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