Corporate Finance: Principles and Practice, 8th Edition PDF by Denzil Watson and Antony Head

By

Corporate Finance: Principles and Practice, Eighth Edition

By Denzil Watson and Antony Head

Corporate Finance Principles and Practice, Eighth Edition

Contents

Preface xiii

Acknowledgements xv

1 The finance function 1

Learning objectives 1

Introduction 2

1.1 Two key concepts in corporate finance 2

1.2 The role of the financial manager 5

1.3 Corporate objectives 8

1.4 How is shareholder wealth maximised? 11

1.5 Agency theory 13

1.6 Corporate governance 20

1.7 Conclusion 26

Key points 29

Self-test questions 31

Questions for review 32

Questions for discussion 33

References 33

Recommended reading 34

2 Capital markets, market efficiency and ratio analysis 35

Learning objectives 35

Introduction 36

2.1 Sources of business finance 36

2.2 Capital markets 39

2.3 Capital market efficiency 41

2.4 Assessing financial performance 49

2.5 Conclusion 68

Key points 68

Self-test questions 70

Questions for review 71

Questions for discussion 72

References 74

Recommended reading 76

3 Short-term finance and working capital management 77

Learning objectives 77

Introduction 78

3.1 The objectives of working capital management 78

3.2 Working capital policies 78

3.3 Working capital and the cash conversion cycle 82

3.4 Overtrading 85

3.5 Managing inventory 86

3.6 Managing cash 91

3.7 Managing trade receivables 94

3.8 Conclusion 100

Key points 100

Self-test questions 101

Questions for review 102

Questions for discussion 103

References 105

Recommended reading 105

4 Long-term finance: equity finance 106

Learning objectives 106

Introduction 107

4.1 Equity finance 107

4.2 The Stock Exchange 109

4.3 Rights issues 114

4.4 Scrip issues, share splits, scrip dividends and share repurchases 120

4.5 Preference shares 125

4.6 Conclusion 128

Key points 128

Self-test questions 130

Questions for review 131

Questions for discussion 132

References 133

Recommended reading 133

5 Long-term finance: debt finance, hybrid finance and leasing 135

Learning objectives 135

Introduction 136

5.1 Bonds, loan notes, loan stock and debentures 136

5.2 Bank and institutional debt 143

5.3 International debt finance 145

5.4 Convertible bonds 145

5.5 Warrants 149

5.6 Valuing fixed interest bonds 150

5.7 Valuing convertible bonds 152

5.8 Leasing 154

5.9 Evaluating the financial effects of financing choices 159

5.10 Conclusion 161

Key points 161

Self-test questions 163

Questions for review 164

Questions for discussion 165

References 166

Recommended reading 166

6 An overview of investment appraisal methods 168

Learning objectives 168

Introduction 169

6.1 The payback method 169

6.2 The return on capital employed method 171

6.3 The net present value method 174

6.4 The internal rate of return method 177

6.5 Comparing the NPV and IRR methods 181

6.6 The profitability index and capital rationing 185

6.7 The discounted payback method 192

6.8 Conclusion 192

Key points 192

Self-test questions 194

Questions for review 195

Questions for discussion 196

References 198

Recommended reading 198

7 Investment appraisal: applications and risk 199

Learning objectives 199

Introduction 200

7.1 Relevant project cash flows 200

7.2 Taxation and capital investment decisions 202

7.3 Inflation and capital investment decisions 207

7.4 Investment appraisal and risk 210

7.5 Appraisal of foreign direct investment 217

7.6 Empirical investigations of investment appraisal 223

7.7 Conclusion 226

Key points 226

Self-test questions 227

Questions for review 228

Questions for discussion 230

References 233

Recommended reading 234

8 Portfolio theory and the capital asset pricing model 235

Learning objectives 235

Introduction 236

8.1 The measurement of risk 236

8.2 The concept of diversification 239

8.3 Investor attitudes to risk 245

8.4 Markowitz’s portfolio theory 247

8.5 Introduction to the capital asset pricing model 252

8.6 Using the CAPM to value shares 253

8.7 Empirical tests of the CAPM 263

8.8 Conclusion 265

Key points 266

Self-test questions 267

Questions for review 267

Questions for discussion 269

References 270

Recommended reading 271

9 The cost of capital and capital structure 273

Learning objectives 273

Introduction 274

9.1 Calculating the cost of individual sources of finance 274

9.2 Calculating the weighted average cost of capital 278

9.3 Average and marginal cost of capital 281

9.4 The CAPM and investment appraisal 282

9.5 Practical problems with calculating WACC 289

9.6 WACC in the real world 291

9.7 The cost of capital for foreign direct investment 293

9.8 Gearing: its measurement and significance 295

9.9 The concept of an optimal capital structure 299

9.10 The traditional approach to capital structure 301

9.11 Miller and Modigliani (I): net income approach 302

9.12 Miller and Modigliani (II): corporate tax 305

9.13 Market imperfections 305

9.14 Miller and personal taxation 308

9.15 Pecking order theory 308

9.16 Conclusion: does an optimal capital structure exist? 310

Key points 311

Self-test questions 313

Questions for review 314

Questions for discussion 315

References 317

Recommended reading 318

10 Dividend policy 320

Learning objectives 320

Introduction 321

10.1 Dividends: operational and practical issues 321

10.2 The effect of dividends on shareholder wealth 324

10.3 Dividend irrelevance 324

10.4 Dividend relevance 326

10.5 Dividend relevance or irrelevance? 330

10.6 Dividend policies 331

10.7 Alternatives to cash dividends 336

10.8 Empirical evidence on dividend policy 342

10.9 Conclusion 344

Key points 345

Self-test questions 346

Questions for review 347

Questions for discussion 348

References 350

Recommended reading 351

11 Mergers and takeovers 352

Learning objectives 352

Introduction 353

11.1 The terminology of mergers and takeovers 353

11.2 Justifications for acquisitions 354

11.3 Trends in takeover activity 359

11.4 Target company valuation 363

11.5 The financing of acquisitions 370

11.6 Strategic and tactical issues 375

11.7 Divestment 383

11.8 Private equity 389

11.9 Empirical research on acquisitions 392

11.10 Conclusion 395

Key points 396

Self-test questions 397

Questions for review 397

Questions for discussion 399

References 403

Recommended reading 404

12 Risk management 405

Learning objectives 405

Introduction 406

12.1 Interest and exchange rate risk 406

12.2 Internal risk management 414

12.3 External risk management 416

12.4 Futures contracts 418

12.5 Options 421

12.6 Swaps 427

12.7 Issues in interest and exchange risk management 432

12.8 Political risk 441

12.9 Conclusion 443

Key points 443

Self-test questions 445

Questions for review 446

Questions for discussion 447

References 448

Recommended reading 449

Answers to self-test questions 451

Glossary 470

Present value tables 479

Index 481

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