Parrino

17.17 You would probably prefer that the firm initiate a stock repur- Solutions to Selected Questions and Problems 717
chase. You can opt not to sell your shares to the firm but still partici-
pate in the increased value of the firm’s shares since your pro-rata share and therefore the value of the expected free cash flows from the firm. It
of the expected future cash flows generated by the firm will increase. makes sense to add back the value of excess cash because it represents
You would probably not prefer a dividend payment since you would value over and above that which the operating assets of the business are
then be required to receive the cash if you were the registered owner expected to produce.
of the shares on the record date. 18.11 Probably not. The private shares are relatively illiquid and the
value would be discounted for this lack of liquidity in the market.
17.19 Assuming that managers are acting to maximize firm value, any 18.13 A Limited Liability Company (LLC) is a hybrid of a C-corporation
time they are repurchasing shares they must be doing so because they and a partnership. It has the limited liability of a C-corporation with the
believe that the firm’s shares are undervalued and that repurchasing tax advantages of a partnership.
shares is a positive NPV project. In repurchasing the shares, management 18.15 Break-even for TV option ϭ 1,250 units per year. Break-even for
is utilizing inside information to take advantage of the sellers of those flyer option ϭ 150 units per year. Choose the flyer option.
shares in a way that benefits the remaining stockholders of the firm. Con- 18.17 $1,573.64 million
sequently, management is not doing something in the interest of all stock- 18.19 The enterprise value/EBITDA multiple is more appropriate since
holders. Stockholders who sell will be selling at a lower price than they the capital structures of Johnson and Billy’s differ considerably.
could have realized had they held their shares until the inside information 18.21 $12,675,000
became public. 18.23 It is not adequate. $9,400 of additional capital will be required
up-front. $89,400 is needed to maintain a $5,000 cash balance. The
17.21 (1) Open-market purchase—the firm simply purchases the monthly break-even points for the firm are: 4,333.3 bottles in the initial
shares in the market, (2) Tender offer—the firm makes an offer through a month and 1,833.3 bottles in the following months.
general announcement, offering to buy up to a certain number of shares 18.25 See the outline for a business plan in Section 18.2.
from anyone who wishes to sell, (3) Targeted stock repurchase—the firm 18.27 The company has a short history, high investments, no sales, and
directly negotiates with an individual stockholder to buy shares from that highly uncertain future cash flows. The cost approach is not valid for such
individual. Exhibit 17.3 presents data on stock price reactions. a young biochemical company. It is hard to value the company using mul-
tiples because of the lack of sales and negative earnings, and because of a
17.23 The purpose of setting the ex-dividend date before the record lack of comparable public companies. The transaction approach is also
date is to allow time for a sale of securities to be completed and re- likely to be difficult to apply due to the difficulty of finding a comparable
corded before the record date. Since the settlement period was reduced transaction. Despite the many uncertainties, we should try to estimate the
from five days to two days, we should also have seen the number of future free cash flows and the risks associated with these cash flows and
days between the ex-dividend date and the record date reduced, which use the FCFF approach to value it.
we did. 18.29 7.9%
18.31 VE ϭ $354,849; Your friend should receive 9.87 percent of the
17.25 Paying a dividend reduces the value of equity and thereby in- equity.
creases the debt-to-total-capital ratio in a levered firm.
CHAPTER 19
17.27 $15
19.1 The strategic plan drives all decision-making within the firm and
17.29 $72,500 covers all areas of a firm’s operations.
19.3 The financing plan identifies EFN, sources of funding, target capi-
17.31 $150,000 tal structure, and dividend policy.
19.5 The important elements of financial modeling are sales and cost
17.33 Ultimately, the best decision will depend on a comparison of the forecasts, investment decisions, financing requirements and decisions,
advantages and disadvantages of a special dividend and a share repur- and pro-forma statements.
chase, in view of the characteristics of your company and your objectives. 19.7 55%
If speed is a primary concern, a special dividend is likely to be your only 19.9 Net sales $1,710; Costs $399; Net income $1,311
choice. On the other hand, if speed is not a primary concern, a share re- 19.11 The capital intensity ratio measures the amount of assets needed
purchase might be more appropriate. to generate one dollar in sales.
19.13 68.02%
CHAPTER 18 19.15 6.8%
19.17 Exhibit 19.11 gives you the plot.
18.1 The forms of organizations discussed in this chapter include: 19.19 The electric utilities industry and the aluminum processing industry
Sole Proprietorship, Partnership (General Partnership and Limited are capital intensive.
Partnership), Limited Liability Company (LLC), and Corporation 19.21 8%
(S-Corporation and C-Corporation). The access to capital for each is 19.23 8.2%
summarized in Exhibit 18.1. 19.25 9.9%
19.27 5.2%
18.3 With sole proprietors and general partners, there is the pos- 19.29 35.9%
sibility that personal assets can be taken to satisfy claims on the 19.31 9.6%
businesses. In contrast, the liabilities of investors in LLCs and cor-
porations are generally limited to the money that they have invested
in the business.

18.5 Equity capital can be obtained from friends and family, venture
capitalists, or other potential investors that you know. Debt capital can be
obtained from bank loans, cash advances on credit cards, or loans from
other individual investors or other businesses.

18.7 The replacement cost of a business is the cost of replacing the
assets of the business in their present form.

18.9 Excess cash is a non-operating asset because this cash can be dis-

718 Solutions to Selected Questions and Problems

19.35

Morgan Construction Company—Pro Forma Balance Sheet for June 20, 2012

2011 2012 2011 2012

Cash $ 3,349,239 1.25 $ 4,186,548 Accounts payable $ 9,041,679 1.25 $11,302,098

Accounts receivables 5,830,754 1.25 7,288,442 Notes payable 4,857,496 1.25 6,071,869

Inventories 22,267,674 1.25 27,834,593 Total current liabilities $13,899,174 $17,373,968

Total current assets $31,447,666 $39,309,583 Long-term debt 29,371,406 37,164,258

Net fixed assets 43,362,482 1.25 54,203,102 Common stock 19,987,500 1.25 24,984,375

Other assets 1,748,482 1.25 2,186,133 Retained earnings 12,940,974 1.25 16,176,217

Total assets $76,559,054 $95,698,818 Total liabilities & equity $76,559,054 $95,698,818

Morgan Construction Company
Pro Forma Income Statement for the Fiscal Year Ended

June 30, 2012

2011 2012

Net sales $193,212,500 1.25 $241,515,625

Costs 145,265,625 1.25 181,582,031

EBITDA $ 47,946,875 $ 59,933,594

Depreciation 23,318,750 1.25 29,148,438

EBIT $ 24,628,125 $ 30,785,156

Interest 11,935,869 1.25 14,919,836

EBT $ 12,692,256 $ 15,865,320

Taxes (35%) 4,442,290 1.25 5,552,862

Net income $ 8,249,967 $ 10,312,458

19.37 3.37%; 6.26%

19.39 a. 4.31%; b. 13.86%; c. $4,777,333;
d. See the following financial statements

Munson Communications Company—Pro Forma Balance Sheet for June 20, 2012

2011 2012 2011 2012

Cash $ 1,728,639 1.20 $ 2,074,367 Accounts payable 4,666,673 1.20 $ 5,600,007

Accounts receivables 3,009,421 1.20 3,611,305 Notes payable 2,507,094 1.20 3,008,513

Inventories 11,492,993 1.20 13,791,592 Total current liabilities $ 7,173,767 $ 8,608,521

Total current assets $16,231,054 $19,477,264 Long-term debt 13,345,242 16,687,821

Net fixed assets 22,380,635 1.20 26,856,763 Common stock 10,165,235 10,165,235

Other assets 1,748,906 1.20 2,098,688 Retained earnings 9,676,351 12,971,137

Total assets $40,360,595 $48,432,714 Total liabilities & equity $40,360,595 $48,432,714

Munson Communications Company
Pro Forma Income Statement for the Fiscal Year Ended

June 30,2012

Net sales 2011 1.20 2012
Costs 1.20
EBITDA $79,722,581 $95,667,097
Depreciation 59,358,499 1.20 71,230,199
EBIT $20,364,082 $24,436,898
Interest 7,318,750 1.20 8,782,500
EBT $13,045,332 $15,654,398
Taxes (35%) 3,658,477 1.20 4,390,172
Net income $ 9,386,855 $11,264,226
3,285,399 3,942,479
$ 6,101,456 $ 7,321,747

CHAPTER 20 Solutions to Selected Questions and Problems 719

20.1 An option is the right to buy or sell an asset at a prespecified price 20.33 It mitigates this concern because the lenders will benefit through
on or before a prespecified date. the call option from increased volatility in the value of the firm. How
much a conversion option mitigates this concern depends on the specific
20.3 $0; $15 characteristics of the option.

20.5 The value of a call option increases as: (1) Current value of the CHAPTER 21
underlying asset increases; (2) Exercise price decreases; (3) Volatility of
the value of the underlying asset increases; (4) Time until the expiration 21.1 $183.77
of the option increases; or (5) Risk-free rate of interest increases. 21.3 a. MP11.8483/$; b. €1.1747/£; c. C$0.0316/Rs
21.5 Same cost in both cities based on the spot rate!
20.7 The seller of a put option hopes that the value of the underlying 21.7 $9,400
asset will remain at or above the exercise price, thereby making it worth- 21.9 $3,753,295
less to the owner (buyer) of the option. 21.11 (i) The forward premium (discount) ϭ (SF1.045/$ Ϫ SF1.0434/$)/

20.9 No. The losses to the seller of a call option are only limited by the SF1.0434/$ ϭ 0.31%, so there is a forward premium on the
extent to which the value of the underlying asset can increase. There is no Swiss franc.
other limit. (ii) Theforwardpremium(discount)ϭ(C$1.0003/$ϪC$1.0048/$)/
C$1.0048/$ ϭ Ϫ0.90%, so there is a forward discount on the
20.11 Your option is worth very slightly more than zero. There is little Canadian dollar.
chance that the stock price will move above $100 by tomorrow, but the (iii) Given the data on forward rates in (i) and (ii) we can ex-
chance is not zero, so the option still has some value. pect the Swiss franc to appreciate relative to the U.S. dollar and
the Canadian dollar can be expected to depreciate relative to
20.13 The underlying asset of a financial option is a financial asset, the U.S. dollar.
while the underlying asset of a real option is a non-financial (real) asset, 21.13 3.91%
such as a project. 21.15 €1.1952/£
21.17 SK6.8761/SF
20.15 The payoff functions for lenders and stockholders are like those 21.19 Transaction exposure is related to foreign exchange risk faced by
for different types of options. Agency costs arise because these payoff firms that are expecting revenues in foreign currency or have expenses in
functions are different. foreign currency that relate to transactions they have already entered into.
As the exchange rate changes, the home currency value of these revenues
20.17 The purchaser of a callable bond is simultaneously buying a or expenses changes. If exchange rate changes are more permanent in
straight (non-callable) bond and selling the issuer a call option on that nature and modify the way a firm does its business, then we say that a
bond. The total value of the callable bond would equal the value of the firm is facing operating exposure.
straight bond minus the value of the option. It would be lower than the 21.21 5.44%
value for a straight bond. 21.23 €0.007368/¥
21.25 Rs43.43/$
20.19 Because option buyers pay option sellers an amount that com- 21.27 $3,250,307
pensates sellers for the risks that they will lose money on the option. The 21.29 $5,286.50
amount that the seller receives is known as the option premium. 21.31 $7,807.35
21.33 4,426.87 million won
20.21 $7.01 21.35 2.92%; 2.95%; The domestic bond issue will have the lowest cost
to the firm.
20.23 $1.18 21.37 $64,062.50; $61,875; Daiwa’s offer has the lower interest cost.

20.25 A golden parachute can help reduce agency problems by reducing
the potential cost to a manager of making decisions that stockholders want,
but that could harm the manager. For example, having a golden parachute
can provide a manager with stronger incentives to invest in risky projects or
approve a merger that could result in the loss of his or her job.

20.27 The payoff of these two portfolios is identical.

20.29 Both the debt and equity are worth $5 million before the invest-
ment; $6.5 million; $3.5 million

20.31 Call option #1 has a lower strike price and costs less. In a situa-
tion like this you can earn an arbitrage opportunity by purchasing the
less-expensive option (#1) and selling the more expensive (#2).

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Glossary

A best-effort underwriting underwriting agreement in which the under-
writer does not agree to purchase the securities at a particular price but
accounting operating profit (EBIT) break-even point the number of promises only to make its “best effort” to sell as much of the issue as pos-
units that must be sold for accounting operating profit to equal $0 sible above a certain price
accounting rate of return (ARR) a rate of return on a capital project beta (␤) a measure of nondiversifiable, systematic, or market, risk
based on average net income divided by average book value over the proj- bid price the price a securities dealer will pay for a given stock
ect’s life; also called the book value rate of return book value the net value of an asset or liability recorded on the financial
adjusted book value the sum of the fair market values of the individual statements—normally reflects historical cost
assets in a business bootstrapping the process by which many entrepreneurs raise seed
agency conflicts conflicts of interest between a principal and an agent money and obtain other resources necessary to start their businesses
agency costs the costs arising from conflicts of interest between a break-even analysis an analysis that tells us how many units must be
principal and an agent; for example, between a firm’s owners and its sold in order for a project to break even on a cash flow or accounting
management profit basis
amortization schedule a table that shows the loan balance at the begin- brokers market specialists who bring buyers and sellers together, usually
ning and end of each period, the payment made during that period, and for a commission
how much of that payment represents interest and how much represents business plan a document that describes the details of how a business
repayment of principal will be developed over time
amortizing loan a loan for which each loan payment contains repay- business risk the risk in the cash flows to stockholders that is associated
ment of some principal and a payment of interest that is based on the re- with uncertainty due to the characteristics of the firm’s assets
maining principal to be repaid
angels (angel investors) wealthy individuals who invest their own C
money in new ventures
annual percentage rate (APR) the simple interest rate charged per pe- call option an option to buy the underlying asset
riod multiplied by the number of periods per year call premium the price that the buyer of a call option pays the seller for
annuity a series of equally spaced and level cash flows extending over a that option
finite number of periods Capital Asset Pricing Model (CAPM) a model that describes the rela-
annuity due an annuity in which payments are made at the beginning of tion between risk and expected return
each period capital budgeting the process of choosing the productive assets in
arbitrage buying and selling assets in a way that takes advantage of price which the firm will invest
discrepancies and yields a profit greater than that which would be ex- capital lease a lease which has the characteristics of a sale
pected based solely on the risk of the individual investments capital markets financial markets where equity and debt instruments
asset substitution problem the incentive that stockholders in a finan- with maturities greater than one year are traded
cially leveraged firm have to substitute more risky assets for less risky assets capital rationing a situation where a firm does not have enough capital
average tax rate total taxes paid divided by taxable income to invest in all attractive projects and must therefore ration capital
capital structure the mix of debt and equity that is used to finance
B a firm
cash conversion cycle the length of time from the point at which a
balance sheet financial statement that shows a firm’s financial position company pays for raw materials until the point at which it receives cash
(assets, liabilities, and equity) at a point in time from the sale of finished goods made from those materials
bankruptcy legally declared inability of an individual or a company to cash flow to investors the cash flow that a firm generates for its inves-
pay its creditors tors in a given period, excluding cash inflows from the sale of securities to
bankruptcy costs, or costs of financial distress costs associated with investors
financial difficulties a firm might experience because it uses debt financing chief financial officer (CFO) the most senior financial manager in a
benchmark a standard against which performance is measured company

722 Glossary depreciation allocation of the cost of an asset over its estimated life to
reflect the wear and tear on the asset as it is used to produce the firm’s
oefficient of variation (CV) a measure of the risk associated with an goods and services
nvestment for each one percent of expected return derivative security a security that derives its value from the value of
ollection time (float) the time between when a customer makes a pay- another asset; an option is an example of a derivative security
ment and when the cash becomes available to the firm direct bankruptcy costs out-of-pocket costs that a firm incurs when it
ommercial paper short-term debt in the form of promissory notes is- gets into financial distress
ued by large, financially secure firms with high credit ratings discount bonds bonds that sell at prices below par (face) value
ommon-size financial statement a financial statement in which each discounted payback period the length of time required to recover a
number is expressed as a percent of a base number, such as total assets or project’s initial cost, accounting for the time value of money
otal revenues discounting the process by which the present value of future cash flows
ommon stock an equity share that represents the basic ownership is obtained
laim in a corporation; the most common type of equity security discount rate the interest rate used in the discounting process to find
ompensating balances bank balances that firms must maintain to at the present value of future cash flows
east partially compensate banks for loans or services rendered diversification Reducing risk by investing in two or more assets whose
ompound annual growth rate (CAGR) the average annual growth values do not always move in the same direction at the same time
ate over a specified period of time dividend something of value distributed to a firm’s stockholders on a pro-rata
ompounding the process by which interest earned on an investment is basis—that is, in proportion to the percentage of the firm’s shares that they own
einvested, so in future periods interest is earned on the interest as well as dividend discount model (DDM) approach an income approach to
he principal valuation in which all dividends that are expected to be distributed to stock-
ompound interest interest earned both on the original principal holders in the future are discounted to estimate the value of the equity
mount and on interest previously earned dividend payout ratio the proportion of net income paid out (distrib-
onsumer credit credit extended by a business to consumers uted) as dividends
ontingent projects projects whose acceptance depends on the accep- dividend reinvestment program (DRIP) a program in which a com-
ance of other projects pany sells new shares, commission free, to dividend recipients who elect
ontrol premium an adjustment that is made to a business value esti- to automatically reinvest their dividends in the company’s stock
mate to reflect value associated with control that is not already reflected dividend yield a stock’s annual dividend divided by its current price
n the analysis
onventional cash flow a cash flow pattern consisting of an initial cash E
utflow that is followed by one or more cash inflows
orporation a legal entity formed and authorized under a state charter; earnings per share (EPS) net income divided by the number of com-
n a legal sense, a corporation is a “person” distinct from its owners mon shares outstanding
ost of capital the required rate of return for a capital investment economic order quantity (EOQ) order quantity that minimizes the
ountry risk the political uncertainty associated with a particular total costs incurred to order and hold inventory
ountry effective annual interest rate (EAR) the annual interest rate that reflects
oupon payments the interest payments made to bondholders compounding within a year
oupon rate the annual coupon payment of a bond divided by the effective annual yield (EAY) the annual yield that takes compounding
ond’s face value into account; another name for the effective annual interest rate (EAR)
ovariance of returns a measure of how the returns on two assets co- efficient market hypothesis a theory concerning the extent to which
ary, or move together information is reflected in security prices and how information is incor-
rossover level of unit sales (CO) the level of unit sales at which cash porated into security prices
flows or profitability for one project alternative switches from being lower efficient market market where prices reflect the knowledge and expec-
han that of another alternative to being higher tations of all investors
rossover point the discount rate at which the NPV profiles of two proj- enterprise value the value of a company’s equity plus the value of its
cts cross and, thus, at which the NPVs of the projects are equal debt; also the present value of the total free cash flows the company’s as-
urrent assets assets, such as accounts receivable and inventories, that sets are expected to generate in the future
re expected to be liquidated (collected or sold) within one year equivalent annual cost (EAC) the annual dollar amount of an annuity
that has a life equal to that of a project and that also has a present value
D equal to the present value of the cash flows from the project; the term comes
from the fact that the EAC calculation is often used to calculate a constant
dealers market specialists who “make markets” for securities by buying annual cost associated with projects in order to make comparisons
nd selling from their own inventories Eurocredits short- to medium-term loans of a Eurocurrency to multina-
declaration date the date on which a dividend is publicly announced tional corporations and governments of medium to high credit quality
default risk the risk that a firm will not be able to pay its debt obligations Eurocurrency a time deposit that is in a bank located in a country differ-
s they come due ent from the country that issued the currency
degree of accounting operating leverage (Accounting DOL) a Eurodollar a U.S. dollar deposited in a bank outside the United States
measure of the sensitivity of accounting operating profits (EBIT) to ex-dividend date the first day on which a stock trades without the rights
hanges in revenue to a dividend
degree of pretax cash flow operating leverage (Cash Flow DOL) a exercise (expiration) date the last date on which an option can be
measure of the sensitivity of cash flows from operations (EBITDA) to

exercise (strike) price the price at which the owner of an option has the Glossary 723
right to buy or sell the underlying asset
expected return an average of the possible returns from an investment, formal line of credit a contractual agreement between a bank and a
where each return is weighted by the probability that it will occur firm under which the bank has a legal obligation to lend funds to the firm
external funding needed (EFN) the additional debt or equity a firm up to a preset limit; also known as revolving credit
must raise from external sources to meet its total funding requirements forward rate a rate agreed on today for an exchange to take place on a
extra dividend a dividend that is generally paid at the same time as a specified date in the future
regular cash dividend to distribute additional value free cash flow from the firm (FCFF) approach an income approach to
valuation in which all free cash flows the assets are expected to generate
F in the future are discounted to estimate the enterprise value
free cash flow to equity (FCFE) approach an income approach to
face value, or par value the amount on which interest is calculated and valuation in which all cash flows that are expected to be available for dis-
that is owed to the bondholder when a bond reaches maturity tribution to stockholders in the future are discounted to estimate the
factor an individual or a financial institution, such as a bank or a busi- value of the equity
ness finance company, that buys accounts receivable without recourse future value (FV) the value of an investment after it earns interest for
fair market value the value of a business to a typical investor one or more periods
finance balance sheet a balance sheet that is based on market values of future value of an annuity (FVA) the value of an annuity at some point
expected cash flows in the future
financial assets assets that are claims on the cash flows from other as-
sets; business loans, stocks, and bonds are financial assets G
financial intermediation conversion of securities with one set of char-
acteristics into securities with another set of characteristics general-use asset an asset which is of similar value to potential users
financial leverage the use of debt in a firm’s capital structure; the more general cash offer a sale of debt or equity, open to all investors, by a
debt, the higher the financial leverage company that has previously sold stock to the public
financial option the right to buy or sell a financial security, such as a generally accepted accounting principles (GAAP) a set of rules that
share of stock, on or before a specified date for a specified price defines how companies are to prepare financial statements
financial planning the process by which management decides what globalization the removal of barriers to free trade and the integration of
types of investments the firm needs to make and how to finance those national economies
investments going-concern value the difference between the value of a business as a
financial plan a plan outlining the investments a firm intends to make going concern (the present value of the expected cash flows) and the ad-
and how it will finance them justed book value
financial ratio A number from a financial statement that has been scaled growing annuity an annuity in which the cash flows increase at a
by dividing by another financial number constant rate
financial restructuring a combination of financial transactions that growing perpetuity a cash flow stream that grows at a constant rate
changes the capital structure of the firm without affecting its real assets forever
financial risk the risk in the cash flows to stockholders that is due to the
way in which the firm has financed its assets H
financial statement analysis the use of financial statements to
evaluate a company’s overall performance and assess its strengths hedge a financial transaction intended to reduce risk
and shortcomings
firm-commitment underwriting underwriting agreement in which the I
underwriter purchases securities for a specified price and resells them
firm-specific asset an asset that is substantially more valuable to a par- income statement a financial statement that reports a firm’s revenues,
ticular firm than to any other firm expenses, and profits or losses over a period of time
firm’s marginal tax rate (t) the tax rate that is applied to each additional incremental additions to working capital (Add WC) the investments
dollar of earnings at a firm in working capital items, such as accounts receivable, inventory, and ac-
firm value, or enterprise value the total value of the firm’s assets; it counts payable, that must be made if the project is pursued
equals the value of the equity financing plus the value of the debt financ- incremental after-tax free cash flows the difference between the total
ing used by the firm after-tax free cash flows at a firm with a project and the total after-tax free
fixed-income securities debt instruments that pay interest in amounts cash flows at the same firm without that project; a measure of a project’s
that are fixed for the life of the contract total impact on the free cash flows at a firm
fixed costs costs that do not vary directly with the number of units sold incremental capital expenditures (Cap Exp) the investments in prop-
flexible current asset management strategy current asset man- erty, plant, and equipment and other long-term assets that must be made
agement strategy that involves keeping high balances of current assets if a project is pursued
on hand incremental cash flow from operations (CF Opns) the cash flow that
foreign exchange market international markets where currencies are a project generates after all operating expenses and taxes have been paid
bought and sold in wholesale amounts but before any cash outflows for investments
foreign exchange rate risk, or exchange rate risk the uncertainty incremental depreciation and amortization (D&A) the depreciation
and amortization charges that are associated with a project
incremental net operating profits after tax (NOPAT) a measure of
the impact of a project on the firm’s cash net income, excluding the effects

724 Glossary long-term funding strategy financing strategy that relies on long-term
debt and equity to finance both fixed assets and working capital
ndependent projects projects whose cash flows are unrelated lumpy assets fixed assets added as large, discrete units; these assets
ndirect bankruptcy costs costs associated with changes in the be- may not be used to full capacity for some time, leaving the company with
havior of people who deal with a firm when the firm gets into financial excess capacity
istress
nformal line of credit a verbal agreement between a bank and a firm under M
which the firm can borrow an amount of money up to an agreed-on limit
nformation asymmetry the situation in which one party in a business marginal tax rate the tax rate paid on the last dollar of income earned
ransaction has information that is unavailable to the other parties in the marketability the ease with which a security can be sold and converted
ransaction into cash
nitial public offering (IPO) the first offering of a corporation’s stock to market informational efficiency the degree to which current market
he public prices reflect relevant information and, therefore, the true value of the
nsolvency the inability to pay debts when they are due security
ntangible assets nonphysical assets such as patents, mailing lists, or market operational efficiency the degree to which the transaction
rand names costs of bringing buyers and sellers together are minimized
nterest on interest interest earned on interest that was earned in previ- market portfolio the portfolio of all assets
us periods market risk a term commonly used to refer to nondiversifiable, or sys-
nterest rate risk uncertainty about future bond values that is caused by tematic, risk
he unpredictability of interest rates market value the price at which an item can be sold
nternal growth rate (IGR) the maximum growth rate that a firm can maturity matching strategy financing strategy that matches the ma-
chieve without external financing turities of liabilities and assets
nternal rate of return (IRR) the discount rate at which the present value Modified Accelerated Cost Recovery System (MACRS) the acceler-
f a project’s expected cash inflows equals the present value of the project’s ated depreciation method that has been in use for U.S. federal taxes since
utflows; it is the discount rate at which the project’s NPV equals zero the Tax Reform Act of 1986 went into effect
nventory carrying costs expenses associated with maintaining inven- modified internal rate of return (MIRR) an internal rate of return
ory, including interest forgone on money invested in inventory, storage (IRR) measure which assumes that cash inflows are reinvested at the
osts, taxes, and insurance opportunity cost of capital until the end of the project
nvestment-grade bonds bonds with low risk of default that are rated money center banks large commercial banks that provide both tradi-
Baa (BBB) or above tional and investment banking services throughout the world
nvestment banks firms that underwrite new security issues money markets markets where short-term financial instruments are
nvestment value the value of a business to a specific investor traded
multinational corporation a business firm that operates in more than
K one country
multiples analysis a valuation approach that uses stock price or other
ey person discount an adjustment to a business value estimate that is value multiples for public companies to estimate the value of another
made to reflect the potential loss of value associated with the unexpected company’s stock or its entire business
multistage-growth dividend model a model that allows for varying
eparture of a key person dividend growth rates in the near term, followed by a constant long-term
growth rate; another term used to describe the mixed (supernormal)
L dividend growth model discussed in Chapter 9
mutually exclusive projects projects for which acceptance of one pre-
ease (rental agreement) a financial arrangement in which the user of cludes acceptance of the other
n asset pays the owner of the asset to use it for a period of time
essee the user of a leased asset N
essor the owner of a leased asset
mited liability partnerships (LLPs) hybrid business organizations that net present value (NPV) method a method of evaluating a capital in-
ombine some of the advantages of corporations and partnerships; in vestment project which measures the difference between its cost and the
eneral, income to the partners is taxed only as personal income, but the present value of its expected cash flows
artners have limited liability net working capital the dollar difference between current assets and
mited liability the legal liability of a limited partner or stockholder in a current liabilities
usiness, which extends only to the capital contributed or the amount nominal dollars dollar amounts that are not adjusted for inflation. The
nvested purchasing power of a nominal dollar amount depends on when that
quidating dividend the final dividend that is paid to stockholders amount is received
when a firm is liquidated nominal rate of interest the rate of interest that is unadjusted for inflation
quidity the ability to convert an asset into cash quickly without loss of noninvestment-grade bonds bonds rated below Baa (or BBB) by rating
alue agencies; often called speculative-grade bonds, high-yield bonds, or junk bonds
ockbox A system that allows geographically dispersed customers to nonoperating assets (NOA) cash or other assets that are not required
end their payments to a post office box near them
ondon Interbank Offer Rate (LIBOR) the interest rate British-based
anks charge each other for short-term loans. Also, commonly used as

normal distribution a symmetric frequency distribution that is com- Glossary 725
pletely described by its mean and standard deviation; also known as a bell
curve due to its shape post a specific location on the floor of a stock exchange at which auc-
North American Industry Classification System (NAICS) a classifica- tions for a particular security take place
tion system for businesses introduced to refine and replace the older SIC preferred stock an equity share in a corporation that entitles the owner
system to preferred treatment over owners of common stock with respect to
NPV profile a graph showing NPV as a function of the discount rate dividend payments and claims against the firm’s assets in the event of
bankruptcy or liquidation, but that typically has no voting rights
O preliminary prospectus the initial registration statement filed with the
SEC by a company preparing to issue securities in the public market; it
offer (ask) price the price at which a securities dealer seeks to sell a contains detailed information about the issuer and the proposed issue
given stock premium bonds bonds that sell at prices above par (face) value
open-market repurchase the repurchase of shares by a company in the present value (PV) the current value of future cash flows discounted at
open market the appropriate discount rate
operating cycle the average time between receipt of raw materials and present value of an annuity (PVA) the present value of the cash flows
receipt of cash for the sale of finished goods made from those materials from an annuity, discounted at the appropriate discount rate
operating lease a lease which does not have the characteristics of a sale pretax operating cash flow (EBITDA) break-even point the number
operating leverage a measure of the relative amounts of fixed and vari- of units that must be sold for pretax operating cash flow to equal $0
able costs in a project’s cost structure; operating leverage is higher with pretax operating cash flow earnings before interest, taxes, depreciation,
more fixed costs and amortization, or EBITDA
opportunity cost the return from the best alternative investment with primary market a financial market in which new security issues are sold
similar risk that an investor gives up when he or she makes a certain by companies directly to investors
investment principal the amount of money on which interest is paid
opportunity cost of capital the return an investor gives up when his or private information information that is not available to all investors
her money is invested in one asset rather than the best alternative asset privately held (closely held) corporations corporations whose stock
optimal capital structure the capital structure that minimizes the cost is not traded in public markets
of financing a firm’s activities private placement the sale of an unregistered security directly to an
option payoff function the function that shows how the value of an investor, such as an insurance company or a wealthy individual
option varies with the value of the underlying asset productive assets the tangible and intangible assets a firm uses to gen-
ordinary annuity an annuity in which payments are made at the ends of erate cash flows
the periods profitability index (PI) a measure of the value a project generates for each
dollar invested in that project
P pro forma financial statements projected financial statements that reflect a
set of assumptions concerning investment, financing, and operating decisions
par-value bonds bonds that sell at par value, or face value; whenever a progressive tax system a tax system in which the marginal tax rate at low
bond’s coupon rate is equal to the market rate of interest on similar bonds, levels of income is lower than the marginal tax rate at high levels of income
the bond will sell at par (face) value public information information that is available to all investors
partnership two or more owners who have joined together legally to public markets financial markets where securities registered with the
manage a business and share in its profits SEC are sold
payable date the date on which a company pays a dividend public markets markets regulated by the Securities and Exchange Com-
payback period the length of time required to recover a project’s mission in which large amounts of debt and equity are publicly traded
initial cost pure-play comparable a comparable company that is in exactly the
payout policy the overall policy concerning the distribution of value same business as the project or business being analyzed
from a firm to its stockholders put-call parity the relation between the value of a call option on an
pecking order theory the theory that in financing projects, managers asset and the value of a put option on the same asset that has the same
first use retained earnings, which they view as the least expensive form of exercise price
capital, then debt, and finally externally raised equity, which they view as put option an option to sell the underlying asset
the most expensive put premium the price that the buyer of a put option pays the seller of
per-unit contribution the dollar amount that is left over from the sale of that option
a single unit after all the variable costs associated with that unit have been
paid; this is the amount that is available to help cover FC for the project Q
percent of sales model a simple financial planning model that assumes
that most income statement and balance sheet accounts vary proportion- quoted interest rate a simple annual interest rate, such as the APR
ally with sales
permanent working capital the minimum level of working capital that R
a firm will always have on its books
perpetuity a series of level cash flows that continue forever real assets nonfinancial assets such as plant and equipment; productive
portfolio the collection of assets an investor owns assets are real assets; many financial assets are claims on cash flows from
postaudit review an audit to compare actual project results with the real assets
real dollars inflation-adjusted dollars; the actual purchasing power of dollars

726 Glossary specialist the trader designated by an exchange to represent orders
placed by public customers at auctions of securities; specialists handle a
eal investment policy the policy relating to the criteria the firm uses in small set of securities and are also allowed to act as dealers
eciding which real assets (projects) to invest in spot rate the exchange rate for immediate delivery
eal option An option for which the underlying asset is a real asset stakeholder anyone other than an owner (stockholder) with a claim on
eal rate of interest the interest rate that would exist in the absence of the cash flows of a firm, including employees, suppliers, creditors, and the
nflation government
ealized yield for a bond, the interest rate at which the present value of stand-alone principle the principle that allows us to treat each project
he actual cash flows from a bond equals the bond’s price as a stand-alone firm when we perform an NPV analysis
ecord date the date by which an investor must be a stockholder of re- standard deviation (␴) the square root of the variance
ord in order to receive a dividend Standard Industrial Classification (SIC) System a numerical system
egular cash dividend a cash dividend that is paid on a regular basis, developed by the U.S. Government to classify businesses according to the
ypically quarterly type of activity they perform
epatriation of earnings restrictions restrictions placed by a foreign statement of cash flows a financial statement that shows a firm’s cash
overnment on the amount of cash that can be repatriated, or returned to receipts and cash payments and investments for a period of time
parent company by a subsidiary doing business in the foreign country stock dividend a distribution of new shares to existing stockholders in
eplacement cost the cost of duplicating the assets of a business in their proportion to the percentage of shares that they own (pro rata); the value
resent form on the valuation date of the assets in a company does not change with a stock dividend
esidual cash flows the cash remaining after a firm has paid operating stock repurchase the purchase of stock by a company from it stock-
xpenses and what it owes creditors and in taxes; can be paid to the own- holders; an alternative way for the company to distribute value to the
rs as a cash dividend or reinvested in the business stockholders
estrictive current asset management strategy current asset manage- stock split a pro-rata distribution of new shares to existing stock-
ment strategy that involves keeping the level of current assets at a minimum holders that is not associated with any change in the assets held by the
etention (plowback) ratio the proportion of net income retained in firm; stock splits involve larger increases in the number of shares than
he firm stock dividends
Rule of 72 a rule proposing that the time required to double money in- strategic planning the process by which management establishes the
ested (TDM) approximately equals 72/i, where i is the rate of return ex- firm’s long-term goals, the strategies that will be used to achieve those
ressed as a percentage goals, and the capabilities that are needed to sustain the firm’s competitive
position
S strong-form of the efficient market hypothesis the theory that security
prices reflect all information
cenario analysis an analytical method concerned with how the results sustainable growth rate (SGR) the rate of growth that a firm can sus-
rom a financial analysis will change under alternative scenarios tain without selling additional equity while maintaining the same capital
easoned public offering the sale of securities to the public by a firm structure
hat already has publicly traded securities outstanding systematic or nondiversifiable risk risk that cannot be eliminated
econdary market a financial market in which the owners of outstand- through diversification
ng securities can sell them to other investors
Security Market Line (SML) a plot of the relation between expected T
eturn and systematic risk
emistrong-form of the efficient market hypothesis the theory tangible assets physical assets such as property, plant, and equipment
hat security prices reflect all public information but not all private targeted stock repurchase a stock repurchase that targets a specific
nformation stockholder
ensitivity analysis examination of the sensitivity of the results from a tender offer an open offer by a company to purchase shares
financial analysis to changes in individual assumptions terminal value the value of the expected free cash flows beyond the pe-
Sharpe Ratio A measure of the return per unit of risk for an investment riod over which they are explicitly forecast
helf registration a type of SEC registration that allows firms to register term loan a business loan with a maturity greater than one year
o sell securities over a two-year period and, during that time, take the term structure of interest rates the relation between yield to maturity
ecurities “off the shelf ” and sell them as needed and term to maturity
hort-term funding strategy financing strategy that relies on short-term time value of money the difference in value between a dollar in hand
ebt to finance all seasonal working capital and a portion of permanent today and a dollar promised in the future; a dollar today is worth more
working capital and fixed assets than a dollar in the future
hortage costs costs incurred because of lost production and sales or time zero the beginning of a transaction; often the current point in time
liquidity total holding period return the total return on an asset over a specific
imple interest interest earned on the original principal amount only period of time or holding period
imulation analysis an analytical method that uses a computer to trade-off theory the theory that managers trade off the benefits
uickly examine a large number of scenarios and obtain probability esti- against the costs of using debt to identify the optimal capital structure
mates for various values in a financial analysis for a firm
ole proprietorship a business owned by a single individual trade credit credit extended by one business to another
pecial dividend a one-time payment to stockholders that is normally
used to distribute a large amount of value

transactions analysis a valuation approach that uses transactions data Glossary 727
from the sale of similar companies to estimate the value of another com-
pany’s stock or its entire business V
transnational corporation a multinational firm that has widely dis-
persed ownership and that is managed from a global perspective valuation date the date on which a value estimate applies
treasury stock stock that the firm has repurchased from investors variable costs costs that vary directly with the number of units sold
trend analysis analysis of trends in financial data variance (␴2) a measure of the uncertainty associated with an outcome
true (intrinsic) value for a security, the value of the cash flows an inves- venture capitalists individuals or firms that invest by purchasing
tor who owns that security can expect to receive in the future equity in new businesses and often provide entrepreneurs with
Truth-in-Lending Act a federal law requiring lenders to fully inform business advice
borrowers of important information related to loans, including the an-
nual percentage rate charged W
Truth-in-Savings Act a federal law requiring institutions offering con-
sumer savings vehicles, such as certificates of deposit (CDs), to fully weak-form of the efficient market hypothesis the theory that secu-
inform consumers of important information about the savings vehi- rity prices reflect all information in past prices but do not reflect all pri-
cles, including the annual percentage rate paid vate or all public information
wealth the economic value of the assets someone possesses
U weighted average cost of capital (WACC) the weighted average of
the costs of the different types of capital (debt and equity) that have been
underinvestment problem the incentive that stockholders in a finan- used to finance a firm; the cost of each type of capital is weighted by the
cially leveraged firm have to turn down positive NPV projects when the proportion of the total capital that it represents
firm is in financial distress
underlying asset the asset from which the value of an option is derived Y
underpricing offering new securities for sale at a price below their true value
underwriting syndicate a group of underwriters that joins forces to re- yield curve a graph representing the term structure of interest rates,
duce underwriting risk with the term to maturity on the horizontal axis and the yield on the
unsystematic or diversifiable risk risk that can be eliminated through vertical axis
diversification yield to maturity for a bond, the discount rate that makes the pres-
ent value of the coupon and principal payments equal to the price of
the bond

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Subject Index

A for different forms of business, 572, 573 ARR (accounting rate of return), 318
Abandoning projects, 657 manager-stockholder, 14 Asian legal system, 674
Accelerated depreciation, 55, 61 with ownership and control, 14 Ask (offer) price, 273, 489
Accounting controls, internal, 17 payoff functions leading to, 658–661 Ask quotations (exchange rate), 680–681
Accounting DOL (degree of accounting operating in private equity firms, 494 Assets. See also specific types
and regulatory reforms, 16–18
leverage), 389–391 Agency costs, 14, 523–526 on balance sheet, 52–55, 619
Accounting earnings, cash flows vs., 349 of debt, 659–660 in balance sheet identity, 411–412
Accounting firm scandals, 16, 122–123 of equity, 660–661 in bankruptcy, 4
Accounting operating profit (EBIT) break-even ethics conflicts involving, 19 book value of, 57–58, 411
and payoff functions, 658–661 cash flows associated with, 345–346, 506
point, 393–395 in private equity firms, 494 on common-size balance sheets, 84–85
Accounting principles (standards), 50–51 stockholder-lender, 524–526 cost of existing assets, 369–370
stockholder-manager, 523 depreciation of, 356–359
FASB statements, 50 Agency relationships, 14, 19 financing, 459–460
GAAP, 50–51 Agents, 14 harvesting, 367–368
international, 51–52, 676 Aging accounts receivable, 453–454 leasing, 535–544
Accounting (operating) profits, 98, 390n.4. Aging schedule, 453–454 and leverage, 512, 513
Allocated costs, 350 market value of, 57–58, 411–412
See also Earnings before interest and taxes American currency quote, 680 nationalization of, 686
(EBIT); EBIT plus depreciation and American options, 645 of new firms, 475
amortization (EBITDA) Amortization, 172, 349. See also Incremental replacing/renewing, 303, 368–369
and fixed/variable costs, 381–382 return on, see Return on assets
incremental net operating profits after tax, depreciation and amortization rights to, 535, 539
345–348, 352 Amortization expense, 62, 64, 65 salvage value of, 360, 361
Accounting rate of return (ARR), 318 Amortization schedule, 172–174 taxes on sale of, 361
Accounting statement of cash flows, 342, 344 Amortizing loans, 172 underlying options, 643, 646–649
Accounts payable, 444–445 Andersen, Arthur, 122 underlying risk of, 510
as current liability, 53 Angels (angel investors), 474 value of, 4, 12, 646–648
in financial planning models, 619 Announcement date (dividends), 548, 549 variety of, 2, 3
forecasting, 365 Annual percentage rate (APR), 185 Asset abuse problem, 539–540
as short-term financing, 461 Asset substitution problem, 525, 659, 660
Accounts receivable, 444 comparing, 186–187 Asset turnover:
aging, 453–454 on credit cards, 198 profit margins vs., 102–103
as current assets, 53 disclosure of, 185, 187–188 total, 92–93, 102
forecasting, 364–365 Annual reports, 49–50 Asset turnover ratios, 89–93
management of, 452–454 Annuities, 167–184. See also Present value of an Assumptions:
realization principle for, 51 of arm’s-length transactions, 50
terms of sale for, 452–454 annuity (PVA) changing, in Microsoft Excel, 388
Accounts receivable financing, 462–463 finding monthly/yearly payments from, going concern, 51
Accounts receivable turnover, 91–92 in sensitivity analysis, 395, 396
Accrued taxes, as current liability, 53 170–172 in simplifying stock valuation, 281–289
Accumulated depreciation account, 54–55 future value of, 177–179 Auction markets, 273
Acid-test ratio, 88 growing, 183 Audit committee, 10, 17, 18
Additional paid-in capital account, 56 interest rate for, 174–177 Audited financial statements, 10, 50, 83
Add WC, see Incremental additions to loan amortization schedule for, 172–174 for raising new equity, 556
working capital ordinary, 167 in valuation of companies, 594–595
Adjustable-rate mortgages (ARMs), 268 Annuities due, 181–182 Auditors:
Adjusted book value, 582 Annuity transformation method, 182 external, 10, 17
Adjusted book value valuation approach, 582–584 Appendixes, in business plan, 579 internal, 9, 10
After-tax cost of debt, 418, 419, 509n.5 Approval, for general cash offers, 488 responsibilities of, 122
Agency conflicts, 13–18, 14 APR, see Annual percentage rate Aueros South Asia Fund, 569
and agency relationships, 14, 19 Arbitrage, 650
aligning interests of management and ARMs (adjustable-rate mortgages), 268
stockholders, 14–16 Arm’s-length transactions, assumption of, 50

730 Subject Index Bonds, 239–257. See also specific types and regulatory reform, 17
call provisions for, 256 and student credit cards, 198–199
Australia, business in, 675 cost of issuing, 490–491 and subprime mortgage market, 267–269
Average collection period, 92 estimating current cost of, 416–417 and sustainability, 378–379
Average first-day return (IPOs), 485–486 general cash offers for, 489–490 Business failures, 571
Average tax rate, 72–73, 356, 357 historical returns on, 211–214 Business finance companies, 36
interest rate risk with, 252–255 Business formation, 570–578
B issuance costs for, 417, 518 by bootstrapping, 473–474, 492
␤, see Beta as perpetuities, 179 choosing organizational form in, 571–574
Bacanovic, Peter, 299 yields of, 244, 245, 248–252 deciding to proceed with, 571
Balance sheet, 52–60 financial considerations in, 574–578
Bond markets, 239–240, 690–691 initial funding for, 474
assets on, 52–55, 619 Bond prices, 240. See also Bond valuation raising capital for, see Raising capital
book-value vs. market-value, 57–58 usual process for, 473
common-size, 84–85 and interest rates, 252–255 Business growth, see Growth of business
dividends on, 552 with semiannual compounding, 246–248 Business Owner’s Toolkit, 306, 392, 570, 571
effect of decision making on, 4 volatility of, 240, 253, 254 Business plan, 303, 578–579
equity on, 55–57, 619 and yields, 245 divisional, 609–610
finance, 411–412 Bond ratings, 238–239, 241, 256–257 importance of, 578–579
in financial planning models, 614, 617–622 Bond theorems, 253–255 key elements of, 579
historical trends on, 617–618 Bond valuation, 241–248 for seeking venture capital, 474
liabilities on, 54–55, 619 discount bonds, 244 in venture capital funding cycle, 476
pro forma, 614–615, 617–622 formula for, 242–243 Business risk, 510–511, 676
relationship of other statements and, 66–67 in international finance, 676 Business strategy, 378–379, 609. See also
stock repurchases on, 552 par-value bonds, 244
working capital accounts on, 618–619 premium bonds, 244 Strategic plan
Balance sheet identity, 411–412 with semiannual compounding, 246–248 Business valuation, 580–597. See also Firm value
Banks: using financial calculator for, 243–244
commercial, 35 for zero coupon bonds, 246, 247 approaches to, 581
Eurobanks, 689 Bonuses, 15 controlling interest vs. minority interest in, 596
investment, 28–29, 268, 481–483 Book runners, 483 cost approaches to, 581–584
largest, 692 Book value, 50 fundamental principles for, 580–581
money center, 28, 492, 677 adjusted book value valuation approach, income approaches to, 588–594
Banking, international, 673, 692–694 in international finance, 676
Bank loans, 494–496 582–584 and investors’ points of view, 580–581
from commercial banks, 494–496 of assets, 57–58, 411 key person discount in, 596–597
Eurocredit, 693–694 of liabilities, 58 market approaches to, 584–588
international, 692–694 market vs., 57–58 for public vs. private companies, 594–595
pricing model for, 495–496 of stockholders’ equity, 58 as time-specific, 580
prime-rate, 494–496 Book-value balance sheet, 58–60 for young vs. mature companies, 595–596
short-term, 461–462 Book value rate of return, 318 Buying, leasing vs., 540–543
term, 495, 496 Bootstrapping: Buy-vs.-build analysis, 581–582, 588
Bank loan pricing model, 495–496 in business formation, 473–474
Bankruptcy, 4 in private markets, 492 C
of Blockbuster, 200 Borrower-spenders, 26 CAGR (compound annual growth rate), 151
and debt financing, 5 Borrowing rates, 26 Calculators, see Financial calculators
of Enron and WorldCom, 16, 18–20 “Bottom line,” see Net income Callable bonds, 666
losses limited in, 659 Break-even analysis, 391–395 Call interest premium (CIP), 256
from mismanagement of working accounting, 393–395 Call options:
for cash flow, 391–393, 574–575
capital, 6 economic, 395 early exercise of, 648n.2
Bankruptcy costs, 520–523 in international finance, 676 exercising, 643–645
British Treasury, 179 limits on value of, 646–648
direct, 521 Brokers, 30, 273 real, 655
indirect, 521–523 Broker markets, 273 variables affecting values of, 648–649
Base salaries, 15 Budgets: Call premiums, 644
Basis points, 496 capital, 39, 609. See also Capital budgeting Call provisions, 256
Bearer bonds, 690–691 cash, 574–578, 608, 610 Canada, 674, 675
Bell curve, 208 Bundles, project, 398 Cap Exp, see Incremental capital expenditures
Benchmarks, 83 Business communication, 674–675 Capital:
in financial statement analysis, Business culture, 20 cost of, see Cost of capital
Business ethics, 18–20 for different forms of business, 572
106–107 and accounting firm scandals, 122–123 and flight to quality, 492
of performance, 83 and company-owned life insurance, 502–503 net working, 4, 6, 53–54, 68–69, 443, 450–451
Bermudan options, 645 compensation levels, 669–670 for new businesses, 572–573
Bernanke, Ben, 24–25 and compliance and ethics director, 10 opportunity cost of, 305
Best-effort basis, 29n.2, 484 conflicts of, 19–20 raising, see Raising capital
Best-effort underwriting, 482, 484 consequences of mistakes in, 20 venture, 474–479, 492
Beta (␤), 226–230 ethics programs, 17 weighted average cost of, see Weighted average
in estimating cost of equity, 422–423 everyday ethics vs., 18–19
for projects, 413 and insider trading, 299–300 cost of capital (WACC)
Bid-ask spread, 680–681 manager incentives for, 15 working, see Working capital
Bid price, 273 Capital appreciation, 202–203
Bid quotations (exchange rate), 680–681
Binomial pricing model (options), 649–652

Subject Index 731

Capital Asset Pricing Model (CAPM), 228–231 Cash equivalents, forecasting, 364 CFOA (cash flow from operating activities),
common stock cost of equity with, 421–423 Cash flows, 2–4, 67–71, 342–365 68, 70–71
and controlling ownership interest, 596
and portfolio returns, 230–231 for bonds, 242 CFO magazine, 10
as preferred model, 426 calculations with, 71 CF Opns, see Incremental cash flow from
preferred stock cost of equity with, 427–428 in capital budgeting vs. accounting, 342, 344
Security Market Line in, 228–229 cash flows to investors, 67–71 operations
conventional, 321–322 Chicago Board of Trade, 32, 272
Capital budget, 39, 608, 609 of corporations and financial system, 36, 37 Chicago Board Options Exchange (CBOE),
Capital budgeting, 3, 301–331, 302 debt as incentive to focus on, 518–520
differing from net income, 510n.7 32, 649
accounting rate of return in, 318 and dividends vs. stock repurchases, 557–558 Chicago Mercantile Exchange, 272
asset harvesting decisions in, 367–368 estimating, 588 Chief accountants, 9
asset replacement decisions in, 368–369 expected, 362 Chief executive officer (CEO), 9, 15–17
basic terms, 305 free, see Incremental after-tax free cash flows Chief financial officer (CFO), 9, 10
capital rationing in, 398–402 future, see Future cash flows China, 301, 674–676
cash flows in, 342, 344. See also Future generation of, 3 CIA (Central Intelligence Agency), 675, 686
growth at constant rate, 183–184 CIP (call interest premium), 256
cash flows importance of, 67 CLOs (collateralized loan obligations), 268
decision making in, 4–5, 303, 367–369, 609 in international finance, 676 Closely held corporations, see Privately held
depreciation methods in, 356–359 level, 167–182
importance of, 302–303 and long-term assets, 69–70 corporations
information used in, 304 management decisions affecting, 12, 13 Closing, of firm-commitment offerings, 483, 489
internal rate of return in, 318–328 market-value indicators of, 100 CNNMoney, 130
in international finance management, multiple, 160–166 CO, see Crossover level of unit sales
net income vs., 67–70 COD (cash on delivery), 452
685–688 and net working capital, 68–69 Coefficient of variation (CV), 216–217
for multinational companies, 671–672 for new businesses, 574–578 COLI (company-owned life insurance), 502–503
net present value in, 306–313 from operations, 345. See also EBIT plus Collateral, 462
opportunity costs in, 369–370 Collateralized loan obligations (CLOs), 268
payback period in, 313–317 depreciation and amortization Collection time (cash), 457–458
in practice, 328–329 from overseas capital projects, 685–686 Commercial banks, 35
process for, 303 present value of, 506 Commercial bank loans, 494–496
project classification for, 304 for purchase vs. lease options, 539–543 Commercial paper, 462
for projects with different lives, 365–367 residual, 3 Commodity price risk, options for, 662
techniques used in, 302 risk with, 12 Common-size financial statements, 84–86
Capital gains taxes, 556 sensitivity to fixed vs. variable costs, Common stock, 275–280
Capital intensity ratio, 619
Capital leases, 536, 538 381–382 bundling of options and, 654
Capital markets, 6, 31, 32, 689–691 and stockholders’ equity, 59 cost of equity for, 421–426
Capital rationing, 305, 398–402 timing of, 11 cost of issuing, 490, 491
across multiple periods, 401–402 Cash flow (EBITDA) break-even analysis, and debt-to-equity ratio, 509–513
in a single period, 399–401 as equity account, 55–56
Capital requirements and uses, in business 391–393, 574–575 initial public offerings of, 36, 37
Cash Flow DOL (degree of pretax cash flow market value, 56
plan, 579 valuation of, 276–280
Capital structure, 6, 504–530 operating leverage), 389, 391 Common stock accounts, 55–56
Cash flow from operating activities (CFOA), Communication, in international business,
choosing, 526–529
decisions on, 612 68, 70–71 674–675
dividends in management of, 556 Cash flow identity, 557–558 Company overview, in business plan, 579
and financial risk, 510 Cash flow invested in long-term assets Company-owned life insurance (COLI), 502–503
in financing plan, 609 Comparables, 433, 584–588
leasing, 535–544 (CFLTA), 69–70 Compensating balances, 457, 461
and Modigliani and Miller propositions, Cash flow invested in net working capital Compensation:

506–514 (CFNWC), 69 and ethics, 669–670
optimal, 505–506, 520, 676 Cash Flow Template (Excel), 575 excess, 595
pecking order theory of, 526–528 Cash flows to investors (CFI), 67–71 of managers, 15
for selected industries, 527 Cash on delivery (COD), 452 underwriter’s, 29
trade-off theory of, 526–528 Cash reconciliation, on statement of cash flows, 65 Competition, potential, 489
use of debt in, 514–526 Casualty insurance companies, 36 Competitive financial systems, 26
CAPM, see Capital Asset Pricing Model CBOE (Chicago Board Options Exchange), Competitive sales, 489–490
Carrying costs, 450–451, 455 Compliance and ethics director, 10
Cash, 444 32, 649 Compliance programs, 17, 18
collection of, 457–458 CCH Business Owner’s Toolkit, 306, 392 Compound annual growth rate (CAGR), 151
as current asset, 53 C-corporations, 572–574 Compound growth rates, 150–152
forecasting, 364 CDs (certificates of deposit), 26 Compounding, 127, 129
management and budgeting of, 456–457 Center for Business Planning, 609 for bonds, 246–248
reasons for holding, 456–457 Central Intelligence Agency (CIA), 675, 686 continuous, 136–137
retained earnings vs., 56 Centrally planned economies, 675 frequency of, 134–135
sources and uses of, 63–65, 557 CEO (chief executive officer), 9, 15–17 and future value, 127–129
Cash budget, 574–578, 608, 610 Certificates of deposit (CDs), 26 power of, 132–134
Cash collection cycles, 457 Certified public accounting (CPA) firms, 10, 122 with single-period investment, 127–128
Cash conversion cycle, 445–446, 448–449 CFLTA (cash flow invested in long-term assets), with two-period investment, 128–129
Cash coverage, 96–97 Compound interest, 128–130, 129
69–70
CFNWC (cash flow invested in net working

capital), 68–69

732 Subject Index fixed, see Fixed costs (FC) Credit cards, 198–199
of general cash offers, 490–491 Credit Card Act (2009), 188, 199
Concentration account system, 457 information, 537 Credit Card Nation (Robert Manning), 198
Conflicts of interest, 2, 19, 123 of IPOs, 480, 486–488 Creditors, 2, 83
issuance, 417, 490, 491, 518, 526 Credit ratings, 691
and company-owned life insurance, 503 out-of-pocket, 417, 486, 491, 521 Credit risk, 495, 693
of lessors and lessees, 539–540 of projects, 308, 309 Crossover level of unit sales (CO), 392
Consols, 179, 516 reorder, 455
Constant-growth dividend model, 281–284, 286, replacement, 581–582 for EBIT, 394–395
shortage, 450 for EBITDA, 392
423–424 sunk, 351 Crossover point, 325
Construction projects, deferral of, 655 of trade credit, 453 Cross rates, 681, 683
Consumers, global, 672–673 transaction, see Transaction costs Culture, 20, 675
Consumer credit, 444 variable, 363, 381–388 Cum dividend trades, 549
Consumer Credit Protection Act, 187n.9 Cost approaches to business valuation, 581–584 Cumulative net cash flow, 314
Consumer price index (CPI), 42 Cost of assets, leverage and, 512, 513 Currencies, 673, 681–682. See also Foreign
Consumer protection acts, 187–188 Cost of capital, 38, 305, 409–435
Contingent projects, 304 and cost of debt, 415–420 exchange rates
Contracts, service and lease, 540 and cost of equity, 421–428 Currency risk, 693
Contractual obligations, of formal line of credit, determining, 309 Current assets, 345, 443
nominal, 354
461–462 overall, 410–415. See also Weighted average cost on balance sheet, 53–54
Control: cash flows associated with, 345
of capital flexible investment strategy for, 450
and choice of capital structure, 529 real, 354 inventory, 54
and form of organization, 572, 573 use of term, 354n.3 management of, 3
ownership vs., 13–14 in venture capital funding, 479 market value and book value of, 57
separation of ownership and, 573 Cost of debt, 415–420, 509n.5, 520–526 in net working capital, 69
value associated with, 587 after-tax, 418, 419, 509n.5 restrictive current asset investment strategy, 450
with venture capital funding, 479 agency costs, 523–526, 659–660 and use of cash, 64
Controllers, 9, 10 bankruptcy costs, 520–523 Current liabilities, 53–54, 69, 443
Controlling ownership interest, 596 in decision making, 420 Current ratio, 88
Control premium, 596 estimating, 416–418 Current value of the underlying asset, 646–648
Conventional cash flows, 321 firm’s overall, 418–420 Customers, indirect bankruptcy costs from, 521
Conversion options, 654 in international finance, 676 CV (coefficient of variation), 216–217
Convertible bonds, 241, 654, 666 and leverage, 510n.6, 512, 513
Convertible preferred stock, 654 in M&M proposition 2, 510n.6 D
Corporate bonds, 239–241 pretax, 418, 419, 509n.5 D&A, see Incremental depreciation and
call provision for, 256 and taxes, 418
convertible, 241, 654, 666 use of term, 509n.5 amortization
cost of issuing, 490–491 Cost of equity, 421–428, 509n.5 Damage deposits, 540
rating system for, 256–257 agency costs, 660–661 Damodaran, Aswath, 585
risk premiums for, 257 with Capital Asset Pricing Model, 421–423, 596 Days’ payables outstanding (DPO), 448
vanilla, 240, 489 for common stock, 421–426 Days’ sales in inventory (DSI), 90–91, 446
zero coupon, 148, 240–241, 246, 247, 255 with constant-growth dividend model, 423–424 Days’ sales outstanding (DSO), 92, 447
Corporate governance, 17 and financial leverage, 510 DDM (dividend discount model) approach,
Corporate raiders, 16 in international finance, 676
Corporate veil of limited liability, 7 and leverage, 512, 513 593–594
Corporations, 7–8 with multistage-growth dividend model, Dealers, 31, 273
capital for, 572–573 Dealer markets, 273
C-corporations, 572–574 424–426 Debt:
characteristics of, 572 for preferred stock, 426–428
financial liabilities of, 574 use of term, 509n.5 among students, 198–199
and financial system, 36–37 Cost principle, 50 cost of, see Cost of debt
life of, 573 Cost structure, business risk and, 511 long-term, see Long-term debt
multinational, 673, 674 Country risk, 675, 686–687, 693 permanent, 416
privately held, 8, 12 Coupon payments, 240 preferred stock as, 276
professional, 8 Coupon rate, 240, 244 sale of, 488. See also General cash offers
S-corporations, 8, 571, 572 Covariance of returns, 219–221 Debt financing, 3, 5, 505, 514–526. See also
stateless, 673 Coverage ratios, 96–97
transnational, 673 CPA (certified public accounting) firms, 10, 122 Capital structure
Correlation, 220–222 CPI (consumer price index), 42 benefits of, 514–520
Correlation of 0, 220 Credit: cost of, 520–526. See also Cost of debt
The Cosmopolitan, 641, 642, 655 consumer, 444 in cost of capital, 413–414
Costs: and cost of debt, 416 and dividend payouts, 557
agency, see Agency costs lines of, 461–462 for growth, 625
allocated, 350 revolving, 461 as interest tax shield, 514–518
bankruptcy, 520–523 and statement of cash flows, 63 tax-induced bias toward, 73
and benefits of investments, 5 and student debt, 198–199 with vanilla bonds, 489–490
carrying, 450–451, 455 terms of sale for, 452 Debt ratios, 94–96
for different forms of business, 572 trade, 444–445, 452–454, 461 Debt-to-equity ratio, 94–95
of dividends, 556–557 common stock and, 509–513
equivalent annual, 366–367 solving for unknown with, 95
of financial distress, 520, 521. See also Decision making:
balance sheet affected by, 4
Bankruptcy costs by boards of directors, 16

Subject Index 733

cost of debt in, 420 Distribution(s), 29. See also Dividends DuPont system of analysis, 101–105
financial models in, 621, 622 as investment banking service, 481, 483 applying, 104
for financing, 3, 4–6, 609, 612 noncash, 547–548 DuPont equation, 101, 103–104
in interests of owner, 2 stock dividends, 560–562 and maximization of ROE as goal, 104, 105
for international capital projects, 685 stock splits, 561–562 performance analysis with, 108–111
net present value in, 309 ROA equation in, 98, 101–103
nominal vs. real dollars in, 355 Diversifiable risk, 223 ROE equation in, 103
payback period in, 315–316 Diversification, 214–224
in private equity firms, 494 Durability, of leased assets, 540
for profit maximization, 11–12 limits of, 223–224 Dutch auction tender offers, 553, 554
purchase vs. lease, 539–543 in market portfolio, 225
stock prices affected by, 12, 13 in portfolios with more than one asset, 217–222 E
using expected returns in, 206–207, 231 and risk, 223–224 EAC, see Equivalent annual cost
in working capital management, 6 and single-asset portfolios, 215–217 EAR, see Effective annual interest rate
Declaration date, 548 Dividends, 545–564, 546. See also Stock valuation Earnings. See also Retained earnings
Default risk, 94, 256–257 benefits of, 555–556
Default risk premium (DRP), 256, 495 computing future stock prices, 284–286 cash flows vs. accounting, 349
Deferred revenues, 68 constant-growth dividend model, 281–284, 286 choice of capital structure and, 528–529
Deferred taxes, 68 costs of, 556–557 and compounding, 134
Deflation, 40n.6 expected, 423 repatriation of earnings restrictions, 685–686
Degree of accounting operating leverage extra, 547 Earnings before interest and taxes (EBIT),
failure to pay, 290
(Accounting DOL), 389–391 financing decisions about, 5 62, 96, 97
Degree of pretax cash flow operating leverage and firm value, 554–559 and Accounting DOL, 390
general dividend model of stock valuation, and amount of interest expense, 515
(Cash Flow DOL), 389, 391 break-even point for, 393–395
Dell, Michael, 441 279–281 and cash flow from operating activity, 68
Demand curve, 679 and growth stocks, 280 in FCF calculation, 346–348, 352–353
Depletion charges, 68 liquidating, 547 fixed costs and fluctuation in, 387
Deposits, damage, 540 noncash, 547–548 forecasting, 386
Depreciation, 54–55. See also Incremental payment process for, 548–551, 558–559 sensitivity to changes in revenue, 385–388
on preferred stock, 56, 180 volatility in, 390
depreciation and amortization regular cash, 547 Earnings before taxes (EBT), 62
accelerated, 55, 61 repatriation of earnings restrictions on, 686 Earnings per share (EPS), 60, 61, 100, 529
and cash flow invested in long-term assets, 70 residual cash flows as, 3 EAY (effective annual yield), 250–251
and FCF, 349 as return of capital, 552n.6 Ebbers, Bernard J., 20
GAAP vs. IRS rules for, 356–359 setting payouts of, 562–563 EBIT, see Earnings before interest and taxes
on statement of cash flows, 64, 65 as signal of strength, 555 EBITDA margin, 97
straight-line, 55, 61–62, 358 special, 547 EBIT plus depreciation and amortization
Depreciation charges, 358 stock, 560–562
Depreciation expense, 61–62 and stockholder-lender agency costs, 524 (EBITDA), 62, 96–97
Derivative securities, 32, 643 stock market reactions to, 557–558 break-even point for, 391–393
Direct bankruptcy costs, 521 stock repurchases vs., 551–552, 558–559 and Cash Flow DOL, 389
Direct costs, of IPOs, 487 supernormal growth dividend model, in FCF calculation, 346–348, 352–353
Direct currency quote, 680 in multiples analysis, 586
Direct financing, 27–29, 35 286–289 sensitivity to changes in revenue, 382–386, 388
Direct out-of-pocket costs, 417 taxes on, 73, 549, 552, 556 volatility in, 390
Direct search markets, 273 types of, 547–548 EBIT return on assets (EROA), 98, 99
Discounts: as use of cash, 64 EBT (earnings before taxes), 62
in factoring, 463 zero-growth dividend model, 281 Echelon Place, 641–642, 655
forward, 683–684 Dividend discount model (DDM) approach, ECN (electronic communications network), 273
key person, 596–597 Economic break-even analysis, 395
liquidity, 585n.3 593–594 Economic expansions/contractions, 43–44
marketability, 584–585 Dividend payout ratio, 617 Economic growth rate, 424
Discount bonds, 244 Dividend policy, 554–559 Economic order quantity (EOQ), 456–457
Discounted payback period, 316–317 Economic systems, foreign, 675
Discount factor, 140 and firm value, 554–559 Economies of scale:
Discounting, 140 in international finance, 676 with general cash offers, 491
of future cash flows, 307 setting, 562–563 with IPOs, 487
with multiple-period investment, 141 stock dividends and stock splits, 560–562 EDGAR database, 49, 611
and present value, 140–141 Dividend reinvestment program (DRIP), 557 Edison, Thomas, 671
with single-period investment, 140–141 Dividend yield, 275 Effective annual interest rate (EAR), 185–189
of zero coupon bonds, 247 Divisional business plans, 609–610 for bonds, 417
Discount rate, 140 DJIA, see Dow Jones Industrial Average and effective annual yield, 250
for annuities, 174–177 Dollar value of net income, 529 for loans from factors, 463
and capital structure, 506 Dove Social Mission, 379 for terms of sale, 452
with controlling ownership position, 596 Dow Jones Industrial Average (DJIA), 211, Effective annual yield (EAY), 250–251
and cost of debt, 515 Effective DSO, 454
estimating, 410. See also Cost of capital 270, 274 Efficiency projects, 434
for individual projects, 434 DPO (days’ payables outstanding), 448 Efficiency ratios, 89–93
IRR as, 318 DRIP (dividend reinvestment program), 557 Efficient market, 33–34
relations among time, present value, and, 144–145 DRP (default risk premium), 256, 495 Efficient market hypothesis, 33–34
DSI (days’ sales in inventory), 90–91, 446 EFN, see External funding needed
DSO (days’ sales outstanding), 92, 447
Due-diligence firms, 269
Due diligence meetings (IPOs), 483

734 Subject Index

Electronic funds transfers, 457 Exchange rates, see Foreign exchange rates Financial Accounting Standards Board (FASB),
Electronic trading, 31. See also NASDAQ Exchange rate risk, 662, 673, 677, 686, 693 50, 51
Employees: Ex-dividend date, 549, 550
Ex dividend trades, 549 Financial assets, 25, 305, 306
attracting/maintaining, 573 Executive summary, in business plan, 579 Financial buyers, 478
company-owned insurance on, 502–503 Exercise (expiration) date, 643–645, 649 Financial calculators, 127
indirect bankruptcy costs from, 522 Exercise (strike) price, 643, 644, 647–649
as stakeholders, 2 Exit strategy (venture capital funding), 478–479 for annuity interest rates, 175–177
End-of-month payment (EOM), 453 Expansion, capital expenditures for, 303 for bond valuation, 243–244
Enterprise value, 506, 585–586. See also Business Expected cash flows, 362 for bond yields, 249, 250, 252
Expected rate of inflation, 40–41, 259 for future value problems, 137–139, 163, 179
valuation; Firm value Expected returns, 202–207, 204 for internal rate of return, 320
Entrepreneurs, 473–474, 571–578 for net present value, 310
EOM (end-of-month payment), 453 and CAPM, 229–231 for preferred stock valuation, 291
EOQ (economic order quantity), 456–457 compensation for risk in, 227–228 for present value problems, 145–146, 164,
EPS, see Earnings per share in international finance, 676
Equilibrium exchange rate, 679–680 and portfolio risk, 231 169–170, 182n.5
Equilibrium rate of interest, 38, 39 on portfolio with more than one asset, tips for using, 139
Equity. See also Stocks Financial claims, 27. See also Securities
217–219 Financial flexibility, choice of capital structure
agency costs of, 660–661 for single-asset portfolios, 215
on balance sheet, 52n.2, 55–57, 619 and systematic risk, 224 and, 528
on common-size balance sheets, 84, 85 Expenses. See also Incremental operating expenses Financial flexibility risk, 528
cost of, see Cost of equity Financial forecasts, in business plan, 579
debt-to-equity ratio, 94–95, 509–513 (Op Ex) Financial institutions, 25, 35–36. See also Banks
in financial planning models, 619 amortization, 62, 64, 65 Financial instruments, 27, 31. See also Securities
general cash offers for, 490. See also General depreciation, 61–62 Financial intermediation, 34, 35
extraordinary items, 62 Financial investors, 580
cash offers on income statement, 60, 62–63 Financial leverage, 93–94, 505, 512
long-term, 64 interest, 73, 623
preferred stock as, 276 matching revenue and, 51 and asset substitution/underinvestment, 525
raising new, 556 noncash, 62, 68 and choice of capital structure, 528–529
repurchasing, 63 prepaid, 68 in international finance, 676
return on, see Return on equity (ROE) Expense accounts, 594 Financial management:
sale of, 488 Expiration date, see Exercise date fundamental decisions in, 4–6
stockholders’, see Stockholders’ equity External auditors, 10, 17, 122 goal for, 11–13
Equity accounts, on balance sheet, 55–57 External funding needed (EFN), 615 international, see International finance
Equity financing, 3, 5, 413–414, 490, 505. See also determining, 609
for growth, 625–628 management
Capital structure; Cost of equity mathematical model for, 627 managing financial function, 9–10
Equity interest, of venture capitalists, 477 Extra dividends, 547 Financial managers, 2–6, 9
Equity multiplier, 95–96 Extraordinary items, 62 agency conflict between stockholders and, 19
Equity valuation, in international finance, 676 fundamental decisions of, 4–6
Equivalent annual cost (EAC), 366–367 F goal of, 12
Face value, 240 role of, 2
and replacement of assets, 368–369 Factors, 462–463 Financial markets, 25, 30–32. See also Exchanges
and use of existing assets, 370 Failure of businesses, 571 capital markets, 6, 31, 32, 689–691
EROA (EBIT return on assets), 98, 99 Fair market value, 581 direct, 27–29
Ethics. See also Business ethics efficiency of, 415
everyday vs. business, 18–19 in adjusted book value approach, 582 Euromarkets, 689
and norms in international finance, 676 in multiples analysis, 587 global, 689–691
Ethics programs, 17 Fairness: indirect, 34–37
Euro, 689 of company-owned life insurance, 502 money markets, 31, 32, 689–691
Eurobanks, 689 and insider trading, 300 over-the-counter, 31, 239, 240, 272
Eurobonds, 690–691 Fama, Eugene, 33 primary, 30, 32, 491–494
Eurocredits, 690 FASB (Financial Accounting Standards Board), private, 32, 491–494
Eurocredit bank loans, 693–694 public, 8, 31–33, 491, 492
Eurocurrency, 689–690 50, 51 secondary, 30, 239, 271–273
Eurocurrency market, 689–690 FASB statements, 50 transparency of, 240
Eurodollars, 689 FC, see Fixed costs Financial models, in decision making, 621, 622
Euromarkets, 689 FCF, see Incremental after-tax free cash flows Financial options, 643–654. See also Real options
Europe: FCFE approach (free cash flow to equity agency costs as, 658–661
bond coupon interest in, 246 American, European, and Bermudan, 644–645
business in, 675 approach), 591–593 call, 643–649, 665
NGOs in, 379 FCFF approach (free cash flow from the firm exchange-traded, 645
European currency quote, 680 exercising, 643–645
European options, 645 approach), 589–592 foreign currency, 685n.2
Evans, Matt, 364, 512, 575 Federal Drug Administration (FDA), 299 payoff functions for, 643–646
Excess compensation, 595 Federal income tax, see Income taxes put, 644, 645, 648n.2, 655, 662
Exchanges, 31, 272–273. See also New York Federal Open Market Committee (FOMC), 24–25 in risk management, 662
Federal Reserve System (the Fed), 24–25, 44 Financial options valuation, 646–654
Stock Exchange binomial pricing model for, 649–652
Chicago Board Options Exchange, 32, 649 and interest rate movement, 255 limits on option values, 646–648
foreign exchange markets, 677–685 monetary policy and real interest rate, 40 options and securities issued by firms, 653–654
London, 31, 272, 673, 677 and subprime mortgage crisis, 268 put-call parity in, 652–653
NASDAQ, 8, 31, 272, 273, 562 Web site, 188
FIFO (first in, first out), 54

Subject Index 735

Financial plan, 607–608 indirect financing in, 34–37 of future cash flows, 307, 312, 313
Financial planning, 606–632, 607 interest rates, 38–44 sales, 611–612
market efficiency in, 33–34 SEC requirement for, 481
for managing and financing growth, 625–632 operation of corporations within, 36–37 Foreign bonds, 690
models for, 610–625 Financial Times, 274 Foreign exchange markets, 677–685
planning documents, 607–610 Financing. See also Raising capital equilibrium exchange rate, 679–680
Financial planning models, 610–625 accounts receivable, 462–463 foreign currency quotations, 680–685
advanced, 616–622 debt, see Debt financing foreign exchange rates, 677–679
basic, 611–615 direct, 27–29, 35 participants in, 677
improving, 623–625 equity, see Equity financing structure of, 677
inputs, 611–612 indirect, 27, 34–37 Foreign exchange rate risk, 662, 673, 677,
outputs, 613 mezzanine, 477
sales forecast for, 611 short-term sources of, 461–463 686, 693
Financial policy decisions, 612 in terms of sale, 452 Foreign exchange rates, 677–679
Financial ratios, 86–101 trade credit as, 444–445
analysis using, 108–111 for working capital, 458–463 equilibrium, 679–680
efficiency ratios, 89–93 Financing activities, on statement of cash flows, 65 quotations of, 680–685
leverage ratios, 93–97 Financing costs, 413–414 spot, 680–682
market-value indicators, 100–101 Financing decisions, 3–6, 609, 612 Foreign exchange speculation, 685
profitability ratios, 97–99 Financing plan, 608, 609 Formal line of credit, 461–462
short-term liquidity ratios, 87–90 Finished goods inventories, 444 Forms of business organization, 6–8. See also specific
Financial restructuring, 507, 508 “Fire sales,” 89
Financial results, in business plan, 579 Firm-commitment underwriting, 29, 482, 484 forms, e.g.: Limited liability companies
Financial risk, 510–511 Firm’s marginal tax rate (t), 344 choosing, 571–574
Financial Services Modernization Act (1999), 28 Firm’s overall cost of capital, 410–415. See also corporations, 7–8
Financial shortage costs, 450 hybrid, 8
Financial statements. See also individual types Weighted average cost of capital (WACC) in international finance, 676
Firm-specific assets, 537–538 Forward premium/discount, 683–684
of statements Firm value, 506, 507. See also Business valuation; Forward rates, 683–685
accounting principles for, 49–52 France, 674, 675
adjusting for differences in accounting Enterprise value Frankfurt Stock Exchange, 272
and agency costs, 523–526 Free cash flows, 343. See also Incremental after-tax
principles, 51 and bankruptcy costs, 520–523
in annual reports, 49–50 and dividend policy, 554–559 free cash flows
audited, 10, 50, 83, 556, 594–595 effect of debt on, 518–520 Free cash flow from the firm (FCFF) approach,
comparing, 83–84 and financing decisions, 5
for financial planning models, 611 and tax deductibility of interest, 514–519 589–592
income statement, 60–63 First in, first out (FIFO), 54 Free cash flow to equity (FCFE) approach,
market vs. book value, 57–60 First Valuation Principle, 580
pro forma, see Pro forma financial statements Fisher, Irving, 41 591–593
relationships among, 66–67 Fisher equation, 40–42 Frequency (bond payments), 245
SEC requirement for, 481 Fixed assets: Funds, sources of, 3. See also Raising capital;
standardized, 84 in financial planning models, 619, 623–625
statement of cash flows, 63–67 market value and book value of, 57–58 Working capital
statement of retained earnings, 63, 66–67 use of cash for, 64 internally generated, 526
and stock performance, 48–49 Fixed asset turnover, 93 for venture capital firms, 474, 475
for tax purposes vs. management and Fixed costs (FC), 363 Funding constraints, 305
in calculating EBIT, 385–388 Future cash flows, 4
reporting, 61 in calculating EBITDA, 382–385 calculating, 342–350
in valuation of companies, 594–595 controlling, in new businesses, 574–575 in capital budgeting, 342
Financial statement analysis, 81–113, 82 and project risk, 381–388 compared to cost of project, 5
and accounting firm scandals, 122–123 in sensitivity analysis, 396 conventional, 321–322
common-size financial statements, 84–86 Fixed-income securities, 240–241 estimating, 308, 350–362
creditors’ perspective on, 83 Fixed maturity, preferred stock with, 290–291 expected, 362
DuPont system for, 101–105 Fixed-price tender offers, 553, 554 forecasting, 307, 312, 313
efficiency ratios, 89–93 Flash crash, 270 free cash flows, see Incremental after-tax free
guidelines for, 83–84 Flexibility:
in international finance, 676 and capital structure, 528 cash flows
leverage ratios, 93–97 of lease agreements, 537 investment of, 345–346, 364–365
limitations of, 111 and options to change operations, 657 nominal vs. real, 353–355
managers’ perspective on, 83 Flexible current asset investment strategy, 450 from operations, 345
market-value indicators, 100–101 Flight to quality, 492 tax rates and depreciation, 355–359
profitability ratios, 97–99 Flipping shares, 485 Futures markets, 32
selecting benchmarks in, 106–107 Float, 457 Future stock prices, 284–286
short-term liquidity ratios, 87–90 Follow-on investments, options to make, 656 Future value (FV), 127–139
stockholders’ perspective on, 82 FOMC (Federal Open Market Committee), 24–25 applying formula for, 132–137
types of financial ratios for, 86–101 Fontainebleu, 641, 642, 655 with financial calculators, 137–139
using financial ratios, 108–111 Forecasts: of multiple cash flows, 160–163
Financial system, 25–45 of EBIT, 386 present value vs., 142, 146–147
characteristics of, 26 of exchange rates, 686 Future value equation, 129–131, 142
direct financing in, 27–29 financial, 579 Future value interest factor (future value factor),
financial markets, 30–32
flow of funds through, 26–27 128, 131–132, 179
Future value of an annuity (FVA), 177–179
FV, see Future value

G
GAAP, see Generally accepted accounting principles

736 Subject Index Historical market performance, 211–214 in sensitivity analysis, 396
Historical trends, in financial planning models, in terminal-year FCF, 359–361
General cash offers, 488–491 Incremental cash flow from operations
competitive or negotiated sales, 489–490 617–618
cost of, 490–491 HKIBOR (Hong Kong Interbank Offer Rate), 690 (CF Opns), 343, 345
shelf registration, 490 Holding period, 202 in FCF calculation, 352
Holding period returns, 202–203 forecasting, 363, 364
General dividend model (stock valuation), Hold-up problems (lease), 538 in terminal-year FCF, 359–361
279–281 Hong Kong Interbank Offer Rate (HKIBOR), 690 Incremental depreciation and amortization
Hong Kong Stock Exchange, 272
Generally accepted accounting principles Hybrid forms of business organization, 8 (D&A), 344
(GAAP), 16, 50–52 in Accounting DOL, 390
I in accounting operating profit break-even
fundamental accounting principles in, 50–51 IASB (International Accounting Standards
international, 51–52 point, 393–395
revenue recognition under, 67–68 Board), 51 in cash flows from operations, 345
sales vs. leases, 536 Icahn, Carl, 642 in EBIT calculation, 385, 386
for tax depreciation, 356 Identity, 52n.3 in FCF calculation, 346–348, 352, 359
General partners, 7, 493 IFRS (International Financial Reporting forecasting, 363, 364
General partnerships, 7, 572–574 Incremental net operating profits after tax
General-use assets, 538 Standards), 51
Georgetown University, 199 IGR (internal growth rate), 628–629 (NOPAT), 345–348, 352
German bonds, 238–239 Impairment test, 62 Incremental net revenue (Revenue), 363
Germany, 674, 675 Incentives: Incremental operating expenses (Op Ex):
Global financial markets, 689–691
Globalization, 672–673 alignment of, 555–556 in FCF calculation, 346–348, 352–353
Goals of firms, 11–13 for different forms of business, 572 fixed and variable costs in, 382
in business plans, 579 for ethical behavior, 19 forecasting, 363
for financial management, 11–13 for managers, 15, 16, 660–661 Independent evaluations (contingent projects), 304
growth rate as, 631–632 in private vs. public companies, 595 Independent parties, 50
maximization of ROE as, 104, 105 for stockholders to pay dividends, 659 Independent projects, 304, 321
Going concern assumption, 51 Income, see Net income Index funds, 213
Going-concern value, 582 Income approaches to business valuation, India, 674, 675
Golden parachute, 667 Indirect bankruptcy costs, 521–523
Golden rule, 18 588–594 Indirect currency quote, 680
Goodwill, 54, 62 dividend discount model, 593–594 Indirect financing, 34–37
Governance, 17 free cash flow from the firm, 589–592 direct financing vs., 35
Government. See also Regulation free cash flow to equity, 591–593 financial institutions in, 35–36
new business investment by, 473 market approaches vs., 588 in flow of funds, 27
as stakeholders, 2 using, 588–589 market transactions in, 35
Graham, John, 516 Income statement, 60–63 Industry analysis, 106
Grasso, Richard A., 669–670 common-size, 85–86 Inflation, 38
Great Depression, 44 in financial planning models, 613, 616–617 and economic growth rate, 424
Greek debt crisis, 238–239, 270 pro forma, 613, 616–617 expected rate of, 40–41, 259
Greenberg, Maurice R., 670 relationship of other statements and, 66–67 and Fisher equation, 40–42
Gross profit margin, 97 Income taxes, 71–73 and loans, 40–42
Gross working capital, 443. See also Working capital average vs. marginal rates, 72–73 and long-term interest rates, 42–44
Growing annuities, 183 corporate rates, 72 and purchasing power, 354, 355
Growing perpetuities, 183–184 and cost of debt, 514–518 realized rate of, 41
Growth of business, 625–632 for different forms of business, 572 and stock growth rate, 286
external funding for, 625–628 on dividends, 73, 556 Inflation premium, 41–42
graphical view of, 628 on interest payments, 73 Informal line of credit, 461
growth rates and profits, 631 Income valuation: Information:
internal growth rate, 628–629 and controlling interest, 596 for capital budgeting, 304
as planning goal, 631–632 for young companies, 595–596 in financial planning documents, 608
sustainable growth rate, 629–631 Incremental additions to working capital material, 259
valuation of rapidly-growing companies, private, 34
(Add WC), 343, 346, 443n.1 public, 34
595–596 in FCF calculation, 346–348, 352 Informational efficiency, 33
Growth opportunities, 411n.2 forecasting, 364–365 Information asymmetry, 19
Growth rates, 149–152 in terminal-year FCF, 359–361 ethics conflicts involving, 19–20, 503
Incremental after-tax free cash flows (FCF), with start-up companies, 475
compound annual, 151 Information costs, 537
economic, 424 343–365 Initial public offerings (IPOs), 36, 37, 479–488
internal, 628–629 accounting earnings vs., 349 advantages of, 480
and profits, 631 calculation of, 342–350 bundling options and common stock in, 654
sustainable, 629–631 and capital structure, 505 cost of, 480, 486–488, 491
Growth stock pricing, 280, 286–289 estimating, 350–362 disadvantages of, 480–481
Gulf oil spill (2010), 280 expected, 362 distribution of shares, 483
forecasting, 363–365 investment banking services for, 481–483
H general rules for calculating, 350–353 origination of, 481–482
Haircut, 463 tax rates and depreciation, 355–359 proceeds from, 483–484
Harvesting assets, 367–368 terminal-year, 359–362 underpricing of, 485–486
Hedge, 684–685 Incremental capital expenditures (Cap Exp), underwriting for, 482–483
Hedging, 32, 662, 684–685
High-yield bonds, 257 343, 346
in FCF calculation, 346–348, 352

Inside directors, 17 International finance management, 671–695 Subject Index 737
Insider trading, 299–300 basic principles of, 676
Insolvency, 88 capital budgeting in, 685–688 IPOs, see Initial public offerings
Institutional investors, 555 factors affecting, 673–675 IRR, see Internal rate of return
Insurable interest, 502 foreign exchange markets, 677–685 IRS, see Internal Revenue Service
Insurance, company-owned life, 502–503 and globalization, 672–673 Issuance costs:
Insurance companies, 35, 36 global money and capital markets in,
Intangible assets, 2, 3, 54, 345 689–691 for bonds, 417, 490, 491, 518
goals of, 675–676 for stock, 518, 526
amortization of, 62 international banking, 692–694 Italy, 674
capital structures of companies with, 527 and rise of multinational corporations, 673
cash flows associated with, 345–346 J
Intensity of use conflict, 539, 540 International Financial Reporting Standards “Janitor’s insurance,” 502–503
Interest: (IFRS), 51 Japan, business in, 675
compound, 128–130 Jobs, Steve, 287, 472
deferred payment of, 521 International GAAP, 51–52 Jones, Barbara S., 20
on Eurocredit loans, 693–694 Intrinsic value, 33, 588 Junk bonds, 257
future value interest factor, 128, 131–132, 179 Inventory, 444 Just-in-time inventory management, 456
simple, 128–130, 185
and taxes, 418, 514–518 accounting for, 54 K
total simple, 130 as current asset, 53, 54 Keiretsu, 675
Interest expense, 73, 623 forecasting, 365 Key person discount, 596–597
Interest on interest, 128–129, 131–133 just-in-time, 456
Interest rates, 38–44 management of, 455–456 L
annual percentage rate, 185–188, 198 profitability and, 6 Labor market, managerial, 15
for annuities, 174–177 Inventory carrying costs, 450 Land of the Lost (movie), 5
for bank loans, 494–495 Inventory turnover, 89–91, 446, 447 Langone, Ken, 669
and bond prices, 246–248, 253–255 Investing activities, on statement of cash Last in, first out (LIFO), 54
caps on, 267 Las Vegas, Nevada, 641, 655
comparing, 186–187 flows, 65 Laws. See also Regulation
and cost of debt, 416 Investments:
cyclical and long-term trends in, 42–44 for business ethics, 20
disclosure of, 187–188 as cash outflows, 63 and managers’ decision making, 16
effective annual, see Effective annual interest costs and benefits of, 5 Leases (rental agreements), 535
by entrepreneurs, 477 capital, 536, 538
rate (EAR) evaluating opportunities for, 614–615 operating, 536
equilibrium, 38, 39 follow-on, 656 types of, 535–536
Fed’s role in setting, 24–25 in long-term assets, 69–70 Leasing, 535–544
finding, 148–149 in multinational corporations, 673 evaluating opportunities for, 540–543
impact of inflation on loans, 40–42 in net working capital, 68–69 lessee and lessor conflicts, 539–540
lending and borrowing, 26 options to defer, 655–656 motivations for, 536–539
and market value of liabilities, 58 real investment policy, 506 types of leases, 535–536
nominal, 38 through private equity funds, 493–494 Lee, Spike, 474
and options associated with securities, 654 Investment banks, 28–29 Legal persons, corporations as, 7
prime, 494–495 distribution by, 29, 483 Legal systems, foreign, 674
quoted, 185, 186 origination by, 28, 481–482 Lenders. See also Loans
real, 38–40, 259 in private placements, 492 mortgage, 267–269
risk-free rate of interest for options, 649 services of, 28–29, 481–483 payoff functions for, 659–661
structure of, 255–259 and subprime mortgages, 268 stockholder-lender agency costs,
term structure of, 258–259 underwriting by, 29, 482–483
Interest rate factor, 188–189 Investment funds, 36 524–526
Interest rate per period, 186 Investment-grade bonds, 257 venture capitalists, 474, 477, 479
Interest rate risk, 252, 259 Investment period, 202 Lender-savers, 26
with bonds, 252–255 Investment plan, 608, 609 Lending margin, 694
options in management of, 662 Investment policies, 523, 539, 612 Lending rates, 26
Intermediation, financial, 34, 35 Investment projects: Lessees, 535, 539–540
Internal accounting controls, 17 classification of, 304 Lessors, 535
Internal auditors, 9, 10 with different lives, 365–367 conflicts with lessee, 539–540
Internal growth rate (IGR), 628–629 Investment strategies, for working capital, value of asset to, 535–536
Internally generated funds, use of, 526 Level cash flows, 167–182
Internal rate of return (IRR), 318–328 450–451 annuities, 167–182
agreement of NPV and, 321–322 Investment value, 581, 587, 588 annuities due, 181–182
calculating, 319–321 Investopedia, 168, 350 perpetuities, 179–180
disagreement of NPV and, 322–325 Investors: Leverage. See also Financial leverage
modified, 325–327 and choice of capital structure, 528–529
NPV vs., 327–328 angel, 474 and cost of assets, 512, 513
as practitioners’ method of choice, 329 benefits of dividends for, 555 and cost of debt, 510n.6, 512, 513
Internal Revenue Service (IRS), 358, 536, 580 business plan for, 578–579 and cost of equity, 510, 512, 513
International Accounting Standards Board cash flows to, 67–71 and interest tax shield, 515, 517
effects of financial restructuring for, operating, 388–391, 511–512, 676
(IASB), 51 and return on equity, 103
International banking, 692–694 507–508, 512 Leveraged buyouts, 1–2, 493
financial, 580 Leverage ratios, 89, 93–97
importance of cash flow to, 4
institutional, 555
and need for dividends, 554–555
specialization of, 572

738 Subject Index true cost of, 186–187 Marketability, 30, 255, 595
unsecured, 462 Marketability discount, 584–585
iabilities, 52–55 when starting a business, 474, 494–496 Marketability risk premium (MRP), 255
on balance sheet, 52–55 Loan pricing model, 495–496 Marketable securities, 53, 444
in balance sheet identity, 411–412 Lockbox systems, 457–458 Market analysis, in business plan, 579
on common-size balance sheets, 84, 85 London Interbank Offer Rate (LIBOR), 690 Market approaches to business valuation, 584–588
current, 53–54, 69, 443 London Stock Exchange, 31, 272, 673, 677
for different forms of business, 572 Long-term assets: income approaches vs., 588
in financial planning models, 619 on balance sheet, 54–55 multiples analysis, 584–588
limited, 7 cash flow invested in, 69–70 transactions analysis, 584, 588
long-term, 55, 64 funding of, 460. See also Raising capital Market capitalization, 272
market value of, 58 Long-term debt: Market economies, 675
and organizational form, 573–574 book value and market value for, 58 Market extension projects, 434
retiring, 63 cost of, 415–420 Marketing and sales, in business plan, 579
IBOR (London Interbank Offer Rate), 690 in financial planning models, 619 Market operational efficiency, 33
ife cycles (business), 286 financing with, 459–460 Market portfolio, 225
ife insurance, company-owned, 502–503 as source of cash, 64 Market rate of interest, 244
ife insurance companies, 36 Long-term equity, 64 Market risk, 225. See also Systematic risk
ife of a business: Long-term funding strategy, 460 Market risk premium, 228, 410, 422
for different business forms, 572, 573 Long-term liabilities, 55, 64 Market-to-book ratio, 100–101
in valuation of business, 588 Long-term solvency ratios, 93. See also Market value (MV), 50, 57
IFO (last in, first out), 54 of assets, 57–58, 411–412
imited liability, 7, 276 Leverage ratios book value vs., 57–58
imited liability companies (LLCs), Lowest-cost method of sale, 489 of common stock, 56
Lumpy assets, 623–625 of liabilities, 58
8, 571, 572 of stockholders’ equity, 58
capital for, 573 M in WACC, 428
characteristics of, 572 MACRS (Modified Accelerated Cost Recovery Market-value balance sheet, 58–60
financial liabilities of, 574 Market-value ratios, 89, 100–101
life of, 573 System), 357–361 Marking to market, 57
partnership agreements in, 573 Maintenance conflict, 539–540 MAT (term to maturity), 495
private equity funds as, 493 Management. See also Financial management Matching maturities, see Maturity matching strategy
taxes as C-corporations, 574n.1 Matching principle, 51, 67–68
imited liability partnerships (LLPs), 8 of current assets, 3 Material information, 299
imited partners, 7, 493 venture capitalists’ involvement in, 479 Mature companies, valuation of, 595–596
imited partnerships, 7 Management team: Maturity:
capital for, 572, 573 in business plan, 579 fixed, 290–291
characteristics of, 572 and private equity investment, 494 yield to, 241, 248–249, 251
financial liabilities of, 573 Managers. See also Financial managers Maturity date (bonds), 245
life of, 573 agency relationship of stockholders and, 14 Maturity matching strategy, 459, 460
private equity funds as, 493 aligning interests of stockholders and, 14–16, Maximizing shareholder wealth, 676
inear programming, 402 Maximizing stock value, 12
ine of best fit, 225–226 555–556 MBSs (mortgage-backed securities), 267–269
ines of credit, 461–462 compensation of, 15 Mean, 208–209
intner, John, 563 competition among, 16 Mega Millions lottery game, 125
iquidating dividend, 547 control of firm by, 13–14 Merchandising companies, 60
iquidation value of a business, 582–583 financial analysis for, 83 Mergers, 272, 341
iquidity, 30, 444 incentives for, 15, 16 Metering of services, 540
marketability vs., 30 payoff function for, 660–661 Mezzanine financing, 477
in money markets, 31 shift in behavior of, 18 Michigan State University, 199
of seasoned vs. unseasoned stocks, 481 specialization of, 572 Microsoft Excel, 127
iquidity discounts, 585n.3 as stakeholders, 2 for bond prices/yields, 245
iquidity position, 87–88 and stockholder-lender agency costs, 524 business valuation templates, 585
iquidity ratios, 87–90 and stockholder-manager agency costs, 523 Cash Flow Template, 575
isted stocks, 272 stock price affected by decisions of, 12, 13 and changes in assumptions, 388
LCs, see Limited liability companies views of stock repurchases, 563 for free cash flow, 348, 364
LPs (limited liability partnerships), 8 waste of money by, 518 for internal rate of return, 321
oans. See also Bank loans Managerial labor market, 15 and leverage model, 512
amortizing, 172 Mandatory contingent projects, 304 loan amortization tables, 174
estimating current cost of, 418 Manning, Robert, 198 for Monte Carlo simulations, 398
from factors, 462–463 Manufacturing companies, revenues of, 60 and multistage-growth dividend model, 426
from family and friends, 474 Marginal tax rate, 72–73, 344, 356, 357, 364 for net present value, 312
impact of inflation on, 40–42 Markets. See also Financial markets for time value of money, 138
interest rates on, 148–149 bond, 239–240, 690–691 Miller, Merton, 506, 514, 554
mortgage, 267–269 broker, 273 Minneapolis Fed, 495
no documentation, 269 dealer, 273 Minority ownership interest, 596
pricing model for, 495–496 direct search, 273 MIRR (modified internal rate of return), 325–327
prime-rate, 494–495 efficiency of, 33–34, 272–273, 415 Mixed (supernormal) growth dividend model,
risk-free, 659n.5 foreign exchange, 677–685
secured loans, 462 historical performance of, 211–214 286–289, 424–426
securitization of, 267 informal, 677 M&M propositions, see Modigliani and
short-term, 461–462, 496 options, 32
stock, 225, 270–276

Modified Accelerated Cost Recovery System in international finance, 676 Subject Index 739
(MACRS), 357–361 IRR vs., 327–328
of leasing opportunities, 540–543 NPV method, see Net present value method
Modified internal rate of return (MIRR), payback period vs., 317 NPV profile, 321–323, 325
325–327 of projects with different lives, 365–366 NVCA (National Venture Capital Association), 475
and replacing of assets, 368–369 NWC, see Net working capital
Modigliani, Franco, 506, 514, 554 in risk analysis, 395–397 NYSE, see New York Stock Exchange
Modigliani and Miller (M&M) propositions, and use of existing assets, 370 NYSE Euronext, 272
Net present value (NPV) method, 306–313
506–514 calculation of NPV, 309–312 O
proposition 1, 506–509 for cash flows, 347 Odd lots (of shares), 561–562
proposition 2, 509–513 concept of, 306 Offer price, 273, 489
Money, value of, 40n.6. See also Foreign exchange expected cash flows in, 362 Oil industry, options to defer in, 655–656
for financial vs. real assets, 306 OMX Group, 272
rates; Time value of money framework for, 307–309 One-period model (stock valuation), 277–278
Money center banks, 28 as practitioners’ method of choice, 329 Ongoing reviews of projects, 329
and value creation, 307–309 Open-market repurchases, 553, 554, 558
in foreign exchange market, 677 and value of options, 655–658 Operating activities:
in private placements, 492 Net proceeds (bonds), 417
Money markets, 31, 32, 689–691 Net profit margins, 97–98 cash flow from, 68, 70–71
Monte Carlo simulations, 398 of discount retailers, 81–82 on statement of cash flows, 64, 65
Mortgage-backed securities (MBSs), 267–269 in DuPont system of analysis, 102 Operating cycle, 446–448
Mortgage brokers, 267 Net sales, 85 accounts receivable in, 452–454
Mortgage market, subprime, 267–269, 280 Net working capital (NWC), 4, 6 inventory management in, 455–456
Motley Fool, 277 cash flow invested in, 68–69 Operating leases, 536
MRP (marketability risk premium), 255 on financial statements, 53–54 Operating leverage, 388–391
MSN Money Central, 86, 227, 270, 422, 424 in working capital management, 443, 450–451 Accounting DOL, 389–391
Multinational corporations, 673, 674. See also Net worth, 52n.2. See also Stockholders’ equity Cash Flow DOL, 389, 391
New businesses, see Business formation in international finance, 676
International finance management New product projects, 434 and net income, 511–512
Multiples analysis, 584–588, 595, 596 New York Board of Trade, 32 Operating profits, see Accounting profits
Multiple cash flows, 160–166 New York Stock Exchange (NYSE), 8 Operating shortage costs, 450
as auction market, 273 Operations:
future value of, 160–163 as capital market, 31 in business plan, 579
present value of, 163–166 corporate bonds on, 239 options to change, 656–657
Multistage-growth dividend model, 424–426 financial market classifications for, 30 Operational efficiency, market, 33
Mutual funds, 36 as foreign exchange market, 677 Op Ex, see Incremental operating expenses
Mutually exclusive projects, 304, 312 overcompensation by, 669–670 Opportunity costs, 242, 305, 351
with different lives, 365–367 as public market, 31 Opportunity cost of capital, 305
IRR vs. NPV methods for, 324–325 and reverse stock splits, 562 Opportunity loss, 485
MV, see Market value as secondary market, 271, 272 Optimal capital structure, 505–506, 520, 676
transparency of, 240 Options, 641–663
N Wall Street Journal listings for, 274–275 agency costs of, 658–661
NAICS (North American Industry Classification Web site, 8, 272, 275 and compensation, 669–670
New York University, 693 financial, 643–654
System), 106 NGOs (nongovernmental organizations), 379 real, 655–658
NASA, 656 NOA (nonoperating assets), 588–589 and risk management, 662
NASD (National Association of Securities No documentation (no-doc) loans, 269 value of, 646–654
Nominal, use of term, 41n.7 Optional contingent projects, 304
Dealers), 272 Nominal cost of capital, 354 Options markets, 32
NASDAQ, 8, 31, 272, 273, 562 Nominal dollars, 353–355 Option payoff function, 643–646
NASDAQ Composite Index, 211, 274 Nominal rate of interest, 38, 676 Options to abandon projects, 657
National Association of Insurance Noncash expenses, 62, 68 Options to change operations, 656–657
Noncash revenues, 68 Options to defer investment, 655–656
Commissioners, 503 Nonconvertible bonds, cost of issuing, 490, 491 Options to make follow-on investments, 656
National Association of Securities Dealers Nonconvertible preferred stock, 276 Option writers, 32
Nondiversifiable risk, 223. See also Systematic Ordinary annuities, 167
(NASD), 272 Organizational form, see Forms of business
National Association of Securities Dealers risk
Nongovernmental organizations (NGOs), 379 organization
Automated Quotation system, see NASDAQ Noninvestment-grade bonds, 257 “Organized” markets, 31. See also Exchanges
Nationalization, 686 Nonoperating assets (NOA), 588–589 Origination, 28, 481–482
National Venture Capital Association (NVCA), 475 NOPAT (incremental net operating profits after OTC markets, see Over-the-counter market(s)
NCF, see Net cash flow Otellini, Paul, 301
Negative correlation, 220 tax), 345–348, 352 Out-of-pocket costs, 417
Negotiated sales, 489–490 Normal distribution, 208–210
Net cash flow (NCF), 308, 314. See also Normal trading range, 562 direct bankruptcy costs as, 521
North American Industry Classification System economies of scale in, 491
Incremental after-tax free cash flows with IPOs, 486
Net income, 60–62 (NAICS), 106 Outright sales, leases vs., 536
Notes payable, as current liability, 53 Outside directors, 17
cash flow to investors vs., 67–70 Not-for-Profit Corporation Law (New York), 670 Overall cost of capital, 410–415. See also Weighted
and decrease in revenue, 511
differing from cash flows, 510n.7 average cost of capital (WACC)
dollar value of, 529 estimating, 413–415
and operating leverage, 511–512
on statement of cash flows, 64, 65
Net plant and equipment, 54
Net present value (NPV):
agreement of IRR and, 321–322
calculation of, 309–312
disagreement of IRR and, 322–325
of free cash flow, 352–353

740 Subject Index

Overcompensation, 669–670 Popeil, Ron, 607n.1 Prime rate of interest, 494–495
Over-the-counter (OTC) market(s), 31, 239, Portfolios, 214 Principal (agency), 14, 523
Principal (amount), 129, 240, 241
240, 272 CAPM and returns on, 230–231
Owners: market, 225 deferred payment of, 521
with more than one asset, 217–222 in future value analysis, 127, 128
agency conflict between managers and, 14 replicating, 650–652 Private equity firms, 493–494
cash flows between stakeholders and, 3 risk and diversification of, 214–224 Private equity funds, 493
decisions in interest of, 2 single-asset, 215–217 Private information, 34
double taxation of, 7 Positive correlation, 220, 222 Private investments in public equity (PIPE), 494
Owners’ equity, 52n.2. See also Stockholders’ equity Positive time preference for consumption, 38 Privately held companies:
Ownership: Posts, 273 business valuation for, 594–595
control vs., 13–14 Postaudit reviews, 329 dividend payment process for, 550, 551
separation of control and, 573 Preferred stock, 56–57, 276 financial statements of, 594–595
and stock repurchases, 551 convertible, 654 transactions analysis for, 588
transfer of, 572 cost of equity for, 426–428 Privately held corporations, 8, 12
Ownership interest, 573, 596 as debt vs. equity, 276 Private markets, 32
Ownership rights, with common stock, 55 with fixed maturity, 290–291 private equity firms, 493–494
Ownership structure, in business plan, 579 nonconvertible, 276 private investments in public equity, 494
as perpetuities, 179, 180, 291 private placements, 32, 492–493
P valuation of, 290–291 public markets vs., 492
Partnerships, 7 for venture capitalists, 477 raising capital in, 491–494
Preliminary prospectus, 481 Private placements, 32, 492–493
characteristics of, 572 Premiums: Products and services, in business plan, 579
life of, 573 call, 644 Product extension projects, 434
limited liability, 8 call interest, 256 Production, globalization of, 673
maximizing stock value for, 12 control, 596 Productive assets, 2–3. See also Long-term assets
taxation of, 8 default risk, 256, 495 financing of, 5
Partnership agreements, 572, 573 forward, 683–684 purchasing, 4, 5
Par value, 56, 240 inflation, 41–42 for venture capital funding, 475
Par-value bonds, 244 marketability risk, 255 Productivity ratios, 87
Payables, see Accounts payable market risk, 228, 410, 422 Professional corporations (PCs), 8
Payable date, 550 Premium bonds, 244 Professional partnerships, 8
Payback period, 313–317 Prepaid expenses, 68 Profits, 631. See also Accounting (operating)
in capital budgeting, 315–316 Present value (PV), 33, 140–147. See also Net
computing, 313–315 profits; Net income
discounted, 316–317 present value incremental net operating profits after tax,
NPV method vs., 317 applying formula for, 142–144
Payments: of cash flows, 506 345–348, 352
annuity, 170–172 of exercise price, 648 maximization of, 11–12
cash collection cycles for, 457 with financial calculators, 145–146 of multinational companies, 671
as cash outflows, 63 future value vs., 142, 146–147 Profitability:
coupon, 240 of multiple cash flows, 163–166 and amount of debt, 528
dividend, 548–551, 558–559 relations among time, discount rate, and, and inventory level, 6
end-of-month, 453 Profitability index (PI), 399–402
frequency of bond, 245 144–145 Profitability ratios, 89, 97–99
Payoff functions: Present value equation, 142, 163–164 Profit margins:
and agency conflicts, 658–661 Present value factor, 140, 145, 168–169 asset turnover vs., 102–103
for options, 643–646 Present value of an annuity (PVA), 167–177 net, 81–82, 97–98, 102
Payout policy, 546, 609, 612 Pro forma financial statements, 613–615
PCs (professional corporations), 8 for annuities due, 182 balance sheet, 614–615, 617–622
Pecking order theory, 526–528 with financial calculator, 169–170 final, 621–622
Peer group analysis, 106–107 interest rate, 174–177 income statement, 613, 616–617
Pension funds, 36 loan amortization schedule, 172–174 preliminary, 619–621
P/E ratio, see Price-earnings ratio monthly/yearly payments, 170–172 Progressive tax system, 356
Percent of sales model, 613–615 present value factors, 168–169 Project costs, 308, 309
Performance analysis, 108–111 Pretax cost of debt, 418, 419, 509n.5 Project economics, 381–398
Permanent debt, 416 Pretax earnings, 351 break-even analysis, 391–395
Permanent working capital, 459, 460 Pretax operating cash flow, 382. See also EBIT cost structure and project risk, 381–388
Perpetuities, 167, 179–180 operating leverage, 388–391
common stock as, 276 plus depreciation and amortization risk analysis, 395–398
growing, 183–184 (EBITDA) Project risk, 381–388
preferred stock as, 291 Pretax operating cash flow (EBITDA) break-even analysis of, 395–398
present value of, 281 point, 391–393 determining, 309
Perpetuity model: Price-earnings (P/E) ratio, 100, 275, 584, 585, 587 scenario analysis, 396–397
for stock valuation, 278–279, 427 Price/revenue ratio, 584, 585, 587 sensitivity analysis, 395–396
for tax benefit of debt financing, 515–516 Price risk, 31, 273, 482, 662 sensitivity of EBITDA to revenue changes,
Personal investment, by entrepreneurs, 477 Pricing:
Per-unit contribution, 392 of bank loans, 495–496 382–385
PI (profitability index), 399–402 of Eurocredit loans, 693–694 sensitivity of EBIT to revenue changes, 385–388
PIPE (private investments in public equity), 494 of IPOs, 485–488 simulation analysis, 387–398
Planet Ventures II, LP fund, 569 of leases, 540 variable and fixed costs’ effect on, 381–388
Pricing call, 483 Promised yield (bonds), 249
Primary markets, 30

Subject Index 741

Pro-rata basis (dividends), 546 Real investment policy, 506 on IPOs, 485–486
Public accounting firm scandals, see Accounting Realization principle, 50–51 quantitative measures of, 202–207
Realized rate of inflation, 41 and rate of interest, 38
firm scandals Realized yield (bonds), 252 for single-asset portfolios, 215–217
Public announcement (dividend payment), Real options, 642, 655–658 and standard deviation, 210–211
on stocks, 422
548, 549 to abandon projects, 657 and systematic risk, 224
Public companies. See also Initial public to change operations, 656–657 for venture capitalists, 479
to defer investment, 655–656 Revenue(s):
offerings (IPOs) to make follow-on investments, 656 deferred, 68
business valuation for, 594–595 and NPV analysis, 657–658 in FCF calculation, 346, 347, 352–353
dividend payment process for, 548–550 value of, 658 forecasting, 379
dividend payments vs. stock repurchases by, Real rate of interest, 38–40, 259 on income statement, 60
Receipts, 63 incremental net, 363
558–559 Receivables, see Accounts receivable matching expenses and, 51
financial statements of, 594 Recessions, 43 noncash, 68
new regulations for, 17 Reconciliation, 65, 614 recognition of, 50–51, 67–68
PIPE transactions by, 494 Record date, 550 Revenue changes:
transparency of, 480 Redemption (bonds), 245 EBITDA sensitivity to, 382–385
Public corporations, 8. See also Corporations Registered public offerings, 488. See also General EBIT sensitivity to, 385–388
Public information, 34 fixed costs and, 382
Public markets, 8, 31–33. See also Initial cash offers Reverse stock splits, 562
Regression analysis, 225–226 Review of projects, 329
public offerings Regular cash dividends, 547, 558 Revolving credit, 461
private markets vs., 492 Regulation, 16–18. See also Laws Rights:
as wholesale markets, 491 to assets, 535, 539
Public offerings, 479. See also Initial public consumer protection acts, 187–188 with common stock, 55
managers’ decisions influenced by, 16 Right to buy (leased assets), 540
offerings; Securities of private equity firms, 494 Risk. See also specific types
registered, 488. See also General cash offers reforms in, 16–18 avoiding, 11
seasoned, 479, 481 requiring capital expenditures, 303 with cash flows, 12
Purchasing power, 40, 354, 355 Reinvestment of residual cash flows, 3 and choice of capital structure, 528
Pure-play comparables, 433 Renewal of assets, 303 with debt financing, 5
Put-call parity, 652–653 Rental agreements, 535 and diversification, 214–224
Put options, 644 Reorder costs, 455 and expected return, 229, 231
early exercise of, 648n.2 Repatriation of earnings restrictions, 685–686 and financial planning models, 615
exercising, 645 Replacement cost, 581–582 and flight to quality, 492
as “insurance,” 662 Replacement cost valuation approach, 581–582 with international bank lending, 692–693
real, 655 Replacement of assets, 303, 368–369 measures of, 207–214
Put premium, 644 Replicating portfolios, 650–652 with portfolio having more than one asset,
PV, see Present value “Report to the Congress on College Credit Card
PVA, see Present value of an annuity 218–222
Agreements,” 199 and rate of return, 201–202
Q Required return, 509n.5. See also Cost of debt; with seasoned vs. unseasoned securities, 481
Quick ratio, 88–89 with single-asset portfolios, 215–217
Quoted interest rate, 185, 186 Cost of equity and stockholder-manager agency costs, 523
Resale of securities, with private placements, and structure of interest rates, 255–257
R with underwriting, 29
r (real cost of capital), 354 492–493 with venture capital funding, 475, 477
Raising capital, 472–497 Residual cash flows, 3 Risk analysis, 395–398
Resource constraints, 305 Risk-free bonds, 659n.5
with bank loans, 494–496 Restricted securities, 494 Risk-free loans, 659n.5
by bootstrapping, 473–474, 492 Restrictions, on leased assets, 540 Risk-free rate of interest (options), 648, 649
business plan in, 578–579 Restrictive current asset investment strategy, 450 Risk-free rate of return, 216, 227–228, 421
for cash-constrained companies, 578–579 Restructuring, financial, 507, 508 Riskglossary.com, 290
with company owned life insurance, 502–503 Retained earnings: Risk management, 662
with general cash offers, 488–491 Risk Management Association, 106
with initial public offerings, 479–488 cash vs., 56 Risk managers, 9, 10
for multinational companies, 672 events affecting, 63 ROA, see Return on assets
in private markets, 491–494 in financial planning models, 619 Road show, 482–483
for starting business, 473–474 statement of, 63, 66–67 ROE, see Return on equity
from venture capitalists, 474–479 Retained earnings account, 56 Rollover pricing, 694
Range of returns, 210–211 Retention (plowback) ratio, 617 Round lots (of shares), 561–562
Rapidly-growing companies, valuation of, Return on assets (ROA): Rule 144A, 492–493
in DuPont system of analysis, 101–103 Rule of 72, 150
595–596 EBIT, 98, 99 Russia, 18–19, 43
Rate of return: for multiple-asset portfolios, 217–222
for single-asset portfolios, 215–217 S
accounting, 318 Return on equity (ROE), 87, 99 ␴, see Standard deviation
book value, 318 in DuPont system of analysis, 103 ␴2, see Variance
internal, 318–328 maximization of, 104, 105
modified internal, 325–327 M&M proposition 2 in calculation of, 512, 513
and risk, 201–202 Return on investment, 201–207. See also Rate of
risk-free, 216, 227–228, 421
Raw materials inventories, 444 return
Real, use of term, 41n.7 on bonds, 422. See also Yields, bond
Real assets, 25, 305, 306 calculating, 205–206
Real cost of capital (r), 354

742 Subject Index

ales: Securitization of mortgage loans, 267 Standard Industrial Classification (SIC)
of assets, 361 Security Market Line (SML), 228–229, System, 106
and leases, 536, 539–543
and working capital, 623, 624 431–432, 650 Standardized financial statements, 84
Seed money, 474 Standard & Poor’s (S&P) 500 Index, 211, 213,
allie Mae, 198 Seendripu, Kishore, 380, 381
alvage rights, 535 Selling groups, 482 225–227, 274, 328, 479
alvage value, 360, 361 Semiannual compounding (bonds), 246–248, Starting a business, see Business formation
amurai bonds, 690 Stateless corporations, 673
arbanes-Oxley Act (2002), 16–18, 48, 494 416–417 Statement of cash flows, 63–67
avings and loan industry, 525 Semistrong-form, efficient market hypothesis, 34 Statement of retained earnings, 63, 66–67
caling, 84, 87 Sensitivity analysis, 395–396 Stewart, Martha, 299, 300
candals, accounting firm, 16, 122–123 September 11, 2001 terrorist attack, 58 Stillwagoner, Peggy, 503
cenario analysis, 396–397 Service companies, 60 Stocks. See also related topics, e.g.: Stock valuation
chultz, Howard, 606 Service contracts, 540
chumer, Charles E., 267 Settlement date (bonds), 245 common, see Common stock
-corporations, 8, 571, 572 SGR (sustainable growth rate), 629–631 convertible preferred, 654
easonal working capital, 458–460 Shanghai Stock Exchange, 272 cost of equity for, see Cost of equity
easoned public offerings, 479, 481. Shareholders’ equity, 52n.2. See also cost of issuing, 490, 491
dividends from, 560–562
See also Securities Stockholders’ equity dollar value of earnings per share, 529
Seat-of-the-pants” forecasts, 611 Sharpe, William, 217 financial statements and performance of,
EC, see Securities and Exchange Commission Sharpe Ratio, 217
econdary markets, 30, 271–273 Shelf registration, 490 48–49
She’s Gotta Have It (film), 474 growth, 280, 286–289
corporate bonds transactions in, 239 Shortage costs, 450 historical returns on, 211–214
efficiency of, 272–273 Short-term assets, 460. See also Working capital issuance costs for, 518, 526
transactions in, 271–272 Short-term financing sources, 461–463 listed, 272
types of, 273 Short-term funding strategy, 460 odd vs. round lots of, 561–562
econd Valuation Principle, 580–581 Short-term liabilities, book value and market preferred, see Preferred stock
ecured loans, 462 Treasury, 56
ecurities. See also Bonds; Stocks value for, 58 yields, 275, 291
derivative, 32, 643 Short-term liquidity ratios, 87–90 Stock dividends, 560–562
in direct financing, 27–29 Short-term solvency ratios, 88 Stock exchanges, see Exchanges
fixed-income, 240–241 SIBOR (Singapore Interbank Offer Rate), 690 Stockholders:
historical returns on, 211–214 SIC (Standard Industrial Classification) agency conflicts with, 14, 19
issuing, 63, 417, 490–491, 518, 526 cash flows available to, 591–594
marketability of, 255 System, 106 dividends and claims of, 546–547
marketable, 53, 444 Simple interest, 128–130, 129, 185 FCF as focus of, 344
and market efficiency, 33–34 Simulation analysis, 397–398 financial analysis for, 82
mortgage-backed, 267–269 Singapore Interbank Offer Rate (SIBOR), 690 interests of management and, 14–16, 555–556
options associated with, 653–654 Single-asset portfolios, returns for, 215–217 limited liability of, 7
public offering of, 479–480. See also Initial Sinking fund provisions, 276 manager monitoring by, 16
Size factor, 87 payoff functions for, 659–661
public offerings Small Business Administration, 571 for S-corporations, 572
restricted, 494 SML, see Security Market Line stock repurchases vs. dividends for, 551
seasoned vs. unseasoned, 481 Social communication, 675 Stockholders’ equity:
treasury, 256, 258, 421, 495 Sole proprietorships, 6–7 on balance sheet, 52
and types of financial markets, 30–32 in balance sheet identity, 411–412
unregistered, 32, 492–493 capital for, 572, 573 book value and market value of, 58
U.S. government, 227 characteristics of, 572 and cash flow, 59
ecurities Act (1933), 16 financial liabilities of, 573–574 maximizing, 12
ecurities and Exchange Commission (SEC), 8, life of, 573 Stockholder-lender agency costs, 524–526
taxation of, 7 Stockholder-manager agency costs, 523
50, 549 Sovereign nations, 675n.1 Stockholder of record, 550
and Arthur Andersen scandal, 122–123 Soviet Union, 675 Stock market, 271–276
compliance and ethics directors required by, 10 S&P 500, see Standard & Poor’s 500 Index as benchmark for systematic risk, 225
cost of compliance with, 480 Special dividends, 547 flash crash, 270
depreciation expense reporting for, 61, 62 Specialists, 273 reading listings for, 274–275
EDGAR database of, 49, 611 Specialization (venture capitalist’s), 477 Stock market indexes, 211–214
external auditors required by, 10 Speculation, foreign exchange, 685 Stock prices. See also Stock valuation
filing of financial statements with, 588, 594 Speculative-grade bonds, 257 from balance sheet, 58
financial statements in documents filed Spin-offs, 524 current listing of, 424
Spitzer, Eliot, 670 and dividend announcements, 550, 557–558
with, 356 Spot rate, 680–682 ex-dividend date and drop in, 549–550
general cash offer registration statements for, 488 Spread: future, 284–286
and IFRS adoption, 51 bid-ask, 680–681 growth stocks, 280, 286–289
IPO requirements for, 479, 481 of borrowing and lending rates, 26 major factors affecting, 13
PIPE registration with, 494 on securities, 273 and management decisions, 12, 13
and private equity firms, 494 Spreadsheet programs, 138. See also Microsoft Excel in market valuation approaches, 584
private placements limited by, 492–493 Staged funding (venture capital), 477 maximizing, 12
public markets regulated by, 31–33 Stakeholders, 2, 3 and ownership vs. control of firm, 14
registering securities with, 28, 481–483 Stand-alone principle, 344–345 and size of dividends, 555–556
shelf registrations allowed by, 490 Standard deviation (␴), 207–211, 208
and Martha Stewart trading case, 299, 300 for portfolios with more than one asset, 221, 223

Stock repurchases, 545, 551 deferred, 68 Subject Index 743
dividends vs., 551–552, 558–559 and depreciation, 356–359
managers’ views on, 563 for different forms of business, 572 relations among time, discount rate, and
process for, 553–554 on dividends, 73, 549, 552, 556 present value, 144–145
targeted, 553, 554 and excess compensation, 595
taxes on, 552 in foreign countries, 674 Rule of 72, 150
and interest, 418, 514–518 time lines illustrating, 126
Stock splits, 561–562 in international finance, 676 and value of call options, 647–648
Stock valuation, 270–293 on leased assets, 536–537 Time zero, 126, 146, 147
on life insurance policies, 502, 503 Tokyo Stock Exchange, 31, 272, 673, 677
common stock, 276–280 on limited liability companies, 574n.1 Toronto Stock Exchange, 272
computing future stock prices, 284–286 on limited liability partnerships, 8 Total asset turnover, 92–93, 102
constant-growth dividend model, 281–284, 286 and organizational form, 574 Total debt ratio, 94, 95
and insider trading, 299–300 on owners of corporations, 7 Total equity risk, 510–511
in international finance, 676 on partnerships, 8 Total holding period return, 202–203
mixed growth dividend model, 286–289 on sale of assets, 361 Total simple interest (TSI), 130
preferred stock, 290–291 on sole proprietorships, 7 Total volatility, 432
relationship between R and g, 285, 286 on stock repurchases, 552 “Tracking stock,” 433n.9
of seasoned vs. unseasoned stocks, 481 on Subchapter S corporations, 8 Trade credit, 444–445
simplifying assumptions in, 281–289 Tax rates: cost of, 453
and stock markets, 271–276 average, 72–73, 356, 357 as short-term financing, 461
zero-growth dividend model, 281 and depreciation of free cash flows, 355–359 terms of sale, 452–454
Straight-line depreciation, 55, 61–62, 358 marginal, 72–73, 344, 356, 357, 364 Trade-off theory, 520, 526–528
Strategic buyers, 478 progressive, 356 Trading range argument, 561–562
Strategic investors, 580 and real interest rate, 40 Transactions analysis, 584, 588
Strategic plan, 303, 608–609 Tax Reform Act (1986), 72, 357 Transaction costs, 30, 33
Strategic planning, 608 TDM (time to double your money), 150 direct bankruptcy costs as, 521
Strike price, see Exercise price TeachMeFinance.com, 125 of dividends, 556–557
Strong-form, efficient market hypothesis, 33–34 Technology, real interest rate and, 40 indirect bankruptcy costs as, 522
Student debt, 198–199 Tender offers, 553, 554 for leasing, 537
StudyFinance.com, 163 Terminal value (TV), 325–327, 589 for shares in public vs. private companies, 595
Subchapter S corporations, 8 Terminal-year FCF, 359–362 Transaction costs argument (stock splits), 562
Subprime mortgage market, 267–269, 280 Term loans, 495, 496 Transfer of ownership, forms of business and, 572
Sunk costs, 351 Terms of sale, 452–454 Transnational corporations, 673. See also
SuperDOT trading system, 273 Term structure of interest rates, 258–259
Supernormal growth dividend model, 286–289, Term to maturity (MAT), 495 International finance management
Thin market, 239 Transparency, 19n.8
424–426 Three-period model (stock valuation), 279
Suppliers: Tillman, Anthony, 502 and company-owned life insurance, 503
Tillman, Felipe, 502 of financial markets, 240
indirect bankruptcy costs from, 522 Time interest earned, 96 of public companies, 480
as stakeholders, 2 Time lines: Treasurer, 9, 10
Supply curve, 680 for calculating NPV, 308 Treasury securities, 256, 258, 421, 495
Sustainability, 378–379 for time value of money, 126 Treasury stock, 56
Sustainable Agriculture Code, 379 Time periods, in future value equation, Trend analysis, 83, 106
Sustainable growth rate (SGR), 629–631 Trial-and-error IRR calculation, 319–321
Sustainable Living Plan, 378–379 149–150 True (intrinsic) value, 33, 588
Syndicates, underwriting, 482, 483 Time preference for consumption: Truth-in-Lending Act (1968), 185, 187, 188
Syndication, 477 Truth-in-Savings Act, 187
Synergies, value of, 580–581, 587 positive, 38 Truth in Securities Act, 16
Systematic risk, 223–228 and rate of interest, 38 TSI (total simple interest), 130
associated with stock, 422 and time value of money, 125–126 TV (terminal value), 325–327, 589
beta, 226–230 Time to double your money (TDM), 150 Two-period model (stock valuation), 278
compensation for bearing, 227–228, 410 Time-trend analysis, 89
and cost of capital, 413 Time value of money, 124–153, 125 U
line of best fit, 225–226 applying future value formula, 132–137 U.K. GAAP, 51
measuring, 225–227 applying present value formula, 142–144 Uncertainty, see Risk
nature of business and, 432 compound growth rates, 150–152 Unconventional cash flows, 322–324
Systematic volatility, 432–433 compounding, 132–137 Underinvestment problem, 525, 660
finding interest rate, 148–149 Underlying assets (options), 643, 646–649
T future value, 127–139
t (firm’s marginal tax rate), 344 future value equation, 129–131 current value of, 646–648
Takeovers, 16 future value factor, 131–132 volatility of the value of, 648
Tangible assets, 2, 54, 345 future value vs. present value, 142, 146–147 Underpricing, 485–486
growth rates, 149–152 Underwriter’s compensation, 29
capital structures of companies with, 527 in international finance, 676 Underwriting, 29
cash flows associated with, 345–346 investment growth rates, 149–152 for competitive vs. negotiated sales, 489
depreciation of, 55 and positive time preference for consumption, as investment banking service, 481–483
Targeted stock repurchases, 553, 554 Underwriting spread, 29, 482, 486, 491
Taxes. See also Income taxes; related topics, e.g.: 125–126 Underwriting syndicates, 482, 483
present value, 140–147 United Kingdom, 675
Earnings before interest and taxes (EBIT) present value equation, 142 United States:
accelerating depreciation for, 61 bond coupon interest in, 246
accrued, 53 corporate tax system in, 355–357
capital gains, 556 inflation and real interest rate in, 43

744 Subject Index Value additivity, 653 limitations as a discount rate, 430–433
Value creation, 302, 307–309 minimizing, 514
U.S. Department of Commerce, 106, 686 Value proposition, 476 and M&M proposition 2, 509
U.S. Department of the Treasury, 72 Vanilla bonds, 240, 489 Weighted average first-day return (IPOs), 486
U.S. dollar, 689 Variable costs (VC), 363 Whistleblower programs, 10
U.S. Federal Reserve Bank, 421, 462 Wikipedia, 645
U.S. Justice Department, 123 in calculating EBIT, 385–388 Working capital, 443. See also Incremental
U.S. Small Business Administration, 393 in calculating EBITDA, 382–385
U.S. Treasury bills, 211–214, 216, 255, 422 and project risk, 381–388 additions to working capital (Add WC)
U.S. Treasury bonds, 241, 422 Variance (␴2), 207–210, 208 gross, 443
United States Saving Bonds, 241 in international finance, 676 Investment strategies for, 450–451
Unit sales: for portfolios with two assets, net, 4, 6, 53–54, 68–69, 443, 450–451
permanent, 459, 460
in break-even analysis, 391–395 219–222 seasonal, 458–460
in EBIT, 386 VC, see Variable costs on statement of cash flows, 65
in EBITDA, 384–385 Venture capital, 474–479 and use of cash, 64
University of Notre Dame du Lac, 199 use of term, 443
University of Southern California, 199 advice from lenders of, 479 Working capital accounts, 444–445, 618–619,
University of Tennessee, 199 cost of funding, 479
Unregistered securities, 32, 492–493 funding cycle for, 476–478 623, 624
Unsecured loans, 462 in private markets, 492 Working capital efficiency, 444
Unsystematic risk, 223, 225, 227, 410 traditional funding vs., 475 Working capital management, 3, 441–465
Venture capital industry, 474, 475
V Venture capitalists, 474, 477, 479 accounts and trade-offs in, 444–445
Valuation: Verbal agreements, 461 accounts receivable, 452–454
Volatility: cash conversion cycle in, 445–446, 448–449
of bonds, see Bond valuation of bond prices, 253, 254 cash management and budgeting, 456–458
of business, see Business valuation of EBIT, 390 decisions in, 6
of financial options, 646–654 of EBITDA, 390 financing working capital, 458–463
of inventory, 54 and nature of business, 432 in international finance, 676
of stocks, see Stock valuation of portfolios, 218, 219 inventory management, 455–456
of young vs. mature companies, 595–596 total vs. systematic, 432–433 investment strategies in, 450–451
Valuation date, 580 underpricing to reduce, 485 operating cycle in, 446–448
Value: of the value of the underlying asset, 649 terms and concepts in, 443–444
of asset to lessor, 535–536 use of term, 444
book, see Book value W Working capital trade-offs, 444–445, 451
dollar value of earnings per share, 529 WACC, see Weighted average cost of capital Wozniak, Steve, 472
dollar value of net income, 529 Waksal, Sam, 299, 300
enterprise, 506, 585–586 Wall Street Journal, 34, 274–275, 422, 523, 584, Y
face, 240 Yahoo! Finance, 52, 240, 270, 423, 424
fair market, 581, 582, 587 586, 672, 680, 681, 683 Yankee bonds, 690
of firm, see Firm value Warrants, 654 Yields, bond:
future, see Future value Weak-form, efficient market hypothesis, 34
going-concern, 582 Wealth, 2 and bond pricing, 244, 245
intrinsic, 33, 588 Wealth transfer, 524, 558 effective annual yield, 250–251
investment, 581, 587, 588 Webb, Dan, 670 realized yield, 252
liquidation, 582–583 Weighted average cost of capital (WACC), yield to maturity, 241, 248–249, 251
market, see Market value Yields, stock, 275, 291
of money, 40n.6. See also Time value 414–434 Yield curve, 258–259
alternatives to using, 433–434 Yield to maturity (bonds), 241, 248–249, 251
of money calculating, 428–430 Young companies, valuation of, 595–596
net present, see Net present value and capital structure, 506 Yuan, 689
par, 56, 240 cost of debt in, 415–420
present, see Present value cost of equity in, 421–428 Z
salvage, 360, 361 effect of debt on, 517–519 Zero coupon bonds, 148, 240–241, 246, 247, 255
of synergies, 580–581, 587 in FCFF approach, 589–590 Zero-growth dividend model, 281
terminal, 325–327, 589 in international finance, 676 Zuckerberg, Mark, 472
of underlying assets, 646–648 interpreting, 430

Company Index

A Bradley Corporation, 298 Ernst & Young, 122
Accel Partners, 472 BrightStar Corporation, 501 Exxon Mobil Corporation, 218, 673, 674
Accenture, 122 Bristol Myers, 299
Acme United, 274, 275 British Petroleum, see BP p.l.c. F
Adams Resource & Energy, 274, 275 Burger King, 625 Facebook Incorporated, 472, 473
AdCare Health Systems, 274, 275 Busch Entertainment Corporation, 1, 493n.6 FedEx, 411, 543
Adeona Pharmaceuticals, 274, 275 Fidelity Investment Company, 256
Advanced Micro Devices (AMD), 215–217 C Fitch, Inc., 256–257
Advanced Photonix, 274, 275 Cadbury PLC, 159, 160 FITCO, 376
AdvanSource Biomaterials, 274, 275 Callan Associates, 202 Ford Motor Company, 83–84, 107, 319–322, 327,
Advantage Medical Services, Inc., 503 Cargill Company, 492
ADVENTRX Pharmaceuticals, 274, 275 Carlson Companies, 492 328, 373, 601, 609, 610, 619, 645, 690, 698
Aerocentury, 274, 275 Caterpillar, Inc., 405, 699 Ford Motor Credit Company, 453
Aerosonic, 274, 275 CCH Incorporated, 308, 392, 570, 571 FPL Group, Inc., 415, 416, 555
AIG Corporation, 669, 670 Chevron Corporation, 328, 674
AirTran Airways, 341 China National Petroleum, 674 G
Alexco Resource, 274, 275 Chipotle Mexican Grill, 478 GE Capital Corporation, 26, 462
Allied Nevada Gold, 274, 275 Chrysler LLC, 601 General Electric Company (GE), 225–227, 229,
Almaden Minerals, 274, 275 Cisco Systems, Inc., 117, 328, 504
Amazon.com, 690 Citibank, 694, 698, 699 671–672, 674, 697
AMD (Advanced Micro Devices), 215–217 Citigroup, 28, 669, 692 General Motors Company, 84, 124, 518
Ameriquest Mortgage Company, 269 Colnago, 177–179 Global Crossing, 16, 18
Anheuser-Busch InBev, 1 Colonial Realty, 122 Global Partners, 500
Apple, Inc., 28, 48, 213, 287, 350, 351, 472, 504 Compaq, 673 The Goldman Sachs Group, Inc., 28, 670
Archers Daniels Midland Company, 374 ConocoPhillips Company, 422 Goodwill Industries International, Inc., 375
Arthur Andersen LLP, 122–123 Conseco, Inc., 117 The Goodyear Tire & Rubber Company, 669
AT&T, 271, 328 Credit Agricole, 692 Google Inc., 20, 31, 211, 287, 500, 504
Aura Mira Energy Company Private Limited, CSX Corporation, 548
H
569, 570 D Harrods Ltd., 697
AXA Group, 674 Dairy Queen, 29 Hartford Life, 502
Daiwa Bank, 698, 700 Hatteras Hammocks®, 160
B Datsun, 203 Hershey Company, 159
Banco Santander S.A., 692 Dean Foods Company, 498 Hewlett-Packard Company (HP), 30, 127, 137,
Bank of America Corporation, 26, 28, 193, 414, Dell, Inc., 202–205, 236, 304, 344, 345, 441–443,
455, 596, 691
419, 674, 692, 698–700 446–448, 456, 504, 656, 673 Honda Motor Company, 193
Bank of India, 698 Deloitte Touche, 122 Hoover’s, Inc., 611
Barclays, 692, 698 Delta Air Lines, Inc., 93 HP, see Hewlett-Packard
Berkshire Hathaway, Inc., 562 Deutsche Bank, 642, 692, 699, 700 H&R Block, 90, 93, 95
Best Buy, 455 Domino’s IP Holder LLC, 422, 423 HSBC Group Holdings, 692, 694
Biogenesis Inc., 192 The Dow Chemical Company, 502, 503 Hyundai Motor, 375
Blackstone Group, 1 Dun & Bradstreet, 106
Blockbuster Inc., 200 Dunkin‘ Donuts, 606 I
BMW, 50, 142–143, 304, 609, 690, 697 DuPont Company, 101 IBM, 5, 152, 643, 644, 648, 649, 699
BNP Paribas, 692 ImClone Systems, Inc., 299
Boeing Company, 5, 54, 83, 411, 434, 656, 699 E Industrial and Commercial Bank
Boston Chicken, Inc., 625, 631 Edison Electric Company, 671
Boston Market Corporation, 625 eFunda, 185 of China, 692
Bplans, 579 Enron Corporation, 16, 18–20, 48, 122, 123 Infosys Technologies Limited, 157
BP p.l.c. (British Petroleum), 280, 673, 674 ING Group, 674, 692
Intel Corporation, 215–217, 301, 329, 504
International Finance Corporation, 569

746 Company Index Nike, Inc., 226, 227 Standard & Poor’s, 106, 238, 256–257
Nissan Motor Company, 203, 375 Starbucks Corporation, 606–607
apan Post Holdings, 674 Nordstrom, Inc., 106 State Bank of India, 698
PMorgan Chase & Co., 28, 419, 692, 698 Northern Manufacturing Company, 467 State Farm Mutual Automobile Insurance
Northwest Airlines, 291
K Company, 26
Kellogg Company, 328 O State Grid, 674
Kia Motors, 699 Oakley, Inc., 498 Stride Rite Corporation, 498
Kingston, Inc., 334 Oracle, 504 Sumitomo Corporation, 675
Kirby Manufacturing, 463 Sunbeam Corporation, 122
Kmart, 51 P
Knight, Inc., 263 Pfizer Inc., 538 T
KPMG International, 122 Piper Aircraft, Inc., 83 Target Corporation, 81, 415
Kraft Foods, 159, 160 Pitney Bowes, Inc., 502 Texas Instruments, Inc., 127, 137, 434
Krispy Kreme Doughnuts, 485 PlanWare, 579 3M Corporation, 36, 37
Polo Ralph Lauren Corporation, 102, 103 Tiffany & Company, 102, 103
aurel Electronics, Inc., 117 Praxair, Inc., 545, 547 Total S.A., 674
loyds Banking Group, 692 PricewaterhouseCoopers International Toyota Motor Company, 84, 107, 456, 673,

M Limited (PwC), 5, 122, 429 674, 700
Magna International, 561 Procter & Gamble, 6, 117, 218, 285–286, 502 Treeplan, 398
Marriott Corporation, Inc., 524 Public Service of New Mexico, 502 TXU Corporation, 493
Mason Corporation, 298 PwC, see PricewaterhouseCoopers Tyco International, Ltd., 16, 18
MaxLinear Inc. (MXL), 380, 381
MBNA Corporation, 199 Q U
McDonalds Corporation, 478, 606, 625 Qualcomm, 504 U-Haul, 540
Merrill Lynch & Co., Inc., 26 Unilever PLC, 378–379
Microsoft Corporation, 31, 127, 138, 334, R United Airlines Inc., 619
Regatta Inc., 263 United Parcel Service (UPS), 411, 543
472, 504 Ronco Corporation, 607 Universal Pictures, 5
Mitsubishi, 675 The Royal Bank of Scotland International
Mitsubishi UFJ Financial Group, 692 V
Mitsui Group, 675 Limited, 692 Volkswagen AG, 696
Mizuho Financial Group, 692 Royal Dutch Shell plc, 673, 674, 697
Moneychimp, 134 Ryder System, Inc., 540 W
Moody’s Investors Service, 256–257 Wal-Mart Stores, Inc., 81, 90, 93, 102, 103, 106,
Morgan Construction Company, 638, 639 S
Morgan Stanley, 28, 37 San Diego Gas and Electric Company 117, 502, 550, 551, 673, 674
MXL (MaxLinear Inc.), 380, 381 Walt Disney Company, 409, 410
(SDG&E), 291 Waste Management, Inc., 122
N Sealed Air Corporation, 547, 554 Wells Fargo & Company, 427
Nalco Holding Company, 500 Sharp Electronics Corporation, 127, 137 Weyerhaeuser Company, 67
Nestlé, 159, 502 Shearson Lehman Hutton Inc., 255 Whole Foods Markets, Inc., 102, 103
Netflix, 200, 219–223, 287 Siemens International, 694 Winn-Dixie Stores, Inc., 502
Newell Corporation, 636 Sinopec Group, 674 WorldCom, 16, 18–20, 48, 518
New York Life Insurance Company, 168 SmartMoney, 143, 258
Southwest Airlines, Inc., 121, 219–223, 341 Y
Spear, Leeds, and Kellogg Specialists LLC, 670 Yahoo!, Inc., 52, 240, 270, 423, 424

BUILDING Throughout the book important finance principles and
INTUITION concepts are identified and emphasized in Building

Intuition boxes. These boxes restate an important finance
concept that has been discussed in the main text, such
as the importance of cash flows, and provide an intuitive example or explanation of the
concept. The Building Intuition boxes and the pages on which they appear are as follows:

Cash Flows Matter Most to Investors PAGE
Sound Investments are Those Where the Value of the Benefits Exceeds Their Cost
Financing Decisions Affect the Value of the Firm 4
The Timing of Cash Flows Affects Their Value 5
The Riskiness of Cash Flows Affects Their Value 5
The Financial Manager’s Goal Is to Maximize the Value of the Firm’s Stock 11
The Value of Money Changes with Time 12
Compounding Drives Much of the Earnings on Long-Term Investments 12
More Risk Means a Higher Expected Return 126
Diversified Portfolios are Less Risky 134
Systematic Risk Is the Risk That Matters 202
Investment Decisions Have Opportunity Costs 223
Capital Budgeting Is Forward Looking 224
Incremental After-Tax Free Cash Flows Are What Stockholders 305
Care About in Capital Budgeting 342
We Discount Expected Cash Flows in an NPV Analysis
High Fixed Costs Mean Larger Fluctuations in Cash Flows and Profits 344
362
385

Revenue Changes Drive Profit Volatility Through Operating Leverage PAGE
The Market Value of a Firm’s Assets Equals the Market Value
of the Claims on Those Assets 390
A Firm’s Cost of Capital Is a Weighted Average of All of Its Financing Costs
The Current Cost of Long-Term Debt Is What Matters When Calculating WACC 412
Investors View Seasoned Securities as Less Risky Than Unseasoned Securities 414
The Optimal Capital Structure Minimizes the Cost of Financing a Firm’s Activities 416
Capital Structure Choices Do Not Affect Firm Value If They 481
Do Not Affect the Value of the Free Cash Flows to Investors 506
The Cost of Equity Increases With Financial Leverage
People Behave Differently toward a Firm in Financial Distress, 506
and This Increases Bankruptcy Costs 510
Leasing Is an Alternative Means of Financing the Acquisition of an Asset
Splitting the Rights to an Asset Between the Lessee 522
and Lessor Can Create Costly Conflicts 535
Dividends Reduce the Stockholders’ Investment in a Firm
Dividend Announcements Send Signals to Investors 539
The Value of a Business Is Specific to a Point in Time 546
The Value of a Business Is Not the Same to All Investors 549
A Firm’s Strategy Drives Its Business Decisions 580
Payoff Functions for Options Are Not Linear 581
The Basic Principles of Finance Apply No Matter Where You Do Business 609
646
676

Selected Abbreviations and Notation

b5 beta (a measure of systematic risk)
Δ5 change (e.g., DP 5 change in price level, DS 5 change in sales level)
r5 correlation
s2 (s) 5 variance (standard deviation)
x5 fractional weight of investment or component of capital
Add WC 5 addition to working capital
APR 5 annual percentage rate
ARR 5 accounting rate of return
b5 dividend payout ratio
C5 coupon payment (bond), call option value
Cap Exp 5 capital expenditures
CF 5 cash flow
CF Opns 5 cash flow from operations
CFI 5 cash flow to investors
CFLTA 5 cash flow invested in long-term assets
CFNWC 5 cash flow invested in net working capital
CFOA 5 cash flow from operating activity
CIP 5 call interest premium
CO 5 crossover level of unit sales
COGS 5 cost of goods sold
CV 5 coefficient of variation
D5 dividend (stock)
D&A 5 depreciation and amortization
DOL 5 degree of operating leverage
DPO 5 days’ payables outstanding
DRP 5 default risk premium
DSI 5 days’ sales in inventory
DSO 5 days’ sales outstanding
E(•) 5 expected value (E(R) 5 expected return, etc.)
EAC 5 equivalent annual cost
EAR 5 EAY 5 effective annual rate (yield)
EBIT 5 earnings before interest and taxes
EBITDA 5 earnings before interest, taxes, depreciation, and amortization
EBT 5 earnings before taxes
EFN 5 external funding needed
EOQ 5 economic order quantity
EROA 5 EBIT return on assets
F5 face value (bond)
FC 5 fixed costs
FCF 5 free cash flows
FCFE 5 free cash flow to equity
FCFF 5 free cash flow from the firm

FV 5 future value
FVAn 5 future value of an annuity
FXR 5 foreign exchange or currency risk premium
g5 growth rate
i5 nominal rate of interest
IGR 5 internal growth rate
IRR 5 internal rate of return
k5 cost of capital (debt or equity)
m5 number of payments per year
MAT 5 maturity adjustment to cost of a loan
MRP 5 marketability risk premium
MV 5 market value
n5 number of periods
NCF 5 net cash flow
NCFOA 5 net cash flow from operating activities
NOPAT 5 net operating profits after tax
NPV 5 net present value
NWC 5 net working capital
OC 5 operating cycle
Op Ex 5 cash operating expenses
p5 probability
P5 price (P0 5 price at time zero, etc.), put option value
P/E ratio 5 price/earnings ratio
PB 5 payback period
PI 5 profitability index
PR 5 prime rate
PV 5 present value
PV annuity factor 5 present value of annuity factor
PVAn 5 present value of an annuity
PVP 5 present value of a perpetuity
r5 real rate of interest
R5 return (Rrf 5 risk free, Ri, RPortfolio, etc.)
ROA 5 return on assets
ROE 5 return on equity
S5 Sharpe Ratio
SGR 5 sustainable growth rate
t5 tax rate
TV 5 terminal value
V5 value (e.g.,VFirm 5 VAssets 5 VDebt 1 VEquity)
VC 5 variable costs
WACC 5 weighted average cost of capital

Wiley Series in FINANCE

SURVEY OF FINANCE Fisher Investments, Fisher Investments MERGERS AND ACQUISITIONS
on Energy Gaughan, Mergers, Acquisitions, and
Melicher, Introduction to Finance:
Markets, Investments, and Fisher Investments, Fisher Investments Corporate Restructurings 5e
Financial Management 14e on Industrials Gilson, Creating Value through

Grossman, The Portable MBA in Investments, Fisher Investments on Corporate Restructuring 2e
Finance and Accounting 4e Staples Cole, M&A Titans: The Pioneers Who

CORPORATE FINANCE VALUATION Shaped Wall Street’s Mergers and
Arzac, Valuation: Mergers, Buyouts and Acquisitions Industry
Parrino, Fundamentals of Corporate Bruner, Deals from Hell: M&A Lessons
Finance 2e Restructuring 2e that Rise Above the Ashes

Clayman, Corporate Finance: A Damodaran, Investment Valuation: VENTURE CAPITAL
Practical Approach Tools and Techniques for Lerner, Venture Capital, Private
Determining the Value of Any
PERSONAL FINANCE Asset Equity, and the Financing of
MANAGEMENT Entrepreneurship 1e
McKinsey, Valuation University Lerner, Venture Capital and Private
Bajelsmit, Personal Finance: Planning Edition 5e Equity: A Casebook 5e
and Implementing Your Financial Metrick, Venture Capital and the
Goals McKinsey, Valuation Workbook Finance of Innovation 2e
Cumming, Venture Capital: Investment
Bajelsmit, Personal Finance 1e with Stowe, Equity Asset Valuation Strategies, Structures, and Policies
Student Financial Planner Package
Stimes, Equity Valuation, Risk and ADVANCED APPLIED
FINANCIAL MARKETS Investment: A Practitioner’s CORPORATE FINANCE
AND INSTITUTIONS Roadmap Damodaran, Applied Corporate

Kidwell, Financial Institutions, Markets, INTERNATIONAL FINANCE Finance 3e
and Money 11e Shapiro, Multinational Financial
FINANCIAL THEORY
Acharya, Restoring Financial Stability: Management 9e Fabozzi, Introduction to Financial
How to Repair a Failed System
Shapiro, Foundations of Multinational Economics 1e
Blackwell, Modern Financial Markets: Financial Management 6e Fabozzi, The Basics of Finance
Prices, Yields, and Risk Analysis Fabozzi, Finance: Capital Markets,
FIXED INCOME SECURITIES
INVESTMENTS Veronesi, Fixed Income Securities: Financial Management, and
Investment Management
Peck, Investment Ethics Valuation, Risk, and Risk Kolb, Lessons from the Financial Crisis:
Management Causes, Consequences, and our
Jones, Investments: Analysis and Economic Future
Management 11e Tuckman, Fixed Income Securities: Triana, Lecturing Birds on Flying: Can
Tools for Today’s Markets Mathematical Theories Destroy the
Elton, Modern Portfolio Theory and University Edition 3e Financial Markets?
Investment Analysis 8e
Fabozzi, Fixed Income Analysis 2e www.wiley.com/go/businesscatalog
McMillan, Investments: Principles of
Portfolio and Equity Analysis FINANCIAL RISK MANAGEMENT
Vaughan, Fundamentals of Risk and
Lawton, Investment Performance
Management (CFA) Insurance 10e

Cuthbertson, Investments 2e INVESTMENT BANKING
Rosenbaum, Investments Banking:
Fisher Investments, Fisher Investments
on Materials Valuation, Leveraged Buyouts, and
Mergers and Acquisitions