Index

Accounting
- economic concept, 55
- economic reality, 52–56
- method, 52–56
Accounts payable, 25–28
- increase, 26–27
- monthly pro forma accounts payable, calculation, 65t
Accounts receivable
- increase, 17
  - meaning, 19
- pro forma monthly accounts receivables, computation, 62t
Accounts receivable/sales, 22
Accrual accounting, 53t
Accruals
- constancy, 39
- monthly pro forma accruals, calculation, 67t
Accrued liabilities, 65–66
Ackman, William, 425
Acquisition, valuation, 433
Activist shareholders, impact, 470–472
Activity ratios, 20
Adjustable rate preferred securities, 179
Adjusted present value (APV), 383–385
- approach, usage, 384–385
- calculation, 3
After-tax profits, usage, 122–123
Agency costs, 126, 269–272
- capital structure, 278–280
- example, 128t
- manager behavior, 278–280
- minimization process, 278–279
- reduction, leverage increase (impact), 279
Agency problems, capital structure (relationship), 284
Algebraic substitution, 312
All-equity firm, valuation, 383, 385
Alternative valuation techniques (AVTs), 363
American Stock Exchange (AMEX) firms, sample, 109
American Telephone and Telegraph Company (AT&T)
- background, 178
- balance sheets, 181t, 209t
- best-case/worst-case scenarios, 196–198
- cash dividend payment, 257
- cash flow statements, 190t
- corporate finance, practice (implications), 202–203
- corporate financial needs, financial policies (impact), 189
- cross-sectional questions, 188
- current status, 193–205
- debt
  - choices, 186
  - issuance, 460
  - policy, 183–184
- debt ratio, 200, 202–203
  - calculation, 181–183
- divestiture, 178, 215, 226
- dividend policy, 201
- dividends, problem, 203
- equity issue, 271
  - announcement, 201–203
- equity policy, 184–185
- expected-case scenario, 200
- external questions, 187–188
- financial goals, setting (nonrandomness), 192
- financial objectives, 186–189
- financial policies, 200–201
  - decisions, 177
  - objectives, 186
- financial slack, 202
- financing
  - alternatives, 230t
  - projected sources, 194, 196
- history (pre-1984), 180–193
- income statements, 181t
- interest coverage ratios, 189
- internally generated funds, 189–192
- internal questions, 187
- market capitalization, decrease, 201–202
- net debt, 199
- net worth, growth, 191
- operating financials, 208t
- outside equity, obtaining, 193
- postdivestiture balance sheets, 206t
- postdivestiture income statements, 206t
- pre-divestiture, 480
- predivestiture product market strategy, 187
- product market changes, financial ratio (impact), 198–200
- pro forma Balance Sheets, 196t
  - worst-case scenario, 199t
- pro forma cash flow statements, 196t
  - expected/worst-case scenarios, 200t
  - worst-case scenario, 199t
- pro forma Income Statements, 195t
  - worst-case scenarios, 198t
- pro forma ratios, expected/worst-case scenarios, 200t
- pro formas, development, 208–210
- projections, quality, 203, 205
- ratios, 194t
- revenue, 208t
- sales growth, 190
- sustainable growth, 192–193
  - power, 202
- tax shield, 223
Amortization (Family Dollar), 440–441
Annual purchases, 27
Annuities, 315
Apple, Inc.
- balance sheets, 250t, 263t
- bank line of credit, 257
- cash
  - disadvantages/advantages, 253
  - retention, 258
  - usage, 256
- cash flows, 256
- debt
  - choices, 252
  - justification, 259
- dividends, 241
  - approach, 259–260
  - payment decision, 248–259
  - payout, 254
  - policy, 252–253, 256, 378
- equity choices, 252
- financial policies, 252–255
  - future, 255–258
- funds, borrowing, 460
- income statements, 250t, 262t
- line of credit, 258
- long-term debt, issuance, 257
- post-Jobs era, 249–251
- product market strategy/pricing, 251–252
- ratios, 256t
- R&D expenditures, 255
- ROE, 254
- sales/earnings, increase, 260–262
- shares
  - price, level, 257
  - repurchases, 480
- stock
  - buyback, 258
  - repurchases, 241
AppStore, launch, 249
APT. See Arbitrage pricing theory
APV. See Adjusted present value
Arbitrage, 111, 112, 241
Arbitrage pricing
theory (APT), 363, 374–375
- regression, 375
Argus, 85
Assets
- beta (unlevered beta), 108, 141, 443
  - formula, 373
- cash flows, 364
- equation, 50
- growth, 223
- liquidation, 45
- Marriott purchase, 169
- multiples, 328, 340, 482
Asymmetric information, 269–272
- absence, 116
- allowance, 480–481
- concept, 173
- equity issue timing, relationship, 277–278
- firm financing, relationship, 272–278
- importance, 211
AT&T. See American Telephone and Telegraph Company
Avaya Holdings Ltd.
- Amended Disclosure Statement, 305
- bankrtupcy emergence, 305–307
- chapter 11 bankruptcy, filing, 298
- debt to total assets ratio, 298
- description, 294–298
- EBIT, 295
- financial distress, 293–298
- financial information, 293t
- interest-bearing debt, 295f
- operating income, 294f, 295
- purchase, 294
- reorganization plan, submission, 306
- restructuring/bankruptcy, 293
- revenue, 294f
Average (method), 51–56, 54t
AVTs. See Alternative valuation techniques

Baby Bells, 214, 235
Backdoor equity, 283
Balance Sheets, 15, 329
- balancing, 39, 50, 85
- components, 20
- creation, 59
- debt, amount, 35
- examination, 19
- example, 12, 52t
- items, 33
- monthly pro forma balance sheets, 60–68
- monthly ratios, 61
Banker (conversation), job interview (analogy), 11–12
Bank of America, Merrill Lynch bonus payments, 280
Bankruptcy, 293
- costs
  - assumption, 125
  - indirect costs, 125
- deal, impact, 303–304
- direct bankruptcy costs, impact, 301
- economic principle, 298–299
- filing, timing decision, 299–302
- firm value maintenance, 304–305
- prepackaged bankruptcy, 301
- Prudential, impact, 399
- reorganization plan, approval, 303
- rules, 302–304
- time, length, 304
Banks
- coverage, improvement, 46
- debt, 38, 184
  - rate, 400
  - risk, 399
- line of credit, 68, 70
- loan, 44
  - constancy, 18
- money lending, risks, 45
- prime rate, cost, 145–146
- repayment, 41
- restructuring agreement, 95
Basic business risk (BBR), 83–84, 108, 131
- Congoleum, 400–401
- firm BBR, 187
- MCI BBR, 223–224
Bath Industries (Bath Iron Works), 391, 397
Before-tax cash flow, impact, 119
Bell, Alexander Graham, 178
Best-case scenarios (AT&T), 196–198
Beta, 108, 349–350
- calculation, 350
- change, impact, 142t
- impact, 141
- levering, 371–375
- presence, 371–372
- risk measurement, 120
- unlevered beta, 351
- unlevering, 351, 371–375
- usage, 352–353
- value, 353
Black, Fischer, 5
Board of directors, selection, 471
Bonds
- interest rates payment, 145
- value, 230
  - change, 372
Book value ratio, 109
Break-even terminal value, 449
Burn rates, 1
Business
- model, usage, 428
- strategy, consistency, 477
- worth, 484
Buyers, location, 427–429

CAPEX. See Capital expenditures
Capital
- intensity ratio, 85
- markets data, 357t
Capital asset pricing model (CAPM), 266
- creation, 5
- equation, 141, 353
- formula, 350, 383
  - usage, 372
- market risk measure, usage, 349
- usage, 138
Capital cost, 48, 131–132, 143–146
- CFO minimization, 143
- determination, factors, 146
- estimation, 443–447
- impact, 339–340
- nuances, 365–371, 483–484
- usage, 373
Capital expenditures (CAPEX), 91–92, 112
- amount, provision, 337
- calculation, 337
- future growth, 223
- increase, 338
- necessity, 222–223
Capital expenditures (Family Dollar), 440–441
Capital gains, 121
- deferral, impact, 123–124
- realization, 123
Capital markets, 2
- impact, 167–172
- imperfections, 2
Capital structure, 266
- agency costs, 278–280
- agency problems, relationship, 284
- change, impact, 139–143
- concepts, 172
- costs, 143f, 145f
- decisions, 2, 89, 137
- determination, 107, 187
- impact, 146f
  - absence, 116
- importance, 115
- irrelevance, 114–115
- optimum, 108–110
  - textbook perspective, 132f
- pecking order theory, 282–283
- personal taxes, impact, 266–267
- setting process, 146–147
- target capital structure, setting (checklist), 286
- textbook perspective, 129–131
- theory, 107, 265, 404
  - static capital structure theory, 479
- usage, 347–349
- WACC, relationship, 439
CAPS. See Convertible adjustable preferred stock
CARDS. See Certificates for amortizing revolving debits
CARS. See Certificates for automobile receivables
Cash
- accounting, 54
- basis, 55t
- customer payment, 25
- cycle, 25–28
- dividends, payment decision, 149
- equivalents, requirements, 182
- impact, 53–54
- importance, 328–330
- increase, 17
- management, CFO task, 107
- obtaining, 1
- zero level, 335
Cash flows, 111, 317, 327
- AT&T statements, 190t
- dividend policy, relationship, 247
- evaluation, 364–365
- fluctuation, 341
- formulas, understanding, 461–462
- hypothesis, 245
- impact, 365
- importance, 212
- inclusions/exclusions, 363–365
- increase, 140
- management
  - financial tools, 478
  - necessity, 3
- multiples, 328
- nuances, 363–365, 483
- origin, 478–479
- predictors, 54
- separation, 375–376
Catastrophic risks, reduction/elimination, 46
Center for Research into Security Prices (CRSP), stock returns time series, 355
Century Capital Associates, 398, 406
- shares purchase, 392
Certificates for amortizing revolving debits (CARDS), 284
Certificates for automobile receivables (CARS), 284
CFO. See Chief finance officer
Chapter 11 bankruptcy, impact, 302
Chief finance officer (CFO), tasks, 107
Chirico, Jim, 305
Circular relationships, 39–41
Cisco, competition, 296
COGS/sales ratio, 23
Collateral
- evaluation, 47t, 71t
- example, 47t
- quality, 45
- values, 71
Collateralized accrued treasury securities (CATS), 284
Collateral/loan ratio, 71
Common equity, 217–218
Common size balance sheets, 22t
Common size income statements, 21t
Comparison firms, beta/unlevered beta, 351
Compounding, 313–314
Congoleum
- asset, 395–396
- Balance Sheets, 398, 404, 415t, 417t
- basic business risk (BBR), 400–401
- basic sheets, 394t
- business, 393
- buy rating, 392–393
- capital expenditures (CAPEX), 404
- common stock, 399
- condensed liabilities, 399t
- consortium, fairness opinion, 407
- deal, financing, 398t
  - process, 397–400
- debt/bank debt payment, 399
- dismantling, 408
- equity returns, 406
- expected cash flows, 401
- Fibic, setup, 395–396
- history, 391–392
- income statements, 393t, 417t
- income tax rate, 418
- interest expense, 418
- leveraged buyouts (LBOs), 391, 403–404
  - deal, details, 395–408
  - result, 400
  - risk, 400–401
- leverage, increase, 398
- management
  - investment, 406
  - quality, 401
- operations, 402
- owner equity, 399t
- players, 391–392
- post LBO pro formas, 417–418
- private equity financing, 391
- pro forma Balance Sheets, 418, 419t
- pro forma capital structure, 406t
- pro forma excess cash, 406t
- pro forma income statements, 404, 404t, 415t
- pro formas, 402, 412–418
  - assumptions, 412–413
  - LBOs, impact, 414
- projections, 405
- stockholders, price payment, 407–408
- strip investment, 406
- taxes, 403–404
  - expenses, change, 403t
- total purchase price, 396t
- value creation, 401–402
Congoleum Narin, 391
Conrad Black, 85, 90, 94
- dilution, 97
Consistency, meaning, 14–15
Contingent claims, 482
Contributed capital
- shareholder equity, 67
- usage, 39
Conversion price, 218
Convertible adjustable preferred stock (CAPS), 284
Convertible bonds, 218–221
- coupon level, 219
- trading price, 219
Convertible debt
- absence, 159
- attractiveness, 220
Convertible issues
- market reaction, 284
- negative signal, 221
Convertible preferred securities, 179
Convertible preferred stocks, 218–221
Convertibles
- defining, 218
- exclusion, 148–149
- issuance, 220
- synthetic convertible, 230
Corporate debt, types, 184
Corporate dividend policy theory, M&M establishment, 179
Corporate finance, 110–116
- basics, 3–4
- diagram, 4
- excess cash, negative debt (comparison), 120
- importance, 115
- policy, operating strategy (impact), 211
- practice, 178–180
  - implications, 202–203
- primary functions, 1
- schematic, 4f, 99f
- trade-offs, 212–213
Corporate financial needs, financial policies (impact), 189
Corporate financial policies, 147–149
Corporate income tax, 119–120
Corporate taxes
- absence, 119t
- single corporate tax rate, usage, 120–121
Corporate tax law, change, 48–49
Corporate tax rate, change, 49
Correction, necessity, 39–40
Cost of goods sold (COGS), 23
- calculation, 37
- change, 35
- constancy, 45
- estimates, 44
- forecast, 34
- liquidation value, 46
- sales percentage, 61
- sum, 59
- understanding, 37–38
- usage, 58
Covenants
- elimination, 301
- impact, 280
Creditors, coordination problem, 308
Cross-sectional analysis, 32
Current ratio, 20
Customers, range, 428
Cyperus Paper, betas (unlevering), 352

Days Inventory ratio, 20, 23, 24
Days Payable ratio, 20
Days receivable, 23
Days Receivable ratio, 20, 24
DCFs. See Discounted cash flows
Debt
- addition, 143–144
- after-tax debt, ROE (comparison), 138
- assumption, 384
- AT&T choices, 186
- AT&T policy, 183–184
- beta, presence, 371–372
- domestic debt, issuance, 147–148
- excess, 146
- financial risk, trade-off, 281
- financing, 118
  - tax advantage, 123
- inclusion, 460
- interest payments, tax deductibility, 138
- issuance, equity issuance (contrast), 108–109
- junior debt, 400
- level, 89
  - change, 446
- maintenance, 147, 159
- market costs, 138
- net debt, 199
  - equation, 182–183
- obligations, restructuring, 129
- overhang, 96, 125
  - example, 129t
- payment, reduction, 394
- percentage
  - calculation, 366
  - increase, 139–140
- pretax cost assumption, 446
- rating, estimation process, 370–371
- relative advantage, 123t
- risk, 399
- senior debt, interest rate, 400
- straight debt, 231
- tax advantage, 123
- tax shield, 266–267, 269
- weights, 347
Debt/asset ratio, 71
Debt cost, 355–356
- estimation process, 370–371
- increase rate, 139
- reduction, tax rate (impact), 346
Debt/equity level, maintenance, 213
Debt/equity ratio, 20, 85
- firm change, 141
- range, 143–144
Debt holders
- equity holders, leverage/agency conflicts, 280–285
- firm payment, absence, 124
- identification, 404
- unhappiness, 126
- value, transfer, 269
Debtor-in-possession (DIP) financing, 304
- repayment, 306
Debt ratios, 20, 110t, 228, 367
- calculation, 181–183
- comparison, 232
- equation, 182
- interest rates, relationship, 222–223
Debt-to-equity ratio, 187
Debt/total assets ratio, 20
Delaware, firm incorporation, 470–471
Dell, Michael, 248
Depreciation (Family Dollar), 440–441
Depreciation (Sungreen Corporation), 335
Derivatives, 230
Dilution, concept, 222
DIP. See Debtor-in-possession
Direct bankruptcy costs, 269
- impact, 301
Discounted cash flows (DCFs), 328, 435, 482
- variations, 382–385
Discounted cash flows (Family Dollar), 447
Discounting, 311, 313–314
Discount rates, 457–459
- importance, 340
Discount retailer, creation, 428
Disney, Wilson (CFO role), 170
Distressed liquidation, 45
Distress, probability, 267–268
Dividend payout ratio (DPR), 84
- equation, 191
Dividend policy, 266
- cash flow, relationship, 247
- concept, 173
- empirical evidence, 245–247
- theory, 241–245
Dividend reinvestment plan (DRP), 185
Dividends, 241
- Apple approach, 259–260
- AT&T policy, 185–186
- cutting, absence, 213
- increase, credibility, 243
- payment
  - absence, 122–123
  - increase, 394
- simplicity, 243
- tax rates, 242
- visibility, 243
Dollar General, 465
- competition, 423
- Family Dollar acquisition, strategic rationale, 428
- hostile tender offer, 468
- IPO, 424
- KKR purchase, 424
Dollar store retailers, comparisoni, 424t
Dollar Stores, The
- acquisition, valuation, 433
- CAPEX, subtraction, 459
- cash flow formulas, understanding, 461–462
- competitors, 423–424
- depreciation, addition, 459
- free cash flows, 433
  - equity, relationship, 459–462
  - understanding, 455
- history, 424–427
- LBO valuation, 458
- mergers and acquisitions (M&As), 423
  - executions, 465
- strategic issues, 423
- WACC, 458
Dollar Tree
- acquisition, strategic rationale, 428–429
- bid, 433–435
  - preference, 469
  - shareholder lawsuit, 472–473
- binding agreement, 467
- competition, 423
- Family Dollar, merger announcement, 467
- goodwill, 435
- offer, 466
- vote, usage, 474
Domestic debt, issuance, 147–148
Dot-coms, overvaluation, 6
Dow Jones Industrial Average, increase, 427
DPR. See Dividend payout ratio
Drexel Burnham Lambert
- employee bonuses, 280
- market creation, 6
- MCI option, 229
DRP. See Dividend reinvestment plan
DuPont formula (DuPont Corporation usage), 86, 150, 479

Earnings, 328, 482
- multiples, 340
Earnings before interest after taxes (EBIAT), 336
Earnings before interest and tax (EBIT), 3, 15, 118, 336
- analysis, 438–439
- assumption, 122
- computation, 337
- multiple, usage, 484
Earnings before interest and tax interest rate coverage ratio (EBIT/I), 371
Earnings before interest, taxes, depreciation, and amortization (EBITDA), 3, 116, 117–118
- assumptions, 122
- impact, 369
- interest cap, 385
Earnings per share (EPS), 139–140
- equation, 139
- increase, 392
EBIAT. See Earnings before interest after taxes
EBIT/I. See Earnings before interest and tax interest rate coverage ratio
Economic downturn, 47
Economic value, usage, 56
Economies of scale, 82–83
- impact, 427
Efficient markets, 266
ELKS. See Equity linked-securities
Elliot Management, 465
Equity, 231
- AT&T policy, 184–185
- backdoor equity1, 283
- beginning-of-the-year amount, 15
- beta, 108, 141
- concept, 173
- discount rate, 140
- free cash flows to equity, discounting, 462–463
- holder
  - debt holders, leverage/agency conflicts, 280–285
  - perspective, 127
- initial public offering, 47
- issuance, debt issuance (contrast), 108–109
- market costs, 138
- percentage, calculation, 366
- pre-emergence equity, 306
- returns, 406
- shares, issuance, 98
- undervaluation, 275–276
- weights, 347
Equity cost, 353–355
- calculation, nuances, 371–375
- estimation techniques, 374–375
- formula, 366
Equity issues
- announcements, stock price reaction, 271f
- placement, unevenness, 283
- timing, asymmetric information (relationship), 277–278
Equity linked-securities (ELKS), 284
Equivalent annual revenue, 323
Equivalent cost, 323
Excess capacity, usage, 364
Excess cash
- concept, 173
- defining, 181–182
- firm usage, 394
- negative debt, comparison, 120, 222
- usage, 151–152, 254, 256
Excess cash flow, sustainable growth (relationship), 149–150
Excess debt capacity, maintenance, 151
Execution financing, 349
Expected-case scenario, 200
External financing, firm/investor behavior, 271–272

Fairness opinion (Lazard Frères & Co.), 420–421
Fairness opinion, charges, 407
Fallen angels, 6
Fama, Eugene, 5
Family Dollar
- acquisition, 467
- Balance Sheets, 425–427, 427t
- balance sheets, constant debt ratio (inclusion), 453t
- bidding, events, 474–475
- book equity, 434
- capital cost, estimation, 443–447
- capital expenditure (CAPEX), 440–441
- depreciation/amortization, 440–441
- discounted cash flows, 447
- Dollar General, purchase (strategic rationale), 428
- Dollar Tree
  - bid, 433–435
  - merger accouncement, 467
  - purchase, strategic rationale, 428–429
- EBIT, 425
- EBITDA, 448
- equity, purchase price, 450
- free cash flows, 435–442, 454t
  - calculation, 441–442
- income statements, 427t
- intangible assets, 435
- managerial discretion, 468–470
- market capitalization, 434
- merger risk, 469
- Morgan Stanley, interaction, 427
- postacquisition restated balance sheet, 435
- PP&E, 442
- pre-acquisition balance sheet, 434t
- pre-acquisition financial statements, 436t
- pro forma assumptions, 438t, 452t–453t
- pro forma cash flows, present value, 447t
- pro forma financial statements, constant debt ratio (inclusion), 451
- pro forma free cash flows, 442t
- pro forma free cash flows to equity, 461t
  - constant debt ratio, inclusion, 464
- pro forma postacquisition financial statements, adjustment, 437t
- pro formas, execution, 433
- terminal values, 447–449
  - validation, 449
- time line, 465–468
- Trian acquisition, 425
- working capital, 440–441
Farm equipment dealers, independence, 91
FCFs. See Free cash flows
Federal corporate tax returns, 65–66
Federal Trade Commission (FTC)
- creation, 472
- monopoly power scrutiny, 427
Fibic
- Balance Sheet perspective, 397
Fibic, setup, 395–396
FIFO. See First in, first out
Finance
- approach, 487–488
- art/science, 486
Financial claims, validity, 303
Financial distress, 98, 243
- costs, 97, 124–129, 267–269
  - absence, 115
  - minimization, 129
- expected costs, 130
- increase, 128
- occurrence, 299
- understanding, 299
Financial health, determination, 11
Financial objectives (AT&T), 186–189
Financial performance, enhancement, 429
Financial policies, 2, 478–482
- AT&T decisions/objectives, 177, 186
- concepts, 172
- decisions, 177
- function, 481
- information content, 281
- irrelevance, 114–115
- product market, impact, 165–167
- setting, 482
- strategic weapon, 98
Financial ratio, impact, 198–200
Financial risk, 108, 281
Financial slack, 202, 212
- creation, 282
Financial statements
- disclosures, 54
- examples, 102–105
- pro formas, usage, 33
Financial strategy, consistency, 477
Financial tools, 478
Financial transactions, usage, 114
Financing
- CFO task, 107
- choices, alternatives, 229–234
- debt/principal repayments, inclusion, 460
- decisions, 1, 3, 477, 478–482
- external financing, firm/investor behavior, 271–272
- importance, 81
- projected sources, 194, 196
- requirement, 285–287
- source, 147, 159
- strategy, 97–98
  - maturity, 228–229
- worth, 368
Firms
- all-equity firm, valuation, 383, 385
- bankruptcy, 139
  - filing, timing decision, 299–302
- basic business risk (BBR), 187
- capital structure, personal taxes (impact), 266–267
- cash flows, 477
  - management process, 1
- chapter 11 bankruptcy, 302–303
- comparison, 32
- debt, 127
  - level, 131
  - ratio, 202–203
  - restructuring, preventions, 299–300
- dividends payment, 246
- EPS, increase, 140
- examination, 67
- excess cash usage, 394
- FCF elements, calculation, 336–338
- financial distress, 125–126, 293–298
- financial health, determination, 11
- financial objectives, 212–213
- financing, asymmetric information (relationship), 272–277
- free cash flows, 279, 435–442
- funding, seasonality (impact), 57
- funds, sources/uses, 16
- internal funds, absence, 283
- long-term debt issuance, 148
- money, necessity, 41
- quarterly installments, 65–66
- restructuring, split, 129
- return on equity (ROE), 149
- shopping, 427–429
- stock issuance, 270
- twin-firm technique, 350–353
- WACC, calculation, 348
Firm value, 130
- corporate taxes, relationship, 119t
- determination, 384
- equation, 117
- maintenance, bankruptcy occurrence, 304–305
First Boston, 395, 398, 406
First in, first out (FIFO) method, 52–56
- example, 53t
First-lien creditors, 306
Forecasting
- ratios, reliance, 43
- usage, 41–42
Free cash flows (FCFs), 328, 433
- elements, calculation, 336–338
- equation, 329, 333, 336, 436
  - logic, 457
- Family Dollar, 435–442
- formulas, 338, 483
  - comparison, 455–457
- net present value, 359t
- presence, 279
- present value, addition, 450
- understanding, 455
Free cash flows to equity, discounting, 462–463
Free-cash-flows-to-the-firm approach, 455
Free-cash-flow-to-equity, 446
Free cash flow to equity ratio, 370
Fuji Film, impact, 268
Funding
- level, requirement, 107
- sources/forms, 107
Funds
- growth, 47–48
- primary sources, 19
- sources/uses, 16–19, 19t
- total sources/uses, 18
Fuqua, J.P., 391–292
Future cash flows, projection, 333
Future outcomes, 42
Future profits, predictors, 54
Future value (FV), 312
- equation, 313

Ibbotson and Associates estimates, 445
IBM. See International Business Machines
Icahn, Carl, 465, 466
Income Statement
- calculations, 15
- changes, 40
- components, 20
- examination, 19
- example, 12t
- monthly pro forma income statements, 58–60
Income tax rate, 418
Industrial bonds, subsidized rate, 367
Industrial revenue bonds, 145
Inflation, impact, 365
Information asymmetry, 244–245
- absence/presence, 273–274
Information content, financial policy usage, 281
Initial public offering (IPO), 47, 277f, 283
Institutional Shareholder Services (ISS), 465, 471–472
Insurance, carrying, 47
Intangible assets, 435
Interest
- deductibility, EBITDA cap, 385
- expense, estimate (usage), 35
- tax shields, limitation, 369–370
Interest-bearing debt, exclusion, 441
Interest expense (Congoleum), 418
Interest expense (Sungreen Corporation), 335
Interest-free financing, negative working capital source, 164–165
Interest rate, 35
- debt ratios, relationship, 222–223
- impact, 96
- payment, 145
- periodic interest rate, 314–315
- setting, 44
Interest-rate swaps, 171
Internal capital markets, concept, 173
Internal funds
- firm absence, 283
- sufficiency, 276
Internally generated funds, 189–192
Internal rate of return (IRR), 5, 317–318, 382
- answers, 321–322
- computation, 323
- rules, 320–321
- usage, 318–322
International Business Machines (IBM)
- divisions, 227
- markets, niches, 92
International Harvester, 81
- bankruptcy, 95
- competition, comparison, 84t, 91t
- default, 90–91
- Massey competition, 83
Inventory
- calculation, 64
- costing, 55
- financing, 44
- increase, 17
  - meaning, 19
- pro forma monthly inventory calculation, 65t
- turnover, 23
- understanding, 37–38
Inventory/COGS ratio, 3 1, 23
Inventory/sales ratio, 23
Inventory-to-sales ratio, 87
Inventory to sales ratio, constancy, 62
Inverse relationship, 84
Investment analysis, 364
Investment decisions, 327, 477
- capital structure, impact (absence), 116
- concept, 48
- making, 1, 3
Investments, elements, 423
IPO. See Initial public offering
IRR. See Internal rate of return
ISS. See Institutional Shareholder Services
Issue spotter, 81

Lahey, Pat, 331, 333
Last In, First Out (LIFO) method, 53–56, 53t
Lazard Frères & Co., 398, 407
- fairness opinion, 420–421
LBOs. See Leveraged buyouts
LDCs. See Less developed countries
Lease financing, 223
Leases, 223
Lenders, banker perspective, 40–41, 71–71
Less developed countries (LDCs), lending, 348
Leverage
- addition, 141
- evaluations, 71t
- increase, impact, 279
- ratio, 150
Leveraged buyouts (LBOs), 3, 280
- complications, 405
- Congoleum, 391
- development, 411
- explanation, 403–404
- introduction, 484
- occurrences, 408–409
- performance incentives, 4007
- target, valuation, 392–395
- valuation, consideration, 458
Leverage ratios, 24
Levered betas, 353, 374, 443
- computation, 445
Levine, Howard, 466, 468
Liabilities, growth, 85
LIFO. See Last In, First Out
Line of credit (Apple), 258
Lintner, John, 5
Liquidation, delay, 126, 280
Liquidity
- management, 99
- premium, 354, 443
- ratios, 20, 24–25
Loan
- covenants, 164–165
- evaluation, 44–48
- quality, 47
Long-term debt, 35, 88, 89, 114, 329
- Apple issuance, 257
- calculation, 38
- increase, 416
- issuance, 148
- short-term debt, contrast, 266
Long-term financing, obtaining, 306
Long-term maturities, short-debt maturities (contrast), 99

Majority vote, claimant constitution, 300
Management
- focus, loss, 268
- interests, securing, 469
Manager behavior, agency costs, 278–280
Managerial market imperfections, 2
Marginal tax rates, 119–120
Markets
- capitalization, decrease, 201–202
- debt ratio, 109
- exploitation, 2
- institutional differences, 184
- risk measure, usage, 349
- share
  - capture, 224
  - increase, 92
- value, 54
Markowitz, Harry, 5
Mark-to-market accounting, 55–56
- example, 56t
Marriott Corporation, 480
- after-tax debt, 138
- assets, purchase, 169
- balance sheets, 153–154
- business acquisitions, 159
- capital market, impact, 167–172
- capital structure, 137–143
  - decisions, 137
- cash dividends, payment decision, 149
- choices, 159
- current/pro forma earnings per share (EPS), 162t
- debt, reduction, 159
- earnings per share, 139, 167, 169
- equity, repurchase, 164
- excess cash, 256
- family decision, 163–164
- financial information, 138, 169t
- financial policies, product market (impact), 165–167
- future, 170–172
- history, 137
- income statements, 153–154
- investment decisions, 159
- long-term, fixed-rate debt issuance, 170–171
- net income, 169
- open-market repurchase, 161
- price, determination, 160
- product market operations, policy change, 165
- profitability, 152
- ratios, 138, 154
- repurchase decision, 166–167
- return on asset (ROA), 167–168
- return on equity (ROE), 149, 167–169
- shares, purchase, 160–164
- stock price, increase (justification), 162
- stocks, buyback, 159
- straight preferred stock, issuance (absence), 148–149
- tender offer, 166–167, 468
- working capital, 169
Massey Ferguson, 81–82, 124–125, 146
- alternative strategy, 83
- balance sheets, 102–103
- bankruptcy, 93, 95
- business strategy, financing policy (matching), 97–98
- competition, comparison, 84t, 91t
- competitors, 90–93
- debt, 90t, 92–93
  - level, 90
  - renegotiation, 94
- diversification, 82
- dividend policy, 98
- equity
  - book value, 93
  - issuance, absence, 84–85
- financial distress, 98
- financial statements, 102–105
- financial troubles, 89
- financing (1971-1976), 83–85
- financing strategy, 99–100
- growth, deceleration, 84
- income statements, 104
- interest rates, impact, 97
- inventory-to-sales ratio, 87
- lender renegotiation, 94
- long-term debt, 88, 89
- long-term, fixed-rate debt, 96
- market capitalization, 89f
- negotiation process, 95
- operations, profitability, 293
- options, limitations, 89
- performance (1971-1982), 87f
- performance (post-1976), 86–90
- political risk, response, 87
- product market strategy, 99–100
- ratios, 105
- receivables, increase, 88
- refinancing, avoidance, 97
- repair, 93–94
- restructuring, 96–100
  - bank agreement, 95
  - completion, 96–100
  - deal, 97
- return on equity, increase, 82–83
- sales/income, 83f
- short-term debt, 88, 89
- stock prices, 89f
- strategy, 82–83
- worldwide sales, decline, 86–87
May, Peter, 424
McCardell, Archie R., 90–91
McGowan, William, 213
MCI. See Microwave Communications, Inc.
Mean, calculation process, 354
Merchandise expertise, leverage, 429
Mergers
- investment types, 423
- synergy, 427
Mergers and acquisitions (M&As), 423
Merrill Lynch, bonus payments, 280
Merton, Robert, 5
Microsoft
- cash availability, 255
- competition, 296
- project annual cost, writeoff, 336
Microwave Communications, Inc. (MCI), 177, 185
- alternative financing choices, examination, 229–234
- balance sheets, 215t
- basic business risk (BBR), 226–229
  - consideration, 226
- business plan, reliance, 213–214
- business situation, 226
- capital expenditures (CAPEX), 223–226
  - forecast, 229
- capital structure
  - alternative financing choices, 233t
  - options, impact, 230–231
- cash flow, 216t
  - importance, 212
- common equity, 217–218
- competitive advantage, 226
- conversion price, 229
- convertible debt, attractiveness, 220
- convertibles
  - cessation, 221
  - issuance, reasons, 219–220
- corporate finance policy, operating strategy (impact), 211
- debt maturities, 228
  - policy, 217
- debt ratio, 216–217, 228
  - comparison, 234
- depreciation, estimates, 223
- dividend payment, 244
- dividend policy, 216
  - zero level, 228
- expected scenario, 224
- external financings, 218t
- finances, 214–217
- financial needs, 215
- financing
  - choices, 234–235
  - needs, 215–216, 223–234
  - options, 232
  - strategy, maturity, 227–228
- future, 224–228
- history, 213–218
- income statements, 215t
- leases, 223
- marketing expenditures, increase, 228
- prefunding, decision, 229
- pro forma balance sheet, 239t
- pro forma CAPEX, 223
- pro forma cash flow, 224, 224t, 239t
- pro forma income statement, 238t
- pro formas, development, 238–240
- self-financing, 217
- technological risk, 227
- working capital, increase, 225
- worries, 227
- worst-case scenario, 225
Milken, Michael, 6
Miller, Merton, 5, 110, 113
M&M. See Modigliani and Miller
Modern finance, history, 5–6
Modigliani and Miller (M&M)
- assumptions, 111, 115–116, 265
- corporate finance theory, 178–180
- financial policy idea, 115
- papers, 5
- study, 110–116
- theory, 247
Modligiani, Franco, 5, 110
Money
- borrowing, 16
- lending, risks, 45
- time value (See Time value of money)
Monopoly power
- FTC scrutiny, 427
- increase, 427
Monthly pro forma accounts payable, calculation, 65t
Monthly pro forma accruals, calculation, 67t
Monthly pro forma balance sheets, 60–68
- examples, 69t, 73t–77t
Monthly pro forma income statements, 58–60
- example, 68t, 71t–78t
Monthly purchases, calculation, 64
Monthly sales, 58t
Moody's, commercial paper rating, 147
Morgan Stanley
- debt, pretax cost assumption, 446
- Family Dollar engagement, 425
- preference equity redemption cumulative stock issuance, 284
- U.S. Treasury rate usage, 443
Mullins, Asquith, 281
Myers, Stewart, 352

P-1 Moody's commercial paper, 147
Paulson and Co., 425, 465, 472
Paulson, John, 472
Payback, 382
- usage, 322
P/E. See Price/earnings; Price-to-earnings ratio
Pecking order theory, 281, 282–283
Peltz, Nelson, 424
Pension Benefit Guaranty Corporation (PBGC), cash/common stock receipt, 306
Percentage of sales, usage, 31
Periodic interest rate, 314–315
Perkins, 93–94
Perpetuities, 324–325
- formulas, 340
Perpetuity tax shield, present value, 119
Pershing Square Capital Management, 425
Personal taxes, 120–123
- impact, 267–267
Pickens, T. Boone, 279
Poison pill, 470
Political risk, 82–83, 87
Predatory pricing (engagement), excess cash (usage), 254
Pre-emergence equity, 306
Preference equity redemption cumulative stock (PERCS), Morgan Stanley issuance, 285
Preferred shares, issuance, 99
Prepackaged bankruptcy, 301
- costs, 302
Prepaid expenses, decrease, 17
Present value, equation, 117
Price/earnings (P/E) ratio, impact, 141
Price-to-earnings ratio (P/E), 3
Principal-agent problem, 279–280
Principal repayments, inclusion, 460
Prisoners' dilemma, creation, 301
Private corporate debt, 184
Private equity
- financing (Congoleum), 391
- usage, 484
Procter and Gamble (P&G), payback usage, 322
Production
- economies of scale, 82–83
- political risk, 82–83
Product markets, 2
- changes, financial ratio (impact), 196–198
- imperfections, 2
- position/strategy, 81–82
- strategy, usage, 13, 99–100
Profit
- calculation, 53
- computation, 55
Profitability
- example, 14
- ratios, 14, 16t, 20, 24
Pro forma analysis, 478
Pro forma Balance Sheet, 36–39, 36t, 43t
- AT&T example, 196t
- building, 36
- completion, 35
- revision, 41t
Pro forma cash flow statements (AT&T), 196t
- expected/worst-case scenarios, 200t
Pro forma forecasts, 31, 32–39
Pro forma Income Statement, 33–35, 33t, 43t
- AT&T example, 195t
- building, 36
- revision, 40t
- usage, 64
Pro forma monthly accounts receivables, computation, 62t
Pro forma monthly income statements, 59t
Pro forma monthly inventory calculation, 64t
Pro forma ratios, expected/worst-case scenarios, 200t
Pro formas
- extension, 70
- usage, 42–43
Projected cash flows (Sungreen), 345
Projections
- revision, 42
- usage, 42–44
Projects
- beta, 372
- capital structure, usage, 347–349
- cash flows, evaluation, 364–365
- charges, 364
- debt cost, estimation process, 370–371
- debt rating, estimation process, 370–371
- NPV, change, 319–320
- scale, IRR (relationship), 318
- unequal lives, 322–324
- valuation process, 328–339
- value, financing dependence, 282
Property, plant and equipment (PP&E), 337, 442
- forecast, 38
- growth, 208
- increase, 17, 416
Proxy advisory firms, 471–472
Prudent business judgment, 473
Prudential Insurance, 395
- investment, 406
- risk, 401
Public corporate debt, 184
Purchases
- calculation, 37
- understanding, 37–38

Radaker, Byron C., 391, 392, 398
Ratios
- analysis, 19–25, 31–32
- categories, 20
- comparison, 32
- examples, 23t
- interpretation process, 24
- reliance, 43
- usage, 32
Ratios, calculation/math, 14–16
Real cash flows, 336
Real options (strategic choices), 386–389
Receivables
- days, constancy, 61
- estimation, 62
- financing, 44
- increase, 88
Receivables/(sales/365) ratio, 31
Receivables to sales, monthly ratio, 60
Receivable turnover, calculation, 22
Reich, Victor A., 100
Relevered beta, 353
Reorganization costs, reduction, 301
Restructuring, 293
- offer, force, 300–301
Retained earnings
- increase, 18
- usage, 39
Return on assets (ROA)
- equation, 86, 163
- examination, 14–16
Return on equity (ROE)
- debt after-tax cost, comparison, 138
- equation, 86, 150, 163, 191, 254, 479
- examination, 14–16
- increase, 82–83, 141
- meaning, 24
Return on net assets (RONA), calculation, 16
Risk
- excess, 126
- factors, identification, 374–375
- increase, 142
- involvement, 41
- management, 266
- profile, 349–350
- return spectrum, 349–350
- risk-free rate, 353, 383
  - calculation, 354
Riskless debt, CAPM formula (usage), 372
Risky debt, impact, 276
RJR Nabisco, merger, 93
RONA. See Return on net assets
Ross, Steve, 374

Sales/accounts receivable, calculation, 22
Sales/COGS ratio, 23
Sales/receivables ratio, 31
Samsung, damages payments, 251
Sanders, Thomas, 178
Scholes, Myron, 5
Seasonality, impact, 57, 71
Seasoned equity issues (SEOs), 277, 277f
Second-lien creditors, 306
Segmented markets, 231
Self-financing, importance, 88–90
Selling, General, and Administrative (SG&A) expenses, 58–60
Senior debt, interest rate, 400
SEOs. See Seasoned equity issues
Service, meaning, 13
SG&A. See Selling, General, and Administrative
Shafford, Richard, 259
Shareholders
- activist shareholders, 470–472
- equity, 67
- lawsuits, 472–473
Share prices, 162–163
Share repurchases
- description, 244
- signal, 244
Sharpe, William, 5
Short-term debt, 88, 89, 114, 210
- increase, 89, 416
- long-term debt, contrast, 266
Short-term financing, necessity, 44
Short-term maturities, long-term maturities (contrast), 99
Signaling, 243
- theory, 245–246
Signals, identification, 244
Silver Lake Partners, 294, 297
Sources and Uses of Funds
- example, 19t
- Statement, creation, 17
- Worksheet, 17t
Standard Paper, betas (unlevering), 352
Static capital structure theory, 479
Step function, 38
Stock buybacks, 241, 394
Stockholders
- lawsuits, usage, 472–473
- value, maximization (absence), 472–473
Stock market bubbles, 6, 278
Stock price
- capital structure, impact, 144, 146f
- change, 221
- equity issue reaction, 271f
Stock repurchases, 241
Stock returns, time series, 355
Straight debt, 231
Straight preferred securities, issuance, 179
Straight preferred stock
- exclusion, 148–149
- issuance, 159
Strategic analysis, 358–359
Strategic considerations, 386–387
Strip investment, 406
Subsidized interest rates, treatment, 367
Summers, Hanna, 331, 333, 351
Sungreen Corporation
- balance sheets, 331t
- capacity, building, 333–335
- CAPEX, 335
- capital structure, 347
  - usage, 347–349
- cash flows, 327
- depreciation, 335
- EBIT interest rate coverage ratio (EBIT/I), 371
- elements, assembly, 338–339
- financial information, 331t
- free cash flow forecast, data (usage), 333–334
- income statements, 331t
- income tax rate, 335
- interest expense, 335
- Kingsport balance sheets, 335t
- Kingsport income statements, 335t
- mill/plant construction, 387
- net working capital, 338
- nominal/real cash flows, 335–336
- pro forma free cash flows, 340t, 346t
- pro forma new working capital CAPEX Kingsport, 337
- pro forma new working capital Kingsport, 339t
- projected cash flows, 345
- terminal value estimation, 341
- valuation, 327, 345
  - example, 330–331
- wrapping paper interest, 332–333
Sunk costs, 363–364
Suppliers, payments, 27
Sustainable growth, 84, 85–86
- equation, 85
- excess cash flow, relationship, 149–150
- rate, 254
Synergy, 427
- opportunities, generation, 429
Synthetic convertible, 230

Takeovers (prevention), poison pill (creation), 470
Target capital structure, setting (checklist), 287
Taxes, 116–124, 403–404
- advantages, trade-off, 281
- estimates, 44
- personal taxes, 120–123
- zero level, 115
Tax Reform Act (1986), 410
Tax shields, 120
- adjustment, 358
- advantages, 327
Telex, 92
Tender offers, 161
- opening, time line, 468
Terminal value (Family Dollar), 448–450
- validation, 450
Terminal value (TV), 341–343
- break-even terminal value, 451
- calculation, 357
- equation, 341–342
- methods, nuances, 376–382
- Morgan Stanley calculation, 447
- separation, 375–376
Term premium, 355
Tesla, subsidized rates, 369
Thaler, Richard, 5
Thatcher, Margaret, 94
Time horizons, forecasting, 41–42
Times interest earned ratio, 20
Time value of money, 311–315
Total assets
- beginning-of-the-year amount, 15
- growth, 13
Total assets/equity ratio, 20
Total cash flow, capital structure (relationship), 113
Total financing, percentage, 347
Total interest-bearing debt, assumption, 39–40
Total Sources of Funds, 18
Total Uses of Funds, 18
TPG Capital, 292, 295
Trade credit, 18
Trade-off theory, violation, 284
Transaction costs, 269–272
- zero level, 112
Treasury investor growth receipts (TIGRS), 285
Trian Partners, 425, 465
- removal, 468
Trudeau, Pierre, 91, 95
Truth (presentation), accounting (usage), 52
Turner, J.L./Cal, 423
TV. See Terminal value
Twin firms, financial information, 352t
Twin-firm technique, 350–353, 483