Principles of Corporate Finance, Thirteenth Edition
By Richard A. Brealey, Stewart C. Myers and Franklin Allen
Contents:
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/
Shareholders/Takeovers
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
APPENDIX A-1
GLOSSARY G-1
INDEX I-1
Note: Present value tables are available in Connect.