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• Cover Page
• Title Page
• Copyright Page
• Detailed Contents
• Videos in this Enhanced eBook
• Welcome to Your Enhanced eBook
• Bridging Theory and Practice
• Teaching Students to Think Finance
• MyLab Finance
• Improving Results
• About the Authors
• Preface
• Enhanced eBook Acknowledgments
• Part 1 Introduction
• Chapter 1 The Corporation and Financial Markets
• 1.1 The Four Types of Firms
• Sole Proprietorships
• Partnerships
• Limited Liability Companies
• Corporations
• Tax Implications for Corporate Entities
• ▪ Corporate Taxation Around the World
• 1.2 Ownership Versus Control of Corporations
• The Corporate Management Team
• ▪ Interview with David Viniar
• The Financial Manager
• ▪ Global Financial Crisis The Dodd-Frank Act
• The Goal of the Firm
• The Firm and Society
• Ethics and Incentives within Corporations
• ▪ Global Financial Crisis The Dodd-Frank Act on Corporate Compensation and Governance
• ▪ Citizens United v. Federal Election Commission
• ▪ Airlines in Bankruptcy
• 1.3 The Stock Market
• Primary and Secondary Stock Markets
• Traditional Trading Venues
• ▪ Interview with Frank Hatheway
• New Competition and Market Changes
• Dark Pools
• 1.4 Fintech: Finance and Technology
• Telecommunications
• Security and Verification
• Automation of Banking Services
• Big Data and Machine Learning
• Competition
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Chapter 2 Introduction to Financial Statement Analysis
• 2.1 Firms’ Disclosure of Financial Information
• Preparation of Financial Statements
• ▪ International Financial Reporting Standards
• ▪ Interview with Ruth Porat
• Types of Financial Statements
• 2.2 The Balance Sheet
• Assets
• Liabilities
• Stockholders’ Equity
• Market Value Versus Book Value
• Enterprise Value
• 2.3 The Income Statement
• Earnings Calculations
• 2.4 The Statement of Cash Flows
• Operating Activity
• Investment Activity
• Financing Activity
• 2.5 Other Financial Statement Information
• Statement of Stockholders’ Equity
• Management Discussion and Analysis
• Notes to the Financial Statements
• 2.6 Financial Statement Analysis
• Profitability Ratios
• Liquidity Ratios
• Working Capital Ratios
• Interest Coverage Ratios
• Leverage Ratios
• Valuation Ratios
• ▪ Common Mistake Mismatched Ratios
• Operating Returns
• The DuPont Identity
• 2.7 Financial Reporting in Practice
• Enron
• WorldCom
• Sarbanes-Oxley Act
• ▪ Global Financial Crisis Bernard Madoff’s Ponzi Scheme
• Dodd-Frank Act
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Data Case
• Chapter 3 Financial Decision Making and the Law of One Price
• 3.1 Valuing Decisions
• Analyzing Costs and Benefits
• Using Market Prices to Determine Cash Values
• ▪ When Competitive Market Prices Are Not Available
• 3.2 Interest Rates and the Time Value of Money
• The Time Value of Money
• The Interest Rate: An Exchange Rate Across Time
• 3.3 Present Value and the NPV Decision Rule
• Net Present Value
• The NPV Decision Rule
• NPV and Cash Needs
• 3.4 Arbitrage and the Law of One Price
• Arbitrage
• Law of One Price
• 3.5 No-Arbitrage and Security Prices
• Valuing a Security with the Law of One Price
• ▪ An Old Joke
• The NPV of Trading Securities and Firm Decision Making
• Valuing a Portfolio
• ▪ Global Financial Crisis Liquidity and the Informational Role of Prices
• ▪ Arbitrage in Markets
• Where Do We Go from Here?
• Appendix The Price of Risk
• Risky Versus Risk-Free Cash Flows
• Arbitrage with Transactions Costs
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Data Case
• Part 2 Time, Money, and Interest Rates
• Chapter 4 The Time Value of Money
• 4.1 The Timeline
• 4.2 The Three Rules of Time Travel
• Rule 1: Comparing and Combining Values
• Rule 2: Moving Cash Flows Forward in Time
• Rule 3: Moving Cash Flows Back in Time
• ▪ Rule of 72
• Applying the Rules of Time Travel
• 4.3 Valuing a Stream of Cash Flows
• 4.4 Calculating the Net Present Value
• ▪ Using Excel Calculating Present Values in Excel
• 4.5 Perpetuities and Annuities
• Perpetuities
• ▪ Historical Examples of Perpetuities
• ▪ Common Mistake Discounting One Too Many Times
• Annuities
• ▪ Formula for an Annuity Due
• Growing Cash Flows
• 4.6 Using an Annuity Spreadsheet or Calculator
• 4.7 Non-Annual Cash Flows
• 4.8 Solving for the Cash Payments
• 4.9 The Internal Rate of Return
• ▪ Using Excel Excel’s IRR Function
• Appendix Solving for the Number of Periods
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Data Case
• Chapter 5 Interest Rates
• 5.1 Interest Rate Quotes and Adjustments
• The Effective Annual Rate
• ▪ Common Mistake Using the Wrong Discount Rate in the Annuity Formula
• Annual Percentage Rates
• 5.2 Application: Discount Rates and Loans
• 5.3 The Determinants of Interest Rates
• ▪ Global Financial Crisis Teaser Rates and Subprime Loans
• Inflation and Real Versus Nominal Rates
• Investment and Interest Rate Policy
• The Yield Curve and Discount Rates
• The Yield Curve and the Economy
• ▪ Common Mistake Using the Annuity Formula When Discount Rates Vary by Maturity
• ▪ Interview with Dr. Janet Yellen
• 5.4 Risk and Taxes
• Risk and Interest Rates
• After-Tax Interest Rates
• 5.5 The Opportunity Cost of Capital
• ▪ Common Mistake States Dig a Multi-Trillion Dollar Hole by Discounting at the Wrong Rate
• Appendix Continuous Rates and Cash Flows
• Discount Rates for a Continuously Compounded APR
• Continuously Arriving Cash Flows
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Data Case
• Chapter 6 Valuing Bonds
• 6.1 Bond Cash Flows, Prices, and Yields
• Bond Terminology
• Zero-Coupon Bonds
• ▪ Global Financial Crisis Negative Bond Yields
• Coupon Bonds
• 6.2 Dynamic Behavior of Bond Prices
• Discounts and Premiums
• Time and Bond Prices
• Interest Rate Changes and Bond Prices
• ▪ Clean and Dirty Prices for Coupon Bonds
• 6.3 The Yield Curve and Bond Arbitrage
• Replicating a Coupon Bond
• Valuing a Coupon Bond Using Zero-Coupon Yields
• Coupon Bond Yields
• Treasury Yield Curves
• 6.4 Corporate Bonds
• Corporate Bond Yields
• ▪ Are Treasuries Really Default-Free Securities?
• Bond Ratings
• Corporate Yield Curves
• 6.5 Sovereign Bonds
• ▪ Global Financial Crisis The Credit Crisis and Bond Yields
• ▪ Global Financial Crisis European Sovereign Debt Yields: A Puzzle
• ▪ Interview with Carmen M. Reinhart
• Appendix Forward Interest Rates
• Computing Forward Rates
• Computing Bond Yields from Forward Rates
• Forward Rates and Future Interest Rates
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Data Case
• Case Study
• Part 3 Valuing Projects and Firms
• Chapter 7 Investment Decision Rules
• 7.1 NPV and Stand-Alone Projects
• Applying the NPV Rule
• The NPV Profile and IRR
• Alternative Rules Versus the NPV Rule
• ▪ Interview with Dick Grannis
• 7.2 The Internal Rate of Return Rule
• Applying the IRR Rule
• Pitfall #1: Delayed Investments
• Pitfall #2: Multiple IRRs
• ▪ Common Mistake IRR Versus the IRR Rule
• Pitfall #3: Nonexistent IRR
• 7.3 The Payback Rule
• Applying the Payback Rule
• Payback Rule Pitfalls in Practice
• ▪ Why Do Rules Other Than the NPV Rule Persist?
• 7.4 Choosing between Projects
• NPV Rule and Mutually Exclusive Investments
• IRR Rule and Mutually Exclusive Investments
• The Incremental IRR
• ▪ When Can Returns Be Compared?
• ▪ Common Mistake IRR and Project Financing
• 7.5 Project Selection with Resource Constraints
• Evaluating Projects with Different Resource Requirements
• Profitability Index
• Shortcomings of the Profitability Index
• Appendix Computing the NPV Profile Using Excel’s Data Table Function
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Data Case
• Chapter 8 Fundamentals of Capital Budgeting
• 8.1 Forecasting Earnings
• Revenue and Cost Estimates
• Incremental Earnings Forecast
• Indirect Effects on Incremental Earnings
• ▪ Common Mistake The Opportunity Cost of an Idle Asset
• Sunk Costs and Incremental Earnings
• ▪ Common Mistake The Sunk Cost Fallacy
• Real-World Complexities
• 8.2 Determining Free Cash Flow and NPV
• Calculating Free Cash Flow from Earnings
• Calculating Free Cash Flow Directly
• Calculating the NPV
• ▪ Using Excel Capital Budgeting Using Excel
• 8.3 Choosing among Alternatives
• Evaluating Manufacturing Alternatives
• Comparing Free Cash Flows for Cisco’s Alternatives
• 8.4 Further Adjustments to Free Cash Flow
• ▪ Interview with David Holland
• 8.5 Analyzing the Project
• Break-Even Analysis
• ▪ Common Mistake Corporate Tax Rates and Investment
• Sensitivity Analysis
• Scenario Analysis
• ▪ Using Excel Project Analysis Using Excel
• Appendix MACRS Depreciation
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Data Case
• Chapter 9 Valuing Stocks
• 9.1 The Dividend-Discount Model
• A One-Year Investor
• Dividend Yields, Capital Gains, and Total Returns
• ▪ The Mechanics of a Short Sale
• A Multiyear Investor
• The Dividend-Discount Model Equation
• 9.2 Applying the Dividend-Discount Model
• Constant Dividend Growth
• Dividends Versus Investment and Growth
• ▪ John Burr Williams’s Theory of Investment Value
• Changing Growth Rates
• Limitations of the Dividend-Discount Model
• 9.3 Total Payout and Free Cash Flow Valuation Models
• Share Repurchases and the Total Payout Model
• The Discounted Free Cash Flow Model
• 9.4 Valuation Based on Comparable Firms
• Valuation Multiples
• Limitations of Multiples
• Comparison with Discounted Cash Flow Methods
• Stock Valuation Techniques: The Final Word
• ▪ Kenneth Cole Productions—What Happened?
• ▪ Cryptocurrencies and Price Bubbles
• ▪ Interview with Susan Athey
• 9.5 Information, Competition, and Stock Prices
• Information in Stock Prices
• Competition and Efficient Markets
• Lessons for Investors and Corporate Managers
• The Efficient Markets Hypothesis Versus No Arbitrage
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Data Case
• Part 4 Risk and Return
• Chapter 10 Capital Markets and the Pricing of Risk
• 10.1 Risk and Return: Insights from 92 Years of Investor History
• 10.2 Common Measures of Risk and Return
• Probability Distributions
• Expected Return
• Variance and Standard Deviation
• 10.3 Historical Returns of Stocks and Bonds
• Computing Historical Returns
• Average Annual Returns
• The Variance and Volatility of Returns
• Estimation Error: Using Past Returns to Predict the Future
• ▪ Arithmetic Average Returns Versus Compound Annual Returns
• 10.4 The Historical Tradeoff Between Risk and Return
• The Returns of Large Portfolios
• The Returns of Individual Stocks
• 10.5 Common Versus Independent Risk
• Theft Versus Earthquake Insurance: An Example
• The Role of Diversification
• 10.6 Diversification in Stock Portfolios
• Firm-Specific Versus Systematic Risk
• No Arbitrage and the Risk Premium
• ▪ Global Financial Crisis Diversification Benefits During Market Crashes
• ▪ Common Mistake A Fallacy of Long-Run Diversification
• 10.7 Measuring Systematic Risk
• Identifying Systematic Risk: The Market Portfolio
• Sensitivity to Systematic Risk: Beta
• 10.8 Beta and the Cost of Capital
• Estimating the Risk Premium
• ▪ Common Mistake Beta Versus Volatility
• The Capital Asset Pricing Model
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Data Case
• Chapter 11 Optimal Portfolio Choice and the Capital Asset Pricing Model
• 11.1 The Expected Return of a Portfolio
• 11.2 The Volatility of a Two-Stock Portfolio
• Combining Risks
• Determining Covariance and Correlation
• ▪ Common Mistake Computing Variance, Covariance, and Correlation in Excel
• Computing a Portfolio’s Variance and Volatility
• 11.3 The Volatility of a Large Portfolio
• Large Portfolio Variance
• Diversification with an Equally Weighted Portfolio
• ▪ Interview with Anne Martin
• Diversification with General Portfolios
• 11.4 Risk Versus Return: Choosing an Efficient Portfolio
• Efficient Portfolios with Two Stocks
• The Effect of Correlation
• Short Sales
• Efficient Portfolios with Many Stocks
• ▪ Nobel Prize Harry Markowitz and James Tobin
• 11.5 Risk-Free Saving and Borrowing
• Investing in Risk-Free Securities
• Borrowing and Buying Stocks on Margin
• Identifying the Tangent Portfolio
• 11.6 The Efficient Portfolio and Required Returns
• Portfolio Improvement: Beta and the Required Return
• Expected Returns and the Efficient Portfolio
• 11.7 The Capital Asset Pricing Model
• The CAPM Assumptions
• Supply, Demand, and the Efficiency of the Market Portfolio
• Optimal Investing: The Capital Market Line
• 11.8 Determining the Risk Premium
• Market Risk and Beta
• ▪ Nobel Prize William Sharpe on the CAPM
• The Security Market Line
• Beta of a Portfolio
• Summary of the Capital Asset Pricing Model
• Appendix The CAPM with Differing Interest Rates
• The Efficient Frontier with Differing Saving and Borrowing Rates
• The Security Market Line with Differing Interest Rates
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Data Case
• Chapter 12 Estimating the Cost of Capital
• 12.1 The Equity Cost of Capital
• 12.2 The Market Portfolio
• Constructing the Market Portfolio
• Market Indexes
• ▪ Value-Weighted Portfolios and Rebalancing
• The Market Risk Premium
• 12.3 Beta Estimation
• Using Historical Returns
• Identifying the Best-Fitting Line
• Using Linear Regression
• ▪ Why Not Estimate Expected Returns Directly?
• 12.4 The Debt Cost of Capital
• Debt Yields Versus Returns
• ▪ Common Mistake Using the Debt Yield as Its Cost of Capital
• Debt Betas
• 12.5 A Project’s Cost of Capital
• All-Equity Comparables
• Levered Firms as Comparables
• The Unlevered Cost of Capital
• Industry Asset Betas
• 12.6 Project Risk Characteristics and Financing
• Differences in Project Risk
• ▪ Common Mistake Adjusting for Execution Risk
• Financing and the Weighted Average Cost of Capital
• ▪ Interview with Shelagh Glaser
• ▪ Common Mistake Using a Single Cost of Capital in Multi-Divisional Firms
• 12.7 Final Thoughts on Using the CAPM
• Appendix Practical Considerations When Forecasting Beta
• Time Horizon
• The Market Proxy
• Beta Variation and Extrapolation
• Outliers
• ▪ Common Mistake Changing the Index to Improve the Fit
• ▪ Using Excel Estimating Beta Using Excel
• Other Considerations
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Data Case
• Chapter 13 Investor Behavior and Capital Market Efficiency
• 13.1 Competition and Capital Markets
• Identifying a Stock’s Alpha
• Profiting from Non-Zero Alpha Stocks
• 13.2 Information and Rational Expectations
• Informed Versus Uninformed Investors
• Rational Expectations
• 13.3 The Behavior of Individual Investors
• Underdiversification and Portfolio Biases
• Excessive Trading and Overconfidence
• Individual Behavior and Market Prices
• 13.4 Systematic Trading Biases
• Hanging on to Losers and the Disposition Effect
• ▪ Nobel Prize Prospect Theory, Mental Accounting, and Nudges
• Investor Attention, Mood, and Experience
• Herd Behavior
• Implications of Behavioral Biases
• 13.5 The Efficiency of the Market Portfolio
• Trading on News or Recommendations
• ▪ Nobel Prize The 2013 Prize: An Enigma?
• The Performance of Fund Managers
• The Winners and Losers
• 13.6 Style-Based Techniques and the Market Efficiency Debate
• Size Effects
• ▪ Interview with Jonathan Clements
• Momentum
• ▪ Market Efficiency and the Efficiency of the Market Portfolio
• Implications of Positive-Alpha Trading Strategies
• 13.7 Multifactor Models of Risk
• Using Factor Portfolios
• Smart Beta
• Long-Short Portfolios
• Selecting the Portfolios
• The Cost of Capital with Fama-French-Carhart Factor Specification
• 13.8 Methods Used in Practice
• Financial Managers
• Investors
• Appendix Building a Multifactor Model
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Part 5 Capital Structure
• Chapter 14 Capital Structure in a Perfect Market
• 14.1 Equity Versus Debt Financing
• Financing a Firm with Equity
• Financing a Firm with Debt and Equity
• The Effect of Leverage on Risk and Return
• 14.2 Modigliani-Miller I: Leverage, Arbitrage, and Firm Value
• MM and the Law of One Price
• Homemade Leverage
• ▪ MM and the Real World
• The Market Value Balance Sheet
• Application: A Leveraged Recapitalization
• 14.3 Modigliani-Miller II: Leverage, Risk, and the Cost of Capital
• Leverage and the Equity Cost of Capital
• Capital Budgeting and the Weighted Average Cost of Capital
• ▪ Common Mistake Is Debt Better Than Equity?
• Computing the WACC with Multiple Securities
• Levered and Unlevered Betas
• ▪ Nobel Prize Franco Modigliani and Merton Miller
• 14.4 Capital Structure Fallacies
• Leverage and Earnings per Share
• ▪ Global Financial Crisis Bank Capital Regulation and the ROE Fallacy
• Equity Issuances and Dilution
• 14.5 MM: Beyond the Propositions
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Data Case
• Chapter 15 Debt and Taxes
• 15.1 The Interest Tax Deduction
• 15.2 Valuing the Interest Tax Shield
• The Interest Tax Shield and Firm Value
• ▪ Pizza and Taxes
• The Interest Tax Shield with Permanent Debt
• The Weighted Average Cost of Capital with Taxes
• ▪ The Repatriation Tax: Why Some Cash-Rich Firms Borrowed
• The Interest Tax Shield with a Target Debt-Equity Ratio
• 15.3 Recapitalizing to Capture the Tax Shield
• The Tax Benefit
• The Share Repurchase
• No Arbitrage Pricing
• Analyzing the Recap: The Market Value Balance Sheet
• 15.4 Personal Taxes
• Including Personal Taxes in the Interest Tax Shield
• Determining the Actual Tax Advantage of Debt
• Valuing the Interest Tax Shield with Personal Taxes
• ▪ Common Mistake How to Save for Retirement
• 15.5 Optimal Capital Structure with Taxes
• Do Firms Prefer Debt?
• Limits to the Tax Benefit of Debt
• Growth and Debt
• ▪ Interview with Andrew Balson
• Other Tax Shields
• The Low Leverage Puzzle
• ▪ Employee Stock Options
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Data Case
• Chapter 16 Financial Distress, Managerial Incentives, and Information
• 16.1 Default and Bankruptcy in a Perfect Market
• Armin Industries: Leverage and the Risk of Default
• Bankruptcy and Capital Structure
• 16.2 The Costs of Bankruptcy and Financial Distress
• The Bankruptcy Code
• Direct Costs of Bankruptcy
• Indirect Costs of Financial Distress
• ▪ Global Financial CRISIS The Chrysler Prepack
• 16.3 Financial Distress Costs and Firm Value
• Armin Industries: The Impact of Financial Distress Costs
• Who Pays for Financial Distress Costs?
• 16.4 Optimal Capital Structure: The Tradeoff Theory
• The Present Value of Financial Distress Costs
• Optimal Leverage
• 16.5 Exploiting Debt Holders: The Agency Costs of Leverage
• Excessive Risk-Taking and Asset Substitution
• Debt Overhang and Under-Investment
• ▪ Global Financial Crisis Bailouts, Distress Costs, and Debt Overhang
• Agency Costs and the Value of Leverage
• The Leverage Ratchet Effect
• Debt Maturity and Covenants
• ▪ Why Do Firms Go Bankrupt?
• 16.6 Motivating Managers: The Agency Benefits of Leverage
• Concentration of Ownership
• Reduction of Wasteful Investment
• ▪ Excessive Perks and Corporate Scandals
• ▪ Global Financial Crisis Moral Hazard, Government Bailouts, and the Appeal of Leverage
• Leverage and Commitment
• ▪ Nobel Prize Contract Theory
• 16.7 Agency Costs and the Tradeoff Theory
• The Optimal Debt Level
• Debt Levels in Practice
• 16.8 Asymmetric Information and Capital Structure
• Leverage as a Credible Signal
• Issuing Equity and Adverse Selection
• ▪ Nobel Prize Markets with Asymmetric Information and Adverse Selection
• Implications for Equity Issuance
• Implications for Capital Structure
• 16.9 Capital Structure: The Bottom Line
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Chapter 17 Payout Policy
• 17.1 Distributions to Shareholders
• Dividends
• Share Repurchases
• 17.2 Comparison of Dividends and Share Repurchases
• Alternative Policy 1: Pay Dividend with Excess Cash
• Alternative Policy 2: Share Repurchase (No Dividend)
• ▪ Common Mistake Repurchases and the Supply of Shares
• Alternative Policy 3: High Dividend (Equity Issue)
• Modigliani-Miller and Dividend Policy Irrelevance
• ▪ Common Mistake The Bird in the Hand Fallacy
• Dividend Policy with Perfect Capital Markets
• 17.3 The Tax Disadvantage of Dividends
• Taxes on Dividends and Capital Gains
• Optimal Dividend Policy with Taxes
• 17.4 Dividend Capture and Tax Clienteles
• The Effective Dividend Tax Rate
• Tax Differences Across Investors
• Clientele Effects
• ▪ Interview with John Connors
• 17.5 Payout Versus Retention of Cash
• Retaining Cash with Perfect Capital Markets
• Taxes and Cash Retention
• Adjusting for Investor Taxes
• Issuance and Distress Costs
• Agency Costs of Retaining Cash
• 17.6 Signaling with Payout Policy
• Dividend Smoothing
• Dividend Signaling
• ▪ Royal & SunAlliance’s Dividend Cut
• Signaling and Share Repurchases
• 17.7 Stock Dividends, Splits, and Spin-Offs
• Stock Dividends and Splits
• Spin-Offs
• ▪ Berkshire Hathaway’s A & B Shares
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Data Case
• Part 6 Advanced Valuation
• Chapter 18 Capital Budgeting and Valuation with Leverage
• 18.1 Overview of Key Concepts
• 18.2 The Weighted Average Cost of Capital Method
• ▪ Interview with Zane Rowe
• Using the WACC to Value a Project
• Summary of the WACC Method
• Implementing a Constant Debt-Equity Ratio
• 18.3 The Adjusted Present Value Method
• The Unlevered Value of the Project
• Valuing the Interest Tax Shield
• Summary of the APV Method
• 18.4 The Flow-to-Equity Method
• Calculating the Free Cash Flow to Equity
• Valuing Equity Cash Flows
• ▪ What Counts as “Debt”?
• Summary of the Flow-to-Equity Method
• 18.5 Project-Based Costs of Capital
• Estimating the Unlevered Cost of Capital
• Project Leverage and the Equity Cost of Capital
• Determining the Incremental Leverage of a Project
• ▪ Common Mistake Re-Levering the WACC
• 18.6 APV with Other Leverage Policies
• Constant Interest Coverage Ratio
• Predetermined Debt Levels
• A Comparison of Methods
• 18.7 Other Effects of Financing
• Issuance and Other Financing Costs
• Security Mispricing
• Financial Distress and Agency Costs
• ▪ Global Financial Crisis Government Loan Guarantees
• 18.8 Advanced Topics in Capital Budgeting
• Periodically Adjusted Debt
• Leverage and the Cost of Capital
• The WACC or FTE Method with Changing Leverage
• Personal Taxes
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Data Case
• Appendix Foundations and Further Details
• Deriving the WACC Method
• The Levered and Unlevered Cost of Capital
• Solving for Leverage and Value Simultaneously
• The Residual Income and Economic Value Added Valuation Methods
• Chapter 19 Valuation and Financial Modeling: A Case Study
• 19.1 Valuation Using Comparables
• 19.2 The Business Plan
• Operational Improvements
• Capital Expenditures: A Needed Expansion
• Working Capital Management
• Capital Structure Changes: Levering Up
• 19.3 Building the Financial Model
• Forecasting Earnings
• ▪ Interview with Joseph L. Rice, III
• Working Capital Requirements
• Forecasting Free Cash Flow
• ▪ Using Excel Summarizing Model Outputs
• The Balance Sheet and Statement of Cash Flows (Optional)
• ▪ Using Excel Auditing Your Financial Model
• 19.4 Estimating the Cost of Capital
• CAPM-Based Estimation
• Unlevering Beta
• Ideko’s Unlevered Cost of Capital
• 19.5 Valuing the Investment
• The Multiples Approach to Continuation Value
• The Discounted Cash Flow Approach to Continuation Value
• ▪ Common Mistake Continuation Values and Long-Run Growth
• APV Valuation of Ideko’s Equity
• A Reality Check
• ▪ Common Mistake Missing Assets or Liabilities
• IRR and Cash Multiples
• 19.6 Sensitivity Analysis
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Appendix Compensating Management
• Part 7 Options
• Chapter 20 Financial Options
• 20.1 Option Basics
• Understanding Option Contracts
• Interpreting Stock Option Quotations
• Options on Other Financial Securities
• 20.2 Option Payoffs at Expiration
• Long Position in an Option Contract
• Short Position in an Option Contract
• Profits for Holding an Option to Expiration
• Returns for Holding an Option to Expiration
• Combinations of Options
• 20.3 Put-Call Parity
• 20.4 Factors Affecting Option Prices
• Strike Price and Stock Price
• Arbitrage Bounds on Option Prices
• Option Prices and the Exercise Date
• Option Prices and Volatility
• 20.5 Exercising Options Early
• Non-Dividend-Paying Stocks
• Dividend-Paying Stocks
• 20.6 Options and Corporate Finance
• Equity as a Call Option
• Debt as an Option Portfolio
• Credit Default Swaps
• ▪ Global Financial Crisis Credit Default Swaps
• Pricing Risky Debt
• Agency Conflicts
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Data Case
• Chapter 21 Option Valuation
• 21.1 The Binomial Option Pricing Model
• A Two-State Single-Period Model
• The Binomial Pricing Formula
• A Multiperiod Model
• Making the Model Realistic
• 21.2 The Black-Scholes Option Pricing Model
• The Black-Scholes Formula
• ▪ Interview with Myron S. Scholes
• Implied Volatility
• ▪ Global Financial Crisis The VIX Index
• The Replicating Portfolio
• 21.3 Risk-Neutral Probabilities
• A Risk-Neutral Two-State Model
• Implications of the Risk-Neutral World
• Risk-Neutral Probabilities and Option Pricing
• 21.4 Risk and Return of an Option
• 21.5 Corporate Applications of Option Pricing
• Beta of Risky Debt
• ▪ Common Mistake Valuing Employee Stock Options
• ▪ Nobel Prize Pricing Financial Options
• Agency Costs of Debt
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Chapter 22 Real Options
• 22.1 Real Versus Financial Options
• 22.2 Decision Tree Analysis
• Representing Uncertainty
• Real Options
• Solving Decision Trees
• 22.3 The Option to Delay: Investment as a Call Option
• An Investment Option
• ▪ Why Are There Empty Lots in Built-Up Areas of Big Cities?
• Factors Affecting the Timing of Investment
• Investment Options and Firm Risk
• ▪ Global Financial Crisis Uncertainty, Investment, and the Option to Delay
• 22.4 Growth and Abandonment Options
• Valuing Growth Potential
• The Option to Expand
• ▪ Interview with Scott Mathews
• The Option to Abandon
• 22.5 Investments with Different Lives
• ▪ Equivalent Annual Benefit Method
• 22.6 Optimally Staging Investments
• 22.7 Rules of Thumb
• The Profitability Index Rule
• The Hurdle Rate Rule
• ▪ The Option to Repay a Mortgage
• 22.8 Key Insights from Real Options
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Part 8 Long-Term Financing
• Chapter 23 Raising Equity Capital
• 23.1 Equity Financing for Private Companies
• Sources of Funding
• ▪ Crowdfunding: The Wave of the Future?
• ▪ Interview with Kevin Laws
• Venture Capital Investing
• Venture Capital Financing Terms
• ▪ Common Mistake Misinterpreting Start-Up Valuations
• ▪ From Launch to Liquidity
• Exiting an Investment in a Private Company
• 23.2 The Initial Public Offering
• Advantages and Disadvantages of Going Public
• Types of Offerings
• The Mechanics of an IPO
• ▪ Google’s IPO
• ▪ An Alternative to the Traditional IPO: Spotify’s Direct Listing
• 23.3 IPO Puzzles
• Underpricing
• Cyclicality and Recent Trends
• ▪ Global Financial Crisis Worldwide IPO Deals in 2008–2009
• Cost of an IPO
• Long-Run Underperformance
• 23.4 The Seasoned Equity Offering
• The Mechanics of an SEO
• Price Reaction
• Issuance Costs
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Data Case
• Chapter 24 Debt Financing
• 24.1 Corporate Debt
• Public Debt
• Private Debt
• 24.2 Other Types of Debt
• Sovereign Debt
• Municipal Bonds
• ▪ Detroit’s Art Museum at Risk
• Asset-Backed Securities
• ▪ Global Financial Crisis CDOs, Subprime Mortgages, and the Financial Crisis
• 24.3 Bond Covenants
• 24.4 Repayment Provisions
• Call Provisions
• ▪ New York City Calls Its Municipal Bonds
• Sinking Funds
• Convertible Provisions
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Data Case
• Chapter 25 Leasing
• 25.1 The Basics of Leasing
• Examples of Lease Transactions
• Lease Payments and Residual Values
• Leases Versus Loans
• ▪ Calculating Auto Lease Payments
• End-of-Term Lease Options
• Other Lease Provisions
• 25.2 Accounting, Tax, and Legal Consequences of Leasing
• Lease Accounting
• ▪ Operating Leases at Alaska Air Group
• The Tax Treatment of Leases
• Leases and Bankruptcy
• ▪ Synthetic Leases
• 25.3 The Leasing Decision
• Cash Flows for a True Tax Lease
• Lease Versus Buy (An Unfair Comparison)
• Lease Versus Borrow (The Right Comparison)
• Evaluating a True Tax Lease
• Evaluating a Non-Tax Lease
• 25.4 Reasons for Leasing
• Valid Arguments for Leasing
• ▪ Interview with Mark Long
• Suspect Arguments for Leasing
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Part 9 Short-Term Financing
• Chapter 26 Working Capital Management
• 26.1 Overview of Working Capital
• The Cash Cycle
• Firm Value and Working Capital
• 26.2 Trade Credit
• Trade Credit Terms
• Trade Credit and Market Frictions
• Managing Float
• 26.3 Receivables Management
• Determining the Credit Policy
• Monitoring Accounts Receivable
• 26.4 Payables Management
• Determining Accounts Payable Days Outstanding
• Stretching Accounts Payable
• 26.5 Inventory Management
• Benefits of Holding Inventory
• Costs of Holding Inventory
• 26.6 Cash Management
• Motivation for Holding Cash
• Alternative Investments
• ▪ Hoarding Cash
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Data Case
• Chapter 27 Short-Term Financial Planning
• 27.1 Forecasting Short-Term Financing Needs
• Seasonalities
• Negative Cash Flow Shocks
• Positive Cash Flow Shocks
• 27.2 The Matching Principle
• Permanent Working Capital
• Temporary Working Capital
• Financing Policy Choices
• 27.3 Short-Term Financing with Bank Loans
• Single, End-of-Period Payment Loan
• Line of Credit
• Bridge Loan
• Common Loan Stipulations and Fees
• 27.4 Short-Term Financing with Commercial Paper
• ▪ Global Financial Crisis Short-Term Financing in Fall 2008
• 27.5 Short-Term Financing with Secured Financing
• Accounts Receivable as Collateral
• ▪ A Seventeenth-Century Financing Solution
• Inventory as Collateral
• ▪ Loan Guarantees: The Ex-Im Bank Controversy
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Part 10 Special Topics
• Chapter 28 Mergers and Acquisitions
• 28.1 Background and Historical Trends
• Merger Waves
• Types of Mergers
• 28.2 Market Reaction to a Takeover
• 28.3 Reasons to Acquire
• Economies of Scale and Scope
• Vertical Integration
• Expertise
• Monopoly Gains
• Efficiency Gains
• Tax Savings from Operating Losses
• Diversification
• Earnings Growth
• Managerial Motives to Merge
• 28.4 Valuation and the Takeover Process
• Valuation
• The Offer
• Merger “Arbitrage”
• Tax and Accounting Issues
• Board and Shareholder Approval
• 28.5 Takeover Defenses
• Poison Pills
• Staggered Boards
• White Knights
• Golden Parachutes
• Recapitalization
• Other Defensive Strategies
• Regulatory Approval
• ▪ Weyerhaeuser’s Hostile Bid for Willamette Industries
• 28.6 Who Gets the Value Added from a Takeover?
• The Free Rider Problem
• Toeholds
• The Leveraged Buyout
• ▪ The Leveraged Buyout of RJR-Nabisco by KKR
• The Freezeout Merger
• Competition
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Chapter 29 Corporate Governance
• 29.1 Corporate Governance and Agency Costs
• 29.2 Monitoring by the Board of Directors and Others
• Types of Directors
• Board Independence
• ▪ Common Mistake “Celebrity” Boards
• Board Size and Performance
• Other Monitors
• 29.3 Compensation Policies
• Stock and Options
• Pay and Performance Sensitivity
• 29.4 Managing Agency Conflict
• Direct Action by Shareholders
• ▪ Shareholder Activism at The New York Times
• Management Entrenchment
• The Threat of Takeover
• 29.5 Regulation
• The Sarbanes-Oxley Act
• ▪ Interview with Lawrence E. Harris
• The Cadbury Commission
• Dodd-Frank Act
• Insider Trading
• ▪ Martha Stewart and ImClone
• 29.6 Corporate Governance Around the World
• Protection of Shareholder Rights
• Controlling Owners and Pyramids
• The Stakeholder Model
• Cross-Holdings
• 29.7 The Tradeoff of Corporate Governance
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Chapter 30 Risk Management
• 30.1 Insurance
• The Role of Insurance: An Example
• Insurance Pricing in a Perfect Market
• The Value of Insurance
• The Costs of Insurance
• The Insurance Decision
• 30.2 Commodity Price Risk
• Hedging with Vertical Integration and Storage
• Hedging with Long-Term Contracts
• Hedging with Futures Contracts
• ▪ Common Mistake Hedging Risk
• ▪ Differing Hedging Strategies
• Deciding to Hedge Commodity Price Risk
• 30.3 Exchange Rate Risk
• Exchange Rate Fluctuations
• Hedging with Forward Contracts
• Cash-and-Carry and the Pricing of Currency Forwards
• ▪ Global Financial Crisis Arbitrage in Currency Markets?
• Hedging with Options
• 30.4 Interest Rate Risk
• Interest Rate Risk Measurement: Duration
• Duration-Based Hedging
• ▪ The Savings and Loan Crisis
• Swap-Based Hedging
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Chapter 31 International Corporate Finance
• 31.1 Internationally Integrated Capital Markets
• 31.2 Valuation of Foreign Currency Cash Flows
• WACC Valuation Method in Domestic Currency
• Using the Law of One Price as a Robustness Check
• 31.3 Valuation and International Taxation
• The TCJA: A New Approach to International Taxation
• Harmonizing the Tax Treatment of Exports: GILTI and FDII
• Avoiding Base Erosion: BEAT
• 31.4 Internationally Segmented Capital Markets
• Differential Access to Markets
• Macro-Level Distortions
• Implications
• 31.5 Capital Budgeting with Exchange Risk
• ▪ Interview with Bill Barrett
• MyLab Finance
• Key Terms
• Further Reading
• Problems
• Data Case
• Glossary
• Index