Handbook of Corporate Finance: A Business Companion to Financial Markets, Decisions and Techniques

by Arnold, Glen

• ISBN13: 9780273688518
• ISBN10: 0273688510
• Edition: 1st
• Format: Paperback
• Copyright: 2005-01-01
• Publisher: FT Press

Summary

Get an immediate firm grasp of all the main fundamental financial issues that face your business. This book provides: - A thorough grounding in value-based management, which is increasingly talked about but little understood. - Discussion of mergers and the problems of merger failure (i.e. acquiring shareholders losing out), along with remedies. - The proper use of derivatives as tools to help a business control risk, rather than increase it, is explained in easy to follow and practically-oriented fashion. - Modern investment appraisal techniques in contrast with the rules of thumb frequently employed. - An overview of modern financial markets and instruments, with insight into the benefits brought by effective exploitation of the markets and perils of ignoring the needs of the finance providers.

Table of Contents

About the author	xiii
Acknowledgments	xiv
Author's Acknowledgments	xv
Introduction	xvi
What is the firm's objective?	1	(22)
Introduction	2	(1)
A common purpose	2	(5)
The assumed objective for finance	7	(4)
What is shareholder value?	11	(1)
Profit maximization is not the same as shareholder wealth-maximization	12	(3)
Getting manager's objectives aligned with those of shareholders	15	(4)
What happens if control over directors is weak?	19	(1)
Conclusion	20	(3)
SECTION I: INVESTING IN PROJECTS
State-of-the-art project appraisal techniques	23	(38)
Introduction	23	(2)
How do you know if an investment generates value for shareholders?	25	(5)
State-of-the-art technique 1: net present value	30	(9)
State-of-the-art technique 2: internal rate of return	39	(8)
Choosing between NPV and IRR	47	(2)
Conclusion	49	(1)
Appendix 2.1 Mathematical tools for finance	50	(11)
Traditional appraisal techniques	61	(12)
Introduction	62	(1)
What appraisal techniques do businesses use?	62	(1)
Payback	62	(5)
Accounting rate of return	67	(3)
Internal rate of return: reasons for continued popularity	70	(1)
Conclusion	71	(2)
Investment decision-making in companies	73	(20)
Introduction	74	(1)
The managerial art of investment selection	75	(7)
More tricky issues in real world project appraisal	82	(3)
The stages of investment decision-making	85	(7)
Conclusion	92	(1)
Allowing for risk in project appraisal	93	(24)
Introduction	95	(1)
What is risk?	95	(3)
Adjusting for risk through the discount rate	98	(1)
Sensitivity analysis	98	(6)
Scenario analysis	104	(2)
Probability analysis	106	(6)
Problems with using probability analysis	112	(1)
Evidence of risk analysis in practice	113	(1)
Conclusion	113	(4)
SECTION II: SHAREHOLDER VALUE
Value managed vs. earnings managed companies	117	(28)
Introduction	118	(1)
The pervasiveness of the value approach	118	(3)
Case studies: FT100 companies creating and destroying value	121	(2)
Why shareholder value?	123	(2)
Three steps to value	125	(1)
Earnings-based management's failings	126	(7)
Return on capital employed has failings	133	(1)
Focussing on earnings is not the same as value	134	(1)
How a business creates value	134	(3)
The five actions for creating value	137	(6)
Conclusion	143	(2)
Value through strategy	145	(20)
Introduction	146	(1)
Value principles touch every corner of the business	146	(1)
The firm's objective	146	(2)
Strategic business unit management	148	(2)
Strategic assessment	150	(8)
Strategic choice	158	(1)
Strategy implementation	159	(1)
What use is the head office?	159	(3)
Targets and motivation	162	(2)
Conclusion	164	(1)
Measures of value creation	165	(30)
Introduction	166	(1)
Using cash flow to measure value	166	(6)
Shareholder value analysis	172	(9)
Economic profit	181	(8)
Economic value added	189	(2)
Cash flow return on investment	191	(1)
Conclusion	191	(4)
Entire firm value measurement	195	(16)
Introduction	196	(1)
Total shareholder return	197	(3)
Wealth Added Index	200	(4)
Market Value Added	204	(4)
Market to Book Ratio	208	(1)
Conclusion	209	(2)
What is the company's cost of capital?	211	(42)
Introduction	212	(1)
A word of warning	212	(1)
The required rate of return	213	(1)
Two sides of the same coin	214	(1)
The weighted average cost of capital	215	(6)
The cost of equity capital	221	(11)
The cost of retained earnings	232	(1)
The cost of debt capital	232	(4)
The cost of preference share capital	236	(1)
Hybrid securities	236	(1)
Calculating the weights	236	(1)
The WACC with three or more types of finance	237	(1)
Classic error	237	(1)
What about short-term debt?	238	(1)
Applying the WACC to projects and SBUs	238	(1)
What do managers actually do?	239	(4)
Implementation issues	243	(2)
Which risk-free rate?	245	(3)
Fundamental beta	248	(1)
Some thoughts on the cost of capital	249	(2)
Conclusion	251	(2)
Mergers: Impulse, regret and success	253	(34)
Introduction	254	(1)
The merger decision	254	(1)
You say acquisition, I say merger	255	(2)
Merger statistics	257	(2)
What drives firms to merge?	259	(13)
Do the shareholders of acquiring firms gain from mergers?	272	(1)
Managing mergers	273	(11)
Conclusion	284	(3)
The merger process	287	(20)
Introduction	288	(1)
The City Code on Takeovers and Mergers	288	(2)
Action before the bid	290	(4)
The bid	294	(1)
After the bid	295	(1)
Defense tactics	296	(2)
Paying for the target's shares	298	(6)
Conclusion	304	(3)
Valuing companies	307	(40)
Introduction	308	(1)
The two skills	308	(1)
Valuation using net asset value	309	(5)
Income flow is the key	314	(1)
Dividend valuation methods	314	(7)
How do you estimate future growth?	321	(3)
Price earnings ratio-to-model	324	(6)
Valuation using cash flow	330	(5)
Valuing unquoted shares	335	(1)
Unusual companies	336	(3)
Managerial control changes the valuation	339	(6)
Conclusion	345	(2)
What pay-outs should we make to shareholders?	347	(22)
Introduction	348	(1)
Defining the problem	348	(1)
Theorists in their hypothetical world	349	(3)
The other extreme - dividends as a residual	352	(1)
What about the world in which we live?	352	(2)
Some muddying factors	354	(6)
Scrip dividends	360	(1)
Share buy-backs and special dividends	360	(1)
A round-up of the arguments	361	(3)
Conclusion	364	(5)
SECTION III: FINANCE RAISING
Debt finance available to firms of all sizes	369	(34)
Introduction	370	(1)
Contrasting debt finance with equity	371	(2)
Bank borrowing	373	(3)
Overdraft	376	(6)
Term loans	382	(1)
Trade credit	382	(4)
Factoring	386	(5)
Hire purchase	391	(2)
Leasing	393	(6)
Bills of exchange	399	(2)
Acceptance credits (bank bills or banker's acceptance)	401	(1)
Conclusion	402	(1)
Debt finance from the financial markets	403	(48)
Introduction	404	(1)
Bonds	405	(4)
Syndicated loans	409	(1)
Credit rating	410	(4)
Mezzanine debt and high-yield (junk) bonds	414	(6)
Convertible bonds	420	(4)
Valuing bonds	424	(4)
International sources of debt finance	428	(13)
Medium-term notes	441	(1)
Commercial paper	442	(1)
Project finance	443	(2)
Sale and leaseback	445	(2)
Securitization	447	(1)
Conclusion	448	(3)
Raising equity capital	451	(58)
Introduction	453	(1)
What is equity capital?	454	(2)
Preference shares	456	(3)
Floating on the official list	459	(1)
What managers need to consider	460	(6)
Methods of issue	466	(2)
Timetable for a new offer	468	(5)
How does an alternative investment market flotation differ from one on the official list?	473	(2)
The costs of new issues	475	(4)
Rights issues	479	(3)
Other equity issues	482	(2)
Scrip issues	484	(1)
Warrants	484	(1)
Equity finance for unquoted firms	485	(8)
Disillusionment and dissatisfaction with quotation	493	(2)
Conclusion	495	(1)
Appendix 17.1 Arguments for and against floating	496	(13)
SECTION IV: MANAGING RISK
The financial risks managers have to deal with	509	(36)
Introduction	510	(1)
Types of risk	511	(3)
Risk in the financial structure	514	(7)
The dangers of gearing	521	(2)
What do we mean by gearing?	523	(11)
Agency costs	534	(2)
Pecking order	536	(2)
Some further thoughts on debt finance	538	(6)
Conclusion	544	(1)
Options	545	(22)
Introduction	546	(1)
What is a derivative?	546	(1)
A long history	547	(1)
What is an option?	547	(1)
Share options	548	(10)
Index options	558	(3)
Corporate uses of options	561	(1)
Real options	562	(2)
Conclusion	564	(3)
Using futures, forwards and swaps to manage risk	567	(28)
Introduction	568	(1)
Futures	568	(8)
Short-term interest rate futures	576	(4)
Forwards	580	(3)
Forward rate agreements	583	(1)
A comparison of options, futures and FRAs	584	(1)
Caps	584	(2)
Swaps	586	(3)
Derivatives users	589	(3)
Over-the-counter and exchange-traded derivatives	592	(1)
Conclusion	593	(2)
Managing exchange-rate risk	595	(34)
Introduction	596	(1)
The impact of currency rate changes on the firm	597	(1)
Volatility in foreign exchange	598	(1)
The currency markets	599	(2)
Exchange rates	601	(5)
Covering in the forward market	606	(1)
Types of foreign-exchange risk	607	(4)
Transaction risk strategies	611	(11)
Managing translation risk	622	(3)
Managing economic risk	625	(2)
Conclusion	627	(2)
Appendices I-III	629	(4)
Glossary	633	(54)
Further reading	687	(16)
Index	703