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• Title Page
• Copyright
• Dedication
• Pearson’s Commitment to Diversity, Equity, and Inclusion
• Brief Contents
• Detailed Contents
• Bridging Theory and Practice
• Teaching Students to Think Finance
• Engaging with Concepts and Data
• About the Authors
• Preface
• Part 1: Introduction
  • Chapter 1. The Corporation and Financial Markets
    • 1.1 The Four Types of Firms
      • Sole Proprietorships
      • Partnerships
      • Limited Liability Companies
      • Corporations
      • Tax Implications for Corporate Entities
      • Corporate Taxation Around the World
    • 1.2 Ownership Versus Control of Corporations
      • The Corporate Management Team
      • Interview with David Viniar
      • The Financial Manager
      • Finance In Times Of Disruption: The Dodd-Frank Act
      • The Goal of the Firm
      • The Firm and Society
      • Ethics and Incentives within Corporations
      • Shareholder versus Stakeholder Value
      • Finance In Times Of Disruption: The Dodd-Frank Act on Corporate Compensation
      • Citizens United v. Federal Election Commission
      • Airlines in Bankruptcy
    • 1.3 The Stock Market
      • Primary and Secondary Stock Markets
      • Traditional Trading Venues
      • Interview with Adena T. Friedman
      • New Competition and Market Changes
      • Dark Pools
    • 1.4 Fintech: Finance and Technology
      • Telecommunications
      • Security and Verification
      • Automation of Banking Services
      • Big Data and Machine Learning
      • Competition
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
  • Chapter 2. Introduction to Financial Statement Analysis
    • 2.1 Firms’ Disclosure of Financial Information
      • Preparation of Financial Statements
      • International Financial Reporting Standards
      • Interview with Ruth Porat
      • Types of Financial Statements
    • 2.2 The Balance Sheet
      • Assets
      • Liabilities
      • Stockholders’ Equity
      • Market Value Versus Book Value
      • Enterprise Value
    • 2.3 The Income Statement
      • Earnings Calculations
    • 2.4 The Statement of Cash Flows
      • Operating Activity
      • Investment Activity
      • Financing Activity
    • 2.5 Other Financial Statement Information
      • Statement of Stockholders’ Equity
      • Management Discussion and Analysis
      • Notes to the Financial Statements
    • 2.6 Financial Statement Analysis
      • Profitability Ratios
      • Liquidity Ratios
      • Working Capital Ratios
      • Interest Coverage Ratios
      • Leverage Ratios
      • Valuation Ratios
      • Common Mistake: Mismatched Ratios
      • Operating Returns
      • The DuPont Identity
    • 2.7 Financial Reporting in Practice
      • Enron
      • WorldCom
      • Sarbanes-Oxley Act
      • Finance In Times Of Disruption: Bernard Madoff’s Ponzi Scheme
      • Dodd-Frank Act
      • Foreign Regulation: Wirecard
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
    • Data Case
  • Chapter 3. Financial Decision Making and the Law of One Price
    • 3.1 Valuing Decisions
      • Analyzing Costs and Benefits
      • Using Market Prices to Determine Cash Values
      • When Competitive Market Prices Are Not Available
    • 3.2 Interest Rates and the Time Value of Money
      • The Time Value of Money
      • The Interest Rate: An Exchange Rate Across Time
    • 3.3 Present Value and the NPV Decision Rule
      • Net Present Value
      • The NPV Decision Rule
      • NPV and Cash Needs
    • 3.4 Arbitrage and the Law of One Price
      • Arbitrage
      • Law of One Price
    • 3.5 No-Arbitrage and Security Prices
      • Valuing a Security with the Law of One Price
      • An Old Joke
      • The NPV of Trading Securities and Firm Decision Making
      • Valuing a Portfolio
      • Finance In Times Of Disruption: Liquidity and the Informational Role of Prices
      • Arbitrage in Markets
      • Where Do We Go from Here?
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
    • Data Case
    • Appendix: The Price of Risk
      • Risky Versus Risk-Free Cash Flows
      • Arbitrage with Transactions Costs
• Part 2: Time, Money, And Interest Rates
  • Chapter 4. The Time Value of Money
    • 4.1 The Timeline
    • 4.2 The Three Rules of Time Travel
      • Rule 1: Comparing and Combining Values
      • Rule 2: Moving Cash Flows Forward in Time
      • Rule 3: Moving Cash Flows Back in Time
      • Rule of 72
      • Applying the Rules of Time Travel
    • 4.3 Valuing a Stream of Cash Flows
    • 4.4 Calculating the Net Present Value
      • Using Excel: Calculating Present Values in Excel
    • 4.5 Perpetuities and Annuities
      • Perpetuities
      • Historical Examples of Perpetuities
      • Annuities
      • Common Mistake: Discounting One Too Many Times
      • Formula for an Annuity Due
      • Growing Cash Flows
    • 4.6 Using an Annuity Spreadsheet or Calculator
      • Annuity Calculator
    • 4.7 Non-Annual Cash Flows
    • 4.8 Solving for the Cash Payments
    • 4.9 The Internal Rate of Return
      • Using Excel: Excel’s IRR Function
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
    • Data Case
    • Appendix: Solving for the Number of Periods
  • Chapter 5. Interest Rates
    • 5.1 Interest Rate Quotes and Adjustments
      • The Effective Annual Rate
      • Common Mistake: Using the Wrong Discount Rate in the Annuity Formula
      • Annual Percentage Rates
    • 5.2 Application: Discount Rates and Loans
    • 5.3 The Determinants of Interest Rates
      • Finance In Times Of Disruption: Teaser Rates and Subprime Loans
      • Inflation and Real Versus Nominal Rates
      • Investment and Interest Rate Policy
      • The Yield Curve and Discount Rates
      • The Yield Curve and the Economy
      • Common Mistake: Using the Annuity Formula When Discount Rates Vary by Maturity
      • Interview with Dr. Janet Yellen
    • 5.4 Risk and Taxes
      • Risk and Interest Rates
      • After-Tax Interest Rates
    • 5.5 The Opportunity Cost of Capital
      • Common Mistake: States Dig a Multi- Trillion Dollar Hole by Discounting at the Wrong Rate
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
    • Data Case
    • Appendix Continuous Rates and Cash Flows
      • Discount Rates for a Continuously Compounded APR
      • Continuously Arriving Cash Flows
  • Chapter 6. Valuing Bonds
    • 6.1 Bond Cash Flows, Prices, and Yields
      • Bond Terminology
      • Zero-Coupon Bonds
      • Finance In Times Of Disruption: Negative Bond Yields
      • Coupon Bonds
    • 6.2 Dynamic Behavior of Bond Prices
      • Discounts and Premiums
      • Time and Bond Prices
      • Interest Rate Changes and Bond Prices
      • Clean and Dirty Prices for Coupon Bonds
    • 6.3 The Yield Curve and Bond Arbitrage
      • Replicating a Coupon Bond
      • Valuing a Coupon Bond Using Zero-Coupon Yields
      • Coupon Bond Yields
      • Treasury Yield Curves
    • 6.4 Corporate Bonds
      • Corporate Bond Yields
      • Are Treasuries Really Default-Free Securities?
      • Bond Ratings
      • Corporate Yield Curves
    • 6.5 Sovereign Bonds
      • Finance In Times Of Disruption: The Credit Crisis and Bond Yields
      • Finance In Times Of Disruption: European Sovereign Debt Yields: A Puzzle
      • Interview with Carmen M. Reinhart
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
    • Data Case
    • Case Study
    • Appendix: Forward Interest Rates
      • Computing Forward Rates
      • Computing Bond Yields from Forward Rates
      • Forward Rates and Future Interest Rates
• Part 3: Valuing Projects And Firms
  • Chapter 7. Investment Decision Rules
    • 7.1 NPV and Stand-Alone Projects
      • Applying the NPV Rule
      • The NPV Profile and IRR
      • Alternative Rules Versus the NPV Rule
      • Interview with Dick Grannis
    • 7.2 The Internal Rate of Return Rule
      • Applying the IRR Rule
      • Pitfall #1: Delayed Investments
      • Pitfall #2: Multiple IRRs
      • Common Mistake: IRR Versus the IRR Rule
      • Pitfall #3: Nonexistent IRR
    • 7.3 The Payback Rule
      • Applying the Payback Rule
      • Payback Rule Pitfalls in Practice
      • Why Do Rules Other Than the NPV Rule Persist?
    • 7.4 Choosing between Projects
      • NPV Rule and Mutually Exclusive Investments
      • IRR Rule and Mutually Exclusive Investments
      • The Incremental IRR
      • Common Mistake: Manipulating the IRR with Financing
      • When Can Returns Be Compared?
    • 7.5 Project Selection with Resource Constraints
      • Evaluating Projects with Different Resource Requirements
      • Profitability Index
      • Shortcomings of the Profitability Index
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
    • Data Case
    • Appendix: Computing the NPV Profile Using Excel’s Data Table Function
  • Chapter 8. Fundamentals of Capital Budgeting
    • 8.1 Forecasting Earnings
      • Revenue and Cost Estimates
      • Incremental Earnings Forecast
      • Indirect Effects on Incremental Earnings
      • Common Mistake: The Opportunity Cost of an Idle Asset
      • Sunk Costs and Incremental Earnings
      • Common Mistake: The Sunk Cost Fallacy
      • Real-World Complexities
    • 8.2 Determining Free Cash Flow and NPV
      • Calculating Free Cash Flow from Earnings
      • Calculating Free Cash Flow Directly
      • Calculating the NPV
      • Using Excel: Capital Budgeting Using Excel
    • 8.3 Choosing among Alternatives
      • Evaluating Manufacturing Alternatives
      • Comparing Free Cash Flows for Cisco’s Alternatives
    • 8.4 Further Adjustments to Free Cash Flow
      • Interview with David Holland
    • 8.5 Analyzing the Project
      • Break-Even Analysis
      • Common Mistake: Corporate Tax Rates and Investment
      • Sensitivity Analysis
      • Using Excel: Project Analysis Using Excel
      • Scenario Analysis
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
    • Data Case
    • Appendix: MACRS Depreciation
  • Chapter 9. Valuing Stocks
    • 9.1 The Dividend-Discount Model
      • A One-Year Investor
      • Dividend Yields, Capital Gains, and Total Returns
      • The Mechanics of a Short Sale
      • A Multiyear Investor
      • The Dividend-Discount Model Equation
    • 9.2 Applying the Dividend-Discount Model
      • Constant Dividend Growth
      • Dividends Versus Investment and Growth
      • John Burr Williams’s Theory of Investment Value
      • Changing Growth Rates
      • Limitations of the Dividend-Discount Model
    • 9.3 Total Payout and Free Cash Flow Valuation Models
      • Share Repurchases and the Total Payout Model
      • The Discounted Free Cash Flow Model
    • 9.4 Valuation Based on Comparable Firms
      • Valuation Multiples
      • Limitations of Multiples
      • Comparison with Discounted Cash Flow Methods
      • Stock Valuation Techniques: The Final Word
      • Kenneth Cole Productions—What Happened?
      • Cryptocurrencies and Price Bubbles
      • Interview with Susan Athey
    • 9.5 Information, Competition, and Stock Prices
      • Information in Stock Prices
      • Competition and Efficient Markets
      • Lessons for Investors and Corporate Managers
      • Interview with Fahmi Quadir
      • The Efficient Markets Hypothesis Versus No Arbitrage
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
    • Data Case
• Part 4: Risk And Return
  • Chapter 10. Capital Markets and the Pricing of Risk
    • 10.1 Risk and Return: Insights from 96 Years of Investor History
    • 10.2 Common Measures of Risk and Return
      • Probability Distributions
      • Expected Return
      • Variance and Standard Deviation
    • 10.3 Historical Returns of Stocks and Bonds
      • Computing Historical Returns
      • Average Annual Returns
      • The Variance and Volatility of Returns
      • Estimation Error: Using Past Returns to Predict the Future
      • Arithmetic Average Returns Versus Compound Annual Returns
    • 10.4 The Historical Tradeoff Between Risk and Return
      • The Returns of Large Portfolios
      • The Returns of Individual Stocks
    • 10.5 Common Versus Independent Risk
      • Theft Versus Earthquake Insurance: An Example
      • The Role of Diversification
    • 10.6 Diversification in Stock Portfolios
      • Firm-Specific Versus Systematic Risk
      • No Arbitrage and the Risk Premium
      • Finance In Times Of Disruption: Diversification Benefits During Market Crashes
      • Common Mistake: A Fallacy of Long- Run Diversification
    • 10.7 Measuring Systematic Risk
      • Identifying Systematic Risk: The Market Portfolio
      • Sensitivity to Systematic Risk: Beta
    • 10.8 Beta and the Cost of Capital
      • Estimating the Risk Premium
      • Common Mistake: Beta Versus Volatility
      • The Capital Asset Pricing Model
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
    • Data Case
  • Chapter 11. Optimal Portfolio Choice and the Capital Asset Pricing Model
    • 11.1 The Expected Return of a Portfolio
    • 11.2 The Volatility of a Two-Stock Portfolio
      • Combining Risks
      • Determining Covariance and Correlation
      • Common Mistake: Computing Variance, Covariance, and Correlation in Excel
      • Computing a Portfolio’s Variance and Volatility
    • 11.3 The Volatility of a Large Portfolio
      • Large Portfolio Variance
      • Diversification with an Equally Weighted Portfolio
      • Interview with Anne Martin
      • Diversification with General Portfolios
    • 11.4 Risk Versus Return: Choosing an Efficient Portfolio
      • Efficient Portfolios with Two Stocks
      • The Effect of Correlation
      • Short Sales
      • Efficient Portfolios with Many Stocks
      • Nobel Prize: Harry Markowitz and James Tobin
    • 11.5 Risk-Free Saving and Borrowing
      • Investing in Risk-Free Securities
      • Borrowing and Buying Stocks on Margin
      • Identifying the Tangent Portfolio
    • 11.6 The Efficient Portfolio and Required Returns
      • Portfolio Improvement: Beta and the Required Return
      • Expected Returns and the Efficient Portfolio
    • 11.7 The Capital Asset Pricing Model
      • The CAPM Assumptions
      • Supply, Demand, and the Efficiency of the Market Portfolio
      • Optimal Investing: The Capital Market Line
    • 11.8 Determining the Risk Premium
      • Market Risk and Beta
      • Nobel Prize: William Sharpe on the CAPM
      • The Security Market Line
      • Beta of a Portfolio
      • Summary of the Capital Asset Pricing Model
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
    • Data Case
    • Appendix: The CAPM with Differing Interest Rates
      • The Efficient Frontier with Differing Saving and Borrowing Rates
      • The Security Market Line with Differing Interest Rates
  • Chapter 12. Estimating the Cost of Capital
    • 12.1 The Equity Cost of Capital
    • 12.2 The Market Portfolio
      • Constructing the Market Portfolio
      • Market Indexes
      • Value-Weighted Portfolios and Rebalancing
      • The Market Risk Premium
    • 12.3 Beta Estimation
      • Using Historical Returns
      • Identifying the Best-Fitting Line
      • Using Linear Regression
      • Why Not Estimate Expected Returns Directly?
    • 12.4 The Debt Cost of Capital
      • Debt Yields Versus Returns
      • Common Mistake: Using the Debt Yield as Its Cost of Capital
      • Debt Betas
    • 12.5 A Project’s Cost of Capital
      • All-Equity Comparables
      • Levered Firms as Comparables
      • The Unlevered Cost of Capital
      • Industry Asset Betas
    • 12.6 Project Risk Characteristics and Financing
      • Differences in Project Risk
      • Common Mistake: Adjusting for Execution Risk
      • Financing and the Weighted Average Cost of Capital
      • Interview with Shelagh Glaser
      • Common Mistake: Using a Single Cost of Capital in Multi-Divisional Firms
    • 12.7 Final Thoughts on Using the CAPM
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
    • Data Case
    • Appendix: Practical Considerations When Forecasting Beta
      • Time Horizon
      • The Market Proxy
      • Beta Variation and Extrapolation
      • Outliers
      • Common Mistake: Changing the Index to Improve the Fit
      • Using Excel: Estimating Beta Using Excel
      • Other Considerations
  • Chapter 13. Investor Behavior and Capital Market Efficiency
    • 13.1 Competition and Capital Markets
      • Identifying a Stock’s Alpha
      • Profiting from Non-Zero Alpha Stocks
    • 13.2 Information and Rational Expectations
      • Informed Versus Uninformed Investors
      • Rational Expectations
    • 13.3 The Behavior of Individual Investors
      • Underdiversification and Portfolio Biases
      • Excessive Trading and Overconfidence
      • Individual Behavior and Market Prices
    • 13.4 Systematic Trading Biases
      • Hanging on to Losers and the Disposition Effect
      • Nobel Prize: Prospect Theory, Mental Accounting, and Nudges
      • Investor Attention, Mood, and Experience
      • Herd Behavior
      • Implications of Behavioral Biases
    • 13.5 The Efficiency of the Market Portfolio
      • Trading on News or Recommendations
      • Nobel Prize: The 2013 Prize: An Enigma?
      • The Performance of Fund Managers
      • The Winners and Losers
    • 13.6 Style-Based Techniques and the Market Efficiency Debate
      • Size Effects
      • Interview with Jonathan Clements
      • Momentum
      • Market Efficiency and the Efficiency of the Market Portfolio
      • Implications of Positive-Alpha Trading Strategies
    • 13.7 Multifactor Models of Risk
      • Using Factor Portfolios
      • Smart Beta
      • Long-Short Portfolios
      • Selecting the Portfolios
      • The Cost of Capital with Fama-French-Carhart Factor Specification
    • 13.8 Methods Used in Practice
      • Financial Managers
      • Investors
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
    • Appendix: Building a Multifactor Model
• Part 5: Capital Structure
  • Chapter 14. Capital Structure in a Perfect Market
    • 14.1 Equity Versus Debt Financing
      • Financing a Firm with Equity
      • Financing a Firm with Debt and Equity
      • The Effect of Leverage on Risk and Return
    • 14.2 Modigliani-Miller I: Leverage, Arbitrage, and Firm Value
      • MM and the Law of One Price
      • Homemade Leverage
      • MM and the Real World
      • The Market Value Balance Sheet
      • Application: A Leveraged Recapitalization
    • 14.3 Modigliani-Miller II: Leverage, Risk, and the Cost of Capital
      • Leverage and the Equity Cost of Capital
      • Capital Budgeting and the Weighted Average Cost of Capital
      • Common Mistake: Is Debt Better Than Equity?
      • Computing the WACC with Multiple Securities
      • Levered and Unlevered Betas
      • Nobel Prize: Franco Modigliani and Merton Miller
    • 14.4 Capital Structure Fallacies
      • Leverage and Earnings per Share
      • Finance In Times Of Disruption: Bank Capital Regulation and the ROE Fallacy
      • Equity Issuances and Dilution
    • 14.5 MM: Beyond the Propositions
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
  • Chapter 15. Debt and Taxes
    • 15.1 The Interest Tax Deduction
    • 15.2 Valuing the Interest Tax Shield
      • The Interest Tax Shield and Firm Value
      • Pizza and Taxes
      • The Interest Tax Shield with Permanent Debt
      • The Weighted Average Cost of Capital with Taxes
      • The Repatriation Tax: Why Some Cash- Rich Firms Borrowed
      • The Interest Tax Shield with a Target Debt- Equity Ratio
    • 15.3 Recapitalizing to Capture the Tax Shield
      • The Tax Benefit
      • The Share Repurchase
      • No Arbitrage Pricing
      • Analyzing the Recap: The Market Value Balance Sheet
    • 15.4 Personal Taxes
      • Including Personal Taxes in the Interest Tax Shield
      • Determining the Actual Tax Advantage of Debt
      • Valuing the Interest Tax Shield with Personal Taxes
      • Common Mistake: How to Save for Retirement
    • 15.5 Optimal Capital Structure with Taxes
      • Do Firms Prefer Debt?
      • Limits to the Tax Benefit of Debt
      • Growth and Debt
      • Interview with Andrew Balson
      • Other Tax Shields
      • The Low Leverage Puzzle
      • Employee Stock Options
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
    • Data Case
  • Chapter 16. Financial Distress, Managerial Incentives, and Information
    • 16.1 Default and Bankruptcy in a Perfect Market
      • Armin Industries: Leverage and the Risk of Default
      • Bankruptcy and Capital Structure
    • 16.2 The Costs of Bankruptcy and Financial Distress
      • The Bankruptcy Code
      • Direct Costs of Bankruptcy
      • Indirect Costs of Financial Distress
      • Finance In Times Of Disruption: The Chrysler Prepack
    • 16.3 Financial Distress Costs and Firm Value
      • Armin Industries: The Impact of Financial Distress Costs
      • Who Pays for Financial Distress Costs?
    • 16.4 Optimal Capital Structure: The Tradeoff Theory
      • The Present Value of Financial Distress Costs
      • Optimal Leverage
    • 16.5 Exploiting Debt Holders: The Agency Costs of Leverage
      • Excessive Risk-Taking and Asset Substitution
      • Debt Overhang and Under-Investment
      • Finance In Times Of Disruption: Bailouts, Distress Costs, and Debt Overhang
      • Agency Costs and the Value of Leverage
      • The Leverage Ratchet Effect
      • Debt Maturity and Covenants
      • Why Do Firms Go Bankrupt?
    • 16.6 Motivating Managers: The Agency Benefits of Leverage
      • Concentration of Ownership
      • Reduction of Wasteful Investment
      • Excessive Perks and Corporate Scandals
      • Finance In Times Of Disruption: Moral Hazard, Bailouts, and the Appeal of Leverage
      • Leverage and Commitment
      • Nobel Prize: Contract Theory
    • 16.7 Agency Costs and the Tradeoff Theory
      • The Optimal Debt Level
      • Debt Levels in Practice
    • 16.8 Asymmetric Information and Capital Structure
      • Leverage as a Credible Signal
      • Issuing Equity and Adverse Selection
      • Nobel Prize: Markets with Asymmetric Information and Adverse Selection
      • Implications for Equity Issuance
      • Implications for Capital Structure
      • Nobel Prize: The Cost of Bank Runs
    • 16.9 Capital Structure: The Bottom Line
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
  • Chapter 17. Payout Policy
    • 17.1 Distributions to Shareholders
      • Dividends
      • Share Repurchases
    • 17.2 Comparison of Dividends and Share Repurchases
      • Alternative Policy 1: Pay Dividend with Excess Cash
      • Alternative Policy 2: Share Repurchase (No Dividend)
      • Common Mistake: Repurchases and the Supply of Shares
      • Alternative Policy 3: High Dividend (Equity Issue)
      • Modigliani-Miller and Dividend Policy Irrelevance
      • Common Mistake: The Bird in the Hand Fallacy
      • Dividend Policy with Perfect Capital Markets
    • 17.3 The Tax Disadvantage of Dividends
      • Taxes on Dividends and Capital Gains
      • Optimal Dividend Policy with Taxes
    • 17.4 Dividend Capture and Tax Clienteles
      • The Effective Dividend Tax Rate
      • Tax Differences Across Investors
      • Clientele Effects
      • Interview with John Connors
    • 17.5 Payout Versus Retention of Cash
      • Retaining Cash with Perfect Capital Markets
      • Taxes and Cash Retention
      • Adjusting for Investor Taxes
      • Issuance and Distress Costs
      • Agency Costs of Retaining Cash
      • Common Mistake: Mischaracterizing Buybacks
    • 17.6 Signaling with Payout Policy
      • Dividend Smoothing
      • Dividend Signaling
      • Can a Dividend Cut be Good News?
      • Signaling and Share Repurchases
    • 17.7 Stock Dividends, Splits, and Spin-Offs
      • Stock Dividends and Splits
      • Spin-Offs
      • Berkshire Hathaway’s A & B Shares
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
    • Data Case
• Part 6: Advanced Valuation
  • Chapter 18. Capital Budgeting and Valuation with Leverage
    • 18.1 Overview of Key Concepts
    • 18.2 The Weighted Average Cost of Capital Method
      • Interview with Zane Rowe
      • Using the WACC to Value a Project
      • Summary of the WACC Method
      • Implementing a Constant Debt-Equity Ratio
    • 18.3 The Adjusted Present Value Method
      • The Unlevered Value of the Project
      • Valuing the Interest Tax Shield
      • Summary of the APV Method
    • 18.4 The Flow-to-Equity Method
      • Calculating the Free Cash Flow to Equity
      • Valuing Equity Cash Flows
      • What Counts as “Debt”?
      • Summary of the Flow-to-Equity Method
    • 18.5 Project-Based Costs of Capital
      • Estimating the Unlevered Cost of Capital
      • Project Leverage and the Equity Cost of Capital
      • Determining the Incremental Leverage of a Project
      • Common Mistake: Re-Levering the WACC
    • 18.6 APV with Other Leverage Policies
      • Constant Interest Coverage Ratio
      • Predetermined Debt Levels
      • A Comparison of Methods
    • 18.7 Other Effects of Financing
      • Issuance and Other Financing Costs
      • Security Mispricing
      • Financial Distress and Agency Costs
      • Finance In Times Of Disruption: Government Loan Guarantees
    • 18.8 Advanced Topics in Capital Budgeting
      • Periodically Adjusted Debt
      • Leverage and the Cost of Capital
      • The WACC or FTE Method with Changing Leverage
      • Personal Taxes
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
    • Data Case
    • Appendix: Foundations and Further Details
      • Deriving the WACC Method
      • The Levered and Unlevered Cost of Capital
      • Solving for Leverage and Value Simultaneously
      • The Residual Income and Economic Value Added Valuation Methods
  • Chapter 19. Valuation and Financial Modeling: A Case Study
    • 19.1 Valuation Using Comparables
    • 19.2 The Business Plan
      • Operational Improvements
      • Capital Expenditures: A Needed Expansion
      • Working Capital Management
      • Capital Structure Changes: Levering Up
    • 19.3 Building the Financial Model
      • Forecasting Earnings
      • Interview with Joseph L. Rice, III
      • Working Capital Requirements
      • Forecasting Free Cash Flow
      • Using Excel: Summarizing Model Outputs
      • The Balance Sheet and Statement of Cash Flows (Optional)
      • Using Excel: Auditing Your Financial Model
    • 19.4 Estimating the Cost of Capital
      • CAPM-Based Estimation
      • Unlevering Beta
      • Ideko’s Unlevered Cost of Capital
    • 19.5 Valuing the Investment
      • The Multiples Approach to Continuation Value
      • The Discounted Cash Flow Approach to Continuation Value
      • Common Mistake: Continuation Values and Long-Run Growth
      • APV Valuation of Ideko’s Equity
      • A Reality Check
      • Common Mistake: Missing Assets or Liabilities
      • IRR and Cash Multiples
    • 19.6 Sensitivity Analysis
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
    • Appendix: Compensating Management
• Part 7: Options
  • Chapter 20. Financial Options
    • 20.1 Option Basics
      • Understanding Option Contracts
      • Interpreting Stock Option Quotations
      • Options on Other Financial Securities
    • 20.2 Option Payoffs at Expiration
      • Long Position in an Option Contract
      • Short Position in an Option Contract
      • Profits for Holding an Option to Expiration
      • Returns for Holding an Option to Expiration
      • Combinations of Options
    • 20.3 Put-Call Parity
    • 20.4 Factors Affecting Option Prices
      • Strike Price and Stock Price
      • Arbitrage Bounds on Option Prices
      • Option Prices and the Exercise Date
      • Option Prices and Volatility
    • 20.5 Exercising Options Early
      • Non-Dividend-Paying Stocks
      • Dividend-Paying Stocks
    • 20.6 Options and Corporate Finance
      • Equity as a Call Option
      • Debt as an Option Portfolio
      • Credit Default Swaps
      • Finance In Times Of Disruption: Credit Default Swaps
      • Pricing Risky Debt
      • Agency Conflicts
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
    • Data Case
  • Chapter 21. Option Valuation
    • 21.1 The Binomial Option Pricing Model
      • A Two-State Single-Period Model
      • The Binomial Pricing Formula
      • A Multiperiod Model
      • Making the Model Realistic
    • 21.2 The Black-Scholes Option Pricing Model
      • The Black-Scholes Formula
      • Interview with Myron S. Scholes
      • Implied Volatility
      • Finance In Times Of Disruption: The VIX Index
      • The Replicating Portfolio
    • 21.3 Risk-Neutral Probabilities
      • A Risk-Neutral Two-State Model
      • Implications of the Risk-Neutral World
      • Risk-Neutral Probabilities and Option Pricing
    • 21.4 Risk and Return of an Option
    • 21.5 Corporate Applications of Option Pricing
      • Beta of Risky Debt
      • Common Mistake: Valuing Employee Stock Options
      • Nobel Prize: Pricing Financial Options
      • Agency Costs of Debt
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
  • Chapter 22. Real Options
    • 22.1 Real Versus Financial Options
    • 22.2 Decision Tree Analysis
      • Representing Uncertainty
      • Real Options
      • Solving Decision Trees
    • 22.3 The Option to Delay: Investment as a Call Option
      • An Investment Option
      • Factors Affecting the Timing of Investment
      • Why Are There Empty Lots in Built-Up Areas of Big Cities?
      • Investment Options and Firm Risk
      • Finance In Times Of Disruption: Uncertainty, Investment, and the Option to Delay
    • 22.4 Growth and Abandonment Options
      • Valuing Growth Potential
      • Growth Options and COVID
      • The Option to Expand
      • The Option to Abandon
      • Interview with Kenneth C. Frazier
    • 22.5 Investments with Different Lives
      • Equivalent Annual Benefit Method
    • 22.6 Optimally Staging Investments
    • 22.7 Rules of Thumb
      • The Profitability Index Rule
      • The Hurdle Rate Rule
      • The Option to Repay a Mortgage
    • 22.8 Key Insights from Real Options
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
• Part 8: Long-Term Financing
  • Chapter 23. Raising Equity Capital
    • 23.1 Equity Financing for Private Companies
      • Sources of Funding
      • Crowdfunding: The Wave of the Future?
      • Interview with Kevin Laws
      • Venture Capital Investing
      • Venture Capital Financing Terms
      • Common Mistake: Misinterpreting Start-Up Valuations
      • From Launch to Liquidity
      • Exiting an Investment in a Private Company
    • 23.2 The Initial Public Offering
      • Advantages and Disadvantages of Going Public
      • Types of Offerings
      • The Mechanics of an IPO
      • Google’s IPO
      • An Alternative to the Traditional IPO: Spotify’s Direct Listing
    • 23.3 IPO Puzzles
      • Underpricing
      • Cyclicality and Recent Trends
      • Finance In Times Of Disruption: Worldwide IPO Deals in 2008–2009
      • Cost of an IPO
      • Long-Run Underperformance
    • 23.4 SPACs: A New Way to Go Public
      • The SPAC Process
      • Analyzing a Deal
      • SPAC Performance
    • 23.5 The Seasoned Equity Offering
      • The Mechanics of an SEO
      • Price Reaction
      • Issuance Costs
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
    • Data Case
  • Chapter 24. Debt Financing
    • 24.1 Corporate Debt
      • Public Debt
      • Private Debt
    • 24.2 Other Types of Debt
      • Sovereign Debt
      • Green Bonds
      • Municipal Bonds
      • Detroit’s Art Museum at Risk
      • Asset-Backed Securities
      • Finance In Times Of Disruption: CDOs, Subprime Mortgages, and the Financial Crisis
    • 24.3 Bond Covenants
    • 24.4 Repayment Provisions
      • Call Provisions
      • New York City Calls Its Municipal Bonds
      • Sinking Funds
      • Convertible Provisions
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
  • Chapter 25. Leasing
    • 25.1 The Basics of Leasing
      • Examples of Lease Transactions
      • Lease Payments and Residual Values
      • Leases Versus Loans
      • Calculating Auto Lease Payments
      • End-of-Term Lease Options
      • Other Lease Provisions
    • 25.2 Accounting, Tax, and Legal Consequences of Leasing
      • Lease Accounting
      • Operating Leases at Alaska Air Group
      • The Tax Treatment of Leases
      • Leases and Bankruptcy
      • Synthetic Leases
    • 25.3 The Leasing Decision
      • Cash Flows for a True Tax Lease
      • Lease Versus Buy (An Unfair Comparison)
      • Lease Versus Borrow (The Right Comparison)
      • Evaluating a True Tax Lease
      • Evaluating a Non-Tax Lease
    • 25.4 Reasons for Leasing
      • Valid Arguments for Leasing
      • Interview with Mark Long
      • Suspect Arguments for Leasing
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
• Part 9: Short-Term Financing
  • Chapter 26. Working Capital Management
    • 26.1 Overview of Working Capital
      • The Cash Cycle
      • Firm Value and Working Capital
    • 26.2 Trade Credit
      • Trade Credit Terms
      • Trade Credit and Market Frictions
      • Managing Float
    • 26.3 Receivables Management
      • Determining the Credit Policy
      • Monitoring Accounts Receivable
    • 26.4 Payables Management
      • Determining Accounts Payable Days Outstanding
      • Stretching Accounts Payable
    • 26.5 Inventory Management
      • Benefits of Holding Inventory
      • Costs of Holding Inventory
      • Finance In Times Of Disruption: Supply Chains during COVID-19
    • 26.6 Cash Management
      • Motivation for Holding Cash
      • Alternative Investments
      • Finance In Times Of Disruption: Hoarding Cash
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
    • Data Case
  • Chapter 27. Short-Term Financial Planning
    • 27.1 Forecasting Short-Term Financing Needs
      • Seasonalities
      • Negative Cash Flow Shocks
      • Positive Cash Flow Shocks
    • 27.2 The Matching Principle
      • Permanent Working Capital
      • Temporary Working Capital
      • Financing Policy Choices
    • 27.3 Short-Term Financing with Bank Loans
      • Single, End-of-Period Payment Loan
      • Line of Credit
      • Bridge Loan
      • Common Loan Stipulations and Fees
    • 27.4 Short-Term Financing with Commercial Paper
      • Finance In Times Of Disruption: Short-Term Financing Costs during Crises
    • 27.5 Short-Term Financing with Secured Financing
      • Accounts Receivable as Collateral
      • Inventory as Collateral
      • A Seventeenth-Century Financing Solution
      • Loan Guarantees: The Ex-Im Bank Controversy
      • Sales as Collateral
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
• Part 10: Special Topics
  • Chapter 28. Mergers and Acquisitions
    • 28.1 Background and Historical Trends
      • Merger Waves
      • Types of Mergers
    • 28.2 Market Reaction to a Takeover
    • 28.3 Reasons to Acquire
      • Economies of Scale and Scope
      • Vertical Integration
      • Expertise
      • Monopoly Gains
      • Efficiency Gains
      • Tax Savings from Operating Losses
      • Diversification
      • Earnings Growth
      • Managerial Motives to Merge
    • 28.4 Valuation and the Takeover Process
      • Valuation
      • The Offer
      • Merger “Arbitrage”
      • Tax and Accounting Issues
      • Board and Shareholder Approval
    • 28.5 Takeover Defenses
      • Poison Pills
      • Staggered Boards
      • White Knights
      • Golden Parachutes
      • Recapitalization
      • Other Defensive Strategies
      • Regulatory Approval
      • Weyerhaeuser’s Hostile Bid for Willamette Industries
    • 28.6 Who Gets the Value Added from a Takeover?
      • The Free Rider Problem
      • Toeholds
      • The Leveraged Buyout
      • The Leveraged Buyout of RJR-Nabisco by KKR
      • The Freezeout Merger
      • Competition
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
  • Chapter 29. Corporate Governance
    • 29.1 Corporate Governance and Agency Costs
    • 29.2 Monitoring by the Board of Directors and Others
      • Types of Directors
      • Board Independence
      • Common Mistake: “Celebrity” Boards
      • Board Size and Performance
      • Other Monitors
    • 29.3 Compensation Policies
      • Stock and Options
      • Pay and Performance Sensitivity
    • 29.4 Managing Agency Conflict
      • Direct Action by Shareholders
      • Shareholder Activism at The New York Times
      • Management Entrenchment
      • The Threat of Takeover
    • 29.5 Regulation
      • The Sarbanes-Oxley Act
      • Interview with Lawrence E. Harris
      • The Cadbury Commission
      • Dodd-Frank Act
      • Insider Trading
      • Martha Stewart and ImClone
    • 29.6 Corporate Governance Around the World
      • Protection of Shareholder Rights
      • Controlling Owners and Pyramids
      • The Stakeholder Model
      • Cross-Holdings
    • 29.7 The Tradeoff of Corporate Governance
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
  • Chapter 30. Risk Management
    • 30.1 Insurance
      • The Role of Insurance: An Example
      • Insurance Pricing in a Perfect Market
      • The Value of Insurance
      • The Costs of Insurance
      • The Insurance Decision
    • 30.2 Commodity Price Risk
      • Hedging with Vertical Integration and Storage
      • Hedging with Long-Term Contracts
      • Hedging with Futures Contracts
      • Common Mistake: Hedging Risk
      • Differing Hedging Strategies
      • Deciding to Hedge Commodity Price Risk
      • Finance In Times Of Disruption: Negative Oil Prices
    • 30.3 Exchange Rate Risk
      • Exchange Rate Fluctuations
      • Hedging with Forward Contracts
      • Cash-and-Carry and the Pricing of Currency Forwards
      • Finance In Times Of Disruption: Arbitrage in Currency Markets?
      • Hedging with Options
    • 30.4 Interest Rate Risk
      • Interest Rate Risk Measurement: Duration
      • Duration-Based Hedging
      • The Savings and Loan Crisis
      • Swap-Based Hedging
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
  • Chapter 31. International Corporate Finance
    • 31.1 Internationally Integrated Capital Markets
    • 31.2 Valuation of Foreign Currency Cash Flows
      • WACC Valuation Method in Domestic Currency
      • Using the Law of One Price as a Robustness Check
    • 31.3 Valuation and International Taxation
      • The TCJA: A New Approach to International Taxation
      • Harmonizing the Tax Treatment of Exports: GILTI and FDII
      • Avoiding Base Erosion: BEAT
    • 31.4 Internationally Segmented Capital Markets
      • Differential Access to Markets
      • Macro-Level Distortions
      • Implications
    • 31.5 Capital Budgeting with Exchange Risk
      • Interview with Sally Johnson
    • Key Points and Equations
    • Key Terms
    • Further Reading
    • Problems
    • Data Case
• Glossary
• Index
  • Numbers
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