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Corporate Finance, 5th Edition

Book Description

The essential corporate finance text, updated with new data

Corporate Finance has long been a favourite among both students and professionals in the field for its unique blend of theory and practice with a truly global perspective. The fact that the authors are well-known academics and professionals in the world of mergers and acquisitions (M&A) and investment explains this popularity. This new Fifth Edition continues the tradition, offering a comprehensive tour of the field through scenario-based instruction that places concept and application in parallel. A new chapter has been added, devoted to the financial management of operating buildings that aims to answer questions such as, “to own or to rent?” “variable or fixed rents?” etc. The book’s companion website features regularly updated statistics, graphs and charts, along with study aids including quizzes, case studies, articles, lecture notes and computer models, reflecting the author team’s deep commitment to facilitating well-rounded knowledge of corporate finance topics. In addition, a monthly free newsletter keeps the readers updated on the latest developments in corporate finance as well as the book’s Facebook page, which publishes a post daily.

Financial concepts can be quite complex, but a familiar setting eases understanding while immediate application promotes retention over simple memorisation. As comprehensive, relevant skills are the goal, this book blends academic and industry perspective with the latest regulatory and practical developments to provide a complete corporate finance education with real-world applicability.

  • Blend theory and practice to gain a more relevant understanding of corporate finance concepts
  • Explore the field from a truly European perspective for a more global knowledge base
  • Learn essential concepts, tools and techniques by delving into real-world applications
  • Access up-to-date data, plus quizzes, case studies, lecture notes and more

A good financial manager must be able to analyse a company’s economic, financial and strategic situation, and then value it, all while mastering the conceptual underpinnings of all decisions involved. By emphasising the ways in which concepts impact and relate to real-world situations, Corporate Finance provides exceptional preparation for working productively and effectively in the field.

Table of Contents

  1. About the Authors
  2. Preface
  3. Frequently used symbols
  4. Chapter 1: What is corporate finance?
    1. Section 1.1 The financial manager is first and foremost a salesman . . .
    2. Section 1.2 . . . of financial securities . . .
    3. Section 1.3 . . . valued continuously by the financial markets
    4. Section 1.4 Most importantly, he is a negotiator . . .
    5. Section 1.5 . . . who never forgets to do an occasional reality check!
    6. Section 1.6 . . . he is also now a risk manager
  5. Section I: Financial analysis
    1. Part One: Fundamental concepts in financial analysis
      1. Chapter 2: Cash flow
        1. Section 2.1 Classifying company cash flows
        2. Section 2.2 Operating and investment cycles
        3. Section 2.3 Financial resources
      2. Chapter 3: Earnings
        1. Section 3.1 Additions to wealth and deductions from wealth
        2. Section 3.2 Different income statement formats
      3. Chapter 4: Capital employed and invested capital
        1. Section 4.1 The balance sheet: definitions and concepts
        2. Section 4.2 A capital-employed analysis of the balance sheet
        3. Section 4.3 A solvency-and-liquidity analysis of the balance sheet
        4. Section 4.4 A detailed example of a capital-employed balance sheet
      4. Chapter 5: Walking through from earnings to cash flow
        1. Section 5.1 Analysis of earnings from a cash flow perspective
        2. Section 5.2 Cash flow statement
      5. Chapter 6: Getting to grips with consolidated accounts
        1. Section 6.1 Consolidation methods
        2. Section 6.2 Consolidation-related issues
        3. Section 6.3 Technical aspects of consolidation
      6. Chapter 7: How to cope with the most complex points in financial accounts
        1. Section 7.1 Accruals
        2. Section 7.2 Cash assets
        3. Section 7.3 Construction contracts
        4. Section 7.4 Convertible bonds and loans
        5. Section 7.5 Currency translation adjustments
        6. Section 7.6 Deferred tax assets and liabilities
        7. Section 7.7 Dilution profit and losses
        8. Section 7.8 Financial hedging instruments
        9. Section 7.9 Impairment losses
        10. Section 7.10 Intangible fixed assets
        11. Section 7.11 Inventories
        12. Section 7.12 Leases
        13. Section 7.13 Off-balance-sheet commitments
        14. Section 7.14 Pensions and other employee benefits
        15. Section 7.15 Preference shares
        16. Section 7.16 Provisions
        17. Section 7.17 Stock options
        18. Section 7.18 Tangible assets
        19. Section 7.19 Treasury shares
    2. Part Two: Financial analysis and forecasting
      1. Chapter 8: How to perform a financial analysis
        1. Section 8.1 What is financial analysis?
        2. Section 8.2 Economic analysis of companies
        3. Section 8.3 An assessment of a company’s accounting policy
        4. Section 8.4 Standard financial analysis plan
        5. Section 8.5 The various techniques of financial analysis
        6. Section 8.6 Ratings
        7. Section 8.7 Scoring techniques
        8. Section 8.8 Expert systems
      2. Chapter 9: Margin analysis: structure
        1. Section 9.1 How operating profit is formed
        2. Section 9.2 How operating profit is allocated
        3. Section 9.3 Standard income statements (individual and consolidated accounts)
        4. Section 9.4 Financial assessment
        5. Section 9.5 Case study: ArcelorMittal
      3. Chapter 10: Margin analysis: risks
        1. Section 10.1 How operating leverage works
        2. Section 10.2 A more refined analysis provides greater insight
        3. Section 10.3 From analysis to forecasting: the concept of normative margin
        4. Section 10.4 Case study: ArcelorMittal
      4. Chapter 11: Working capital and capital expenditures
        1. Section 11.1 The nature of working capital
        2. Section 11.2 Working capital turnover ratios
        3. Section 11.3 Reading between the lines of working capital
        4. Section 11.4 Analysing capital expenditures (capex)
        5. Section 11.5 Case study: ArcelorMittal
      5. Chapter 12: Financing
        1. Section 12.1 A dynamic analysis of the company’s financing
        2. Section 12.2 A static analysis of the company’s financing
        3. Section 12.3 Case study: ArcelorMittal
      6. Chapter 13: Return on capital employed and return on equity
        1. Section 13.1 Analysis of corporate profitability
        2. Section 13.2 Leverage effect
        3. Section 13.3 Uses and limitations of the leverage effect
        4. Section 13.4 Case study: ArcelorMittal
      7. Chapter 14: Conclusion of financial analysis
        1. Section 14.1 Solvency
        2. Section 14.2 Value creation
        3. Section 14.3 Financial analysis without the relevant accounting documents
        4. Section 14.4 Case study: ArcelorMittal
  6. Section II: Investors and markets
    1. Part One: Investment decision rules
      1. Chapter 15: The financial markets
        1. Section 15.1 The rise of capital markets
        2. Section 15.2 The functions of a financial system
        3. Section 15.3 The relationship between banks and companies
        4. Section 15.4 Theoretical framework: efficient markets
        5. Section 15.5 Another theoretical framework under construction: behavioural finance
        6. Section 15.6 Investors’ behaviour
      2. Chapter 16: The time value of money and net present value
        1. Section 16.1 Capitalisation
        2. Section 16.2 Discounting
        3. Section 16.3 Present value and net present value of a financial security
        4. Section 16.4 What does net present value depend on?
        5. Section 16.5 Some examples of simplification of present value calculations
      3. Chapter 17: The internal rate of return
        1. Section 17.1 How is internal rate of return determined?
        2. Section 17.2 Internal rate of return as an investment criterion
        3. Section 17.3 The limits of the internal rate of return
        4. Section 17.4 Some more financial mathematics: interest rate and yield to maturity
    2. Part Two: The risk of securities and the required rate of return
      1. Chapter 18: Risk and return
        1. Section 18.1 Sources of risk
        2. Section 18.2 Risk and fluctuation in the value of a security
        3. Section 18.3 Tools for measuring return and risk
        4. Section 18.4 Market and specific risk
        5. Section 18.5 The beta coefficient
        6. Section 18.6 Portfolio risk
        7. Section 18.7 Choosing among several risky assets and the efficient frontier
        8. Section 18.8 Choosing between several risky assets and a risk-free asset: the capital market line
        9. Section 18.9 How portfolio management works
      2. Chapter 19: The required rate of return
        1. Section 19.1 Return required by investors: the CAPM
        2. Section 19.2 Properties of the CAPM
        3. Section 19.3 Limits of the CAPM
        4. Section 19.4 Multifactor models
        5. Section 19.5 Fractals and other leads
        6. Section 19.6 Term structure of interest rates
    3. Part Three: Financial securities
      1. Chapter 20: Bonds
        1. Section 20.1 Basic concepts
        2. Section 20.2 The yield to maturity
        3. Section 20.3 Floating-rate bonds
        4. Section 20.4 Socially responsible bonds
        5. Section 20.5 The volatility of debt securities
        6. Section 20.6 Default risk and the role of rating
      2. Chapter 21: Other debt products
        1. Section 21.1 Marketable debt securities
        2. Section 21.2 Bank debt products
        3. Section 21.3 Financing linked to an asset of the firm
      3. Chapter 22: Shares
        1. Section 22.1 Basic concepts
        2. Section 22.2 Multiples
        3. Section 22.3 Key market data
        4. Section 22.4 How to perform a stock market analysis
        5. Section 22.5 Adjusting per share data for technical factors
      4. Chapter 23: Options
        1. Section 23.1 Definition and theoretical foundation of options
        2. Section 23.2 Mechanisms used in pricing options
        3. Section 23.3 Analysing options
        4. Section 23.4 Parameters to value options
        5. Section 23.5 Methods for pricing options
        6. Section 23.6 Tools for managing an options position
      5. Chapter 24: Hybrid securities
        1. Section 24.1 Warrants
        2. Section 24.2 Convertible bonds
        3. Section 24.3 Preference shares
        4. Section 24.4 Other hybrid securities
      6. Chapter 25: Selling securities
        1. Section 25.1 General principles in the sale of securities
        2. Section 25.2 Initial public offerings
        3. Section 25.3 Capital increases
        4. Section 25.4 Block trades of shares
        5. Section 25.5 Bonds
        6. Section 25.6 Convertible and exchangeable bonds
        7. Section 25.7 Syndicated loans
  7. Section III: Value
    1. Chapter 26: Value and corporate finance
      1. Section 26.1 The purpose of finance is to create value
      2. Section 26.2 Value creation and markets in equilibrium
      3. Section 26.3 Value and organisation theories
      4. Section 26.4 How can we create value?
      5. Section 26.5 Value and taxation
    2. Chapter 27: Measuring value creation
      1. Section 27.1 Overview of the different criteria
      2. Section 27.2 NPV, the only reliable criterion
      3. Section 27.3 Financial/accounting criteria
      4. Section 27.4 Market criteria
      5. Section 27.5 Accounting criteria
      6. Section 27.6 Putting things into perspective
    3. Chapter 28: Investment criteria
      1. Section 28.1 The predominance of NPV and the importance of IRR
      2. Section 28.2 The main lines of reasoning
      3. Section 28.3 Which cash flows are important?
      4. Section 28.4 Other investment criteria
    4. Chapter 29: The cost of capital
      1. Section 29.1 The cost of capital and the risk of assets
      2. Section 29.2 Alternative methods for estimating the cost of capital
      3. Section 29.3 Some practical applications
      4. Section 29.4 Can corporate managers influence the cost of capital?
    5. Chapter 30: Risk and investment analysis
      1. Section 30.1 Assessing risk through the business plan
      2. Section 30.2 Assessing risk through a mathematical approach
      3. Section 30.3 The contribution of real options
    6. Chapter 31: Valuation techniques
      1. Section 31.1 Overview of the different methods
      2. Section 31.2 Valuation by discounted cash flow
      3. Section 31.3 Multiple approach or peer-group comparisons
      4. Section 31.4 The sum-of-the-parts method (SOTP) or net asset value (NAV)
      5. Section 31.5 Comparison of valuation methods
      6. Section 31.6 Premiums and discounts
  8. Section IV: Corporate financial policies
    1. Part One: Capital structure policies
      1. Chapter 32: Capital structure and the theory of perfect capital markets
        1. Section 32.1 The value of capital employed
        2. Section 32.2 Debt and equity
        3. Section 32.3 What our grandparents thought
        4. Section 32.4 The capital structure policy in perfect financial markets
      2. Chapter 33: Capital structure, taxes and organisation theories
        1. Section 33.1 The benefits of debt or the trade-off model
        2. Section 33.2 Debt to control management
        3. Section 33.3 Signalling and debt policy
        4. Section 33.4 Information asymmetries and the pecking order theory
      3. Chapter 34: Debt, equity and options theory
        1. Section 34.1 Analysing the firm in light of options theory
        2. Section 34.2 Contribution of options theory to the valuation of equity
        3. Section 34.3 Using options theory to analyse a company’s financial decisions
        4. Section 34.4 Resolving conflicts between shareholders and creditors
        5. Section 34.5 Analysing the firm’s liquidity
        6. Section 34.6 Conclusion
      4. Chapter 35: Working out details: the design of the capital structure
        1. Section 35.1 The major concepts
        2. Section 35.2 How to choose a capital structure
        3. Section 35.3 Effects of the financing choice on accounting and financial criteria
    2. Part Two: Equity capital
      1. Chapter 36: Returning cash to shareholders
        1. Section 36.1 Reinvested cash flow and the value of equity
        2. Section 36.2 Internal financing and financial criteria
        3. Section 36.3 Why return cash to shareholders?
      2. Chapter 37: Distribution in practice: dividends and share buy-backs
        1. Section 37.1 Dividends
        2. Section 37.2 Exceptional dividends, share buy-backs and capital reduction
        3. Section 37.3 The choice between dividends, share buy-backs and capital reduction
      3. Chapter 38: Share issues
        1. Section 38.1 A definition of a share issue
        2. Section 38.2 Share issues and finance theory
        3. Section 38.3 Current and new shareholders
        4. Section 38.4 Share issues and accounting criteria
    3. Part Three: Debt capital
      1. Chapter 39: Implementing a debt policy
        1. Section 39.1 Debt structure
        2. Section 39.2 Covenants
        3. Section 39.3 Renegotiating debt
        4. Section 39.4 Why keep cash on the balance sheet?
        5. Section 39.5 The levers of a good debt policy
  9. Section V: Financial management
    1. Part One: Corporate governance and financial engineering
      1. Chapter 40: Setting up a company or financing start-ups
        1. Section 40.1 Financial particularities of the company being set up
        2. Section 40.2 Some basic principles for financing a start-up
        3. Section 40.3 Investors in start-ups
        4. Section 40.4 The organisation of relationships between the entrepreneur and the financial investors
        5. Section 40.5 The financial management of a start-up
        6. Section 40.6 The particularities of valuing young companies
        7. Section 40.7 Example inspired by a real case: Example.com
      2. Chapter 41: Choice of corporate structure
        1. Section 41.1 Shareholder structure
        2. Section 41.2 How to strengthen control over a company
        3. Section 41.3 Organising a diversified group
        4. Section 41.4 Financial securities’ discounts
      3. Chapter 42: Initial public offerings (IPOs)
        1. Section 42.1 To be or not to be listed?
        2. Section 42.2 Preparation of an IPO
        3. Section 42.3 Execution of the IPO
        4. Section 42.4 Underpricing of IPOs
        5. Section 42.5 How to carry out a successful IPO
        6. Section 42.6 Public to private
      4. Chapter 43: Corporate governance
        1. Section 43.1 What does corporate governance mean?
        2. Section 43.2 Corporate governance and financial theories
        3. Section 43.3 Value and corporate governance
      5. Chapter 44: Taking control of a company
        1. Section 44.1 The rise of mergers and acquisitions
        2. Section 44.2 Choosing a negotiating strategy
        3. Section 44.3 Taking over a listed company
      6. Chapter 45: Mergers and demergers
        1. Section 45.1 All-share deals
        2. Section 45.2 The mechanics of all-share transactions
        3. Section 45.3 Demergers and split-offs
      7. Chapter 46: Leveraged buyouts (LBOs)
        1. Section 46.1 LBO structures
        2. Section 46.2 The players
        3. Section 46.3 LBOs and financial theory
        4. Section 46.4 The LBO market: following the crisis, a gradual bounce-back
      8. Chapter 47: Bankruptcy and restructuring
        1. Section 47.1 Causes of bankruptcy
        2. Section 47.2 The different bankruptcy procedures
        3. Section 47.3 Bankruptcy and financial theory
        4. Section 47.4 Restructuring plans
    2. Part Two: Managing working capital, cash flows, financial risks and real estate
      1. Chapter 48: Managing working capital
        1. Section 48.1 A bit of common sense
        2. Section 48.2 Managing receivables
        3. Section 48.3 Managing trade payables
        4. Section 48.4 Inventory management
        5. Section 48.5 Conclusion
      2. Chapter 49: Cash management
        1. Section 49.1 The basics
        2. Section 49.2 Cash management
        3. Section 49.3 Cash management within a group
        4. Section 49.4 Investing cash balances
        5. Section 49.5 The changing role of the treasurer
      3. Chapter 50: Managing financial risks
        1. Section 50.1 Introduction to risk management
        2. Section 50.2 Measuring financial risks
        3. Section 50.3 Principles of financial risk management
        4. Section 50.4 Organised markets – OTC markets
      4. Chapter 51: Managing operational real estate
        1. Section 51.1 Methods for financing real estate
        2. Section 51.2 Criteria for choosing real-estate financing
        3. Section 51.3 Value creation and investor perception
        4. Section 51.4 An ideal way of organising real estate?
  10. Epilogue – Finance and Strategy
  11. Top 20 Largest Listed Companies
  12. Contents
  13. Index
  14. EULA