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Corporate Financial Management 6th Edition

Corporate Financial Management 6th Edition

Glen Arnold | Deborah Lewis

(2019)

Additional Information

Book Details

Abstract

"The book combines academic rigour (in the explanation of theory) with practical application (explaining how companies apply theory in real life). There are lots of numerical examples to help with understanding of the concepts covered." Dr Rob Jones, Newcastle University Business School

 

The sixth edition of this highly respected text is comprehensive yet accessible, with real-world case studies to ground you in the application of important concepts.

 

Written with authority by authors steeped in the financial world, the book offers a comprehensive survey of the theory and practice of corporate finance for anyone studying the topic by itself or within business, accounting, finance, banking or economics courses, teaching you how to make informed, successful financial decisions that are crucial for a career in business.

 

It explores topics such as investment appraisal, risk and return, sources of finance, and risk management, including derivatives, and gives a unique treatment of corporate value.

 

Key features

  • Financial techniques are illustrated in practical terms, using clear accessible language.
  • New Financial Times articles help you see the relevance of the theory to the real world
  • Finance is presented as a dynamic subject that is open to theoretical re-evaluation 
  • Extensive range of examples and case studies, with statistics and data ranging from the number of corporate mergers to the default rates on corporate bonds
  • Easy-to-follow mathematical explanations

Glen Arnold runs an investment fund and previously held positions as professor of finance and professor of investing. In addition to the textbook Modern Financial Markets and Institutions he has authored leading investment and banking books including The Financial Times Guide to Investment, The FT Guide to Banking and The FT Guide to Value Investing

 

Deborah Lewis is a Senior Teaching Fellow at the University of Bath. As Director of Studies for the Bath MBA programme, which features in the top 100 of the FT Global MBA 2018 Ranking, she ensures the material is useful for both the student and the practitioner. Deb’s previous commercial experience allows her to blend academic theory with professional application.   

 

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Table of Contents

Section Title Page Action Price
Front Cover Front Cover
Half Title Page i
Title Page iii
Copyright Page iv
Brief contents vii
Contents ix
Topics covered in the book xxi
Introduction to the book xxiii
Acknowledgements xxix
PART 1 Introduction 1
Chapter 1 The financial world 2
LEARNING OUTCOMES 2
Introduction 3
The objective of the firm 3
Case study 1.1 Experian 3
Some possible objectives 5
Corporate governance 16
Primitive and modern economies 22
The role of the financial manager 24
The flow of funds and financial intermediation 27
Growth in the financial services sector 33
The financial system 35
Concluding comments 41
Key points and concepts 41
References and further reading 43
Case study recommendations 46
Websites 46
Self-review questions 46
Questions and problems 47
Assignments 48
PART 2 The investment decision 49
Chapter 2 Project appraisal: net present value and internal rate of return 50
LEARNING OUTCOMES 50
Introduction 51
Value creation and corporate investment 52
Net present value and internal rate of return 57
Modified internal rate of return 72
Concluding comments 76
Key points and concepts 77
Appendix 2.1 Mathematical tools for finance 77
References and further reading 84
Case study recommendations 85
Websites 85
Self-review questions 85
Questions and problems 86
Assignments 88
Chapter 3 Project appraisal: cash flow and applications 89
LEARNING OUTCOMES 89
Introduction 90
Case study 3.1 Toyota invests £240m to upgrade car plant in boost for Brexit Britain 90
Quality of information 91
Are profit calculations useful for estimating project viability? 92
The replacement decision 104
Replacement cycles 104
When to introduce a new machine 111
Drawbacks of the annual equivalent annuity method 112
Timing of projects 112
The make or buy decision 113
Fluctuating output 114
Concluding comments 115
Key points and concepts 116
References and further reading 116
Case study recommendations 117
Self-review questions 117
Questions and problems 118
Assignments 124
Chapter 4 The decision-making process for investment appraisal 125
LEARNING OUTCOMES 125
Introduction 126
Evidence on the employment of appraisal techniques 127
Payback 128
Accounting rate of return 130
Internal rate of return: reasons for continued popularity 133
The managerial ‘art’ of investment appraisal 134
The investment process 138
Concluding comments 144
Key points and concepts 144
References and further reading 145
Case study recommendations 147
Self-review questions 148
Questions and problems 148
Assignment 150
Chapter 5 Project appraisal: capital rationing, taxation and inflation 151
LEARNING OUTCOMES 151
Introduction 152
Capital rationing 152
Taxation and investment appraisal 156
Inflation 159
Concluding comments 165
Key points and concepts 165
References and further reading 165
Case study recommendations 166
Self-review questions 166
Questions and problems 166
Assignments 171
PART 3 Risk and return 173
Chapter 6 Risk and project appraisal 174
LEARNING OUTCOMES 174
Case study 6.1 Camelot 175
Introduction 175
What is risk? 176
Adjusting for risk through the discount rate 178
Sensitivity analysis 179
Scenario analysis 183
The risk of insolvency 195
Probability analysis 185
Problems of using probability analysis 200
Evidence of risk analysis in practice 201
Real options (managerial options) 201
Concluding comments 212
Key points and concepts 212
References and further reading 213
Case study recommendations 215
Self-review questions 215
Questions and problems 216
Assignments 221
Chapter 7 Portfolio theory 222
LEARNING OUTCOMES 222
Introduction 223
Holding period returns 223
Expected return and standard deviation for shares 225
Combinations of investments 228
Portfolio expected return and standard deviation 235
Dominance and the efficient frontier 239
Indifference curves 243
Choosing the optimal portfolio 245
The boundaries of diversification 246
Extension to a large number of securities 248
Evidence on the benefits of diversification 249
The capital market line 253
Problems with portfolio theory 256
Concluding comments 259
Key points and concepts 260
References and further reading 261
Case study recommendations 262
Self-review questions 262
Questions and problems 263
Assignments 267
Chapter 8 The Capital Asset PricingModel and multi-factor models 268
LEARNING OUTCOMES 268
Introduction 269
Some fundamental ideas and problems 270
A short history of shares, bonds and bills 271
The Capital Asset Pricing Model 285
Factor models 303
The arbitrage pricing theory 306
The three-factor model 307
The five-factor model 307
Fundamental beta 308
Project appraisal and systematic risk 309
Sceptics’ views – alternative perspectives on risk 310
Concluding comments 312
Key points and concepts 314
Appendix 8.1: Note on arithmetic and geometric means 314
Appendix 8.2: Why professors do or do not use CAPM-beta 315
Comments from professors who use calculated betas 316
Comments from professors who use ‘common sense’12 betas 317
Comments from professors who do not use betas 317
References and further reading 318
Case study recommendations 322
Self-review questions 322
Questions and problems 323
Assignments 324
PART 4 Sources of finance 325
Chapter 9 Stock markets 326
LEARNING OUTCOMES 326
Case study 9.1 Using the stock market both to create wealth and to treat disease 327
Introduction 327
Stock exchanges around the world 327
Globalisation of financial flows 331
Why do companies list their shares on more than one exchange? 333
The importance of a well-run stock exchange 335
The London Stock Exchange 337
The UK equity markets available to companies 341
Tasks for stock exchanges 343
How stock exchanges work 344
The ownership of UK shares 351
Regulation 352
Understanding the figures in the financial pages 355
Taxation and corporate finance 357
Concluding comments 358
Key points and concepts 359
References and further reading 360
Case study recommendations 360
Websites 361
Video presentations 361
Self-review questions 361
Questions and problems 362
Assignments 362
Chapter 10 Raising equity capital 363
LEARNING OUTCOMES 363
Case study 10.1 To float or not to float? 364
Introduction 364
What is equity capital? 365
Preference shares 368
Some unusual types of shares 369
Floating on the Main Market (Official List) 371
The new issue process 376
Other methods of floating 378
How does an AIM flotation differ from one on the Official List? 379
The costs of new issues 380
Rights issues 382
Other equity issues 387
Warrants 389
Equity finance for unquoted firms 389
Crowdfunding 394
How an independent private equity fund is establishedand managed 397
Disillusionment and dissatisfaction with quotation 404
Concluding comments 404
Key points and concepts 405
Appendix 10.1: Reasons for and against floating 407
References and further reading 413
Case study recommendations 416
Websites 416
Video presentations 416
Self-review questions 417
Questions and problems 417
Assignment 418
Chapter 11 Long-term debt finance 419
LEARNING OUTCOMES 419
Introduction 420
Some fundamental features of debt finance 420
Bonds 420
Bank borrowing 426
Syndicated loans 429
Credit rating 430
Mezzanine finance and high-yield ( junk) bonds 432
Case study 11.1 The junk bond wizard: Michael Milken 436
Convertible bonds 439
Valuing bonds 442
International sources of debt finance 446
Project finance 453
Sale and leaseback 455
Securitisation 456
Islamic banking 458
Peer-to-peer lending 458
The term structure of interest rates 459
Concluding comments 464
Key points and concepts 464
References and further reading 466
Case study recommendations 467
Websites 467
Video presentations 467
Self-review questions 468
Questions and problems 468
Assignments 470
Chapter 12 Short- and medium-term finance,treasury and working capitalmanagement 471
LEARNING OUTCOMES 471
Introduction 472
Short- and medium-term bank finance 472
Trade credit 477
Factoring 480
Case study 12.1 LG Steelworks 482
Hire purchase 484
Leasing 487
Bills of exchange 492
Bankers’ acceptances (banks bills, acceptance credits) 493
Treasury management 493
Financing 495
Risk management 503
Working capital management 507
Investment of temporary surplus funds 524
Concluding comments 527
Key points and concepts 528
References and further reading 530
Case study recommendations 531
Websites 531
Self-review questions 532
Questions and problems 532
Assignments 538
Chapter 13 Stock market efficiency 539
LEARNING OUTCOMES 539
Introduction 540
What is meant by efficiency? 540
Random walks 544
The three levels of efficiency 546
Weak-form tests 546
Semi-strong form tests 558
Strong-form tests 579
Behavioural finance 581
Misconceptions about the efficient market hypothesis 589
Implications of the EMH for investors 589
Implications of the EMH for companies 590
Concluding comments 591
Key points and concepts 592
References and further reading 592
Case study recommendations 603
Self-review questions 603
Questions and problems 604
Assignment 605
PART 5 Corporate value 607
Chapter 14 Value-based management 608
LEARNING OUTCOMES 608
Introduction 609
The shareholder wealth-maximising goal 611
Three steps of value 612
Traditional measurement techniques 613
Earnings-based management 613
Return on capital employed (ROCE) has failings 618
An overview of the application of value principles 628
Strategic business unit management 630
Corporate strategy 641
Targets and motivation 644
Case study 14.1 Strategy, planning and budgeting at Lloyds TSB 644
Concluding comments 645
Key points and concepts 645
References and further reading 648
Video presentations 650
Case study recommendations 650
Self-review questions 651
Questions and problems 651
Assignments 653
Chapter 15 Value-creation metrics 654
LEARNING OUTCOMES 654
Introduction 655
Using cash flow to measure value 655
Shareholder value analysis 660
Economic profit 668
Economic value added (EVA®) 674
Total shareholder return (TSR) 676
Wealth Added Index (WAI) 679
Case study 15.1 Vone’s wealth added index 679
Market Value Added (MVA) 680
Excess return (ER) 683
Market to book ratio (MBR) 685
Concluding comments 689
Key points and concepts 689
References and further reading 692
Case study recommendations 694
Websites 694
Self-review questions 694
Questions and problems 695
Assignments 698
Appendix 15.1: Further consideration of the entity and equity EP 698
Chapter 16 The cost of capital 700
LEARNING OUTCOMES 700
Introduction 701
A word of warning 701
The required rate of return 701
The weighted average cost of capital (WACC) 703
The cost of equity capital 708
The cost of retained earnings 711
The cost of debt capital 711
Traded debt 712
The cost of preference share capital 713
Calculating the weights 714
Applying the WACC to projects and SBUs 715
Empirical evidence of corporate practice 716
How large is the equity risk premium? 723
Some thoughts on the cost of capital 726
Concluding comments 727
Key points and concepts 728
References and further reading 728
Case study recommendations 731
Websites 731
Video presentations 731
Self-review questions 731
Questions and problems 732
Assignment 733
Chapter 17 Valuing shares 734
LEARNING OUTCOMES 734
Introduction 735
Case study 17.1 Amazon.com 735
Valuation using net asset value (NAV) 737
Valuation using income-flow methods 739
Dividend valuation models 740
The price-earnings ratio (PER) model 748
Valuation using cash flow 753
Valuation using owner earnings 754
Case study 17.2 N Brown – owner earnings analysis 760
EBITDA 763
Valuing unquoted shares 765
Unusual companies 765
Managerial control and valuation 766
Allowing for real option values 768
Concluding comments 772
Key points and concepts 772
References and further reading 774
Case study recommendations 775
Websites 776
Self-review questions 776
Questions and problems 776
Assignments 782
Chapter 18 Capital structure 783
LEARNING OUTCOMES 783
Introduction 784
Other ideas 784
What do we mean by ‘gearing’? 786
The effect of gearing 792
The value of the firm and the cost of capital 798
Does the cost of capital (WACC) decrease with higher debt levels? 799
Modigliani and Miller’s argument in a world with no taxes 800
The capital structure decision in a world with tax 803
Additional considerations 805
Some further thoughts on debt finance 819
Concluding comments 823
Key points and concepts 824
Appendix 18.1: Asset beta 825
Appendix 18.2: Adjusted present value (APV) 827
References and further reading 828
Case study recommendations 832
Video presentations 832
Self-review questions 833
Questions and problems 833
Assignments 835
Chapter 19 Dividend policy 836
LEARNING OUTCOMES 836
Introduction 837
Defining the problem 837
Miller and Modigliani’s dividend irrelevancy proposition 839
Dividends as a residual 841
Clientele effects 844
Taxation 845
Dividends as conveyors of information 846
Resolution of uncertainty 849
Owner control (agency theory) 850
Scrip dividends 852
Share buy-backs and special dividends 852
A round-up of the arguments 853
Concluding comments 856
Key points and concepts 857
References and further reading 858
Case study recommendations 860
Video presentations 860
Self-review questions 860
Questions and problems 861
Assignments 863
Chapter 20 Mergers 864
LEARNING OUTCOMES 864
Introduction 865
The merger decision 865
Merger statistics 867
Merger motives 869
Financing mergers 885
The merger process 890
The impact of mergers 897
Managing mergers 901
Concluding comments 911
Key points and concepts 912
References and further reading 913
Case study recommendations 918
Websites 918
Video presentations 918
Self-review questions 919
Questions and problems 919
Assignment 921
PART 6 Managing risk 923
Chapter 21 Derivatives 924
LEARNING OUTCOMES 924
Introduction 925
A long history 925
Options 926
Forwards 937
Futures 938
Case study 21.1 Protecting a portfolio against a major market fall 945
Forward rate agreements (FRAs) 950
A comparison of options, futures, forwards and FRAs 952
Caps 953
Swaps 954
Derivatives users 958
Over-the-counter (OTC) and exchange-traded derivatives 959
Concluding comments 960
Key points and concepts 961
Appendix 21.1: Option pricing 962
Appendix 21.2: The relationship between FRAs and swaps 963
References and further reading 966
Case study recommendations 966
Websites 967
Self-review questions 967
Questions and problems 968
Assignments 971
Chapter 22 Managing exchange-rate risk 972
LEARNING OUTCOMES 972
Introduction 973
Case study 22.1 What a difference a few percentage point moves on the \nexchange rate make 973
The effects of exchange-rate changes 974
Volatility in foreign exchange 977
The foreign exchange markets 979
Exchange rates 982
Types of foreign-exchange risk 988
Transaction risk strategies 991
Managing translation risk 1001
Managing economic risk 1002
Exchange-rate determination 1004
Concluding comments 1010
Key points and concepts 1010
References and further reading 1011
Case study recommendations 1012
Websites 1013
Video presentations 1013
Self-review questions 1013
Questions and problems 1014
Assignments 1015
Appendices 1017
Appendix I Future value of £1 at compound interest 1018
Appendix II Present value of £1 at compound interest 1019
Appendix III Present value of an annuity of £1 at compound interest 1020
Appendix IV Future value of an annuity of £1 at compound interest 1021
Appendix V Areas under the standardised normal distribution 1022
Appendix VI Answers to the mathematical tools exercises inChapter 2, Appendix 2.1 1023
Glossary G:1
Bibliography B:1
Index I:1
Back Cover Back Cover