Corporate Finance: Principles and Practice, Eighth Edition
By Denzil Watson and Antony Head
Contents:
Preface xiii
Acknowledgements xv
1 The finance function 1
Learning objectives 1
Introduction 2
1.1 Two key concepts in corporate finance 2
1.2 The role of the financial manager 5
1.3 Corporate objectives 8
1.4 How is shareholder wealth maximised? 11
1.5 Agency theory 13
1.6 Corporate governance 20
1.7 Conclusion 26
Key points 29
Self-test questions 31
Questions for review 32
Questions for discussion 33
References 33
Recommended reading 34
2 Capital markets, market efficiency and ratio analysis 35
Learning objectives 35
Introduction 36
2.1 Sources of business finance 36
2.2 Capital markets 39
2.3 Capital market efficiency 41
2.4 Assessing financial performance 49
2.5 Conclusion 68
Key points 68
Self-test questions 70
Questions for review 71
Questions for discussion 72
References 74
Recommended reading 76
3 Short-term finance and working capital management 77
Learning objectives 77
Introduction 78
3.1 The objectives of working capital management 78
3.2 Working capital policies 78
3.3 Working capital and the cash conversion cycle 82
3.4 Overtrading 85
3.5 Managing inventory 86
3.6 Managing cash 91
3.7 Managing trade receivables 94
3.8 Conclusion 100
Key points 100
Self-test questions 101
Questions for review 102
Questions for discussion 103
References 105
Recommended reading 105
4 Long-term finance: equity finance 106
Learning objectives 106
Introduction 107
4.1 Equity finance 107
4.2 The Stock Exchange 109
4.3 Rights issues 114
4.4 Scrip issues, share splits, scrip dividends and share repurchases 120
4.5 Preference shares 125
4.6 Conclusion 128
Key points 128
Self-test questions 130
Questions for review 131
Questions for discussion 132
References 133
Recommended reading 133
5 Long-term finance: debt finance, hybrid finance and leasing 135
Learning objectives 135
Introduction 136
5.1 Bonds, loan notes, loan stock and debentures 136
5.2 Bank and institutional debt 143
5.3 International debt finance 145
5.4 Convertible bonds 145
5.5 Warrants 149
5.6 Valuing fixed interest bonds 150
5.7 Valuing convertible bonds 152
5.8 Leasing 154
5.9 Evaluating the financial effects of financing choices 159
5.10 Conclusion 161
Key points 161
Self-test questions 163
Questions for review 164
Questions for discussion 165
References 166
Recommended reading 166
6 An overview of investment appraisal methods 168
Learning objectives 168
Introduction 169
6.1 The payback method 169
6.2 The return on capital employed method 171
6.3 The net present value method 174
6.4 The internal rate of return method 177
6.5 Comparing the NPV and IRR methods 181
6.6 The profitability index and capital rationing 185
6.7 The discounted payback method 192
6.8 Conclusion 192
Key points 192
Self-test questions 194
Questions for review 195
Questions for discussion 196
References 198
Recommended reading 198
7 Investment appraisal: applications and risk 199
Learning objectives 199
Introduction 200
7.1 Relevant project cash flows 200
7.2 Taxation and capital investment decisions 202
7.3 Inflation and capital investment decisions 207
7.4 Investment appraisal and risk 210
7.5 Appraisal of foreign direct investment 217
7.6 Empirical investigations of investment appraisal 223
7.7 Conclusion 226
Key points 226
Self-test questions 227
Questions for review 228
Questions for discussion 230
References 233
Recommended reading 234
8 Portfolio theory and the capital asset pricing model 235
Learning objectives 235
Introduction 236
8.1 The measurement of risk 236
8.2 The concept of diversification 239
8.3 Investor attitudes to risk 245
8.4 Markowitz’s portfolio theory 247
8.5 Introduction to the capital asset pricing model 252
8.6 Using the CAPM to value shares 253
8.7 Empirical tests of the CAPM 263
8.8 Conclusion 265
Key points 266
Self-test questions 267
Questions for review 267
Questions for discussion 269
References 270
Recommended reading 271
9 The cost of capital and capital structure 273
Learning objectives 273
Introduction 274
9.1 Calculating the cost of individual sources of finance 274
9.2 Calculating the weighted average cost of capital 278
9.3 Average and marginal cost of capital 281
9.4 The CAPM and investment appraisal 282
9.5 Practical problems with calculating WACC 289
9.6 WACC in the real world 291
9.7 The cost of capital for foreign direct investment 293
9.8 Gearing: its measurement and significance 295
9.9 The concept of an optimal capital structure 299
9.10 The traditional approach to capital structure 301
9.11 Miller and Modigliani (I): net income approach 302
9.12 Miller and Modigliani (II): corporate tax 305
9.13 Market imperfections 305
9.14 Miller and personal taxation 308
9.15 Pecking order theory 308
9.16 Conclusion: does an optimal capital structure exist? 310
Key points 311
Self-test questions 313
Questions for review 314
Questions for discussion 315
References 317
Recommended reading 318
10 Dividend policy 320
Learning objectives 320
Introduction 321
10.1 Dividends: operational and practical issues 321
10.2 The effect of dividends on shareholder wealth 324
10.3 Dividend irrelevance 324
10.4 Dividend relevance 326
10.5 Dividend relevance or irrelevance? 330
10.6 Dividend policies 331
10.7 Alternatives to cash dividends 336
10.8 Empirical evidence on dividend policy 342
10.9 Conclusion 344
Key points 345
Self-test questions 346
Questions for review 347
Questions for discussion 348
References 350
Recommended reading 351
11 Mergers and takeovers 352
Learning objectives 352
Introduction 353
11.1 The terminology of mergers and takeovers 353
11.2 Justifications for acquisitions 354
11.3 Trends in takeover activity 359
11.4 Target company valuation 363
11.5 The financing of acquisitions 370
11.6 Strategic and tactical issues 375
11.7 Divestment 383
11.8 Private equity 389
11.9 Empirical research on acquisitions 392
11.10 Conclusion 395
Key points 396
Self-test questions 397
Questions for review 397
Questions for discussion 399
References 403
Recommended reading 404
12 Risk management 405
Learning objectives 405
Introduction 406
12.1 Interest and exchange rate risk 406
12.2 Internal risk management 414
12.3 External risk management 416
12.4 Futures contracts 418
12.5 Options 421
12.6 Swaps 427
12.7 Issues in interest and exchange risk management 432
12.8 Political risk 441
12.9 Conclusion 443
Key points 443
Self-test questions 445
Questions for review 446
Questions for discussion 447
References 448
Recommended reading 449
Answers to self-test questions 451
Glossary 470
Present value tables 479
Index 481