Modern Corporate Finance: Theory and Practice / Edition 2

Modern Corporate Finance: Theory and Practice / Edition 2

by Donald R. Chambers, Nelson J. Lacey, Nelson J. Lacey
     
 

ISBN-10: 0321014472

ISBN-13: 9780321014474

Pub. Date: 10/16/1998

Publisher: Addison-Wesley

Reinforced by economic principles, this book approaches corporate finance from a modernist perspective. Modern Corporate Finance strikes an excellent balance between theory and application to demonstrate the usefulness of finance in corporate decision-making. Realistic exercises and examples make the theoretical material relevant.

Overview

Reinforced by economic principles, this book approaches corporate finance from a modernist perspective. Modern Corporate Finance strikes an excellent balance between theory and application to demonstrate the usefulness of finance in corporate decision-making. Realistic exercises and examples make the theoretical material relevant.

Product Details

ISBN-13:
9780321014474
Publisher:
Addison-Wesley
Publication date:
10/16/1998
Pages:
601
Product dimensions:
7.76(w) x 9.59(h) x 1.23(d)

Table of Contents

Preface xv
1 Introduction to Modern Corporate Finance
1(38)
Modern Corporate Finance
2(1)
The Meaning of Corporate Finance
3(15)
What is Finance?
3(3)
Defining the Corporation
6(10)
What is Meant by Modern?
16(2)
The Goal or Purpose of the Corporation
18(2)
Corporate Ownership
18(2)
Owners Versus Managers
20(1)
Economic Foundations of Finance
20(8)
Underlying Assumptions
21(1)
The First Principle: Positive Marginal Utility of Wealth
22(1)
The Second Principle: Diminishing Marginal Utility of Wealth
23(2)
The Third Principle: Diminishing Marginal Return
25(1)
The Fourth Principle: Conservation of Value
25(1)
A Summary of the Four Economic Principles
26(2)
Time and Risk
28(11)
Time Value and the Concept of Different Commodities
30(1)
Risk and the Concept of Different Commodities
31(8)
2 Markets and Contracts
39(36)
Market Efficiency
41(4)
Inefficient Markets
45(3)
Liquid Assets
47(1)
Liquidity and Corporate Finance
47(1)
Acquiring Assets in the Financial System
48(27)
Real Versus Financial Assets
49(3)
Asset Ownership Through Financial Intermediation
52(3)
Real Asset Ownership and Governments
55(2)
Taxation
57(1)
Governments and Money
57(18)
3 The Time Value of Money
75(40)
Time Value
75(6)
Dollars Through Time as Different Commodities
76(1)
Discounting Cash Flows
77(2)
Compounding Cash Flows
79(1)
Time Lines
80(1)
Interest Rates and Present Value
80(1)
A Summary of Time Value
81(1)
The Techniques of Discounting and Compounding
81(14)
Future Values
82(13)
The Time Values for More Than One Cash Flow
95(5)
Compounding Multiple Cash Flows
95(1)
Discounting Multiple Cash Flows
96(4)
The Present Value of Annuities
100(3)
Developing a Shortcut Procedure for Annuities
101(2)
Beginning and Ending Payments
103(1)
The Future Value of an Annuity
103(2)
Solving for the Interest Rate
105(1)
Solving for the Time Period
105(10)
4 The Valuation of Financial Securities
115(30)
Review of Discounting Annuities
116(5)
Special Annuities
116(5)
Financial Securities
121(10)
U.S. Treasury Bills
122(1)
Calculating the Interest Rate of Treasury Bills
122(2)
Coupon-Paying Bonds
124(6)
Yield to Maturity
130(1)
The Valuation of Common Stock
131(14)
The Discounted Cash Flow Model
132(13)
5 The Techniques of Capital Budgeting
145(34)
Creating Value
146(3)
Keeping Score
148(1)
The Required Rate of Return in Project Analysis
149(1)
A Summary of Value Creation
149(1)
Net Present Value
149(4)
The NPV Rule in Capital Budgeting
150(3)
Competitors of NPV
153(8)
The Profitability Index
153(1)
The Internal Rate of Return
154(6)
The Accounting Rate of Return
160(1)
NPV Versus IRR-Which Method is Better?
161(7)
Accept-or-Reject Projects Versus Ranking Projects
162(2)
Capital Rationing
164(1)
NPV Versus IRR for Nonstandard Projects
165(3)
Estimating the Required Rate of Return-An Advantage to the IRR?
168(1)
Project Selection and the Required Rate of Return
168(11)
6 Estimating Project Cash Flows
179(30)
Estimating Project Cash Flows
180(6)
Incremental Cash Flow Versus Accounting Profit
181(1)
Cash Flow and Taxes
182(1)
Depreciation (and other Noncash Expenses) and Cash Flow
183(2)
Sunk Costs and Cash Flow
185(1)
Project Side Effects and Cash Flow
186(1)
Summary of Cash Flow Estimation
186(1)
Estimating Cash Flow and NPV for Project Prose
186(10)
The Initial Investment Phase
187(1)
The Long-Term Cash Flow Phase
188(4)
The Terminal Cash Flow Phase
192(1)
Total Project Cash Flows and NPV
193(1)
Has Everything Been Included?
194(2)
Errors in Project Cash Flow Estimation
196(2)
Managerial Bias
196(1)
Misestimation
197(1)
Sensitivity Analysis
198(11)
7 Advanced Topics in Capital Budgeting
209(30)
Overview-Complexities in Capital Budgeting Analysis
210(1)
Projects with Unequal Lives
210(6)
NPV Versus IRR: The Controversy Revisited
210(1)
The Hidden Reinvestment or Replication Assumption
211(1)
Solving the Problem of Unequal Lives
212(4)
Least-Cost Decisions
216(2)
Least Cost and Unequal Lives
217(1)
Inflation and Investment Decisions
218(6)
The Mathematics of Inflation
220(1)
Interest Rates and the Fisher Effect
221(1)
Estimating the Real Rate of Interest
221(1)
Using the Fisher Effect in Investment Decisions
222(1)
Adjusting for Inflation in a Corporate Context
223(1)
Capital Rationing
224(11)
Capital Rationing and the Profitability Index
224(11)
Appendix: Integer Linear Programming
235(4)
8 Risk and Diversification
239(30)
A Conceptual Analysis of Risk
239(5)
What is Uncertainty?
240(1)
What is Risk?
241(1)
Risk-Averse Behavior
241(3)
Return and Risk on Individual Assets
244(10)
Distributions of Returns
244(3)
Mean Returns
247(2)
The Standard Deviation of Returns
249(3)
The Normal Distribution
252(1)
Risk and Reward
252(1)
The Problem with Standard Deviation as a Risk Measure
253(1)
Return and Risk on Portfolios
254(15)
Portfolio Returns
254(1)
A First Look at Portfolio Risk
255(1)
The Covariance
256(1)
The Correlation Coefficient
257(1)
Calculating Portfolio Variance and Standard Variation
258(1)
The Relationship Between Covariance and Portfolio Standard Deviation
259(2)
Measuring Portfolio Risk with Diversification
261(8)
9 Modern Portfolio Theory and the Capital Asset Pricing Model
269(28)
Portfolio Management Theory
270(8)
The Markowitz Model: Risky Assets Only
270(2)
An Alternative Framework: Risky and Risk-Free Assets
272(1)
The Market Portfolio
273(2)
Summary and Illustration of Risk
275(3)
Beta
278(8)
Systematic Risk and Beta
278(4)
Using Beta to Calculate Expected Rates of Return
282(3)
The CAPM and Corporate Risk Management
285(1)
Why All Securities Lie on the Security Market Line
285(1)
The CAPM and Capital Budgeting
286(9)
Appendix: Why Expected Returns Lie in a Straight Line Against Beta
295(2)
10 Introduction to Options
297(28)
The Importance of Option Theory
298(1)
The Mechanics of Options
298(7)
A Graphical Look at Options
299(5)
Who Pays the Profits to Call Option Buyers?
304(1)
Call Option Pricing Prior to Expiration
305(1)
The Black-Scholes Option Pricing Model
305(5)
Systematic Risk and Option Pricing
305(1)
Foundations of the Black-Scholes Option Pricing Model
306(1)
The Five Variables in the Black-Scholes Option Pricing Model
306(4)
Summary of the Black-Scholes Option Pricing Model
310(1)
Option Pricing-A Two-State Example
310(1)
An Application of Option Theory to the Equity of a Firm
311(10)
Appendix: The Black-Scholes Option Pricing Model
321(4)
11 Financial Leverage
325(38)
An Introduction to Corporate Financing
325(1)
An Overview of Corporate Financing
326(5)
Financing in Perfect Markets
329(1)
The Traditionalist Versus the Modernist Positions on Capital Structure
330(1)
The Mechanics of Financial Leverage
331(9)
Being Unlevered: The Case of No Debt
332(1)
Being Levered: The Case of Debt
332(2)
Financial Leverage from the Perspective of Debtholders and Equityholders
334(5)
A Summary of the Mechanics of Leverage
339(1)
Capital Structure and Firm value-The Traditionalists'View
340(1)
Capital Structure and Firm Value-The Modernists'View
341(22)
Capital Structure Irrelevancy Using Market Efficiency and Net Present Value
343(2)
Capital Structure Irrelevancy Using Arbitrage
345(3)
Capital Structure Irrelevance Using Homemade Leverage
348(15)
12 Financing: Why Might It Matter
363(28)
The Rationale for Capital Structure Relevance
364(2)
The No-Free-Lunch Analogy for Capital Structure Relevance
364(2)
Capital Structure with Corporate Taxes
366(5)
How Corporate Taxes Are Levied
366(1)
Financial Leverage with Corporate Income Taxes
366(3)
Summary of Financial Leverage and Corporate Taxation
369(1)
Illustrating Financial Leverage and Taxes with an M&M Proposition
369(2)
The Miller Tax Model
371(4)
Prop Wash and the Miller Tax Model
372(1)
Which Model Is Better: M&M or Miller?
373(2)
Bankruptcy and Capital Structure
375(4)
Bankruptcy and Option Theory
377(1)
Risky Projects and the Games Shareholders Can Play
378(1)
Summary of Bankruptcy and Capital Structure
379(1)
Transactions Costs, Agency Costs, and Information Signaling
379(1)
Wrapping Up
380(11)
13 The Dividend Decision
391(30)
An Overview of the Firm's Dividend Decision
391(4)
Why Are Dividends Special?
393(1)
The Dividend Payment Flow
394(1)
The Traditionalists' View of Cash Dividends
395(1)
The Modernists' Viewpoint-The M&M Model Without Taxes
396(5)
Homemade Dividend in a Perfect Market
397(2)
How Can the Firm's Dividend Policy Be Irrelevant?
399(1)
What About Superior Investment Opportunities?
400(1)
Summary of the Modernist Viewpoint on Dividend Policy
401(1)
Market Imperfections and Dividend Policy
401(2)
The M&M Model with Taxes
401(2)
The Miller Tax Model
403(1)
Summary of the Two Tax Models for Dividends
404(1)
Dividends and Bankruptcy
404(3)
Bankruptcy and Option Theory
405(1)
The Bankruptcy Option in Practice
405(2)
Dividends and Agency Costs
407(1)
Dividends and Information Signaling
408(1)
Stock Dividends and Stock Splits
409(2)
A Final Wrap-up
411(10)
14 Corporate Ethics and Shareholder Wealth Maximation
421(22)
Corporate Ethics Introduced
422(1)
Can Corporations Act Ethically
423(1)
Two Approaches to Corporate Ethics
424(2)
The Contractual-Rights Approach to Corporate Ethics
424(1)
The Societal-Good Approach to Corporate Ethics
425(1)
Debating the Two Approaches to Corporate Ethics
425(1)
Unrequired Behavior Versus Required Behavior: Outhttas Versus Gottas
426(2)
Oughttas
427(1)
Gottas
427(1)
Personal Versus Public-Policy Debates
428(2)
Personal Ethical Decisions
428(1)
Public-Policy Ethical Decisions
428(2)
Corporate Ethics and Shareholder Wealth Maximization
430(2)
Corporate Ethics and Market Values
432(5)
Appendix 14.1: Overviewing the History of the Philosophy of Ethics and Economics
437(3)
Appendix 14.2: The Origin of Individual Rights
440(3)
15 Financial Analysis
443(32)
Two Views of Financial Analysis
445(2)
Modernists'View of Financial Analysis
445(2)
Traditionalists'View of Financial Analysis
447(1)
Financial Statements
447(7)
The Balance Sheet
448(3)
The Income Statement
451(3)
Summary of Income Statements
454(1)
Ratio Analysis
454(6)
Standards for Comparison of Financial Ratios
455(1)
Financial Ratio Example: The Walt Desney Company
455(3)
Problems with Ratio Analysis
458(1)
Systems of Ratio Analysis
459(1)
Financial Ratios As a Predictor of Performance
459(1)
Statement of Cash Flows
460(15)
The Statement of Cash Flows as a Summary of Balance Sheet Changes
460(1)
Complex Aspects of the Statement of Cash Flows
460(3)
The Starting Formate for a Statement of Cash Flows
463(1)
Alternative formats for a Statement of Cash Flows
463(1)
Summary of Statement of Cash Flows
464(11)
16 Working Capital Management
475(24)
An Overview of Working Capital Management
476(1)
The Three Tasks of Working Capital Management
476(1)
Current Asset Management
477(13)
Cash Management
477(5)
Marketable Securities Management
482(8)
Inventory Management
490(1)
Current Liability Management
490(9)
Accounts Payable Management
491(1)
Bank Loan and Notes Payable Management
492(1)
Current Debt Management
492(7)
17 Corporate Financial Planning
499(22)
Short-Term Financial Planning and the Cash Budget
500(4)
Cash Forecasting
504(1)
Long-Range financial Planning
505(16)
The Accounting Mechanics of a Financial Planning Model
505(1)
Condensing the Balance Sheet
506(1)
An Example of Compiling a Forecast
507(1)
The Slack Variable
508(1)
Using a Financial Planning Model
509(1)
The Planning Process of a New Business
509(1)
Summary of the Financial Planning Process
510(11)
18 International Finance
521(32)
An Overview of International Finance
522(1)
The Economics of Multiple Currencies
522(7)
The Foreign Exchange Market
522(1)
Exchange Rates
523(1)
The Spot Market for Foreign Exchange
524(2)
Perfect Markets and the Law of One Price
526(1)
The Law of One Price and Arbitrage Opportunities
527(1)
Imperfect Markets and the Law of One Price
528(1)
Purchasing Power Parity
528(1)
Multiple Currencies and the Passage of Time
529(10)
Forward contracts
530(1)
Futures Contracts
531(4)
Forward and Futures Contracts as a Double-Edged Sword
535(1)
To the Rescue: Options on Foreign Currency Risk
536(1)
Interest Rates and the Law of One Price
536(2)
The Interest Rate Parity Theorem
538(1)
Summary of the Forward, Futures, and Options Markets
539(1)
Multiple Currencies with Time and Risk
539(2)
A Review of the Theory of Risk
539(1)
The International Capital Asset Pricing Model
540(1)
Systematic Risk and Multiple Currencies
540(1)
Political Risk
541(2)
Overview of Political Risk
541(1)
Political Risk and Investment Decisions
542(1)
Innovative Financial Arrangements
542(1)
Practical Considerations of International Financial Management
543(10)
Payment for Goods
543(1)
Receipt of Goods
543(10)
19 Mergers and Other Reorganizations
553(22)
The Market for Corporate Control
554(4)
Mergers and Corporate Finance
555(1)
Friendly Versus Hostile Mergers
556(1)
The Traditional View of Corporate Reorganizations
558(4)
Types of Mergers
558(1)
Merger Law
558(1)
The Medium of Exchange in a Merger
559(1)
Motivations for Mergers-The Traditionalists' View
560(2)
Legal and Tax Aspects of Mergers
562(1)
The Modernists' View of Mergers
562(6)
Mergers Motivated by Managers
563(1)
Mergers Motivated by Owners
564(1)
Mergers and Changes in Shareholder Wealth
565(1)
Do the Tables Tell the Entire Story?
566(2)
A Modernists' Fairy Tale
568(1)
Divestitures and Liquidations
569(6)
20 Financial Engineering
575
An Overview of Financial Engineering
576(1)
Environmental Risk and Core Business Risk
576(1)
Risk Exposure Profiles
577(2)
Combining Risk Exposure Profiles: An Introduction
579(3)
The Use of Derivatives in Financial Engineering
582(11)
Call Options
582(2)
Put Options
584(1)
Forward Contracts and Futures Contracts
585(3)
Combining Derivative Positions
588(2)
Interest Rate Derivatives
590(1)
Delta Hedging
591(2)
Financial Engineering and Financial Theory
593

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