lOMoAR cPSD| 10422409
Summary
Fundamentals of Corporate
Finance
Stephen Ross, Randolph Westerfield,
Bradford Jordan
10th Edition
, lOMoAR cPSD| 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
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, lOMoAR cPSD| 10422409
7.1. Bonds and bond valuation .......................................................................................................32
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
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, lOMoAR cPSD| 10422409
12.2. The historical record...............................................................................................................55
12.3. Average returns: the first lesson ..........................................................................................56
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
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Summary
Fundamentals of Corporate
Finance
Stephen Ross, Randolph Westerfield,
Bradford Jordan
10th Edition
, lOMoAR cPSD| 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
, lOMoAR cPSD| 10422409
7.1. Bonds and bond valuation .......................................................................................................32
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
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, lOMoAR cPSD| 10422409
12.2. The historical record...............................................................................................................55
12.3. Average returns: the first lesson ..........................................................................................56
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
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