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For two-semester principles of economics courses. An intuitive and grounded approach to economics Get students to think like economists using the latest policy anddata while incorporating global issues. Economics, 13th Edition builds on thefoundation of the previous edition and retains a thorough and carefulpresentation of the principles of economics. The text emphasizes real-worldapplications, the development of critical-thinking skills, diagrams renownedfor their pedagogy and clarity, and path-breaking technology.
As a hallmarkfeatures in the chapter openings and endings encourage students to thinkcritically about a news article relating to the issue, demonstrating howthinking like an economist can bring a clearer perspective to and deeperunderstanding of today’s events. Pearson MyLab Economics not included. Students, if MyLab is a recommended/mandatorycomponent of the course, please ask your instructor for the correct ISBN andcourse ID.
MyLab should only be purchased when required by an instructor. Instructors, contact your Pearson rep for more information. Pearson MyLab is the teaching and learning platform that empowers you to reachevery student. It is an online homework, tutorial, and assessment productdesigned to personalize learning and improve results. With a wide range ofinteractive, engaging, and assignable activities, students are encouraged toactively learn and retain tough course concepts.
Annað
- Höfundar: Jonathan Berk, Peter DeMarzo
- Útgáfa:5
- Útgáfudagur: 2021-03-18
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- Hægt að afrita 2 bls.
- Format:ePub
- ISBN 13: 9781292366562
- Print ISBN: 9781292304151
- ISBN 10: 1292366567
Efnisyfirlit
- Cover Page
- Title Page
- Copyright Page
- Detailed Contents
- Videos in this Enhanced eBook
- Welcome to Your Enhanced eBook
- Bridging Theory and Practice
- Teaching Students to Think Finance
- MyLab Finance
- Improving Results
- About the Authors
- Preface
- Enhanced eBook Acknowledgments
- 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
- ▪ Global Financial Crisis The Dodd-Frank Act
- The Goal of the Firm
- The Firm and Society
- Ethics and Incentives within Corporations
- ▪ Global Financial Crisis The Dodd-Frank Act on Corporate Compensation and Governance
- ▪ Citizens United v. Federal Election Commission
- ▪ Airlines in Bankruptcy
- 1.3 The Stock Market
- Primary and Secondary Stock Markets
- Traditional Trading Venues
- ▪ Interview with Frank Hatheway
- 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
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- 1.1 The Four Types of Firms
- Chapter 1 The Corporation and Financial Markets
- 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
- ▪ Global Financial Crisis Bernard Madoff’s Ponzi Scheme
- Dodd-Frank Act
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- Data Case
- 2.1 Firms’ Disclosure of Financial Information
- 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
- ▪ Global Financial Crisis Liquidity and the Informational Role of Prices
- ▪ Arbitrage in Markets
- Where Do We Go from Here?
- Appendix The Price of Risk
- Risky Versus Risk-Free Cash Flows
- Arbitrage with Transactions Costs
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- Data Case
- 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
- ▪ Common Mistake Discounting One Too Many Times
- Annuities
- ▪ Formula for an Annuity Due
- Growing Cash Flows
- 4.6 Using an Annuity Spreadsheet or 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
- Appendix Solving for the Number of Periods
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- Data Case
- 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
- ▪ Global Financial Crisis 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
- Appendix Continuous Rates and Cash Flows
- Discount Rates for a Continuously Compounded APR
- Continuously Arriving Cash Flows
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- Data Case
- 6.1 Bond Cash Flows, Prices, and Yields
- Bond Terminology
- Zero-Coupon Bonds
- ▪ Global Financial Crisis 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
- ▪ Global Financial Crisis The Credit Crisis and Bond Yields
- ▪ Global Financial Crisis European Sovereign Debt Yields: A Puzzle
- ▪ Interview with Carmen M. Reinhart
- Appendix Forward Interest Rates
- Computing Forward Rates
- Computing Bond Yields from Forward Rates
- Forward Rates and Future Interest Rates
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- Data Case
- Case Study
- 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
- ▪ When Can Returns Be Compared?
- ▪ Common Mistake IRR and Project Financing
- 7.5 Project Selection with Resource Constraints
- Evaluating Projects with Different Resource Requirements
- Profitability Index
- Shortcomings of the Profitability Index
- Appendix Computing the NPV Profile Using Excel’s Data Table Function
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- Data Case
- 7.1 NPV and Stand-Alone Projects
- 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
- Scenario Analysis
- ▪ Using Excel Project Analysis Using Excel
- Appendix MACRS Depreciation
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- Data Case
- 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
- The Efficient Markets Hypothesis Versus No Arbitrage
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- Data Case
- Chapter 10 Capital Markets and the Pricing of Risk
- 10.1 Risk and Return: Insights from 92 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
- ▪ Global Financial Crisis 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
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- Data Case
- 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
- Appendix The CAPM with Differing Interest Rates
- The Efficient Frontier with Differing Saving and Borrowing Rates
- The Security Market Line with Differing Interest Rates
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- Data Case
- 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
- 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
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- Data Case
- 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
- Appendix Building a Multifactor Model
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- 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
- ▪ Global Financial Crisis Bank Capital Regulation and the ROE Fallacy
- Equity Issuances and Dilution
- 14.5 MM: Beyond the Propositions
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- Data Case
- 14.1 Equity Versus Debt Financing
- 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
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- Data Case
- 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
- ▪ Global Financial CRISIS 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
- ▪ Global Financial Crisis 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
- ▪ Global Financial Crisis Moral Hazard, Government 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
- 16.9 Capital Structure: The Bottom Line
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- 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
- 17.6 Signaling with Payout Policy
- Dividend Smoothing
- Dividend Signaling
- ▪ Royal & SunAlliance’s Dividend Cut
- Signaling and Share Repurchases
- 17.7 Stock Dividends, Splits, and Spin-Offs
- Stock Dividends and Splits
- Spin-Offs
- ▪ Berkshire Hathaway’s A & B Shares
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- Data Case
- 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
- ▪ Global Financial Crisis 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
- MyLab Finance
- 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
- 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
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- Appendix Compensating Management
- 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
- ▪ Global Financial Crisis Credit Default Swaps
- Pricing Risky Debt
- Agency Conflicts
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- Data Case
- 20.1 Option Basics
- 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
- ▪ Global Financial Crisis 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
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- 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
- ▪ Why Are There Empty Lots in Built-Up Areas of Big Cities?
- Factors Affecting the Timing of Investment
- Investment Options and Firm Risk
- ▪ Global Financial Crisis Uncertainty, Investment, and the Option to Delay
- 22.4 Growth and Abandonment Options
- Valuing Growth Potential
- The Option to Expand
- ▪ Interview with Scott Mathews
- The Option to Abandon
- 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
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- 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
- ▪ Global Financial Crisis Worldwide IPO Deals in 2008–2009
- Cost of an IPO
- Long-Run Underperformance
- 23.4 The Seasoned Equity Offering
- The Mechanics of an SEO
- Price Reaction
- Issuance Costs
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- Data Case
- 23.1 Equity Financing for Private Companies
- 24.1 Corporate Debt
- Public Debt
- Private Debt
- 24.2 Other Types of Debt
- Sovereign Debt
- Municipal Bonds
- ▪ Detroit’s Art Museum at Risk
- Asset-Backed Securities
- ▪ Global Financial Crisis 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
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- Data Case
- 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
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- 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
- 26.6 Cash Management
- Motivation for Holding Cash
- Alternative Investments
- ▪ Hoarding Cash
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- Data Case
- 26.1 Overview of Working Capital
- 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
- ▪ Global Financial Crisis Short-Term Financing in Fall 2008
- 27.5 Short-Term Financing with Secured Financing
- Accounts Receivable as Collateral
- ▪ A Seventeenth-Century Financing Solution
- Inventory as Collateral
- ▪ Loan Guarantees: The Ex-Im Bank Controversy
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- 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
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- 28.1 Background and Historical Trends
- 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
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- 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
- 30.3 Exchange Rate Risk
- Exchange Rate Fluctuations
- Hedging with Forward Contracts
- Cash-and-Carry and the Pricing of Currency Forwards
- ▪ Global Financial Crisis 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
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- 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 Bill Barrett
- MyLab Finance
- Key Terms
- Further Reading
- Problems
- Data Case
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