Corporate Finance - A Focused Approach - 4th Edition (2010)

841 Pages·2010·21.23 MB·English

by  Michael C. Ehrhardt

F U S
REQUENTLY SED YMBOLS
ACP Averagecollectionperiod
ADR AmericanDepositoryReceipt
APR Annualpercentagerate
AR Accountsreceivable
b Betacoefficient,ameasureofanasset’smarketrisk
b Leveredbeta
L
b Unleveredbeta
U
BEP Basicearningpower
BVPS Bookvaluepershare
CAPM CapitalAssetPricingModel
CCC Cashconversioncycle
CF Cashflow;CF isthecashflowinPeriodt
t
CFPS Cashflowpershare
CR Conversionratio
CV Coefficientofvariation
Δ Difference,orchange(uppercasedelta)
D Dividendofpreferredstock
ps
D DividendinPeriodt
t
DCF Discountedcashflow
D/E Debt-to-equityratio
DPS Dividendspershare
DRIP Dividendreinvestmentplan
DRP Defaultriskpremium
DSO Dayssalesoutstanding
EAR Effectiveannualrate,EFF%
EBIT Earningsbeforeinterestandtaxes;netoperatingincome
EBITDA Earningsbeforeinterest,taxes,depreciation,andamortization
EPS Earningspershare
EVA EconomicValueAdded
(1)
F Fixedoperatingcosts
(2)
Flotationcost
FCF Freecashflow
FV FuturevalueforYearN
N
FVA FuturevalueofanannuityforNyears
N
g Growthrateinearnings,dividends,andstockprices
I Interestrate;alsodenotedbyr
I/YR Interestratekeyonsomecalculators
INT Interestpaymentindollars
IP Inflationpremium
IPO Initialpublicoffering
IRR Internalrateofreturn
LP Liquiditypremium
(1)
M Maturityvalueofabond
(2)
Margin(profitmargin)
M/B Market-to-bookratio
MIRR ModifiedInternalRateofReturn
MRP Maturityriskpremium
MVA MarketValueAdded
n Numberofsharesoutstanding
N Calculatorkeydenotingnumberofperiods
N(d) Representsareaunderastandardnormaldistributionfunction
i
NOPAT Netoperatingprofitaftertaxes
NOWC Netoperatingworkingcapital
NPV Netpresentvalue
(1)
P PriceofashareofstockinPeriodt;P =priceofthestocktoday
0
(2)
Salespriceperunitofproductsold
P Conversionprice
c
P Priceofgoodinforeigncountry
f
P Priceofgoodinhomecountry
h
P Astock’shorizon,orterminal,value
N
P/E Price/earningsratio
PMT Paymentofanannuity
PPP Purchasingpowerparity
PV Presentvalue
PVA PresentvalueofanannuityforNyears
N
Q Quantityproducedorsold
Q Breakevenquantity
BE
(1)
r Apercentagediscountrate,orcostofcapital;alsodenotedbyi
(2)
Nominalrisk-adjustedrequiredrateofreturn
¯r “rbar,”historic,orrealized,rateofreturn
^r “rhat,”anexpectedrateofreturn
r* Realrisk-freerateofreturn
r Before-taxcostofdebt
d
r Costofnewcommonstock(outsideequity)
e
r Interestrateinforeigncountry
f
r Interestrateinhomecountry
h
r Requiredreturnforanindividualfirmorsecurity
i
r Returnfor“themarket”orforan“average”stock
M
r Nominalrateofinterest;alsodenotedbyi
NOM NOM
(1)
r Costofpreferredstock
ps
(2) Portfolio’sreturn
r Periodicrateofreturn
PER
r Rateofreturnonarisk-freesecurity
RF
(1)
r Requiredreturnoncommonstock
s
(2)
Costofoldcommonstock(insideequity)
ρ Correlationcoefficient(lowercaserho);alsodenotedbyRwhenusinghistoricaldata
ROA Returnonassets
ROE Returnonequity
RP Riskpremium
RP Marketriskpremium
M
RR Retentionrate
(1)
S Sales
(2)
Estimatedstandarddeviationforsampledata
(3)
Intrinsicvalueofstock(i.e.,allcommonequity)
SML SecurityMarketLine
∑ Summationsign(uppercasesigma)
σ Standarddeviation(lowercasesigma)
σ2 Variance
t Timeperiod
T Marginalincometaxrate
TV Astock’shorizon,orterminal,value
N
TIE Timesinterestearned
V Variablecostperunit
V Bondvalue
B
V Totalmarketvalueofaleveredfirm
L
V Valueofoperations
op
V Valueofpreferredstock
ps
V Totalmarketvalueofanunleveredfirm
U
VC Totalvariablecosts
w Proportionorweight
w Weightofdebt
d
w Weightofpreferredstock
ps
w Weightofcommonequityraisedinternallybyretainingearnings
s
w Weightofcommonequityraisedexternallybyissuingstock
ce
WACC Weightedaveragedcostofcapital
X Exercisepriceofoption
YTC Yieldtocall
YTM Yieldtomaturity
Corporate Finance:
A Focused Approach
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Corporate Finance:
A Focused Approach
FOURTH EDITION
MICHAEL C. EHRHARDT
University of Tennessee
EUGENE F. BRIGHAM
University of Florida
Australia(cid:129)Brazil(cid:129)Japan(cid:129)Korea(cid:129)Mexico(cid:129)Singapore(cid:129)Spain(cid:129)UnitedKingdom(cid:129)UnitedStates
CorporateFinance:AFocusedApproach, ©2011,2009South-Western,apartofCengageLearning
FourthEdition
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Brief Contents
Preface xvi
PART 1 Fundamental Concepts PART 3 Stocks and Options 215
of Corporate Finance 1
CHAPTER 1 An Overview of Financial CHAPTER 6 Risk, Return, and the Capital
Management and the Financial Asset Pricing Model 217
Environment 3 WebExtensions 6A: Continuous Probability
WebExtensions 1A: An Overview of Derivatives Distributions
1B: A Closer Look at the Stock 6B: Estimating Beta with
Markets a Financial Calculator
CHAPTER 2 Financial Statements, Cash Flow, CHAPTER 7 Stocks, Stock Valuation,
and Taxes 47 and Stock Market
WebExtensions 2A: The Federal Income Tax Equilibrium 267
System for Individuals WebExtensions 7A: Derivation of Valuation
CHAPTER 3 Analysis of Financial Equations
Statements 87 CHAPTER 8 FinancialOptionsandApplications
inCorporateFinance 305
PART 2 Fixed Income
Securities 121
CHAPTER 4 Time Value of Money 123 PART 4 Projects and Their
Valuation 333
WebExtensions 4A: The Tabular Approach
4B:DerivationofAnnuityFormulas CHAPTER 9 The Cost of Capital 335
4C: Continuous Compounding WebExtensions 9A: The Required Return
CHAPTER 5 Bonds, Bond Valuation, and AssumingNonconstant Dividends
Interest Rates 173 and Stock Repurchases
WebExtensions 5A: A Closer Look at Zero CHAPTER 10 The Basics of Capital Budgeting:
Coupon Bonds Evaluating Cash Flows 379
5B: A Closer Look at TIPS: WebExtensions 10A: The Accounting Rate of
Treasury Inflation-Protected Return (ARR)
Securities CHAPTER 11 Cash Flow Estimation and Risk
5C: A Closer Look at Bond Risk: Analysis 423
Duration WebExtensions 11A: Certainty Equivalents
5D:ThePureExpectationsTheory and Risk-Adjusted Discount
andEstimationofForwardRates Rates
v
vi BriefContents
PART 5 Corporate Valuation PART 7 Managing Global

and Governance 471 Operations 639
CHAPTER 12 FinancialPlanningandForecasting CHAPTER 16 Working Capital
FinancialStatements 473 Management 641
WebExtensions 12A: Advanced Techniques for WebExtensions 16A:SecuredShort-TermFinancing
Forecasting Financial Statements CHAPTER 17 Multinational Financial
Accounts
Management 691
CHAPTER 13 Corporate Valuation,
Value-Based Management and Appendix 731
Corporate Governance 511
Appendix A SolutionstoSelf-TestProblems 731
Appendix B Answers to End-of-Chapter
PART 6 Cash Distributions and Problems 753
Capital Structure 557 Appendix C SelectedEquationsandData 759
CHAPTER 14 Distributions to Shareholders: Appendix D Values of the Areas under the
Standard Normal Distribution
Dividends and Repurchases 559
Function 771
CHAPTER 15 Capital Structure
Glossary 773
Decisions 599
Name Index 791
WebExtensions 15A: Degree of Leverage Subject Index 795
Contents
Preface .................................................................xvi
PART 1 Fundamental Concepts of Corporate Finance 1
CHAPTER 1
An Overview of Financial Management and the Financial Environment 3
TheFive-MinuteMBA 4
Box:SayHellototheGlobalEconomicCrisis! 5
TheCorporate Life Cycle 5
Box:Columbus WasWrong—theWorld IsFlat!And Hot,andCrowded! 6
ThePrimary Objectiveof theCorporation: ValueMaximization 9
Box:Ethics forIndividualsand Businesses 10
Box:Corporate Scandals andMaximizing StockPrice 13
AnOverviewof theCapitalAllocation Process 13
Financial Securities 15
TheCostof Money 19
Financial Institutions 23
Financial Markets 27
TradingProcedures inFinancial Markets 29
Typesof StockMarketTransactions 30
Box:Rational Exuberance? 31
TheSecondary StockMarkets 31
Box:Measuring theMarket 33
StockMarketReturns 34
TheGlobal Economic Crisis 36
TheBigPicture 42
e-Resources 43
Summary 44
Web Extensions
1A:An OverviewofDerivatives
1B:ACloser LookattheStockMarkets
CHAPTER 2
Financial Statements, Cash Flow, and Taxes 47
Box:Intrinsic Value, FreeCash Flow,andFinancial Statements 48
Financial Statements andReports 48
TheBalanceSheet 49
Box:Let’s PlayHide-and-Seek! 51
vii