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Tables of Contents for Fundamentals of Corporate Finance
Chapter/Section Title
Page #
Page Count
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