Publisher: McGraw-Hill, 1999, 886 pages

ISBN: 0-256-24640-8

Keywords: Finance

- Part I: Overview

- Introduction to Corporate Finance
- What is Corporate Finance?
- The Balance-Sheet Model of the Firm
- Capital Structure
- The Financial Manager
- Corporate Securities as Contingent Claims on Total Firm Value
- The Corporate Firm
- The Sole Proprietorship
- The Partnership
- The Corporation
- Goals of the Corporate Firm
- Agency Costs and the Set-of-Contracts Perspective
- Managerial Goals
- Separation of Ownership and Control
- Do Shareholders Control Managerial Behavior?
- Financial Markets
- The Primary Market: New Issues
- Secondary Markets
- Exchange Trading of Listed Stocks
- Listing
- Outline of the Text
- Accounting Statements and Cash Flow
- The Balance Sheet
- Accounting Liquidity
- Debt versus Liquidity
- Value versus Cost
- The Income Statement
- Generally Accepted Accounting Principles
- Noncash Items
- Time and Costs
- Net Working Capital
- Financial Cash Flow
- Summary and Conclusions
- Appendix 2A: Financial Statement Analysis
- Appendix 2B: Statement of Cash Flows
- Appendix 2C: U.S. Federal Tax Rates

- Part II: Value and Capital Budgeting

- Financial Markets and Net Present Value: First Principles of Finance (Advanced)
- The Financial Market Economy
- The Anonymous Market
- Market Clearing
- Making Consumption Choices Over Time
- The Competitive Market
- How Many Interest Rates Are There in a Competitive Market?
- The Basic Principle
- Practicing the Principle
- A Lending Example
- A Borrowing Example
- Illustrating the Investment Decision
- Corporate Investment Decisionâ€‘Making
- Summary and Conclusions
- Net Present Value
- The One-Period Case
- The Multiperiod Case
- Future Value and Compounding
- The Power of Compounding: A Digression
- Present Value and Discounting: The Algebraic Formula
- Compounding Periods
- Distinction between Stated Annual Interest Rate and Effective Annual Interest Rate
- Compounding over Many Years
- Continuous Compounding (Advanced)
- Simplifications
- Perpetuity
- Growing Perpetuity
- Annuity
- Growing Annuity
- Case Study: Making the Decision to Convert Lottery Prize Winnings: The Case of the Singer Asset Finance Company
- What Is a Firm Worth?
- Summary and Conclusions
- How to Value Bonds and Stock
- Definition and Example of a Bond
- How to Value Bonds
- Pure Discount Bonds
- Level-Coupon Bonds
- Consols
- Bond Concepts
- Interest Rates and Bond Prices
- Yield to Maturity
- Bond Market Reporting
- The Present Value of Common Stocks
- Dividend versus Capital Gains
- Valuation of Different Types of Stocks
- Estimates of Parameters in the Dividend-Discount Model
- Where Does g Come From?
- Where Does r Come From?
- A Healthy Sense of Sketicism
- Growth Opportunities
- Growth in Earnings and Dividends versus Growth Opportunities
- Dividends or Earnings: Which to Discount?
- The No-Dividend Firm
- The Dividend Growth Model and the NPVGO Model (Advanced)
- The Dividend Growth Model
- The NPVGO Model
- Summation
- Price-Earnings Ratio
- Stock Market Reporting
- Summary and Conclusions
- Appendix 5A: The Term Structure of Interest Rates, Spot Rates, and Yield to Maturity
- Some Alternative Investment Rules
- Why Use Net Present Value?
- The Payback Period Rule
- Defining the Rule
- Problems with the Payback Method
- Managerial Perspective
- Summary of the Payback Period Rule
- The Discounted Payback Period Rule
- The Average Accounting Return
- Defining the Rule
- Analyzing the Average Accounting Return Method
- The Internal Rate of Return
- Problems with the IRR Approach
- Definition of Independent and Mutually Exclusive Projects
- Two General Problems Affecting Both Independent and Mutually Exclusive Projects
- Problems Specific to Mutually Exclusive Projects
- Redeeming Qualities of the IRR
- A Test
- The Profitability Index
- The Practice of Capital Budgeting
- Summary and Conclusions
- Net Present Value and Capital Budgeting
- Incremental Cash Flows
- Cash Flows — Not Accounting Income
- Sunk Costs
- Opportunity Costs
- Side Effects
- The Baldwin Company: An Example
- An Analysis of the Project
- Which Set of Books?
- A Note on Net Working Capital
- Interest Expense
- Inflation and Capital Budgeting
- Interest Rates and Inflation
- Cash Flow and Inflation
- Discounting: Nominal or Real?
- Investments of Unequal Lives: The Equivalent Annual Cost Method
- The Equivalent Annual Cost Method
- Replacement Chain
- The General Decision to replace (Advanced)
- Summary and Conclusions
- Appendix 7A: Depreciation
- Strategy and Analysis in Using Net Present Value
- Corporate Strategy and Positive NPV
- Corporate Strategy and the Stock Market
- How Firms Can Learn about NPV from the Stock Market: The AT&T Decision to Acquire NCR and to Change Its CEO
- Decision Trees
- Sensitivity Analysis, Scenario Analysis, and Break-Even Analysis
- Sensitivity Analysis and Scenario Analysis
- Break-Even Analysis
- Options
- The Option to Expand
- The Option to Abandon
- Discounted Cash Flows and Options
- Summary and Conclusions

- Part III: Risk

- Capital Market Theory: An Overview
- Returns
- Dollar Returns
- Percentage Returns
- Holding-Period Returns
- Return Statistics
- Average Stock Returns and Risk-Free Returns
- Risk Statistics
- Variance
- Normal Distribution and Its Implications for Standard Deviation
- Summary and Conclusions
- Return and Risk: The Capital-Asset-Pricing Model (CAPM)
- Individual Securities
- Expected Return, Variance, and Covariance
- Expected Return and Variance
- Covariance and Correlation
- The Return and Risk for Portfolios
- The Example of Supertech and Slowpoke
- The Expected on a Portfolio
- Variance and Standard Deviation of a Portfolio
- The Efficient Set for Two Assets
- The Efficient Set for Many Securities
- Variance and Standard Deviation in a Portfolio of Many Assets
- Diversification: An Example
- Risk and the Sensible Investor
- Riskless Borrowing and Lending
- The Optimal Portfolio
- Market Equilibrium
- Definition of the Market-Equilibrium Portfolio
- Definition of Risk When Investors Hold the Market Portfolio
- The Formula for Beta
- A Test
- Relationship between Risk and Expected Return (CAPM)
- Expected Return on Market
- Expected Return on Individual Security
- Summary and Conclusions
- Appendix 10A: Is Beta Dead?
- An Alternative View of Risk and Return: The Arbitrage Pricing Theory
- Factor Models: Announcements, Surprises, and Expected Returns
- Risk: Systematic and Unsystematic
- Systematic Risk and Betas
- Portfolios and Factor Models
- Portfolios and Diversification
- Betas and Expected Returns
- The Linear Relationship
- The Market Portfolio and the Single Factor
- The Capital Asset Pricing Model and the Arbitrage Pricing Theory
- Differences in Pedagogy
- Differences in Application
- Parametric Approaches to Asset Pricing
- Empirical Models
- Style Portfolios
- Summary and Conclusions
- Risk, Return, and Capital Budgeting
- The Cost of Equity Capital
- Estimation of Beta
- Real-World Betas
- Stability of Beta
- Using an Industry Beta
- Determinants of Beta
- Cyclicality of Revenues
- Operating Leverage
- Financial Leverage and Beta
- Extensions of the Basic Model
- The Firm versus the Project: Vive la Différence
- The Cost of Capital with Debt
- Estimating International Paper's Cost of Capital
- Cost of Equity and Debt
- Determining r
_{wacc} - Summary and Conclusions

- Part IV: Capital Structure and Dividend Policy

- Corporate-Financing Decisions and Efficicent Capital Markets
- Can Financing Decisions Create Value?
- A Description of Efficient Capital Markets
- The Different Types of Efficiency
- The Weak Form
- The Semistrong and Strong Forms
- Some Common Misconceptions about the Efficient-Market Hypothesis
- The Evidence
- The Weak Form
- The Semistrong Form
- The Strong Form
- Implications for Corporate Finance
- Accounting and Efficient Markets
- The Timing Decision
- Price-Pressure Effects
- Summary and Conclusions
- Long-Term Financing: An Introduction
- Common Stock
- Par and No-Par Stock
- Authorized versus Issued Common Stock
- Capital Surplus
- Retained Earnings
- Market Value, Book Value, and Replacement Value
- Shareholders' Rights
- Dividends
- Classes of Stock
- Corporate Long-Term Debt: The Basics
- Interest versus Dividends
- Is It Debt or Equity?
- Basic Features of Long-Term Debt
- Different Types of Debt
- Repayment
- Seniority
- Security
- Indenture
- Preferred Stock
- Stated Value
- Cumulative and Noncumulative Dividends
- Is Preferred Stock Really Debt?
- The Preferred-Stock Puzzle
- Patterns of Financing
- Recent Trends in Capital Structure
- Which Are Best: Book or Market Values?
- Summary and Conclusions
- Capital Structure: Basic Concepts
- The Capital-Structure Question and The Pie Theory
- Maximizing Firm Value versus Maximizing Stockholder Interests
- Financial Leverage and Firm Value: An Example
- Leverage and Returns to Shareholders
- The Choice between Debt and Equity
- A Key Assumption
- Modigliani and Miller: Proposition II (No Taxes)
- Risk to Equityholders Rises with Leverage
- Proposition II: Required Return to Equityholders Rises with Leverage
- Example Illustrating Proposition I and Proposition II
- MM: An Interpretation
- Taxes
- The Basic Insight
- The Quirk in the Tax Code
- Present Value of the Tax Shield
- Value of the Levered Firm
- Expected Return and Leverage under Corporate Taxes
- The Weighted Average Cost of Capital r
_{wacc}and Corporate Taxes - Stock Price and Leverage under Corporate Taxes
- Summary and Conclusions
- Capital Structure: Limits to the Use of Debt
- Costs of Financial Distress
- Bankruptcy Risk or Bankruptcy Cost?
- Description of Costs
- Direct Costs of Financial Distress: Legal and Administrative Costs of Liquidation or Reorganization
- Indirect Costs of Financial Distress
- Agency Costs
- Can Costs of Debt Be Reduced?
- Protective Covenants
- Consolidation of Debt
- Integration of Tax Effects and Financial Distress Costs
- Pie Again
- Shirking, Perquisites, and Bad Investments: A Note on Agency Cost of Equity
- Investments: A Note on Agency Costs of Equity
- Effect of Agency Costs of Equity on Debt-Equity Financing
- Free Cash Flow
- Growth and the Debt-Equity Ratio
- No-Growth
- Growth
- Personal Taxes
- The Miller Model
- How Firms Establish Capital Structure
- Summary and Conclusions
- Valuation and Capital Budgeting for the Levered Firm
- Adjusted Present Value Approach
- Flows to Equity Approach
- Step 1: Calculating Levered Cash Flow (LCF)
- Step 2: Calculating r
_{s} - Step 3: Valuation
- Weighted Average Cost of Capital Method
- A Comparison of the APV, FTE, and WACC Approaches
- A Suggested Guideline
- Capital Budgeting for Projects that are Not Scale-Enhancing
- APV Example
- All-Equity Value
- Additional Effects of Debt
- Beta and Leverage
- The Project Is Not Scale-Enhancing
- Summary and Conclusions
- Appendix 17A: The Adjusted-Present-Value Approach to Valuing Leveraged Buyouts
- Dividend Policy: Why Does It Matter?
- Different Types of Dividends
- Standard Method of Cash Dividend Payment
- The Benchmark Case: An Illustration of the Irrelevance of Dividend Policy
- Current Policy: Dividends Set Equal to Cash Flow
- Alternative Policy: Initial Dividend Is Greater than Cash Flow
- The Indifference Proposition
- Homemade Dividends
- A Test
- Dividends and Investment Policy
- Taxes, Issuance Costs, and Dividends
- Firms without Sufficient Cash to Pay a Dividend
- Firms with Sufficient Cash to Pay a Dividend
- Summary on Taxes
- Repurchase of Stock
- Dividend versus Repurchase
- Relationship between EPS and Market Value
- Taxes
- Targeted Repurchase
- Repurchase as Investment
- Expected Return, Dividends, and Personal Taxes
- Empirical Evidence
- Real-World Factors Favoring a High-Dividend Policy
- Desire for Current Income
- Uncertainty Resolution
- Tax Arbitrage
- Agency Costs
- A Resolution of Real-World Factors?
- Information Content of Dividends: A Brainteaser with Practical Applications
- The Clientele Effect
- What We Know and Do Not Know About Dividend Policy
- Corporations Smooth Dividends
- Dividends Provide Information to the Market
- A Sensible Dividend Policy
- Case Study: How Firms Make the Decision to Pay Dividends: The Case of Apple Computer
- Summary and Conclusions
- Appendix 18A: Stock Dividends and Stock Splits

- Part V: Long-Term Financing

- Issuing Equity Securities to the Public
- The Public Issue
- The Basic Procedure for a New Issue
- Alternative Issue Methods
- The Cash Offer
- Investment Bankers
- The Offering Price
- Underpricing: The Case of Conrail and Shiva
- Underpricing: A Possible Explanation
- The Announcement of New Equity and the Value of the Firm
- The Cost of New Issues
- Rights
- The Mechanics of a Rights Offering
- Subscription Price
- Number of Rights Needed to Purchase a Share
- Effects of Rights Offering in Price of Stock
- Effects on Shareholders
- The Underwriting Arrangements
- The New-Issues Puzzle
- Shelf Registration
- The Private Equity Market
- Private Placement
- The Private Equity Firm
- Suppliers of Venture Capital
- Stages of Financing
- Case Study: The Decision to Do an Initial Public Offering (IPO): The Case of Medstone International, Inc.
- Summary and Conclusions
- Long-Term Debt
- Long Term Debt: A Review
- The Public Issue of Bonds
- The Basic Terms
- Security
- Protective Covenants
- The Sinking Fund
- The Call Provision
- Bond Refunding
- Should Firms Issue Callable Bonds?
- Calling Bonds: When Does It Make Sense?
- Bond Ratings
- Junk Bonds
- Some Different Types of Bonds
- Floating-Rate Bonds
- Deep-Discount Bonds
- Income Bonds
- Direct Placement Compared to Public Issues
- Summary and Conclusions
- Options and Corporate Finance: Basic Concepts
- Options
- Call Options
- The Value of a Call Option at Expiration
- Put Options
- The Value of a Put Option at Expiration
- Selling Options
- Reading The Wall Street Journal
- Combinations of Options
- Valuing Options
- Bounding the Value of a Call
- The Factors Determining Call-Option Values
- A Quick Discussion of Factors Determining Put-Option Values
- An Optionâ€‘Pricing Formula
- A Two-State Option Model
- The Black-Scholes Model
- Stocks and Bonds as Options
- The Firm Expressed in Terms of Call Options
- The Firm Expressed in Terms of Put Options
- A Resolution of the Two Views
- A Note on Loan Guarantees
- Capital-Structure Policy and Options
- Selecting High-Risk Projects
- Milking the Firm
- Investment in Real Projects and Options
- Summary and Conclusions
- Options and Corporate Finance: Extensions and Applications
- Executive Stock Options
- Why Options?
- Valuing Executive Compensation
- Flexible Production
- Automobile Production
- Waiting to Invest
- The Real Estate Developer
- Analyzing the Decisions
- The Binomal or General Two-State Approach to Project Valuation
- Setting Up the Binomial Model
- The Risk-Neutral Approach to Valuation
- Building the Tree
- Filling Out the Tree
- Working Back the Tree
- Simulation
- Shutdown and Reopening Decisions
- Valuing a Gold Mine
- The Abandonment and Opening Decisions
- Valuing the Simple Gold Mine
- Summary and Conclusions
- Warrants and Convertibles
- Warrants
- The Difference between Warrants and Call Options
- How the Firm Can Hurt Warrant Holders
- Warrant Pricing and the Black-Scholes Model (Advanced)
- Convertible Bonds
- The Value of Convertible Bonds
- Straight Bond Value
- Conversion Value
- Option Value
- Reasons for Issuing Warrants and Convertibles
- Convertible Debt versus Straight Debt
- Convertible Debt versus Common Stock
- The "Free Lunch" Story
- The "Expensive Lunch" Story
- A Reconciliation
- Why are Warrants and Convertibles Issued?
- Matching Cash Flows
- Risk Synergy
- Agency Costs
- Conversion Policy
- Summary and Conclusions
- Leasing
- Types of Leases
- The basics
- Operating Leases
- Financial Leases
- Accounting and Leasing
- Taxes, the IRS, and Leases
- The Cash Flows of Leasing
- A Detour on Discounting and Debt Capacity with Corporate Taxes
- Present Value of Riskless Cash Flows
- Optimal Debt Level and Riskless Cash Flows (Advanced)
- NPV Analysis of the Lease-versus-Buy Decision
- The Discount Rate
- Debt Displacement and Lease Valuation
- The Basic Concept of Debt Displacement (Advanced)
- Optimal Debt Level in the Xomox Example (Advanced)
- Does Leasing Ever Pay: The Base Case
- Reasons for Leasing
- Good Resons for Leasing
- Bad Reasons for Leasing
- Some Unanswered Questions
- Are the Uses of Leases and of Debt Complementary?
- Why Are Leases Offered by Both Manufacturers and Third-Party Lessors?
- Why Are Some Assets Leased More than Others?
- Summary and Conclusions
- Appendix 24A: APV Approach to Leasing
- Derivates and Hedging Risk
- Forward Contracts
- Futures Contracts
- Hedging
- Interest-Rate Futures Contracts
- Pricing of Treasury Bonds
- Pricing of Forward Contracts
- Futures Contracts
- Hedging in Interest-Rate Futures
- Duration Hedging
- The Case of Zero-Coupon Bonds
- The Case of Two Bonds with the Same Maturity but woth Different Coupons
- Duration
- Matching Liabilities with Assets
- Swap Contracts
- Interest-Rate Swaps
- Currency Swaps
- Exotics
- Summary & Conclusions

- Part VI: Financial Planning and Short-Term Finance

- Corporate Financial Models and Lon-Term Planning
- What Is Corporate Financial Planning?
- A Financial Planning Model: The Ingredients
- What Determines Growth?
- Some Caveats of Financial Planning Models
- Summary & Conclusions
- Short-Term Financing and Planning
- Tracing Cash and Net Working Capital
- Defining Cash in Terms of Other Elements
- The Sources-and-Uses-of-Cash Statement
- The Operating Cycle and the Cash Cycle
- Some Aspects of Short-Term Financial Policy
- The Size of the Firm's Investment in Current Assets
- Alternative Financing Policies for Current Assets
- Which Is Best?
- Cash Budgeting
- Cash Outflow
- The Cash Balance
- The Short-Term Financial Plan
- Unsecured Loans
- Secured Loans
- Other Sources
- Summary & Conclusions
- Cash Management
- Reasons for Holding Cash
- Determining the Target Cash Balance
- The Baumol Model
- The Miller-Orr Model
- Othr Factors Influencing the Target Cash Balance
- Managing the Collection and Disbursement of Cash
- Accelerating Collections
- Delaying Disbursements
- Disbursement Float ("Playing the Float Game")
- Zero-Balance Accounts
- Drafts
- Ethical and Legal Questions
- Investing Idle Cash
- Seasonal or Cyclical Activities
- Planned Expenditures
- Different Types of Money-Market Securities
- Summary & Conclusions
- Appendix 28A: Adjustable-Rate Preferred Stock, Auction-Rate Preferred Stock, and Floating-Rate Certificates of Deposit
- Credit Management
- Terms of the Sale
- Credit Period
- Cash Discounts
- Credit Instruments
- The Decision to Grant Credit: Risk and Information
- The Value of New Information about Credit Risk
- Future Sales
- Optimal Credit Policy
- Credit Analysis
- Credit Information
- Credit Scoring
- Collection Policy
- Average Collection Period
- Aging Schedule
- Collection Effort
- Factoring
- How to Finance Trade Credit
- Summary & Conclusions

- Part VII: Special Topics

- Mergers and Acquisitions
- The Basic Forms of Acquisitions
- Merger or Consolidation
- Acquisition of Stock
- Acquisition of Assets
- A Classification Scheme
- A Note on Takeovers
- The Tax Forms of Acquisitions
- Accounting for Acquisitions
- The Purchase Method
- Pooling of Interests
- Purchase or Pooling of Interests: A Comparison
- Determining the Synergy from an Acquisition
- Source of Synergy from Acquisitions
- Revenue Enhancement
- Cost Reduction
- Tax Gains
- The Cost of Capital
- Calculating the Value of the Firm after an Acquisition
- Acquisition
- Avoiding Mistakes
- A Cost to Stockholders from Reduction in Risk
- The Base Case
- One Firm Has Debt
- How Can Shareholders Reduce Their Losses from the Coinsurance Effect?
- Two "Bad" Reasons for Mergers
- Earning Growth
- Diversification
- The NPV of a Merger
- Cash
- Common Stock
- Cash versus Common Stock
- Defensive Tactics
- The Corporate Charter
- Repurchase Standstill Agreements
- Exclusionary Self-Tenders
- Going Private and Leveraged Buyouts
- Other Devices and Jargon of Corporate Takeovers
- Some Evidence on Acquisitions
- Do Acquisitions Benefit Shareholders?
- The Short Run
- The Long Run
- The Japanese Keiretsu
- Summary and Conclusions
- Minicase: U.S. Steel's Acquisition of Marathon Oil
- Financial Distress
- What Is Financial Distress?
- What Happens in Financial Distress?
- Bankruptcy Liquidation and Reorganization
- Bankruptcy Liquidation
- Bankruptcy Reorganization
- Private Workout or Bankruptcy: Which Is Best?
- The Marginal Firm
- Holdouts
- Complexity
- Lack of Information
- Prepackaged Bankruptcy
- Case Study: The Decision to File for Bankruptcy: The Case of Revco
- Summary and Conclusions
- Appendix 31-A: Predicting Corporate Bankruptcy: The Z-score model
- International Corporate Finance
- Terminology
- Foreign Exchange Markets and Exchange Rates
- Exchange Rates
- Types of Transactions
- The Law of One Price and Purchasing-Power Parity
- Interest Rates and Exchange Rates: Interest Rate Parity
- The Dollar Investment
- The Deutschmark Investment
- The Forward-Discount and Expected Spot Rates
- Exchange-Rate Risk
- Which Firms Hedge Exchange-Rate Risk?
- International Capital Budgeting
- Foreign Exchange Conversion
- Unremitted Cash Flows
- The Cost of Capital for International Firms
- International Financial Decisions
- Short-Term and Medium-Term Financing
- International Bond Markets
- Reporting Foreign Operations
- Summary and Conclusions
- Appendix A: Mathematical Tables
- Appendix B: Selected Answers to End-of-Chapter Problems

More and more advanced forumlas than in Brealey/Myers. Could be read separately or as a complement.

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