, Financial
Management and
Real Options
Jack Broyles
,Copyright # 2003 John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester,
West Sussex PO19 8SQ, England
Telephone (+ 44) 1243 779777
Email (for orders and customer service enquiries):
Visit our Home Page on www.wileyeurope.com or www.wiley.com
All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval
system or transmitted in any form or by any means, electronic, mechanical, photocopying,
recording, scanning or otherwise, except under the terms of the Copyright, Designs and
Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency
Ltd, 90 Tottenham Court Road, London W1T 4LP, UK, without the permission in writing of
the Publisher. Requests to the Publisher should be addressed to the Permissions Department,
John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ,
England, or emailed to , or faxed to (+ 44) 1243 770620.
This publication is designed to provide accurate and authoritative information in regard to
the subject matter covered. It is sold on the understanding that the Publisher is not engaged
in rendering professional services. If professional advice or other expert assistance is
required, the services of a competent professional should be sought.
Other Wiley Editorial Offices
John Wiley & Sons Inc., 111 River Street, Hoboken, NJ 07030, USA
Jossey-Bass, 989 Market Street, San Francisco, CA 94103-1741, USA
Wiley-VCH Verlag GmbH, Boschstr. 12, D-69469 Weinheim, Germany
John Wiley & Sons Australia Ltd, 33 Park Road, Milton, Queensland 4064, Australia
John Wiley & Sons (Asia) Pte Ltd, 2 Clementi Loop #02-01, Jin Xing Distripark, Singapore 129809
John Wiley & Sons Canada Ltd, 22 Worcester Road, Etobicoke, Ontario, Canada M9W 1L1
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
ISBN 0-471-89934-8
Project management by Originator, Gt Yarmouth, Norfolk (typeset in 9/13pt Gill Sans Light and Times)
Printed and bound in Great Britain by Ashford Colour Press Ltd, Gosport, Hampshire
This book is printed on acid-free paper responsibly manufactured from sustainable forestry
in which at least two trees are planted for each one used for paper production.
, Contents
Preface xi
Part 1 Introduction to Financial Management 1
1 Financial Management and Corporate Governance 3
1-1 What Financial Management is Really About 3
1-2 How Finance Is Organized in Corporations 6
1-3 The Chief Financial Officer 8
1-4 The Chief Accountant 8
1-5 The Treasurer 9
1-6 Corporate Financial Objectives 11
1-7 Corporate Governance 14
1-8 Conclusions 15
Further Reading 15
Questions and Problems 15
2 Fundamental Methods of Financial Analysis 17
2-1 What is a rate of return? 18
2-2 What is Risk? 19
2-3 How to Relate Required Rates of Return to Risk 22
2-4 Discounted Cash Flow and Net Value for Shareholders 24
2-5 Precision Discounting 28
2-6 The Internal Rate of Return 30
2-7 The Present Value of a Perpetuity 32
2-8 The Present Value of an Annuity 33
2-9 The Loan Balance Method 36
2-10 The Value of Growth 37
2-11 Why Flexibility and Choice Have Value 37
2-12 Conclusions 39
Questions and Problems 39
Management and
Real Options
Jack Broyles
,Copyright # 2003 John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester,
West Sussex PO19 8SQ, England
Telephone (+ 44) 1243 779777
Email (for orders and customer service enquiries):
Visit our Home Page on www.wileyeurope.com or www.wiley.com
All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval
system or transmitted in any form or by any means, electronic, mechanical, photocopying,
recording, scanning or otherwise, except under the terms of the Copyright, Designs and
Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency
Ltd, 90 Tottenham Court Road, London W1T 4LP, UK, without the permission in writing of
the Publisher. Requests to the Publisher should be addressed to the Permissions Department,
John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ,
England, or emailed to , or faxed to (+ 44) 1243 770620.
This publication is designed to provide accurate and authoritative information in regard to
the subject matter covered. It is sold on the understanding that the Publisher is not engaged
in rendering professional services. If professional advice or other expert assistance is
required, the services of a competent professional should be sought.
Other Wiley Editorial Offices
John Wiley & Sons Inc., 111 River Street, Hoboken, NJ 07030, USA
Jossey-Bass, 989 Market Street, San Francisco, CA 94103-1741, USA
Wiley-VCH Verlag GmbH, Boschstr. 12, D-69469 Weinheim, Germany
John Wiley & Sons Australia Ltd, 33 Park Road, Milton, Queensland 4064, Australia
John Wiley & Sons (Asia) Pte Ltd, 2 Clementi Loop #02-01, Jin Xing Distripark, Singapore 129809
John Wiley & Sons Canada Ltd, 22 Worcester Road, Etobicoke, Ontario, Canada M9W 1L1
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
ISBN 0-471-89934-8
Project management by Originator, Gt Yarmouth, Norfolk (typeset in 9/13pt Gill Sans Light and Times)
Printed and bound in Great Britain by Ashford Colour Press Ltd, Gosport, Hampshire
This book is printed on acid-free paper responsibly manufactured from sustainable forestry
in which at least two trees are planted for each one used for paper production.
, Contents
Preface xi
Part 1 Introduction to Financial Management 1
1 Financial Management and Corporate Governance 3
1-1 What Financial Management is Really About 3
1-2 How Finance Is Organized in Corporations 6
1-3 The Chief Financial Officer 8
1-4 The Chief Accountant 8
1-5 The Treasurer 9
1-6 Corporate Financial Objectives 11
1-7 Corporate Governance 14
1-8 Conclusions 15
Further Reading 15
Questions and Problems 15
2 Fundamental Methods of Financial Analysis 17
2-1 What is a rate of return? 18
2-2 What is Risk? 19
2-3 How to Relate Required Rates of Return to Risk 22
2-4 Discounted Cash Flow and Net Value for Shareholders 24
2-5 Precision Discounting 28
2-6 The Internal Rate of Return 30
2-7 The Present Value of a Perpetuity 32
2-8 The Present Value of an Annuity 33
2-9 The Loan Balance Method 36
2-10 The Value of Growth 37
2-11 Why Flexibility and Choice Have Value 37
2-12 Conclusions 39
Questions and Problems 39
