Corporate Finance

Corporate Finance by Booth, Cleary, & Drake is designed for a corporate finance course that focuses on decision making for a business enterprise.

Authors Booth, Cleary, and Drake introduce students to the fundamental concepts in corporate finance through a step–by–step approach to working problems using extensive spreadsheet and calculator assistance. The authors also provide in–depth coverage of challenging topics in finance including derivatives and leasing. Given world news on topics like the financial crisis, the need for in depth knowledge for tomorrow s leaders in finance, and the importance of ethical decision making in financial management, Corporate Finance is tailored for tomorrow s professional.

As part of a robust digital and print program, Corporate Finance includes WileyPLUS, a student–centered learning and assessment environment where students work through practice questions and assigned end–of–chapter problems, video assessments, and interactive animations alongside an embedded e–Textbook.

WileyPLUS sold separately from text.

PART 1 THE FINANCIAL ENVIRONMENT 1

CHAPTER 1 An Introduction to Finance 2

1.1 What is finance? 3

1.2 Financial instruments and markets 6

1.3 The global financial crisis 15

Appendix 1A Careers in Finance 29

CHAPTER 2 Financial Management 33

2.1 Forms of business organizations 34

2.2 The goals of the business enterprise 42

2.3 The role of management and agency issues 45

2.4 Financial management 49

Case 2.1 The Tex Tech Company 55

Case 2.2 To invest or not to invest 56

PART 2 FINANCIAL ANALYSIS 57

CHAPTER 3 Financial Statements 58

3.1 Accounting principles 59

3.2 Financial statements 64

3.3 The tax system 79

Case 3.1 Finns Fridges 92

Case 3.2 Charlotte Honey Bee Company 93

CHAPTER 4 Financial Statement Analysis 94

4.1 A framework for financial analysis 95

4.2 Financial ratios 99

4.3 Using financial ratios 120

Case 4.1 Ratio Analysis of the Backup Zone 137

Case 4.2 Applying Altman s Model to IBM 138

PART 3 THE BASICS OF VALUATION 139

CHAPTER 5 The Time Value of Money 140

5.1 Time is money 141

5.2 Annuities and perpetuities 157

5.3 Nominal and effective rates 168

5.4 Applications 173

Case 5.1 Saving for retirement, considering different scenarios 191

Case 5.2 Evaluating an investment 191

CHAPTER 6 Debt Valuation and Interest Rates 192

6.1 The basics of bonds 193

6.2 Bond valuation 200

6.3 Bond yields 211

6.4 Government debt obligations 217

6.5 Interest rates 223

Case 6.1 Slice & Dice 236

CHAPTER 7 Equity Valuation 237

7.1 Equity securities 238

7.2 Discounted cash flow approaches to valuing equity 242

7.3 Using multiples to value equity 258

Case 7.1 Big G Company 273

Case 7.2 The Denver Company 273

Case 7.3 Nova Lobster Company 274

Appendix 7A A Short Primer on Bubbles 275

PART 4 CAPITAL MARKET THEORY AND FINANCIAL MANAGEMENT 277

CHAPTER 8 Risk, Return, and Portfolio Theory 278

8.1 Measuring returns 279

8.2 Measuring risk 289

8.3 Expected return and risk for portfolios 293

8.4 The efficient frontier 305

8.5 Diversification 309

8.6 A comprehensive example 312

The standard deviation 313

Case 8.1 The Boise Boyz Company 324

CHAPTER 9 Asset Pricing 325

9.1 The efficient frontier 326

9.2 The capital asset pricing model 332

9.3 The CAPM and market risk 337

9.4 Alternative asset pricing models 347

9.5 Market efficiency 350

9.6 Behavioral finance and financial management 358

Case 9.1 Morgantown Company Stock 368

Case 9.2 JPMorgan Chase s Sinking Profit 369

PART 5 LONG–TERM INVESTMENT DECISIONS 371

CHAPTER 10 Capital Budgeting Decisions 372

10.1 The capital budgeting process 373

10.2 Evaluating investment projects 377

10.3 Special issues 397

Case 10.1 The Austin Saddle Company Expansion 412

Appendix 10A Dealing with unequal lives 413

CHAPTER 11 Capital Budgeting: Cash Flows and Risk 417

11.1 Identifying relevant cash flows 418

11.2 Estimating cash flows 423

11.3 Sensitivity to inputs 432

11.4 Replacement decisions 438

11.5 Inflation and capital budgeting 441

Case 11.1 The Jam Music Company 449

Case 11.2 Can Tax Credits Make Solar Panels Profitable? 450

Appendix 11A Integrative Problem: Dazzle 451

PART 6 LONG–TERM FINANCING 457

CHAPTER 12 Debt Instruments 458

12.1 What is debt? 459

12.2 Short–term instruments 460

12.3 Long–term instruments 470

12.4 Bond ratings 474

Case 12.1 General Electric s Bond Rating Downgrade 484

CHAPTER 13 Equity and Hybrid Instruments 487

13.1 Shareholders equity 488

13.2 Common equity 492

13.3 Preferred equity 495

13.4 Hybrid securities 501

Case 13.1 Angel Financing and St. Paul 508

CHAPTER 14 Cost of Capital 509

14.1 The marginal cost of capital schedule 510

14.2 Estimating the weights 512

14.3 Estimating the costs of capital 516

14.4 Assembling the pieces 528

Case 14.1 The Lazquez Company 540

Case 14.2 The Cost of Capital of Merck & Co. 540

PART 7 FINANCIAL POLICIES 543

CHAPTER 15 Capital Structure Decisions 544

15.1 Operating and financial leverage 545

15.2 The Modigliani and Miller theorems 556

15.3 Capital structure in practice 569

Case 15.1 Analyzing Delta Air Lines 581

CHAPTER 16 Dividend Policy 584

16.1 Distributions to shareholders 586

16.2 Why do companies pay cash dividends? 595

16.3 Dividend policy in practice 599

Case 16.1 Safe–n–Secure 610

Case 16.2 Cautious George Company 610

PART 8 FINANCIAL MANAGEMENT: CAPSTONE 611

CHAPTER 17 Financial Planning, Forecasting, and Risk Management 612

17.1 The role of financial planning in a business entity 613

17.2 Methods of forecasting 614

17.3 Risk management 629

Case 17.1 Peterson Wake–up Calls 640

CHAPTER 18 Derivatives 643

18.1 Options 645

18.2 Forward and futures contracts 659

18.3 Swaps 666

Case 18.1 The Vanilla Bean Company 672

CHAPTER 19 Working Capital Management 673

19.1 Analyzing working capital 674

19.2 Managing cash and cash equivalents 688

19.3 Managing accounts receivable 691

19.4 Managing inventory 698

19.5 Short–term financing considerations 700

Case 19.1 Mikopo and Trade Credit 713

CHAPTER 20 Leasing 715

20.1 Leasing arrangements 716

20.2 Accounting issues 722

20.3 Evaluating the lease decision 728

Case 20.1 Malcolm as Tax Czar 738

CHAPTER 21 Mergers and Acquisitions 740

21.1 Types of takeovers 741

21.2 Motives for mergers and acquisitions 748

21.3 Valuation issues 757

21.4 Accounting for acquisitions 766

Case 21.1 The Merger of Alpha and Beta 774

Case 21.2 Stanford Sausage Company 775

Appendix

Answers to Multiple Choice

Questions 776

Glossary 780

Index 797

Professor Pamela Peterson Drake, Ph.D. CFA, is the J. Gray Ferguson Professor of Finance and Department Head, Department of Finance and Business Law in the College of Business at James Madison University. She received her Ph.D. in finance from the University of North Carolina at Chapel Hill and her B.S. in Accountancy from Miami University. Professor Drake previously taught at Florida State University and Florida Atlantic University.