Brief Contents
PART I
FOUNDATIONS OF FINANCE
Vignette: Coca-Cola, The Most Admired Corporation
CHAPTER 1 Goals and Functions ofFinance
CHAPTER 2 ConceptsinValuation
CHAPTER 3 Market Risk and Retums
CHAPTER 4 Multivariable and Factor Valuation
CHAPTER 5 Option Valuation
PART II
INVESTMENT IN ASSETS AND REQUIRED RETURNS
Case: Fazio Pump Corporation
CHAPTER 6 Principles of Capital Investment
CHAPTER 7 Risk and Real Options in Capital Budgeting
CHAPTER 8 Creating Value through Required Retums
PART III
FINANCING AND DIVIDEND POLICIES
Vignette: Boeing Company
CHAPTER 9 Theory of Capital Structure
CHAPTER 10 Making Capital Structure Decisions
CHAPTER 11 Dividend Policy: Theory and Practice
PART IV
LIQUIDITY AND WORKING CAPITAL MANAGEMENT
Case: Flores Distributors, Inc
CHAPTER 12 LIquidity, Cash, and Marketable Securities
CHAPTER 13 Management ofAccounts Receivable and Invenfbries
CHAPTER 14 Short-Term Financing
CHAPTER 15 Secured Loans and Term Financing
PART V
CAPITAL MARKET FINANCING AND RISK MANAGEMENT
Case: Dougall & Gilligan Global Agency
CHAPTER 16 Foundations for Longer-Term Financing
CHAPTER 17 Lease Financing
CHAPTER 18 Issuing Securities
CHAPTER 19 Fixed-Income Financing and Pension Liability
CHAPTER 20 Option Financing: Warrants, Convertibles,
and Exchangeables
CHAPTER 21 Managing Financial Risk
PART VI
EXPANSION AND RESTRUCTURING
Case: Marriott Restructuring
CHAPTER 22 Mergers and the Marketfor Corporate Control
CHAPTER 23 Corporate and Distress Restructuring
CHAPTER 24 Intemational Financial Management
PART VII
TOOLS OF FINANCIAL ANALYSIS AND CONTROL
Vignette: New YorkTimes Company's New CFO
CHAPTER 25 Financial Ratio Analysis
CHAPTER 26 Financial Planning
APPENDIX: Present-Value Tables and Normal Probability Distribution Table
Preface xvii
PART I
FOUNDATIONS OF FINANCE
Vignette: Coca-Cola, The Most Admired Corporation
1 Goals and Functions of Finance
Creation of Value
Inyestment Decision
Financing Dedsion
Dividend Decision
Financial Management
Questions
Selected References
2 Concepts in Valuation
The Time Value of Money
Present Values
Intemal Rate of Retum or Yield
Bond Returns
Retum from a Stock Investment
Dividend Discount Models
Measuring Risk: Standard Deviation
Summary
Appendix: Using a Calculator to Solve Equations
Self-Correction Problems
Problems
Solutions to Self-Correction Problems
Selected References
3 Market Risk and Retums 49
Efficient Financial Markets
Security Portfolios
Multiple Security Portfolio Analysis and Selection
Capital Asset Priicing Model
Expected Retum for Individual Security
Certain Issues with the CAPM
Summary
Self-Correction Problems
Problems
Solutions to Self-Correction Problems
Selected References
4 Multivariable and Factor Valuation
Extended CAPM
Factor Models in General
Arbitrage Pricing Theory
Summary
Self-Correction Problems
Problems
Solutions to Self-Correction problems
Selected References
5 Option Valuation
Expiration Date Value of an Option
Valuation with One Period to Expiration:
General Consideration
Binomial Option Pricing of a Hedged Posidon
The Black-Scholes Option Model
American Options
Debt and Other Options
Summary
Appendix: Put-Call Parity
Self-Correction Problems
Problems
Appendix Problem
Solutions to Self-Correction Problems
Selected References
PART II
INVESTMENT IN ASSETS AND REQUIRED RETURNS
Case: Fazio Pump Corporation
6 Principles of Capital Investment
Administrative Framework
Methods for Evaluation
NPV Versus IRR
Depreciation and Other Refinements in
Cash-Flow Information
What Happens when Capital is Rationed?
Inflation and Capital Budgetmg
Information to Analyze an Acquisition
Summary
Appendix: Multiple Intemal Rates of Retum
Self-Correction Problems
Problems
Solutions to Self-Correction Problems
Selected References
7 Risk and Real Options in Capital Budgeting
Quantifying Risk and its Appraisal
Total Risk for Multiple Investments
Real Options in Capital Investments
Summary
Self-Correction Problems
Problems
Solutions to Self-Correction Problems
Selected References
8 Creating Value through Required Retums
Foundations of Value Creation
Required Market-Based Retum for a Single Project
Modification for Leverage
Weighted Average Required Retum
Adjusted Present Value
Divisional Required Retums
Company's Overall Cost of Capital
Diversification of Assets and Total Risk Analysis
Evaluation of Acquisitions
Summary
Self-Correction Problems
Problems
Solutions to Self-Correction Problems
Selected References
Case: National Foods Corporation
PART III
FINANCING AND DIVIDEND POLICIES
Vignette: Boeing Company
9 Theory of Capital Structure
Introduction to the Theory
Modigliani-Miller Position
Taxes and Capital Structure
Effect of Bankruptcy Costs
Other Imperfections
Incentive Issues and Agency Costs
Financial Signaling
Summary
Self-Correction Problems
Problems
Solutions to Self-Correction Problems
Selected References
10 Making Capital Struicture Decisions
EBIT-EPS Analysis
Cash-Flow Ability to Service Debt
Effect on Debt Ratios
Effect on Security Rating
Timmg and Flexibility
A Pecking Order of Financing?
Checklist when it Comes to Financing
Summary
Self-Correction Problems
Problems
Solutions to Self-Correction Problems
Selected References
11 Dividend Policy: Theory and Practice
Procedural Aspects of Paying Dividends
Dividend Payout Irrelevance
Arguments for Dividend Payout Maiiering
Financial Signaling
Empirical Testing and Implications for Payout
Share Repurchase
Stock Dividends and Stock Splits
Managerial Considerations as to Dividend Policy
Summary
Self-Correction Problems
Problems
Solutions to Self-Correction Problems
Selected References
PART IV
LIQUIDITY AND WORKING CAPITAL MANAGEMENT
Case: Fiores Distributors, Inc.
12 Liquidity, Cash, and Marketable Securities
Liquidity and its Role
Cash Management and Collections
Investment in Marketable Securities
Summary
Self-Correction Problems
Problems
Solutions to Self-Correction Problems
Selected References
13 Management of Accounts Receivable and Inventories
Credit Policies
Collection Policy
Evaluating the Credit Applicant
Inventory Management and Control
Uncertainty and Safety Stock
Inventory and the Financial Manager
Summary
Appendix: Application of Discrminant Analysis
to the Selection of Accounts
Self-Correction Problems
Problems
Solutions to Self-Correction Problems
Selected References
14 Short-Term Financing
Liability Structure of a Company
Trade Credit Financing
Accrual Accounts as Spontaneous Financing
Money Market Credit
Short-Term Loans
Summary
Self-Correction Problems
Problems
Solutions to Self-Correction Problems
Selected References
15 Secured Loans and Term Financing
Secured Lending Arrangements
Intermediate-Term Debt
Protective Covenants and Loan Agreements
Summary
Self-Correction Problems
Problems
Solutions to Self-Correction Problems
Selected References
PART V
CAPITAL MARKET FINANCING AND RISK MANAGEMENT
Case: Dougall & Gilligan Global Agency
16 Foundations for Longer-Term Financing
Purpose of Financial Markets
Inflation and Expected Retums
Inflation and Nominal Contracting Effects
Yield Curves and Their Use
Pricing Default Risk Off Treasuries
Summary
Self-Correction Problems
Problems
Solutions to Self-Correction Problems
Selected References
17 LeaseFinancing
Features of a Lease
Accounting and Tax Treatments of Leases
Return to the Lessor
After-Tax Analyses of Lease Versus Buy/Borrow
Sources of Value in Leasing
Summary
Self-Correction Problems
Problems
Solutions to Self-Correction Problems
Selected References
18 Issning Securities
Public Offermg of Securities
Govemment Regulations
Selling Common Stock through a Rights Issue
Inital Financing
Information Effects
Summary
Self-Correction Problems
Problems
Solutions to Self-Correction Problems
Selected References
19 Fixed-Income Financing and Pension Liability
Features of Debt
Types of Debt Financing
Call Feature and Refunding
Private Placements
Preferred Stock
Pension Fund Liability
Summary
Self-Correction Problems
Problems
Solutions to Self-Correction Problems
Selected References
20 Option Financing: Warrants, Convertibles
and Exchangeables
Use of Warrants
Convertible Securities
Valuation of Convertible Securities
Exchangeable Debt
Summary
Appendix: Valuing Convertible Bonds in the Face of Firm Volatility
Default Risks, and Fluctuating Interest Rates
Self-Correction Problems
Problems
Solutions to Self-Correction Problems
Selected References
26 Financial Planning
Methods of Analysis
Source and Use of Funds
Cash Budgeting
Pro Forma Statements
Sustainable Growth Modeling
Summary
Self-Correction Problems
Problems
Solutions to Self-Correction Problems
Selected References
Appendix: Present-Value Tables and Normal
Probabilty Distribution Table
Index
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