Applied Corporate Finance : Making Value-Enhancing Decisions in the Real World

This textbook helps students truly understand how to apply the principles behind corporate finance in a real world context from both a firm and investor perspective. In its second edition, this text focuses on traditional theory applied to a holistic and realistic business case study, written as a novel set in current times so that all readers can relate. As such, this textbook offers readers both a quantitative and qualitative perspective on topics such as capital budgeting, time value of money, corporate risk, and capital structure. The sections are laid out to mirror the financial decision process, making it easier for readers to grasp the idea of the corporate financial life cycle. New topics such as socially responsible investing and private capital markets are also incorporated into this edition. Finally, PowerPoint slides, answer keys and data sets are available online for instructors. Preface In the Real World Prologue Acknowledgments Contents 1: In the Beginning... 1.1 Types of Business Organizations 1.1.1 Sole Proprietorships 1.1.2 Partnerships 1.1.3 Corporations 1.2 Primary Markets and the Going-Public Process 1.2.1 Primary Versus Secondary Markets 1.2.2 Private Capital Markets 1.2.3 The IPO Process 1.2.4 IPO Paperwork 1.2.5 After Issuance 1.3 The Goal of the Firm 1.3.1 The Only Appropriate Goal 1.3.2 Other Goals 1.4 Ownership and Control 1.5 The Corporate Finance Process 1.5.1 Capital Budgeting 1.5.2 Capital Structure 1.5.3 Working Capital Management 2: Financial Statement Analysis: What Is Right, What Is Wrong, and Why? 2.1 Finance and Accounting 2.2 Income Statement 2.2.1 Taxes 2.2.2 Depreciation 2.3 The Balance Sheet 2.4 The Cash Flow Statement 2.5 Using Accounting Statements in Finance 2.6 Standardized Statements 2.7 Ratio Analysis 2.7.1 Short-Term Solvency Ratios 2.7.2 Long-Term Solvency Ratios 2.7.3 Asset Utilization Ratios 2.7.4 Profitability Ratios 2.7.5 Market Ratios 2.7.6 Dividend Ratios 2.7.7 DuPont Identity 2.7.8 Growth Rates 3: Cash Flow: Easy Come, Easy Go 3.1 Introducing Cash Flows 3.2 Cash Flow Identity 3.2.1 Operating Cash Flow 3.2.2 Net Capital Spending 3.2.3 Change in Net Working Capital 3.2.4 Cash Flow to Creditors 3.2.5 Cash Flow to Shareholders 3.2.6 Balancing Act 3.3 Projects and Cash Flow 3.3.1 Relevant Cash Flows 3.3.2 Pro Forma Statements 3.3.3 Project Expected Cash Flows 4: The Right Frame of Time 4.1 Introducing the Time Value of Money 4.2 Single Cash Flows 4.2.1 Future Value of a Lump Sum 4.2.2 Present Value of a Lump Sum 4.2.3 More than Annual Compounding 4.2.4 Solving for Rates and Time Periods 4.3 Multiple Cash Flows 4.3.1 Future Value of Multiple Cash Flows 4.3.2 Present Value of Multiple Cash Flows 4.3.3 Future Value of an Annuity 4.3.4 Present Value of an Annuity 4.3.5 Multiple Cash Flows with More Frequent Compounding 4.3.6 Solving for Rate, Payment, and Time 4.4 Loans 4.4.1 Pure Discount Loans 4.4.2 Interest-Only Loans 4.4.3 Amortized Loans 5: Capital Structure: Borrow It! 5.1 Private and Public Debt 5.2 Introducing Coupon 5.2.1 The Bond Issuance Process 5.2.2 Characteristics of Coupon Bonds 5.2.3 Bond Markets 5.3 Bond Valuation 5.3.1 Bond Prices 5.3.2 Bond Yields 5.3.3 Semiannual Payments 5.3.4 Callable Bonds TECH HELP 5.1 Bond Prices and Yields Solving for Price Solving for YTM Callable Bonds 5.4 Other Types of Bonds 5.4.1 Zero-Coupon Bonds 5.4.2 Convertible Bonds 6: Capital Structure: Sell It Off! 6.1 Public and Private Equity 6.2 Valuation of Common Stock 6.3 Dividends 6.4 Pricing Models 6.4.1 Zero Growth 6.4.2 Constant Growth 6.4.3 Multiple Growth Rates 6.5 A Note on the Usefulness of the DGM 6.6 Required Return 6.7 Valuation Models 6.8 Stock Exchanges 6.8.1 The New York Stock Exchange 6.8.2 Nasdaq 6.8.3 The Changing World of Stock Exchanges 7: The Rocky Marriage of Risk and Return 7.1 Introduction to Risk and Return 7.2 Historical Returns 7.2.1 Dollar Returns 7.2.2 Percentage Returns 7.2.3 Geometric Returns 7.3 Historical Risk 7.4 Confidence Intervals 7.5 Relationship Between Risk and Return 7.6 Expected Returns 7.7 Portfolios 7.7.1 Portfolio Expected Returns 7.7.2 Portfolio Risk 7.8 Quantifying the Relationship Between Risk and Return 7.8.1 Systematic and Unsystematic Risk 7.8.2 Beta 7.8.3 Portfolio Beta 7.8.4 The Security Market Line 7.8.5 The Capital Asset Pricing Model 7.8.6 Fama-French Models 7.9 CAPM and the Cost of Equity 8: This Is So WACC! 8.1 The Cost of Capital 8.2 Sources of Capital 8.2.1 Existing Equity 8.2.2 Preferred Equity 8.2.3 New Equity 8.2.4 Coupon Bonds 8.2.5 Zero-Coupon Bonds 8.2.6 Private Sources of Capital 8.3 Capital Structure Weights 8.4 Weighted Average Cost of Capital 8.5 Capital Structure Theories 8.5.1 M&M Proposition I 8.5.2 M&M Proposition II 8.5.3 M&M Proposition I with Taxes 8.5.4 Financial Distress Costs 8.5.5 The Trade-Off Theory of Capital Structure 8.6 Applications of the Trade-Off Theory 8.7 Additional Details 9: Capital Budgeting Decisions: The End of the Road Meets the Beginning of Another 9.1 Capital Budgeting Tools 9.1.1 Payback Period 9.1.2 Discounted Payback Period 9.1.3 Average Accounting Return 9.1.4 Net Present Value 9.1.5 Profitability Index 9.1.6 Internal Rate of Return 9.2 A Note on the Capital Budgeting Tools 9.3 Sensitivity Analysis Appendix 1 In the Real World Epilogue Appendix 2 Rowdy Power’s 2017, 2018, and 2019 Income Statements Rowdy Power 2018 and 2019 Balance Sheets Rowdy Power’s 2019 Cash Flow Statement Appendix 3 DGP, Inc.’s 2019 Income Statement and Balance Sheet StoneJetts Unlimited’s 2019 Income Statement and Balance Sheet Battery Factory‘s 2019 Income Statement and Balance Sheet Index