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| Preface | |
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| A Financial Model of the Corporation | |
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| Why Corporate Finance? | |
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| Corporations: Products, Bonds, Stocks, and People | |
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| The Financial Balance Sheet | |
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| The Left-Hand Side of the Financial Balance Sheet | |
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| The Right-Hand Side of the Financial Balance Sheet | |
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| Three Major Distinctions: The Financial Balance Sheet versus the Accounting Balance Sheet | |
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| Acquisition of Capital | |
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| The Financial Goal of the Corporation | |
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| Management's Job | |
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| Creating Wealth | |
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| Information Asymmetry | |
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| Agency Costs | |
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| Competing Organizational Forms | |
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| Corporations and Society | |
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| Summary | |
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| Markets, Value, and the Firm | |
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| Governments, Corporations, and Markets | |
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| Markets and Exchange | |
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| Some General Comments About Markets | |
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| Markets and Prices | |
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| Corporations and Markets | |
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| Financial Markets | |
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| Financial Securities, Transferability, and Liquidity | |
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| Primary and Secondary Markets | |
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| Money and Capital Markets | |
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| Foreign Financial Markets | |
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| Competition and Information in the Financial Markets | |
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| Informational Efficiency in Financial Markets | |
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| Informational Efficiency and Profits from Investing | |
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| Product Markets | |
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| Perfect and Imperfect Competition | |
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| Market Participants and Value | |
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| Behavioral Foundations of Value | |
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| A Simple Value Formula | |
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| Summary | |
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| Estimating Cash Flows | |
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| The Importance of Cash Flow | |
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| The Cash Cycle of a Typical Firm | |
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| A Simple Cash Cycle | |
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| The Days Model (The Cash Conversion Cycle Model) | |
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| Why Accounting Profits and Cash Flows Differ | |
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| Revenue Recognition | |
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| The Matching Principle | |
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| Depreciation | |
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| Translating Accounting Profits into Cash Flows | |
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| Estimating Cash Flows for a New Project | |
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| An Initial Estimate | |
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| Example: Estimating Cash Flows for the Steaming Bean Coffee Cart | |
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| Sensitivity Analysis | |
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| Before-Tax and After-Tax Cash Flows | |
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| More on the Cash Cycle: The Effect of Growth | |
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| When Future Cash Flows Are Not Certain: Computing Expected Cash Flows | |
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| When Cash Flows Are Not in Dollars | |
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| Summary | |
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| Constructing a Pro Forma Balance Sheet | |
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| Time Is Money | |
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| The Time Value of Money | |
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| Compound and Simple Interest | |
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| The Time Value of a Single Cash Flow | |
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| The Future Value of a Single Cash Flow | |
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| The Present Value of a Cash Flow | |
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| Effective Annual Percentage Rate | |
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| Continuous Compounding | |
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| Valuing Multiple Cash Flows | |
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| Perpetuities | |
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| Annuities | |
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| Loan Amortization: An Annuity Application | |
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| Summary | |
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| Summing a Geometric Series and Derivation of Time Value Formulas | |
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| Solving Time Value of Money Problems with a Financial Calculator | |
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| Time Value Applications: Security Valuation and Expected Returns | |
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| An Application of Single Cash Flow Formulas: Zero Coupon Bonds | |
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| A Perpetuity Application: Preferred Stock | |
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| Common Stock: A Growing Perpetuity | |
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| Common Stock: Nonconstant Growth | |
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| Bonds: An Annuity and a Single Cash Flow | |
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| Bond Prices and Interest Rates | |
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| Solving for Expected Returns | |
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| Summary | |
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| Risk and Return in the Capital Markets | |
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| Risk and Return in the Stock Market | |
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| What We Can Learn from the Capital Markets | |
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| Investor Behavior, Portfolios, and Risk | |
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| Portfolio Risk and Return | |
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| The Portfolio Effect | |
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| Rates of Return and Standard Deviation | |
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| Correlation | |
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| Calculating the Strength of the Portfolio Effect | |
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| The Effect of Correlation on Risk for Two-stock Portfolios | |
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| Adding Stocks to a Portfolio to Reduce Risk | |
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| A Brief Review of Portfolios and a Few Key Points | |
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| The Risk of Stocks in Portfolios | |
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| Stocks and Portfolios | |
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| Calculating Stock Risk | |
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| Interpreting Beta | |
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| The Past and the Future | |
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| Risks and Return of Individual Securities | |
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| The Security Market Line (SML) | |
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| What the SML Really Tells Us | |
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| Stock Market Games | |
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| The Capital Asset Pricing Model | |
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| The Dividend Growth Model and the CAPM | |
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| Summary | |
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| An International Perspective | |
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| Covariance and Correlation | |
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| Determining Beta from Regression Analysis | |
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| Capital Budgeting: Investing to Create Value | |
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| Linking Corporate Investments to Value Creation | |
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| Investing Principles | |
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| Investing in Fixed Assets | |
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| Product Market Opportunities | |
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| Project Selection | |
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| Identifying Potential Projects | |
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| Classifying Projects | |
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| Eliminating Project Dependencies | |
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| Estimating Project Cash Flows | |
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| Consider Only Incremental Cash Flows | |
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| Cash Flow Categories | |
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| Cash Flow Calculations | |
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| The Challenge of Estimating Project Cash Flows | |
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| Analyzing the Pogo Harness Project | |
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| Project Cash Flows | |
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| Calculating the Net Present Value and Internal Rate of Return for the Pogo Harness Project | |
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| Comparing NPV and IRR Results | |
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| Decision Criterion | |
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| Mutually Exclusive Projects | |
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| Project Dependencies | |
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| The Timing of Project Cash Flows | |
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| Differences in Size of the Initial Investment | |
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| Resolving the Conflict: Choosing NPV over IRR | |
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| Payback as an Alternative to NPV and IRR | |
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| Options in Capital Projects | |
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| Learning to Recognize Options | |
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| An Option Example | |
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| Factors that Affect the Value of an Option | |
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| Real Options | |
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| Real Options in Practice | |
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| Types of Real Options | |
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| Adjusting NPV for the Option Effect | |
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| Summary | |
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| Accelerated Cost Recovery Tax Depreciation Schedules | |
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| Cost of Capital | |
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| Estimating the Discount Rate | |
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| The Weighted Average Cost of Capital | |
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| Calculating the Weighted Average Cost of Capital | |
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| The Cost of Debt | |
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| The Cost of Preferred Stock | |
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| The Cost of Common Equity | |
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| The Cost of Selling Securities | |
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| The Financing Mix and Weights in the WACC | |
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| Estimating the Discount Rate for Individual Projects | |
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| Why a Project's Risk May Differ from the Company's Overall Risk | |
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| Estimating a Risk-Adjusted Discount Rate for NPV Analysis | |
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| Estimating a Project's Beta | |
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| Summary | |
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| The Best Proxy for the Risk-Free Rate | |
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| Risk, Inflation, and the Corporate Capital Budget | |
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| Handling Risk in Project Cash Flow Estimates | |
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| Understanding Sources of Risk in Estimated Future Cash Flow | |
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| Using Scenario Analysis to Identify Risk Factors | |
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| Using Sensitivity Analysis to Analyze Risk in Replacement and Expansion Projects | |
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| Using Simulation to Analyze Risk in Diversification and Dispersion Projects | |
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| Dealing with Inflation | |
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| The Effects of Expected Inflation | |
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| The Effect of Unequal Inflation Rates on Project NPV | |
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| Nominal vs. Real Estimates | |
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| The Corporate Capital Budget | |
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| Aggregating Independent Projects | |
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| The Question of Corporate Investment Diversification | |
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| Capital Rationing | |
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| A Few Key Points to Remember About the Capital Budget | |
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| The Benefits and Risks of Global Investing | |
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| The Scope of Global Investing | |
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| Differences Between Global and Domestic Investing | |
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| Managing Political Risk | |
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| Evaluating a Foreign Investment | |
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| Wayfarer Industries: Evaluating a Foreign Investment | |
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| Summary | |
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| Sensitivity Analysis Using a Spreadsheet: TopFlight Airlines | |
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| Capital Structure: Right-Hand-Side Decisions and the Value of the Firm | |
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| Perfect Capital Markets and the Irrelevance of Capital Structure | |
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| Perfect Capital Markets | |
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| The Irrelevance of Capital Structure | |
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| Leverage and the Risk of Common Stock | |
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| Capital Market Imperfections and Capital Structure | |
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| Taxes and Leverage | |
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| Bankruptcy Costs and Leverage | |
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| Information Asymmetry and Agency Costs | |
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| Information Asymmetry and Signaling with Debt | |
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| The Target Capital Structure | |
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| Taxes | |
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| Bankruptcy | |
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| Agency Problems | |
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| Signaling | |
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| Summary | |
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| Dividend Policy: Distributions to Shareholders | |
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| Dividend Policy in Perfect Capital Markets | |
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| Capital Market Imperfections and Dividend Policy | |
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| Market Frictions: Transaction Costs, Taxes, and Dividend Policy | |
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| Information Asymmetry: Signaling, Agency Costs, and Dividend Policy | |
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| Summarizing Dividend Policy in Practice | |
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| Expectations and Dividend Policy | |
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| The Process of Paying Dividends | |
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| Stock Repurchases | |
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| Stock Dividends and Stock Splits | |
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| Summary | |
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| Short-Term Financial Management | |
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| The Cash Cycle and Solvency | |
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| Liquidity and Corporate Value | |
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| Does Liquidity Really Matter? | |
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| The Costs of Too Much and Not Enough Liquidity | |
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| Managing Inventories, Receivables, and Cash | |
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| Inventories | |
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| Receivables and Credit Policy | |
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| Cash | |
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| Short-Term Credit | |
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| Spontaneous Credit Sources: Payables and Accruals | |
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| Loans from Banks and other Financial Institutions | |
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| Terms of Borrowing from Banks | |
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| Marketable Securities | |
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| Types of Marketable Securities | |
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| The Rate of Return on Marketable Securities | |
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| The Cash Budget | |
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| Preparing the Cash Budget | |
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| The Cash Budget for Endless Bummer Beach Wear, Inc. | |
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| Summary | |
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| Financial Analysis: Evaluation of Corporate Performance | |
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| Evaluating Corporate Performance: Who, Why, and How | |
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| Information Sources and Their Characteristics | |
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| Accounting Statements | |
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| Market Data | |
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| Opinions of Other Analysts | |
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| Comparative Data | |
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| The Press | |
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| The Internet | |
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| Financial Statement Analysis | |
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| Trend Statements | |
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| Common Size Statements | |
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| Ratio Analysis | |
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| Economic Value Added and Market Value Added | |
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| Stock Prices and Ratio Analysis | |
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| Summary | |
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| Ethics and Firm Value | |
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| Corporate Restructuring: An Application of Financial Tools | |
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| A Taxonomy of Corporate Restructuring Transactions | |
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| Mergers | |
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| Acquisitions | |
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| Hostile Takeovers or Tender Offer Contests | |
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| Divestitures | |
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| IPO Roll-Ups | |
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| Going-Private Transactions | |
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| Alternatives to the Corporate Form | |
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| Lessons from the History of the Market for Corporate Control | |
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| The 1960s: Synergistic Mergers | |
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| The Late 1970s and 1980s: Competition, Hostile Takeovers, and Junk Bonds | |
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| The Mid-1990s: The Era of Strategic Mergers and Acquisitions | |
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| The Twenty-First Century | |
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| Do Mergers Create Value? | |
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| The Evidence | |
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| Restructuring and Actions that Harm Shareholders | |
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| Unjustified Growth | |
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| Overconfidence | |
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| Diversification and the Risk Aversion of Managers | |
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| Defensive Actions and Managerial Entrenchment | |
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| Ethical Problems Inherent in MBOs | |
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| The Quantitative Analysis of Restructuring Transactions | |
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| Summary | |
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| Numerical Analyses of Two Restructurings | |
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| Finance and the Firm: Creating Value and Improving Decision Making Through the Firm | |
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| Accounting and Finance | |
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| Accounting Supporting the Finance Function | |
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| Finance Supporting the Accounting Function | |
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| Human Resources and Finance | |
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| Human Resources Supporting the Finance Function | |
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| Finance Supporting the Human Resources Function | |
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| Marketing and Finance | |
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| Marketing Supporting the Finance Function | |
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| Finance Supporting the Marketing Function | |
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| Operations and Production and Finance | |
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| Operations and Production Supporting the Finance Function | |
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| Finance Supporting the Operations/Logistics Function | |
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| Strategic Management and Finance | |
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| Strategic Management Supporting the Finance Function | |
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| Finance Supporting the Strategic Management Function | |
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| Summary | |
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| Epilogue: The Journey Through Corporate Finance | |
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| Northwood Publishing Co.: an Apocryphal Tale of Finance | |
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| How Northwood Got into Trouble | |
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| The Turnaround | |
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| Evaluating the Investment Projects | |
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| Required Returns on Investments | |
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| Divisional Rates of Return | |
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| Project Financing | |
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| The Investment Decision | |
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| Epilogue | |
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| A Note on Northwood Publishing Co. | |
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| Postscripts on Corporate Finance | |
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| Placing Finance in Perspective | |
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| Continuing Education in Finance | |
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| A Final Thought | |
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| Appendix A.1 | |
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| Appendix A.2 | |
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| Appendix A.3 | |
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| Appendix A.4 | |
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| Answers to Odd-Numbered Problems | |
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| Glossary | |
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| Index | |