Analytical Corporate Finance (Springer Texts in Business and Economics)

This book draws readers’ attention to the financial aspects of daily life at a corporation by combining a robust mathematical setting and the explanation and derivation of the most popular models of the firm. Intended for third-year undergraduate students of business finance, quantitative finance, and financial mathematics, as well as first-year postgraduate students, it is based on the twin pillars of theory and analytics, which merge in a way that makes it easy for students to understand the exact meaning of the concepts and their representation and applicability in real-world contexts. Examples are given throughout the chapters in order to clarify the most intricate aspects; where needed, there are appendices at the end of chapters, offering additional mathematical insights into specific topics. Due to the recent growth in knowledge demand in the private sector, practitioners can also profit from the book as a bridge-builder between university and industry. Lastly, the book provides useful information for managers who want to deepen their understanding of risk management and come to recognize what may have been lacking in their own systems. Preface to the Second Edition A Modern Approach An Innovative Pedagogy A Selected Audience Addendum to the Preface Acknowledgments Contents 1: Basic Concepts 1.1 The Corporation 1.1.1 Organizational Forms 1.1.2 The Corporate Objective 1.2 Financial Statement Analysis 1.2.1 Balance Sheet 1.2.2 Income Statement 1.2.3 Cash Flow Statement 1.2.4 Pro-Forma Statements 1.3 Arbitrage 1.3.1 The Law of One Price 1.3.2 Forms of Arbitrage 1.4 Summary Problems Case 1.1: Pro-Forma Statements Projectcast Ltd The Case Questions References 2: Valuation Tools 2.1 The Time Value of Money 2.1.1 The Rules of Time Travel 2.1.2 Valuation of Cash Flow Streams 2.1.3 Annuities and Perpetuities 2.2 Interest Rates 2.2.1 Types of Interest Rates 2.2.2 Compounding Frequencies 2.2.3 Drivers of Interest Rates 2.3 Present Value Calculation 2.3.1 Net Present Value 2.3.2 Internal Rate of Return 2.3.3 Growing Cash Flows 2.4 Summary Problems Case 2.1: Time Value of Money Lottery in the USA The Case Questions References 3: The Relationship Between Risk and Return 3.1 Expected Return and Volatility 3.1.1 The Portfolio Return 3.1.2 Volatility and Correlation 3.1.3 Maximum Likelihood Methods Snapshot 3.1: Risk and Return in Excel 3.1.4 The Risk/Return Trade-Off 3.1.5 Optimal Portfolios 3.1.6 The Market Price of Risk Snapshot 3.2: Portfolio Optimization in Excel 3.2 The Capital Asset Pricing Model 3.2.1 Model Assumptions 3.2.2 The Security Market Line 3.2.3 Beyond CAPM 3.3 Summary Problems Appendix: Liquidity CAPM Case Study 3.1: Risk and Return Financo Ltd The Case Questions References 4: Business Analysis 4.1 Capital Budgeting Decision Rules 4.1.1 The Net Present Value Rule 4.1.2 The Internal Rate of Return Rule 4.1.3 The Payback Rule 4.1.4 Profitability Index Rule 4.2 Project Valuation 4.2.1 Scenario Analysis 4.2.2 Decision Trees 4.2.3 Simulations 4.3 Subdisciplines of Business Analysis 4.3.1 Enterprise Analysis 4.3.2 Business Requirements Analysis 4.3.3 Analysis Techniques 4.4 Project Finance 4.4.1 Project Finance vs. Corporate Finance 4.4.2 Project Risks 4.4.3 Project Finance and Development 4.5 Summary Problems Case 4.1: Net Present Value Voltoncamp Ltd The Case Questions References 5: Debt Valuation 5.1 Bond Markets 5.1.1 Bond Fundamentals 5.1.2 Bond Types 5.1.3 Knowing the Risks 5.2 The Price/Yield Relationship 5.2.1 Bond Prices and Yields 5.2.2 Yield Curve 5.2.3 Duration and Convexity 5.3 The Term Structure of Interest Rates 5.3.1 Brownian Motion 5.3.2 Single-Factor Models 5.3.3 Multifactor Models 5.4 Summary Problems Appendix 5.1: Principal Component Analysis of the Term Structure References 6: Equity Valuation 6.1 The Stock Market 6.1.1 Market Microstructure 6.1.2 Funding vs. Market Liquidity 6.2 Common Equity 6.2.1 Dividend Discount Models 6.2.2 Discounted Free Cash Flow Models 6.2.3 Relative Valuation Models 6.3 Special Issuances 6.3.1 Preferred Stocks 6.3.2 Warrants 6.3.3 Convertibles 6.4 Summary Problems References 7: Capital Structure 7.1 The Modigliani-Miller Theorems 7.1.1 The Irrelevance of Capital Structure 7.1.2 The Weighted Average Cost of Capital 7.2 Payout Policy 7.2.1 Dividends vs. Share Repurchase 7.2.2 Modigliani-Miller Revisited 7.3 Modern Theories of Capital Structure 7.3.1 Static Trade-Off Theory and the Pecking Order Hypothesis 7.3.2 Adjusted Present Value 7.3.3 Tax-Based Theories of Capital Structure 7.4 Summary Problems Appendix 7.1: Risk-Adjusted Return on Capital Case 7.1: Capital Structure References 8: Company Valuation 8.1 CAPM Parameter Estimation 8.1.1 The Risk-Free Rate 8.1.2 The Risk Premium 8.1.3 The Beta 8.2 Valuation of Private Firms 8.2.1 The Cost of Capital 8.2.2 Beta Estimation 8.2.3 Growth and Terminal Value 8.3 A Real Case: The IPO of Facebook 8.3.1 The Road to the IPO 8.3.2 The Firm ́s Fundamentals 8.3.3 After the IPO 8.4 Summary Problems Case 8.1: Company Valuation References 9: Financial and Real Options 9.1 Basic Concepts 9.1.1 Financial Derivatives 9.1.2 Option Structure and Payout 9.1.3 Strategies and Combinations 9.2 Option Valuation 9.2.1 Binomial Trees 9.2.2 Black-Scholes-Merton Model 9.2.3 The Greeks 9.3 Real Options 9.3.1 Types of Real Options 9.3.2 Valuation Methods 9.4 Summary Problems References 10: Long-Term Financing 10.1 Early-Stage Funding 10.1.1 Angel Investors 10.1.2 Venture Capital 10.1.3 Private Equity 10.2 Initial Public Offering 10.2.1 Types of Offering 10.2.2 IPO Underpricing 10.3 Debt Financing 10.3.1 Types of Debt 10.3.2 Loans vs. Bonds 10.3.3 Leasing 10.4 Summary Problems References 11: Working Capital Management 11.1 Structure of Working Capital 11.1.1 Current Assets and Liabilities 11.1.2 Conversion Cycles 11.1.3 Significance of Short-Term Financing 11.2 Receivables and Payables 11.2.1 Accounts Receivable 11.2.2 Accounts Payable 11.3 Inventory Management 11.3.1 Definition and Purpose 11.3.2 Inventory Models 11.4 Cash and Liquidity Management 11.4.1 The Management of Cash 11.4.2 Float Management and Collection 11.5 Summary Problems Case 11.1: Conversion Cycles References 12: Financial Planning 12.1 The Birth of Business 12.1.1 Business Start-Up 12.1.2 Rights 12.2 Growth Management 12.2.1 The Life Cycle of the Firm 12.2.2 Short-Term Financial Planning 12.3 Planning and Forecasting 12.3.1 Basic Planning Rules 12.3.2 The Process of Strategic Planning 12.4 Summary Problems References 13: International Corporate Finance 13.1 Internationalization 13.1.1 International Trade 13.1.2 Multinational Corporations 13.1.3 Globalization and the Cost of Capital 13.2 Variables Involved 13.2.1 Exchange Rate 13.2.2 Purchasing Power Parity 13.2.3 Interest Rate Parity 13.3 Foreign Exchange Markets 13.3.1 Background 13.3.2 Foreign Exchange Risk 13.3.3 International Capital Budgeting 13.4 Summary Problems References 14: Special Topics 14.1 Mergers and Acquisitions 14.1.1 Reasons for a Merger 14.1.1.1 Rationales 14.1.1.2 Drivers 14.1.2 The Process of Merging and Acquiring 14.1.3 Hostile Takeovers and Defense Strategies 14.2 Corporate Governance 14.2.1 Management Failures 14.2.2 Postcrisis Perspectives 14.3 Remuneration and Incentive Schemes 14.3.1 Types of Scheme 14.3.2 Stock Options vs. Stock Units 14.4 Risk Management 14.4.1 Corporate Risk 14.4.2 From Identification to Mitigation 14.4.3 Response Strategies 14.5 Digital Transformation 14.5.1 Fintech and Operations 14.6 Summary Problems References Index The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. 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