Corporate Finance

by Carney, William J.

• ISBN13: 9781587787690
• ISBN10: 1587787695
• Format: Hardcover
• Copyright: 2004-11-30
• Publisher: Foundation Pr

Summary

This law school casebook provides a finance-oriented approach to corporate law. Students first learn financial fundamentals such as balance sheets, income, and cash flows, then proceed into increasingly more complex areas such as corporate debt and convertible securities. Along the way they are given opportunities to apply the financial principles they've learned to analyze and understand cases presented in the text. The book focuses on what students will need to know in corporate practice, with an emphasis on the contractual solutions employed to deal with the various conflicts and ambiguities that arise in the area.

Table of Contents

Preface	v
Acknowledgments	vii
Table of Cases	xxi
Introduction	1	(3)
Measuring Firm Output	4	(74)
Introduction	4	(5)
Forms of Financial Reports	9	(25)
The Balance Sheet	10	(1)
Assets	11	(1)
Liabilities	12	(1)
Stockholders' Equity	13	(4)
The Income Statement	17	(4)
In re Software Toolworks, Inc.	21	(6)
The Statement of Cash Flows	27	(6)
The Statement of Changes in Stockholders' Equity	33	(1)
Analysis of Financial Statements	34	(44)
Accounting Options	35	(6)
Ratios	41	(1)
Profitability Ratios	42	(2)
Financial Leverage Ratios	44	(1)
Liquidity Ratios	45	(1)
Activity Ratios	46	(1)
Market Value Ratios	47	(2)
The Analysis of Ratios	49	(5)
Appendix 2--A Examples of Contingent Liability Statements	54	(7)
Appendix 2--B 2001 Annual Statement Studies	61	(17)
Valuing Firm Output	78	(117)
Introduction	78	(2)
Discounting and Present Value	80	(15)
Compounding	80	(3)
The Frequency of Compounding	83	(1)
Present Values	84	(3)
Annuities	87	(3)
Valuing a Perpetuity	90	(1)
Valuing Common Stock	90	(2)
Valuing Investments with Different Cash Flows at Different Times	92	(1)
Net Present Value	93	(2)
The Cost of Capital	95	(22)
The Price of Risk	95	(3)
Measurement of Risk---Of Expected Values and Standard Deviations	98	(5)
Risk and Diversification	103	(2)
Pricing Risk in Markets---The Capital Assets Pricing Model	105	(10)
Levered Betas and the Cost of Capital for Leveraged Firms	115	(1)
Challenges to CAPM	116	(1)
Efficient Capital Markets	117	(40)
The ECMH Model	117	(1)
Signalling and Causation in Insider Trading	118	(3)
Challenges to ECMH	121	(1)
Inefficient Markets: An Introduction to Behavioral Finance (2000), 10--16	121	(5)
Are Markets Efficient?---No, Arbitrage Is Inherently Risky	126	(2)
Are Markets Efficient?---Yes, Even if They Make Errors	128	(3)
Takeover Defense When Financial Markets Are (Only) Relatively Efficient	131	(7)
ECMH in the Courts	138	(1)
West v. Prudential Securities, Incorporated	138	(4)
Measuring Securities Market Efficiency in the Regulatory Setting	142	(3)
In Re Time Warner Securities Litigation	145	(12)
Valuation in the Courts	157	(38)
CAPM in the Courts	157	(1)
Cede & Co. and Cinerama, Inc. v. Technicolor, Inc.	157	(12)
Piemonte v. New Boston Garden Corp.	169	(10)
Minority Discounts, Control Premia and Leverage	179	(3)
Rapid--American Corporation v. Harris	182	(7)
Appraising The Non--Existent: The Delaware Courts' Struggle With Control Premiums	189	(6)
Capital Structure	195	(89)
Introduction	195	(1)
The Range of Financial Choices	196	(14)
Eliasen v. Itel Corporation	202	(8)
Modigliani & Miller's Irrelevance Hypothesis	210	(7)
The Real World	217	(12)
Debt and Taxes	218	(2)
Weighted Average Cost of Capital	220	(4)
Debt and Agency Costs	224	(1)
``Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure''	225	(4)
Capital Structure in the Courts	229	(14)
New England Tel. and Tel. Co. v. Department of Public Utilities	229	(8)
Heckman v. Ahmanson	237	(6)
The Wages of Excessive Debt	243	(41)
Subordination	243	(1)
In re Fett Roofing & Sheet Metal Co., Inc., Bankrupt	244	(7)
Fiduciary Duties to Creditors	251	(1)
Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Co.	252	(8)
Creditor Liability	260	(1)
Krivo Industrial Supply Company v. National Distillers and Chemical Corporation	260	(11)
The Close Corporation and Disallowance of Interest Deductions	271	(1)
Fin Hay Realty Co. v. United States	271	(6)
Liability of Affiliated Parties under the ``Deepening Insolvency'' Doctrine	277	(1)
Official Committee of Unsecured Creditors v. R. F. Lafferty & Co.	277	(5)
Structural Response to the Threat of Insolvency	282	(2)
Common Stock	284	(55)
Limited Liability of Stockholders	284	(4)
Limited Liability	284	(4)
The Problem of Dilution	288	(51)
Preemptive Rights to Purchase a Portion of Any New Issue	291	(1)
Stokes v. Continental Trust Company	292	(6)
Equitable Doctrines Governing Dilutive Stock Issues	298	(1)
Katzowitz v. Sidler et al.	298	(5)
Dilution as a Takeover Defense---The Poison Pill	303	(1)
The Illusory Protections of the Poison Pill	303	(7)
Moran v. Household International, Inc.	310	(11)
Creditor Protection: Legal Capital	321	(5)
Public Securities Markets and Regulation	326	(1)
The Federal Securities Laws in a Nutshell	326	(4)
The New Issues Market	330	(4)
Trading Markets	334	(1)
Market Making in the Electronic Age	334	(5)
Corporate Debt	339	(110)
Introduction	339	(7)
Credit Report: Suddenly, Banks Are Acting a Lot Like Bond Markets	340	(6)
Contract Interpretation	346	(11)
Sharon Steel Corporation v. The Chase Manhattan Bank, N.A.	347	(10)
Contract Terms	357	(63)
On Financial Contracting: An Analysis of Bond Covenants	357	(2)
Capital Structure: Restricting New Debt	359	(1)
On Financial Contracting: An Analysis of Bond Covenants	359	(5)
Metropolitan Life Insurance Company v. RJR Nabisco, Inc.	364	(20)
Alteration of Risks	384	(1)
On Financial Contracting: An Analysis of Bond Covenants	384	(6)
Distributions	390	(1)
On Financial Contracting: An Analysis of Bond Covenants	390	(5)
Underinvestment---Asset Maintenance	395	(1)
On Financial Contracting: An Analysis of Bond Covenants	395	(3)
Conversion Rights as Substitutes for Covenants	398	(1)
On Financial Contracting: An Analysis of Bond Covenants	398	(1)
Sinking Funds	399	(1)
On Financial Contracting: An Analysis of Bond Covenants	399	(1)
Principles of Corporate Finance, 6th Ed. (2000)	400	(1)
Call Protection	401	(1)
Morgan Stanley & Co., Incorporated v. Archer Daniels Midland Company	401	(7)
Monitoring Compliance	408	(1)
On Financial Contracting: An Analysis of Bond Covenants	408	(1)
Amendments	409	(1)
On Financial Contracting: An Analysis of Bond Covenants	409	(3)
Katz v. Oak Industries, Inc.	412	(8)
The Indenture Trustee and the Trust Indenture Act	420	(17)
The Nature of the Trustee and its Duties	420	(1)
On Financial Contracting: An Analysis of Bond Covenants	420	(2)
Elliott Associates v. J. Henry Schroder Bank & Trust Co.	422	(8)
The Trustee's Duties in Default	430	(3)
LNC Investments, Inc. v. First Fidelity Bank, National Association	433	(4)
Capital Leasing	437	(2)
Asset Backed Financing	439	(10)
Appendix 6--A Moody's Investor Services	444	(1)
Standard & Poors	445	(1)
Appendix 6--B Revised Model Simplified Indenture	446	(3)
Preferred Stock	449	(88)
Introduction	449	(4)
Defining Preferred Stock	449	(3)
The Uses of Preferred Stock	452	(1)
Dividends	453	(27)
The Varieties of Dividends	453	(2)
Arizona Western Insurance Company v. L. L. Constantin & Co.	455	(2)
L.L. Constantin & Co. v. R. P. Holding Corp.	457	(3)
Straight and Cumulative Dividends	460	(1)
Guttmann v. Illinois Central R. Co.	460	(6)
Property Rights in Dividends	466	(1)
Hay v. Hay	466	(9)
Smith v. Nu--West Industries, Inc.	475	(5)
Altering the Preferred Contract	480	(22)
Voting Rules and Voting Rights	480	(2)
Elliott Associates, L.P. v. Avatex Corporation	482	(10)
Dealing with the Class Veto Power	492	(2)
Schreiber v. Carney	494	(8)
Board Duties	502	(26)
Board Duties to Preferred Shareholders	502	(1)
Mary G. Dalton v. American Investment Company	502	(8)
Duties of a Preferred-Controlled Board	510	(1)
Baron v. Allied Artists Pictures Corporation	511	(7)
Burton v. Exxon Corporation	518	(10)
Share Redemptions and Repurchases	528	(9)
Eisenberg v. Chicago Milwaukee Corporation	528	(9)
Options and Convertible Securities	537	(124)
Introduction	537	(5)
The Uses of Options and Option Theory	537	(2)
Real Options	539	(1)
Long and Short Positions and Position Diagrams	540	(2)
How Options Operate	542	(14)
Call Options	542	(1)
Long Positions in Call Options	543	(2)
Short Positions in Call Options	545	(1)
Put Options	546	(2)
Combining Options, Stocks and Bonds; Put--Call Parity	548	(3)
Uses of Options	551	(1)
Brane v. Roth	551	(2)
Who Says You Can't Make Money Off Stalled Stocks? More Investors Use Options, Trading Upside for Steady Gains	553	(3)
Valuation of Options	556	(7)
Disclosure Issues With Options	563	(12)
Securities and Exchange Commission, Regulation S--K, Item 402(c) 17 C.F.R. 229.402(c) (Executive Compensation)	563	(2)
Five Ways of Valuing Options Of these possible methods, only one results in reliable, tamperproof, financial results	565	(4)
Herbert Resnik v. Jerome Swartz	569	(6)
Convertible Securities, Deal Protection, and Venture Capital	575	(68)
Destruction of the Option	575	(1)
John Parkinson v. West End Street Railway Company	575	(2)
Simons v. Cogan	577	(7)
Andaloro v. PFPC Worldwide, Inc.	584	(3)
Dilution of Option Rights	587	(2)
HB Korenvaes Investments, L.P. v. Marriott Corporation	589	(19)
Stephenson v. Plastics Corporation of America, Inc.	608	(9)
Wood v. Coastal States Gas Corporation	617	(10)
Cofman v. Acton Corporation	627	(4)
CL Investments, L.P. v. Advanced Radio Telecom Corp.	631	(12)
Last Period Financing: Death Spirals	643	(18)
Internet Law Library, Inc. v. Southridge Capital Management, LLC	645	(3)
GFL Advantage Fund, Ltd. v. Colkitt	648	(13)
Dividends and Distributions	661	(138)
Distributions and Investor Wealth	661	(26)
Dividend Practices	661	(1)
Distribution of Incomes of Corporations Among Dividends, Retained Earnings, and Taxes	661	(4)
Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay?	665	(4)
How Do Dividends Relate to Firm Value?	669	(5)
Explaining Dividend Practices	674	(1)
Clientele Effects and Expectations	674	(1)
Transaction Costs of Selling Shares	675	(1)
Taxes	676	(3)
Imperfect Capital Markets and the Signaling Value of Dividends	679	(1)
Alternative Explanations of Dividends	680	(1)
Two Agency--Cost Explanations of Dividends	680	(7)
Restrictions on Dividends and Other Distributions to Shareholders	687	(20)
Klang v. Smith's Food & Drug Centers, Inc.	693	(8)
Hullender v. Acts II	701	(1)
Stock Repurchase Agreements in Bankruptcy: A Tale of State Law Rights Discarded	702	(5)
Board Discretion and Duties in Declaring Dividends	707	(15)
Caleb & Co. v. E. I. DuPont de Nemours & Company	708	(3)
Berwald v. Mission Development Company	711	(7)
Smith v. Atlantic Properties, Inc.	718	(4)
Stock Dividends and Stock Splits	722	(20)
The Economics of Stock Dividends and Stock Splits	722	(2)
Accounting for Dividends and Splits	724	(6)
Reverse Stock Splits	730	(1)
Applebaum v. Avaya	731	(11)
Stock Repurchases	742	(37)
The Economics of Share Repurchases	742	(3)
Legal Authority for Share Repurchases	745	(1)
Regulation of Share Repurchases	745	(1)
Market Repurchases	745	(1)
Securities and Exchange Commission v. Georgia--Pacific Corporation	746	(3)
Going Private Transactions	749	(1)
Howing Co. v. Nationwide Corporation	750	(8)
Repurchases During Hostile Tender Offers	758	(1)
AC Acquisitions Corp. v. Anderson, Clayton & Co.	759	(6)
Targeted Repurchases	765	(1)
Grobow v. Perot	766	(6)
Duties in Share Repurchases	772	(1)
Nixon v. Blackwell	772	(7)
Leveraged Buyouts	779	(16)
United States of America v. Tabor Court Realty Corp.	780	(11)
Matter of Munford, Inc., d.b.a. Majik Market, Debtor	791	(4)
Spin--Offs and Tracking Stock	795	(4)
Spin--Offs	795	(2)
Tracking Stock	797	(2)
Index	799