Corporate finance: the core

✍ Scribed by Berk, Jonathan B.; DeMarzo, Peter M

• Publisher: Pearson
• Year: 2016;2017
• Tongue: English
• Leaves: 800
• Series: Pearson series in finance
• Edition: Fourth edition
• Category: Library

✦ Synopsis

Berk and DeMarzo'sCorporate Financeuses a unifying valuation framework, the Law Of One Price, to present the core content instructors expect, the new ideas they want, and the pedagogy their students need to succeed.Corporate Finance: The Corefits programs and individual professors who desire a streamlined book that is specifically tailored to the topics covered in the first one-semester course. For programs and professors who would like to use a text in a two semester, or more, sequence, please seeCorporate Finance, the 31-chapter book also by Jonathan Berk and Peter DeMarzo.KEY TOPICS:The Corporation; Introduction to Financial Statement Analysis; Financial Decision Making and the Law of One Price; The Time Value of Money; Interest Rates; Valuing Bonds; Investment Decision Rules; Fundamentals of Capital Budgeting; Valuing Stocks; Capital Markets and the Pricing of Risk; Optimal Portfolio Choice and the Capital Asset Pricing Model; Estimating the Cost of Capital; Investor Behavior and Capital Market Efficiency; Capital Structure in a Perfect Market; Debt and Taxes; Financial Distress, Managerial Incentives, and Information; Payout Policy; Capital Budgeting and Valuation with Leverage; Valuation and Financial Modeling: A Case StudyMARKET:Directed primarily toward MBA/graduate students, this text also provides practical content to current and aspiring finance professionals.

✦ Table of Contents

Cover......Page 1
Title Page......Page 6
Copyright Page......Page 7
Brief Contents......Page 8
Detailed Contents......Page 9
PART 1 INTRODUCTION......Page 34
Chapter 1 The Corporation......Page 35
Sole Proprietorships......Page 36
Partnerships......Page 37
Corporations......Page 38
Tax Implications for Corporate Entities......Page 39
The Corporate Management Team......Page 40
INTERVIEW with David Viniar......Page 41
The Financial Manager......Page 42
The Goal of the Firm......Page 43
Ethics and Incentives within Corporations......Page 44
Citizens United v. Federal Election Commission......Page 45
1.3 The Stock Market......Page 47
Traditional Trading Venues......Page 48
INTERVIEW with Frank Hatheway......Page 49
New Competition and Market Changes......Page 50
Dark Pools......Page 51
Key Terms......Page 52
Problems......Page 53
Chapter 2 Introduction to Financial Statement Analysis......Page 56
International Financial Reporting Standards......Page 57
INTERVIEW with Ruth Porat......Page 58
2.2 The Balance Sheet......Page 59
Assets......Page 60
Liabilities......Page 61
Market Value Versus Book Value......Page 62
2.3 The Income Statement......Page 63
Earnings Calculations......Page 64
2.4 The Statement of Cash Flows......Page 65
Operating Activity......Page 66
Financing Activity......Page 67
Statement of Stockholders’ Equity......Page 68
Notes to the Financial Statements......Page 69
Profitability Ratios......Page 70
Liquidity Ratios......Page 71
Working Capital Ratios......Page 72
Interest Coverage Ratios......Page 73
Leverage Ratios......Page 74
COMMON MISTAKE Mismatched Ratios......Page 76
Operating Returns......Page 77
The DuPont Identity......Page 79
WorldCom......Page 81
Sarbanes-Oxley Act......Page 82
Dodd-Frank Act......Page 83
MyFinanceLab......Page 84
Key Terms......Page 85
Problems......Page 86
Data Case......Page 93
Chapter 3 Financial Decision Making and the Law of One Price......Page 94
Analyzing Costs and Benefits......Page 95
Using Market Prices to Determine Cash Values......Page 96
The Interest Rate: An Exchange Rate Across Time......Page 98
Net Present Value......Page 101
The NPV Decision Rule......Page 102
NPV and Cash Needs......Page 104
Arbitrage......Page 105
Valuing a Security with the Law of One Price......Page 106
The NPV of Trading Securities and Firm Decision Making......Page 110
Valuing a Portfolio......Page 111
GLOBAL FINANCIAL CRISIS Liquidity and the Informational Role of Prices......Page 112
Arbitrage in Markets......Page 113
Where Do We Go from Here?......Page 114
MyFinanceLab......Page 115
Problems......Page 116
Risky Versus Risk-Free Cash Flows......Page 120
Arbitrage with Transactions Costs......Page 125
PART 2 TIME, MONEY, AND INTEREST RATES......Page 130
Chapter 4 The Time Value of Money......Page 131
4.1 The Timeline......Page 132
Rule 1: Comparing and Combining Values......Page 133
Rule 2: Moving Cash Flows Forward in Time......Page 134
Rule 3: Moving Cash Flows Back in Time......Page 135
Rule of 72......Page 136
Applying the Rules of Time Travel......Page 137
4.3 Valuing a Stream of Cash Flows......Page 139
4.4 Calculating the Net Present Value......Page 142
USING EXCEL Calculating Present Values in Excel......Page 143
Perpetuities......Page 144
Historical Examples of Perpetuities......Page 145
Annuities......Page 147
Growing Cash Flows......Page 150
4.6 Using an Annuity Spreadsheet or Calculator......Page 155
4.7 Non-Annual Cash Flows......Page 157
4.8 Solving for the Cash Payments......Page 158
4.9 The Internal Rate of Return......Page 161
USING EXCEL Excel’s IRR Function......Page 164
MyFinanceLab......Page 165
Key Terms......Page 166
Problems......Page 167
Data Case......Page 173
Appendix Solving for the Number of Periods......Page 174
Chapter 5 Interest Rates......Page 176
The Effective Annual Rate......Page 177
COMMON MISTAKE Using the Wrong Discount Rate in the Annuity Formula......Page 178
Annual Percentage Rates......Page 179
5.2 Application: Discount Rates and Loans......Page 181
5.3 The Determinants of Interest Rates......Page 182
Inflation and Real Versus Nominal Rates......Page 183
Investment and Interest Rate Policy......Page 184
The Yield Curve and Discount Rates......Page 185
COMMON MISTAKE Using the Annuity Formula When Discount Rates Vary by Maturity......Page 187
INTERVIEW with Kevin M. Warsh......Page 189
5.4 Risk and Taxes......Page 190
Risk and Interest Rates......Page 191
After-Tax Interest Rates......Page 192
5.5 The Opportunity Cost of Capital......Page 193
COMMON MISTAKE States Dig a $3 Trillion Hole by Discounting at the Wrong Rate......Page 194
MyFinanceLab......Page 195
Problems......Page 196
Data Case......Page 201
Continuously Arriving Cash Flows......Page 203
Chapter 6 Valuing Bonds......Page 206
Zero-Coupon Bonds......Page 207
GLOBAL FINANCIAL CRISIS Negative Bond Yields......Page 209
Coupon Bonds......Page 210
Discounts and Premiums......Page 212
Time and Bond Prices......Page 213
Interest Rate Changes and Bond Prices......Page 215
Clean and Dirty Prices for Coupon Bonds......Page 216
Replicating a Coupon Bond......Page 218
Valuing a Coupon Bond Using Zero-Coupon Yields......Page 219
Coupon Bond Yields......Page 220
6.4 Corporate Bonds......Page 221
Are Treasuries Really Default-Free Securities?......Page 222
Bond Ratings......Page 224
6.5 Sovereign Bonds......Page 225
GLOBAL FINANCIAL CRISIS The Credit Crisis and Bond Yields......Page 226
GLOBAL FINANCIAL CRISIS European Sovereign Debt Yields: A Puzzle......Page 228
INTERVIEW with Carmen M. Reinhart......Page 229
MyFinanceLab......Page 230
Key Terms......Page 231
Problems......Page 232
Data Case......Page 236
Case Study......Page 237
Computing Forward Rates......Page 239
Computing Bond Yields from Forward Rates......Page 240
PART 3 VALUING PROJECTS AND FIRMS......Page 244
Chapter 7 Investment Decision Rules......Page 245
The NPV Profile and IRR......Page 246
Alternative Rules Versus the NPV Rule......Page 247
INTERVIEW with Dick Grannis......Page 248
Pitfall #1: Delayed Investments......Page 249
Pitfall #2: Multiple IRRs......Page 250
Pitfall #3: Nonexistent IRR......Page 252
Applying the Payback Rule......Page 253
Payback Rule Pitfalls in Practice......Page 254
NPV Rule and Mutually Exclusive Investments......Page 255
IRR Rule and Mutually Exclusive Investments......Page 256
The Incremental IRR......Page 257
When Can Returns Be Compared?......Page 258
Evaluating Projects with Different Resource Requirements......Page 260
Profitability Index......Page 261
MyFinanceLab......Page 263
Problems......Page 264
Data Case......Page 270
Appendix Computing the NPV Profile Using Excel’s Data Table Function......Page 271
Chapter 8 Fundamentals of Capital Budgeting......Page 272
Revenue and Cost Estimates......Page 273
Incremental Earnings Forecast......Page 274
Indirect Effects on Incremental Earnings......Page 276
COMMON MISTAKE The Opportunity Cost of an Idle Asset......Page 277
COMMON MISTAKE The Sunk Cost Fallacy......Page 278
Real-World Complexities......Page 279
Calculating Free Cash Flow from Earnings......Page 280
Calculating Free Cash Flow Directly......Page 282
Calculating the NPV......Page 283
USING EXCEL Capital Budgeting Using a Spreadsheet Program......Page 284
Evaluating Manufacturing Alternatives......Page 285
Comparing Free Cash Flows for Cisco’s Alternatives......Page 286
8.4 Further Adjustments to Free Cash Flow......Page 287
Break-Even Analysis......Page 291
Sensitivity Analysis......Page 292
INTERVIEW with David Holland......Page 294
Scenario Analysis......Page 295
USING EXCEL Project Analysis Using Excel......Page 296
MyFinanceLab......Page 297
Problems......Page 299
Data Case......Page 306
Appendix MACRS Depreciation......Page 308
Chapter 9 Valuing Stocks......Page 310
A One-Year Investor......Page 311
Dividend Yields, Capital Gains, and Total Returns......Page 312
The Mechanics of a Short Sale......Page 313
A Multiyear Investor......Page 314
Constant Dividend Growth......Page 315
Dividends Versus Investment and Growth......Page 316
John Burr Williams’ Theory of Investment Value......Page 317
Changing Growth Rates......Page 319
Share Repurchases and the Total Payout Model......Page 321
The Discounted Free Cash Flow Model......Page 323
Valuation Multiples......Page 327
Limitations of Multiples......Page 329
Comparison with Discounted Cash Flow Methods......Page 330
Stock Valuation Techniques: The Final Word......Page 331
INTERVIEW with Douglas Kehring......Page 332
Information in Stock Prices......Page 333
Competition and Efficient Markets......Page 334
Lessons for Investors and Corporate Managers......Page 336
Kenneth Cole Productions—What Happened?......Page 338
MyFinanceLab......Page 339
Further Reading......Page 341
Problems......Page 342
Data Case......Page 347
PART 4 RISK AND RETURN......Page 350
Chapter 10 Capital Markets and the Pricing of Risk......Page 351
10.1 Risk and Return: Insights from 89 Years of Investor History......Page 352
Expected Return......Page 355
Variance and Standard Deviation......Page 356
Computing Historical Returns......Page 358
Average Annual Returns......Page 360
The Variance and Volatility of Returns......Page 362
Estimation Error: Using Past Returns to Predict the Future......Page 363
10.4 The Historical Trade-Off Between Risk and Return......Page 365
The Returns of Large Portfolios......Page 366
The Returns of Individual Stocks......Page 367
Theft Versus Earthquake Insurance: An Example......Page 368
The Role of Diversification......Page 369
10.6 Diversification in Stock Portfolios......Page 370
Firm-Specific Versus Systematic Risk......Page 371
No Arbitrage and the Risk Premium......Page 372
GLOBAL FINANCIAL CRISIS Diversification Benefits During Market Crashes......Page 374
COMMON MISTAKE A Fallacy of Long-Run Diversification......Page 375
Sensitivity to Systematic Risk: Beta......Page 376
COMMON MISTAKE Beta Versus Volatility......Page 379
MyFinanceLab......Page 381
Problems......Page 383
Data Case......Page 388
Chapter 11 Optimal Portfolio Choice and the Capital Asset Pricing Model......Page 390
11.1 The Expected Return of a Portfolio......Page 391
Combining Risks......Page 392
Determining Covariance and Correlation......Page 393
COMMON MISTAKE Computing Variance, Covariance, and Correlation in Excel......Page 395
Computing a Portfolio’s Variance and Volatility......Page 396
Large Portfolio Variance......Page 398
Diversification with an Equally Weighted Portfolio......Page 399
INTERVIEW with John Powers......Page 401
11.4 Risk Versus Return: Choosing an Efficient Portfolio......Page 402
Efficient Portfolios with Two Stocks......Page 403
The Effect of Correlation......Page 405
Short Sales......Page 406
Efficient Portfolios with Many Stocks......Page 407
NOBEL PRIZES Harry Markowitz and James Tobin......Page 408
Investing in Risk-Free Securities......Page 410
Borrowing and Buying Stocks on Margin......Page 411
Identifying the Tangent Portfolio......Page 412
Portfolio Improvement: Beta and the Required Return......Page 414
Expected Returns and the Efficient Portfolio......Page 416
The CAPM Assumptions......Page 418
Optimal Investing: The Capital Market Line......Page 419
Market Risk and Beta......Page 420
NOBEL PRIZE William Sharpe on the CAPM......Page 422
Beta of a Portfolio......Page 423
MyFinanceLab......Page 425
Further Reading......Page 428
Problems......Page 429
Data Case......Page 435
The Security Market Line with Differing Interest Rates......Page 437
Chapter 12 Estimating the Cost of Capital......Page 440
12.1 The Equity Cost of Capital......Page 441
Market Indexes......Page 442
Value-Weighted Portfolios and Rebalancing......Page 443
The Market Risk Premium......Page 444
Using Historical Returns......Page 446
Identifying the Best-Fitting Line......Page 448
Using Linear Regression......Page 449
Debt Yields Versus Returns......Page 450
COMMON MISTAKE Using the Debt Yield as Its Cost of Capital......Page 451
Debt Betas......Page 452
All-Equity Comparables......Page 453
The Unlevered Cost of Capital......Page 454
Industry Asset Betas......Page 456
Differences in Project Risk......Page 458
Financing and the Weighted Average Cost of Capital......Page 460
INTERVIEW with Shelagh Glaser......Page 461
COMMON MISTAKE Using a Single Cost of Capital in Multi-Divisional Firms......Page 462
12.7 Final Thoughts on Using the CAPM......Page 463
MyFinanceLab......Page 464
Further Reading......Page 466
Problems......Page 467
Data Case......Page 471
Beta Variation and Extrapolation......Page 472
Outliers......Page 473
COMMON MISTAKE Changing the Index to Improve the Fit......Page 474
USING EXCEL Estimating Beta Using Excel......Page 475
Other Considerations......Page 476
Chapter 13 Investor Behavior and Capital Market Efficiency......Page 478
Identifying a Stock’s Alpha......Page 479
Profiting from Non-Zero Alpha Stocks......Page 480
Informed Versus Uninformed Investors......Page 481
Rational Expectations......Page 482
Underdiversification and Portfolio Biases......Page 483
Excessive Trading and Overconfidence......Page 484
Hanging on to Losers and the Disposition Effect......Page 486
Investor Attention, Mood, and Experience......Page 487
Implications of Behavioral Biases......Page 488
Trading on News or Recommendations......Page 489
The Performance of Fund Managers......Page 491
The Winners and Losers......Page 494
Size Effects......Page 495
INTERVIEW with Jonathan Clements......Page 497
Momentum......Page 499
Implications of Positive-Alpha Trading Strategies......Page 500
13.7 Multifactor Models of Risk......Page 502
Using Factor Portfolios......Page 503
Selecting the Portfolios......Page 504
The Cost of Capital with Fama-French-Carhart Factor Specification......Page 505
Financial Managers......Page 507
Investors......Page 508
MyFinanceLab......Page 509
Further Reading......Page 511
Problems......Page 512
Appendix Building a Multifactor Model......Page 518
PART 5 CAPITAL STRUCTURE......Page 520
Chapter 14 Capital Structure in a Perfect Market......Page 521
Financing a Firm with Equity......Page 522
Financing a Firm with Debt and Equity......Page 523
The Effect of Leverage on Risk and Return......Page 524
Homemade Leverage......Page 526
MM and the Real World......Page 527
The Market Value Balance Sheet......Page 528
Application: A Leveraged Recapitalization......Page 529
Leverage and the Equity Cost of Capital......Page 531
Capital Budgeting and the Weighted Average Cost of Capital......Page 532
Levered and Unlevered Betas......Page 535
NOBEL PRIZE Franco Modigliani and Merton Miller......Page 537
Leverage and Earnings per Share......Page 538
GLOBAL FINANCIAL CRISIS Bank Capital Regulation and the ROE Fallacy......Page 540
Equity Issuances and Dilution......Page 541
14.5 MM: Beyond the Propositions......Page 542
MyFinanceLab......Page 543
Further Reading......Page 544
Problems......Page 545
Data Case......Page 549
Chapter 15 Debt and Taxes......Page 552
15.1 The Interest Tax Deduction......Page 553
The Interest Tax Shield and Firm Value......Page 555
The Interest Tax Shield with Permanent Debt......Page 556
The Weighted Average Cost of Capital with Taxes......Page 557
The Repatriation Tax: Why Some Cash-Rich Firms Borrow......Page 558
The Interest Tax Shield with a Target Debt-Equity Ratio......Page 559
The Tax Benefit......Page 561
No Arbitrage Pricing......Page 562
Analyzing the Recap: The Market Value Balance Sheet......Page 563
Including Personal Taxes in the Interest Tax Shield......Page 564
Valuing the Interest Tax Shield with Personal Taxes......Page 567
Cutting the Dividend Tax Rate......Page 568
Do Firms Prefer Debt?......Page 569
Limits to the Tax Benefit of Debt......Page 572
INTERVIEW with Andrew Balson......Page 573
Growth and Debt......Page 574
The Low Leverage Puzzle......Page 575
MyFinanceLab......Page 577
Further Reading......Page 578
Problems......Page 579
Data Case......Page 583
Chapter 16 Financial Distress, Managerial Incentives, and Information......Page 584
Armin Industries: Leverage and the Risk of Default......Page 585
Bankruptcy and Capital Structure......Page 586
16.2 The Costs of Bankruptcy and Financial Distress......Page 587
Direct Costs of Bankruptcy......Page 588
Indirect Costs of Financial Distress......Page 589
GLOBAL FINANCIAL CRISIS The Chrysler Prepack......Page 592
Who Pays for Financial Distress Costs?......Page 593
The Present Value of Financial Distress Costs......Page 595
Optimal Leverage......Page 596
Excessive Risk-Taking and Asset Substitution......Page 598
Debt Overhang and Under-Investment......Page 599
GLOBAL FINANCIAL CRISIS Bailouts, Distress Costs, and Debt Overhang......Page 600
Agency Costs and the Value of Leverage......Page 601
The Leverage Ratchet Effect......Page 602
Why Do Firms Go Bankrupt?......Page 603
16.6 Motivating Managers: The Agency Benefits of Leverage......Page 604
Reduction of Wasteful Investment......Page 605
Excessive Perks and Corporate Scandals......Page 606
GLOBAL FINANCIAL CRISIS Moral Hazard, Government Bailouts, and the Appeal of Leverage......Page 607
16.7 Agency Costs and the Trade-Off Theory......Page 608
The Optimal Debt Level......Page 609
Leverage as a Credible Signal......Page 610
Issuing Equity and Adverse Selection......Page 612
Implications for Equity Issuance......Page 614
Implications for Capital Structure......Page 615
16.9 Capital Structure: The Bottom Line......Page 618
MyFinanceLab......Page 619
Problems......Page 621
Chapter 17 Payout Policy......Page 630
Dividends......Page 631
Share Repurchases......Page 633
Alternative Policy 1: Pay Dividend with Excess Cash......Page 634
Alternative Policy 2: Share Repurchase (No Dividend)......Page 635
Alternative Policy 3: High Dividend (Equity Issue)......Page 637
Modigliani-Miller and Dividend Policy Irrelevance......Page 638
17.3 The Tax Disadvantage of Dividends......Page 639
Taxes on Dividends and Capital Gains......Page 640
Optimal Dividend Policy with Taxes......Page 641
The Effective Dividend Tax Rate......Page 643
Tax Differences Across Investors......Page 644
Clientele Effects......Page 645
INTERVIEW with John Connors......Page 646
17.5 Payout Versus Retention of Cash......Page 648
Retaining Cash with Perfect Capital Markets......Page 649
Taxes and Cash Retention......Page 650
Adjusting for Investor Taxes......Page 651
Issuance and Distress Costs......Page 652
Agency Costs of Retaining Cash......Page 653
Dividend Smoothing......Page 655
Dividend Signaling......Page 656
Signaling and Share Repurchases......Page 657
Stock Dividends and Splits......Page 659
Spin-Offs......Page 661
Berkshire Hathaway’s A & B Shares......Page 662
MyFinanceLab......Page 663
Key Terms......Page 664
Problems......Page 665
Data Case......Page 669
PART 6 ADVANCED VALUATION......Page 672
Chapter 18 Capital Budgeting and Valuation with Leverage......Page 673
18.1 Overview of Key Concepts......Page 674
18.2 The Weighted Average Cost of Capital Method......Page 675
INTERVIEW with Zane Rowe......Page 676
Using the WACC to Value a Project......Page 677
Summary of the WACC Method......Page 678
Implementing a Constant Debt-Equity Ratio......Page 679
The Unlevered Value of the Project......Page 681
Valuing the Interest Tax Shield......Page 682
Summary of the APV Method......Page 683
Calculating the Free Cash Flow to Equity......Page 685
Valuing Equity Cash Flows......Page 686
Summary of the Flow-to-Equity Method......Page 687
18.5 Project-Based Costs of Capital......Page 688
Project Leverage and the Equity Cost of Capital......Page 689
COMMON MISTAKE Re-Levering the WACC......Page 691
Constant Interest Coverage Ratio......Page 693
Predetermined Debt Levels......Page 694
Issuance and Other Financing Costs......Page 696
Security Mispricing......Page 697
Financial Distress and Agency Costs......Page 698
18.8 Advanced Topics in Capital Budgeting......Page 699
Periodically Adjusted Debt......Page 700
Leverage and the Cost of Capital......Page 702
The WACC or FTE Method with Changing Leverage......Page 704
Personal Taxes......Page 705
MyFinanceLab......Page 707
Further Reading......Page 709
Problems......Page 710
Data Case......Page 716
Deriving the WACC Method......Page 718
The Levered and Unlevered Cost of Capital......Page 719
Solving for Leverage and Value Simultaneously......Page 720
The Residual Income and Economic Value Added Valuation Methods......Page 722
Chapter 19 Valuation and Financial Modeling: A Case Study......Page 724
19.1 Valuation Using Comparables......Page 725
Operational Improvements......Page 727
Capital Expenditures: A Needed Expansion......Page 728
Capital Structure Changes: Levering Up......Page 729
Forecasting Earnings......Page 730
INTERVIEW with Joseph L. Rice, III......Page 731
Working Capital Requirements......Page 733
Forecasting Free Cash Flow......Page 734
USING EXCEL Summarizing Model Outputs......Page 736
The Balance Sheet and Statement of Cash Flows (Optional)......Page 737
USING EXCEL Auditing Your Financial Model......Page 739
CAPM-Based Estimation......Page 740
Ideko’s Unlevered Cost of Capital......Page 741
19.5 Valuing the Investment......Page 742
The Multiples Approach to Continuation Value......Page 743
The Discounted Cash Flow Approach to Continuation Value......Page 744
APV Valuation of Ideko’s Equity......Page 746
COMMON MISTAKE Missing Assets or Liabilities......Page 747
IRR and Cash Multiples......Page 748
19.6 Sensitivity Analysis......Page 749
MyFinanceLab......Page 750
Further Reading......Page 751
Problems......Page 752
Appendix Compensating Management......Page 754
Glossary......Page 756
A......Page 776
B......Page 777
C......Page 778
D......Page 780
E......Page 782
F......Page 783
G......Page 784
I......Page 785
J......Page 786
L......Page 787
M......Page 788
O......Page 789
P......Page 790
R......Page 791
S......Page 793
T......Page 795
W......Page 796
Z......Page 797

✦ Subjects

Textbooks;Economics;Finance