Intermediate Financial Management (with Thomson One)

by Brigham, Eugene F.; Daves, Phillip R.

• ISBN13: 9780324319866
• ISBN10: 032431986X
• Edition: 9th
• Format: Hardcover
• Copyright: 2006-03-29
• Publisher: Thomson South-Western

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