Index

current ratio, 78–79 • A • divestitures, 297 α () 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 (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 ratio, 106–107 acid test ratios, 79–80 operating asset turnover ratio, 92 acquisitions, 292–294 other, 53 active management, 205–206 overview, 48–49 activity ratios, 80–87 repatriation risk, 199 activity-based costing, 320 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 (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 (), 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 PMPM 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 , 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 , 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 PMPM 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 , 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

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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-, 318–320 differentials, 216–217, 304 cultural differences, 299, 323–324 diluted , 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 cover ratios, 104–105 cyclical sales, 267 , 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 ratios, 103 data mining, 282 , 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 , 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 ratios, 102

332_9781118743508-bindex.indd2_9781118743508-bindex.indd 340340 88/28/13/28/13 112:532:53 PMPM 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 Easton, 289 experience-based judgements, 326 embargoes, 322 expiry date, 179 emotionally charged decisions, 327–328 extrinsic models, 172 employees, 71, 322 employment, 175, 275 • F • Energy Brands, 302 energy sector, 169 face values, 57, 154, 156 entry-level positions, 29 factor price equalisation, 313 EPS (earnings per share), 65–66, 99–100, factoring, 295–296 102–103 fair value, 104, 183, 241, 305–306 equities. See shares fallacies, 326–327 equity fi bre-optic broadband, 237 assets, 36 FIFO (fi rst-in, fi rst-out) method, 61–62, 263 cost of, 240–241, 243 fi ll-or-kill orders, 161 debt to , 96 fi nance lease obligations, 54–55 fi nancing M&A, 308 fi nancial analysis importance of debt versus, 94–95 common-size comparisons, 252–258 raising capital, 35 determining quality of profi ts, 262–267 return on total equity ratio, 93 importance of, 251–252 ROI, 94 investment performance, 267–272 selling to raise cash, 40–43 operating risk, 200 equity to total assets ratios, 108–109 overview, 251 equity valuation models, 171–172 performance comparatives, 258–262 equivalent annual cost (EAC), 135–136 Financial Conduct Authority, 27, 233 ERP Financials, 238 fi nancial engineering error variable (ε), 217 bundling assets, 229–231 estimate at completion (EAC), 141–142 computational fi nance, 236–238 estimate to complete (ETC), 141–142 exotic fi nances, 231–233 ethnocentrism, 335 general discussion, 224 e-trading, 236–237 hybrid fi nances, 227–229 Eurobonds, 314–315 portfolios, 233–235 European Union, international trade securitisation, 224–227 agreements, 323 fi nancial institutions, intermediary Euroyen bonds, 314 processes, 10–11 EV (earned value), 133–134, 139–142 fi nancial management, 200, 256

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fi nancial ratios, 77 Financial Reporting Council, 27 • G • fi nancial reports, 263–265, 274–275 gains, prospect theory, 332 fi nancial sector, 169 Gambler’s Fallacy, 327 fi nancing, M&A, 307–308 GDP (gross domestic product), 173–174 fi nancing activities cash fl ows, 70, 73–74 Generally Accepted Accounting Practice fi nancing institutions, 24–25 (GAAP), 27 fi rst-in, fi rst-out (FIFO) method, 61–62, 263 geographic expansion, 299 fi scal policy, 175 global registered shares, 319 fi xed asset turnover ratios, 86–87 golden parachutes, 302 fi xed assets, 50–52, 56, 72, 92 Gordon’s Model, 246 fi xed charge coverage ratios, 95–96 government gilts, 144–146 fi xed rate returns, 192–193 government policy, 13 fl ash crashes, 235 Graebner, David, 8 fl uctuations, in , 174 graphs, 281–284 forecasting green chip companies, 166 collecting data, 274–275 greenmail circumstances, 302 evaluating performance, 287 gross domestic product (GDP), 173–174 fi nding average, 275–276 gross margin, 60, 62 historical data, 281–285 gross profi t, 60–62 measuring data distribution, 276–278 gross profi t margin ratio, 89–90 overview, 273 growth, 103, 113 probability, 278–281 growth versus development, as cultural reference class, 287 dimension, 324 statistics and probability, 285–287 guiding scenarios, 287 foreign exchange risk, 192, 196–199, 318 foreign regulations, 318 foreign-exchange swaps, 187–188 • H • Forensic Accounting For Dummies, 30 health insurance companies, 20 Format One, 60 hedge portfolios, 204 Format Two, 60 hedging, 185 forward contracts, 181–183, 232 heuristic methods, 326 forward integration, 301 Hewlett-Packard (HP), 292 forward transactions, 317 historical data, 281–285, 287 framing, 334–335 HM Treasury (the Treasury), 27–28 free cash fl ow method, 172 HMRC, 27 free-trade zones, 321 Hofstede, Geert, 324 FRS 102 (UK Generally Accepted horizontal common-size comparisons, 253, Accounting Practice), 62, 264 255–257 FTSE 100 Index, 152, 170 horizontal integration, 301 full acquisitions, 293 hospitality sector, 169 funds, 23–24, 36–40 hostile takeovers, 295 future transactions, 317 human resources, 33–34 future value, 119–123, 131, 187 hybrid fi nances, 227–229 futures contracts, 184–185

332_9781118743508-bindex.indd2_9781118743508-bindex.indd 342342 88/28/13/28/13 112:532:53 PMPM Index 343

hybrid models, 172 interest rate risk, 192–193 Hyperion, 238 interest rates based on credit risk, 195–-196 • I • calculating earnings, 122–123 callable bonds, 149 icons, explained, 3 fi xed and variable rate loans, 39 IFE (International Fisher Effect), 315–316 future value, 120–121 IFRS (International Financial Reporting general discussion, 119 Standards), 27, 324 international fi nance, 315–316 IFRS For Dummies, 324 MPC, 28 income sources, , 267 puttable bonds, 150 incorporated entities, 16–17 role of Bank of England, 28 index-backed certifi cates of deposit variable-rate bonds, 152 (CDs), 229 interest-only loans, 233 index-linked gilts, 145 interest-rate swaps, 186–187 indexed-principal swaps, 232 intermediary processes, 10–11 indices, and shares, 170–171 internal audits, 200 individualism, as cultural dimension, 324 internal rate of return (IRR), 130–132 industrial sector, 169 international fi nance industry, 173–174, 261–262 cross-listing, 318–320 infl ation, 28, 118–119, 175, 313 cultural differences, 323–324 infl ation risk, 192–193 diversifying and risk exposure, 317–318 infl ationary periods, 264 Eurobonds, 314–315 infl ows, 69 interest and exchange rates, 315–316 information presentation, 333–335 outsourcing as taxing issue, 320–321 information resources, 32–34 politics, 321–323 infrastructure sector, 169 purchasing power versus exchange rate, Initial Public Offerings (IPOs), 41, 308 313–314 insolvency, 150, 201–202 selling currency, 316–317 Institute for Fiscal Studies, 27 trade imbalances, 311–313 institutions. See organisations International Financial Reporting insurance companies, 19–22, 30 Standards (IFRS), 27, 324 intangible assets, 52, 63, 305 International Fisher Effect (IFE), 315–316 integrating, 300–302 International Monetary Fund, 275 interest Internet, information resources, 32–33, 275 bank asset management, 105 interquartile ranges, 277 calculating, 38–39 intrinsic models, 172 coupon bonds, 147 investing activities cash fl ows, 70–73 fi xed charge coverage ratio, 95–96 investment banking, 18, 21, 41 net interest margin ratio, 106–107 investment performance, 267–272 net profi t, 64–65 investment portfolios, 204 simple versus compounding, 40 investments interest cover ratios, 95 amortisation, 63, 134, 265 interest expense, 65 ARR, 128 interest income, 65 calculating NPV over time, 133

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investments (continued) balance sheets, 47–48 diversifying, 209–211 current, 53–54 EAC, 136 current ratio, 78–79 effect of portfolio theory, 205 debt to equity ratio, 96 effi cient market hypothesis, 206–207 fi nancing activities cash fl ows, 73 fi nancial versus capital, 125 long-term, 54–56 general discussion, 11 ROI, 94 measuring performance, 140 working capital ratio, 85 payback period, 135 life insurance companies, 21 rate of return, 127 LIFO (last-in, fi rst-out) method, 61–62, traders, 31 263–264 Investopedia, 32 limit orders, 162–163 ratios, 98–105 limited liability, 17 investors, 209, 318–320 limited liability companies, 16 IPOs (Initial Public Offerings), 41, 308 liquid asset management, 136–138 IRR (internal rate of return), 130–132 liquidation, 42, 201, 286–287 irrationality, determining value of, 335–336 liquidation value model, 172 Islamic Finance, 3, 19 liquidity, 48, 75, 78–80, 192, 201–202 issuers, bonds, 154 listed companies, 40–41 loan loss coverage ratios, 107–108 • J • loan sharks, 25 loans, 11, 36–40, 54, 233 J curve, 315 loans to deposits ratios, 110 JD Edwards, 238 logic programming, 238 joint ventures, 296 logical fallacies, 326–327 just-in-time (JIT) stock management, London Gazette, 146 137–138 London , 27, 41, 170 long-term debt to operating property ratios, 113 • K • long-term investments, 51 Kass-Shraibman, Frimette, 30 long-term liabilities, 53–56, 94 Kimberly Clark, 300 long-term trends, 282 loss adjusters, 30 • L • losses, 107–108, 188, 212–213, 332 lagging indicators, 175 • M • large cap companies, 167 last-in, fi rst-out (LIFO) method, 61–62, macroeconomics, 174–175 263–264 managers, 16–17, 30, 302–303 leading indicators, 175 M&A. See mergers and acquisitions legislation, 291, 318, 322 margin, 60, 62 leveraged buyouts, 294, 296 margin trading, 165 liabilities marginal cost (MC), 196 acid test ratio, 79–80 marginal revenue (MR), 196 assets, 36 market caps, 166–168 market orders, 162

332_9781118743508-bindex.indd2_9781118743508-bindex.indd 344344 88/28/13/28/13 112:532:53 PMPM Index 345

market premiums, 214 market price per ordinary share, 101, 103 • N • market prices, 215–216 NAFTA (North American Free Trade market risk, 192–194 Agreement), 323 market share, 307 nano cap companies, 167 market value, 104, 183, 241, 305–306 National Association of Securities Dealers MBSs (mortgage-backed securities), 149, Automated Quotations (), 171 225–227 negative correlation, 282 MC (marginal cost), 196 negative-amortisation loans, 233 mean averages, 276 nepotism, 329 measuring risk, 213–218 net asset turnover ratios, 89 Mercado Común del Sur (MERCOSUR), 323 net assets method, 172 mergers, 291–292 net book value, 52, 56 mergers and acquisitions (M&A) net cash fl ow, 70–74 differentiating between, 291–296 net change in cash, 74 divestitures, 297 net interest margin ratios, 106–107 fi nancing, 307–308 net present value (NPV), 124, 132–134, 138, general discussion, 289–291 141–142 measuring business worth, 303–307 net profi t, 64–66, 90–91, 93–94, 111–112 motivation, 297–303 net profi t margin ratios, 88–89 mergers of equals, 291 networking, 330 Merrill Lynch, 294 nominal interest rates, 315 micro cap companies, 167 non-controlling interests, 293 Microsoft Excel, 284 non-value-added costs, 192, 200 mid cap companies, 167 normal distribution, 279–280 minority shareholders, 293 North American Free Trade Agreement mixed-interest hybrids, 227–228 (NAFTA), 323 mixed-rate bonds, 228 not-for-profi t organisations, 17 modifi ed internal rate of return (MIRR), NPV (net present value), 124, 132–134, 138, 130–132, 140 141–142 Modigliani–Miller Theorem, 244 monetary policy, 175 Monetary Policy Committee (MPC), 28 • O • money, 7–9, 117–124 off the spread revenue, 234–235 money pits, 327 off-balance-sheet risk, 192, 196 Moody’s, 153 Offi ce for National Statistics, 146, 275 mortgage-backed securities (MBSs), 149, operating activities, 70–71, 104–105 225–227 operating assets, 92–93, 111–113 movements, predicting, 286 operating cycle ratios, 84–85 moving averages, 276 operating profi t, 62–63 MR (marginal revenue), 196 operating profi t margin ratios, 91–92 multi-asset bundles, 230 operating property, 111–113 multivariate regressions, 284 operating ratios, 111–113 Muslim fi nance, 323–324 operating risk, 192, 199–200 mutual funds, 23–24, 230 options, 179–181, 232

332_9781118743508-bindex.indd2_9781118743508-bindex.indd 345345 88/28/13/28/13 112:532:53 PMPM 346 Corporate Finance For Dummies

options contracts, 317 payment histories, 195 orders, for shares, 160–163 P/E (price to earnings ratios), 101, 286 ordinary dividends, 245 Peachtree, 238 ordinary shares, 42, 57, 104, 245 pegged orders, 163 organisational sovereignty, 293 penny stocks, 168 organisations percentage earned on operating property analysts, 29 ratios, 111–113 auditors, 30 performance comparatives, 258–262 Bank of England, 27–28 personal credit fi nancing institutions, 24 cultural differences, 299 Peterson, Steven D., 37 depository institutions, 17–19 petty cash portfolios, 204 entry-level positions, 29 pharmaceutical sector, 169 executives and managers, 30 planned value (PV), 139 fi nancing institutions, 24–25 politics, 318, 321–323 funds, 23–24 portfolio engineering, 233–235 HM Treasury, 28 portfolio manager evaluations, 270–272 human resources, 33–34 portfolio theory incorporated entities, 16–17 effi cient market hypothesis, 206–207 information resources, 32–34 management strategies, 204–205 insurance companies, 19–21 optimising risk, 218–221 loss adjusters, 30 overview, 203–204 overview, 15–16 passive versus active management, regulatory bodies, 26–27 205–206 securities fi rms, 21–22 risking returns, 207–218 stock markets, 26 positive cash fl ows, 131 traders, 31 positive correlation, 282 treasury offi cers, 31 power distance, as cultural dimension, 324 underwriters, 22 PPP (purchasing power parity), 313–314 outfl ows, 69 predicting movements, 286 outsourcing, 320–321 preference shares, 42, 55, 104, 245 overall corporate capital structure, 240 preferred cumulative dividends, 244 overhead, economies of scale, 300 preferred noncumulative dividends, over-the-counter (OTC) markets, 160 244–245 over-trading, 201 prepayments, 49 present value of future cash fl ows • P • method, 172 present values (PVs), 120–124, 134, 156 P chip companies, 167 price to earnings ratios (P/E), 101, 286 par values, 57, 154, 156 pricing partial acquisition, 293 assessing, for M&A, 304 partnerships, 296 bonds, 154 passive portfolio management, 205–206 derivatives, 177–178 patterns, from historical data, 281–282 forward contracts, 182 payback period, 135 shares, 161–163, 172 valuing options, 180

332_9781118743508-bindex.indd2_9781118743508-bindex.indd 346346 88/28/13/28/13 112:532:53 PMPM Index 347

primary industries, 168 , 21, 41, 184–185 • Q • print information resources, 33 quality profi ts, 262–267 probability quantities, 182, 184 Bayesian, 280–281 quarterly reports, 267 forecasting with, 285–287 quarters, 174 general discussion, 275 quick ratios, 259 normal distribution, 279–280 Quicken, 238 overview, 278–279 quotas, 322 of particular outcomes, 181 production, data collection, 275 profi t and loss accounts, 59–67, 253–256 • R • profi t and loss reserves, 57–58, 243–245 ranges, 277 profi tability ratios, 87–94 RAROC (risk-adjusted return on profi t/loss on discontinued operations capital), 270 category, profi t and loss accounts, 64 rate-of-change cross comparisons, 256–257 profi ts rates of return, 126–132, 214, 268–269 accounting, 56 ratio analyses dividend policy, 243–244 activity, 80–87 loan loss coverage ratio, 107–108 debt, 94–96 not-for-profi t organisations, 17 liquidity, 78–80 percentage earned on operating property, measuring company management, 67 111–112 overview, 77–78 quality of, 262–267 profi tability, 87–94 range, 277 rationality, in fi nancial decisions, 326 , 98 recessions, 194, 221 return on operating assets ratio, 92–93 red chip companies, 166 taxable, 56 reference class forecasting, 287 project capital structure management, 240 registered bonds, 150 project management, 138–142 regression, 282–285 proposed laws (bills), 13 regulatory bodies, 26–27 prospect theory, 331–332 relationships, fi nancial decisions based on, proxy fi ghts, 295 329–330 public liability insurance companies, 20 relative models, 172 public limited companies, 16 Remember icon, 3 purchase prices, for M&A, 303–308 repatriation risk, 199 purchasing power, 313–314 reserves, profi t and loss, 57–58, 243–245 purchasing power parity (PPP), 313–314 retained earnings, 245 purple chip companies, 166 return on assets ratios, 90–91 put options, 179, 181 employed (ROCE) ratios, puttable bonds, 150 87–88 PV (planned value), 139 return on equity ratios, 98 PVs (present values), 120–124, 134, 156 return on investment (ROI) ratios, 94, 217

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return on operating assets ratio, 92–93 risk-free investments, 211, 214, 217 return on total equity ratio, 93 risking returns, 208–213 returns ROCE (return on capital employed) ratios, alpha ratio, 270–271 87–88 APT, 217 ROI (return on investment) ratios, 94, 217 bonds, 155 RPI (UK Retail Prices Index), 145 measuring with APT, 220 measuring with CAPM, 219–220 • S • risking, 208–213 , 271 S chip companies, 166 revaluation reserves, 58 S&P (Standard & Poor’s), 152, 171 revenue S&P 500, 171 calculating rate of return, 128 sales, 60–61, 73, 83, 88–89 forward contracts, 183 sales (turnover) to working capital futures contracts, 185 ratios, 86 off the spread, 234–235 sales fi nancing institutions, 24 operating ratios, 111 sales ledgers, 296 options, 180 Sampath, Vijay S., 30 swaps, 187–188 SAS, 238 risk, 220, 270–271, 286–287 satisfi cing, 330–331, 335–336 risk aversion, 211–213, 324 savings institutions, 18–19 risk management schedule performance (SP), 139–140 bundling assets, 230 schedule variation (SV), 139 catastrophe bonds, 151 secondary markets, 21, 41–42, 295 credit risk, 194–196 sector rotation, 173–174 cultural differences, 324 sectors, 166, 168–169 diversifying, 218–219 securities, 147–148, 224–225, 230–231 foreign exchange risk, 196–199 securities fi rms, 21–22 forward contracts, 182 securitisation, 224–227 futures contracts, 184–185 self-serving bias, 333 interest rates and infl ation, 192–193 selling , 165–166 international fi nance, 317–318 sentiment indices, 175 liquidity risk, 201–202 share premium, 57 market caps, 168 shareholder wealth maximisation market risk, 193–194 model, 247 off-balance-sheet risk, 196 shareholders operating risk, 199–200 asking about temporary transactions, 266 portfolio theory, 218–221 assessing price for M&A, 304 prospect theory, 332 company characteristics, 16–17 put and call options, 179 general discussion, 40 sourcing capital globally, 319–320 partial acquisition, 293 swaps, 186–187 shareholders’ funds unavoidability of risk, 191–192 balance sheets, 47–48 risk-adjusted return on capital debt to equity ratio, 96 (RAROC), 270 deposits times capital ratio, 109

332_9781118743508-bindex.indd2_9781118743508-bindex.indd 348348 88/28/13/28/13 112:532:53 PMPM Index 349

fi nancing activities cash fl ows, 73 operating asset management, 110–113 ordinary shares, 57 overview, 97 overview, 56 specifi c risks, 211 profi t and loss reserves, 57–58 speculating, 188 return on equity, 98 spot analyses, 258–259 revaluation reserves, 58 spot rates, 316–317 share premium, 57 spread, 105, 161, 316 treasury shares, 57 SPSS, 238 shares stampeding, 328–329 book value per share ratio, 104 Standard & Poor’s (S&P), 152, 171 bull and bear markets, 169–170 standard deviation, 278–279 calculating value, 171–175 start-ups, 73, 318–320 classifying, 166–169 STATA, 238 convertible bonds, 148–149 Statements of Cash Flows. See cash fl ow , 102–103 statements dividend per share ratio, 100–101 Statements of Financial . See ratio, 103 balance sheets earnings yield ratio, 102 statistical bias, 333 EPS, 65–66, 99–100 statistics, forecasting with, 285–287 exchanging, 160 status quo bias, 333 fi nancing activities cash fl ows, 73 Sterling ratios, 271–272 long and short stocks, 164–166 stochastic calculus, 235 orders, 160–163 stock, 83–85, 137–138, 263–264, 275. See overview, 40, 159 also shares P/E, 101 stock and share indices, 170–171 preference, 55 stock and work-in-progress, 49 selling to public, 40–41 stock exchanges, 160 stock and share indices, 170–171 stock markets, 26, 169–170, 174 swapping, 308 Stone, Oliver, 289 types of, 42–43 stop orders, 162–163 Sharia law, 323–324 straddle strategy, 181 Sharpe ratios, 271 straight-line depreciation, 51–52 short-selling, 165–166 strike prices, 179 short-term trends, 282 strips (Separate Trading of Registered simple interest, 40, 120 Interest and Principal Securities), 146 single asset class hybrids, 228–229 subprime lenders, 25 slush funds, 204 Sunk Cost Fallacy, 327 small cap companies, 167 supplemental notes section, profi t and Smith, Adam, 8 loss accounts, 66 software, fi nancial, 238 suppliers, 71, 82–83 SP (schedule performance), 139–140 SV (schedule variation), 139 special-use ratios swaps, 186–188 banks, 105–110 swaps contracts, 232–233 investors, 98–105 synergy, 290, 303 systematic risks, 211, 317–318

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Treasury bonds, 286 • T • treasury offi cers, 31 tangible fi xed assets, 51, 63 treasury shares, 42, 57, 73, 143 target companies, 293 Treasury Solicitor, 27–28 tariffs, 322 trends, 258–260, 281–282, 328–329 tax assets, 49 turnover (sales) to working capital tax on profi ts, 65 ratios, 86 tax-deductible expenses, 242 turnovers, 82–84, 86–92, 254 taxes, 16, 64–65, 320–321 Tutor2U, 32 TCP (to-complete performance), 142 teaser rates, 39, 228 • U • Technical Stuff icon, 3 technology sector, 169 UK Generally Accepted Accounting telecom sector, 169 Practice (FRS 102), 62, 264 temporary transactions, 266 UK Retail Prices Index (RPI), 145 terms, of loans, 39–40 ultimate controlling parties, 16 three-month lag index-linked gilts, 146 unbundling securities, 230–231 Tiffany, Paul, 37 undated gilts, 146 time, value of, 118–119, 330–331 underwriters, 22, 41 time analyses, 258–260 unemployment, 175 time horizon (context), as cultural university websites, 33 dimension, 324 US, trade with China, 313 time-contingent orders, 163 time-distribution cross comparisons, • V • 257–258 time-weighted rate of returns, 269 , 272 Tip icon, 3 value, measuring to-complete performance (TCP), 142 bonds, 155–157 total assets, 106, 108–109 corporate fi nance, 10 Toys ‘R’ Us, 296 forward contracts, 183 trade creditors, 53 futures contracts, 185 trade creditors ratios, 82–83 money, 8–9 trade debtor days ratios, 80–81 options, 180–181 trade debtors, 50, 296 satisfi cing, 330–331 trade debtors turnover ratios, 81–82, 85 shares, 171–175 trade defi cits, 313 swaps, 188 trade imbalances, 311–313 vertical common-size comparisons, traders, 31, 237 253–254 trading, 236–237 value investors, 214–215 tranches, 226–227 value of money, 117–124 transaction risk, 197 value over time, 181 transfer pricing, 129, 320 value schedule calculations, 138–140 translation risk, 198 values, comparing to market prices, Treasury, the (HM Treasury), 28 215–216 treasury bills, 211–212 variables, 276

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variance strikes, 232 weighted average cost of capital (WACC), variance swaps, 232 241–242 venture capitalists, 294 weighted averages, 99–100, 170, 276 vertical acquisitions, 292 working capital, 80, 86 vertical common-size comparisons, working capital ratios, 85 253–254, 256–257 World Bank, 275 vertical integration, 301 volatility, 214, 267, 271 • Y • • W • yield to maturity (YTM), 155 Wall Street, 289 • Z • Walter’s Model, 246 Warning! icon, 3 zero-coupon bonds, 144, 147 websites, information resources, 32–33 z-scores, 286–287 weighted average cost (AVCO) method, 61–62, 264

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