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Fundamentals of Corporate Finance / Edition 11 by Stephen A. Ross EBOOK PDF Instant Download
Table of Contents
Title
Copyright
Preface from the Authors
Acknowledgments
Contents
PART 1 Overview of Corporate Finance
CHAPTER 1 INTRODUCTION TO CORPORATE FINANCE
1.1 Corporate Finance and the Financial Manager
What Is Corporate Finance?
The Financial Manager
Financial Management Decisions
Capital Budgeting
Capital Structure
Working Capital Management
Conclusion
1.2 Forms of Business Organization
Sole Proprietorship
Partnership
Corporation
A Corporation by Another Name…
1.3 The Goal of Financial Management
Possible Goals
The Goal of Financial Management
A More General Goal
Sarbanes-Oxley
1.4 The Agency Problem and Control of the Corporation
Agency Relationships
Management Goals
Do Managers Act in the Stockholders’ Interests?
Managerial Compensation
Control of the Firm
Conclusion
Stakeholders
1.5 Financial Markets and the Corporation
Cash Flows to and from the Firm
Primary versus Secondary Markets
Primary Markets
Secondary Markets
Dealer versus Auction Markets
Trading in Corporate Securities
Listing
1.6 Summary and Conclusions
CHAPTER 2 FINANCIAL STATEMENTS, TAXES, AND CASH FLOW
2.1 The Balance Sheet
Assets: The Left Side
Liabilities and Owners’ Equity: The Right Side
Net Working Capital
Liquidity
Debt versus Equity
Market Value versus Book Value
2.2 The Income Statement
GAAP and the Income Statement
Noncash Items
Time and Costs
2.3 Taxes
Corporate Tax Rates
Average versus Marginal Tax Rates
2.4 Cash Flow
Cash Flow from Assets
Operating Cash Flow
Capital Spending
Change in Net Working Capital
Conclusion
A Note about “”Free”” Cash Flow
Cash Flow to Creditors and Stockholders
Cash Flow to Creditors
Cash Flow to Stockholders
An Example: Cash Flows for Dole Cola
Operating Cash Flow
Net Capital Spending
Change in NWC and Cash Flow from Assets
Cash Flow to Stockholders and Creditors
2.5 Summary and Conclusions
PART 2 Financial Statements and Long-Term Financial Planning
CHAPTER 3 WORKING WITH FINANCIAL STATEMENTS
3.1 Cash Flow and Financial Statements: A Closer Look
Sources and Uses of Cash
The Statement of Cash Flows
3.2 Standardized Financial Statements
Common-Size Statements
Common-Size Balance Sheets
Common-Size Income Statements
Common-Size Statements of Cash Flows
Common-Base Year Financial Statements: Trend Analysis
Combined Common-Size and Base Year Analysis
3.3 Ratio Analysis
Short-Term Solvency, or Liquidity, Measures
Current Ratio
The Quick (or Acid-Test) Ratio
Other Liquidity Ratios
Long-Term Solvency Measures
Total Debt Ratio
A Brief Digression: Total Capitalization versus Total Assets
Times Interest Earned
Cash Coverage
Asset Management, or Turnover, Measures
Inventory Turnover and Days’ Sales in Inventory
Receivables Turnover and Days’ Sales in Receivables
Asset Turnover Ratios
Profitability Measures
Profit Margin
Return on Assets
Return on Equity
Market Value Measures
Price–Earnings Ratio
Price–Sales Ratio
Market-to-Book Ratio
Enterprise Value–EBITDA Ratio
Conclusion
3.4 The DuPont Identity
A Closer Look at Roe
An Expanded Dupont Analysis
3.5 Using Financial Statement Information
Why Evaluate Financial Statements?
Internal Uses
External Uses
Choosing a Benchmark
Time Trend Analysis
Peer Group Analysis
Problems with Financial Statement Analysis
3.6 Summary and Conclusions
CHAPTER 4 LONG-TERM FINANCIAL PLANNING AND GROWTH
4.1 What Is Financial Planning?
Growth as a Financial Management Goal
Dimensions of Financial Planning
What Can Planning Accomplish?
Examining Interactions
Exploring Options
Avoiding Surprises
Ensuring Feasibility and Internal Consistency
Conclusion
4.2 Financial Planning Models: A First Look
A Financial Planning Model: The Ingredients
Sales Forecast
Pro Forma Statements
Asset Requirements
Financial Requirements
The Plug
Economic Assumptions
A Simple Financial Planning Model
4.3 The Percentage of Sales Approach
The Income Statement
The Balance Sheet
A Particular Scenario
An Alternative Scenario
4.4 External Financing and Growth
EFN and Growth
Financial Policy and Growth
The Internal Growth Rate
The Sustainable Growth Rate
Determinants of Growth
A Note about Sustainable Growth Rate Calculations
4.5 Some Caveats Regarding Financial Planning Models
4.6 Summary and Conclusions
PART 3 Valuation of Future Cash Flows
CHAPTER 5 INTRODUCTION TO VALUATION: THE TIME VALUE OF MONEY
5.1 Future Value and Compounding
Investing for a Single Period
Investing for More Than One Period
A Note about Compound Growth
5.2 Present Value and Discounting
The Single-Period Case
Present Values for Multiple Periods
5.3 More about Present and Future Values
Present versus Future Value
Determining the Discount Rate
Finding the Number of Periods
5.4 Summary and Conclusions
CHAPTER 6 DISCOUNTED CASH FLOW VALUATION
6.1 Future and Present Values of Multiple Cash Flows
Future Value with Multiple Cash Flows
Present Value with Multiple Cash Flows
A Note about Cash Flow Timing
6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Present Value for Annuity Cash Flows
Annuity Tables
Finding the Payment
Finding the Rate
Future Value for Annuities
A Note about Annuities Due
Perpetuities
Growing Annuities and Perpetuities
6.3 Comparing Rates: The Effect of Compounding
Effective Annual Rates and Compounding
Calculating and Comparing Effective Annual Rates
EARs and APRs
Taking It to the Limit: A Note about Continuous Compounding
6.4 Loan Types and Loan Amortization
Pure Discount Loans
Interest-Only Loans
Amortized Loans
6.5 Summary and Conclusions
CHAPTER 7 INTEREST RATES AND BOND VALUATION
7.1 Bonds and Bond Valuation
Bond Features and Prices
Bond Values and Yields
Interest Rate Risk
Finding the Yield to Maturity: More Trial and Error
7.2 More about Bond Features
Is It Debt or Equity?
Long-Term Debt: The Basics
The Indenture
Terms of a Bond
Security
Seniority
Repayment
The Call Provision
Protective Covenants
7.3 Bond Ratings
7.4 Some Different Types of Bonds
Government Bonds
Zero Coupon Bonds
Floating-Rate Bonds
Other Types of Bonds
Sukuk
7.5 Bond Markets
How Bonds are Bought and Sold
Bond Price Reporting
A Note about Bond Price Quotes
7.6 Inflation and Interest Rates
Real versus Nominal Rates
The Fisher Effect
Inflation and Present Values
7.7 Determinants of Bond Yields
The Term Structure of Interest Rates
Bond Yields and the Yield Curve: Putting It All Together
Conclusion
7.8 Summary and Conclusions
CHAPTER 8 STOCK VALUATION
8.1 Common Stock Valuation
Cash Flows
Some Special Cases
Zero Growth
Constant Growth
Nonconstant Growth
Two-Stage Growth
Components of the Required Return
Stock Valuation Using Multiples
8.2 Some Features of Common and Preferred Stocks
Common Stock Features
Shareholder Rights
Proxy Voting
Classes of Stock
Other Rights
Dividends
Preferred Stock Features
Stated Value
Cumulative and Noncumulative Dividends
Is Preferred Stock Really Debt?
8.3 The Stock Markets
Dealers and Brokers
Organization of the NYSE
Members
Operations
Floor Activity
NASDAQ Operations
ECNs
Stock Market Reporting
8.4 Summary and Conclusions
PART 4 Capital Budgeting
CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA
9.1 Net Present Value
The Basic Idea
Estimating Net Present Value
9.2 The Payback Rule
Defining the Rule
Analyzing the Rule
Redeeming Qualities of the Rule
Summary of the Rule
9.3 The Discounted Payback
9.4 The Average Accounting Return
9.5 The Internal Rate of Return
Problems with The IRR
Nonconventional Cash Flows
Mutually Exclusive Investments
Investing or Financing?
Redeeming Qualities of the IRR
The Modified Internal Rate of Return (MIRR)
Method #1: The Discounting Approach
Method #2: The Reinvestment Approach
Method #3: The Combination Approach
MIRR or IRR: Which Is Better?
9.6 The Profitability Index
9.7 The Practice of Capital Budgeting
9.8 Summary and Conclusions
CHAPTER 10 MAKING CAPITAL INVESTMENT DECISIONS
10.1 Project Cash Flows: A First Look
Relevant Cash Flows
The Stand-Alone Principle
10.2 Incremental Cash Flows
Sunk Costs
Opportunity Costs
Side Effects
Net Working Capital
Financing Costs
Other Issues
10.3 Pro Forma Financial Statements and Project Cash Flows
Getting Started: Pro Forma Financial Statements
Project Cash Flows
Project Operating Cash Flow
Project Net Working Capital and Capital Spending
Projected Total Cash Flow and Value
10.4 More about Project Cash Flow
A Closer Look at Net Working Capital
Depreciation
Modified ACRS Depreciation (MACRS)
Book Value versus Market Value
An Example: The Majestic Mulch and Compost Company (MMCC)
Operating Cash Flows
Change in NWC
Capital Spending
Total Cash Flow and Value
Conclusion
10.5 Alternative Definitions of Operating Cash Flow
The Bottom-Up Approach
The Top-Down Approach
The Tax Shield Approach
Conclusion
10.6 Some Special Cases of Discounted Cash Flow Analysis
Evaluating Cost-Cutting Proposals
Setting the Bid Price
Evaluating Equipment Options with Different Lives
10.7 Summary and Conclusions
CHAPTER 11 PROJECT ANALYSIS AND EVALUATION
11.1 Evaluating NPV Estimates
The Basic Problem
Projected versus Actual Cash Flows
Forecasting Risk
Sources of Value
11.2 Scenario and Other What-If Analyses
Getting Started
Scenario Analysis
Sensitivity Analysis
Simulation Analysis
11.3 Break-Even Analysis
Fixed and Variable Costs
Variable Costs
Fixed Costs
Total Costs
Accounting Break-Even
Accounting Break-Even: A Closer Look
Uses for the Accounting Break-Even
11.4 Operating Cash Flow, Sales Volume, and Break-Even
Accounting Break-Even and Cash Flow
The Base Case
Calculating the Break-Even Level
Payback and Break-Even
Sales Volume and Operating Cash Flow
Cash Flow, Accounting, and Financial Break-Even Points
Accounting Break-Even Revisited
Cash Break-Even
Financial Break-Even
Conclusion
11.5 Operating Leverage
The Basic Idea
Implications of Operating Leverage
Measuring Operating Leverage
Operating Leverage and Break-Even
11.6 Capital Rationing
Soft Rationing
Hard Rationing
11.7 Summary and Conclusions
PART 5 Risk and Return
CHAPTER 12 SOME LESSONS FROM CAPITAL MARKET HISTORY
12.1 Returns
Dollar Returns
Percentage Returns
12.2 The Historical Record
A First Look
A Closer Look
12.3 Average Returns: The First Lesson
Calculating Average Returns
Average Returns: The Historical Record
Risk Premiums
The First Lesson
12.4 The Variability of Returns: The Second Lesson
Frequency Distributions and Variability
The Historical Variance and Standard Deviation
The Historical Record
Normal Distribution
The Second Lesson
2008: The Bear Growled and Investors Howled
Using Capital Market History
More on the Stock Market Risk Premium
12.5 More about Average Returns
Arithmetic versus Geometric Averages
Calculating Geometric Average Returns
Arithmetic Average Return or Geometric Average Return?
12.6 Capital Market Efficiency
Price Behavior in an Efficient Market
The Efficient Markets Hypothesis
Some Common Misconceptions about the EMH
The Forms of Market Efficiency
12.7 Summary and Conclusions
CHAPTER 13 RETURN, RISK, AND THE SECURITY MARKET LINE
13.1 Expected Returns and Variances
Expected Return
Calculating the Variance
13.2 Portfolios
Portfolio Weights
Portfolio Expected Returns
Portfolio Variance
13.3 Announcements, Surprises, and Expected Returns
Expected and Unexpected Returns
Announcements and News
13.4 Risk: Systematic and Unsystematic
Systematic and Unsystematic Risk
Systematic and Unsystematic Components of Return
13.5 Diversification and Portfolio Risk
The Effect of Diversification: Another Lesson from Market History
The Principle of Diversification
Diversification and Unsystematic Risk
Diversification and Systematic Risk
13.6 Systematic Risk and Beta
The Systematic Risk Principle
Measuring Systematic Risk
Portfolio Betas
13.7 The Security Market Line
Beta and the Risk Premium
The Reward-to-Risk Ratio
The Basic Argument
The Fundamental Result
The Security Market Line
Market Portfolios
The Capital Asset Pricing Model
13.8 The SML and the Cost of Capital: A Preview
The Basic Idea
The Cost of Capital
13.9 Summary and Conclusions
PART 6 Cost of Capital and Long-Term Financial Policy
CHAPTER 14 COST OF CAPITAL
14.1 The Cost of Capital: Some Preliminaries
Required Return versus Cost of Capital
Financial Policy and Cost of Capital
14.2 The Cost of Equity
The Dividend Growth Model Approach
Implementing the Approach
Estimating G
Advantages and Disadvantages of the Approach
The SML Approach
Implementing the Approach
Advantages and Disadvantages of the Approach
14.3 The Costs of Debt and Preferred Stock
The Cost of Debt
The Cost of Preferred Stock
14.4 The Weighted Average Cost of Capital
The Capital Structure Weights
Taxes and the Weighted Average Cost of Capital
Calculating the WACC for Eastman Chemical
Eastman’s Cost of Equity
Eastman’s Cost of Debt
Eastman’s WACC
Solving the Warehouse Problem and Similar Capital Budgeting Problems
Performance Evaluation: Another Use of the WACC
14.5 Divisional and Project Costs of Capital
The SML and the WACC
Divisional Cost of Capital
The Pure Play Approach
The Subjective Approach
14.6 Company Valuation With The WACC
14.7 Flotation Costs and the Average Cost of Capital
The Basic Approach
Flotation Costs and NPV
Internal Equity and Flotation Costs
14.8 Summary and Conclusions
CHAPTER 15 RAISING CAPITAL
15.1 The Financing Life Cycle of a Firm: Early-Stage Financing and Venture Capital
Venture Capital
Some Venture Capital Realities
Choosing a Venture Capitalist
Conclusion
15.2 Selling Securities to the Public: The Basic Procedure
Crowdfunding
15.3 Alternative Issue Methods
15.4 Underwriters
Choosing an Underwriter
Types of Underwriting
Firm Commitment Underwriting
Best Efforts Underwriting
Dutch Auction Underwriting
The Aftermarket
The Green Shoe Provision
Lockup Agreements
The Quiet Period
15.5 IPOs and Underpricing
IPO Underpricing: The 1999–2000 Experience
Evidence on Underpricing
Why Does Underpricing Exist?
15.6 New Equity Sales and the Value of the Firm
15.7 The Costs of Issuing Securities
The Costs of Selling Stock to the Public
The Costs of Going Public: A Case Study
15.8 Rights
The Mechanics of a Rights Offering
Number of Rights Needed to Purchase a Share
The Value of a Right
Ex Rights
The Underwriting Arrangements
Effects on Shareholders
15.9 Dilution
Dilution of Proportionate Ownership
Dilution of Value: Book versus Market Values
A Misconception
The Correct Arguments
15.10 Issuing Long-Term Debt
15.11 Shelf Registration
15.12 Summary and Conclusions
CHAPTER 16 FINANCIAL LEVERAGE AND CAPITAL STRUCTURE POLICY
16.1 The Capital Structure Question
Firm Value and Stock Value: An Example
Capital Structure and the Cost of Capital
16.2 The Effect of Financial Leverage
The Basics of Financial Leverage
Financial Leverage, EPS, and ROE: An Example
EPS versus EBIT
Corporate Borrowing and Homemade Leverage
16.3 Capital Structure and the Cost of Equity Capital
M&M Proposition I: The Pie Model
The Cost of Equity and Financial Leverage: M&M Proposition II
Business and Financial Risk
16.4 M&M Propositions I and II with Corporate Taxes
The Interest Tax Shield
Taxes and M&M Proposition I
Taxes, the WACC, and Proposition II
Conclusion
16.5 Bankruptcy Costs
Direct Bankruptcy Costs
Indirect Bankruptcy Costs
16.6 Optimal Capital Structure
The Static Theory of Capital Structure
Optimal Capital Structure and the Cost of Capital
Optimal Capital Structure: A Recap
Capital Structure: Some Managerial Recommendations
Taxes
Financial Distress
16.7 The Pie Again
The Extended Pie Model
Marketed Claims versus Nonmarketed Claims
16.8 The Pecking-Order Theory
Internal Financing and the Pecking Order
Implications of the Pecking Order
16.9 Observed Capital Structures
16.10 A Quick Look at the Bankruptcy Process
Liquidation and Reorganization
Bankruptcy Liquidation
Bankruptcy Reorganization
Financial Management and the Bankruptcy Process
Agreements to Avoid Bankruptcy
16.11 Summary and Conclusions
CHAPTER 17 DIVIDENDS AND PAYOUT POLICY
17.1 Cash Dividends and Dividend Payment
Cash Dividends
Standard Method of Cash Dividend Payment
Dividend Payment: A Chronology
More about the Ex-Dividend Date
17.2 Does Dividend Policy Matter?
An Illustration of the Irrelevance of Dividend Policy
Current Policy: Dividends Set Equal to Cash Flow
Alternative Policy: Initial Dividend Greater Than Cash Flow
Homemade Dividends
A Test
17.3 Real-World Factors Favoring a Low Dividend Payout
Taxes
Flotation Costs
Dividend Restrictions
17.4 Real-World Factors Favoring a High Dividend Payout
Desire for Current Income
Tax and Other Benefits from High Dividends
Corporate Investors
Tax-Exempt Investors
Conclusion
17.5 A Resolution of Real-World Factors?
Information Content of Dividends
The Clientele Effect
17.6 Stock Repurchases: An Alternative to Cash Dividends
Cash Dividends versus Repurchase
Real-World Considerations in a Repurchase
Share Repurchase and EPS
17.7 What We Know and Do Not Know about Dividend and Payout Policies
Dividends and Dividend Payers
Corporations Smooth Dividends
Putting It All Together
Some Survey Evidence on Dividends
17.8 Stock Dividends and Stock Splits
Some Details about Stock Splits and Stock Dividends
Example of a Small Stock Dividend
Example of a Stock Split
Example of a Large Stock Dividend
Value of Stock Splits and Stock Dividends
The Benchmark Case
Popular Trading Range
Reverse Splits
17.9 Summary and Conclusions
PART 7 Short-Term Financial Planning and Management
CHAPTER 18 SHORT-TERM FINANCE AND PLANNING
18.1 Tracing Cash and Net Working Capital
18.2 The Operating Cycle and the Cash Cycle
Defining the Operating and Cash Cycles
The Operating Cycle
The Cash Cycle
The Operating Cycle and the Firm’s Organizational Chart
Calculating the Operating and Cash Cycles
The Operating Cycle
The Cash Cycle
Interpreting the Cash Cycle
18.3 Some Aspects of Short-Term Financial Policy
The Size of the Firm’s Investment in Current Assets
Alternative Financing Policies for Current Assets
An Ideal Case
Different Policies for Financing Current Assets
Which Financing Policy Is Best?
Current Assets and Liabilities in Practice
18.4 The Cash Budget
Sales and Cash Collections
Cash Outflows
The Cash Balance
18.5 Short-Term Borrowing
Unsecured Loans
Compensating Balances
Cost of a Compensating Balance
Letters of Credit
Secured Loans
Accounts Receivable Financing
Inventory Loans
Other Sources
18.6 A Short-Term Financial Plan
18.7 Summary and Conclusions
CHAPTER 19 CASH AND LIQUIDITY MANAGEMENT
19.1 Reasons for Holding Cash
The Speculative and Precautionary Motives
The Transaction Motive
Compensating Balances
Costs of Holding Cash
Cash Management versus Liquidity Management
19.2 Understanding Float
Disbursement Float
Collection Float and Net Float
Float Management
Measuring Float
Some Details
Cost of the Float
Ethical and Legal Questions
Electronic Data Interchange and Check 21: The End of Float?
19.3 Cash Collection and Concentration
Components of Collection Time
Cash Collection
Lockboxes
Cash Concentration
Accelerating Collections: An Example
19.4 Managing Cash Disbursements
Increasing Disbursement Float
Controlling Disbursements
Zero-Balance Accounts
Controlled Disbursement Accounts
19.5 Investing Idle Cash
Temporary Cash Surpluses
Seasonal or Cyclical Activities
Planned or Possible Expenditures
Characteristics of Short-Term Securities
Maturity
Default Risk
Marketability
Taxes
Some Different Types of Money Market Securities
19.6 Summary and Conclusions
19A Determining the Target Cash Balance
The Basic Idea
The Bat Model
The Opportunity Costs
The Trading Costs
The Total Cost
The Solution
Conclusion
The Miller–Orr Model: A More General Approach
The Basic Idea
Using the Model
Implications of the BAT and Miller–Orr Models
Other Factors Infl uencing the Target Cash Balance
CHAPTER 20 CREDIT AND INVENTORY MANAGEMENT
20.1 Credit and Receivables
Components of Credit Policy
The Cash Flows from Granting Credit
The Investment in Receivables
20.2 Terms of the Sale
The Basic Form
The Credit Period
The Invoice Date
Length of the Credit Period
Cash Discounts
Cost of the Credit
Trade Discounts
The Cash Discount and the ACP
Credit Instruments
20.3 Analyzing Credit Policy
Credit Policy Effects
Evaluating a Proposed Credit Policy
NPV of Switching Policies
A Break-Even Application
20.4 Optimal Credit Policy
The Total Credit Cost Curve
Organizing the Credit Function
20.5 Credit Analysis
When Should Credit Be Granted?
A One-Time Sale
Repeat Business
Credit Information
Credit Evaluation and Scoring
20.6 Collection Policy
Monitoring Receivables
Collection Effort
20.7 Inventory Management
The Financial Manager and Inventory Policy
Inventory Types
Inventory Costs
20.8 Inventory Management Techniques
The ABC Approach
The Economic Order Quantity Model
Inventory Depletion
The Carrying Costs
The Restocking Costs
The Total Costs
Extensions to the EOQ Model
Safety Stocks
Reorder Points
Managing Derived-Demand Inventories
Materials Requirements Planning
Just-in-Time Inventory
20.9 Summary and Conclusions
20A More about Credit Policy Analysis
Two Alternative Approaches
The One-Shot Approach
The Accounts Receivable Approach
Discounts and Default Risk
NPV of the Credit Decision
A Break-Even Application
PART 8 Topics in Corporate Finance
CHAPTER 21 INTERNATIONAL CORPORATE FINANCE
21.1 Terminology
21.2 Foreign Exchange Markets and Exchange Rates
Exchange Rates
Exchange Rate Quotations
Cross-Rates and Triangle Arbitrage
Types of Transactions
21.3 Purchasing Power Parity
Absolute Purchasing Power Parity
Relative Purchasing Power Parity
The Basic Idea
The Result
Currency Appreciation and Depreciation
21.4 Interest Rate Parity, Unbiased Forward Rates, and the International Fisher Effect
Covered Interest Arbitrage
Interest Rate Parity
Forward Rates and Future Spot Rates
Putting It All Together
Uncovered Interest Parity
The International Fisher Effect
21.5 International Capital Budgeting
Method 1: The Home Currency Approach
Method 2: The Foreign Currency Approach
Unremitted Cash Flows
21.6 Exchange Rate Risk
Short-Run Exposure
Long-Run Exposure
Translation Exposure
Managing Exchange Rate Risk
21.7 Political Risk
21.8 Summary and Conclusions
CHAPTER 22 BEHAVIORAL FINANCE: IMPLICATIONS FOR FINANCIAL MANAGEMENT
22.1 Introduction to Behavioral Finance
22.2 Biases
Overconfidence
Overoptimism
Confirmation Bias
22.3 Framing Effects
Loss Aversion
House Money
22.4 Heuristics
The Affect Heuristic
The Representativeness Heuristic
Representativeness and Randomness
The Gambler’s Fallacy
22.5 Behavioral Finance and Market Efficiency
Limits to Arbitrage
The 3Com/Palm Mispricing
The Royal Dutch/Shell Price Ratio
Bubbles and Crashes
The Crash of 1929
The Crash of October 1987
The Nikkei Crash
The “”Dot-Com”” Bubble and Crash
22.6 Market Efficiency and the Performance of Professional Money Managers
22.7 Summary and Conclusions
CHAPTER 23 ENTERPRISE RISK MANAGEMENT
23.1 Insurance
23.2 Managing Financial Risk
The Risk Profile
Reducing Risk Exposure
Hedging Short-Run Exposure
Cash Flow Hedging: A Cautionary Note
Hedging Long-Term Exposure
Conclusion
23.3 Hedging with Forward Contracts
Forward Contracts: The Basics
The Payoff Profile
Hedging with Forwards
A Caveat
Credit Risk
Forward Contracts in Practice
23.4 Hedging with Futures Contracts
Trading in Futures
Futures Exchanges
Hedging with Futures
23.5 Hedging with Swap Contracts
Currency Swaps
Interest Rate Swaps
Commodity Swaps
The Swap Dealer
Interest Rate Swaps: An Example
23.6 Hedging with Option Contracts
Option Terminology
Options versus Forwards
Option Payoff Profiles
Option Hedging
Hedging Commodity Price Risk with Options
Hedging Exchange Rate Risk with Options
Hedging Interest Rate Risk with Options
A Preliminary Note
Interest Rate Caps
Other Interest Rate Options
Actual Use of Derivatives
23.7 Summary and Conclusions
CHAPTER 24 OPTIONS AND CORPORATE FINANCE
24.1 Options: The Basics
Puts and Calls
Stock Option Quotations
Option Payoffs
24.2 Fundamentals of Option Valuation
Value of a Call Option at Expiration
The Upper and Lower Bounds on a Call Option’s Value
The Upper Bound
The Lower Bound
A Simple Model: Part I
The Basic Approach
A More Complicated Case
Four Factors Determining Option Values
24.3 Valuing a Call Option
A Simple Model: Part II
The Fifth Factor
A Closer Look
24.4 Employee Stock Options
ESO Features
ESO Repricing
ESO Backdating
24.5 Equity as a Call Option on the Firm’s Assets
Case I: The Debt Is Risk-Free
Case II: The Debt Is Risky
24.6 Options and Capital Budgeting
The Investment Timing Decision
Managerial Options
Contingency Planning
Options in Capital Budgeting: An Example
Strategic Options
Conclusion
24.7 Options and Corporate Securities
Warrants
The Difference between Warrants and Call Options
Earnings Dilution
Convertible Bonds
Features of a Convertible Bond
Value of a Convertible Bond
Other Options
The Call Provision on a Bond
Put Bonds
Insurance and Loan Guarantees
24.8 Summary and Conclusions
CHAPTER 25 OPTION VALUATION
25.1 Put–Call Parity
Protective Puts
An Alternative Strategy
The Result
Continuous Compounding: A Refresher Course
25.2 The Black–Scholes Option Pricing Model
The Call Option Pricing Formula
Put Option Valuation
A Cautionary Note
25.3 More about Black–Scholes
Varying the Stock Price
Varying the Time to Expiration
Varying the Standard Deviation
Varying the Risk-Free Rate
Implied Standard Deviations
25.4 Valuation of Equity and Debt in a Leveraged Firm
Valuing the Equity in a Leveraged Firm
Options and the Valuation of Risky Bonds
25.5 Options and Corporate Decisions: Some Applications
Mergers and Diversification
Options and Capital Budgeting
25.6 Summary and Conclusions
CHAPTER 26 MERGERS AND ACQUISITIONS
26.1 The Legal Forms of Acquisitions
Merger or Consolidation
Acquisition of Stock
Acquisition of Assets
Acquisition Classifications
A Note about Takeovers
Alternatives to Merger
26.2 Taxes and Acquisitions
Determinants of Tax Status
Taxable versus Tax-Free Acquisitions
26.3 Accounting for Acquisitions
The Purchase Method
More about Goodwill
26.4 Gains from Acquisitions
Synergy
Revenue Enhancement
Marketing Gains
Strategic Benefits
Market Power
Cost Reductions
Economies of Scale
Economies of Vertical Integration
Complementary Resources
Lower Taxes
Net Operating Losses
Unused Debt Capacity
Surplus Funds
Asset Write-Ups
Reductions in Capital Needs
Avoiding Mistakes
A Note about Ineffi cient Management
26.5 Some Financial Side Effects of Acquisitions
EPS Growth
Diversification
26.6 The Cost of an Acquisition
Case I: Cash Acquisition
Case II: Stock Acquisition
Cash versus Common Stock
26.7 Defensive Tactics
The Corporate Charter
Repurchase and Standstill Agreements
Poison Pills and Share Rights Plans
Going Private and Leveraged Buyouts
Other Devices and Jargon of Corporate Takeovers
26.8 Some Evidence on Acquisitions: Does M&A Pay?
26.9 Divestitures and Restructurings
26.10 Summary and Conclusions
CHAPTER 27 LEASING
27.1 Leases and Lease Types
Leasing versus Buying
Operating Leases
Financial Leases
Tax-Oriented Leases
Leveraged Leases
Sale and Leaseback Agreements
27.2 Accounting and Leasing
27.3 Taxes, the IRS, and Leases
27.4 The Cash Flows from Leasing
The Incremental Cash Flows
A Note about Taxes
27.5 Lease or Buy?
A Preliminary Analysis
Three Potential Pitfalls
NPV Analysis
A Misconception
27.6 A Leasing Paradox
27.7 Reasons for Leasing
Good Reasons for Leasing
Tax Advantages
A Reduction of Uncertainty
Lower Transactions Costs
Fewer Restrictions and Security Requirements
Dubious Reasons for Leasing
Leasing and Accounting Income
100 Percent Financing
Low Cost
Other Reasons for Leasing
27.8 Summary and Conclusions
APPENDICES
APPENDIX A: MATHEMATICAL TABLES
APPENDIX B: KEY EQUATIONS
APPENDIX C: ANSWERS TO SELECTED END-OF-CHAPTER PROBLEMS
APPENDIX D: USING THE HP 10B AND TI BA II PLUS FINANCIAL CALCULATORS
INDEX
