Principles of Corporate Finance

Haim Levy

Publisher: Thomson, 1998, 871 pages

ISBN: 0-538-84741-7

Keywords: Finance

Last modified: April 11, 2011, 2:59 p.m.

Principles of Corporate Finance is a modern treatment of corporate finance. It offers a presentation of key tools and concepts combined with the business applications students need to understand corporate financial theory. Bridging between theory and application through a "learning-by-doing" problem-solving approach, the text makes use of real-world examples, mini-cases, and a selection of problem material. This practical, applied approach helps students appreciate the role of the Chief Financial Officer (CFO) and emphasizes capital markets innovations that substantially affect the CFO's job.

  • Part I: The Financial Environment
    1. The Role of the Financial Manager
      1. Introduction and Preview
      2. Why Do Individuals and Firms Invest?
      3. Raising Capital: The Need for a Business Organization
      4. Forms of Business Organization
      5. Who Are the Decision Makers in a Corporation?
      6. The Role of the Chief Financial Officer (CFO)
      7. Conflicts of Interest
      8. The Corporation's Goal: Profitability versus Risk
      9. Achieving the Corporation's Goal in Practice: The Economic Value Added (EVA) Principle
    2. The Business Environment
      1. Introduction
      2. The Flow of Funds
      3. Raising Funds: Securities
      4. Risk and Rates of Return on Bonds and Stocks: The Historical Record
      5. The Effects of Government and Environment on a Firm's Investment Decisions
      6. Customer Service
      7. Business Ethics
      8. The Tax Structure
    3. The Firm's Financial Statements
      1. Introduction
      2. An Overview of the Firm's Financial Statements
      3. The Income Statement
      4. The Balance Sheet
      5. The Statement of Cash Flows
      6. "Window Dressing"
      7. Market Value Ratios
      8. Time Series and Industry Financial Analyses
      9. International Comparative Financial Analysis
      10. A Word of Caution
      • Appendix 3A: Financial Ratio Analysis
      • Appendix 3B: The DuPont System
  • Part II: Project Evaluation
    1. Present Value and Future Value
      1. Introduction
      2. Future Value and Present Value: The One-Period Case
      3. Future Value and Present Value: The Multiperiod Case
      4. Using FV and PV Tables
      5. The Equations
      6. A Note on Risk
      • Appendix 4A: Effective Interest Rate and Continuous Compounding
    2. The Net Present Value Investment Criterion
      1. Introduction
      2. Definition and Justification of the NPV Rule: Certain Cash Flows
      3. Net Present Value: Uncertain Cash Flows
      4. The PV and the NPV of Bonds and Stocks
      5. Creating Wealth by Contracting or Expanding Size
      • Appendix 5A: The NPV Criterion and Wealth Creation: Generalization
    3. Net Present Value versus Other Investment Criteria
      1. Introduction
      2. The Properties of the NPV Rule
      3. The Internal Rate of Return (IRR) Rule
      4. The NPV Rule versus the IRR Rule
      5. The Reasons for the differences in Project Ranking by the NPV and the IRR Rules
      6. Technical Drawbacks of the IRR Rule
      7. The Payback Period Rule (PBP) Rule
      8. The Accounting Rate of Return (ARR) Rule
      9. The Profitability Index Rule
      • Appendix 6A: The Discounted Payback Rule
    4. Capital Budgeting: Estimating Cash Flows
      1. Introduction
      2. Initiating a Project and Forecasting Sales
      3. Cash Flows versus Accounting Data
      4. The Incremental Cash Flow Principle
      5. Separating the Investment and Financing Decisions
      6. The Treatment of Working Capital
      7. Lease-versus-Buy Decisons
      8. Evaluating the Cash Flows of Projects with Unequal Lives
      9. Replacement Decisions
      10. Cash Flows and Capital Budgeting in an Inflationary Environment
      • Appendix 7A: Depreciation Values
      • Appendix 7B: Optimal Replacement Decision: The Uniform Annuity Series (UAS)
  • Part III: Portfolio and Capital Budget Decisions
    1. The Gain from Diversification
      1. Introduction
      2. Uncertainty of Returns: The Source of Risk
      3. Risk Aversion and the Risk Premium
      4. Standard Deviation as a Measure of Risk
      5. Diversification
      6. Risk in a Portfolio Context
      7. Expected Rate of Return and Standard Deviation on a Portfolio of Assets
      8. Investment Strategies
    2. Risk and Return
      1. Introduction
      2. Risk and the Rate of Return on Efficient Portfolios: The Capital Market Line
      3. Risk and the Rate of Return on Individual Assets
      4. Unique Risk and Market Risk
      5. The Security Market Line and the Capital Asset Pricing Model
      6. A Word of Caution
    3. Cost of Capital, Risk, and the Optimal Capital Budget
      1. Introduction
      2. The Cost of Capital for Firms and Projects: A General Rule for Project Evaluation
      3. Using Beta to Estimate the Cost of Capital: An All-Equity Firm
      4. Weighted Average Cost of Capital: Debt and Equity Financing
      5. The Optimal Capital Budget
      6. The Cost of Equity and the Price/Earnings Ratio: An International Comparison
      • Appendix 10A: The After-Tax Weighted Average Cost of Capital
      • Appendix 10B: The Cost of Capital Under Capital Rationing
    4. Hedging Macroeconomic Risk with Derivatives
      1. Introduction
      2. Forward Contracts
      3. Futures Contracts
      4. The Basic Characteristics of Opetions
      5. Stock Option Quotations
      6. The Cash Flows of Stock Options
      7. Option Values
      8. How Firms Use Options
      9. Hedging Risk with Swap Contracts
      10. Misuse of Derivatives
      • Appendix 11A: Black-Scholes Option Pricing Formula
  • Part IV: Long-Term Financing
    1. Long-Term Debt
      1. Introduction
      2. The Terms of a Bond and Its Cash Flows
      3. How the Interest Rate is Determined in the Market
      4. The Yield-to-Maturity and Cost of Debt
      5. Types of Risk Affecting Bonds
      6. Classification of Bonds by Special Features
      7. Classification of Bonds by Tax Obligation and Risk of Default
      8. Safeguarding the Interests of Bondholders: The Indenture
    2. Stocks: Equity Financing
      1. Introduction
      2. Cost of Equity and Cost of Debt: The Historical Record
      3. Why Is It Important to Understand How Stocks Are Valued?
      4. Stock Valuation: The Discounted Cash Flow Principle
      5. The Constant Dividend Growth Model (CDGM)
      6. Supergrowth Firms
      7. Supergrowth for a Limited Time Period
      8. Stock Valuation When All Earnings Are Paid Out As Cash Dividends
      9. Using the CDGM to Estimate the Firms Cost of Equity
      10. PV of Dividends and the Price-Earnings Ratio
      11. Stock Market Equilibrium: How Stock Prices Respond to New Information
      12. The Efficient Market Hypothesis: Are There Undervalued Stocks?
      • Appendix 13A: A Valuation Formula for Supergrowth Stocks
      • Appendix 13B: Estimating the Dividend Growth Rate in Practice
      • Appendix 13C: Using E/P as the Cost of Equity for a Normal-Growth Firm
    3. Going Public: Why and How
      1. Introduction
      2. The Stockholders' Equity Account
      3. The Legal Rights of Stockholders
      4. The Legal Rights of Bondholders
      5. Preparing to Issue Securities
      6. The Role of the Investment Bank
      7. The Initial Public Offering
      8. The Rights Offering
      9. Flotation Costs and the Firm's Cost of Capital
  • Part V: Capital Structure and Dividend Policy
    1. Does Capital Structure Matter? A Perfect Market
      1. Introduction
      2. Some Preliminary Definitions
      3. Leverage and the Rate of Return on Equity
      4. Leverage and Earnings per Share: Break-Even Analysis
      5. Modigliani and Miller (M & M)
      6. Leverage and the Firm's Weighted Average Cost of Capital
    2. Does Capital Structure Matter? An Imperfect Market
      1. Introduction
      2. Corporate Taxes and Firm Distress
      3. Agency Cost
      4. A Final Perspective on Capital Structure
      • Appendix 16A: Corporate Taxes, Personal Taxes, and Leverage
    3. Does Dividend Policy Matter?
      1. Introduction
      2. Dividend Types and Payment Procedures
      3. Dividend Policy
      4. Dividend Policy, Capital Structure, and Business Risk: A Simultaneous Solution
      5. The Empirical Evidence
  • Part VI: Financial Planning
    1. Long-Term Financial Planning
      1. Introduction
      2. Long-Term Planning: Boeing's Economic Forecast Through Year 2010
      3. Pro Forma Financial Statements
      4. Forecasting Sales Using Regression Analysis
      5. Forecasting a Firm's External Financial Needs: The Linear Model
    2. Short-Term Financial Planning
      1. Introduction
      2. Ways of reducing Net Working Capital
      3. Financing Current Assets: The Operating Cycle versus the Cash Flow Cycle
      4. Working Capital: Investment and Financing Decisions
      5. Short-Term Financial Planning: The Cash Budget and the Financing Decision
  • Part VII: Short-Term Financial Planning
    1. Managing Cash Assets
      1. Introduction
      2. Why Do Firms Hold Cash Assets?
      3. The Firm's Optimal Level of Cash Assets
      4. The Cash Budget
      5. Techniques for Minimizing Cash Balances
      6. The Seasonality Factor in Cash Management
      7. Dividing Cash Assets Between Cash and Marketable Securities: The Baumol Model
      8. Forecasting the Daily Cash Flows: The Stone and Miller Approach
      9. Cash Management in International Firms
      10. Investing Cash in Repurchase Agreements
    2. Managing Accounts Receivable and Inventory
      1. Introduction
      2. Accounts Receivable, Cash Flow, and NPV
      3. Credit Policy and Investment in Receivables
      4. The Costs and Benefits of Credit
      5. The Optimal Level of Investment in Receivables
      6. Credit Policy in Practice
      7. Interest Rate Risk and Foreign Currency Risk Inherent in Receivables
      8. Credit Risk Analysis: Collection of Receivables and Bad Debt
      9. Financing Receivables: Factoring
      10. Inventory Management


Principles of Corporate Finance

Reviewed by Roland Buresund

Good ******* (7 out of 10)

Last modified: April 10, 2011, 10:48 p.m.

Not really the stuff of cliff-hangers, but what you have to take you through when getting your MBA. It is well worth its money.

A good complement to Levy's other book.


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