Table of Contents
Preface xi
List of Figures xiii
List of Tables xv
Acknowledgments xvii
About the Author xix
PART ONE Managing the Left-Hand Side of the Balance Sheet
CHAPTER 1 The Cost Of Capital 3
Calculation Pitfalls 3
Market Risk Premium (MRP) 5
Toward a Better Beta 10
The ‘‘Riskless Rate’’ 13
The Cost of Debt 14
Global Capital Costs 16
WACC and Hurdle Rates 23
CHAPTER 2 Fix: Finding Your Sources of Value 26
Why Shareowner Value? 27
Performance Measurement Pitfalls 28
Measuring Economic Profit and Value 30
Analyzing the Corporate Portfolio 35
Incorporating the Cost of Capacity 39
Value-Based Strategies and Tactics 43
Managing for Value 45
Balancing Performance with Value 52
CHAPTER 3 Sell: Creating Value Through Divestiture 54
Divestiture Creates Value 56
Sources of Value: Motives for Divestiture 58
Alternative Methods of Disposition 60
What Works Best for Whom? 63
What Happens Longer Term? 64
Practical Impediments to Divestiture 65
Financial Policy Considerations 70
Tax Considerations and Structural Refinements 70
CHAPTER 4 Grow: How To Make M&A Pay 73
M&A Today 73
Transactions that Create Value 77
M&A Fact and Fallacy 81
RX for the ‘‘Conglomerate Discount’’ 86
EVA and M&A 88
How ‘‘Serial Acquirers’’ Create Value 90
Financial Policy Considerations 93
Financing Growth 94
CHAPTER 5 Cash and The Optimal Capital Structure 97
Trends and Implications 98
How Much Is Too Much? 100
The Costs and Benefits of Excess Cash 105
How the Market Views Excess Cash 108
Optimal Capital Allocation 109
PART TWO Managing the Right-Hand Side of the Balance Sheet
CHAPTER 6 An Executive’s Guide to Credit Ratings 117
Trends and Implications 117
Empirical Evidence 123
Limitations of Quantitative Credit Analysis 123
What Metrics Matter Most? 126
Case Study: Treatment of Pension and Postretirement Liabilities 131
Multivariate Credit Models 133
Industry Considerations 135
Case Study: Property and Casualty Insurance 135
Application Issues 137
How to Manage Your Agencies 137
Case Study: Illustration of Secured and Unsecured Notching 139
CHAPTER 7 Today’s Optimal Capital Structure 141
Value-Based Financial Policy 141
Less Debt Is Now ‘‘Optimal’’ 143
Extend Duration When Rates Are Low 146
Maintain Financial Liquidity to ‘‘Insure’’ Your Equity 149
A New Perspective on Equity 151
Case Study: Does Tech Need Debt? 154
CHAPTER 8 Dividends and Buybacks: Calibrating Your Shareholder Distributions 160
The Cash Problem 162
Dividends Are Back 163
How Dividends and Buybacks Create Value 165
Should You Increase Your Dividend? 171
How Large Should Your Buyback Program Be? 178
How to Execute Your Share Repurchase Program 181
CHAPTER 9 The Stock Liquidity Handbook 187
Measuring Stock Liquidity 188
The ‘‘Liquidity Discount’’ 191
Implications of Stock Illiquidity 192
Solutions to Illiquidity 193
Stock Splits 195
PART THREE Managing the Enterprise
CHAPTER 10 Strategic Risk Management: Where ERM Meets Optimal Capital Structure 203
The Value of Risk Management 204
Mapping and Modeling Risk 209
Managing to a Benchmark 213
External Considerations and Constraints 216
ERM Case Study: Metallgesellschaft AG 219
Capital Structure Solutions 220
CHAPTER 11 Best Practices In Hedging 224
Which ‘‘Exposure’’ to Hedge 225
Hedge Horizon 230
Hedge Ratio 232
Options versus Forwards 233
Accounting Considerations 235
Implementation 236
CHAPTER 12 ERM Case Study: Reengineering The Corporate Pension 238
Why Now? 239
The Problems with Equity 240
The Case for More Bonds 243
Optimal Capital Structure Reprise 246
Capital Markets Solutions 248
The Boots Case 251
Why It Still Hasn’t Happened 252
APPENDIX A
Resources 254
Tools and Portals 254
New Research and Literature Search 254
Economic Research and Data 254
News and Market Data 254
Corporate Governance and Compensation 255
Other Agencies 255
Endnotes 256
References 268
Index 277
