Principles of Corporate Finance

Cover
Principles of Corporate Finance
Dedication
About the Authors
Preface
Guided Tour
Supplements
For Students
Brief Contents
Contents
Part One: Value
Chapter 1: Introduction to Corporate Finance
1-1 Corporate Investment and Financing Decisions
Investment Decisions
Financing Decisions
What Is a Corporation?
The Role of the Financial Manager
1-2 The Financial Goal of the Corporation
Shareholders Want Managers to Maximize Market Value
A Fundamental Result
The Investment Trade-Off
Should Managers Look After the Interests of Their Shareholders?
Agency Problems and Corporate Governance
1-3 Preview of Coming Attractions
Summary
Problem Sets
Appendix: Why Maximizing Shareholder Value Makes Sense
Chapter 2: How to Calculate Present Values
2-1 Future Values and Present Values
Calculating Future Values
Calculating Present Values
Valuing an Investment Opportunity
Net Present Value
Risk and Present Value
Present Values and Rates of Return
Calculating Present Values When There Are Multiple Cash Flows
The Opportunity Cost of Capital
2-2 Looking for Shortcuts—Perpetuities and Annuities
How to Value Perpetuities
How to Value Annuities
Valuing Annuities Due
Calculating Annual Payments
Future Value of an Annuity
2-3 More Shortcuts—Growing Perpetuities and Annuities
Growing Perpetuities
Growing Annuities
2-4 How Interest Is Paid and Quoted
Continuous Compounding
Summary
Problem Sets
Finance on the Web
Chapter 3: Valuing Bonds
3-1 Using the Present Value Formula to Value Bonds
A Short Trip to Paris to Value a Government Bond
Back to the United States: Semiannual Coupons and Bond Prices
3-2 How Bond Prices Vary with Interest Rates
Duration and Volatility
3-3 The Term Structure of Interest Rates
Spot Rates, Bond Prices, and the Law of One Price
Measuring the Term Structure
Why the Discount Factor Declines as Futurity Increases—and a Digression on Money Machines
3-4 Explaining the Term Structure
Expectations Theory of the Term Structure
Introducing Risk
Inflation and Term Structure
3-5 Real and Nominal Rates of Interest
Indexed Bonds and the Real Rate of Interest
What Determines the Real Rate of Interest?
Inflation and Nominal Interest Rates
3-6 The Risk of Default
Corporate Bonds and Default Risk
Sovereign Bonds and Default Risk
Summary
Further Reading
Problem Sets
Finance on the Web
Chapter 4: The Value of Common Stocks
4-1 How Common Stocks Are Traded
Trading Results for Boeing
4-2 How Common Stocks Are Valued
Valuation by Comparables
Stock Prices and Dividends
4-3 Estimating the Cost of Equity Capital
Using the DCF Model to Set Water, Gas, and Electricity Prices
Dangers Lurk in Constant-Growth Formulas
4-4 The Link between Stock Price and Earnings per Share
Calculating the Present Value of Growth Opportunities for FledglingElectronics
4-5 Valuing a Business by Discounted Cash Flow
Valuing the Concatenator Business
Valuation Format
Estimating Horizon Value
Free Cash Flow, Dividends, and Repurchases
Summary
Problem Sets
Finance on the Web
Mini-Case: Reeby Sports
Chapter 5: Net Present Value and Other Investment Criteria
5-1 A Review of the Basics
Net Present Value’s Competitors
Three Points to Remember about NPV
5-2 Book Rate of Return and Payback
Book Rate of Return
Payback
Discounted Payback
5-3 Internal (or Discounted Cash Flow) Rate of Return
Calculating the IRR
The IRR Rule
Pitfall 1—Lending or Borrowing?
Pitfall 2—Multiple Rates of Return
Pitfall 3—Mutually Exclusive Projects
Pitfall 4—What Happens When There Is More Than One Opportunity Cost of Capital
The Verdict on IRR
5-4 Choosing Capital Investments When Resources Are Limited
An Easy Problem in Capital Rationing
Uses of Capital Rationing Models
Summary
Further Reading
Problem Sets
Mini-Case: Vegetron’s CFO Calls Again
Chapter 6: Making Investment Decisions with the Net Present Value Rule
6-1 Applying the Net Present Value Rule
Rule 1: Discount Cash Flows, Not Profits
Rule 2: Discount Incremental Cash Flows
Rule 3: Treat Inflation Consistently
Rule 4: Separate Investment and Financing Decisions
Rule 5: Remember to Deduct Taxes
6-2 Corporate Income Taxes
U.S. Corporate Income Tax Reform
6-3 Example—IM&C’s Fertilizer Project
The Three Elements of Project Cash Flows
Forecasting the Fertilizer Project’s Cash Flows
Accelerated Depreciation and First-Year Expensing
Final Comments on Taxes
Project Analysis
Calculating NPV in Other Countries and Currencies
6-4 Using the NPV Rule to Choose among 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
Problem 4: Cost of Excess Capacity
Summary
Further Reading
Problem Sets
Mini-Case: New Economy Transport (A)
New Economy Transport (B)
Part Two: Risk
Chapter 7: Introduction to Risk and Return
7-1 Over a Century of Capital Market History in One Easy Lesson
Arithmetic Averages and Compound Annual Returns
Using Historical Evidence to Evaluate Today’s Cost of Capital
7-2 Diversification and Portfolio Risk
Variance and Standard Deviation
Measuring Variability
How Diversification Reduces Risk
7-3 Calculating Portfolio Risk
General Formula for Computing Portfolio Risk
Do I Really Have to Add up 36 Million Boxes?
7-4 How Individual Securities Affect Portfolio Risk
Market Risk Is Measured by Beta
Why Security Betas Determine Portfolio Risk
7-5 Diversification and Value Additivity
Summary
Further Reading
Problem Sets
Finance on the Web
8 Portfolio Theory and the Capital Asset Pricing Model
8-1 Harry Markowitz and the Birth of Portfolio Theory
Combining Stocks into Portfolios
We Introduce Borrowing and Lending
8-2 The Relationship between Risk and Return
Some Estimates of Expected Returns
Review of the Capital Asset Pricing Model
What If a Stock Did Not Lie on the Security Market Line?
8-3 Validity and Role of the Capital Asset Pricing Model
Tests of the Capital Asset Pricing Model
Assumptions behind the Capital Asset Pricing Model
8-4 Some Alternative Theories
Arbitrage Pricing Theory
A Comparison of the Capital Asset Pricing Model and Arbitrage Pricing Theory
The Three-Factor Model
Summary
Further Reading
Problem Sets
Finance on the Web
Mini-Case: John and Marsha on Portfolio Selection
9 Risk and the Cost of Capital
9-1 Company and Project Costs of Capital
Perfect Pitch and the Cost of Capital
Debt and the Company Cost of Capital
9-2 Measuring the Cost of Equity
Estimating Beta
The Expected Return on CSX’s Common Stock
CSX’s After-Tax Weighted-Average Cost of Capital
CSX’s Asset Beta
9-3 Analyzing Project Risk
What Determines Asset Betas?
Don’t Be Fooled by Diversifiable Risk
Avoid Fudge Factors in Discount Rates
Discount Rates for International Projects
9-4 Certainty Equivalents—Another Way to Adjust for Risk
Valuation by Certainty Equivalents
When to Use a Single Risk-Adjusted Discount Rate for Long-Lived Assets
A Common Mistake
When You Cannot Use a Single Risk-Adjusted Discount Rate for Long-Lived Assets
Summary
Further Reading
Problem Sets
Finance on the Web
Mini-Case: The Jones Family Incorporated
Part Three: Best Practices in Capital Budgeting
Chapter 10: Project Analysis
10-1 Sensitivity and Scenario Analysis
Value of Information
Limits to Sensitivity Analysis
Scenario Analysis
10-2 Break-Even Analysis and Operating Leverage
Break-Even Analysis
Operating Leverage and the Break-Even Point
10-3 Monte Carlo Simulation
Simulating the Electric Scooter Project
10-4 Real Options and Decision Trees
The Option to Expand
The Option to Abandon
Production Options
Timing Options
More on Decision Trees
Pro and Con Decision Trees
Summary
Further Reading
Problem Sets
Mini-Case: Waldo County
Chapter 11: How to Ensure That Projects Truly Have Positive NPVs
11-1 How Firms Organize the Investment Process
The Capital Budget
Project Authorizations—and the Problem of Biased Forecasts
Postaudits
11-2 Look First to Market Values
The BMW and Your Sporting Idol
11-3 Economic Rents and Competitive Advantage
11-4 Marvin Enterprises Decides to Exploit a New Technology—an Example
Forecasting Prices of Gargle Blasters
The Value of Marvin’s New Expansion
Alternative Expansion Plans
The Value of Marvin Stock
The Lessons of Marvin Enterprises
Summary
Further Reading
Problem Sets
Mini-Case: Ecsy-Cola
Chapter 12: Agency Problems and Investment
12-1 What Agency Problems Should You Watch Out For?
Agency Problems Don’t Stop at the Top
Risk Taking
12-2 Monitoring
Boards of Directors
Auditors
Lenders
Shareholders
Takeovers
12-3 Management Compensation
Compensation Facts and Controversies
The Economics of Incentive Compensation
The Specter of Short-Termism
12-4 Measuring and Rewarding Performance: Residual Income and EVA
Residual Income or Economic Value Added (EVA®)
Pros and Cons of EVA
12-5 Biases in Accounting Measures of Performance
Example: Measuring the Profitability of the Nodhead Supermarket
Measuring Economic Profitability
Do the Biases Wash Out in the Long Run?
What Can We Do about Biases in Accounting Profitability Measures?
Summary
Further Reading
Problem Sets
Part Four: Financing Decisions and Market Efficiency
Chapter 13: Efficient Markets and Behavioral Finance
13-1 Differences between Investment and Financing Decisions
We Always Come Back to NPV
13-2 The Efficient Market Hypothesis
A Startling Discovery: Price Changes Are Random
Random Walks: The Evidence
Semistrong Market Efficiency: The Evidence
Strong Market Efficiency: The Evidence
13-3 Bubbles and Market Efficiency
13-4 Behavioral Finance
Sentiment
Limits to Arbitrage
Incentive Problems and the Financial Crisis of 2008–2009
13-5 The Five Lessons of Market Efficiency
Lesson 1: Markets Have No Memory
Lesson 2: Trust Market Prices
Lesson 3: Read the Entrails
Lesson 4: The Do-It-Yourself Alternative
Lesson 5: Seen One Stock, Seen Them All
What If Markets Are Not Efficient? Implications for the Financial Manager
Summary
Further Reading
Problem Sets
Finance on the Web
Chapter 14: An Overview of Corporate Financing
14-1 Patterns of Corporate Financing
Do Firms Rely Too Much on Internal Funds?
How Much Do Firms Borrow?
14-2 Common Stock
Ownership of the Corporation
Voting Procedures
Dual-Class Shares and Private Benefits
Equity in Disguise
Preferred Stock
14-3 Debt
Debt Comes in Many Forms
A Debt by Any Other Name
Variety’s the Very Spice of Life
14-4 Financial Markets and Intermediaries
Financial Markets
Financial Intermediaries
Investment Funds
Financial Institutions
14-5 The Role of Financial Markets and Intermediaries
The Payment Mechanism
Borrowing and Lending
Pooling Risk
Information Provided by Financial Markets
The Financial Crisis of 2007–2009
Summary
Further Reading
Problem Sets
Finance on the Web
Chapter 15: How Corporations Issue Securities
15-1 Venture Capital
The Venture Capital Market
15-2 The Initial Public Offering
The Public-Private Choice
Arranging an Initial Public Offering
The Sale of Marvin Stock
The Underwriters
Costs of a New Issue
Underpricing of IPOs
Hot New-Issue Periods
The Long-Run Performance of IPO Stocks
15-3 Alternative Issue Procedures for IPOs
Types of Auction: A Digression
15-4 Security Sales by Public Companies
General Cash Offers
International Security Issues
The Costs of a General Cash Offer
Market Reaction to Stock Issues
Rights Issues
15-5 Private Placements and Public Issues
Summary
Further Reading
Problem Sets
Finance on the Web
Appendix: Marvin’s New-Issue Prospectus
Part Five: Payout Policy and Capital Structure
Chapter 16: Payout Policy
16-1 Facts about Payout
How Firms Pay Dividends
How Firms Repurchase Stock
16-2 The Information Content of Dividends and Repurchases
The Information Content of Share Repurchases
16-3 Dividends or Repurchases? The Payout Controversy
Payout Policy Is Irrelevant in Perfect Capital Markets
Dividends or Repurchases? An Example
Stock Repurchases and DCF Models of Share Price
Dividends and Share Issues
16-4 The Rightists
Payout Policy, Investment Policy, and Management Incentives
16-5 Taxes and the Radical Left
Empirical Evidence on Dividends and Taxes
Alternative Tax Systems
16-6 Payout Policy and the Life Cycle of the Firm
Payout and Corporate Governance
Summary
Further Reading
Problem Sets
Chapter 17: Does Debt Policy Matter?
17-1 The Effect of Financial Leverage in a Competitive Tax-Free Economy
Enter Modigliani and Miller
The Law of Conservation of Value
An Example of Proposition 1
17-2 Financial Risk and Expected Returns
Proposition 2
Leverage and the Cost of Equity
How Changing Capital Structure Affects Beta
Watch Out for Hidden Leverage
17-3 No Magic in Financial Leverage
Today’s Unsatisfied Clienteles Are Probably Interested in Exotic Securities
Imperfections and Opportunities
17-4 A Final Word on the After-Tax Weighted-Average Cost of Capital
Summary
Further Reading
Problem Sets
Mini-Case: Claxton Drywall Comes to the Rescue
Chapter 18: How Much Should a Corporation Borrow?
18-1 Corporate Taxes
How Do Interest Tax Shields Contribute to the Value of Stockholders’ Equity?
Recasting Johnson & Johnson’s Capital Structure
MM and Taxes
18-2 Corporate and Personal Taxes
18-3 Costs of Financial Distress
Bankruptcy Costs
Evidence on Bankruptcy Costs
Direct versus Indirect Costs of Bankruptcy
Financial Distress without Bankruptcy
Debt and Incentives
Risk Shifting: The First Game
Refusing to Contribute Equity Capital: The Second Game
And Three More Games, Briefly
What the Games Cost
Costs of Distress Vary with Type of Asset
The Trade-Off Theory of Capital Structure
18-4 The Pecking Order of Financing Choices
Debt and Equity Issues with Asymmetric Information
Implications of the Pecking Order
The Trade-Off Theory vs. the Pecking-Order Theory—Some Evidence
The Bright Side and the Dark Side of Financial Slack
Is There a Theory of Optimal Capital Structure?
Summary
Further Reading
Problem Sets
Finance on the Web
Chapter 19: Financing and Valuation
19-1 The After-Tax Weighted-Average Cost of Capital
Review of Assumptions
Mistakes People Make in Using the Weighted-Average Formula
19-2 Valuing Businesses
Valuing Rio Corporation
Estimating Horizon Value
WACC vs. the Flow-to-Equity Method
19-3 Using WACC in Practice
Some Tricks of the Trade
Adjusting WACC When Debt Ratios and Business Risks Differ
Unlevering and Relevering Betas
The Importance of Rebalancing
The Modigliani–Miller Formula, Plus Some Final Advice
19-4 Adjusted Present Value
APV for the Perpetual Crusher
Other Financing Side Effects
APV for Entire Businesses
APV and Limits on Interest Deductions
APV for International Investments
19-5 Your Questions Answered
Summary
Further Reading
Problem Sets
Finance on the Web
Appendix: Discounting Safe, Nominal Cash Flows
Part Six: Options
Chapter 20: Understanding Options
20-1 Calls, Puts, and Shares
Call Options and Position Diagrams
Put Options
Selling Calls and Puts
Position Diagrams Are Not Profit Diagrams
20-2 Financial Alchemy with Options
Spotting the Option
20-3 What Determines Option Values?
Risk and Option Values
Summary
Further Reading
Problem Sets
Finance on the Web
Chapter 21: Valuing Options
21-1 A Simple Option-Valuation Model
Why Discounted Cash Flow Won’t Work for Options
Constructing Option Equivalents from Common Stocks and Borrowing
Valuing the Amazon Put Option
21-2 The Binomial Method for Valuing Options
Example: The Two-Step Binomial Method
The General Binomial Method
The Binomial Method and Decision Trees
21-3 The Black–Scholes Formula
Using the Black–Scholes Formula
The Risk of an Option
The Black–Scholes Formula and the Binomial Method
21-4 Black–Scholes in Action
Executive Stock Options
Warrants
Portfolio Insurance
Calculating Implied Volatilities
21-5 Option Values at a Glance
21-6 The Option Menagerie
Summary
Further Reading
Problem Sets
Finance on the Web
Mini-Case: Bruce Honiball’s Invention
Chapter 22: Real Options
22-1 The Value of Follow-On Investment Opportunities
Questions and Answers about Blitzen’s Mark II
Other Expansion Options
22-2 The Timing Option
Valuing the Malted Herring Option
Optimal Timing for Real Estate Development
22-3 The Abandonment Option
Bad News for the Perpetual Crusher
Abandonment Value and Project Life
Temporary Abandonment
22-4 Flexible Production and Procurement
Aircraft Purchase Options
22-5 Investment in Pharmaceutical R&D
22-6 Valuing Real Options
A Conceptual Problem?
What about Taxes?
Practical Challenges
Summary
Further Reading
Problem Sets
Part Seven: Debt Financing
Chapter 23: Credit Risk and the Value of Corporate Debt
23-1 Yields on Corporate Debt
What Determines the Yield Spread?
23-2 Valuing the Option to Default
The Value of Corporate Equity
A Digression: Valuing Government Financial Guarantees
23-3 Bond Ratings and the Probability of Default
23-4 Predicting the Probability of Default
Statistical Models of Default
Structural Models of Default
Summary
Further Reading
Problem Sets
Finance on the Web
Chapter 24: The Many Different Kinds of Debt
24-1 Long-Term Bonds
Bond Terms
Security and Seniority
Asset-Backed Securities
Call Provisions
Sinking Funds
Bond Covenants
Privately Placed Bonds
Foreign Bonds and Eurobonds
24-2 Convertible Securities and Some Unusual Bonds
The Value of a Convertible at Maturity
Forcing Conversion
Why Do Companies Issue Convertibles?
Valuing Convertible Bonds
A Variation on Convertible Bonds: The Bond–Warrant Package
Innovation in the Bond Market
24-3 Bank Loans
Commitment
Maturity
Rate of Interest
Syndicated Loans
Security
Loan Covenants
24-4 Commercial Paper and Medium-Term Notes
Commercial Paper
Medium-Term Notes
Summary
Further Reading
Problem Sets
Mini-Case: The Shocking Demise of Mr. Thorndike
Appendix: Project Finance 660Appendix Further Reading
Chapter 25: Leasing
25-1 What Is a Lease?
25-2 Why Lease?
Sensible Reasons for Leasing
Some Dubious Reasons for Leasing
25-3 Operating Leases
Example of an Operating Lease
Lease or Buy?
25-4 Valuing Financial Leases
Example of a Financial Lease
Who Really Owns the Leased Asset?
Leasing and the Internal Revenue Service
A First Pass at Valuing a Lease Contract
The Story So Far
Financial Leases When There Is No Interest Tax Shield
25-5 When Do Financial Leases Pay?
Leasing around the World
25-6 Leveraged Leases
Summary
Further Reading
Problem Sets
Part Eight: Risk Management
Chapter 26: Managing Risk
26-1 Why Manage Risk?
Reducing the Risk of Cash Shortfalls or Financial Distress
Agency Costs May Be Mitigated by Risk Management
The Evidence on Risk Management
26-2 Insurance
26-3 Reducing Risk with Options
26-4 Forward and Futures Contracts
A Simple Forward Contract
Futures Exchanges
The Mechanics of Futures Trading
Trading and Pricing Financial Futures Contracts
Spot and Futures Prices—Commodities
More about Forward Contracts
Homemade Forward Rate Contracts
26-5 Swaps
Interest Rate Swaps
Currency Swaps
Some Other Swaps
26-6 How to Set Up a Hedge
Hedging Interest Rate Risk
Hedge Ratios and Basis Risk
26-7 Is “Derivative” a Four-Letter Word?
Summary
Further Reading
Problem Sets
Finance on the Web
Mini-Case: Rensselaer Advisers
Chapter 27: Managing International Risks
27-1 The Foreign Exchange Market
27-2 Some Basic Relationships
Interest Rates and Exchange Rates
The Forward Premium and Changes in Spot Rates
Changes in the Exchange Rate and Inflation Rates
Interest Rates and Inflation Rates
Is Life Really That Simple?
27-3 Hedging Currency Risk
Transaction Exposure and Economic Exposure
27-4 Exchange Risk and International Investment Decisions
The Cost of Capital for International Investments
27-5 Political Risk
Summary
Further Reading
Problem Sets
Finance on the Web
Mini-Case: Exacta, S.a.
Part Nine: Financial Planning and Working Capital Management
Chapter 28: Financial Analysis
28-1 Financial Ratios
28-2 Financial Statements
28-3 Home Depot’s Financial Statements
The Balance Sheet
The Income Statement
28-4 Measuring Home Depot’s Performance
Economic Value Added
Accounting Rates of Return
Problems with EVA and Accounting Rates of Return
28-5 Measuring Efficiency
28-6 Analyzing the Return on Assets: The Du Pont System
The Du Pont System
28-7 Measuring Leverage
Leverage and the Return on Equity
28-8 Measuring Liquidity
28-9 Interpreting Financial Ratios
Summary
Further Reading
Problem Sets
Finance on the Web
Chapter 29: Financial Planning
29-1 Links between Short-Term and Long-Term Financing Decisions
29-2 Tracing Changes in Cash
The Cash Cycle
29-3 Cash Budgeting
29-4 Dynamic’s Short-Term Financial Plan
Dynamic Mattress’s Financing Plan
Evaluating the Plan
A Note on Short-Term Financial Planning Models
29-5 Long-Term Financial Planning
Why Build Financial Plans?
A Long-Term Financial Planning Model for Dynamic Mattress
Pitfalls in Model Design
Choosing a Plan
29-6 Growth and External Financing
Summary
Further Reading
Problem Sets
Finance on the Web
Chapter 30: Working Capital Management
30-1 The Composition of Working Capital
30-2 Inventories
30-3 Credit Management
Terms of Sale
The Promise to Pay
Credit Analysis
The Credit Decision
Collection Policy
30-4 Cash
How Purchases Are Paid For
Speeding Up Check Collections
International Cash Management
Paying for Bank Services
30-5 Marketable Securities
Tax Strategies
Investment Choices
Calculating the Yield on Money Market Investments
Returns on Money Market Investments
The International Money Market
Money Market Instruments
Summary
Further Reading
Problem Sets
Finance on the Web
Part Ten: Mergers, Corporate Control, and Governance
Chapter 31: Mergers
31-1 Sensible Motives for Mergers
Economies of Scale
Economies of Vertical Integration
Complementary Resources
Surplus Funds
Eliminating Inefficiencies
Industry Consolidation
31-2 Some Dubious Reasons for Mergers
Diversification
Increasing Earnings per Share: The Bootstrap Game
Lower Financing Costs
31-3 Estimating Merger Gains and Costs
Right and Wrong Ways to Estimate the Benefits of Mergers
More on Estimating Costs—What If the Target’s Stock Price Anticipates the Merger?
Estimating Cost When the Merger Is Financed by Stock
Asymmetric Information
31-4 The Mechanics of a Merger
Mergers, Antitrust Law, and Popular Opposition
The Form of Acquisition
Merger Accounting
Some Tax Considerations
Cross-Border Mergers and Tax Inversion
31-5 Proxy Fights, Takeovers, and the Market for Corporate Control
Proxy Contests
Takeovers
Valeant Bids for Allergan
Takeover Defenses
Who Gains Most in Mergers?
31-6 Merger Waves and Merger Profitability
Merger Waves
Merger Announcements and the Stock Price
Merger Profitability
Do Mergers Generate Net Benefits?
Summary
Further Reading
Problem Sets
Appendix: Conglomerate Mergers and Value Additivity
Chapter 32: Corporate Restructuring
32-1 Leveraged Buyouts
The RJR Nabisco LBO
Barbarians at the Gate?
Leveraged Restructurings
LBOs and Leveraged Restructurings
32-2 The Private-Equity Market
Private-Equity Partnerships
Are Private-Equity Funds Today’s Conglomerates?
32-3 Fusion and Fission in Corporate Finance
Spin-Offs
Carve-Outs
Asset Sales
Privatization and Nationalization
32-4 Bankruptcy
Is Chapter 11 Efficient?
Workouts
Alternative Bankruptcy Procedures
Summary
Further Reading
Problem Sets
Chapter 33: Governance and Corporate Control around the World
33-1 Financial Markets and Institutions
Investor Protection and the Development of Financial Markets
33-2 Ownership, Control, and Governance
Ownership and Control in Japan
Ownership and Control in Germany
European Boards of Directors
Shareholders versus Stakeholders
Ownership and Control in Other Countries
Conglomerates Revisited
33-3 Do These Differences Matter?
Risk and Short-Termism
Growth Industries and Declining Industries
Transparency and Governance
Summary
Further Reading
Problem Sets
Part Eleven: Conclusion
Chapter 34: Conclusion: What We Do and Do Not Know about Finance
34-1 What We Do Know: The Seven Most Important Ideas in Finance
1. Net Present Value
2. The Capital Asset Pricing Model
3. Efficient Capital Markets
4. Value Additivity and the Law of Conservation of Value
5. Capital Structure Theory
6. Option Theory
7. Agency Theory
34-2 What We Do Not Know: 10 Unsolved Problems in Finance
1. What Determines Project Risk and Present Value?
2. Risk and Return—What Have We Missed?
3. How Important Are the Exceptions to the Efficient-Market Theory?
4. Is Management an Off-Balance-Sheet Liability?
5. How Can We Explain the Success of New Securities and New Markets?
6. How Can We Resolve the Payout Controversy?
7. What Risks Should a Firm Take?
8. What Is the Value of Liquidity?
9. How Can We Explain Merger Waves?
10. Why Are Financial Systems So Prone to Crisis?
34-3 A Final Word
APPENDIX
GLOSSARY
INDEX