Principles of Corporate Finance, 13th Edition PDF by Richard A. Brealey, Stewart C. Myers and Franklin Allen


Principles of Corporate Finance, Thirteenth Edition

By Richard A. Brealey, Stewart C. Myers and Franklin Allen

Principles of Corporate Finance 13th Edition


I Part One: Value

1 Introduction to Corporate Finance 1

1-1 Corporate Investment and Financing Decisions 2

Investment Decisions/Financing Decisions/What Is a Corporation?/The Role of the Financial Manager

1-2 The Financial Goal of the Corporation 7

Shareholders Want Managers to Maximize Market Value/A Fundamental Result/The Investment Trade- Off/Should Managers Look After the Interests of Their Shareholders?/Agency Problems and Corporate Governance

1-3 Preview of Coming Attractions 13

Summary 15 • Problem Sets 15 • Appendix: Why

Maximizing Shareholder Value Makes Sense 18

2 How to Calculate Present Values 20

2-1 Future Values and Present Values 20

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 Looking for Shortcuts—Perpetuities and Annuities 28

How to Value Perpetuities/How to Value Annuities/

Valuing Annuities Due/Calculating Annual

Payments/Future Value of an Annuity

2-3 More Shortcuts—Growing Perpetuities and

Annuities 34

Growing Perpetuities/Growing Annuities

2-4 How Interest Is Paid and Quoted 36

Continuous Compounding

Summary 39 • Problem Sets 40 • Finance on the Web 45

3 Valuing Bonds 46

3-1 Using the Present Value Formula to Value

Bonds 47

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 Interest

Rates 50

Duration and Volatility

3-3 The Term Structure of Interest Rates 56

Spot Rates, Bond Prices, and the Law of One

Price/Measuring the Term Structure/Why the

Discount Factor Declines as Futurity Increases—

and a Digression on Money Machines

3-4 Explaining the Term Structure 60

Expectations Theory of the Term Structure/

Introducing Risk/Inflation and Term Structure

3-5 Real and Nominal Rates of Interest 62

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 67

Corporate Bonds and Default Risk/Sovereign

Bonds and Default Risk

Summary 70 • Further Reading 71 • Problem Sets 71

Finance on the Web 76

4 The Value of Common Stocks 77

4-1 How Common Stocks Are Traded 78

Trading Results for Boeing

4-2 How Common Stocks Are Valued 80

4-3 Estimating the Cost of Equity Capital 87

Using the DCF Model to Set Water, Gas, and

Electricity Prices/Dangers Lurk in Constant-

Growth Formulas

4-4 The Link between Stock Price and Earnings

per Share 92

Calculating the Present Value of Growth

Opportunities for Fledgling Electronics

4-5 Valuing a Business by Discounted Cash Flow 95

Valuing the Concatenator Business/Valuation

Format/Estimating Horizon Value/Free Cash Flow,

Dividends, and Repurchases

Summary 100 • Problem Sets 101 • Finance on the

Web 106 • Mini-Case: Reeby Sports 106

5 Net Present Value and Other

Investment Criteria 108

5-1 A Review of the Basics 108

Net Present Value’s Competitors/Three Points to

Remember about NPV

5-2 Book Rate of Return and Payback 111

Book Rate of Return /Payback/Discounted Payback

5-3 Internal (or Discounted Cash Flow) Rate of

Return 114

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 122

An Easy Problem in Capital Rationing/Uses of

Capital Rationing Models

Summary 126 • Further Reading 127 • Problem Sets

127 • Mini-Case: Vegetron’s CFO Calls Again 132

6 Making Investment Decisions with

the Net Present Value Rule 135

6-1 Applying the Net Present Value Rule 135

Rule 1: Discount Cash Flows, Not Profits/Rule 2:

Discount Incremental Cash Flows /Rule 3: Treat

Inflation Consistently/Rule 4: Separate Investment

and Financing Decisions/Rule 5: Remember to

Deduct Taxes

6-2 Corporate Income Taxes 142

U.S. Corporate Income Tax Reform

6-3 Example—IM&C’s Fertilizer Project 144

The Three Elements of Project Cash Flows/

Forecasting the Fertilizer Project’s Cash Flows/

Accelerated Depreciation and First-Year

Expensing/Final Comments on Taxes/Project

Analysis/Calculating NPV in Other Countries and


6-4 Using the NPV Rule to Choose among

Projects 151

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

Summary 156 • Further Reading 157 • Problem Sets

157 • Mini-Case: New Economy Transport (A)

165 • New Economy Transport (B) 166

I Part Two: Risk

7 Introduction to Risk and

Return 167

7-1 Over a Century of Capital Market History in

One Easy Lesson 167

Arithmetic Averages and Compound Annual

Returns/Using Historical Evidence to Evaluate

Today’s Cost of Capital

7-2 Diversification and Portfolio Risk 174

Variance and Standard Deviation/Measuring

Variability/How Diversification Reduces Risk

7-3 Calculating Portfolio Risk 181

General Formula for Computing Portfolio Risk/Do

I Really Have to Add up 36 Million Boxes?

7-4 How Individual Securities Affect Portfolio

Risk 185

Market Risk Is Measured by Beta/Why Security

Betas Determine Portfolio Risk

7-5 Diversification and Value Additivity 189

Summary 190 • Further Reading 191 • Problem Sets

191 • Finance on the Web 197

8 Portfolio Theory and the Capital

Asset Pricing Model 198

8-1 Harry Markowitz and the Birth of Portfolio

Theory 198

Combining Stocks into Portfolios/We Introduce

Borrowing and Lending

8-2 The Relationship between Risk

and Return 205

Some Estimates of Expected Returns/Review of the

Capital Asset Pricing Model/What If a Stock Did

Not Lie on the Security Market Line?

8-3 Validity and Role of the Capital Asset Pricing

Model 208

Tests of the Capital Asset Pricing Model/

Assumptions behind the Capital Asset Pricing


8-4 Some Alternative Theories 213

Arbitrage Pricing Theory/A Comparison of the

Capital Asset Pricing Model and Arbitrage Pricing

Theory/The Three-Factor Model

Summary 217 • Further Reading 218 • Problem Sets

219 • Finance on the Web 225 • Mini-Case: John and

Marsha on Portfolio Selection 225

9 Risk and the Cost of Capital 228

9-1 Company and Project Costs of Capital 229

Perfect Pitch and the Cost of Capital/Debt and the

Company Cost of Capital

9-2 Measuring the Cost of Equity 232

Estimating Beta/The Expected Return on CSX’s

Common Stock/CSX’s After-Tax Weighted-Average

Cost of Capital/CSX’s Asset Beta

9-3 Analyzing Project Risk 236

What Determines Asset Betas?/Don’t Be Fooled

by Diversifiable Risk/Avoid Fudge Factors in

Discount Rates/Discount Rates for International


9-4 Certainty Equivalents—Another Way to Adjust

for Risk 242

Valuation by Certainty Equivalents/When to Use a

Single Risk-Adjusted Discount Rate for Long-Lived

Assets/A Common Mistake/When You Cannot Use

a Single Risk-Adjusted Discount Rate for Long-

Lived Assets

Summary 248 • Further Reading 249 • Problem Sets

249 • Finance on the Web 254 • Mini-Case: The

Jones Family Incorporated 254

I Part Three: Best Practices in Capital


10 Project Analysis 257

10-1 Sensitivity and Scenario Analysis 258

Value of Information/Limits to Sensitivity Analysis/

Scenario Analysis

10-2 Break-Even Analysis and Operating

Leverage 262

Break-Even Analysis/Operating Leverage and the

Break-Even Point

10-3 Monte Carlo Simulation 264

Simulating the Electric Scooter Project

10-4 Real Options and Decision Trees 266

The Option to Expand/The Option to Abandon/

Production Options/Timing Options/More on

Decision Trees/Pro and Con Decision Trees

Summary 274 • Further Reading 275 • Problem Sets

275 • Mini-Case: Waldo County 282

11 How to Ensure That Projects Truly

Have Positive NPVs 284

11-1 How Firms Organize the Investment

Process 284

The Capital Budget/Project Authorizations—and

the Problem of Biased Forecasts/Postaudits

11-2 Look First to Market Values 287

The BMW and Your Sporting Idol

11-3 Economic Rents and Competitive Advantage 292

11-4 Marvin Enterprises Decides to Exploit a New

Technology—an Example 295

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

Summary 303 • Further Reading 303 • Problem Sets

303 • Mini-Case: Ecsy-Cola 309

12 Agency Problems and

Investment 311

12-1 What Agency Problems Should You Watch Out

For? 311

Agency Problems Don’t Stop at the Top/Risk Taking

12-2 Monitoring 314

Boards of Directors /Auditors/Lenders/


12-3 Management Compensation 316

Compensation Facts and Controversies/The

Economics of Incentive Compensation/The Specter

of Short-Termism

12-4 Measuring and Rewarding Performance:

Residual Income and EVA 323

Residual Income or Economic Value Added

(EVA®)/Pros and Cons of EVA

12-5 Biases in Accounting Measures of

Performance 326

Example: Measuring the Profitability of the Nodhead

Supermarket/Measuring Economic Profitability/Do the

Biases Wash Out in the Long Run?/What Can We Do

about Biases in Accounting Profitability Measures?

Summary 331 • Further Reading 332 • Problem Sets 332

I Part Four: Financing Decisions and

Market Efficiency

13 Efficient Markets and Behavioral

Finance 337

13-1 Differences between Investment and Financing

Decisions 338

We Always Come Back to NPV

13-2 The Efficient Market Hypothesis 340

A Startling Discovery: Price Changes Are

Random/Random Walks: The Evidence/Semistrong

Market Efficiency: The Evidence/Strong Market

Efficiency: The Evidence

13-3 Bubbles and Market Efficiency 348

13-4 Behavioral Finance 349

Sentiment/Limits to Arbitrage/Incentive Problems

and the Financial Crisis of 2008–2009

13-5 The Five Lessons of Market

Efficiency 354

Lesson 1: Markets Have No Memory/Lesson 2:

Trust Market Prices/Lesson 3: Read the Entrails/

Lesson 4: The Do-It-Yourself Alternative/Lesson 5:

Seen One Stock, Seen Them All/What If Markets

Are Not Efficient? Implications for the Financial


Summary 359 • Further Reading 360 • Problem Sets

361 • Finance on the Web 364

14 An Overview of Corporate

Financing 365

14-1 Patterns of Corporate Financing 365

Do Firms Rely Too Much on Internal Funds?/How

Much Do Firms Borrow?

14-2 Common Stock 369

Ownership of the Corporation/Voting Procedures/

Dual-Class Shares and Private Benefits/Equity in

Disguise/Preferred Stock

14-3 Debt 374

Debt Comes in Many Forms/A Debt by Any Other

Name/Variety’s the Very Spice of Life

14-4 Financial Markets and Intermediaries 377

Financial Markets/Financial Intermediaries/

Investment Funds/Financial Institutions

14-5 The Role of Financial Markets and

Intermediaries 382

The Payment Mechanism/Borrowing and Lending/

Pooling Risk/Information Provided by Financial

Markets/The Financial Crisis of 2007–2009

Summary 386 • Further Reading 387 • Problem Sets

388 • Finance on the Web 390

15 How Corporations Issue

Securities 391

15-1 Venture Capital 391

The Venture Capital Market

15-2 The Initial Public Offering 396

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

15-3 Alternative Issue Procedures for IPOs 406

Types of Auction: A Digression

15-4 Security Sales by Public Companies 408

General Cash Offers/International Security

Issues/The Costs of a General Cash Offer/Market

Reaction to Stock Issues/Rights Issues

15-5 Private Placements and Public Issues 413

Summary 413 • Further Reading 414

Problem Sets 415 • Finance on the Web 420

Appendix: Marvin’s New-Issue Prospectus 421

I Part Five: Payout Policy and Capital


16 Payout Policy 425

16-1 Facts about Payout 426

How Firms Pay Dividends/How Firms Repurchase


16-2 The Information Content of Dividends and

Repurchases 428

The Information Content of Share


16-3 Dividends or Repurchases? The Payout

Controversy 431

Payout Policy Is Irrelevant in Perfect Capital

Markets/Dividends or Repurchases? An Example/

Stock Repurchases and DCF Models of Share

Price/Dividends and Share Issues

16-4 The Rightists 436

Payout Policy, Investment Policy, and Management


16-5 Taxes and the Radical Left 437

Empirical Evidence on Dividends and Taxes/

Alternative Tax Systems

16-6 Payout Policy and the Life Cycle of the Firm 441

Payout and Corporate Governance

Summary 443 • Further Reading 444 • Problem Sets 445

17 Does Debt Policy Matter? 451

17-1 The Effect of Financial Leverage in a

Competitive Tax-Free Economy 452

Enter Modigliani and Miller/The Law of

Conservation of Value/An Example of Proposition 1

17-2 Financial Risk and Expected Returns 457

Proposition 2/Leverage and the Cost of Equity/

How Changing Capital Structure Affects Beta/

Watch Out for Hidden Leverage

17-3 No Magic in Financial Leverage 464

Today’s Unsatisfied Clienteles Are Probably

Interested in Exotic Securities/Imperfections and


17-4 A Final Word on the After-Tax Weighted-

Average Cost of Capital 467

Summary 468 • Further Reading 469 • Problem

Sets 470 • Mini-Case: Claxton Drywall Comes to the

Rescue 474

18 How Much Should a Corporation

Borrow? 475

18-1 Corporate Taxes 476

How Do Interest Tax Shields Contribute to the

Value of Stockholders’ Equity?/Recasting Johnson

& Johnson’s Capital Structure/MM and Taxes

18-2 Corporate and Personal Taxes 480

18-3 Costs of Financial Distress 482

Bankruptcy Costs/Evidence on Bankruptcy Costs/

Direct versus Indirect Costs of Bankruptcy/

Financial Distress without Bankruptcy/Debt and

Incentives/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/The

Trade-Off Theory of Capital Structure

18-4 The Pecking Order of Financing Choices 495

Debt and Equity Issues with Asymmetric

Information/Implications of the Pecking Order/The

Trade-Off Theory vs. the Pecking-Order Theory—

Some Evidence/The Bright Side and the Dark Side

of Financial Slack/Is There a Theory of Optimal

Capital Structure?

Summary 501 • Further Reading 502 • Problem Sets

503 • Finance on the Web 506

19 Financing and Valuation 507

19-1 The After-Tax Weighted-Average Cost of

Capital 508

Review of Assumptions/Mistakes People Make in

Using the Weighted-Average Formula

19-2 Valuing Businesses 512

Valuing Rio Corporation/Estimating Horizon

Value/WACC vs. the Flow-to-Equity Method

19-3 Using WACC in Practice 517

Some Tricks of the Trade/Adjusting WACC When

Debt Ratios and Business Risks Differ/Unlevering

and Relevering Betas/The Importance of

Rebalancing/The Modigliani–Miller Formula, Plus

Some Final Advice

19-4 Adjusted Present Value 524

APV for the Perpetual Crusher/Other Financing

Side Effects/APV for Entire Businesses/APV

and Limits on Interest Deductions/APV for

International Investments

19-5 Your Questions Answered 529

Summary 531 • Further Reading 532 • Problem

Sets 532 • Finance on the Web 537 • Appendix:

Discounting Safe, Nominal Cash Flows 538

I Part Six: Options

20 Understanding Options 542

20-1 Calls, Puts, and Shares 543

Call Options and Position Diagrams/Put Options/

Selling Calls and Puts/Position Diagrams Are Not

Profit Diagrams

20-2 Financial Alchemy with Options 547

Spotting the Option

20-3 What Determines Option Values? 552

Risk and Option Values

Summary 557 • Further Reading 558

Problem Sets 558 • Finance on the Web 562

21 Valuing Options 563

21-1 A Simple Option-Valuation Model 564

Why Discounted Cash Flow Won’t Work for

Options/Constructing Option Equivalents from

Common Stocks and Borrowing/Valuing the

Amazon Put Option

21-2 The Binomial Method for Valuing Options 568

Example: The Two-Step Binomial Method/The

General Binomial Method/The Binomial Method

and Decision Trees

21-3 The Black–Scholes Formula 573

Using the Black–Scholes Formula/The Risk of

an Option/The Black–Scholes Formula and the

Binomial Method

21-4 Black–Scholes in Action 577

Executive Stock Options/Warrants/Portfolio

Insurance/Calculating Implied Volatilities

21-5 Option Values at a Glance 580

21-6 The Option Menagerie 582

Summary 582 • Further Reading 583 • Problem Sets

583 • Finance on the Web 588 • Mini-Case: Bruce

Honiball’s Invention 588

22 Real Options 590

22-1 The Value of Follow-On Investment

Opportunities 590

Questions and Answers about Blitzen’s Mark II/

Other Expansion Options

22-2 The Timing Option 594

Valuing the Malted Herring Option/Optimal

Timing for Real Estate Development

22-3 The Abandonment Option 597

Bad News for the Perpetual Crusher/Abandonment

Value and Project Life/Temporary Abandonment

22-4 Flexible Production and Procurement 600

Aircraft Purchase Options

22-5 Investment in Pharmaceutical R&D 604

22-6 Valuing Real Options 606

A Conceptual Problem?/What about Taxes?/

Practical Challenges

Summary 608 • Further Reading 609

Problem Sets 609

I Part Seven: Debt Financing

23 Credit Risk and the Value of

Corporate Debt 614

23-1 Yields on Corporate Debt 614

What Determines the Yield Spread?

23-2 Valuing the Option to Default 618

The Value of Corporate Equity/A Digression:

Valuing Government Financial Guarantees

23-3 Bond Ratings and the Probability of

Default 622

23-4 Predicting the Probability of Default 624

Statistical Models of Default/Structural Models

of Default

Summary 628 • Further Reading 628 • Problem

Sets 629 • Finance on the Web 630

24 The Many Different Kinds of

Debt 631

24-1 Long-Term Bonds 632

Bond Terms/Security and Seniority/Asset-Backed

Securities/Call Provisions/Sinking Funds/Bond

Covenants/Privately Placed Bonds/Foreign Bonds

and Eurobonds

24-2 Convertible Securities and Some Unusual

Bonds 641

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

24-3 Bank Loans 647

Commitment/Maturity/Rate of Interest/Syndicated

Loans/Security/Loan Covenants

24-4 Commercial Paper and Medium-Term Notes 650

Commercial Paper/Medium-Term Notes

Summary 652 • Further Reading 653 • Problem

Sets 653 • Mini-Case: The Shocking Demise of

Mr. Thorndike 658 • Appendix: Project Finance 660

Appendix Further Reading 662

25 Leasing 663

25-1 What Is a Lease? 663

25-2 Why Lease? 664

Sensible Reasons for Leasing/Some Dubious

Reasons for Leasing

25-3 Operating Leases 667

Example of an Operating Lease/Lease or Buy?

25-4 Valuing Financial Leases 669

Example of a Financial Lease/Who Really Owns

the Leased Asset?/Leasing and the Internal

Revenue Service/A First Pass at Valuing a Lease

Contract/The Story So Far/Financial Leases When

There Is No Interest Tax Shield

25-5 When Do Financial Leases Pay? 675

Leasing around the World

25-6 Leveraged Leases 676

Summary 677 • Further Reading 678 • Problem Sets 678

I Part Eight: Risk Management

26 Managing Risk 683

26-1 Why Manage Risk? 684

Reducing the Risk of Cash Shortfalls or Financial

Distress/Agency Costs May Be Mitigated by Risk

Management/The Evidence on Risk Management

26-2 Insurance 687

26-3 Reducing Risk with Options 689

26-4 Forward and Futures Contracts 690

A Simple Forward Contract/Futures Exchanges/

The Mechanics of Futures Trading/Trading and

Pricing Financial Futures Contracts/Spot and

Futures Prices—Commodities/More about Forward

Contracts/Homemade Forward Rate Contracts

26-5 Swaps 697

Interest Rate Swaps/Currency Swaps/Some Other


26-6 How to Set Up a Hedge 702

Hedging Interest Rate Risk/Hedge Ratios and

Basis Risk

26-7 Is “Derivative” a Four-Letter Word? 705

Summary 707 • Further Reading 708 • Problem

Sets 708 • Finance on the Web 714 • Mini-Case:

Rensselaer Advisers 714

27 Managing International Risks 717

27-1 The Foreign Exchange Market 717

27-2 Some Basic Relationships 719

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?

27-3 Hedging Currency Risk 728

Transaction Exposure and Economic Exposure

27-4 Exchange Risk and International Investment

Decisions 731

The Cost of Capital for International Investments

27-5 Political Risk 734

Summary 736 • Further Reading 737 • Problem Sets 738

  • Finance on the Web 741 • Mini-Case: Exacta, S.a. 742

I Part Nine: Financial Planning and

Working Capital Management

28 Financial Analysis 743

28-1 Financial Ratios 743

28-2 Financial Statements 744

28-3 Home Depot’s Financial Statements 745

The Balance Sheet/The Income Statement

28-4 Measuring Home Depot’s Performance 748

Economic Value Added/Accounting Rates of

Return/Problems with EVA and Accounting

Rates of Return

28-5 Measuring Efficiency 752

28-6 Analyzing the Return on Assets: The Du Pont

System 754

The Du Pont System

28-7 Measuring Leverage 756

Leverage and the Return on Equity

28-8 Measuring Liquidity 758

28-9 Interpreting Financial Ratios 760

Summary 763 • Further Reading 763 • Problem Sets

763 • Finance on the Web 769

29 Financial Planning 770

29-1 Links between Short-Term and Long-Term

Financing Decisions 770

29-2 Tracing Changes in Cash 773

The Cash Cycle

29-3 Cash Budgeting 778

29-4 Dynamic’s Short-Term Financial Plan 780

Dynamic Mattress’s Financing Plan/Evaluating

the Plan/A Note on Short-Term Financial Planning


29-5 Long-Term Financial Planning 784

Why Build Financial Plans?/A Long-Term

Financial Planning Model for Dynamic

Mattress/Pitfalls in Model Design/Choosing a


29-6 Growth and External Financing 789

Summary 791 • Further Reading 791 • Problem Sets

792 • Finance on the Web 800

30 Working Capital

Management 801

30-1 The Composition of Working Capital 802

30-2 Inventories 804

30-3 Credit Management 806

Terms of Sale/The Promise to Pay/Credit Analysis/

The Credit Decision/Collection Policy

30-4 Cash 812

How Purchases Are Paid For/Speeding Up Check

Collections/International Cash Management/

Paying for Bank Services

30-5 Marketable Securities 816

Tax Strategies/Investment Choices/Calculating

the Yield on Money Market Investments/Returns

on Money Market Investments/The International

Money Market/Money Market Instruments

Summary 822 • Further Reading 823 • Problem Sets

824 • Finance on the Web 829

I Part Ten: Mergers, Corporate Control, and Governance

31 Mergers 830

31-1 Sensible Motives for Mergers 831

Economies of Scale/Economies of Vertical

Integration/Complementary Resources/Surplus Funds/

Eliminating Inefficiencies/Industry Consolidation

31-2 Some Dubious Reasons for Mergers 836

Diversification/Increasing Earnings per Share:

The Bootstrap Game/Lower Financing Costs

31-3 Estimating Merger Gains and Costs 839

Right and Wrong Ways to Estimate the Benefits

of Mergers/More on Estimating Costs—What If

the Target’s Stock Price Anticipates the Merger?/

Estimating Cost When the Merger Is Financed by

Stock/Asymmetric Information

31-4 The Mechanics of a Merger 844

Mergers, Antitrust Law, and Popular Opposition/ The Form of Acquisition/Merger Accounting/Some Tax Considerations/Cross-Border Mergers and Tax Inversion

31-5 Proxy Fights, Takeovers, and the Market for Corporate Control 847

Proxy Contests/Takeovers/Valeant Bids for Allergan/

Takeover Defenses/Who Gains Most in Mergers?

31-6 Merger Waves and Merger Profitability 853

Merger Waves/Merger Announcements and the

Stock Price/Merger Profitability/Do Mergers

Generate Net Benefits?

Summary 855 • Further Reading 856 • Problem

Sets 856 • Appendix: Conglomerate Mergers and Value Additivity 861

32 Corporate Restructuring 863

32-1 Leveraged Buyouts 863

The RJR Nabisco LBO/Barbarians at the Gate?/

Leveraged Restructurings/LBOs and Leveraged Restructurings

32-2 The Private-Equity Market 868

Private-Equity Partnerships/Are Private-Equity

Funds Today’s Conglomerates?

32-3 Fusion and Fission in Corporate Finance 873

Spin-Offs/Carve-Outs/Asset Sales/Privatization

and Nationalization

32-4 Bankruptcy 878

Is Chapter 11 Efficient?/Workouts/Alternative

Bankruptcy Procedures

Summary 883 • Further Reading 884 • Problem Sets 885

33 Governance and Corporate Control

around the World 888

33-1 Financial Markets and Institutions 888

Investor Protection and the Development of

Financial Markets

33-2 Ownership, Control, and Governance 892

Ownership and Control in Japan/Ownership and

Control in Germany/European Boards of Directors/

Shareholders versus Stakeholders/Ownership and

Control in Other Countries/Conglomerates Revisited

33-3 Do These Differences Matter? 902

Risk and Short-Termism/Growth Industries and

Declining Industries/Transparency and Governance

Summary 905 • Further Reading 906

Problem Sets 907

I Part Eleven: Conclusion

34 Conclusion: What We Do and Do Not Know about Finance 909

34-1 What We Do Know: The Seven Most Important Ideas in Finance 909

  1. Net Present Value/2. The Capital Asset Pricing

Model/3. Efficient Capital Markets/4. Value

Additivity and the Law of Conservation of Value/

  1. Capital Structure Theory/6. Option Theory/
  2. Agency Theory

34-2 What We Do Not Know: 10 Unsolved Problems

in Finance 912

  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 918




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