Ready Notes to Accompany Fundamentals of Corporate Finance

Ready Notes to Accompany Fundamentals of Corporate Finance

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ISBN-13: 9780256119046
Publisher: McGraw-Hill Higher Education
Publication date: 01/01/1993
Pages: 376
Product dimensions: 6.50(w) x 1.50(h) x 9.50(d)

About the Author

Stephen Ross is presently the Franco Modigliani Professor of Finance and Economics at the Sloan School of Management, Massachusetts Institute of Technology. One of the most widely published authors in finance and economics, Professor Ross is recognized for his work in developing the Arbitrage Pricing Theory and his substantial contributions to the discipline through his research in signaling, agency theory, option pricing, and the theory of the term structure of interest rates, among other topics. A past president of the American Finance Association, he currently serves as an associate editor of several academic and practitioner journals. He is a trustee of CalTech, a director of the College Retirement Equity Fund (CREF), and Freddie Mac. He is also the co-chairman of Roll and Ross Asset Management Corporation.

Randoloph W. Westerfield is Dean of the Marshall School of Business at University of Southern California and holder of the Robert R. Dockson Dean’s Chair of Business Administration.From 1988 to 1993, Professor Westerfield served as the chairman of the School’s finance and business economics department and the Charles B. Thornton Professor of Finance. He came to USC from The Wharton School, University of Pennsylvania, where he was the chairman of the finance department and member of the finance faculty for 20 years. His areas of expertise include corporate financial policy, investment management and analysis, mergers and acquisitions, and stock market price behavior. Professor Westerfield has served as a member of the Continental Bank trust committee, supervising all activities of the trust department. He has been consultant to a number of corporations,including AT&T, Mobil Oil and Pacific Enterprises, as well as to the United Nations, the U.S. Department of Justice and Labor, and the State of California.

Bradford D. Jordan is Professor of Finance and Gatton Research Fellow in the Carol Martin Gatton College of Business and Economics at the University of Kentucky. He has a long-standing interest in both applied and theoretical issues in corporate finance, and has extensive experience teaching all levels of corporate finance and financial management policy. Professor Jordan has published numerous articles on issues such as cost of capital, capital structure, and the behavior of security prices.

Table of Contents

Chapter Outline
A Simplified Organizational Chart
Forms of Organization
Limited Liability Companies
The Goal of Financial Management
The Agency Problem
Financial Markets
Cash Flows between the Firm and the Fin'l Markets
Chapter 1 Quick Quiz
Chapter Outline
The Balance Sheet
GAAP versus Cash Flow Time Line
Taxes
Marginal versus Average Corporate Tax Rates
Cash Flow Example (3 pages)
Cash Flow Summary
Hermetic, Inc., Balance Sheet
Hermetic, Inc., Income Statement
Hermetic, Inc., Cash Flow from Assets
Chapter 2 Quick Quiz
Solution to Problem 2.6
Solution to Problem 2.11
Solution to Problem 2.12
Solution to Problem 2.13
Chapter Outline
Hermetic, Inc., Balance Sheet (2 pages)
Hermetic, Inc., Income Statement
Statement of Cash Flows (2 pages)
Hermetic, Inc., Statement of Cash Flows (2 pages)
Hermetic, Inc., Common-Size Balance Sheet (3 pages)
Hermetic, Inc., Common-Size Income Statement
Things to Consider When Using Financial Ratios
Categories of Financial Ratios
Common Financial Ratios (5 pages)
The Du Pont Identity (2 pages)
Ratio Comparison across Business Types (2 pages)
A Brief Case History of Hermetic, Inc.
Chapter 3 Quick Quiz
Solution to Problem 3.2
Solution to Problem 3.9 (3 pages)
Chapter Outline
Financial Planning Model Ingredients
Example: A Simple Financial Planning Model (2 pages)
The Percentage of Sales Approach (2 pages)
Pro Forma Statements (3 pages)
The Percentage of Sales Approach: General Formulas (2 pages)
The Percentage of Sales Approach: A Financing Plan (2 pages)
The Percentage of Sales Approach: What About Capacity?
Growth and External Financing (2 pages)
Growth and Financing Needed for the Hoffman Company
The Internal Growth Rate
The Sustainable Growth Rate
Summary of Internal and Sustainable Growth Rates
Questions the Financial Planner Should Consider
Chapter 4 Quick Quiz
Solution to Problem 4.8 (2 pages)
Solution to Problem 4.14 (2 pages)
Chapter Outline
Future Value for a Lump Sum (3 pages)
Chapter 5 Quick Quiz-Part 1 of 5 (2 pages)
Interest on Interest Illustration
Future Value of $100 at 10 Percent (Table 5.1)
Chapter 5 Quick Quiz-Part 2 of 5 (2 pages)
Present Value for a Lump Sum (2 pages)
Present Value of $1 for Different Periods and Rates (Figure 5.3)
Chapter 5 Quick Quiz-Part 3 of 5
Chapter 5 Quick Quiz-Part 4 of 5 (2 pages)
Summary of Time Value Calculations (Table 5.4, 2 pages)
Chapter 5 Quick Quiz-Part 5 of 5 (2 pages)
Solution to Problem 5.6 (2 pages)
Solution to Problem 5.10
Chapter Outline
Future Value Calculated (Fig. 6.3-6.4)
Present Value Calculated (Fig. 6.5-6.6)
Annuities and Perpetuities -- Basic Formulas
Examples: Annuity Present Value (2 pages)
Chapter 6 Quick Quiz -- Part 1 of 4 (2 pages)
Example: Annuity Future Value
Chapter 6 Quick Quiz -- Part 2 of 4 (2 pages)
Summary of Annuity and Perpetuity Calculations (Table 6.2)
Example: Perpetuity Calculations
Chapter 6 Quick Quiz -- Part 3 of 4 (2 pages)
Compounding Periods, EARs, and APRs (3 pages)
Example: Cheap Financing or Rebate?
Chapter 6 Quick Quiz -- Part 4 of 4 (2 pages)
Example: Amortization Schedule-Fixed Principal
Example: Amortization Schedule-Fixed Payments
Solution to Problem 6.10
Solution to Problem 6.11
Chapter Outline (2 pages)
Bond Features (2 pages)
Bond Rates and Yields (2 pages)
Valuing a Bond
Example: A Discount Bond
Example: A Premium Bond
Bond Price Sensitivity to YTM
The Bond Pricing Equation
Interest Rate Risk and Time to Maturity (Fig. 7.2)
Bond Pricing Theorems
Features of a May Department Stores Bond (2 pages)
The Bond Indenture
Bond Ratings (2 pages)
Sample Wall Street Journal Bond Quotation (Fig. 7.3)
Sample Wall Street Journal U.S. Treasury Note and Bond Prices (Fig. 7.4)
The Historical Real Rate of Return on Long-Term U.S. Treasuries
Inflation and Returns (4 pages)
The Treasury Yield Curve (Figure 7.7)
Factors Affecting Bond Yields
Chapter 7 Quick Quiz
Solution to Problem 7.9 (2 pages)
Solution to Problem 7.14 (2 pages)
Solution to Problem 7.18 (4 pages)
Chapter Outline
Common Stock Cash Flows and the Fundamental Theory of Valuation
Common Stock Valuation: The Zero Growth Case (2 pages)
Common Stock Valuation: The Constant Growth Case (2 pages)
Stock Price Sensitivity to Dividend Growth, g
Stock Price Sensitivity to Required Return, r
Common Stock Valuation: The Nonconstant Growth Case
Chapter 8 Quick Quiz -- Part 1 of 3
Chapter 8 Quick Quiz -- Part 2 of 3
Summary of Stock Valuation (Table 8.1)
Chapter 8 Quick Quiz -- Part 3 of 3 (2 pages)
Sample Stock Market Quotation from The Wall Street Journal (Fig 8.2)
Solution to Problem 8.1
Solution to Problem 8.10 (2 pages)
Chapter Outline
NPV Illustrated (2 pages)
Underpinnings of the NPV Rule
Payback Rule Illustrated
Ordinary and Discounted Payback (Table 9.3)
Discounted Payback Illustrated
Average Accounting Return Illustrated (2 pages)
Internal Rate of Return Illustrated (2 pages)
Net Present Value Profile
Multiple Rates of Return (3 pages)
IRR, NPV, and Mutually Exclusive Projects
Profitability Index Illustrated (2 pages)
Summary of Investment Criteria (2 pages)
Chapter 9 Quick Quiz
Solution to Problem 9.3 (2 pages)
Solution to Problem 9.7 (2 pages)
Chapter Outline
Fundamental Principles of Project Evaluation
Incremental Cash Flows
Example: Preparing Pro Forma Statements (3 pages)
Example: Using Pro Formas for Project Evaluation (3 pages)
Example: Estimating Changes in Net Working Capital (3 pages)
Modified ACRS Property Classes (Table 10.6)
Modified ACRS Depreciation Allowances (Table 10.7)
MACRS Depreciation: An Example
Example: Fairways Equipment and Operating Costs (2 pages)
Example: Fairways Revenues, Depreciation, and Other Costs (3 pages)
Example: Fairways Pro Forma Income Statement
Example: Fairways Projected Increase in NWC
Example: Fairways Cash Flows (2 pages)
Alternative Definitions of OCF (2 pages)
Chapter 10 Quick Quiz -- Part 1 of 3 (2 pages)
Example: A Cost-Cutting Proposal (2 pages)
Chapter 10 Quick Quiz -- Part 2 of 3 (2 pages)
Example: Setting the Bid Price (6 pages)
Example: Equivalent Annual Cost Analysis (5 pages)
Chapter 10 Quick Quiz -- Part 3 of 3 (3 pages)
Solution to Problem 10.5 (2 pages)
Solution to Problem 10.14 (2 pages)
Solution to Problem 10.26 (3 pages)
Chapter Outline
Evaluating NPV Estimates I: The Basic Problem
Evaluating NPV Estimates II: Scenario and Other "What-If" Analyses
Fairways Driving Range Example (2 pages)
Fairways Driving Range Scenario Analysis (2 pages)
Fairways Driving Range Sensitivity Analysis (2 pages)
Fairways Driving Range: Rentals versus NPV
Fairways Driving Range: Total Cost Calculations
Fairways Driving Range: Break-Even Analysis
Fairways Driving Range Accounting Break-Even Quantity
Chapter 11 Quick Quiz -- Part 1 of 2 (2 pages)
Summary of BE Measures (Table 11.1)
Fairways Driving Range DOL
Managerial Options and Capital Budgeting
Capital Rationing
Chapter 11 Quick Quiz -- Part 2 of 2
Solution to Problem 11.1 (2 pages)
Solution to Problem 11.7 (2 pages)
Solution to Problem 11.13
Chapter Outline
Risk, Return, and Financial Markets
Percentage Returns (Fig. 12.2) (2 pages)
The Importance of Financial Markets in the Economy
A $1 Investment in Different Types of Portfolios: 1926-1996 (Fig. 12.4)
Year-to-Year Total Returns on Common Stocks: 1926-1996
Year-to-Year Total Returns on Small-Company Stocks: 1926-1996
Year-to-Year Total Returns on Bonds and Bills: 1926-1996 (Fig. 12.7)
Year-to-Year Inflation: 1926-1996 (Fig. 12.8)
Historical Dividend Yield on Common Stocks
The Five Largest One-Day Percentage Declines in the DJIA
S&P 500 Risk Premiums: 1926-1996
S&P 500 Small Stock Risk Premiums: 1926-1996
Average Annual Returns and Risk Premiums: 1926-1996 (Table 12.3)
Frequency Distribution of Returns on Large-Company Stocks: 1926-1996 (Fig 12.15)
Historical Returns, Standard Deviations, and Frequency Distributions: 1926-1996 (Fig. 12.10)
The Normal Distribution (Fig. 12.11)
Two Views on Market Efficiency
Reaction of Stock Prices to New Information (Fig. 12.12)
Chapter 12 Quick Quiz (4 pages)
Solution to Problem 12.3 (2 pages)
Solution to Problem 12.7 (2 pages)
Chapter Outline
Expected Return and Variance: Basic Ideas
Example: Calculating the Expected Return (2 pages)
Calculation of Expected Return (Table 13.3)
Example: Calculating the Variance
Example: Expected Returns and Variances (2 pages)
Example: Portfolio Expected Returns and Variances (3 pages)
The Effect of Diversification on Portfolio Variance
Announcements, Surprises, and Expected Returns
Risk: Systematic and Unsystematic
Peter Bernstein on Risk and Diversification
Standard Deviations of Annual Portfolio Returns (Table 13.7)
Portfolio Diversification (Figure 13.1)
Beta Coefficients for Selected Companies (Table 13.8)
Example: Portfolio Beta Calculations
Example: Portfolio Expected Returns and Betas (2 pages)
Return, Risk, and Equilibrium (2 pages)
The Capital Asset Pricing Model
The Security Market Line (SML) (Fig. 13.4)
Summary of Risk and Return (Table 13.9)
Chapter 13 Quick Quiz
Solution to Problem 13.9 (2 pages)
Solution to Problem 13.21 (2 pages)
Chapter Outline
The Cost of Capital: Issues
The Dividend Growth Model Approach
Example: Estimating the Dividend Growth Rate
Example: The SML Approach
Costs of Debt and Preferred Stock (2 pages)
The Weighted Average Cost of Capital
Example: Eastman Chemical's WACC (2 pages)
Summary of Cost of Capital Calculations (Table 14.1) (2 pages)
Divisional and Project Costs of Capital
The Security Market Line and the WACC (Fig. 14.1)
The Security Market Line and the Subjective Approach (Fig. 14.2)
Chapter 14 Quick Quiz
Solution to Problem 14.16 (3 pages)
Solution to Problem 14.17 (2 pages)
Solution to Problem 14.20 (2 pages)
Chapter Outline
Evaluation Activities Carried Out By Venture Capitalists
Choosing a Venture Capitalist
The Basic Procedure for a New Issue
A Red Herring (4 pages)
A Tombstone Ad (3 pages)
Methods of Issuing New Securities (2 pages)
The Ten Largest U.S. Corporate IPOs
Average Initial Returns by Month for SEC-Registered Initial Public Offerings (Fig. 15.2)
Number of Offerings by Month for SEC-Registered Initial Public Offerings (Fig. 15.3)
Average Initial Returns Categorized by Annual Sales of Issuing Firm (Table 15.3)
Direct and Indirect Costs, in Percentages, of Equity IPOs (Table 15.5)
Rights Offering: Basic Concepts
The Value of a Right (2 pages)
Ex Rights Stock Prices (Fig. 15.4)
Rights Offerings: Issues
New Issues and Dilution
Chapter 15 Quick Quiz
Solution to Problem 15.1 (2 pages)
Chapter Outline
What's Your Financing I. Q.? (2 pages)
Capital Structure, Cost of Capital, and the Value of the Firm
Example: Computing Break-Even EBIT
Financial Leverage, EPS and EBIT
Example: Homemade Leverage and ROE (2 pages)
Milestones in Finance: The M&M Propositions (2 pages)
The Cost of Equity and the WACC (Fig. 16.3)
The CAPM, the SML, and Proposition II
Business Risk and Financial Risk
Debt, Taxes, and Firm Value (2 pages)
Example: Debt, Taxes, and the WACC (2 pages)
Taxes, the WACC, and Proposition II
Modigliani and Miller Summary (Table 16.6) (2 pages)
The Optimal Capital Structure and the Value of the Firm (Fig. 16.6)
The Optimal Capital Structure and the Cost of Capital (Fig. 16.7)
The Extended Pie Model
Chapter 16 Quick Quiz
Solution to Problem 16.1 (3 pages)
Solution to Problem 16.11
Solution to Problem 16.12 (2 pages)
Chapter Outline
Types of Distributions to Shareholders
Example of Procedure for Dividend Payment (Fig. 17.1) (2 pages)
Does Dividend Policy Matter? (2 pages)
Dividends and the Real World
Example: Residual Dividend Policy
The Best of All Worlds? Establishing a Compromise Dividend Policy
Example: Stock Repurchase Announcement
The Number of Announced Share Repurchases 1990-1996
Example: The Effects of a Cash Dividend versus a Share Repurchase (4 pages)
Stock Dividends and Stock Splits
Accounting Treatment of Stock Dividends and Stock Splits (2 pages)
Chapter 17 Quick Quiz
Solution to Problem 17.8 (2 pages)
Solution to Problem 17.12 (2 pages)
Solution to Problem 17.16 (3 pages)
Chapter Outline
Operating and Cash Cycles Illustrated (Fig. 18.1)
Managers Who Deal with Short-term Financial Problems (Table 18.1)
Survey: The Importance of Short-Term Finance and Planning
Hermetic, Inc., Operating Cycle (2 pages)
Hermetic, Inc., Cash Cycle
The Size of the Firm's Investment in Current Assets
Carrying Costs and Shortage Costs (Fig. 18.2) (4 pages)
Financing Policy for an "Ideal" Economy (Fig. 18.3)
Alternative Asset Financing Policies (Fig. 18.5) (2 pages)
A Compromise Financing Policy (Fig. 18.6)
Example: Cash Budget for Ajax Co. (6 pages)
Short-Term Borrowing
Chapter 18 Quick Quiz
Solution to Problem 18.6 (3 pages)
Solution to Problem 18.9 (2 pages)
Solution to Problem 18.12 (2 pages)
Chapter Outline
Key Issues: Cash and Liquidity Management
Reasons for Holding Cash
Understanding Float
Check Clearing Illustrated
Overview of Lockbox Processing (Fig. 19.3)
Lockboxes and Concentration Banks in a Cash Management System (Fig. 19.4)
Zero-Balance Accounts (Fig. 19.5)
Money Market Securities
Chapter 19 Quick Quiz
Solution to Problem 19.2 (2 pages)
Solution to Problem 19.11 (3 pages)
Cost of Holding Cash (Fig. 19A.1)
The Miller-Orr Model (Fig. 19A.3)
Chapter Outline
Credit and Inventory Management: Key Issues
Components of Credit Policy
The Cash Flows from Granting Credit
Determinants of the Length of the Credit Period
Credit Policy Effects
Evaluating a Proposed Credit Policy (2 pages)
The Costs of Granting Credit (Fig. 20.1)
The Five Cs of Credit
ABC Inventory Analysis (Fig. 20.3)
Costs of Holding Inventory (Fig. 20.4)
Inventory Holdings for the Eyssell Corporation (Fig. 20.5)
Safety Stocks and Reorder Points (Fig. 20.6) (3 pages)
Chapter 20 Quick Quiz
Solution to Problem 20.5 (2 pages)
Solution to Problem 20.10 (2 pages)
Solution to Problem 20.11
Chapter Outline
Example: Statement of Risk Management Policy at Walt Disney Co.
Changes in Five-Year Treasury Bond Rates: 1960-93 (Fig. 21.3)
The Risk Management Process
Risk Profile for a Wheat Grower (Fig. 21.6)
Risk Profile for a Wheat Buyer (Fig. 21.7)
Payoff Profiles for a Forward Contract (Fig. 21.8)
Sample Wall Street Journal Futures Price Quotations (Table 21.1) (2 pages)
Illustration of an Interest Rate Swap (Fig. 21.11)
Option Payoff Profiles (Fig. 21.13) (4 pages)
Sample Wall Street Journal Futures Option Price Quotations (Table 21.2)
Hedging with Options (Fig. 21.14) (2 pages)
Chapter 21 Quick Quiz
Solution to Problem 21.1
Solution to Problem 21.4 (2 pages)
Chapter Outline
Option Terminology
A Sample Wall Street Journal Option Quotation (Table 22.1)
Value of a Call Option at Expiration (Fig. 22.1)
Value of a Call Option Before Expiration (Fig. 22.2)
Five Factors That Determine Option Values (Table 22.2)
Terminology: Convertible Bonds
Minimum Value of a Convertible Bond (Fig. 22.3)
Value of a Convertible Bond (Fig. 22.4)
The Case For and Against Convertibles (Table 22.4)
Other Options
Chapter 22 Quick Quiz
Solution to Problem 22.2 (2 pages)
Solution to Problem 22.4 (2 pages)
Solution to Problem 22.6
Chapter Outline
How to Make a Merger Work
The Mechanics of Mergers and Acquisitions (2 pages)
A Note on Takeovers
Reasons for Mergers and Acquisitions (3 pages)
Acquisitions and EPS Growth (2 pages)
Defensive Tactics
Adoption of a Share Rights Plan (SRP) (Fig. 23.1) (3 pages)
Evidence on Acquisitions (2 pages)
Chapter 23 Quick Quiz
Solution to Problem 23.7 (2 pages)
Solution to Problem 23.8 (2 pages)
Chapter Outline
Leasing versus Buying (Fig. 24.1)
Types of Leases
Leasing and the Balance Sheet (Table 24.1)
Criteria for a Capital Lease
When is a Lease a Lease?
Incremental Cash Flows for Tasha Co. (Table 24.2)
Chapter 24 Quick Quiz
Solution to Problem 24.1 (2 pages)
Solution to Problem 24.2 (2 pages)
Chapter Outline
Domestic Financial Management and International Financial Management
International Finance Terminology
The Number and Value of Non-U.S. Firms Listed on the NYSE: 1990-1996
Global Capital Markets-Representative Listing
International Currency Symbols (Table 25.1) (2 pages)
Exchange Rate Quotations (Fig. 25.1)
Triangle Arbitrage
Interest Rates in Selected Countries
Alternative Approaches to Overseas Production
International Capital Budgeting: An Example
Types of Political Risk
The Riskiest Countries in Which to do Business
Chapter 25 Quick Quiz
Solution to Problem 25.3 (2 pages)
Solution to Problem 25.7
Solution to Problem 25.9 (2 pages)

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