lOMoARcPSD|10422409
Summary
Fundamentals of Corporate
Finance
Stephen Ross, Randolph Westerfield,
Bradford Jordan
10th Edition
, lOMoARcPSD|10422409
Contents
1. Introduction to corporate finance..........................................................................................6
1.1..................................................Corporate finance and the financial manager 6
1.2........................................................................Forms of business organization 7
1.3...................................................................The goal of financial management 8
1.4.........................................The agency problem and control of the corporation 9
1.5.............................................................Financial markets and the corporation 10
2. Financial statements, taxes, and cash flow......................................................................11
2.1............................................................................................ The balance sheet 11
2.2...................................................................................... The income statement 12
2.3................................................................................................................ Taxes 13
2.4.......................................................................................................... Cash flow 13
3. Working with financial statements......................................................................................15
3.1............................................Cash flow and financial statements: a closer look 15
3.2...................................................................Standardized financial statements 16
3.3................................................................................................... Ratio analysis 16
3.4.The DuPont identity.....................................................................................................20
3.5..............................................................Using financial statement information 20
4. Long-term financial planning and growth.........................................................................21
4.1............................................................................... What is financial planning? 21
4.2.............................................................Financial planning models: a first look 21
4.3...................................................................The percentage of sales approach 22
4.4..........................................................................External financing and growth 23
4.5.........................................Some caveats regarding financial planning models 24
5. Introduction to valuation: the time value of money......................................................25
5.1........................................................................Future value and compounding 25
5.2.........................................................................Present value and discounting 25
5.3.............................................................More about present and future values 26
6. Discounted cash flow valuation............................................................................................28
6.1............................................Future and present values of multiple cash flows 28
6.2........................................Valuing level cash flows: annuities and perpetuities 29
6.3...................................................Comparing rates: the effect of compounding 30
6.4....................................................................Loan types and loan amortization 30
7. Interest rates and bond valuation........................................................................................32
1
7.1................................................................................Bonds and bond valuation 32
, lOMoARcPSD|10422409
7.2................................................................................ More about bond features 33
7.3..................................................................................................... Bond ratings 34
7.4.Some different types of bonds.................................................................................35
7.5................................................................................................... Bond markets 35
7.6...............................................................................Inflation and interest rates 35
7.7.Determinants of bond yields....................................................................................36
8. Stock valuation...........................................................................................................................38
8.1.................................................................................. Common stock valuation 38
8.2..............................................Some features of common and preferred stocks 39
8.3............................................................................................ The stock markets 40
9. Net present value and other investment criteria...........................................................42
9.1............................................................................................. Net present value 42
9.2.............................................................................................. The payback rule 42
9.3................................................................................... The discounted payback 43
9.4........................................................................The average accounting return 43
9.5................................................................................The internal rate of return 44
9.6....................................................................................... The profitability index 45
9.7.....................................................................The practice of capital budgeting 45
10.Making capital investment decisions................................................................................46
10.1........................................................................Project cash flows: a first look 46
10.2................................................................................... Incremental cash flows 46
10.3..................................Pro forma financial statements and project cash flows 47
10.4........................................................................More about project cash flows 47
10.5................................................Alternative definitions of operating cash flow 48
10.6....................................Some special cases of discounted cash flow analysis 48
11.Project analysis and evaluation..........................................................................................50
11.1............................................................................... Evaluating NPV estimates 50
11.2..............................................................Scenario and other what-if analyses 50
11.3....................................................................................... Break-even analysis 51
11.4......................................Operating cash flow, sales volume, and break-even 52
11.5......................................................................................... Operating leverage 53
11.6............................................................................................. Capital rationing 53
12.Some lessons from capital market history.....................................................................55
12.1........................................................................................................... Returns 55
2
12.2....................................................................................... The historical record 55
12.3....................................................................Average returns: the first lesson 56
, lOMoARcPSD|10422409
12.4.................................................THe variability of returns: the second lesson 56
12.5...........................................................................More about average returns 57
12.6................................................................................ Capital market efficiency 58
13.Return, risk, and the security market line......................................................................60
13.1.....................................................................Expected returns and variances 60
13.2........................................................................................................ Portfolios 61
13.3.........................................Announcements, surprises, and expected returns 61
13.4................................................................Risk: systematic and unsystematic 61
13.5.....................................................................Diversification and portfolio risk 62
13.6................................................................................Systematic risk and beta 62
13.7.................................................................................The security market line 62
13.8....................................................The SML and the cost of capital: a preview 63
14.Cost of capital.....................................................................................................................65
14.1..........................................................The cost of capital: some preliminaries 65
14.2......................................................................................... The cost of equity 65
14.3............................................................The costs of debt and preferred stock 67
14.4.............................................................The weighted average cost of capital 67
14.5............................................................Divisional and project costs of capital 68
14.6...............................Flotation costs and the weighted average cost of capital 68
15.Raising capital..........................................................................................................................70
15.1..The financing life cycle of a firm: early-stage financing and venture capital 70
15.2......................................Selling securities to the public: the basic procedure 70
15.3.............................................................................. Alternative issue methods 71
15.4................................................................................................... Underwriters 71
15.5.................................................................................... IPOs and underpricing 72
15.6....................................................New equity sales and the value of the firm 73
15.7........................................................................The costs of issuing securities 73
15.8............................................................................................................. Rights 74
15.9.......................................................................................................... Dilution 75
15.10.................................................................................Issuing long-term debt 75
15.11.......................................................................................... Shelf registration 76
16.Financial leverage and capital structure policy............................................................77
16.1........................................................................The capital structure question 77
3
16.2......................................................................The effect of financial leverage 78
16.3..............................................Capital structure and the cost of equity capital 78
16.4..............................................M&M propositions I and II with corporate taxes 79
, lOMoARcPSD|10422409
16.5............................................................................................ Bankruptcy costs 80
16.6................................................................................Optimal capital structure 80
16.7.................................................................................................. The pie again 81
16.8...............................................................................The pecking-order theory 81
16.9...........................................................................Observed capital structures 82
16.10........................................................A quick look at the bankruptcy process 82
17.Dividends and payout policy...............................................................................................84
17.1...........................................................Cash dividends and dividend payment 84
17.2.........................................................................Does dividend policy matter? 85
17.3.........................................Real-world factors favoring a low dividend payout 85
17.4.......................................Real-world factors favoring a high dividend payout 86
17.5..................................................................A resolution of real-world factors? 86
17.6.....................................Stock repurchases: an alternative to cash dividends 87
17.7............What we know and do not know about dividend and payout policies 87
17.8.....................................................................Stock dividends and stock splits 88
18.Short-term finance and planning.......................................................................................90
18.1.............................................................Tracing cash and net working capital 90
18.2.........................................................The operating cycle and the cash cycle 91
18.3...................................................Some aspects of short-term financial policy 92
18.4............................................................................................. The cash budget 93
18.5..................................................................................... Short-term borrowing 93
18.6...........................................................................A short-term financial plan 94
19.Cash and liquidity management........................................................................................95
19.1................................................................................ Reasons for holding cash 95
19.2........................................................................................ Understanding float 96
19.3..................................................................Cash collection and concentration 97
19.4.......................................................................Managing cash disbursements 97
19.5.......................................................................................... Investing idle cash 98
20.Credit and inventory management...................................................................................99
20.1....................................................................................Credit and receivables 99
20.2.......................................................................................... Terms of the sales 100
20.3...................................................................................Analysing credit policy 100
4
20.4..................................................................................... Optimal credit policy 101
20.5................................................................................................ Credit analysis 102
20.6............................................................................................ Collection policy 102
20.7..................................................................................Inventory management 103
, lOMoARcPSD|10422409
20.8................................................................Inventory management techniques 104
21.International corporate finance........................................................................................105
21.1................................................................................................... Terminology 105
21.2.............................................Foreign exchange markets and exchange rates 106
21.3................................................................................. Purchasing power parity 106
21.4.Interest rate parity, unbiased forward rates, and the international Fisher effect
107
21.5......................................................................International capital budgeting 108
21.6.......................................................................................... Exchange rate risk 109
21.7.................................................................................................... Political risk 109
5
Summary
Fundamentals of Corporate
Finance
Stephen Ross, Randolph Westerfield,
Bradford Jordan
10th Edition
, lOMoARcPSD|10422409
Contents
1. Introduction to corporate finance..........................................................................................6
1.1..................................................Corporate finance and the financial manager 6
1.2........................................................................Forms of business organization 7
1.3...................................................................The goal of financial management 8
1.4.........................................The agency problem and control of the corporation 9
1.5.............................................................Financial markets and the corporation 10
2. Financial statements, taxes, and cash flow......................................................................11
2.1............................................................................................ The balance sheet 11
2.2...................................................................................... The income statement 12
2.3................................................................................................................ Taxes 13
2.4.......................................................................................................... Cash flow 13
3. Working with financial statements......................................................................................15
3.1............................................Cash flow and financial statements: a closer look 15
3.2...................................................................Standardized financial statements 16
3.3................................................................................................... Ratio analysis 16
3.4.The DuPont identity.....................................................................................................20
3.5..............................................................Using financial statement information 20
4. Long-term financial planning and growth.........................................................................21
4.1............................................................................... What is financial planning? 21
4.2.............................................................Financial planning models: a first look 21
4.3...................................................................The percentage of sales approach 22
4.4..........................................................................External financing and growth 23
4.5.........................................Some caveats regarding financial planning models 24
5. Introduction to valuation: the time value of money......................................................25
5.1........................................................................Future value and compounding 25
5.2.........................................................................Present value and discounting 25
5.3.............................................................More about present and future values 26
6. Discounted cash flow valuation............................................................................................28
6.1............................................Future and present values of multiple cash flows 28
6.2........................................Valuing level cash flows: annuities and perpetuities 29
6.3...................................................Comparing rates: the effect of compounding 30
6.4....................................................................Loan types and loan amortization 30
7. Interest rates and bond valuation........................................................................................32
1
7.1................................................................................Bonds and bond valuation 32
, lOMoARcPSD|10422409
7.2................................................................................ More about bond features 33
7.3..................................................................................................... Bond ratings 34
7.4.Some different types of bonds.................................................................................35
7.5................................................................................................... Bond markets 35
7.6...............................................................................Inflation and interest rates 35
7.7.Determinants of bond yields....................................................................................36
8. Stock valuation...........................................................................................................................38
8.1.................................................................................. Common stock valuation 38
8.2..............................................Some features of common and preferred stocks 39
8.3............................................................................................ The stock markets 40
9. Net present value and other investment criteria...........................................................42
9.1............................................................................................. Net present value 42
9.2.............................................................................................. The payback rule 42
9.3................................................................................... The discounted payback 43
9.4........................................................................The average accounting return 43
9.5................................................................................The internal rate of return 44
9.6....................................................................................... The profitability index 45
9.7.....................................................................The practice of capital budgeting 45
10.Making capital investment decisions................................................................................46
10.1........................................................................Project cash flows: a first look 46
10.2................................................................................... Incremental cash flows 46
10.3..................................Pro forma financial statements and project cash flows 47
10.4........................................................................More about project cash flows 47
10.5................................................Alternative definitions of operating cash flow 48
10.6....................................Some special cases of discounted cash flow analysis 48
11.Project analysis and evaluation..........................................................................................50
11.1............................................................................... Evaluating NPV estimates 50
11.2..............................................................Scenario and other what-if analyses 50
11.3....................................................................................... Break-even analysis 51
11.4......................................Operating cash flow, sales volume, and break-even 52
11.5......................................................................................... Operating leverage 53
11.6............................................................................................. Capital rationing 53
12.Some lessons from capital market history.....................................................................55
12.1........................................................................................................... Returns 55
2
12.2....................................................................................... The historical record 55
12.3....................................................................Average returns: the first lesson 56
, lOMoARcPSD|10422409
12.4.................................................THe variability of returns: the second lesson 56
12.5...........................................................................More about average returns 57
12.6................................................................................ Capital market efficiency 58
13.Return, risk, and the security market line......................................................................60
13.1.....................................................................Expected returns and variances 60
13.2........................................................................................................ Portfolios 61
13.3.........................................Announcements, surprises, and expected returns 61
13.4................................................................Risk: systematic and unsystematic 61
13.5.....................................................................Diversification and portfolio risk 62
13.6................................................................................Systematic risk and beta 62
13.7.................................................................................The security market line 62
13.8....................................................The SML and the cost of capital: a preview 63
14.Cost of capital.....................................................................................................................65
14.1..........................................................The cost of capital: some preliminaries 65
14.2......................................................................................... The cost of equity 65
14.3............................................................The costs of debt and preferred stock 67
14.4.............................................................The weighted average cost of capital 67
14.5............................................................Divisional and project costs of capital 68
14.6...............................Flotation costs and the weighted average cost of capital 68
15.Raising capital..........................................................................................................................70
15.1..The financing life cycle of a firm: early-stage financing and venture capital 70
15.2......................................Selling securities to the public: the basic procedure 70
15.3.............................................................................. Alternative issue methods 71
15.4................................................................................................... Underwriters 71
15.5.................................................................................... IPOs and underpricing 72
15.6....................................................New equity sales and the value of the firm 73
15.7........................................................................The costs of issuing securities 73
15.8............................................................................................................. Rights 74
15.9.......................................................................................................... Dilution 75
15.10.................................................................................Issuing long-term debt 75
15.11.......................................................................................... Shelf registration 76
16.Financial leverage and capital structure policy............................................................77
16.1........................................................................The capital structure question 77
3
16.2......................................................................The effect of financial leverage 78
16.3..............................................Capital structure and the cost of equity capital 78
16.4..............................................M&M propositions I and II with corporate taxes 79
, lOMoARcPSD|10422409
16.5............................................................................................ Bankruptcy costs 80
16.6................................................................................Optimal capital structure 80
16.7.................................................................................................. The pie again 81
16.8...............................................................................The pecking-order theory 81
16.9...........................................................................Observed capital structures 82
16.10........................................................A quick look at the bankruptcy process 82
17.Dividends and payout policy...............................................................................................84
17.1...........................................................Cash dividends and dividend payment 84
17.2.........................................................................Does dividend policy matter? 85
17.3.........................................Real-world factors favoring a low dividend payout 85
17.4.......................................Real-world factors favoring a high dividend payout 86
17.5..................................................................A resolution of real-world factors? 86
17.6.....................................Stock repurchases: an alternative to cash dividends 87
17.7............What we know and do not know about dividend and payout policies 87
17.8.....................................................................Stock dividends and stock splits 88
18.Short-term finance and planning.......................................................................................90
18.1.............................................................Tracing cash and net working capital 90
18.2.........................................................The operating cycle and the cash cycle 91
18.3...................................................Some aspects of short-term financial policy 92
18.4............................................................................................. The cash budget 93
18.5..................................................................................... Short-term borrowing 93
18.6...........................................................................A short-term financial plan 94
19.Cash and liquidity management........................................................................................95
19.1................................................................................ Reasons for holding cash 95
19.2........................................................................................ Understanding float 96
19.3..................................................................Cash collection and concentration 97
19.4.......................................................................Managing cash disbursements 97
19.5.......................................................................................... Investing idle cash 98
20.Credit and inventory management...................................................................................99
20.1....................................................................................Credit and receivables 99
20.2.......................................................................................... Terms of the sales 100
20.3...................................................................................Analysing credit policy 100
4
20.4..................................................................................... Optimal credit policy 101
20.5................................................................................................ Credit analysis 102
20.6............................................................................................ Collection policy 102
20.7..................................................................................Inventory management 103
, lOMoARcPSD|10422409
20.8................................................................Inventory management techniques 104
21.International corporate finance........................................................................................105
21.1................................................................................................... Terminology 105
21.2.............................................Foreign exchange markets and exchange rates 106
21.3................................................................................. Purchasing power parity 106
21.4.Interest rate parity, unbiased forward rates, and the international Fisher effect
107
21.5......................................................................International capital budgeting 108
21.6.......................................................................................... Exchange rate risk 109
21.7.................................................................................................... Political risk 109
5
