| Judul Buku | : | Corporate Finance – Asia Global Edition |
| Pengarang | : | Stephen A. Ross – Randolph W. Westerfield – Jeffrey Jaffe – Joseph Lim – Ruth Tan – Helen Wong |
| Penerbit | : | Mc Graw Hill Education |
| Cetakan | : | Asia Global Edition |
| Tahun Terbit | : | 2015 | |
| Bahasa | : | Inggris | |
| Jumlah Halaman | : | 1060 | |
| Kertas Isi | : | HVS | |
| Cover | : | Soft | |
| Ukuran | : | 20 x 26 | |
| Berat | : | 1800 | |
| Kondisi | : | Baru | |
| Harga | : | Rp 435,000 | |
| Bayar | : | | |
| Stock | : | 1 | |
Corporate Finance – Asia Global Edition
Pengarang : Stephen A. Ross – Randolph W. Westerfield – Jeffrey Jaffe – Joseph Lim – Ruth Tan – Helen Wong
Penerbit : Mc Graw Hill Education
Contents
PART I Overview
CHAPTER I
Introduction to Corporate Finance I
1.1 What Is Corporate Finance? I
The Balance Sheet Model of the Firm I
The Financial Manager 3
1.2 The Corporate Firm 4
The Sole Proprietorship 4
The Partnership 4
The Corporation 5
A Corporation by Another Name … 6
1.3 The Importance of Cash Flows 8
1.4 The Goal of Financial Management I I
Possible Goals I I
The Goal of Financial Management 12
A More General Goal 12
1.5 The Agency Problem and Control
of the Corporation 13
Agency Relationships 13
Management Goals 13
Do Managers Act in the Stockholders’ Interests? 14
Stakeholders 15
1.6 Regulation 16
Sarbanes-Oxley 16
Corporate Governance 17
Summary and Conclusions 17
Concept Questions 18
CHAPTER 2
Financial Statements and Cash Flow 20
2.1 The Balance Sheet 20
Liquidity 21
Debt versus Equity 22
Value versus Cost 22
2.2 The Income Statement 23
Generally Accepted Accounting Principles 24
Noncash Items 25
Time and Costs 25
2.3 Taxes 26
Corporate Tax Rates 27
Average versus Marginal Tax Rates 27
2.4 Net Working Capital 29
2.5 Financial Cash Flow 29
2.6 The Accounting Statement of
Cash Flows 33
Cash Flow from Operating Activities 33
Cash Flow from Investing Activities 34
Cash Flow from Financing Activities 34
2.7 Cash Flow Management 35
Summary and Conclusions 36
Concept Questions 36
Questions and Problems 37
Excel Master It! 42
Mini Case: Beauty Community Public
Company Limited 43
CHAPTER 3
Financial Statements Analysis and Financial Models 45
3.1 Financial Statements Analysis 45
Standardizing Statements 46
Common-Size Balance Sheets 46
Common-Size Income Statements 47
3.2 Ratio Analysis 49
Short-Term Solvency or Liquidity Measures 50
Long-Term Solvency Measures 51
Asset Management or Turnover Measures 53
Profitability Measures 55
Market Value Measures 56
3.3 The DuPont Identity 59
A Closer Look at ROE 59
Problems with Financial Statement Analysis 61
3.4 Financial Models 62
A Simple Financial Planning Model 62
The Percentage of Sales Approach 64
3.5 External Financing and Growth
EFN and Growth 69
Financial Policy and Growth 71
A Note about Sustainable Growth Rate
Calculations 75
3.6 Some Caveats Regarding Financial
Planning Models 76
Summary and Conclusions 77
Concept Questions 77
Questions and Problems 79
Excel Master It! 84
Mini Case: Beauty Community Public
Company Limited Part 2 86
PART II Valuation and Capital Budgeting
CHAPTER 4
Discounted Cash Flow Valuation 88
4.1 Valuation: The One-Period Case 88
4.2 The Multiperiod Case 92
Future Value and Compounding 92
The Power of Compounding: A Digression 95
Present Value and Discounting 96
Finding the Number of Periods 99
The Algebraic Formula 103
4.3 Compounding Periods 103
Distinction between Stated Annual Interest
Rate and Effective Annual Rate 105
Compounding over Many Years 106
Continuous Compounding 106
4.4 Simplifications 108
Perpetuity 108
Growing Perpetuity 110
Annuity III
Growing Annuity 118
4.5 Loan Amortization 119
4.6 What Is a Firm Worth? 123
4.7 Another Reason Why APR May Differ
from EAR 125
Summary and Conclusions 127
Concept Questions 128
Questions and Problems 129
Excel Master It! 139
Mini Case: The MBA Decision 139
Appendix 4A: Net Present Value: First Principles
of Finance 140
Appendix 48: Using Financial Calculators 140
CHAPTER 5
Net Present Value and Other Investment Rules 141
5.1 Why Use Net Present Value? 141
5.2 The Payback Period Method 144
Defining the Rule 144
Problems with the Payback Method 145
Managerial Perspective 146
Summary of Payback 147
5.3 The Discounted Payback Period Method 147
5.4 The Internal Rate of Return 148
5.5 Problems with the IRR Approach 151
Definition of Independent and Mutually
Exclusive Projects 151
Two General Problems Affecting Both
Independent and Mutually Exclusive Projects
151 Problems Specific to Mutually Exclusive Projects 155
Redeeming Qualities of 1RR 160
A Test 160
5.6 The Profitability index 161
Calculation of Profitability Index 161
5.7 The Practice of Capital Budgeting 163
Summary and Conclusions 165
Concept Questions 166
Questions and Problems 168
Excel Master It! 175
Mini Case: Hutti Gold Mines Limited 176
CHAPTER 6
Making Capital Investment Decisions 177
6.1 Incremental Cash Flows: The Key
to Capital Budgeting 177
Cash Flows—Not Accounting Income 177
Sunk Costs 178
Opportunity Costs 178
Side Effects 179
Allocated Costs 179
6.2 The Baldwin Company; An Example 180
An Analysis of The Project 183
Which Set of Books? 185
A Note About Net Working Capital 185
Interest Expense 186
6.3 Inflation and Capital Budgeting 187
Interest Rates and Inflation 187
Cash Flow and Inflation 188
Discounting: Nominal or Real? 189
6.4 Alternative Definitions of Operating
Cash Flow 191
The Top-Down Approach 192
The Bottom-Up Approach 192
The Tax Shield Approach 193
Conclusion 194
6.5 Some Special Cases of Discounted
Cash Flow Analysis 194
Evaluating Cost-Cutting Proposals 194
Setting The Bid Price 196
Investments of Unequal Lives: The Equivalent
Annual Cost Method 198
Summary and Conclusions 200
Concept Questions 200
Questions and Problems 202
Excel Master It! 210
Mini Case: Goodtime Rubber Co. Ltd. 211
CHAPTER 7
Risk Analysis, Real Options, and Capital Budgeting 212
7.1 Sensitivity Analysis, Scenario Analysis,
and Break-Even Analysis 212
Sensitivity Analysis and Scenario Analysis 212
Break-Even Analysis 216
7.2 Monte Carlo Simulation 220
Step 1: Specify the Basic Model 220
Step 2: Specify a Distribution for Each
Variable in the Model 220
Step 3: The Computer Draws One Outcome 223
Step 4: Repeat the Procedure 223
Step 5: Calculate NPV 224
7.3 Real Options 224
The Option to Expand 225
The Option to Abandon 226
Timing Options 228
7.4 Decision Trees 229
Summary and Conclusions 231
Concept Questions 232
Questions and Problems 232
Excel Master Itl 239
Mini Case: Allied Lumber 240
CHAPTER 8
Interest Rates and Bond Valuation 242
8.1 Bonds and Bond Valuation 242
Bond Features and Prices 242
Bond Values and Yields 243
Interest Rate Risk 246
Finding the Yield to Maturity: More Trial
and Error 248
Zero Coupon Bonds 250
8.2 Government and Corporate Bonds 252
Government Bonds 252
Corporate Bonds 253
Bond Ratings 255
Asian Bond Rating Agencies 256
8.3 Bond Markets 256
How Bonds Are Bought and Sold 257
Bond Price Reporting 258
A Note on Bond Price Quotes 261
8.4 Inflation and Interest Rates 261
Real versus Nominal Rates 261
Inflation Risk and Inflation-Linked Bonds 263
The Fisher Effect 264
8.5 Determinants of Bond Yields 265
The Term Structure of Interest Rates 265
Bond Yields and the Yield Curve: Putting
It All Together 268
Conclusion 269
Summary and Conclusions 269
Concept Questions 270
Questions and Problems 271
Excel Master It! 274
Mini Case: Singapore Airlines Limited 275
CHAPTER 9
Stock Valuation 277
9.1 The Present Value of Common Stocks 277
Dividends versus Capital Gains 277
Valuation of Different Types of Stocks
278 9.2 Estimates of Parameters in the
Dividend Discount Model 282
Where Does g Come From? 282
Where Does R Come From? 284
A Healthy Sense of Skepticism 285
Dividends or Earnings: Which to Discount? 286
The No-Dividend Firm 286
9.3 Growth Opportunities 287
NPVGOs of Real-World Companies 289
Growth in Earnings and Dividends
versus Growth Opportunities 290
9.4 Comparables 291
Price-to-Earnings Ratio 291
Enterprise Value Ratios 294
9.5 Valuing the Entire Firm 296
9.6 The Stock Markets 297
Dealers and Brokers 297
Organization of the NYSE 298
NASDAQ Operations 300
Stock Market Reporting 301
Summary and Conclusions 302
Concept Questions 302
Questions and Problems 303
Excel Master It! 308
Mini Case: West Coast Yachts 309
PART III Risk
CHAPTER 10
Risk and Return: Lessons from Market History 310
10.1 Returns 310
Dollar Returns 310
Percentage Returns 312
10.2 Holding Period Returns 314
10.3 Return Statistics 317
10.4 Average Stock Returns and Risk-Free
Returns 322
10.5 Risk Statistics 322
Variance 323
Normal Distribution and Its Implications
for Standard Deviation 325
10.6 More on Average Returns 325
Arithmetic versus Geometric Averages 326
Calculating Geometric Average Returns 326
Arithmetic Average Return or Geometric
Average Return? 328
10.7 The U.S. Equity Risk Premium:
Historical and International
Perspectives 329
10.8 2008: A Year of Financial Crisis 332
Summary and Conclusions 334
Concept Questions 334
Questions and Problems 335
Excel Master It! 338
Mini Case: Investment of Pension Money 339
CHAPTER 11
Return and Risk: The Capital Asset Pricing Model (CAPM) 341
11.1 Individual Securities 341
11.2 Expected Return, Variance, and Covariance 342
Expected Return and Variance 342
Covariance and Correlation 344
11.3 The Return and Risk for Portfolios 347
The Expected Return on a Portfolio 347
Variance and Standard Deviation of a Portfolio 348
11.4 The Efficient Set for Two Assets 351
11.5 The Efficient Set for Many Securities 356
Variance and Standard Deviation in a Portfolio of Many Assets 357
11.6 Diversification 359
The Anticipated and Unanticipated Components of News 359
Risk: Systematic and Unsystematic 359
The Essence of Diversification 360
11.7 Riskless Borrowing and Lending 362
The Optimal Portfolio 364
11.8 Market Equilibrium 36S
Definition of the Market Equilibrium Portfolio 365
Definition of Risk When Investors Hold the Market Portfolio 366
The Formula for Beta 368
A Test 369
11.9 Relationship between Risk and Expected Return (CAPM) 370
Expected Return on Market 370
Expected Return on Individual Security 371
Summary and Conclusions 373
Concept Questions 374
Questions and Problems 375
Excel Master It! 381
Mini Case: Investment of Pension Money Part 2 382
Appendix I IA: Is Beta Dead? 383
CHAPTER 12
An Alternative View of Risk and Return: The Arbitrage Pricing Theory 384
12.1 Introduction 384
12.2 Systematic Risk and Betas 384
12.3 Portfolios and Factor Models 387
Portfolios and Diversification 389
12.4 Betas, Arbitrage, and Expected Returns 392
The Linear Relationship 392
The Market Portfolio and the Single Factor 393
12.5 The Capital Asset Pricing Model and the Arbitrage Pricing Theory 394
Differences in Pedagogy 394
Differences in Application 394
12.6 Empirical Approaches to Asset Pricing 396
Empirical Models 396
Style Portfolios 397
Summary and Conclusions 399
Concept Questions 400
Questions and Problems 401
Excel Master It! 405
Mini Case: Risk and Return 405
CHAPTER 13
Risk, Cost of Capital, and Valuation 407
13.1 The Cost of Capital 407
13.2 Estimating the Cost of Equity Capital with the CAPM 408
The Risk-Free Rate 411
Market Risk Premium 411
13.3 Estimation of Beta 412
Real-World Betas 413
Stability of Beta 413
Using an Industry Beta 414
13.4 Determinants of Beta 416
Cyclicality of Revenues 416
Operating Leverage 417
Financial Leverage and Beta 417
13.5 The Dividend Discount Model Approach 418
Comparison of DDM and CAPM 419
13.6 Cost of Capital for Divisions and Projects 420
13.7 Cost of Fixed Income Securities 422
Cost of Debt 422
Cost of Preferred Stock 423
13.8 The Weighted Average Cost of Capital 424
13.9 Valuation with R WACC 425
Project Evaluation and the RwAcc 425
Firm Valuation with the P.11 426
13.10 Estimating Eastman Chemical’s Cost of Capital 429
13.11 Flotation Costs and the Weighted Average Cost of Capital 432
The Basic Approach 432
Flotation Costs and NPV 433
Internal Equity and Flotation Costs 434
Summary and Conclusions 435
Concept Questions 435
Questions and Problems 437
Mini Case: Newcrest Mining Limited (NCM) 441
Appendix 13A: Economic Value Added and the Measurement of Financial Performance 442
PART IV Capital Structure and Dividend Policy
CHAPTER 14
Efficient Capital Markets and Behavioral Challenges 443
14.1 Can Financing Decisions Create Value? 443
14.2 A Description of Efficient Capital Markets 445
Foundations of Market Efficiency 447
14.3 The Different Types of Efficiency 448
The Weak Form 448
The Semistrong and Strong Forms 450
Some Common Misconceptions about the Efficient Market Hypothesis 451
14.4 The Evidence 452
The Weak Form 452
The Semistrong Form 454
The Strong Form 458
14.5 The Behavioral Challenge to Market Efficiency 458
14.6 Empirical Challenges to Market Efficiency 460
14.7 Reviewing the Differences 466
14.8 Implications for Corporate Finance 467
- Accounting Choices, Financial Choices, and Market Efficiency 468
- The Timing Decision 469
- Speculation and Efficient Markets 470
- Information in Market Prices 472
Summary and Conclusions 474
Concept Questions 475
Questions and Problems 479
Mini Case: Investment of Pension Money Part 3 480
CHAPTER 15
Long-Term Financing: An Introduction 483
ISA Some Features of Common and Preferred Stocks 483
Common Stock Features 483
Preferred Stock Features 486
15.2 Corporate Long-Term Debt 487
is It Debt or Equity? 488
Long-Term Debt: The Basics 488
The Indenture 490
Corporate Bonds In Asia 493
I5.3 Some Different Types of Bonds 493
Floating-Rate Bonds 493
Other Types of Bonds 494
15.4 Bank Loans 494
15.5 International Bonds 495
15.6 Patterns of Financing 496
15.7 Recent Trends in Capital Structure 498
Which Are Best: Book or Market Values? 500
Summary and Conclusions Soo
Concept Questions 500
Questions and Problems 501
Mini Case: Corporate Debts 503
CHAPTER 16
Capital Structure: Basic Concepts 505
16.1 The Capital Structure Question and the Pie Theory 505
16.2 Maximizing Firm Value versus Maximizing Stockholder Interests 506
16.3 Financial Leverage and Firm Value: An Example 508
Leverage and Returns to Shareholders 508
The Choice between Debt and Equity 510
A Key Assumption 512
16.4 Modigliani and Miller: Proposition 11
(No Taxes) 512
Risk to Equityholders Rises with Leverage 512
Proposition II: Required Return to
Equityholders Rises with Leverage 513
MM: An Interpretation 519
16.5 Taxes 521
The Basic Insight 521
Present Value of the Tax Shield 523
Value of the Levered Firm 523
Expected Return and Leverage under Corporate Taxes 525
The Weighted Average Cost of Capital, R.,C’ and Corporate Taxes 527
Stock Price and Leverage under Corporate Taxes 528
Summary and Conclusions 530
Concept Questions 530
Questions and Problems 531
Mini Case: Sinher Technology Inc 536
CHAPTER 17
Capital Structure: Limits to the Use of Debt 538
17.1 Costs of Financial Distress 539
Bankruptcy Risk or Bankruptcy Cost? 539
17.2 Description of financial’,Distress Costs S41
Direct Costs of Financial Distress: Legal and Administrative Costs of Liquidation or
Reorganization 541
Indirect Costs of Financial Distress 542
Agency Costs 543
17.3 Can Costs of Debt Be Reduced? 546
Protective Covenants 546
Consolidation of Debt 547
17.4 Integration of Tax Effects and FinancialDistress Costs 548
Pie Again 549
17.5 Signaling 550
17.6 Shirking, Perquisites, and Bad Investments: A Note on Agency Cost of Equity 552
Effect of Agency Costs of Equity on Debt–Equity Financing 554
Free Cash Flow 554
17.7 The Pecking-Order Theory 555
Rules of the Pecking Order 556
Implications 557
17.8 Personal Taxes 558
The Basics of Personal Taxes 558
The Effect of Personal Taxes on Capital Structure 558
17.9 How Firms Establish Capital Structure 560
Summary and Conclusions 565
Concept Questions 565
Questions and Problems 566
Mini Case: Food Empire Holdings Limited 569
Appendix 17A: Some Useful Formulas of Financial Structure 570
Appendix 178, The Miller Model and the Graduated Income Tax 570
CHAPTER 18
Valuation and Capital Budgeting for the levered Firm 571
18.1 Adjusted Present Value Approach 571
18.2 Flow to Equity Approach 573
Step 1: Calculating Levered Cash Flow (LCF) 573
Step 2: Calculating Rs 574
Step 3: Valuation 574
18.3 Weighted Average Cost of Capital Method 574
18.4 A Comparison of the APV, FTE, and WACC Approaches 575
A Suggested Guideline 576
Alternative application of target debt to market value ratio 578
APV Approach 579
FTE Approach 579
WACC Approach 580
18.5 Valuation When the Discount Rate Must Be Estimated 580
18.6 APV Example 582
18.7 Beta and Leverage 585
The Project Is Not Scale Enhancing 587
Summary and Conclusions 588
Concept Questions 588
Questions and Problems 589
Mini Case: HCP Holdings Inc. 593
Appendix I 8A: The Adjusted Present Value Approach to Valuing Leveraged
Buyouts 594
CHAPTER 19
Dividends and Other Payouts 595
19.1 Different Types of Payouts 595
19.2 Standard Method of Cash Dividend Payment 596
19.3 The Benchmark Case: An Illustration of the Irrelevance of Dividend Policy 598
Current Policy: Dividends Set Equal to Cash Flow 598
Alternative Policy: Initial Dividend Is Greater Than Cash Flow 599
The Indifference Proposition 599
Homemade Dividends 599
A Test 601
Dividends and Investment Policy 601
19.4 Repurchase of Stock 602
Dividend versus Repurchase: Conceptual Example 603
ividends versus Repurchases: Real-World Considerations 604
19.5 Personal Taxes, Dividends, and Stock Repurchases 605
Firms without Sufficient Cash to Pay a Dividend 605
Firms with Sufficient Cash to Pay a Dividend 607
Summary of Personal Taxes 609
19.6 Real-World Factors Favoring a High-Dividend Policy 609
Desire for Current Income 610
Behavioral Finance 610
Agency Costs 611
Information Content of Dividends and Dividend Signaling 612
19.7 The Clientele Effect: A Resolution of Real-World Factors? 614
19.8 What We Know and Do Not Know about Dividend Policy 616
Corporate Dividends Are Substantial 616
Fewer Companies Pay Dividends 617
Corporations Smooth Dividends 618
Some Survey Evidence about Dividends 620
19.9 Putting It All Together 621
19.10 Stock Dividends and Stock Splits 623
Value of Stock Splits and Stock Dividends 623
Reverse Splits 625
19.11 Corporate Tax Systems 626
Classical System 626
Imputation System 626
One-Tier Corporate Tax System 627
Comparison of the Imputation System and the One-Tier Corporate Tax System 628
Benefits of Imputation System over One-tier Corporate Tax System 628
Benefits of One-tier Corporate Tax System over Imputation System 628
19.12 Corporate Tax Systems in Singapore, Malaysia, and Hong Kong 629
Singapore’s Corporate Tax System 629
Malaysia’s Corporate Tax System 630
Hong Kong’s Corporate Tax System 631
Summary and Conclusions 631
Concept Questions 632
Questions and Problems 634
Mini Case: Electronic Timing, Inc, 638
PART V Long-Term Financing
CHAPTER 20
Raising Capital 639
20.1 Early-Stage Financing and Venture Capital 639
Venture Capital 640
Stages of Financing 641
Some Venture Capital Realities 642
Venture Capital Investments and Economic Conditions 643
20.2 The Public Issue 643
20.3 Alternative Issue Methods 646
20.4 The Cash Offer 647
Investment Banks 649
The Offering Price 651
Underpricing: A Possible Explanation 651
20.5 The Announcement of New Equity and the Value of the Firm 653
20.6 The Cost of New Issues 654
The Costs of Going Public: A Case Study 655
20.7 Rights 657
The Mechanics of a Rights Offering 657
Subscription Price 659
Number of Rights Needed to Purchase a Share 659
Effect of Rights Offering on Price of Stock 660
Effects on Shareholders 661
The Underwriting Arrangements 662
20.8 The Rights Puzzle 662
20.9 Dilution 663
Dilution of Proportionate Ownership 663
Stock Price Dilution 663
Book Value 664
Earnings per Share 665
Conclusion 665
20.10 Shelf Registration 666
20.11 Issuing Long-Term Debt 666
Summary and Conclusions 667
Concept Questions 668
Questions and Problems 670
Mini Case: West Coast Yachts Goes Public 672
CHAPTER 21
Leasing 674
21.1 Types of Leases 674
The Basics 674
Operating Leases 675
Financial Leases 676
21.2 Accounting and Leasing 677
21.3 Taxes, the IRS, and Leases 678
21.4 The Cash Flows of Leasing 679
21.5 A Detour for Discounting and Debt Capacity with Corporate Taxes 681
Present Value of Riskless Cash Flows 681
Optimal Debt Level and Riskless Cash Flows 683
21.6 NPV Analysis of the Lease-versus-Buy Decision 683
The Discount Rate 684
21.7 Debt Displacement and Lease Valuation 684
The Basic Concept of Debt Displacement 684
Optimal Debt Level in the Xomox Example 685
21.8 Does Leasing Ever Pay? The Base Case 688
21.9 Reasons for Leasing 689
Good Reasons for Leasing 689
Bad Reasons for Leasing 692
2 1. 10 Some Unanswered Questions 693
Are the Uses of Leases and Debt Complementary? 693
Why Are Leases Offered by Both Manufacturers and Third-Party Lessors? 693
Why Are Some Assets Leased More Than Others? 693
Summary and Conclusions 694
Concept Questions 695
Questions and Problems 695
Mini Case: Sa Sa International Holding Limited 698
Appendix 21A: APV Approach to Leasing 699
PART VI Options, Futures, and Corporate Finance
CHAPTER 22
Options and Corporate Finance 700
22.1 Options 700
22.2 Call Options 701
The Value of a Call Option at Expiration 701
22.3 Put Options 702
The Value of a Put Option at Expiration 703
22.4 Selling Options 704
22.5 Option Quotes 705
22.6 Combinations of Options 707
22.7 Valuing Options 710
Bounding the Value of a Call 710
The Factors Determining Call Option Values 711
A Quick Discussion of Factors Determining Put Option Values 714
A Note on Capital Changes and Dividend Payments 715
22.8 An Option Pricing Formula 715
A Two-State Option Model 716
The Black–Scholes Model 718
22.9 Stocks and Bonds as Options 723
The Firm Expressed in Terms of Call Options 724
The Firm Expressed in Terms of Put Options 726
A Resolution of the Two Views 727
A Note about Loan Guarantees 728
22.10 Options and Corporate Decisions: Some Applications 729
Mergers and Diversification 729
Options and Capital Budgeting 731
22.11 Investment in Real Projects and Options 733
Summary and Conclusions 736
Concept Questions 736
Questions and Problems 737
Excel Master It! 744
Mini Case: Clissold Industries Options 745
CHAPTER 23
Options and Corporate Finance: Extensions and Applications 747
23.1 Executive Stock Options 747
Why Options? 747
Valuing Executive Compensation 749
23.2 Valuing a Start-Up 751
23.3 More about the Binomial Model 754
Heating Oil 755
23.4 Shutdown and Reopening Decisions 761
Valuing a Gold Mine 761
The Abandonment and Opening Decisions 762
Valuing the Simple Gold Mine 763
Summary and Conclusions 768
Concept Questions 768
Questions and Problems 769
Mini Case: Exotic Cuisines’ Employee Stock Options 771
CHAPTER 24
Warrants and Convertibles 772
24.1 Warrants 772
24.2 The Difference between Warrants and Call Options 773
How the Firm Can Hurt Warrant Holders 776
24.3 Warrant Pricing and the Black–Scholes Model 776
24.4 Convertible Bonds 778
24.5 The Value of Convertible Bonds 779
Straight Bond Value 779
Conversion Value 779
Option Value 780
24.6 Reasons for Issuing Warrants and Convertibles 782
Convertible Debt versus Straight Debt 782
Convertible Debt versus Common Stock 782
The “Free Lunch” Story 783
The “Expensive Lunch” Story 784
A Reconciliation 784
24.7 Why Are Warrants and Convertibles Issued? 785
Matching Cash Flows 785
Risk Synergy 785
Agency Costs 786
Backdoor Equity 786
24.8 Conversion Policy 786
Summary and Conclusions 788
Concept Questions 788
Questions and Problems 789
Mini Case: Convertible Bond 791
CHAPTER 25
Derivatives and Hedging Risk 793
25.1 Derivatives, Hedging, and Risk 793
25.2 Forward Contracts 794
25.3 Futures Contracts 795
25A Hedging 799
25.5 Interest Rate Futures Contracts 801
Pricing of Treasury Bonds 801
Pricing of Forward Contracts 802
Futures Contracts 803
Hedging in Interest Rate Futures 804
25.6 Duration Hedging 808
The Case of Zero Coupon Bonds 808
The Case of Two Bonds with the Same Maturity but with Different Coupons 809
Duration 810
Matching Liabilities with Assets 812
25.7 Swaps Contracts 814
Interest Rate Swaps 815
Currency Swaps 816
Credit Default Swaps (CDS) 817
Exotics 817
The Swap Market 818
25.8 Actual Use of Derivatives 819
Summary and Conclusions 821
Concept Questions 822
Questions and Problems 823
Mini Case: Williamson Mortgage, Inc. 826
PART V11 Short-Term Finance
CHAPTER 26
Short-Term Finance and Planning 827
26.1 Tracing Cash and Net Working Capital 828
26.2 The Operating Cycle and the Cash Cycle 829
Defining the Operating and Cash Cycles 830
The Operating Cycle and the Firm’s Organization Chart 832
Calculating the Operating and Cash Cycles 832
Interpreting the Cash Cycle 835
A Look at Operating and Cash Cycles 835
26.3 Some Aspects of Short-Term Financial Policy 836
The Size of the Firm’s Investment in Current Assets 837
Alternative Financing Policies for Current Assets 839
Which Is Best? 841
26A Cash Budgeting 842
Cash Outflow 843
The Cash Balance 844
26.5 The Short-Term Financial Plan 844
Unsecured Loans 844
Secured Loans 845
Other Sources 845
Summary and Conclusions 846
Concept Questions 846
Questions and Problems 847
Excel Master It’ 855
Mini Case; Keafer Manufacturing Working Capital Management 856
CHAPTER 27
Cash Management 857
Cash Management versus Liquidity Management 857
27.1 Reasons for Holding Cash 858
The Speculative and Precautionary Motives 858
The Transaction Motive 858
Compensating Balances 858
Costs of Holding Cash 859
27.2 Understanding Float 859
Disbursement Float 859
Collection Float and Net Float 860
Float Management 861
Electronic Data Interchange and Check 21: The End of Float? 864
27.3 Cash Collection and Concentration 865
Components of Collection Time 865
Cash Collection 866
Lockboxes 866
Cash Concentration 867
Accelerating Collections: An Example 868
27.4 Managing Cash Disbursements 870
Increasing Disbursement Float 870
Controlling Disbursements 871
27.5 Investing Idle Cash 872
Temporary Cash Surpluses 872
Characteristics of Short-Term Securities 873
Some Different Types of Money Market Securities 873
Summary and Conclusions 874
Concept Questions 875
Questions and Problems 876
Mini Case: Tiger Airways Holdings Limited 878
Appendix 27A: Determining the Target Cash Balance 878
Appendix 278: Adjustable Rate Preferred Stock, Auction Rate Preferred Stock,
and Floating-Rate Certificates of Deposit 878
CHAPTER 28
Credit and Inventory Management 879
28.1 Credit and Receivables 879
Components of Credit Policy 880
The Cash Flows from Granting Credit 880
The Investment in Receivables 881
28.2 Terms of the Sale 881
The Basic Form 882
The Credit Period 882
Cash Discounts 883
Credit Instruments 885
28.3 Analyzing Credit Policy 886
Credit Policy Effects 886
Evaluating a Proposed Credit Policy 886
28.4 Optimal Credit Policy 889
The Total Credit Cost Curve 889
Organizing the Credit Function 890
28.5 Credit Analysis 891
When Should Credit Be Granted? 891
Credit Information 893
Credit Evaluation and Scoring 893
28.6 Collection Policy 894
Monitoring Receivables 894
Collection Effort 895
28.7 Inventory Management 895
The Financial Manager and Inventory Policy 896
Inventory Types 896
Inventory Costs 896
28.8 Inventory Management Techniques 897
The ABC Approach 897
The Economic Order Quantity Model 897
Extensions to the EOQ Model 902
Managing Derived-Demand Inventories 902
Summary and Conclusions 904
Concept Questions 905
Questions and Problems 906
Mini Case: A-motion Company Limited 908
Appendix 28A: More about Credit Policy Analysis 909
PART VIII Special Topics
CHAPTER 29
Mergers, Acquisitions, and Divestitures 910
29.1 The Basic Forms of Acquisitions 910
Merger or Consolidation 910
Acquisition of Stock 911
Acquisition of Assets 911
A Classification Scheme 912
A Note about Takeovers 912
Alternatives to Merger 913
A Note on Reverse Takeovers 913
29.2 Synergy 913
29.3 Sources of Synergy 9
Revenue Enhancement 915
Cost Reduction 916
Tax Gains 918
Reduced Capital Requirements 920
29A Dubious Reasons for of Acquisitions 921
Earnings Growth 921
Diversification 923
29.5 A Cost to Stockholders from Reduction in Risk 923
The Base Case 924
Both Firms Have Debt 925
How Can Shareholders Reduce Their Losses from the Coinsurance Effect? 926
29.6 The NPV of a Merger 926
Cash 926
Common Stock 927
Cash versus Common Stock 928
29.7 Friendly versus Hostile Takeovers 930
29.8 Defensive Tactics 932
Deterring Takeovers before Being in Play 932
Deterring a Takeover after the Company Is in Play 933
29.9 Do Mergers Add Value? 935
Returns to Bidders 937
Target Companies 938
The Managers versus the Stockholders 938
29.10 The Tax Forms of Acquisitions 940
29.11 Accounting for Acquisitions 942
29.12 Going Private and Leveraged Buyouts 941
29.13 Divestitures 944
Sale 944
Spin-Off 944
Carve-Out 945
Tracking Stocks 945
Summary and Conclusions 946
Concept Questions 946
Questions and Problems 947
Mini Case: The Birdie Golf—Hybrid Golf Merger 953
CHAPTER 30
Financial Distress 955
30.1 What Is Financial Distress? 955
30.2 What Happens in Financial Distress? 957
30.3 Bankruptcy Liquidation and Reorganization 959
Bankruptcy Liquidation 960
Bankruptcy Reorganization 961
30.4 Private Workout or Bankruptcy: Which Is Best? 965
The Marginal Firm 966
Holdouts 966
Complexity 966
Lack of Information 966
30.5 Prepackaged Bankruptcy 967
30.6 Predicting Corporate Bankruptcy: The Z-Score Model 968
Summary and Conclusions 970
Concept Questions 970
Questions and Problems 971
CHAPTER 31
International Corporate Finance 973
31.1 Terminology 974
31.2 Foreign Exchange Markets and Exchange Rates 974
Exchange Rates 976
31.3 Purchasing Power Parity 980
Absolute Purchasing Power Parity 980
Relative Purchasing Power Parity 981
31.4 Interest Rate Parity, Unbiased Forward Rates, and the International Fisher Effect 984
Covered Interest Arbitrage 984
Interest Rate Parity 986
Forward Rates and Future Spot Rates 987
Putting It All Together 988
31.5 International Capital Budgeting 989
Method 1: The Home Currency Approach 990
Method 2: The Foreign Currency Approach 990
Unremitted Cash Flows 991
The Cost of Capital for International Firms 991
31.6 Exchange Rate Risk 992
Short-Term Exposure 992
Long-Term Exposure 993
Translation Exposure 993
Managing Exchange Rate Risk 995
31.7 Political Risk 995
Summary and Conclusions 996
Concept Questions 996
Questions and Problems 998
Excel Master It! 1001
Mini Case: Carpenter Technology Corporation 1001
Appendix A: Mathematical Tables 1003
Appendix B: Solutions to Selected
End-of-Chapter Problems 1012
Appendix C: Using the HP 108 and TI BA 11 Plus
Financial Calculators 1015
Glossary 1019
Name Index 1037
Subject Index 1039
Some Commonly Used Notations 1061
Some Useful Formulas 1062
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