Principles of Corporate Finance

Cover
Principles of Corporate Finance
Dedication
About the Authors
Preface
Acknowledgments
Brief Contents
Contents
Part One: Value
	1: Introduction to Corporate Finance
		1-1: Corporate Investment and Financing Decisions
			Investment Decisions
			Financing Decisions
			What Is a Corporation?
			The Role of the Financial Manager
		1-2: The Financial Goal of the Corporation
			Shareholders Want Managers to Maximize Market Value
			A Fundamental Result: Why Maximizing Shareholder Wealth Makes Sense
			Should Managers Maximize Shareholder Wealth?
			The Investment Trade-Off
			Agency Problems and Corporate Governance
		1-3: Key Questions in Corporate Finance
		Key Takeaways
		Problem Sets
		Solutions to Self-Test Questions
		Appendix: Why Maximizing Shareholder Value Makes Sense
	2: How to Calculate Present Values
		2-1: How to Calculate Future and Present Values
			Calculating Future Values
			Calculating Present Values
			Valuing an Investment Opportunity
			Net Present Value
			Risk and Present Value
			Present Values and Rates of Return
			Calculating Present Values When There Are Multiple Cash Flows
			The Opportunity Cost of Capital
		2-2: How to Value Perpetuities and Annuities
			How to Value Perpetuities
			How to Value Annuities
			Valuing Annuities Due
			Calculating Annual Payments
			Future Value of an Annuity
		2-3: How to Value Growing Perpetuities and Annuities
			Growing Perpetuities
			Growing Annuities
		2-4: How Interest Is Paid and Quoted
			Continuous Compounding
		Key Takeaways
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
	3: Valuing Bonds
		3-1: Using the Present Value Formula to Value Bonds
			A Short Trip to Paris to Value a Government Bond
			Back to the United States: Semiannual Coupons and Bond Prices
		3-2: How Bond Prices Vary with Yields
			Duration and Interest-Rate Sensitivity
		3-3: The Term Structure of Interest Rates
			Spot Rates, Bond Prices, and the Law of One Price
			Measuring the Term Structure
			Why the Discount Factor Declines as Futurity Increases
		3-4: Explaining the Term Structure
			Expectations Theory of the Term Structure
			Interest Rate Risk
			Inflation Risk
		3-5: Real and Nominal Interest Rates
			Indexed Bonds and the Real Rate of Interest
			What Determines the Real Rate of Interest?
			Inflation and Nominal Interest Rates
		3-6: The Risk of Default
			Corporate Bonds and Default Risk
			Sovereign Bonds and Default Risk
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
	4: Valuing Stocks
		4-1: How Stocks Are Traded
			Trading Results for Cummins
			Market Price vs. Book Value
		4-2: Valuation by Comparables
		4-3: Dividends and Stock Prices
			Dividends and Capital Gains
			Two Versions of the Dividend Discount Model
		4-4: Dividend Discount Model Applications
			Using the Constant-Growth DCF Model to Set Water, Gas, and Electricity Prices
			DCF Models with Two or More Stages of Growth
		4-5: Income Stocks and Growth Stocks
			Calculating the Present Value of Growth Opportunities for Establishment Electronics
		4-6: Valuation Based on Free Cash Flow
			Valuing the Concatenator Business
			Valuation Format
			Estimating Horizon Value
		Key Takeaways
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
		Mini-Case: Reeby Sports
	5: Net Present Value and Other Investment Criteria
		5-1: A Review of the Net Present Value Rule
			Net Present Value’s Competitors
			Five Points to Remember about NPV
		5-2: The Payback and Accounting Rate of Return Rules
			The Payback Rule
			Accounting Rate of Return
		5-3: The Internal Rate of Return Rule
			Calculating the IRR
			The IRR Rule
			Pitfall 1-Lending or Borrowing?
			Pitfall 2-Multiple Rates of Return
			Pitfall 3-Mutually Exclusive Projects
			Pitfall 4-What Happens When There Is More Than One Opportunity Cost of Capital
			The Verdict on IRR
		5-4: Choosing Capital Investments When Resources Are Limited
			How Important Is Capital Rationing in Practice?
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Mini-Case: Vegetron’s CFO Calls Again
	6: Making Investment Decisions with the Net Present Value Rule
		6-1: Forecasting a Project’s Cash Flows
			Rule 1: Discount Cash Flows, Not Profits
			Rule 2: Discount Incremental Cash Flows and Ignore Non-Incremental Cash Flows
			Rule 3: Treat Inflation Consistently
			Rule 4: Separate Investment and Financing Decisions
			Rule 5: Forecast Cash Flows after Taxes
		6-2: Corporate Income Taxes
			Depreciation Deductions
			Tax on Salvage Value
			Tax Loss Carry-Forwards
		6-3: A Worked Example of a Project Analysis
			The Three Components of Project Cash Flows
			Cash Flow from Capital Investment
			Operating Cash Flow
			Investment in Working Capital
			How to Construct a Set of Cash Flow Forecasts: An Example
			Capital Investment
			Operating Cash Flow
			Investment in Working Capital
			Accelerated Depreciation and First-Year Expensing
			Project Analysis
		6-4: How to Choose between Competing Projects
			Problem 1: The Investment Timing Decision
			Problem 2: The Choice between Long- and Short-Lived Equipment
			Problem 3: When to Replace an Old Machine
			Problem 4: Cost of Excess Capacity
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Mini-Case: New Economy Transport (A)
		New Economy Transport (B)
Part Two: Risk
	7: Introduction to Risk, Diversification, and Portfolio Selection
		7-1: The Relationship between Risk and Return
			Over a Century of Capital Market History
			Using Historical Evidence to Evaluate Today’s Cost of Capital
		7-2: How to Measure Risk
			Variance and Standard Deviation
			Calculating Risk
			Estimating Future Risk
		7-3: How Diversification Reduces Risk
			Specific and Systematic Risk
			Diversification with Many Stocks
		7-4: Systematic Risk Is Market Risk
			Portfolio Choice with Borrowing and Lending
			Market Risk
		7-5: Should Companies Diversify?
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
	8: The Capital Asset Pricing Model
		8-1: Market Risk Is Measured by Beta
			The Market Portfolio
			Why Betas Determine Portfolio Risk
		8-2: The Relationship between Risk and Return
			What If a Stock Did Not Lie on the Security Market Line?
			The Capital Market Line and the Security Market Line
			The Logic behind the Capital Asset Pricing Model
			Intuition: Why Do High Beta and High Returns Go Together?
			Applying the Capital Asset Pricing Model
		8-3: Does the CAPM Hold in the Real World?
			How Large Is the Return for Risk?
			Are Returns Unrelated to All Other Characteristics?
		8-4: Some Alternative Theories
			Arbitrage Pricing Theory
			A Comparison of the Capital Asset Pricing Model and Arbitrage Pricing Theory
			The Three-Factor Model
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
	9: Risk and the Cost of Capital
		9-1: Company and Project Costs of Capital
			Company Cost of Capital for CSX
			Three Warnings
			What about Investments That Are Not Average Risk?
			Perfect Pitch and the Cost of Capital
		9-2: Estimating Beta and the Company Cost of Capital
			Estimating Beta
			Portfolio Betas
		9-3: Analyzing Project Risk
			1. The Determinants of Asset Betas
			2. Don’t Be Fooled by Diversifiable Risk
			3. Avoid Fudge Factors in Discount Rates
			Discount Rates for International Projects
		9-4: Certainty Equivalents
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
		Mini-Case: The Jones Family Incorporated
Part Three: Best Practices in Capital Budgeting
	10: Project Analysis
		10-1: Sensitivity and Scenario Analysis
			Value of Information
			Limits to Sensitivity Analysis
			Stress Tests and Scenario Analysis
		10-2: Break-Even Analysis and Operating Leverage
			Break-Even Analysis
			Operating Leverage
		10-3: Real Options and the Value of Flexibility
			The Option to Expand
			The Option to Abandon
			Production Options
			Timing Options
			More on Decision Trees
			Pro and Con Decision Trees
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Mini-Case: Waldo County
	11: How to Ensure That Projects Truly Have Positive NPVs
		11-1: Behavioral Biases in Investment Decisions
		11-2: Avoiding Forecast Errors
		11-3: How Competitive Advantage Translates into Positive NPVs
		11-4: Marvin Enterprises Decides to Exploit a New Technology-An Example
			Forecasting Prices of Gargle Blasters
			The Value of Marvin’s New Expansion
			Alternative Expansion Plans
			The Value of Marvin Stock
			The Lessons of Marvin Enterprises
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Mini-Case: Ecsy-Cola
Part Four: Financing Decisions and Market Efficiency
	12: Efficient Markets and Behavioral Finance
		12-1: Differences between Investment and Financing Decisions
			NPV Matters for Both Investment and Financing Decisions
			The NPV of Financing Decisions Is Zero in Efficient Markets
			The NPV of Financing Decisions in Inefficient Markets
		12-2: The Efficient Market Hypothesis
			Forms of Market Efficiency
			Why Do We Expect Markets to Be Efficient?
		12-3: Implications of Market Efficiency
			What Market Efficiency Does Not Imply
			What if Markets Are Not Efficient? Implications for the Financial Manager
		12-4: Are Markets Efficient? The Evidence
			Weak-Form Efficiency
			Semistrong-Form Efficiency
			Strong-Form Efficiency
		12-5: Behavioral Finance
			Sentiment
			Limits to Arbitrage
			Agency and Incentive Problems
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
	13: An Overview of Corporate Financing
		13-1: Patterns of Corporate Financing
			How Much Do Firms Borrow?
		13-2: Equity
			Ownership of the Corporation
			Preferred Stock
		13-3: Debt
			The Different Kinds of Debt
			A Debt by Any Other Name
		13-4: The Role of the Financial System
			The Payment Mechanism
			Borrowing and Lending
			Pooling Risk
			Information Provided by Financial Markets
		13-5: Financial Markets and Intermediaries
			Financial Intermediaries
			Investment Funds
			Financial Institutions
		13-6: Financial Markets and Intermediaries around the World
			Conglomerates and Internal Capital Markets
		13-7: The Fintech Revolution
			Payment Systems
			Person-to-Person Lending
			Crowdfunding
			AI/ML Credit Scoring
			Distributed Ledgers and Blockchains
			Cryptocurrencies
			Initial Coin Offerings
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
	14: How Corporations Issue Securities
		14-1: Venture Capital
			The Venture Capital Market
		14-2: The Initial Public Offering
			The Public-Private Choice
			Arranging an Initial Public Offering
			The Sale of Marvin Stock
			The Underwriters
			Costs of a New Issue
			Underpricing of IPOs
			Hot New-Issue Periods
			The Long-Run Performance of IPO Stocks
			Alternative Issue Procedures
			Types of Auction: A Digression
		14-3: Security Sales by Public Companies
			Public Offers
			The Costs of a Public Offer
			Rights Issues
			Market Reaction to Stock Issues
		14-4: Private Placements
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
		Appendix: Marvin’s New-Issue Prospectus
Part Five: Payout Policy and Capital Structure
	15: Payout Policy
		15-1: Facts about Payout
			How Firms Pay Dividends
			How Firms Repurchase Stock
			The Information Content of Dividends
			The Information Content of Share Repurchases
		15-2: Dividends or Repurchases? Does the Choice Affect Shareholder Value?
			Dividends or Repurchases? An Example
			Stock Repurchases and DCF Valuation Models
			Dividends and Share Issues
		15-3: Dividend Clienteles
		15-4: Taxes and Payout Policy
			Empirical Evidence on Payout Policies and Taxes
			Alternatives to the U.S. Tax System
		15-5: Payout Policy and the Life Cycle of the Firm
			The Agency Costs of Idle Cash
			Payout and Corporate Governance
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
	16: Does Debt Policy Matter?
		16-1: Financial Leverage and Shareholder Value
		16-2: Modigliani and Miller’s Proposition 1
			The Law of the Conservation of Value
			An Example of Proposition 1
		16-3: Leverage and Expected Returns: MM’s Proposition 2
			Proposition 2
			Leverage and the Cost of Equity
			How Changing Capital Structure Affects the Equity Beta
			Watch Out for Hidden Leverage
		16-4: No Magic in Financial Leverage
			Today’s Unsatisfied Clienteles Are Probably Interested in Financial Innovation
			Imperfections and Opportunities
		16-5: A Final Word on the Cost of Capital
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Mini-Case: Claxton Drywall Comes to the Rescue
	17: How Much Should a Corporation Borrow?
		17-1: Debt and Taxes
			How Do Interest Tax Shields Contribute to the Value of Stockholders’ Equity?
			Recasting Johnson & Johnson’s Capital Structure
			MM and Corporate Tax
			Corporate and Personal Taxes
		17-2: Costs of Financial Distress
			Bankruptcy Costs
			Evidence on Bankruptcy Costs
			Direct versus Indirect Costs of Bankruptcy
			Financial Distress without Bankruptcy
			Agency Costs of Financial Distress
			Risk Shifting: The First Game
			Refusing to Contribute Equity Capital: The Second Game
			And Three More Games, Briefly
			What the Games Cost
			Costs of Distress Vary with Type of Asset
		17-3: The Trade-Off Theory of Capital Structure
		17-4: The Pecking Order of Financing Choices
			Debt and Equity Issues with Asymmetric Information
			Implications of the Pecking Order
			The Bright Side and the Dark Side of Financial Slack
		17-5: The Capital Structure Decision
			The Evidence
			Is There a Theory of Optimal Capital Structure?
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
	18: Financing and Valuation
		18-1: The After-Tax Weighted-Average Cost of Capital
			Review of Assumptions
			Mistakes People Make in Using the Weighted-Average Formula
		18-2: Valuing Businesses
			Valuing Rio Corporation
			Estimating Horizon Value
			Valuation by Comparables
			Liquidation Value
			WACC vs. the Flow-to-Equity Method
		18-3: Using WACC in Practice
			Some Tricks of the Trade
			Adjusting WACC When Debt Ratios and Business Risks Differ
			Three-Step Procedure for Finding WACCs at Different Debt Ratios
			Unlevering and Relevering Betas
			Calculating Divisional WACCs
			The Assumption of a Constant Debt Ratio in the After-Tax WACC
			The Modigliani–Miller Formula
		18-4: Adjusted Present Value
			APV for the Perpetual Crusher
			Other Financing Side Effects
			APV for Entire Businesses
			APV and Limits on Interest Deductions
			APV for International Investments
		18-5: Your Questions Answered
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
		Appendix: Discounting Safe, Nominal Cash Flows
		A Consistency Check
Part Six: Corporate Objectives and Governance
	19: Agency Problems and Corporate Governance
		19-1: What Agency Problems Should You Watch Out For?
			Reduced Effort
			Private Benefits
			Overinvestment
			Risk Taking
			Short-Termism
		19-2: Monitoring by the Board of Directors
			U.S. and U.K. Boards of Directors
			European Boards of Directors
		19-3: Monitoring by Shareholders
			Voting
			Engagement
			Exit
		19-4: Monitoring by Auditors, Lenders, and Potential Acquirers
			Auditors
			Lenders
			Takeovers
		19-5: Management Compensation
			Compensation Facts and Controversies
			The Structure of CEO Pay
		19-6: Government Regimes around the World
			Ownership and Control in Japan
			Ownership and Control in Germany
			Ownership and Control in Other Countries
		19-7: Do These Differences Matter?
			Public Market Myopia
			Growth Industries and Declining Industries
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
	20: Stakeholder Capitalism and Responsible Business
		20-1: Who Are the Stakeholders?
			Employees
			Customers
			Suppliers
			Local and Regional Communities
			The Environment
			The Government
		20-2: The Case for Shareholder Capitalism
			Government Policy Ensures Companies Will Engage in Socially Responsible Behavior
			Maximizing Shareholder Value Allows Investors to Pursue Social Objectives
			Maximizing Shareholder Value Requires a Company to Invest in Stakeholders
			Enlightened Shareholder Value
			Decision Making under Enlightened Shareholder Value
		20-3: The Case for Stakeholder Capitalism
			Well-Functioning Governments
			No Comparative Advantage in Serving Society
			Instrumental Decision Making Is Effective
			The Challenge of Stakeholder Capitalism
			Summary
		20-4: Responsible Business
			Defining Responsible Business
			Decision Making in Responsible Businesses
			Summary
		20-5: Responsible Business in Practice
			Shareholder Primacy in the United States and United Kingdom
			Benefit Corporations
			B Corps
			Purpose
			Reporting
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
Part Seven: Options
	21: Understanding Options
		21-1: Calls, Puts, and Shares
			Call Options and Payoff Diagrams
			Put Options
			Selling Calls and Puts
			Payoff Diagrams Are Not Profit Diagrams
		21-2: Financial Alchemy with Options
			Spotting the Option
		21-3: What Determines the Value of a Call Option?
			Risk and Option Values
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
	22: Valuing Options
		22-1: A Simple Option-Valuation Model
			Why Discounted Cash Flow Won’t Work for Options
			Constructing Option Equivalents from Common Stocks and Borrowing
			Risk-Neutral Valuation
			Valuing the Amazon Put Option
			Valuing the Put Option by the Risk-Neutral Method
			The Relationship between Call and Put Prices
		22-2: The Binomial Method for Valuing Options
			Example: The Two-Step Binomial Method
			The General Binomial Method
			The Binomial Method and Decision Trees
		22-3: The Black–Scholes Formula
			Using the Black–Scholes Formula
			How Black–Scholes Values Vary with the Stock Price
			The Risk of an Option
			The Black–Scholes Formula and the Binomial Method
			Some Practical Examples
		22-4: Early Exercise and Dividend Payments
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
		Mini-Case: Bruce Honiball’s Invention
	23: Real Options
		23-1: The Option to Expand
			Questions and Answers about Blitzen’s Mark II
			Other Expansion Options
		23-2: Options in R&D
		23-3: The Timing Option
			Valuing the Malted Herring Option
			Optimal Timing for Real Estate Development
		23-4: The Abandonment Option
			Bad News for the Perpetual Crusher
			Abandonment Value and Project Life
			Temporary Abandonment
		23-5: Flexible Production and Procurement
			Aircraft Purchase Options
		23-6: Valuing Real Options
			A Conceptual Problem?
			What about Taxes?
			Practical Challenges
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
Part Eight: Debt Financing
	24: Credit Risk and the Value of Corporate Debt
		24-1: Yields on Corporate Debt
			Distinguishing Promised and Expected Yields
			What Determines the Yield Spread?
		24-2: Valuing the Option to Default
			Finding Bond Values
			The Value of Corporate Equity
		24-3: Predicting the Probability of Default
			Statistical Models of Default
			Structural Models of Default
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
	25: The Many Different Kinds of Debt
		25-1: Long-Term Corporate Bonds
			Bond Terms
			Security and Seniority
			Asset-Backed Securities
			Call Provisions
			Sinking Funds
			Bond Covenants
			Privately Placed Bonds
			Foreign Bonds and Eurobonds
		25-2: Convertible Securities and Some Unusual Bonds
			The Value of a Convertible at Maturity
			Forcing Conversion
			Why Do Companies Issue Convertibles?
			Valuing Convertible Bonds
			A Variation on Convertible Bonds: The Bond–Warrant Package
			Innovation in the Bond Market
		25-3: Bank Loans
			Commitment
			Maturity
			Rate of Interest
			Syndicated Loans
			Security
			Loan Covenants
		25-4: Commercial Paper and Medium-Term Notes
			Commercial Paper
			Medium-Term Notes
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Mini-Case: The Shocking Demise of Mr. Thorndike
		Appendix: Project Finance
		Appendix Further Reading
	26: Leasing
		26-1: What Is a Lease?
		26-2: Why Lease?
			Sensible Reasons for Leasing
			A Dubious Reason for Leasing
		26-3: Rentals on an Operating Lease
			Example of an Operating Lease
			Lease or Buy?
		26-4: Valuing Financial Leases
			Example of a Financial Lease
			Valuing the Lease Contract
			Comparing the Lease with an Equivalent Loan
			Financial Leases When There Are Limits on the Interest Tax Shield
			Leasing and the Internal Revenue Service
		26-5: When Do Financial Leases Pay?
			Leasing around the World
		26-6: Setting Up a Leveraged Lease
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
Part Nine: Risk Management
	27: Managing Risk
		27-1: Why Manage Risk?
			Reducing the Risk of Cash Shortfalls or Financial Distress
			Agency Costs May Be Mitigated by Risk Management
			The Evidence on Risk Management
		27-2: Insurance
		27-3: Reducing Risk with Financial Options
		27-4: Forward and Futures Contracts
			A Simple Forward Contract
			Futures Exchanges
			The Mechanics of Futures Trading
			Trading and Pricing Financial Futures Contracts
			Spot and Futures Prices-Commodities
			More about Forwards and Futures
		27-5: Interest Rate Risk
			Forward Rates of Interest and the Term Structure
			Borrowing and Lending at Forward Interest Rates
			Forward Rate Agreements
			Interest Rate Futures
		27-6: Swaps
			Interest Rate Swaps
			Currency Swaps
			Some Other Swaps
		27-7: How to Set Up a Hedge
			Hedging Interest Rate Risk
			Hedge Ratios and Basis Risk
		27-8: Is “Derivative” a Four-Letter Word?
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
		Mini-Case: Rensselaer Advisers
	28: International Financial Management
		28-1: The Foreign Exchange Market
		28-2: Some Basic Relationships
			Interest Rates and Exchange Rates
			The Forward Premium and Changes in Spot Rates
			Changes in the Exchange Rate and Inflation Rates
			Interest Rates and Inflation Rates
			Is Life Really That Simple?
		28-3: Hedging Currency Risk
			Transaction Exposure and Economic Exposure
		28-4: International Investment Decisions
			The Cost of Capital for International Investments
		28-5: Political Risk
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test
		Finance on the Web
		Mini-Case: Exacta, s.a.
Part Ten: Financial Planning and Working Capital Management
	29: Financial Analysis
		29-1: Understanding Financial Statements
			The Balance Sheet
			The Income Statement
		29-2: Measuring Company Performance
			Economic Value Added
			Accounting Rates of Return
			Problems with EVA and Accounting Rates of Return
		29-3: Measuring Efficiency
			The DuPont Formula
			Other Efficiency Measures
		29-4: Measuring Leverage
			Leverage and the Return on Equity
		29-5: Measuring Liquidity
		29-6: Interpreting Financial Ratios
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
	30: Financial Planning
		30-1: What Are the Links between Short-Term and Long-Term Financing Decisions?
		30-2: Tracing and Forecasting Changes in Cash
			Tracing Changes in Cash
			Forecasting Dynamic’s Cash Needs
		30-3: Developing a Short-Term Financial Plan
			Dynamic Mattress’s Financing Plan
			Evaluating the Plan
			Short-Term Financial Planning Models
		30-4: Using Long-Term Financial Planning Models
			Why Build Financial Plans?
			A Long-Term Financial Planning Model for Dynamic Mattress
			Pitfalls in Model Design
			Choosing a Plan
		30-5: Long-Term Planning Models and Company Valuation
		30-6: The Relationship between Growth and External Financing
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
	31: Working Capital Management
		31-1: The Working Capital Requirement
			The Cash Cycle
		31-2: Managing Inventories
		31-3: Accounts Receivable Management
			Terms of Sale
			Credit Analysis
			The Credit Decision
			Collection Policy
		31-4: Cash Management
			How Purchases Are Paid For
			Changes in Check Usage
			Speeding Up Check Collections
			Electronic Payment Systems
			International Cash Management
			Paying for Bank Services
		31-5: Investing Surplus Cash
			Investment Choices
			Calculating the Yield on Money Market Investments
			Returns on Money Market Investments
			The International Money Market
			Money Market Instruments
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
Part Eleven: Mergers, Corporate Control, and Governance
	32: Mergers
		32-1: Types of Merger
		32-2: Some Sensible Motives for Mergers
			Economies of Scale and Scope
			Economies of Vertical Integration
			Complementary Resources
			Changes in Corporate Control
			Industry Consolidation
			Logic Does Not Guarantee Success
		32-3: Some Dubious Motives for Mergers
			Diversification
			Increasing Earnings per Share: The Bootstrap Game
			Lower Borrowing Costs
			Management Motives
		32-4: Estimating Merger Gains and Costs
			Estimating NPV When the Merger Is Financed by Cash
			Estimating NPV When the Merger Is Financed by Stock
			Asymmetric Information
			More on Estimating Costs-What If the Target’s Stock Price Anticipates the Merger?
			Right and Wrong Ways to Estimate the Benefits of Mergers
		32-5: The Mechanics of a Merger
			Mergers, Antitrust Law, and Popular Opposition
			The Form of Acquisition
			Merger Accounting
			Some Tax Considerations
		32-6: Takeovers and the Market for Corporate Control
		32-7: Merger Waves and Merger Profitability
			Merger Waves
			Who Gains and Loses from Mergers?
			Buyers vs. Sellers
			Mergers and Society
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
		Finance on the Web
		Appendix: Conglomerate Mergers and Value Additivity
	33: Corporate Restructuring
		33-1: Leveraged Buyouts
			The RJR Nabisco LBO
			Barbarians at the Gate?
			Leveraged Restructurings
		33-2: The Private-Equity Market
			Private-Equity Partnerships
			Are Private-Equity Funds Today’s Conglomerates?
		33-3: Fusion and Fission in Corporate Finance
			Spin-Offs
			Carve-Outs
			Asset Sales
			Privatization and Nationalization
		33-4: Bankruptcy
			Is Chapter 11 Efficient?
			Workouts
			Alternative Bankruptcy Procedures
		Key Takeaways
		Further Reading
		Problem Sets
		Solutions to Self-Test Questions
Part Twelve: Conclusion
	34: Conclusion: What We Do and Do Not Know about Finance
		34-1: What We Do Know: The Seven Most Important Ideas in Finance
			1. Net Present Value
			2. The Capital Asset Pricing Model
			3. Efficient Capital Markets
			4. Value Additivity and the Law of the Conservation of Value
			5. Capital Structure Theory
			6. Option Theory
			7. Agency Theory
		34-2: What We Do Not Know: 10 Unsolved Problems in Finance
			1. What Determines Project Risk and Present Value?
			2. Risk and Return-What Have We Missed?
			3. How Important Are the Exceptions to the Efficient-Market Theory?
			4. Is Management an Off-Balance-Sheet Liability?
			5. How Can We Explain the Success of New Securities and New Markets?
			6. How Can We Resolve the Payout Controversy?
			7. What Risks Should a Firm Take?
			8. What Is the Value of Liquidity?
			9. How Can We Explain Merger Waves?
			10. Why Are Financial Systems So Prone to Crisis?
		34-3: A Final Word
Glossary
Index