Detailed Table of

Contents f

Part 1: Overview .1 1.1 1.2 1.3 1.4

Introduction to Corporate Finance What is Corporate Finance? The Goal of Financial Management Financial Markets Corporate Finance in Action: The Case of Google Summarg and Conclusions Questions and Problems Exam Question (45 minutes) Practical Case Study References Additional Reading Endnote

Corporate Governance 2 2.1 The Corporate Firm 2.2 The Agency Problem and Control of the Corporation 2.3 The Governance Structure of Corporations 2.4 The OECD Principles of Corporate Governance 2.5 International Corporate Governance 2.6 Corporate Governance in Action: Starbucks Summarg and Conclusions Questions and Problems Exam Question (45 minutes) Mini Case Practical Case Studg Reference Additional Reading

7 2 3 9 10 16 19 19 23 23 24 24 24 23 26 32 42 45 51 54 55 55 37 37 38 38 38

Part 2: Value and Capital

Discounted Cash Flow Valuation Valuation: The One-period Case Valuation: The Multi-period Case Compounding Periods Simplifications Summarg and Conclusions Questions and Problems Exam Question (45 minutes) Mini Case Practical Case Study Additional Reading Endnotes

93 94 97 102 106 114 115 118 118 119 119 119

5 5.1 5.2 5.3 5.4 5.5

Bond, Equity and Firm Valuation Definition and Example of a Bond How to Value Bonds Bond Concepts The Present Value of Equity Estimates of Parameters in the Dividend Growth Model Growth Opporturuties The Dividend Growth Model and the NPVGO Model Stock Market Reporting Firm Valuation Summarg and Conclusions Questions and Problems Exam Question (45 minutes) Mini Case Practical Case Studg Relevant Accounting Standards Additional Reading Endnotes

120 121 722 724 725

733 736 738 141 142 146 147 148 148 148 149

Net Present Value and Other Investment Rules Why Use Net Present Value? The Payback Period Method The Discounted Pagback Period Method The Average Accounting Return Method The Internal Rate of Return Problems with the IRR Approach The Profitability Index The Practice of Capital Budgeting Summarg and Conclusions Questions and Problems Exam Question (45 minutes) Mini Case Practical Case Studg Additional Reading Endnotes

150 151 752 155 155 157 159 165 167 168 169 174 174 175 176 176

Making Capital Investment Decisions Incremental Cash Flows Energg Renewables Ltd: An Example Inflation and Capital Budgeting

177 178 180 186

5.6 5.7 5.8 5.9

6

Budgeting

63

3 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9

64 65 66 68 69 70 72 73 80 81 84 84 89 90 92 92 92 92 92

Financial Statement Analysis The Statement of Financial Position The Income Statement Taxes Net Working Capital Cash Flow Financial Statement Analgsis Ratio Analgsis The Du Pont Identitg Using Financial Statement Information Summarg and Conclusions Questions and Problems Exam Question (45 minutes) Mini Case Practical Case Studg Relevant Accounting Standards Reference Additional Reading Endnote

4 4.1 4.2 4.3 4.4

6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8

7 7.1 7.2 7.3

729 732

Detailed Table of Contents

viii

7.4 Alternative Definitions of Operating Cash Flow 7.5 Investments of Unequal Lives: The Equivalent Annual Cost Method Summarg and Conclusions Questions and Problems Exam Question (45 minutes) Mini Gase Practical Gase Study Relevant Accounting Standards Additional Reading Endnote 8 Risk Analysis, Real Options and Capital Budgeting 8.1 Sensitivity Analysis, Scenario Analysis and Break even Analysis 8.2 Monte Carlo Simulation 8.3 Real Options 8.4 Decision Trees Summary and Conclusions Questions and Problems Exam Question (45 minutes) Mini Gase Practical Gase Study Relevant Accounting Standards Reference Additional Reading Endnotes Part 3: Risk 9 9.1 9.2 9.3 9.4 9.5 9.6

10 10.1 in'q 10.3 10.4 in « 10.6 10.7

Risk and Return: Lessons from Market History Returns Holding Period Returns Return Statistics Average Stock Returns and Risk-free Returns Risk Statistics More on Average Returns Summary and Conclusions Questions and Problems Exam Question (45 minutes) Mini Gase Practical Gase Study Relevant Accounting Standards References Additional Reading Endnotes Risk and Return: The Capital Asset Pricing Model Individual Securities Retum'Variance andCovariance The Return and Risk for Portfolios The Efficient Set for Two Assets n* EfflCieritSetfor Marv« Securities Diversification: An Example Riskless Borrowing and Lending

189 191 194 194 200 200 207 202 203 203 204 205 211 215 213 220 221 227 223 220 230 230 230 230

10.8 Market Equilibrium 10.9 The Capital Asset Pricing Model 10.10 Criticisms of the CAPM 10.11 Variations of the CAPM Summary and Conclusions Questions and Problems Exam Question (45 minutes) Mini Case Practical Case Study References Additional Reading Endnotes 11 Factor Models and the Arbitrage Pricing Theory 11.1 Factor Models: Announcements, Surprises and Expected Returns 11.2 Risk: Systematic and Unsystematic 11.3 Systematic Risk and Betas 11.4 Portfolios and Factor Models 11.5 Betas and Expected Returns 11.6 The Capital Asset Pricing Model and the Arbitrage Pricing Theory Summary and Conclusions Questions and Problems Exam Question (45 minutes) Mini Case References Additional Reading Endnotes

231

12

232 233 236 233

12.1 12.2 12.3 12.4 12.5

240 241 2# 246 247 240 250 251 252 252 252 252

12.6 12.7

253 254 254 250 263 266 260 271

13

12.8

13.1 13.2 13.3 13.4 13.5

Risk, Cost of Capital and Capital Budgeting The Cost of Equity Capital Estimation of Beta Determinants of Beta Extensions of the Basic Model Estimating Carrefour Croups Cost of Capital Reducing the Cost of Capital How Do Corporations Estimate Cost of Capital in Practice? Economic Value Added and the Measurement of Financial Performance Summary and Conclusions Questions and Problems Exam Question (45 minutes) Mini Case References Additional Reading Endnotes

274 277 231 232 232 234 290

3 4 3,4 3:'~

333 323 326 323 332 333 335 335 340 340 341 341 342

Efficient Capital Markets and Behavioural Finance Can Financing Decisions Create Value? 344 A Description of Efficient Capital Markets 3# The Different Tgpes of Efficiency 34? TheEvidence The Behavioural Challenge to Market Efficiency

Detailed Table of Contents 13.6 Empirical Challenges to Market Efficiency 13.7 Reviewing the Differences 13.8 Implications for Corporate Finance Summarg and Conclusions Questions and Problems Exam Question (45 minutes) Mini Gase Practical Gase Study Relevant Accounting Standards References Additional Reading Endnotes 14 14.1 14.2 14.3 14.4 14.5 14.6

Long-term Financing: An Introduction Ordinarg Shares Corporate Long-term Debt: The Basics Preference Shares Pattems of Financing Hierarchies in Long-term Financing Long-term Islamic Financing Summarg and Conclusions Questions and Problems Exam Question (45 minutes) Mini Gase Practical Gase Study Relevant Accounting Standard References Additional Reading Endnote

357 361 362 366 367 371 371 372 373 373 374 373 376 376 379 332 333 386 387 390 390 392 393 393 393 393 393 394

Part 4: Capital Structure and Dividend Policy

395

15 Capital Structure: Basic Concepts 15.1 The Capital Structure Question and the Pie Theory 15.2 Maximizing Firm Value versus Maximizing Shareholder Interests 15.3 Financial Leverage and Firm Value: An Example 15.4 Modigliani and Miller: Proposition II (No Taxes) 15.5 Corporate Taxes 1-5.6 Personal Taxes Summary and Conclusions Questions and Problems Exam Question (45 minutes) Mini Gase Practical Gase Study References Additional Reading Endnotes

396

16 16.1 16.2 16.3 16.4

Capital Structure: Limits to the Use of Debt Costs of Financial Distress Description of Financial Distress Costs Can Costs of Debt Be Reduced? Integration of Tax Effects and Financial Distress Costs

397 397 399 403 410 416 419 419 424 424 423 423 426 426 423 429 429 434 435

16.5 Signalling 16.6 Shirking, Perquisites and Bad Investments: A Note on Agency Cost of Equity 16.7 The Pecking Order Theory 16.8 Growth and the Debt-Equity Ratio 16.9 Market Timing Theory 16.10 How Firnis Establish Capital Structure Summary and Conclusions Questions and Problems Exam Question (45 minutes) Mini Gase Practical Gase Study References Additional Reading Endnotes 17 17.1 17.2 17.3 17.4 17.5 17.6 17.7

Valuation and Capital Budgeting for the Levered Firm Adjusted Present Value Approach Flow to Equity Approach Weighted Average Cost of Capital Method A Comparison of the APV, FTE and WACC Approaches Capital Budgeting When the Discount Rate Must Be Estimated APV Example Beta and Leverage Summary and Conclusions Questions and Problems Exam Question (45 minutes) Mini Case Practical Case Study Reference Additional Reading Endnotes

18 Dividends and Other Payouts 18.1 Different Types of Dividends 18.2 Standard Method of Cash Dividend Payment 18.3 The Benchmark Case: An Illustration of the Irrelevance of Dividend Policy 18.4 Share Repurchases 18.5 Personal Taxes and Dividends 18.6 Real-world Factors Favouring a High-dividend Policy 18.7 The Clientele Effect 18.8 A Catering Theory of Dividends 18.9 What We Know and Do Not Know about Dividend Policy 18.10 Stock Dividends and Stock Splits Summary and Conclusions Questions and Problems Exam Question (45 minutes) Mini Case Practical Case Study Relevant Accounting Standards References Additional Reading Endnotes

438 439 441 443 445 445 449 450 453 453 454 454 455 456 458 459 460 461 462 464 465 469 471 472 477 477 473 478 473 479 430 481 481 433 436 489 492 495 496 497 501 503 504 508 303 509 509 510 510 512

Detalled Table of Contents 0

References Additional Reading Endnotes

Part 5: Long-term Financing 513 19 19.1 19.2 19.3 19.4 19.5 19.6 19.7 19.8

Equity Financing The Public Issue Alternative Issue Methods The Cash Offer The Announcement of New Equity and the Value of the Firm The Cost of New Issues Rights Shelf Registration The PrivateEquity Market Summary and Conclusions Questions and Problems Exam Question (45 minutes) Mini Gase Practica! Gase Study Relevant Accounting Standard References Additional Reading Endnotes

514 515 515 516 383 383 524 387 383 531 536 536 537 337 537 538 540

Debt Financing BankLoans Debt Financing The Public Issue of Bonds Bond Refunding Bond Ratings Some Different Types of Bonds Private Placement Compared to Public Issues 20.8 Long-term Syndicated Bank Loans Summary and Conclusions Questions and Problems Exam Question (45minutes) Mini Gase Practical Gase Study Relevant Accounting Standards References Additional Reading Endnotes

541 348 343 543 547 549 554

21 21.1 21.2 21.3 21.4

565 566 338 568

20 20.1 20.2 20.3 20.4 20.5 20.6 20.7

21.5 21.6 21.7 21.8

Leasing Types of Lease Financing Accounting and Leasing The Cash Flows of Leasing A Detour for Discounting and Debt Capacity with Corporate Taxes NPV Analysis of the Lease versus Buy Decision Does Leasing EverPay? The Base Case Reasons for Leasing Some Unanswered Questions about Leasing Summary and Conclusions Questions and Problems Exam Question (45 minutes) Mini Case Practica! Case Study Relevant Accounting Standards

556 337 337 558 561 561 562 338 338 563 564

570 378 378 373 578 579 580 388 383 583 384

, '

Part 6: Options, Futures and Corporate Finance

58.5

22

586 58; 58; 58\ 58.'/ 5.W/ 591 504 5.97 30) 60.5 609 610 615 61 611 617 617 6AS

Options and Corporate Finance

22.1 Options 22.2 Call Options 22.3 Put Options 22.4 Writing Options 22.5 Option Quotes 22.6 Option Combinations 22.7 Valuing Options 22.8 An Option Pricing Formula 22.9 The'Greeks' 22.10 Shares and Bonds as Options Summary and Conclusions Questions and Problems Exam Question (45 minutes) Mini Case Relevant Accounting Standards Reference Additional Reading Endnotes 23 23.1 23.2 23.3 23.4 23.5 23.6 23.7

Options and Corporate Finance: Extensions and Applications Executive Share Options Investment in Real Projects and Options Valuing a Start-up More about the Binomial Model Shutdown and Reopening Decisions Mergers and Diversification Options and Capital Budgeting Summary and Conclusions Questions and Problems Exam Question (45 minutes) Mini Case Practical Case Study Relevant Accounting Standards References Additional Reading Endnotes

619 680 622 624 627 622 628 640 641 642 644 643 645 646 646 646 647

24 Warrants and Convertibles 648 24.1 Warrants 649 24.2 The Difference between Warrants and Call Options 650 24.3 Warrant Pricing and the Black-Scholes Model 651 24.4 Convertible Bonds 652 24.5 The Value of Convertible Bonds 653 24.6 Reasons for Issuing Warrants and Convertibles 656 24.7 Why Are Warrants and Convertibles Issued? 658 24.8 Convention Policy 660

Detailed Table of Contents

25 25.1 25.2 25.3 25.4 25.5 25.6 25.7 25.8

Summary and Conclusions Questions and Problems Exam Question (45 minutes) Mini Gase Practical Case Study Relevant Accounting Standard References Additional Reading Endnotes

661 662 664 665 666 666 666 667 667

Financial Risk Management with Derivatives Derivatives, Hedging and Risk Forward Contracts Futures Contracts Hedging Interest Rate Futures Contracts Duration Hedging Swaps Contracts Financial Risk Management in Practice Summary and Conclusions Questions and Problems Exam Question (45 minutes) Mini Case Practical Case Study Relevant Accounting Standards References Additional Reading Endnotes

669 670 670 671 674 676 681 686 689 690 690 694 694 695 695 695 695 696

Part 7: Financial Flanning and Short-term Finance

697

25 26.1 26.2 26.3 26.1

698 699 699 700

Short-term Finance and Flanning Tracing Cash and Net Working Capital Defining Cash in Terms of Other Elements The Operating Cycle and the Cash Cycle Some Aspects of Short-term Financial Policy 26.5 Cash Budgeting 25.6 The Short-term Financial Plan Summary and Conclusions Questions and Problems Exam Question (45 minutes) Mini Case Practical Case Study Relevant Accounting Standards References Additional Reading Endnotes 27 27.1 27.2 27.3

Short-term Capital Management Reasons for Holding Cash Determining the Target Cash Balance Managing the Collection and Disbursement of Cash 27.4 Investing Idle Cash 27.5 Terms of Sale

703 708 710 711 712 718 719 719 730 720 720 720 721 722 724 729 734 736

27.6 The Decision to Grant Credit: Risk and Information 27.7 Optimal Credit Policy 27.8 Credit Analysis 27.9 Collection Policy 27.10 How to Finance Trade Credit Summary and Conclusions Questions and Problems Exam Question (45 minutes) Mini Case References Additional Reading

739 742 743 744 745 746 747 751 751 762 753

Part 8: Special Topics

754

Mergers and Acquisitions The Basic Forms of Acquisitum Synergy Sources of Synergy Two Bad' Reasons for Mergers A Cost to Shareholders from Reduction in Risk 28.6 The NPV of a Merger 28.7 Valuation of Mergers in Practice 28.8 Friendly versus Hostile Takeovers 28.9 Defensive Tactics 28.10 The Diary of a Takeover: Abbvie Inc. and Shire plc 28.11 Do Mergers Add Value? 28.12 Accounting and Tax Considerations 28.13 Going Private and Leveraged Buyouts 28.14 Divestitures Summary and Conclusions Questions and Problems Exam Question (45 minutes) Mini Case Practical Case Study Relevant Accounting Standards References Additional Reading Endnotes

755 756 767 758 762

28 28.1 28.2 28.3 28.4 28.5

Financial Distress What Is Financial Distress? What Happens in Financial Distress? Bankruptcy, Liquidation and Reorganization 29.4 Private Workout or Bankruptcy: Which Is Best? 29.5 Predicting Financial Distress: The Z-score Model Summary and Conclusions Questions and Problems Exam Question (45 minutes) Mini Case Practical Case Study Relevant Accounting Standards References Additional Reading Endnotes 29 29.1 29.2 29.3

764 766 768 770 771 773 775 779 780 780 782 782 788 788 789 790 790 790 793 794 795 796 799 803 804 806 807 808 809 810 811 811 811 872

Detailed Table of Contents 30 International Corporate Finance 30.1 Terminology 30.2 Foreign Exchange Markets and Exchange Rates 30.3 Purchasing Power Parity 30.4 Interest Rate Parity, Unbiased Forward Rates and the International Fisher Effect 30.5 International Capital Budgeting 30.6 Exchange Rate Risk 30.7 Political Risk Summary and Conclusions

813 815 816 820 824 827 829 831 832

Quesöons and Problems Exam Question (45 minutes) Mini Gase Practical Case Study Relevant Accounting Standards Additional Reading Endnote Index Appendix A Mathematical Table Web Glossary

833 836 837 837 837 838 838 839 mline •inline