Essentials of corporate finance /
Stephen A. Ross, Massachusetts Institute of Technology, Randolph W. Westerfield, University of Southern California, Bradford D. Jordan, University of Kentucky
- Ninth edition
- xxxvi, 644 pages : illustrations ; 26 cm
- The McGraw-Hill/Irwin series in finance, insurance, and real estate .
- McGraw-Hill/Irwin series in finance, insurance, and real estate .
Includes indexes
Includes indexes
Part one: overview of financial management -- 1. Introduction to financial management -- Finance: a quick look -- The four basic areas -- Corporate finance -- Investments -- Financial institutions -- International finance -- Why study finance? -- Marketing and finance -- Accounting and finance -- Management and finance -- You and finance -- Business finance and the financial manager -- What is business finance? -- The financial manager -- Financial management decisions -- Capital budgeting -- Capital structure -- Working capital management -- Conclusion -- Forms of business organizations -- Sole proprietorship -- Partnership -- Corporation -- A corporation by another name... -- The goal of financial management -- Profit maximization -- The foal of financial management in a corporation -- A more general financial management goal -- Sarbanes-Oxley Act -- The agency problem and control of the corporation -- Agency relationships -- Management goals -- Do managers act in the stockholders' interests? -- Managerial compensation -- Control of the firm -- Conclusion -- Stakeholders -- Financial markets and the corporation -- Cash flows to and from the firm -- Primary versus secondary markets -- Primary markets -- Secondary markets -- Part two: Understanding financial statements and cash flow -- 2. Financial statements. taxes, and cash flow -- the balance sheet -- Assets: the left-hand side -- Liabilities and owners' equity: the right-hand side -- Net working capital -- Liquidity -- Debt versus equity -- Market value versus book value -- The income statement -- GAAP and the income statement -- Noncash items -- Times and costs -- Earnings management -- Taxes -- Corporate tax rates -- Average versus marginal tax rates -- Cash flow -- Cash flow from assets -- Operating cash flow -- Capital spending -- Change in net working capital -- Conclusion -- A note on free cash flow -- Cash flow to creditors and stockholders -- Cash flow to creditors -- Cash flow to stockholders -- Conclusion -- An example: cash flows for dole cola -- Operating cash flow -- Net capital spending -- Change in NWC and cash flow from assets -- Cash flow to creditors and stockholders -- 3. Working with financial statements -- Standardized financial statements -- Common-size balance sheets -- Common-size income statements -- Ratio analysis -- Short-term solvency, or liquidity, measures -- Current ratio -- Quick (or acid-test) ratio -- Cash ratio -- Long-term solvency measures -- total debt ratio -- times interest earned -- Cash coverage -- Asset management, or turnover, measures -- Inventory turnover and days' sales in inventory -- Receivables turnover and days' sales in receivables -- Total asset turnover -- Profitability measures -- Profit margin -- Return on assets -- return on equity -- Market value measures -- Price-earnings ratio -- Price-sales ratio -- market-to-book ratio -- Enterprise value-EBITDA ratio -- The DuPont identity -- an expanded DuPont analysis -- Internal and sustainable growth -- Dividend payout and earning retention -- ROA, ROE, and growth -- The internal growth rate -- The sustainable growth rate -- Determinants of growth -- A note on sustainable growth rate calculations -- Using financial statement information -- Why evaluate financial statements? -- Internal uses -- External uses -- Choosing a benchmark -- Time-trend analysis -- Problems with financial statement analysis -- Part three: Valuation of future cash flows -- 4. Introduction to valuation: the time value of money -- Future value and compounding -- Investing for a single period -- Investing for more than one period -- Present value and discounting -- The single-period case -- Present values for multiple periods -- More on present and future value -- Present versus future value -- Determining the discount rate -- Finding the number of periods -- 5. Discounted cash flow valuation -- Future and present values of multiple cash flows -- Future value with multiple cash flows -- Present value with multiple cash flows -- A note on cash flow timing -- Valuing level cash flows: annuities and perpetuities -- Present value for annuity cash flows -- Annuity tables -- Finding the payment -- Finding the rate -- Future value for annuities -- A note on annuities due -- Perpetuities -- Comparing rates: the effect of compounding periods -- Effective annual rates and compounding -- Calculating and comparing effective annual rates EARs and APRs -- EARs, APRs, financial calculators, and spreadsheets -- Loan types and loan amortization -- Pure discount loans -- Interest-only loans -- Amortized loans -- Part four: valuing stocks and bonds -- 6. Interest rates and bond valuation -- Bonds and bond valuation -- Bond features and prices -- Bond values and yields -- Interest rate risk -- Finding the yield to maturity: more trial and error -- More on bond features -- Is it debt or equity? -- Long-term debt: the basic -- The indenture -- Terms of a bond -- Security -- Seniority -- Repayment -- The call provision -- Protective covenants -- Bond ratings -- Some different types of bonds -- Government bonds -- Zero coupon bonds -- floating-rate bonds -- Other types of bonds -- Bond markets -- How bonds are bought and sold -- Bond price reporting -- A note on bond price quotes -- Inflation and interest rates -- Real versus nominal rates -- The fisher effect -- Determinants of bond yields -- The term structure of interest rates -- Bond yields and the yield curve: putting it al together -- Conclusion -- 7. Equity markets and stock valuation -- Common stock valuation -- Cash flows -- Some special cases -- Zero growth -- Constant growth -- Non constant growth -- Components of the required return -- Stock valuation using comparable, or comps -- Some features of common and preferred stock -- Common stock features -- Shareholder rights -- Proxy voting -- Classes of stock -- Other rights -- Dividends -- Preferred stock features -- Stated value -- Cumulative and noncumulative dividends -- Is preferred stock really debt? -- The stock markets -- Dealers and brokers -- Organization of the NYSE -- Members -- Operations -- Floor activity -- NASDAQ operations -- ECNs -- Stock market reporting -- Part five: Capital budgeting -- 8. Net present value and other investment criteria -- Net present value -- The basic idea -- Estimating net present value -- The payback rule -- Defining the rule -- analyzing the rule -- redeeming qualities of the rule -- Summary of the rule -- The average accounting return -- the internal rate of return -- Problems with the IRR -- Nonconventional cash flows -- Mutually exclusive investments -- Redeeming qualities of the IRR -- The modified internal rate of return (MIRR) -- Method 1: the discounting approach -- Method 2: the reinvestment approach -- Method 3: the combination approach -- MIRR or IRR: which is better? -- The profitability index -- The practice of capital budgeting -- 9. Making capital investment decisions -- Project cash plows: a first look -- Relevant cash flows -- The stand-alone principle -- Incremental cash flows -- Sunk costs -- Opportunity casts -- Side effects -- Net working capital -- Financing costs -- Other issues -- Pro forma financial statements and project cash flows -- Getting started: pro forma financial statements -- Project cash flows -- Project operating cash flow -- Project net working capital and capital spending -- Projected total cash flow and value -- The tax shield approach -- More on project cash flow -- A closer look at net working capital -- Depreciation -- Modified ACRS (MACRS) depreciation -- Book value versus market value -- An example: the majestic mulch and compost company (MMCC) -- Operating cash flows -- Changed in NWC -- Capital spending -- Total cash flow and value -- Conclusion -- Evaluating NPV estimates -- The basic problem -- forecasting risk -- Sources of value --Scenario and other what-if analyses -- Getting started -- Scenario analysis -- Sensitivity analysis -- Additional considerations in capital budgeting -- Managerial options and capital budgeting -- Contingency planning -- Strategic options -- Conclusion -- Capital rationing -- Soft rationing -- Hard rationing -- Part six: Risk and return -- 10. Some lessons from capital market history -- Returns -- Dollar returns -- Percentage returns -- The historical record -- A first look -- A closer look -- Average returns: the first lesson -- Calculating average returns -- Average returns: the historical record -- Risk premiums -- The first lesson -- The variability of returns: the second lesson -- Frequency distributions and variability -- The historical variance and standard deviation -- The historical record -- Normal distribution -- The second lesson -- 2008: the bear growled and investors howled -- Using capital market history -- More on the stock market risk premium -- More on average returns -- Arithmetic versus geometric averages -- Calculating geometric average returns -- Arithmetic average return or geometric average return? -- Capital market efficiency -- Price behavior in an efficient market -- The efficient markets hypothesis -- Some common misconceptions about the EMH -- The forms of market efficiency -- 11. Risk and return -- Expected returns and variances -- Expected return -- Calculating the varience -- Portfolios -- Portfolio weights -- portfolio expected returns -- Portfolio variance -- Announcements, surprises, and expected returns -- Expected and unexpected returns -- Announcements and news -- Risk: systematic and unsystematic -- Systematic and unsystematic risk -- Systematic and unsystematic components of return -- Diversification and portfolio risk -- The effect of diversification: another lesson from market history -- The principle of diversification -- Diversification and unsystematic risk -- Diversification and systematic risk -- Systematic risk and beta -- The systematic risk principle -- Measuring systematic risk -- Portfolio betas -- The security market line -- Beta and the risk premium -- The reward-to-risk ratio -- The basic argument -- The fundamental result -- The security market line -- Market portfolios -- The capital asset pricing model -- The SML and the cost of capital: a preview -- The basic idea -- The cost of capital -- Part seven: Long-term financing -- 12. Cost of capital -- The cost of capital: some preliminaries -- Required return versus cast of capital -- Financial policy and cost of capital -- The cost of equity -- The dividend growth model approach -- Implementing the approach -- Estimating g -- Advantages and disadvantages of the approach -- The SML approach -- Implementing the approach -- Advantages and disadvantages of the approach -- The costs of debt and preferred stock -- The cost of debt -- The cost of preferred stock -- The weighted average cost of capital -- The capital structure weights -- Taxes and the weighted average cost of capital -- Solving the warehouse problem and similar capital budgeting problems -- Calculating the WACC for Eastman chemical -- Eastman's cost of equity -- Eastman's cost of debt -- Eastman's WACC -- Divisional and project costs of capital -- The SML and the WACC -- Divisional cost of capital -- The pure play approach -- The subjective approach -- Company valuation with the WACC -- 13. Leverage and capital structure -- The capital structure question -- The effect of financial leverage -- The impact of financial leverage -- financial leverage, EPS, and ROE: an example EPS versus EBIT -- Corporate borrowing and homemade leverage -- Capital structure and the cost of equity capital -- M&M proposition I: the pie model -- The cost of equity and financial leverage: M&M proposition II -- Business and financial risk -- Corporate taxes and capital structure -- The interest tax shield -- Taxes and M&M proposition I -- Conclusion -- Bankruptcy costs -- direct bankruptcy costs -- Indirect bankruptcy costs -- Optimal capital structure -- The static theory of capital structure -- Optimal capital structure and the cast of capital -- Capital structure: some managerial recommendations -- Taxes -- Financial distress -- Observed capital structures -- A quick look at the bankruptcy process -- Liquidation and reorganization -- Bankruptcy liquidation -- Bankruptcy reorganization -- Financial management and the bankruptcy process -- Agreements to avoid bankruptcy -- 14. Dividends and dividend policy -- Cash dividends and dividend payment -- Cash dividends -- Standard method of cash dividend payment -- Dividend payment: a chronology -- More on the ex-dividend date -- Does dividend policy matter? -- An illustration of the irrelevance of dividend policy -- Current policy: dividends set equal to cash flow -- Alternative policy: initial dividend greater than cash flow -- A test -- Some real-world factors favoring a low payout -- Taxes -- Flotation costs -- Dividend restrictions -- Some real-world factors favoring a high payout -- Desire for current income -- Tax and legal benefits form high dividends -- Clientele effects" a resolution of real-world factors? -- Stock repurchases: an alternative to cash dividends -- Cash dividends versus repurchase -- Real-world considerations in a repurchase -- Share repurchase and EPS -- What we know and do not know about dividend and payout policies -- Dividends and dividend payers -- Corporations smooth dividends -- Putting it all together -- Some survey evidence on dividends -- Stock dividends and stock splits -- Value of stock splits and stock dividends -- The benchmark case -- Popular trading range -- Reverse splits -- 15. Raising capital -- The financing life cycle of a firm: early-stage financing and venture capital -- Venture capital -- Come venture capital realities -- Choosing a venture capitalist -- Conclusion -- Selling securities to the public" the basic procedure -- Crowdfunding -- Alternative issue methods -- underwriters -- Choosing an underwriter -- Types of underwriting -- Firm commitment underwriting -- Best efforts underwriting -- Dutch auction underwriting -- The green shoe provision -- The aftermarket -- Lookup agreements -- The quiet period -- IPOS and under pricing -- Evidence on under pricing -- IPO under pricing: the 19990-2000 experience -- The partial adjustment phenomenon -- Why does under pricing exist? -- New equity sales and the value of the firm -- The cost of issuing securities -- Issuing long-term debt -- Shelf registration -- Part Eight: Short-term financial management -- 16. Short-term financial planning -- Tracing cash and net working capital -- the operating cycle and the cash cycle -- Defining the operating and cash cycles -- The operating cycle -- The cash cycle -- The operating cycle and the firm's -- Organizational chart -- Calculating the operating and cash cycles -- The operating cycle -- The cash cycle -- Interpreting the cash cycle -- Some aspects of short-term financial policy -- The size of the firm's investment in current assets -- Alternative financing policies for current assets -- Which financing policy is best? -- Current assets and liabilities in practice -- The cash budget -- Sales and cash collections -- Cash outflows -- The cash balance -- Short-term borrowing -- Unsecured loans -- Secured loans -- Accounts receivable financing -- Inventory loans -- Other sources -- A short-term financial plan -- 17. working capital management -- Float and cash management -- Reasons for holding cash -- The speculative and precautionary motives -- The transaction motive -- Benefits of holding cash -- Understanding float -- Disbursement float -- Collection float and net float -- Float management -- Ethical and legal questions -- Electronic data interchange and check21: the end of float? -- Cash management: collection, disbursement, and investment -- Cash collection and concentration -- Components of collection time -- Cash collection -- Lock boxes -- Cash concentration -- Managing cash disbursements -- increasing disbursement float -- Controlling disbursements -- Investing idle cash -- Temporary cash surpluses -- Characteristics of short-term securities -- Some different types of money market securities -- credit and receivables -- Components of credit policy -- Terms of sale -- The basic form -- The credit period -- Cash discounts -- Credit instruments -- Optimal credit policy -- The total credit cost curve -- Organizing the credit function -- Credit analysis -- Credit analysis -- Credit information -- Credit evaluation and scoring -- Collection policy -- Monitoring receivables -- Collection effort -- Inventory management -- The financial manager and inventory policy -- Inventory types -- Inventory costs -- Inventory management techniques -- The ABC approach -- The economic order quantity model -- Inventory depletion -- Carrying costs -- Shortage costs -- Total costs -- Extensions to the EOQ model -- Safety stocks -- Reorder points -- Managing derived-demand inventories -- Materials requirements planning -- Just-in-time inventory -- Part nine: Topics in business finance -- 18. International aspects of financial management -- Terminology -- Foreign exchange markets and exchange rates -- Exchange rates -- Exchange rate quotations -- Cross-rates and triangle arbitrage -- Types of transactions -- Purchasing power parity -- Absolute purchasing power parity -- Relative purchasing power parity -- The basic idea -- The result -- Currency appreciation and depreciation -- Exchange rates and interest rates -- Covered interest arbitrage -- Interest rate parity -- Exchange rate risk -- Short-run exposure -- Long-run exposure -- Translation exposure -- Managing exchange rate risk -- Political risk -- Mathematical tables -- Key equations -- Answers to selected end-of-chapter problems -- Using the HP-10B and TI BA II plus financial calculators
Written to convey the most important concepts and principles of corporate finance at a level that is approachable for a wide audience by a well-respected author team known for clear, accessible presentation of material