Publisher: Thomson, 1998, 871 pages

ISBN: 0-538-84741-7

Keywords: Finance

*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****The Role of the Financial Manager**- Introduction and Preview
- Why Do Individuals and Firms Invest?
- Raising Capital: The Need for a Business Organization
- Forms of Business Organization
- Who Are the Decision Makers in a Corporation?
- The Role of the Chief Financial Officer (CFO)
- Conflicts of Interest
- The Corporation's Goal: Profitability versus Risk
- Achieving the Corporation's Goal in Practice: The Economic
Value Added (EVA) Principle

**The Business Environment**- Introduction
- The Flow of Funds
- Raising Funds: Securities
- Risk and Rates of Return on Bonds and Stocks: The Historical Record
- The Effects of Government and Environment on a Firm's Investment Decisions
- Customer Service
- Business Ethics
- The Tax Structure
**The Firm's Financial Statements**- Introduction
- An Overview of the Firm's Financial Statements
- The Income Statement
- The Balance Sheet
- The Statement of Cash Flows
- "Window Dressing"
- Market Value Ratios
- Time Series and Industry Financial Analyses
- International Comparative Financial Analysis
- A Word of Caution
- Appendix 3A: Financial Ratio Analysis
- Appendix 3B: The DuPont System

**Part II: Project Evaluation****Present Value and Future Value**- Introduction
- Future Value and Present Value: The One-Period Case
- Future Value and Present Value: The Multiperiod Case
- Using FV and PV Tables
- The Equations
- A Note on Risk
- Appendix 4A: Effective Interest Rate and Continuous
Compounding

**The Net Present Value Investment Criterion**- Introduction
- Definition and Justification of the NPV Rule: Certain Cash Flows
- Net Present Value: Uncertain Cash Flows
- The PV and the NPV of Bonds and Stocks
- Creating Wealth by Contracting or Expanding Size
- Appendix 5A: The NPV Criterion and Wealth Creation:
Generalization

**Net Present Value versus Other Investment Criteria**- Introduction
- The Properties of the NPV Rule
- The Internal Rate of Return (IRR) Rule
- The NPV Rule versus the IRR Rule
- The Reasons for the differences in Project Ranking by the NPV and the IRR Rules
- Technical Drawbacks of the IRR Rule
- The Payback Period Rule (PBP) Rule
- The Accounting Rate of Return (ARR) Rule
- The Profitability Index Rule
- Appendix 6A: The Discounted Payback Rule

**Capital Budgeting: Estimating Cash Flows**- Introduction
- Initiating a Project and Forecasting Sales
- Cash Flows versus Accounting Data
- The Incremental Cash Flow Principle
- Separating the Investment and Financing Decisions
- The Treatment of Working Capital
- Lease-versus-Buy Decisons
- Evaluating the Cash Flows of Projects with Unequal Lives
- Replacement Decisions
- 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****The Gain from Diversification**- Introduction
- Uncertainty of Returns: The Source of Risk
- Risk Aversion and the Risk Premium
- Standard Deviation as a Measure of Risk
- Diversification
- Risk in a Portfolio Context
- Expected Rate of Return and Standard Deviation on a Portfolio of Assets
- Investment Strategies
**Risk and Return**- Introduction
- Risk and the Rate of Return on Efficient Portfolios: The Capital Market Line
- Risk and the Rate of Return on Individual Assets
- Unique Risk and Market Risk
- The Security Market Line and the Capital Asset Pricing Model
- A Word of Caution

**Cost of Capital, Risk, and the Optimal Capital Budget**- Introduction
- The Cost of Capital for Firms and Projects: A General Rule for Project Evaluation
- Using Beta to Estimate the Cost of Capital: An All-Equity Firm
- Weighted Average Cost of Capital: Debt and Equity Financing
- The Optimal Capital Budget
- 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

**Hedging Macroeconomic Risk with Derivatives**- Introduction
- Forward Contracts
- Futures Contracts
- The Basic Characteristics of Opetions
- Stock Option Quotations
- The Cash Flows of Stock Options
- Option Values
- How Firms Use Options
- Hedging Risk with Swap Contracts
- Misuse of Derivatives
- Appendix 11A: Black-Scholes Option Pricing Formula
**Part IV: Long-Term Financing****Long-Term Debt**- Introduction
- The Terms of a Bond and Its Cash Flows
- How the Interest Rate is Determined in the Market
- The Yield-to-Maturity and Cost of Debt
- Types of Risk Affecting Bonds
- Classification of Bonds by Special Features
- Classification of Bonds by Tax Obligation and Risk of Default
- Safeguarding the Interests of Bondholders: The Indenture
**Stocks: Equity Financing**- Introduction
- Cost of Equity and Cost of Debt: The Historical Record
- Why Is It Important to Understand How Stocks Are Valued?
- Stock Valuation: The Discounted Cash Flow Principle
- The Constant Dividend Growth Model (CDGM)
- Supergrowth Firms
- Supergrowth for a Limited Time Period
- Stock Valuation When All Earnings Are Paid Out As Cash Dividends
- Using the CDGM to Estimate the Firms Cost of Equity
- PV of Dividends and the Price-Earnings Ratio
- Stock Market Equilibrium: How Stock Prices Respond to New Information
- 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

**Going Public: Why and How**- Introduction
- The Stockholders' Equity Account
- The Legal Rights of Stockholders
- The Legal Rights of Bondholders
- Preparing to Issue Securities
- The Role of the Investment Bank
- The Initial Public Offering
- The Rights Offering
- Flotation Costs and the Firm's Cost of Capital

**Part V: Capital Structure and Dividend Policy****Does Capital Structure Matter? A Perfect Market**- Introduction
- Some Preliminary Definitions
- Leverage and the Rate of Return on Equity
- Leverage and Earnings per Share: Break-Even Analysis
- Modigliani and Miller (M & M)
- Leverage and the Firm's Weighted Average Cost of Capital
**Does Capital Structure Matter? An Imperfect Market**- Introduction
- Corporate Taxes and Firm Distress
- Agency Cost
- A Final Perspective on Capital Structure
- Appendix 16A: Corporate Taxes, Personal Taxes, and Leverage
**Does Dividend Policy Matter?**- Introduction
- Dividend Types and Payment Procedures
- Dividend Policy
- Dividend Policy, Capital Structure, and Business Risk: A Simultaneous Solution
- The Empirical Evidence

**Part VI: Financial Planning****Long-Term Financial Planning**- Introduction
- Long-Term Planning: Boeing's Economic Forecast Through Year 2010
- Pro Forma Financial Statements
- Forecasting Sales Using Regression Analysis
- Forecasting a Firm's External Financial Needs: The Linear
Model

**Short-Term Financial Planning**- Introduction
- Ways of reducing Net Working Capital
- Financing Current Assets: The Operating Cycle versus the Cash Flow Cycle
- Working Capital: Investment and Financing Decisions
- Short-Term Financial Planning: The Cash Budget and the
Financing Decision

**Part VII: Short-Term Financial Planning****Managing Cash Assets**- Introduction
- Why Do Firms Hold Cash Assets?
- The Firm's Optimal Level of Cash Assets
- The Cash Budget
- Techniques for Minimizing Cash Balances
- The Seasonality Factor in Cash Management
- Dividing Cash Assets Between Cash and Marketable Securities: The Baumol Model
- Forecasting the Daily Cash Flows: The Stone and Miller Approach
- Cash Management in International Firms
- Investing Cash in Repurchase Agreements

**Managing Accounts Receivable and Inventory**- Introduction
- Accounts Receivable, Cash Flow, and NPV
- Credit Policy and Investment in Receivables
- The Costs and Benefits of Credit
- The Optimal Level of Investment in Receivables
- Credit Policy in Practice
- Interest Rate Risk and Foreign Currency Risk Inherent in Receivables
- Credit Risk Analysis: Collection of Receivables and Bad Debt
- Financing Receivables: Factoring
- Inventory Management

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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