Fundamentals of Financial Management, 15th Edition and Concise, 10th Edition PDF by Eugene F Brigham and Joel F Houston

Part 2
Fundamental Concepts in
Financial Management 61
Chapter 3
Financial Statements, Cash Flow,
and Taxes 62
Unlocking the Valuable Information in Financial
Statements 62
PUTTING THINGS IN PERSPECTIVE 63
3-1 Financial Statements and Reports 64
Global Perspectives: Global Accounting Standards:
Will It Ever Happen? 65
3-2 The Balance Sheet 65
3-2A Allied’s Balance Sheet 67
The Balance Sheet of an Average
American Household 72
3-3 The Income Statement 73
3-4 Statement of Cash Flows 75
3-5 Statement of Stockholders’ Equity 79
3-6 Uses and Limitations of Financial
Statements 80
3-7 Free Cash Flow 81
Free Cash Flow Is Important for Businesses
Both Small and Large 83
3-8 MVA and EVA 84
3-9 Income Taxes 86
Congress Considers Significant Changes to the
Tax Code 86
3-9A Individual Taxes 87
3-9B Corporate Taxes 90
TYING IT ALL TOGETHER 94
INTEGRAT ED CASE D’leon Inc., Part I 101
Taking a Closer Look
Exploring Dunkin’ Brands Group’s Financial
Statements 104
Chapter 4
Analysis of Financial Statements 105
Can You Make Money Analyzing Stocks? 105
PUTTING THINGS IN PERSPECTIVE 106
4-1 Ratio Analysis 107
4-2 Liquidity Ratios 108
4-2A Current Ratio 108
Financial Analysis on the Internet 109
4-2B Quick, or Acid Test, Ratio 110
4-3 Asset Management Ratios 111
4-3A Inventory Turnover Ratio 111
4-3B Days Sales Outstanding 112
4-3C Fixed Assets Turnover Ratio 113
4-3D Total Assets Turnover Ratio 113
4-4 Debt Management Ratios 114
4-4A Total Debt to Total Capital 116
4-4B Times-Interest-Earned Ratio 116
Household Debt Burdens have Declined
in Recent Years 117
4-5 Profitability Ratios 118
4-5A Operating Margin 118
4-5B Profit Margin 118
4-5C Return on Total Assets 119
4-5D Return on Common Equity 119
4-5E Return on Invested Capital 119
4-5F Basic Earning Power (BEP) Ratio 120
4-6 Market Value Ratios 121
4-6A Price/Earnings Ratio 121
4-6B Market/Book Ratio 122
4-6C Enterprise Value/EBITDA Ratio 123
4-7 Tying the Ratios Together:
The DuPont Equation 124
Microsoft Excel: A Truly Essential Tool 125
4-8 Potential Misuses of ROE 126
Economic Value Added (EVA) Versus Net Income 127
4-9 Using Financial Ratios to Assess
Performance 128
4-9A Comparison to Industry Average 128
4-9B Benchmarking 128
4-9C Trend Analysis 130
4-10 Uses and Limitations of Ratios 131
Looking for Warning Signs within the Financial
Statements 133
4-11 Looking Beyond the Numbers 133
TYING IT ALL TOGETHER 135
INTEGRAT ED CASE D’leon Inc., Part II 144
Taking a Closer Look
Conducting A Financial Ratio Analysis on HP Inc. 147
WEB APPENDIX 4A
Common Size and Percent Change Analyses
Chapter 5
Time Value of Money 148
Will You Be Able to Retire? 148
PUTTING THINGS IN PERSPECTIVE 149
5-1 Time Lines 150
5-2 Future Values 151
5-2A Step-By-Step Approach 152
5-2B Formula Approach 152
Simple Versus Compound Interest 152
5-2C Financial Calculators 153
5-2D Spreadsheets 153
5-2E Graphic View of the Compounding
Process 155
5-3 Present Values 157
5-3A Graphic View of the Discounting
Process 159
5-4 Finding the Interest Rate, I 160
5-5 Finding the Number of Years, N 161
5-6 Annuities 161
5-7 Future Value of an Ordinary Annuity 162
5-8 Future Value of an Annuity Due 165
5-9 Present Value of an Ordinary Annuity 166
5-10 Finding Annuity Payments, Periods,
and Interest Rates 168
5-10A Finding Annuity Payments, PMT 168
5-10B Finding the Number of Periods, N 169
5-10C Finding the Interest Rate, I 169
5-11 Perpetuities 170
5-12 Uneven Cash Flows 171
5-13 Future Value of an Uneven
Cash Flow Stream 173
5-14 Solving for I with Uneven Cash Flows 174
5-15 Semiannual and Other
Compounding Periods 175
5-16 Comparing Interest Rates 177
5-17 Fractional Time Periods 180
5-18 Amortized Loans 180
TYING IT ALL TOGETHER 182
INTEGRAT ED CASE First National Bank 190
Web Appendix 5A
Continuous Compounding and Discounting
Web Appendix 5B
Growing Annuities
Part 3
Financial Assets 193
Chapter 6
Interest Rates 194
The Fed Contemplates an Increase in Interest Rates as the
U.S. Economy Shows Signs of a Strong Rebound 194
PUTTING THINGS IN PERSPECTIVE 195
6-1 The Cost of Money 196
6-2 Interest Rate Levels 197
6-3 The Determinants of Market
Interest Rates 201
6-3A The Real Risk-Free Rate of Interest, r* 201
Global Perspectives: European Banks Confront the
Reality of Negative Interest Rates 202
6-3B The Nominal, or Quoted, Risk-Free Rate
of Interest, rRF 5 r* 1 IP 203
6-3C Inflation Premium (IP) 203
6-3D Default Risk Premium (DRP) 204
6-3E Liquidity Premium (LP) 204
6-3F Interest Rate Risk and the Maturity
Risk Premium (MRP) 205
An Almost Riskless Treasury Bond 206
6-4 The Term Structure of Interest Rates 208
6-5 What Determines the Shape of the Yield
Curve? 210
The Links Between Expected Inflation
and Interest Rates: A Closer Look 212
6-6 Using the Yield Curve to Estimate Future
Interest Rates 214
6-7 Macroeconomic Factors that Influence
Interest Rate Levels 217
6-7A Federal Reserve Policy 217
6-7B Federal Budget Deficits or Surpluses 217
6-7C International Factors 218
6-7D Business Activity 218
6-8 Interest Rates and Business Decisions 219
TYING IT ALL TOGETHER 220
INTEGRAT ED CASE M orton Handley & Company 226
Taking a Closer Look
Using the New York Times Bond Market Page to
Understand Interest Rates 227
Chapter 7
Bonds and Their Valuation 228
Sizing Up Risk in the Bond Market 228
PUTTING THINGS IN PERSPECTIVE 229
7-1 Who Issues Bonds? 230
7-2 Key Characteristics of Bonds 231
7-2A Par Value 231
7-2B Coupon Interest Rate 231
7-2C Maturity Date 232
7-2D Call Provisions 232
7-2E Sinking Funds 233
7-2F Other Features 234
7-3 Bond Valuation 234
7-4 Bond Yields 238
7-4A Yield to Maturity 239
7-4B Yield to Call 240
7-5 Changes in Bond Values over Time 242
7-6 Bonds with Semiannual Coupons 245
7-7 Assessing a Bond’s Riskiness 247
7-7A Price Risk 248
7-7B Reinvestment Risk 249
7-7C Comparing Price Risk and Reinvestment
Risk 250
7-8 Default Risk 252
7-8A Various Types of Corporate Bonds 252
7-8B Bond Ratings 253
7-8C Bankruptcy and Reorganization 258
7-9 Bond Markets 259
Accrued Interest and the Pricing of Coupon
Bonds 260
TYING IT ALL TOGETHER 262
INTEGRAT ED CASE Western Money
Management Inc. 268
Taking a Closer Look
Using Online Resources to Understand the Impact of
Interest Rates on Bond Valuation 269
Web Appendix 7A
Zero Coupon Bonds
Web Appendix 7B
Bond Risk and Duration
Web Appendix 7C
Bankruptcy and Reorganization
Chapter 8
Risk and Rates of Return 270
Managing Risk in Difficult Times 270
PUTTING THINGS IN PERSPECTIVE 271
8-1 The Risk-Return Trade-Off 272
8-2 Stand-Alone Risk 274
8-2A Statistical Measures of Stand-Alone
Risk 275
8-2B Measuring Stand-Alone Risk:
The Standard Deviation 277
8-2C Using Historical Data to Measure Risk 279
8-2D Other Measures of Stand-Alone Risk: The
Coefficient of Variation and the Sharpe
Ratio 280
8-2E Risk Aversion and Required Returns 281
The Historical Trade-Off Between Risk and
Return 282
8-3 Risk in a Portfolio Context: The
CAPM 283
8-3A Expected Portfolio Returns, r⁄
p 284
8-3B Portfolio Risk 285
Adding More Stocks Doesn’t Always Reduce
The Risk of Your Portfolio 289
8-3C Risk in a Portfolio Context: The Beta
Coefficient 289
Global Perspectives: The Benefits of Diversifying
Overseas 294
8-4 The Relationship between Risk
and Rates of Return 295
Estimating The Market Risk Premium 298
8-4A The Impact of Expected Inflation 298
8-4B Changes in Risk Aversion 300
8-4C Changes in a Stock’s Beta Coefficient 302
8-5 Some Concerns about Beta and the
CAPM 303
8-6 Some Concluding Thoughts: Implications
for Corporate Managers and Investors 303
TYING IT ALL TOGETHER 305
INTEGRATED CASE Merrill Finch Inc. 312
Taking a Closer Look
Using Past Information to Estimate Required Returns 314
Web Appendix 8A
Calculating Beta Coefficients
Chapter 9
Stocks and Their Valuation 316
Searching for the Right Stock 316
PUTTING THINGS IN PERSPECTIVE 317
9-1 Legal Rights and Privileges of Common
Stockholders 317
9-1A Control of the Firm 317
9-1B The Preemptive Right 319
9-2 Types of Common Stock 319
9-3 Stock Price versus Intrinsic Value 320
Are “Smart Beta” Funds A Smart Idea? 321
9-3A Why Do Investors and Companies
Care about Intrinsic Value? 322
9-4 The Discounted Dividend Model 323
9-4A Expected Dividends as the Basis for Stock
Values 325
9-5 Constant Growth Stocks 326
9-5A Illustration of a Constant Growth Stock 327
9-5B Dividends Versus Growth 328
9-5C Which is Better: Current Dividends or
Growth? 330
9-5D Required Conditions for the Constant
Growth Model 330
9-6 Valuing Nonconstant Growth Stocks 331
Evaluating Stocks That Don’t Pay Dividends 335
9-7 Enterprise-Based Approach
to Valuation 335
9-7A The Corporate Valuation Model 336
9-7B Comparing the Corporate Valuation
and Discounted Dividend Models 339
Other Approaches to Valuing Common Stocks 340
9-8 Preferred Stock 341
TYING IT ALL TOGETHER 342
INTEGRATED CASE Mutual of Chicago Insurance
Company 348
Taking a Closer Look
Estimating Exxon Mobil Corporation’s Intrinsic Stock
Value 349
APPENDIX 9A
Stock Market Equilibrium 351
Part 4
Investing in Long-Term Assets:
Capital Budgeting 355
Chapter 10
The Cost of Capital 356
Creating Value at Disney 356
PUTTING THINGS IN PERSPECTIVE 357
10-1 An Overview of the Weighted Average
Cost of Capital (WACC) 358
10-2 Basic Definitions 359
10-3 Cost of Debt, rd(12T) 361
10-4 Cost of Preferred Stock, rp 362
10-5 Cost of Retained Earnings, rs 363
10-5A CAPM Approach 364
10-5B Bond-Yield-Plus-Risk-Premium
Approach 365
10-5C Dividend-Yield-Plus-Growth-Rate,
or Discounted Cash Flow (DCF),
Approach 366
10-5D Averaging the Alternative Estimates 367
10-6 Cost of New Common Stock, re 368
10-6A Add Flotation Costs to a Project’s Cost 368
10-6B Increase the Cost of Capital 369
10-6C When Must External Equity Be
Used? 370
10-7 Composite, or Weighted Average,
Cost of Capital, WACC 371
10-8 Factors that Affect the WACC 371
10-8A Factors the Firm Cannot Control 371
Some Real-World Estimates of the WACC 372
10-8B Factors the Firm Can Control 373
10-9 Adjusting the Cost of Capital for
Risk 373
10-10 Some Other Problems with Cost
of Capital Estimates 375
TYING IT ALL TOGETHER 376
INTEGRAT ED CASE Coleman Technologies Inc. 382
Taking a Closer Look
Calculating 3M’s Cost of Capital 383
Web Appendix 10A
The Cost of New Common Stock and WACC
Chapter 11
The Basics of Capital Budgeting 385
Competition in the Aircraft Industry: Airbus versus
Boeing 385
PUTTING THINGS IN PERSPECTIVE 386
11-1 An Overview of Capital Budgeting 386
11-2 Net Present Value (NPV) 388
11-3 Internal Rate of Return (IRR) 392
Why NPV Is Better Than IRR 395
11-4 Multiple Internal Rates of Return 395
11-5 Reinvestment Rate Assumptions 397
11-6 Modified Internal Rate of Return
(MIRR) 398
11-7 NPV Profiles 402
11-8 Payback Period 405
11-9 Conclusions on Capital Budgeting
Methods 407
11-10 Decision Criteria Used in Practice 408
TYING IT ALL TOGETHER 409
INTEGRAT ED CASE A llied Components
Company 415
Chapter 12
Cash Flow Estimation and Risk
Analysis 417
Home Depot Carefully Evaluates New Investments 417
PUTTING THINGS IN PERSPECTIVE 418
12-1 Conceptual Issues in Cash Flow
Estimation 418
12-1A Free Cash Flow Versus Accounting
Income 419
12-1B Timing of Cash Flows 420
12-1C Incremental Cash Flows 420
12-1D Replacement Projects 420
12-1E Sunk Costs 420
12-1F Opportunity Costs Associated With
Assets the Firm Owns 421
12-1G Externalities 421
12-2 Analysis of an Expansion Project 423
12-2A Effect of Different Depreciation
Rates 426
12-2B Cannibalization 426
12-2C Opportunity Costs 426
12-2D Sunk Costs 426
12-2E Other Changes to the Inputs 427
12-3 Replacement Analysis 427
12-4 Risk Analysis in Capital Budgeting 430
12-5 Measuring Stand-Alone Risk 431
12-5A Sensitivity Analysis 431
12-5B Scenario Analysis 433
12-5C Monte Carlo Simulation 435
12-6 Within-Firm and Beta Risk 435
12-7 Unequal Project Lives 436
12-7A Replacement Chains 438
12-7B Equivalent Annual Annuities (EAA) 438
12-7C Conclusions about Unequal Lives 438
TYING IT ALL TOGETHER 439
INTEGRAT ED CASE A llied Food Products 448
APPENDIX 12A
Tax Depreciation 451
Web Appendix 12B
Refunding Operations
Web Appendix 12C
Using the CAPM to Estimate the Risk-Adjusted Cost of
Capital
Web Appendix 12D
Techniques for Measuring Beta Risk
Chapter 13
Real Options and Other Topics in Capital
Budgeting 453
Anheuser-Busch Used Real Options to Enhance Its
Value 453
PUTTING THINGS IN PERSPECTIVE 454
13-1 Introduction to Real Options 454
13-2 Growth (Expansion) Options 455
13-3 Abandonment/Shutdown Options 458
13-4 Investment Timing Options 460
13-5 Flexibility Options 462
13-6 The Optimal Capital Budget 463
13-7 The Post-Audit 466
TYING IT ALL TOGETHER 467
INTEGRAT ED CASE 21St Century Education
Products 471
Part 5
Capital Structure
and Dividend Policy 473
Chapter 14
Capital Structure and Leverage 474
Debt: Rocket Booster or Anchor? Caterpillar Inc. 474
PUTTING THINGS IN PERSPECTIVE 475
14-1 Book, Market, or “Target” Weights? 475
14-1A Measuring the Capital Structure 476
14-1B Capital Structure Changes Over Time 478
14-2 Business and Financial Risk 478
14-2A Business Risk 479
14-2B Factors That Affect Business Risk 480
14-2C Operating Leverage 481
14-2D Financial Risk 485
14-3 Determining the Optimal Capital
Structure 490
14-3A WACC and Capital Structure
Changes 490
14-3B The Hamada Equation 490
14-3C The Optimal Capital Structure 494
14-4 Capital Structure Theory 495
Yogi Berra on the MM Proposition 496
14-4A The Effect of Taxes 497
14-4B The Effect of Potential Bankruptcy 498
14-4C Trade-off Theory 498
14-4D Signaling Theory 499
14-4E Using Debt Financing to Constrain
Managers 500
14-4F Pecking Order Hypothesis 501
14-4G Windows of Opportunity 502
14-5 Checklist for Capital Structure Decisions 502
14-6 Variations in Capital Structures 505
TYING IT ALL TOGETHER 506
INTEGRAT ED CASE Campus Deli Inc. 513
Taking a Closer Look
Exploring the Capital Structures for Four Restaurant
Companies 516
Web Appendix 14A
Degree of Leverage
Chapter 15
Distributions to Shareholders:
Dividends and Share Repurchases 517
Apple Shifts Gears and Begins to Unload Part of Its Vast
Cash Hoard 517
PUTTING THINGS IN PERSPECTIVE 518
15-1 Dividends versus Capital Gains: What Do
Investors Prefer? 519
15-1A Dividend Irrelevance Theory 519
15-1B Reasons Some Investors Prefer
Dividends 520
15-1C Reasons Some Investors Prefer Capital
Gains 520
15-2 Other Dividend Policy Issues 521
15-2A Information Content, or Signaling,
Hypothesis 521
15-2B Clientele Effect 522
15-3 Establishing the Dividend Policy
in Practice 523
15-3A Setting the Target Payout Ratio: The
Residual Dividend Model 523
15-3B Earnings, Cash Flows, and
Dividends 528
Global Perspectives: Dividend Yields around the
World 530
15-3C Payment Procedures 532
15-4 Dividend Reinvestment Plans 533
15-5 Summary of Factors Influencing Dividend
Policy 535
15-5A Constraints 535
15-5B Investment Opportunities 535
15-5C Alternative Sources of Capital 536
15-5D Effects of Dividend Policy on rs 536
15-6 Stock Dividends and Stock Splits 536
15-6A Stock Splits 537
15-6B Stock Dividends 537
15-6C Effect on Stock Prices 538
15-7 Stock Repurchases 539
15-7A The Effects of Stock Repurchases 539
15-7B Advantages of Repurchases 541
15-7C Disadvantages of Repurchases 541
15-7D Conclusions on Stock Repurchases 542
TYING IT ALL TOGETHER 543
INTEGRAT ED CASE S outheastern Steel
Company 548
Taking a Closer Look
Apple’s Dividend Policy 549
Web Appendix 15A
The Residual Dividend Model: An Example
Part 6
Working Capital Management
and Financial Forecasting 551
Chapter 16
Working Capital Management 552
Successful Firms Efficiently Manage Their Working
Capital 552
PUTTING THINGS IN PERSPECTIVE 553
16-1 Background on Working Capital 553
16-2 Current Assets Investment Policies 554
16-3 Current Assets Financing Policies 556
16-3A Maturity Matching, or “Self-
Liquidating,” Approach 556
16-3B Aggressive Approach 556
16-3C Conservative Approach 558
16-3D Choosing Between the
Approaches 558
16-4 The Cash Conversion Cycle 559
16-4A Calculating the Targeted CCC 559
16-4B Calculating the CCC from Financial
Statements 560
Some Real-World Examples of the Cash Conversion
Cycle 561
16-5 The Cash Budget 563
16-6 Cash and Marketable Securities 567
16-6A Currency 567
16-6B Demand Deposits 567
16-6C Marketable Securities 569
16-7 Inventories 570
16-8 Accounts Receivable 571
16-8A Credit Policy 571
16-8B Setting and Implementing the Credit
Policy 572
16-8C Monitoring Accounts Receivable 573
16-9 Accounts Payable (Trade Credit) 574
A Difficult Balancing Act 576
16-10 Bank Loans 577
16-10A Promissory Note 577
16-10B Line of Credit 578
16-10C Revolving Credit Agreement 579
16-10D Costs of Bank Loans 579
16-11 Commercial Paper 581
16-12 Accruals (Accrued Liabilities) 582
16-13 Use of Security in Short-Term
Financing 582
TYING IT ALL TOGETHER 583
INTEGRAT ED CASE S ki Equipment Inc. 589
Web Appendix 16A
Inventory Management
Web Appendix 16B
Short-Term Loans and Bank Financing
Chapter 17
Financial Planning and Forecasting 592
Effective Forecasting is an Important Component
of Strong Performance 592
PUTTING THINGS IN PERSPECTIVE 593
17-1 Strategic Planning 593
17-2 The Sales Forecast 595
17-3 The AFN Equation 597
17-3A Excess Capacity Adjustments 599
17-4 Forecasted Financial Statements 602
17-4A Part I. Inputs 604
17-4B Part II. Forecasted Income
Statement 604
17-4C Part III. Forecasted Balance Sheet 605
17-4D Part IV. Ratios and EPS 605
17-4E Using the Forecast to Improve
Operations 606
17-5 Using Regression to Improve
Forecasts 606
17-6 Analyzing the Effects of Changing
Ratios 608
17-6A Modifying Accounts Receivable 608
17-6B Modifying Inventories 608
17-6C Other “Special Studies” 608
TYING IT ALL TOGETHER 609
INTEGRAT ED CASE N ew World Chemicals Inc. 615
Taking a Closer Look
Forecasting the Future Performance of Abercrombie
& Fitch 617
Web Appendix 17A
Forecasting Financial Requirements When Financial
Ratios Change
Part 7
Special Topics in Financial
Management 619
Chapter 18
Derivatives and Risk Management 620
Using Derivatives to Manage Risk 620
PUTTING THINGS IN PERSPECTIVE 621
18-1 Reasons to Manage Risk 622
CFOs Assess the Costs and Benefits of Risk
Management 624
18-2 Background on Derivatives 625
18-3 Options 627
18-3A Option Types and Markets 627
18-3B Factors that Affect the Value of a Call
Option 629
18-3C Exercise Value Versus Option Price 629
18-4 Introduction to Option Pricing Models 632
Expensing Executive Stock Options 635
18-5 The Black–Scholes Option Pricing Model
(OPM) 635
18-5A OPM Assumptions and Equations 635
18-5B OPM Illustration 637
Using the Vix as a Measure of Investors’ Fears 638
18-6 Forward and Futures Contracts 640
18-7 Other Types of Derivatives 644
18-7A SWAPS 644
Credit Instruments Create New Opportunities
and Risks 645
18-7B Structured Notes 645
18-7C Inverse Floaters 647
18-8 Using Derivatives to Reduce Risks 647
18-8A Security Price Exposure 647
18-8B Futures 648
18-8C SWAPS 649
18-8D Commodity Price Exposure 650
18-8E The Use and Misuse of Derivatives 650
18-9 Risk Management 651
18-9A An Approach to Risk Management 652
PWC’s Guide for Assessing and Managing Risk 653
TYING IT ALL TOGETHER 655
INTEGRAT ED CASE T ropical Sweets Inc. 659
Taking a Closer Look
NETFLIX, Inc.: Call and Put Option Pricing and Interest
Rate Futures 660
APPENDIX 18A
Valuation of Put Options 662
Chapter 19
Multinational Financial Management 664
U.S. Firms Look Overseas to Enhance Shareholder Value 664
PUTTING THINGS IN PERSPECTIVE 665
19-1 Multinational, or Global,
Corporations 665
Corporate Inversions Have Attracted
Increased Criticism 669
19-2 Multinational versus Domestic Financial
Management 669
19-3 The International Monetary System 671
19-3A International Monetary
Terminology 671
19-3B Current Monetary Arrangements 672
Brexit Shakes Europe 673
19-4 Foreign Exchange Rate Quotations 674
19-4A Cross Rates 674
19-4B Interbank Foreign Currency
Quotations 675
19-5 Trading in Foreign Exchange 676
19-5A Spot Rates and Forward Rates 677
19-6 Interest Rate Parity 678
19-7 Purchasing Power Parity 680
Hungry for a Big Mac? Go to Hong Kong! 682
19-8 Inflation, Interest Rates, and Exchange
Rates 684
19-9 International Money and Capital
Markets 685
19-9A International Credit Markets 685
19-9B International Stock Markets 686
Stock Market Indexes around the World 687
19-10 Investing Overseas 688
Global Perspectives: Measuring Country Risk 688
Global Perspectives: Investing in International
Stocks 689
19-11 International Capital Budgeting 691
19-12 International Capital Structures 692
TYING IT ALL TOGETHER 694
INTEGRAT ED CASE Citrus Products Inc. 698
Taking a Closer Look
Using the Internet to Follow Exchange Rates and
International Indexes 699
Chapter 20
Hybrid Financing: Preferred Stock,
Leasing, Warrants, and Convertibles 700
Tesla’s Investors Love the Convertible 700
PUTTING THINGS IN PERSPECTIVE 701
20-1 Preferred Stock 701
20-1A Basic Features 701
Preferred Stock: Does It Make Sense for Individual
Investors? 702
20-1B Adjustable-Rate Preferred Stock 704
20-1C Advantages and Disadvantages
of Preferred Stock 704
20-2 Leasing 705
20-2A Types of Leases 705
Changes to the Financial Reporting of Leases
Coming Soon 706
20-2B Financial Statement Effects 707
20-2C Evaluation by the Lessee 709
20-2D Other Factors that Affect Leasing
Decisions 712
20-3 Warrants 713
20-3A Initial Market Price of a Bond with
Warrants 713
20-3B Use of Warrants in Financing 714
20-3C The Component Cost of Bonds with
Warrants 715
20-3D Problems with Warrant Issues 716
20-4 Convertibles 717
20-4A Conversion Ratio and Conversion
Price 717
20-4B The Component Cost of Convertibles 718
20-4C Use of Convertibles in Financing 721
20-4D Convertibles Can Reduce Agency
Costs 722
20-5 A Final Comparison of Warrants
and Convertibles 723
20-6 Reporting Earnings When Warrants
or Convertibles Are Outstanding 724
TYING IT ALL TOGETHER 724
INTEGRAT ED CASE Fish & Chips Inc., Part I 730
Fish & Chips Inc., Part II 731
Taking a Closer Look
Using the Internet to Follow Hybrid Securities 732
Chapter 21
Mergers and Acquisitions 734
Amazon Announces Plans to Acquire Whole Foods 734
PUTTING THINGS IN PERSPECTIVE 735
21-1 Rationale for Mergers 736
21-1A Synergy 736
21-1B Tax Considerations 736
21-1C Purchase of Assets Below Their
Replacement Cost 737
21-1D Diversification 737
21-1E Managers’ Personal Incentives 737
21-1F Breakup Value 738
21-2 Types of Mergers 738
21-3 Level of Merger Activity 738
21-4 Hostile Versus Friendly Takeovers 740
21-5 Merger Analysis 741
21-5A Valuing the Target Firm 741
21-5B Setting the Bid Price 745
More than just Financial Statements 747
21-5C Post-Merger Control 747
21-6 The Role of Investment Bankers 748
21-6A Arranging Mergers 748
21-6B Developing Defensive Tactics 749
21-6C Establishing a Fair Value 750
21-6D Financing Mergers 750
21-6E Arbitrage Operations 751
21-7 Do Mergers Create Value?
The Empirical Evidence 751
The Track Record of Large Mergers 752
21-8 Corporate Alliances 753
21-9 Private Equity Investments 754
21-10 Divestitures 754
21-10A Types of Divestitures 754
21-10B Divestiture Illustrations 755
TYING IT ALL TOGETHER 757
INTEGRAT ED CASE S mitty’s Home Repair
Company 760
Taking a Closer Look
Using Dealbook to Follow Recent Merger and Acquisition
Announcements 761
Web Appendix 21A
Merger Regulation
Web Appendix 21B
Holding Companies
Appendixes
APPENDIX A Solutions to Self-Test
Questions and Problems A-1
APPENDIX B Answers to Selected
End-of-Chapter Problems B-1
APPENDIX C Selected Equations
and Tables C-1
Index I-1

Share this Book!