Fin 609A calculation Qs Week 2
Chapter 5: Mini- Case study a.through g. &m.through q.only (pg.236-237) 10 pts.
Chapter 6: Problems 6-3 & 6-6 (pgs.286-287) 10 pts.
Chapter 7: Problem 7-17 (pg. 336) 10 pts.
Chapter 9:Mini- Case study a. through j. only (pg. 411-412) 20 pts.
Use excel to answer all questions
Sheet1
Chapter 9: Mini Case
a. 1) Stock that should be included when estimating Jana’s WACC is bonds, preferred stock and common stock.
2) The component cost should ideally be figured out after-tax basis since dividends are paid and reinvestment is made with after-tax dollars.
3) The cost should be the new marginal) costs
b. 10%*(1-40%)= 6%
c. 1) Firms cost of preferred stock:
10/116.95= 8.55%
2) After-tax cost of debt is lower than the cost of the preferred stock, which means that the preferred stock is actually a higher risk than the debt.
d. 1) The two common ways that companies raise common equity is either directly, by issuing new common shares or stocks. Or indirectly, by using retained earnings.
2) There is a cost associated with reinvested earnings since that causes shareholders incur an opportunity cost. If those retained earnings were paid as dividends, shareholders would have had the opportunity to invest those earnings in other stocks.
3) CAPM Approach:
5.6% + (1.2 * 6%)= 12.8%
e. 1) Dividend growth approach:
[[$3.12(1+5.8%)]/$50] +5.8%= 12.4%
2) ROE: 15%; Payout Rate: 62%
G=(1-62%)(15%)= 5.7%
The 5.7% future dividend growth rate does fall consistent with the 5.8% growth rate.
3) Yes, the dividend growth rate could still be applied even if the growth rate was not consistent, the PV of the dividends during the non-constant growth period can be calculated and added to the PV of the series of inflow during the constant growth.
f. own-bond-yield-plus-judgmental risk premium = 3.2%
Semiannual YTM = YTM/2
N=30 PV=$1153.72 PMT=60 FV=$1000
YTM/2=(60+((1000=1153.72)/30) (1000+1153.72)/2)
YTM=5%*2=10%
Cost of Equity= 10%+3.2%= 13.2%
g. Approach Formula Cost of equity
CAPM 5.6%+(1.2*6%)= 12.8%
DCF ((3.12*(1+5.8%))/50)+5.8%= 12.4%
bond-yield-plus-risk-premium 10%+3.2%= 13.2%
Average (12.8%+12.4%+13.2%)/3= 12.8%
h. WACC=(30%*6%)+(10%*9%)+(60%*12.8%)= 10.38%
i. Factors that influence a company’s WACC:
Uncontrollable: Market Conditions
Market risk premium
Tax Rate
Controllable: Capital structure policy
Dividend policy
Investment policy
j. No, different investments tend to have different risks assocaited with them meaning that WACC has to be asjusted accordingly to the risk.
k. Subjective adjustment to he composite WACC as well as attempting in making estimation about the cost of capital in case stand-alone company and estimation of the division beta can be used when it comes to determining the risk-adjusted capital cost.
The proxy play approach or the accounting betta apprach can be used when it comes to measuring a division’s beta.
l. Debt: 10% Equity: 90% Cost of dept: 12% Beta: 1.7
Cost of equity=5.6%+(1.7*6%)= 15.8%
WACC=(12%*.10*(1-.40))+(90%*15.8%)= 14.94%
Based on the above calculation, it shows that the cost of capital has increased to what it was before. This indicates an increase in risk by changing the capital strcuture of the company. Only projects/investments that will generate a return of 14/94% or greater will be accepted.
m. The three types of project risk are stand alone risk, corporate risk and market risk.
Stand alone risk: Total risk if operated independently, measured by standard deviation.
Corporate risk: The variability of a project contributes to a corporation’s stock returns.
Market risk: The part of a project that cannot be eliminated by diversification.
n. One of the main reasons for a firm to raise fund is that they are then able to explore other investment opportunites. The amount raised then becomes associated with the costs which based on the required rate of return and has an opportunity cost. The new investment should be of more or equal value to other investment opportunities that are being considered.
o. 1) Next year dividend =$3.12*(1+.058)= $ 3.30
Price of stock = $50*(1-.15)= $ 42.50
Cost of equity = ($3.30/$42.5)+.058= 13.56%
2) PV:$1000 NPER: 30 Years Coupon rate: 10% Floating costs: 2%
PV of Debt = $1000*(1-.02)= $ 980
Coupon=$1000*10%= $ 100
Yield=RATE(30,100,-980,1000)= 10.22%
Cost of debt=10.22%*(1-.40)= 6.13%
p. Jana should avoid the four following mistaks:
1. Use the current cost of debt rather that the coupon rate
2. The historical average return should not be subtracted from the risk-free rate directly when it comes to determining the cost of equity using the CAPM approach.
3. Use the market value rather that the book value when it comes to determining the weights as it gives a better use to the target capital strcture when compared to the historical information.
4. The only capital that shouldbe considered is the capital that us raised from the investors for investing purposes. www.acetxt.com
FREQUENTLY USED SYMBOLS
Term for book Definition
ACP Average collection period
ADR American Depository Receipt
AFN Additional funds needed
APR Annual percentage rate
AR Accounts receivable
b Beta coefficient in the CAPM
bL Levered beta
bU Unlevered beta
BEP Basic earning power
BVPS Book value per share
CAPM Capital Asset Pricing Model
CCC Cash conversion cycle
CF Cash flow; CFt is the cash flow in Period t
CFPS Cash flow per share
COGS Cost of goods sold
COViM Covariance between stock i and the market
CR (1) Capital requirement ratio
(2) Conversion ratio
CV Coefficient of variation
D/E Debt-to-equity ratio
Difference, or change (uppercase delta)
di Input to the Black-Scholes option pricing model
Dps Dividend of preferred stock
Dt Dividend of common stock in Period t
DCF Discounted cash flow
DPS Dividends per share
DRIP Dividend reinvestment plan
DRP Default risk premium
DSO Days sales outstanding
EAR Effective annual rate, EFF%
EBIT Earnings before interest and taxes; net operating income
EBITDA Earnings before interest, taxes, depreciation, and amortization
EFF% Effective annual rate, EAR
EPS Earnings per share
EVA Economic Value Added
F (1) Flotation cost percentage
(2) Fixed operating costs
FCF Free cash flow
FVAN Future value of an annuity for N years
FVN Future value for Year N
g Growth rate in earnings, dividends, and stock prices
gL Constant long-term growth rate in earnings, dividends, and stock prices
HVT Horizon value of stock or company at time T
I Interest rate; also denoted by r
I/YR Interest rate key on some calculators
INT Interest payment in dollars
IP Inflation premium
IPO Initial public offering
IRR Internal rate of return
LP Liquidity premium
M/B Market-to-book ratio
M (1) Number of periods per year
(2) Maturity value of a bond
(3) Margin (profit margin)
MIRR Modified Internal Rate of Return
MRP Maturity risk premium
MVA Market Value Added
n Number of shares outstanding
N Calculator key denoting number of periods
N di Area under a standard normal distribution to the left of di
NOPAT Net operating profit after taxes
NOWC Net operating working capital
NPV Net present value
OP Operating profitability ratio
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P/E Price/earnings ratio
P (1) Stock price; price in Period t Pt; current price P0
(2) Sales price per unit of product sold
Pc Conversion price
P^ 0 Expected stock price as PV of expected dividends
Pf Price of good in foreign country
Ph Price of good in home country
PI Profitability index
PN A stocks horizon value
PM Profit margin
PMT Payment of an annuity
PPP Purchasing power parity
PV Present value
PVAN Present value of an annuity for N years
Q Quantity produced or sold
QBE Breakeven quantity
r (1) Percentage interest rate
(2) Required rate of return
r r bar, actual rate of return
r* Real risk-free rate of return
r r hat, expected rate of return
rd Required return on debt
re Cost of new common stock including flotation costs
rf Interest rate in foreign country
rh Interest rate in home country
ri Required return for an individual firm or security
rM Required return for the market or for an average stock
rNOM Nominal rate of interest; also denoted by INOM
rp Required return on portfolio
rps Required return on preferred stock
rPER Periodic rate of return
rRF Rate of return on a risk-free security
rs Required return on common stock
rSMB Return on Fama-French small (size) minus big (size) portfolio
rHML Return on Fama-French high (B/M) minus big (B/M) portfolio
Correlation coefficient (lowercase rho)
R Estimated correlation coefficient for sample data
ROA Return on assets
ROE Return on equity
ROIC Return on invested capital
RPi Risk premium for Stock i
RPM Market risk premium
RR Retention rate
S (1) Sales
(2) Estimated standard deviation for sample data
(3) Intrinsic value of stock (i.e., all common equity)
Summation sign (uppercase sigma)
Standard deviation (lowercase sigma)
2 Variance
SML Security Market Line
t Time period
T Marginal income tax rate
TIE Times interest earned
TVN A stocks horizon, or terminal, value
V Variable cost per unit
VB Bond value
VC Total variable costs
VL Total market value of a levered firm
Vop Value of operations
Vps Value of preferred stock
VU Total market value of an unlevered firm
w Proportion or weight
wd Weight of debt
wps Weight of preferred stock
ws Weight of common stock
WACC Weighted average cost of capital
X Exercise price of option
YTC Yield to call
YTM Yield to maturity
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Corporate
Finance
A Focused Approach
6e
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Corporate Finance: A Focused Approach,
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Brief Contents
Preface ix
PART 1 THE COMPANY AND ITS ENVIRONMENT 1
CHAPTER 1 An Overview of Financial Management
and the Financial Environment 3
Web Extensions 1A: An Overview of Derivatives
CHAPTER 2 Financial Statements, Cash Flow, and Taxes 57
Web Extension 2A: The Federal Income Tax System for
Individuals
CHAPTER 3 Analysis of Financial Statements 101
PART 2 FIXED INCOME SECURITIES 137
CHAPTER 4 Time Value of Money 139
Web Extensions 4A: The Tabular Approach
4B: Derivation of Annuity Formulas
4C: Continuous Compounding
CHAPTER 5 Bonds, Bond Valuation, and
Interest Rates 193
Web Extensions 5A: A Closer Look at Zero Coupon
and Other OID Bonds
Web Extensions 5B: A Closer Look at TIPS: Treasury
Inflation-Protected Securities
Web Extensions 5C: A Closer Look at Bond Risk: Duration
Web Extensions 5D: The Pure Expectations Theory and
Estimation of Forward Rates
PART 3 STOCKS AND OPTIONS 239
CHAPTER 6 Risk and Return 241
Web Extensions 6A: Continuous Probability Distributions
Web Extensions 6B: Estimating Beta with a Financial Calculator
CHAPTER 7 Corporate Valuation and Stock Valuation 293
Web Extension 7A: Derivation of Valuation Equations
CHAPTER 8 Financial Options and Applications in
Corporate Finance 343
PART 4 PROJECTS AND THEIR VALUATION 373
CHAPTER 9 The Cost of Capital 375
Web Extension 9A: The Required Return Assuming
Nonconstant Dividends and Stock Repurchases
CHAPTER 10 The Basics of Capital Budgeting:
Evaluating Cash Flows 413
Web Extension 10A: The Accounting Rate of Return (ARR)
CHAPTER 11 Cash Flow Estimation and Risk Analysis 453
Web Extension 11A: Certainty Equivalents and Risk-
Adjusted Discount Rates
PART 5 CORPORATE VALUATION AND
GOVERNANCE 501
CHAPTER 12 Corporate Valuation and Financial
Planning 503
CHAPTER 13 Corporate Governance 541
PART 6 CASH DISTRIBUTIONS AND CAPITAL
STRUCTURE 563
CHAPTER 14 Distributions to Shareholders: Dividends
and Repurchases 565
CHAPTER 15 Capital Structure Decisions 607
Web Extension 15A: Degree of Leverage
Web Extension 15B: Capital Structure Theory: Arbitrage
Proofs of the Modigliani-Miller Theorems
PART 7 MANAGING GLOBAL OPERATIONS 653
CHAPTER 16 Supply Chains and Working Capital
Management 655
Web Extension 16A: Secured Short-Term Financing
CHAPTER 17 Multinational Financial
Management 705
APPENDIXES
APPENDIX A Solutions to Self-Test Problems 749
APPENDIX B Answers to End-of-Chapter Problems 773
APPENDIX C Selected Equations 781
APPENDIX D Values of the Areas under the
Standard Normal Distribution Function 791
GLOSSARY AND INDEXS
Glossary 793
Name Index 831
Subject Index 833
EpicStockMedia/Shutterstock.com
iii
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Contents
Preface ix
PART 1 THE COMPANY AND ITS ENVIRONMENT 1
CHAPTER 1
An Overview of Financial
Management and the Financial
Environment 3
The Five-Minute MBA 4
Finance from 40,000 Feet Above 4
The Corporate Life Cycle 5
Governing a Corporation 10
Box: Be Nice with a B-Corp 12
Box: Taxes and Whistleblowing 14
An Overview of Financial Markets 14
Claims on Future Cash Flows: Types of Financial Securities 16
Claims on Future Cash Flows: The Required Rate of Return
(The Cost of Money) 20
The Functions of Financial Institutions 24
Financial Markets 29
Overview of the U.S. Stock Markets 33
Trading in the Modern Stock Markets 34
Box: Measuring the Market 42
Finance and the Great Recession of 2007 42
Box: Anatomy of a Toxic Asset 50
The Big Picture 52
e-Resources 53
Summary 53
Web Extensions
1A: An Overview of Derivatives
CHAPTER 2
Financial Statements, Cash Flow,
and Taxes 57
Box: Intrinsic Value, Free Cash Flow, and Financial
Statements 58
Financial Statements and Reports 58
The Balance Sheet 59
Box: The Great Recession of 2007: Let s Play
Hide-and-Seek! 62
The Income Statement 62
Statement of Stockholders Equity 65
Box: Financial Analysis on the Web 66
Statement of Cash Flows 66
Box: Filling in the GAAP 69
Net Cash Flow 70
Free Cash Flow: The Cash Flow Available for Distribution to
Investors 70
Box: Sarbanes-Oxley and Financial Fraud 76
Performance Evaluation 78
The Federal Income Tax System 84
Box: When It Comes to Taxes, History Repeats
and Repeals Itself! 86
Summary 89
Web Extension
2A: The Federal Income Tax System for Individuals
CHAPTER 3
Analysis of Financial Statements 101
Box: Intrinsic Value and Analysis of Financial Statements 102
Financial Analysis 102
Liquidity Ratios 104
Asset Management Ratios 106
Debt Management Ratios 109
Box: The Great Recession of 2007: The Price Is
Right! (Or Wrong!) 110
Profitability Ratios 114
Box: The World Might Be Flat, but Global Accounting Is Bumpy!
The Case of IFRS versus FASB 115
Market Value Ratios 116
Trend Analysis, Common Size Analysis, and Percentage
Change Analysis 120
Tying the Ratios Together: The DuPont Equation 123
Comparative Ratios and Benchmarking 124
Uses and Limitations of Ratio Analysis 125
Box: Ratio Analysis on the Web 126
Looking Beyond the Numbers 126
Summary 127
PART 2 FIXED INCOME SECURITIES 137
CHAPTER 4
Time Value of Money 139
Box: Corporate Valuation and the Time Value of Money 140
Time Lines 140
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iv
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Future Values 141
Box: Hints on Using Financial Calculators 145
Present Values 149
Box: It s a Matter of Trust 150
Finding the Interest Rate, I 153
Finding the Number of Years, N 154
Perpetuities 154
Annuities 155
Future Value of an Ordinary Annuity 156
Box: The Power of Compound Interest 159
Future Value of an Annuity Due 159
Present Value of Ordinary Annuities and Annuities Due 160
Finding Annuity Payments, Periods, and Interest Rates 162
Box: Variable Annuities: Good or Bad? 163
Box: Using the Internet for Personal Financial Planning 164
Uneven, or Irregular, Cash Flows 165
Future Value of an Uneven Cash Flow Stream 168
Solving for I with Irregular Cash Flows 169
Semiannual and Other Compounding Periods 170
Box: Truth in Lending: What Loans Really Cost 173
Fractional Time Periods 174
Amortized Loans 175
Box: What You Know Is What You Get: Not in Payday Lending 176
Growing Annuities 178
Box: The Great Recession of 2007: An Accident
Waiting to Happen: Option Reset Adjustable Rate Mortgages 179
Summary 181
Web Extensions
4A: The Tabular Approach
4B: Derivation of Annuity Formulas
4C: Continuous Compounding
CHAPTER 5
Bonds, Bond Valuation, and Interest Rates 193
Box: Intrinsic Value and the Cost of Debt 194
Who Issues Bonds? 194
Box: Betting With or Against the U.S. Government: The Case
of Treasury Bond Credit Default Swaps 196
Key Characteristics of Bonds 196
Bond Valuation 200
Changes in Bond Values Over Time 205
Box: Chocolate Bonds 208
Bonds with Semiannual Coupons 208
Bond Yields 209
The Pre-Tax Cost of Debt: Determinants of Market Interest
Rates 212
The Risk-Free Interest Rate: Nominal (rRF) and Real (r*) 213
The Inflation Premium (IP) 214
The Maturity Risk Premium (MRP) 216
The Default Risk Premium (DRP) 219
Box: Insuring with Credit Default Swaps: Let the
Buyer Beware! 221
Box: The Great Recession of 2007: U.S. Treasury
Bonds Downgraded! 223
Box: The Few, the Proud, the AAA-Rated Companies! 225
The Liquidity Premium (LP) 225
Box: The Great Recession of 2007: Fear and Rationality 226
The Term Structure of Interest Rates 226
Financing with Junk Bonds 228
Bankruptcy and Reorganization 228
Summary 229
Web Extensions
5A: A Closer Look at Zero Coupon and Other OID Bonds
5B: A Closer Look at TIPS: Treasury Inflation-Protected Securities
5C: A Closer Look at Bond Risk: Duration
5D: The Pure Expectations Theory and Estimation of Forward Rates
PART 3 STOCKS AND OPTIONS 239
CHAPTER 6
Risk and Return 241
Box: Intrinsic Value, Risk, and Return 242
Investment Returns and Risk 242
Measuring Risk for Discrete Distributions 243
Risk in a Continuous Distribution 247
Box: What Does Risk Really Mean? 249
Using Historical Data to Estimate Risk 249
Box: The Historic Trade-Off between Risk and Return 252
Risk in a Portfolio Context 252
The Relevant Risk of a Stock: The Capital Asset Pricing Model
(CAPM) 256
Box: The Benefits of Diversifying Overseas 263
The Relationship between Risk and Return in the Capital Asset
Pricing Model 263
Box: Another Kind of Risk: The Bernie Madoff Story 271
The Efficient Markets Hypothesis 272
The Fama-French Three-Factor Model 276
Behavioral Finance 280
The CAPM and Market Efficiency: Implications for Corporate
Managers and Investors 282
Summary 283
Web Extensions
6A: Continuous Probability Distributions
6B: Estimating Beta with a Financial Calculator
CHAPTER 7
Corporate Valuation and Stock Valuation 293
Box: Corporate Valuation and Stock Prices 294
Contents v
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Legal Rights and Privileges of Common Stockholders 294
Types of Common Stock 295
Stock Market Reporting 296
Valuing Common StocksIntroducing the Free Cash Flow
(FCF) Valuation Model 297
The Constant Growth Model: Valuation When Expected Free
Cash Flow Grows at a Constant Rate 300
The Multistage Model: Valuation when Expected Short-Term
Free Cash Flow Grows at a Nonconstant Rate 305
Application of the FCF Valuation Model to MicroDrive 309
Do Stock Values Reflect Long-Term or Short-Term Cash
Flows? 315
Value-Based Management: Using the Free Cash Flow Valuation
Model to Identify Value Drivers 316
Why Are Stock Prices So Volatile? 319
Valuing Common Stocks with the Dividend Growth Model 320
The Market Multiple Method 328
Comparing the FCF Valuation Model, the Dividend Growth
Model, and the Market Multiple Method 329
Preferred Stock 330
Summary 331
Web Extensions
7A: Derivation of Valuation Equations
CHAPTER 8
Financial Options and Applications in
Corporate Finance 343
Box: The Intrinsic Value of Stock Options 344
Overview of Financial Options 344
The Single-Period Binomial Option Pricing Approach 347
Box: Financial Reporting for Employee Stock Options 348
The Single-Period Binomial Option Pricing Formula 353
The Multi-Period Binomial Option Pricing Model 355
The Black-Scholes Option Pricing Model (OPM) 357
Box: Taxes and Stock Options 362
The Valuation of Put Options 363
Applications of Option Pricing in Corporate Finance 365
Summary 367
PART 4 PROJECTS AND THEIR VALUATION 373
CHAPTER 9
The Cost of Capital 375
Box: Corporate Valuation and the Cost of Capital 376
The Weighted Average Cost of Capital 376
Choosing Weights for the Weighted Average Cost of Capital 378
After-Tax Cost of Debt: rd 1 T and rstd 1 T 379
Box: How Effective Is the Effective Corporate Tax Rate? 382
Cost of Preferred Stock, rps 384
Cost of Common Stock: The Market Risk Premium, RPM 384
Using the CAPM to Estimate the Cost of Common Stock, rs 388
Using the Dividend Growth Approach to Estimate the Cost of
Common Stock 390
The Weighted Average Cost of Capital (WACC) 393
Box: Global Variations in the Cost of Capital 395
Adjusting the Cost of Equity for Flotation Costs 395
Privately Owned Firms and Small Businesses 397
The Divisional Cost of Capital 398
Estimating the Cost of Capital for Individual Projects 401
Managerial Issues and the Cost of Capital 402
Summary 404
Web Extensions
9A: The Required Return Assuming Nonconstant Dividends and
Stock Repurchases
CHAPTER 10
The Basics of Capital Budgeting: Evaluating Cash Flows 413
Box: Corporate Valuation and Capital Budgeting 414
An Overview of Capital Budgeting 414
The First Step in Project Analysis 416
Net Present Value (NPV) 417
Internal Rate of Return (IRR) 419
Modified Internal Rate of Return (MIRR) 426
Profitability Index (PI) 429
Payback Period 430
How to Use the Different Capital Budgeting Methods 432
Other Issues in Capital Budgeting 435
Summary 441
Web Extensions
10A: The Accounting Rate of Return (ARR)
CHAPTER 11
Cash Flow Estimation and Risk
Analysis 453
Box: Project Valuation, Cash Flows, and Risk Analysis 454
Identifying Relevant Cash Flows 454
Analysis of an Expansion Project 459
Box: Mistakes in Cash Flow Estimation Can Kill
Innovation 466
Risk Analysis in Capital Budgeting 467
Measuring Stand-Alone Risk 467
Sensitivity Analysis 468
Scenario Analysis 471
Monte Carlo Simulation 474
Project Risk Conclusions 477
Replacement Analysis 478
Real Options 480
Phased Decisions and Decision Trees 482
vi Contents
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Summary 485
Web Extensions
11A: Certainty Equivalents and Risk-Adjusted Discount Rates
PART 5 CORPORATE VALUATION AND
GOVERNANCE 501
CHAPTER 12
Corporate Valuation and Financial Planning 503
Box: Corporate Valuation and Financial Planning 504
Overview of Financial Planning 504
Financial Planning at MicroDrive, Inc. 506
Forecasting Operations 508
Evaluating MicroDrives Strategic Initiatives 512
Projecting MicroDrives Financial Statements 515
Analysis and Selection of a Strategic Plan 519
The CFOs Model 521
Additional Funds Needed (AFN) Equation Method 523
Forecasting When the Ratios Change 526
Summary 530
CHAPTER 13
Corporate Governance 541
Box: Corporate Governance and Corporate Valuation 542
Agency Conflicts 542
Corporate Governance 545
Box: Would the U.S. Government Be an Effective
Board Director? 550
Box: The Dodd-Frank Act and Say on Pay 552
Box: The Sarbanes-Oxley Act of 2002 and
Corporate Governance 553
Box: International Corporate Governance 555
Employee Stock Ownership Plans (ESOPs) 557
Summary 560
PART 6 CASH DISTRIBUTIONS AND CAPITAL
STRUCTURE 563
CHAPTER 14
Distributions to Shareholders: Dividends and
Repurchases 565
Box: Uses of Free Cash Flow: Distributions to
Shareholders 566
An Overview of Cash Distributions 566
Procedures for Cash Distributions 568
Cash Distributions and Firm Value 571
Clientele Effect 575
Signaling Hypothesis 576
Implications for Dividend Stability 577
Box: The Great Recession of 2007: Will Dividends
Ever Be the Same? 578
Setting the Target Distribution Level: The Residual
Distribution Model 578
The Residual Distribution Model in Practice 580
A Tale of Two Cash Distributions: Dividends versus Stock
Repurchases 581
The Pros and Cons of Dividends and Repurchases 590
Box: Dividend Yields around the World 592
Other Factors Influencing Distributions 592
Summarizing the Distribution Policy Decision 594
Stock Splits and Stock Dividends 595
Box: The Great Recession of 2007: Talk About a
Split Personality! 596
Dividend Reinvestment Plans 598
Summary 599
CHAPTER 15
Capital Structure Decisions 607
Box: Corporate Valuation and Capital Structure 608
An Overview of Capital Structure 608
Business Risk and Financial Risk 610
Capital Structure Theory: The Modigliani and Miller
Models 614
Box: Yogi Berra on the MM Proposition 616
Capital Structure Theory: Beyond the Modigliani and Miller
Models 618
Capital Structure Evidence and Implications 623
Estimating the Optimal Capital Structure 628
Anatomy of a Recapitalization 634
Box: The Great Recession of 2007: Deleveraging 639
Risky Debt and Equity as an Option 639
Managing the Maturity Structure of Debt 642
Summary 645
Web Extensions
15A: Degree of Leverage
15B: Capital Structure Theory: Arbitrage Proofs of the
Modigliani-Miller Theorems
PART 7 MANAGING GLOBAL OPERATIONS 653
CHAPTER 16
Supply Chains and Working Capital
Management 655
Box: Corporate Valuation and Working Capital
Management 656
Overview of Supply Chain Management 656
Using and Financing Operating Current Assets 658
The Cash Conversion Cycle 662
Contents vii
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Box: Some Firms Operate with Negative Working
Capital! 667
Inventory Management 668
Receivables Management 669
Box: Supply Chain Finance 671
Accruals and Accounts Payable (Trade Credit) 673
Box: A Wag of the Finger or Tip of the Hat? The
Colbert Report and Small Business Payment Terms 674
The Cash Budget 677
Cash Management and the Target Cash Balance 681
Box: Use It or Lose Part of It: Cash Can Be Costly! 682
Cash Management Techniques 682
Managing Short-Term Investments 685
Box: Your Check Isn t in the Mail 686
Short-Term Financing 687
Short-Term Bank Loans 688
Commercial Paper 692
Use of Security in Short-Term Financing 692
Summary 693
Web Extensions
16A: Secured Short-Term Financing
CHAPTER 17
Multinational Financial Management 705
Box: Corporate Valuation in a Global Context 706
Multinational, or Global, Corporations 706
Multinational versus Domestic Financial Management 707
Exchange Rates 709
Exchange Rates and International Trade 714
The International Monetary System and Exchange Rate
Policies 715
Trading in Foreign Exchange 720
Interest Rate Parity 722
Purchasing Power Parity 724
Box: Hungry for a Big Mac? Go to Ukraine! 725
Inflation, Interest Rates, and Exchange Rates 726
International Money and Capital Markets 726
Box: Greasing the Wheels of International
Business 727
Box: Stock Market Indices around the World 731
Multinational Capital Budgeting 732
Box: Consumer Finance in China 733
Box: Double Irish with a Dutch Twist 735
International Capital Structures 737
Multinational Working Capital Management 738
Summary 741
APPENDIXES
Appendix a Solutions to Self-Test Problems 749
Appendix b Answers to End-of-Chapter
Problems 773
Appendix c Selected Equations 781
Appendix d Values of the Areas under the Standard
Normal Distribution Function 791
GLOSSARY AND INDEXES
Glossary 793
Name Index 831
Subject Index 833
viii Contents
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Preface
When we wrote the first edition of Corporate Finance: A Focused Approach, we had four goals: (1) to
create a text that would help students make better financial decisions; (2) to provide a book that covers
the core material necessary for a one-semester introductory MBA course but without all the other
interesting-but-not-essential material that is contained in most MBA texts; (3) to motivate students by
demonstrating that finance is both interesting and relevant; and (4) to make the book clear enough so
that students could go through the material without wasting either their time
