This book on corporate finance systemically integrates firms' approach toward the market, the value fundamentals of investors, and the pricing dynamics of financial markets. The reader is first introduced to an illustration and analysis of some of the main models used in corporate finance and in asset pricing. The text moves to define the core analysis and valuation techniques to demonstrate how integrating the fields of corporate finance and asset pricing allows us to make comprehensive and precise valuations over time.
The textbook combines rigorous quantitative analysis with effective use of graphics to aid intuitive understanding, as well as didactic elements to help grasp the theoretical framework. Suitable for advanced undergraduate and graduate students, as well as financial analysts and advisors, investors, and bankers, the book also provides an overview of Mergers and Acquisitions (M&A), IPO, and Private Equity to help illustrate the theoretical concepts in practice.
Author(s): Pasquale De Luca
Series: Springer Texts in Business and Economics
Publisher: Springer
Year: 2022
Language: English
Pages: 632
City: Cham
Introduction
Contents
Part I: Economic and Financial Analysis of the Firm
1: Production Functions, Cost Minimization, and Profit Maximization
1.1 Production Functions
1.1.1 Baseline Concepts
Net Output
Production Plan
Production Possibilities Set
Inputs Requirement Set
Isoquant
Production Function
1.1.2 Assumptions
1.1.3 Marginal Product of Factor (MP)
1.1.4 Technical Rate of Substitution of Factor (TRS)
1.1.5 Elasticity of Substitution (ES)
1.1.6 Returns to Scale
1.2 Cost Minimization
1.2.1 Weak Axiom of Cost Minimization (WACM)
1.3 Profit Maximization
1.3.1 Comparative Statics
1.3.2 Weak Axiom of Profit Maximization (WAPM)
2: Cost Structure of the Firm
2.1 Cost Functions
2.1.1 Short-Run Cost Functions
2.1.2 Long-Run Cost Functions
2.1.3 Price and Cost Function
2.2 Cost Functions in the Short run
2.2.1 Short-Run Total Cost Functions
2.2.2 Short-Run Average Cost Functions
2.2.3 Marginal Cost Function (MC)
2.3 Cost Functions in the Short Run: Linear Approximation
2.3.1 Fixed Costs
2.3.2 Variable Costs
2.3.3 Cost-Output Diagram
2.3.4 Contribution Margin
2.3.5 Break-Even Point
2.3.6 Product Mix
2.3.7 Degree of Operating Leverage
2.4 Cost Curves in the Long run
2.4.1 Long-Run Marginal Cost
2.5 Full Cost of Product
2.5.1 Direct Cost
2.5.2 Indirect Cost
2.5.3 Direct-Indirect Costs and Variable-Fixed Costs
2.5.4 Step-Down Order Procedure
3: Variance Analysis and Economic Performance
3.1 Variance Analysis: Definition and Aim
3.2 Sales Revenue Variance
3.2.1 Actual
3.2.2 Forecast
3.2.3 Variance Actual Vs Forecast
3.3 Cost of Material Variance
3.3.1 Forecast
3.3.2 Actual
3.3.3 Variance Forecast vs Actual
3.4 Direct Labour Cost Variance
3.4.1 Forecast
3.4.2 Actual
3.4.3 Variance Forecast vs Actual
3.5 Overhead Costs Variance
3.5.1 Forecast
3.5.2 Actual
Production Quantity Variance (QPV)
Spending Variance (SV)
4: Economic and Financial Dynamic Analysis: Operating Income and Net Income
4.1 Economic and Financial Dynamic Analysis of the Firm
4.2 Operating Income and Net Income: Scheme of Analysis
4.2.1 Operating Section
4.2.2 Non-Operating Section
4.2.3 Financial Section
4.2.4 Taxes Section
4.3 Gross Profit (GP)
4.3.1 Net Operating Revenues
Net Sales Revenue (NSR)
Change in Inventories of Finished Goods and Work in Progress
Other Operating Revenues
4.3.2 Cost of Goods Sold
4.3.3 Gross Profit and Contribution Margin
4.3.4 Gross Profit Margin
4.4 EBITDA
4.4.1 Personnel Cost
4.4.2 Research and Development (R&D) Cost
4.4.3 Marketing and Sales (M&S) Cost
4.4.4 Logistic Cost
4.4.5 Advisory Cost
4.4.6 Leasing and Rent (L&R) Cost
4.4.7 General and Administrative (G&A) Cost
4.4.8 EBITDA Margin
4.5 EBIT
4.5.1 EBIT Margin
Amortization and Depreciation
Impairment of Operating Assets
Accruals to Provisions
4.5.2 Net Operating Profit After Taxes (NOPAT)
4.6 EBT-Operating
4.6.1 EBT-Operating Margin
4.7 EBT and Net Income
4.7.1 EBT Margin
4.7.2 Net Income
4.7.3 Net Income Margin
4.7.4 Earnings per Share (EPS)
5: Economic and Financial Dynamic Analysis: Invested Capital and Capital Structure
5.1 Invested Capital and Capital Structure: Scheme of Analysis
5.1.1 Invested Capital (IC)
5.1.2 Capital Structure (CS)
5.1.3 Identity Condition
5.2 Capital Expenditures
5.2.1 Operating CapEx (CAPEXOP)
Operating Tangible and Intangible Assets
Operating Financial Assets
Permanent Inventories
5.2.2 Non-Operating CapEx (CAPEXNOP)
5.3 Net Working Capital
5.3.1 Operating Net Working Capital (NWCOP)
5.3.2 Non-Operating Net Working Capital (NWCNOP)
5.3.3 Net Working Capital Management
Trade Receivables Management
Trade Payables Management
Inventory Management
5.4 Provisions (PS)
5.5 Equity Capital
5.5.1 Book Value and Market Value of Equity
5.5.2 Financial Independence
5.6 Debt Capital
5.6.1 Firm Leverage
5.6.2 Financial Debt Sustainability
Degree of Financial Leverage
Interest Coverage Ratio (ICR)
The Debt Service Cover Ratios (DSCR)
5.7 Relationship between Invested Capital and Capital Structure
5.7.1 Relationship in Long Run
5.7.2 Relationship in Short Run
6: Economic and Financial Dynamic Analysis: Free Cash-Flow to the Firm and Free Cash-Flow to Equity
6.1 Free Cash-Flow to the Firm and Free Cash-Flow to Equity: Scheme of Analysis
6.2 Cash-In and Cash-Out
6.2.1 Credits
6.2.2 Debts
6.2.3 Inventories
6.2.4 Tangible and Intangible Assets
6.2.5 Financial Assets
6.2.6 Provisions
6.2.7 Equity
6.2.8 Liquidity
6.3 Free Cash-Flow to the Firm
6.3.1 EBITDA
6.3.2 Operating CapEx
6.3.3 Operating Net Working Capital (NWCOP)
6.3.4 Decrease of Provisions (PS)
6.3.5 Non-Operating Revenues and Costs
6.3.6 Non-Operating Net Working Capital (NWCNOP)
6.3.7 Non-Operating CapEx (CAPEXNOP)
6.4 Free Cash-Flow to Equity
7: Financial Ratios
7.1 Return on Investment
7.1.1 Return on Investment (ROI)
7.1.2 Return on Operating Invested Capital (ROIC)
7.1.3 Return on Assets (ROA)
7.2 Operating Income Growth Rate
7.3 Return on Equity
7.3.1 Return on Equity (ROE)
7.3.2 Total Return on Shareholders (TRS)
7.4 Net Income Growth Rate
8: Investment Analysis Rules
8.1 Investment Decisions
8.2 Net Present Value (NPV)
8.3 Internal Rate of Return (IRR)
Part II: Risk and Return in the Capital Markets
9: Mean-Variance Portfolio Analysis
9.1 Portfolio Expected Return
9.1.1 Portfolio of Two Assets
9.1.2 Portfolio of N Assets
9.2 Portfolio Variance: Two Assets
9.2.1 Case 1: Portfolio of Two Assets-Perfect Positive Correlation
9.2.2 Case 2: Portfolio of Two Assets-Perfect Negative Correlation
9.2.3 Correlation Coefficient Between -1 and +1
9.3 Portfolio Variance: N Assets
9.4 Asset Marginal Contribution to the Portfolio
9.4.1 Asset Marginal Contribution to the Portfolio Return
9.4.2 Asset Marginal Contribution to Portfolio Variance
9.4.3 Asset Marginal Contribution to Portfolio Standard Deviation
10: Efficient Frontier
10.1 Portfolio of Two Risky Assets
10.2 Portfolio of N Risky Assets
10.3 Portfolio of N Risky Assets and One Riskless Asset
10.4 Determination of the Efficient Frontier
10.4.1 Case 1) Short Sales Allowed and Riskless Lending and Borrowing
10.4.2 Case 2) Short Sales Allowed and No Riskless Lending and Borrowing
11: Optimum Portfolio
11.1 Expected Utility Theorem
11.1.1 Axiomatic Theory
11.1.2 Axiom 1: Consistent-Completeness and Transitivity
11.1.3 Axiom 2: Monotonicity
11.1.4 Axiom 3: Continuity
11.1.5 Axiom 4: Independence
11.1.6 Axiom 5: Reduction
11.2 Investor Behaviour About Risk
11.2.1 Risk Aversion
11.2.2 Risk Seeking
11.2.3 Risk Neutrality
11.3 Risk Aversion Measurement
11.3.1 Utility Functions
11.4 Expected Utility and the Mean-Variance Approach
11.4.1 Portfolio´s Returns Follow a Normal Distribution
11.4.2 Quadratic Utility Function
11.5 Selection of Optimal Portfolio
12: Single Index Model
12.1 Structure of the Model
12.2 Portfolio Expected Return and Variance
12.3 Asset Contribution to the Portfolio´s Risk
12.4 Determination of the Optimum Portfolio
13: Capital Asset Pricing Model: Standard Form
13.1 Baseline Assumptions
13.2 Intuitive Approach to CAPM
13.3 Rigorous Approach to CAPM
13.4 CAPM in Terms of Prices
14: Capital Asset Pricing Model: Non-standard Form
14.1 Zero-Beta CAPM
14.1.1 Intuitive Approach
14.1.2 Rigorous Approach
14.1.3 Riskless Lending and No Riskless Borrowing
14.2 Tax CAPM
14.3 Consumption CAPM
Part III: Money, Interest Rates and Bond Market
15: Demand for Money, Supply of Money, and Equilibrium Interest Rate
15.1 Monetary Base
15.2 Deposit Multiplier
15.3 Money Multiplier
15.4 Equilibrium Interest Rate: Currency Only
15.4.1 The Demand for Money
15.4.2 The Supply of Money
15.4.3 Equilibrium Interest Rate
15.5 Equilibrium Interest Rate: Currency and Checkable Deposits
15.5.1 The Demand for Money
15.5.2 The Supply of Money
15.5.3 The Equilibrium Interest Rate
16: Behaviour of Interest Rates
16.1 Government Bonds
16.1.1 Bond Rating
16.2 Price, Interest Rate, and Yield to Maturity
16.3 Supply, Demand, and Equilibrium in Bond Market
16.3.1 Demand Curve of Bond
16.3.2 Supply Curve
16.3.3 Market Equilibrium
16.4 Shift in the Demand Curve for Bonds
16.5 Shift in the Supply Curve for Bonds
16.6 Expected Inflation and Business Cycle Effects on Demand and Supply of Bond
16.6.1 Expected Inflation
16.6.2 Business Cycle
17: Risk and Term Structure of Interest Rates
17.1 Risk Structure of Interest Rates
17.2 Term Structure of Interest Rates
17.2.1 Expectations Theory
17.2.2 Liquidity Premium Theory
Part IV: Financial Policies and Capital Structure Choices
18: Firm Financing: Equity and Debt
18.1 Shareholders Equity
18.1.1 Share Capital
Common Stock
Preferred Stock
18.1.2 Treasury Share
18.1.3 Retained Earnings
18.2 Stocks Issue
18.2.1 New Shares Issue with Option
18.2.2 New Shares Issue Without Option
18.3 Private Debt
18.3.1 Bank Loans
18.3.2 Secured Loans
Accounts Receivable as Collateral
Inventory as Collateral
18.3.3 Other Types of Loans
18.4 Corporate Bond
18.4.1 Callable Bonds
18.4.2 Convertible Bonds
19: Capital Structure Choice and Company Value
19.1 Modigliani-Miller Propositions
19.2 Proposition I
19.3 Proposition II
19.4 Proposition I with Corporate Taxes
19.5 Proposition II with Corporate Taxes
19.6 Corporate and Personal Taxes
19.7 Optimal Capital Structure Theories
19.7.1 Trade-Off Theory
19.7.2 Pecking Order Theory
19.7.3 Market Time Theory
20: Payout Policy
20.1 Payout Policy: Dividend and Buyback
20.1.1 Dividends
20.1.2 Buyback
20.2 Payout Policy in Perfect Capital Market
20.3 Payout Policy and Taxes
20.4 Payout Policy and Signaling Theory
20.5 Stock Dividend and Stock Split
21: Cost of Capital
21.1 Investor Expected Return and the Firm´s Cost of Capital
21.2 Cost of Equity
21.3 Risk-Free Rate Estimation
21.4 Risk Premium Estimation
21.4.1 Historical Premiums
Country Risk Premium
21.4.2 Implied Equity Premiums
21.5 Beta Estimation
21.5.1 Regression Beta Approach
21.5.2 Fundamental Beta
21.6 Cost of Debt
21.7 Weighted Average Cost of Capital
Part V: Valuation
22: Firm Valuation Approach
22.1 The General Equation of Value of the Firm
22.2 Valuation Time Period: Analytical and Synthetical Valuation
22.3 Valuation Perspective: Equity Side and Asset Side
22.3.1 Equity Side Perspective
22.3.2 Asset Side Perspective
23: Equity Valuation Models
23.1 Dividend Discount Model
23.2 Discount Dividend Model: Constant Growth
23.3 Discount Dividend Model: Two-Stage Growth
23.3.1 The DDM2S Based on Dividends Estimation
23.3.2 Two-Stage Growth DDM with H-Model Specification
23.4 Discount Dividend Model: Three-Stage Growth
23.4.1 The DDM3S Based on Dividends Estimation
23.5 Free Cash-Flow to Equity Discounted Model
23.6 Free Cash-Flow to Equity Discounted Model: Constant Growth
23.7 Free Cash-Flow to Equity Discounted Model: Two-Stage Growth
23.8 Free Cash-Flow to Equity Discounted Model: Three-Stage Growth
24: Firm Valuation Models
24.1 Free Cash-Flow to the Firm Discount Models
24.2 Free Cash-Flow to the Firm Discount Model: Cost of Capital Approach
24.2.1 Steady-State Growth Model
24.2.2 Two-Stage Growth Model
24.2.3 Three-Stage Growth Model
24.3 Free Cash-Flow to the Firm Discount Model: Adjusted Present Value Approach
24.3.1 Unlevered Value
Steady-State Growth Scenario
Two-Stage Growth Scenario
Three-Stage Growth Scenario
24.3.2 Value of Tax Shields
24.3.3 Value of Bankruptcy Costs
24.3.4 Firm Value
24.4 Discounted Economic Profit
24.4.1 Steady-State Growth Rate
25: Multiples Valuation
25.1 Multiples Approach
25.2 Price to Earnings
25.2.1 Steady-State Growth Scenario
25.2.2 Two-Stage Growth Scenario
25.3 Price to Earning to Growth
25.3.1 Steady-State Growth Scenario
25.3.2 Two-Stage Growth Scenario
25.4 Price to Book Value
25.4.1 Steady-State Growth Scenario
25.4.2 Two-Stage Growth Scenario
25.5 Price to Sales
25.5.1 Steady-State Growth Scenario
25.5.2 Two-Stage Growth Scenario
25.6 Firm Value to EBITDA
25.6.1 Steady-State Growth Scenario
25.6.2 Two-Stage Growth Scenario
25.7 Firm Value to Book Value
25.7.1 Steady-State Growth Scenario
25.7.2 Two-Stage Growth Scenario
25.8 Firm Value to Sales Revenue
25.8.1 Steady-State Growth Scenario
25.8.2 Two-Stage Growth Scenario
Part VI: Options
26: Financial Options
26.1 Definitions and Basic Elements
26.2 Payoffs and Profit
26.2.1 Investor in Long Position
26.2.2 Investor in Short Position
26.2.3 Profit for Call and Put Options
26.3 Call and Put Combinations
26.3.1 Straddle
26.3.2 Stock and Portfolio Insurance
26.4 Put-Call Parity
26.5 European and American Options
27: Option Pricing
27.1 Binomial Option Pricing Model
27.1.1 Two-State Single-Period Model
27.1.2 A Multiperiod Model
27.2 Black-Scholes Option Pricing Model
27.2.1 European Put Options
27.2.2 Call Option on Dividend-Paying Stocks
27.2.3 Replicating Portfolio
27.3 Risk-Neutral Probabilities
Part VII: Special Topics
28: Mergers & Acquisitions
28.1 Reasons of the M&A
28.2 Investors Approach
28.3 The Team of M&A
28.3.1 Financial Advisor
28.3.2 Legal Advisor
28.3.3 Fiscal Advisor
28.3.4 Transaction Advisor
28.3.5 Strategic Advisor
28.4 Buy-Side M&A
28.4.1 Step (1): Preliminary Phase
28.4.2 Step (2): Exploratory Phase
28.4.3 Step (3): Selection Phase
28.4.4 Step (4): Negotiation and Closing Phase
Timing
28.5 Sell-Side M&A
28.6 Price and Terms of Payment
28.7 Takeover Defence
28.7.1 Poison Pills
28.7.2 White Knights
28.7.3 Golden Parachutes
28.7.4 Recapitalization
29: Private Equity, Venture Capital, and Hedge Fund
29.1 Private Equity
29.2 Phases of the Private Equity Investment
29.2.1 Phase (1): Fundraising
29.2.2 Phase (2): Investment
Step (1): Origination
Step (2): Analysis
Step (3): Execution
29.2.3 Phase (3): Monitoring
29.2.4 Phase (4): Exit
29.3 Venture Capital
29.4 Venture Capital Valuation Method
29.5 Venture Capital Control Tools
29.6 Hedge Fund
29.6.1 The Team and Fees
29.6.2 Investment Strategy
30: Initial Public Offering
30.1 Reasons of IPO
30.2 Preparation of the IPO
30.2.1 Timing
30.2.2 Equity Story
30.2.3 Financial Model
30.2.4 IPO Prospectus
30.2.5 Pilot-Fishing
30.3 Pricing of the IPO
References
