Table Of Contents:

Part One Introduction

Chapter 1 Goals and Governance of the Corporation 2(28)

1.1 Investment and Financing Decisions 4(4)

The Investment (Capital Budgeting) Decision 6(1)

The Financing Decision 6(2)

1.2 What Is a Corporation? 8(2)

Other Forms of Business Organization 9(1)

1.3 Who Is the Financial Manager? 10(1)

1.4 Goals of the Corporation 11(9)

Shareholders Want Managers to Maximize Market Value 11(3)

The Ethics of Maximizing Value 14(2)

Do Managers Really Maximize Value? 16(3)

Corporate Governance 19(1)

1.5 Careers in Finance 20(3)

1.6 Topics Covered in This Book 23(7)

Snippets of History 23(2)

Summary 25(1)

Questions 26(4)

Chapter 2 Financial Markets and Institutions 30(22)

2.1 The Importance of Financial Markets and Institutions 32(1)

2.2 The Flow of Savings to Corporations 33(10)

The Stock Market 35(1)

Other Financial Markets 36(2)

Financial Intermediaries 38(2)

Financial Institutions 40(2)

Total Financing of U.S. Corporations 42(1)

2.3 Functions of Financial Markets and Intermediaries 43(4)

Transporting Cash across Time 43(1)

Risk Transfer and Diversification 43(1)

Liquidity 44(1)

The Payment Mechanism 45(1)

Information Provided by Financial Markets 45(2)

2.4 The Crisis of 2007-2009 47(5)

Summary 48(1)

Questions 49(3)

Chapter 3 Accounting and Finance 52(26)

3.1 The Balance Sheet 54(5)

Book Values and Market Values 57(2)

3.2 The Income Statement 59(4)

Profits versus Cash Flow 60(3)

3.3 The Statement of Cash Flows 63(3)

Free Cash Flow 65(1)

3.4 Accounting Practice and Malpractice 66(2)

3.5 Taxes 68(10)

Corporate Tax 68(1)

Personal Tax 69(2)

Summary 71(1)

Questions 71(7)

Chapter 4 Measuring Corporate Performance 78(34)

4.1 Value and Value Added 80(1)

How Financial Ratios Help to Understand Value Added 80(1)

4.2 Measuring Market Value and Market Value Added 81(3)

4.3 Economic Value Added and Accounting Rates of Return 84(4)

Accounting Rates of Return 86(1)

Problems with EVA and Accounting Rates of Return 87(1)

4.4 Measuring Efficiency 88(2)

4.5 Analyzing the Return on Assets: The Du Pont System 90(2)

The Du Pont System 90(2)

4.6 Measuring Financial Leverage 92(3)

Leverage and the Return on Equity 94(1)

4.7 Measuring Liquidity 95(2)

4.8 Calculating Sustainable Growth 97(1)

4.9 Interpreting Financial Ratios 98(3)

4.10 The Role of Financial Ratios---and a Final Note on Transparency 101(11)

Transparency 103(1)

Summary 103(2)

Questions 105(5)

Minicase 110(2)

Part Two Value

Chapter 5 The Time Value of Money 112(46)

5.1 Future Values and Compound Interest 114(3)

5.2 Present Values 117(7)

Finding the Interest Rate 123(1)

5.3 Multiple Cash Flows 124(3)

Future Value of Multiple Cash Flows 124(2)

Present Value of Multiple Cash Flows 126(1)

5.4 Level Cash Flows: Perpetuities and Annuities 127(9)

How to Value Perpetuities 127(2)

How to Value Annuities 129(4)

Future Value of an Annuity 133(3)

5.5 Annuities Due 136(2)

5.6 Effective Annual Interest Rates 138(1)

5.7 Inflation and the Time Value of Money 139(19)

Real versus Nominal Cash Flows 139(2)

Inflation and Interest Rates 141(2)

Valuing Real Cash Payments 143(1)

Real or Nominal? 144(1)

Summary 144(1)

Questions 145(11)

Minicase 156(2)

Chapter 6 Valuing Bonds 158(26)

6.1 The Bond Market 160(1)

Bond Characteristics 160(1)

6.2 Interest Rates and Bond Prices 161(5)

How Bond Prices Vary with Interest Rates 163(2)

Interest Rate Risk 165(1)

6.3 Yield to Maturity 166(2)

6.4 Bond Rates of Return 168(3)

6.5 The Yield Curve 171(3)

Nominal and Real Rates of Interest 172(2)

6.6 Corporate Bonds and the Risk of Default 174(10)

Variations in Corporate Bonds 177(1)

Summary 178(1)

Questions 178(6)

Chapter 7 Valuing Stocks 184(42)

7.1 Stocks and the Stock Market 186(3)

Reading Stock Market Listings 187(2)

7.2 Market Values, Book Values, and Liquidation Values 189(2)

7.3 Valuing Common Stocks 191(6)

Valuation by Comparables 191(1)

Price and Intrinsic Value 192(2)

The Dividend Discount Model 194(3)

7.4 Simplifying the Dividend Discount Model 197(5)

The Dividend Discount Model with No Growth 197(1)

The Constant-Growth Dividend Discount Model 197(2)

Estimating Expected Rates of Return 199(1)

Nonconstant Growth 200(2)

7.5 Growth Stocks and Income Stocks 202(4)

Valuing Growth Stocks 205(1)

Market-Value Balance Sheets 205(1)

7.6 There Are No Free Lunches on Wall Street 206(6)

Method 1 Technical Analysis 206(4)

Method 2 Fundamental Analysis 210(1)

A Theory to Fit the Facts 211(1)

7.7 Market Anomalies and Behavioral Finance 212(14)

Market Anomalies 212(1)

Bubbles and Market Efficiency 213(1)

Behavioral Finance 214(1)

Summary 215(2)

Questions 217(6)

Minicase 223(3)

Chapter 8 Net Present Value and Other Investment Criteria 226(36)

8.1 Net Present Value 228(6)

A Comment on Risk and Present Value 229(1)

Valuing Long-Lived Projects 230(4)

8.2 Using the NPV Rule to Choose among Projects 234(5)

Problem 1 The Investment Timing Decision 235(1)

Problem 2 The Choice between Long-and Short-Lived Equipment 236(2)

Problem 3 When to Replace an Old Machine 238(1)

8.3 The Payback Rule 239(1)

Discounted Payback 240(1)

8.4 The Internal Rate of Return Rule 240(8)

A Closer Look at the Rate of Return Rule 241(1)

Calculating the Rate of Return for Long-Lived Projects 241(2)

A Word of Caution 243(1)

Some Pitfalls with the Internal Rate of Return Rule 243(5)

8.5 The Profitability Index 248(2)

Capital Rationing 249(1)

Soft Rationing 249(1)

Hard Rationing 249(1)

Pitfalls of the Profitability Index 249(1)

8.6 A Last Look 250(12)

Summary 251(1)

Questions 252(6)

Minicase 258(1)

Appendix: More on the IRR Rule 259(1)

Using the IRR Rule to Choose between Mutually Exclusive Projects 259(1)

Using the Modified Internal Rate of Return when there are Multiple IRRs 260(2)

Chapter 9 Using Discounted Cash-Flow Analysis to Make Investment Decisions 262(28)

9.1 Identifying Cash Flows 264(7)

Discount Cash Flows, Not Profits 264(2)

Discount Incremental Cash Flows 266(3)

Discount Nominal Cash Flows by the Nominal Cost of Capital 269(1)

Separate Investment and Financing Decisions 270(1)

9.2 Calculating Cash Flow 271(3)

Capital Investment 271(1)

Operating Cash Flow 271(2)

Changes in Working Capital 273(1)

9.3 An Example: Blooper Industries 274(16)

Cash-Flow Analysis 274(2)

Calculating the NPV of Blooper's Project 276(1)

Further Notes and Wrinkles Arising from Blooper's Project 277(4)

Summary 281(1)

Questions 282(5)

Minicase 287(3)

Chapter 10 Project Analysis 290(26)

10.1 How Firms Organize the Investment Process 292(2)

Stage 1 The Capital Budget 292(1)

Stage 2 Project Authorizations 292(1)

Problems and Some Solutions 293(1)

10.2 Some "What-If" Questions 294(4)

Sensitivity Analysis 295(2)

Scenario Analysis 297(1)

10.3 Break-Even Analysis 298(7)

Accounting Break-Even Analysis 298(2)

NPV Break-Even Analysis 300(3)

Operating Leverage 303(2)

10.4 Real Options and the Value of Flexibility 305(11)

The Option to Expand 305(2)

A Second Real Option: The Option to Abandon 307(1)

A Third Real Option: The Timing Option 307(1)

A Fourth Real Option: Flexible Production Facilities 308(1)

Summary 308(1)

Questions 309(6)

Minicase 315(1)

Part Three Risk

Chapter 11 Introduction to Risk, Return, and the Opportunity Cost of Capital 316(28)

11.1 Rates of Return: A Review 318(1)

11.2 A Century of Capital Market History 319(5)

Market Indexes 319(1)

The Historical Record 319(3)

Using Historical Evidence to Estimate Today's Cost of Capital 322(2)

11.3 Measuring Risk 324(5)

Variance and Standard Deviation 324(3)

A Note on Calculating Variance 327(1)

Measuring the Variation in Stock Returns 327(2)

11.4 Risk and Diversification 329(5)

Diversification 329(1)

Asset versus Portfolio Risk 330(3)

Market Risk versus Specific Risk 333(1)

11.5 Thinking about Risk 334(10)

Message 1 Some Risks Look Big and Dangerous but Really Are Diversifiable 335(1)

Message 2 Market Risks Are Macro Risks 336(1)

Message 3 Risk Can Be Measured 336(1)

Summary 337(1)

Questions 338(6)

Chapter 12 Risk, Return, and Capital Budgeting 344(26)

12.1 Measuring Market Risk 346(6)

Measuring Beta 346(2)

Betas for Dow Chemical and Consolidated Edison 348(2)

Total Risk and Market Risk 350(1)

Portfolio Betas 350(2)

12.2 Risk and Return 352(7)

Why the CAPM Makes Sense 354(1)

The Security Market Line 355(1)

How Well Does the CAPM Work? 356(3)

Using the CAPM to Estimate Expected Returns 359(1)

12.3 Capital Budgeting and Project Risk 359(11)

Company versus Project Risk 359(2)

Determinants of Project Risk 361(1)

Don't Add Fudge Factors to Discount Rates 362(1)

Summary 362(1)

Questions 363(7)

Chapter 13 The Weighted-Average Cost of Capital and Company Valuation 370(28)

13.1 Geothermal's Cost of Capital 372(1)

13.2 The Weighted-Average Cost of Capital 373(7)

Calculating Company Cost of Capital as a Weighted Average 374(2)

Use Market Weights, Not Book Weights 376(1)

Taxes and the Weighted-Average Cost of Capital 377(1)

What If There Are Three (or More) Sources of Financing? 378(1)

Wrapping Up Geothermal 379(1)

Checking Our Logic 379(1)

13.3 Measuring Capital Structure 380(2)

13.4 Calculating the Weighted-Average Cost of Capital 382(2)

The Expected Return on Bonds 382(1)

The Expected Return on Common Stock 382(1)

The Expected Return on Preferred Stock 383(1)

Adding It All Up 384(1)

Real-Company WACCs 384(1)

13.5 Interpreting the Weighted-Average Cost of Capital 384(3)

When You Can and Can't Use WACC 384(1)

Some Common Mistakes 385(1)

How Changing Capital Structure Affects Expected Returns 386(1)

What Happens When the Corporate Tax Rate Is Not Zero 387(1)

13.6 Valuing Entire Businesses 387(11)

Calculating the Value of the Concatenator Business 388(1)

Summary 389(1)

Questions 390(4)

Minicase 394(4)

Part Four Financing

Chapter 14 Introduction to Corporate Financing 398(24)

14.1 Creating Value with Financing Decisions 400(1)

14.2 Patterns of Corporate Financing 400(4)

Do Firms Rely Too Heavily on Internal Funds? 403(1)

Are Firms Issuing Too Much Debt? 403(1)

14.3 Common Stock 404(3)

Ownership of the Corporation 406(1)

Voting Procedures 407(1)

Classes of Stock 407(1)

14.4 Preferred Stock 407(2)

14.5 Corporate Debt 409(6)

Debt Comes in Many Forms 409(5)

Innovation in the Debt Market 414(1)

14.6 Convertible Securities 415(7)

Summary 416(1)

Questions 417(5)

Chapter 15 How Corporations Raise Venture Capital and Issue Securities 422(22)

15.1 Venture Capital 424(2)

Venture Capital Companies 425(1)

15.2 The Initial Public Offering 426(5)

Arranging a Public Issue 427(3)

Other New-Issue Procedures 430(1)

The Underwriters 431(1)

15.3 General Cash Offers by Public Companies 431(3)

General Cash Offers and Shelf Registration 432(1)

Costs of the General Cash Offer 433(1)

Market Reaction to Stock Issues 433(1)

15.4 The Private Placement 434(10)

Summary 435(1)

Questions 436(3)

Minicase 439(1)

Appendix: Hotch Pot's New-Issue Prospectus 440(4)

Part Five Debt and Payout Policy

Chapter 16 Debt Policy 444(34)

16.1 How Borrowing Affects Value in a Tax-Free Economy 446(8)

MM's Argument 447(1)

How Borrowing Affects Earnings per Share 448(2)

How Borrowing Affects Risk and Return 450(1)

Debt and the Cost of Equity 451(3)

16.2 Capital Structure and Corporate Taxes 454(4)

Debt and Taxes at River Cruises 454(2)

How Interest Tax Shields Contribute to the Value of Stockholders' Equity 456(1)

Corporate Taxes and the Weighted-Average Cost of Capital 456(2)

The Implications of Corporate Taxes for Capital Structure 458(1)

16.3 Costs of Financial Distress 458(5)

Bankruptcy Costs 459(2)

Costs of Bankruptcy Vary with Type of Asset 461(1)

Financial Distress without Bankruptcy 461(2)

16.4 Explaining Financing Choices 463(15)

The Trade-Off Theory 463(1)

A Pecking Order Theory 464(1)

The Two Faces of Financial Slack 465(2)

Summary 467(1)

Questions 468(6)

Minicase 474(1)

Appendix: Bankruptcy Procedures 475(3)

Chapter 17 Payout Policy 478(24)

17.1 How Corporations Pay Out Cash to Shareholders 480(2)

Paying Dividends 480(1)

Limitations on Dividends 481(1)

Stock Dividends and Stock Splits 481(1)

17.2 Stock Repurchases 482(3)

Why Repurchases Are Like Dividends 483(1)

Repurchases and Share Valuation 484(1)

17.3 How Do Corporations Decide How Much to Pay Out? 485(2)

The Information Content of Dividends and Repurchases 486(1)

17.4 The Payout Controversy 487(4)

Why Dividends Are Irrelevant in Perfect and Efficient Capital Markets 488(2)

The Assumptions behind Dividend Irrelevance 490(1)

17.5 Why Dividends May Increase Value 491(1)

17.6 Why Dividends May Reduce Value 492(10)

Taxation of Dividends and Capital Gains under Current Tax Law 493(1)

Summary 494(1)

Questions 494(5)

Minicase 499(3)

Part Six Financial Analysis And Planning

Chapter 18 Long-Term Financial Planning 502(24)

18.1 What Is Financial Planning? 504(2)

Financial Planning Focuses on the Big Picture 504(1)

Why Build Financial Plans? 505(1)

18.2 Financial Planning Models 506(6)

Components of a Financial Planning Model 506(1)

Percentage of Sales Models 507(1)

An Improved Model 508(4)

18.3 Planners Beware 512(3)

Pitfalls in Model Design 512(1)

The Assumption in Percentage of Sales Models 513(1)

The Role of Financial Planning Models 514(1)

18.4 External Financing and Growth 515(11)

Summary 519(1)

Questions 520(5)

Minicase 525(1)

Chapter 19 Short-Term Financial Planning 526(32)

19.1 Links between Long-Term and Short-Term Financing 528(3)

19.2 Working Capital 531(6)

The Components of Working Capital 531(2)

Working Capital and the Cash Conversion Cycle 533(3)

The Working Capital Trade-Off 536(1)

19.3 Tracing Changes in Cash and Working Capital 537(2)

19.4 Cash Budgeting 539(4)

Forecast Sources of Cash 539(2)

Forecast Uses of Cash 541(1)

The Cash Balance 541(2)

19.5 A Short-Term Financing Plan 543(2)

Dynamic Mattress's Financing Plan 543(1)

Evaluating the Plan 544(1)

19.6 Sources of Short-Term Financing 545(13)

Bank Loans 545(2)

Secured Loans 547(1)

Commercial Paper 548(1)

Summary 549(1)

Questions 550(6)

Minicase 556(2)

Chapter 20 Working Capital Management 558(32)

20.1 Accounts Receivable and Credit Policy 560(11)

Terms of Sale 560(2)

Credit Agreements 562(1)

Credit Analysis 562(3)

The Credit Decision 565(4)

Collection Policy 569(2)

20.2 Inventory Management 571(2)

20.3 Cash Management 573(5)

Check Handling and Float 574(1)

Other Payment Systems 575(1)

Electronic Funds Transfer 576(2)

International Cash Management 578(1)

20.4 Investing Idle Cash: The Money Market 578(12)

Yields on Money Market Investments 580(1)

The International Money Market 580(1)

Summary 581(1)

Questions 582(6)

Minicase 588(2)

Part Seven Special Topics

Chapter 21 Mergers, Acquisitions, and Corporate Control 590(28)

21.1 Sensible Motives for Mergers 592(4)

Economies of Scale 594(1)

Economies of Vertical Integration 594(1)

Combining Complementary Resources 595(1)

Mergers as a Use for Surplus Funds 595(1)

Eliminating Inefficiencies 595(1)

21.2 Dubious Reasons for Mergers 596(2)

Diversification 596(1)

The Bootstrap Game 596(2)

21.3 The Mechanics of a Merger 598(1)

The Form of Acquisition 598(1)

Mergers, Antitrust Law, and Popular Opposition 598(1)

21.4 Evaluating Mergers 599(3)

Mergers Financed by Cash 599(2)

Mergers Financed by Stock 601(1)

A Warning 602(1)

Another Warning 602(1)

21.5 The Market for Corporate Control 602(1)

21.6 Method 1: Proxy Contests 603(1)

21.7 Method 2: Takeovers 604(3)

21.8 Method 3: Leveraged Buyouts 607(3)

Barbarians at the Gate? 608(2)

21.9 Method 4: Divestitures, Spin-Offs, and Carve-Outs 610(1)

21.10 The Benefits and Costs of Mergers 610(8)

Summary 612(1)

Questions 613(3)

Minicase 616(2)

Chapter 22 International Financial Management 618(26)

22.1 Foreign Exchange Markets 620(3)

Spot Exchange Rates 620(2)

Forward Exchange Rates 622(1)

22.2 Some Basic Relationships 623(8)

Exchange Rates and Inflation 624(2)

Real and Nominal Exchange Rates 626(1)

Inflation and Interest Rates 626(3)

The Forward Exchange Rate and the Expected Spot Rate 629(1)

Interest Rates and Exchange Rates 630(1)

22.3 Hedging Exchange Rate Risk 631(2)

Transaction Risk 631(1)

Economic Risk 632(1)

22.4 International Capital Budgeting 633(11)

Net Present Values for Foreign Investments 633(2)

Political Risk 635(1)

The Cost of Capital for Foreign Investment 636(1)

Avoiding Fudge Factors 636(1)

Summary 637(1)

Questions 638(4)

Minicase 642(2)

Chapter 23 Options 644(26)

23.1 Calls and Puts 646(6)

Selling Calls and Puts 647(2)

Payoff Diagrams Are Not Profit Diagrams 649(1)

Financial Alchemy with Options 650(1)

Some More Option Magic 650(2)

23.2 What Determines Option Values? 652(5)

Upper and Lower Limits on Option Values 652(1)

The Determinants of Option Value 652(3)

Option-Valuotion Models 655(2)

23.3 Spotting the Option 657(13)

Options on Real Assets 657(2)

Options on Financial Assets 659(3)

Summary 662(1)

Questions 662(8)

Chapter 24 Risk Management 670(20)

24.1 Why Hedge? 672(2)

The Evidence on Risk Management 673(1)

24.2 Reducing Risk with Options 674(2)

24.3 Futures Contracts 676(4)

The Mechanics of Futures Trading 677(2)

Commodity and Financial Futures 679(1)

24.4 Forward Contracts 680(1)

24.5 Swaps 681(2)

24.6 Innovation in the Derivatives Market 683(1)

24.7 Is "Derivative" a Four-Letter Word? 684(6)

Summary 685(1)

Questions 686(4)

Part Eight Conclusion

Chapter 25 What We Do and Do Not Know about Finance 690

25.1 What We Do Know: The Six Most Important Ideas in Finance 692(2)

Net Present Value (Chapter 5) 692(1)

Risk and Return (Chapters 11 and 12) 692(1)

Efficient Capital Markets (Chapter 7) 692(1)

MM's Irrelevance Propositions (Chapters 16 and 17) 693(1)

Option Theory (Chapter 23) 693(1)

Agency Theory 694(1)

25.2 What We Do Not Know: Nine Unsolved Problems in Finance 694(5)

What Determines Project Risk and Present Value? 694(1)

Risk and Return---Have We Missed Something? 695(1)

Are There Important Exceptions to the Efficient-Market Theory? 696(1)

Is Management an Off-Balance-Sheet Liability? 696(1)

How Can We Explain Capital Structure? 697(1)

How Can We Resolve the Payout Controversy? 697(1)

How Can We Explain Merger Waves? 697(1)

What Is the Value of Liquidity? 698(1)

Why Are Financial Systems Prone to Crisis? 698(1)

25.3 A Final Word 699

Questions 699
Appendix A 1(1)
Appendix B
Glossary
Credits 1(4)
Global Index
Index 5