Essentials of Corporate Finance (The Mcgraw-Hill/Irwin Series in Finance, Insurance, and Real Estate) by Ross, Stephen A. -- Read -- Imperial Library of Trantor

Index

PART ONE OVERVIEW OF FINANCIAL MANAGEMENT CHAPTER 1 Introduction to Financial Management

1.1 Finance: A Quick Look

The Four Basic Areas Corporate Finance Investments Financial Institutions International Finance Why Study Finance? Marketing and Finance Accounting and Finance Management and Finance You and Finance

1.2 Business Finance and the Financial Manager

What Is Business Finance? The Financial Manager Financial Management Decisions Capital Budgeting Capital Structure Working Capital Management Conclusion

1.3 Forms of Business Organization

Sole Proprietorship Partnership Corporation A Corporation by Another Name…

1.4 The Goal of Financial Management

Profit Maximization The Goal of Financial Management in a Corporation A More General Financial Management Goal Sarbanes-Oxley Act

1.5 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

1.6 Financial Markets and the Corporation

Cash Flows to and from the Firm Primary versus Secondary Markets Primary Markets Secondary Markets Summary and Conclusions Critical Thinking and Concepts Review What’s on the Web? Chapter Case: The McGee Cake Company

PART TWO UNDERSTANDING FINANCIAL STATEMENTS AND CASH FLOW

CHAPTER 2 Financial Statements, Taxes, and Cash Flow

2.1 The Balance Sheet

Assets: The Left-Hand Side Liabilities and Owners Equity: The Right-Hand 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 Earnings Management

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 on “Free” Cash Flow Cash Flow to Creditors and Stockholders Cash Flow to Creditors Cash Flow to Stockholders Conclusion An Example: Cash Flows for Dole Cola Operating Cash Flow Net Capital Spending Change in NWC and Cash Flow from Assets Cash Flow to Creditors and Stockholders Summary and Conclusions Chapter Review and Self-Test Problem Answer to Chapter Review and Self-Test Problem Critical Thinking and Concepts Review Questions and Problems What’s on the Web? Chapter Case: Cash Flows and Financial Statements at Sunset Boards, Inc.

CHAPTER 3 Working with Financial Statements

3.1 Standardized Financial Statements

Common-Size Balance Sheets Common-Size Income Statements

3.2 Ratio Analysis

Short-Term Solvency, or Liquidity, Measures Current Ratio Quick (or Acid-Test) Ratio Cash Ratio Long-Term Solvency Measures Total Debt Ratio Times Interest Earned Cash Coverage Asset Management, or Turnover, Measures Inventory Turnover and Days’ Sales in Inventory Receivables Turnover and Days’ Sales in Receivables Total Asset Turnover Profitability Measures Profit Margin Return on Assets Return on Equity Market Value Measures Price-Earnings Ratio Price-Sales Ratio Market-to-Book Ratio

3.3 The Du Pont Identity

An Expanded Du Pont Analysis

3.4 Internal and Sustainable Growth

Dividend Payout and Earnings Retention ROA, ROE, and Growth The Internal Growth Rate The Sustainable Growth Rate Determinants of Growth A Note on Sustainable Growth Rate Calculations

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 Summary and Conclusions Chapter Review and Self-Test Problems Answers to Chapter Review and Self-Test Problems Critical Thinking and Concepts Review Questions and Problems What’s on the Web? Chapter Case: Ratios and Financial Planning at S&S Air, Inc.

PART THREE VALUATION OF FUTURE CASH FLOWS

CHAPTER 4 Introduction to Valuation: The Time Value of Money

4.1 Future Value and Compounding

Investing for a Single Period Investing for More Than One Period

4.2 Present Value and Discounting

The Single-Period Case Present Values for Multiple Periods

4.3 More on Present and Future Values

Present versus Future Value Determining the Discount Rate Finding the Number of Periods Summary and Conclusions Chapter Review and Self-Test Problems Answers to Chapter Review and Self-Test Problems Critical Thinking and Concepts Review Questions and Problems What’s on the Web?

CHAPTER 5 Discounted Cash Flow Valuation

5.1 Future and Present Values of Multiple Cash Flows

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

5.2 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 on Annuities Due Perpetuities

5.3 Comparing Rates: The Effect of Compounding Periods

Effective Annual Rates and Compounding Calculating and Comparing Effective Annual Rates EARs and APRs EARs, APRs, Financial Calculators, and Spreadsheets

5.4 Loan Types and Loan Amortization

Pure Discount Loans Interest-Only Loans Amortized Loans Summary and Conclusions Chapter Review and Self-Test Problems Answers to Chapter Review and Self-Test Problems Critical Thinking and Concepts Review Questions and Problems What’s on the Web? Chapter Case: S&S Air’s Mortgage

PART FOUR VALUING STOCKS AND BONDS

CHAPTER 6 Interest Rates and Bond Valuation

6.1 Bonds and Bond Valuation

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

6.2 More on 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

6.3 Bond Ratings 6.4 Some Different Types of Bonds

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

6.5 Bond Markets

How Bonds Are Bought and Sold Bond Price Reporting A Note on Bond Price Quotes

6.6 Inflation and Interest Rates

Real versus Nominal Rates The Fisher Effect

6.7 Determinants of Bond Yields

The Term Structure of Interest Rates Bond Yields and the Yield Curve: Putting It All Together Conclusion Summary and Conclusions Chapter Review and Self-Test Problems Answers to Chapter Review and Self-Test Problems Critical Thinking and Concepts Review Questions and Problems What’s on the Web? Chapter Case: Financing S&S Air’s Expansion Plans with a Bond Issue

CHAPTER 7 Equity Markets and Stock Valuation

7.1 Common Stock Valuation

Cash Flows Some Special Cases Zero Growth Constant Growth Nonconstant Growth Components of the Required Return

7.2 Some Features of Common and Preferred Stock

Common Stock Features Proxy Voting Classes of Stock Other Rights Dividends Preferred Stock Features Stated Value Cumulative and Noncumulative Dividends Is Preferred Stock Really Debt?

7.3 The Stock Markets

Dealers and Brokers Organization of the NYSE Members Operations Floor Activity NASDAQ Operations ECNs Stock Market Reporting Summary and Conclusions Chapter Review and Self-Test Problems Answers to Chapter Review and Self-Test Problems Critical Thinking and Concepts Review Questions and Problems What’s on the Web? Chapter Case: Stock Valuation at Ragan, Inc.

PART FIVE CAPITAL BUDGETING

CHAPTER 8 Net Present Value and Other Investment Criteria

8.1 Net Present Value

The Basic Idea Estimating Net Present Value

8.2 The Payback Rule

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

8.3 The Average Accounting Return 8.4 The Internal Rate of Return

Problems with the IRR Nonconventional Cash Flows Mutually Exclusive Investments 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?

8.5 The Profitability Index 8.6 The Practice of Capital Budgeting

CHAPTER 9 Making Capital Investment Decisions

9.1 Project Cash Flows: A First Look

Relevant Cash Flows The Stand-Alone Principle

9.2 Incremental Cash Flows

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

9.3 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 The Tax Shield Approach

9.4 More on Project Cash Flow

A Closer Look at Net Working Capital Depreciation Modifi ed ACRS (MACRS) Depreciation Book Value versus Market Value An Example: The Majestic Mulch and Compost Company (MMCC) Operating Cash Flows Changes in NWC Capital Spending Total Cash Flow and Value Conclusion

9.5 Evaluating NPV Estimates

The Basic Problem Forecasting Risk Sources of Value

9.6 Scenario and Other What-lf Analyses

Getting Started Scenario Analysis Sensitivity Analysis

9.7 Additional Considerations in Capital Budgeting

Managerial Options and Capital Budgeting Contingency Planning Strategic Options Conclusion Capital Rationing Soft Rationing Hard Rationing Summary and Conclusions Chapter Review and Self-Test Problems Answers to Chapter Review and Self-Test Problems Critical Thinking and Concepts Review Questions and Problems Chapter Case: Conch Republic Electronics

PART SIX RISK AND RETURN

CHAPTER 10 Some Lessons from Capital Market History

10.1 Returns

Dollar Returns Percentage Returns

10.2 The Historical Record

A First Look A Closer Look

10.3 Average Returns: The First Lesson

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

10.4 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 Using Capital Market History More on the Stock Market Risk Premium

10.5 More on Average Returns

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

10.6 Capital Market Efficiency

Price Behavior in an Effi cient Market The Effi cient Markets Hypothesis Some Common Misconceptions about the EMH The Forms of Market Effi ciency Summary and Conclusions Chapter Review and Self-Test Problems Answers to Chapter Review and Self-Test Problems Critical Thinking and Concepts Review Questions and Problems What’s on the Web? Chapter Case: A Job at S&S Air

CHAPTER 11 Risk and Return

11.1 Expected Returns and Variances

Expected Return Calculating the Variance

11.2 Portfolios

Portfolio Weights Portfolio Expected Returns Portfolio Variance

11.3 Announcements, Surprises, and Expected Returns

Expected and Unexpected Returns Announcements and News

11.4 Risk: Systematic and Unsystematic

Systematic and Unsystematic Risk Systematic and Unsystematic Components of Return

11.5 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

11.6 Systematic Risk and Beta

The Systematic Risk Principle Measuring Systematic Risk Portfolio Betas

11.7 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

11.8 The SML and the Cost of Capital: A Preview

The Basic Idea The Cost of Capital Summary and Conclusions Chapter Review and Self-Test Problems Answers to Chapter Review and Self-Test Problems Critical Thinking and Concepts Review Questions and Problems What’s on the Web? Chapter Case: The Beta for FLIR Systems

PART SEVEN LONG-TERM FINANCING

CHAPTER 12 Cost of Capital

12.1 The Cost of Capital: Some Preliminaries

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

12.2 The Cost of Equity

The Dividend Growth Model Approach Implementing the Approach Estimating g The SML Approach Implementing the Approach Advantages and Disadvantages of the Approach

12.3 The Costs of Debt and Preferred Stock

The Cost of Debt The Cost of Preferred Stock

12.4 The Weighted Average Cost of Capital

The Capital Structure Weights Taxes and the Weighted Average Cost of Capital Solving the Warehouse Problem and Similar Capital Budgeting Problems Calculating the WACC for Eastman Chemical Eastman’s Cost of Equity Eastman’s Cost of Debt Eastman’s WACC

12.5 Divisional and Project Costs of Capital

The SML and the WACC Divisional Cost of Capital The Pure Play Approach The Subjective Approach Summary and Conclusions Chapter Review and Self-Test Problems Answers to Chapter Review and Self-Test Problems Critical Thinking and Concepts Review Questions and Problems What’s on the Web? Chapter Case: Cost of Capital for Hubbard Computer, Inc.

CHAPTER 13 Leverage and Capital Structure

13.1 The Capital Structure Question 13.2 The Effect of Financial Leverage

The Impact of Financial Leverage Financial Leverage, EPS, and ROE: An Example EPS versus EBIT Corporate Borrowing and Homemade Leverage

13.3 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

13.4 Corporate Taxes and Capital Structure

The Interest Tax Shield Taxes and M&M Proposition I Conclusion

13.5 Bankruptcy Costs

Direct Bankruptcy Costs Indirect Bankruptcy Costs

13.6 Optimal Capital Structure

The Static Theory of Capital Structure Optimal Capital Structure and the Cost of Capital Capital Structure: Some Managerial Recommendations Taxes Financial Distress

13.7 Observed Capital Structures 13.8 A Quick Look at the Bankruptcy Process

Liquidation and Reorganization Bankruptcy Liquidation Bankruptcy Reorganization Financial Management and the Bankruptcy Process Agreements to Avoid Bankruptcy Summary and Conclusions Chapter Review and Self-Test Problems Answers to Chapter Review and Self-Test Problems Critical Thinking and Concepts Review Questions and Problems What’s on the Web? Chapter Case: Stephenson Real Estate Recapitalization

CHAPTER 14 Dividends and Dividend Policy

14.1 Cash Dividends and Dividend Payment

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

14.2 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 A Test Some Real-World Factors Favoring a Low Payout Taxes Flotation Costs Dividend Restrictions Some Real-World Factors Favoring a High Payout Desire for Current Income Tax and Legal Benefi ts from High Dividends Clientele Effects: A Resolution of Real-World Factors?

14.3 Stock Repurchase: An Alternative to Cash Dividends

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

14.4 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

14.5 Stock Dividends and Stock Splits

Value of Stock Splits and Stock Dividends The Benchmark Case Popular Trading Range Reverse Splits Summary and Conclusions Chapter Review and Self-Test Problem Answer to Chapter Review and Self-Test Problem Critical Thinking and Concepts Review Questions and Problems What’s on the Web? Chapter Case: Electronic Timing, Inc.

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 15.3 Alternative Issue Methods 15.4 Underwriters

Choosing an Underwriter Types of Underwriting Firm Commitment Underwriting Best Efforts Underwriting Dutch Auction Underwriting The Green Shoe Provision The Aftermarket Lockup Agreements The Quiet Period

15.5 IPOs and Underpricing

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

15.6 New Equity Sales and the Value of the Firm 15.7 The Cost of Issuing Securities 15.8 Issuing Long-Term Debt 15.9 Shelf Registration

Summary and Conclusions Chapter Review and Self-Test Problem Answer to Chapter Review and Self-Test Problem Critical Thinking and Concepts Review Questions and Problems What’s on the Web? Chapter Case: S&S Air Goes Public

PART EIGHT SHORT-TERM FINANCIAL MANAGEMENT

CHAPTER 16 Short-Term Financial Planning

16.1 Tracing Cash and Net Working Capital 16.2 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

16.3 Some Aspects of Short-Term Financial Policy

The Size of the Firm’s Investment in Current Assets Alternative Financing Policies for Current Assets Which Financing Policy Is Best? Current Assets and Liabilities in Practice

16.4 The Cash Budget

Sales and Cash Collections Cash Outflows The Cash Balance

16.5 Short-Term Borrowing

Unsecured Loans Secured Loans Accounts Receivable Financing Inventory Loans Other Sources

16.6 A Short-Term Financial Plan

CHAPTER 17 Working Capital Management

17.1 Float and Cash Management

Reasons for Holding Cash The Speculative and Precautionary Motives The Transaction Motive Benefi ts of Holding Cash Understanding Float Disbursement Float Collection Float and Net Float Float Management Ethical and Legal Questions Electronic Data Interchange and Check 21: The End of Float?

17.2 Cash Management: Collection, Disbursement, and Investment

Cash Collection and Concentration Components of Collection Time Cash Collection Lockboxes Cash Concentration Managing Cash Disbursements Increasing Disbursement Float Controlling Disbursements Investing Idle Cash Temporary Cash Surpluses Characteristics of Short-Term Securities Some Different Types of Money Market Securities

17.3 Credit and Receivables

Components of Credit Policy Terms of the Sale The Basic Form The Credit Period Cash Discounts Credit Instruments Optimal Credit Policy The Total Credit Cost Curve Organizing the Credit Function Credit Analysis Credit Information Credit Evaluation and Scoring Collection Policy Monitoring Receivables Collection Effort

17.4 Inventory Management

The Financial Manager and Inventory Policy Inventory Types Inventory Costs

17.5 Inventory Management Techniques

The ABC Approach The Economic Order Quantity Model Inventory Depletion The Carrying Costs The Shortage Costs The Total Costs Extensions to the EOQ Model Safety Stocks Reorder Points Managing Derived-Demand Inventories Materials Requirements Planning Just-in-Time Inventory Summary and Conclusions Chapter Review and Self-Test Problems Answers to Chapter Review and Self-Test Problems Critical Thinking and Concepts Review Questions and Problems What’s on the Web? Chapter Case: Piepkorn Manufacturing Working Capital Management, Part 2

PART NINE TOPICS IN BUSINESS FINANCE

CHAPTER 18 International Aspects of Financial Management

18.1 Terminology 18.2 Foreign Exchange Markets and Exchange Rates

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

18.3 Purchasing Power Parity

Absolute Purchasing Power Parity Relative Purchasing Power Parity The Basic Idea The Result Currency Appreciation and Depreciation

18.4 Exchange Rates and Interest Rates

Covered Interest Arbitrage Interest Rate Parity

18.5 Exchange Rate Risk

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

18.6 Political Risk

Summary and Conclusions Chapter Review and Self-Test Problems Answers to Chapter Review and Self-Test Problems Critical Thinking and Concepts Review Questions and Problems What’s on the Web? Chapter Case: S&S Air Goes International Appendix A Mathematical Tables Appendix B Key Equations Appendix C Answers to Selected End-of-Chapter Problems Appendix D Using the HP-10B and Tl BA II Plus Financial Calculators Glossary Name Index Subject Index

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