
Endnotes......Page 747
Part 5: Long-term Financing......Page 748
19 Equity Financing......Page 749
19.1 The Public Issue......Page 750
19.2 Alternative Issue Methods......Page 751
19.3 The Cash Offer......Page 752
19.4 The Announcement of New Equity and the Value of the Firm......Page 760
19.5 The Cost of New Issues......Page 761
19.6 Rights......Page 762
19.7 Shelf Registration......Page 767
19.8 The Private Equity Market......Page 768
Summary and Conclusions......Page 773
Questions and Problems......Page 774
Mini Case......Page 780
Practical Case Study......Page 781
References......Page 782
Additional Reading......Page 783
Endnotes......Page 787
20 Debt Financing......Page 789
20.1 Bank Loans......Page 790
20.2 Debt Financing......Page 791
20.3 The Public Issue of Bonds......Page 792
20.4 Bond Refunding......Page 797
20.5 Bond Ratings......Page 801
20.6 Some Different Types of Bonds......Page 807
20.8 Long-term Syndicated Bank Loans......Page 811
Summary and Conclusions......Page 812
Questions and Problems......Page 813
Mini Case......Page 817
Practical Case Study......Page 818
References......Page 819
Additional Reading......Page 820
Endnotes......Page 822
21 Leasing......Page 823
21.1 Types of Lease Financing......Page 824
21.2 Accounting and Leasing......Page 827
21.3 The Cash Flows of Leasing......Page 828
21.4 A Detour for Discounting and Debt Capacity with Corporate Taxes......Page 830
21.5 NPV Analysis of the Lease versus Buy Decision......Page 832
21.6 Does Leasing Ever Pay? The Base Case......Page 833
21.7 Reasons for Leasing......Page 835
21.8 Some Unanswered Questions about Leasing......Page 841
Summary and Conclusions......Page 842
Questions and Problems......Page 843
Mini Case......Page 847
Relevant Accounting Standards......Page 848
Additional Reading......Page 849
Endnotes......Page 850
Part 6: Options, Futures and Corporate Finance......Page 851
22 Options and Corporate Finance......Page 852
22.1 Options......Page 853
22.2 Call Options......Page 854
22.3 Put Options......Page 855
22.4 Writing Options......Page 857
22.5 Option Quotes......Page 858
22.6 Option Combinations......Page 859
22.7 Valuing Options......Page 862
22.8 An Option Pricing Formula......Page 867
22.9 The ‘Greeks’......Page 876
22.10 Shares and Bonds as Options......Page 877
Summary and Conclusions......Page 883
Questions and Problems......Page 884
Mini Case......Page 892
Additional Reading......Page 894
Endnotes......Page 895
23 Options and Corporate Finance: Extensions and Applications......Page 896
23.1 Executive Share Options......Page 897
23.2 Investment in Real Projects and Options......Page 901
23.3 Valuing a Start-up......Page 903
23.4 More about the Binomial Model......Page 907
23.5 Shutdown and Reopening Decisions......Page 914
23.6 Mergers and Diversification......Page 921
23.7 Options and Capital Budgeting......Page 924
Summary and Conclusions......Page 926
Questions and Problems......Page 927
Exam Question (45 minutes)......Page 930
Mini Case......Page 931
Additional Reading......Page 932
Endnotes......Page 934
24 Warrants and Convertibles......Page 935
24.1 Warrants......Page 936
24.3 Warrant Pricing and the Black–Scholes Model......Page 939
24.4 Convertible Bonds......Page 941
24.5 The Value of Convertible Bonds......Page 942
24.6 Reasons for Issuing Warrants and Convertibles......Page 945
24.7 Why Are Warrants and Convertibles Issued?......Page 949
Summary and Conclusions......Page 952
Questions and Problems......Page 954
Mini Case......Page 958
Practical Case Study......Page 959
References......Page 960
Additional Reading......Page 961
Endnotes......Page 962
25 Financial Risk Management with Derivatives......Page 964
25.1 Derivatives, Hedging and Risk......Page 965
25.2 Forward Contracts......Page 966
25.3 Futures Contracts......Page 967
25.4 Hedging......Page 971
25.5 Interest Rate Futures Contracts......Page 973
25.6 Duration Hedging......Page 980
25.7 Swaps Contracts......Page 986
25.8 Financial Risk Management in Practice......Page 991
Summary and Conclusions......Page 992
Questions and Problems......Page 993
Mini Case......Page 998
References......Page 999
Additional Reading......Page 1000
Endnotes......Page 1001
Part 7: Financial Planning and Short-term Finance......Page 1003
26 Short-term Finance and Planning......Page 1004
26.1 Tracing Cash and Net Working Capital......Page 1005
26.2 Defining Cash in Terms of Other Elements......Page 1006
26.3 The Operating Cycle and the Cash Cycle......Page 1007
26.4 Some Aspects of Short-term Financial Policy......Page 1010
26.5 Cash Budgeting......Page 1018
26.6 The Short-term Financial Plan......Page 1020
Questions and Problems......Page 1022
Exam Question (45 minutes)......Page 1031
Mini Case......Page 1032
Additional Reading......Page 1033
Endnotes......Page 1034
27 Short-term Capital Management......Page 1035
27.1 Reasons for Holding Cash......Page 1036
27.2 Determining the Target Cash Balance......Page 1039
27.3 Managing the Collection and Disbursement of Cash......Page 1045
27.4 Investing Idle Cash......Page 1052
27.5 Terms of Sale......Page 1056
27.6 The Decision to Grant Credit: Risk and Information......Page 1059
27.7 Optimal Credit Policy......Page 1062
27.8 Credit Analysis......Page 1065
27.9 Collection Policy......Page 1066
Summary and Conclusions......Page 1068
Questions and Problems......Page 1069
Mini Case......Page 1076
References......Page 1077
Additional Reading......Page 1078
Part 8: Special Topics......Page 1080
28 Mergers and Acquisitions......Page 1081
28.1 The Basic Forms of Acquisition......Page 1082
28.2 Synergy......Page 1085
28.3 Sources of Synergy......Page 1086
28.4 Two ‘Bad’ Reasons for Mergers......Page 1092
28.5 A Cost to Shareholders from Reduction in Risk......Page 1094
28.6 The NPV of a Merger......Page 1097
28.7 Valuation of Mergers in Practice......Page 1100
28.8 Friendly versus Hostile Takeovers......Page 1103
28.9 Defensive Tactics......Page 1104
28.10 The Diary of a Takeover: AbbVie Inc. and Shire plc......Page 1108
28.11 Do Mergers Add Value?......Page 1111
28.12 Accounting and Tax Considerations......Page 1117
28.13 Going Private and Leveraged Buyouts......Page 1118
28.14 Divestitures......Page 1119
Summary and Conclusions......Page 1120
Questions and Problems......Page 1121
Exam Question (45 minutes)......Page 1129
Mini Case......Page 1130
References......Page 1131
Additional Reading......Page 1132
Endnotes......Page 1137
29 Financial Distress......Page 1138
29.1 What Is Financial Distress?......Page 1139
29.2 What Happens in Financial Distress?......Page 1141
29.3 Bankruptcy, Liquidation and Reorganization......Page 1145
29.4 Private Workout or Bankruptcy: Which Is Best?......Page 1150
29.5 Predicting Financial Distress: The Z-score Model......Page 1152
Summary and Conclusions......Page 1154
Questions and Problems......Page 1155
Mini Case......Page 1157
Practical Case Study......Page 1159
Additional Reading......Page 1160
Endnotes......Page 1162
30 International Corporate Finance......Page 1163
30.1 Terminology......Page 1165
30.2 Foreign Exchange Markets and Exchange Rates......Page 1166
30.3 Purchasing Power Parity......Page 1172
30.4 Interest Rate Parity, Unbiased Forward Rates and the International Fisher Effect......Page 1178
30.5 International Capital Budgeting......Page 1182
30.6 Exchange Rate Risk......Page 1185
30.7 Political Risk......Page 1188
Summary and Conclusions......Page 1189
Questions and Problems......Page 1190
Mini Case......Page 1196
Relevant Accounting Standards......Page 1197
Endnote......Page 1198
Index......Page 1208