Finance for Executives: Managing for Value Creation Book

Part I	Introduction
Chapter 1	Financial Management and Value Creation: an Overview	1
	The Key Question: Will Your Decision Create Value?	2
	The Fundamental Finance Principle	5
	Applying the Fundamental Finance Principle	9
	The Role of Financial Markets	14
	The Business Cycle	18
	HLC's Financial Statements	20
	How Profitable is a Firm?	25
	How Much Cash Does a Firm Generate?	26
	How Risky is a Firm?	28
	Is Value Created?	30
	Summary	31
	Further Reading	32
	Review Problems	33
Chapter 2	Understanding Balance Sheets and Income Statements	37
	Financial Accounting Statements	37
	The Balance Sheet	40
	The Income Statement	50
	Reconciling Balance Sheets and Income Statements	54
	The Structure of the Owners' Equity Account	56
	Summary	57
Appendix 2.1	Specimen Financial Statements	60
	Polo Ralph Lauren's Balance Sheets and Income Statements	60
	Further Reading	65
	Review Problems	65
Part II	Financial Diagnosis and Management
Chapter 3	Assessing Liquidity and Operational Efficiency	67
	The Managerial Balance Sheet	68
	The Components of Capital Employed	75
	The Matching Strategy	77
	A Measure of Liquidity Based on the Funding Structure of Working Capital Requirement	79
	Improving Liquidity Through Better Management of the Operating Cycle	81
	Traditional Measures of Liquidity	89
	Summary	91
Appendix 3.1	Financing Strategies	93
Appendix 3.2	Polo Ralph Lauren's Liquidity and Operational Efficiency	96
	Further Reading	102
	Review Problems	102
Chapter 4	Measuring Cash Flows	107
	Cash Flows and Their Sources	108
	Preparing a Detailed Cash Flow Statement	111
	Two Variations of the Cash Flow Statement	119
	Bankers' Cash Flow versus Net Operating Cash Flow	123
	Managerial Implications	124
	Summary	126
Appendix 4.1	Obtaining the Net Operating Cahs Flow From Balance Sheet and Income Statement Accounts	127
Appendix 4.2	Polo Ralph Lauren's Cash Flows	132
	Further Reading	137
	Review Problems	137
Chapter 5	Diagnosing Profitability, Risk, and Growth	141
	Measures of Profitability	142
	Return on Equity	143
	Other Measures of Profitability	157
	Financial Leverage and Risk	158
	Self-Sustainable Growth	162
	Summary	167
Appendix 5.1	Factors Affecting a Firm's Operating Profitability	169
Appendix 5.2	The Relationship Between a Firm's Roe and Its Aftertax Roic	173
Appendix 5.3	Polo Ralph Lauren's Profitability	174
	Further Reading	180
	Review Problems	180
Part III	Investment Decisions
Chapter 6	Using the Net Present Value Rule to Make Value-Creating Investment Decisions	185
	The Capital Investment Process	186
	Would You Buy this Parcel of Land?	188
	The Net Present Value Rule	190
	Applying the Net Present Value Rule to a Capital Investment Decision	196
	Why the NPV Rule is a Good Investment Rule	198
	Special Cases of Capital Budgeting	205
	Limitations of the Net Present Value Criterion	209
	Summary	213
Appendix 6.1	Calculation of the Present Value of an Annuity and the Constant Annual-Equivalent Cash Flow of a Project's Cash-Flow Stream	215
	Further Reading	218
	Review Problems	218
Chapter 7	Alternatives to the Net Present Value Rule	221
	The Payback Period	222
	The Discounted Payback Period	226
	The Internal Rate of Return (IRR)	229
	The Profitability Index (PI)	236
	Summary	239
	Further Reading	239
	Review Problems	239
Chapter 8	Identifying and Estimating a Project's Cash Flows	243
	The Actual Cash-Flow Principle	243
	The With/Without Principle	244
	The Designer Desk Lamp Project	246
	Identifying a Project's Relevant Cash Flows	249
	Estimating a Project's Relevant Cash Flows	255
	Should SMC Launch the New Product?	261
	Summary	263
	Further Reading	264
	Review Problems	265
Part IV	Financing Decisions
Chapter 9	Raising Capital and Valuing Securities	267
	Estimating the Amount of Required External Funds	268
	The Financial System: Its Structure and Functions	272
	How Firms Issue Securities	279
	Debt Capital: Characteristics and Valuation	285
	Equity Capital: Characteristics and Valuation	299
	Summary	304
Appendix 9.1	The Bond Valuation Formula	305
Appendix 9.2	The Valuation Formula for the Constant Growth Dividend Model	307
	Further Reading	308
	Review Problems	308
Chapter 10	Estimating the Cost of Capital	311
	Identifying Proxy or Pure-Play Firms	313
	Estimating the Cost of Debt	313
	Estimating the Cost of Equity: The Divided Discount Model	315
	Estimating the Cost of Equity: The Capital Asset Pricing Model	317
	Estimating the Cost of Capital of a Firm	329
	Estimating the Cost of Capital of a Project	333
	Summary	343
	Further Reading	344
	Review Problems	345
Chapter 11	Designing a Capital Structure	347
	The Capital Structure Decision: No Corporate Taxes and No Financial Distress Costs	348
	Effect of Changes in Capital Structure on the Firm's Value: The Pizza Theory	353
	The Capital Structure Decision: Corporate Income Taxes and No Financial Distress Costs	359
	The Capital Structure Decision When Financial Distress is Costly	367
	Formulating a Capital Structure Policy	370
	Summary	382
	Further Reading	384
	Review Problems	384
Part V	Business Decisions
Chapter 12	Valuing and Acquiring a Business	387
	Alternative Valuation Methods	388
	Valuing a Firm's Equity Using Comparables	390
	Valuing a Firm's Assets and Equity Using the Discounted Cash Flow Approach	397
	Estimating the DCF Value of OS Distributers' Assets and Equity	402
	Estimating the Acquisition Value of OS Distributors	409
	Estimating the Leveraged Buyout Value of OS Distributors	419
	Summary	428
Appendix 12.1	The Dividend Discount Model Approach to the Valuation of a Firm's Equity	431
	Further Reading	432
	Review Problems	433
Chapter 13	Making Value-Creating Decisions in an International Environment	435
	The Firm's Risk Exposure from Foreign Operations	436
	The Foreign Exchange Market	439
	Hedging Contractual Exposure to Currency Risk	442
	Hedging Long-Term Contractual Exposure to Currency Risk with Swaps	454
	The Relationships Among Exchange Rates, Inflation Rates, and Interest Rates	455
	Analyzing an International Investment Project	460
	Managing Country Risk	469
	Summary	471
Appendix 13.1	Translating Financial Statements with the Monetary/Nonmonetary Method and the Current Method	473
Appendix 13.2	The Parity Relations	477
	Further Reading	483
	Review Problems	484
Chapter 14	Managing for Value Creation	487
	Measuring Value Creation	488
	Identifying the Drivers of Value Creation	495
	Linking Operating Performance and Remuneration to Value Creation	500
	Linking the Capital Budgeting Process to Value Creation	508
	Putting it all Together: The Financial Strategy Matrix	512
	Summary	515
Appendix 14.1	Adjusting Book Values to Estimate the Amount of Invested Equity Capital and Operating Profit	517
Appendix 14.2	Estimating Market Value Added (MVA) When Future Cash Flows are Expected to Grow at a Constant Rate in Perpetuity	520
	Further Reading	521
	Review Problems	522
	Glossary	527
	Answers to Review Problems	551
	Index	599