,Contents
Part I: Introduction
ui ui
Chapter 1 ui The Corporation and Financial Markets
ui ui ui ui 1
Chapter 2 ui Introduction to Financial Statement Analysis ui ui ui ui 5
Part II: Tools
ui ui
Chapter 3 ui Arbitrage and Financial Decision Making
ui ui ui ui 15
Chapter 4 ui The Time Value of Money
ui ui ui ui 26
Chapter 5 ui Interest Rates ui 49
Part III: Basic Valuation
ui ui ui
Chapter 6 ui Valuing Bonds ui 65
Chapter 7 ui Valuing Stocks ui 77
Chapter 8 ui Investment Decision les ui uiui 85
Chapter 9 ui Fundamentals of Capital Budgeting ui ui ui 100
Part IV: Risk and Return
ui ui ui ui
Chapter 10ui Capital Markets and the Pricing of Risk ui ui ui ui ui ui 108
Chapter 11ui Optimal Portfolio Choice and the Capital Asset Pricing Model ui ui ui ui ui ui ui ui 117
Chapter 12ui Estimating the Cost of Capital ui ui ui ui 131
Chapter 13ui Investor Behaviour and Capital Market Efficiency ui ui ui ui ui 137
Part V: Options
ui ui
Chapter 14ui Financial Options ui 143
Chapter 15ui Option Valuation ui 152
Chapter 16ui Real Options
ui 162
Part VI: Capital St cture and Dividend Policy
ui ui ui ui ui ui ui
Chapter 17ui Capital St cture in a Perfect Market ui ui ui ui ui ui 185
Chapter 18ui Debt and Taxes ui ui 192
Chapter 19ui Financial Distress, Managerial Incentives, and Information ui ui ui ui ui 199
Chapter 20ui Payout Policy ui 207
Part VII: Valuation
ui ui
Chapter 21ui Capital Budgeting and Valuation with Leverage
ui ui ui ui ui 213
Chapter 22ui Valuation and Financial Modelling: A Case Study
ui ui ui ui ui ui 227
Part VIII: Long-Term Financing
ui ui ui
Chapter 23ui Raising Equity Capital ui ui 235
Chapter 24ui Debt Financing ui 239
Chapter 25ui Leasing 242
Part IX: Short-Term Financing
ui ui ui
Chapter 26ui Working Capital Management ui ui 248
Chapter 27ui Short-Term Financial Planning ui ui 253
Part X: Special Topics
ui ui ui
Chapter 28ui Mergers and Acquisitions ui ui 257
Chapter 29ui Corporate Governance ui 260
Chapter 30ui Risk Management ui 263
Chapter 31ui International Corporate Finance ui ui 272
,Chapter 1 ui
The Corporation and Financial Markets
ui ui ui ui
1-
1. u i A corporation is a legal entity separate from its owners. This means ownership shares in the cor
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poration can be freely traded. None of the other organizational forms share this characteristic.
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1-
2. u iOwners’ liability is limited to the amount they invested in the firm. Shareholders are not responsib
u i ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
le for any encumbrances of the firm; in particular, they cannot be required to pay back any debts incurred
ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
by the firm.
ui ui ui
1-
3. Corporations (all shareholders have limited liability). Limited partnerships provide limited liability f
u i u i ui ui ui ui ui ui ui ui ui ui ui
or the limited partners, but not for the general partners.
ui ui ui ui ui ui ui ui ui
1-
4. Advantages: Limited liability, liquidity, infinite life. Disadvantages: Double taxation, separ
u i u i u i u i u i u i u i u i u i u i u i
ation of ownership and control.
u i ui ui ui
1-
5. u iThe corporation that only holds real estate must pay corporate income taxes. The real estate invest
u i ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
ment t st (REIT) does not pay corporate taxes but must pass through substantially all of the income to the
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t st unit holders to whom it is taxable.
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1-6. u i u i First, the corporation pays the taxes. After taxes, $2 × (1 –
ui ui ui ui ui ui ui ui ui ui ui
0.34) = $1.32 per share is left to pay dividends. Once the dividend is paid, personal tax on this must be p
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aid, leaving $1.32 × (1 –
ui ui ui ui ui
0.18) = $1.0824 per share. So after all the taxes are paid, you are left with $1.0824 per share.
ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
1-
7. u i As a real estate investment t st (REIT) pays no corporate tax, the full amount of $2 per unit can
u i u i ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
be paid out to you as a t st unit holder. You must then pay personal income tax on the distribution. So you
ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui u
are left with
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$2 × (1 – 0.4) = $1.20 per unit.
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1-8. As the manager of an iPhone applications developer, you will make three types of financial decisions.
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i. You will make investment decisions such as determining which type of iPhone application projects wil
ui ui ui ui ui ui ui ui ui ui ui ui ui ui
l offer your company a positive NPV and should, therefore, be developed by your company.
ui ui ui ui ui ui ui ui ui ui ui ui ui ui
ii. You will make the decision on how to fund your iPhone application investments and what mix of de
ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
bt and equity your company will have.
ui ui ui ui ui ui
iii. You will be responsible for the cash management of your company, ensuring that your company has th
ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
e necessary funds to make investments, pay interest on loans, and pay your employees.
ui ui ui ui ui ui ui ui ui ui ui ui ui
1-9. Shareholders can ui
i. ensure that employees are paid with company stock and/or stock options.
ui ui ui ui ui ui ui ui ui ui
ii. ensure that underperforming managers are fired. ui ui ui ui ui
iii. write contracts that ensure that the interests of the managers and shareholders are closely aligned.
ui ui ui ui ui ui ui ui ui ui ui ui ui ui
iv. mount hostile takeovers. ui ui
1-
10. u i u i This will affect and hurt the customers. It will have a negative impact on the customers, for they
ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui u
, will likely get sour milk. It will also have a negative impact on shareholders because, in the long n, cust
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omers will realize that the supermarket sells sour milk and will switch to other supermarkets. Thus, the v
ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
alue today of the future income and cash flow streams generated by the supermarket will drop because of
ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
the long-
ui ui
term loss of customers caused by this strategy. This will negatively affect the current stock price as share
ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
holders anticipate these long-term drawbacks.
ui ui ui ui
Part I: Introduction
ui ui
Chapter 1 ui The Corporation and Financial Markets
ui ui ui ui 1
Chapter 2 ui Introduction to Financial Statement Analysis ui ui ui ui 5
Part II: Tools
ui ui
Chapter 3 ui Arbitrage and Financial Decision Making
ui ui ui ui 15
Chapter 4 ui The Time Value of Money
ui ui ui ui 26
Chapter 5 ui Interest Rates ui 49
Part III: Basic Valuation
ui ui ui
Chapter 6 ui Valuing Bonds ui 65
Chapter 7 ui Valuing Stocks ui 77
Chapter 8 ui Investment Decision les ui uiui 85
Chapter 9 ui Fundamentals of Capital Budgeting ui ui ui 100
Part IV: Risk and Return
ui ui ui ui
Chapter 10ui Capital Markets and the Pricing of Risk ui ui ui ui ui ui 108
Chapter 11ui Optimal Portfolio Choice and the Capital Asset Pricing Model ui ui ui ui ui ui ui ui 117
Chapter 12ui Estimating the Cost of Capital ui ui ui ui 131
Chapter 13ui Investor Behaviour and Capital Market Efficiency ui ui ui ui ui 137
Part V: Options
ui ui
Chapter 14ui Financial Options ui 143
Chapter 15ui Option Valuation ui 152
Chapter 16ui Real Options
ui 162
Part VI: Capital St cture and Dividend Policy
ui ui ui ui ui ui ui
Chapter 17ui Capital St cture in a Perfect Market ui ui ui ui ui ui 185
Chapter 18ui Debt and Taxes ui ui 192
Chapter 19ui Financial Distress, Managerial Incentives, and Information ui ui ui ui ui 199
Chapter 20ui Payout Policy ui 207
Part VII: Valuation
ui ui
Chapter 21ui Capital Budgeting and Valuation with Leverage
ui ui ui ui ui 213
Chapter 22ui Valuation and Financial Modelling: A Case Study
ui ui ui ui ui ui 227
Part VIII: Long-Term Financing
ui ui ui
Chapter 23ui Raising Equity Capital ui ui 235
Chapter 24ui Debt Financing ui 239
Chapter 25ui Leasing 242
Part IX: Short-Term Financing
ui ui ui
Chapter 26ui Working Capital Management ui ui 248
Chapter 27ui Short-Term Financial Planning ui ui 253
Part X: Special Topics
ui ui ui
Chapter 28ui Mergers and Acquisitions ui ui 257
Chapter 29ui Corporate Governance ui 260
Chapter 30ui Risk Management ui 263
Chapter 31ui International Corporate Finance ui ui 272
,Chapter 1 ui
The Corporation and Financial Markets
ui ui ui ui
1-
1. u i A corporation is a legal entity separate from its owners. This means ownership shares in the cor
u i u i ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
poration can be freely traded. None of the other organizational forms share this characteristic.
ui ui ui ui ui ui ui ui ui ui ui ui ui
1-
2. u iOwners’ liability is limited to the amount they invested in the firm. Shareholders are not responsib
u i ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
le for any encumbrances of the firm; in particular, they cannot be required to pay back any debts incurred
ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
by the firm.
ui ui ui
1-
3. Corporations (all shareholders have limited liability). Limited partnerships provide limited liability f
u i u i ui ui ui ui ui ui ui ui ui ui ui
or the limited partners, but not for the general partners.
ui ui ui ui ui ui ui ui ui
1-
4. Advantages: Limited liability, liquidity, infinite life. Disadvantages: Double taxation, separ
u i u i u i u i u i u i u i u i u i u i u i
ation of ownership and control.
u i ui ui ui
1-
5. u iThe corporation that only holds real estate must pay corporate income taxes. The real estate invest
u i ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
ment t st (REIT) does not pay corporate taxes but must pass through substantially all of the income to the
ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
t st unit holders to whom it is taxable.
ui ui ui ui ui ui ui ui ui
1-6. u i u i First, the corporation pays the taxes. After taxes, $2 × (1 –
ui ui ui ui ui ui ui ui ui ui ui
0.34) = $1.32 per share is left to pay dividends. Once the dividend is paid, personal tax on this must be p
ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
aid, leaving $1.32 × (1 –
ui ui ui ui ui
0.18) = $1.0824 per share. So after all the taxes are paid, you are left with $1.0824 per share.
ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
1-
7. u i As a real estate investment t st (REIT) pays no corporate tax, the full amount of $2 per unit can
u i u i ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
be paid out to you as a t st unit holder. You must then pay personal income tax on the distribution. So you
ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui u
are left with
i ui ui
$2 × (1 – 0.4) = $1.20 per unit.
ui ui ui ui ui ui ui ui
1-8. As the manager of an iPhone applications developer, you will make three types of financial decisions.
ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
i. You will make investment decisions such as determining which type of iPhone application projects wil
ui ui ui ui ui ui ui ui ui ui ui ui ui ui
l offer your company a positive NPV and should, therefore, be developed by your company.
ui ui ui ui ui ui ui ui ui ui ui ui ui ui
ii. You will make the decision on how to fund your iPhone application investments and what mix of de
ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
bt and equity your company will have.
ui ui ui ui ui ui
iii. You will be responsible for the cash management of your company, ensuring that your company has th
ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
e necessary funds to make investments, pay interest on loans, and pay your employees.
ui ui ui ui ui ui ui ui ui ui ui ui ui
1-9. Shareholders can ui
i. ensure that employees are paid with company stock and/or stock options.
ui ui ui ui ui ui ui ui ui ui
ii. ensure that underperforming managers are fired. ui ui ui ui ui
iii. write contracts that ensure that the interests of the managers and shareholders are closely aligned.
ui ui ui ui ui ui ui ui ui ui ui ui ui ui
iv. mount hostile takeovers. ui ui
1-
10. u i u i This will affect and hurt the customers. It will have a negative impact on the customers, for they
ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui u
, will likely get sour milk. It will also have a negative impact on shareholders because, in the long n, cust
i ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui uiui ui
omers will realize that the supermarket sells sour milk and will switch to other supermarkets. Thus, the v
ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
alue today of the future income and cash flow streams generated by the supermarket will drop because of
ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
the long-
ui ui
term loss of customers caused by this strategy. This will negatively affect the current stock price as share
ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui ui
holders anticipate these long-term drawbacks.
ui ui ui ui
