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Fundamentals of Corporate Finance: Standard Edition,9780072312898
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Fundamentals of Corporate Finance: Standard Edition

by ; ;
Edition:
5th
ISBN13:

9780072312898

ISBN10:
0072312890
Format:
Hardcover
Pub. Date:
12/1/2000
Publisher(s):
McGraw-Hill College
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Table of Contents

Part One Overview of Corporate Finance 1(46)
Introduction to Corporate Finance
2(19)
Corporate Finance and the Financial Manager
3(2)
What Is Corporate Finance?
3(1)
The Financial Manager
3(1)
Financial Management Decisions
3(1)
Capital Budgeting
3(1)
Capital Structure
4(1)
Working Capital Management
5(1)
Conclusion
5(1)
Forms of Business Organization
5(4)
Sole Proprietorship
6(1)
Partnership
6(1)
Corporation
7(1)
A Corporation by Another Name...
8(1)
The Goal of Financial Management
9(3)
Possible Goals
9(1)
The Goal of Financial Management
10(1)
A More General Goal
11(1)
The Agency Problem and Control of the Corporation
12(4)
Agency Relationships
12(1)
Management Goals
12(2)
Do Managers Act in the Stockholders' Interests?
14(1)
Managerial Compensation
14(1)
Control of the Firm
14(1)
Conclusion
15(1)
Stakeholders
15(1)
Financial Markets and the Corporation
16(2)
Cash Flows to and from the Firm
16(1)
Primary versus Secondary Markets
17(1)
Primary Markets
17(1)
Secondary Markets
17(1)
Summary and Conclusions
18(3)
Financial Statements, Taxes, and Cash Flow
21(26)
The Balance Sheet
21(5)
Assets: The Left-Hand Side
22(1)
Liabilities and Owners' Equity: The Right-Hand Side
22(1)
Net Working Capital
23(1)
Liquidity
23(1)
Debt versus Equity
24(1)
Market Value versus Book Value
25(1)
The Income Statement
26(3)
GAAP and the Income Statement
27(1)
Noncash Items
28(1)
Time and Costs
28(1)
Taxes
29(2)
Corporate Tax Rates
29(1)
Average versus Marginal Tax Rates
29(2)
Cash Flow
31(7)
Cash Flow from Assets
32(1)
Operating Cash Flow
32(1)
Capital Spending
33(1)
Change in Net Working Capital
33(1)
Conclusion
33(1)
A Note on ``Free'' Cash Flow
34(1)
Cash Flow to Creditors and Stockholders
34(1)
Cash Flow to Creditors
34(1)
Cash Flow to Stockholders
34(2)
An Example: Cash Flows for Dole Cola
36(1)
Operating Cash Flow
36(1)
Net Capital Spending
37(1)
Change in NWC and Cash Flow from Assets
37(1)
Cash Flow to Stockholders and Creditors
37(1)
Summary and Conclusions
38(9)
Part Two Financial Statements and Long-Term Financial Planning 47(70)
Working with Financial Statements
48(38)
Cash Flow and Financial Statements: A Closer Look
49(4)
Sources and Uses of Cash
49(2)
The Statement of Cash Flows
51(2)
Standardized Financial Statements
53(4)
Common-Size Statements
54(1)
Common-Size Balance Sheets
54(1)
Common-Size Income Statements
55(1)
Common-Size Statements of Cash Flows
55(1)
Common-Base Year Financial Statements: Trend Analysis
55(1)
Combined Common-Size and Base-Year Analysis
56(1)
Ratio Analysis
57(11)
Short-Term Solvency, or Liquidity, Measures
58(1)
Current Ratio
58(1)
The Quick (or Acid-Test) Ratio
59(1)
Other-Liquidity Ratios
59(1)
Long-Term Solvency Measures
60(1)
Total Debt Ratio
60(1)
A Brief Digression: Total Capitalization versus Total Assets
61(1)
Times Interest Earned
61(1)
Cash Coverage
61(1)
Asset Management, or Turnover, Measures
62(1)
Inventory Turnover and Days' Sales in Inventory
62(1)
Receivables Turnover and Days' Sales in Receivables
63(1)
Asset Turnover Ratios
64(1)
Profitability Measures
64(1)
Profit Margin
65(1)
Return on Assets
65(1)
Return on Equity
65(1)
Market Value Measures
66(1)
Price-Earnings Ratio
66(1)
Market-to-Book Ratio
67(1)
Conclusion
67(1)
The Du Pont Identity
68(2)
Using Financial Statement Information
70(6)
Why Evaluate Financial Statements?
70(1)
Internal Uses
70(1)
External Uses
70(1)
Choosing a Benchmark
71(1)
Time-Trend Analysis
71(1)
Peer Group Analysis
71(4)
Problems with Financial Statement Analysis
75(1)
Summary and Conclusions
76(10)
Long-Term Financial Planning and Growth
86(31)
What is Financial Planning?
87(3)
Growth as a Financial Management Goal
88(1)
Dimensions of Financial Planning
88(1)
What Can Planning Accomplish?
89(1)
Examining Interactions
89(1)
Exploring Options
89(1)
Avoiding Surprises
89(1)
Ensuring Feasibility and Internal Consistency
90(1)
Conclusion
90(1)
Financial Planning Models: A First-Look
90(3)
A Financial Planning Model: The Ingredients
90(1)
Sales Forecast
90(1)
Pro Forma Statements
91(1)
Asset Requirements
91(1)
Financial Requirements
91(1)
The Plug
91(1)
Economic Assumptions
92(1)
A Simple Financial Planning Model
92(1)
The Percentage of Sales Approach
93(6)
The Income Statement
93(2)
The Balance Sheet
95(1)
A Particular Scenario
96(1)
An Alternative Scenario
97(2)
External Financing and Growth
99(8)
EFN and Growth
100(2)
Financial Policy and Growth
102(1)
The Internal Growth Rate
102(1)
The Sustainable Growth Rate
103(1)
Determinants of Growth
104(3)
Some Caveats Regarding Financial Planning Models
107(1)
Summary and Conclusions
107(10)
Part Three Valuation of Future Cash Flows 117(126)
Introduction to Valuation: The Time Value of Money
118(22)
Future Value and Compounding
119(6)
Investing for a Single Period
119(1)
Investing for More Than One Period
119(5)
A Note on Compound Growth
124(1)
Present Value and Discounting
125(3)
The Single-Period Case
125(1)
Present Values for Multiple Periods
126(2)
More on Present and Future Values
128(7)
Present versus Future Value
128(1)
Determining the Discount Rate
129(4)
Finding the Number of Periods
133(2)
Summary and Conclusions
135(5)
Discounted Cash Flow Valuation
140(39)
Future and Present Values of Multiple Cash Flows
141(7)
Future Value with Multiple Cash Flows
141(3)
Present Value with Multiple Cash Flows
144(3)
A Note on Cash Flow Timing
147(1)
Valuing Level Cash Flows: Annuities and Perpetuities
148(8)
Present Value for Annuity Cash Flows
148(1)
Annuity Tables
149(1)
Finding the Payment
150(1)
Finding the Rate
151(2)
Future Value for Annuities
153(1)
A Note on Annuities Due
154(1)
Perpetuities
154(2)
Comparing Rates: The Effect of Compounding
156(4)
Effective Annual Rates and Compounding
156(1)
Calculating and Comparing Effective Annual Rates
156(2)
EARs and APRs
158(1)
Taking It to the Limit: A Note on Continuous Compounding
159(1)
Loan Types and Loan Amortization
160(5)
Pure Discount Loans
161(1)
Interest-Only Loans
161(1)
Amortized Loans
162(3)
Summary and Conclusions
165(14)
Interest Rates and Bond Valuation
179(38)
Bonds and Bond Valuation
179(9)
Bond Features and Prices
180(1)
Bond Values and Yields
180(4)
Interest Rate Risk
184(2)
Finding the Yield to Maturity: More Trial and Error
186(2)
More on Bond Features
188(5)
Is It Debt or Equity?
189(1)
Long-Term Debt: The Basics
189(1)
The Indenture
190(1)
Terms of a Bond
191(1)
Security
191(1)
Seniority
192(1)
Repayment
192(1)
The Call Provision
192(1)
Protective Convenants
193(1)
Bond Ratings
193(2)
Some Different Types of Bonds
195(4)
Government Bonds
195(1)
Zero Coupon Bonds
196(2)
Floating-Rate Bonds
198(1)
Other Types of Bonds
199(1)
Bond Markets
199(5)
How Bonds Are Bought and Sold
200(1)
Bond Price Reporting
200(4)
Inflation and Interest Rates
204(2)
Real versus Nominal Rates
204(1)
The Fisher Effect
205(1)
Determinants of Bond Yields
206(4)
The Term Structure of Interest Rates
206(3)
Bond Yields and the Yield Curve: Putting It All Together
209(1)
Conclusion
210(1)
Summary and Conclusions
210(7)
Stock Valuation
217(26)
Common Stock Valuation
217(10)
Cash Flows
218(1)
Some Special Cases
219(1)
Zero Growth
219(1)
Constant Growth
220(3)
Nonconstant Growth
223(2)
Components of the Required Return
225(2)
Some Features of Common and Preferred Stocks
227(5)
Common Stock Features
227(1)
Shareholder Rights
228(1)
Proxy Voting
229(1)
Classes of Stock
229(1)
Other Rights
230(1)
Dividends
230(1)
Preferred Stock Features
231(1)
Stated Value
231(1)
Cumulative and Noncumulative Dividends
231(1)
Is Preferred Stock Really Debt?
231(1)
The Stock Markets
232(5)
Dealers and Brokers
232(1)
Organization of the NYSE
233(1)
Members
233(1)
Operations
233(1)
Floor Activity
234(1)
Nasdaq Operations
235(1)
Stock Market Reporting
236(1)
Summary and Conclusions
237(6)
Part Four Capital Budgeting 243(108)
Net Present Value and Other Investment Criteria
244(34)
Net Present Value
245(4)
The Basic Idea
245(1)
Estimating Net Present Value
246(3)
The Payback Rule
249(4)
Defining the Rule
249(2)
Analyzing the Rule
251(1)
Redeeming Qualities of the Rule
251(1)
Summary of the Rule
252(1)
The Discounted Payback
253(4)
The Average Accounting Return
257(1)
The Internal Rate of Return
257(9)
Problems with the IRR
261(1)
Nonconventional Cash Flows
261(2)
Mutually Exclusive Investments
263(3)
Redeeming Qualities of the IRR
266(1)
The Profitability Index
266(1)
The Practice of Capital Budgeting
267(2)
Summary and Conclusions
269(9)
Making Capital Investment Decisions
278(39)
Project Cash Flows: A First Look
279(1)
Relevant Cash Flows
279(1)
The Stand-Alone Principle
279(1)
Incremental Cash Flows
280(2)
Sunk Costs
280(1)
Opportunity Costs
280(1)
Side Effects
281(1)
Net Working Capital
281(1)
Financing Costs
282(1)
Other Issues
282(1)
Pro Forma Financial Statements and Project Cash Flows
282(5)
Getting Started: Pro Forma Financial Statements
282(2)
Project Cash Flows
284(1)
Project Operating Cash Flow
284(1)
Project Net Working Capital and Capital Spending
284(1)
Projected Total Cash Flow and Value
285(2)
More on Project Cash Flow
287(11)
A Closer Look at Net Working Capital
287(2)
Depreciation
289(1)
Modified ACRS Depreciation (MACRS)
290(1)
Book Value versus Market Value
291(1)
An Example: The Majestic Mulch and Compost Company (MMCC)
292(1)
Operating Cash Flows
293(1)
Change in NWC
293(2)
Capital Spending
295(1)
Total Cash Flow and Value
295(3)
Conclusion
298(1)
Alternative Definitions of Operating Cash Flow
298(3)
The Bottom-Up Approach
299(1)
The Top-Down Approach
299(1)
The Tax Shield Approach
300(1)
Conclusion
300(1)
Some Special Cases of Discounted Cash Flow Analysis
301(6)
Evaluating Cost-Cutting Proposals
301(2)
Setting the Bid Price
303(2)
Evaluating Equipment Options with Different Lives
305(2)
Summary and Conclusions
307(10)
Project Analysis and Evaluation
317(34)
Evaluating NPV Estimates
317(3)
The Basic Problem
318(1)
Projected versus Actual Cash Flows
318(1)
Forcasting Risk
318(1)
Sources of Value
319(1)
Scenario and Other What-If Analyses
320(4)
Getting Started
320(1)
Scenario Analysis
321(1)
Sensitivity Analysis
322(1)
Simulation Analysis
323(1)
Break-Even Analysis
324(6)
Fixed and Variable Costs
324(1)
Variable Costs
324(2)
Fixed Costs
326(1)
Total Costs
326(1)
Accounting Break-Even
327(2)
Accounting Break-Even: A Closer Look
329(1)
Uses for the Accounting Break-Even
329(1)
Operating Cash Flow, Sales Volume, and Break-Even
330(5)
Accounting Break-Even and Cash Flow
330(1)
The Base Case
330(1)
Calculating the Break-Even Level
331(1)
Payback and Break-Even
331(1)
Sales Volume and Operating Cash Flow
332(1)
Cash Flow, Accounting, and Financial Break-Even Points
333(1)
Accounting Break-Even Revisited
333(1)
Cash Break-Even
333(1)
Financial Break-Even
333(2)
Conclusion
335(1)
Operating Leverage
335(3)
The Basic Idea
335(1)
Implications of Operating Leverage
335(1)
Measuring Operating Leverage
336(1)
Operating Leverage and Break-Even
337(1)
Additional Considerations in Capital Budgeting
338(5)
Managerial Options
338(1)
Contingency Planning
339(1)
Options in Capital Budgeting: An Example
340(1)
Strategic Options
341(1)
Conclusion
341(1)
Capital Rationing
342(1)
Soft Rationing
342(1)
Hard Rationing
342(1)
Summary and Conclusions
343(8)
Part Five Risk and Return 351(66)
Some Lessons from Capital Market History
352(29)
Returns
353(4)
Dollar Returns
353(2)
Percentage Returns
355(2)
The Historical Record
357(5)
A First Look
358(2)
A Closer Look
360(2)
Average Returns: The First Lesson
362(4)
Calculating Average Returns
362(1)
Average Returns: The Historical Record
363(2)
Risk Premiums
365(1)
The First Lesson
366(1)
The Variability of Returns: The Second Lesson
366(6)
Frequency Distributions and Variability
366(1)
The Historical Variance and Standard Deviation
366(3)
The Historical Record
369(1)
Normal Distribution
369(1)
The Second Lesson
370(1)
Using Capital Market History
371(1)
Capital Market Efficiency
372(4)
Price Behavior in an Efficient Market
372(1)
The Efficient Markets Hypothesis
373(1)
Some Common Misconceptions about the EMH
374(1)
The Forms of Market Efficiency
375(1)
Summary and Conclusions
376(5)
Return, Risk, and the Security Market Line
381(36)
Expected Returns and Variances
382(3)
Expected Return
382(2)
Calculating the Variance
384(1)
Portfolios
385(4)
Portfolio Weights
386(1)
Portfolio Expected Returns
386(1)
Portfolio Variance
387(2)
Announcements, Surprises, and Expected Returns
389(3)
Expected and Unexpected Returns
390(1)
Announcements and News
390(2)
Risk: Systematic and Unsystematic
392(1)
Systematic and Unsystematic Risk
392(1)
Systematic and Unsystematic Components of Return
393(1)
Diversification and Portfolio Risk
393(4)
The Effect of Diversification: Another Lesson from Market History
393(1)
The Principle of Diversification
394(1)
Diversification and Unsystematic Risk
395(1)
Diversification and Systematic Risk
396(1)
Systematic Risk and Beta
397(2)
The Systematic Risk Principle
397(1)
Measuring Systematic Risk
397(1)
Portfolio Betas
398(1)
The Security Market Line
399(8)
Beta and the Risk Premium
399(1)
The Reward-to-Risk Ratio
400(1)
The Basic Argument
401(1)
The Fundamental Result
402(2)
The Security Market Line
404(1)
Market Portfolios
404(1)
The Capital Asset Pricing Model
405(2)
The SML and the Cost of Capital: A Preview
407(1)
The Basic Idea
407(1)
The Cost of Capital
407(1)
Summary and Conclusions
408(9)
Part Six Cost of Capital and Long-Term Financial Policy 417(136)
Cost of Capital
418(29)
The Cost of Capital: Some Preliminaries
419(1)
Required Return versus Cost of Capital
419(1)
Financial Policy and Cost of Capital
420(1)
The Cost of Equity
420(4)
The Dividend Growth Model Approach
420(1)
Implementing the Approach
421(1)
Estimating g
421(1)
Advantages and Disadvantages of the Approach
422(1)
The SML Approach
422(1)
Implementing the Approach
422(1)
Advantages and Disadvantages of the Approach
423(1)
The Costs of Debt and Preferred Stock
424(1)
The Cost of Debt
424(1)
The Cost of Preferred Stock
425(1)
The Weighted Average Cost of Capital
425(7)
The Capital Structure Weights
426(1)
Taxes and the Weighted Average Cost of Capital
426(2)
Calculating the WACC for Eastman Chemical
428(1)
Eastman's Cost of Equity
428(1)
Eastman's Cost of Debt
428(1)
Eastman's WACC
429(1)
Solving the Warehouse Problem and Similar Capital Budgeting Problems
429(2)
Performance Evaluation: Another Use of the WACC
431(1)
Divisional and Project Costs of Capital
432(4)
The SML and the WACC
432(1)
Divisional Cost of Capital
433(1)
The Pure Play Approach
434(1)
The Subjective Approach
434(2)
Flotation Costs and the Weighted Average Cost of Capital
436(3)
The Basic Approach
436(2)
Flotation Costs and NPV
438(1)
Summary and Conclusions
439(8)
Raising Capital
447(38)
The Financing Life Cycle of a Firm: Early-Stage Financing and Venture Capital
448(2)
Venture Capital
448(1)
Some Venture Capital Realities
449(1)
Choosing a Venture Capitalist
449(1)
Conclusion
450(1)
Selling Securities to the Public: The Basic Procedure
450(1)
Alternative Issue Methods
451(2)
Underwriters
453(2)
Choosing an Underwriter
454(1)
Types of Underwriting
454(1)
Firm Commitment Underwriting
454(1)
Best Efforts Underwriting
454(1)
The Aftermarket
454(1)
The Green Shoe Provision
455(1)
IPOs and Underpricing
455(6)
Underpricing: The Case of Conrail
455(2)
Evidence on Underpricing
457(3)
Why Does Underpricing Exist?
460(1)
New Equity Sales and the Value of the Firm
461(1)
The Costs of Issuing Securities
462(4)
The Costs of Selling Stock to the Public
462(3)
The Costs of Going Public: The Case of Multicom
465(1)
Rights
466(8)
The Mechanics of a Rights Offering
466(1)
Number of Rights Needed to Purchase a Share
467(1)
The Value of a Right
468(2)
Ex Rights
470(1)
The Underwriting Arrangements
471(1)
Rights Offers: The Case of Time-Warner
471(1)
Effects on Shareholders
472(1)
The Rights Offerings Puzzle
473(1)
Dilution
474(3)
Dilution of Proportionate Ownership
474(1)
Dilution of Value: Book versus Market Values
475(1)
A Misconception
476(1)
The Correct Arguments
476(1)
Issuing Long-Term Debt
477(1)
Shelf Registration
477(1)
Summary and Conclusions
478(7)
Financial Leverage and Capital Structure Policy
485(35)
The Capital Structure Question
486(1)
Firm Value and Stock Value: An Example
486(1)
Capital Structure and the Cost of Capital
487(1)
The Effect of Financial Leverage
487(6)
The Basics of Financial Leverage
488(1)
Financial Leverage, EPS, and ROE: An Example
488(1)
EPS versus EBIT
489(2)
Corporate Borrowing and Homemade Leverage
491(2)
Capital Structure and the Cost of Equity Capital
493(3)
M&M Proposition I: The Pie Model
493(1)
The Cost of Equity and Financial Leverage: M&M Proposition II
493(3)
Business and Financial Risk
496(1)
M&M Propositions I and II with Corporate Taxes
496(6)
The Interest Tax Shield
497(1)
Taxes and M&M Proposition I
497(2)
Taxes, the WACC, and Proposition II
499(1)
Conclusion
499(3)
Bankruptcy Costs
502(1)
Direct Bankruptcy Costs
502(1)
Indirect Bankruptcy Costs
503(1)
Optimal Capital Structure
503(5)
The Static Theory of Capital Structure
504(1)
Optimal Capital Structure and the Cost of Capital
505(1)
Optimal Capital Structure: A Recap
506(1)
Capital Structure: Some Managerial Recommendations
506(1)
Taxes
506(2)
Financial Distress
508(1)
The Pie Again
508(2)
The Extended Pie Model
508(1)
Marketed Claims versus Nonmarketed Claims
509(1)
Observed Capital Structures
510(1)
A Quick Look at the Bankruptcy Process
511(3)
Liquidation and Reorganization
511(1)
Bankruptcy Liquidation
512(1)
Bankruptcy Reorganization
512(1)
Financial Management and the Bankruptcy Process
513(1)
Agreements to Avoid Bankruptcy
514(1)
Summary and Conclusions
514(6)
Dividends and Dividend Policy
520(33)
Cash Dividends and Dividend Payment
521(4)
Cash Dividends
521(1)
Standard Method of Cash Dividend Payment
522(1)
Dividend Payment: A Chronology
522(1)
More on the Ex-Dividend Date
523(2)
Does Dividend Policy Matter?
525(2)
An Illustration of the Irrelevance of Dividend Policy
525(1)
Current Policy: Dividends Set Equal to Cash Flow
525(1)
Alternative Policy: Initial Dividend Greater than Cash Flow
526(1)
Homemade Dividends
526(1)
A Test
527(1)
Real-World Factors Favoring a Low Payout
527(3)
Taxes
528(1)
Expected Return, Dividends, and Personal Taxes
529(1)
Flotation Costs
529(1)
Dividend Restrictions
529(1)
Real-World Factors Favoring a High Payout
530(2)
Desire for Current Income
530(1)
Uncertainty Resolution
531(1)
Tax and Legal Benefits from High Dividends
531(1)
Corporate Investors
531(1)
Tax-Exempt Investors
531(1)
Conclusion
532(1)
A Resolution of Real-World Factors?
532(3)
Information Content of Dividends
532(1)
The Clientele Effect
533(2)
Establishing a Dividend Policy
535(4)
Residual Dividend Approach
535(2)
Dividend Stability
537(1)
A Compromise Dividend Policy
538(1)
Stock Repurchase: An Alternative to Cash Dividends
539(3)
Cash Dividends versus Repurchase
539(2)
Real-World Considerations in a Repurchase
541(1)
Share Repurchase and EPS
541(1)
Stock Dividends and Stock Splits
542(3)
Some Details on Stock Splits and Stock Dividends
542(1)
Example of a Small Stock Dividend
543(1)
Example of a Stock Split
543(1)
Example of a Large Stock Dividend
544(1)
Value of Stock Splits and Stock Dividends
544(1)
The Benchmark Case
544(1)
Popular Trading Range
544(1)
Reverse Splits
545(1)
Summary and Conclusions
545(8)
Part Seven Short-Term Financial Planning and Management 553(56)
Short-Term Finance and Planning
554(32)
Tracing Cash and Net Working Capital
555(2)
The Operating Cycle and the Cash Cycle
557(6)
Defining the Operating and Cash Cycles
557(1)
The Operating Cycle
557(1)
The Cash Cycle
558(1)
The Operating Cycle and the Firm's Organizational Chart
559(1)
Calculating the Operating and Cash Cycles
560(1)
The Operating Cycle
560(1)
The Cash Cycle
561(1)
Interpreting the Cash Cycle
562(1)
Some Aspects of Short-Term Financial Policy
563(7)
The Size of the Firm's Investment in Current Assets
563(3)
Alternative Financing Policies for Current Assets
566(1)
An Ideal Case
566(1)
Different Policies for Financing Current Assets
566(2)
Which Financing Policy Is Best?
568(1)
Current Assets and Liabilities in Practice
569(1)
The Cash Budget
570(3)
Sales and Cash Collections
570(1)
Cash Outflows
571(1)
The Cash Balance
572(1)
Short-Term Borrowing
573(3)
Unsecured Loans
573(1)
Compensating Balances
573(1)
Cost of a Compensating Balance
574(1)
Letters of Credit
574(1)
Secured Loans
575(1)
Accounts Receivable Financing
575(1)
Inventory Loans
576(1)
Other Sources
576(1)
A Short-Term Financial Plan
576(1)
Summary and Conclusions
577(9)
Cash and Liquidity Management
586(23)
Reasons for Holding Cash
586(2)
The Speculative and Precautionary Motives
586(1)
The Transaction Motive
587(1)
Compensating Balances
587(1)
Costs of Holding Cash
587(1)
Cash Management versus Liquidity Management
588(1)
Understanding Float
588(7)
Disbursement Float
588(1)
Collection Float and Net Float
589(1)
Float Management
590(1)
Measuring Float
590(1)
Some Details
591(1)
Cost of the Float
592(2)
Ethical and Legal Questions
594(1)
Electronic Data Interchange: The End of Float?
594(1)
Cash Collection and Concentration
595(5)
Components of Collection Time
595(1)
Cash Collection
595(1)
Lockboxes
596(1)
Cash Concentration
597(1)
Accelerating Collections: An Example
597(3)
Managing Cash Disbursements
600(1)
Increasing Disbursement Float
600(1)
Controlling Disbursements
600(1)
Zero-Balance Accounts
601(1)
Controlled Disbursement Accounts
601(1)
Investing Idle Cash
601(3)
Temporary Cash Surpluses
602(1)
Seasonal or Cyclical Activities
602(1)
Planned or Possible Expenditures
602(1)
Characteristics of Short-Term Securities
603(1)
Maturity
603(1)
Default Risk
603(1)
Marketability
603(1)
Taxes
603(1)
Some Different Types of Money Market Securities
603(1)
Summary and Conclusions
604(5)
Appendix 19A Determining the Target Cash Balance 609(41)
The Basic Idea
609(1)
The BAT Model
610(4)
The Opportunity Costs
611(1)
The Trading Costs
612(1)
The Total Cost
612(1)
The Solution
613(1)
Conclusion
614(1)
The Miller-Orr Model: A More General Approach
614(2)
The Basic Idea
614(1)
Using the Model
614(2)
Implications of the BAT and Miller-Orr Models
616(1)
Other Factors Influencing the Target Cash Balance
616(3)
Credit and Inventory Management
619(31)
Credit and Receivables
619(2)
Components of Credit Policy
620(1)
The Cash Flows from Granting Credit
620(1)
The Investment in Receivables
621(1)
Terms of the Sale
621(4)
The Basic Form
621(1)
The Credit Period
622(1)
The Invoice Date
622(1)
Length of the Credit Period
622(1)
Cash Discounts
623(1)
Cost of the Credit
624(1)
Trade Discounts
624(1)
The Cash Discount and the ACP
624(1)
Credit Instruments
625(1)
Analyzing Credit Policy
625(3)
Credit Policy Effects
625(1)
Evaluating a Proposed Credit Policy
626(1)
NPV of Switching Policies
626(2)
A Break-Even Application
628(1)
Optimal Credit Policy
628(2)
The Total Credit Cost Curve
628(1)
Organizing the Credit Function
629(1)
Credit Analysis
630(3)
When Should Credit Be Granted?
630(1)
A One-Time Sale
631(1)
Repeat Business
631(1)
Credit Information
632(1)
Credit Evaluation and Scoring
633(1)
Collection Policy
633(3)
Monitoring Receivables
633(2)
Collection Effort
635(1)
Inventory Management
636(2)
The Financial Manager and Inventory Policy
636(1)
Inventory Types
636(1)
Inventory Costs
637(1)
Inventory Management Techniques
638(7)
The ABC Approach
638(1)
The Economic Order Quantity Model
639(1)
Inventory Depletion
639(1)
The Carrying Costs
640(1)
The Shortage Costs
640(1)
The Total Costs
641(1)
Extensions to the EOQ Model
642(1)
Safety Stocks
643(1)
Reorder Points
643(1)
Managing Derived-Demand Inventories
643(1)
Materials Requirements Planning
643(1)
Just-in-Time Inventory
643(2)
Summary and Conclusions
645(5)
Appendix 20A More on Credit Policy Analysis 650(7)
Two Alternative Approaches
650(2)
The One-Shot Approach
651(1)
The Accounts Receivable Approach
651(1)
Discounts and Default Risk
652(5)
NPV of the Credit Decision
653(1)
A Break-Even Application
654(3)
Part Eight Topics in Corporate Finance 657(88)
International Corporate Finance
658(27)
Terminology
659(1)
Foreign Exchange Markets and Exchange Rates
660(5)
Exchange Rates
661(1)
Exchange Rate Quotations
661(1)
Cross-Rates and Triangle Arbitrage
662(2)
Types of Transactions
664(1)
Purchasing Power Parity
665(3)
Absolute Purchasing Power Parity
665(1)
Relative Purchasing Power Parity
666(1)
The Basic Idea
667(1)
The Result
667(1)
Currency Appreciation and Depreciation
668(1)
Interest Rate Parity, Unbiased Forward Rates, and the International Fisher Effect
668(4)
Covered Interest Arbitrage
669(1)
Interest Rate Parity
670(1)
Forward Rates and Future Spot Rates
671(1)
Putting It All Together
671(1)
Uncovered Interest Parity
671(1)
The International Fisher Effect
672(1)
International Capital Budgeting
672(3)
The Home Currency Approach
673(1)
The Foreign Currency Approach
674(1)
Unremitted Cash Flows
675(1)
Exchange Rate Risk
675(3)
Short-Run Exposure
675(1)
Long-Run Exposure
676(1)
Translation Exposure
677(1)
Managing Exchange Rate Risk
678(1)
Political Risk
678(1)
Summary and Conclusions
679(6)
Risk Management: An Introduction to Financial Engineering
685(28)
Hedging and Price Volatility
685(5)
Price Volatility: A Historical Perspective
686(1)
Interest Rate Volatility
687(1)
Exchange Rate Volatility
687(1)
Commodity Price Volatility
688(1)
The Impact of Financial Risk: The U.S. Savings and Loan Industry
688(2)
Managing Financial Risk
690(4)
The Risk Profile
691(1)
Reducing Risk Exposure
691(2)
Hedging Short-Run Exposure
693(1)
Cash Flow Hedging: A Cautionary Note
693(1)
Hedging Long-Term Exposure
694(1)
Conclusion
694(1)
Hedging with Forward Contracts
694(3)
Forward Contracts: The Basics
694(1)
The Payoff Profile
695(1)
Hedging with Forwards
695(2)
A Caveat
697(1)
Credit Risk
697(1)
Forward Contracts in Practice
697(1)
Hedging with Futures Contracts
697(4)
Trading in Futures
698(1)
Futures Exchanges
698(2)
Hedging with Futures
700(1)
Hedging with Swap Contracts
701(2)
Currency Swaps
701(1)
Interest Rate Swaps
701(1)
Commodity Swaps
702(1)
The Swap Dealer
702(1)
Interest Rate Swaps: An Example
702(1)
Hedging with Option Contracts
703(5)
Option Terminology
704(1)
Options versus Forwards
704(1)
Option Payoff Profiles
704(1)
Option Hedging
704(1)
Hedging Commodity Price Risk with Options
705(1)
Hedging Exchange Rate Risk with Options
706(1)
Hedging Interest Rae Risk with Options
707(1)
A Preliminary Note
707(1)
Interest Rate Caps
708(1)
Other Interest Rate Options
708(1)
Summary and Conclusions
708(5)
Options and Corporate Securities
713(32)
Options: The Basics
714(4)
Puts and calls
714(1)
Stock Option Quotations
714(1)
Option Payoffs
715(3)
Fundamentals of Option Valuation
718(5)
Value of a Call Option at Expiration
718(1)
The Upper and Lower Bounds on a Call Options' Value
718(1)
The Upper Bound
719(1)
The Lower Bound
719(1)
A Simple Model: Part I
720(1)
The Basic Approach
721(1)
A More Complicated Case
721(1)
Four Factors Determining Option Values
722(1)
Valuing a Call Option
723(3)
A Simple Model: Part II
723(1)
The Fifth Factor
724(1)
A Closer Look
725(1)
Equity as a Call Option on the Firm's Assets
726(3)
The Debt Is Risk-Free
727(1)
The Debt Is Risky
727(2)
Warrants
729(3)
The Difference between Warrants and Call Options
729(1)
Warrants and the Value of the Firm
730(1)
The Effect of a Call Option
730(1)
The Effect of a Warrant
730(2)
Warrant Value and Stock Value
732(1)
Earnings Dilution
732(1)
Convertible Bonds
732(4)
Fatures of a Convertible Bond
733(1)
Value of a Convertible Bond
733(1)
Straight Bond Value
733(1)
Conversion Value
734(1)
Floor Value
734(1)
Option Value
735(1)
Reasons for Issuign Warrants and Convertibles
736(1)
The Free Lunch Story
736(1)
The Expensive Lunch Story
736(1)
A Reconciliation
737(1)
Other Options
737(2)
The Call Provision on a Bond
738(1)
Put Bonds
738(1)
The Green Shoe Provision
738(1)
Insurance and Loan Guarantees
738(1)
Summary and Conclusions
739(6)
Appendix 23A The Black-Scholes Option Pricing Model 745
Mergers and Acquisitions
750(32)
The Legal Forms of Acquisitions
751(4)
Merer of Consolidation
752(1)
Acquisition of Stock
752(1)
Acquisition of Assets
753(1)
Acquisition Classifications
753(1)
A Note on Takeovers
754(1)
Taxes and Acquisitions
755(1)
Determinants of Tax Status
755(1)
Taxable versus Tax-Free Acquisitions
755(1)
Accounting for Acquisitions
756(2)
The Purchase Method
756(1)
Pooling of Interests
756(1)
Which Is Better: Purchase or Pooling of Interests?
757(1)
Gains from Acquisition
758(6)
Synergy
758(2)
Revenue Enhancement
760(1)
Marketing Gains
760(1)
Strategic Benefits
760(1)
Market Power
760(1)
Cost Reductions
760(1)
Economies of Scale
761(1)
Economies of Vertical Integration
761(1)
Complementary Resources
761(1)
Lower Taxes
761(1)
Net Operating Losses
762(1)
Unused Debt Capacity
762(1)
Surplus Funds
762(1)
Asset Write-Ups
762(1)
Reductions in Capital Needs
763(1)
Avoiding Mistkaes
763(1)
A Note on Inefficient Management
764(1)
Some Financial Side Effects of Acquisitions
764(2)
EPS Growth
764(1)
Diversification
765(1)
The Cost of an Acquisition
766(2)
Cash Acquisition
767(1)
Stock Acquisition
767(1)
Cash versus Common Stock
768(1)
Defensive Tactics
768(5)
The Corporate Charter
769(1)
Repurchase and Standstill Agreements
769(1)
Exclusionary Self-Tenders
770(1)
Poison Pills and Share Rights Plans
770(2)
Going Private and Leveraged Buyouts
772(1)
Other Devices and Jargon of Corporate Takeovers
772(1)
Some Evidence on acquisitions
773(2)
Summary and Conclusions
775(7)
Leasing
782
Leases and Lease Types
782(3)
Leasing versus Buying
783(1)
Operatng Leases
784(1)
Financial Leases
784(1)
Tax-Oriented Leases
784(1)
Leveraged Leases
785(1)
Sale and Leaseback Agreements
785(1)
Accounting and Leasing
785(2)
Taxes, the IRS, and Leases
787(1)
The Cash Flows from Leasing
788(2)
The Incremental Cash Flows
788(1)
A Note on Taxes
789(1)
Lease or Buy?
790(2)
A Preliminary Analysis
790(1)
Three Potential Pitfalls
791(1)
NPV Analysis
791(1)
A Misconception
791(1)
A Leasing Paradox
792(1)
Reasons for Leasing
793(3)
Good Reasosn for Leasing
793(1)
Tax Advantages
794(1)
A Reduction of Uncertainty
795(1)
Lower Transactions Costs
795(1)
Fewer Restrictions and Security Requirements
795(1)
Bad Reasons for Leasing
795(1)
Leasing and Accounting Income
795(1)
100 Percent Financing
796(1)
Low Cost
796(1)
Other Reasons for Leasing
796(1)
Summary and Conclusions
796
Appendix A---Mathematical Tables A-1
Appendix B---Key Equations B-1
Appendix C---Answers to Selected End-of-Chapter Problems C-1
Index


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