SUMMARY
CORPORATE FINANCIAL
MANAGEMENT
,Table of contents
CHAPTER 1: Goals and governance of the corporation.....................................7
1. Investment and Financing decisions...............................................................................................7
2. What is a corporation?...................................................................................................................8
3. Who is the financial manager?.....................................................................................................10
4. Goals of the corporation...............................................................................................................11
5. Agency problems, executive compensation, and corporate governance.....................................11
6. The ethics of maximizing value.....................................................................................................12
7. Careers in finance.........................................................................................................................12
8. Preview of coming attractions......................................................................................................12
9. Snippets of financial history..........................................................................................................13
CHAPTER 2: Financial markets and institutions.............................................13
1. The importance of financial markets and institutions..................................................................13
2. The flow of savings to corporations..............................................................................................14
3. Functions of financial markets and intermediaries.......................................................................17
4. The crisis of 2007-2009.................................................................................................................17
CHAPTER 3: Accounting and finance...........................................................17
1. The Balance Sheet........................................................................................................................17
Book values and market values....................................................................................................18
2. The income statement..................................................................................................................19
Profits vs cash flows......................................................................................................................19
3. The statement of cash flows.........................................................................................................19
Free cash flow...............................................................................................................................20
4. Accounting practice and malpractice............................................................................................20
Corporate tax rates (2018)............................................................................................................21
5. Taxes.............................................................................................................................................21
CHAPTER 4: Measuring corporate performance.............................................21
1. How financial ratios relate to shareholder value..........................................................................21
2. Measuring market value and market value added.......................................................................21
3. Economic value added and accounting rates of return................................................................23
4. Measuring efficiency.....................................................................................................................24
Asset turnover ratio......................................................................................................................24
Inventory turnover.......................................................................................................................26
Receivables turnover....................................................................................................................26
5. The Du Pont system......................................................................................................................26
1
, 6. Measuring financial leverage........................................................................................................28
7. Measuring liquidity.......................................................................................................................28
8. Interpreting financial ratios..........................................................................................................29
9. The role of financial ratios............................................................................................................29
CHAPTER 5: The time value of money.........................................................29
1. Future Values and Compound Interest.........................................................................................29
Manhattan Island Sale..................................................................................................................30
2. Present Values..............................................................................................................................31
Time value of money (Applications).............................................................................................32
3. Multiple Cash Flows......................................................................................................................32
Future value of multiple cash flows..............................................................................................32
Present value of multiple cash flows............................................................................................32
4. Reducing the Chore of the Calculations: Part 1............................................................................33
Spreadsheets................................................................................................................................33
Financial calculators.....................................................................................................................34
5. Level Cash Flows: Perpetuities and Annuities...............................................................................34
Annuities Due...............................................................................................................................36
6. Reducing the Chore of the Calculations: Part 2............................................................................37
Calculations: Part 2 – Financial Calculators...................................................................................37
Calculations: part 2 – Spreadsheets..............................................................................................37
7. Effective Annual Interest Rates.....................................................................................................37
EAR and Financial Calculators.......................................................................................................38
APR and Financial Calculators.......................................................................................................38
8. Inflation & The Time Value of Money...........................................................................................38
CHAPTER 6: Valuing Bonds........................................................................39
1. The bond market..........................................................................................................................39
2. Interest rates and bond prices......................................................................................................40
3. Yield to maturity...........................................................................................................................43
Bond Yields...................................................................................................................................43
4. Bond rates of returns....................................................................................................................44
5. The yield curve..............................................................................................................................45
Nominal and real rates of interest................................................................................................46
6. Corporate bonds and the risk of default.......................................................................................47
Default risk...................................................................................................................................47
Corporate bonds...........................................................................................................................47
CHAPTER 7: Valuing Stocks.......................................................................48
2
, 1. Stocks and the Stock Market........................................................................................................48
2. Market Values, Book Values, and Liquidation Values...................................................................48
3. Valuing Common Stocks...............................................................................................................49
4. Simplifying the Dividend Discount Model.....................................................................................51
5. Valuing a Business by Discounted Cash Flow................................................................................54
Valuing non-constant growth.......................................................................................................54
6. There Are No Free Lunches on Wall Street...................................................................................54
Random walk theory.....................................................................................................................55
Another tool.................................................................................................................................55
Efficient market theory.................................................................................................................55
7. Market Anomalies and Behavioral Finance...................................................................................56
Market Anomalies........................................................................................................................56
Behavioral finance........................................................................................................................56
CHAPTER 8: Net present value and other investment criteria..........................56
1. Net Present Value.........................................................................................................................56
Valuing an office building.............................................................................................................58
Risk and present value..................................................................................................................58
2. The Internal Rate of Return Rule..................................................................................................59
3. The Profitability Index...................................................................................................................62
Capital rationing...........................................................................................................................62
4. The Payback Rule..........................................................................................................................62
Project interactions......................................................................................................................62
The investment timing decision....................................................................................................63
Equivalent annual annuity............................................................................................................63
Capital budgeting techniques.......................................................................................................64
CHAPTER 9: Using discounted cash-flow analysis to make investment decisions 64
1. Identifying Cash Flows..................................................................................................................64
Cash flow vs accounting income...................................................................................................64
Incremental cash flows.................................................................................................................64
Inflation........................................................................................................................................65
Separate investment and financing decisions...............................................................................66
Calculating cash flows...................................................................................................................66
2. Corporate Income Taxes...............................................................................................................66
3. An Example: Blooper Industries....................................................................................................67
CHAPTER 10: Project analysis....................................................................68
1. How Firms Organize the Investment Process to Draw on Their Competitive Strengths...............68
3
CORPORATE FINANCIAL
MANAGEMENT
,Table of contents
CHAPTER 1: Goals and governance of the corporation.....................................7
1. Investment and Financing decisions...............................................................................................7
2. What is a corporation?...................................................................................................................8
3. Who is the financial manager?.....................................................................................................10
4. Goals of the corporation...............................................................................................................11
5. Agency problems, executive compensation, and corporate governance.....................................11
6. The ethics of maximizing value.....................................................................................................12
7. Careers in finance.........................................................................................................................12
8. Preview of coming attractions......................................................................................................12
9. Snippets of financial history..........................................................................................................13
CHAPTER 2: Financial markets and institutions.............................................13
1. The importance of financial markets and institutions..................................................................13
2. The flow of savings to corporations..............................................................................................14
3. Functions of financial markets and intermediaries.......................................................................17
4. The crisis of 2007-2009.................................................................................................................17
CHAPTER 3: Accounting and finance...........................................................17
1. The Balance Sheet........................................................................................................................17
Book values and market values....................................................................................................18
2. The income statement..................................................................................................................19
Profits vs cash flows......................................................................................................................19
3. The statement of cash flows.........................................................................................................19
Free cash flow...............................................................................................................................20
4. Accounting practice and malpractice............................................................................................20
Corporate tax rates (2018)............................................................................................................21
5. Taxes.............................................................................................................................................21
CHAPTER 4: Measuring corporate performance.............................................21
1. How financial ratios relate to shareholder value..........................................................................21
2. Measuring market value and market value added.......................................................................21
3. Economic value added and accounting rates of return................................................................23
4. Measuring efficiency.....................................................................................................................24
Asset turnover ratio......................................................................................................................24
Inventory turnover.......................................................................................................................26
Receivables turnover....................................................................................................................26
5. The Du Pont system......................................................................................................................26
1
, 6. Measuring financial leverage........................................................................................................28
7. Measuring liquidity.......................................................................................................................28
8. Interpreting financial ratios..........................................................................................................29
9. The role of financial ratios............................................................................................................29
CHAPTER 5: The time value of money.........................................................29
1. Future Values and Compound Interest.........................................................................................29
Manhattan Island Sale..................................................................................................................30
2. Present Values..............................................................................................................................31
Time value of money (Applications).............................................................................................32
3. Multiple Cash Flows......................................................................................................................32
Future value of multiple cash flows..............................................................................................32
Present value of multiple cash flows............................................................................................32
4. Reducing the Chore of the Calculations: Part 1............................................................................33
Spreadsheets................................................................................................................................33
Financial calculators.....................................................................................................................34
5. Level Cash Flows: Perpetuities and Annuities...............................................................................34
Annuities Due...............................................................................................................................36
6. Reducing the Chore of the Calculations: Part 2............................................................................37
Calculations: Part 2 – Financial Calculators...................................................................................37
Calculations: part 2 – Spreadsheets..............................................................................................37
7. Effective Annual Interest Rates.....................................................................................................37
EAR and Financial Calculators.......................................................................................................38
APR and Financial Calculators.......................................................................................................38
8. Inflation & The Time Value of Money...........................................................................................38
CHAPTER 6: Valuing Bonds........................................................................39
1. The bond market..........................................................................................................................39
2. Interest rates and bond prices......................................................................................................40
3. Yield to maturity...........................................................................................................................43
Bond Yields...................................................................................................................................43
4. Bond rates of returns....................................................................................................................44
5. The yield curve..............................................................................................................................45
Nominal and real rates of interest................................................................................................46
6. Corporate bonds and the risk of default.......................................................................................47
Default risk...................................................................................................................................47
Corporate bonds...........................................................................................................................47
CHAPTER 7: Valuing Stocks.......................................................................48
2
, 1. Stocks and the Stock Market........................................................................................................48
2. Market Values, Book Values, and Liquidation Values...................................................................48
3. Valuing Common Stocks...............................................................................................................49
4. Simplifying the Dividend Discount Model.....................................................................................51
5. Valuing a Business by Discounted Cash Flow................................................................................54
Valuing non-constant growth.......................................................................................................54
6. There Are No Free Lunches on Wall Street...................................................................................54
Random walk theory.....................................................................................................................55
Another tool.................................................................................................................................55
Efficient market theory.................................................................................................................55
7. Market Anomalies and Behavioral Finance...................................................................................56
Market Anomalies........................................................................................................................56
Behavioral finance........................................................................................................................56
CHAPTER 8: Net present value and other investment criteria..........................56
1. Net Present Value.........................................................................................................................56
Valuing an office building.............................................................................................................58
Risk and present value..................................................................................................................58
2. The Internal Rate of Return Rule..................................................................................................59
3. The Profitability Index...................................................................................................................62
Capital rationing...........................................................................................................................62
4. The Payback Rule..........................................................................................................................62
Project interactions......................................................................................................................62
The investment timing decision....................................................................................................63
Equivalent annual annuity............................................................................................................63
Capital budgeting techniques.......................................................................................................64
CHAPTER 9: Using discounted cash-flow analysis to make investment decisions 64
1. Identifying Cash Flows..................................................................................................................64
Cash flow vs accounting income...................................................................................................64
Incremental cash flows.................................................................................................................64
Inflation........................................................................................................................................65
Separate investment and financing decisions...............................................................................66
Calculating cash flows...................................................................................................................66
2. Corporate Income Taxes...............................................................................................................66
3. An Example: Blooper Industries....................................................................................................67
CHAPTER 10: Project analysis....................................................................68
1. How Firms Organize the Investment Process to Draw on Their Competitive Strengths...............68
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