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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 |