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Corporate Finance for Dummies

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Corporate Finance for Dummies Index current ratio, 78–79 • A • divestitures, 297 α (alpha) ratios, 270–271 earning assets to total assets ratio, 106 absolute models, 172 effi cient market hypothesis, 206–207 AC (actual cost), 140–142 equity to total assets ratio, 108–109 accounting methods, 263–265, 275 fi xed, 50–52 accounting rate of return (ARR), 128–130 general discussion, 35–36 accrued expenses, 54 intangible, 52 accrued payroll, 54 net asset turnover ratio, 89 accuracy, in correlations, 284 net interest margin ratio, 106–107 acid test ratios, 79–80 operating asset turnover ratio, 92 acquisitions, 292–294 other, 53 active portfolio management, 205–206 overview, 48–49 activity ratios, 80–87 repatriation risk, 199 activity-based costing, 320 return on assets ratio, 90–91 actual cost (AC), 140–142 return on operating assets ratio, 92–93 agency problem, 16 secured loans, 39 algorithms, fi nancial engineering, 234–235 transferring over international AllExperts, 32 boundaries, 321 alpha (α) ratios, 270–271 turnover to working capital ratios, 86 Altman’s Z-score, 286–287 working capital ratio, 85 American Psycho, 289 Association of Southeast Asian Nations amortisation, 63, 134, 265 (ASEAN), 323 analysis, 11–12, 200. See also fi nancial auditors, 30 analysis automated algorithms, 235 analysts, 29 automated bill-payment facilities, 237–238 Annual Investment Allowance, 56 automotive sector, 169 arbitrage pricing theory (APT), 213–218, AVCO (weighted average cost) method, 220, 243 61–62, 264 arithmetic rate of return, 268–269 average rate of returns, 269 ARR (accounting rate of return), 128–130 averages, 275–276 ask prices, 152, 161, COPYRIGHTED316 aversion MATERIAL functions, 212–213 asset pools, 229 asset-backed securities, 147–148 • B • assets acid test ratio, 79–80 β (beta), 214, 217–218 balance sheets, 47–48 BAC (budget at completion), 141–142 bundling, 229–231 backward integration, 301 current, 48–50 bad debt provisions, 50, 107–108 332_9781118743508-bindex.indd2_9781118743508-bindex.indd 337337 88/28/13/28/13 112:532:53 PPMM 338 Corporate Finance For Dummies bait-and-switch arrangements, 228 Bollinger bands, 277 balance sheets bonds assets, 47–53 debt fi nancing, 38 common-size comparisons, 252 Eurobonds, 314–315 depreciation and amortisation, 63 international investors, 319 general discussion, 47–48 overview, 143 importance of, 58 rates, 151–152 liabilities, 53–56 reading information about, 152–155 sections, 48 types of, 144–151 shareholders’ funds, 56–58 valuation, 155–157 Bank of America (BoA), 294 book value, 195, 241, 305–306 Bank of England, 26–28 book value per share, 104 bank ratios, 105–109 box plots, 277 banking, online, 237–238 British Telecom (BT), 237 banks, 18–19, 195, 225–-226 broker-dealers, 21–22 Basel Accords on banking supervision, budget at completion (BAC), 141–142 199–200 budgeting, 140–142 Bayesian Probability, 280–281 Buffett, Warren, 210, 246 bear market, 169–170 bull market, 169–170 behavioural fi nance bundling assets, 229–231 analysing and presenting information, business credit fi nancing institutions, 25 333–335 business cycle, 174 bias, 332–333 Business Plans For Dummies, 37 emotionally charged decisions, 327–328 buying long, 164 irrationality, determining value of, buyouts, 294–295 335–336 logical fallacies, identifying, 326–327 • C • overview, 325 prospect theory, 331–332 call options, 179, 181 rationality, 326 callable bonds, 149 relationships, decisions based on, capital 329–330 acquiring debt to raise funds, 36–40 satisfi cing, 330–331 EBITDA/capital employed ratio, 90 stampeding, 328–329 international investors, 318–320 benchmarks, 262 net asset turnover ratio, 89 beta (β), 214, 217–218 raising, 35–36 bias, 287, 332–333 relationship with interest, 38–39 bid prices, 161, 316 ROCE ratio, 87–88 bid-ask spread, 186 selling equity to raise cash, 40–43 bidders, in acquisitions, 293 capital accounts, 312–313 Big Mac Index, 314 capital allocation lines (CALs), 218–219 bill payment, automated, 237–238 capital allocations, 135–138 bills (proposed laws), 13 capital asset pricing model (CAPM), blue chip companies, 166 213–219, 243 BoA (Bank of America), 294 332_9781118743508-bindex.indd2_9781118743508-bindex.indd 338338 88/28/13/28/13 112:532:53 PPMM Index 339 capital budgeting companies general discussion, 125–126 comparing sales prices, 306 managing capital allocations, 135–138 taxation when outsourcing, 321 NPV, 132–134 Companies Act 2006, 47, 255 payback period, 135 Companies House, 32, 275 project management, 138–142 Compaq, 292 rate of return, 126–132 compensation, for managers, 302–303 capital gains tax, 16 competition, 261–262, 302 capital structure, 239–247 compounding interest, 40, 121 caps, 166–168 computational fi nance, 236–238 cash conditional probabilities, 280–281 and cash equivalents, 50, 70 confi rmation bias, 273, 333 defi cits, 74 conglomerate integration, 301–302 fi nancing M&A, 307 consortiums of investing companies, 296 general discussion, 50 Consultative Committee of Accountancy cash fl ow statements, 69–75, 253, 267 Bodies, 26 cash fl ows consumer discretionary sector, 169 calculating discounted, 123–124 consumer goods sector, 169 credit risk, 195 context (time horizon), as cultural evaluating companies, 306 dimension, 324 NPV, 132 contingent exchanges, 196 payback period, 135 contracts, 181–185. See also derivatives sources of, 266–267 control premiums, 305 catastrophe bonds, 151 controlling shareholding, 294 CDs (index-backed certifi cates of conventional gilts, 145 deposit), 229 convertibility risk, 199 Chancellor of the Exchequer, 28 convertible bonds, 148–149 change values, 256–257, 260 convertible debt, 66, 228 Chartered Financial Analyst Society United convertible preference shares, 228 Kingdom, 26 corporate analysis, 172–173 China, trade with US, 313 corporate bonds, 144 chips, 166–167 corporate fi nance, 7–14 Chrysler, 297, 299 correlations, 282–284 cluster formation, 315 cost of capital, 240–246 Coca-Cola, 302 cost of debt, 240–242 cognitive bias, 333 cost of equity, 240–241, 243 coincident indicators, 175 cost of sales (COS), 61 collateralised mortgage obligations, cost of stock, 138 226–227 cost performance (CP), 141 Collings, Steve, 324 cost recognition, 265 Combined Online Information System cost variance, 140–141 (COINS), 28 costs, 127–128, 192 commercial banks, 18, 37 coupon bonds, 147, 152, 156 commodities, 184, 225 coupons, government gilts, 145 common-size comparisons, 252–258 covariance, 214 332_9781118743508-bindex.indd2_9781118743508-bindex.indd 339339 88/28/13/28/13 112:532:53 PPMM 340 Corporate Finance For Dummies credit quality ratings, 152 general discussion, 177–178 credit rating agencies, 227 off-balance-sheet transactions, 196 credit risk, 192, 194–196 options, 179–181 credit unions, 19 swaps, 186–188 cronyism, 329 swaps contracts, 232–233 cross-comparisons, 256–258 deviations, in SP, 139 cross-listing, 318–320 differentials, 216–217, 304 cultural differences, 299, 323–324 diluted earnings per share, 66, 243 currency, 197–199, 316–317 discounted cash fl ows, 123–124 current accounts, 312–313 disposition effect, 327 current assets, 49–50 diversifying, 194, 209–211, 298–299, current liabilities, 53–54 317–318 current portion of long-term debt, 54 divestitures, 297 current ratio, 78–79, 261–262 dividend cover ratios, 104–105 cyclical sales, 267 dividend discount model, 172 dividend payments, 42, 73, 243 • D • dividend payout ratios, 102–103 dividend per share ratios, 100–101 Daimler, 297, 299 dividend policy, 243–246 data collection, 274–275, 333–335 dividend puzzle, 244 data distribution, 276–279 dividend yield ratios, 103 data mining, 282 dividends, company owners, 16 days sales in stock ratios, 83 dividends in arrears, 245 days sales in trade debtors ratios, 81 double-dated conventional gilts, 146 debt, 35–40, 240–241, 307–308 Dow Jones Industrial Average (DJIA), debt expenses, 242 170, 235 debt portfolio, 204 drawdown, 271–272 debt ratios, 94–96 duties, 322 debt to equity ratios, 96 debtors, 48, 50, 81 • E • decision-making. See behavioural fi nance declared dividends, 244 ε (error variable), 217 deep discounts, 144, 147 EAC (equivalent annual cost), 135–136 default risk, 242 EAC (estimate at completion), 141–142 deferred income, 53 earned value (EV), 133–134, 139–142 deferred tax, 49, 55–56 earned value management (EVM), 138 defl ation, 119 earning assets to total assets ratios, 106 defl ationary periods, 264 earnings, 99, 122–123, 290 delivery price, 183 earnings before interest and taxes (EBIT), depository institutions, 17–19 95–96, 128–130 depository receipts, 319 earnings before interest and taxes, deposits times capital ratios, 109 depreciation and amortisation depreciation, 51–52, 63, 128, 265 (EBITDA), 63–64, 90 derivatives earnings per share (EPS), 65–66, 99–100, forward contracts, 181–183 102–103 futures contracts, 184–185 earnings yield ratios, 102 332_9781118743508-bindex.indd2_9781118743508-bindex.indd 340340 88/28/13/28/13 112:532:53 PPMM Index 341 EBITDA/capital employed ratios, 90 evaluations, of investment performance, economic capital, 137, 270 268–270 economic equilibrium, 206 EVM (earned value management), 138 economies of scale, 299–300 Excel, Microsoft, 284 economies of scope, 300 exchange rates, 196–198, 313–316 economy, changes in, 173, 193, 221, 275 exchanges. See stock markets effi ciency ratios, 80–87 exchanging shares, 160 effi cient frontier, 218–219 executives, 30 effi cient market hypothesis, 206–207 exercising options, 179 electronic communication networks exotic fi nances, 231–233 (ECNs), 160 expanding geographically, 299 Ellis, Bret
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