ISE Fundamentals of Corporate Finance

Cover
Fundamentals of Corporate Finance 11e
Dedication
About the Authors
Preface
Unique Features
Supplements
Acknowledgments
Contents in Brief
Contents
Part One: Introduction
Chapter 1: Goals and Governance of the Corporation
1.1: Investment and Financing Decisions
The Investment (Capital Budgeting) Decision
The Financing Decision
1.2: What Is a Corporation?
Other Forms of Business Organization
1.3: Who Is the Financial Manager?
1.4: Goals of the Corporation
Shareholders Want Managers to Maximize Market Value
1.5: Agency Problems, Executive Compensation, and Corporate Governance
Executive Compensation
Corporate Governance
1.6: The Ethics of Maximizing Value
1.7: Careers in Finance
1.8: Preview of Coming Attractions
1.9: Snippets of Financial History
Summary
Questions and Problems
Chapter 2: Financial Markets and Institutions
2.1: The Importance of Financial Markets and Institutions
2.2: The Flow of Savings to Corporations
The Stock Market
Other Financial Markets
Financial Intermediaries
Financial Institutions
Total Financing of U.S. Corporations
2.3: Functions of Financial Markets and Intermediaries
Transporting Cash across Time
Risk Transfer and Diversification
Liquidity
The Payment Mechanism
Information Provided by Financial Markets
2.4: The Crisis of 2007_2009
Summary
Questions and Problems
Chapter 3: Accounting and Finance
3.1: The Balance Sheet
Book Values and Market Values
3.2: The Income Statement
Income versus Cash Flow
3.3: The Statement of Cash Flows
Free Cash Flow
3.4: Accounting Practice and Malpractice
3.5: Taxes
Corporate Tax
Personal Tax
Summary
Questions and Problems
Chapter 4: Measuring Corporate Performance
4.1: How Financial Ratios Relate to Shareholder Value
4.2: Measuring Market Value and Market Value Added
4.3: Economic Value Added and Accounting Rates of Return
Accounting Rates of Return
Problems with EVA and Accounting Rates of Return
4.4: Measuring Efficiency
4.5: Analyzing the Return on Assets: The Du Pont System
The Du Pont System
4.6: Measuring Financial Leverage
Leverage and the Return on Equity
4.7: Measuring Liquidity
4.8: Interpreting Financial Ratios
4.9: The Role of Financial Ratios
Summary
Questions and Problems
Minicase
Part Two: Value
Chapter 5: The Time Value of Money
5.1: Future Values and Compound Interest
5.2: Present Values
Finding the Interest Rate
5.3: Multiple Cash Flows
Future Value of Multiple Cash Flows
Present Value of Multiple Cash Flows
5.4: Reducing the Chore of the Calculations: Part 1
Using Financial Calculators to Solve Simple Time-Value-of-Money Problems
Using Spreadsheets to Solve Simple Time-Value-of-Money Problems
5.5: Level Cash Flows: Perpetuities and Annuities
How to Value Perpetuities
How to Value Annuities
Future Value of an Annuity
Annuities Due
5.6: Reducing the Chore of the Calculations: Part 2
Using Financial Calculators to Solve Annuity Problems
Using Spreadsheets to Solve Annuity Problems
5.7: Effective Annual Interest Rates
5.8: Inflation and the Time Value of Money
Real versus Nominal Cash Flows
Inflation and Interest Rates
Valuing Real Cash Payments
Real or Nominal?
Summary
Questions and Problems
Minicase
Chapter 6: Valuing Bonds
6.1: Bond Pricing
6.2: Interest Rates and Bond Prices
Interest Rate Risk and Bond Maturity
6.3: Yield to Maturity
6.4: Bond Rates of Return
6.5: The Yield Curve
Nominal and Real Rates of Interest
6.6: Corporate Bonds and the Risk of Default
Protecting against Default Risk
Not All Corporate Bonds Are Plain Vanilla
Summary
Questions and Problems
Chapter 7: Valuing Stocks
7.1: Stocks and the Stock Market
Reading Stock Market Listings
7.2: Market Values, Book Values, and Liquidation Values
7.3: Valuing Common Stocks
Valuation by Comparables
Price and Intrinsic Value
The Dividend Discount Model
7.4: Simplifying the Dividend Discount Model
Case 1: The Dividend Discount Model with No Growth
Case 2: The Dividend Discount Model with Constant Growth
Case 3: The Dividend Discount Model with Nonconstant Growth
7.5: Valuing a Business by Discounted Cash Flow
Valuing the Concatenator Business
Repurchases and the Dividend Discount Model
7.6: There Are No Free Lunches on Wall Street
Random Walks and Efficient Markets
7.7: Market Anomalies and Behavioral Finance
Market Anomalies
Bubbles and Market Efficiency
Behavioral Finance
Summary
Questions and Problems
Minicase
Chapter 8: Net Present Value and Other Investment Criteria
8.1: Net Present Value
A Comment on Risk and Present Value
Valuing Long-Lived Projects
Choosing between Alternative Projects
8.2: The Internal Rate of Return Rule
A Closer Look at the Rate of Return Rule
Calculating the Rate of Return for Long-Lived Projects
A Word of Caution
Some Pitfalls with the Internal Rate of Return Rule
8.3: The Profitability Index
Capital Rationing
Pitfalls of the Profitability Index
8.4: The Payback Rule
Discounted Payback
8.5: More Mutually Exclusive Projects
Problem 1: The Investment Timing Decision
Problem 2: The Choice between Long- and Short-Lived Equipment
Problem 3: When to Replace an Old Machine
8.6: A Last Look
Summary
Questions and Problems
Minicase
Appendix: More on the IRR Rule
Using the IRR to Choose between Mutually Exclusive Projects
Using the Modified Internal Rate of Return When There Are Multiple IRRs
Chapter 9: Using Discounted Cash-Flow Analysis to Make Investment Decisions
9.1: Identifying Cash Flows
Discount Cash Flows, Not Profits
Discount Incremental Cash Flows
Discount Nominal Cash Flows by the Nominal Cost of Capital
Separate Investment and Financing Decisions
9.2: Corporate Income Taxes
9.3: An ExampleÑBlooper Industries
Forecasting Blooper's Cash Flows
Calculating the NPV of Blooper's Mine
Further Notes and Wrinkles Arising from Blooper's Project
Summary
Questions and Problems
Minicase
Chapter 10: Project Analysis
10.1: The Capital Investment Process, Some Problems, and Some Solutions
10.2: Some ÒWhat-IfÓ Questions
Sensitivity Analysis
Stress Tests and Scenario Analysis
10.3: Break-Even Analysis
Accounting Break-Even Analysis
NPV Break-Even Analysis
Operating Leverage
10.4: Real Options and the Value of Flexibility
The Option to Expand
A Second Real Option: The Option to Abandon
A Third Real Option: The Timing Option
A Fourth Real Option: Flexible Production Facilities
Summary
Questions and Problems
Minicase
Part Three: Risk
Chapter 11: Introduction to Risk, Return, and the Opportunity Cost of Capital
11.1: Rates of Return: A Review
11.2: A Century of Capital Market History
Market Indexes
The Historical Record
Using Historical Evidence to Estimate Today's Cost of Capital
11.3: Measuring Risk
Variance and Standard Deviation
A Note on Calculating Variance
Measuring the Variation in Stock Returns
11.4: Risk and Diversification
Diversification
Asset versus Portfolio Risk
Market Risk versus Specific Risk
11.5: Thinking about Risk
Message 1: Some Risks Look Big and Dangerous but Really Are Diversifiable
Message 2: Market Risks Are Macro Risks
Message 3: Risk Can Be Measured
Summary
Questions and Problems
Chapter 12: Risk, Return, and Capital Budgeting
12.1: Measuring Market Risk
Measuring Beta
Betas for Amazon and McDonald's
Total Risk and Market Risk
12.2: What Can You Learn from Beta?
Portfolio Betas
The Portfolio Beta Determines the Risk of a Diversified Portfolio
12.3: Risk and Return
Why the CAPM Makes Sense
The Security Market Line
Using the CAPM to Estimate Expected Returns
How Well Does the CAPM Work?
12.4: The CAPM and the Opportunity Cost of Capital
The Company Cost of Capital
What Determines Project Risk?
DonÕt Add Fudge Factors to Discount Rates
Summary
Questions and Problems
Chapter 13: The Weighted-Average Cost of Capital and Company Valuation
13.1: Geothermal's Cost of Capital
13.2: The Weighted-Average Cost of Capital
Calculating Company Cost of Capital as a Weighted Average
Use Market Weights, Not Book Weights
Taxes and the Weighted-Average Cost of Capital
What If There Are Three (or More) Sources of Financing?
The NPV of GeothermalÕs Expansion
Checking Our Logic
13.3: Interpreting the Weighted-Average Cost of Capital
When You Can and Can't Use WACC
Some Common Mistakes
How Changing Capital Structure Affects Expected Returns
What Happens When the Corporate Tax Rate Is Not Zero
13.4: Practical Problems: Measuring Capital Structure
13.5: More Practical Problems: Estimating Expected Returns
The Expected Return on Bonds
The Expected Return on Common Stock
The Expected Return on Preferred Stock
Adding It All Up
Real-Company WACCs
13.6: Valuing Entire Businesses
Calculating the Value of the Deconstruction Business
Summary
Questions and Problems
Minicase
Part Four: Financing
Chapter 14: Introduction to Corporate Financing
14.1: Creating Value with Financing Decisions
14.2: Patterns of Corporate Financing
Are Firms Issuing Too Much Debt?
14.3: Common Stock
Stock Splits
Ownership of the Corporation
Voting Procedures
The Wall Street Walk
Classes of Stock
14.4: Preferred Stock
14.5: Corporate Debt
Debt Comes in Many Forms
Innovation in the Debt Market
14.6: Convertible Securities
Summary
Questions and Problems
Chapter 15: How Corporations Raise Venture Capital and Issue Securities
15.1: Venture Capital
Venture Capital Companies
15.2: The Initial Public Offering
Arranging a Public Issue
Other New-Issue Procedures
The Underwriters
15.3: General Cash Offers by Public Companies
General Cash Offers and Shelf Registration
Costs of the General Cash Offer
Market Reaction to Stock Issues
15.4: The Private Placement
Summary
Questions and Problems
Minicase
Appendix: Hotch PotÕs New-Issue Prospectus
Part Five: Debt and Payout Policy
Chapter 16: Debt Policy
16.1: How Borrowing Affects Value in a Tax-Free Economy
MMÕs Argument-A Simple Example
How Borrowing Affects Earnings per Share
How Borrowing Affects Risk and Return
16.2: Debt and the Cost of Equity
No Magic in Financial Leverage
16.3: Debt, Taxes, and the Weighted-Average Cost of Capital
Debt and Taxes at River Cruises
How Interest Tax Shields Contribute to the Value of Stockholders' Equity
Corporate Taxes and the Weighted-Average Cost of Capital
The Implications of Corporate Taxes for Capital Structure
16.4: Costs of Financial Distress
Bankruptcy Costs
Costs of Bankruptcy Vary with Type of Asset
Financial Distress without Bankruptcy
16.5: Explaining Financing Choices
The Trade-Off Theory
A Pecking Order Theory
The Two Faces of Financial Slack
Is There a Theory of Optimal Capital Structure?
Summary
Questions and Problems
Minicase
Appendix: Bankruptcy Procedures
Chapter 17: Payout Policy
17.1: How Corporations Pay Out Cash to Shareholders
How Firms Pay Dividends
Stock Dividends
Stock Repurchases
17.2: The Information Content of Dividends and Repurchases
17.3: Dividends or Repurchases? The Payout Controversy
Dividends or Repurchases? An Example
Repurchases and the Dividend Discount Model
Dividends and Share Issues
17.4: Why Dividends May Increase Value
17.5: Why Dividends May Reduce Value
Taxation of Dividends and Capital Gains under Current Tax Law
Taxes and PayoutÑA Summary
17.6: Payout Policy and the Life Cycle of the Firm
Summary
Questions and Problems
Minicase
Part Six: Financial Analysis and Planning
Chapter 18: Long-Term Financial Planning
18.1: What Is Financial Planning?
Why Build Financial Plans?
18.2: Financial Planning Models
Components of a Financial Planning Model
18.3: A Long-Term Financial Planning Model for Dynamic Mattress
Pitfalls in Model Design
Choosing a Plan
Valuing Dynamic Mattress
18.4: External Financing and Growth
Summary
Questions and Problems
Minicase
Chapter 19: Short-Term Financial Planning
19.1: Links between Long-Term and Short-Term Financing
Tax Strategies
Reasons to Hold Cash
19.2: Tracing Changes in Cash
19.3: Cash Budgeting
Preparing the Cash Budget
19.4: Dynamic's Short-Term Financial Plan
Dynamic Mattress's Financing Plan
Evaluating the Plan
A Note on Short-Term Financial Planning Models
Summary
Questions and Problems
Minicase
Chapter 20: Working Capital Management
20.1: Working Capital
Components of Working Capital
Working Capital and the Cash Cycle
20.2: Accounts Receivable and Credit Policy
Terms of Sale
Credit Agreements
Credit Analysis
The Credit Decision
Collection Policy
20.3: Inventory Management
20.4: Cash Management
Check Handling and Float
Other Payment Systems
Electronic Funds Transfer
International Cash Management
20.5: Investing Idle Cash: The Money Market
Money Market Investments
Calculating the Yield on Money Market Investments
Yields on Money Market Investments
The International Money Market
20.6: Managing Current Liabilities: Short-Term Debt
Bank Loans
Commercial Paper
Summary
Questions and Problems
Minicase
Part Seven: Special Topics
Chapter 21: Mergers, Acquisitions, and Corporate Control
21.1: Types of Mergers
21.2: Sensible Motives for Mergers
Economies of Scale and Scope
Economies of Vertical Integration
Complementary Resources
Changes in Corporate Control
Industry Consolidation
Industrial Logic Does Not Guaranty Success
21.3: Dubious Reasons for Mergers
Improved Diversification
The Bootstrap Game
Management Bias
21.4: The Mechanics of a Merger
The Form of Acquisition
Mergers, Antitrust Law, and Popular Opposition
21.5: Evaluating Mergers
Mergers Financed by Cash
Mergers Financed by Stock
A Warning
Another Warning
21.6: The Market for Corporate Control
21.7: Proxy Contests
21.8: Takeovers
21.9: Leveraged Buyouts
Barbarians at the Gate?
21.10: Divestitures, Spin-Offs, and Carve-Outs
21.11: The Benefits and Costs of Mergers
Who Gains and Loses from Mergers?
Buyers versus Sellers
Mergers and Society
Summary
Questions and Problems
Minicase
Chapter 22: International Financial Management
22.1: Foreign Exchange Markets
Spot Exchange Rates
Forward Exchange Rates
22.2: Some Basic Relationships
Exchange Rates and Inflation
Real and Nominal Exchange Rates
Inflation and Interest Rates
The Forward Exchange Rate and the Expected Spot Rate
Interest Rates and Exchange Rates
22.3: Hedging Currency Risk
Transaction Risk
Economic Risk
22.4: International Capital Budgeting
Net Present Values for Foreign Investments
The Cost of Capital for Foreign Investment
Avoiding Fudge Factors
Political Risk
Summary
Questions and Problems
Minicase
Chapter 23: Options
23.1: Calls and Puts
Selling Calls and Puts
Payoff Diagrams Are Not Profit Diagrams
Financial Alchemy with Options
Some More Option Magic
23.2: What Determines Option Values?
Upper and Lower Limits on Option Values
The Determinants of Option Value
Option-Valuation Models
23.3: Spotting the Option
Options on Real Assets
Options on Financial Assets
Summary
Questions and Problems
Chapter 24: Risk Management
24.1: Why Hedge?
24.2: Reducing Risk with Options
24.3: Forward and Futures Contracts
The Mechanics of Futures Trading
Commodity and Financial Futures
Forward Contracts
24.4: Valuing Futures and Forward Contracts
24.5: Swaps
Interest Rate Swaps
Currency Swaps
24.6: Innovation in the Derivatives Market
24.7: Is 'Derivative' a Four-Letter Word?
Summary
Questions and Problems
Part Eight: Conclusion
Chapter 25: What We Do and Do Not Know about Finance
25.1: What We Do Know: The Six Most Important Ideas in Finance
Net Present Value (Chapter 5)
Risk and Return (Chapters 11 and 12)
Efficient Capital Markets (Chapter 7)
MMÕs Irrelevance Propositions (Chapters 16 and 17)
Option Theory (Chapter 23)
Agency Theory
25.2: What We Do Not Know: Nine Unsolved Problems in Finance
What Determines Project Risk and Present Value?
Risk and ReturnÑHave We Missed Something?
Are There Important Exceptions to the Efficient-Market Theory?
Is Management an Off-Balance-Sheet Liability?
How Can We Explain Capital Structure?
How Can We Resolve the Payout Controversy?
How Can We Explain Merger Waves?
What Is the Value of Liquidity?
Why Are Financial Systems Prone to Crisis?
What Should Be the Goals of the Corporation?
25.3: A Final Word
Questions and Problems
Appendix A
Glossary
Index