CONTENTS
Part One
Summary
VALUE
3
Chapter
1
Further Reading
Quiz
What Is a Corporation?
1.2
The Role of the Financial Manager
1.3
Who Is the Financial Manager?
1.4
Separation of Ownership and Management
1.5
Topics Covered in this Book
Chapter 3
9
11
HOW TO CALCULATE PRESENT VALUES
3.1
12
13
2
3.2
Foundations of the Net Present Value Rule
20
3.3
Corporate Goals and Corporate Governance
Looking for Shortcuts—Perpetuities and
Annuities 39
Compound Interest and Present Values
44
A Note on Compounding Intervals / Continuous
Compounding
3.4
Nominal and Real Rates of Interest
Summary
How Capital Markets Reconcile Preferences for
Current vs. Future Consumption / A Fundamental
Result / Other Corporate Goals
2.3
35
How to Value Growing Perpetuities / How to Value
Annuities
15
Calculating Future and Present Value / Net Present
Value / Risk and Present Value / Present Values and
Rates of Return / The Opportunity Cost of Capital / A
Source of Confusion
2.2
Valuing Long-Lived Assets
34
Valuing Cash Flows in Several Periods / Why the
Discount Factor Declines as Futurity Increases—
And a Digression on Money Machines / Calculating
PVs and NPVs
13
Introduction to Present Value
32
8
PRESENT VALUES, THE OBJECTIVES OF THE FIRM,
AND CORPORATE GOVERNANCE 14
2.1
31
6
12
Chapter
30
30
Practice Questions
5
Concept Review Questions
Quiz
4
Challenge Questions
1.1
Further Reading
30
Concept Review Questions
FINANCE AND THE FINANCIAL MANAGER
Summary
28
50
Web Exercises
51
Concept Review Questions
25
Quiz
Should Managers Look after the Interests of their
Shareholders? / Should Firms Be Managed for
Shareholders or All Stakeholders?
52
Practice Questions
53
Challenge Questions
xvii
55
52
49
CONTENTS
Chapter
THE VALUE OF BONDS AND COMMON STOCKS
4.1
Pitfall 4—What Happens When We Can’t Finesse the
Term Structure of Interest Rates? / The Verdict on IRR
4
56
5.4
Using Present Value Formulas
to Value Bonds 57
An Easy Problem in Capital Rationing / Uses of
Capital Rationing Models
A Short Trip to Germany to Value a Government Bond
/ What Happens When Interest Rates Change? / Back
to India: Semiannual Coupons and Bond Prices
4.2
How Common Stocks Are Traded
60
4.3
How Common Stocks Are Valued
61
Summary
Quiz
Calculating the Present Value of Growth
Opportunities for Fledgling Electronics / Some
Examples of Growth Opportunities?
Summary
76
Further Reading
Quiz
Chapter
6.1
6.2
6.3
5.1
5.2
6.4
Example—IM&C’S Fertilizer Project
Equivalent Annual Costs
Project Interactions
125
130
A Review of the Basics 85
Summary
Net Present Value’s Competitors / Three Points to
Remember about NPV / NPV Depends on Cash Flow,
Not on Book Returns
Concept Review Questions
Payback
118
Case 1: Optimal Timing of Investment / Case 2:
Fluctuating Load Factors
Quiz
133
134
134
Practice Questions
89
136
Challenge Questions
The Payback Rule
5.3
113
Investing to Produce Reformulated Gasoline at
California Refineries / Choosing between Long- and
Short-Lived Equipment / Deciding When to Replace an
Existing Machine / Cost of Excess Capacity
5
WHY NET PRESENT VALUE LEADS
TO BETTER INVESTMENT DECISIONS THAN
OTHER CRITERIA 84
What to Discount
Separating Investment and Financing Decisions /
Investments in Working Capital / A Further Note on
Depreciation / A Final Comment on Taxes / Project
Analysis / Calculating NPV in Other Countries and
Currencies
Mini-case: Reeby Sports 82
Chapter
6
Only Cash Flow is Relevant / Estimate Cash Flows on
an Incremental Basis / Treat Inflation Consistently
78
81
109
MAKING INVESTMENT DECISIONS WITH THE NET
PRESENT VALUE RULE 112
79
Challenge Questions
108
Mini-case: Vegetron’s CFO Calls Again
78
Practice Questions
106
Challenge Questions
77
Concept Review Questions
105
105
Practice Questions
Estimating the Cost of Equity Capital 65
The Link between Stock Price and Earnings per
Share 72
104
Concept Review Questions
Using the DCF Model to Set Gas and Electricity
Prices / Some Warnings about Constant-Growth
Formulas / DCF Valuation with Varying Growth
Rates
4.5
103
Further Reading
Today’s Price / But What Determines Next Year’s
Price?
4.4
Choosing Capital Investments When Resources
Are Limited 100
140
Mini-case: New Economy Transport (A)
and (B) 141
Internal (or Discounted-Cash-Flow) Rate
of Return 91
Calculating the IRR / The IRR Rule / Pitfall 1—
Lending or Borrowing? / Pitfall 2—Multiple Rates of
Return / Pitfall 3—Mutually Exclusive Projects /
xviii
CONTENTS
8.4
Part Two
RISK
7
Summary
INTRODUCTION TO RISK, RETURN, AND THE
OPPORTUNITY COST OF CAPITAL 146
7.1
7.2
Arithmetic Averages and Compound Annual Returns /
Using Historical Evidence to Evaluate Today’s Cost of
Capital / An Alternative Measure of the Risk Premium
Practice Questions
Quiz
157
Calculating Portfolio Risk
9.1
9.2
175
9.4
180
RISK AND RETURN
8
182
9.5
221
Setting Discount Rates When You Do Not Have
a Beta 224
Certainty Equivalents—Another Way to Adjust
for Risk 228
Discount Rates for International Projects
233
Foreign Investments Are Not Always Riskier / Foreign
Investment in the United States / Do Some Countries
Have a Lower Cost of Capital?
Harry Markowitz and the Birth
of Portfolio Theory 183
Combining Stocks into Portfolios / We Introduce
Borrowing and Lending
Summary 236
Further Reading 237
Concept Review Questions 237
Quiz 237
Practice Questions 238
Challenge Questions 241
Mini-case: The Jones Family, Incorporated 242
The Relationship between Risk and Return 190
Some Estimates of Expected Returns / Review of the
Capital Asset Pricing Model / What If a Stock Did Not
Lie on the Security Market Line?
8.3
Measuring the Cost of Equity
Valuation by Certainty Equivalents / When to Use a
Single Risk-Adjusted Discount Rate for Long-Lived
Assets / A Common Mistake / When You Cannot Use a
Single Risk-Adjusted Discount Rate for Long-Lived
Assets
177
Chapter
8.2
217
What Determines Asset Betas?
175
Challenge Questions
8.1
9.3
173
176
Practice Questions
Company and Project Costs of Capital
Avoid Fudge Factors in Discount Rates /
Concept Review Questions
Quiz
216
Estimating Beta / The Expected Return on India
cements Common Stock
174
Further Reading
9
Perfect Pitch and the Cost of Capital / Debt and the
Company Cost of Capital
How Individual Securities Affect
Portfolio Risk 169
Summary
214
CAPITAL BUDGETING AND RISK
165
Diversification and Value Additivity
210
Chapter
Market Risk Is Measured by Beta / Why Security Betas
Determine Portfolio Risk
7.5
208
208
Challenge Questions
General Formula for Computing Portfolio Risk /
Limits to Diversification
7.4
208
Concept Review Questions
Variance and Standard Deviation / Measuring
Variability / How Diversification Reduces Risk
7.3
206
Further Reading
Over a Century of Capital Market History in
One Easy Lesson 147
Measuring Portfolio Risk
199
Consumption Betas versus Market Betas / Arbitrage
Pricing Theory / A Comparison of the Capital Asset
Pricing Model and Arbitrage Pricing Theory / APT
Example / The Three-Factor Model
145
Chapter
Some Alternative Theories
Validity and Role of the Capital Asset
Pricing Model 194
Tests of the Capital Asset Pricing Model /
Assumptions behind the Capital Asset Pricing Model
xix
CONTENTS
Summary
Part Three
Further Reading
PRACTICAL PROBLEMS
IN CAPITAL BUDGETING
Quiz
10
246
297
Mini-case: Ecsy-Cola
299
Chapter
255
10.3 Real Options and Decision Trees
12.1 The Capital Investment Process
301
Project Authorizations / Some Investments May Not
Show Up in the Capital Budget / Postaudits
259
12.2 Decision Makers Need Good Information
The Option to Expand / The Option to Abandon / Two
Other Real Options / More on Decision Trees / An
Example: Air coromondal / Pro and Con Decision
Trees / Decision Trees and Monte Carlo Simulation
304
Establishing Consistent Forecasts / Reducing Forecast
Bias / Getting Senior Management the Information
That It Needs / Eliminating Conflicts of Interest
12.3 Incentives
Summary 269
Further Reading 270
Concept Review Questions 270
Quiz 270
Practice Questions 271
Challenge Questions 273
Mini-case: Waldo County 273
306
Overview: Agency Problems in Capital Budgeting /
Monitoring / Providing Incentives for Managers /
Management Compensation
12.4 Measuring and Rewarding Performance:
Residual Income and EVA 311
Pros and Cons of EVA
12.5 Biases in Accounting Measures of Performance
316
11
Example: Measuring the Profitability of the
Jamshedpur Supermarket
STRATEGY AND THE CAPITAL INVESTMENT
DECISION 276
11.1 Look First to Market Values
12
AGENCY PROBLEMS, MANAGEMENT
COMPENSATION, AND THE MEASUREMENT OF
PERFORMANCE 300
Simulating the Electric Scooter Project / Simulation of
Pharmaceutical Research and Development
Chapter
295
Challenge Questions
10.1 Sensitivity Analysis 247
Value of Information / Limits to Sensitivity Analysis /
Scenario Analysis / Break-Even Analysis / Operating
Leverage and Break-Even Points
294
294
Practice Questions
A PROJECT IS NOT A BLACK BOX
10.2 Monte Carlo Simulation
294
Concept Review Questions
245
Chapter
294
12.6 Measuring Economic Profitability
277
318
Do the Biases Wash Out in the Long Run? / What Can
We Do about Biases in Accxxiounting Profitability
Measures? / Do Managers Worry Too Much about Book
Profitability?
The Cadillac and the Movie Star / Example: Investing
in a New Department Store / Another Example:
Opening a Gold Mine
Summary
11.2 Economic Rents and Competitive Advantage
282
323
Further Reading
How One Company Avoided a $100 Million Mistake
324
Concept Review Questions
11.3 Example: Marvin Enterprises Decides to Exploit
a New Technology 286
Quiz
325
Practice Questions
Forecasting Prices of Gargle Blasters / The Value of
Marvin’s New Expansion / Alternative Expansion
Plans / The Value of Marvin Stock / The Lessons of
Marvin Enterprises
326
Challenge Questions
xx
327
324
CONTENTS
14.4 Financial Markets and Institutions
Part Four
Financial Institutions
FINANCING DECISIONS
AND MARKET EFFICIENCY
Summary
Web Exercises
13.1 We Always Come Back to NPV 334
Differences between Investment and Financing
Decisions
13.2 What is an Efficient Market? 336
A Startling Discovery: Price Changes Are Random /
Three Forms of Market Efficiency / Efficient Markets:
The Evidence
13.3 Puzzles and Anomalies—What Do They Mean
for the Financial Manager? 344
Do Investors Respond Slowly to New Information? /
Stock Market Anomalies and Behavioral Finance /
Irrational Exuberance and the Dot.com Bubble / The
Dot.com Boom and Relative Efficiency / Market
Anomalies and the Financial Manager
13.4 The Six Lessons of Market Efficiency 352
Lesson 1: Markets Have No Memory / Lesson 2: Trust
Market Prices / Lesson 3: Read the Entrails / Lesson 4:
There Are No Financial Illusions / Lesson 5: The Do-ItYourself Alternative / Lesson 6: Seen One Stock, Seen
Them All
Summary 357
Further Reading 358
Quiz
Quiz
382
382
Practice Questions
383
Challenge Question
384
Chapter
15
HOW CORPORATIONS ISSUE SECURITIES
15.1 Venture Capital
The Venture Capital Market
392
Arranging an Initial Public Offering / The Sale of
Marvin Stock / The Underwriters / Costs of a New
Issue / Underpricing of IPOs
15.3 Other New-Issue Procedures
15.4 Security Sales by Public Companies
15.5 Private Placements and Public Issues
Summary
407
Further Reading
Web Exercises
Quiz
362
364
414
PAYOUT POLICY AND
CAPITAL STRUCTURE 417
370
Chapter
Ownership of the Corporation / Voting Procedures and
the Value of Votes / Preferred Stock
375
Debt Comes in Many Forms / Variety’s the Very
Spice of Life
415
Part Five
365
Do Firms Rely Too Much on Internal Funds? / How
Much Do Firms Borrow?
14.2 Common Stock
412
413
Challenge Questions
14
408
412
412
Practice Questions
14.1 Patterns of Corporate Financing
406
Appendix: Marvin’s New-Issue Prospectus
358
AN OVERVIEW OF CORPORATE FINANCING
400
General Cash Offers / International Security Issues /
The Costs of a General Cash Offer / Market Reaction to
Stock Issues / Rights Issues
Concept Review Questions
Chapter
398
Types of Auction
360
Challenge Questions
386
387
15.2 The Initial Public Offering
359
Practice Questions
14.3 Debt
382
382
Concept Review Questions
13
CORPORATE FINANCING AND THE SIX LESSONS
OF MARKET EFFICIENCY 332
Concept Review Questions
381
Further Reading
331
Chapter
378
16
PAYOUT POLICY
16.1 The Choice of Payout Policy
418
419
16.2 Dividend Payments and Stock Repurchases 420
xxi
CONTENTS
Further Reading
How Dividends Are Paid / Importance of Bonus Issues
in India How Firms Repurchase Buyback Stock
16.3 How Do Companies Decide on the Payout
465
Concept Review Questions
422
Quiz
16.4 The Information in Dividends and Stock
Repurchases 423
466
466
Practice Questions
467
Challenge Questions
469
The Information Content of Share Repurchase
16.5 The Payout Controversy
426
Chapter
Dividend Policy Is Irrelevant in Perfect Capital
Markets / Dividend Irrelevance—An Illustration /
Calculating Share Price / Share Repurchase / Stock
Repurchase and Valuation
18.1 Corporate Taxes
18.2 Corporate and Personal Taxes
436
Alternative Tax Systems
Summary
439
Further Reading
440
Concept Review Questions
Quiz
440
444
Chapter
17
DOES DEBT POLICY MATTER?
Summary
446
Quiz
17.4 A Final Word on the After-Tax WeightedAverage Cost of Capital 463
503
Chapter
19
FINANCING AND VALUATION
458
Two Warnings / Rates of Return on Levered Equity—
The Traditional Position / Today’s Unsatisfied
Clienteles Are Probably Interested in Exotic Securities
/ Imperfections and Opportunities
501
Challenge Questions
454
499
500
Practice Questions
Proposition 2 / How Changing Capital Structure
Affects Beta
17.3 The Weighted-Average Cost of Capital
499
Concept Review Questions
Enter Modigliani and Miller / The Law of
Conservation of Value / An Example of Proposition 1
17.2 Financial Risk and Expected Returns
497
Further Reading
17.1 The Effect of Financial Leverage in a
Competitive Tax-free Economy 447
504
19.1 The After-Tax Weighted-Average Cost
of Capital 505
Example: Sangria Corporation / Review of
Assumptions
19.2 Valuing Businesses
509
Valuing Rio Corporation / Estimating Horizon Value /
WACC vs. the Flow-to-Equity Method
Tital Industries Limited’s WACC
Summary
492
Debt and Equity Issues with Asymmetric Information
/ Implications of the Pecking Order / The Trade-Off
Theory vs. the Pecking-Order Theory—Some Recent
Tests / The Bright Side and the Dark Side of Financial
Slack
442
Challenge Questions
478
18.4 The Pecking Order of Financing Choices
440
Practice Questions
475
Bankruptcy Costs / Evidence on Bankruptcy Costs in
the US / Direct versus Indirect Costs of Bankruptcy /
Financial Distress without Bankruptcy / Debt and
Incentives / Risk Shifting: The First Game / Refusing
to Contribute Equity Capital: The Second Game / And
Three More Games, Briefly / What the Games Cost /
Costs of Distress Vary with Type of Asset / The Tradeoff Theory of Capital Structure
Dividend Tax Policy in India / Why Pay Any
Dividends at All? / Empirical Evidence on Dividends
and Taxes
16.8 The Middle-of-the-Roaders
471
18.3 Costs of Financial Distress
16.7 Taxes and the Radical Left 433
470
How Do Interest Tax Shields Contribute to the Value
of Stockholders’ Equity? / Recasting Asian paints
Capital Structure / MM and Taxes
16.6 The Rightists 431
Payout Policy, Investment Policy, and Management
Incentives
18
HOW MUCH SHOULD A FIRM BORROW?
464
xxii
CONTENTS
19.3 Using WACC in Practice
515
Why Discounted Cash Flow Won’t Work for Options /
Constructing Option Equivalents from Common
Stocks and Borrowing / Valuing the Arvind Mills Put
Option
Some Tricks of the Trade / Mistakes People Make in
Using the Weighted-Average Formula / Adjusting
WACC When Debt Ratios and Business Risks Differ /
Unlevering and Relevering Betas / The Importance of
Rebalancing / The Modigliani-Miller Formula, Plus
Some Final Advice
19.4 Adjusted Present Value
21.2 The Binomial Method for Valuing Options
523
APV for the Perpetual Crusher / Other Financing Side
Effects / APV for Businesses / APV for International
Investments
19.5 Your Questions Answered
Summary
527
Further Reading
21.4 Black–Scholes in Action
21.5 Option Values at a Glance
Summary
534
587
Further Reading
591
Concept Review Questions
539
Quiz
Part Six
OPTIONS
Chapter
541
20
542
544
548
REAL OPTIONS
Questions and Answers about Blitzen’s Mark II /
Other Expansion Options
22.2 The Timing Option
22.3 The Abandonment Option
560
561
561
561
Practice Questions
22.4 Flexible Production—and Another Look at
Aircraft Purchase Options 612
Another Look at Aircraft Purchase Options
562
Challenge Questions
607
The Zircon Subductor Project / Abandonment Value
and Project Life / Temporary Abandonment
Concept Review Questions
Quiz
604
Valuing the Malted Herring Option / Optimal Timing
for Real Estate Development
554
Risk and Option Values
598
22.1 The Value of Follow-on Investment
Opportunities 599
Spotting the Option
20.3 What Determines Option Values?
595
22
Chapter
20.2 Financial Alchemy with Options
Further Reading
594
Mini-case: Bruce Honiball’s Invention
Call Options and Position Diagrams / Put Options /
Selling Calls, Puts, and Shares / Position Diagrams
Are Not Profit Diagrams
Summary
592
Challenge Questions
UNDERSTANDING OPTIONS
591
591
Practice Questions
20.1 Calls, Puts, and Shares
584
Appendix: How Dilution Affects Option Value 587
536
Challenge Questions
581
Executive Stock Options / Warrants / Portfolio
Insurance / Calculating Implied Volatilities
535
Practice Questions
577
Using the Black–Scholes Formula / The Black–Scholes
Formula and the Binomial Method
534
Concept Review Questions
Quiz
21.3 The Black–Scholes Formula
529
Appendix: Discounting Safe, Nominal Cash
Flows 531
572
Example: The Two-Stage Binomial Method / The
General Binomial Method / The Binomial Method and
Decision Trees
22.5 A Conceptual Problem?
564
616
Practical Challenges
Chapter
21
VALUING OPTIONS
Summary
617
Further Reading
566
618
Concept Review Questions
21.1 A Simple Option-Valuation Model 567
xxiii
619
CONTENTS
Quiz
619
Further Reading
Practice Questions
619
Challenge Questions
668
Concept Review Questions
621
Quiz
Practice Questions
DEBT FINANCING
Chapter
625
VALUING GOVERNMENT BONDS
23.2 Term Structure and Yields to Maturity
25.2 The Bond Contract
Indenture, or Trust Deed / The Bond Terms
25.4 Repayment Provisions
676
Sinking Funds / Call Provisions
23.3 How Interest Rate Changes Affect
Bond Prices 634
25.5 Debt Covenants
679
25.6 Convertible Bonds and Warrants
Duration and Bond Volatility / Managing Interest
Rate Risk / A Cautionary Note
638
643
25.7 Private Placements and Project Finance
644
Concept Review Questions
645
25.8 Innovation in the Bond Market
646
Challenge Questions
Summary
648
693
Further Reading
694
Concept Review Questions
Chapter
24
Quiz
CREDIT RISK
650
Practice Questions
24.2 Bond Ratings and the Probability
of Default 658
667
665
697
Chapter
661
LEASING
Credit Scoring / Market-Based Risk Models
Summary
695
Mini-case: The Shocking Demise
of Mr. Thorndike 698
The Difference Between Safe and Risky Debt /
Valuing the Default Option / Valuing Government
Loan Guarantees
24.4 Value at Risk
694
694
Challenge Questions
24.1 The Value of Corporate Debt 650
24.3 Predicting the Probability of Default
687
Project Finance / Project Finance—Some Common
Features / The Role of Project Finance
645
Practice Questions
681
What Is a Convertible Bond? / The Value of a
Convertible at Maturity / Forcing Conversion /
Why Do Companies Issue Convertibles? / Valuing
Convertible Bonds / Some Variations on Convertible
Bonds: Compulsorily Convertible Bonds (Debentures)
and Reverse Convertibles / A Third Variation on
Convertible Bonds: The Bond-Warrant Package
The Expectations Theory / The Liquidity-Preference
Theory / Introducing Inflation / Relationships between
Bond Returns
Quiz
674
Asset-Backed Securities
631
644
672
25.3 Security and Seniority
Yield to Maturity / Measuring the Term Structure
Web Exercise
670
25.1 Domestic Bonds, Foreign Bonds,
and Eurobonds 672
626
Indexed Bonds and the Real Rate of Interest / Inflation
and Nominal Interest Rates / How Well Does Fisher’s
Theory Explain Interest Rates?
Further Reading
25
Chapter
23.1 Real and Nominal Rates of Interest 628
Summary
669
THE MANY DIFFERENT KINDS OF DEBT
23
23.4 Explaining the Term Structure
669
Challenge Questions
Part Seven
668
668
26.1 What is a Lease?
26.2 Why Lease?
xxiv
702
701
26
700
691
CONTENTS
Concept Review Questions
Sensible Reasons for Leasing / Some Dubious Reasons
for Leasing
26.3 Operating Leases
Quiz
705
26.4 Valuing Financial Leases
MANAGING INTERNATIONAL RISKS
28.1 The Foreign Exchange Market
28.2 Some Basic Relationships
716
717
718
Challenge Questions
28.3 Hedging Currency Risk
719
RISK MANAGEMENT
721
More about the Cost of Capital
Summary
722
774
776
Further Reading
723
Web Exercise
Reducing the Risk of Cash Shortfalls or Financial
Distress / Agency Costs May Be Mitigated by Risk
Management / The Evidence on Risk Management
27.2 Insurance
767
28.4 Exchange Risk and International Investment
Decisions 771
28.5 Political Risk
27
MANAGING RISK
27.1 Why Manage Risk?
757
759
Transaction Exposure and Economic Exposure /
Currency Speculation
Part Eight
Chapter
756
Interest Rates and Exchange Rates / The Forward
Premium and Changes in Spot Rates / Changes in the
Exchange Rate and Inflation Rates / Interest Rates and
Inflation Rates / Is Life Really That Simple? Interest
Rate Parity in India
716
Practice Questions
28
Chapter
715
Concept Review Questions
Quiz
755
708
26.5 When Do Financial Leases Pay? 714
Further Reading
751
Challenge Questions
Example of a Financial Lease / Who Really Owns the
Leased Asset? / Leasing and the Internal Revenue
Service / A First Pass at Valuing a Lease Contract /
The Story So Far
Summary
750
Practice Questions
Example of an Operating Lease / Lease or Buy?
749
777
778
Concept Review Questions
Quiz
778
Practice Questions
726
How British Petroleum (BP) Changed Its Insurance
Strategy
778
779
Challenge Questions
781
Mini-case: Exacta, s.a.
782
27.3 Forward and Futures Contracts 729
A Simple Forward Contract / Futures Exchanges /
The Mechanics of Futures Trading / Trading and
Pricing Financial Futures Contracts / Spot and
Futures Prices—Commodities / More about Forward
Contracts / Homemade Forward Rate Contracts
27.4 Swaps
Part Nine
FINANCIAL PLANNING AND
THE MANAGEMENT OF
WORKING CAPITAL 785
737
Interest Rate Swaps / Currency Swaps / Credit
Derivatives
27.5 How to Set Up a Hedge
Using Theory to Set Up the Hedge: An Example /
Options, Deltas, and Betas
27.6 Is “Derivative” a Four-Letter Word?
Summary
Chapter
741
745
FINANCIAL ANALYSIS AND PLANNING
29.1 Financial Statements
786
787
29.2 ACC’s Financial Statements
748
Further Reading
29
788
The Balance Sheet / The Profit and Loss Account /
Sources and Uses of Funds
749
xxv
CONTENTS
29.3 Measuring ACC’s Financial Condition
783
How Much Has ACC’s Borrowed? / How Liquid Is
ACC’s? / How Productively Is ACC’s Using Its
Assets? / How Profitable Is ACC’s? / How Highly Is
ACC’s Valued by Investors? / The Dupont System
29.4 Financial Planning
801
29.5 Financial Planning Models 802
Pitfalls in Model Design / There Is No Finance in
Financial Planning Models
29.6 Growth and External Financing
Summary
Further Reading
Web Exercises
807
808
Concept Review Questions
Quiz
805
806
808
808
Practice Questions
811
Challenge Questions
815
Chapter
31.2 Tracing Changes in Cash and Working Capital 845
Tracing Changes in Net Working Capital / Profits and
Cash Flow
31.3 Cash Budgeting 851
Preparing the Cash Budget: Inflow / Preparing the
Cash Budget: Outflow
31.4 The Short-Term Financing Plan 854
Options for Short-Term Financing / Dynamic’s
Financing Plan / Evaluating the Plan / A Note on
Short-Term Financial Planning Models
31.5 Sources of Short-Term Borrowing 858
Bank Loans / Commercial Paper /
Summary 863
Further Reading 864
Concept Review Questions 864
Quiz 864
Practice Questions 866
Challenge Questions 868
30
WORKING CAPITAL MANAGEMENT
P a r t Te n
816
MERGERS, CORPORATE
CONTROL, AND
GOVERNANCE 871
30.1 Credit Management 818
Terms of Sale / The Promise to Pay / Credit Analysis /
The Credit Decision / Collection Policy
30.2 Inventory Management 825
30.3 Cash
Chapter
825
Using Cash Efficiently / Electronic Funds Transfer /
International Cash Management / Paying for Bank
Services
30.4 Marketable Securities
830
Calculating the Yield on Money-Market Investments /
Yields on Money-Market Investments / The
International Money Market / Money-Market
Instruments
Summary
834
Further Reading
Web Exercises
835
836
Concept Review Questions
Quiz
836
836
Practice Questions
838
Challenge Questions
840
Chapter
31
SHORT-TERM FINANCIAL PLANNING
842
MERGERS
32
872
32.1 Sensible Motives for Mergers 873
Economies of Scale / Economies of Vertical Integration
/ Complementary Resources / Surplus Funds /
Eliminating Inefficiencies / Industry Consolidation
32.2 Some Dubious Reasons for Mergers 880
To Diversify / Increasing Earnings per Share: The
Bootstrap Game / Lower Financing Costs
32.3 Estimating Merger Gains and Costs 883
Right and Wrong Ways to Estimate the Benefits of
Mergers / More on Estimating Costs—What If the
Target’s Stock Price Anticipates the Merger? /
Estimating Cost When the Merger Is Financed by
Stock / Asymmetric Information
32.4 The Mechanics of a Merger 888
Mergers and Competitive Act / The Form of
Acquisition / Merger Accounting / Some Tax
Considerations
32.5 Takeover Battles and Tactics 892
Boone Pickens Tries to Take Over Cities Service, Gulf
Oil, and Phillips Petroleum / Takeover Defenses /
AlliedSignal vs. AMP / Who Gains Most in Mergers?
31.1 Links between Long-Term and Short-Term
Financing Decisions 843
xxvi
CONTENTS
32.6 Mergers and the Economy
34.3 Do These Differences Matter?
899
Risk and Short-termism / Growth Industries and
Declining Industries / Transparency and Governance
Merger Waves / Do Mergers Generate Net Benefits?
Summary
900
Appendix: Conglomerate Mergers and Value
Additivity 901
Summary
Further Reading
Concept Review Questions
Quiz
Quiz
904
906
Chapter
33
CONCLUSION
Chapter
33.2 Fusion and Fission in Corporate Finance
914
35.1 What We Do Know: The Seven Most Important
Ideas in Finance 963
Spin-offs / Carve-outs / Asset Sales Demerger /
Privatization
1. Net Present Value / 2. The Capital Asset Pricing
Model / 3. Efficient Capital Markets / 4. Value
Additivity and the Law of Conservation of Value / 5.
Capital Structure Theory / 6. Option Theory / 7.
Agency Theory
919
Group Diversification in India / Fifteen Years after
Reading This Chapter / Financial Architecture of
Traditional U.S. Conglomerates / Temporary
Conglomerates
35.2 What We Do Not Know: 10 Unsolved Problems
in Finance 966
925
1. What Determines Project Risk and Present Value? /
2. Risk and Return—What Have We Missed? / 3. How
Important Are the Exceptions to the Efficient-Market
Theory? / 4. Is Management an Off-Balance-Sheet
Liability? / 5. How Can We Explain the Success of
New Securities and New Markets? / 6. How Can We
Resolve the Payout Controversy? / 7. What Risks
Should a Firm Take? / 8. What Is the Value of
Liquidity? / 9. How Can We Explain Merger Waves? /
10. How Can We Explain International Differences in
Financial Architecture?
Is Chapter 11 Efficient? / Workouts / Alternative
Bankruptcy Procedures Benkruptcy Regulations in
India
Quiz
931
932
933
933
Practice Questions
934
Chapter
34
35.3 A Final Word
GOVERNANCE AND CORPORATE CONTROL
AROUND THE WORLD 936
34.1 Financial Markets and Institutions
973
Appendix A: Present Value Tables
Appendix B: Answers to Quizzes
937
974
980
Some Useful Indian Websites 1000
Investor Protection and the Development of Financial
Markets
34.2 Ownership, Control, and Governance
35
CONCLUSION: WHAT WE DO AND DO NOT KNOW
ABOUT FINANCE 962
RJR Nabisco / Barbarians at the Gate? / Leveraged
Restructurings / LBOs and Leveraged Restructurings
Concept Review Questions
961
908
33.1 Leveraged Buyouts 909
Further Reading
958
Part Eleven
CORPORATE RESTRUCTURING
33.3 Conglomerates
958
958
905
Challenge Questions
Summary
957
Practice Questions
904
Practice Questions
33.4 Bankruptcy
956
Further Reading
903
Concept Review Questions
952
Glossary
Index
942
Ownership and Control in India / Ownership and
Control in Japan / Ownership and Control in Germany
/ European Boards of Directors / Ownorship and
Control in Other Countries / Conglomerates Revisited
1002
1018
Some Useful Websites
1037
Some Commonly Used Symbols
Some Useful Formulas
xxvii
1039
1038