Contents
PART
I
Overview
Chapter I
2.4
2.5
Net Working Capital
2.6
TheAccounting Statement of Cash Flows
Cash Flow from Operating Activities
Cash Flow from InvestingActivities
Cash Flow from Financing Activities
2.7
Cash Flow Management
Summary and Conclusions
Concept Questions
Questions and Problems
S&P Problems
Mini Case: Cash Flows at Warf Computers, Inc.
Introduction to Corporate Finance
I. I
What Is Corporate Finance?
The Balance Sheet Model ofthe Firm
The Financial Manager
1.2
The Corporate Firm
The Sole Proprietorship
The Partnership
The Corporation
A Corporation by Another Name . . .
1.3
The Importance of Cash Flows
1.4
The Goal of Financial Management
Possible Goals
The Goal of Financial ~ a n a ~ e m e 6
A More General Goal
1.5
The Agency Problem and Control
of the Corporation
Agency Relationships
Management Goals
Do Managers Act in the Stockholders'Interests?
Stakeholders
1.6
Regulation
The Securities Act of 1933 and the Securities
Exchange Act of 1934
Sarbanes-Oxley
Summary and Conclusions
Concept Questions
S&P Problems
Chapter 2
Financial Statements and Cash Flow
2.1
The Balance Sheet
L~quidity
Debt versus Equity
Value versus Cost
2.2
The Income Statement
Generally Accepted Accounting Principles
Noncash Items
Time and Costs
2.3
Taxes
Corporate Tax Rates
Average versus MarginalTax Rates
Financial Cash Flow
Chapter 3
Financial Statements Analysis and
Financial Models
3.1
Financial Statements Analysis
Standardizing Statements
Common-Size Balance Sheets
Common-Size Income Statements
3.2
Ratio Analysis
Short-Term Solvency or Liquidity Measures
Long-Term Solvency Measures
Asset Management orTurnover Measures
Profitability Measures
Market Value Measures
3.3
The Du Pont Identity
A Closer Look at ROE
Problems with Financial Statement Analysis
3.4
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
3.5
3.6
Some Caveats Regarding Financial
Planning Models
Summary and Conclusions
Concept Questions
Questions and Problems
S&P Problems
Mini Case: Ratios and Financial Planning
at East Coast Yachts
I
Contents
xxvi
PA R T
Definition o f lndependent and Mutually
Exclusive Projects
Two General Problems Affecting Both
lndependent and Mutually Exclusive Projects
Problems Specific t o Mutually Exclusive Projects
Redeeming Qualities of IRR
ATest
I1 Valuation and
Capital Budgeting
Chapter 4
Discounted Cash Flow Valuation
4.1
Va1uation:The One-Period Case
4.2
The Multiperiod Case
Futurevalue and Compounding
The Power of Compounding:A Digression
PresentValue and Discounting
Finding the Number of Periods
The Algebraic Formula
Compounding Periods
Distinction between Stated Annual lnterest
Rate and EffectiveAnnual Rate
Compounding over Many Years
Continuous Compounding
4.3
4.4
4.5
4.6
Simplifications
Perpetuity
Growing Perpetuity
Annuity
Growing Annurty
5.6
The Profitability lndex
Calculation o f Profitability lndex
5.7
The Practice of Capital Budgeting
Summary and Conclusions
Concept Questions
Questions and Problems
Mini Case: Bullock Gold Mining
Chapter 6
Making Capital Investment Decisions
6.1
Incremental Cash Flows:The Key t o
Capital Budgeting
Cash Flows-Not Accounting Income
Sunk Costs
Opportunity Costs
Side Effects
Allocated Costs
6.2
The Baldwin Company:An Example
An Analysis of the Project
Which Set of Books?
A Note about Net Working Capital
A Note about Depreciation
lnterest Expense
Loan Amortization
What Is a Firm Worth?
Summary and Conclusions
Concept Questions
Questions and Problems
S&P Problems
Appendix 4A: Net PresentValue: First Principles
of Finance
Appendix 4B: Using Financial Calculators
Mini Case: The MBA Decision
Chapter 5
Net Present Value and Other
Investment Rules
5.1
5.2
Why Use Net PresentValue?
5.3
5.4
5.5
The Discounted Payback Period Method
The Payback Period Method
Defining the Rule
Problems with the Payback Method
Managerial Perspective
Summary o f Payback
The Internal Rate of Return
Problems with the IRRApproach
6.~3 lnflation and Capital Budgeting
Interest Rates and lnflation
Cash Flow and lnflation
Discounting: Nominal or Real?
6.4 Alternative Definitions of Operating Cash Flow
TheTop-Down Approach
The Bottom-Up Approach
TheTax Shield Approach
Conclusion
6.5
Investments of Unequal Lives:The Equivalent
Annual Cost Method
The General Decision t o Replace
Summary and Conclusions
Concept Questions
Questions and Problems
Mini Cases: Bethesda Mining Company
GoodweekTires,Inc.
Contents
Chapter 7
Risk Analysis, Real Options,
and Capital Budgeting
7.1
Sensitivity Analysis, Scenario Analysis, and
Break-EvenAnalysis
Sensitivity Analysis and Scenario Analysis
Break-Even Analysis
7.2
Monte Carlo Simulation
Step I : Specify the Basic Model
Step 2: Specify a Distribution for EachVariable
in the Model
Step 3:The Computer Draws One Outcome
Step 4: Repeat the Procedure
Step 5: Calculate NPV
7.3
Real Options
The Option to Expand
The Option t o Abandon
Timing Options
7.4
DecisionTrees
Summary and Conclusions
Concept Questions
Questions and Problems
Mini Case: Bunyan Lumber; LLC
Chapter 8
Interest Rates and Bond Valuation
Bonds and BondValuation
Bond Features and Prices
BondValues and Yields
Interest Rate Risk
Finding the Yield to Maturity: MoreTrial and Error
Zero Coupon Bonds
Government and Corporate Bonds
Government Bonds
Corporate Bonds
Bond Ratings
Bond Markets
How Bonds Are Bought and Sold
Bond Price Reporting
A Note on Bond Price Quotes
Inflation and Interest Rates
Real versus Nominal Rates
Inflation Risk and Inflat~on-Linked
Bonds
The Fisher Effect
Determinants of BondYields
TheTerm Structure of Interest Rates
Bondyields and the Yield Curve: Putting It
All Together
Conclusion
Summary and Conclusions
Concept Questions
Questions and Problems
S&P Problem
Mini Case: Financing East CoastYachts's
Expansion Plans with a Bond Issue
Chapter 9
Stock Valuation
9.1
The Presentvalue of Common Stocks
Dividends versus Capital Gains
Valuation of DifferentTypes of Stocks
9.2
Estimates of Parameters in the Dividend
Discount Model
Where Does g Come From?
Where Does R Come From?
A Healthy Sense of Skepticism
A Note on the Link between Dividends and
Corporate Cash Flows
Growth Opportunities
NPVGOs of Real-World Companies
Growth in Earnings and Dividends versus
Growth Opportunities
Does a Higher Retention Ratio Benefit
Shareholders?
Dividends or Earnings:Which to Discount?
The No-Dividend Firm
9.3
234
234
234
235
238
240
242
244
244
245
247
248
248
249
252
253
253
254
255
257
257
260
9.4
9.5
Price-Earnings Ratio
The Stock Markets
Dealers and Brokers
Organization of the NYSE
NASDAQ Operations
Stock Market Reporting
Summary and Conclusions
Concept Questions
Questions and Problems
S&P Problems
Mini Case: Stockvaluation at Ragan Engines
PA R T
I11 Risk
Chapter 1 0
Risk and Return: Lessons from
Market History
10.1 Returns
Dollar Returns
Percentage Returns
xxviii
Contents
10.2 Holding Period Returns
The Formula for Beta
ATest
10.3 Return Statistics
10.4 Average Stock Returns and Risk-Free Returns
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:AYear of Financial Crisis
Summary and Conclusions
Concept Questions
Questions and Problems
S&P Problems
Appendix IOA: The Historical Market Risk
Premium:TheVery Long Run
Mini Case: A Job at East Coast Yachts
Chapter I I
Return and Risk: The Capital Asset
Pricing Model (CAPM)
1 1.1
Individual Securities
1 1.2 Expected Return,Variance.and Covariance
Expected Return and Variance
Covariance and Correlation
1 1.3 The Return and Risk for Portfolios
The Expected Return on a Portfolio
Variance and Standard Deviation
of a Portfolio
1 1.4 The Efficient Set for Two Assets
1 1.5 The Efficient Set for Many Securities
Variance and Standard Deviation in a Portfolio
of Many Assets
1 1.6 Diversification
The Anticipated and Unanticipated
Components of News
Risk Systematic and Unsystematic
The Essence of Diversification
1 1.7 Riskless Borrowing and Lending
The Optimal Portfolio
1 1.8 Market Equilibrium
Definition of the Market Equilibrium Portfolio
Definition of RiskWhen Investors Hold the Mark
Portfolio
1 1.9 Relationship between Risk and Expected
Return (CAPM)
Expected Return on Market
Expected Return on Individual Security
Summary and Conclus~ons
Concept Questions
Questions and Problems
S&P Problem
Appendix I IA: Is Beta Dead?
Mini Case: A Job at East Coast Yachts, Part 2
Chapter I 2
An Alternative View of Risk and
Return: The Arbitrage Pricing Theory
12. I Introduction
12.2 Systematic Risk and Betas
12.3
Portfolios and Factor Models
Portfolios and Diversificatron
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 PricingTheory
Differences in Pedagogy
Differences in Application
12.6
.:
Empirical Approaches t o Asset Pricing
Empirical Models
Style Portfolros
Summary and Conclusions
con;ept Questions
Questions and Problems
Mini Case: The Fama-French Multifactor Model
and Mutual Fund Returns
Chapter 13
Risk, Cost of Capital, and Capital
Budgeting
13.1 The Cost of Equity 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
Usrng an Industry Beta
xxix
Contents
The Semistrong Form
The Strong Form
13.4 Beta, Covariance, and Correlation
Beta and Covariance
Beta and Correlation
14.5 The Behavioral Challenge to Market Efficiency
13.5 Determinants of Beta
Cyclicality of Revenues
Operating Leverage
Financial Leverage and Beta
14.6
Empirical Challenges to Market Efficiency
14.7 Reviewing the Differences
Representativeness
Conservatism
The Academic Viewpoints
13.6 Dividend Discount Model
Comparison of DDM and CAPM
Can a Low-Dividend or a No-Dividend Stock
Have a High Cost of Capital?
14.8
13.7 Cost of Capital for Divisions and Projects
13.8 Cost of Fixed Income Securities
Cost of Debt
Cost of Preferred Stock
13.9 The Weighted Average Cost of Capital
13.10 Estimating Eastman Chemical's Cost of Capita!
Implications for Corporate Finance
I .Accounting Choices, Financial Choices, and
Market Efficiency
2.TheTiming Decision
3. Speculation and Efficient Markets
4. Information in Market Prices
Summary and Conclusions
Concept Questions
Questions and Problems
Mini Case: Your 40 1 (k) Account at East
Coast Yachts
13.1 1 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
Chapter 1 5
Long-Term Financing: An Introduction 467
15.1
Appendix 13A: EconomicValueAdded and
the Measurement of Financial
Performance
Some Features of Common and Preferred Stocks 467
Common Stock Features
467
Preferred Stock Features
470
15.2
Corporate Long-Term Debt
Is It Debt or Equity?
Long-Term Debt:The Basics
The Indenture
Mini Case: The Cost of Capital for Goff
Computer; Inc.
PA R T
IV
Capital Structure
and Dividend Policy
Chapter 14
Efficient Capital Markets and
Behavioral Challenges
14.1
Can Financing Decisions Createvalue?
14.2 A Description of Efficient Capital Markets
Foundations of Market Efficiency
428
428
430
432
433
14.3 The DifferentTypes of Efficiency
The Weak Form
433
The Semistrong and Strong Forms
435
Some Common Misconceptions about the Efficient
Market Hypothesis
436
14.4 The Evidence
The Weak Form
437
437
472
472
472
474
15.3 Some DifferentTypes of Bonds
Floating-Rate Bonds
OtherTypes of Bonds
477
477
478
15.4 Long-Term Syndicated Bank Loans
479
15.5 International Bonds
480
15.6 Patterns of Financing
480
15.7 RecentTrends in Capital Structure
Which Are Best: Book or MarketValues?
Summary and Conclusions
Concept Questions
Questions and Problems
482
483
484
484
485
Chapter 16
Capital Structure: Basic Concepts
488
16.1 The Capital Structure Question and the
Pie Theory
488
16.2 Maximizing Firmvalue versus Maximizing
Stockholder Interests
489
xxx
Contents
16.3 Financial Leverage and Firmvalue: An Example
Leverage and Returns t o Shareholders
The Choice between Debt and Equity
A Key Assumption
16.4 Modigliani and Miller: Proposition II (NoTaxes)
Risk t o Equityholders Rises with Leverage
Proposition II: Required Return t o Equityholders
Rises with Leverage
MM:An Interpretation
16.5 Taxes
' The Basic Insight
PresentValue of the Tax Shield
Value of the Levered Firm
Expected Return and Leverage under
Corporate Taxes
The Weighted Average Cost of Capital,
hAcc,
and Corporate Taxes
Stock Price and Leverage under CorporateTaxes
Summary and Conclusions
Concept Questions
Questions and Problems
S&P Problems
Mini Case: Stephenson Real Estate Recapitalization
Chapter 17
Capital Structure: Limits to the
Use of Debt
17.1 Costs of Financial Distress
Bankruptcy Risk or Bankruptcy Cost?
17.2 Description of Financial Distress Costs
Direct Costs of Financial Distress: Legal and
Administrative Costs of Liquidation or
Reorganization
Indirect Costs of Financial Distress
Agency Costs
17.3 Can Costs of Debt Be Reduced?
Protective Covenants
Consolidation of Debt
17.4 Integration ofTax Effects and Financial
Distress Costs
Pie Again
17.5 Signaling
17.6 Shirking. Perquisites, and Bad Investments:
A Note on Agency Cost of Equity
Effect of Agency Costs of Equity on Debt-Equity
Financing
Free Cash Flow
17.7 The Pecking-OrderTheory
Rules of the Pecking Order
Implications
17.8 Growth and the Debt-Equity Ratio
N o Growth
Growth
17.9 PersonalTaxes
The Basics of PersonalTaxes
The Effect of PersonalTaxes on Capital
Structure
17.10 How Firms Establish Capital Structure
Summary and Conclusions
Concept Questions
Questions and Problems
Appendix 17A: Some Useful Formulas
of Financial Structure
Appendix 17B: The Miller Model and the
Graduated IncomeTax
Mini Case: McKenzie Corporation's
Capital Budgeting
Chapter 18
Valuation and Capital Budgeting
for the Levered Firm
18.1 Adjusted PresentValueApproach
18.2 Flow t o Equity Approach
Step I : Calculat~ngLevered Cash Flow (LCF)
Step 2: Calculating R,
Step 3: Valuation
18.3 Weighted Average Cost of Capital Method
18.4 A Comparison of the APV, FTE, and WACC
Approaches .
A Suggested Guideline
18.5 Capital BudgetingWhen the
Discount Rate Must Be Estimated
18.6 APV Example
18.7 Beta and Leverage
The Project Is N o t Scale Enhanc~ng
Summary and Conclusions
Concept Questions
Questions and Problems
S&P Problem
Appendix 18A: The Adjusted PresentValue
Approach tovaluing Leveraged Buyouts
Mini Case: The Leveraged Buyout of Cheek
Products, Inc.
Chapter 19
Dividends and Other Payouts
19.1 Different Types of Payouts
19.2 Standard Method of Cash Dividend Payment
xxxi
Contents
193 The Benchmark Case: An Illustration of the
Irrelevance of Dividend Policy
C - ~ n Policy:
t
Dividends Set Equal
1; Cash Flow
-:e~at~ve Policy: Initial Dividend Is Greater
- I - Cash Flow
-c lnd~fferenceProposition
-2nemade Dividends
.- "st
3 i~dendsand Investment Policy
19.4 Repurchase of Stock
2 .dend versus Repurchase: Conceptual
Sample
3 wdends versus Repurchases: Real-World
Considerations
195 PersonalTaxes, Dividends, and
Stock Repurchases
--ns without Sufficient Cash to Pay
:Dlvidend
TS with Sufficient Cash t o Pay
r Dividend
Ssmmary of Personal Taxes
19d Real-World Factors Favoring a
High-Dividend Policy
3es1refor Current Income
khav~oralFinance
.Agency Costs
Information Content of Dividends and
Dlvidend Signaling
19.7 The Clientele Effect:A Resolution of
Real-World Factors?
19.8 WhatWe Know and Do N o t Know about
Dividend Policy
Corporate DividendsAre Substantial
Fewer Companies Pay Dividends
Corporations Smooth Dividends
Some Survey Evidence about Dividends
19.9 Putting It All Together
'
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
S&P Problem
Mini Case: ElectronicTiming,Inc.
PA R T
V Long-Term
Financing
Chapter 20
Issuing Securities to the Public
616
20.1 The Public lssue
The Basic Procedure for a New lssue
6 16
20.2 Alternative lssue Methods
20.3 The Cash Offer
lnvestment Banks
The Offering Price
Underpricing: A Possible Explanation
617
20.4 What CFOs Say about the IPO Process
20.5 The Announcement of New Equity and the
Value of the Firm
627
20.6 The Cost of New Issues
The Costs of Going Public: The Case of Symbion
629
20.7 Rights
The Mechanics of a Rights Offering
Subscription Price
Number of Rights Needed t o Purchase a Share
Effect of Rights Offering on Price of Stock
Effects on Shareholders
The Underwriting Arrangements
633
20.8 The Rights Puzzle
20.9 Dilution
Dilution of Proportionate Ownership
Dilution ofvalue: Book versus Market Values
20.10 Shelf Registration
20.1 I The Private Equity Market
Private Placement
The Private Equity Firm
Suppliers ofventure Capital
Stages of Financing
Summary and Conclusions
Concept Questions
Questions and Problems
Mini Case: East Coastyachts Goes Public
637
Chapter 2 1
Leasing
2 1.1
Types of Leases
I
The Basics
Operating Leases
Financial Leases
616
6 19
622
623
624
628
632
633
634
634
635
636
637
639
639
640
64 1
642
642
643
643
644
646
646
648
65.'
652
652
652
652
653
xsxii
Contents
2 1.2 Accounting and Leasing
2 1.3 Taxes, the IRS, and Leases
A Quick Discussion of Factors Determining
Put Option Values
22.8 An Option Pricing Formula
ATwo-State Option Model
The Black-Scholes Model
2 1.4 The Cash Flows of Leasing
2 1.5 A Detour for Discounting and Debt
Capacity with CorporateTaxes
Presentvalue of Riskless Cash Flows
Optimal Debt Level and Riskless Cash Flows
2 1.6 NW Analysis of the Lease-versus-BuyDecision
The Discount Rate
2 1.7 Debt Displacement and Leasevaluation
' The Basic Concept of Debt Displacement
Optimal Debt Level in the Xomox Example
2 1.8 Does Leasing Ever Pay?The Base Case
2 1.9 Reasons for Leasing
Good Reasons for Leasing
Bad Reasons for Leasing
2 I . I 0 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 Other
Summary and Conclusions
Concept Questions
Questions and Problems
22.9 Stocks and Bonds as Options
The Firm Expressed inTerms of Call Options
The Firm Expressed inTerms 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
22.1 1 Investment in Real Projects and Options
Summary and Conclusions
Concept Questions
Questions and Problems
Mini Case: Clissold Industries Options
Chapter 23
Options and Corporate Finance:
Extensions and Applications
23.1 Executive Stock Options
Why Options?
Valuing Executive Compensation
Appendix 2 I A: APV Approach t o Leasing
Mini Case: The Decision t o Lease or Buy
at Warf Computers
P A R 'I'VI
Options, Futures,
and Corporate Finance
Chapter 22
Options and Corporate Finance
22.1 Options
22.2 Call Options
Thevalue of a Call Option at Expiration
22.3 Put Options
TheValue of a Put Option at Expiration
22.4 Selling Options
22.5 Option Quotes
22.6 Combinations of Options
22.7 Valuing Options
Bounding thevalue of a Call
The Factors Determining Call Optionvalues
719
23.2 Valuing a Start-Up
23.3 More about the Binomial Model
,
Heating Oil
23.4 Shutdown and Reopening Decisions
'
Valuing a Gold Mine
The Abandonment and Opening Decisions
Valuing the Simple Gold Mine
Summary and Conclusions
Concept Questions
Questions and Problems
Mini Case: Exotic Cuisines Employee Stock Options
;
676
676
677
678
Chapter 24
Warrants and Convertibles
678
24.1 Warrants
682
24.2 The Difference betweenWarrants and
Call Options
How the Firm Can Hurtwarrant Holders
24.3 Warrant Pricing and the Black-Scholes Model
677
680
68 1
685
685
687
24.4 Convertible Bonds
744
745
748
748
749
Contents
24.5 TheValue of Convertible Bonds
Straight BondValue
ConversionValue
Option Value
24.6 Reasons for IssuingWarrants and Convertibles
Convertible Debt versus Straight Debt
Convertible Debt versus Common Stock
The "Free Lunch" Story
The "Expensive Lunch" Story
A Reconciliation
24.7 Why Are Warrants and Convertibles Issued?
Matching Cash Flows
Risk Synergy
Agency Costs
Backdoor Equity
24.8 Conversion Policy
Summary and Conclusions
Concept Questions
Questlons and Problems
Mini Case: S&S Air's Convertible Bond
Chapter 25
Derivatives and Hedging Risk
25.1
25.2
25.3
25.4
25.5
Derivatives,Hedging, and Risk
Forward Contracts
Futures Contracts
Hedging
lnterest Rate Futures Contracts
Pricing ofTreasury Bonds
Pricing of Forward Contracts
Futures Contracts
Hedging in lnterest 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 Swap (CDS)
Exotics
25.8 Actual Use of Derivatives
Summary and Conclusions
Concept Questions
Questions and Problems
Mini Case: Williamson Mortgage, Inc.
PA R T
VII
Short-Term
Finance
Chapter 26
Short-Term Finance and Planning
26.1 Tracing Cash and Net Working 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
Interpretingthe 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
S&P Problems
Mini Case: Keafer ManufacturingWork~ng
Capital Management
Chapter 27
Cash Management
27.1 Reasons for Holding Cash
The Speculative and Precautionary Motives
TheTransaction 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 2 1 :
The End of Float?
xxxiv
Contents
27.3 Cash Collection and Concentration
Components of CollectionTime
Cash Collection
Lockboxes
Cash Concentration
Accelerating Collections:An Example
27.4 Managing Cash Disbursements
Increasing Disbursement Float
Controlling Disbursements
27.5 Investing Idle Cash
Temporary Cash Surpluses
Characteristics of Short-Term Securities
Some DifferentTypes of Money Market
Securities
Summary and Conclusions
Concept Questions
Questions and Problems
28.6 Collection Policy
Monitoring Receivables
Collection Effort
28.7 lnventory Management
The Financial Manager and lnventory Policy
InventoryTypes
lnventory Costs
28.8 lnventory ManagernentTechniques
The ABC Approach
The Economic Order Quantity Model
Extensions to the EOQ Model
Managing Derived-Demand Inventories
Summary and Conclusions
Concept Questions
Questions and Problems
Appendix 28A: More about Credit Policy Analysis
Mini Case: Credit Policy at Braam Industries
Appendix 27A: Determining theTarget
Cash Balance
Appendix 27B: Adjustable Rate Preferred Stock,
Auction Rate Preferred Stock,
and Floating-Rate Certificates
of Deposit
Mini Case: Cash Management at Richmond
Corporation
Chapter 28
Credit and Inventory Management
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
TheTotal Credit Cost Curve
Organizing the Credit Function
28.5 Credit Analysis
When Should Credit Be Granted?
Credit Information
Credit Evaluation and Scoring
PA R T
VIII
Special Topics
Chapter 29
Mergers, Acquisitions, and Divestitures 875
29.1 The Basic Forms of Acquisitions
Merger or Consolidation
Acquisition of Stock
Acquisition of Assets
A Classification Scheme
A Note aboutfakeovers
29.2 Synergy
29.3 Sources of Synergy
Revenue Enhancement
,
Cost Reduct~on
Tax Gains
Reduced Capital Requirements
29.4 Two Financial Side Effects of Acquisitions
Earnings Growth
Diversification
29.5 A Cost t o Stockholders from Reduction in Risk
The Base Case
Both Firms Have Debt
How Can Shareholders ReduceTheir Losses
from the Coinsurance Effect?
29.6 The NPV of a Merger
Cash
Common Stock
Cash versus Common Stock
Contents
29.7 Friendly versus HostileTakeovers
29.8 DefensiveTactics
DeterringTakeovers 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
29.1 1 Accounting for Acquisitions
29.12 Going Private and Leveraged Buyouts
29.13 Divestitures
Sale
Spin-Off
Carve-Out
Tracking Stocks
Summary and Conclusions
Concept Questions
Questions and Problems
b i dMerger
Mini Case: The Birdie ~ o l f - ~ ~ Golf
Chapter 30
Financial Distress
30.1 What Is Financial Distress?
30.2 What Happens in Financial Distress?
30.3 Bankruptcy Liquidation and Reorganization
Bankruptcy Liquidation
Bankruptcy Reorganization
30.4 PrivateWorkout or Bankruptcy:
Which 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
Chapter 3 1
International Corporate Finance
3 1.1
Terminology
3 I.2 Foreign Exchange Markets and
Exchange Rates
Exchange Rates
3 1.3 Purchasing Power Parity
Absolute Purchasing Power Parity
Relative Purchasing Power Parity
3 1.4 lnterest Rate Parity, Unbiased Forward Rates,
and the lnternational Fisher Effect
Covered Interest Arbitrage
lnterest Rate Parity
Forward Rates and Future Spot Rates
Putting It All Together
3 1.5 lnternational Capital Budgeting
Method I :The Home Currency Approach
Method 2:The Foreign Currency Approach
Unremitted Cash Flows
The Cost of Capital for lnternational Firms
3 1.6 Exchange Rate Risk
Short-Term Exposure
Long-Term Exposure
Translation Exposure
Managing Exchange Rate Risk
3 1.7 Political Risk
Summary and Conclusions
Concept Questions
Questions and Problems
S&P Problem
Mini Case: East Coast Yachts Goes lnternational
Appendix A: MothemoticalTobles
Appendix 6: Solutions to Selected
End-ofxhapter Problems
Name lndex
Subject lndex