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Corporate Finance Textbook: Valuation & Capital Budgeting
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Corporate Finance TENTH EDITION Stephen A. Ross Sloan School of Management Massachusetts Institute ofTechnology Randolph W. Westerfield Marshall School of Business University of Southern California Jeffrey Jaffe Wharton School of Business University of Pennsylvania McGraw-Hill Irwin Contents 2.4 2.5 2.6 CHAPTER I Introduction to Corporate Finance I. I 1.2 1.3 1.4 1.5 1.6 W h a t Is Corporate Finance? The Balance Sheet Model of the Firm The Financial Manager The Corporate Firm The Sole Proprietorship The Partnership The Corporation A Corporation by Another Name ... The Importance of Cash Flows The Goal of Financial Management Possible Goals The Goal of Financial Management A More General Goal The Agency Problem and Control of the Corporation Agency Relationships Management Goals Do Managers Act in the Stockholders' Interests? Stakeholders Regulation The Securities Act of 1933 and the Securities Exchange Act of 1934 Sarbanes-Oxley Summary and Conclusions Concept Questions I I 3 4 4 4 5 7 8 II II 12 12 2.7 Financial Statements Analysis and Financial Models 3.1 1J 1 1Ti 3.2 1 r 10 \k 1O 1 A 1 D 1 —f \1 1 0Q 1 3.3 1 1 0Q 3.4 - CHAPTER 2 Financial Statements and Cash Flow •%(% 2.1 20 21 22 22 23 24 2.2 2.3 The Balance Sheet Liquidity Debt versus Equity Value versus Cost The Income Statement Generally Accepted Accounting Principles Noncash Items Time and Costs Taxes Corporate Tax Rates Average versus Marginal Tax Rates XXVI 3.5 25 25 26 26 26 28 29 32 32 33 33 34 35 36 36 41 42 CHAPTER 3 17 1 1 "35 1 1A T- N e t w o r k i n g Capital Financial Cash Flow The Accounting Statement of Cash Flows Cash Flow from Operating Activities Cash Flow from Investing Activities Cash Flow from Financing Activities Cash Flow Management Summary and Conclusions Concept Questions Questions and Problems Excel Master It! Mini Case: Cash Flows at Warf Computers, Inc. 3.6 Financial Statements Analysis Standardizing Statements Common-Size Balance Sheets Common-Size Income Statements Ratio Analysis Short-Term Solvency or Liquidity Measures Long-Term Solvency Measures Asset Management orTurnover Measures Profitability Measures Market Value Measures The DuPont Identity A Closer Look at ROE Problems with Financial Statement Analysis Financial Models A Simple Financial Planning Model The Percentage of Sales Approach External Financing and Growth EFN and Growth Financial Policy and Growth A Note about Sustainable Growth Rate Calculations Some Caveats Regarding Financial Planning Models Summary and Conclusions Concept Questions Questions and Problems Excel Master It! Mini Case: Ratios and Financial Planning at East Coast Yachts 44 44 44 45 46 48 49 50 52 54 55 58 58 60 61 61 63 67 68 70 74 75 76 76 78 83 84 PART II Valuation and Capital Budgeting CHAPTER 4 5.6 Discounted Cash Flow Valuation 87 4.1 4.2 Valuation: The One-Period Case The Multiperiod Case 87 91 Future Value and Compounding The Power of Compounding: A Digression Present Value and Discounting Finding the Number of Periods The Algebraic Formula Compounding Periods Distinction between Stated Annual Interest Rate and Effective Annual Rate Compounding over Many Years Continuous Compounding Simplifications Perpetuity Growing Perpetuity Annuity Growing Annuity Loan Amortization W h a t Is a Firm Worth? . Summary and Conclusions , Concept Questions , Questions and Problems Excel Master It! Mini Case:The MBA Decision 91 94 95 98 101 102 5.7 4.3 4.4 4.5 4.6 Appendix 4A: Net Present Value: First Principles of Finance Appendix 4B: Using Financial Calculators 103 104 104 106 106 108 109 I 15 116 120 122 123 123 133 134 Making Capital Investment Decisions 6.1 6.2 6.3 134 134 6.4 5.1 5.2 Why Use Net Present Value? The Payback Period Method Defining the Rule Problems with the Payback Method Managerial Perspective Summary of Payback 5.3 5.4 5.5 The Discounted Payback Period 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 135 135 138 138 139 140 141 141 141 145 145 145 149 154 154 155 155 157 159 160 162 169 170 CHAPTER 6 CHAPTER 5 Net Present Value and Other Investment Rules Problems Specific to Mutually Exclusive Projects Redeeming Qualities of IRR A Test T h e Profitability Index Calculation of Profitability Index T h e Practice of Capital Budgeting Summary and Conclusions Concept Questions ' Questions and Problems Excel Master It! Mini Case: Bullock Gold Mining 6.5 171 Incremental Cash Flows: The Key to Capital Budgeting 171 Cash Flows—Not Accounting Income Sunk Costs Opportunity Costs Side Effects Allocated Costs T h e Baldwin Company: A n Example An Analysis of the Project Which Set of Books? A Note about Net Working Capital A Note about Depreciation Interest Expense 171 172 172 173 173 174 176 179 179 180 181 Inflation and Capital Budgeting Interest Rates and Inflation Cash Flow and Inflation Discounting: Nominal or Real? Alternative Definitions of Operating Cash Flow The Top-Down Approach The Bottom-Up Approach The Tax Shield Approach Conclusion ' Some Special Cases of Discounted Cash Flow Analysis Evaluating Cost-Cutting Proposals ' Setting the Bid Price Investments of Unequal Lives: The Equivalent . Annual Cost Method Summary and Conclusions Concept Questions Questions and Problems Excel Master It! Mini Cases: Bethesda Mining Company GoodweekTires, Inc. 181 181 183 184 186 187 187 188 189 189 189 191 193 195 195 197 205 206 206 XXVll Concept Questions Questions and Problems Excel Master It! Mini Case: Financing East Coast Yachts's Expansion Plans with a Bond Issue CHAPTER 7 Risk Analysis, Real Options, and Capital Budgeting 7.1 7.2 7.3 7.4 208 Sensitivity Analysis, Scenario Analysis, and Break-Even Analysis Sensitivity Analysis and Scenario Analysis Break-Even Analysis Monte Carlo Simulation Step I: Specify the Basic Model Step 2: Specify a Distribution for Each Variable in the Model Step 3:The Computer Draws One Outcome Step 4: Repeat the Procedure Step 5: Calculate NPV Real Options The Option to Expand The Option to Abandon Timing Options Decision Trees Summary and Conclusions Concept Questions Questions and Problems Excel Master It! Mini Case: Bunyan Lumber; LLC 208 208 212 216 216 216 219 219 220 220 221 222 224 225 227 228 228 235 236 CHAPTER 8 Interest Rates and Bond Valuation 8.1 238 Bonds and Bond Valuation 238 Bond Features and Prices 238 Bond Values and Yields 239 Interest Rate Risk 242 Finding the Yield to Maturity: More Trial and Error 244 Zero Coupon Bonds 246 8.2 Government and Corporate Bonds 248 Government Bonds 248 Corporate Bonds 249 Bond Ratings 251 8.3 Bond Markets 252 How Bonds Are Bought and Sold 252 Bond Price Reporting 253 A Note on Bond Price Quotes 256 8.4 Inflation and Interest Rates 257 Real versus Nominal Rates 257 Inflation Risk and Inflation-Linked Bonds 258 The Fisher Effect 259 8.5 Determinants of Bond Yields 261 The Term Structure of Interest Rates 261 . Bond Yields and the Yield Curve: Putting It All Together 264 Conclusion 265 Summary and Conclusions 265 XXVUl 265 267 270 271 CHAPTER 9 Stock Valuation 9.1 9.2 9.3 9.4 9.5 9.6 The Present Value of C o m m o n Stocks Dividends 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 Skepticism Dividends or Earnings: Which to Discount? The No-Dividend Firm Growth Opportunities NPVGOs of Real-World Companies Growth in Earnings and Dividends • versus Growth Opportunities Comparables Price-to-Earnings Ratio Enterprise Value Ratios Valuing the Entire Firm The Stock Markets Dealers and Brokers Organization of the NYSE NASDAQ Operations Stock Market Reporting Summary and Conclusions Concept Questions Questions and Problems Excel Master It! Mini Case: Stock Valuation at Ragan Engines CHAPTER 273 273 273 274 278 278 280 281 282 282 283 285 286 287 287 290 291 292 293 293 295 297 297 298 299 303 304 10 Risk and Return: Lessons from Market History 10.1 Returns Dollar Returns Percentage Returns 10.2 Holding Period Returns 306 306 10.3 Return Statistics 306 308 310 313 10.4 Average Stock Returns and Risk-Free Returns 317 10.5 Risk Statistics Variance Normal Distribution and Its Implications for Standard Deviation 10.6 More on Average Returns Arithmetic versus Geometric Averages Calculating Geometric Average Returns Arithmetic Average Return or Geometric Average Return? 10.7 The U.S. Equity Risk Premium: Historical and International Perspectives 10.8 2008: A Year of Financial Crisis Summary and Conclusions Concept Questions Questions and Problems Excel Master It! Mini Case: A Job at East Coast Yachts 317 318 320 321 321 322 Appendix 11 A: Is Beta Dead? CHAPTER 323 324 327 328 328 329 332 332 CHAPTER 11 Return and Risk: The Capital Asset Pricing Model (CAPM) 335 I I.I Individual Securities 11.2 Expected Return,Variance, and Covariance Expected Return and Variance Covariance and Correlation 11.3 The Return and Risk for Portfolios The Expected Return on a Portfolio Variance and Standard Deviation of a Portfolio 11.4 The Efficient Set for Two Assets 11.5 The Efficient Set for Many Securities Variance and Standard Deviation in a Portfolio of Many Assets 11.6 Diversification The Anticipated and Unanticipated Components of News Risk: Systematic and Unsystematic The Essence of Diversification 11.7 Riskless Borrowing and Lending The Optimal Portfolio 11.8 Market Equilibrium Definition of the Market Equilibrium Portfolio Definition of Risk When Investors Hold the Market Portfolio The Formula for Beta A Test 335 11.9 Relationship between Risk and Expected Return ( C A P M ) Expected Return on Market Expected Return on Individual Security Summary and Conclusions Concept Questions Questions and Problems Excel Master It! Mini Case: A Job at East Coast Yachts, Part 2 336 336 338 341 341 342 345 350 351 353 353 353 354 356 358 359 359 360 362 363 363 363 364 367 368 369 375 376 377 12 An Alternative View of Risk and Return: The Arbitrage Pricing Theory 378 12.1 Introduction 12.2 Systematic Risk and Betas 12.3 Portfolios and Factor Models Portfolios and Diversification 12.4 Betas,Arbitrage, and Expected Returns The Linear Relationship The Market Portfolio and the Single Factor 12.5 The Capital Asset Pricing Model and the Arbitrage Pricing Theory Differences in Pedagogy Differences in Application 12.6 Empirical Approaches to Asset Pricing Empirical Models Style Portfolios Summary and Conclusions • Concept Questions Questions and Problems Excel Master It! Mini Case:The Fama-French Multifactor Model and Mutual Fund Returns 378 378 381 383 386 386 387 388 388 388 390 390 391 393 393 394 398 399 CHAPTER 13 Risk, Cost of Capital, and Valuation 400 13.1 The Cost of Capital 13.2 Estimating the Cost of Equity Capital with the CAPM The Risk-Free Rate Market Risk Premium 13.3 Estimation of Beta Real-World Betas Stability of Beta Using an Industry Beta 13.4 Determinants of Beta Cyclically of Revenues Operating Leverage Financial Leverage and Beta 400 13.5 The Dividend Discount Model Approach Comparison of DDM and CAPM 13.6 Cost of Capital for Divisions and Projects 13.7 Cost of Fixed Income Securities Cost of Debt Cost of Preferred Stock 401 404 404 405 406 406 407 409 409 410 410 411 412 413 415 415 416 XXIX 13.8 The Weighted Average Cost of Capital 13.9 Valuation with RWACC 417 418 Project Evaluation and the RWACC 418 Firm Valuation with the RWACC 419 13.10 Estimating Eastman Chemical's Cost of Capital 13.11 Flotation Costs and the Weighted Average Cost of Capital The Basic Approach Flotation Costs and NPV Internal Equity and Flotation Costs Summary and Conclusions Concept Questions Questions and Problems Mini Case:The Cost of Capital for Goff Computer, Inc. 422 424 424 425 426 426 427 428 433 Appendix 13 A: Economic Value Added and the Measurement of Financial Performance 334 C H A P T E R 15 Long-Term Financing: An Introduction 474 15.1 Some Features of C o m m o n and Preferred Stocks Common Stock Features Preferred Stock Features 15.2 Corporate Long-Term Debt Is It Debt or Equity? Long-Term Debt:The Basics The Indenture 15.3 Some Different Types of Bonds Floating-Rate Bonds Other Types of Bonds 15.4 Bank Loans 15.5 International Bonds 15.6 Patterns of Financing 15.7 Recent Trends in Capital Structure Which Are Best: Book or Market Values? Summary and Conclusions Concept Questions Questions and Problems 474 474 477 478 479 479 481 484 484 484 485 486 486 488 489 490 490 491 C H A P T E R 16 C H A P T E R 14 Efficient Capital Markets and Behavioral Challenges Capital Structure: Basic Concepts / 13c 14.1 Can Financing Decisions Create Value? 435 14.2 A Description of Efficient Capital Markets 437 439 Foundations of Market Efficiency 14.3 The Different Types of Efficiency 440 The Weak Form 440 The Semistrong and Strong Forms 442 Some Common Misconceptions about the Efficient Market Hypothesis 443 14.4 The Evidence 444 • The Weak Form 444 The Semistrong Form 446 The Strong Form 450 14.5 The Behavioral Challenge to Market Efficiency 450 14.6 Empirical Challenges t o Market Efficiency 452 14.7 Reviewing the Differences 458 14.8 Implications for Corporate Finance 459 I. Accounting Choices, Financial Choices, and Market Efficiency 460 2,The Timing Decision 461 3. Speculation and Efficient Markets 462 464 4. Information in Market Prices Summary and Conclusions 466 Concept Questions 467 Questions and Problems 471 Mini Case: Your 401 (k) Account at East Coast Yachts 472 XXX 16.1 The Capital Structure Question and the Pie Theory 16.2 Maximizing Firm Value versus Maximizing Stockholder Interests 16.3 Financial Leverage and Firm Value: A n Example Leverage and Returns to Shareholders The Choice between Debt and Equity A Key Assumption 16.4 Modigliani and Miller: Proposition II ( N o Taxes) Risk to Equityholders Rises with Leverage Proposition II: Required Return to Equityholders Rises with Leverage MM: An Interpretation 16.5 Taxes The Basic Insight Present Value of the Tax Shield Value of the Levered Firm Expected Return and Leverage under Corporate Taxes The Weighted Average Cost of Capital, RVJN-C and Corporate Taxes Stock Price and Leverage under Corporate Taxes Summary and Conclusions Concept Questions Questions and Problems Mini Case: Stephenson Real Estate Recapitalization 494 494 495 497 497 499 501 501 501 502 508 510 510 512 512 514 516 517 519 519 520 525 CHAPTER 17 Capital Structure: Limits to the Use of Debt 526 17.1 Costs of Financial Distress 526 Bankruptcy Risk or Bankruptcy Cost? 526 17.2 Description of Financial Distress Costs 528 Direct Costs of Financial Distress: Legal and Administrative Costs of Liquidation or Reorganization 528 Indirect Costs of Financial Distress 530 Agency Costs 531 17.3 Can Costs of Debt Be Reduced? 534 Protective Covenants 534 Consolidation of Debt 535 17.4 Integration of Tax Effects and Financial Distress Costs 536 Pie Again 537 17.5 Signaling 538 17.6 Shirking, Perquisites, and Bad Investments: A Note on Agency Cost of Equity 540 Effect of Agency Costs of Equity on Debt-Equity Financing 542 Free Cash Flow 542 17.7 The Pecking-Order Theory 543 Rules of the Pecking Order 544 Implications 545 17.8 Personal Taxes ' 546 The Basics of Personal Taxes 546 The Effect of Personal Taxes on Capital Structure 546 17.9 How Firms Establish Capital Structure 548 Summary and Conclusions 553 Concept Questions 553 Questions and Problems 554 Mini Case: McKenzie Corporation's Capital Budgeting 557 Appendix 17A: Some Useful Formulas of Financial Structure 558 Appendix l7B:The Miller Model and the Graduated Income Tax 558 CHAPTER 18 Valuation and Capital Budgeting for the Levered Firm 18.1 Adjusted Present Value Approach 18.2 Flow to Equity Approach Step I: Calculating Levered Cash Flow (LCF) Step 2: Calculating Rs Step 3:Valuation 18.3 Weighted Average Cost of Capital Method 18.4 A Comparison of the APV, FTE, and W A C C Approaches A Suggested Guideline 559 559 561 561 562 562 562 563 564 18.5 Valuation W h e n the Discount Rate Must Be Estimated 18.6 A P V Example 18.7 Beta and Leverage The Project Is Not Scale Enhancing Summary and Conclusions Concept Questions Questions and Problems Mini Case:The Leveraged Buyout of Cheek Products, Inc. 566 568 571 573 574 574 575 579 Appendix 18A: The Adjusted Present Value Approach to Valuing Leveraged Buyouts 580 CHAPTER 19 Dividends and Other Payouts 581 19.1 Different Types of Payouts 19.2 Standard Method of Cash Dividend Payment 19.3 The Benchmark Case: A n 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 PropositionHomemade Dividends A Test Dividends and Investment Policy 19.4 Repurchase of Stock Dividend versus Repurchase: Conceptual Example Dividends versus Repurchases: Real-World Considerations 19.5 Personal Taxes, Dividends, and Stock Repurchases Firms without Sufficient Cash to Pay a Dividend Firms with Sufficient Cash to Pay a Dividend Summary of Personal Taxes 19.6 Real-World Factors Favoring a High-Dividend Policy Desire for Current Income Behavioral Finance Agency Costs Information Content of Dividends and Dividend Signaling 19.7 The Clientele Effect: A Resolution of Real-World Factors? 19.8 W h a t W e Know and Do Not Know about Dividend Policy Corporate Dividends Are Substantial Fewer Companies Pay Dividends Corporations Smooth Dividends Some Survey Evidence about Dividends 19.9 Putting It All Together 581 581 584 584 584 585 585 586 587 587 589 590 591 591 592 595 595 595 596 597 598 600 602 602 603 604 605 607 xxxi 19.10 Stock Dividends and Stock Splits Some Details about Stock Splits and Stock Dividends Value of Stock Splits and Stock Dividends Reverse Splits Summary and Conclusions Concept Questions Questions and Problems Mini Case: Electronic Timing, Inc. 609 Leasing 609 61 I 21.1 Types of Leases 612 The Basics 613 Operating Leases 613 Financial Leases 615 21.2 Accounting and Leasing 619 21.3 Taxes, the IRS, and Leases CHAPTER 20 Raising Capital 621 20.1 Early-Stage Financing and Venture Capital Venture Capital Stages of Financing Some Venture Capital Realities Venture Capital Investments and Economic Conditions 20.2 The Public Issue 20.3 Alternative Issue Methods 20.4 The Cash Offer Investment Banks The Offering Price Underpricing: A Possible Explanation 20.5 The Announcement of New Equity and the Value of the Firm 20.6 The Cost of New Issues The Costs of Going Public: A Case Study 20.7 Rights The Mechanics of a Rights Offering Subscription Price Number of Rights Needed to Purchase a Share Effect of Rights Offering on Price of Stock Effects on Shareholders The Underwriting Arrangements 20.8 The Rights Puzzle 20.9 Dilution Dilution of Proportionate Ownership Stock Price Dilution BookValue Earnings Per Share Conclusion 20.10 Shelf Registration 20.11 Issuing Long-Term Debt Summary and Conclusions Concept Questions Questions and Problems Mini Case: East Coast Yachts Goes Public 621 622 623 624 XXXll CHAPTER 21 625 625 626 628 631 632 633 635 636 637 639 639 21.4 The Cash Flows of Leasing 21.5 A Detour for Discounting and Debt Capacity with Corporate Taxes Present Value of Riskless Cash Flows Optimal Debt Level and Riskless Cash Flows 21.6 N P V Analysis of the Lease-versus-Buy Decision The Discount Rate 21.7 Debt Displacement and Lease Valuation The Basic Concept of Debt Displacement Optimal Debt Level in the Xomox Example 21.8 Does Leasing Ever Pay? The Base Case 21.9 Reasons for Leasing Good Reasons for Leasing Bad Reasons for Leasing 21.10i Some Unanswered Questions Are the Uses of Leases and Debt Complementary? Why Are Leases Offered by Both Manufacturers and Third-Party Lessors? Why Are Some Assets Leased More Than Others? Summary and Conclusions Concept Questions Questions and Problems Mini Case:The Decision to Lease or Buy at Warf Computers 641 641 642 643 644 644 Appendix 21 A: APV Approach to Leasing 645 645 646 647 647 647 648 649 649 652 654 CHAPTER 22 656 656 656 656 657 658 660 661 663 663 664 665 665 666 666 667 669 670 670 673 674 674 674 675 675 676 677 679 680 PAIRT ¥1 Options, Futures, ami Corporate Finance Options and Corporate Finance 681 22.1 Options 22.2 Call Options The Value of a Call Option at Expiration 22.3 Put Options The Value of a Put Option at Expiration 22.4 Selling Options 22.5 Option Quotes 22.6 Combinations of Options 681 682 682 683 683 685 686 687 22.7 Valuing Options Bounding the Value of a Call The Factors Determining Call Option Values A Quick Discussion of Factors Determining Put Option Values 22.8 An Option Pricing Formula A Two-State Option Model The Black-Scholes Model 22.9 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 about Loan Guarantees 22.10 Options and Corporate Decisions: Some Applications Mergers and Diversification Options and Capital Budgeting 22.11 Investment in Real Projects and Options Summary and Conclusions Concept Questions Questions and Problems Excel Master It! Mini Case: Clissold Industries Options CHAPTER 23 690 690 692 695 695 696 698 703 704 705 706 707 708 708 710 712 715 715 716 723 724 24.4 Convertible Bonds 24.5 The Value of Convertible Bonds Straight Bond Value Conversion Value Option Value 24.6 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 24.7 W h y Are Warrants and Convertibles Issued? Matching Cash Flows Risk Synergy Agency Costs Backdoor Equity 24.8 Conversion Policy Summary and Conclusions Concept Questions Questions and Problems Mini Case: S&S Air's Convertible Bond 757 758 758 758 759 761 761 761 762 763 763 764 764 764 765 765 765 767 767 768 770 : Options and Corporate Finance: Extensions and Applications < C H A P T E R 25 726 23.1 Executive Stock Options 726 Why Options? 726 Valuing Executive Compensation 727 23.2 Valuing a Start-Up 730 23.3 More about the Binomial Model 733 Heating Oil 734 23.4 Shutdown and Reopening Decisions 740 Valuing a Gold Mine 740 The Abandonment and Opening Decisions 741 Valuing the Simple Gold Mine 742 Summary and Conclusions 747 Concept Questions 747 Questions and Problems 748 Mini Case: Exotic Cuisines' Employee Stock Options 750 CHAPTER 24 Warrants and Convertibles 751 24.1 Warrants 24.2 The Difference between Warrants and Call Options How the Firm Can Hurt Warrant Holders 24.3 Warrant Pricing and the Black-Scholes Model 751 752 755 755 Derivatives and Hedging Risk 772 25.1 25.2 25.3 25.4 25.5 772 773 774 778 780 780 781 782 783 787 787 Derivatives, Hedging, and Risk Forward Contracts Futures Contracts Hedging Interest Rate Futures Contracts Pricing ofTreasury Bonds Pricing of Forward Contracts Futures Contracts Hedging in Interest Rate Futures 25.6 Duration Hedging The Case of Zero Coupon Bonds The Case ofTwo Bonds with the Same Maturity but with Different Coupons Duration Matching Liabilities with Assets 25.7 Swaps Contracts . Interest Rate Swaps Currency Swaps Credit Default Swaps (CDS) Exotics 25.8 Actual Use of Derivatives Summary and Conclusions Concept Questions Questions and Problems Mini Case:Williamson Mortgage, Inc. 788 789 791 793 794 795 796 796 797 799 799 801 803 XXXUl CHAPTER 26 Short-Term Finance and Planning 804 26.1 Tracing Cash and Networking Capital 26.2 The Operating Cycle and the Cash Cycle Defining the Operating and Cash Cycles The Operating Cycle and the Firm's Organization Chart Calculating the Operating and Cash Cycles Interpreting the Cash Cycle A Look at Operating and Cash Cycles 26.3 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? 26.4 Cash Budgeting Cash Outflow The Cash Balance 26.5 The Short-Term Financial Plan Unsecured Loans Secured Loans Other Sources . Summary and Conclusions Concept Questions Questions and Problems ' Excel Master It! Mini Case: Keafer Manufacturing Working 805 806 807 Capital Management 809 809 812 812 813 814 815 818 819 820 821 821 821 822 822 823 823 824 832 833 CHAPTER 27 Cash Management 834 27.1 Reasons for Holding Cash 834 • 834 835 835 835 835 836 836 837 838 The Speculative and Precautionary Motives The Transaction Motive Compensating Balances Costs of Holding Cash Cash Management versus Liquidity Management 27.2 Understanding Float Disbursement Float Collection Float and Net Float Float Management Electronic Data Interchange and Check 21: The End of Float? 27.3 Cash Collection and Concentration Components of Collection Time • Cash Collection Lockboxes Cash Concentration Accelerating Collections: An Example XXXIV 841 842 842 843 843 844 845 27.4 Managing Cash Disbursements Increasing Disbursement Float Controlling Disbursements 27.5 Investing Idle Cash Temporary Cash Surpluses Characteristics of Short-Term Securities Some Different Types of Money Market Securities Summary and Conclusions Concept Questions Questions and Problems Mini Case: Cash Management at Richmond Corporation 847 847 848 849 849 850 850 851 852 853 855 Appendix 27A: Determining the Target Cash Balance 855 Appendix 27B: Adjustable Rate Preferred Stock, Auction Rate Preferred Stock, and Floating-Rate Certificates of Deposit. 855 CHAPTER 28 Credit and Inventory Management 856 28.1 Credit and Receivables Components of Credit Policy The Cash Flows from Granting Credit The Investment in Receivables 28.2 Terms of the Sale The Basic Form The Credit Period Cash Discounts Credit Instruments 28.3 Analyzing Credit Policy Credit Policy Effects Evaluating a Proposed Credit Policy 28.4 Optimal Credit Policy The Total Credit Cost Curve Organizing the Credit Function 28.5 Credit Analysis When Should Credit Be Granted? Credit Information Credit Evaluation and Scoring 28.6 Collection Policy Monitoring Receivables Collection Effort 28.7 Inventory Management The Financial Manager and Inventory Policy Inventory Types Inventory Costs 28.8 Inventory Management Techniques The ABC Approach The Economic Order Quantity Model Extensions to the EOQ Model Managing Derived-Demand Inventories 856 856 857 857 858 858 858 860 861 862 862 862 864 865 866 866 867 868 869 869 869 870 871 871 871 872 872 872 873 877 879 Summary and Conclusions Concept Questions Questions and Problems Mini Case: Credit Policy At Braam Industries 880 880 881 884 Appendix 28A: More about Credit Policy Analysis 884 PART VIII Special Topics CHAPTER 29 Mergers,Acquisitions, and Divestitures B85 29.1 The Basic Forms of Acquisitions Merger or Consolidation Acquisition of Stock Acquisition of Assets A Classification Scheme A Note about Takeovers 29.2 Synergy 29.3 Sources of Synergy Revenue Enhancement Cost Reduction Tax Gains Reduced Capital Requirements 29.4 Two Financial Side Effects of Acquisitions Earnings Growth Diversification 29.5 A Cost to Stockholders from Reduction in Risk The Base Case Both Firms Have Debt How Can Shareholders Reduce Their Losses from the Coinsurance Effect? 29.6 The N P V of a Merger Cash Common Stock Cash versus Common Stock 29.7 Friendly versus Hostile Takeovers 29.8 Defensive Tactics Deterring Takeovers before Being in Play Deterring aTakeover after the Company Is in Play 29.9 Do Mergers Add Value? Returns to Bidders Target Companies The Managers versus the Stockholders . 29.10 The Tax Forms of Acquisitions 29.11 Accounting for Acquisitions 29.12 Going Private and Leveraged Buyouts 29.13 Divestitures Sale Spin-Off Carve-Out Tracking Stocks Summary and Conclusions 885 OOC 885 886 886 887 887 ooo 888 889 OOQ 889 QQA 890 892 894 895 895 Concept Questions Questions and Problems Mini Case: The Birdie Golf—Hybrid Golf Merger 919 920 926 CHAPTER 30 Financial Distress 928 30.1 W h a t Is Financial Distress? 30.2 W h a t Happens in Financial Distress? 30.3 Bankruptcy Liquidation and Reorganization Bankruptcy Liquidation Bankruptcy Reorganization 30.4 Private W o r k o u t or Bankruptcy: W h i c h Is Best? The Marginal Firm Holdouts Complexity Lack of Information 30.5 Prepackaged Bankruptcy 30.6 Predicting Corporate Bankruptcy: The Z-Score Model Summary and Conclusions Concept Questions Questions and Problems 928 930 932 932 934 937 938 938 939 939 939 940 942 942 943 896 CHAPTER 31 897 897 897 899 899 899 901 902 903 905 905 906 908 910 911 911 913 915 916 917 917 917 918 918 919 International Corporate Finance 945 31.1 Terminology 31.2 Foreign Exchange Markets and Exchange Rates 946 Exchange Rates 31.3 Purchasing Power Parity Absolute Purchasing Power Parity Relative Purchasing Power Parity 31.4 Interest Rate Parity, Unbiased Forward Rates, and the International Fisher Effect Covered Interest Arbitrage Interest Rate Parity Forward Rates and Future Spot Rates Putting It All Together 31.5 International Capital Budgeting Method 1 :The Home Currency Approach Method 2:The Foreign Currency Approach Unremitted Cash Flows The Cost of Capital for International Firms 31.6 Exchange Rate Risk Short-Term Exposure Long-Term Exposure Translation Exposure Managing Exchange Rate Risk 946 947 951 952 953 955 955 956 957 958 959 960 961 961 962 962 962 963 964 965 XXXV 31.7 Political Risk Summary and Conclusions Concept Questions Questions and Problems Excel Master It! Mini Case: East Coast Yachts Goes International Appendix A: Mathematical Tables XXXVI 965 966 967 968 971 971 9 73 Appendix B: Solutions to Selected End-of-Chapter Problems Appendix C: Using the HP I OB and Tl BA II Plus Financial Calculators Glossary Name Index Subject Index 982 985 989 1007 1009
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