| Part 1 Introduction |
|
|
Chapter 1 The Corporation |
|
|
2 | (21) |
|
1.1 The Four Types of Firms |
|
|
3 | (4) |
|
|
|
3 | (1) |
|
|
|
4 | (1) |
|
Limited Liability Companies |
|
|
5 | (1) |
|
|
|
5 | (1) |
|
Tax Implications for Corporate Entities |
|
|
6 | (1) |
|
Corporate Taxation Around the World |
|
|
7 | (1) |
|
1.2 Ownership Versus Control of Corporations |
|
|
7 | (7) |
|
The Corporate Management Team |
|
|
7 | (2) |
|
Interview with David Viniar |
|
|
8 | (1) |
|
|
|
9 | (1) |
|
Global Financial Crisis: The Dodd-Frank Act |
|
|
10 | (1) |
|
|
|
10 | (1) |
|
|
|
11 | (1) |
|
Ethics and Incentives within Corporations |
|
|
11 | (3) |
|
Global Financial Crisis: The Dodd-Frank Act on Corporate Compensation and Governance |
|
|
12 | (1) |
|
Citizens United v. Federal Election Commission |
|
|
12 | (2) |
|
|
|
14 | (1) |
|
|
|
14 | (5) |
|
Primary and Secondary Stock Markets |
|
|
15 | (1) |
|
Traditional Trading Venues |
|
|
15 | (2) |
|
Interview With Frank Hatheway |
|
|
16 | (1) |
|
New Competition and Market Changes |
|
|
17 | (1) |
|
|
|
18 | (1) |
|
|
|
19 | (1) |
|
|
|
19 | (1) |
|
|
|
20 | (1) |
|
|
|
20 | (3) |
|
Chapter 2 Introduction to Financial Statement Analysis |
|
|
23 | (38) |
|
2.1 Firms' Disclosure of Financial Information |
|
|
24 | (2) |
|
Preparation of Financial Statements |
|
|
24 | (2) |
|
International Financial Reporting Standards |
|
|
24 | (1) |
|
Interview with Ruth Porat |
|
|
25 | (1) |
|
Types of Financial Statements |
|
|
26 | (1) |
|
|
|
26 | (4) |
|
|
|
27 | (1) |
|
|
|
28 | (1) |
|
|
|
29 | (1) |
|
Market Value Versus Book Value |
|
|
29 | (1) |
|
|
|
30 | (1) |
|
|
|
30 | (2) |
|
|
|
31 | (1) |
|
2.4 The Statement of Cash Flows |
|
|
32 | (3) |
|
|
|
33 | (1) |
|
|
|
34 | (1) |
|
|
|
34 | (1) |
|
2.5 Other Financial Statement Information |
|
|
35 | (2) |
|
Statement of Stockholders' Equity |
|
|
35 | (1) |
|
Management Discussion and Analysis |
|
|
36 | (1) |
|
Notes to the Financial Statements |
|
|
36 | (1) |
|
2.6 Financial Statement Analysis |
|
|
37 | (11) |
|
|
|
37 | (1) |
|
|
|
38 | (1) |
|
|
|
39 | (1) |
|
|
|
40 | (1) |
|
|
|
41 | (2) |
|
|
|
43 | (1) |
|
Common Mistake: Mismatched Ratios |
|
|
43 | (1) |
|
|
|
44 | (2) |
|
|
|
46 | (2) |
|
2.7 Financial Reporting in Practice |
|
|
48 | (3) |
|
|
|
48 | (1) |
|
|
|
48 | (1) |
|
|
|
49 | (1) |
|
Global Financial Crisis Bernard Madoff's Ponzi Scheme |
|
|
50 | (1) |
|
|
|
50 | (1) |
|
|
|
51 | (1) |
|
|
|
52 | (1) |
|
|
|
53 | (1) |
|
|
|
53 | (7) |
|
|
|
60 | (1) |
|
Chapter 3 Financial Decision Making and the Law of One Price |
|
|
61 | (37) |
|
|
|
62 | (3) |
|
Analyzing Costs and Benefits |
|
|
62 | (1) |
|
Using Market Prices to Determine Cash Values |
|
|
63 | (2) |
|
When Competitive Market Prices Are Not Available |
|
|
65 | (1) |
|
3.2 Interest Rates and the Time Value of Money |
|
|
65 | (3) |
|
|
|
65 | (1) |
|
The Interest Rate: An Exchange Rate Across Time |
|
|
65 | (3) |
|
3.3 Present Value and the NPV Decision Rule |
|
|
68 | (4) |
|
|
|
68 | (1) |
|
|
|
69 | (2) |
|
|
|
71 | (1) |
|
3.4 Arbitrage and the Law of One Price |
|
|
72 | (1) |
|
|
|
72 | (1) |
|
|
|
73 | (1) |
|
3.5 No-Arbitrage and Security Prices |
|
|
73 | (9) |
|
Valuing a Security with the Law of One Price |
|
|
73 | (4) |
|
|
|
77 | (1) |
|
The NPV of Trading Securities and Firm Decision Making |
|
|
77 | (1) |
|
|
|
78 | (9) |
|
Global Financial Crisis Liquidity and the Informational Role of Prices |
|
|
79 | (1) |
|
|
|
80 | (1) |
|
Where Do We Go from Here? |
|
|
81 | (1) |
|
|
|
82 | (1) |
|
|
|
83 | (1) |
|
|
|
83 | (1) |
|
|
|
83 | (4) |
|
Appendix The Price of Risk |
|
|
87 | (11) |
|
Risky Versus Risk-Free Cash Flows |
|
|
87 | (5) |
|
Arbitrage with Transactions Costs |
|
|
92 | (6) |
| Part 2 Time, Money, And Interest Rates |
|
|
Chapter 4 The Time Value of Money |
|
|
98 | (45) |
|
|
|
99 | (1) |
|
4.2 The Three Rules of Time Travel |
|
|
100 | (6) |
|
Rule 1: Comparing and Combining Values |
|
|
100 | (1) |
|
Rule 2: Moving Cash Flows Forward in Time |
|
|
101 | (1) |
|
Rule 3: Moving Cash Flows Back in Time |
|
|
102 | (2) |
|
|
|
103 | (1) |
|
Applying the Rules of Time Travel |
|
|
104 | (2) |
|
4.3 Valuing a Stream of Cash Flows |
|
|
106 | (3) |
|
4.4 Calculating the Net Present Value |
|
|
109 | (2) |
|
Using Excel Calculating Present Values in Excel |
|
|
110 | (1) |
|
4.5 Perpetuities and Annuities |
|
|
111 | (11) |
|
|
|
111 | (3) |
|
Historical Examples of Perpetuities |
|
|
112 | (2) |
|
Common Mistake Discounting One Too Many Times |
|
|
114 | (1) |
|
|
|
114 | (3) |
|
Formula for an Annuity Due |
|
|
117 | (1) |
|
|
|
117 | (5) |
|
4.6 Using an Annuity Spreadsheet or Calculator |
|
|
122 | (2) |
|
4.7 Non-Annual Cash Flows |
|
|
124 | (1) |
|
4.8 Solving for the Cash Payments |
|
|
125 | (3) |
|
4.9 The Internal Rate of Return |
|
|
128 | (4) |
|
Using Excel: Excel's IRR Function |
|
|
131 | (1) |
|
|
|
132 | (1) |
|
|
|
133 | (1) |
|
|
|
134 | (1) |
|
|
|
134 | (6) |
|
|
|
140 | (1) |
|
Appendix Solving for the Number of Periods |
|
|
141 | (2) |
|
|
|
143 | (30) |
|
5.1 Interest Rate Quotes and Adjustments |
|
|
144 | (4) |
|
The Effective Annual Rate |
|
|
144 | (2) |
|
Common Mistake Using the Wrong Discount Rate in the Annuity Formula |
|
|
145 | (1) |
|
|
|
146 | (2) |
|
5.2 Application: Discount Rates and Loans |
|
|
148 | (1) |
|
5.3 The Determinants of Interest Rates |
|
|
149 | (8) |
|
Global Financial Crisis Teaser Rates and Subprime Loans |
|
|
150 | (1) |
|
Inflation and Real Versus Nominal Rates |
|
|
150 | (1) |
|
Investment and Interest Rate Policy |
|
|
151 | (1) |
|
The Yield Curve and Discount Rates |
|
|
152 | (2) |
|
The Yield Curve and the Economy |
|
|
154 | (3) |
|
Common Mistake Using the Annuity Formula When Discount Rates Vary by Maturity |
|
|
154 | (2) |
|
Interview With Kevin M. Warsh |
|
|
156 | (1) |
|
|
|
157 | (3) |
|
|
|
158 | (1) |
|
|
|
159 | (1) |
|
5.5 The Opportunity Cost of Capital |
|
|
160 | (2) |
|
Common Mistake States Dig a $3 Trillion Hole by Discounting at the Wrong Rate |
|
|
161 | (1) |
|
|
|
162 | (1) |
|
|
|
163 | (1) |
|
|
|
163 | (1) |
|
|
|
163 | (5) |
|
|
|
168 | (2) |
|
Appendix Continuous Rates and Cash Flows |
|
|
170 | (3) |
|
Discount Rates for a Continuously Compounded APR |
|
|
170 | (1) |
|
Continuously Arriving Cash Flows |
|
|
170 | (3) |
|
|
|
173 | (39) |
|
6.1 Bond Cash Flows, Prices, and Yields |
|
|
174 | (5) |
|
|
|
174 | (1) |
|
|
|
174 | (3) |
|
Global Financial Crisis Negative Bond Yields |
|
|
176 | (1) |
|
|
|
177 | (2) |
|
6.2 Dynamic Behavior of Bond Prices |
|
|
179 | (6) |
|
|
|
179 | (1) |
|
|
|
180 | (2) |
|
Interest Rate Changes and Bond Prices |
|
|
182 | (3) |
|
Clean and Dirty Prices for Coupon Bonds |
|
|
183 | (2) |
|
6.3 The Yield Curve and Bond Arbitrage |
|
|
185 | (3) |
|
Replicating a Coupon Bond |
|
|
185 | (1) |
|
Valuing a Coupon Bond Using Zero-Coupon Yields |
|
|
186 | (1) |
|
|
|
187 | (1) |
|
|
|
188 | (1) |
|
|
|
188 | (4) |
|
|
|
189 | (2) |
|
Are Treasuries Really Default-Free Securities? |
|
|
189 | (2) |
|
|
|
191 | (1) |
|
|
|
192 | (1) |
|
|
|
192 | (5) |
|
Global Financial Crisis The Credit Crisis and Bond Yields |
|
|
193 | (2) |
|
Global Financial Crisis European Sovereign Debt Yields: A Puzzle |
|
|
195 | (1) |
|
Interview With Carmen M. Reinhart |
|
|
196 | (1) |
|
|
|
197 | (1) |
|
|
|
198 | (1) |
|
|
|
199 | (1) |
|
|
|
199 | (4) |
|
|
|
203 | (1) |
|
|
|
204 | (2) |
|
Appendix Forward Interest Rates |
|
|
206 | (6) |
|
|
|
206 | (1) |
|
Computing Bond Yields from Forward Rates |
|
|
207 | (5) |
| Part 3 Valuing Projects And Firms |
|
|
Chapter 7 Investment Decision Rules |
|
|
212 | (27) |
|
7.1 NPV and Stand-Alone Projects |
|
|
213 | (3) |
|
|
|
213 | (1) |
|
|
|
213 | (1) |
|
Alternative Rules Versus the NPV Rule |
|
|
214 | (2) |
|
Interview with Dick Grannis |
|
|
215 | (1) |
|
7.2 The Internal Rate of Return Rule |
|
|
216 | (4) |
|
|
|
216 | (1) |
|
Pitfall #1: Delayed Investments |
|
|
216 | (1) |
|
Pitfall #2: Multiple IRRs |
|
|
217 | (2) |
|
Common Mistake: IRR Versus the IRR Rule |
|
|
219 | (1) |
|
Pitfall #3: Nonexistent IRR |
|
|
219 | (1) |
|
|
|
220 | (2) |
|
Applying the Payback Rule |
|
|
220 | (1) |
|
Payback Rule Pitfalls in Practice |
|
|
221 | (1) |
|
Why Do Rules Other Than the NPV Rule Persist? |
|
|
222 | (1) |
|
7.4 Choosing Between Projects |
|
|
222 | (5) |
|
NPV Rule and Mutually Exclusive Investments |
|
|
222 | (1) |
|
IRR Rule and Mutually Exclusive Investments |
|
|
223 | (1) |
|
|
|
224 | (3) |
|
When Can Returns Be Compared? |
|
|
225 | (2) |
|
Common Mistake: IRR and Project Financing |
|
|
227 | (1) |
|
7.5 Project Selection with Resource Constraints |
|
|
227 | (3) |
|
Evaluating Projects with Different Resource Requirements |
|
|
227 | (1) |
|
|
|
228 | (2) |
|
Shortcomings of the Profitability Index |
|
|
230 | (1) |
|
|
|
230 | (1) |
|
|
|
231 | (1) |
|
|
|
231 | (1) |
|
|
|
231 | (6) |
|
|
|
237 | (1) |
|
Appendix Computing the NPV Profile Using Excel's Data Table Function |
|
|
238 | (1) |
|
Chapter 8 Fundamentals of Capital Budgeting |
|
|
239 | (38) |
|
|
|
240 | (7) |
|
Revenue and Cost Estimates |
|
|
240 | (1) |
|
Incremental Earnings Forecast |
|
|
241 | (2) |
|
Indirect Effects on Incremental Earnings |
|
|
243 | (2) |
|
Common Mistake The Opportunity Cost of an Idle Asset |
|
|
244 | (1) |
|
Sunk Costs and Incremental Earnings |
|
|
245 | (1) |
|
Common Mistake The Sunk Cost Fallacy |
|
|
245 | (1) |
|
|
|
246 | (1) |
|
8.2 Determining Free Cash Flow and NPV |
|
|
247 | (5) |
|
Calculating Free Cash Flow from Earnings |
|
|
247 | (2) |
|
Calculating Free Cash Flow Directly |
|
|
249 | (1) |
|
|
|
250 | (2) |
|
Using Excel Capital Budgeting Using a Spreadsheet Program |
|
|
251 | (1) |
|
8.3 Choosing Among Alternatives |
|
|
252 | (2) |
|
Evaluating Manufacturing Alternatives |
|
|
252 | (1) |
|
Comparing Free Cash Flows for Cisco's Alternatives |
|
|
253 | (1) |
|
8.4 Further Adjustments to Free Cash Flow |
|
|
254 | (4) |
|
Global Financial Crisis The American Recovery and Reinvestment Act of 2009 |
|
|
258 | (1) |
|
8.5 Analyzing the Project |
|
|
258 | (6) |
|
|
|
258 | (1) |
|
|
|
259 | (3) |
|
Interview with David Holland |
|
|
261 | (1) |
|
|
|
262 | (16) |
|
Using Excel Project Analysis Using Excel |
|
|
263 | (1) |
|
|
|
264 | (2) |
|
|
|
266 | (1) |
|
|
|
266 | (1) |
|
|
|
266 | (7) |
|
|
|
273 | (2) |
|
Appendix MACRS Depreciation |
|
|
275 | (2) |
|
|
|
277 | (41) |
|
9.1 The Dividend-Discount Model |
|
|
278 | (4) |
|
|
|
278 | (1) |
|
Dividend Yields, Capital Gains, and Total Returns |
|
|
279 | (2) |
|
The Mechanics of a Short Sale |
|
|
280 | (1) |
|
|
|
281 | (1) |
|
The Dividend-Discount Model Equation |
|
|
282 | (1) |
|
9.2 Applying the Dividend-Discount Model |
|
|
282 | (6) |
|
|
|
282 | (1) |
|
Dividends Versus Investment and Growth |
|
|
283 | (3) |
|
John Burr Williams' Theory of Investment Value |
|
|
284 | (2) |
|
|
|
286 | (2) |
|
Limitations of the Dividend-Discount Model |
|
|
288 | (1) |
|
9.3 Total Payout and Free Cash Flow Valuation Models |
|
|
288 | (6) |
|
Share Repurchases and the Total Payout Model |
|
|
288 | (2) |
|
The Discounted Free Cash Flow Model |
|
|
290 | (4) |
|
9.4 Valuation Based on Comparable Firms |
|
|
294 | (6) |
|
|
|
294 | (2) |
|
|
|
296 | (1) |
|
Comparison with Discounted Cash Flow Methods |
|
|
297 | (1) |
|
Stock Valuation Techniques: The Final Word |
|
|
298 | (2) |
|
Interview with Douglas Kehring |
|
|
299 | (1) |
|
9.5 Information, Competition, and Stock Prices |
|
|
300 | (6) |
|
Information in Stock Prices |
|
|
300 | (1) |
|
Competition and Efficient Markets |
|
|
301 | (2) |
|
Lessons for Investors and Corporate Managers |
|
|
303 | (3) |
|
Kenneth Cole Productions—What Happened? |
|
|
305 | (1) |
|
The Efficient Markets Hypothesis Versus No Arbitrage |
|
|
306 | (1) |
|
|
|
306 | (2) |
|
|
|
308 | (1) |
|
|
|
308 | (1) |
|
|
|
309 | (5) |
|
|
|
314 | (4) |
| Part 4 Risk And Return |
|
|
Chapter 10 Capital Markets and the Pricing of Risk |
|
|
318 | (39) |
|
10.1 Risk and Return: Insights from 89 Years of Investor History |
|
|
319 | (3) |
|
10.2 Common Measures of Risk and Return |
|
|
322 | (3) |
|
Probability Distributions |
|
|
322 | (1) |
|
|
|
322 | (1) |
|
Variance and Standard Deviation |
|
|
323 | (2) |
|
10.3 Historical Returns of Stocks and Bonds |
|
|
325 | (7) |
|
Computing Historical Returns |
|
|
325 | (2) |
|
|
|
327 | (2) |
|
The Variance and Volatility of Returns |
|
|
329 | (1) |
|
Estimation Error: Using Past Returns to Predict the Future |
|
|
330 | (2) |
|
Arithmetic Average Returns Versus Compound Annual Returns |
|
|
332 | (1) |
|
10.4 The Historical Trade-Off Between Risk and Return |
|
|
332 | (3) |
|
The Returns of Large Portfolios |
|
|
333 | (1) |
|
The Returns of Individual Stocks |
|
|
334 | (1) |
|
10.5 Common Versus Independent Risk |
|
|
335 | (2) |
|
Theft Versus Earthquake Insurance: An Example |
|
|
335 | (1) |
|
The Role of Diversification |
|
|
336 | (1) |
|
10.6 Diversification in Stock Portfolios |
|
|
337 | (6) |
|
Firm-Specific Versus Systematic Risk |
|
|
338 | (1) |
|
No Arbitrage and the Risk Premium |
|
|
339 | (4) |
|
Global Financial Crisis Diversification Benefits During Market Crashes |
|
|
341 | (1) |
|
Common Mistake A Fallacy of Long-Run Diversification |
|
|
342 | (1) |
|
10.7 Measuring Systematic Risk |
|
|
343 | (3) |
|
Identifying Systematic Risk: The Market Portfolio |
|
|
343 | (1) |
|
Sensitivity to Systematic Risk: Beta |
|
|
343 | (3) |
|
10.8 Beta and the Cost of Capital |
|
|
346 | (2) |
|
Estimating the Risk Premium |
|
|
346 | (2) |
|
Common Mistake Beta Versus Volatility |
|
|
346 | (2) |
|
The Capital Asset Pricing Model |
|
|
348 | (1) |
|
|
|
348 | (2) |
|
|
|
350 | (1) |
|
|
|
350 | (1) |
|
|
|
350 | (5) |
|
|
|
355 | (2) |
|
Chapter 11 Optimal Portfolio Choice and the Capital Asset Pricing Model |
|
|
357 | (50) |
|
11.1 The Expected Return of a Portfolio |
|
|
358 | (1) |
|
11.2 The Volatility of a Two-Stock Portfolio |
|
|
359 | (6) |
|
|
|
359 | (1) |
|
Determining Covariance and Correlation |
|
|
360 | (3) |
|
Common Mistake Computing Variance, Covariance, and Correlation in Excel |
|
|
362 | (1) |
|
Computing a Portfolio's Variance and Volatility |
|
|
363 | (2) |
|
11.3 The Volatility of a Large Portfolio |
|
|
365 | (4) |
|
|
|
365 | (1) |
|
Diversification with an Equally Weighted Portfolio |
|
|
366 | (3) |
|
Interview with John Powers |
|
|
368 | (1) |
|
Diversification with General Portfolios |
|
|
369 | (1) |
|
11.4 Risk Versus Return: Choosing an Efficient Portfolio |
|
|
369 | (8) |
|
Efficient Portfolios with Two Stocks |
|
|
370 | (2) |
|
The Effect of Correlation |
|
|
372 | (1) |
|
|
|
373 | (1) |
|
Efficient Portfolios with Many Stocks |
|
|
374 | (3) |
|
Nobel Prizes Harry Markowitz and James Tobin |
|
|
375 | (2) |
|
11.5 Risk-Free Saving and Borrowing |
|
|
377 | (4) |
|
Investing in Risk-Free Securities |
|
|
377 | (1) |
|
Borrowing and Buying Stocks on Margin |
|
|
378 | (1) |
|
Identifying the Tangent Portfolio |
|
|
379 | (2) |
|
11.6 The Efficient Portfolio and Required Returns |
|
|
381 | (4) |
|
Portfolio Improvement: Beta and the Required Return |
|
|
381 | (2) |
|
Expected Returns and the Efficient Portfolio |
|
|
383 | (2) |
|
11.7 The Capital Asset Pricing Model |
|
|
385 | (2) |
|
|
|
385 | (1) |
|
Supply, Demand, and the Efficiency of the Market Portfolio |
|
|
386 | (1) |
|
Optimal Investing: The Capital Market Line |
|
|
386 | (1) |
|
11.8 Determining the Risk Premium |
|
|
387 | (5) |
|
|
|
387 | (3) |
|
Nobel Prize William Sharpe on the CAPM |
|
|
389 | (1) |
|
|
|
390 | (1) |
|
|
|
390 | (2) |
|
Summary of the Capital Asset Pricing Model |
|
|
392 | (1) |
|
|
|
392 | (3) |
|
|
|
395 | (1) |
|
|
|
395 | (1) |
|
|
|
396 | (6) |
|
|
|
402 | (2) |
|
Appendix The CAPM with Differing Interest Rates |
|
|
404 | (3) |
|
The Efficient Frontier with Differing Saving and Borrowing Rates |
|
|
404 | (1) |
|
The Security Market Line with Differing Interest Rates |
|
|
404 | (3) |
|
Chapter 12 Estimating the Cost of Capital |
|
|
407 | (38) |
|
12.1 The Equity Cost of Capital |
|
|
408 | (1) |
|
12.2 The Market Portfolio |
|
|
409 | (4) |
|
Constructing the Market Portfolio |
|
|
409 | (1) |
|
|
|
409 | (2) |
|
Value-Weighted Portfolios and Rebalancing |
|
|
410 | (1) |
|
|
|
411 | (2) |
|
|
|
413 | (4) |
|
|
|
413 | (2) |
|
Identifying the Best-Fitting Line |
|
|
415 | (1) |
|
|
|
416 | (1) |
|
Why Not Estimate Expected Returns Directly? |
|
|
417 | (1) |
|
12.4 The Debt Cost of Capital |
|
|
417 | (3) |
|
Debt Yields Versus Returns |
|
|
417 | (2) |
|
Common Mistake Using the Debt Yield as Its Cost of Capital |
|
|
418 | (1) |
|
|
|
419 | (1) |
|
12.5 A Project's Cost of Capital |
|
|
420 | (5) |
|
|
|
420 | (1) |
|
Levered Firms as Comparables |
|
|
421 | (1) |
|
The Unlevered Cost of Capital |
|
|
421 | (2) |
|
|
|
423 | (2) |
|
12.6 Project Risk Characteristics and Financing |
|
|
425 | (5) |
|
Differences in Project Risk |
|
|
425 | (2) |
|
Common Mistake Adjusting for Execution Risk |
|
|
427 | (1) |
|
Financing and the Weighted Average Cost of Capital |
|
|
427 | (12) |
|
Interview with Shelagh Glaser |
|
|
428 | (1) |
|
Common Mistake Using a Single Cost of Capital in Multi-Divisional Firms |
|
|
429 | (1) |
|
12.7 Final Thoughts on Using the CAPM |
|
|
430 | (1) |
|
|
|
431 | (2) |
|
|
|
433 | (1) |
|
|
|
433 | (1) |
|
|
|
434 | (4) |
|
|
|
438 | (1) |
|
Appendix Practical Considerations When Forecasting Beta |
|
|
439 | (6) |
|
|
|
439 | (1) |
|
|
|
439 | (1) |
|
Beta Variation and Extrapolation |
|
|
439 | (1) |
|
|
|
440 | (3) |
|
Common Mistake Changing the Index to Improve the Fit |
|
|
441 | (1) |
|
Using Excel Estimating Beta Using Excel |
|
|
442 | (1) |
|
|
|
443 | (2) |
|
Chapter 13 Investor Behavior and Capital Market Efficiency |
|
|
445 | (43) |
|
13.1 Competition and Capital Markets |
|
|
446 | (2) |
|
Identifying a Stock's Alpha |
|
|
446 | (1) |
|
Profiting from Non-Zero Alpha Stocks |
|
|
447 | (1) |
|
13.2 Information and Rational Expectations |
|
|
448 | (2) |
|
Informed Versus Uninformed Investors |
|
|
448 | (1) |
|
|
|
449 | (1) |
|
13.3 The Behavior of Individual Investors |
|
|
450 | (3) |
|
Underdiversification and Portfolio Biases |
|
|
450 | (1) |
|
Excessive Trading and Overconfidence |
|
|
451 | (2) |
|
Individual Behavior and Market Prices |
|
|
453 | (1) |
|
13.4 Systematic Trading Biases |
|
|
453 | (3) |
|
Hanging on to Losers and the Disposition Effect |
|
|
453 | (1) |
|
Nobel Prize Kahneman and Tversky's Prospect Theory |
|
|
454 | (1) |
|
Investor Attention, Mood, and Experience |
|
|
454 | (1) |
|
|
|
455 | (1) |
|
Implications of Behavioral Biases |
|
|
455 | (1) |
|
13.5 The Efficiency of the Market Portfolio |
|
|
456 | (6) |
|
Trading on News or Recommendations |
|
|
456 | (2) |
|
Nobel Prize The 2013 Prize: An Enigma? |
|
|
458 | (1) |
|
The Performance of Fund Managers |
|
|
458 | (3) |
|
|
|
461 | (1) |
|
13.6 Style-Based Techniques and the Market Efficiency Debate |
|
|
462 | (7) |
|
|
|
462 | (4) |
|
Interview with Jonathan Clements |
|
|
464 | (2) |
|
|
|
466 | (1) |
|
Market Efficiency and the Efficiency of the Market Portfolio |
|
|
467 | (1) |
|
Implications of Positive-Alpha Trading Strategies |
|
|
467 | (2) |
|
13.7 Multifactor Models of Risk |
|
|
469 | (5) |
|
|
|
470 | (1) |
|
|
|
471 | (1) |
|
The Cost of Capital with Fama-French-Carhart Factor Specification |
|
|
472 | (2) |
|
13.8 Methods Used in Practice |
|
|
474 | (2) |
|
|
|
474 | (1) |
|
|
|
475 | (1) |
|
|
|
476 | (2) |
|
|
|
478 | (1) |
|
|
|
478 | (1) |
|
|
|
479 | (6) |
|
Appendix Building a Multifactor Model |
|
|
485 | (3) |
| Part 5 Capital Structure |
|
|
Chapter 14 Capital Structure in a Perfect Market |
|
|
488 | (31) |
|
14.1 Equity Versus Debt Financing |
|
|
489 | (4) |
|
Financing a Firm with Equity |
|
|
489 | (1) |
|
Financing a Firm with Debt and Equity |
|
|
490 | (1) |
|
The Effect of Leverage on Risk and Return |
|
|
491 | (2) |
|
14.2 Modigliani-Miller I: Leverage, Arbitrage, and Firm Value |
|
|
493 | (5) |
|
MM and the Law of One Price |
|
|
493 | (1) |
|
|
|
493 | (2) |
|
|
|
494 | (1) |
|
The Market Value Balance Sheet |
|
|
495 | (1) |
|
Application: A Leveraged Recapitalization |
|
|
496 | (2) |
|
14.3 Modigliani-Miller II: Leverage, Risk, and the Cost of Capital |
|
|
498 | (7) |
|
Leverage and the Equity Cost of Capital |
|
|
498 | (1) |
|
Capital Budgeting and the Weighted Average Cost of Capital |
|
|
499 | (3) |
|
Common Mistake Is Debt Better Than Equity? |
|
|
502 | (1) |
|
Computing the WACC with Multiple Securities |
|
|
502 | (1) |
|
Levered and Unlevered Betas |
|
|
502 | (3) |
|
Nobel Prize Franco Modigliani and Merton Miller |
|
|
504 | (1) |
|
14.4 Capital Structure Fallacies |
|
|
505 | (4) |
|
Leverage and Earnings per Share |
|
|
505 | (3) |
|
Global Financial Crisis Bank Capital Regulation and the ROE Fallacy |
|
|
507 | (1) |
|
Equity Issuances and Dilution |
|
|
508 | (1) |
|
14.5 MM: Beyond the Propositions |
|
|
509 | (1) |
|
|
|
510 | (1) |
|
|
|
511 | (1) |
|
|
|
511 | (1) |
|
|
|
512 | (4) |
|
|
|
516 | (3) |
|
Chapter 15 Debt and Taxes |
|
|
519 | (32) |
|
15.1 The Interest Tax Deduction |
|
|
520 | (2) |
|
15.2 Valuing the Interest Tax Shield |
|
|
522 | (6) |
|
The Interest Tax Shield and Firm Value |
|
|
522 | (1) |
|
|
|
523 | (1) |
|
The Interest Tax Shield with Permanent Debt |
|
|
523 | (1) |
|
The Weighted Average Cost of Capital with Taxes |
|
|
524 | (2) |
|
The Repatriation Tax: Why Some Cash-Rich Firms Borrow |
|
|
525 | (1) |
|
The Interest Tax Shield with a Target Debt-Equity Ratio |
|
|
526 | (2) |
|
15.3 Recapitalizing to Capture the Tax Shield |
|
|
528 | (3) |
|
|
|
528 | (1) |
|
|
|
529 | (1) |
|
|
|
529 | (1) |
|
Analyzing the Recap: The Market Value Balance Sheet |
|
|
530 | (1) |
|
|
|
531 | (5) |
|
Including Personal Taxes in the Interest Tax Shield |
|
|
531 | (3) |
|
Valuing the Interest Tax Shield with Personal Taxes |
|
|
534 | (1) |
|
Determining the Actual Tax Advantage of Debt |
|
|
535 | (1) |
|
Cutting the Dividend Tax Rate |
|
|
535 | (1) |
|
15.5 Optimal Capital Structure with Taxes |
|
|
536 | (8) |
|
|
|
536 | (3) |
|
Limits to the Tax Benefit of Debt |
|
|
539 | (2) |
|
Interview with Andrew Balson |
|
|
540 | (1) |
|
|
|
541 | (1) |
|
|
|
542 | (1) |
|
|
|
542 | (10) |
|
|
|
544 | (1) |
|
|
|
544 | (1) |
|
|
|
545 | (1) |
|
|
|
545 | (1) |
|
|
|
546 | (4) |
|
|
|
550 | (1) |
|
Chapter 16 Financial Distress, Managerial Incentives, and Information |
|
|
551 | (46) |
|
16.1 Default and Bankruptcy in a Perfect Market |
|
|
552 | (2) |
|
Armin Industries: Leverage and the Risk of Default |
|
|
552 | (1) |
|
Bankruptcy and Capital Structure |
|
|
553 | (1) |
|
16.2 The Costs of Bankruptcy and Financial Distress |
|
|
554 | (6) |
|
|
|
555 | (1) |
|
Direct Costs of Bankruptcy |
|
|
555 | (1) |
|
Indirect Costs of Financial Distress |
|
|
556 | (4) |
|
Global Financial Crisis The Chrysler Prepack |
|
|
559 | (1) |
|
16.3 Financial Distress Costs and Firm Value |
|
|
560 | (2) |
|
Armin Industries: The Impact of Financial Distress Costs |
|
|
560 | (1) |
|
Who Pays for Financial Distress Costs? |
|
|
560 | (2) |
|
16.4 Optimal Capital Structure: The Trade-Off Theory |
|
|
562 | (3) |
|
The Present Value of Financial Distress Costs |
|
|
562 | (1) |
|
|
|
563 | (2) |
|
16.5 Exploiting Debt Holders: The Agency Costs of Leverage |
|
|
565 | (6) |
|
Excessive Risk-Taking and Asset Substitution |
|
|
565 | (1) |
|
Debt Overhang and Under-Investment |
|
|
566 | (2) |
|
Global Financial Crisis Bailouts, Distress Costs, and Debt Overhang |
|
|
567 | (1) |
|
Agency Costs and the Value of Leverage |
|
|
568 | (1) |
|
The Leverage Ratchet Effect |
|
|
569 | (1) |
|
Debt Maturity and Covenants |
|
|
570 | (1) |
|
Why Do Firms Go Bankrupt? |
|
|
570 | (1) |
|
16.6 Motivating Managers: The Agency Benefits of Leverage |
|
|
571 | (4) |
|
Concentration of Ownership |
|
|
572 | (1) |
|
Reduction of Wasteful Investment |
|
|
572 | (3) |
|
Excessive Perks and Corporate Scandals |
|
|
573 | (1) |
|
Global Financial Crisis Moral Hazard, Government Bailouts, and the Appeal of Leverage |
|
|
574 | (1) |
|
|
|
575 | (1) |
|
16.7 Agency Costs and the Trade-Off Theory |
|
|
575 | (2) |
|
|
|
576 | (1) |
|
|
|
577 | (1) |
|
16.8 Asymmetric Information and Capital Structure |
|
|
577 | (8) |
|
Leverage as a Credible Signal |
|
|
577 | (2) |
|
Issuing Equity and Adverse Selection |
|
|
579 | (2) |
|
Nobel Prize The 2001 Nobel Prize in Economics |
|
|
581 | (1) |
|
Implications for Equity Issuance |
|
|
581 | (1) |
|
Implications for Capital Structure |
|
|
582 | (3) |
|
16.9 Capital Structure: The Bottom Line |
|
|
585 | (1) |
|
|
|
586 | (2) |
|
|
|
588 | (1) |
|
|
|
588 | (1) |
|
|
|
588 | (9) |
|
|
|
597 | (43) |
|
17.1 Distributions to Shareholders |
|
|
598 | (3) |
|
|
|
598 | (2) |
|
|
|
600 | (1) |
|
17.2 Comparison of Dividends and Share Repurchases |
|
|
601 | (5) |
|
Alternative Policy 1: Pay Dividend with Excess Cash |
|
|
601 | (1) |
|
Alternative Policy 2: Share Repurchase (No Dividend) |
|
|
602 | (2) |
|
Common Mistake Repurchases and the Supply of Shares |
|
|
604 | (1) |
|
Alternative Policy 3: High Dividend (Equity Issue) |
|
|
604 | (1) |
|
Modigliani-Miller and Dividend Policy Irrelevance |
|
|
605 | (1) |
|
Common Mistake The Bird in the Hand Fallacy |
|
|
606 | (1) |
|
Dividend Policy with Perfect Capital Markets |
|
|
606 | (1) |
|
17.3 The Tax Disadvantage of Dividends |
|
|
606 | (4) |
|
Taxes on Dividends and Capital Gains |
|
|
607 | (1) |
|
Optimal Dividend Policy with Taxes |
|
|
608 | (2) |
|
17.4 Dividend Capture and Tax Clienteles |
|
|
610 | (5) |
|
The Effective Dividend Tax Rate |
|
|
610 | (1) |
|
Tax Differences Across Investors |
|
|
611 | (1) |
|
|
|
612 | (3) |
|
Interview with John Connors |
|
|
613 | (2) |
|
17.5 Payout Versus Retention of Cash |
|
|
615 | (7) |
|
Retaining Cash with Perfect Capital Markets |
|
|
616 | (1) |
|
|
|
617 | (1) |
|
Adjusting for Investor Taxes |
|
|
618 | (1) |
|
Issuance and Distress Costs |
|
|
619 | (1) |
|
Agency Costs of Retaining Cash |
|
|
620 | (2) |
|
17.6 Signaling with Payout Policy |
|
|
622 | (4) |
|
|
|
622 | (1) |
|
|
|
623 | (1) |
|
Royal & Sun Alliance's Dividend Cut |
|
|
624 | (1) |
|
Signaling and Share Repurchases |
|
|
624 | (2) |
|
17.7 Stock Dividends, Splits, and Spin-Offs |
|
|
626 | (4) |
|
Stock Dividends and Splits |
|
|
626 | (2) |
|
|
|
628 | (14) |
|
Berkshire Hathaway's A & B Shares |
|
|
629 | (1) |
|
|
|
630 | (1) |
|
|
|
631 | (1) |
|
|
|
632 | (1) |
|
|
|
632 | (4) |
|
|
|
636 | (4) |
| Part 6 Advanced Valuation |
|
|
Chapter 18 Capital Budgeting and Valuation with Leverage |
|
|
640 | (51) |
|
18.1 Overview of Key Concepts |
|
|
641 | (1) |
|
18.2 The Weighted Average Cost of Capital Method |
|
|
642 | (6) |
|
|
|
643 | (1) |
|
Using the WACC to Value a Project |
|
|
644 | (1) |
|
Summary of the WACC Method |
|
|
645 | (1) |
|
Implementing a Constant Debt-Equity Ratio |
|
|
646 | (2) |
|
18.3 The Adjusted Present Value Method |
|
|
648 | (4) |
|
The Unlevered Value of the Project |
|
|
648 | (1) |
|
Valuing the Interest Tax Shield |
|
|
649 | (1) |
|
Summary of the APV Method |
|
|
650 | (2) |
|
18.4 The Flow-to-Equity Method |
|
|
652 | (3) |
|
Calculating the Free Cash Flow to Equity |
|
|
652 | (1) |
|
Valuing Equity Cash Flows |
|
|
653 | (1) |
|
|
|
654 | (1) |
|
Summary of the Flow-to-Equity Method |
|
|
654 | (1) |
|
18.5 Project-Based Costs of Capital |
|
|
655 | (5) |
|
Estimating the Unlevered Cost of Capital |
|
|
656 | (1) |
|
Project Leverage and the Equity Cost of Capital |
|
|
656 | (2) |
|
Determining the Incremental Leverage of a Project |
|
|
658 | (2) |
|
Common Mistake Re-Levering the WACC |
|
|
658 | (2) |
|
18.6 APV with Other Leverage Policies |
|
|
660 | (3) |
|
Constant Interest Coverage Ratio |
|
|
660 | (1) |
|
Predetermined Debt Levels |
|
|
661 | (2) |
|
|
|
663 | (1) |
|
18.7 Other Effects of Financing |
|
|
663 | (3) |
|
Issuance and Other Financing Costs |
|
|
663 | (1) |
|
|
|
664 | (1) |
|
Financial Distress and Agency Costs |
|
|
665 | (1) |
|
Global Financial Crisis Government Loan Guarantees |
|
|
666 | (1) |
|
18.8 Advanced Topics in Capital Budgeting |
|
|
666 | (8) |
|
Periodically Adjusted Debt |
|
|
667 | (2) |
|
Leverage and the Cost of Capital |
|
|
669 | (2) |
|
The WACC or FTE Method with Changing Leverage |
|
|
671 | (1) |
|
|
|
672 | (2) |
|
|
|
674 | (2) |
|
|
|
676 | (1) |
|
|
|
676 | (1) |
|
|
|
677 | (6) |
|
|
|
683 | (2) |
|
Appendix Foundations and Further Details |
|
|
685 | (6) |
|
|
|
685 | (1) |
|
The Levered and Unlevered Cost of Capital |
|
|
686 | (1) |
|
Solving for Leverage and Value Simultaneously |
|
|
687 | (2) |
|
The Residual Income and Economic Value Added Valuation Methods |
|
|
689 | (2) |
|
Chapter 19 Valuation and Financial Modeling: A Case Study |
|
|
691 | (32) |
|
19.1 Valuation Using Comparables |
|
|
692 | (2) |
|
|
|
694 | (3) |
|
|
|
694 | (1) |
|
Capital Expenditures: A Needed Expansion |
|
|
695 | (1) |
|
Working Capital Management |
|
|
696 | (1) |
|
Capital Structure Changes: Levering Up |
|
|
696 | (1) |
|
19.3 Building the Financial Model |
|
|
697 | (10) |
|
|
|
697 | (3) |
|
Interview with Joseph L. Rice, III |
|
|
698 | (2) |
|
Working Capital Requirements |
|
|
700 | (1) |
|
Forecasting Free Cash Flow |
|
|
701 | (3) |
|
Using Excel Summarizing Model Outputs |
|
|
703 | (1) |
|
The Balance Sheet and Statement of Cash Flows (Optional) |
|
|
704 | (3) |
|
Using Excel Auditing Your Financial Model |
|
|
706 | (1) |
|
19.4 Estimating the Cost of Capital |
|
|
707 | (2) |
|
|
|
707 | (1) |
|
|
|
708 | (1) |
|
Ideko's Unlevered Cost of Capital |
|
|
708 | (1) |
|
19.5 Valuing the Investment |
|
|
709 | (7) |
|
The Multiples Approach to Continuation Value |
|
|
710 | (1) |
|
The Discounted Cash Flow Approach to Continuation Value |
|
|
711 | (2) |
|
Common Mistake Continuation Values and Long-Run Growth |
|
|
713 | (1) |
|
APV Valuation of Ideko's Equity |
|
|
713 | (1) |
|
|
|
714 | (1) |
|
Common Mistake Missing Assets or Liabilities |
|
|
714 | (1) |
|
|
|
715 | (1) |
|
19.6 Sensitivity Analysis |
|
|
716 | (1) |
|
|
|
717 | (1) |
|
|
|
718 | (1) |
|
|
|
718 | (1) |
|
|
|
719 | (2) |
|
Appendix Compensating Management |
|
|
721 | (2) |
| Glossary |
|
723 | (20) |
| Index |
|
743 | |
