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Summary:
Publisher Summary 1
Principles of Corporate Finance is the worldwide leading text that describes the theory and practice of corporate finance. Throughout the book the authors show how managers use financial theory to solve practical problems and as a way of learning how to respond to change by showing not just how but why companies and management act as they do. The text is comprehensive, authoritative, and modern and yet the material is presented at a common sense level. The discussions and illustrations are unique due to the depth of detail blended with a distinct sense of humor for which the book is well known and highly regarded. This text is a valued reference for thousands of practicing financial managers.Richard A. Brealey and Stewart C. Myers welcome Franklin Allen as a new coauthor to this Eighth Edition. Sometimes the addition of a new coauthor means that one of the existing authors proposes to take a back seat. That is not the case with this team. Dr. Allen's addition represents a genuine increase in capacity and brings fresh expertise and ideas to an already tremendously successful textbook and partnership.
目录
Table Of Contents:
Part One VALUE 1(143)
Finance and the Financial Manager 4(10)
What Is a Corporation? 5(1)
The Role of the Financial Manager 6(2)
Who Is the Financial Manager? 8(1)
Separation of Ownership and Management 9(2)
Topics Covered in this Book 11(3)
Summary 12(1)
Further Reading 12(1)
Concept Review Questions 13(1)
Quiz 13(1)
Present Values, the Objectives of the Firm, and Corporate Governance 14(20)
Introduction to Present Value 15(5)
Calculating Future and Present Value
Net Present Value
Risk and Present Value
Present Values and Rates of Return
The Opportunity Cost of Capital
A Source of Confusion
Foundations of the Net Present Value Rule 20(5)
How Capital Markets Reconcile Preferences for Current vs. Future Consumption
A Fundamental Result
Other Corporate Goals
Corporate Goals and Corporate Governance 25(9)
Should Managers Look after the Interests of Shareholders?
Should Firms Be Managed for Shareholders or All Stakeholders?
Summary 28(2)
Further Reading 30(1)
Concept Review Questions 30(1)
Quiz 30(1)
Practice Questions 31(1)
Challenge Questions 32(2)
How to Calculate Present Values 34(22)
Valuing Long-Lived Assets 35(4)
Valuing Cash Flows in Several Periods
Why the Discount Factor Declines As Futurity Increases---And a Digression on Money Machines
Calculating PVs and NPVs
Looking for Shortcuts---Perpetuities and Annuities 39(5)
How to Value Growing Perpetuities
How to Value Annuities
Compound Interest and Present Values 44(5)
A Note on Compounding Intervals
Continuous Compounding
Nominal and Real Rates of Interest 49(7)
Summary 50(1)
Web Exercises 51(1)
Concept Review Questions 52(1)
Quiz 52(1)
Practice Questions 53(2)
Challenge Questions 55(1)
The Value of Bonds and Common Stocks 56(28)
Using Present Value Formulas to Value Bonds 57(3)
A Short Trip to Germany to Value a Government Bond
What Happens When Interest Rates Change?
Back in the United States: Semiannual Coupons and Bond Prices
How Common Stocks Are Traded 60(1)
How Common Stocks Are Valued 61(4)
Today's Price
But What Determines Next Year's Price?
Estimating the Cost of Equity Capital 65(7)
Using the DCF Model to Set Gas and Electricity Prices
Some Warnings about Constant-Growth Formulas
DCF Valuation with Varying Growth Rates
The Link between Stock Price and Earnings per Share 72(12)
Calculating the Present Value of Growth Opportunities for Fledgling Electronics
Some Examples of Growth Opportunities?
Summary 76(1)
Further Reading 77(1)
Concept Review Questions 78(1)
Quiz 78(1)
Practice Questions 79(2)
Challenge Questions 81(1)
Mini-case: Reeby Sports 82(2)
Why Net Present Value Leads to Better Investment Decisions than Other Criteria 84(28)
A Review of the Basics 85(4)
Net Present Value's Competitors
Three Points to Remember about NPV
NPV Depends on Cash Flow, Not on Book Returns
Payback 89(2)
The Payback Rule
Internal (or Discounted-Cash-Flow) Rate of Return 91(9)
Calculating the IRR
The IRR Rule
Pitfall 1---Lending or Borrowing?
Pitfall 2---Multiple Rates of Return
Pitfall 3---Mutually Exclusive Projects
Pitfall 4---What Happens When We Can't Finesse the Term Structure of Interest Rates?
The Verdict on IRR
Choosing Capital Investments When Resources Are Limited 100(12)
An Easy Problem in Capital Rationing
Uses of Capital Rationing Models
Summary 103(1)
Further Reading 104(1)
Concept Review Questions 105(1)
Quiz 105(1)
Practice Questions 106(2)
Challenge Questions 108(1)
Mini-case: Vegetron's CFO Calls Again 109(3)
Making Investment Decisions with the Net Present Value Rule 112(32)
What to Discount 113(5)
Only Cash Flow Is Relevant
Estimate Cash Flows on an Incremental Basis
Treat Inflation Consistently
Example---IM&C'S Fertilizer Project 118(7)
Separating Investment and Financing Decisions
Investments in Working Capital
A Further Note on Depreciation
A Final Comment on Taxes
Project Analysis
Calculating NPV in Other Countries and Currencies
Equivalent Annual Costs 125(5)
Investing to Produce Reformulated Gasoline at California Refineries
Choosing between Long- and Short-Lived Equipment
Deciding When to Replace an Existing Machine
Cost of Excess Capacity
Project Interactions 130(14)
Case 1: Optimal Timing of Investment
Case 2: Fluctuating Load Factors
Summary 133(1)
Concept Review Questions 134(1)
Quiz 134(2)
Practice Questions 136(4)
Challenge Questions 140(1)
Mini-case: New Economy Transport (A) and (B) 141(3)
Part Two RISK 144(98)
Introduction to Risk, Return, and the Opportunity Cost of Capital 146(34)
Over a Century of Capital Market History in One Easy Lesson 147(7)
Arithmetic Averages and Compound Annual Returns
Using Historical Evidence to Evaluate Today's Cost of Capital
An Alternative Measure of the Risk Premium
Measuring Portfolio Risk 154(9)
Variance and Standard Deviation
Measuring Variability
How Diversification Reduces Risk
Calculating Portfolio Risk 163(4)
General Formula for Computing Portfolio Risk
Limits to Diversification
How Individual Securities Affect Portfolio Risk 167(4)
Market Risk Is Measured by Beta
Why Security Betas Determine Portfolio Risk
Diversification and Value Additivity 171(9)
Summary 172(1)
Further Reading 173(1)
Concept Review Questions 173(1)
Quiz 174(1)
Practice Questions 175(3)
Challenge Questions 178(2)
Risk and Return 180(34)
Harry Markowitz and the Birth of Portfolio Theory 181(7)
Combining Stocks into Portfolios
We Introduce Borrowing and Lending
The Relationship between Risk and Return 188(4)
Some Estimates of Expected Returns
Review of the Capital Asset Pricing Model
What If a Stock Did Not Lie on the Security Market Line?
Validity and Role of the Capital Asset Pricing Model 192(5)
Tests of the Capital Asset Pricing Model
Assumptions behind the Capital Asset Pricing Model
Some Alternative Theories 197(17)
Consumption Betas versus Market Betas
Arbitrage Pricing Theory
A Comparison of the Capital Asset Pricing Model and Arbitrage Pricing Theory
APT Example
The Three-Factor Model
Summary 204(2)
Further Reading 206(1)
Concept Review Questions 206(1)
Quiz 206(2)
Practice Questions 208(4)
Challenge Questions 212(2)
Capital Budgeting and Risk 214(28)
Company and Project Costs of Capital 215(4)
Perfect Pitch and the Cost of Capital
Debt and the Company Cost of Capital
Measuring the Cost of Equity 219(3)
Estimating Beta
The Expected Return on Union Pacific Corporation's Common Stock
Setting Discount Rates When You Do Not Have a Beta 222(4)
Avoid Fudge Factors in Discount Rates
What Determines Asset Betas?
Certainty Equivalents---Another Way of Adjusting for Risk 226(5)
Valuation by Certainty Equivalents
When to Use a Single Risk-Adjusted Discount Rate for Long-Lived Assets
A Common Mistake
When You Cannot Use a Single Risk-Adjusted Discount Rate for Long-Lived Assets
Discount Rates for International Projects 231(11)
Foreign Investments Are Not Always Riskier
Foreign Investment in the United States
Do Some Countries Have a Lower Cost of Capital?
Summary 234(1)
Further Reading 235(1)
Concept Review Questions 235(1)
Quiz 235(1)
Practice Questions 236(3)
Challenge Questions 239(1)
Mini-case: The Jones Family, Incorporated 240(2)
Part Three PRACTICAL PROBLEMS IN CAPITAL BUDGETING 242(86)
A Project is not a Black Box 244(30)
Sensitivity Analysis 245(8)
Value of Information
Limits to Sensitivity Analysis
Scenario Analysis
Break-Even Analysis
Operating Leverage and Break-Even Points
Monte Carlo Simulation 253(4)
Simulating the Electric Scooter Project
Simulation of Pharmaceutical Research and Development
Real Options and Decision Trees 257(17)
The Option to Expand
The Option to Abandon
Two Other Real Options
More on Decision Trees
An Example: Magna Charter
Pro and Con Decision Trees
Decision Trees and Monte Carlo Simulation
Summary 267(1)
Further Reading 268(1)
Concept Review Questions 268(1)
Quiz 268(1)
Practice Questions 269(2)
Challenge Questions 271(1)
Mini-case: Waldo County 271(3)
Strategy and the Capital Investment Decision 274(24)
Look First to Market Values 275(5)
The Cadillac and the Movie Star
Example: Investing in a New Department Store
Another Example: Opening a Gold Mine
Economic Rents and Competitive Advantage 280(4)
How One Company Avoided a $100 Million Mistake
Example: Marvin Enterprises Decides to Exploit a New Technology 284(14)
Forecasting Prices of Gargle Blasters
The Value of Marvin's New Expansion
Alternative Expansion Plans
The Value of Marvin Stock
The Lessons of Marvin Enterprises
Summary 292(1)
Further Reading 292(1)
Concept Review Questions 292(1)
Quiz 292(1)
Practice Questions 293(2)
Challenge Questions 295(2)
Mini-case: Ecsy-Cola 297(1)
Agency Problems, Management Compensation, and the Measurement of Performance 298(30)
The Capital Investment Process 299(3)
Project Authorizations
Some Investments May Not Show Up in the Capital Budget
Postaudits
Decision Makers Need Good Information 302(2)
Establishing Consistent Forecasts
Reducing Forecast Bias
Getting Senior Management the Information That It Needs
Eliminating Conflicts of Interest
Incentives 304(5)
Overview: Agency Problems in Capital Budgeting
Monitoring
Providing Incentives for Managers
Management Compensation
Measuring and Rewarding Performance: Residual Income and EVA 309(5)
Pros and Cons of EVA
Biases in Accounting Measures of Performance 314(2)
Example: Measuring the Profitability of the Nodhead Supermarket
Measuring Economic Profitability 316(12)
Do the Biases Wash Out in the Long Run?
What Can We Do about Biases in Accounting Profitability Measures?
Do Managers Worry Too Much about Book Profitability?
Summary 321(1)
Further Reading 322(1)
Concept Review Questions 322(1)
Quiz 323(1)
Practice Questions 324(1)
Challenge Questions 325(3)
Part Four FINANCING DECISIONS AND MARKET EFFICIENCY 328(84)
Corporate Financing and the Six Lessons of Market Efficiency 330(30)
We Always Come Back to NPV 332(1)
Differences between Investment and Financing Decisions
What Is an Efficient Market? 333(9)
A Startling Discovery: Price Changes Are Random
Three Forms of Market Efficiency
Efficient Markets: The Evidence
Puzzles and Anomalies---What Do They Mean for the Financial Manager? 342(7)
Do Investors Respond Slowly to New Information?
Stock Market Anomalies and Behavioral Finance
Irrational Exuberance and the Dot.com Bubble
The Dot.com Boom and Relative Efficiency
Market Anomalies and the Financial Manager
The Six Lessons of Market Efficiency 349(11)
Lesson 1: Markets Have No Memory
Lesson 2: Trust Market Prices
Lesson 3: Read the Entrails
Lesson 4: There Are No Financial Illusions
Lesson 5: The Do-It-Yourself Alternative
Lesson 6: Seen One Stock, Seen Them All
Summary 354(1)
Further Reading 355(1)
Concept Review Questions 355(1)
Quiz 356(1)
Practice Questions 357(2)
Challenge Questions 359(1)
An Overview of Corporate Financing 360(22)
Patterns of Corporate Financing 361(5)
Do Firms Rely Too Much on Internal Funds?
How Much Do Firms Borrow?
Common Stock 366(6)
Ownership of the Corporation
Voting Procedures and the Value of Votes
Equity in Disguise
Preferred Stock
Debt 372(3)
Debt Comes in Many Forms
Variety's the Very Spice of Life
Financial Markets and Institutions 375(7)
Financial Institutions
Summary 378(1)
Further Reading 379(1)
Web Exercises 379(1)
Concept Review Questions 379(1)
Quiz 379(1)
Practice Questions 380(1)
Challenge Questions 381(1)
How Corporations Issue Securities 382(30)
Venture Capital 383(4)
The Venture Capital Market
The Initial Public Offering 387(7)
Arranging an Initial Public Offering
The Sale of Marvin Stock
The Underwriters
Costs of a New Issue
Underpricing of IPOs
Other New-Issue Procedures 394(2)
Types of Auctions
Security Sales by Public Companies 396(7)
General Cash Offers
International Security Issues
The Costs of a General Cash Offer
Market Reaction to Stock Issues
Rights Issues
Private Placements and Public Issues 403(9)
Summary 403(1)
Appendix: Marvin's New-Issue Prospectus 404(4)
Further Reading 408(1)
Web Exercises 408(1)
Concept Review Questions 408(1)
Quiz 409(1)
Practice Questions 410(1)
Challenge Questions 411(1)
Part Five PAYOUT POLICY AND CAPITAL STRUCTURE 412(126)
Payout Policy 414(30)
The Choice of Payout Policy 415(1)
Dividend Payments and Stock Repurchases 416(2)
How Dividends Are Paid
How Firms Repurchase Stock
How Do Companies Decide on the Payout 418(1)
The Information in Dividends and Stock Repurchases 419(3)
The Information Content of Share Repurchase
The Payout Controversy 422(5)
Dividend Policy Is Irrelevant in Perfect Capital Markets
Dividend Irrelevance---An Illustration
Calculating Share Price
Share Repurchase
Stock Repurchase and Valuation
The Rightists 427(2)
Payout Policy, Investment Policy, and Management Incentives
Taxes and the Radical Left 429(6)
Why Pay Any Dividends at All?
Empirical Evidence on Dividends and Taxes
The Taxation of Dividends and Capital Gains
The Middle-of-the-Roaders 435(9)
Alternative Tax Systems
Summary 436(1)
Further Reading 437(1)
Concept Review Questions 437(1)
Quiz 437(2)
Practice Questions 439(2)
Challenge Questions 441(3)
Does Debt Policy Matter? 444(24)
The Effect of Financial Leverage in a Competitive Tax-free Economy 445(7)
Enter Modigliani and Miller
The Law of Conservation of Value
An Example of Proposition 1
Financial Risk and Expected Returns 452(4)
Proposition 2
How Changing Capital Structure Affects Beta
The Weighted-Average Cost of Capital 456(5)
Two Warnings
Rates of Return on Levered Equity---The Traditional Position
Today's Unsatisfied Clienteles Are Probably Interested in Exotic Securities
Imperfections and Opportunities
A Final Word on the After-Tax Weighted-Average Cost of Capital 461(7)
Union Pacific's WACC
Summary 462(1)
Further Reading 463(1)
Concept Review Questions 464(1)
Quiz 464(1)
Practice Questions 465(2)
Challenge Questions 467(1)
How Much Should a Firm Borrow? 468(34)
Corporate Taxes 469(4)
How Do Interest Tax Shields Contribute to the Value of Stockholders' Equity?
Recasting Pfizer's Capital Structure
MM and Taxes
Corporate and Personal Taxes 473(3)
Costs of Financial Distress 476(14)
Bankruptcy Costs
Evidence on Bankruptcy Costs
Direct versus Indirect Costs of Bankruptcy
Financial Distress without Bankruptcy
Debt and Incentives
Risk Shifting: The First Game
Refusing to Contribute Equity Capital: The Second Game
And Three More Games, Briefly
What the Games Cost
Costs of Distress Vary with Type of Asset
The Trade-off Theory of Capital Structure
The Pecking Order of Financing Choices 490(12)
Debt and Equity Issues with Asymmetric Information
Implications of the Pecking Order
The Trade-Off Theory vs. the Pecking-Order Theory---Some Recent Tests
The Bright Side and the Dark Side of Financial Slack
Summary 495(2)
Further Reading 497(1)
Concept Review Questions 497(1)
Quiz 498(1)
Practice Questions 499(2)
Challenge Questions 501(1)
Financing and Valuation 502(36)
The After-Tax Weighted-Average Cost of Capital 503(4)
Example: Sangria Corporation
Review of Assumptions
Valuing Businesses 507(6)
Valuing Rio Corporation
Estimating Horizon Value
WACC vs. the Flow-to-Equity Method
Using WACC in Practice 513(8)
Some Tricks of the Trade
Mistakes People Make in Using the Weighted-Average Formula
Adjusting WACC When Debt Ratios or Business Risks Differ
Unlevering and Relevering Betas
The Importance of Rebalancing
The Modigliani-Miller Formula, Plus Some Final Advice
Adjusted Present Value 521(4)
APV for the Perpetual Crusher
Other Financing Side Effects
APV for Businesses
APV for International Investments
Your Questions Answered 525(13)
Summary 527(2)
Appendix: Discounting Safe, Nominal Cash Flows 529(3)
Further Reading 532(1)
Concept Review Questions 532(1)
Quiz 533(1)
Practice Questions 534(3)
Challenge Questions 537(1)
Part Six OPTIONS 538(84)
Understanding Options 540(24)
Calls, Puts, and Shares 542(4)
Call Options and Position Diagrams
Put Options
Selling Calls, Puts, and Shares
Position Diagrams Are Not Profit Diagrams
Financial Alchemy with Options 546(6)
Spotting the Option
What Determines Option Values? 552(12)
Risk and Option Values
Summary 558(1)
Further Reading 558(1)
Concept Review Questions 559(1)
Quiz 559(1)
Practice Questions 560(2)
Challenge Questions 562(2)
Valuing Options 564(32)
A Simple Option-Valuation Model 565(5)
Why Discounted Cash Flow Won't Work for Options
Constructing Option Equivalents from Common Stocks and Borrowing
Valuing the Amgen Put Option
The Binomial Method for Valuing Options 570(5)
Example: The Two-Stage Binomial Method
The General Binomial Method
The Binomial Method and Decision Trees
The Black--Scholes Formula 575(4)
Using the Black--Scholes Formula
The Black--Scholes Formula and the Binomial Method
Black--Scholes in Action 579(3)
Executive Stock Options
Warrants
Portfolio Insurance
Calculating Implied Volatilities
Option Values at a Glance 582(14)
Summary 585(1)
Appendix: How Dilution Affects Option Value 585(4)
Further Reading 589(1)
Concept Review Questions 589(1)
Quiz 589(1)
Practice Questions 590(3)
Challenge Questions 593(1)
Mini-case: Bruce Honiball's Invention 593(3)
Real Options 596(26)
The Value of Follow-on Investment Opportunities 597(5)
Questions and Answers about Blitzen's Mark II
Other Expansion Options
The Timing Option 602(3)
Valuing the Malted Herring Option
Optimal Timing for Real Estate Development
The Abandonment Option 605(5)
The Zircon Subductor Project
Abandonment Value and Project Life
Temporary Abandonment
Flexible Production---and Another Look at Aircraft Purchase Options 610(4)
Another Look at Aircraft Purchase Options
A Conceptual Problem? 614(8)
Practical Challenges
Summary 615(1)
Further Reading 616(1)
Concept Review Questions 617(1)
Quiz 617(1)
Practice Questions 617(2)
Challenge Questions 619(3)
Part Seven DEBT FINANCING 622(96)
Valuing Government Bonds 624(24)
Real and Nominal Rates of Interest 626(3)
Indexed Bonds and the Real Rate of Interest
Inflation and Nominal Interest Rates
How Well Does Fisher's Theory Explain Interest Rates?
Term Structure and Yields to Maturity 629(3)
Yield to Maturity
Measuring the Term Structure
How Interest Rate Changes Affect Bond Prices 632(4)
Duration and Bond Volatility
Managing Interest Rate Risk
A Cautionary Note
Explaining the Term Structure 636(12)
The Expectations Theory
The Liquidity-Preference Theory
Introducing Inflation
Relationships between Bond Returns
Summary 641(1)
Further Reading 642(1)
Web Exercise 642(1)
Concept Review Questions 643(1)
Quiz 643(1)
Practice Questions 644(2)
Challenge Questions 646(2)
Credit Risk 648(20)
The Value of Corporate Debt 649(7)
The Difference between Safe and Risky Debt
Valuing the Default Option
Valuing Government Loan Guarantees
Bond Ratings and the Probability of Default 656(3)
Predicting the Probability of Default 659(4)
Credit Scoring
Market-Based Risk Models
Value at Risk 663(5)
Summary 665(1)
Further Reading 666(1)
Concept Review Questions 666(1)
Quiz 666(1)
Practice Questions 667(1)
Challenge Questions 667(1)
The Many Different Kinds of Debt 668(30)
Domestic Bonds, Foreign Bonds, and Eurobonds 670(1)
The Bond Contract 670(3)
Indenture, or Trust Deed
The Bond Terms
Security and Seniority 673(2)
Asset-Backed Securities
Repayment Provisions 675(3)
Sinking Funds
Call Provisions
Debt Covenants 678(2)
Convertible Bonds and Warrants 680(6)
What Is a Convertible Bond?
The Value of a Convertible at Maturity
Forcing Conversion
Why Do Companies Issue Convertibles?
Valuing Convertible Bonds
Some Variations on Convertible Bonds: Mandatory Convertibles and Reverse Convertibles
A Third Variation on Convertible Bonds: The Bond-Warrant Package
Private Placements and Project Finance 686(4)
Project Finance
Project Finance---Some Common Features
The Role of Project Finance
Innovation in the Bond Market 690(8)
Summary 692(1)
Further Reading 693(1)
Concept Review Questions 693(1)
Quiz 693(1)
Practice Questions 694(2)
Challenge Questions 696(1)
Mini-case: The Shocking Demise of Mr. Thorndike 697(1)
Leasing 698(20)
What Is a Lease? 699(1)
Why Lease? 700(3)
Sensible Reasons for Leasing
Some Dubious Reasons for Leasing
Operating Leases 703(3)
Example of an Operating Lease
Lease or Buy?
Valuing Financial Leases 706(6)
Example of a Financial Lease
Who Really Owns the Leased Asset?
Leasing and the Internal Revenue Service
A First Pass at Valuing a Lease Contract
The Story So Far
When Do Financial Leases Pay? 712(6)
Summary 713(1)
Further Reading 714(1)
Concept Review Questions 714(1)
Quiz 715(1)
Practice Questions 716(1)
Challenge Questions 717(1)
Part Eight RISK MANAGEMENT 718(62)
Managing Risk 720(34)
Why Manage Risk? 721(3)
Reducing the Risk of Cash Shortfalls or Financial Distress
Agency Costs May Be Mitigated by Risk Management
The Evidence on Risk Management
Insurance 724(3)
How British Petroleum (BP) Changed Its Insurance Strategy
Forward and Futures Contracts 727(8)
A Simple Forward Contract
Futures Exchanges
The Mechanics of Futures Trading
Trading and Pricing Financial Futures Contracts
Spot and Futures Prices---Commodities
More about Forward Contracts
Homemade Forward Rate Contracts
Swaps 735(4)
Interest Rate Swaps
Currency Swaps
Credit Derivatives
How to Set Up a Hedge 739(4)
Using Theory to Set Up the Hedge: An Example
Options, Deltas, and Betas
Is ``Derivative'' a Four-Letter Word? 743(11)
Summary 746(1)
Further Reading 747(1)
Concept Review Questions 747(1)
Quiz 748(1)
Practice Questions 749(4)
Challenge Questions 753(1)
Managing International Risks 754(26)
The Foreign Exchange Market 755(2)
Some Basic Relationships 757(8)
Interest Rates and Exchange Rates
The Forward Premium and Changes in Spot Rates
Changes in the Exchange Rate and Inflation Rates
Interest Rates and Inflation Rates
Is Life Really That Simple?
Hedging Currency Risk 765(3)
Transaction Exposure and Economic Exposure
Currency Speculation
Exchange Risk and International Investment Decisions 768(3)
More about the Cost of Capital
Political Risk 771(9)
Summary 773(1)
Further Reading 774(1)
Web Exercise 775(1)
Concept Review Questions 775(1)
Quiz 775(1)
Practice Questions 776(2)
Challenge Questions 778(1)
Mini-case: Exacta, s.a. 779(1)
Part Nine FINANCIAL PLANNING AND THE MANAGEMENT OF WORKING CAPITAL 780(88)
Financial Analysis and Planning 782(30)
Financial Statements 783(1)
Executive Paper's Financial Statements 784(5)
The Balance Sheet
The Income Statement
Sources and Uses of Funds
Measuring Executive Paper's Financial Condition 789(8)
How Much Has Executive Paper Borrowed?
How Liquid Is Executive Paper?
How Productively Is Executive Paper Using Its Assets?
How Profitable Is Executive Paper?
How Highly Is Executive Paper Valued by Investors?
The Dupont System
Financial Planning 797(1)
Financial Planning Models 798(3)
Pitfalls in Model Design
There Is No Finance in Financial Planning Models
Growth and External Financing 801(11)
Summary 802(1)
Further Reading 803(1)
Web Exercises 804(1)
Concept Review Questions 804(1)
Quiz 804(3)
Practice Questions 807(4)
Challenge Questions 811(1)
Working Capital Management 812(28)
Credit Management 814(7)
Terms of Sale
The Promise to Pay
Credit Analysis
The Credit Decision
Collection Policy
Inventory Management 821(1)
Cash 821(5)
Using Cash Efficiently
Electronic Funds Transfer
International Cash Management
Paying for Bank Services
Marketable Securities 826(14)
Calculating the Yield on Money-Market Investments
Yields on Money-Market Investments
The International Money Market
Money-Market Instruments
Summary 832(2)
Further Reading 834(1)
Web Exercises 834(1)
Concept Review Questions 834(1)
Quiz 835(1)
Practice Questions 836(2)
Challenge Questions 838(2)
Short-Term Financial Planning 840(28)
Links between Long-Term and Short-Term Financing Decisions 841(4)
Tracing Changes in Cash and Working Capital 845(4)
Tracing Changes in Net Working Capital
Profits and Cash Flow
Cash Budgeting 849(3)
Preparing the Cash Budget: Inflow
Preparing the Cash Budget: Outflow
The Short-Term Financing Plan 852(4)
Options for Short-Term Financing
Dynamic's Financing Plan
Evaluating the Plan
A Note on Short-Term Financial Planning Models
Sources of Short-Term Borrowing 856(12)
Bank Loans
Commercial Paper
Medium-Term Notes
Summary 861(2)
Further Reading 863(1)
Web Exercise 863(1)
Concept Review Questions 863(1)
Quiz 863(2)
Practice Questions 865(2)
Challenge Questions 867(1)
Part Ten MERGERS, CORPORATE CONTROL, AND GOVERNANCE 868(87)
Mergers 870(34)
Sensible Motives for Mergers 871(6)
Economies of Scale
Economies of Vertical Integration
Complementary Resources
Surplus Funds
Eliminating Inefficiencies
Industry Consolidation
Some Dubious Reasons for Mergers 877(4)
To Diversify
Increasing Earnings per Share: The Bootstrap Game
Lower Financing Costs
Estimating Merger Gains and Costs 881(5)
Right and Wrong Ways to Estimate the Benefits of Mergers
More on Estimating Costs---What If the Target's Stock Price Anticipates the Merger
Estimating Cost When the Merger Is Financed by Stock
Asymmetric Information
The Mechanics of a Merger 886(3)
Mergers and Antitrust Law
The Form of Acquisition
Merger Accounting
Some Tax Considerations
Takeover Battles and Tactics 889(7)
Boone Pickens Tries to Take Over Cities Service, Gulf Oil, and Phillips Petroleum
Takeover Defenses
AlliedSignal vs. AMP
Who Gains Most in Mergers?
Mergers and the Economy 896(8)
Merger Waves
Do Mergers Generate Net Benefits?
Summary 897(1)
Appendix: Conglomerate Mergers and Value Additivity 898(2)
Further Reading 900(1)
Concept Review Questions 901(1)
Quiz 901(1)
Practice Questions 902(1)
Challenge Questions 903(1)
Corporate Restructuring 904(26)
Leveraged Buyouts 905(5)
RJR Nabisco
Barbarians at the Gate?
Leveraged Restructurings
LBOs and Leveraged Restructurings
Fusion and Fission in Corporate Finance 910(5)
Spin-offs
Carve-outs
Asset Sales
Privatization
Conglomerates 915(6)
Fifteen Years after Reading This Chapter
Financial Architecture of Traditional U.S. Conglomerates
Temporary Conglomerates
Bankruptcy 921(9)
Is Chapter 11 Efficient?
Workouts
Alternative Bankruptcy Procedures
Summary 926(1)
Further Reading 927(1)
Concept Review Questions 928(1)
Quiz 929(1)
Practice Questions 929(1)
Governance and Corporate Control Around the World 930(25)
Financial Markets and Institutions 931(5)
Investor Protection and the Development of Financial Markets
Ownership, Control, and Governance 936(9)
Ownership and Control in Japan
Ownership and Control in Germany
European Boards of Directors
Ownership and Control in Other Countries
Conglomerates Revisited
Do These Differences Matter? 945(10)
Risk and Short-termism
Growth Industries and Declining Industries
Transparency and Governance
Summary 949(2)
Further Reading 951(1)
Concept Review Questions 951(1)
Quiz 951(1)
Practice Questions 952(3)
Part Eleven CONCLUSION 955(13)
Conclusion: What We Do and Do Not Know About Finance 956(12)
What We Do Know: The Seven Most Important Ideas in Finance 957(3)
Net Present Value
The Capital Asset Pricing Model
Efficient Capital Markets
Value Additivity and the Law of Conservation of Value
Capital Structure Theory
Option Theory
Agency Theory
What We Do Not Know: 10 Unsolved Problems in Finance 960(7)
What Determines Project Risk and Present Value?
Risk and Return---What Have We Missed?
How Important Are the Exceptions to the Efficient-Market Theory?
Is Management an Off-Balance-Sheet Liability?
How Can We Explain the Success of New Securities and New Markets?
How Can We Resolve the Payout Controversy?
What Risks Should a Firm Take? What Is the Value of Liquidity?
How Can We Explain Merger Waves?
How Can We Explain International Differences in Financial Architecture?
A Final Word 967(1)
Appendix A Present Value Tables 968(6)
Appendix B Answers to Quizzes 974(18)
Glossary 992(15)
Global Index 1007(4)
General Index 1011
Part One VALUE 1(143)
Finance and the Financial Manager 4(10)
What Is a Corporation? 5(1)
The Role of the Financial Manager 6(2)
Who Is the Financial Manager? 8(1)
Separation of Ownership and Management 9(2)
Topics Covered in this Book 11(3)
Summary 12(1)
Further Reading 12(1)
Concept Review Questions 13(1)
Quiz 13(1)
Present Values, the Objectives of the Firm, and Corporate Governance 14(20)
Introduction to Present Value 15(5)
Calculating Future and Present Value
Net Present Value
Risk and Present Value
Present Values and Rates of Return
The Opportunity Cost of Capital
A Source of Confusion
Foundations of the Net Present Value Rule 20(5)
How Capital Markets Reconcile Preferences for Current vs. Future Consumption
A Fundamental Result
Other Corporate Goals
Corporate Goals and Corporate Governance 25(9)
Should Managers Look after the Interests of Shareholders?
Should Firms Be Managed for Shareholders or All Stakeholders?
Summary 28(2)
Further Reading 30(1)
Concept Review Questions 30(1)
Quiz 30(1)
Practice Questions 31(1)
Challenge Questions 32(2)
How to Calculate Present Values 34(22)
Valuing Long-Lived Assets 35(4)
Valuing Cash Flows in Several Periods
Why the Discount Factor Declines As Futurity Increases---And a Digression on Money Machines
Calculating PVs and NPVs
Looking for Shortcuts---Perpetuities and Annuities 39(5)
How to Value Growing Perpetuities
How to Value Annuities
Compound Interest and Present Values 44(5)
A Note on Compounding Intervals
Continuous Compounding
Nominal and Real Rates of Interest 49(7)
Summary 50(1)
Web Exercises 51(1)
Concept Review Questions 52(1)
Quiz 52(1)
Practice Questions 53(2)
Challenge Questions 55(1)
The Value of Bonds and Common Stocks 56(28)
Using Present Value Formulas to Value Bonds 57(3)
A Short Trip to Germany to Value a Government Bond
What Happens When Interest Rates Change?
Back in the United States: Semiannual Coupons and Bond Prices
How Common Stocks Are Traded 60(1)
How Common Stocks Are Valued 61(4)
Today's Price
But What Determines Next Year's Price?
Estimating the Cost of Equity Capital 65(7)
Using the DCF Model to Set Gas and Electricity Prices
Some Warnings about Constant-Growth Formulas
DCF Valuation with Varying Growth Rates
The Link between Stock Price and Earnings per Share 72(12)
Calculating the Present Value of Growth Opportunities for Fledgling Electronics
Some Examples of Growth Opportunities?
Summary 76(1)
Further Reading 77(1)
Concept Review Questions 78(1)
Quiz 78(1)
Practice Questions 79(2)
Challenge Questions 81(1)
Mini-case: Reeby Sports 82(2)
Why Net Present Value Leads to Better Investment Decisions than Other Criteria 84(28)
A Review of the Basics 85(4)
Net Present Value's Competitors
Three Points to Remember about NPV
NPV Depends on Cash Flow, Not on Book Returns
Payback 89(2)
The Payback Rule
Internal (or Discounted-Cash-Flow) Rate of Return 91(9)
Calculating the IRR
The IRR Rule
Pitfall 1---Lending or Borrowing?
Pitfall 2---Multiple Rates of Return
Pitfall 3---Mutually Exclusive Projects
Pitfall 4---What Happens When We Can't Finesse the Term Structure of Interest Rates?
The Verdict on IRR
Choosing Capital Investments When Resources Are Limited 100(12)
An Easy Problem in Capital Rationing
Uses of Capital Rationing Models
Summary 103(1)
Further Reading 104(1)
Concept Review Questions 105(1)
Quiz 105(1)
Practice Questions 106(2)
Challenge Questions 108(1)
Mini-case: Vegetron's CFO Calls Again 109(3)
Making Investment Decisions with the Net Present Value Rule 112(32)
What to Discount 113(5)
Only Cash Flow Is Relevant
Estimate Cash Flows on an Incremental Basis
Treat Inflation Consistently
Example---IM&C'S Fertilizer Project 118(7)
Separating Investment and Financing Decisions
Investments in Working Capital
A Further Note on Depreciation
A Final Comment on Taxes
Project Analysis
Calculating NPV in Other Countries and Currencies
Equivalent Annual Costs 125(5)
Investing to Produce Reformulated Gasoline at California Refineries
Choosing between Long- and Short-Lived Equipment
Deciding When to Replace an Existing Machine
Cost of Excess Capacity
Project Interactions 130(14)
Case 1: Optimal Timing of Investment
Case 2: Fluctuating Load Factors
Summary 133(1)
Concept Review Questions 134(1)
Quiz 134(2)
Practice Questions 136(4)
Challenge Questions 140(1)
Mini-case: New Economy Transport (A) and (B) 141(3)
Part Two RISK 144(98)
Introduction to Risk, Return, and the Opportunity Cost of Capital 146(34)
Over a Century of Capital Market History in One Easy Lesson 147(7)
Arithmetic Averages and Compound Annual Returns
Using Historical Evidence to Evaluate Today's Cost of Capital
An Alternative Measure of the Risk Premium
Measuring Portfolio Risk 154(9)
Variance and Standard Deviation
Measuring Variability
How Diversification Reduces Risk
Calculating Portfolio Risk 163(4)
General Formula for Computing Portfolio Risk
Limits to Diversification
How Individual Securities Affect Portfolio Risk 167(4)
Market Risk Is Measured by Beta
Why Security Betas Determine Portfolio Risk
Diversification and Value Additivity 171(9)
Summary 172(1)
Further Reading 173(1)
Concept Review Questions 173(1)
Quiz 174(1)
Practice Questions 175(3)
Challenge Questions 178(2)
Risk and Return 180(34)
Harry Markowitz and the Birth of Portfolio Theory 181(7)
Combining Stocks into Portfolios
We Introduce Borrowing and Lending
The Relationship between Risk and Return 188(4)
Some Estimates of Expected Returns
Review of the Capital Asset Pricing Model
What If a Stock Did Not Lie on the Security Market Line?
Validity and Role of the Capital Asset Pricing Model 192(5)
Tests of the Capital Asset Pricing Model
Assumptions behind the Capital Asset Pricing Model
Some Alternative Theories 197(17)
Consumption Betas versus Market Betas
Arbitrage Pricing Theory
A Comparison of the Capital Asset Pricing Model and Arbitrage Pricing Theory
APT Example
The Three-Factor Model
Summary 204(2)
Further Reading 206(1)
Concept Review Questions 206(1)
Quiz 206(2)
Practice Questions 208(4)
Challenge Questions 212(2)
Capital Budgeting and Risk 214(28)
Company and Project Costs of Capital 215(4)
Perfect Pitch and the Cost of Capital
Debt and the Company Cost of Capital
Measuring the Cost of Equity 219(3)
Estimating Beta
The Expected Return on Union Pacific Corporation's Common Stock
Setting Discount Rates When You Do Not Have a Beta 222(4)
Avoid Fudge Factors in Discount Rates
What Determines Asset Betas?
Certainty Equivalents---Another Way of Adjusting for Risk 226(5)
Valuation by Certainty Equivalents
When to Use a Single Risk-Adjusted Discount Rate for Long-Lived Assets
A Common Mistake
When You Cannot Use a Single Risk-Adjusted Discount Rate for Long-Lived Assets
Discount Rates for International Projects 231(11)
Foreign Investments Are Not Always Riskier
Foreign Investment in the United States
Do Some Countries Have a Lower Cost of Capital?
Summary 234(1)
Further Reading 235(1)
Concept Review Questions 235(1)
Quiz 235(1)
Practice Questions 236(3)
Challenge Questions 239(1)
Mini-case: The Jones Family, Incorporated 240(2)
Part Three PRACTICAL PROBLEMS IN CAPITAL BUDGETING 242(86)
A Project is not a Black Box 244(30)
Sensitivity Analysis 245(8)
Value of Information
Limits to Sensitivity Analysis
Scenario Analysis
Break-Even Analysis
Operating Leverage and Break-Even Points
Monte Carlo Simulation 253(4)
Simulating the Electric Scooter Project
Simulation of Pharmaceutical Research and Development
Real Options and Decision Trees 257(17)
The Option to Expand
The Option to Abandon
Two Other Real Options
More on Decision Trees
An Example: Magna Charter
Pro and Con Decision Trees
Decision Trees and Monte Carlo Simulation
Summary 267(1)
Further Reading 268(1)
Concept Review Questions 268(1)
Quiz 268(1)
Practice Questions 269(2)
Challenge Questions 271(1)
Mini-case: Waldo County 271(3)
Strategy and the Capital Investment Decision 274(24)
Look First to Market Values 275(5)
The Cadillac and the Movie Star
Example: Investing in a New Department Store
Another Example: Opening a Gold Mine
Economic Rents and Competitive Advantage 280(4)
How One Company Avoided a $100 Million Mistake
Example: Marvin Enterprises Decides to Exploit a New Technology 284(14)
Forecasting Prices of Gargle Blasters
The Value of Marvin's New Expansion
Alternative Expansion Plans
The Value of Marvin Stock
The Lessons of Marvin Enterprises
Summary 292(1)
Further Reading 292(1)
Concept Review Questions 292(1)
Quiz 292(1)
Practice Questions 293(2)
Challenge Questions 295(2)
Mini-case: Ecsy-Cola 297(1)
Agency Problems, Management Compensation, and the Measurement of Performance 298(30)
The Capital Investment Process 299(3)
Project Authorizations
Some Investments May Not Show Up in the Capital Budget
Postaudits
Decision Makers Need Good Information 302(2)
Establishing Consistent Forecasts
Reducing Forecast Bias
Getting Senior Management the Information That It Needs
Eliminating Conflicts of Interest
Incentives 304(5)
Overview: Agency Problems in Capital Budgeting
Monitoring
Providing Incentives for Managers
Management Compensation
Measuring and Rewarding Performance: Residual Income and EVA 309(5)
Pros and Cons of EVA
Biases in Accounting Measures of Performance 314(2)
Example: Measuring the Profitability of the Nodhead Supermarket
Measuring Economic Profitability 316(12)
Do the Biases Wash Out in the Long Run?
What Can We Do about Biases in Accounting Profitability Measures?
Do Managers Worry Too Much about Book Profitability?
Summary 321(1)
Further Reading 322(1)
Concept Review Questions 322(1)
Quiz 323(1)
Practice Questions 324(1)
Challenge Questions 325(3)
Part Four FINANCING DECISIONS AND MARKET EFFICIENCY 328(84)
Corporate Financing and the Six Lessons of Market Efficiency 330(30)
We Always Come Back to NPV 332(1)
Differences between Investment and Financing Decisions
What Is an Efficient Market? 333(9)
A Startling Discovery: Price Changes Are Random
Three Forms of Market Efficiency
Efficient Markets: The Evidence
Puzzles and Anomalies---What Do They Mean for the Financial Manager? 342(7)
Do Investors Respond Slowly to New Information?
Stock Market Anomalies and Behavioral Finance
Irrational Exuberance and the Dot.com Bubble
The Dot.com Boom and Relative Efficiency
Market Anomalies and the Financial Manager
The Six Lessons of Market Efficiency 349(11)
Lesson 1: Markets Have No Memory
Lesson 2: Trust Market Prices
Lesson 3: Read the Entrails
Lesson 4: There Are No Financial Illusions
Lesson 5: The Do-It-Yourself Alternative
Lesson 6: Seen One Stock, Seen Them All
Summary 354(1)
Further Reading 355(1)
Concept Review Questions 355(1)
Quiz 356(1)
Practice Questions 357(2)
Challenge Questions 359(1)
An Overview of Corporate Financing 360(22)
Patterns of Corporate Financing 361(5)
Do Firms Rely Too Much on Internal Funds?
How Much Do Firms Borrow?
Common Stock 366(6)
Ownership of the Corporation
Voting Procedures and the Value of Votes
Equity in Disguise
Preferred Stock
Debt 372(3)
Debt Comes in Many Forms
Variety's the Very Spice of Life
Financial Markets and Institutions 375(7)
Financial Institutions
Summary 378(1)
Further Reading 379(1)
Web Exercises 379(1)
Concept Review Questions 379(1)
Quiz 379(1)
Practice Questions 380(1)
Challenge Questions 381(1)
How Corporations Issue Securities 382(30)
Venture Capital 383(4)
The Venture Capital Market
The Initial Public Offering 387(7)
Arranging an Initial Public Offering
The Sale of Marvin Stock
The Underwriters
Costs of a New Issue
Underpricing of IPOs
Other New-Issue Procedures 394(2)
Types of Auctions
Security Sales by Public Companies 396(7)
General Cash Offers
International Security Issues
The Costs of a General Cash Offer
Market Reaction to Stock Issues
Rights Issues
Private Placements and Public Issues 403(9)
Summary 403(1)
Appendix: Marvin's New-Issue Prospectus 404(4)
Further Reading 408(1)
Web Exercises 408(1)
Concept Review Questions 408(1)
Quiz 409(1)
Practice Questions 410(1)
Challenge Questions 411(1)
Part Five PAYOUT POLICY AND CAPITAL STRUCTURE 412(126)
Payout Policy 414(30)
The Choice of Payout Policy 415(1)
Dividend Payments and Stock Repurchases 416(2)
How Dividends Are Paid
How Firms Repurchase Stock
How Do Companies Decide on the Payout 418(1)
The Information in Dividends and Stock Repurchases 419(3)
The Information Content of Share Repurchase
The Payout Controversy 422(5)
Dividend Policy Is Irrelevant in Perfect Capital Markets
Dividend Irrelevance---An Illustration
Calculating Share Price
Share Repurchase
Stock Repurchase and Valuation
The Rightists 427(2)
Payout Policy, Investment Policy, and Management Incentives
Taxes and the Radical Left 429(6)
Why Pay Any Dividends at All?
Empirical Evidence on Dividends and Taxes
The Taxation of Dividends and Capital Gains
The Middle-of-the-Roaders 435(9)
Alternative Tax Systems
Summary 436(1)
Further Reading 437(1)
Concept Review Questions 437(1)
Quiz 437(2)
Practice Questions 439(2)
Challenge Questions 441(3)
Does Debt Policy Matter? 444(24)
The Effect of Financial Leverage in a Competitive Tax-free Economy 445(7)
Enter Modigliani and Miller
The Law of Conservation of Value
An Example of Proposition 1
Financial Risk and Expected Returns 452(4)
Proposition 2
How Changing Capital Structure Affects Beta
The Weighted-Average Cost of Capital 456(5)
Two Warnings
Rates of Return on Levered Equity---The Traditional Position
Today's Unsatisfied Clienteles Are Probably Interested in Exotic Securities
Imperfections and Opportunities
A Final Word on the After-Tax Weighted-Average Cost of Capital 461(7)
Union Pacific's WACC
Summary 462(1)
Further Reading 463(1)
Concept Review Questions 464(1)
Quiz 464(1)
Practice Questions 465(2)
Challenge Questions 467(1)
How Much Should a Firm Borrow? 468(34)
Corporate Taxes 469(4)
How Do Interest Tax Shields Contribute to the Value of Stockholders' Equity?
Recasting Pfizer's Capital Structure
MM and Taxes
Corporate and Personal Taxes 473(3)
Costs of Financial Distress 476(14)
Bankruptcy Costs
Evidence on Bankruptcy Costs
Direct versus Indirect Costs of Bankruptcy
Financial Distress without Bankruptcy
Debt and Incentives
Risk Shifting: The First Game
Refusing to Contribute Equity Capital: The Second Game
And Three More Games, Briefly
What the Games Cost
Costs of Distress Vary with Type of Asset
The Trade-off Theory of Capital Structure
The Pecking Order of Financing Choices 490(12)
Debt and Equity Issues with Asymmetric Information
Implications of the Pecking Order
The Trade-Off Theory vs. the Pecking-Order Theory---Some Recent Tests
The Bright Side and the Dark Side of Financial Slack
Summary 495(2)
Further Reading 497(1)
Concept Review Questions 497(1)
Quiz 498(1)
Practice Questions 499(2)
Challenge Questions 501(1)
Financing and Valuation 502(36)
The After-Tax Weighted-Average Cost of Capital 503(4)
Example: Sangria Corporation
Review of Assumptions
Valuing Businesses 507(6)
Valuing Rio Corporation
Estimating Horizon Value
WACC vs. the Flow-to-Equity Method
Using WACC in Practice 513(8)
Some Tricks of the Trade
Mistakes People Make in Using the Weighted-Average Formula
Adjusting WACC When Debt Ratios or Business Risks Differ
Unlevering and Relevering Betas
The Importance of Rebalancing
The Modigliani-Miller Formula, Plus Some Final Advice
Adjusted Present Value 521(4)
APV for the Perpetual Crusher
Other Financing Side Effects
APV for Businesses
APV for International Investments
Your Questions Answered 525(13)
Summary 527(2)
Appendix: Discounting Safe, Nominal Cash Flows 529(3)
Further Reading 532(1)
Concept Review Questions 532(1)
Quiz 533(1)
Practice Questions 534(3)
Challenge Questions 537(1)
Part Six OPTIONS 538(84)
Understanding Options 540(24)
Calls, Puts, and Shares 542(4)
Call Options and Position Diagrams
Put Options
Selling Calls, Puts, and Shares
Position Diagrams Are Not Profit Diagrams
Financial Alchemy with Options 546(6)
Spotting the Option
What Determines Option Values? 552(12)
Risk and Option Values
Summary 558(1)
Further Reading 558(1)
Concept Review Questions 559(1)
Quiz 559(1)
Practice Questions 560(2)
Challenge Questions 562(2)
Valuing Options 564(32)
A Simple Option-Valuation Model 565(5)
Why Discounted Cash Flow Won't Work for Options
Constructing Option Equivalents from Common Stocks and Borrowing
Valuing the Amgen Put Option
The Binomial Method for Valuing Options 570(5)
Example: The Two-Stage Binomial Method
The General Binomial Method
The Binomial Method and Decision Trees
The Black--Scholes Formula 575(4)
Using the Black--Scholes Formula
The Black--Scholes Formula and the Binomial Method
Black--Scholes in Action 579(3)
Executive Stock Options
Warrants
Portfolio Insurance
Calculating Implied Volatilities
Option Values at a Glance 582(14)
Summary 585(1)
Appendix: How Dilution Affects Option Value 585(4)
Further Reading 589(1)
Concept Review Questions 589(1)
Quiz 589(1)
Practice Questions 590(3)
Challenge Questions 593(1)
Mini-case: Bruce Honiball's Invention 593(3)
Real Options 596(26)
The Value of Follow-on Investment Opportunities 597(5)
Questions and Answers about Blitzen's Mark II
Other Expansion Options
The Timing Option 602(3)
Valuing the Malted Herring Option
Optimal Timing for Real Estate Development
The Abandonment Option 605(5)
The Zircon Subductor Project
Abandonment Value and Project Life
Temporary Abandonment
Flexible Production---and Another Look at Aircraft Purchase Options 610(4)
Another Look at Aircraft Purchase Options
A Conceptual Problem? 614(8)
Practical Challenges
Summary 615(1)
Further Reading 616(1)
Concept Review Questions 617(1)
Quiz 617(1)
Practice Questions 617(2)
Challenge Questions 619(3)
Part Seven DEBT FINANCING 622(96)
Valuing Government Bonds 624(24)
Real and Nominal Rates of Interest 626(3)
Indexed Bonds and the Real Rate of Interest
Inflation and Nominal Interest Rates
How Well Does Fisher's Theory Explain Interest Rates?
Term Structure and Yields to Maturity 629(3)
Yield to Maturity
Measuring the Term Structure
How Interest Rate Changes Affect Bond Prices 632(4)
Duration and Bond Volatility
Managing Interest Rate Risk
A Cautionary Note
Explaining the Term Structure 636(12)
The Expectations Theory
The Liquidity-Preference Theory
Introducing Inflation
Relationships between Bond Returns
Summary 641(1)
Further Reading 642(1)
Web Exercise 642(1)
Concept Review Questions 643(1)
Quiz 643(1)
Practice Questions 644(2)
Challenge Questions 646(2)
Credit Risk 648(20)
The Value of Corporate Debt 649(7)
The Difference between Safe and Risky Debt
Valuing the Default Option
Valuing Government Loan Guarantees
Bond Ratings and the Probability of Default 656(3)
Predicting the Probability of Default 659(4)
Credit Scoring
Market-Based Risk Models
Value at Risk 663(5)
Summary 665(1)
Further Reading 666(1)
Concept Review Questions 666(1)
Quiz 666(1)
Practice Questions 667(1)
Challenge Questions 667(1)
The Many Different Kinds of Debt 668(30)
Domestic Bonds, Foreign Bonds, and Eurobonds 670(1)
The Bond Contract 670(3)
Indenture, or Trust Deed
The Bond Terms
Security and Seniority 673(2)
Asset-Backed Securities
Repayment Provisions 675(3)
Sinking Funds
Call Provisions
Debt Covenants 678(2)
Convertible Bonds and Warrants 680(6)
What Is a Convertible Bond?
The Value of a Convertible at Maturity
Forcing Conversion
Why Do Companies Issue Convertibles?
Valuing Convertible Bonds
Some Variations on Convertible Bonds: Mandatory Convertibles and Reverse Convertibles
A Third Variation on Convertible Bonds: The Bond-Warrant Package
Private Placements and Project Finance 686(4)
Project Finance
Project Finance---Some Common Features
The Role of Project Finance
Innovation in the Bond Market 690(8)
Summary 692(1)
Further Reading 693(1)
Concept Review Questions 693(1)
Quiz 693(1)
Practice Questions 694(2)
Challenge Questions 696(1)
Mini-case: The Shocking Demise of Mr. Thorndike 697(1)
Leasing 698(20)
What Is a Lease? 699(1)
Why Lease? 700(3)
Sensible Reasons for Leasing
Some Dubious Reasons for Leasing
Operating Leases 703(3)
Example of an Operating Lease
Lease or Buy?
Valuing Financial Leases 706(6)
Example of a Financial Lease
Who Really Owns the Leased Asset?
Leasing and the Internal Revenue Service
A First Pass at Valuing a Lease Contract
The Story So Far
When Do Financial Leases Pay? 712(6)
Summary 713(1)
Further Reading 714(1)
Concept Review Questions 714(1)
Quiz 715(1)
Practice Questions 716(1)
Challenge Questions 717(1)
Part Eight RISK MANAGEMENT 718(62)
Managing Risk 720(34)
Why Manage Risk? 721(3)
Reducing the Risk of Cash Shortfalls or Financial Distress
Agency Costs May Be Mitigated by Risk Management
The Evidence on Risk Management
Insurance 724(3)
How British Petroleum (BP) Changed Its Insurance Strategy
Forward and Futures Contracts 727(8)
A Simple Forward Contract
Futures Exchanges
The Mechanics of Futures Trading
Trading and Pricing Financial Futures Contracts
Spot and Futures Prices---Commodities
More about Forward Contracts
Homemade Forward Rate Contracts
Swaps 735(4)
Interest Rate Swaps
Currency Swaps
Credit Derivatives
How to Set Up a Hedge 739(4)
Using Theory to Set Up the Hedge: An Example
Options, Deltas, and Betas
Is ``Derivative'' a Four-Letter Word? 743(11)
Summary 746(1)
Further Reading 747(1)
Concept Review Questions 747(1)
Quiz 748(1)
Practice Questions 749(4)
Challenge Questions 753(1)
Managing International Risks 754(26)
The Foreign Exchange Market 755(2)
Some Basic Relationships 757(8)
Interest Rates and Exchange Rates
The Forward Premium and Changes in Spot Rates
Changes in the Exchange Rate and Inflation Rates
Interest Rates and Inflation Rates
Is Life Really That Simple?
Hedging Currency Risk 765(3)
Transaction Exposure and Economic Exposure
Currency Speculation
Exchange Risk and International Investment Decisions 768(3)
More about the Cost of Capital
Political Risk 771(9)
Summary 773(1)
Further Reading 774(1)
Web Exercise 775(1)
Concept Review Questions 775(1)
Quiz 775(1)
Practice Questions 776(2)
Challenge Questions 778(1)
Mini-case: Exacta, s.a. 779(1)
Part Nine FINANCIAL PLANNING AND THE MANAGEMENT OF WORKING CAPITAL 780(88)
Financial Analysis and Planning 782(30)
Financial Statements 783(1)
Executive Paper's Financial Statements 784(5)
The Balance Sheet
The Income Statement
Sources and Uses of Funds
Measuring Executive Paper's Financial Condition 789(8)
How Much Has Executive Paper Borrowed?
How Liquid Is Executive Paper?
How Productively Is Executive Paper Using Its Assets?
How Profitable Is Executive Paper?
How Highly Is Executive Paper Valued by Investors?
The Dupont System
Financial Planning 797(1)
Financial Planning Models 798(3)
Pitfalls in Model Design
There Is No Finance in Financial Planning Models
Growth and External Financing 801(11)
Summary 802(1)
Further Reading 803(1)
Web Exercises 804(1)
Concept Review Questions 804(1)
Quiz 804(3)
Practice Questions 807(4)
Challenge Questions 811(1)
Working Capital Management 812(28)
Credit Management 814(7)
Terms of Sale
The Promise to Pay
Credit Analysis
The Credit Decision
Collection Policy
Inventory Management 821(1)
Cash 821(5)
Using Cash Efficiently
Electronic Funds Transfer
International Cash Management
Paying for Bank Services
Marketable Securities 826(14)
Calculating the Yield on Money-Market Investments
Yields on Money-Market Investments
The International Money Market
Money-Market Instruments
Summary 832(2)
Further Reading 834(1)
Web Exercises 834(1)
Concept Review Questions 834(1)
Quiz 835(1)
Practice Questions 836(2)
Challenge Questions 838(2)
Short-Term Financial Planning 840(28)
Links between Long-Term and Short-Term Financing Decisions 841(4)
Tracing Changes in Cash and Working Capital 845(4)
Tracing Changes in Net Working Capital
Profits and Cash Flow
Cash Budgeting 849(3)
Preparing the Cash Budget: Inflow
Preparing the Cash Budget: Outflow
The Short-Term Financing Plan 852(4)
Options for Short-Term Financing
Dynamic's Financing Plan
Evaluating the Plan
A Note on Short-Term Financial Planning Models
Sources of Short-Term Borrowing 856(12)
Bank Loans
Commercial Paper
Medium-Term Notes
Summary 861(2)
Further Reading 863(1)
Web Exercise 863(1)
Concept Review Questions 863(1)
Quiz 863(2)
Practice Questions 865(2)
Challenge Questions 867(1)
Part Ten MERGERS, CORPORATE CONTROL, AND GOVERNANCE 868(87)
Mergers 870(34)
Sensible Motives for Mergers 871(6)
Economies of Scale
Economies of Vertical Integration
Complementary Resources
Surplus Funds
Eliminating Inefficiencies
Industry Consolidation
Some Dubious Reasons for Mergers 877(4)
To Diversify
Increasing Earnings per Share: The Bootstrap Game
Lower Financing Costs
Estimating Merger Gains and Costs 881(5)
Right and Wrong Ways to Estimate the Benefits of Mergers
More on Estimating Costs---What If the Target's Stock Price Anticipates the Merger
Estimating Cost When the Merger Is Financed by Stock
Asymmetric Information
The Mechanics of a Merger 886(3)
Mergers and Antitrust Law
The Form of Acquisition
Merger Accounting
Some Tax Considerations
Takeover Battles and Tactics 889(7)
Boone Pickens Tries to Take Over Cities Service, Gulf Oil, and Phillips Petroleum
Takeover Defenses
AlliedSignal vs. AMP
Who Gains Most in Mergers?
Mergers and the Economy 896(8)
Merger Waves
Do Mergers Generate Net Benefits?
Summary 897(1)
Appendix: Conglomerate Mergers and Value Additivity 898(2)
Further Reading 900(1)
Concept Review Questions 901(1)
Quiz 901(1)
Practice Questions 902(1)
Challenge Questions 903(1)
Corporate Restructuring 904(26)
Leveraged Buyouts 905(5)
RJR Nabisco
Barbarians at the Gate?
Leveraged Restructurings
LBOs and Leveraged Restructurings
Fusion and Fission in Corporate Finance 910(5)
Spin-offs
Carve-outs
Asset Sales
Privatization
Conglomerates 915(6)
Fifteen Years after Reading This Chapter
Financial Architecture of Traditional U.S. Conglomerates
Temporary Conglomerates
Bankruptcy 921(9)
Is Chapter 11 Efficient?
Workouts
Alternative Bankruptcy Procedures
Summary 926(1)
Further Reading 927(1)
Concept Review Questions 928(1)
Quiz 929(1)
Practice Questions 929(1)
Governance and Corporate Control Around the World 930(25)
Financial Markets and Institutions 931(5)
Investor Protection and the Development of Financial Markets
Ownership, Control, and Governance 936(9)
Ownership and Control in Japan
Ownership and Control in Germany
European Boards of Directors
Ownership and Control in Other Countries
Conglomerates Revisited
Do These Differences Matter? 945(10)
Risk and Short-termism
Growth Industries and Declining Industries
Transparency and Governance
Summary 949(2)
Further Reading 951(1)
Concept Review Questions 951(1)
Quiz 951(1)
Practice Questions 952(3)
Part Eleven CONCLUSION 955(13)
Conclusion: What We Do and Do Not Know About Finance 956(12)
What We Do Know: The Seven Most Important Ideas in Finance 957(3)
Net Present Value
The Capital Asset Pricing Model
Efficient Capital Markets
Value Additivity and the Law of Conservation of Value
Capital Structure Theory
Option Theory
Agency Theory
What We Do Not Know: 10 Unsolved Problems in Finance 960(7)
What Determines Project Risk and Present Value?
Risk and Return---What Have We Missed?
How Important Are the Exceptions to the Efficient-Market Theory?
Is Management an Off-Balance-Sheet Liability?
How Can We Explain the Success of New Securities and New Markets?
How Can We Resolve the Payout Controversy?
What Risks Should a Firm Take? What Is the Value of Liquidity?
How Can We Explain Merger Waves?
How Can We Explain International Differences in Financial Architecture?
A Final Word 967(1)
Appendix A Present Value Tables 968(6)
Appendix B Answers to Quizzes 974(18)
Glossary 992(15)
Global Index 1007(4)
General Index 1011
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