Corporate Finance : Theory and Practice

by Pierre Vernimmen; Pascal Quiry (HEC, France); Yann Le Fur (Schroder Salomon Smith Barney, France); Maurizio Dallochio (Bocconi Institute, Italy); Antonio Salvi (Bocconi Institute, Italy)

• ISBN13: 9780470092255
• ISBN10: 0470092254
• Format: Paperback
• Copyright: 2005-08-01
• Publisher: WILEY

Summary

Corporate Finance: Theory and Practice covers the theory and practice of Corporate Finance from a truly European perspective. It shows how to use financial theory to solve practical problems and is written for students of corporate finance and financial analysis and practising corporate financiers. Corporate Finance is split into four sections and covers the basics of financial analysis; the basic theoretical knowledge that you will need to value a firm; the major types of financial securities: equity, debt & options and finally financial management which shows you how to organise a company's equity capital, buying and selling companies, M&A, bankruptcy and cash flow management. Key features include: A section on financial analysis a Corporate Financier must understand a company based on a detailed analysis of its accounts. Large numbers neglected this approach during the last stock market bubble and were caught in the crash that inevitably followed. How many investors took the trouble to read Enron's annual report? Those who did found that it spoke volumes! End of Chapter Summary, Questions and Answers, Glossary, European Case Studies A supporting Website http://www.vernimmen.com with free access to statistics, a glossary & lexicon; articles, notes on financial transactions, basic financial figures for more than 10,000 European and US listed companies, thesis topics, a bibliography; case studies, Q&A; A letter box for your questions to the authors a reply guaranteed within 72 hours! A free monthly newsletter on Corporate Finance sent out to subscribers to the site. The book, the website www.vernimmen.com and the Vernimmen.com newsletter are all written and created by an author team who are both investment bankers/corporate financiers and academics."Impressive book for finance professionals - Probably the best recently published Corporate Finance book with a truly European emphasis. The balance between theory and practice makes this book an excellent tool for Investment Bankers and other finance professionals, as it covers both basic as well as more sophisticated topics. Particularly impressive is their commitment to continuously updating material, as well as the regular publication of a newsletter containing timely articles on various current finance topics. The possibility of asking questions to the authors and effectively receiving in-depth answers for free is a very valuable feature. I sincerely recommend this text." Amazon.co.uk 31 October 2005"An excellent book for all business students - For a few months already, the Vernimmen.com website had been helping me for my finance class, as well as the monthly newsletter. I finally bought the book, and I have not been disappointed: the style is clear, very practical ; theories are mixed with real cases, which makes them easy to understand. Valuation techniques are well explained (discounted cash flow methods, methods based on ratios). Fundamental concepts (accounting, finance, financial markets) are recalled in the first part; when more complex concepts are tackled (investment analysis, LBOs, capital structure...), they are explained with lots of simplicity and conciseness. I recommend this book for every student in Management or Finance!" Amazon.co.uk 30 July 2005

Author Biography

Pascal Quiry is an adjunct finance teacher in the leading French business school HEC Paris, and a managing director at BNP Paribas Corporate Finance, specialising in M&A transactions for listed companies.

Maurizio Dallocchio is the current Dean of the leading Italian business school Bocconi (Milan) and Lehman Brothers chair of Corporate Finance. He is also a board member of several listed and unlisted companies and is one of the most distinguished Italian authorities on finance.

Yann Le Fur is a corporate finance teacher at HEC Paris business school and an investment banker with Mediobanca in Paris (after several years with Schroders and Citigroup).

Antonio Salvi is an Assistant Professor of Finance at Bocconi and the University of Venice where he teaches corporate finance. His areas of research cover cost of capital, structure of debt finance and corporate governance.

Pierre Vernimmen who died in 1996, was both an M&A dealmaker (he advised Louis Vuitton on its merger with Moët Henessy to create LVMH, the world luxury goods leader) and a finance teacher at HEC Paris. His book, Finance d’Entreprise, was and still is the top selling financial textbook in French speaking countries and is the forebear of Corporate Finance: Theory and European Practice.

Table of Contents

Foreword	xvi
Richard Roll
Preface	xviii
List of frequently used symbols	xxii
What is corporate finance?	1	(14)
The Financial Manager is First and Foremost a Salesman . . .	1	(3)
. . . Of Financial Securities . . .	4	(3)
. . . Valued Continuously in the Financial Markets	7	(3)
. . . Most Importantly, He is a Negotiator . . .	10	(1)
. . . And He Remembers to Do an Occasional Reality Check!	11	(4)
Section I Financial analysis	15	(2)
Part One Fundamental concepts in financial analysis	17	(104)
Cash flows	19	(10)
Operating and Investment Cycles	20	(2)
Financial Resources	22	(7)
Earnings	29	(15)
Additions to Wealth and Deductions to Wealth	29	(5)
Different Income Statement Formats	34	(10)
Capital employed and invested capital	44	(13)
The Balance Sheet: Definitions and Concepts	45	(2)
The Capital-Employed Analysis of the Balance Sheet	47	(4)
A Solvency-and-Liquidity Analysis of the Balance Sheet	51	(2)
A Detailed Example of a Capital-Employed Balance Sheet	53	(4)
Walking through from earnings to cash flow	57	(16)
Analysis of Earnings From a Cash Flow Perspective	57	(4)
Cash Flow Statement	61	(12)
Getting to grips with consolidated accounts	73	(21)
Consolidation Methods	73	(7)
Consolidation-Related Issues	80	(5)
Technical Aspects of Consolidation	85	(9)
How to cope with the most complex points in financial accounts	94	(27)
Accruals	95	(1)
Construction Contracts	95	(1)
Convertible Bonds and Loans	96	(1)
Currency Translation Adjustments	97	(1)
Deferred Tax Assets and Liabilities	97	(2)
Dilution Profit and Losses	99	(1)
Exchangeable Bonds	100	(1)
Goodwill	100	(1)
Intangible Fixed Assets	101	(3)
Inventories	104	(2)
Leases	106	(2)
Mandatory Convertible Bonds	108	(1)
Off-Balance-Sheet Commitments	108	(2)
Preference Shares	110	(1)
Perpetual Subordinated Loans and Notes	111	(1)
Provisions	111	(4)
Stock Options	115	(1)
Tangible Fixed Assets	116	(1)
Treasury Shares	117	(4)
Part Two Financial analysis and forecasting	121	(138)
How to perform a financial analysis	123	(32)
What is Financial Analysis?	123	(2)
Economic Analysis of Companies	125	(12)
An Assessment of a Company's Accounting Policy	137	(1)
Standard Financial Analysis Plan	138	(1)
The Various Techniques of Financial Analysis	139	(3)
Ratings	142	(1)
Scoring Techniques	143	(1)
Expert Systems	144	(11)
Margin analysis: Structure	155	(23)
How Operating Profit is Formed	156	(10)
How Operating Profit is Allocated	166	(1)
Financial Assessment	167	(5)
Pro Forma Income Statements (Individual and Consolidated Accounts)	172	(1)
Case Study: Ericsson	172	(6)
Margin analysis: Risks	178	(15)
How Operating Leverage Works	178	(4)
A More Refined Analysis Provides Greater Insight	182	(5)
From Analysis to Forecasting: the Concept of Normative Margin	187	(1)
Case Study: Ericsson	188	(5)
Working capital and capital expenditures	193	(24)
The Nature of Working Capital	193	(4)
Working Capital Turnover Ratios	197	(4)
Reading Between the Lines of Working Capital	201	(6)
Analysing Capital Expenditures	207	(3)
Case Study: Ericsson	210	(7)
Financing	217	(15)
A Dynamic Analysis of the Company's Financing	218	(2)
A Static Analysis of the Company's Financing	220	(7)
Case Study: Ericsson	227	(5)
Return on capital employed and return on equity	232	(20)
Analysis of Corporate Profitability	232	(2)
Leverage Effect	234	(9)
Uses and Limitations of the Leverage Effect	243	(3)
Case Study: Ericsson	246	(6)
Conclusion of financial analysis	252	(7)
Solvency	252	(2)
Value Creation	254	(1)
Financial Analysis Without the Relevant Accounting Documents	255	(1)
Case Study: Ericsson	256	(3)
Section II Investment analysis	259	(2)
Part One Investment decision rules	261	(124)
The financial markets	263	(27)
The Rise of Capital Markets	263	(5)
The Functions of a Financial System	268	(2)
The Relationship Between Banks and Companies	270	(1)
From Value to Price (1): Financial Communication	271	(1)
From Value to Price (2): Efficient Markets	272	(5)
Limitations in the Theory of Efficient Markets	277	(5)
Investors' Behaviour	282	(8)
The time value of money and Net Present Value (NPV)	290	(19)
Capitalisation	290	(4)
Discounting	294	(2)
Present Value and Net Present Value of a Financial Security	296	(1)
The NPV Decision Rule	297	(1)
What Does Net Present Value Depend On?	298	(1)
Some Examples of Simplification of Present Value Calculations	299	(3)
Special NPV Topics	302	(7)
The Internal Rate of Return (IRR)	309	(18)
How is Internal Rate of Return Determined?	309	(1)
Internal Rate of Return as an Investment Criterion	310	(1)
The Limits of the Internal Rate of Return	310	(7)
Some More Financial Mathematics: Interest Rate and Yield to Maturity	317	(10)
Incremental cash flows and other investment criteria	327	(18)
The Predominance of NPV and the Importance of IRR	327	(2)
The Main Lines of Reasoning	329	(4)
Which Cash Flows are Important?	333	(1)
Other Investment Criteria	334	(11)
Measuring value creation	345	(22)
Accounting Criteria	348	(5)
Economic Criteria	353	(4)
Market Criteria	357	(2)
Putting Things into Perspective	359	(8)
Risk and investment analysis	367	(18)
A Closer Look at Risk	368	(5)
The Contribution of Real Options	373	(12)
Part Two The risk of securities and the cost of capital	385	(88)
Risk and return	387	(32)
Sources of Risk	387	(2)
Risk and Fluctuation in the Value of a Security	389	(3)
Tools for Measuring Return and Risk	392	(2)
How Diversification Reduces Risk	394	(2)
Portfolio Risk	396	(5)
Measuring How Individual Securities Affect Portfolio Risk: The Beta Coefficient	401	(4)
Choosing Among Several Risky Assets and the Efficient Frontier	405	(2)
Choosing Between Several Risky Assets and a Risk-Free Asset: The Capital Market Line	407	(4)
How Portfolio Management Works	411	(8)
The cost of equity	419	(24)
Return Required by Investors: the CAPM	420	(4)
Properties of the CAPM	424	(1)
The Limits of the CAPM Model	425	(4)
Multifactor Models	429	(3)
The Cost of Equity Based on Historical Returns	432	(2)
The Cost of Equity Based on Current Market Prices	434	(6)
A Formal Derivation of the CAPM	440	(3)
From the cost of equity to the cost of capital	443	(18)
The Cost of Capital and the β of Assets	443	(1)
Alternative Methods for Estimating the Cost of Capital	444	(6)
Some Practical Applications	450	(3)
Can Corporate Managers Influence the Cost of Capital?	453	(2)
Cost of Capital: a Look at the Evidence	455	(6)
The term structure of interest rates	461	(12)
Fixed Income Securities and Risk	461	(2)
The Different Interest Rate Curves	463	(3)
Relationship Between Interest Rates and Maturities	466	(3)
The Stochastic Approach to Modelling the Rate Structure	469	(1)
A Flashback	469	(4)
Section III Corporate financial policies	473	(2)
Part One Financial securities	475	(160)
Enterprise value and financial securities	477	(8)
A Completely Different Way of Looking at Things	477	(1)
Debt and Equity	478	(2)
Overview of How to Compute Enterprise Value	480	(1)
Valuation by Discounting Free Cash Flows	480	(5)
Debt securities	485	(27)
Basic Concepts	487	(2)
The Yield to Maturity	489	(3)
Floating Rate Bonds	492	(3)
Other Debt Securities	495	(4)
The Volatility of Debt Securities	499	(4)
Default Risk and the Role of Rating	503	(9)
Managing net debt	512	(26)
General Features of Corporate Financing	512	(5)
Marketable Debt Securities	517	(3)
Bank Debt Products	520	(7)
Leasing	527	(3)
Project Financing	530	(3)
Investment of Cash	533	(5)
Shares	538	(18)
Basic Concepts	538	(7)
Price/Earnings Ratio	545	(3)
Key Market Data	548	(2)
Adjusting Per-Share Data for Technical Factors	550	(6)
Options	556	(21)
Definition and Theoretical Foundation of Options	557	(2)
Mechanisms Used in Pricing Options	559	(2)
Analysing Options	561	(3)
Parameters to Value Options	564	(2)
Methods for Pricing Options	566	(4)
Tools for Managing an Options Position	570	(7)
Hybrid securities	577	(24)
Warrants	578	(4)
Convertible Bonds	582	(6)
Preference Shares	588	(3)
Other Hybrid Securities	591	(10)
Selling securities	601	(34)
General Principles in the Sale of Securities	601	(6)
Initial Public Offerings (IPOs)	607	(6)
Capital Increases	613	(5)
Block Trades of Shares	618	(2)
Bonds	620	(6)
Convertible and Exchangeable Bonds	626	(1)
Syndicated Loans	626	(9)
Part Two Capital structure policies	635	(118)
Value and corporate finance	637	(20)
The Purpose of Finance is to Create Value	637	(3)
Value Creation and Markets in Equilibrium	640	(4)
Value and Organisation Theories	644	(6)
How Can We Create Value?	650	(1)
Value and Taxation	651	(6)
Capital structure and the theory of perfect capital markets	657	(11)
The Evidence From the Real World	658	(2)
The Capital Structure Policy in Perfect Financial Markets	660	(8)
The tradeoff model	668	(30)
The Benefits of Debt	669	(12)
The Costs of Debt	681	(6)
The Tradeoff Model	687	(8)
The Capital Structure Choice: the Endesa Case	695	(3)
Debt, equity and options theory	698	(18)
Analysing the Firm in Light of Options Theory	699	(2)
Contribution of the Options Theory to the Valuation of Equity	701	(3)
Using Options Theory to Analyse a Company's Financial Decisions	704	(4)
Resolving Conflicts Between Shareholders and Creditors	708	(8)
Working out details: The design of the capital structure	716	(37)
The Major Concepts	717	(5)
Competitors, Lifecycle and Other Capital Structure Determinants	722	(4)
Other Factors Affecting the Capital Structure Choice	726	(3)
Effects of the Financing Choice on Accounting and Financial Criteria	729	(4)
Working Out the Details of the Capital Structure	733	(8)
Capital Structure Policies: a Look at the Evidence	741	(6)
Capital Structure Design: the Alitalia Case	747	(6)
Part Three Equity capital and dividend policies	753	(56)
Internal financing: Reinvesting cash flow	755	(13)
Reinvested Cash Flow and the Value of Equity	756	(3)
Internal Financing and the Various Stakeholders	759	(1)
Internal Financing and Return Criteria	760	(8)
Returning cash to shareholders: Dividend policies	768	(24)
Dividends and Market Value	768	(4)
Dividend Distribution in Practice	772	(6)
Share Buybacks	778	(5)
Taxation of Dividends, Share Buybacks and Capital Reduction	783	(9)
Capital increases	792	(17)
A Definition of Capital Increase	792	(2)
Capital Increases and Finance Theory	794	(2)
Old and New Shareholders	796	(3)
Capital Increases and Financial Criteria	799	(10)
Section IV Financial management	809	(2)
Part One Valuation and financial engineering	811	(126)
Valuation	813	(31)
Overview of the Different Methods	813	(1)
Premiums and Discounts	814	(4)
Valuation by Discounted Cash Flow	818	(8)
Multiple Approach or Peer Group Comparisons	826	(6)
The Sum-Of-The-Parts Method and Restated Net Asset Value (RNAV)	832	(3)
Example: Valuation of Ericsson	835	(2)
Comparison of Valuation Methods	837	(7)
Choice of corporate structure	844	(28)
Shareholder Structure	844	(9)
Initial Public Offerings (IPOs) and Corporate Governance	853	(4)
How to Strengthen Control Over a Company	857	(8)
Financial Securities' Discounts	865	(2)
Organising a Diversified Group	867	(5)
Taking control of a company	872	(22)
The Rise of Mergers and Acquisitions	873	(4)
Choosing a Negotiating Strategy	877	(5)
Taking Over a Listed European Company	882	(12)
Mergers and demergers	894	(18)
All-Share Deals	894	(5)
The Mechanics of All-Share Transactions	899	(5)
Demergers and Splitoffs	904	(8)
Leveraged buyouts (LBOs)	912	(11)
LBO Structures	912	(3)
The Players	915	(5)
LBOs and Financial Theory	920	(3)
Bankruptcy and restructuring	923	(14)
Causes of Bankruptcy	923	(5)
Bankruptcy and Financial Theory	928	(3)
An Illustrative Example of Financial Restructuring	931	(6)
Part Two Managing net debt and financial risks	937	(55)
Managing cash flows	939	(17)
Basic Tenets	939	(3)
Cash Management	942	(5)
Cash Management Within a Group	947	(4)
Investment of Cash	951	(5)
Asset-based financing	956	(16)
Reasons for Using Asset-Based Financing	956	(2)
Main Techniques	958	(6)
Accounting Treatment	964	(4)
Consequences for Financial Analysis	968	(4)
Managing financial risks	972	(20)
The Various Sources of Financial Risk	972	(1)
Measuring Financial Risks	973	(2)
Principles of Financial Risk Management	975	(10)
Organised Markets--OTC Markets	985	(7)
Glossary	992	(10)
Index	1002	(29)
Vernimmen.com	1031	(1)
Cribsheet	1032