КФ / Лекции / Brealey Myers - Principles Of Corporate Finance 7th Ed (eBook)

Beta continued

interest rates in, 47–49, 668–683

Capital asset pricing model (CAPM),

equity, 549

option pricing models in, 686–689, 690

195–205, 995–996, 999

hedging, 773

present value formulas in, 47–49

alternatives to, 205–210

impact of borrowing on, 197–198

term structure of interest rates in,

arbitrage pricing theory (APT) versus, 206

industry, 226

671–674, 678–683

assumptions behind, 202–203

market risk and, 173–174

websites, 150

capital structure and, 227–231

past returns in estimating, 225

Bookbuilding, 412–413

cost of equity capital and, 224–227

portfolio, 226

Book depreciation, 330, 333

defined, 195

portfolio risk and, 174–177, 195–205

Book rate of return, 93–94

equity beta and, 549

project, 222–223

Book-to-market effect, 202n

estimates of expected returns in,

relevering, 535

Book-to-market ratio, 202, 202n

195–196, 226–227

setting discount rates without

Book value, 330, 820

opportunity cost of capital and, 549

Bootstrap game, in mergers, 936

review of, 196–197

unlevering, 535

Borison, A., 636

security market line and, 195, 197–198

Bhagat, S., 971n

Borrowing and lending; see also Debt

tests of, 199–202

Bhandari, J. S., 724, 724n

financing; Financing decisions

weighted average cost of capital and, 549

Bhattacharya, S., 457

banks and, 394–395

Capital budget

Bhutto, Benazir, 716

in capital structure, 227–231

defined, 311

Biddle, G. C., 368, 368n

internal rate of return and, 98–99

investments outside, 312–313

Bierman, H., 140, 745, 916n

in portfolio theory, 192–194, 197–198

postaudits, 313–314

Billington, Corey A., 632

Borucki, L. S., 68n, 82, 223n

project authorizations, 312

Binomial method of option pricing, 596–602

Bower, J. L., 316, 316n, 335

Capital budgeting, 5, 7; see also Capital

Black-Scholes model and, 606

Boyco, M., 973n

budgeting problems; Capital

decision trees and, 601–602

Brattle Group, Inc., 67n

budgeting and risk; Investment

defined, 596

Break-even analysis, 259–262

decisions; Net present value

general binomial method, 601

defined, 259

(NPV), investment decisions and

two-stage, 596–601

operating leverage and, 261–262

book rate of return in, 93–94

using, 625–626, 626–628

Break-even cash flow, 543–544

capital rationing in, 105–109

Biogen, 301

Break-even points, 261–262

information needed for, 314–316

B.J. Services, 643–645

Brealey, R. A., 681n, 724, 836

internal rate of return in, 93, 96–105

Black, B., 405n

Breeden, Douglas T., 203, 212

net present value analysis in, 91–94,

Black, Fischer, 199n, 200n, 201n, 212, 452,

Brennan, Michael J., 449n, 457, 636, 656n,

119–140

658, 709n, 710n, 724, 763n

payback period in, 93, 94–96

Bridge loans, 867

process for, 311–314

Black box, nature of, 255

Brigham, E., 440n

Capital budgeting problems, 255–342; see

Black Monday (1987), 165, 361–362

Brown, G. W., 807

also Net present value (NPV),

Black-Scholes option pricing model,

Brown, K. C., 900n

investment decisions and

Brown, S. J., 353n

capital investment process, 311–314

binomial method and, 606

Bruner, R., 958

decision trees, 268–278

development of, 602–604

Buffett, Warren, 302–303, 934n

forecasting economic rents, 292–303

to estimate variability, 606–607

Burlington Industries, 966n

incentives, 316–320, 448

using, 604–605, 618–622

Burrough, B., 958, 965n, 989

information needed by decision makers,

for warrants, 644–648

Business risk, opportunity cost of capital

314–316

websites, 664

and, 549–550

market values in assessing, 287–292

Blake, C. R., 355n

Business valuation process

Monte Carlo simulation, 263–268

Blockbuster, 944

discounted cash flow (DCF) in, 75–80

performance measurement, 321–334

Blue-sky laws, 407

websites, 150

real options, 268–278, 617–636

Boardman, A., 501n

Bussard, R. N., 866n, 873

sensitivity analysis, 255–262

Board of directors

Butler, G. F., 631n, 633n

Capital budgeting and risk, 220–244

mergers and, 946–953

capital structure and, 227–231

monitoring of agency costs, 317–318

company cost of capital, 222–223,

role of, 4, 7, 23

C

227–231

voting procedures and, 385–388

discounted cash flow and, 239–243

Bodie, Z., 82, 333n, 336

measuring cost of equity capital,

Boeing, 192, 360, 943

Cadillac, 287–288

224–227

Boesky, Ivan, 953

California Air Resources Board (CARB),

project cost of capital, 222–223

Bognanno, M. L., 320n

131–132

setting discount rates without

Call options, 564–566

calculating beta, 234–238

corporate; see Corporate bonds

relationship between put prices and,

Capital gains taxes, 435, 448–452

riskiness of, 164n

595–596

Capital investments, 94

Treasury; see Treasury bonds

selling, 568

Capitalization rate, in common stock

Bond ratings, 684–685, 706, 751, 911–912

valuation of, 572

valuation, 64–65

Bond valuation

Call protection, 653

Capital markets, 5n

default risk in, 153–154, 683–692

Call provisions, 708–710

historic performance of, 153–160, 194

indexed bonds, 668–669

Campbell, J. Y., 680n, 694

reconciliation of current and future

inflation in, 668–671

Campeau Corporation, 686, 967

consumption, 19–21

Capital rationing, 105–109

value of liquidity, 1002–1003

defined, 105

websites, 926

example, 105–108

Cash ratio, 823, 826

linear programming in, 107–109,

Catastrophe bonds, 757

191–192

Cendant Corporation, 318, 318n

initial public offerings (IPOs), 405–414

profitability index in, 106–107

Certainty equivalents, 239–240, 292, 594n

quadratic programming in, 192

Chandler, A., 974n, 975n

Capital structure, 227–231, 465–521, 997; see

Chapter 7 bankruptcy, 720

also Debt policy

Chapter 11 bankruptcy, 720–723

beta and changes in, 229–230

Chase Manhattan Bank, 366, 367n, 930, 931

historic performance of capital markets,

changes in, 379–382

Chemical Bank, 930, 931

defined, 465

Chen, C. R., 965n

discount rates and, 230–231

Chen, H. C., 410, 410n

Modigiliani-Miller approach to, 465,

Chesbrough, H., 404n

467–475

Chevron Corp., 976

restructuring debt, 712

Chew, D. H., Jr., 368n

trade-off theory of capital structure, 497,

Chicago Board Options Exchange (CBOE),

508–510

564, 607, 664

websites on, 430, 559

Chief executive officers (CEOs)

Careers in finance

compensation of, 320

financial manager, 5–7

mergers and, 933, 946–953

website, 150

Chief financial officers (CFOs), 7, 418–419

Cargill, 406

Childs, P. D., 624n, 625n

Carhart, Mark, 354, 355n

CHIPS, 887–888

Carleton, W. T., 839

Chrysler, 509, 509n, 932, 946

Carlson, J. B., 436n

Chung, K. S., 958

accounting measures of performance

Carrow, K. A., 717n

Cifelli, A., 723n

Carrying cost, 890

Cisco, 434

Carve-outs, 971–972

Cissell, H., 50

incentives for managers and, 318–320

Cash, 854–859

Cissell, R., 50

in short-term financial planning, 852–853

Citibank, 972

surplus, 854

Citicorp, 435, 481, 969

tracing changes in, 854–855

Cities Service, 947–949

Compounded rates of return, risk and,

Cash balance

Citigroup, 435

determining optimal, 889–893

Citron, Robert, 364–365, 365n, 897n

minimum operating, 862

Clark, D., 930n

compounding intervals, 42–45, 48–49

surplus, 854

Class A stocks, 386

Cash budgeting, 859–862

Class B stocks, 386

inflow, 859–860

Clayton Act of 1914, 943

outflow, 860–862

Clinton, K., 807

Cash-flow beta, 237

Closely-held corporations, 3–4

Cash flows; see also Discounted cash

Coca-Cola, 169–171, 175–177, 188–190,

flow (DCF)

192, 205

accounting income versus, 119–120

Cochrane, J. H., 202n, 405n

defined, 119

Coffee, J. C., Jr., 954n

discounting safe, nominal, 544–548

Cole, R. H., 921

estimating incremental, 120–122, 126–127

Collateral, 392

forecasting, 93, 125

bank loan, 868–869

in Monte Carlo simulation, 266

bond, 706

in net present value analysis, 93–94,

Collateralized mortgage obligations

119–122, 126–127

(CMOs), 707

profits and, 857–858

Collateral trust bonds, 706

surplus-funds mergers and, 933

Collections, 883–885, 918–920

Cash in and run game, in financial

College Retirement Equities Fund

distress, 505

(CREF), 951

Cash management, 881–902

Comcast, 972

in collections, 883–885, 918–920

Comment, R., 440, 440n

in disbursement, 885–886

Commercial credit instruments, 910–911

Continuously compounded rate, 43–44

electronic funds transfer, 886–888

Commercial drafts, 910–911

floating-rate preferred stock in, 899–900

Commercial paper, 869–871, 893, 896, 898

inventory decision and, 890–892

Commodity futures contracts, 759–760,

investing idle cash, 893–895

762–764, 814

just-in-time, 890n, 891–892

Commodity options, 563

money-market investments in, 893–899

Common stock, 383–388; see also Equity

paying for bank services, 889

valuation; Portfolio risk; Stock

trade-off in, 892–893

options

in credit analysis, 912–914

value additivity and, 177–178, 934

government loan guarantees, 689–690

Divestiture, 969

option pricing model and, 686–689, 690

Dividend(s)

restrictive covenants, 710–711

in business valuation, 79–80

websites, 751

in common stock valuation, 60–80

Default swaps, 765, 769

in convertible valuation, 652–653

Deferred taxes, 528n

current price and, 61–62

Degrees of freedom, 161n

estimating growth of, 65–70

Economic value added (EVA), 322–325

Delaware corporate law, 4n

future price and, 62–64

Dell Computer, 73, 74, 166–168, 168n,

in option pricing, 608–609

173–174, 224–226

payout ratio, 66; see also Dividend policy,

Denis, D. J., 989

controversy concerning

Depreciation, 124–126

preferred stock, 389

accelerated, 127–128

types of, 434

biases in calculating returns, 330, 333

in warrant valuation, 644

salvage value, 124, 739, 742–743

Dividend policy, 433–456

Efficient-market hypothesis, 347–370, 996

straight-line, 125, 129–130

capital structure and, tax-free economy,

Depreciation tax shields, 127–128, 132n,

465–475

546–547, 731

controversy concerning, 441–455,

Derivatives; see Forward contracts; Futures

1001–1002

contracts; Swaps

anti-dividend payout, 441, 448–452

Descartes, René, 100n

irrelevance of dividends, 441–447,

Devarajan, S., 291n

452–455

Dewenter, K. L., 439n

pro-dividend payout, 441, 447–448

irrelevance of dividends and, 441–447,

Dhrymes, P. J., 206n

efficient-market hypothesis and,

Diageo, 75

441–447, 452–455

lessons of market efficiency, 363–370

Diamond, D., 391n

information content of, 438–441

Dick, C. L., Jr., 839

method of payment, 433–436

Dill, D. A., 745

model for determining, 434–435

Efficient portfolios, 191–194, 196–197, 204

Dilution

payers and nonpayers, 434–435

in convertible valuation, 651–652

pecking order of financing choices

in warrant valuation, 645, 646–648

and, 513

Dimson, E., 124n, 158, 158n, 159n, 179

share repurchase, 435–436, 439–441,

Disbursement float, 882

445–447, 450

Disbursements, controlling, 885–886

Dividend yield, 64–65, 823, 829–830

Discounted cash flow (DCF)

Dixit, A. K., 279, 630n, 636

Electronic Bill Presentation and Payment

in bond valuation, 47–49

Dodd, D. L., 447, 447n

in business valuation, 75–80

Dodd, Peter, 947n

Electronic funds transfer (EFT), 886–888

in common stock valuation, 60–61, 64,

Doherty, N. A., 757n

65–80

Donaldson, G., 839

debt-equivalent, 544–548

Dow Corning, 723

defined, 34

Dow Jones Industrial Average, 361

problems in option pricing, 591–592

Downes, D. H., 839

risk and, 239–243

Drexel Burnham Lambert, 686

multiple risk-adjusted discount rates

Duffie, D., 777

and, 242–243

Duke Energy, 758

single risk-adjusted discount rate

Dunbar, N., 894n

Equity financing; see also Equity valuation

and, 240–242

Dunn, K. B., 707n

capital structure changes and, 379–382

Discounted-cash-flow rate of return; see

DuPont, 1, 406

Internal rate of return (IRR)

Dupont system, 830–831

Discounted payback rule, 96

Durand, D., 82, 465n, 478n, 482

Discount factor, 14, 34–36

Duration

Discount rate; see also Opportunity cost of

in bond valuation, 674–678

capital

in hedging, 771

avoiding fudge factors in, 235–237

Dutch auction, 435n

capital structure and, 230–231

in financial distress situations, 504–505

setting without calculating beta,

234–238

E

Discriminatory auctions, 413–414

Diversifiable (unique) risk, 168, 174–175,

205, 235

E. F. Hutton, 883

in business valuation process, 75–80

Diversification

Earnings announcements, 357

limits to, 171–172

Earnings per share (EPS)

discounted-cash-flow (DCF) formula in,

market risk and, 172–173

in equity valuation, 70–75

mergers and, 934

mergers and, 935

portfolio risk and, 165–168, 171–172,

Earnings-price ratio, 71

estimating capitalization rate, 64–65

177–178

Eastern Airlines, 500–502, 502n, 721

Equity valuation continued

371, 434–435, 438, 438n, 466n, 483,

financial institutions in, 393–395

stock price and earnings per share in,

510n, 680n, 694, 999, 999n

nature of, 5, 5n

Fama-French three-factor model

pooling risk and, 395

websites, 150

described, 208–210

types of, 392–393

Equivalent annual cost, 131–136

website, 252

Financial planning, 831–837

calculating, 133

Fannie Mae, 708, 897

accounting approach to, 832–836

defined, 132

Federal agency securities, 896, 897

alternative business plans, 831

of excess capacity, 136

Federal Deposit Insurance Corporation

percentage-of-sales model, 832–834

inflation and, 133–134

(FDIC), 895

pitfalls of model design, 832–834

longversus short-lived equipment,

Federal Home Loan Bank (FHLB), 897

short-term; see Short-term financial

Federal National Mortgage Association

planning

operating leases and, 734–737

(Fannie Mae), 708, 897

websites, 926

in replacement decisions, 135–136

Federal Trade Commission (FTC), 943

Financial ratios, 822–831

taxes and, 135

FedEx, 269

Financial slack, 514–515

technological change and, 134–135

Fedwire, 887–888

defined, 514

Equivalent loans, 545–547, 740–742

Financial Accounting Standards Board

free cash flow and, 75–76, 514–515

Erb, C., 804n

(FASB), 733, 944–945

Financial statements, 817–822

Esty, B. C., 724

Financial architecture

balance sheet, 819–820

of conglomerates in the U.S., 977

in credit analysis, 912–914

concerns for, 24

defined, 963

income statement, 820–821

principal-agent problem, 8, 23

of leveraged buyouts and

in merger analysis, 944–945

European calls, 564, 595–596, 608

restructurings, 968

qualified opinions and, 318

European puts, 607

Financial assets, 394; see also Securities

sources and uses of funds, 821–822,

Evans, M. D. D., 807

Financial distress, 497–510

856–857

Evanson, P., 440n

bankruptcy, 498–503

websites, 926

Event risks, 713

without bankruptcy, 503–507

Financial structure; see Capital structure

Evergreen credit, 867

nature of, 497

Financing decisions, 5, 345–430; see also

Excess capacity, equivalent annual cost

trade-off theory of capital structure, 497,

Capital structure; Corporate

508–510

financing; Debt financing;

Ex dividend, 433

type of asset and, 507–508

Efficient-market hypothesis;

Exotic securities

Financial futures contracts, 759–760,

Equity financing; Leasing

asset-backed securities, 707

761–762

adjusted present value (APV), 523,

bonds, 717–718

Financial institutions, 384–385, 393–395

536–544

stripped bonds, 674, 678, 717

Financial leases, 737–744

adjusting discount rate through

success of, 1001

advantages of, 743–744

weighted average cost of capital

and violation of Modigliani-Miller

bankruptcy and, 739

(WACC), 523, 524–536

defined, 730, 733

investing decisions versus, 126, 346–347

Expansion decision

example, 737–738

mergers and, 936–937

exploiting new technology in, 295–303

ownership of asset, 738–739

NPV and, 126, 362–363

forecasting market values in, 287–292

salvage value for depreciation, 739

weighted-average cost of capital in,

Expansion option, 269–270, 563

as source of financing, 730

524–536

flexible production, 630–634

taxes and, 739–740

Finnerty, J. D., 655n

follow-on investment opportunities,

valuing, 740–742

Finnerty, J. E., 903

Financial leverage, 229–230, 824

Fiorina, Carly, 365–366

Expectations theory of term structure,

effect in competitive tax-free economy,

First-in, first-out (FIFO) inventory

465–482

valuation, 368

Expected returns

Modigliani-Miller approach,

First-stage financing, 402–403

capital asset pricing model and,

467–475

First USA, 972

traditional approach, 476–481

Fisher, A. C., 291n

Modigliani-Miller approach to capital

leverage ratios, 823, 824–825

Fisher, F. M., 336, 546n

Financial managers, 5–7

Fisher, Irving, 26, 668–671, 681, 792n

traditional approach to capital structure

book profitability and, 333–334

Fisher, L., 366n, 367n

careers in finance, 5–7, 150

Fisher, M. L., 902

Extra dividends, 434

compensation plans for, 318–320

Fixed-rate debt, 391

Exxon Mobil, 73, 165, 172, 174, 192, 196,

incentives and, 316–320

Flaspohler, D. C., 50

information problems of, 314–316

Float, 883–885

Ezzell, R., 527, 527n, 542n, 553

job titles of, 6–7

creation of, 881–883

lessons of market efficiency and,

managing, 883

363–370

Floating charge, 869

market anomalies and, 356–363

Floating-rate debt, 390–391

profit maximization and, 22

Floating-rate notes, 481

Fabozzi, F. J., 629n, 724, 745, 903

reading done by, 11

Floating-rate preferred stock, 899–900

role of, 5–6

Florida Power & Light Company, 440

Factoring, 919–920

separation of ownership and

Flow-to-equity method of valuing

Faircloth, G., 951n, 952n

management and, 4, 7–9, 22

companies, 531–532

Fair Isaacs, 912

value maximization and, 23–25, 311–335

Food and Drug Administration (FDA),

Fama, Eugene F., 26, 179, 202n, 208–210,

Financial markets, 392–395

267–268

Ford, Henry, 982

Ginnie Mae, 897n

Ford Motor, 23, 859, 932

Ginsberg, A. R., 685n, 966n

Forecasts

Glaxo Smith Kline, 313

cash flow, 93, 125

Goetzmann, W. N., 158n

economic rents in, 292–303

Gold, investment decisions for, 289–292

establishing consistent, 314

Golden parachutes, 949

market values in, 287–292

Goldman Sachs, 3n

reducing bias in, 314–315

Goldreich, D., 413n, 426

Forward contracts, 764–765

Gompers, P. A., 405n, 425

forward rate agreements (FRAs), 764

Goodwill, 945

homemade, 764–765

Gordon, M. J., 65n, 82

speculation in, 773–775, 953

Governance and control, 981–986

Forward interest rate, 678–679

defined, 963

Forward rate agreements (FRAs), 764

in the U.S., 981–982

Foster, G., 238n, 245, 839

Government National Mortgage

FPL Group, 440

Association (GNMA; Ginnie

Franklin Savings Association, 668n

Mae), 897n

Franks, J. R., 722n, 723n, 724, 745,

Government regulation, market

943n, 982–983, 983n, 984n,

imperfections due to, 480–481

986n, 989

Grabbe, J. O., 806

Franks, R., 725

Graham, B., 447, 447n

Freddie Mac, 708

Graham, John R., 221n, 496, 497, 497n, 517

Free cash flow (FCF), 75–76, 514–515

Grant, E. L., 140

Free-cash-flow problem, 317

Gray market, 412n

Free-rider problem, 318

Great Depression, 46, 164

French, K. R., 179, 202n, 208–210, 212, 245,

Green, R. C., 496n

434–435, 510n, 999, 999n

Greenmail, 435

Frenkel, J. A., 807

Greenmail defense, 947

Friend, I., 206n

Green Mountain Coffee, 753

Froot, K. A., 757n, 777, 793n, 807

Greenspan, Alan, 360

Fruit of the Loom, 719

Grenadier, S. R., 745

Full-service leases, 730

Grinblatt, M. S., 366n

Futures contracts, 758–764

Growth rates

commodity, 759–760, 762–764, 814

internal, 837

financial, 759–760, 761–762

sustainable, 837–838

hedging with, 758–764, 769–773

Growth stocks, 70, 202

mechanics of trading, 761

Gruber, M. J., 206–208, 211, 212, 355n,

speculation in, 775

371, 996n

websites, 814

Gulf, 948

Futures prices

Gultekin, N. B., 206n

commodity futures, 762–764

financial futures, 761–762

H

G

H. J. Heinz Company, 360, 383–384,

389, 390

Galai, D., 517, 647n, 658, 937n

Habib, M., 724

Gallinger, G. W., 873

Hall, B. H., 955n

Gates, Bill, 385, 982

Hall, B. J., 319n, 320n

Gearing; See Financial leverage

Hamada, R. S., 483

General cash offers, 414–419

Hansen, R., 410n

costs of, 417

Hard rationing, 109

market reaction to, 418–419

Harper, J. T., 973n

shelf registration, 414–415

Harris, M., 517

Ibbotson Associates, Inc., 45n, 153–156,

General Electric, 3, 59–60, 120–121, 319,

Harris, R. S., 83, 943n

404, 944

Hart, O., 385n, 396, 723n

General Mills, 75

Hart-Scott-Rodino Antitrust Act of

General Motors, 3, 4, 23, 224–226, 360, 932

1976, 943

General Motors Acceptance Corporation

Harvey, C., 221n

(GMAC), 866n

Harvey, C. R., 804n

Georgia Pacific Corporation, 972n

Hausman, W. H., 916n

Getty Oil, 24n

Hawawini, G., 371

Getty Petroleum, 509

Hax, A. C., 279, 839

for financial managers, 316–320, 448

Gibbons, M. R., 212

Healey, P. B., 873

Gibbs, L., 501n

Healy, P. M., 367, 367n, 439, 439n, 832n,

leveraged buyouts (LBOs) and, 967

Gillette, 313

839, 955n

Gilson, R., 405n

Hedge ratio, 593, 770