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 Currencies

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 Model

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 Projects

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 Budgeting

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 Manager

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 Structure

16 Payout Policy 425

16-1 Facts about Payout 426

How Firms Pay Dividends/How Firms Repurchase Stock

16-2 The Information Content of Dividends and Repurchases 428

The Information Content of Share Repurchases

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 Incentives

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 Opportunities

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 Swaps

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 Models

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 Plan

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

Net Present Value/2. The Capital Asset Pricing

Model/3. Efficient Capital Markets/4. Value

Additivity and the Law of Conservation of Value/

Capital Structure Theory/6. Option Theory/Agency Theory

34-2 What We Do Not Know: 10 Unsolved Problems in Finance 912

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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