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Intermediate Financial Management (with Thomson One)

by
Edition:
9th
ISBN13:

9780324319866

ISBN10:
032431986X
Format:
Hardcover
Pub. Date:
3/29/2006
Publisher(s):
Thomson South-Western

Questions About This Book?

What version or edition is this?
This is the 9th edition with a publication date of 3/29/2006.
What is included with this book?
  • The Used copy of this book is not guaranteed to include any supplemental materials. Typically, only the book itself is included.

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Summary

"Why aren't you using the ONLY book expressly written for your Intermediate/Advanced Corporate Finance course?" This comprehensive text contains enough background material to refresh and reinforce earlier courses in corporate finance while still providing enough advanced material to stimulate the most advanced learner. The predominant strengths of clarity, current coverage, and friendliness to learner and instructors continue in this new edition. The instructor's resources enable outstanding easy prep and presentations.

Table of Contents

Preface iii
Part 1 Fundamental Concepts
xxxii
An Overview of Financial Management
2(29)
About Using the Text
3(1)
Beginning-of-Chapter Questions
4(1)
The Basic Goal: Creating Stockholder Value
4(6)
Societal Considerations
5(2)
Managerial Actions to Maximize Shareholder Wealth
7(1)
Market Value versus Intrinsic Value
8(1)
Short-Term Price versus Long-Term Price
9(1)
Agency Relationships
10(7)
Agency Conflict I: Stockholders versus Managers
10(5)
Agency Conflict II: Stockholders versus Creditors
15(1)
Transparency in Financial Reporting
16(1)
The Sarbanes-Oxley Act of 2002
17(3)
Market Interest Rates
19(1)
The Real Risk-Free Rate of Interest, r*
20(4)
Inflation Premium (IP)
21(1)
The Nominal, or Quoted, Risk-Free Rate of Interest, rRF
22(1)
Default Risk Premium (DRP)
22(1)
Liquidity Premium (LP)
23(1)
Maturity Risk Premium (MRP)
23(1)
A Preview of What's Ahead
24(1)
ThomsonNOW Resources
25(1)
Summary
25(6)
Risk and Return: Part I
31(41)
Beginning-of-Chapter Questions
32(1)
Investment Returns
32(1)
Box: Corporate Valuation and Risk
33(1)
Stand-Alone Risk
34(8)
Probability Distributions
35(1)
Expected Rate of Return
35(3)
Measuring Stand-Alone Risk: The Standard Deviation
38(2)
Using Historical Data to Measure Risk
40(1)
Measuring Stand-Alone Risk: The Coefficient of Variation
41(1)
Box: The Trade-Off between Risk and Return
42(2)
Risk Aversion and Required Returns
42(2)
Risk in a Portfolio Context
44(7)
Portfolio Returns
44(1)
Portfolio Risk
45(4)
Diversifiable Risk versus Market Risk
49(2)
Box: The Benefits of Diversifying Overseas
51(4)
The Concept of Beta
52(3)
Calculating Beta Coefficients
55(3)
The Relationship between Risk and Rates of Return
58(5)
The Impact of Inflation
61(1)
Changes in Risk Aversion
62(1)
Changes in a Stock's Beta Coefficient
62(1)
Some Concerns about Beta and the CAPM
63(1)
Summary
64(8)
Risk and Return: Part II
72(40)
Beginning-of-Chapter Questions
73(1)
Measuring Portfolio Risk
73(1)
Box: Corporate Valuation and Risk
74(4)
Covariance and the Correlation Coefficient
74(3)
The Two-Asset Case
77(1)
Measuring Risk in Practice
77(1)
Efficient Portfolios
78(3)
Choosing the Optimal Portfolio
81(3)
The Efficient Frontier
82(1)
Risk/Return Indifference Curves
82(1)
The Optimal Portfolio for an Investor
83(1)
The Basic Assumptions of the Capital Asset Pricing Model
84(1)
The Capital Market Line and the Security Market Line
85(4)
Calculating Beta Coefficients
89(8)
Calculating the Beta Coefficient for a Single Stock: General Electric
89(3)
The Market Model versus the CAPM
92(1)
Calculating the Beta Coefficient for a Portfolio: The Magellan Fund
93(1)
Additional Insights into Risk and Return
94(2)
Advanced Issues in Calculating Beta
96(1)
Empirical Tests of the CAPM
97(3)
Tests of the Stability of Beta Coefficients
98(1)
Tests of the CAPM Based on the Slope of the SML
98(2)
Current Status of the CAPM
100(1)
Arbitrage Pricing Theory
100(3)
The Fama-French Three-Factor Model
103(3)
An Alternative Theory of Risk and Return: Behavioral Finance
106(1)
Summary
106(6)
Bond Valuation
112(39)
Beginning-of-Chapter Questions
113(1)
Who Issues Bonds?
113(1)
Box: Corporate Valuation and Risk
114(1)
Key Characteristics of Bonds
115(5)
Par Value
115(1)
Coupon Interest Rate
115(1)
Maturity Date
116(1)
Provisions to Call or Redeem Bonds
117(1)
Sinking Funds
118(1)
Other Features
119(1)
Bond Valuation
120(6)
Changes in Bond Values over Time
123(3)
Bond Yields
126(3)
Yield to Maturity
126(1)
Yield to Call
127(1)
Current Yield
128(1)
Box: Drinking Your Coupons
129(1)
Bonds with Semiannual Coupons
129(1)
Assessing the Risk of a Bond
130(3)
Interest Rate Risk
130(3)
Reinvestment Rate Risk
133(1)
Comparing Interest Rate and Reinvestment Rate Risk
133(1)
Default Risk
133(9)
Bond Contract Provisions That Influence Default Risk
134(2)
Bond Ratings
136(4)
Junk Bonds
140(1)
Bankruptcy and Reorganization
141(1)
Bond Markets
142(2)
Summary
144(7)
Basic Stock Valuation
151(37)
Beginning-of-Chapter Questions
152(1)
Legal Rights and Privileges of Common Stockholders
152(1)
Control of the Firm
152(1)
Box: Corporate Valuation and Stock Risk
153(1)
The Preemptive Right
154(1)
Types of Common Stock
154(2)
The Market for Common Stock
156(1)
Types of Stock Market Transactions
156(1)
Box: Rational Exuberance?
157(1)
Common Stock Valuation
157(3)
Definitions of Terms Used in Stock Valuation Models
157(2)
Expected Dividends as the Basis for Stock Values
159(1)
Constant Growth Stocks
160(4)
Illustration of a Constant Growth Stock
161(1)
Dividend and Earnings Growth
162(1)
Do Stock Prices Reflect Long-Term or Short-Term Events?
163(1)
When Can the Constant Growth Model Be Used?
164(1)
Expected Rate of Return on a Constant Growth Stock
164(1)
Valuing Stocks That Have a Nonconstant Growth Rate
165(4)
Stock Valuation by the Free Cash Flow Approach
169(1)
Market Multiple Analysis
169(1)
Stock Market Equilibrium
170(5)
Changes in Equilibrium Stock Prices
171(2)
The Efficient Markets Hypothesis
173(1)
Levels of Market Efficiency
173(1)
Implications of Market Efficiency
174(1)
Actual Stock Prices and Returns
175(3)
Investing in International Stocks
175(2)
Stock Market Reporting
177(1)
Preferred Stock
178(1)
Box: A Nation of Traders
179(1)
Summary
179(9)
Financial Options
188(25)
Beginning-of-Chapter Questions
189(1)
Financial Options
189(6)
Option Types and Markets
189(2)
Factors That Affect the Value of a Call Option
191(1)
Exercise Value versus Option Price
192(3)
Box: Reporting Employee Stock Options
195(1)
Introduction to Option Pricing Models: The Binomial Approach
195(5)
The Black-Scholes Option Pricing Model (OPM)
200(5)
OPM Assumptions and Equations
200(2)
OPM Illustration
202(3)
Box: Taxes and Stock Options
205(1)
The Valuation of Put Options
206(1)
Applications of Option Pricing in Corporate Finance
207(2)
Real Options
207(1)
Risk Management
207(1)
Capital Structure Decisions
208(1)
Compensation Plans
209(1)
Summary
209(4)
Accounting for Financial Management
213(36)
Beginning-of-Chapter Questions
214(1)
Financial Statements and Reports
214(1)
Box: Corporate Valuation and Financial Statements
215(1)
The Balance Sheet
216(1)
The Income Statement
217(1)
Statement of Retained Earnings
218(1)
Net Cash Flow
219(1)
Box: Financial Analysis on the Internet
220(2)
Statement of Cash Flows
222(2)
Modifying Accounting Data for Managerial Decisions
224(4)
Operating Assets and Total Net Operating Capital
224(3)
Net Operating Profit after Taxes (NOPAT)
227(1)
Box: Financial Bamboozling: How to Spot It
228(3)
Free Cash Flow
228(1)
Calculating Free Cash Flow
229(1)
The Uses of FCF
230(1)
FCF and Corporate Value
230(1)
Evaluating FCF, NOPAT, and Operating Capital
230(1)
MVA and EVA
231(4)
Market Value Added (MVA)
231(1)
Economic Value Added (EVA)
232(3)
The Federal Income Tax System
235(5)
Corporate Income Taxes
235(4)
Taxation of Small Businesses: S Corporations
239(1)
Personal Taxes
239(1)
Summary
240(9)
Analysis of Financial Statements
249(35)
Beginning-of-Chapter Questions
250(1)
Ratio Analysis
250(1)
Box: Corporate Valuation and Analysis of Financial Statements
251(1)
Liquidity Ratios
251(3)
Ability to Meet Short-Term Obligations: The Current Ratio
253(1)
Quick, or Acid Test, Ratio
253(1)
Asset Management Ratios
254(3)
Evaluating Inventories: The Inventory Turnover Ratio
254(1)
Evaluating Receivables: The Days Sales Outstanding
255(1)
Evaluating Fixed Assets: The Fixed Assets Turnover Ratio
256(1)
Evaluating Total Assets: The Total Assets Turnover Ratio
256(1)
Debt Management Ratios
257(2)
How the Firm Is Financed: Total Liabilities to Total Assets
257(1)
Ability to Pay Interest: Times-Interest-Earned
258(1)
Ability to Service Debt: EBITDA Coverage Ratio
258(1)
Profitability Ratios
259(1)
Profit Margin on Sales
259(1)
Box: International Accounting Differences Create Headaches for Investors
260(2)
Basic Earning Power (BEP)
261(1)
Return on Total Assets
261(1)
Return on Common Equity
262(1)
Market Value Ratios
262(2)
Price/Earnings Ratio
262(1)
Price/Cash Flow Ratio
263(1)
Market/Book Ratio
263(1)
Trend Analysis, Common Size Analysis, and Percent Change Analysis
264(4)
Tying the Ratios Together: The Du Pont Equation
268(2)
Comparative Ratios and ``Benchmarking''
270(1)
Uses and Limitations of Ratio Analysis
271(1)
Box: Ratio Analysis in the Internet Age
272(1)
Looking beyond the Numbers
273(1)
Summary
274(10)
Part 2 Corporate Valuation
284(110)
Financial Planning and Forecasting Financial Statements
286(31)
Beginning-of-Chapter Questions
287(1)
Overview of Financial Planning
287(1)
Strategic Plans
287(1)
Box: Corporate Valuation and Financial Planning
288(2)
Operating Plans
289(1)
The Financial Plan
289(1)
Sales Forecast
290(2)
Financial Statement Forecasting: The Percent of Sales Method
292(12)
Step 1. Analyze the Historical Ratios
292(2)
Step 2. Forecast the Income Statement
294(3)
Step 3. Forecast the Balance Sheet
297(3)
Step 4. Raising the Additional Funds Needed
300(1)
Analysis of the Forecast
301(3)
The AFN Formula
304(2)
Forecasting Financial Requirements When the Balance Sheet Ratios Are Subject to Change
306(3)
Economies of Scale
306(1)
Lumpy Assets
306(2)
Excess Capacity Adjustments
308(1)
Summary
309(8)
Determining the Cost of Capital
317(38)
Beginning-of-Chapter Questions
318(1)
The Weighted Average Cost of Capital
318(1)
Box: Corporate Valuation and the Cost of Capital
319(1)
Cost of Debt, rd (1 -- T)
320(1)
Cost of Preferred Stock, rps
321(1)
Cost of Common Stock, rs
322(1)
The CAPM Approach
323(6)
Estimating the Risk-Free Rate
324(1)
Estimating the Market Risk Premium
324(3)
Estimating Beta
327(1)
An Illustration of the CAPM Approach
328(1)
Dividend-Yield-Plus-Growth-Rate, or Discounted Cash Flow (DCF), Approach
329(3)
Estimating Inputs for the DCF Approach
329(2)
Illustration of the Discounted Cash Flow Approach
331(1)
Evaluating the Methods for Estimating Growth
331(1)
Bond-Yield-Plus-Risk-Premium Approach
332(1)
Comparison of the CAPM, DCF, and Bond-Yield-Plus-Risk-Premium Methods
332(1)
Composite, or Weighted Average, Cost of Capital, WACC
333(2)
Box: Global Variations in the Cost of Capital
335(1)
Factors That Affect the Weighted Average Cost of Capital
335(2)
Factors the Firm Cannot Control
335(1)
Factors the Firm Can Control
336(1)
Adjusting the Cost of Capital for Risk
337(2)
The Divisional Cost of Capital
337(2)
Techniques for Measuring Divisional Betas
339(1)
The Pure Play Method
339(1)
The Accounting Beta Method
339(1)
Estimating the Cost of Capital for Individual Projects
340(1)
Adjusting the Cost of Capital for Flotation Costs
341(2)
Flotation Costs and the Component Cost of Debt
341(1)
Cost of Newly Issued Common Stock, or External Equity, re
342(1)
How Much Does It Cost to Raise External Capital?
343(1)
Some Problem Areas in Cost of Capital
343(1)
Four Mistakes to Avoid
344(1)
Summary
345(10)
Corporate Value and Value-Based Management
355(39)
Beginning-of-Chapter Questions
356(1)
Overview of Corporate Valuation
356(1)
Box: Corporate Valuation: Putting the Pieces Together
357(1)
The Corporate Valuation Model
358(8)
Estimating the Value of Operations
359(4)
Estimating the Price Per Share
363(2)
The Dividend Growth Model Applied to MagnaVision
365(1)
Comparing the Corporate Valuation and Dividend Growth Models
365(1)
Value-Based Management
366(8)
Corporate Governance and Shareholder Wealth
374(1)
Box: Value-Based Management in Practice
375(5)
Provisions to Prevent Managerial Entrenchment
375(3)
Using Compensation to Align Managerial and Shareholder Interests
378(2)
Box: International Corporate Governance
380(5)
Summary
385(9)
Part 3 Project Valuation
394(112)
Capital Budgeting: Decision Criteria
396(39)
Beginning-of-Chapter Questions
397(1)
Overview of Capital Budgeting
397(1)
Box: Corporate Valuation and Capital Budgeting
398(1)
Project Classifications
399(1)
Capital Budgeting Decision Rules
400(7)
Payback Period
400(1)
Discounted Payback Period
401(1)
Evaluating Payback and Discounted Payback
402(1)
Net Present Valu (NPV)
402(2)
Rationale for the NPV Method
404(1)
Internal Rate of Return (IRR)
405(1)
Rationale for the IRR Method
406(1)
Comparison of the NPV and IRR Methods
407(5)
NPV Profiles
407(1)
NPV Rankings Depend on the Cost of Capital
407(1)
Evaluating Independent Projects
408(1)
Evaluating Mutually Exclusive Projects
409(1)
Multiple IRRs
410(2)
Modified Internal Rate of Return (MIRR)
412(1)
Profitability Index
413(1)
Conclusions on Capital Budgeting Methods
414(2)
Business Practices
416(1)
The Post-Audit
417(1)
Box: How Does Industry Evaluate Projects?
418(1)
Special Applications of Cash Flow Evaluation
418(4)
Comparing Projects with Unequal Lives
419(2)
Economic Life versus Physical Life
421(1)
The Optimal Capital Budget
422(2)
An Increasing Marginal Cost of Capital
422(1)
Capital Rationing
422(2)
Summary
424(11)
Capital Budgeting: Estimating Cash Flows and Analyzing Risk
435(44)
Beginning-of-Chapter Questions
436(1)
Estimating Cash Flows
436(1)
Box: Corporate Valuation, Cash Flows, and Risk Analysis
437(1)
Identifying the Relevant Cash Flows
437(5)
Project Cash Flow versus Accounting Income
438(1)
Incremental Cash Flows
439(3)
Timing of Cash Flows
442(1)
Tax Effects
442(4)
An Overview of Depreciation
442(1)
Tax Depreciation Life
443(3)
Evaluating Capital Budgeting Projects
446(6)
Analysis of the Cash Flows
448(4)
Making the Decision
452(1)
Adjusting for Inflation
452(2)
Inflation-Induced Bias
452(2)
Making the Inflation Adjustment
454(1)
Project Risk Analysis: Techniques for Measuring Stand-Alone Risk
454(5)
Sensitivity Analysis
455(1)
Scenario Analysis
456(2)
Monte Carlo Simulation
458(1)
Box: Capital Budgeting Practices in the Asia/Pacific Region
459(1)
Box: High-Tech CFOs
460(4)
Project Risk Conclusions
464(1)
Incorporating Project Risk into Capital Budgeting
464(1)
Managing Risk through Phased Decisions: Decision Trees
465(2)
The Basic Decision Tree
465(2)
Introduction to Real Options
467(3)
Investment Timing Options
468(1)
Growth Options
468(1)
Abandonment Options
469(1)
Flexibility Options
469(1)
Valuing Real Options
469(1)
Summary
470(9)
Real Options
479(27)
Beginning-of-Chapter Questions
480(1)
Valuing Real Options
480(1)
Box: Corporate Valuation and Real Options
481(1)
The Investment Timing Option: An Illustration
482(11)
Approach 1. DCF Analysis Ignoring the Timing Option
482(1)
Approach 2. DCF Analysis with a Qualitative Consideration of the Timing Option
483(1)
Approach 3. Scenario Analysis and Decision Trees
484(2)
Approach 4. Valuing the Timing Option with the Black-Scholes Option Pricing Model
486(5)
Approach 5. Financial Engineering
491(2)
The Growth Option: An Illustration
493(5)
Approach 1. DCF Analysis Ignoring the Growth Option
493(1)
Approach 2. DCF Analysis with a Qualitative Consideration of the Growth Option
493(1)
Approach 3. Decision Tree Analysis of the Growth Option
494(1)
Approach 4. Valuing the Growth Option with the Black-Scholes Option Pricing Model
494(4)
Box: Growth Options at Dot-Com Companies
498(2)
Concluding Thoughts on Real Options
500(1)
Summary
501(5)
Part 4 Strategic Financing Decisions
506(110)
Capital Structure Decisions: Part I
508(40)
Beginning-of-Chapter Questions
509(1)
A Preview of Capital Structure Issues
509(1)
Box: Corporate Valuation and the Cost of Capital
510(2)
Debt Increases the Cost of Stock, rs
510(1)
Debt Reduces the Taxes a Company Pays
511(1)
The Risk of Bankruptcy Increases the Cost of Debt, rd
511(1)
The Net Effect on the Weighted Average Cost of Capital
511(1)
Bankruptcy Risk Reduces Free Cash Flow
511(1)
Bankruptcy Risk Affects Agency Costs
511(1)
Issuing Equity Conveys a Signal to the Marketplace
512(1)
Business and Financial Risk
512(7)
Business Risk
513(1)
Operating Leverage
514(1)
Financial Risk
515(4)
Capital Structure Theory
519(2)
Modigliani and Miller: No Taxes
519(1)
Modigliani and Miller: The Effect of Corporate Taxes
520(1)
Box: Yogi Berra on the MM Proposition
521(6)
Miller: The Effect of Corporate and Personal Taxes
521(1)
Trade-Off Theory
522(2)
Signaling Theory
524(1)
Reserve Borrowing Capacity
525(1)
The Pecking Order Hypothesis
525(1)
Using Debt Financing to Constrain Managers
526(1)
The Investment Opportunity Set and Reserve Borrowing Capacity
526(1)
Windows of Opportunity
527(1)
Capital Structure Evidence and Implications
527(3)
Empirical Evidence
528(1)
Implications for Managers
529(1)
Estimating the Optimal Capital Structure
530(1)
Estimating the Cost of Debt
530(1)
Box: Taking a Look at Global Capital Structures
531(9)
Estimating the Cost of Equity, rs
531(2)
Estimating the Weighted Average Cost of Capital, WACC
533(1)
Estimating the Firm's Value
534(1)
Estimating Shareholder Wealth and Stock Price
535(3)
Analyzing the Results
538(2)
Summary
540(8)
Capital Structure Decisions: Part II
548(34)
Beginning-of-Chapter Questions
549(1)
Capital Structure Theory: Arbitrage Proofs of the Modigliani-Miller Models
549(1)
Assumptions
549(1)
Box: Corporate Valuation: Capital Structure Decisions
550(10)
MM without Taxes
551(1)
MM's Arbitrage Proof
552(2)
Arbitrage with Short Sales
554(1)
MM with Corporate Taxes
555(1)
Illustration of the MM Models
556(4)
Introducing Personal Taxes: The Miller Model
560(3)
Criticisms of the MM and Miller Models
563(2)
An Extension to the MM Model
565(3)
Illustration of the MM Extension with Growth
568(1)
Risky Debt and Equity as an Option
568(5)
Using the Black-Scholes Option Pricing Model to Value Equity
569(1)
Managerial Incentives
570(1)
Capital Budgeting Decisions
570(2)
Equity with Risky Coupon Debt
572(1)
Capital Structure Theory: Our View
573(2)
Summary
575(7)
Distributions to Shareholders: Dividends and Repurchases
582(34)
Beginning-of-Chapter Questions
583(1)
Box: Corporate Valuation and Distributions to Shareholders
584(1)
The Level of Distributions and Firm Value
584(4)
Dividend Irrelevance Theory
585(1)
Bird-in-the-Hand Theory: Dividends Are Preferred
586(1)
Tax Preference Theory: Capital Gains Are Preferred
586(1)
Empirical Evidence and the Level of Shareholder Distributions
586(2)
Box: Dividend Yields around the World
588(1)
Clientele Effect
589(1)
Information Content, or Signaling, Hypothesis
590(1)
Implications for Dividend Stability
591(1)
Setting the Target Distribution Level: The Residual Distribution Model
591(3)
Distributions in the Form of Dividends
594(3)
Dividends and the Residual Model
594(1)
Dividend Payment Procedures
595(2)
Distributions through Stock Repurchases
597(3)
The Effects of Stock Repurchases
597(2)
A Tale of Two Cash Distributions: Dividends versus Stock Repurchases
599(1)
Comparison of Dividends and Repurchases
600(2)
Other Factors Influencing Distributions
602(1)
Constraints
602(1)
Alternative Sources of Capital
603(1)
Overview of the Distribution Policy Decision
603(2)
Stock Splits and Stock Dividends
605(2)
Stock Splits
605(1)
Stock Dividends
605(1)
Effect on Stock Prices
606(1)
Dividend Reinvestment Plans
607(1)
Summary
608(8)
Part 5 Tactical Financing Decisions
616(100)
Initial Public Offerings, Investment Banking, and Financial Restructuring
618(40)
Beginning-of-Chapter Questions
619(1)
The Financial Life Cycle of a Startup Company
619(1)
Box: Corporate Valuation, IPOs, and Financial Restructuring
620(1)
The Decision to Go Public: Initial Public Offerings
621(2)
Advantages of Going Public
621(1)
Disadvantages of Going Public
622(1)
Conclusions on Going Public
623(1)
The Process of Going Public
623(8)
Selecting an Investment Bank
623(1)
The Underwriting Syndicate
624(1)
Regulation of Securities Sales
625(1)
The Roadshow and Book-Building
625(1)
The First Day of Trading
626(2)
The Costs of Going Public
628(1)
The Importance of the Secondary Market
628(1)
Regulating the Secondary Market
629(1)
Questionable IPO Practices
630(1)
Equity Carve-Outs: A Special Type of IPO
631(2)
Non-IPO Investment Banking Activities
633(3)
Preliminary Decisions
633(1)
Private Placements
634(1)
Shelf Registrations
634(1)
Seasoned Equity Offerings
635(1)
The Decision to Go Private
636(2)
Managing the Maturity Structure of Debt
638(2)
Maturity Matching
638(1)
Effects of Interest Rate Levels and Forecasts
639(1)
Information Asymmetries
639(1)
Amount of Financing Required
640(1)
Availability of Collateral
640(1)
Refunding Operations
640(5)
Step 1: Determine the Investment Outlay Required to Refund the Issue
641(2)
Step 2: Calculate the Annual Flotation Cost Tax Effects
643(1)
Step 3: Calculate the Annual Interest Savings
644(1)
Step 4: Determine the NPV of the Refunding
644(1)
Box: TVA Ratchets Down Its Interest Expenses
645(2)
Managing the Risk Structure of Debt
647(2)
Project Financing
647(2)
Box: Bowie Bonds Ch-Ch-Change Asset Securitization
649(2)
Securitization
649(2)
Summary
651(7)
Lease Financing
658(28)
Beginning-of-Chapter Questions
659(1)
The Two Parties to Leasing
659(1)
Types of Leases
659(1)
Box: Corporate Valuation and Lease Financing
660(3)
Operating Leases
660(1)
Financial, or Capital, Leases
661(1)
Sale-and-Leaseback Arrangements
661(1)
Combination Leases
661(1)
``Synthetic'' Leases
662(1)
Tax Effects
663(1)
Financial Statement Effects
664(3)
Evaluation by the Lessee
667(4)
Evaluation by the Lessor
671(2)
Analysis by the Lessor
672(1)
Setting the Lease Payment
672(1)
Other Issues in Lease Analysis
673(3)
Estimated Residual Value
674(1)
Increased Credit Availability
674(1)
Real Estate Leases
674(1)
Vehicle Leases
675(1)
Leasing and Tax Laws
675(1)
Box: Lease Securitization
676(1)
Other Reasons for Leasing
677(2)
Summary
679(7)
Hybrid Financing: Preferred Stock, Warrants, and Convertibles
686(30)
Beginning-of-Chapter Questions
687(1)
Preferred Stock
687(1)
Box: Corporate Valuation and Hybrid Financing
688(2)
Basic Features
688(2)
Box: Where's the Dividend?
690(1)
Box: MIPS, QUIPS, TOPrS, and QUIDS: A Tale of Two Perspectives
691(2)
Other Types of Preferred Stock
692(1)
Advantages and Disadvantages of Preferred Stock
693(1)
Warrants
693(6)
Initial Market Price of a Bond with Warrants
694(1)
Use of Warrants in Financing
695(1)
Wealth Effects and Dilution Due to Warrants
696(2)
The Component Cost of Bonds with Warrants
698(1)
Convertibles
699(8)
Conversion Ratio and Conversion Price
699(2)
The Component Cost of Convertibles
701(3)
Use of Convertibles in Financing
704(1)
Convertibles and Agency Costs
705(2)
A Final Comparison of Warrants and Convertibles
707(1)
Reporting Earnings When Warrants or Convertibles Are Outstanding
708(1)
Summary
709(7)
Part 6 Working Capital Management
716(114)
Working Capital Management
718(44)
Beginning-of-Chapter Questions
719(1)
The Cash Conversion Cycle
719(1)
An Illustration
719(1)
Box: Corporate Valuation and Working Capital Management
720(5)
Shortening the Cash Conversion Cycle
723(1)
Benefits
723(2)
Alternative Net Operating Working Capital Policies
725(1)
Cash Management
725(1)
Box: The Best at Managing Working Capital
726(1)
Reasons for Holding Cash
726(1)
The Cash Budget
727(3)
Box: The Great Debate: How Much Cash Is Enough?
730(3)
Cash Management Techniques
731(1)
Synchronizing Cash Flow
731(1)
Speeding Up the Check-Clearing Process
732(1)
Using Float
732(1)
Speeding Up Receipts
733(1)
Inventory
733(1)
Receivables Management
734(1)
Credit Policy
734(1)
Box: Supply Chain Management
735(4)
The Accumulation of Receivables
736(1)
Monitoring the Receivables Position
736(3)
Accruals and Accounts Payable (Trade Credit)
739(3)
Accruals
739(1)
Accounts Payable (Trade Credit)
739(1)
The Cost of Trade Credit
739(3)
Alternative Short-Term Financing Policies
742(3)
Maturity Matching, or ``Self-Liquidating,'' Approach
742(2)
Aggressive Approach
744(1)
Conservative Approach
744(1)
Short-Term Investments: Marketable Securities
745(1)
Short-Term Financing
746(1)
Advantages of Short-Term Financing
746(1)
Disadvantages of Short-Term Debt
746(1)
Short-Term Bank Loans
747(2)
Maturity
747(1)
Promissory Note
747(1)
Compensating Balances
747(1)
Informal Line of Credit
748(1)
Revolving Credit Agreement
748(1)
Commercial Paper
749(1)
Maturity and Cost
749(1)
Use of Commercial Paper
749(1)
Use of Security in Short-Term Financing
749(1)
Summary
750(12)
Providing and Obtaining Credit
762(37)
Beginning-of-Chapter Questions
763(1)
Credit Policy
763(1)
Box: Corporate Valuation and Credit Policy
764(1)
Setting the Credit Period and Standards
764(2)
Credit Standards
765(1)
Setting the Collection Policy
766(1)
Cash Discounts
766(1)
Other Factors Influencing Credit Policy
766(1)
Profit Potential
767(1)
Legal Considerations
767(1)
The Payments Pattern Approach to Monitoring Receivables
767(5)
Analyzing Proposed Changes in Credit Policy
772(2)
Analyzing Proposed Changes in Credit Policy: Incremental Analysis
774(7)
The Basic Equations
775(2)
Changing the Credit Period
777(3)
Changes in Other Credit Policy Variables
780(1)
Simultaneous Changes in Policy Variables
780(1)
The Cost of Bank Loans
781(6)
Regular, or Simple, Interest
783(1)
Discount Interest
784(1)
Effects of Compensating Balances
785(1)
Installment Loans: Add-On Interest
786(1)
Choosing a Bank
787(2)
Willingness to Assume Risks
787(1)
Advice and Counsel
788(1)
Loyalty to Customers
788(1)
Specialization
788(1)
Maximum Loan Size
788(1)
Merchant Banking
788(1)
Other Services
789(1)
Summary
789(10)
Other Topics in Working Capital Management
799(31)
Beginning-of-Chapter Questions
800(1)
The Concept of Zero Working Capital
800(1)
Box: Corporate Valuation and Working Capital Management
801(1)
Setting the Target Cash Balance
802(6)
The Baumol Model
803(3)
Monte Carlo Simulation
806(2)
Inventory Control Systems
808(2)
Computerized Systems
808(1)
Just-in-Time Systems
808(1)
Outsourcing
809(1)
The Relationship between Production Scheduling and Inventory Levels
809(1)
Accounting for Inventory
810(2)
Specific Identification
810(1)
First-In, First-Out (FIFO)
810(1)
Last-In, First-Out (LIFO)
810(1)
Weighted Average
810(1)
Comparison of Inventory Accounting Methods
810(2)
The Economic Ordering Quantity (EOQ) Model
812(4)
Carrying Costs
812(1)
Ordering Costs
813(1)
Total Inventory Costs
814(1)
Derivation of the EOQ Model
814(2)
EOQ Model Illustration
816(8)
Setting the Order Point
818(1)
EOQ Model Extensions
818(1)
The Concept of Safety Stocks
818(1)
Setting the Safety Stock Level
819(1)
Quantity Discounts
820(2)
Inflation
822(1)
Seasonal Demand
823(1)
EOQ Range
823(1)
Summary
824(6)
Part 7 Special Topics
830(173)
Derivatives and Risk Management
832(32)
Beginning-of-Chapter Questions
833(1)
Reasons to Manage Risk
833(1)
Box: Corporate Valuation and Risk Management
834(3)
Background on Derivative
837(1)
Derivatives in the News
838(3)
Long Term Capital Management (LTCM)
838(1)
Enron and Other Energy Traders
839(2)
Other Types of Derivatives
841(7)
Forward Contracts versus Futures Contracts
842(1)
Swaps
843(3)
Structured Notes
846(1)
Inverse Floaters
847(1)
Risk Management
848(1)
Fundamentals of Risk Management
848(2)
An Approach to Risk Management
849(1)
Box: Microsoft's Goal: Manage Every Risk!
850(1)
Using Derivatives to Reduce Risks
851(4)
Hedging with Futures
851(3)
Security Price Exposure
854(1)
Box: Risk Management in the Cyber Economy
855(4)
Commodity Price Exposure
857(1)
The Use and Misuse of Derivatives
858(1)
Summary
859(5)
Bankruptcy, Reorganization, and Liquidation
864(30)
Beginning-of-Chapter Questions
865(1)
Financial Distress and Its Consequences
865(1)
Box: Corporate Valuation and Bankruptcy
866(2)
Causes of Business Failure
866(1)
The Business Failure Record
867(1)
Issues Facing a Firm in Financial Distress
868(1)
Settlements without Going through Formal Bankruptcy
869(2)
Informal Reorganization
869(2)
Informal Liquidation
871(1)
Federal Bankruptcy Law
871(1)
Reorganization in Bankruptcy
872(10)
Illustration of a Reorganization
876(4)
Prepackaged Bankruptcies
880(1)
Reorganization Time and Expense
881(1)
Liquidation in Bankruptcy
882(3)
Other Motivations for Bankruptcy
885(1)
Some Criticisms of Bankruptcy Laws
886(1)
Other Topics in Bankruptcy
887(1)
Summary
887(7)
Mergers, LBOs, Divestitures, and Holding Companies
894(50)
Beginning-of-Chapter Questions
895(1)
Box: Corporate Valuation and Mergers
896(1)
Rationale for Mergers
896(4)
Synergy
896(2)
Tax Considerations
898(1)
Purchase of Assets below Their Replacemen Cost
898(1)
Diversification
898(1)
Managers' Personal Incentives
899(1)
Breakup Value
899(1)
Types of Mergers
900(1)
Level of Merger Activity
900(2)
Hostile versus Friendly Takeovers
902(1)
Merger Regulation
903(1)
Overview of Merger Analysis
904(1)
The Adjusted Present Value (APV) Approach
905(4)
The Free Cash Flow to Equity (FCFE) Approach
909(1)
Illustration of the Three Valuation Approaches
909(7)
Pro Forma Cash Flow Statements
910(2)
Estimating the Unlevered Cost of Equity and the WACC
912(2)
Valuing the Cash Flows
914(2)
Setting the Bid Price
916(1)
Analysis When There Is a Permanent Change in Capital Structure
917(2)
The Effect on the Tax Shield
917(1)
The Effect on the Bid Price
918(1)
Taxes and the Structure of the Takeover Bid
919(2)
Box: Tempest in a Teapot?
921(2)
Financial Reporting for Mergers
923(2)
Purchase Accounting
923(1)
Income Statement Effects
924(1)
Analysis for a ``True Consolidation''
925(1)
The Role of Investment Bankers
926(3)
Arranging Mergers
926(1)
Developing Defensive Tactics
927(1)
Establishing a Fair Value
928(1)
Financing Mergers
928(1)
Arbitrage Operations
929(1)
Who Wins: The Empirical Evidence
929(1)
Corporate Alliances
930(1)
Leveraged Buyouts
931(2)
Divestitures
933(1)
Holding Companies
934(2)
Advantages of Holding Companies
934(1)
Disadvantages of Holding Companies
935(1)
Holding Companies as a Leveraging Device
935(1)
Summary
936(8)
Multinational Financial Management
944(59)
Beginning-of-Chapter Questions
945(1)
Multinational, or Global, Corporations
945(1)
Box: Corporate Valuation and Multinational Firms
946(2)
Box: The Euro: What You Need to Know
948(1)
Multinational versus Domestic Financial Management
948(1)
Exchange Rates
949(4)
The International Monetary System
953(4)
The Bretton Woods Fixed Exchange Rate System
954(1)
Modern Exchange Rate Systems
954(3)
Trading in Foreign Exchange
957(1)
Spot Rates and Forward Rates
957(1)
Interest Rate Parity
958(2)
Box: Hungry for a Big Mac? Go to the Philippines!
960(2)
Purchasing Power Parity
962(1)
Inflation, Interest Rates, and Exchange Rates
963(1)
International Money and Capital Markets
964(3)
Eurodollar Market
964(1)
International Bond Markets
965(1)
International Stock Markets
966(1)
Multinational Capital Budgeting
967(3)
Risk Exposure
967(1)
Cash Flow Estimation
968(1)
Project Analysis
969(1)
Box: Stock Market Indices around the World
970(1)
International Capital Structures
971(2)
Multinational Working Capital Management
973(3)
Cash Management
973(1)
Credit Management
974(1)
Inventory Management
975(1)
Summary
976(7)
Web Chapters
Time Value of Money
Basic Financial Tools: A Review
Pension Plan Management
Financial Management in Not-for-Profit Businesses
Web Extensions
Continuous Distributions and Estimating Beta with a Calculator
Bond Risk, Duration, and Zero Coupon Bonds
Derivation of Valuation Equations
The Binomial Approach
Individual Taxes
Financing Feedbacks and Alternative Forecasting Techniques
Estimation Issues: Growth Rates and the Nonconstant Growth Model
The ARR Method, the EAA Approach, and the Marginal WACC
Replacement Project Analysis
Abandonment Options and Risk-Neutral Valuation
Degree of Leverage
Rights Offerings
Percentage Cost Analysis, Leasing Feedback, and Leveraged Leases
Calling Convertible Issues
Secured Short-Term Financing
Risk Management with Insurance and Bond Portfolio Immunization
Case Histories and Multiple Discriminant Analysis
Comparison of Alternative Valuation Models
Appendixes
Appendix A Mathematical Table
983(1)
Appendix B Answers to End-of-Chapter Problems
984(7)
Appendix C Selected Equations and Data
991(12)
Glossary 1003(21)
Name Index 1024(2)
Subject Index 1026


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