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Fundamentals of Corporate Finance by Brealey EBOOK PDF Instant Download

Table of Contents

Dedication To Our Wives

About the Authors

Preface

Acknowledgments

CHAPTER 1. Goals and Governance of the Corporation

PART ONE. Introduction

1.1 Investment and Financing Decisions

The Investment (Capital Budgeting) Decision

The Financing Decision

1.2 What Is a Corporation?

Other Forms of Business Organization

1.3 Who Is the Financial Manager?

1.4 Goals of the Corporation

Shareholders Want Managers to Maximize Market Value

1.5 Agency Problems, Executive Compensation, and Corporate Governance

Executive Compensation

Corporate Governance

1.6 The Ethics of Maximizing Value

1.7 Careers in Finance

1.8 Preview of Coming Attractions

1.9 Snippets of Financial History

SUMMARY

QUESTIONS AND PROBLEMS

CHAPTER 2. Financial Markets and Institutions

2.1 The Importance of Financial Markets and Institutions

2.2 The Flow of Savings to Corporations

The Stock Market

Other Financial Markets

Financial Intermediaries

Financial Institutions

Total Financing of U.S. Corporations

2.3 Functions of Financial Markets and Intermediaries

Transporting Cash across Time

Risk Transfer and Diversification

Liquidity

The Payment Mechanism

Information Provided by Financial Markets

2.4 The Crisis of 2007–2009

SUMMARY

QUESTIONS AND PROBLEMS

CHAPTER 3. Accounting and Finance

3.1 The Balance Sheet

Book Values and Market Values

3.2 The Income Statement

Income versus Cash Flow

3.3 The Statement of Cash Flows

Free Cash Flow

3.4 Accounting Practice and Malpractice

3.5 Taxes

Corporate Tax

Personal Tax

SUMMARY

QUESTIONS AND PROBLEMS

CHAPTER 4. Measuring Corporate Performance

4.1 Value and Value Added

How Financial Ratios Help to Understand Value Added

4.2 Measuring Market Value and Market Value Added

4.3 Economic Value Added and Accounting Rates of Return

Accounting Rates of Return

Problems with EVA and Accounting Rates of Return

4.4 Measuring Efficiency

4.5 Analyzing the Return on Assets: The Du Pont System

The Du Pont System

4.6 Measuring Financial Leverage

Leverage and the Return on Equity

4.7 Measuring Liquidity

4.8 Interpreting Financial Ratios

4.9 The Role of Financial Ratios

SUMMARY

QUESTIONS AND PROBLEMS

MINICASE

CHAPTER 5. The Time Value of Money

PART TWO. Value

5.1 Future Values and Compound Interest

5.2 Present Values

Finding the Interest Rate

5.3 Multiple Cash Flows

Future Value of Multiple Cash Flows

Present Value of Multiple Cash Flows

5.4 Reducing the Chore of the Calculations: Part 1

Using Financial Calculators to Solve Simple Time-Value-of-Money Problems

Using Spreadsheets to Solve Simple Time-Value-of-Money Problems

5.5 Level Cash Flows: Perpetuities and Annuities

How to Value Perpetuities

How to Value Annuities

Future Value of an Annuity

Annuities Due

5.6 Reducing the Chore of the Calculations: Part 2

Using Financial Calculators to Solve Annuity Problems

Using Spreadsheets to Solve Annuity Problems

5.7 Effective Annual Interest Rates

5.8 Inflation and the Time Value of Money

Real versus Nominal Cash Flows

Inflation and Interest Rates

Valuing Real Cash Payments

Real or Nominal?

SUMMARY

QUESTIONS AND PROBLEMS

MINICASE

CHAPTER 6. Valuing Bonds

6.1 The Bond Market

Bond Characteristics

6.2 Interest Rates and Bond Prices

How Bond Prices Vary with Interest Rates

Interest Rate Risk

6.3 Yield to Maturity

Calculating the Yield to Maturity

6.4 Bond Rates of Return

6.5 The Yield Curve

Nominal and Real Rates of Interest

6.6 Corporate Bonds and the Risk of Default

Protecting against Default Risk

Not All Corporate Bonds Are Plain Vanilla

SUMMARY

QUESTIONS AND PROBLEMS

CHAPTER 7. Valuing Stocks

7.1 Stocks and the Stock Market

Reading Stock Market Listings

7.2 Market Values, Book Values, and Liquidation Values

7.3 Valuing Common Stocks

Valuation by Comparables

Price and Intrinsic Value

The Dividend Discount Model

7.4 Simplifying the Dividend Discount Model

The Dividend Discount Model with No Growth

The Constant-Growth Dividend Discount Model

Sustainable Growth

A Caveat

Estimating Expected Rates of Return

Nonconstant Growth

Repurchases and the Dividend Discount Model

7.5 Growth and Growth Opportunities

Valuing Growth Stocks

Market-Value Balance Sheets

7.6 There Are No Free Lunches on Wall Street

Method 1: Technical Analysis

Method 2: Fundamental Analysis

A Theory to Fit the Facts

7.7 Market Anomalies and Behavioral Finance

Market Anomalies

Bubbles and Market Efficiency

Behavioral Finance

SUMMARY

QUESTIONS AND PROBLEMS

MINICASE

CHAPTER 8. Net Present Value and Other Investment Criteria

8.1 Net Present Value

A Comment on Risk and Present Value

Valuing Long-Lived Projects

8.2 The Internal Rate of Return Rule

A Closer Look at the Rate of Return Rule

Calculating the Rate of Return for Long-Lived Projects

A Word of Caution

Some Pitfalls with the Internal Rate of Return Rule

8.3 The Profitability Index

Capital Rationing

Pitfalls of the Profitability Index

8.4 The Payback Rule

Discounted Payback

8.5 More Mutually Exclusive Projects

Problem 1: The Investment Timing Decision

Problem 2: The Choice between Long- and Short-Lived Equipment

Problem 3: When to Replace an Old Machine

8.6 A Last Look

SUMMARY

QUESTIONS AND PROBLEMS

MINICASE

APPENDIX: More on the IRR Rule

Using the IRR to Choose between Mutually Exclusive Projects

Using the Modified Internal Rate of Return When There Are Multiple IRRs

CHAPTER 9. Using Discounted Cash-Flow Analysis to Make Investment Decisions

9.1 Identifying Cash Flows

Discount Cash Flows, Not Profits

Discount Incremental Cash Flows

Discount Nominal Cash Flows by the Nominal Cost of Capital

Separate Investment and Financing Decisions

9.2 Calculating Cash Flow

Capital Investment

Operating Cash Flow

Changes in Working Capital

9.3 An Example: Blooper Industries

Cash-Flow Analysis

Calculating the NPV of Blooper’s Project

Further Notes and Wrinkles Arising from Blooper’s Project

SUMMARY

QUESTIONS AND PROBLEMS

MINICASE

CHAPTER 10. Project Analysis

10.1 How Firms Organize the Investment Process

Stage 1: The Capital Budget

Stage 2: Project Authorizations

Problems and Some Solutions

10.2 Some “What-If” Questions

Sensitivity Analysis

Scenario Analysis

10.3 Break-Even Analysis

Accounting Break-Even Analysis

NPV Break-Even Analysis

Operating Leverage

10.4 Real Options and the Value of Flexibility

The Option to Expand

A Second Real Option: The Option to Abandon

A Third Real Option: The Timing Option

A Fourth Real Option: Flexible Production Facilities

SUMMARY

QUESTIONS AND PROBLEMS

MINICASE

CHAPTER 11. Introduction to Risk, Return, and the Opportunity Cost of Capital

PART THREE. Risk

11.1 Rates of Return: A Review

11.2 A Century of Capital Market History

Market Indexes

The Historical Record

Using Historical Evidence to Estimate Today’s Cost of Capital

11.3 Measuring Risk

Variance and Standard Deviation

A Note on Calculating Variance

Measuring the Variation in Stock Returns

11.4 Risk and Diversification

Diversification

Asset versus Portfolio Risk

Market Risk versus Specific Risk

11.5 Thinking about Risk

Message 1: Some Risks Look Big and Dangerous but Really Are Diversifiable

Message 2: Market Risks Are Macro Risks

Message 3: Risk Can Be Measured

SUMMARY

QUESTIONS AND PROBLEMS

CHAPTER 12. Risk, Return, and Capital Budgeting

12.1 Measuring Market Risk

Measuring Beta

Betas for Dow Chemical and Consolidated Edison

Total Risk and Market Risk

12.2 What Can You Learn from Beta?

Portfolio Betas

The Portfolio Beta Determines the Risk of a Diversified Portfolio

12.3 Risk and Return

Why the CAPM Makes Sense

The Security Market Line

Using the CAPM to Estimate Expected Returns

How Well Does the CAPM Work?

12.4 The CAPM and the Opportunity Cost of Capital

The Company Cost of Capital

What Determines Project Risk?

Don’t Add Fudge Factors to Discount Rates

SUMMARY

QUESTIONS AND PROBLEMS

CHAPTER 13. The Weighted-Average Cost of Capital and Company Valuation

13.1 Geothermal’s Cost of Capital

13.2 The Weighted-Average Cost of Capital

Calculating Company Cost of Capital as a Weighted Average

Use Market Weights, Not Book Weights

Taxes and the Weighted-Average Cost of Capital

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

Wrapping Up Geothermal

Checking Our Logic

13.3 Measuring Capital Structure

13.4 Calculating the Weighted-Average Cost of Capital

The Expected Return on Bonds

The Expected Return on Common Stock

The Expected Return on Preferred Stock

Adding It All Up

Real-Company WACCs

13.5 Interpreting the Weighted-Average Cost of Capital

When You Can and Can’t Use WACC

Some Common Mistakes

How Changing Capital Structure Affects Expected Returns

What Happens When the Corporate Tax Rate Is Not Zero

13.6 Valuing Entire Businesses

Calculating the Value of the Concatenator Business

SUMMARY

QUESTIONS AND PROBLEMS

MINICASE

CHAPTER 14. Introduction to Corporate Financing

PART FOUR. Financing

14.1 Creating Value with Financing Decisions

14.2 Patterns of Corporate Financing

Are Firms Issuing Too Much Debt?

14.3 Common Stock

Ownership of the Corporation

Voting Procedures

Classes of Stock

14.4 Preferred Stock

14.5 Corporate Debt

Debt Comes in Many Forms

Innovation in the Debt Market

14.6 Convertible Securities

SUMMARY

QUESTIONS AND PROBLEMS

CHAPTER 15. How Corporations Raise Venture Capital and Issue Securities

15.1 Venture Capital

Venture Capital Companies

15.2 The Initial Public Offering

Arranging a Public Issue

Other New-Issue Procedures

The Underwriters

15.3 General Cash Offers by Public Companies

General Cash Offers and Shelf Registration

Costs of the General Cash Offer

Market Reaction to Stock Issues

15.4 The Private Placement

SUMMARY

QUESTIONS AND PROBLEMS

MINICASE

APPENDIX: Hotch Pot’s New-Issue Prospectus

CHAPTER 16. Debt Policy

PART FIVE. Debt and Payout Policy

16.1 How Borrowing Affects Value in a Tax-Free Economy

MM’s Argument—A Simple Example

How Borrowing Affects Earnings per Share

How Borrowing Affects Risk and Return

16.2 Debt and the Cost of Equity

No Magic in Financial Leverage

16.3 Debt, Taxes, and the Weighted-Average Cost of Capital

Debt and Taxes at River Cruises

How Interest Tax Shields Contribute to the Value of Stockholders’ Equity

Corporate Taxes and the Weighted-Average Cost of Capital

The Implications of Corporate Taxes for Capital Structure

16.4 Costs of Financial Distress

Bankruptcy Costs

Costs of Bankruptcy Vary with Type of Asset

Financial Distress without Bankruptcy

16.5 Explaining Financing Choices

The Trade-Off Theory

A Pecking Order Theory

The Two Faces of Financial Slack

SUMMARY

QUESTIONS AND PROBLEMS

MINICASE

APPENDIX: Bankruptcy Procedures

CHAPTER 17. Payout Policy

17.1 How Corporations Pay Out Cash to Shareholders

How Firms Pay Dividends

Limitations on Dividends

Stock Dividends and Stock Splits

Stock Repurchases

17.2 The Information Content of Dividends and Repurchases

17.3 Dividends or Repurchases? The Payout Controversy

Dividends or Repurchases? An Example

Repurchases and the Dividend Discount Model

Dividends and Share Issues

17.4 Why Dividends May Increase Value

17.5 Why Dividends May Reduce Value

Taxation of Dividends and Capital Gains under Current Tax Law

17.6 Payout Policy and the Life Cycle of the Firm

SUMMARY

QUESTIONS AND PROBLEMS

MINICASE

CHAPTER 18. Long-Term Financial Planning

PART SIX. Financial Analysis and Planning

18.1 What Is Financial Planning?

Financial Planning Focuses on the Big Picture

Why Build Financial Plans?

18.2 Financial Planning Models

Components of a Financial Planning Model

Percentage of Sales Models

An Improved Model

18.3 Planners Beware

Pitfalls in Model Design

The Assumption in Percentage of Sales Models

The Role of Financial Planning Models

18.4 External Financing and Growth

SUMMARY

QUESTIONS AND PROBLEMS

MINICASE

CHAPTER 19. Short-Term Financial Planning

19.1 Links between Long-Term and Short-Term Financing

19.2 Working Capital

The Components of Working Capital

Working Capital and the Cash Conversion Cycle

The Working Capital Trade-Off

19.3 Tracing Changes in Cash and Working Capital

19.4 Cash Budgeting

Forecast Sources of Cash

Forecast Uses of Cash

The Cash Balance

19.5 A Short-Term Financing Plan

Dynamic Mattress’s Financing Plan

Evaluating the Plan

19.6 Sources of Short-Term Financing

Bank Loans

Secured Loans

Commercial Paper

SUMMARY

QUESTIONS AND PROBLEMS

MINICASE

CHAPTER 20. Working Capital Management

20.1 Accounts Receivable and Credit Policy

Terms of Sale

Credit Agreements

Credit Analysis

The Credit Decision

Collection Policy

20.2 Inventory Management

20.3 Cash Management

Check Handling and Float

Other Payment Systems

Electronic Funds Transfer

International Cash Management

20.4 Investing Idle Cash: The Money Market

Yields on Money Market Investments

The International Money Market

SUMMARY

QUESTIONS AND PROBLEMS

MINICASE

CHAPTER 21. Mergers, Acquisitions, and Corporate Control

PART SEVEN. Special Topics

21.1 Sensible Motives for Mergers

Economies of Scale

Economies of Vertical Integration

Combining Complementary Resources

Mergers as a Use for Surplus Funds

Eliminating Inefficiencies

Industry Consolidation

21.2 Dubious Reasons for Mergers

Diversification

The Bootstrap Game

21.3 The Mechanics of a Merger

The Form of Acquisition

Mergers, Antitrust Law, and Popular Opposition

21.4 Evaluating Mergers

Mergers Financed by Cash

Mergers Financed by Stock

A Warning

Another Warning

21.5 The Market for Corporate Control

21.6 Method 1: Proxy Contests

21.7 Method 2: Takeovers

21.8 Method 3: Leveraged Buyouts

Barbarians at the Gate?

21.9 Method 4: Divestitures, Spin-Offs, and Carve-Outs

21.10 The Benefits and Costs of Mergers

Merger Waves

SUMMARY

QUESTIONS AND PROBLEMS

MINICASE

CHAPTER 22. International Financial Management

22.1 Foreign Exchange Markets

Spot Exchange Rates

Forward Exchange Rates

22.2 Some Basic Relationships

Exchange Rates and Inflation

Real and Nominal Exchange Rates

Inflation and Interest Rates

The Forward Exchange Rate and the Expected Spot Rate

Interest Rates and Exchange Rates

22.3 Hedging Exchange Rate Risk

Transaction Risk

Economic Risk

22.4 International Capital Budgeting

Net Present Values for Foreign Investments

Political Risk

The Cost of Capital for Foreign Investment

Avoiding Fudge Factors

SUMMARY

QUESTIONS AND PROBLEMS

MINICASE

CHAPTER 23. Options

23.1 Calls and Puts

Selling Calls and Puts

Payoff Diagrams Are Not Profit Diagrams

Financial Alchemy with Options

Some More Option Magic

23.2 What Determines Option Values?

Upper and Lower Limits on Option Values

The Determinants of Option Value

Option-Valuation Models

23.3 Spotting the Option

Options on Real Assets

Options on Financial Assets

SUMMARY

QUESTIONS AND PROBLEMS

CHAPTER 24. Risk Management

24.1 Why Hedge?

The Evidence on Risk Management

24.2 Reducing Risk with Options

24.3 Futures Contracts

The Mechanics of Futures Trading

Commodity and Financial Futures

24.4 Forward Contracts

24.5 Swaps

24.6 Innovation in the Derivatives Market

24.7 Is “Derivative” a Four-Letter Word?

SUMMARY

QUESTIONS AND PROBLEMS

CHAPTER 25. What We Do and Do Not Know about Finance

PART EIGHT. Conclusion

25.1 What We Do Know: The Six Most Important Ideas in Finance

Net Present Value (Chapter 5)

Risk and Return (Chapters 11 and 12)

Efficient Capital Markets (Chapter 7)

MM’s Irrelevance Propositions (Chapters 16 and 17)

Option Theory (Chapter 23)

Agency Theory

25.2 What We Do Not Know: Nine Unsolved Problems in Finance

What Determines Project Risk and Present Value?

Risk and Return—Have We Missed Something?

Are There Important Exceptions to the Efficient-Market Theory?

Is Management an Off-Balance-Sheet Liability?

How Can We Explain Capital Structure?

How Can We Resolve the Payout Controversy?

How Can We Explain Merger Waves?

What Is the Value of Liquidity?

Why Are Financial Systems Prone to Crisis?

25.3 A Final Word

QUESTIONS AND PROBLEMS

APPENDIX A. Present Value and Future Value Tables

Glossary

Global Index

Subject Index

Credits