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Fundamentals of Corporate Finance (3rd Global Edition)

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book-author

Jonathan Berk, Peter DeMarzo, Jarrad Harford

publisher

Pearson Higher Education; 3rd edition (global)

file-type

PDF

pages

796 pages

language

English

asin

1292018402

isbn10

1292018409; 013350767X

isbn13

9781292018409/ 9780133507676


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Berk/DeMarzo/Harford’s Fundamentals of Corporate Finance; 3rd Global Edition (PDF) utilized perspective cements your understanding of fashionable-day core rules; emphasizing drawback-fixing and actual-life monetary administration practices—all in a transparent valuation framework.

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book-author

Jonathan Berk, Peter DeMarzo, Jarrad Harford

publisher

Pearson Higher Education; 3rd edition (global)

file-type

PDF

pages

796 pages

language

English

asin

1292018402

isbn10

1292018409; 013350767X

isbn13

9781292018409/ 9780133507676

Table of contents


Table of contents :
Cover……Page 1
IFC……Page 2
Title……Page 5
Copyright……Page 8
Contents……Page 11
PART 1 Introduction……Page 33
CHAPTER 1 Corporate Finance and the Financial Manager……Page 35
Sole Proprietorships……Page 36
Partnerships……Page 37
Features of Corporations……Page 38
Tax Implications for Corporate Entities……Page 39
Corporate Taxation Around the World……Page 40
Making Investment Decisions……Page 41
The Goal of the Firm……Page 42
The Corporate Management Team……Page 43
Ethics and Incentives Within Corporations……Page 44
The Dodd-Frank Act on Corporate Compensation and Governance……Page 45
1.5 The Stock Market……Page 46
Primary and Secondary Markets……Page 47
INTERVIEW WITH Jean-François Théodore……Page 48
Other Financial Markets……Page 49
The Financial Cycle……Page 50
Role of Financial Institutions……Page 51
Summary……Page 52
Problems……Page 54
CHAPTER 2 Introduction to Financial Statement Analysis……Page 57
International Financial Reporting Standards……Page 58
Types of Financial Statements……Page 59
Assets……Page 60
Shareholders’ Equity……Page 62
Market Value Versus Book Value……Page 63
Enterprise Value……Page 64
Earnings Calculations……Page 66
EBITDA……Page 67
Operating Activity……Page 68
Investment Activity……Page 70
Statement of Changes in Shareholders’ Equity……Page 71
2.6 Financial Statement Analysis……Page 72
Profitability Ratios……Page 73
Asset Efficiency……Page 74
Working Capital Ratios……Page 75
Leverage (Gearing) Ratios……Page 76
COMMON MISTAKE Mismatched Ratios……Page 78
Investment Returns……Page 79
The DuPont Identity……Page 80
The Sarbanes-Oxley Act……Page 84
Dodd-Frank Act……Page 85
The Financial Statements: A Useful Starting Point……Page 86
Summary……Page 87
Critical Thinking……Page 89
Problems……Page 90
Data Case……Page 98
PART 2 Interest Rates and Valuing Cash Flows……Page 101
CHAPTER 3 Time Value of Money: An Introduction……Page 103
Quantifying Costs and Benefits……Page 104
The Valuation Principle……Page 106
Why There Can Be Only One Competitive Price for a Good……Page 107
The Time Value of Money……Page 108
The Interest Rate: Converting Cash Across Time……Page 109
Timelines……Page 112
COMMON MISTAKE Summing Cash Flows Across Time……Page 113
Rule 2: Compounding……Page 114
Rule of 72……Page 115
Rule 3: Discounting……Page 116
Summary……Page 118
Critical Thinking……Page 119
Problems……Page 120
CHAPTER 4 Time Value of Money: Valuing Cash Flow Streams……Page 123
Applying the Rules of Valuing Cash Flows to a Cash Flow Stream……Page 124
Using a Financial Calculator: Solving for Present and Future Values of Cash Flow Streams……Page 127
Perpetuities……Page 128
Historical Examples of Perpetuities……Page 130
Present Value of an Annuity……Page 131
Future Value of an Annuity……Page 134
4.4 Growing Cash Flows……Page 135
Growing Perpetuity……Page 136
Growing Annuity……Page 138
Solving for the Cash Flows……Page 139
Rate of Return……Page 142
Solving for the Number of Periods……Page 145
4.6 Non-Annual Cash Flows……Page 146
Summing It Up……Page 147
Summary……Page 148
Problems……Page 149
Data Case ……Page 155
Chapter 4 Appendix Using a Financial Calculator……Page 156
CHAPTER 5 Interest Rates……Page 159
The Effective Annual Rate……Page 160
Adjusting the Discount Rate to Different Time Periods……Page 161
Annual Percentage Rates……Page 162
COMMON MISTAKE Using the EAR in the Annuity Formula……Page 163
Computing Loan Payments……Page 165
Computing the Outstanding Loan Balance……Page 167
5.3 The Determinants of Interest Rates……Page 168
Inflation and Real Versus Nominal Rates……Page 169
Investment and Interest Rate Policy……Page 170
How Is Inflation Actually Calculated?……Page 171
The Yield Curve and Discount Rates……Page 172
INTERVIEW WITH Kevin M. Warsh……Page 174
The Yield Curve and the Economy……Page 175
5.4 The Opportunity Cost of Capital……Page 178
Interest Rates, Discount Rates, and the Cost of Capital……Page 179
Summary……Page 180
Critical Thinking……Page 181
Problems……Page 182
CHAPTER 6 Bonds……Page 187
6.1 Bond Terminology……Page 188
6.2 Zero-Coupon Bonds……Page 189
Yield to Maturity of a Zero-Coupon Bond……Page 190
GLOBAL FINANCIAL CRISIS Pure Discount Bonds Trading at a Premium……Page 191
Risk-Free Interest Rates……Page 192
Coupon Bond Cash Flows……Page 193
The U.S. Treasury Market……Page 194
Yield to Maturity of a Coupon Bond……Page 195
Finding Bond Prices on the Web……Page 197
Interest Rate Changes and Bond Prices……Page 198
Time and Bond Prices……Page 201
Interest Rate Risk and Bond Prices……Page 202
Bond Prices in Practice……Page 205
6.5 Corporate Bonds……Page 206
Are Treasuries Really Default-Free Securities?……Page 207
Corporate Bond Yields……Page 208
Corporate Yield Curves……Page 209
The Credit Crisis and Bond Yields……Page 211
Summary……Page 213
Critical Thinking……Page 214
Problems……Page 215
Data Case……Page 219
Chapter 6 Appendix A Solving for the Yield to Maturity of a Bond Using a Financial Calculator……Page 220
Chapter 6 Appendix B The Yield Curve and the Law of One Price……Page 221
CHAPTER 7 Stock Valuation……Page 225
Stock Market Reporting: Stock Quotes……Page 226
Common Stock……Page 227
Preferred Stock……Page 228
7.2 The Mechanics of Stock Trades……Page 229
A One-Year Investor……Page 230
Dividend Yields, Capital Gains, and Total Returns……Page 231
A Multiyear Investor……Page 232
Dividend-Discount Model Equation……Page 233
Constant Dividend Growth……Page 234
Dividends Versus Investment and Growth……Page 235
Changing Growth Rates……Page 237
COMMON MISTAKE Forgetting to “Grow” This Year’s Dividend……Page 238
Uncertain Dividend Forecasts……Page 240
Non-Dividend-Paying Stocks……Page 241
7.6 Share Repurchases and the Total Payout Model……Page 242
7.7 Putting It All Together……Page 243
Summary……Page 244
Problems……Page 246
PART 2 INTEGRATIVE CASE……Page 250
PART 3 Valuation and the Firm……Page 253
CHAPTER 8 Investment Decision Rules……Page 255
Net Present Value……Page 256
The NPV Decision Rule……Page 257
Organizing the Cash Flows and Computing the NPV……Page 258
The NPV Profile……Page 259
8.3 Alternative Decision Rules……Page 260
USING EXCEL Computing NPV and IRR……Page 261
The Payback Rule……Page 262
The Internal Rate of Return Rule……Page 263
Modified Internal Rate of Return……Page 267
Why Do Rules Other Than the NPV Rule Persist?……Page 268
8.4 Choosing Between Projects……Page 270
Differences in Scale……Page 271
INTERVIEW WITH Dick Grannis……Page 274
Timing of the Cash Flows……Page 275
8.5 Evaluating Projects with Different Lives……Page 276
Important Considerations When Using the Equivalent Annual Annuity……Page 278
Evaluating Projects with Different Resource Requirements……Page 279
8.7 Putting It All Together……Page 282
Summary……Page 283
Critical Thinking……Page 284
Problems……Page 285
Data Case……Page 290
CHAPTER 9 Fundamentals of Capital Budgeting……Page 293
9.1 The Capital Budgeting Process……Page 294
Operating Expenses Versus Capital Expenditures……Page 295
Incremental Revenue and Cost Estimates……Page 296
Incremental Earnings Forecast……Page 297
9.3 Determining Incremental Free Cash Flow……Page 299
Converting from Earnings to Free Cash Flow……Page 300
Calculating Free Cash Flow Directly……Page 303
Calculating the NPV……Page 304
USING EXCEL Capital Budgeting Using a Spreadsheet Program……Page 305
Project Externalities……Page 306
COMMON MISTAKE The Sunk Cost Fallacy……Page 307
Adjusting Free Cash Flow……Page 308
Replacement Decisions……Page 310
Sensitivity Analysis……Page 311
Break-Even Analysis……Page 313
INTERVIEW WITH David Holland……Page 314
Scenario Analysis……Page 315
USING EXCEL Project Analysis Using Excel……Page 316
9.6 Real Options in Capital Budgeting……Page 317
Option to Abandon……Page 318
Summary……Page 319
Critical Thinking……Page 320
Problems……Page 321
Data Case……Page 328
CHAPTER 9 APPENDIX MACRS Depreciation……Page 329
CHAPTER 10 Stock Valuation: A Second Look……Page 331
Valuing the Enterprise……Page 332
Implementing the Model……Page 333
Connection to Capital Budgeting……Page 334
Valuation Multiples……Page 336
Limitations of Multiples……Page 341
10.3 Stock Valuation Techniques: The Final Word……Page 342
INTERVIEW WITH Marilyn Fedak……Page 343
Information in Stock Prices……Page 344
Forms of Market Efficiency……Page 346
Lessons for Investors and Corporate Managers……Page 348
The Efficient Markets Hypothesis Versus No Arbitrage……Page 349
Hanging On to Losers and the Disposition Effect……Page 350
Investor Attention, Mood, and Experience……Page 351
Summary……Page 353
Problems……Page 354
Data Case……Page 358
PART 3 INTEGRATIVE CASE……Page 360
PART 4 Risk and Return……Page 363
CHAPTER 11 Risk and Return in Capital Markets……Page 365
11.1 A First Look at Risk and Return……Page 366
11.2 Historical Risks and Returns of Stocks……Page 368
Computing Historical Returns……Page 369
Average Annual Returns……Page 371
Arithmetic Average Returns Versus Compound Annual Returns……Page 373
The Variance and Volatility of Returns……Page 374
USING EXCEL Computing the Standard Deviation of Historical Returns……Page 376
The Normal Distribution……Page 377
The Returns of Large Portfolios……Page 379
Theft Versus Earthquake Insurance: An Example……Page 380
Types of Risk……Page 381
Unsystematic Versus Systematic Risk……Page 382
Diversifiable Risk and the Risk Premium……Page 384
The Importance of Systematic Risk……Page 385
Summary……Page 387
Problems……Page 389
Data Case……Page 392
CHAPTER 12 Systematic Risk and the Equity Risk Premium……Page 395
Portfolio Returns……Page 396
Expected Portfolio Return……Page 398
Diversifying Risks……Page 399
Measuring Stocks’ Co-Movement: Correlation……Page 401
Computing a Portfolio’s Variance and Standard Deviation……Page 403
The Volatility of a Large Portfolio……Page 405
Nobel Prize Harry Markowitz……Page 406
Role of the Market Portfolio……Page 407
Market Risk and Beta……Page 408
Index Funds……Page 409
COMMON MISTAKE Mixing Standard Deviation and Beta……Page 411
Estimating Beta from Historical Returns……Page 412
USING EXCEL Calculating a Stock’s Beta……Page 414
The CAPM Equation Relating Risk to Expected Return……Page 415
Why Not Estimate Expected Returns Directly?……Page 416
The Security Market Line……Page 417
The CAPM and Portfolios……Page 419
The Big Picture……Page 420
Summary……Page 421
Problems……Page 422
Multi-Factor Models……Page 427
Fama-French-Carhart Factor Specification……Page 428
CHAPTER 13 The Cost of Capital……Page 431
Opportunity Cost and the Overall Cost of Capital……Page 432
Weighted Averages and the Overall Cost of Capital……Page 433
Weighted Average Cost of Capital Calculations……Page 434
Cost of Debt Capital……Page 435
COMMON MISTAKE Using the Coupon Rateas the Cost of Debt……Page 436
Cost of Preferred Stock Capital……Page 437
Cost of Common Stock Capital……Page 438
WACC Equation……Page 440
Weighted Average Cost of Capital in Practice……Page 441
Methods in Practice……Page 442
13.4 Using the WACC to Value a Project……Page 443
Key Assumptions……Page 444
WACC Method Application: Extending the Life of a DuPont Facility……Page 445
Cost of Capital for a New Acquisition……Page 446
Divisional Costs of Capital……Page 447
13.6 When Raising External Capital Is Costly……Page 448
Summary……Page 450
Critical Thinking……Page 451
Problems……Page 452
Data Case……Page 455
PART 4 INTEGRATIVE CASE……Page 457
PART 5 Long-Term Financing……Page 459
CHAPTER 14 Raising Equity Capital……Page 461
Sources of Funding……Page 462
Securities and Valuation……Page 464
Advantages and Disadvantages of Going Public……Page 466
Primary and Secondary IPO Offerings……Page 468
Other IPO Types……Page 473
Underpriced IPOs……Page 476
Hot” and “Cold” IPO Markets……Page 478
High Cost of Issuing an IPO……Page 479
Poor Post-IPO Long-Run Stock Performance……Page 480
SEO Process……Page 481
SEO Price Reaction……Page 483
SEO Costs……Page 484
Summary……Page 485
Problems……Page 486
Data Case……Page 489
CHAPTER 15 Debt Financing……Page 491
Debt Financing at Hertz: Bank Loans……Page 492
Public Debt……Page 493
Debt Financing at Hertz: Public Debt……Page 495
Advantages of Covenants……Page 497
Call Provisions……Page 498
New York City Calls Its Municipal Bonds……Page 500
Convertible Provisions……Page 501
Summary……Page 504
Critical Thinking……Page 505
Problems……Page 506
TI-BAII Plus Professional……Page 507
PART 5 INTEGRATIVE CASE……Page 508
PART 6 Capital Structure and Payout Policy……Page 511
CHAPTER 16 Capital Structure……Page 513
Capital Structure Choices Within Industries……Page 514
16.2 Capital Structure in Perfect Capital Markets……Page 516
Application: Financing a New Business……Page 517
Leverage and Firm Value……Page 518
The Effect of Leverage on Risk and Return……Page 519
Leverage and the Cost of Capital……Page 521
COMMON MISTAKE Capital Structure Fallacies……Page 522
GLOBAL FINANCIAL CRISIS Bank Capital Regulation and the ROE Fallacy……Page 524
NOBEL PRIZE Franco Modigliani and Merton Miller……Page 525
The Interest Tax Deduction and Firm Value……Page 526
Value of the Interest Tax Shield……Page 527
The Interest Tax Shield with Permanent Debt……Page 529
Debt and Taxes: The Bottom Line……Page 530
16.4 The Costs of Bankruptcy and Financial Distress……Page 531
Indirect Costs of Financial Distress……Page 532
Differences Across Firms……Page 533
Optimal Leverage……Page 534
Agency Costs……Page 535
Airlines Use Financial Distress to Their Advantage……Page 536
GLOBAL FINANCIAL CRISIS Moral Hazard and Government Bailouts……Page 537
Debt and Information……Page 538
16.7 Capital Structure: Putting It All Together……Page 540
Summary……Page 541
Problems……Page 543
CHAPTER 16 APPENDIX The Bankruptcy Codel……Page 550
CHAPTER 17 Payout Policy……Page 551
17.1 Cash Distributions to Shareholders……Page 552
Dividends……Page 553
Share Repurchases……Page 554
17.2 Dividends Versus Share Repurchases in a Perfect Capital Market……Page 555
Alternative Policy 2: Share Repurchase (No Dividend)……Page 556
Alternative Policy 3: High Dividend (Equity Issue)……Page 558
Modigliani-Miller and Dividend Policy Irrelevance……Page 559
Dividend Policy with Perfect Capital Markets……Page 560
Optimal Dividend Policy with Taxes……Page 561
Tax Differences Across Investors……Page 564
Retaining Cash with Perfect Capital Markets……Page 566
Retaining Cash with Imperfect Capital Markets……Page 567
Dividend Smoothing……Page 570
Dividend Signaling……Page 571
Signaling and Share Repurchases……Page 572
INTERVIEW WITH John Connors……Page 573
Stock Dividends and Splits……Page 574
Spin-Offs……Page 575
17.7 Advice for the Financial Manager……Page 576
Summary……Page 577
Problems……Page 579
Data Case……Page 582
PART 6 INTEGRATIVE CASE……Page 584
PART 7 Financial Planning and Forecasting……Page 585
CHAPTER 18 Financial Modeling and Pro Forma Analysis……Page 587
Plan for Future Funding Needs……Page 588
Percent of Sales Method……Page 589
Pro Forma Income Statement……Page 590
Pro Forma Balance Sheet……Page 591
Making the Balance Sheet Balance: Net New Financing……Page 592
18.3 Forecasting a Planned Expansion……Page 594
KMS Designs’ Expansion: Financing Needs……Page 595
KMS Designs’ Expansion: Pro Forma Income Statement……Page 596
Forecasting the Balance Sheet……Page 598
18.4 Growth and Firm Value……Page 599
Sustainable Growth Rate and External Financing……Page 600
Forecasting Free Cash Flows……Page 603
KMS Designs’ Expansion: Effect on Firm Value……Page 605
Optimal Timing and the Option to Delay……Page 608
Summary……Page 609
Problems……Page 610
CHAPTER 18 APPENDIX The Balance Sheet and Statement of Cash Flows……Page 614
CHAPTER 19 Working Capital Management……Page 617
The Cash Cycle……Page 618
Working Capital Needs by Industry……Page 620
Firm Value and Working Capital……Page 621
19.2 Trade Credit……Page 622
Trade Credit and Market Frictions……Page 623
COMMON MISTAKE Using APR Instead of EAR to Compute the Cost of Trade Credit……Page 624
Managing Float……Page 625
The 5 C’s of Credit……Page 626
Monitoring Accounts Receivable……Page 628
Determining Accounts Payable Days Outstanding……Page 630
Stretching Accounts Payable……Page 631
Benefits of Holding Inventory……Page 632
Inventory Management Adds to the Bottom Line at Gap……Page 633
Alternative Investments……Page 634
Summary……Page 636
Problems……Page 638
Data Case……Page 641
CHAPTER 20 Short-Term Financial Planning……Page 643
Negative Cash Flow Shocks……Page 644
Seasonalities……Page 645
The Cash Budget……Page 647
Permanent Versus Temporary Working Capital……Page 649
Financing Policy Choices……Page 650
Line of Credit……Page 652
Common Loan Stipulations and Fees……Page 653
Short-Term Financing and the Financial Crisis of the Fall of 2008……Page 655
A Seventeenth-Century Financing Solution……Page 657
Inventory as Collateral……Page 658
20.6 Putting It All Together: Creating a Short-Term Financial Plan……Page 660
Summary……Page 661
Critical Thinking……Page 662
Problems……Page 663
PART 7 INTEGRATIVE CASE……Page 667
PART 8 Special Topics……Page 673
CHAPTER 21 Option Applications and Corporate Finance……Page 675
Option Contracts……Page 676
Stock Option Quotations……Page 677
21.2 Option Payoffs at Expiration……Page 679
The Long Position in an Option Contract……Page 680
The Short Position in an Option Contract……Page 681
Profits for Holding an Option to Expiration……Page 683
Returns for Holding an Option to Expiration……Page 685
Option Prices and the Exercise Date……Page 686
Option Prices and Volatility……Page 687
21.4 The Black-Scholes Option Pricing Formula……Page 688
Portfolio Insurance……Page 690
21.6 Options and Corporate Finance……Page 693
Summary……Page 695
Problems……Page 696
Data Case……Page 698
CHAPTER 22 Mergers and Acquisitions……Page 701
22.1 Background and Historical Trends……Page 702
Merger Waves……Page 703
22.2 Market Reaction to a Takeover……Page 704
Economies of Scale and Scope……Page 705
Monopoly Gains……Page 706
Tax Savings from Operating Losses……Page 707
Diversification……Page 708
Earnings Growth……Page 709
Managerial Motives to Merge……Page 710
Valuation……Page 711
The Offer……Page 712
Merger “Arbitrage”……Page 714
Tax and Accounting Issues……Page 715
Board and Shareholder Approval……Page 716
Poison Pills……Page 717
Staggered Boards……Page 718
Other Defensive Strategies……Page 719
Weyerhaeuser’s Hostile Bid for Willamette Industries……Page 720
The Free Rider Problem……Page 721
The Leveraged Buyout……Page 722
The Leveraged Buyout of RJR-Nabisco by KKR ……Page 724
Competition……Page 725
Summary……Page 726
Problems……Page 728
CHAPTER 23 International Corporate Finance……Page 731
The Foreign Exchange Market……Page 732
23.2 Exchange Rate Risk……Page 734
Exchange Rate Fluctuations……Page 735
Hedging with Forward Contracts……Page 737
Cash-and-Carry and the Pricing of Currency Forwards……Page 738
Hedging Exchange Rate Risk with Options……Page 742
23.3 Internationally Integrated Capital Markets……Page 743
23.4 Valuation of Foreign Currency Cash Flows……Page 745
Application: Ityesi, Inc…….Page 746
The Law of One Price as a Robustness Check……Page 748
23.5 Valuation and International Taxation……Page 749
Multiple Foreign Projects and Deferral of Earnings Repatriation……Page 750
Macro-Level Distortions……Page 751
Implications of Internationally Segmented Capital Markets……Page 752
Application: Ityesi, Inc…….Page 754
Summary……Page 756
Problems……Page 758
Data Case……Page 762
A……Page 765
B……Page 766
C……Page 767
D……Page 769
E……Page 771
F……Page 772
G……Page 774
I……Page 775
L……Page 777
M……Page 778
O……Page 779
P……Page 780
R……Page 782
S……Page 783
T……Page 786
W……Page 787
Z……Page 788

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