PARTⅠ 3
PARTⅠ 3
Chapter 1 3
Interpreting Financial Statements 3
The Cash Flow Cycle 3
ASSESSING THE FINANCIAL HEALTH OF THE FIRM 3
ASSESSING THE FINANCIAL HEALTH OF THE FIRM 3
1 Interpreting Financial Statements 3
The Balance Sheet 6
Current Assets and Liabilities 7
Shareholders'Equity 7
The Income Statement 9
Cash Budgets 10
Measured Earnings 10
Sources and Uses Statements 14
The Two-Finger Approach 16
The Cash Flow Statement 16
Financial Statements and the Value Problem 21
Market Value versus Book Value 21
Economic Income versus Accounting Income 24
Inflation and Company Profits 28
Appendix:Inflation and the Assessment of Company Performance 28
Inflation Accounting 31
Inflation and Company Balance Sheets 31
Chapter Summary 32
Chapter Problems 33
Additional Reading 33
The Levers of Financial Performance 37
Evaluating Financial Performance 37
Chapter2 37
2 Evaluating Financial Performance 37
The Three Determinants of ROE 38
Return on Equity 38
The Profit Margin 40
Asset Turnover 42
Financial Leverage 46
Is ROE a Reliable Financial Yardstick? 52
The Risk Problem 53
The Timing Problem 53
The Value Problem 55
ROE or Market Price? 57
Ratio Analysis 58
Using Ratios Effectively 61
Ratio Analysis of Analog Devices,Inc. 62
Appendix:International Differences in Financial Structure 75
Percentage Balance Sheets 76
Comparisons Among Large,Publicly Traded Companies 78
International Accounting Differences 80
Chapter Summary 82
Additional Reading and Recommended Web Sites 83
Chapter Problems 84
Chapter 3 91
Pro Forma Statements 91
Financial Forecasting 91
PARTⅡ 91
PLANNING FUTURE FINANCIAL PERFORMANCE 91
PARTⅡ 91
3 Financial Forecasting 91
PLANNING FUTURE FINANCIAL PERFORMANCE 91
Percent-of-Sales Forecasting 92
Pro Forma Statements and Financial Planning 98
Sensitivity Analysis 100
Scenario Analysis 100
Simulation 101
Interest Expense 102
Seasonality 103
Forecasting with Computer Spreadsheets 104
Cash Flow Forecasts 106
The Techniques Compared 108
Planning in Large Companies 111
Chapter Summary 112
Additional Reading 113
Chapter Problems 114
4 Managing Growth 119
Managing Growth 119
Chapter 4 119
Sustainable Growth 120
The Sustainable Growth Equation 121
Balanced Growth 124
Too Much Growth 124
Analog Devices'Sustainable Growth Rate 126
"Wgat If"Questions 127
What to do When Actual Growth Exceeds Sustainable Growth 128
Sell New Equity 129
Increase Leverage 134
Reduce the Payout Ratio 134
Profitable Pruning 134
Sourcing 135
Pricing 136
Is Merger the Answer? 136
Too Little Growth 136
What to do When Sustainable Growth Exceeds Actual Growth 138
Ignore the Problem 139
Return the Money to Shareholders 139
Buy Growth 140
Sustainable Growth and Inflation 141
Sustainable Growth and Pro Forma Forecasts 142
Chapter Summary 143
Chapter Problems 144
Additional Reading 144
PARTⅢ 149
FINANCING OPERATIONS 149
Chapter 5 149
Financial Instruments and Markets 149
5 Financial Instruments and Markets 149
FINANCING OPERATIONS 149
PARTⅢ 149
Financial Instruments 150
Bonds 151
Common Stock 156
Preferred Stock 161
Financial Markets 163
Private Placement or Public Issue? 163
Exchanges and Over-the-Counter Markets 165
International Financial Markets 165
Investment Banking 168
Issue Costs 170
Regulatory Changes 171
Efficient Markets 172
What Is an Efficient Market? 173
Implications of Efficiency 174
Forward Markets 178
Appendix:Using Financial Markets to Manage Corporate Risks 178
Hedging in Money and Capital Markets 183
Limitations of Financial Market Hedging 185
Chapter Summary 187
Additional Reading and Recommended Web Sites 188
Chapter Problems 188
6 The Financing Decision 191
Chapter 6 191
The Financing Decision 191
Financial Leverage 192
Techniques for Evaluating Financing Alternatives 195
Range of Earnings Chart 196
Coverage Ratios 201
Selecting the Appropriate Financing Instrument 203
Financial Flexibility 204
Market Signaling 205
The Financing Decision and Sustainable Growth 208
FRICTO 212
Selecting a Maturity Structure 213
Inflation and Financing Strategy 214
Appendix:The Financing Decision and Firm Value 215
No Taxes or Bankruptcy 215
Corporate Taxes but Still No Bankruptcy 218
Taxes and Bankruptcy 220
Concluding Comments 223
Chapter Summary 225
Additional Reading 226
Chapter Problems 226
PARTⅣ 231
EVALUATING INVESTMENT OPPORTUNITIES 231
7 Discounted Cash Flow Techniques 231
EVALUATING INVESTMENT OPPORTUNITIES 231
Chapter 7 231
Discounted Cash Flow Techniques 231
PARTⅣ 231
Figures of Merit 232
The Payback Period and the Accounting Rate of Return 234
The Time Value of Money 235
Equivalence 238
The Net Present Value 239
The Benefit-Cost Ratio 241
The Internal Rate of Return 241
Calculating NPVs,IRRs,and BCRs with a Computer Spreadsheet 245
Bond Valuation:An Example of NPV and IRR Calculations 247
Mutually Exclusive Alternatives and Capital Rationing 248
Determining the Relevant Cash Flows 250
Depreciation 251
Working Capital and Spontaneous Sources 253
Allocated Costs 254
Sunk Costs 254
Excess Capacity 255
Financing Costs 256
Appendix:Mutually Exclusive Alternatives and Capital Rationing 258
What Happened to the Other $578,000? 259
Unequal Lives 260
Capital Rationing 261
The Problem of Future Opportunities 263
A Decision Tree 263
Chapter Summary 264
Additional Reading 265
Chapter Problems 266
Chapter 8 269
Risk Analysis in Investment Decisions 269
8 Risk Analysis in Investment Decisions 269
Risk Defined 271
Estimating Investment Risk 273
Three Techniques for Estimating Investment Risk 274
Including Risk in Investment Evaluation 275
Risk-Adjusted Discount Rates 275
The Cost of Capital 277
The Cost of Capital Defined 277
Analog Devices'Cost of Capital 279
The Cost of Capital in Investment Appraisal 286
Multiple Hurdle Rates 288
Four Pitfalls in the Use of Discounted Cash Flow Techniques 289
The Entity Perspective versus the Equity Perspective 290
Inflation 292
Real Options 293
Excessive Risk Adjustment 296
Economic Value Added 298
EVA and Investment Analysis 299
EVA's Apeal 300
A Cautionary Note 302
Appendix:Diversification and B-Risk 303
Diversification 305
Measuring Beta 308
Using Beta in Investment Evaluation 309
Beta Risk and Conglomerate Diversification 309
Chapter Summary 310
Additional Reading 311
Chapter Problems 312
9 Business Valuation and Corporate Restructuring 315
Business Valuation and Corporate Restructuring 315
Chapter 9 315
Valuing a Business 317
Assets or Equity? 317
Dead or Alive? 318
Minority Interest or Control? 320
Equity Valuation 321
Firm Valuation 321
Discounted Cash Flow Valuation 321
Free Cash Flow 322
The Terminal Value 323
A Numerical Example 326
Problems with Present Value Approaches to Valuation 328
Valuation Based on Comparable Trades 329
Lack of Marketability 335
The Market for Control 335
The Premium for Control 336
Financial Reasons for Restructuring 339
The Empirical Evidence 345
The AT T-McCaw Merger 347
Chapter Summary 349
Additional Reading 350
Chapter Problems 351
APPENDLX A:PRESENT VALUE OF$1 IN YEAN N,DISCOUNTED AT DISCOUNT RATE K 355
APPENDIX A 355
APPENDIX B 357
APPENDLX B:PRESENT VALUE OF AN ANNUITY OF$1 FOR N YEARS,DISCOUNTED AT RATE K 357
GLOSSARY 359
GLOSSARY 359
SUGGESTED ANSWERS TO END-OF-CHAPTER PROBLEMS 371
SUGGESTED ANSWERS TO END-OF-CHAPTER PROBLEMS 371
INDEX 399
INDEX 399