Corporate Finance - European Edition

Description

Corporate Finance, 1st European Edition, is an adaptation of the hugely successful Corporate Finance text by Ross, Westerfield, Jaffe and Jordan aimed specifically at courses outside the United States. Covering the core and emerging topics in an engaging and effective way makes this text a must have for all students studying corporate finance. 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