Fundamentals of Corporate Finance

Description

Cover ......Page 1 Brief Contents ......Page 9 Detailed Contents ......Page 11 PART 1 Introduction......Page 35 CHAPTER 1 Corporate Finance and the Financial Manager......Page 37 1.2 The Four Types of Firms......Page 38 Sole Proprietorships......Page 39 Corporations......Page 40 Corporate Taxation Around the World......Page 42 GLOBAL FINANCIAL CRISIS The Dodd-Frank Act......Page 44 The Goal of the Financial Manager......Page 45 The Corporate Management Team......Page 46 Ethics and Incentives in Corporations......Page 47 Citizens United v. Federal Election Commission......Page 48 The Largest Stock Markets......Page 49 Traditional Trading Venues......Page 50 INTERVIEW WITH Frank Hatheway......Page 51 New Competition and Market Changes......Page 52 Other Financial Markets......Page 53 The Financial Cycle......Page 54 Role of Financial Institutions......Page 55 MyFinanceLab Summary......Page 56 Problems......Page 58 CHAPTER 2 Introduction to Financial Statement Analysis......Page 61 International Financial Reporting Standards ......Page 62 INTERVIEW WITH Ruth Porat ......Page 63 2.2 The Balance Sheet......Page 64 Assets......Page 65 Stockholders’ Equity......Page 66 Market Value Versus Book Value......Page 67 Enterprise Value......Page 68 Earnings Calculations......Page 70 EBITDA......Page 71 Operating Activity......Page 72 2.5 Other Financial Statement Information......Page 75 2.6 Financial Statement Analysis......Page 76 Profitability Ratios......Page 77 Working Capital Ratios......Page 78 Leverage Ratios......Page 80 COMMON MISTAKE Mismatched Ratios......Page 82 Operating Returns......Page 83 The DuPont Identity......Page 84 The Sarbanes-Oxley Act......Page 88 Dodd-Frank Act......Page 89 The Financial Statements: A Useful Starting Point......Page 90 MyFinanceLab Summary......Page 91 Critical Thinking......Page 93 Problems......Page 94 Data Case......Page 102 PART 2 Interest Rates and Valuing Cash Flows......Page 105 CHAPTER 3 Time Value of Money: An Introduction......Page 107 Quantifying Costs and Benefits......Page 108 The Valuation Principle......Page 110 Why There Can Be Only One Competitive Price for a Good......Page 111 The Time Value of Money......Page 112 The Interest Rate: Converting Cash Across Time......Page 113 Timelines......Page 116 COMMON MISTAKE Summing Cash Flows Across Time......Page 117 Rule 2: Compounding......Page 118 Rule of 72......Page 119 Rule 3: Discounting......Page 120 MyFinanceLab Summary......Page 122 Critical Thinking......Page 123 Problems......Page 124 CHAPTER 4 Time Value of Money: Valuing Cash Flow Streams......Page 127 Applying the Rules of Valuing Cash Flows to a Cash Flow Stream......Page 128 Using a Financial Calculator: Solving for Present and Future Values of Cash Flow Streams......Page 131 Perpetuities......Page 132 Historical Examples of Perpetuities......Page 134 Present Value of an Annuity......Page 135 Future Value of an Annuity......Page 138 4.4 Growing Cash Flows......Page 139 Growing Perpetuity......Page 140 Growing Annuity......Page 142 Solving for the Cash Flows......Page 143 Rate of Return......Page 146 Solving for the Number of Periods......Page 149 4.6 Non-Annual Cash Flows......Page 150 The Big Picture......Page 151 MyFinanceLab Summary......Page 152 Problems......Page 153 Data Case......Page 159 CHAPTER 4 APPENDIX Using a Financial Calculator......Page 161 CHAPTER 5 Interest Rates......Page 165 The Effective Annual Rate......Page 166 Adjusting the Discount Rate to Different Time Periods......Page 167 Annual Percentage Rates......Page 168 COMMON MISTAKE Using the EAR in the Annuity Formula......Page 169 Computing Loan Payments......Page 171 Computing the Outstanding Loan Balance......Page 173 5.3 The Determinants of Interest Rates......Page 174 Inflation and Real Versus Nominal Rates......Page 175 Investment and Interest Rate Policy......Page 176 How Is Inflation Actually Calculated?......Page 177 The Yield Curve and Discount Rates......Page 178 INTERVIEW WITH Kevin M. Warsh......Page 180 The Yield Curve and the Economy......Page 181 5.4 The Opportunity Cost of Capital......Page 184 Interest Rates, Discount Rates, and the Cost of Capital......Page 185 MyFinanceLab Summary......Page 186 Problems......Page 188 CHAPTER 6 Bonds......Page 193 6.1 Bond Terminology......Page 194 6.2 Zero-Coupon Bonds......Page 195 Yield to Maturity of a Zero-Coupon Bond......Page 196 GLOBAL FINANCIAL CRISIS Negative Bond Yields......Page 197 Risk-Free Interest Rates......Page 198 Coupon Bond Cash Flows......Page 199 The U.S. Treasury Market......Page 200 Yield to Maturity of a Coupon Bond......Page 201 Finding Bond Prices on the Web......Page 203 Interest Rate Changes and Bond Prices......Page 204 Time and Bond Prices......Page 207 Interest Rate Risk and Bond Prices......Page 208 Bond Prices in Practice......Page 211 6.5 Corporate Bonds......Page 212 Are Treasuries Really Default-Free Securities?......Page 213 Corporate Bond Yields......Page 214 Corporate Yield Curves......Page 215 The Credit Crisis and Bond Yields......Page 217 MyFinanceLab Summary......Page 219 Critical Thinking......Page 220 Problems......Page 221 Data Case......Page 225 CHAPTER 6 APPENDIX A Solving for the Yield to Maturity of a Bond Using a Financial Calculator......Page 226 CHAPTER 6 APPENDIX B The Yield Curve and the Law of One Price......Page 227 CHAPTER 7 Stock Valuation......Page 231 Stock Market Reporting: Stock Quotes......Page 232 Common Stock......Page 233 Preferred Stock......Page 234 7.2 The Mechanics of Stock Trades......Page 235 A One-Year Investor......Page 236 Dividend Yields, Capital Gains, and Total Returns......Page 237 A Multiyear Investor......Page 238 Dividend-Discount Model Equation......Page 239 Constant Dividend Growth......Page 240 Dividends Versus Investment and Growth......Page 241 Changing Growth Rates......Page 243 COMMON MISTAKE Forgetting to “Grow” This Year’s Dividend......Page 244 Uncertain Dividend Forecasts......Page 246 Non-Dividend-Paying Stocks......Page 247 7.6 Share Repurchases and the Total Payout Model......Page 248 7.7 Putting It All Together......Page 249 MyFinanceLab Summary......Page 250 Problems......Page 252 PART 2 INTEGRATIVE CASE......Page 256 PART 3 Valuation and the Firm......Page 259 CHAPTER 8 Investment Decision Rules......Page 261 Net Present Value......Page 262 The NPV Decision Rule......Page 263 Organizing the Cash Flows and Computing the NPV......Page 264 The NPV Profile......Page 265 8.3 Alternative Decision Rules......Page 266 USING EXCEL Computing NPV and IRR......Page 267 The Payback Rule......Page 268 The Internal Rate of Return Rule......Page 269 Modified Internal Rate of Return......Page 273 Why Do Rules Other Than the NPV Rule Persist?......Page 274 8.4 Choosing Between Projects......Page 276 Differences in Scale......Page 277 INTERVIEW WITH Dick Grannis......Page 280 Timing of the Cash Flows......Page 281 8.5 Evaluating Projects with Different Lives......Page 282 Important Considerations When Using the -Equivalent Annual Annuity......Page 284 Evaluating Projects with Different Resource Requirements......Page 285 8.7 Putting It All Together......Page 288 MyFinanceLab Summary......Page 289 Critical Thinking......Page 290 Problems......Page 291 Data Case......Page 297 CHAPTER 9 Fundamentals of Capital Budgeting......Page 299 9.1 The Capital Budgeting Process......Page 300 Operating Expenses Versus Capital Expenditures......Page 301 Incremental Revenue and Cost Estimates......Page 302 Incremental Earnings Forecast......Page 303 9.3 Determining Incremental Free Cash Flow......Page 305 Converting from Earnings to Free Cash Flow......Page 306 Calculating Free Cash Flow Directly......Page 309 Calculating the NPV......Page 310 USING EXCEL Capital Budgeting Using a Spreadsheet Program......Page 311 Project Externalities......Page 312 COMMON MISTAKE The Sunk Cost Fallacy......Page 313 Adjusting Free Cash Flow......Page 314 Replacement Decisions......Page 316 Sensitivity Analysis......Page 317 Break-Even Analysis......Page 318 INTERVIEW WITH David Holland......Page 320 Scenario Analysis......Page 321 USING EXCEL Project Analysis Using Excel......Page 322 9.6 Real Options in Capital Budgeting......Page 323 Option to Abandon......Page 324 MyFinanceLab Summary......Page 325 Critical Thinking......Page 326 Problems......Page 327 Data Case......Page 334 CHAPTER 9 APPENDIX MACRS Depreciation......Page 335 CHAPTER 10 Stock Valuation: A Second Look......Page 337 Valuing the Enterprise......Page 338 Implementing the Model......Page 339 Connection to Capital Budgeting......Page 340 Valuation Multiples......Page 342 Limitations of Multiples......Page 347 10.3 Stock Valuation Techniques: A Final Word......Page 348 INTERVIEW WITH Douglas Kehring......Page 349 Information in Stock Prices......Page 350 Forms of Market Efficiency......Page 352 Lessons for Investors and Corporate Managers......Page 354 The Efficient Markets Hypothesis Versus No Arbitrage......Page 355 Hanging On to Losers and the Disposition Effect......Page 356 Investor Attention, Mood, and Experience......Page 358 MyFinanceLab Summary......Page 359 Problems......Page 360 Data Case......Page 365 PART 3 INTEGRATIVE CASE......Page 367 PART 4 Risk and Return......Page 369 CHAPTER 11 Risk and Return in Capital Markets......Page 371 11.1 A First Look at Risk and Return......Page 372 11.2 Historical Risks and Returns of Stocks......Page 374 Computing Historical Returns......Page 375 Average Annual Returns......Page 377 Arithmetic Average Returns Versus Compound Annual Returns......Page 379 The Variance and Volatility of Returns......Page 380 USING EXCEL Computing the Standard Deviation of Historical Returns......Page 382 The Normal Distribution......Page 383 The Returns of Individual Stocks......Page 385 Types of Risk......Page 387 Unsystematic Versus Systematic Risk......Page 389 GLOBAL FINANCIAL CRISIS Diversification Benefits During Market Crashes......Page 390 The Importance of Systematic Risk......Page 392 COMMON MISTAKE A Fallacy of Long-Run Diversification......Page 393 MyFinanceLab Summary......Page 394 Critical Thinking......Page 395 Problems......Page 396 Data Case......Page 399 CHAPTER 12 Systematic Risk and the Equity Risk Premium......Page 403 Portfolio Returns......Page 404 Expected Portfolio Return......Page 406 Diversifying Risks......Page 407 Measuring Stocks’ Co-Movement: Correlation......Page 409 Computing a Portfolio’s Variance and Standard Deviation......Page 411 The Volatility of a Large Portfolio......Page 413 Nobel Prize Harry Markowitz......Page 414 Role of the Market Portfolio......Page 415 Market Risk and Beta......Page 416 Index Funds......Page 417 COMMON MISTAKE Mixing Standard Deviation and Beta......Page 419 Estimating Beta from Historical Returns......Page 420 USING EXCEL Calculating a Stock’s Beta......Page 422 The CAPM Equation Relating Risk to Expected Return......Page 423 Why Not Estimate Expected Returns Directly?......Page 424 The Security Market Line......Page 425 The CAPM and Portfolios......Page 427 The Big Picture......Page 428 MyFinanceLab Summary......Page 429 Problems......Page 430 CHAPTER 12 APPENDIX Alternative Models of Systematic Risk......Page 435 CHAPTER 13 The Cost of Capital......Page 439 Opportunity Cost and the Overall Cost of Capital......Page 440 Weighted Averages and the Overall Cost of Capital......Page 441 Weighted Average Cost of Capital Calculations......Page 442 Cost of Debt Capital......Page 443 COMMON MISTAKE Using the Coupon Rate as the Cost of Debt......Page 444 Cost of Preferred Stock Capital......Page 445 Cost of Common Stock Capital......Page 446 WACC Equation......Page 448 Weighted Average Cost of Capital in Practice......Page 449 Methods in Practice......Page 450 13.4 Using the WACC to Value a Project......Page 451 Key Assumptions......Page 452 WACC Method Application: Extending the Life of a GE Facility......Page 453 COMMON MISTAKE Using a Single Cost of Capital in Multi-Divisional Firms......Page 454 Divisional Costs of Capital......Page 455 INTERVIEW WITH Shelagh Glaser......Page 456 13.6 When Raising External Capital Is Costly......Page 457 MyFinanceLab Summary......Page 458 Problems......Page 460 Data Case......Page 463 PART 4 INTEGRATIVE CASE......Page 465 PART 5 Long-Term Financing......Page 467 CHAPTER 14 Raising Equity Capital......Page 469 Sources of Funding......Page 470 INTERVIEW WITH Kevin Laws......Page 471 Securities and Valuation......Page 473 Exiting an Investment in a Private Company......Page 475 Primary and Secondary IPO Offerings......Page 476 Other IPO Types......Page 482 Underpriced IPOs......Page 485 “Hot” and “Cold” IPO Markets......Page 487 High Cost of Issuing an IPO......Page 488 Poor Post-IPO Long-Run Stock Performance......Page 489 SEO Process......Page 490 SEO Price Reaction......Page 492 SEO Costs......Page 493 MyFinanceLab Summary......Page 494 Problems......Page 495 Data Case......Page 498 CHAPTER 15 Debt Financing......Page 501 Debt Financing at Hertz: Bank Loans......Page 502 Public Debt......Page 503 Debt Financing at Hertz: Public Debt......Page 505 Sovereign Debt......Page 507 Municipal Bonds......Page 508 Asset-Backed Securities......Page 509 GLOBAL FINANCIAL CRISIS CDOs, Subprime Mortgages, and the Financial Crisis......Page 510 Advantages of Covenants......Page 512 Call Provisions......Page 513 New York City Calls Its Municipal Bonds......Page 515 Convertible Provisions......Page 516 MyFinanceLab Summary......Page 519 Problems......Page 521 Data Case......Page 523 CHAPTER 15 APPENDIX Using a Financial -Calculator to Calculate Yield to Call......Page 524 PART 5 INTEGRATIVE CASE......Page 525 PART 6 Capital Structure and Payout Policy......Page 529 CHAPTER 16 Capital Structure......Page 531 Capital Structure Choices Within Industries......Page 532 16.2 Capital Structure in Perfect Capital Markets......Page 534 Application: Financing a New Business......Page 535 Leverage and Firm Value......Page 536 The Effect of Leverage on Risk and Return......Page 537 Leverage and the Cost of Capital......Page 539 COMMON MISTAKE Capital Structure Fallacies......Page 540 GLOBAL FINANCIAL CRISIS Bank Capital Regulation and the ROE Fallacy......Page 542 Nobel Prize Franco Modigliani and Merton Miller......Page 543 The Interest Tax Deduction and Firm Value......Page 544 Value of the Interest Tax Shield......Page 545 The Interest Tax Shield with Permanent Debt......Page 547 Debt and Taxes: The Bottom Line......Page 548 16.4 The Costs of Bankruptcy and Financial Distress......Page 549 Indirect Costs of Financial Distress......Page 550 Differences Across Firms......Page 551 Optimal Leverage......Page 552 Agency Costs......Page 553 Airlines Use Financial Distress to Their Advantage......Page 554 GLOBAL FINANCIAL CRISIS Moral Hazard and Government Bailouts......Page 555 Debt and Information......Page 556 16.7 Capital Structure: Putting It All Together......Page 558 MyFinanceLab Summary......Page 559 Problems......Page 561 CHAPTER 16 APPENDIX The Bankruptcy Code......Page 569 CHAPTER 17 Payout Policy......Page 571 17.1 Cash Distributions to Shareholders......Page 572 Dividends......Page 573 Share Repurchases......Page 574 17.2 Dividends Versus Share Repurchases in a Perfect Capital Market......Page 575 Alternative Policy 2: Share Repurchase (No Dividend)......Page 576 Alternative Policy 3: High Dividend (Equity Issue)......Page 578 Modigliani-Miller and Dividend Policy Irrelevance......Page 579 Dividend Policy with Perfect Capital Markets......Page 580 Optimal Dividend Policy with Taxes......Page 581 Tax Differences Across Investors......Page 584 Retaining Cash with Perfect Capital Markets......Page 586 Retaining Cash with Imperfect Capital Markets......Page 587 Dividend Smoothing......Page 590 Dividend Signaling......Page 591 Signaling and Share Repurchases......Page 592 INTERVIEW WITH John Connors......Page 593 Stock Dividends and Splits......Page 594 Spin-Offs......Page 595 17.7 Advice for the Financial Manager......Page 596 MyFinanceLab Summary......Page 597 Problems......Page 599 Data Case......Page 602 PART 6 INTEGRATIVE CASE......Page 604 PART 7 Financial Planning and Forecasting......Page 605 CHAPTER 18 Financial Modeling and Pro Forma Analysis......Page 607 Plan for Future Funding Needs......Page 608 Percent of Sales Method......Page 609 Pro Forma Income Statement......Page 610 Pro Forma Balance Sheet......Page 611 Making the Balance Sheet Balance: Net New Financing......Page 612 18.3 Forecasting a Planned Expansion......Page 614 KMS Designs’ Expansion: Financing Needs......Page 615 KMS Designs’ Expansion: Pro Forma Income Statement......Page 616 Forecasting the Balance Sheet......Page 618 18.4 Growth and Firm Value......Page 619 Sustainable Growth Rate and External Financing......Page 620 Forecasting Free Cash Flows......Page 623 KMS Designs’ Expansion: Effect on Firm Value......Page 625 Optimal Timing and the Option to Delay......Page 628 MyFinanceLab Summary......Page 629 Problems......Page 630 CHAPTER 18 APPENDIX The Balance Sheet and Statement of Cash Flows......Page 634 CHAPTER 19 Working Capital Management......Page 637 The Cash Cycle......Page 638 Working Capital Needs by Industry......Page 640 Firm Value and Working Capital......Page 641 19.2 Trade Credit......Page 642 Trade Credit and Market Frictions......Page 643 COMMON MISTAKE Using APR Instead of EAR to -Compute the Cost of Trade Credit......Page 644 Managing Float......Page 645 The 5 C’s of Credit......Page 646 Monitoring Accounts Receivable......Page 648 Determining Accounts Payable Days Outstanding......Page 650 Stretching Accounts Payable......Page 651 Benefits of Holding Inventory......Page 652 Inventory Management Adds to the -Bottom Line at Gap......Page 653 Alternative Investments......Page 654 MyFinanceLab Summary......Page 656 Problems......Page 658 Data Case ......Page 661 CHAPTER 20 Short-Term Financial Planning......Page 663 Negative Cash Flow Shocks......Page 664 Seasonalities......Page 665 The Cash Budget......Page 667 Permanent Versus Temporary Working Capital......Page 669 Financing Policy Choices......Page 670 Line of Credit......Page 672 Common Loan Stipulations and Fees......Page 673 Short-Term Financing and the Financial Crisis of the Fall of 2008......Page 675 A Seventeenth-Century Financing Solution......Page 677 Loan Guarantees: The Ex-Im Bank Controversy......Page 678 20.6 Putting It All Together: Creating a Short-Term Financial Plan......Page 680 MyFinanceLab Summary......Page 681 Critical Thinking......Page 682 Problems......Page 683 PART 7 INTEGRATIVE CASE......Page 687 PART 8 Special Topics......Page 693 CHAPTER 21 Option Applications and Corporate Finance......Page 695 Option Contracts......Page 696 Stock Option Quotations......Page 697 21.2 Option Payoffs at Expiration......Page 699 The Long Position in an Option Contract......Page 700 The Short Position in an Option Contract......Page 701 Profits for Holding an Option to Expiration......Page 703 Returns for Holding an Option to Expiration......Page 705 Option Prices and the Exercise Date......Page 706 Option Prices and Volatility......Page 707 21.4 The Black-Scholes Option Pricing Formula......Page 708 Portfolio Insurance......Page 710 21.6 Options and Corporate Finance......Page 713 MyFinanceLab Summary......Page 715 Problems......Page 716 Data Case......Page 718 CHAPTER 22 Mergers and Acquisitions......Page 721 22.1 Background and Historical Trends......Page 722 Merger Waves......Page 723 22.2 Market Reaction to a Takeover......Page 724 Economies of Scale and Scope......Page 725 Monopoly Gains......Page 726 Tax Savings from Operating Losses......Page 727 Diversification......Page 728 Earnings Growth......Page 729 Managerial Motives to Merge......Page 730 Valuation......Page 731 The Offer......Page 732 Merger “Arbitrage”......Page 734 Tax and Accounting Issues......Page 735 Board and Shareholder Approval......Page 736 Poison Pills......Page 737 Staggered Boards......Page 738 Other Defensive Strategies......Page 739 Weyerhaeuser’s Hostile Bid for Willamette Industries......Page 740 The Free Rider Problem......Page 741 The Leveraged Buyout......Page 742 The Leveraged Buyout of RJR-Nabisco by KKR......Page 744 Competition......Page 745 MyFinanceLab Summary......Page 746 Problems......Page 748 CHAPTER 23 International Corporate Finance......Page 751 The Foreign Exchange Market......Page 752 23.2 Exchange Rate Risk......Page 754 Exchange Rate Fluctuations......Page 755 Brexit......Page 756 Hedging with Forward Contracts......Page 758 Cash-and-Carry and the Pricing of Currency Forwards......Page 760 Hedging Exchange Rate Risk with Options......Page 762 23.3 Internationally Integrated Capital Markets......Page 764 Application: Ityesi, Inc.......Page 766 The Law of One Price as a Robustness Check......Page 768 Multiple Foreign Projects and Deferral of Earnings Repatriation......Page 770 Differential Access to Markets......Page 771 Macro-Level Distortions......Page 772 Implications of Internationally Segmented Capital Markets......Page 773 23.7 Capital Budgeting with Exchange Rate Risk......Page 774 Application: Ityesi, Inc.......Page 775 MyFinanceLab Summary......Page 776 Critical Thinking......Page 778 Problems......Page 779 Data Case......Page 783 B ......Page 785 C ......Page 786 D ......Page 789 E ......Page 790 F ......Page 791 H ......Page 793 I ......Page 794 L ......Page 795 N ......Page 796 P ......Page 797 R ......Page 799 S ......Page 800 T ......Page 802 V ......Page 803 Z ......Page 804 WEB CHAPTER 1 Leasing ......Page 805 WEB CHAPTER 2 Insurance and Risk Management ......Page 831 WEB CHAPTER 3 Corporate Governance ......Page 853