Financial Management and Policy Book

	Preface	xix
Part 1	Foundations Of Finance	1
	Vignette: Problems at Gillette	1
1	Goals and Functions of Finance	3
	Creation of Value	3
	Investment Decision	6
	Financing Decision	7
	Dividend/Share Repurchase Decision	7
	Bringing It All Together	8
2	Concepts in Valuation	11
	The Time Value of Money	11
	Present Values	16
	Internal Rate of Return or Yield	21
	Bond Returns	23
	Return from a Stock Investment	27
	Dividend Discount Models	30
	Measuring Risk: Standard Deviation	37
3	Market Risk and Returns	49
	Efficient Financial Markets	49
	Security Portfolios	51
	Multiple Security Portfolio Analysis and Selection	57
	Capital Asset Pricing Model	62
	Expected Return for Individual Security	68
	Certain Issues with the CAPM	72
4	Multivariable and Factor Valuation	85
	Extended CAPM	85
	Factor Models in General	90
	Arbitrage Pricing Theory	93
5	Option Valuation	103
	Expiration Date Value of an Option	103
	Valuation with One Period to Expiration General Consideration	104
	Binomial Option Pricing of a Hedged Position	109
	The Black-Scholes Option Model	112
	American Options	118
	Debt and Other Options	121
Appendix	Put-Call Parity	122
Part 2	Investment In Assets And Required Returns	129
	Case: Fazio Pump Corporation	129
6	Principles of Capital Investment	133
	Administrative Framework	133
	Methods for Evaluation	138
	NPV versus IRR	143
	Depreciation and Other Refinements in Cash-Flow Information	146
	What Happens When Capital Is Rationed?	148
	Inflation and Capital Budgeting	150
	Information to Analyze an Acquisition	152
Appendix	Multiple Internal Rates of Return	155
7	Risk and Real Options in Capital Budgeting	165
	Quantifying Risk and its Appraisal	165
	Total Risk for Multiple Investments	174
	Real Options in Capital Investments	177
8	Creating Value through Required Returns	199
	Foundations of Value Creation	199
	Required Market-Based Return for a Single Project	202
	Modification for Leverage	206
	Weighted Average Required Return	208
	Adjusted Present Value	214
	Divisional Required Returns	217
	Company's Overall Cost of Capital	221
	Diversification of Assets and Total Risk Analysis	223
	Evaluation of Acquisitions	227
	Case: National Foods Corporation	241
Part 3	Financing And Dividend Policies	249
	Case: Restructuring the Capital Structure at Marriott	249
9	Theory of Capital Structure	253
	Introduction to the Theory	253
	Modigliani-Miller Position	257
	Taxes and Capital Structure	261
	Effect of Bankruptcy Costs	268
	Other Imperfections	270
	Incentive Issues and Agency Costs	271
	Financial Signaling	278
10	Making Capital Structure Decisions	289
	EBIT-EPS Analysis	289
	Cash-Flow Ability to Service Debt	292
	Effect on Debt Ratios	296
	Effect on Security Rating	268
	Timing and Flexibility	297
	A Pecking Order of Financing?	298
	Checklist when it Comes to Financing	299
11	Dividends and Share Repurchase: Theory and Practice	309
	Procedural Aspects of Paying Dividends	309
	Dividend Payout Irrelevance	310
	Arguments for Dividend Payout Mattering	313
	Financial Signaling	316
	Empirical Testing and Implications for Payout	317
	Share Repurchase	320
	Stock Dividends and Stock Splits	324
	Managerial Considerations as to Dividend/Share-Repurchase Policy	328
Part 4	Tools Of Financial Analysis And Control	343
	Case: Morley Industries, Inc.	343
12	Financial Ratio Analysis	349
	Introduction to Financial Analysis	349
	Liquidity Ratios	351
	Debt Ratios	357
	Coverage Ratios	358
	Profitability Ratios	360
	Market-Value Ratios	363
	Predictive Power of Financial Ratios	365
	Common Size and Index Analysis	367
	Case: Financial Ratios and Industries	383
13	Financial Planning	387
	Methods of Analysis	387
	Source and Use of Funds	388
	Cash Budgeting	393
	Pro Forma Statements	398
	Sustainable Growth Modeling	403
Part 5	Liquidity And Working Capital Management	421
	Case: Caceres Semilla S.A. de C.V.	421
14	Liquidity, Cash, and Marketable Securities	429
	Liquidity and its Role	429
	Cash Management and Collections	431
	Control of Disbursements	434
	Investment in Marketable Securities	436
15	Management of Accounts Receivable and Inventories	449
	Credit Policies	449
	Collection Policy	455
	Evaluating the Credit Applicant	459
	Inventory Management and Control	463
	Uncertainty and Safety Stock	467
	Inventory and the Financial Manager	470
Appendix	Application of Discriminant Analysis to the Selection of Accounts	472
16	Liability Management and Short/Medium-Term Financing	483
	Liability Structure of a Company	483
	Trade Credit Financing	488
	Accrual Accounts as Spontaneous Financing	492
	Unsecured Short-Term Loans	493
	Secured Lending Arrangements	496
	Intermediate-Term Debt	503
	Protective Covenants and Loan Agreements	506
Part 6	Capital Market Financing And Risk Management	521
	Case: Douglas & Gilligan Global Agency	521
17	Foundations for Longer-Term Financing	529
	Purpose and Function of Financial Markets	529
	Yield Curves and Their Use	533
	Pricing Default Risk Off Treasuries	537
18	Lease Financing	543
	Features of a Lease	543
	Accounting and Tax Treatments of Leases	545
	Return to the Lessor	548
	After-Tax Analysis of Lease versus Buy/Borrow	549
	Sources of Value in Leasing	556
19	Issuing Securities	565
	Public Offering of Securities	565
	Government Regulations	568
	Selling Common Stock through a Rights Issue	570
	Financing a Fledgling	575
	Information Effects	580
20	Fixed-Income Financing and Pension Liability	589
	Features of Debt	589
	Types of Debt Financing	593
	Call Feature and Refunding	595
	Private Placements	601
	Preferred Stock	602
	Pension Fund Liability	605
21	Hybrid Financing through Equity-Linked Securities	615
	Use of Warrants	615
	Convertible Securities	619
	Valuation of Convertible Securities	623
	Exchangeable Debt	627
	Other Hybrid Securities	629
Appendix	Valuing Convertible Bonds in the Face of Firm Volatility, Default Risks, and Fluctuating Interest Rates	634
22	Managing Financial Risk	645
	Derivative Securities	645
	Hedging Risk	646
	Futures Markets	648
	Forward Contracts	652
	Option Contracts	654
	Interest-Rate Swaps	659
	Credit Derivatives	664
	Commodity Contracts	666
Part 7	Expansion And Contraction	673
	Case: Rayovac Corporation	673
23	Mergers and the Market for Corporate Control	687
	What Is Control Worth?	687
	Features of a Merger	688
	Strategic Acquisitions Involving Stock	690
	Sources or Rearrangements of Value	695
	Corporate Voting and Control	699
	Tender Offers and Company Resistance	701
	Empirical Evidence on Mergers and Takeovers	705
24	Corporate and Distress Restructuring	719
	Divestitures in General	719
	Voluntary Liquidation and Sell-Offs	721
	Spin-Offs	721
	Equity Carve-Outs	723
	Going Private and Leveraged Buyouts	724
	Leveraged Recapitalizations	729
	Distress Restructuring	730
	Gaming with the Rule of Absolute Priority	735
25	International Financial Management	747
	Some Background	747
	Types of Exposure	752
	Economic Exposure	753
	Exposure of Expected Future Cash Flows	756
	Currency Market Hedges	761
	Should Exposure Be Managed?	766
	Macro Factors Governing Exchange-Rate Behavior	767
	Structuring International Trade Transactions	773
Appendix	Translation Exposure	778
Appendix	Present-Value Tables and Normal Probability Distribution Table	787
	Index	797