Fundamentals of Corporate Finance · 11th Edition by Ross, Stephen -- Read -- Imperial Library of Trantor

Index

PART 1 Overview of Corporate Finance

CHAPTER 1 INTRODUCTION TO CORPORATE FINANCE

1.1 Corporate Finance and the Financial Manager

What Is Corporate Finance? The Financial Manager Financial Management Decisions

Capital Budgeting Capital Structure Working Capital Management Conclusion

1.2 Forms of Business Organization

Sole Proprietorship Partnership Corporation A Corporation by Another Name . . .

1.3 The Goal of Financial Management

Possible Goals The Goal of Financial Management A More General Goal Sarbanes-Oxley

1.4 The Agency Problem and Control of the Corporation

Agency Relationships Management Goals Do Managers Act in the Stockholders’ Interests?

Managerial Compensation Control of the Firm Conclusion

Stakeholders

1.5 Financial Markets and the Corporation

Cash Flows to and from the Firm Primary versus Secondary Markets

Primary Markets Secondary Markets Dealer versus Auction Markets Trading in Corporate Securities Listing

1.6 Summary and Conclusions

CHAPTER 2 FINANCIAL STATEMENTS, TAXES, AND CASH FLOW

2.1 The Balance Sheet

Assets: The Left Side Liabilities and Owners’ Equity: The Right Side Net Working Capital Liquidity Debt versus Equity Market Value versus Book Value

2.2 The Income Statement

GAAP and the Income Statement Noncash Items Time and Costs

2.3 Taxes

Corporate Tax Rates Average versus Marginal Tax Rates

2.4 Cash Flow

Cash Flow from Assets

Operating Cash Flow Capital Spending Change in Net Working Capital Conclusion A Note about “Free” Cash Flow

Cash Flow to Creditors and Stockholders

Cash Flow to Creditors Cash Flow to Stockholders

An Example: Cash Flows for Dole Cola

Operating Cash Flow Net Capital Spending Change in NWC and Cash Flow from Assets Cash Flow to Stockholders and Creditors

2.5 Summary and Conclusions

PART 2 Financial Statements and Long-Term Financial Planning

CHAPTER 3 WORKING WITH FINANCIAL STATEMENTS

3.1 Cash Flow and Financial Statements: A Closer Look

Sources and Uses of Cash The Statement of Cash Flows

3.2 Standardized Financial Statements

Common-Size Statements

Common-Size Balance Sheets Common-Size Income Statements Common-Size Statements of Cash Flows

Common-Base Year Financial Statements: Trend Analysis Combined Common-Size and Base Year Analysis

3.3 Ratio Analysis

Short-Term Solvency, or Liquidity, Measures

Current Ratio The Quick (or Acid-Test) Ratio Other Liquidity Ratios

Long-Term Solvency Measures

Total Debt Ratio A Brief Digression: Total Capitalization versus Total Assets Times Interest Earned Cash Coverage

Asset Management, or Turnover, Measures

Inventory Turnover and Days’ Sales in Inventory Receivables Turnover and Days’ Sales in Receivables Asset Turnover Ratios

Profitability Measures

Profit Margin Return on Assets Return on Equity

Market Value Measures

Price–Earnings Ratio Price–Sales Ratio Market-to-Book Ratio Enterprise Value–EBITDA Ratio

Conclusion

3.4 The DuPont Identity

A Closer Look at Roe An Expanded Dupont Analysis

3.5 Using Financial Statement Information

Why Evaluate Financial Statements?

Internal Uses External Uses

Choosing a Benchmark

Time Trend Analysis Peer Group Analysis

Problems with Financial Statement Analysis

3.6 Summary and Conclusions

CHAPTER 4 LONG-TERM FINANCIAL PLANNING AND GROWTH

4.1 What Is Financial Planning?

Growth as a Financial Management Goal Dimensions of Financial Planning What Can Planning Accomplish?

Examining Interactions Exploring Options Avoiding Surprises Ensuring Feasibility and Internal Consistency Conclusion

4.2 Financial Planning Models: A First Look

A Financial Planning Model: The Ingredients

Sales Forecast Pro Forma Statements Asset Requirements Financial Requirements The Plug Economic Assumptions

A Simple Financial Planning Model

4.3 The Percentage of Sales Approach

The Income Statement The Balance Sheet A Particular Scenario An Alternative Scenario

4.4 External Financing and Growth

EFN and Growth Financial Policy and Growth

The Internal Growth Rate The Sustainable Growth Rate Determinants of Growth

A Note about Sustainable Growth Rate Calculations

4.5 Some Caveats Regarding Financial Planning Models 4.6 Summary and Conclusions

PART 3 Valuation of Future Cash Flows

CHAPTER 5 INTRODUCTION TO VALUATION: THE TIME VALUE OF MONEY

5.1 Future Value and Compounding

Investing for a Single Period Investing for More Than One Period A Note about Compound Growth

5.2 Present Value and Discounting

The Single-Period Case Present Values for Multiple Periods

5.3 More about Present and Future Values

Present versus Future Value Determining the Discount Rate Finding the Number of Periods

5.4 Summary and Conclusions

CHAPTER 6 DISCOUNTED CASH FLOW VALUATION

6.1 Future and Present Values of Multiple Cash Flows

Future Value with Multiple Cash Flows Present Value with Multiple Cash Flows A Note about Cash Flow Timing

6.2 Valuing Level Cash Flows: Annuities and Perpetuities

Present Value for Annuity Cash Flows

Annuity Tables Finding the Payment Finding the Rate

Future Value for Annuities A Note about Annuities Due Perpetuities Growing Annuities and Perpetuities

6.3 Comparing Rates: The Effect of Compounding

Effective Annual Rates and Compounding Calculating and Comparing Effective Annual Rates EARs and APRs Taking It to the Limit: A Note about Continuous Compounding

6.4 Loan Types and Loan Amortization

Pure Discount Loans Interest-Only Loans Amortized Loans

6.5 Summary and Conclusions

CHAPTER 7 INTEREST RATES AND BOND VALUATION

7.1 Bonds and Bond Valuation

Bond Features and Prices Bond Values and Yields Interest Rate Risk Finding the Yield to Maturity: More Trial and Error

7.2 More about Bond Features

Is It Debt or Equity? Long-Term Debt: The Basics The Indenture

Terms of a Bond Security Seniority Repayment The Call Provision Protective Covenants

7.3 Bond Ratings 7.4 Some Different Types of Bonds

Government Bonds Zero Coupon Bonds Floating-Rate Bonds Other Types of Bonds Sukuk

7.5 Bond Markets

How Bonds are Bought and Sold Bond Price Reporting A Note about Bond Price Quotes

7.6 Inflation and Interest Rates

Real versus Nominal Rates The Fisher Effect Inflation and Present Values

7.7 Determinants of Bond Yields

The Term Structure of Interest Rates Bond Yields and the Yield Curve: Putting It All Together Conclusion

7.8 Summary and Conclusions

CHAPTER 8 STOCK VALUATION

8.1 Common Stock Valuation

Cash Flows Some Special Cases

Zero Growth Constant Growth Nonconstant Growth Two-Stage Growth

Components of the Required Return Stock Valuation Using Multiples

8.2 Some Features of Common and Preferred Stocks

Common Stock Features

Shareholder Rights Proxy Voting Classes of Stock Other Rights Dividends

Preferred Stock Features

Stated Value Cumulative and Noncumulative Dividends Is Preferred Stock Really Debt?

8.3 The Stock Markets

Dealers and Brokers Organization of the NYSE

Members Operations Floor Activity

NASDAQ Operations

ECNs

Stock Market Reporting

8.4 Summary and Conclusions

PART 4 Capital Budgeting

CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA

9.1 Net Present Value

The Basic Idea Estimating Net Present Value

9.2 The Payback Rule

Defining the Rule Analyzing the Rule Redeeming Qualities of the Rule Summary of the Rule

9.3 The Discounted Payback 9.4 The Average Accounting Return 9.5 The Internal Rate of Return

Problems with The IRR

Nonconventional Cash Flows Mutually Exclusive Investments Investing or Financing?

Redeeming Qualities of the IRR The Modified Internal Rate of Return (MIRR)

Method #1: The Discounting Approach Method #2: The Reinvestment Approach Method #3: The Combination Approach MIRR or IRR: Which Is Better?

9.6 The Profitability Index 9.7 The Practice of Capital Budgeting 9.8 Summary and Conclusions

CHAPTER 10 MAKING CAPITAL INVESTMENT DECISIONS

10.1 Project Cash Flows: A First Look

Relevant Cash Flows The Stand-Alone Principle

10.2 Incremental Cash Flows

Sunk Costs Opportunity Costs Side Effects Net Working Capital Financing Costs Other Issues

10.3 Pro Forma Financial Statements and Project Cash Flows

Getting Started: Pro Forma Financial Statements Project Cash Flows

Project Operating Cash Flow Project Net Working Capital and Capital Spending

Projected Total Cash Flow and Value

10.4 More about Project Cash Flow

A Closer Look at Net Working Capital Depreciation

Modified ACRS Depreciation (MACRS) Book Value versus Market Value

An Example: The Majestic Mulch and Compost Company (MMCC)

Operating Cash Flows Change in NWC Capital Spending Total Cash Flow and Value Conclusion

10.5 Alternative Definitions of Operating Cash Flow

The Bottom-Up Approach The Top-Down Approach The Tax Shield Approach Conclusion

10.6 Some Special Cases of Discounted Cash Flow Analysis

Evaluating Cost-Cutting Proposals Setting the Bid Price Evaluating Equipment Options with Different Lives

10.7 Summary and Conclusions

CHAPTER 11 PROJECT ANALYSIS AND EVALUATION

11.1 Evaluating NPV Estimates

The Basic Problem Projected versus Actual Cash Flows Forecasting Risk Sources of Value

11.2 Scenario and Other What-If Analyses

Getting Started Scenario Analysis Sensitivity Analysis Simulation Analysis

11.3 Break-Even Analysis

Fixed and Variable Costs

Variable Costs Fixed Costs Total Costs

Accounting Break-Even Accounting Break-Even: A Closer Look Uses for the Accounting Break-Even

11.4 Operating Cash Flow, Sales Volume, and Break-Even

Accounting Break-Even and Cash Flow

The Base Case Calculating the Break-Even Level Payback and Break-Even

Sales Volume and Operating Cash Flow Cash Flow, Accounting, and Financial Break-Even Points

Accounting Break-Even Revisited Cash Break-Even Financial Break-Even Conclusion

11.5 Operating Leverage

The Basic Idea Implications of Operating Leverage Measuring Operating Leverage Operating Leverage and Break-Even

11.6 Capital Rationing

Soft Rationing Hard Rationing

11.7 Summary and Conclusions

PART 5 Risk and Return

CHAPTER 12 SOME LESSONS FROM CAPITAL MARKET HISTORY

12.1 Returns

Dollar Returns Percentage Returns

12.2 The Historical Record

A First Look A Closer Look

12.3 Average Returns: The First Lesson

Calculating Average Returns Average Returns: The Historical Record Risk Premiums The First Lesson

12.4 The Variability of Returns: The Second Lesson

Frequency Distributions and Variability The Historical Variance and Standard Deviation The Historical Record Normal Distribution The Second Lesson 2008: The Bear Growled and Investors Howled Using Capital Market History More on the Stock Market Risk Premium

12.5 More about Average Returns

Arithmetic versus Geometric Averages Calculating Geometric Average Returns Arithmetic Average Return or Geometric Average Return?

12.6 Capital Market Efficiency

Price Behavior in an Efficient Market The Efficient Markets Hypothesis Some Common Misconceptions about the EMH The Forms of Market Efficiency

12.7 Summary and Conclusions

CHAPTER 13 RETURN, RISK, AND THE SECURITY MARKET LINE

13.1 Expected Returns and Variances

Expected Return Calculating the Variance

13.2 Portfolios

Portfolio Weights Portfolio Expected Returns Portfolio Variance

13.3 Announcements, Surprises, and Expected Returns

Expected and Unexpected Returns Announcements and News

13.4 Risk: Systematic and Unsystematic

Systematic and Unsystematic Risk Systematic and Unsystematic Components of Return

13.5 Diversification and Portfolio Risk

The Effect of Diversification: Another Lesson from Market History The Principle of Diversification Diversification and Unsystematic Risk Diversification and Systematic Risk

13.6 Systematic Risk and Beta

The Systematic Risk Principle Measuring Systematic Risk Portfolio Betas

13.7 The Security Market Line

Beta and the Risk Premium

The Reward-to-Risk Ratio The Basic Argument The Fundamental Result

The Security Market Line

Market Portfolios The Capital Asset Pricing Model

13.8 The SML and the Cost of Capital: A Preview

The Basic Idea The Cost of Capital

13.9 Summary and Conclusions

PART 6 Cost of Capital and Long-Term Financial Policy

CHAPTER 14 COST OF CAPITAL

14.1 The Cost of Capital: Some Preliminaries

Required Return versus Cost of Capital Financial Policy and Cost of Capital

14.2 The Cost of Equity

The Dividend Growth Model Approach

Implementing the Approach Estimating G Advantages and Disadvantages of the Approach

The SML Approach

Implementing the Approach Advantages and Disadvantages of the Approach

14.3 The Costs of Debt and Preferred Stock

The Cost of Debt The Cost of Preferred Stock

14.4 The Weighted Average Cost of Capital

The Capital Structure Weights Taxes and the Weighted Average Cost of Capital Calculating the WACC for Eastman Chemical

Eastman’s Cost of Equity Eastman’s Cost of Debt Eastman’s WACC

Solving the Warehouse Problem and Similar Capital Budgeting Problems Performance Evaluation: Another Use of the WACC

14.5 Divisional and Project Costs of Capital

The SML and the WACC Divisional Cost of Capital The Pure Play Approach The Subjective Approach

14.6 Company Valuation With The WACC 14.7 Flotation Costs and the Average Cost of Capital

The Basic Approach Flotation Costs and NPV Internal Equity and Flotation Costs

14.8 Summary and Conclusions

CHAPTER 15 RAISING CAPITAL

15.1 The Financing Life Cycle of a Firm: Early-Stage Financing and Venture Capital

Venture Capital Some Venture Capital Realities Choosing a Venture Capitalist Conclusion

15.2 Selling Securities to the Public: The Basic Procedure

Crowdfunding

15.3 Alternative Issue Methods 15.4 Underwriters

Choosing an Underwriter Types of Underwriting

Firm Commitment Underwriting Best Efforts Underwriting Dutch Auction Underwriting

The Aftermarket The Green Shoe Provision Lockup Agreements The Quiet Period

15.5 IPOs and Underpricing

IPO Underpricing: The 1999–2000 Experience Evidence on Underpricing Why Does Underpricing Exist?

15.6 New Equity Sales and the Value of the Firm 15.7 The Costs of Issuing Securities

The Costs of Selling Stock to the Public The Costs of Going Public: A Case Study

15.8 Rights

The Mechanics of a Rights Offering Number of Rights Needed to Purchase a Share The Value of a Right Ex Rights The Underwriting Arrangements Effects on Shareholders

15.9 Dilution

Dilution of Proportionate Ownership Dilution of Value: Book versus Market Values

A Misconception The Correct Arguments

15.10 Issuing Long-Term Debt 15.11 Shelf Registration 15.12 Summary and Conclusions

CHAPTER 16 FINANCIAL LEVERAGE AND CAPITAL STRUCTURE POLICY

16.1 The Capital Structure Question

Firm Value and Stock Value: An Example Capital Structure and the Cost of Capital

16.2 The Effect of Financial Leverage

The Basics of Financial Leverage

Financial Leverage, EPS, and ROE: An Example EPS versus EBIT

Corporate Borrowing and Homemade Leverage

16.3 Capital Structure and the Cost of Equity Capital

M&M Proposition I: The Pie Model The Cost of Equity and Financial Leverage: M&M Proposition II Business and Financial Risk

16.4 M&M Propositions I and II with Corporate Taxes

The Interest Tax Shield Taxes and M&M Proposition I Taxes, the WACC, and Proposition II Conclusion

16.5 Bankruptcy Costs

Direct Bankruptcy Costs Indirect Bankruptcy Costs

16.6 Optimal Capital Structure

The Static Theory of Capital Structure Optimal Capital Structure and the Cost of Capital Optimal Capital Structure: A Recap Capital Structure: Some Managerial Recommendations

Taxes Financial Distress

16.7 The Pie Again

The Extended Pie Model Marketed Claims versus Nonmarketed Claims

16.8 The Pecking-Order Theory

Internal Financing and the Pecking Order Implications of the Pecking Order

16.9 Observed Capital Structures 16.10 A Quick Look at the Bankruptcy Process

Liquidation and Reorganization

Bankruptcy Liquidation Bankruptcy Reorganization

Financial Management and the Bankruptcy Process Agreements to Avoid Bankruptcy

16.11 Summary and Conclusions

CHAPTER 17 DIVIDENDS AND PAYOUT POLICY

17.1 Cash Dividends and Dividend Payment

Cash Dividends Standard Method of Cash Dividend Payment Dividend Payment: A Chronology More about the Ex-Dividend Date

17.2 Does Dividend Policy Matter?

An Illustration of the Irrelevance of Dividend Policy

Current Policy: Dividends Set Equal to Cash Flow Alternative Policy: Initial Dividend Greater Than Cash Flow

Homemade Dividends A Test

17.3 Real-World Factors Favoring a Low Dividend Payout

Taxes Flotation Costs Dividend Restrictions

17.4 Real-World Factors Favoring a High Dividend Payout

Desire for Current Income Tax and Other Benefits from High Dividends

Corporate Investors Tax-Exempt Investors

Conclusion

17.5 A Resolution of Real-World Factors?

Information Content of Dividends The Clientele Effect

17.6 Stock Repurchases: An Alternative to Cash Dividends

Cash Dividends versus Repurchase Real-World Considerations in a Repurchase Share Repurchase and EPS

17.7 What We Know and Do Not Know about Dividend and Payout Policies

Dividends and Dividend Payers Corporations Smooth Dividends Putting It All Together Some Survey Evidence on Dividends

17.8 Stock Dividends and Stock Splits

Some Details about Stock Splits and Stock Dividends

Example of a Small Stock Dividend Example of a Stock Split Example of a Large Stock Dividend

Value of Stock Splits and Stock Dividends

The Benchmark Case Popular Trading Range

Reverse Splits

17.9 Summary and Conclusions

PART 7 Short-Term Financial Planning and Management

CHAPTER 18 SHORT-TERM FINANCE AND PLANNING

18.1 Tracing Cash and Net Working Capital 18.2 The Operating Cycle and the Cash Cycle

Defining the Operating and Cash Cycles

The Operating Cycle The Cash Cycle

The Operating Cycle and the Firm’s Organizational Chart Calculating the Operating and Cash Cycles

The Operating Cycle The Cash Cycle

Interpreting the Cash Cycle

18.3 Some Aspects of Short-Term Financial Policy

The Size of the Firm’s Investment in Current Assets Alternative Financing Policies for Current Assets

An Ideal Case Different Policies for Financing Current Assets

Which Financing Policy Is Best? Current Assets and Liabilities in Practice

18.4 The Cash Budget

Sales and Cash Collections Cash Outflows The Cash Balance

18.5 Short-Term Borrowing

Unsecured Loans

Compensating Balances Cost of a Compensating Balance Letters of Credit

Secured Loans

Accounts Receivable Financing Inventory Loans

Other Sources

18.6 A Short-Term Financial Plan 18.7 Summary and Conclusions

CHAPTER 19 CASH AND LIQUIDITY MANAGEMENT

19.1 Reasons for Holding Cash

The Speculative and Precautionary Motives The Transaction Motive Compensating Balances Costs of Holding Cash Cash Management versus Liquidity Management

19.2 Understanding Float

Disbursement Float Collection Float and Net Float Float Management

Measuring Float Some Details Cost of the Float Ethical and Legal Questions

Electronic Data Interchange and Check 21: The End of Float?

19.3 Cash Collection and Concentration

Components of Collection Time Cash Collection Lockboxes Cash Concentration Accelerating Collections: An Example

19.4 Managing Cash Disbursements

Increasing Disbursement Float Controlling Disbursements

Zero-Balance Accounts Controlled Disbursement Accounts

19.5 Investing Idle Cash

Temporary Cash Surpluses

Seasonal or Cyclical Activities Planned or Possible Expenditures

Characteristics of Short-Term Securities

Maturity Default Risk Marketability Taxes

Some Different Types of Money Market Securities

19.6 Summary and Conclusions 19A Determining the Target Cash Balance

The Basic Idea The Bat Model

The Opportunity Costs The Trading Costs The Total Cost The Solution Conclusion

The Miller–Orr Model: A More General Approach

The Basic Idea Using the Model

Implications of the BAT and Miller–Orr Models Other Factors Influencing the Target Cash Balance

CHAPTER 20 CREDIT AND INVENTORY MANAGEMENT

20.1 Credit and Receivables

Components of Credit Policy The Cash Flows from Granting Credit The Investment in Receivables

20.2 Terms of the Sale

The Basic Form The Credit Period

The Invoice Date Length of the Credit Period

Cash Discounts

Cost of the Credit Trade Discounts The Cash Discount and the ACP

Credit Instruments

20.3 Analyzing Credit Policy

Credit Policy Effects Evaluating a Proposed Credit Policy

NPV of Switching Policies A Break-Even Application

20.4 Optimal Credit Policy

The Total Credit Cost Curve Organizing the Credit Function

20.5 Credit Analysis

When Should Credit Be Granted?

A One-Time Sale Repeat Business

Credit Information Credit Evaluation and Scoring

20.6 Collection Policy

Monitoring Receivables Collection Effort

20.7 Inventory Management

The Financial Manager and Inventory Policy Inventory Types Inventory Costs

20.8 Inventory Management Techniques

The ABC Approach The Economic Order Quantity Model

Inventory Depletion The Carrying Costs The Restocking Costs The Total Costs

Extensions to the EOQ Model

Safety Stocks Reorder Points

Managing Derived-Demand Inventories

Materials Requirements Planning Just-in-Time Inventory

20.9 Summary and Conclusions 20A More about Credit Policy Analysis

Two Alternative Approaches

The One-Shot Approach The Accounts Receivable Approach

Discounts and Default Risk

NPV of the Credit Decision A Break-Even Application

PART 8 Topics in Corporate Finance

CHAPTER 21 INTERNATIONAL CORPORATE FINANCE

21.1 Terminology 21.2 Foreign Exchange Markets and Exchange Rates

Exchange Rates

Exchange Rate Quotations Cross-Rates and Triangle Arbitrage Types of Transactions

21.3 Purchasing Power Parity

Absolute Purchasing Power Parity Relative Purchasing Power Parity

The Basic Idea The Result Currency Appreciation and Depreciation

21.4 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

Uncovered Interest Parity The International Fisher Effect

21.5 International Capital Budgeting

Method 1: The Home Currency Approach Method 2: The Foreign Currency Approach Unremitted Cash Flows

21.6 Exchange Rate Risk

Short-Run Exposure Long-Run Exposure Translation Exposure Managing Exchange Rate Risk

21.7 Political Risk 21.8 Summary and Conclusions

CHAPTER 22 BEHAVIORAL FINANCE: IMPLICATIONS FOR FINANCIAL MANAGEMENT

22.1 Introduction to Behavioral Finance 22.2 Biases

Overconfidence Overoptimism Confirmation Bias

22.3 Framing Effects

Loss Aversion House Money

22.4 Heuristics

The Affect Heuristic The Representativeness Heuristic Representativeness and Randomness The Gambler’s Fallacy

22.5 Behavioral Finance and Market Efficiency

Limits to Arbitrage

The 3Com/Palm Mispricing The Royal Dutch/Shell Price Ratio

Bubbles and Crashes

The Crash of 1929 The Crash of October 1987 The Nikkei Crash The “Dot-Com” Bubble and Crash

22.6 Market Efficiency and the Performance of Professional Money Managers 22.7 Summary and Conclusions

CHAPTER 23 ENTERPRISE RISK MANAGEMENT

23.1 Insurance 23.2 Managing Financial Risk

The Risk Profile Reducing Risk Exposure Hedging Short-Run Exposure Cash Flow Hedging: A Cautionary Note Hedging Long-Term Exposure Conclusion

23.3 Hedging with Forward Contracts

Forward Contracts: The Basics The Payoff Profile Hedging with Forwards

A Caveat Credit Risk Forward Contracts in Practice

23.4 Hedging with Futures Contracts

Trading in Futures Futures Exchanges Hedging with Futures

23.5 Hedging with Swap Contracts

Currency Swaps Interest Rate Swaps Commodity Swaps The Swap Dealer Interest Rate Swaps: An Example

23.6 Hedging with Option Contracts

Option Terminology Options versus Forwards Option Payoff Profiles Option Hedging Hedging Commodity Price Risk with Options Hedging Exchange Rate Risk with Options Hedging Interest Rate Risk with Options

A Preliminary Note Interest Rate Caps Other Interest Rate Options

Actual Use of Derivatives

23.7 Summary and Conclusions

CHAPTER 24 OPTIONS AND CORPORATE FINANCE

24.1 Options: The Basics

Puts and Calls Stock Option Quotations Option Payoffs

24.2 Fundamentals of Option Valuation

Value of a Call Option at Expiration The Upper and Lower Bounds on a Call Option’s Value

The Upper Bound The Lower Bound

A Simple Model: Part I

The Basic Approach A More Complicated Case

Four Factors Determining Option Values

24.3 Valuing a Call Option

A Simple Model: Part II The Fifth Factor A Closer Look

24.4 Employee Stock Options

ESO Features ESO Repricing ESO Backdating

24.5 Equity as a Call Option on the Firm’s Assets

Case I: The Debt Is Risk-Free Case II: The Debt Is Risky

24.6 Options and Capital Budgeting

The Investment Timing Decision Managerial Options

Contingency Planning Options in Capital Budgeting: An Example Strategic Options Conclusion

24.7 Options and Corporate Securities

Warrants

The Difference between Warrants and Call Options Earnings Dilution

Convertible Bonds

Features of a Convertible Bond Value of a Convertible Bond

Other Options

The Call Provision on a Bond Put Bonds Insurance and Loan Guarantees

24.8 Summary and Conclusions

CHAPTER 25 OPTION VALUATION

25.1 Put–Call Parity

Protective Puts An Alternative Strategy The Result Continuous Compounding: A Refresher Course

25.2 The Black–Scholes Option Pricing Model

The Call Option Pricing Formula Put Option Valuation A Cautionary Note

25.3 More about Black–Scholes

Varying the Stock Price Varying the Time to Expiration Varying the Standard Deviation Varying the Risk-Free Rate Implied Standard Deviations

25.4 Valuation of Equity and Debt in a Leveraged Firm

Valuing the Equity in a Leveraged Firm Options and the Valuation of Risky Bonds

25.5 Options and Corporate Decisions: Some Applications

Mergers and Diversification Options and Capital Budgeting

25.6 Summary and Conclusions

CHAPTER 26 MERGERS AND ACQUISITIONS

26.1 The Legal Forms of Acquisitions

Merger or Consolidation Acquisition of Stock Acquisition of Assets Acquisition Classifications A Note about Takeovers Alternatives to Merger

26.2 Taxes and Acquisitions

Determinants of Tax Status Taxable versus Tax-Free Acquisitions

26.3 Accounting for Acquisitions

The Purchase Method More about Goodwill

26.4 Gains from Acquisitions

Synergy Revenue Enhancement

Marketing Gains Strategic Benefits Market Power

Cost Reductions

Economies of Scale Economies of Vertical Integration Complementary Resources

Lower Taxes

Net Operating Losses Unused Debt Capacity Surplus Funds Asset Write-Ups

Reductions in Capital Needs Avoiding Mistakes A Note about Inefficient Management

26.5 Some Financial Side Effects of Acquisitions

EPS Growth Diversification

26.6 The Cost of an Acquisition

Case I: Cash Acquisition Case II: Stock Acquisition Cash versus Common Stock

26.7 Defensive Tactics

The Corporate Charter Repurchase and Standstill Agreements Poison Pills and Share Rights Plans Going Private and Leveraged Buyouts Other Devices and Jargon of Corporate Takeovers

26.8 Some Evidence on Acquisitions: Does M&A Pay? 26.9 Divestitures and Restructurings 26.10 Summary and Conclusions

CHAPTER 27 LEASING

27.1 Leases and Lease Types

Leasing versus Buying Operating Leases Financial Leases

Tax-Oriented Leases Leveraged Leases Sale and Leaseback Agreements

27.2 Accounting and Leasing 27.3 Taxes, the IRS, and Leases 27.4 The Cash Flows from Leasing

The Incremental Cash Flows A Note about Taxes

27.5 Lease or Buy?

A Preliminary Analysis Three Potential Pitfalls NPV Analysis A Misconception

27.6 A Leasing Paradox 27.7 Reasons for Leasing

Good Reasons for Leasing

Tax Advantages A Reduction of Uncertainty Lower Transactions Costs Fewer Restrictions and Security Requirements

Dubious Reasons for Leasing

Leasing and Accounting Income 100 Percent Financing Low Cost

Other Reasons for Leasing

27.8 Summary and Conclusions

APPENDIX A MATHEMATICAL TABLES APPENDIX B KEY EQUATIONS APPENDIX C ANSWERS TO SELECTED END-OF-CHAPTER PROBLEMS APPENDIX D USING THE HP 10B AND TI BA II PLUS FINANCIAL CALCULATORS INDEX

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