,Brief Contents
Preface xii PART FOUR
Evaluating Investment Opportunities 235
PART ONE 7 Discounted Cash Flow
Assessing the Financial Techniques 237
Health of the Firm 1
8 Risk Analysis in Investment
1 Interpreting Financial Statements 3 Decisions 285
2 Evaluating Financial Performance 37 9 Business Valuation and Corporate
Restructuring 335
PART TWO
Planning Future Financial Performance 77 GLOSSARY 385
3 Financial Forecasting 79 SUGGESTED ANSWERS TO
4 Managing Growth 111 ODD-NUMBERED
PROBLEMS 397
PART THREE INDEX 429
Financing Operations 139
5 Financial Instruments and Markets 141
6 The Financing Decision 193
,Contents
Preface xii The Value Problem 56
ROE or Market Price? 58
Ratio Analysis 60
PART ONE Using Ratios Effectively 61
ASSESSING THE FINANCIAL Ratio Analysis of Polaris Inc. 62
HEALTH OF THE FIRM 1 Summary 69
Additional Resources 70
Chapter 1 Problems 71
Interpreting Financial Statements 3
The Cash Flow Cycle 3 PART TWO
Overview of Financial Statements 6 PLANNING FUTURE FINANCIAL
The Balance Sheet 9 PERFORMANCE 77
Current Assets and Liabilities 10
Shareholders’ Equity 11 Chapter 3
The Income Statement 11 Financial Forecasting 79
Measuring Earnings 12
Sources and Uses Statements 16 Pro Forma Statements 79
The Two-Finger Approach 17 Percent-of-Sales Forecasting 80
The Cash Flow Statement 18 Interest Expense 86
Financial Statements and the Value Problem 22 Seasonality 86
Market Value vs. Book Value 22 Pro Forma Statements and Financial
Economic Income vs. Accounting Income 26 Planning 87
Imputed Costs 27 Forecasting with Spreadsheets 89
Summary 30 Coping with Uncertainty 92
Additional Resources 31 Sensitivity Analysis 92
Problems 32 Scenario Analysis 93
Simulation 93
Chapter 2 Cash Flow Forecasts 95
Evaluating Financial Performance 37 Cash Budgets 96
The Techniques Compared 100
The Levers of Financial Performance 37 Summary 101
Return on Equity 38 Additional Resources 102
The Three Determinants of ROE 38 Problems 103
The Profit Margin 40
Asset Turnover 42 Chapter 4
Financial Leverage 48
Managing Growth 111
Is ROE a Reliable Financial Yardstick? 53
The Timing Problem 54 Sustainable Growth 112
The Risk Problem 54 The Sustainable Growth Equation 112
viii
, Contents ix
Too Much Growth 114 Efficient Markets 166
Balanced Growth 115 What Is an Efficient Market? 166
DLH Holdings’ Sustainable Growth Rate 116 Implications of Efficiency 169
“What If” Questions 118 Appendix
What to Do When Actual Growth Exceeds Using Derivatives to Manage Risks 170
Sustainable Growth 118 Forward Markets 172
Sell New Equity 119 Hedging with Forward Contracts 172
Increase Leverage 121 Hedging with Futures Contracts 173
Reduce the Payout Ratio 121 Types of Forwards and Futures 174
Profitable Pruning 122 Hedging with Swaps 175
Outsourcing 122 Interest Rate Swaps 176
Pricing 123 Currency Swaps 177
Is Merger the Answer? 123 Hedging with Options 178
Too Little Growth 123 Limitations of Financial Market Hedging 181
What to Do When Sustainable Growth Exceeds Valuing Options 182
Actual Growth 124 Summary 185
Ignore the Problem 125 Additional Resources 187
Return the Money to Shareholders 126 Problems 188
Buy Growth 127
Sustainable Growth and Pro Forma
Chapter 6
Forecasts 127
New Equity Financing 128 The Financing Decision 193
Why Don’t U.S. Corporations Issue Financial Leverage 195
More Equity? 131 Measuring the Effects of Leverage on a
Summary 132 Business 199
Additional Resources 133 Leverage and Risk 201
Problems 134 Leverage and Earnings 203
How Much to Borrow 206
Irrelevance 206
PART THREE
Tax Benefits 208
FINANCING OPERATIONS 139 Distress Costs 208
Flexibility 213
Chapter 5
Market Signaling 216
Financial Instruments and Management Incentives 219
Markets 141 The Financing Decision and
Financial Instruments 142 Growth 219
Bonds 143 Selecting a Maturity Structure 222
Common Stock 149 Inflation and Financing Strategy 223
Preferred Stock 153 Appendix
Financial Markets 155 The Irrelevance Proposition 223
Venture Capital Financing 155 No Taxes 224
Private Equity 157 Taxes 226
Initial Public Offerings 158 Summary 227
Seasoned Issues 160 Additional Resources 228
Issue Costs 164 Problems 230
Preface xii PART FOUR
Evaluating Investment Opportunities 235
PART ONE 7 Discounted Cash Flow
Assessing the Financial Techniques 237
Health of the Firm 1
8 Risk Analysis in Investment
1 Interpreting Financial Statements 3 Decisions 285
2 Evaluating Financial Performance 37 9 Business Valuation and Corporate
Restructuring 335
PART TWO
Planning Future Financial Performance 77 GLOSSARY 385
3 Financial Forecasting 79 SUGGESTED ANSWERS TO
4 Managing Growth 111 ODD-NUMBERED
PROBLEMS 397
PART THREE INDEX 429
Financing Operations 139
5 Financial Instruments and Markets 141
6 The Financing Decision 193
,Contents
Preface xii The Value Problem 56
ROE or Market Price? 58
Ratio Analysis 60
PART ONE Using Ratios Effectively 61
ASSESSING THE FINANCIAL Ratio Analysis of Polaris Inc. 62
HEALTH OF THE FIRM 1 Summary 69
Additional Resources 70
Chapter 1 Problems 71
Interpreting Financial Statements 3
The Cash Flow Cycle 3 PART TWO
Overview of Financial Statements 6 PLANNING FUTURE FINANCIAL
The Balance Sheet 9 PERFORMANCE 77
Current Assets and Liabilities 10
Shareholders’ Equity 11 Chapter 3
The Income Statement 11 Financial Forecasting 79
Measuring Earnings 12
Sources and Uses Statements 16 Pro Forma Statements 79
The Two-Finger Approach 17 Percent-of-Sales Forecasting 80
The Cash Flow Statement 18 Interest Expense 86
Financial Statements and the Value Problem 22 Seasonality 86
Market Value vs. Book Value 22 Pro Forma Statements and Financial
Economic Income vs. Accounting Income 26 Planning 87
Imputed Costs 27 Forecasting with Spreadsheets 89
Summary 30 Coping with Uncertainty 92
Additional Resources 31 Sensitivity Analysis 92
Problems 32 Scenario Analysis 93
Simulation 93
Chapter 2 Cash Flow Forecasts 95
Evaluating Financial Performance 37 Cash Budgets 96
The Techniques Compared 100
The Levers of Financial Performance 37 Summary 101
Return on Equity 38 Additional Resources 102
The Three Determinants of ROE 38 Problems 103
The Profit Margin 40
Asset Turnover 42 Chapter 4
Financial Leverage 48
Managing Growth 111
Is ROE a Reliable Financial Yardstick? 53
The Timing Problem 54 Sustainable Growth 112
The Risk Problem 54 The Sustainable Growth Equation 112
viii
, Contents ix
Too Much Growth 114 Efficient Markets 166
Balanced Growth 115 What Is an Efficient Market? 166
DLH Holdings’ Sustainable Growth Rate 116 Implications of Efficiency 169
“What If” Questions 118 Appendix
What to Do When Actual Growth Exceeds Using Derivatives to Manage Risks 170
Sustainable Growth 118 Forward Markets 172
Sell New Equity 119 Hedging with Forward Contracts 172
Increase Leverage 121 Hedging with Futures Contracts 173
Reduce the Payout Ratio 121 Types of Forwards and Futures 174
Profitable Pruning 122 Hedging with Swaps 175
Outsourcing 122 Interest Rate Swaps 176
Pricing 123 Currency Swaps 177
Is Merger the Answer? 123 Hedging with Options 178
Too Little Growth 123 Limitations of Financial Market Hedging 181
What to Do When Sustainable Growth Exceeds Valuing Options 182
Actual Growth 124 Summary 185
Ignore the Problem 125 Additional Resources 187
Return the Money to Shareholders 126 Problems 188
Buy Growth 127
Sustainable Growth and Pro Forma
Chapter 6
Forecasts 127
New Equity Financing 128 The Financing Decision 193
Why Don’t U.S. Corporations Issue Financial Leverage 195
More Equity? 131 Measuring the Effects of Leverage on a
Summary 132 Business 199
Additional Resources 133 Leverage and Risk 201
Problems 134 Leverage and Earnings 203
How Much to Borrow 206
Irrelevance 206
PART THREE
Tax Benefits 208
FINANCING OPERATIONS 139 Distress Costs 208
Flexibility 213
Chapter 5
Market Signaling 216
Financial Instruments and Management Incentives 219
Markets 141 The Financing Decision and
Financial Instruments 142 Growth 219
Bonds 143 Selecting a Maturity Structure 222
Common Stock 149 Inflation and Financing Strategy 223
Preferred Stock 153 Appendix
Financial Markets 155 The Irrelevance Proposition 223
Venture Capital Financing 155 No Taxes 224
Private Equity 157 Taxes 226
Initial Public Offerings 158 Summary 227
Seasoned Issues 160 Additional Resources 228
Issue Costs 164 Problems 230
