Additional Information
Book Details
Abstract
For MBA/graduate students taking a course in corporate finance.
An Emphasis on Core Financial Principles to Elevate Individuals’ Financial Decision Making
Berk and DeMarzo's Corporate Finance uses a unifying valuation framework, the Law Of One Price, to present the core content instructors expect, the new ideas they want, and the pedagogy their students need to succeed.
Corporate Finance: The Core fits programs and individual professors who desire a streamlined book that is specifically tailored to the topics covered in the first one-semester course. For programs and professors who would like to use a text in a two semester, or more, sequence, please see Corporate Finance, the 31-chapter book also by Jonathan Berk and Peter DeMarzo.
MyFinanceLab™ not included. Students, if MyFinanceLab is a recommended/mandatory component of the course, please ask your instructor for the correct ISBN and course ID. MyFinanceLab should only be purchased when required by an instructor. Instructors, contact your Pearson representative for more information.
MyFinanceLab is an online homework, tutorial, and assessment product designed to personalize learning and improve results. With a wide range of interactive, engaging, and assignable activities, students are encouraged to actively learn and retain tough course concepts.
Table of Contents
| Section Title | Page | Action | Price |
|---|---|---|---|
| Cover\r | Cover | ||
| Title Page\r | 5 | ||
| Copyright Page\r | 6 | ||
| Brief Contents\r | 7 | ||
| Detailed Contents\r | 8 | ||
| PART 1 INTRODUCTION | 33 | ||
| Chapter 1 The Corporation | 34 | ||
| 1.1 The Four Types of Firms | 35 | ||
| Sole Proprietorships | 35 | ||
| Partnerships | 36 | ||
| Limited Liability Companies | 37 | ||
| Corporations | 37 | ||
| Tax Implications for Corporate Entities\r | 38 | ||
| Corporate Taxation Around the World | 39 | ||
| 1.2 Ownership Versus Control of Corporations\r | 39 | ||
| The Corporate Management Team | 39 | ||
| INTERVIEW with David Viniar | 40 | ||
| The Financial Manager | 41 | ||
| GLOBAL FINANCIAL CRISIS The Dodd-Frank Act | 42 | ||
| The Goal of the Firm | 42 | ||
| The Firm and Society | 43 | ||
| Ethics and Incentives within Corporations | 43 | ||
| GLOBAL FINANCIAL CRISIS The Dodd-Frank Act on Corporate Compensation and Governance | 44 | ||
| Citizens United v. Federal Election Commission | 44 | ||
| Airlines in Bankruptcy | 46 | ||
| 1.3 The Stock Market | 46 | ||
| Primary and Secondary Stock Markets | 47 | ||
| Traditional Trading Venues | 47 | ||
| INTERVIEW with Frank Hatheway | 48 | ||
| New Competition and Market Changes\r | 49 | ||
| Dark Pools | 50 | ||
| MyFinanceLab | 51 | ||
| Key Terms | 51 | ||
| Further Reading | 52 | ||
| Problems | 52 | ||
| Chapter 2 Introduction to Financial Statement Analysis | 55 | ||
| 2.1 Firms’ Disclosure of Financial Information\r | 56 | ||
| Preparation of Financial Statements | 56 | ||
| International Financial Reporting Standards | 56 | ||
| INTERVIEW with Ruth Porat | 57 | ||
| Types of Financial Statements | 58 | ||
| 2.2 The Balance Sheet | 58 | ||
| Assets | 59 | ||
| Liabilities | 60 | ||
| Stockholders’ Equity | 61 | ||
| Market Value Versus Book Value | 61 | ||
| Enterprise Value | 62 | ||
| 2.3 The Income Statement | 62 | ||
| Earnings Calculations | 63 | ||
| 2.4 The Statement of Cash Flows | 64 | ||
| Operating Activity | 65 | ||
| Investment Activity | 66 | ||
| Financing Activity | 66 | ||
| 2.5 Other Financial Statement Information\r | 67 | ||
| Statement of Stockholders’ Equity | 67 | ||
| Management Discussion and Analysis\r | 68 | ||
| Notes to the Financial Statements | 68 | ||
| 2.6 Financial Statement Analysis | 69 | ||
| Profitability Ratios | 69 | ||
| Liquidity Ratios | 70 | ||
| Working Capital Ratios | 71 | ||
| Interest Coverage Ratios | 72 | ||
| Leverage Ratios | 73 | ||
| Valuation Ratios | 75 | ||
| COMMON MISTAKE Mismatched Ratios | 75 | ||
| Operating Returns | 76 | ||
| The DuPont Identity | 78 | ||
| 2.7 Financial Reporting in Practice | 80 | ||
| Enron | 80 | ||
| WorldCom | 80 | ||
| Sarbanes-Oxley Act | 81 | ||
| GLOBAL FINANCIAL CRISIS Bernard Madoff’s Ponzi Scheme | 82 | ||
| Dodd-Frank Act | 82 | ||
| MyFinanceLab | 83 | ||
| Key Terms | 84 | ||
| Further Reading | 85 | ||
| Problems | 85 | ||
| Data Case | 92 | ||
| Chapter 3 Financial Decision Making and the Law of One Price | 93 | ||
| 3.1 Valuing Decisions | 94 | ||
| Analyzing Costs and Benefits | 94 | ||
| Using Market Prices to Determine Cash Values | 95 | ||
| When Competitive Market Prices Are Not Available | 97 | ||
| 3.2 Interest Rates and the Time Value of Money | 97 | ||
| The Time Value of Money | 97 | ||
| The Interest Rate: An Exchange Rate Across Time | 97 | ||
| 3.3 Present Value and the NPV Decision Rule | 100 | ||
| Net Present Value | 100 | ||
| The NPV Decision Rule | 101 | ||
| NPV and Cash Needs | 103 | ||
| 3.4 Arbitrage and the Law of One Price | 104 | ||
| Arbitrage | 104 | ||
| Law of One Price | 105 | ||
| 3.5 No-Arbitrage and Security Prices | 105 | ||
| Valuing a Security with the Law of One Price | 105 | ||
| An Old Joke | 109 | ||
| The NPV of Trading Securities and Firm Decision Making | 109 | ||
| Valuing a Portfolio | 110 | ||
| GLOBAL FINANCIAL CRISIS Liquidity and the Informational Role of Prices | 111 | ||
| Arbitrage in Markets | 112 | ||
| Where Do We Go from Here? | 113 | ||
| MyFinanceLab | 114 | ||
| Key Terms | 115 | ||
| Further Reading | 115 | ||
| Problems | 115 | ||
| Appendix The Price of Risk | 119 | ||
| Risky Versus Risk-Free Cash Flows | 119 | ||
| Arbitrage with Transactions Costs | 124 | ||
| PART 2 TIME, MONEY, AND INTEREST RATES\r | 129 | ||
| Chapter 4 The Time Value of Money | 130 | ||
| 4.1 The Timeline | 131 | ||
| 4.2 The Three Rules of Time Travel | 132 | ||
| Rule 1: Comparing and Combining Values | 132 | ||
| Rule 2: Moving Cash Flows Forward in Time | 133 | ||
| Rule 3: Moving Cash Flows Back in Time | 134 | ||
| Rule of 72 | 135 | ||
| Applying the Rules of Time Travel | 136 | ||
| 4.3 Valuing a Stream of Cash Flows | 138 | ||
| 4.4 Calculating the Net Present Value | 141 | ||
| USING EXCEL Calculating Present Values in Excel | 142 | ||
| 4.5 Perpetuities and Annuities | 143 | ||
| Perpetuities | 143 | ||
| Historical Examples of Perpetuities | 144 | ||
| COMMON MISTAKE Discounting One Too Many Times | 146 | ||
| Annuities | 146 | ||
| Formula for an Annuity Due | 149 | ||
| Growing Cash Flows | 149 | ||
| 4.6 Using an Annuity Spreadsheet or Calculator\r | 154 | ||
| 4.7 Non-Annual Cash Flows | 156 | ||
| 4.8 Solving for the Cash Payments | 157 | ||
| 4.9 The Internal Rate of Return | 160 | ||
| USING EXCEL Excel’s IRR Function\r | 163 | ||
| MyFinanceLab | 164 | ||
| Key Terms | 165 | ||
| Further Reading | 166 | ||
| Problems | 166 | ||
| Data Case | 172 | ||
| Appendix Solving for the Number of Periods | 173 | ||
| Chapter 5 Interest Rates | 175 | ||
| 5.1 Interest Rate Quotes and Adjustments\r | 176 | ||
| The Effective Annual Rate | 176 | ||
| COMMON MISTAKE Using the Wrong Discount Rate in the Annuity Formula | 177 | ||
| Annual Percentage Rates | 178 | ||
| 5.2 Application: Discount Rates and Loans | 180 | ||
| 5.3 The Determinants of Interest Rates | 181 | ||
| GLOBAL FINANCIAL CRISIS Teaser Rates and Subprime Loans | 182 | ||
| Inflation and Real Versus Nominal Rates | 182 | ||
| Investment and Interest Rate Policy | 183 | ||
| The Yield Curve and Discount Rates | 184 | ||
| The Yield Curve and the Economy | 186 | ||
| COMMON MISTAKE Using the Annuity Formula When Discount Rates Vary by Maturity | 186 | ||
| INTERVIEW with Kevin M. Warsh | 188 | ||
| 5.4 Risk and Taxes | 189 | ||
| Risk and Interest Rates | 190 | ||
| After-Tax Interest Rates | 191 | ||
| 5.5 The Opportunity Cost of Capital | 192 | ||
| COMMON MISTAKE States Dig a $3 Trillion Hole by Discounting at the Wrong Rate | 193 | ||
| MyFinanceLab | 194 | ||
| Key Terms | 195 | ||
| Further Reading | 195 | ||
| Problems | 195 | ||
| Data Case | 200 | ||
| Appendix Continuous Rates and Cash Flows | 202 | ||
| Discount Rates for a Continuously Compounded APR | 202 | ||
| Continuously Arriving Cash Flows | 202 | ||
| Chapter 6 Valuing Bonds | 205 | ||
| 6.1 Bond Cash Flows, Prices, and Yields | 206 | ||
| Bond Terminology | 206 | ||
| Zero-Coupon Bonds | 206 | ||
| GLOBAL FINANCIAL CRISIS Negative Bond Yields | 208 | ||
| Coupon Bonds | 209 | ||
| 6.2 Dynamic Behavior of Bond Prices | 211 | ||
| Discounts and Premiums | 211 | ||
| Time and Bond Prices | 212 | ||
| Interest Rate Changes and Bond Prices\r | 214 | ||
| Clean and Dirty Prices for Coupon Bonds | 215 | ||
| 6.3 The Yield Curve and Bond Arbitrage\r | 217 | ||
| Replicating a Coupon Bond | 217 | ||
| Valuing a Coupon Bond Using Zero-Coupon Yields | 218 | ||
| Coupon Bond Yields | 219 | ||
| Treasury Yield Curves | 220 | ||
| 6.4 Corporate Bonds | 220 | ||
| Corporate Bond Yields | 221 | ||
| Are Treasuries Really Default-Free Securities? | 221 | ||
| Bond Ratings | 223 | ||
| Corporate Yield Curves | 224 | ||
| 6.5 Sovereign Bonds | 224 | ||
| GLOBAL FINANCIAL CRISIS The Credit Crisis and Bond Yields | 225 | ||
| GLOBAL FINANCIAL CRISIS European Sovereign Debt Yields: A Puzzle | 227 | ||
| INTERVIEW with Carmen M. Reinhart | 228 | ||
| MyFinanceLab | 229 | ||
| Key Terms | 230 | ||
| Further Reading | 231 | ||
| Problems | 231 | ||
| Data Case | 235 | ||
| Case Study | 236 | ||
| Appendix Forward Interest Rates | 238 | ||
| Computing Forward Rates | 238 | ||
| Computing Bond Yields from Forward Rates | 239 | ||
| PART 3 VALUING PROJECTS AND FIRMS | 243 | ||
| Chapter 7 Investment Decision Rules | 244 | ||
| 7.1 NPV and Stand-Alone Projects | 245 | ||
| Applying the NPV Rule | 245 | ||
| The NPV Profile and IRR | 245 | ||
| Alternative Rules Versus the NPV Rule | 246 | ||
| INTERVIEW with Dick Grannis | 247 | ||
| 7.2 The Internal Rate of Return Rule | 248 | ||
| Applying the IRR Rule | 248 | ||
| Pitfall | 248 | ||
| Pitfall | 249 | ||
| COMMON MISTAKE IRR Versus the IRR Rule | 251 | ||
| Pitfall | 251 | ||
| 7.3 The Payback Rule | 252 | ||
| Applying the Payback Rule | 252 | ||
| Payback Rule Pitfalls in Practice | 253 | ||
| Why Do Rules Other Than the NPV Rule Persist? | 254 | ||
| 7.4 Choosing Between Projects | 254 | ||
| NPV Rule and Mutually Exclusive Investments\r | 254 | ||
| IRR Rule and Mutually Exclusive Investments\r | 255 | ||
| The Incremental IRR | 256 | ||
| When Can Returns Be Compared?\r | 257 | ||
| COMMON MISTAKE IRR and Project Financing | 259 | ||
| 7.5 Project Selection with Resource Constraints\r | 259 | ||
| Evaluating Projects with Different Resource Requirements\r | 259 | ||
| Profitability Index | 260 | ||
| Shortcomings of the Profitability Index\r | 262 | ||
| MyFinanceLab | 262 | ||
| Key Terms | 263 | ||
| Further Reading | 263 | ||
| Problems | 263 | ||
| Data Case | 269 | ||
| Appendix Computing the NPV Profile Using Excel’s Data Table Function\r | 270 | ||
| Chapter 8 Fundamentals of Capital Budgeting\r | 271 | ||
| 8.1 Forecasting Earnings | 272 | ||
| Revenue and Cost Estimates | 272 | ||
| Incremental Earnings Forecast | 273 | ||
| Indirect Effects on Incremental Earnings\r | 275 | ||
| COMMON MISTAKE The Opportunity Cost of an Idle Asset | 276 | ||
| Sunk Costs and Incremental Earnings\r | 277 | ||
| COMMON MISTAKE The Sunk Cost Fallacy | 277 | ||
| Real-World Complexities | 278 | ||
| 8.2 Determining Free Cash Flow and NPV | 279 | ||
| Calculating Free Cash Flow from Earnings | 279 | ||
| Calculating Free Cash Flow Directly | 281 | ||
| Calculating the NPV | 282 | ||
| USING EXCEL Capital Budgeting Using a Spreadsheet Program | 283 | ||
| 8.3 Choosing Among Alternatives | 284 | ||
| Evaluating Manufacturing Alternatives | 284 | ||
| Comparing Free Cash Flows for Cisco’s Alternatives | 285 | ||
| 8.4 Further Adjustments to Free Cash Flow | 286 | ||
| GLOBAL FINANCIAL CRISIS The American Recovery and Reinvestment Act of 2009\r | 290 | ||
| 8.5 Analyzing the Project | 290 | ||
| Break-Even Analysis | 290 | ||
| Sensitivity Analysis | 291 | ||
| INTERVIEW with David Holland | 293 | ||
| Scenario Analysis | 294 | ||
| USING EXCEL Project Analysis Using Excel | 295 | ||
| MyFinanceLab | 296 | ||
| Key Terms | 298 | ||
| Further Reading | 298 | ||
| Problems | 298 | ||
| Data Case | 305 | ||
| Appendix MACRS Depreciation | 307 | ||
| Chapter 9 Valuing Stocks | 309 | ||
| 9.1 The Dividend-Discount Model | 310 | ||
| A One-Year Investor | 310 | ||
| Dividend Yields, Capital Gains, and Total Returns | 311 | ||
| The Mechanics of a Short Sale | 312 | ||
| A Multiyear Investor | 313 | ||
| The Dividend-Discount Model Equation | 314 | ||
| 9.2 Applying the Dividend-Discount Model | 314 | ||
| Constant Dividend Growth | 314 | ||
| Dividends Versus Investment and Growth | 315 | ||
| John Burr Williams’ Theory of Investment Value | 316 | ||
| Changing Growth Rates | 318 | ||
| Limitations of the Dividend-Discount Model | 320 | ||
| 9.3 Total Payout and Free Cash Flow Valuation Models\r | 320 | ||
| Share Repurchases and the Total Payout Model | 320 | ||
| The Discounted Free Cash Flow Model | 322 | ||
| 9.4 Valuation Based on Comparable Firms | 326 | ||
| Valuation Multiples | 326 | ||
| Limitations of Multiples | 328 | ||
| Comparison with Discounted Cash Flow Methods | 329 | ||
| Stock Valuation Techniques: The Final Word | 330 | ||
| INTERVIEW with Douglas Kehring | 331 | ||
| 9.5 Information, Competition, and Stock Prices | 332 | ||
| Information in Stock Prices | 332 | ||
| Competition and Efficient Markets | 333 | ||
| Lessons for Investors and Corporate Managers\r | 335 | ||
| Kenneth Cole Productions—What Happened?\r | 337 | ||
| The Efficient Markets Hypothesis Versus No Arbitrage | 338 | ||
| MyFinanceLab | 338 | ||
| Key Terms | 340 | ||
| Further Reading | 340 | ||
| Problems | 341 | ||
| Data Case | 346 | ||
| PART 4 RISK AND RETURN | 349 | ||
| Chapter 10 Capital Markets and the Pricing of Risk | 350 | ||
| 10.1 Risk and Return: Insights from 89 Years of Investor History | 351 | ||
| 10.2 Common Measures of Risk and Return\r | 354 | ||
| Probability Distributions | 354 | ||
| Expected Return | 354 | ||
| Variance and Standard Deviation | 355 | ||
| 10.3 Historical Returns of Stocks and Bonds | 357 | ||
| Computing Historical Returns | 357 | ||
| Average Annual Returns | 359 | ||
| The Variance and Volatility of Returns | 361 | ||
| Estimation Error: Using Past Returns to Predict the Future | 362 | ||
| Arithmetic Average Returns Versus Compound Annual Returns | 364 | ||
| 10.4 The Historical Trade-Off Between Risk and Return | 364 | ||
| The Returns of Large Portfolios | 365 | ||
| The Returns of Individual Stocks | 366 | ||
| 10.5 Common Versus Independent Risk | 367 | ||
| Theft Versus Earthquake Insurance: An Example | 367 | ||
| The Role of Diversification | 368 | ||
| 10.6 Diversification in Stock Portfolios | 369 | ||
| Firm-Specific Versus Systematic Risk | 370 | ||
| No Arbitrage and the Risk Premium | 371 | ||
| GLOBAL FINANCIAL CRISIS Diversification Benefits During Market Crashes | 373 | ||
| COMMON MISTAKE A Fallacy of Long-Run Diversification | 374 | ||
| 10.7 Measuring Systematic Risk | 375 | ||
| Identifying Systematic Risk: The Market Portfolio | 375 | ||
| Sensitivity to Systematic Risk: Beta | 375 | ||
| 10.8 Beta and the Cost of Capital | 378 | ||
| Estimating the Risk Premium | 378 | ||
| COMMON MISTAKE Beta Versus Volatility | 378 | ||
| The Capital Asset Pricing Model | 380 | ||
| MyFinanceLab | 380 | ||
| Key Terms | 382 | ||
| Further Reading | 382 | ||
| Problems | 382 | ||
| Data Case | 387 | ||
| Chapter 11 Optimal Portfolio Choice and the Capital Asset Pricing Model | 389 | ||
| 11.1 The Expected Return of a Portfolio | 390 | ||
| 11.2 The Volatility of a Two-Stock Portfolio\r | 391 | ||
| Combining Risks | 391 | ||
| Determining Covariance and Correlation | 392 | ||
| COMMON MISTAKE Computing Variance, Covariance, and Correlation in Excel | 394 | ||
| Computing a Portfolio’s Variance and Volatility | 395 | ||
| 11.3 The Volatility of a Large Portfolio | 397 | ||
| Large Portfolio Variance | 397 | ||
| Diversification with an Equally Weighted Portfolio | 398 | ||
| INTERVIEW with John Powers | 400 | ||
| Diversification with General Portfolios | 401 | ||
| 11.4 Risk Versus Return: Choosing an Efficient Portfolio\r | 401 | ||
| Efficient Portfolios with Two Stocks | 402 | ||
| The Effect of Correlation | 404 | ||
| Short Sales | 405 | ||
| Efficient Portfolios with Many Stocks | 406 | ||
| NOBEL PRIZES Harry Markowitz and James Tobin | 407 | ||
| 11.5 Risk-Free Saving and Borrowing | 409 | ||
| Investing in Risk-Free Securities | 409 | ||
| Borrowing and Buying Stocks on Margin | 410 | ||
| Identifying the Tangent Portfolio | 411 | ||
| 11.6 The Efficient Portfolio and Required Returns | 413 | ||
| Portfolio Improvement: Beta and the Required Return | 413 | ||
| Expected Returns and the Efficient Portfolio | 415 | ||
| 11.7 The Capital Asset Pricing Model | 417 | ||
| The CAPM Assumptions | 417 | ||
| Supply, Demand, and the Efficiency of the Market Portfolio | 418 | ||
| Optimal Investing: The Capital Market Line | 418 | ||
| 11.8 Determining the Risk Premium | 419 | ||
| Market Risk and Beta | 419 | ||
| NOBEL PRIZE William Sharpe on the CAPM | 421 | ||
| The Security Market Line | 422 | ||
| Beta of a Portfolio | 422 | ||
| Summary of the Capital Asset Pricing Model | 424 | ||
| MyFinanceLab | 424 | ||
| Key Terms | 427 | ||
| Further Reading | 427 | ||
| Problems | 428 | ||
| Data Case | 434 | ||
| Appendix The CAPM with Differing Interest Rates | 436 | ||
| The Efficient Frontier with Differing Saving and Borrowing Rates | 436 | ||
| The Security Market Line with Differing Interest Rates | 436 | ||
| Chapter 12 Estimating the Cost of Capital\r | 439 | ||
| 12.1 The Equity Cost of Capital | 440 | ||
| 12.2 The Market Portfolio | 441 | ||
| Constructing the Market Portfolio | 441 | ||
| Market Indexes | 441 | ||
| Value-Weighted Portfolios and Rebalancing | 442 | ||
| The Market Risk Premium | 443 | ||
| 12.3 Beta Estimation | 445 | ||
| Using Historical Returns | 445 | ||
| Identifying the Best-Fitting Line | 447 | ||
| Using Linear Regression | 448 | ||
| Why Not Estimate Expected Returns Directly? | 449 | ||
| 12.4 The Debt Cost of Capital | 449 | ||
| Debt Yields Versus Returns | 449 | ||
| COMMON MISTAKE Using the Debt Yield as Its Cost of Capital | 450 | ||
| Debt Betas | 451 | ||
| 12.5 A Project’s Cost of Capital | 452 | ||
| All-Equity Comparables | 452 | ||
| Levered Firms as Comparables | 453 | ||
| The Unlevered Cost of Capital | 453 | ||
| Industry Asset Betas | 455 | ||
| 12.6 Project Risk Characteristics and Financing\r | 457 | ||
| Differences in Project Risk | 457 | ||
| COMMON MISTAKE Adjusting for Execution Risk | 459 | ||
| Financing and the Weighted Average Cost of Capital | 459 | ||
| INTERVIEW with Shelagh Glaser | 460 | ||
| COMMON MISTAKE Using a Single Cost of Capital in Multi-Divisional Firms | 461 | ||
| 12.7 Final Thoughts on Using the CAPM | 462 | ||
| MyFinanceLab | 463 | ||
| Key Terms | 465 | ||
| Further Reading | 465 | ||
| Problems | 466 | ||
| Data Case | 470 | ||
| Appendix Practical Considerations When Forecasting Beta\r | 471 | ||
| Time Horizon | 471 | ||
| The Market Proxy | 471 | ||
| Beta Variation and Extrapolation | 471 | ||
| Outliers | 472 | ||
| COMMON MISTAKE Changing the Index to Improve the Fit | 473 | ||
| USING EXCEL Estimating Beta Using Excel | 474 | ||
| Other Considerations | 475 | ||
| Chapter 13 Investor Behavior and Capital Market Efficiency | 477 | ||
| 13.1 Competition and Capital Markets | 478 | ||
| Identifying a Stock’s Alpha | 478 | ||
| Profiting from Non-Zero Alpha Stocks | 479 | ||
| 13.2 Information and Rational Expectations\r | 480 | ||
| Informed Versus Uninformed Investors\r | 480 | ||
| Rational Expectations | 481 | ||
| 13.3 The Behavior of Individual Investors\r | 482 | ||
| Underdiversification and Portfolio Biases | 482 | ||
| Excessive Trading and Overconfidence\r | 483 | ||
| Individual Behavior and Market Prices\r | 485 | ||
| 13.4 Systematic Trading Biases | 485 | ||
| Hanging on to Losers and the Disposition Effect | 485 | ||
| NOBEL PRIZE Kahneman and Tversky’s Prospect Theory\r | 486 | ||
| Investor Attention, Mood, and Experience | 486 | ||
| Herd Behavior | 487 | ||
| Implications of Behavioral Biases | 487 | ||
| 13.5 The Efficiency of the Market Portfolio\r | 488 | ||
| Trading on News or Recommendations\r | 488 | ||
| NOBEL PRIZE The 2013 Prize: An Enigma? | 490 | ||
| The Performance of Fund Managers | 490 | ||
| The Winners and Losers | 493 | ||
| 13.6 Style-Based Techniques and the Market Efficiency Debate | 494 | ||
| Size Effects | 494 | ||
| INTERVIEW with Jonathan Clements | 496 | ||
| Momentum | 498 | ||
| Market Efficiency and the Efficiency of the Market Portfolio | 499 | ||
| Implications of Positive-Alpha Trading Strategies | 499 | ||
| 13.7 Multifactor Models of Risk | 501 | ||
| Using Factor Portfolios | 502 | ||
| Selecting the Portfolios | 503 | ||
| The Cost of Capital with Fama-French-Carhart Factor Specification | 504 | ||
| 13.8 Methods Used in Practice | 506 | ||
| Financial Managers | 506 | ||
| Investors | 507 | ||
| MyFinanceLab | 508 | ||
| Key Terms | 510 | ||
| Further Reading | 510 | ||
| Problems | 511 | ||
| Appendix Building a Multifactor Model | 517 | ||
| PART 5 CAPITAL STRUCTURE | 519 | ||
| Chapter 14 Capital Structure in a Perfect Market | 520 | ||
| 14.1 Equity Versus Debt Financing | 521 | ||
| Financing a Firm with Equity | 521 | ||
| Financing a Firm with Debt and Equity | 522 | ||
| The Effect of Leverage on Risk and Return | 523 | ||
| 14.2 Modigliani-Miller I: Leverage, Arbitrage, and Firm Value | 525 | ||
| MM and the Law of One Price | 525 | ||
| Homemade Leverage | 525 | ||
| MM and the Real World | 526 | ||
| The Market Value Balance Sheet | 527 | ||
| Application: A Leveraged Recapitalization\r | 528 | ||
| 14.3 Modigliani-Miller II: Leverage, Risk, and the Cost of Capital | 530 | ||
| Leverage and the Equity Cost of Capital | 530 | ||
| Capital Budgeting and the Weighted Average Cost of Capital\r | 531 | ||
| COMMON MISTAKE Is Debt Better Than Equity? | 534 | ||
| Computing the WACC with Multiple Securities\r | 534 | ||
| Levered and Unlevered Betas | 534 | ||
| NOBEL PRIZE Franco Modigliani and Merton Miller | 536 | ||
| 14.4 Capital Structure Fallacies | 537 | ||
| Leverage and Earnings per Share | 537 | ||
| GLOBAL FINANCIAL CRISIS Bank Capital Regulation and the ROE Fallacy | 539 | ||
| Equity Issuances and Dilution | 540 | ||
| 14.5 MM: Beyond the Propositions | 541 | ||
| MyFinanceLab | 542 | ||
| Key Terms | 543 | ||
| Further Reading | 543 | ||
| Problems | 544 | ||
| Data Case | 548 | ||
| Chapter 15 Debt and Taxes | 551 | ||
| 15.1 The Interest Tax Deduction | 552 | ||
| 15.2 Valuing the Interest Tax Shield | 554 | ||
| The Interest Tax Shield and Firm Value\r | 554 | ||
| Pizza and Taxes | 555 | ||
| The Interest Tax Shield with Permanent Debt | 555 | ||
| The Weighted Average Cost of Capital with Taxes | 556 | ||
| The Repatriation Tax: Why Some Cash-Rich Firms Borrow\r | 557 | ||
| The Interest Tax Shield with a Target Debt-Equity Ratio\r | 558 | ||
| 15.3 Recapitalizing to Capture the Tax Shield | 560 | ||
| The Tax Benefit | 560 | ||
| The Share Repurchase | 561 | ||
| No Arbitrage Pricing | 561 | ||
| Analyzing the Recap: The Market Value Balance Sheet | 562 | ||
| 15.4 Personal Taxes | 563 | ||
| Including Personal Taxes in the Interest Tax Shield | 563 | ||
| Valuing the Interest Tax Shield with Personal Taxes | 566 | ||
| Determining the Actual Tax Advantage of Debt | 567 | ||
| Cutting the Dividend Tax Rate | 567 | ||
| 15.5 Optimal Capital Structure with Taxes\r | 568 | ||
| Do Firms Prefer Debt? | 568 | ||
| Limits to the Tax Benefit of Debt | 571 | ||
| INTERVIEW with Andrew Balson | 572 | ||
| Growth and Debt | 573 | ||
| Other Tax Shields | 574 | ||
| The Low Leverage Puzzle | 574 | ||
| Employee Stock Options | 576 | ||
| MyFinanceLab | 576 | ||
| Key Terms | 577 | ||
| Further Reading | 577 | ||
| Problems | 578 | ||
| Data Case | 582 | ||
| Chapter 16 Financial Distress, Managerial Incentives, and Information\r | 583 | ||
| 16.1 Default and Bankruptcy in a Perfect Market | 584 | ||
| Armin Industries: Leverage and the Risk of Default | 584 | ||
| Bankruptcy and Capital Structure | 585 | ||
| 16.2 The Costs of Bankruptcy and Financial Distress | 586 | ||
| The Bankruptcy Code | 587 | ||
| Direct Costs of Bankruptcy | 587 | ||
| Indirect Costs of Financial Distress | 588 | ||
| GLOBAL FINANCIAL CRISIS The Chrysler Prepack | 591 | ||
| 16.3 Financial Distress Costs and Firm Value | 592 | ||
| Armin Industries: The Impact of Financial Distress Costs | 592 | ||
| Who Pays for Financial Distress Costs? | 592 | ||
| 16.4 Optimal Capital Structure: The Trade-Off Theory \r | 594 | ||
| The Present Value of Financial Distress Costs | 594 | ||
| Optimal Leverage | 595 | ||
| 16.5 Exploiting Debt Holders: The Agency Costs of Leverage | 597 | ||
| Excessive Risk-Taking and Asset Substitution\r | 597 | ||
| Debt Overhang and Under-Investment | 598 | ||
| GLOBAL FINANCIAL CRISIS Bailouts, Distress Costs, and Debt Overhang | 599 | ||
| Agency Costs and the Value of Leverage | 600 | ||
| The Leverage Ratchet Effect | 601 | ||
| Debt Maturity and Covenants | 602 | ||
| Why Do Firms Go Bankrupt? | 602 | ||
| 16.6 Motivating Managers: The Agency Benefits of Leverage\r | 603 | ||
| Concentration of Ownership | 604 | ||
| Reduction of Wasteful Investment | 604 | ||
| Excessive Perks and Corporate Scandals | 605 | ||
| GLOBAL FINANCIAL CRISIS Moral Hazard, Government Bailouts, and the Appeal of Leverage | 606 | ||
| Leverage and Commitment | 607 | ||
| 16.7 Agency Costs and the Trade-Off Theory | 607 | ||
| The Optimal Debt Level | 608 | ||
| Debt Levels in Practice | 609 | ||
| 16.8 Asymmetric Information and Capital Structure | 609 | ||
| Leverage as a Credible Signal | 609 | ||
| Issuing Equity and Adverse Selection | 611 | ||
| NOBEL PRIZE The 2001 Nobel Prize in Economics | 613 | ||
| Implications for Equity Issuance | 613 | ||
| Implications for Capital Structure | 614 | ||
| 16.9 Capital Structure: The Bottom Line | 617 | ||
| MyFinanceLab | 618 | ||
| Key Terms | 620 | ||
| Further Reading | 620 | ||
| Problems | 620 | ||
| Chapter 17 Payout Policy | 629 | ||
| 17.1 Distributions to Shareholders | 630 | ||
| Dividends | 630 | ||
| Share Repurchases | 632 | ||
| 17.2 Comparison of Dividends and Share Repurchases | 633 | ||
| Alternative Policy 1: Pay Dividend with Excess Cash | 633 | ||
| Alternative Policy 2: Share Repurchase (No Dividend) | 634 | ||
| COMMON MISTAKE Repurchases and the Supply of Shares | 636 | ||
| Alternative Policy 3: High Dividend (Equity Issue) | 636 | ||
| Modigliani-Miller and Dividend Policy Irrelevance\r | 637 | ||
| COMMON MISTAKE The Bird in the Hand Fallacy | 638 | ||
| Dividend Policy with Perfect Capital Markets\r | 638 | ||
| 17.3 The Tax Disadvantage of Dividends | 638 | ||
| Taxes on Dividends and Capital Gains | 639 | ||
| Optimal Dividend Policy with Taxes | 640 | ||
| 17.4 Dividend Capture and Tax Clienteles\r | 642 | ||
| The Effective Dividend Tax Rate | 642 | ||
| Tax Differences Across Investors | 643 | ||
| Clientele Effects | 644 | ||
| INTERVIEW with John Connors | 645 | ||
| 17.5 Payout Versus Retention of Cash | 647 | ||
| Retaining Cash with Perfect Capital Markets\r | 648 | ||
| Taxes and Cash Retention | 649 | ||
| Adjusting for Investor Taxes | 650 | ||
| Issuance and Distress Costs | 651 | ||
| Agency Costs of Retaining Cash | 652 | ||
| 17.6 Signaling with Payout Policy | 654 | ||
| Dividend Smoothing | 654 | ||
| Dividend Signaling | 655 | ||
| Royal & SunAlliance’s Dividend Cut | 656 | ||
| Signaling and Share Repurchases | 656 | ||
| 17.7 Stock Dividends, Splits, and Spin-Offs | 658 | ||
| Stock Dividends and Splits | 658 | ||
| Spin-Offs | 660 | ||
| Berkshire Hathaway’s A & B Shares | 661 | ||
| MyFinanceLab | 662 | ||
| Key Terms | 663 | ||
| Further Reading | 664 | ||
| Problems | 664 | ||
| Data Case | 668 | ||
| PART 6 ADVANCED VALUATION | 671 | ||
| Chapter 18 Capital Budgeting and Valuation with Leverage | 672 | ||
| 18.1 Overview of Key Concepts | 673 | ||
| 18.2 The Weighted Average Cost of Capital Method | 674 | ||
| INTERVIEW with Zane Rowe | 675 | ||
| Using the WACC to Value a Project | 676 | ||
| Summary of the WACC Method | 677 | ||
| Implementing a Constant Debt-Equity Ratio | 678 | ||
| 18.3 The Adjusted Present Value Method | 680 | ||
| The Unlevered Value of the Project | 680 | ||
| Valuing the Interest Tax Shield | 681 | ||
| Summary of the APV Method | 682 | ||
| 18.4 The Flow-to-Equity Method | 684 | ||
| Calculating the Free Cash Flow to Equity | 684 | ||
| Valuing Equity Cash Flows | 685 | ||
| What Counts as “Debt”? | 686 | ||
| Summary of the Flow-to-Equity Method\r | 686 | ||
| 18.5 Project-Based Costs of Capital | 687 | ||
| Estimating the Unlevered Cost of Capital | 688 | ||
| Project Leverage and the Equity Cost of Capital | 688 | ||
| Determining the Incremental Leverage of a Project | 690 | ||
| COMMON MISTAKE Re-Levering the WACC | 690 | ||
| 18.6 APV with Other Leverage Policies | 692 | ||
| Constant Interest Coverage Ratio | 692 | ||
| Predetermined Debt Levels | 693 | ||
| A Comparison of Methods | 695 | ||
| 18.7 Other Effects of Financing | 695 | ||
| Issuance and Other Financing Costs | 695 | ||
| Security Mispricing | 696 | ||
| Financial Distress and Agency Costs | 697 | ||
| GLOBAL FINANCIAL CRISIS Government Loan Guarantees | 698 | ||
| 18.8 Advanced Topics in Capital Budgeting | 698 | ||
| Periodically Adjusted Debt | 699 | ||
| Leverage and the Cost of Capital | 701 | ||
| The WACC or FTE Method with Changing Leverage | 703 | ||
| Personal Taxes | 704 | ||
| MyFinanceLab | 706 | ||
| Key Terms | 708 | ||
| Further Reading | 708 | ||
| Problems | 709 | ||
| Data Case | 715 | ||
| Appendix Foundations and Further Details | 717 | ||
| Deriving the WACC Method | 717 | ||
| The Levered and Unlevered Cost of Capital | 718 | ||
| Solving for Leverage and Value Simultaneously\r | 719 | ||
| The Residual Income and Economic Value Added Valuation Methods | 721 | ||
| Chapter 19 Valuation and Financial Modeling: A Case Study | 723 | ||
| 19.1 Valuation Using Comparables | 724 | ||
| 19.2 The Business Plan | 726 | ||
| Operational Improvements | 726 | ||
| Capital Expenditures: A Needed Expansion\r | 727 | ||
| Working Capital Management | 728 | ||
| Capital Structure Changes: Levering Up | 728 | ||
| 19.3 Building the Financial Model | 729 | ||
| Forecasting Earnings | 729 | ||
| INTERVIEW with Joseph L. Rice, III | 730 | ||
| Working Capital Requirements | 732 | ||
| Forecasting Free Cash Flow | 733 | ||
| USING EXCEL Summarizing Model Outputs | 735 | ||
| The Balance Sheet and Statement of Cash Flows (Optional) | 736 | ||
| USING EXCEL Auditing Your Financial Model | 738 | ||
| 19.4 Estimating the Cost of Capital | 739 | ||
| CAPM-Based Estimation | 739 | ||
| Unlevering Beta | 740 | ||
| Ideko’s Unlevered Cost of Capital | 740 | ||
| 19.5 Valuing the Investment | 741 | ||
| The Multiples Approach to Continuation Value | 742 | ||
| The Discounted Cash Flow Approach to Continuation Value | 743 | ||
| COMMON MISTAKE Continuation Values and Long-Run Growth | 745 | ||
| APV Valuation of Ideko’s Equity | 745 | ||
| A Reality Check | 746 | ||
| COMMON MISTAKE Missing Assets or Liabilities | 746 | ||
| IRR and Cash Multiples | 747 | ||
| 19.6 Sensitivity Analysis | 748 | ||
| MyFinanceLab | 749 | ||
| Key Terms | 750 | ||
| Further Reading | 750 | ||
| Problems | 751 | ||
| Appendix Compensating Management | 753 | ||
| Glossary | 755 | ||
| Index | 775 | ||
| A\r | 775 | ||
| B\r | 776 | ||
| C\r | 777 | ||
| D\r | 779 | ||
| E\r | 781 | ||
| F\r | 782 | ||
| G\r | 783 | ||
| H\r | 784 | ||
| I\r | 784 | ||
| J\r | 785 | ||
| K\r | 786 | ||
| L\r | 786 | ||
| M\r | 787 | ||
| N\r | 788 | ||
| O\r | 788 | ||
| P\r | 789 | ||
| Q\r | 790 | ||
| R\r | 790 | ||
| S\r | 792 | ||
| T\r | 794 | ||
| U\r | 795 | ||
| V\r | 795 | ||
| W\r | 795 | ||
| Y\r | 796 | ||
| Z\r | 796 |