Corporate Finance: A Focused Approach PDF by Eugene F. Brigham and Michael C. Ehrhardt

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Corporate Finance: A Focused Approach
by Eugene F. Brigham and Michael C. Ehrhardt
Corporate Finance: A Focused Approach

Contents

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvi
PART 1 Fundamental Concepts of Corporate Finance 1
 
C H A P T E R 1
An Overview of Financial Management and the Financial Environment 3

The Five-Minute MBA 4
Box: Say Hello to the Global Economic Crisis! 5
The Corporate Life Cycle 5
Box: Columbus Was Wrong—the World Is Flat! And Hot, and Crowded! 6
The Primary Objective of the Corporation: Value Maximization 9
Box: Ethics for Individuals and Businesses 10
Box: Corporate Scandals and Maximizing Stock Price 13
An Overview of the Capital Allocation Process 13
Financial Securities 15
The Cost of Money 19
Financial Institutions 23
Financial Markets 27
Trading Procedures in Financial Markets 29
Types of Stock Market Transactions 30
Box: Rational Exuberance? 31
The Secondary Stock Markets 31
Box: Measuring the Market 33
Stock Market Returns 34
The Global Economic Crisis 36
The Big Picture 42
e-Resources 43
Summary 44
Web Extensions
1A: An Overview of Derivatives
1B: A Closer Look at the Stock Markets
 
C H A P T E R 2
Financial Statements, Cash Flow, and Taxes 47
Box: Intrinsic Value, Free Cash Flow, and Financial Statements 48
Financial Statements and Reports 48
The Balance Sheet 49
Box: Let’s Play Hide-and-Seek! 51
The Income Statement 52
Statement of Stockholders’ Equity 53
Net Cash Flow 54
Statement of Cash Flows 55
Box: Financial Analysis on the WEB 56
Modifying Accounting Data for Managerial Decisions 59
Box: Financial Bamboozling: How to Spot It 63
MVA and EVA 67
Box: Sarbanes-Oxley and Financial Fraud 70
The Federal Income Tax System 71
Summary 76
Web Extensions
2A: The Federal Income Tax System for Individuals
C H A P T E R 3
Analysis of Financial Statements 87
Box: Intrinsic Value and Analysis of Financial Statements 88
Financial Analysis 88
Liquidity Ratios 89
Asset Management Ratios 92
Box: The Price is Right! (Or Wrong!) 93
Debt Management Ratios 95
Profitability Ratios 98
Box: The World Might be Flat, but Global Accounting is Bumpy!
The Case of IFRS versus FASB 99
Market Value Ratios 100
Trend Analysis, Common Size Analysis, and Percentage Change Analysis 102
Tying the Ratios Together: The Du Pont Equation 106
Comparative Ratios and Benchmarking 107
Uses and Limitations of Ratio Analysis 108
Box: Ratio Analysis on the Web 109
Looking beyond the Numbers 110
Summary 110
PART 2 Fixed Income Securities 121
C H A P T E R 4
Time Value of Money 123
Box: Corporate Valuation and the Time Value of Money 124
Time Lines 125
Future Values 125
Box: Hints on Using Financial Calculators 129
Box: The Power of Compound Interest 132
Present Values 133
Finding the Interest Rate, I 136
Finding the Number of Years, N 137
Annuities 138
Future Value of an Ordinary Annuity 138
Future Value of an Annuity Due 141
Present Value of Ordinary Annuities and Annuities Due 141
Box: Variable Annuities: Good or Bad? 144
Finding Annuity Payments, Periods, and Interest Rates 144
Perpetuities 146
Box: Using the Internet for Personal Financial Planning 147
Uneven, or Irregular, Cash Flows 148
Future Value of an Uneven Cash Flow Stream 151
Solving for I with Irregular Cash Flows 152
Semiannual and Other Compounding Periods 153
Box: Truth in Lending: What Loans Really Cost 156
Fractional Time Periods 157
Amortized Loans 158
Growing Annuities 159
Box: An Accident Waiting to Happen: Option Reset
Adjustable Rate Mortgages 160
Summary 162
Web Extensions
4A: The Tabular Approach
4B: Derivation of Annuity Formulas
4C: Continuous Compounding
C H A P T E R 5
Bonds, Bond Valuation, and Interest Rates 173
Box: Intrinsic Value and the Cost of Debt 174
Who Issues Bonds? 174
Key Characteristics of Bonds 175
Box: Betting With or Against the U.S. Government:
The Case of Treasury Bond Credit Default Swaps 176
Bond Valuation 180
Changes in Bond Values over Time 184
Box: Drinking Your Coupons 187
Bonds with Semiannual Coupons 187
Bond Yields 188
The Pre-Tax Cost of Debt: Determinants of Market Interest Rates 191
The Real Risk-Free Rate of Interest, r* 192
The Inflation Premium (IP) 193
The Nominal, or Quoted, Risk-Free Rate of Interest, rRF 195
The Default Risk Premium (DRP) 195
Box: Insuring with Credit Default Swaps: Let the Buyer Beware! 197
Box: Might the U.S. Treasury Bond Be Downgraded? 199
Box: Are Investors Rational? 201
The Liquidity Premium (LP) 201
The Maturity Risk Premium (MRP) 201
The Term Structure of Interest Rates 204
Financing with Junk Bonds 205
Bankruptcy and Reorganization 206
Summary 207
Web Extensions
5A: A Closer Look at Zero Coupon Bonds
5B: A Closer Look at TIPS: Treasury Inflation-Protected Securities
5C: A Closer Look at Bond Risk: Duration
5D: The Pure Expectations Theory and Estimation of Forward Rates
PART 3 Stocks and Options 215
 
C H A P T E R 6
Risk, Return, and the Capital Asset Pricing Model 217
Box: Intrinsic Value, Risk, and Return 219
Returns on Investments 219
Stand-Alone Risk 220
Box: What Does Risk Really Mean? 227
Box: The Trade-off between Risk and Return 229
Risk in a Portfolio Context 231
Box: How Risky Is a Large Portfolio of Stocks? 236
Box: The Benefits of Diversifying Overseas 239
Calculating Beta Coefficients 243
The Relationship between Risk and Return 246
Box: Another Kind of Risk: The Bernie Madoff Story 252
Some Concerns about Beta and the CAPM 253
Some Concluding Thoughts: Implications for Corporate Managers and Investors 253
Summary 255
Web Extensions
6A: Continuous Probability Distributions
6B: Estimating Beta with a Financial Calculator 
 
C H A P T E R 7
Stocks, Stock Valuation, and Stock Market Equilibrium 267
Box: Corporate Valuation and Stock Prices 268
Legal Rights and Privileges of Common Stockholders 268
Types of Common Stock 269
The Market Stock Price versus Intrinsic Value 270
Stock Market Reporting 272
Valuing Common Stocks 273
Valuing a Constant Growth Stock 276
Expected Rate of Return on a Constant Growth Stock 279
Valuing Nonconstant Growth Stocks 281
Stock Valuation by the Free Cash Flow Approach 285
Market Multiple Analysis 285
Preferred Stock 286
Stock Market Equilibrium 287
The Efficient Markets Hypothesis 290
Box: Rational Behavior versus Animal Spirits, Herding, and Anchoring Bias 293
Summary 294
Web Extensions
7A: Derivation of Valuation Equations
C H A P T E R 8
Financial Options and Applications in Corporate Finance 305
Box: The Intrinsic Value of Stock Options 306
Overview of Financial Options 306
Box: Financial Reporting for Employee Stock Options 309
The Single-Period Binomial Option Pricing Approach 310
The Single-Period Binomial Option Pricing Formula 314
The Multi-Period Binomial Option Pricing Model 316
The Black-Scholes Option Pricing Model (OPM) 319
Box: Taxes and Stock Options 324
The Valuation of Put Options 325
Applications of Option Pricing in Corporate Finance 326
Summary 328
PART 4 Projects and Their Valuation 333
C H A P T E R 9
The Cost of Capital 335
Box: Corporate Valuation and the Cost of Capital 336
The Weighted Average Cost of Capital 337
Basic Definitions 338
Cost of Debt, rd(1 − T) 340
Cost of Preferred Stock, rps 342
Box: GE and Warren Buffett: The Cost of Preferred Stock 343
Cost of Common Stock, rs 344
The CAPM Approach 345
Dividend-Yield-Plus-Growth-Rate, or Discounted Cash Flow (DCF), Approach 353
Over-Own-Bond-Yield-Plus-Judgmental-Risk-Premium Approach 355
Comparison of the CAPM, DCF, and Over-Own-Bond-Yield-Plus-Judgmental-Risk-
Premium Methods 356
Adjusting the Cost of Equity for Flotation Costs 357
Composite, or Weighted Average, Cost of Capital, WACC 358
Box: Global Variations in the Cost of Capital 361
Factors That Affect the WACC 361
Adjusting the Cost of Capital for Risk 363
Privately Owned Firms and Small Businesses 366
Four Mistakes to Avoid 367
Summary 368
Web Extensions
9A: The Required Return Assuming Nonconstant Dividends and Stock Repurchases
 
C H A P T E R 10
The Basics of Capital Budgeting: Evaluating Cash Flows 379
Box: Corporate Valuation and Capital Budgeting 381
An Overview of Capital Budgeting 381
Net Present Value (NPV) 383
Internal Rate of Return (IRR) 387
Box: Why NPV Is Better Than IRR 389
Multiple Internal Rates of Return 390
Reinvestment Rate Assumptions 392
Modified Internal Rate of Return (MIRR) 393
NPV Profiles 396
Profitability Index (PI) 400
Payback Period 401
Conclusions on Capital Budgeting Methods 403
Decision Criteria Used in Practice 405
Other Issues in Capital Budgeting 405
Summary 411
Web Extensions
10A: The Accounting Rate of Return (ARR) 
 
C H A P T E R 11
Cash Flow Estimation and Risk Analysis 423
Box: Corporate Valuation, Cash Flows, and Risk Analysis 424
Conceptual Issues 424
Analysis of an Expansion Project 429
Risk Analysis in Capital Budgeting 435
Measuring Stand-Alone Risk 436
Sensitivity Analysis 436
Scenario Analysis 439
Monte Carlo Simulation 442
Box: Are Bank Stress Tests Stressful Enough? 445
Project Risk Conclusions 446
Box: Capital Budgeting Practices in the Asian/Pacific Region 447
Replacement Analysis 448
Real Options 449
Phased Decisions and Decision Trees 451
Summary 454
Appendix 11A Tax Depreciation 468
Web Extensions
11A: Certainty Equivalents and Risk-Adjusted Discount Rates
PART 5 Corporate Valuation and Governance 471
 
C H A P T E R 12
Financial Planning and Forecasting Financial Statements 473
Box: Corporate Valuation and Financial Planning 474
Overview of Financial Planning 474
Sales Forecast 476
Additional Funds Needed (AFN) Method 478
Forecasted Financial Statements Method 482
Forecasting When the Ratios Change 496
Summary 499
Web Extensions
12A: Advanced Techniques for Forecasting Financial Statements Accounts
C H A P T E R 13
Corporate Valuation, Value-Based Management and Corporate
Governance 511
Box: Corporate Valuation: Putting the Pieces Together 512
Overview of Corporate Valuation 513
The Corporate Valuation Model 514
Value-Based Management 521
Managerial Behavior and Shareholder Wealth 530
Corporate Governance 531
Box: Let’s Go to Miami! IBM’s 2009 Annual Meeting 533
Box: Would the U.S. Government Be an Effective Board Director? 536
Box: Shareholder Reactions to the Crisis 538
Box: The Sarbanes-Oxley Act of 2002 and Corporate Governance 540
Box: International Corporate Governance 542
Employee Stock Ownership Plans (ESOPs) 543
Summary 546
PART 6 Cash Distributions and Capital Structure 557
 
C H A P T E R 14
Distributions to Shareholders: Dividends and Repurchases 559
Box: Uses of Free Cash Flow: Distributions to Shareholders 560
An Overview of Cash Distributions 560
Procedures for Cash Distributions 562
Cash Distributions and Firm Value 564
Clientele Effect 567
Information Content, or Signaling, Hypothesis 568
Implications for Dividend Stability 569
Box: Will Dividends Ever Be the Same? 570
Setting the Target Distribution Level: The Residual Distribution Model 570
The Residual Distribution Model in Practice 572
A Tale of Two Cash Distributions: Dividends versus Stock Repurchases 573
The Pros and Cons of Dividends and Repurchases 582
Box: Dividend Yields around the World 584
Other Factors Influencing Distributions 584
Summarizing the Distribution Policy Decision 585
Stock Splits and Stock Dividends 587
Box: Talk about a Split Personality! 588
Dividend Reinvestment Plans 590
Summary 591
 
C H A P T E R 15
Capital Structure Decisions 599
Box: Corporate Valuation and Capital Structure 600
A Preview of Capital Structure Issues 600
Business Risk and Financial Risk 603
Capital Structure Theory 609
Box: Yogi Berra on the MM Proposition 611
Capital Structure Evidence and Implications 618
Box: Taking a Look at Global Capital Structures 620
Estimating the Optimal Capital Structure 621
Anatomy of a Recapitalization 625
Box: Deleveraging 630
Summary 630
Web Extensions
15A: Degree of Leverage
PART 7 Managing Global Operations 639
 
C H A P T E R 16
Working Capital Management 641
Box: Corporate Valuation and Working Capital Management 642
Current Asset Holdings 643
Current Assets Financing Policies 644
The Cash Conversion Cycle 648
Box: Some Firms Operate with Negative Working Capital! 653
The Cash Budget 654
Cash Management and the Target Cash Balance 657
Box: The CFO Cash Management Scorecard 658
Cash Management Techniques 659
Inventory Management 661
Box: Supply Chain Management 662
Receivables Management 663
Box: Supply Chain Finance 665
Accruals and Accounts Payable (Trade Credit) 667
Short-Term Marketable Securities 670
Short-Term Financing 672
Short-Term Bank Loans 672
Commercial Paper 676
Use of Security in Short-Term Financing 677
Summary 678
Web Extensions
16A: Secured Short-Term Financing
 
C H A P T E R 17
Multinational Financial Management 691
Box: Corporate Valuation in a Global Context 692
Multinational, or Global, Corporations 692
Multinational versus Domestic Financial Management 693
Exchange Rates 694
Exchange Rates and International Trade 698
The International Monetary System and Exchange Rate Policies 699
Trading in Foreign Exchange 703
Interest Rate Parity 704
Purchasing Power Parity 706
Box: Hungry for a Big Mac? Go To Malaysia! 708
Inflation, Interest Rates, and Exchange Rates 709
International Money and Capital Markets 710
Box: Greasing the Wheels of International Business 711
Box: Stock Market Indices around the World 713
Multinational Capital Budgeting 714
Box: Consumer Finance in China 715
International Capital Structures 718
Multinational Working Capital Management 720
Summary 723
Appendix A Solutions to Self-Test Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . 731
Appendix B Answers to End-of-Chapter Problems . . . . . . . . . . . . . . . . . . . . . . 753
Appendix C Selected Equations and Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 759
Appendix D Values of the Areas under the Standard Normal
Distribution Function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 771
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 773
Name Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 791
Subject Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 795

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