PRINCIPLES OF CORPORATE FINANCE, SECOND EDITION by Richard Breal

Used Book Reviews; PRINCIPLES OF CORPORATE FINANCE, SECOND EDITION by Richard Brealey and Stewart Myers

PRINCIPLES OF CORPORATE FINANCE, SECOND EDITION by Richard Brealey and Stewart Myers

Below is brief description of this great finance and accounting book of its about 35 chapters:

Why Finance Matters Why Finance Is Challenging and Interesting The importance of capital markets Understanding value Time and uncertainty Understanding people Who Is the Financial Manager?



VALUE

The Concept of Net Present Value Introduction to Present Value Calculating present value Net present value A comment on risk and present value Present values and rates of return Foundations of the Net Present Value Rule How the capital market helps to smooth consumption patterns In which we introduce productive opportunities A crucial assumption Imperfect capital markets A Fundamental Result A note on other corporate goals

How to Calculate Present Values Valuing Long-Lived Assets Valuing cash flows in several periods Why the discount factor declines as futurity increases-And a digression on money machines How present value tables help the lazy Looking for Shortcuts-Perpetuities and Annuities How to value growing perpetuities How to value annuities Compound Interest and Present Values A note on compounding intervals

Present Value of Bonds and Stocks A Quick Look at How Bonds Are Valued How Common Stocks Are Valued Today's price what determines next year's price? Simple Way to Estimate the Capitalization Rate Using the DCF model to set electricity prices Some warnings about constant-growth formulas The Link between Stock Price and Earnings Per Share Calculating the present value of growth opportunities for Fledgling Electronics A general expression linking dividends and growth opportunities What do price-earnings ratios mean? What do earnings mean?

Why Net Present Value Leads to Better Investment Decisions than Other Criteria A Review of the Basics Competitors of Net Present Value Payback The payback rule Discounted payback Average Return on Book Value Internal (or Discounted Cash Flow) Rate of Return Pitfall I-Lending or borrowing? Pitfall 2-Multiple rates of return Pitfall 3-Mutually exclusive projects Pitfall 4-What happens when we can't finesse the term structure of interest rates? The verdict on IRR 78 Profitability Index or Benefit-Cost Ratio

Making Investment Decisions with the Net Present Value Rule What to Discount Only cash flow is relevant Estimate cash flows on an incremental basis Be consistent in your treatment of inflation Example-IM&C Guano Project Separating investment and financing decisions A further note on estimating cash flow The investment tax credit A further note on depreciation A final comment on taxes final comment on project analysis Project Interactions Case I-Optimal timing of investment Case 2-Choosing between long- and short-lived equipment Case 3-Deciding when to replace an existing machine Case 4-Cost of excess capacity Case 5-Fluctuating load factors Choosing the Capital Expenditure Program when Resources Are Limited Profitability index under capital rationing Some more elaborate capital rationing models Uses of capital rationing models 105 Summary Appendix Some Embellishments to the Capital Rationing Model Cash carry-forward Mutually exclusive projects Contingent projects Constraints on nonfinancial resources Constraints on nonfinancial output Further Reading Quiz Questions and Problems

RISK

Introduction to Risk and Return in Capital Budgeting Fifty-Six Years of Capital Market History in One Easy Lesson Ibbotson and Sinquefield's study Using historical evidence to evaluate today's cost of capital Measuring Portfolio Risk Variance and standard deviation Measuring the variability of portfolios How diversification reduces risk How Individual Securities Affect Portfolio Risk Market risk is measured by beta The Relationship between Risk and Return Using the capital asset pricing model to calculate expected returns Diversification and Value Additivity Va"1ue additivity and the capital asset pricing model

More about the Relationship between Risk and Retutn Harry Markowitz and the Birth of Portfolio Theory Combining stocks into portfolios Choosing portfolios from many stocks Limits to diversification Contribution to portfolio risk Borrowing and lending The Relationship between Risk and Return What would happen if a stock did not lie on the market line? Validity and Role of the Capital Asset Pricing Model Tests of the capital asset pricing model Assumptions behind the capital asset pricing model Arbitrage pricing theory

Capital Budgeting and the Capital Asset Pricing Model Measuring Betas Stability of betas over time Using a beta book divisional cost of capital How to Estimate Philadelphia Electric's Cost of Capital-An Example Asset betas and equity betas Calculating Philadelphia Electric's asset beta and company cost of capital Business and financial risk What Determines Asset Betas? Cyclicality Operating leverage Searching for clues Another Look at Discounted Cash Flow Certainty equivalents Relationship of the certainty equivalent and risk-adjusted discount rate formulas for long-lived assets Using risk-adjusted discount rates-An example When you cannot use a single risk-adjusted discount rate for long-lived assets A common mistake Summary Appendix Using the Capital Asset Pricing Model to Calculate Certainty Equivalents

Industry betas and the

PRACTICAL PROBLEMS IN CAPITAL BUDGETING

A Project Is Not a Black Box Sensitivity Analysis

Value of information Limits to sensitivity analysis Examining the project under different scenarios Break-even analysis Monte Carlo Simulation Simulating the electric car project Assessing simulation: You pay for what you get Misusing simulation Decision Trees and Subsequent Decisions An example: Vegetron A tougher example: Magna Charter Bailing out Abandonment value and capital budgeting Pro and con decision trees Decision trees and Monte Carlo simulation

Where Positive Net Present Values Come From Inconsistent Attitudes and Assumptions The Problems of Bias and Errors in forecasting Look First at Market Values Forecasting Economic Rents Example-Marvin Enterprises Decides to Exploit a New Technology Forecasting prices of gargle blasters The value of Marvin's new expansion Alternative expansion plans The value of Marvin stock The lessons of Marvin Enterprises

Organizing Capital Expenditure and Evaluating Performance Afterwards Capital Budgets and Project Authorizations Project authorizations Bottom-up versus top-down The decision criteria firms actually use Problems and Some Solutions Problems presented by cooperation Some partial solutions Evaluating Performance Controlling projects in progress Post-audits Problems in measuring incremental cash flows after the fact Evaluating operating performance Accounting rate of return as a performance measure Example-Measuring the Profitability of the Nodhead Supermarket Book earnings versus true earnings Does ROI give the right answer in the long run? What Can We Do about Biases in Accounting Profitability Measures?

Corporate Financing and the Six lessons of Market Efficiency We Always Come Back to NPV Differences between investment and financing decisions Efficient capital markets What Is an Efficient Market? A startling discovery: Price changes are random A theory to fit the facts Three forms of efficient-market theory Some misconceptions The First Lesson of Market Efficiency: Markets Have No Memory The Second Lesson of Market Efficiency: Trust Market Prices Example: Northwestern Bell's bond repurchase offer The Third Lesson of Market Efficiency: There Are No Financial Illusions Stock splits and dividends Accounting changes The Fourth Lesson of Market Efficiency: The Do-It-Yourself Alternative The Fifth Lesson of Market Efficiency: Seen One Stock, Seen Them All The Sixth Lesson of Market Efficiency: Reading the Entrails

FINANCING DECISIONS AND MARKET EFFICIENCY

An Overview of Corporate Financing Common Stock Definitions Stockholders' rights A First Look at Corporate Debt Debt comes in many forms A debt by any other name Preferred Stock Convertible Securities Variety's the Very Spice of Life Patterns of Corporate Financing Do firms rely too heavily on internal funds? When do firms need external finance? Timing debt and equity issues Has capital structure changed?

How Corporations Issue Securities The Public Issue General procedures Costs of a public issue The General Cash Offer The role of the underwriter in a general cash offer Who are the underwriters? Setting the price in a general cash offer

Competitive bidding Pricing general cash offers in other countries The Privileged Subscription or Rights Issue How rights issues work How a rights issue affects the stock price Formulas for computing rights values Issue price is irrelevant as long as the rights are exercised A word on dilution Market reaction to rights issues The choice between the cash offer and the rights issue Shelf Registration The Private Placement Appendix Example of a New Prospectus

DIVIDEND POLICY AND CAPITAL STRUCTURE

The Dividend Controversy How Dividends Are Paid Some legal limitations on dividends Dividends come in many forms Share repurchase How Do Companies Decide on Dividend Payments? Lintner's model Effects of information The Controversy over Dividend Policy Dividend policy is irrelevant in perfect capital markets Dividend irrelevance-An illustration Calculating share price Share repurchase The Rightists Do MM ignore risk? Market imperfections Taxes and the Radical Left How taxes affect values Why pay any dividends at all? The Middle-of-the-Roaders Black and Scholes How to avoid taxes on dividends The Empirical Evidence

Does Debt Policy Matter? The Effect of Leverage in a Competitive Tax-Free Economy Enter Modigliani and Miller The law of the conservation of value An example of proposition I How Leverage Affects Returns Implications of proposition Proposition 11 The risk-return trade-off

The Traditional Position Two warnings Rates of return on levered equity-The traditional position Where to look for violations of MM's propositions unsatisfied clienteles are probably interested in exotic securities AT&T's stillborn savings bonds Summary Appendix MM and the Capital Asset Pricing Model

How Much Should a Firm Borrow? Corporate Taxes How do interest tax shields contribute to the value of stockholders' equity? MM and taxes Corporate and Personal Taxes But dividends are taxed more heavily than capital gains A generalization Merton Miller's "Debt and Taxes" Implications of Miller's model Comments and questions A compromise theory Costs of Financial Distress Bankruptcy costs Evidence on bankruptcy costs Direct versus indirect costs of bankruptcy Financial distress without bankruptcy Risk shifting: The first game Refusing to contribute equity capital: .. The second game And three more games, briefly What the games cost Costs of distress vary with type of asset Choosing the Firm's Debt-Equity Ratio A checklist Planning ahead

Interactions of Investment and Financing Decisions The Adjusted-Present-Value Rule The base case Issue costs Subsidized financing Additions to the firm's debt capacity The value of interest tax shields Review of the adjusted-present-value approach Adjusted Discount Rates-An Alternative to Adjusted Present Value Example: The geothermal project A general definition of the adjusted cost of capital What happens when future debt levels are uncertain How useful are adjusted cost-of-capital formulas? The Weighted-Average-Cost-of-Capital Formula Now we apply the textbook formula to the geothermal project Using the textbook formula: An application to the railroad industry Mistakes people make using the weighted-average formula

VALUING THE DIFFERENT KINDS OF DEBT

Corporate Liabilities and the Valuation of Options Every Issue of a Corporate Security Creates Options Calls, Puts, and Shares Selling calls, puts, and shares Holding calls, puts, and shares in combination Bondholders own the firm but have sold a call on it Two Simple Problems in Options and Corporate Financing The case for standby agreements The case for issuing warrants What Determines Option Values? An Option-Valuation Model Constructing option equivalents from common stocks and borrowing Why discounted cash flow won't work for options Using the Black-Scholes formula Summary Appendix A Using Options-Valuation Models Example: Valuing a put option Appendix B Calculating Abandonment Value Using Option Pricing Theory Some extensions Abandonment value in disguise

Valuing Risky Debt The Classical Theory of Interest Real interest rates Inflation and interest rates Term Structure and Yields to Maturity Measuring yield to maturity Problems with yield to maturity Measuring the term structure Duration and volatility Explaining the Term Structure Miss Long's problem Mr. Short's problem The expectations hypothesis The liquidity-preference theory Introducing inflation A comparison of theories of term structure Allowing for the Risk of Default Bond ratings Option pricing and risky debt Valuing government loan guarantees

The Many Different Kinds of Debt The Bond Contract Indenture or trust deed The bond terms

VALUING THE DIFFERENT KINDS OF DEBT

Corporate Liabilities and the Valuation of Options Every Issue of a Corporate Security Creates Options Calls, Puts, and Shares Selling calls, puts, and shares Holding calls, puts, and shares in combination Bondholders own the firm but have sold a call on it Two Simple Problems in Options and Corporate Financing The case for standby agreements The case for issuing warrants What Determines Option Values? An Option-Valuation Model Constructing option equivalents from common stocks and borrowing Why discounted cash flow won't work for options Using the Black-Scholes formula Summary Appendix A Using Options-Valuation Models Example: Valuing a put option Appendix B Calculating Abandonment Value Using Option Pricing Theory Some extensions Abandonment value in disguise

Valuing Risky Debt The Classical Theory of Interest Real interest rates Inflation and interest rates Term Structure and Yields to Maturity Measuring yield to maturity Problems with yield to maturity Measuring the term structure Duration and volatility 472 Explaining the Term Structure Miss Long's problem Mr. Short's problem The expectations hypothesis The liquidity-preference theory Introducing inflation A comparison of theories of term structure Allowing for the Risk of Default Bond ratings Option pricing and risky debt Valuing government loan guarantees

The Many Different Kinds of Debt The Bond Contract Indenture or trust deed The bond terms

Security and Seniority Repayment Provisions The call provision Valuing the call provision Restrictive Covenants Negative covenants Positive covenants Summary Appendix A Project Finance An example from the oil industry Project finance-Some common features The benefits of project finance Appendix B Excerpts from a Prospectus for a Debenture Issue Appendix C Some Unusual Bonds Original issue discount bonds Income bonds Floating-rate bonds Indexed bonds

Warrants and Convertibles What Is a Warrant? Valuing warrants Two complications: Dividends and dilution Adjusting for dilution in valuing warrants Warrants on bonds What is a Convertible Bond? Valuing convertible bonds Dividends and dilution revisited Forcing conversion The Difference between Warrants and Convertibles Why Do Companies Issue Warrants and Convertibles?

Leasing What Is a Lease? Example of a financial lease Who really owns the leased asset? Leasing and the Internal Revenue Service Leasing and the accountants Why Lease? Sensible reasons for leasing Some dubious reasons for leasing Valuing Financial Leases A first pass at valuing a lease contract Financial leases displace debt Calculating the equivalent Calculating the value of the lease The story so far When Does Leasing Pay? Evaluating a Large, Leveraged Lease A General Rule for Valuing Debt-Equivalent Cash Flows Valuing subsidized loans Some further examples Adjusted present value and adjusted discount rates for debt-equivalent cash flows

FINANCIAL PLANNING

Analyzing Financial Performance Financial Ratios Leverage ratios Liquidity ratios Profitability or efficiency ratios Market value ratios Choosing a benchmark Which financial ratios? The Earnings Record The meaning of accounting earnings How inflation affects book returns Applications of Financial Analysis Using financial ratios in credit analysis Using financial ratios to estimate market risk Using financial ratios to predict bond ratings

What is financial planning?

Approaches to Financial Planning What Financial Planning Is and Is Not What financial planning is not: Burmah's crisis Contents of a Completed Financial Plan Pro forma statements Capital expenditure and business strategy Planned financing Two requirements for effective planning Financial planning as managing a portfolio of options Financial Planning Models Executive Fruit's financial model Pitfalls in model design There is no finance in corporate financial models Summary Appendix LONGER Example Extending the model Comparison of LONGER with the typical corporate planning model Shadow prices or marginal costs Further Reading Quiz Questions and Problems

Short-Term Financial Planning The Components of Working Capital Links between Long-Term and Short-Term Financing Decisions Matching maturities Permanent working-capital requirements The comforts of surplus cash

Tracing Changes in Cash and Working Capital Tracing changes in net working capital Profits and cash flow Cash Budgeting Preparing the cash budget: Inflow Preparing the cash budget: Outflow The Short-Term Financing Plan Options for short-term financing The first financing plan The second financing plan A note on short-term financial planning models

SHORT-TERM FINANCIAL DECISIONS

Credit Management Terms of Sale Commercial Credit Instruments Credit Analysis Financial ratio analysis Numerical credit scoring Constructing better risk indexes The Credit Decision When to stop looking for clues Credit decisions with repeat orders Some general principles Collection Policy Factoring and credit insurance Summary Appendix Bankruptcy Procedures Personal bankruptcies Business bankruptcies The choice between liquidation and reorganization Further Reading Quiz Questions and Problems

Cash Management Inventories and Cash Balances The extension to cash balances The Miller-Orr model Using the Miller-Orr model Raising cash by borrowing Cash management in the largest corporations Cash Collection Systems Managing float Speeding up collections Controlling disbursements Bank Relations General considerations What happens if money pays interest? Summary Further Reading

Short-Term Lending and Borrowing Short-Term Lending Valuing money-market investments Calculating the yield on money-market investments U.s. Treasury Bills Agency securities Short-term tax-exempts Bank time deposits and certificates of deposit Eurodollar investments Commercial paper Bankers' acceptances Repurchase agreements Floating-Rate Preferred Stock-An Alternative to Money Market Investments Short-Term Borrowing Unsecured loans Loans secured by receivables Loans secured on inventory Term Loans

MERGERS, INTERNATIONAL FINANCE AND PENSIONS

Mergers Defining the Economic Gains and Costs of Mergers Note: Right and wrong ways to estimate benefits of mergers Sensible Motives for Mergers Economies of scale Economies of vertical integration Eliminating inefficiencies Unused tax shields Mergers as a use for surplus funds Combining complementary resources Some Dubious Reasons for Mergers Diversification The bootstrap game: Mergers and earnings per share Lower financing costs Estimating the Cost of a Merger Estimating cost when the merger is financed by cash Estimating cost when the acquisition is financed by stock The Mechanics of a Merger Mergers and antitrust law The form of acquisition Some tax considerations Requirements for tax-free status The tender offer Merger negotiations and battles A note on merger accounting Postmerger Integration Merger Waves and Profitabi I ity Mergers come in waves Selling companies gain by merger Do mergers generate net benefits?

Further Reading Quiz Questions and Problems Appendix Conglomerate Mergers and Value Additivity

International Financial Management The Foreign Exchange Market Some Basic Relationships Interest rates and exchange rates The forward discount and changes in spot rates Changes in the exchange rates and inflation rates Interest rates and inflation rates Is life really that simple? Insuring against Currency Risks International Investment Decisions The Cost of Capital for Foreign Investment Financing Foreign Operations The international capital markets Repatriating funds The game of international finance Offshore finance subsidiaries Export financing Financing deals to reduce political risk Interactions of Investment and Financing Decisions

Pension Plans Types of Pension Plans The Pension Plan Balance Sheet Valuing the liabilities Valuing the pension fund Valuing future contributions Estimating the deficit Another look at the pension plan balance sheet ERISA, fund contributions, and pension insurance Managing the Pension Fund Risk Simulating the pension plan Taxes and investment policy Measuring Fund Performance Choosing the performance yardstick Measuring performance-An example Some cautions about performance measurement

CONCLUSIONS

Conclusion: What We Do and Do Not Know about Finance What We Do Know: The Five Most Important Ideas in Finance 1 Net present value 2 The capital asset pricing model 3 Efficient capital markets 4 Value additivity and the law of conservation of value 5 Option theory What We Do Not Know: Ten Unsolved Problems in Finance 1 How are major financial decisions made? 2 What determines project risk and present value? 3 Risk and return-Have we missed something? 4 Are there important exceptions to the efficient-markets theory? 5 How are complex options valued? 6 How can we explain issue procedures for common stocks? 7 How can we explain capital structure? 8 How can we resolve the dividend controversy? 9 What is the value of liquidity? 10 How can we explain merger waves?

Appendix Present Value Tables

**** More Info **** PRINCIPLES OF CORPORATE FINANCE Hardcover slightly used (like new) ISBN 007007383X publisher McGRAW-HILL BOOK COMPANY Year: 1984 More than 800 pages

This is a great book about the theory and practice of corporate finance. Financial managers should master the practical aspect of corporate finance. Managers use their experience to cope with problems. They are also able to respond effectively to changes. Therefore managers must understand why companies and financial managers behave the way they do. This book shows how to use financial theory to solve practical problems, and also to illuminate the facts and institutional material that students of corporate finance must absorb. Financial terms and symbols are used extensively: the symbol for a dividend payment is DIV; the symbol for a percentage of rate of return is r. New in this edition is "Analyzing Corporate Performance," and two new chapters on financial planning and financial ratio analysis. The chapters on leasing and on interactions of financing and investment decisions received special attention.