Additional Information
Book Details
Abstract
This book is an essential introduction to the world of financing and investment decision making. With a strong real world focus, this text aims to help you bridge the gap between the theories surrounding financial decision making and what happens in the real business world in an accessible, user-friendly way.
Alongside the book, you can visit the Business Finance companion website at www.pearsoned.co.uk/mclaney to access a comprehensive range of student-learning resources, including additional questions, web links for further reading and a glossary of key terms.
Table of Contents
| Section Title | Page | Action | Price |
|---|---|---|---|
| Cover\r | Cover | ||
| Title Page\r | iii | ||
| Copyright Page\r | iv | ||
| Contents\r | v | ||
| Preface | xiii | ||
| Plan of the book | xv | ||
| Publisher’s acknowledgements | xvi | ||
| Part 1 The business finance environment | 1 | ||
| 1 Introduction | 3 | ||
| Objectives | 3 | ||
| 1.1 The role of business finance | 4 | ||
| 1.2 Risk and business finance | 5 | ||
| 1.3 The relationship between business finance and accounting | 6 | ||
| 1.4 The organisation of businesses – the limited company | 6 | ||
| 1.5 Corporate governance and the role of directors | 9 | ||
| 1.6 Long-term financing of companies | 12 | ||
| 1.7 Liquidation | 14 | ||
| 1.8 Derivatives | 15 | ||
| 1.9 Private equity funds | 16 | ||
| Summary | 17 | ||
| Further reading | 18 | ||
| Review questions | 18 | ||
| 2 A framework for financial decision making | 19 | ||
| Objectives | 19 | ||
| 2.1 Financial decision making | 19 | ||
| 2.2 Business objectives | 21 | ||
| 2.3 Conflicts of interest: shareholders versus managers – the ‘agency’ problem | 25 | ||
| 2.4 Financing, investment and separation | 28 | ||
| 2.5 Behavioural finance | 31 | ||
| 2.6 Theory and practice | 32 | ||
| Summary | 32 | ||
| Further reading | 33 | ||
| Review questions | 33 | ||
| Problem | 33 | ||
| Appendix: Formal derivation of the separation theorem | 35 | ||
| 3 Financial (accounting) statements and their interpretation | 41 | ||
| Objectives | 41 | ||
| 3.1 Introduction | 41 | ||
| 3.2 The financial statements | 42 | ||
| 3.3 Definitions and conventions of accounting | 46 | ||
| 3.4 Problems with using accounting information for decision making | 49 | ||
| 3.5 Creative accounting | 50 | ||
| 3.6 Ratio analysis | 53 | ||
| 3.7 Using accounting ratios to predict financial failure | 65 | ||
| Summary | 66 | ||
| Further reading | 67 | ||
| Review questions | 67 | ||
| Problems | 68 | ||
| Appendix: Jackson plc’s income statement and statement of financial position for 2016 | 74 | ||
| Part 2 Investment decisions | 77 | ||
| 4 Investment appraisal methods | 79 | ||
| Objectives | 79 | ||
| 4.1 Introduction | 79 | ||
| 4.2 Net present value | 80 | ||
| 4.3 Internal rate of return | 87 | ||
| 4.4 Payback period | 94 | ||
| 4.5 Accounting (or unadjusted) rate of return | 97 | ||
| 4.6 Investment appraisal methods used in practice | 99 | ||
| Summary | 104 | ||
| Further reading | 106 | ||
| Review questions | 106 | ||
| Problems | 106 | ||
| 5 Practical aspects of investment appraisal | 111 | ||
| Objectives | 111 | ||
| 5.1 Introduction | 111 | ||
| 5.2 Cash flows or accounting flows? | 112 | ||
| 5.3 Do cash flows really occur at year-ends? | 115 | ||
| 5.4 Which cash flows? | 116 | ||
| 5.5 Taxation | 117 | ||
| 5.6 Inflation | 119 | ||
| 5.7 An example of an investment appraisal | 121 | ||
| 5.8 Capital rationing | 125 | ||
| 5.9 Replacement decisions | 129 | ||
| 5.10 Routines for identifying, assessing, implementing and reviewing investment projects | 131 | ||
| 5.11 Investment appraisal and strategic planning | 134 | ||
| 5.12 Value-based management | 136 | ||
| 5.13 Real options | 142 | ||
| Summary | 143 | ||
| Further reading | 145 | ||
| Review questions | 146 | ||
| Problems | 146 | ||
| 6 Risk in investment appraisal | 153 | ||
| Objectives | 153 | ||
| 6.1 Introduction | 153 | ||
| 6.2 Sensitivity analysis | 154 | ||
| 6.3 Use of probabilities | 159 | ||
| 6.4 Expected value | 162 | ||
| 6.5 Systematic and specific risk | 165 | ||
| 6.6 Utility theory | 166 | ||
| 6.7 Attitudes to risk and expected value | 169 | ||
| 6.8 Particular risks associated with making investments overseas | 174 | ||
| 6.9 Some evidence on risk analysis in practice | 174 | ||
| 6.10 Risk – the story so far | 174 | ||
| Summary | 175 | ||
| Further reading | 176 | ||
| Review questions | 177 | ||
| Problems | 177 | ||
| 7 Portfolio theory and its relevance to real investment decisions | 183 | ||
| Objectives | 183 | ||
| 7.1 The relevance of security prices | 183 | ||
| 7.2 The expected value/variance (or mean/variance) criterion | 185 | ||
| 7.3 Security investment and risk | 186 | ||
| 7.4 Portfolio theory | 188 | ||
| 7.5 The capital asset pricing model | 197 | ||
| 7.6 CAPM: an example of beta estimation | 199 | ||
| 7.7 Assumptions of CAPM | 202 | ||
| 7.8 Tests of CAPM | 202 | ||
| 7.9 CAPM – why the doubts? | 204 | ||
| 7.10 Implications of modern portfolio theory and CAPM | 205 | ||
| 7.11 Lack of shareholder unanimity on risky investment | 206 | ||
| 7.12 Using CAPM to derive discount rates for real investments – the practical problems | 207 | ||
| 7.13 Arbitrage pricing model | 209 | ||
| 7.14 Diversification within the business | 210 | ||
| Summary | 210 | ||
| Further reading | 212 | ||
| Review questions | 212 | ||
| Problems | 212 | ||
| Appendix: Derivation of CAPM | 214 | ||
| Part 3 Financing decisions | 217 | ||
| 8 Sources of long-term finance | 219 | ||
| Objectives | 219 | ||
| 8.1 Introduction | 219 | ||
| 8.2 Ordinary (equity) capital | 221 | ||
| 8.3 Methods of raising additional equity finance | 225 | ||
| 8.4 Preference shares | 235 | ||
| 8.5 Loan notes and debentures | 237 | ||
| 8.6 Convertible loan notes | 242 | ||
| 8.7 Warrants | 242 | ||
| 8.8 Term loans | 243 | ||
| 8.9 Asset-backed finance (securitisation) | 243 | ||
| 8.10 Leasing | 244 | ||
| 8.11 Grants from public funds | 246 | ||
| 8.12 Islamic finance | 247 | ||
| 8.13 Conclusions on long-term finance | 247 | ||
| Summary | 248 | ||
| Further reading | 251 | ||
| Review questions | 251 | ||
| Problems | 252 | ||
| 9 The secondary capital market (the stock exchange) and its efficiency | 253 | ||
| Objectives | 253 | ||
| 9.1 Introduction | 253 | ||
| 9.2 The London Stock Exchange | 254 | ||
| 9.3 Capital market efficiency | 257 | ||
| 9.4 Tests of capital market efficiency | 260 | ||
| 9.5 The efficient market paradox | 268 | ||
| 9.6 Conclusions on, and implications of, capital market efficiency | 268 | ||
| 9.7 Behavioural finance | 271 | ||
| Summary | 273 | ||
| Further reading | 274 | ||
| Review questions | 275 | ||
| Problems | 275 | ||
| 10 Cost of capital estimations and the discount rate | 276 | ||
| Objectives | 276 | ||
| 10.1 Introduction | 276 | ||
| 10.2 Cost of individual capital elements | 277 | ||
| 10.3 Weighted average cost of capital (WACC) | 285 | ||
| 10.4 The discount rate – CAPM versus the traditional approach | 290 | ||
| 10.5 WACC values used in practice | 292 | ||
| 10.6 The use of WACC in practice | 293 | ||
| 10.7 Further points on WACC | 293 | ||
| Summary | 293 | ||
| Further reading | 295 | ||
| Review questions | 295 | ||
| Problems | 295 | ||
| 11 Gearing, the cost of capital and shareholders’ wealth | 298 | ||
| Objectives | 298 | ||
| 11.1 Introduction | 298 | ||
| 11.2 Is debt finance as cheap as it seems? | 299 | ||
| 11.3 Business risk and financial risk | 300 | ||
| 11.4 The traditional view of gearing | 302 | ||
| 11.5 The Modigliani and Miller view of gearing | 304 | ||
| 11.6 Other thoughts on the tax advantage of debt financing | 310 | ||
| 11.7 Capital/financial gearing and operating gearing | 310 | ||
| 11.8 Other practical issues relating to capital gearing | 311 | ||
| 11.9 Evidence on gearing | 312 | ||
| 11.10 Gearing and the cost of capital – conclusion | 314 | ||
| 11.11 The trade-off theory | 316 | ||
| 11.12 Pecking order theory | 317 | ||
| 11.13 Likely determinants of capital gearing | 319 | ||
| 11.14 MM, modern portfolio theory and CAPM | 319 | ||
| 11.15 Weighted average cost of capital revisited | 321 | ||
| Summary | 322 | ||
| Further reading | 323 | ||
| Review questions | 324 | ||
| Problems | 324 | ||
| Appendix I: Proof of the MM cost of capital proposition (pre-tax) | 327 | ||
| Appendix II: Proof of the MM cost of capital proposition (after tax) | 328 | ||
| 12 The dividend decision | 330 | ||
| Objectives | 330 | ||
| 12.1 Introduction | 330 | ||
| 12.2 Modigliani and Miller on dividends | 331 | ||
| 12.3 The traditional view on dividends | 333 | ||
| 12.4 Who is right about dividends? | 334 | ||
| 12.5 Other factors | 335 | ||
| 12.6 Dividends: the evidence | 338 | ||
| 12.7 Conclusions on dividends | 344 | ||
| Summary | 344 | ||
| Further reading | 345 | ||
| Review questions | 346 | ||
| Problems | 346 | ||
| Appendix: Proof of the MM dividend irrelevancy proposition | 350 | ||
| Part 4 Integrated decisions | 353 | ||
| 13 Management of working capital | 355 | ||
| Objectives | 355 | ||
| 13.1 Introduction | 355 | ||
| 13.2 The dynamics of working capital | 356 | ||
| 13.3 The importance of the management of working capital | 360 | ||
| 13.4 Working capital and liquidity | 362 | ||
| 13.5 Overtrading | 364 | ||
| 13.6 Inventories (stock in trade) | 365 | ||
| 13.7 Just-in-time inventories management | 372 | ||
| 13.8 Trade receivables (trade debtors or accounts receivable) | 374 | ||
| 13.9 Cash (including overdrafts and short-term deposits) | 378 | ||
| 13.10 Trade payables (trade creditors) | 384 | ||
| 13.11 Working capital levels in practice | 386 | ||
| Summary | 386 | ||
| Further reading | 389 | ||
| Review questions | 389 | ||
| Problems | 389 | ||
| 14 Corporate restructuring (including takeovers and divestments) | 392 | ||
| Objectives | 392 | ||
| 14.1 Introduction | 392 | ||
| 14.2 Takeovers and mergers | 393 | ||
| 14.3 Mergers: the practicalities | 396 | ||
| 14.4 Divestments | 405 | ||
| Summary | 408 | ||
| Further reading | 409 | ||
| Review questions | 409 | ||
| Problems | 410 | ||
| 15 International aspects of business finance | 412 | ||
| Objectives | 412 | ||
| 15.1 Introduction | 412 | ||
| 15.2 Foreign exchange | 415 | ||
| 15.3 Problems of internationalisation | 422 | ||
| 15.4 International investment appraisal | 430 | ||
| 15.5 Risks of internationalisation, management of those risks and portfolio theory | 431 | ||
| Summary | 434 | ||
| Further reading | 436 | ||
| Review questions | 436 | ||
| Problems | 437 | ||
| 16 Small businesses | 438 | ||
| Objectives | 438 | ||
| 16.1 Introduction | 438 | ||
| 16.2 Corporate objectives | 441 | ||
| 16.3 Organisation of small businesses | 441 | ||
| 16.4 Taxation of small businesses | 442 | ||
| 16.5 Investment decisions | 442 | ||
| 16.6 Risk and the discount rate | 443 | ||
| 16.7 Sources of finance | 444 | ||
| 16.8 Valuation of small businesses | 448 | ||
| 16.9 Gearing | 452 | ||
| 16.10 Dividends | 452 | ||
| 16.11 Working capital and small businesses | 452 | ||
| Summary | 453 | ||
| Further reading | 456 | ||
| Review questions | 456 | ||
| Problems | 457 | ||
| Appendix 1 Present value table | 463 | ||
| Appendix 2 Annuity table | 464 | ||
| Appendix 3 Suggested answers to review questions | 465 | ||
| Appendix 4 Suggested answers to selected problems | 478 | ||
| Glossary | 503 | ||
| References | 509 | ||
| Index | 516 |