Index

Note: Page numbers followed by n subprime mortgage crisis, 13, 168, Annually compounded rate, 46–47 indicate notes. 328–329, 355–356, 779–780 Annual percentage rate (APR), 35–38 transparency and, 861–862 Annuities, 28–33. See also Equivalent A Aggarwal, R., 307, 831n annual cost Aghion, P., 841n defined, 28 Aabar Investments, 853 AGL Resources Inc., 84 equivalent annual cash flow, Abandonment option, 254–256, 561–566 Agnblad, I., 856n 141–145 project life and, 564–565 Agrawal, D., 585n, 586n growing, 33–35 temporary, 565–566 AIG, 13, 355, 581 valuation of, 28–33 valuation of, 562–564 Airbus, 253, 567–569, 568n annual mortgage payments, 31–32 ABB, 856, 857 Aivasian, V., 462n annuities due, 31–32 Abnormal return, 318–319 Alcan, 793 future value, 32–33 Absolute priority, 451–452 Alcoa, 806 growing annuities, 33–35 Accelerated depreciation, 136–138, 139 Allayanis, G., 697 installment plan costing, 30 Accelerated underwritings, 377n Allen, Franklin, 163, 226n, 242, 329n, lottery winnings, 30–31 Accenture, 129 358, 409n, 410n, 412, 747–748, Anthony, R., 300n Accounting income, tax income 846n, 860n, 864, 869, 871n, 875n Antikarov, R. S., 572 versus, 137–138 Allen, J., 844 Antitrust law, mergers and, 805–806 Accounting rates of return, 711–713 Allen, L., 594 Aoki, M., 852n nature of, 711–712 Alliant, 834 AOL, 335, 793, 828 problems with, 712–713 Allied Crude Vegetable Oil Refining A&P, 681 Accounting standards, 705 Corporation, 780 Apex One, 793 Accounts payable, 134–135, 738, 740 Allman-Ward, M., 784 Apollo Management, 823 Accounts receivable, 134–135, Allocated overhead, in net present Apple Computer Inc., 369n, 555 733, 737–738, 757 value analysis, 131 Appropriation requests, 241–242 Accrued interest, 600 Alltel, 793 Aramark, 367 Acharya, V. V., 358 Alpha, efficient market hypothesis Arbitrage Acquisitions. See Mergers and acquisitions and, 318 defined, 57 Adecco, 292 Alternative minimum tax (AMT), limits to, 327–328 Adjusted present value (APV), 486–490 136, 628 market efficiency and, 327–328 additions to debt capacity, 487–489 Altinkilic, O., 378n money machine and, 57 base case, 487 Altman, Edward I., 451n, 590n, 594, risk-neutral option valuation for international projects, 489–490 825n, 843 and, 527–528 issue costs and, 487 A. M. Best, 587n Arbitrage pricing theory (APT), review of, 491–492 Amazon, 77, 174, 188, 189, 193, 200–201 value of interest tax shields, 491–492 217–219, 392 capital asset pricing model Adler, B. E., 844 American Airlines, 627 versus, 200–201 Administrative costs American calls, 503–504, 542, 543 defined, 200 in leasing, 627 American Electric Power, 77 Arcelor, 813 in pooling risks, 649–650 American Express, 378 Archimedes, 526n Adverse selection risk, 649–650 American Jobs Creation Act (JOBS) Archipelago, 75n Agarwal, A., 811n of 2004, 638n Arc Sight, 378 Agency for International American puts, 543 Arithmetic averages, risk and, 158–159 Development, 773n American Shareholders Association, Arthur Andersen, 293 Agency problem, 290–298, 868–869 368 Articles of incorporation, 5 in capital budgeting, 291–292 American Water Works, 378 Ashanti Goldfields, 646n compensation plans, 290–298 Amortizing loan, mortgage as, 31–32 Ashenfelter, O., 307 costs, 13, 291–292, 455–457 Amram, M., 572 Ashland, 779 market-timing scandal, 10–11 Andrade, G., 450–451, 451n, 805, Asian crisis (1997), 605 mitigation, 14–15 805n, 813, 813n, 815, 817 Asian (average) options, 544 monitoring, 292–293 Andress, C., 824n Asked price, bond, 48 Ponzi schemes, 11, 11n Anheuser-Busch, 793 Asked yield to maturity, 48 risk management and, 646, 647–648 Annual coupon, 46–47 Asquith, Paul A., 329n, 333, 333n, 606n I-1 I-2 Index

Asset-backed securities (ABS), 602–603, time deposits and certificates market timing and, 463 781 of deposit, 774, 775 signaling and, 363, 395–397 Asset beta BankAmerica, 779 Bell Laboratories, 827 calculating, 220–221 Bank Boston, 797 BellSouth, 827, 827n defined, 220–221 Bankers’ acceptances (BAs), 761, 774, Benartzi, L., 200n Asset sales, 830 776 Benchmark bills, 774 Asset turnover ratio, 713 Bankers Trust, 333 Benefit-cost ratio, 116n Asymmetric information, 460–462, 805 Bank for International Settlements, Benetton, 4 AT&T, 708, 709, 710, 827, 827n, 828, 767n, 768n Benmelech, E., 627n 828n Bank loans, 740, 777–782 Benveniste, L. M., 375n, 383 AT&T Universal Card, 827 syndication of, 779 Berger, P., 836n Auction markets Bank of America, 13, 295, 604, Berglof, E., 856n initial public offering, 375–376 792, 793, 797 Bergman, N. K., 627n nature of, 75 Bank of America National Trust and Berkshire Hathaway, 11n new issue, 375–376 Savings Association, 599 Bermuda options, 544 Auerbach, A. J., 815n Bank of International Settlements, 668n Bernard, V. L., 724 Australia, taxes on dividends in, 408 Bank of New England, 797 Bernardo, A. E., 410n Authorized share capital, 345 Bank of New York, 795 Berndt, A., 579n Automated Clearing House (ACH), Bank of Nova Scotia, 779 Bertrand, M., 463n, 859, 859n 768–769, 769n Bankruptcy, 837–842 Beta Automatic debit, 768–769 alternate procedures, 840–842 asset, 220–221 Automatic dividend reinvestment plans costs of, 448–452, 465 calculating, 176–177 (DRIPs), 393 direct versus indirect, 451–452 cash-flow, 222 Average collection period, 714, 736–737 evidence of, 450–451 changes in capital structure and, Average days in inventory, 736–737 examples, 837 427–428 Average payment period, 737 nature of, 448–450 company, 214–215 Axa, 616 workouts, 840 defined, 174 Bankruptcy Reform Act of 1978, 837, earnings, 222 B 838n estimating, 217–219 BankSouth, 797 for foreign stocks, 175–176 Babus, A., 875n Banque Paribas, 798 impact of borrowing on, 190–192 Bachelier, Louis, 314n, 504 Barberis, N., 200n, 326n, 336 market risk and, 174–177 Bain Capital, 823 Barca, F., 856n portfolio risk and, 174–177, Bait and switch game, in financial Barclays Bank, 772 192–199 distress, 455 Barclays Capital, 371 project, 214–215 Baker, G. P., 836, 836n Baring Brothers, 666 relevering, 484, 485n Baker, M., 336, 402n, 409n, 463n Barnett Banks, 797 unlevering, 428, 484, 485n Balance sheet Barrier options, 544 Bethlehem Steel, 586 debt ratio, 482–484 Bartram, S. M., 688n, 689n, 690 Betton, S., 817 described, 706–707 Barwise, P., 284 Bhagat, S., 830n Baldwin, R. E., 817 Basis risk, 656 Bhandari, J. S., 837n, 844 Balloon payments, 777 Baskin, J., 834n Bharath, S. T., 840n Banco Central Hispanico, 798 Baskin-Robbins, 870 Bhutto, Benazir, 614 Banco Santander, 798 Bausch & Lomb, 283 Biddle, G. C., 332n Bandler, J., 540n Bautista, A. J., 636n Bid price, bond, 48 Bank(s). See also Bank loans; specific Bayerische Vereinsbank, 798 Big Mac Index, 683 banks BBVA, 395 Bikhchandani, S., 874n borrowing and lending via, 306–307 Bearer bonds, 600 Billington, Corey A., 567 concentration accounts, 769 Bear Stearns, 355, 780 Binomial method of option pricing, direct deposit, 768–769 Beatrice, 823 530–534 direct payment, 768–769 Beaver, William H., 589n, 590, 590n Black-Scholes model and, 538 in financial markets, 846–851 Bebchuk, L. A., 308, 841n, 855n decision trees and, 534 as intermediaries, 356–357 Becht, M., 856n, 864 defined, 530 international, 601, 770, 772–773 Bechtel, 366 general binomial method, 533–534 multicurrency accounts, 770 Behavioral finance, 326–329 two-stage, 530–532 paying for services, 770 dividend payments in, 395–396, using, 562–563 payment mechanism and, 356 397, 403 Biomet, 831–832, 834 pooling risk and, 357 limits to arbitrage, 327–328 BK Vision, 348 sweep programs, 767 market efficiency and, 326–329 Black, B., 365n Index I-3

Black, Fischer, 197n, 198n, 204, 409, inflation in, 59–63 Bruner, R., 817 409n, 525, 526, 526n, 535n, 535– interest rates in, 46–64 Brunnermeier, M., 325n, 336, 874n 543, 544, 545, 868 present value formulas in, 46–49 BT, 617 Black Monday (1987), 167–168 spreadsheet functions, 67 Bubbles, 324–325 Black-Scholes option pricing model, term structure of interest rates in, dot.com stocks, 77, 325, 334–335, 535–542 53–59 366, 372 binomial method and, 538 in the U.S., 47–49 subprime crisis, 13, 168, 328–329, development of, 534–536 volatility in, 52–53 355–356, 779–780 using, 536–537 yield to maturity, 47 Buffett, Warren, 11n, 28, 281, 282, 668 to evaluate implied volatilities, yield to maturity in, 49 Bullet payments, 777 541–542 Boness, A. J., 314n Bulow, J. I., 539n for executive stock options, 539, Bookbuilding, 375 Burch, T. R., 828n 540 Book depreciation, 303–304 Burkart, M., 862n to value executive options, 539 Book rate of return, 104, 711 Burlington Northern Santa Fe, to value portfolio insurance, 540 Book-to-market ratio, 202 84, 219 to value warrants, 539–540 Book value, 707 Burroughs, B., 823n, 844 Blackstone Group, 823, 831–832, Boone, P., 859, 859n Business plans, in venture-capital 833, 834n Booth, L., 462n financing, 363 Blockbuster, 806 Bootstrap game, in mergers, 798–800 Business valuation process Blue-sky laws, 369 Booz Allen Hamilton, 368 adjusted present value (APV) in, BMW, 689 Borison, A., 261 487–489 BNP, 798 Borrowing and lending. See also Debt discounted cash flow (DCF) in, BNP Paribas, 617n financing; Financing decisions; 90–93 Board of directors Leasing weighted-average cost of capital control rights and, 347, 851–859 banks and, 306–307 (WACC) in, 216–221 European, 855 internal rate of return and, Butler, G. F., 567n, 569n mergers and, 808–814 109–110 monitoring of agency costs, 292–293 in portfolio theory, 190–192 role of, 5, 14, 292–293 Bort, R., 784 C shareholder pressures on, 15 Bortolotti, B., 377n voting procedures and, 347–349, 350 Bosch, 4, 853 California Air Resources Board Board of Governors of the Federal Boston Red Sox, 90 (CARB), 141–142 Reserve System, 342n, 344n, 346n, Bowie, David, 602–603 California Public Employee Retirement 351n Bowie bonds, 602–603 System (Calpers), 540 Boatmen’s Bancshares, 797 Boyco, M., 831n Call options, 503–504 Bodega Numanthia Termes, 3 BP, 175, 315, 316, 318, 395, 650 defined, 503 Bodie, Zvi, 305n Bradley, M., 93n position diagrams, 503–504 Boeing, 2, 3, 127, 170–172, 174, 186– Branson, Richard, 221–222 relationship between put prices 189, 193, 253, 806 Brasil Telecom, 75 and, 529 Bolton, P., 864 Brau, J. C., 367n selling, 505–506 Bond(s). See also Bond ratings; Bond Brav, A., 394n, 412 valuation of, 526–528 valuation Brazil, payout policy in, 393 Call protection, 604 callable, 607 Breach, A., 859, 859n Call provisions, 603–605 catastrophe, 650 Break-even analysis, 138–139, 245–248 Calpine, 837 convertible, 353 defined, 245–246 Campa, J. M., 836n corporate. See Corporate bonds operating leverage and, 248–249 Campbell, J. Y., 169n, 204, 224n eurobonds, 352, 377, 598, 599n, 600 Break-even points, 248–249 Campbell Soup, 77, 170–172, 174, 175, global bonds, 377 Brealey, Richard A., 163, 226n, 242, 619, 186–189, 193, 217–219 international, 352–353 747–748, 869 Canadian Pacific, 75, 219 samurai, 598 Brennan, Michael J., 233, 405n, 566n, Caouette, J. B., 594 sold by foreign company, 598 572, 604n, 618 Capital, defined, 4 Treasury. See Treasury bonds Bridge loans, 777 Capital asset pricing model (CAPM), valuation of. See Bond valuation Bris, A., 844 192–199, 321, 867, 869–870 yankee, 598 Bristol Myers Squibb, 829 alternatives to, 199–203 Bond ratings, 587–588, 601 British Bankers Association, 778n arbitrage pricing theory (APT) problems of, 592–593 British Gas, 366 versus, 200–201 Bond valuation, 45–69 Brookdale Senior Living, 378 assumptions behind, 199 default risk in, 65–68, 581–586 Brown, G. W., 688n, 689n, 690 capital structure and, 217–219 duration in, 50–53 Brown, S. J., 204 cost of equity capital and, 217–221 I-4 Index

Capital asset pricing model example, 115–117 money-market investments in, (CAPM)—Cont. linear programming in, 117, 189 771–776 defined, 192–193 profitability index in, 115–116 payment for purchases, 767–769 dividend-discount model, 491 quadratic programming in, 189 speeding up collections, 769–770 estimates of expected returns in, 192, Capital structure. See also Debt “Cash out” selling, 365 219–221 financing; Debt policy; Equity Cash ratio, 719 review of, 194 financing; Restructuring Catalent, 834 security market line and, 193, 194–195 changes in, 343–344, 427–428 Catastrophe bonds, 650 tests of, 196–199 debt ratios, manufacturing industry, CBOT (Chicago Board of Trade), 653, validity and role of, 195–199 482–484 654, 655 Capital budgeting, 2–3. See also Capital defined, 4, 418 Centerparcs, 834 budgeting problems; Capital Modigliani-Miller approach to, 418, Cerberus Capital Management, 794, budgeting and risk; Investment 420–424 832, 832n, 833, 841 decisions; Net present value theory of, 868 Certainty-equivalent cash flow, 228 (NPV), investment decisions and theory of optimal, 465 Certainty equivalents, 227–232, 273, agency problem in, 291–292 trade-off theory of capital 569 book rate of return in, 103 structure, 448 defined, 227 capital budget, defined, 241 Caput options, 544 valuation by, 227–228 capital rationing in, 113, 115–119 Cards, D., 307 Chaebols, 858 discount rates for international Careers in finance, financial manager, Chandler, A., 834n projects, 227 6–7 Changyou.com, 377 internal rate of return in, 103, 107–115 Cargill, 366 Chapter 7 bankruptcy, 837 net present value analysis in, 101–105 Carhart, Mark M., 320, 320n Chapter 11 bankruptcy, 837–842 net present value in other currencies/ Carletti, E., 875n Chava, S., 606n countries, 139 Carried interest, 365 Chavez, Hugo, 831 payback period in, 103, 105–107 Carrow, K. A., 616n Check Clearing for the 21st Century pitfalls of, 268–273 Carry trades, 694 Act (Check 21), 769 postaudits, 242–243 Carter, D. A., 653, 653n Chen, C. R., 371, 371n, 823n, 825, 825n process for, 241–243 Carve-outs, 829–830 Chevron Corp., 835 project authorizations, 241–242 Cascade, 875 Chew, D. H., Jr., 69, 332n Capital budgeting problems, 240–260. Cash, tracing changes in, 855–859 Chicago Board of Trade (CBOT), See also Net present value (NPV), Cash balance, minimum operating, 739 653, 654, 655 investment decisions and Cash budgeting, 737–740 Chicago Board Options Exchange capital investment process, 241–243 inflow, 737–738 (CBOE), 168n, 503n, 541–542, decision trees, 253–260 outflow, 738–740 542n forecasting economic rents, 273–283 Cash coverage ratio, 717 Chicago Mercantile Exchange (CME), incentives, 290–298, 403–404 Cash cycle, 736–737 653, 653n, 654, 655 market values in assessing, 268–273 Cash-flow beta, 222 Chicago Tribune, 4 Monte Carlo simulation, 249–253 Cash-flow rights, 346–347 Chief executive officers (CEOs), 6 performance measurement, 298–306 Cash-flow risk, 223–224 aggressive versus conservative real options, 253–260, 554–571 Cash flows. See also Discounted personal style, 463 sensitivity analysis, 243–249 cash flow (DCF) board of directors and, 14 Capital budgeting and risk, 213–232 adjustments for financial statements, compensation of, 14, 290–298 capital structure and, 217–219 128–129 earnings and earnings targets, company cost of capital, 214–216 in applying net present value rule, 305–306 discounted cash flow and, 227–232 128–129 mergers and, 808–814 project cost of capital, 214–216 estimating incremental, 129–131, Chief financial officers (CFOs), 6 Capital constraints, in capital 134–136 aggressive versus conservative budgeting, 113, 115–119 forecasting, 25–26, 103–104, 129, personal style, 463 Capital expenditure (CAPEX) 475–476 earnings and earnings targets, decisions, 2–3 in Monte Carlo simulation, 252 305–306 Capital gains taxes, 406–407 in net present value analysis, 25–26, market reaction to stock issues, Capitalia, 798 104–105, 134–136 378–380 Capital investments, 104. See also surplus-funds mergers and, 796 Childs, P. D., 560n, 561n Capital budgeting Cash in and run game, in financial Chile, payout policy in, 393 Capitalization, market, 708 distress, 454 China, initial public offerings Capital markets. See also Financial markets Cash management, 776–770 (IPOs) in, 377 historic performance of, 156–163, 192 in collections, 765–766, 769–770 China Eastern Airlines, 75 Capital rationing, 113, 115–119 in disbursement, 738–740 China National Offshore Oil defined, 115 international, 770, 772–773 Corporation (CNOOC), 806 Index I-5

CHIPS, 769 valuation; Portfolio risk; Stock Consistency, in financial planning, 744 Chiquita Brands, 607–610 options; Stock repurchases Consols, 27–28 Choose (as-you-like-it) options, 544 categories of, 347–349 Constant-growth formulas, dangers Chordia, T., 323n classes of, 857–858 of, 83–86 Choudhry, M., 784 dividends. See Dividend(s) Constantinides, G. M., 179, 233, 336, Chrysler, 451–452, 464, 793–795, 832, equity financing 383, 434, 467 837, 840, 841 initial public offerings (IPOs), Consumer credit, 760 Chubb Corporation, 650 366–376 Consumer Price Index (CPI), 60, 62 Chui, M., 846n rights issues, 380–381 Continental, 282, 797 Cingular Wireless, 827 secondary issues, 376–381 Continuous compounding, 36–38 Cisco, 81, 81n, 392, 733 trust, 350 Controller, 6–7 Citibank, 779 venture capital, 362–366 Control rights, 346–347, 851–859 Citicorp, 432, 827 historic performance of capital Convenience yield, 658 Citigroup, 13, 371 markets, 157–159 Convergence trading, 327–328 Citroen, 14 initial public offerings (IPOs), Converse Inc., 793 Claessens, S., 855, 856n 366–376 Conversion ratio, 607–608 Class A stocks, 857–858 trading of, 75–76 Convertible bonds, 353, 607–612 Class B stocks, 857–858 valuation of, 76–81 described, 68 Clayton, J., 221n voting procedures, 347–349 dilution and, 611 Clayton Act of 1914, 805 Company cost of capital dividends and, 610 Clear Channel Communications, 823 defined, 214 forcing conversion, 609 Clifton, Daniel, 368 determining, 214–215 reasons for issuing, 611–612 Clinton, K., 697 nature of, 214–215 types of, 607–608 Closed-end funds, 76n, 871 Company risk, 214–215 Cooper, I. A., 159n, 619 Closely-held corporations, 5 Comparables, 77 Cootner, P. H., 314n Close-to-the-money projects, 115n Compensation plans Copeland, T. E., 572 CME (Chicago Mercantile Exchange), accounting measures of performance Cornell, B., 179, 224n 653, 653n, 654, 655 and, 298–299, 298–301 Cornett, M. M., 380, 380n CME Group, 653n chief executive officer, 14, 290–298 Corporate bonds, 577–593. See also Coca-Cola, 200, 296n, 709, 710 golden parachutes, 812 Bond(s); Bond valuation Cochrane, J. H., 204 incentives for managers and, 290–298 bond terms, 600–601 Codetermination, in Germany, 855 stock price and, 296–298 call provisions, 603–605 Colak, G., 828n Competitive advantage, 273–276 convertible, 607–612 Cole, R. H., 784 economic rents and, 273–276 debt covenants, 605–607 Coles and Myer, 832 example, 276–283 default puts and, 583 Collateral, 352–353 Complementary resources, of merger default risk, 65–68 bank loan, 780 candidates, 796 domestic and foreign, 598 bond, 601 Compounded rates of return, risk and, indenture, 599–600 Collateralized debt obligations 158–159 international security issues, 377 (CDOs), 779–780 Compounding intervals, 46–49 investment grade, 65 Collateralized mortgage obligations Compound interest junk, 65, 481, 579, 587, (CMOs), 602 compounding intervals, 36–38 823–824, 825 Collateral trust bonds, 601 defined, 21 private placements, 381–382 Collections, 765–766, 769–770 Compound options, 544 puttable, 603, 605 Collins, D., 725 ConAgra, 66 ratings, 587–588, 601 Comelli, F., 375n Concentration accounts, 769 repayment provisions, 603–605 COMEX (Commodity Exchange Conditional sale, 762 security of, 601–603 Division of NYMEX), 654 Confidence interval, 217–219 seniority of, 601–603 Comment, R., 396, 396n, 397n Conflicts of interest, eliminating, types, 601–603 Commercial Bank of China, 366 292–293 types of, 67–68 Commercial drafts, 761 Conglomerates, 221–222, 858–859 yields on, 66, 577–581 Commercial paper, 774, 775, 781–782 mergers, 793 yield spread between Treasury bonds Commerzbank, 798 private-equity funds as, 834–837 and, 66, 579–581 Commodity Exchange Division of weighted average cost of capital Corporate financing, 341–357. See also NYMEX (COMEX), 654 (WACC) and, 490–491 Financing decisions Commodity futures contracts, Congressional Budget Office, 586, 586n capital structure and, 482–484 652–654, 657–658 Conoco, 366 debt, 351–354. See also Corporate Common-size financial statements, 720 Conrad, Joseph, 695n bonds Common stock, 74–95, 345–350. See Conseco, 837 equity also Equity financing; Equity Conservatism, 326 initial public offerings, 366–376 I-6 Index

Corporate financing—Cont. Coval, J. D., 780n Debt covenants, 605–607 secondary offerings, 376–381 Covariance Debt-equity ratio (D/E), 425–426, venture capital, 362–366 beta and, 176–177 484–486 financial institutions in, 346–347, in calculating portfolio risk, 171–172, Debt financing, 351–354, 577–593. See 356–357, 849–851 176–177 also Bond(s); Corporate bonds; financial markets and, 356–357 defined, 171, 171n Debt valuation; Financial leases; internal funds, 342–343 Cowgill, B., 331n Leasing links between short-term financing Coy, P., 567n asset-backed securities, 602–603, 781 and, 731–734 Creative accounting, 332 capital structure changes and, patterns, 341–344 Credit analysis, 762 482–484 Corporate governance, 846–862 Credit decision, 762–765 debt ratios, 482–484, 716–717 agency problem, 12–15 Credit default swaps, 580–581 forms of debt, 351–353 components of, 14–15 Credit management, 760–766 international security issues, 377 differences in, 859–863 collection policy in, 765–766 long-term, 743–748 financial manager role, 6–8 credit analysis in, 762 choosing a plan, 747–748 financial markets and institutions credit decision in, 762–765 contingency planning, 743–744 in, 846–851 promise to pay and, 761–762 example, 744–748 in mitigating agency costs, 14–15 terms of sale in, 760–761 need for, 743–744 nature of corporation, 5 CreditMetrics, 593n pitfalls in model design, 747 ownership and control, 851–859 Credit scoring, 588–590 short-term financing versus, 352 value maximization in, 9–12 Credit Suisse, 371 private placements, 381–382 Corporations. See also Corporate Cross-border leasing, 638 secondary offerings, 376–381 bonds; Debt financing; Equity C&S Sovran, 797 short-term, 740–743 financing; Shareholders; Taxes, on CSX, 84, 219 bank loans, 740, 777–782 corporations Cum dividend, 392 commercial paper, 775, 781–782 closely held, 5, 855 Cumulative capital requirements, long-term financing versus, 352 corporate governance and, 1–15 731–734 medium-term notes, 774, 775, 782 debt financing method, 4 Cumulative preferred stock, 350 stretching payables, 740 equity financing methods, 4 Cumulative voting, 347 Debtor-in-possession (DIP), 840 financial manager in, 6–7 Currency risk. See Foreign exchange risk Debt policy, 418–433 financing decisions, 3, 4 Currency swaps, 663 costs of financial distress, 447–460 goals of, 8–12 Current assets, 706, 733 agency costs, 455–457 investment decisions, 2–3 Current liabilities, 480–481, 707 bankruptcy, 448–452 nature of, 5 Current ratio, 719 without bankruptcy, 452 restructuring by. See Restructuring Cusatis, P., 828n nature of financial distress, separation of ownership and Cutoff date, in payback period, 105–106 447–448 management, 5, 808, 851–859 Cyclicality, asset beta and, 222, 223 trade-off theory of capital Corus, 813 structure, 448, 462–463 Corwin, S. A., 381n D varying with type of asset, 457–458 Cost of capital effect of leverage in competitive company, 214–216 Dabora, E. M., 323n tax-free economy, 419–424 discount rates for international Daimler AG, 12, 832, 853, 854 Modigliani-Miller approach, projects, 227 Daimler-Benz, 793–794 458–460 for international investments, 692–694 DaimlerChrysler, 689, 832 traditional approach, 430–431 opportunity. See Opportunity cost Dakota, Minnesota & Eastern pecking order of financing choices, of capital Railroad, 274n 460–465 perfect pitch and, 215 Daley, J. P., 750 financial slack, 463–464, 476–478 project, 214–216 Daley, L. V., 828n impact of asymmetric information, rate of return and, 23 Danone, 806 460–462 using historic evidence to evaluate, Data-mining, 196 implications of, 462 159–163 Data snooping, 196 trade-off theory versus, 462–463 Cost of equity capital Datastream, 580n taxes and, 440–444 defined, 78–79 Davis, S. J., 825n interest tax shields and estimating, 81–86 Davydenko, S. A., 842n stockholders’ equity, 443–444 Counterparty risk, 652, 655 DAX index, 656, 657 personal taxes, 444–447 Countrywide Financial, 797 Dealer markets, 75 Debt ratio, 482–484, 716–717 Coupon, bond DeAngelo, H., 410n, 412 Debt valuation, 597–617 annual, 46–47 DeAngelo, L., 410n, 412 convertible securities, 607–609, defined, 46 Debentures, 601 610–612 semiannual, 47–49, 600 Debt capacity, additions to, 487–489 default risk in, 581–586 Index I-7

bond ratings, 587–588 Derivatives. See also Forward contracts; Discriminatory auctions, 376 government loan guarantees, 586 Futures contracts; Swaps Disney, 174, 189, 193, 217–219, 809 junk bonds, 587 in risk management, 648, 666–668 Dittman, I., 854, 854n duration in, 50–53 Descartes, René, 110n Dittmar, A. K., 395n, 784, 828n government loan guarantees, 586 Deutsch Börse, 75 Dittmar, R., 395n inflation in, 59–63 Deutsche, 12 Diversifiable (unique) risk, 170, interest rate risk and, 53–59 Deutsche Bank, 175, 371, 794, 853, 854 174–177, 224, 867 nominal rate of interest and, 59–63 Dewenter, K. L., 396n Diversification real rate of interest and, 59–63 Diamond, D., 352n arbitrage pricing theory and, 200–201 term structure of interest rates and, DIAMONDS, 76 limits to, 173–174 53–59 Dichev, I. D., 612n market risk and, 173–174 volatility in, 52–53 Digital (binary or cash-or-nothing) mergers and, 798 yields on corporate debt, 66, options, 544 portfolio risk and, 168–170, 173–174, 577–581 Dill, D. A., 636n 177–178 Decision trees, 253–260 Dilution value additivity and, 177–178 abandonment option, 254–256 in convertible valuation, 611 Divestiture, 830 binomial method of option pricing in warrant valuation, 611–612 Dividend(s). See also Payout policy and, 534 Dimitrov, O., 325n in business valuation, 90–91 defined, 254 Dimon, James, 397 in common stock valuation, 78–86 example of use, 257–260 Dimson, E., 60n, 64n, 156, 156n, 157n, in convertible valuation, 610 expansion option, 253–254 161n, 164n, 167n, 179, 685n in option pricing, 543 pros and cons of, 260 Direct debit, 768–769 payout ratio, 83, 403–404 uses of, 253–260 Direct lease, 626 preferred stock, 350 Declining industries, 860–861 Directors. See Board of directors types of, 393 Deep-in-the-money projects, 115n Direct payment, 768–769 in warrant valuation, 610 Deere, 625 Direct quote, 677 Dividend yield, 82 Default puts, 583 Dirksen, Everett, 597n historic, 159–163 Default risk, 581–586. See also Disbursements, controlling, 738–740 risk premium and, 162–163 Bankruptcy Discounted cash flow (DCF) Dixit, A. K., 261, 566n, 572 bond ratings, 587–588 in business valuation, 90–93 Djankov, S., 855, 856n calculating probability of default, in calculating present value, 25–26 Doherty, N. A., 650n 588–592 in common stock valuation, 78–86 Dollar loans, 679 corporate bond, 65–68 dangers of constant-growth Dominion Bond, 587n credit scoring and, 588–590 formulas, 83–86 Dot.com stocks, 77, 325, 334–335, government loan guarantees, 586 defined, 25 366, 372 market-based risk models, 590–592 equivalent annual cash flows, Double-Click, 793 value at risk (VA), 592–593 141–145 Douglas, R., 579n Deferred taxes, 479n problems in option pricing, 525–526 Dow Chemical, 77, 709, 710 Deflation, 62n rate of return and. See Internal rate Dow Jones Industrial Average, 76 DeGeorge, F., 306, 306n of return (IRR) DP World, 806 Degree of operating leverage (DOL), in real option valuation, 569–570 Dresdner Bank, 798 248–249 risk and, 227–232 Dresdner Kleinwort, 370 De Jong, A., 323n multiple risk-adjusted discount Drexel Burnham, 825 Deka Bank, 854 rates and, 230–232 Dual-class equity, 857–858 Dell Computer, 77, 169–170, 174–175, single risk-adjusted discount rate Duffie, D., 594 189, 193, 760 and, 229–232 Dun and Bradstreet, 859 Delphi, 795, 838 in setting gas and electricity Du Pont, 66, 366 Delta Air Lines, 653 prices, 82–83 Du Pont system, 714–718 Demirguc-Kunt, A., 462n spreadsheet functions, 37–38 Durand, David, 420n Denis, D. J., 392n with varying growth rates, 84–86 Duration Depreciation Discounted-cash-flow rate of return. in bond valuation, 50–53 accelerated, 136–138, 139 See Internal rate of return (IRR) in hedging, 665–666 biases in calculating returns, 303–304 Discounted payback rule, 107 Dutch auction, 393–394 economic, 303 Discount factor, 22–23, 56–57 investment decisions and, 136–138, Discount notes, 774 E 139 Discount rate. See also Opportunity cost salvage value, 131, 132, 133, 637 of capital Earnings announcements, 322 straight-line, 132–133, 628 avoiding fudge factors in, 222, Earnings before interest and taxes tax shield, 136–138, 139, 627, 225–226, 242 (EBIT), 708, 717 631n, 633 nature of, 23 Earnings beta, 222 I-8 Index

Earnings per share (EPS) Electronic communication Euribor (euro interbank offered rate), in equity valuation, 87–90 networks (ECFs), 75 773 forecasting, 305–306 Eli Lilly, 796 Eurobonds, 352, 377, 598, 599n, 600 mergers and, 798–800 Ellis, Jim, 859 Eurocurrency, 352, 772–773 Earnings-price ratio, 87 Ellis, K., 368n Eurodollars, 772–773 Eastern Airlines, 451, 839 Ellison, Larry, 14, 539 Euro interbank offered rate, 773 Eastman Kodak, 66 Elton, E. J., 204, 585n, 586n Euronext LIFFE, 75n, 654, 655 eBay, 372–374 Empire building, 291 European Banking Federation, 778n Ebner, Martin, 348 Endesa, 793 European calls, 503–504, 543 Eckbo, B. E., 307, 318n, 383, 817, 843 Enel, 793 European Monetary Union (EMU), Eckel, C., 844 Energy Recovery, 378 677n, 772 Eckel, D., 844 Enriques, L., 855n European puts, 542 Economic depreciation, 303 Enron, 293, 367, 450, 450n, 458, Euros, 677n Economic exposure, 688–690 837, 861, 861n, 862 Evans, M. D., 697 Economic income, 303–304 Equal real interest rates, 686–687 Event risk, 606 Economic profit (EP), 300 Equifax, 588n, 762n Everett, S. J., 817 Economic rents Equipment trust certificates, 601 Evergreen credit, 777 competitive advantage and, 273–276 Equity financing. See also Equity Excess capacity, equivalent annual example, 276–283 valuation cash flow and, 145 forecasting, 273–283 common stock, 74–95 Exchange rates. See also Foreign Economic value added (EVA), initial public offerings (IPOs), exchange risk 298–301, 709–710 366–376 changes in, 681 applying to companies, 299–300 rights issues, 380–381 interest rates and, 679–680 calculating, 299–300, 709–710 secondary issues, 376–381 Exchange-traded funds (ETFs), 76 problems of, 712–713 trust, 350 Ex dividend, 392 pros and cons of, 300–301 venture capital, 362–366 Execucomp, 294n Economies of scale, in mergers, 795 in financial distress situations, 454 Exotic securities Economist, The, 328, 348, 794 initial public offerings (IPOs), asset-backed securities, 602–603 EDF (Electricité de France), 830 366–376 catastrophe bonds, 650 Edwards, F., 666n international security issues, 377 and violation of Modigliani-Miller Efficiency ratios, 713–714, 723 partnership, 349–350 approach to capital structure, Efficient-market hypothesis, preferred stock, 350 431–432 312–325, 867 rights offerings, 380–381 Expansion option, 253–254, 744 anomalies and financial managers, venture capital, 362–366 exploiting new technology in, 321–325 Equity Office Properties, 823, 831–832 276–283 behavioral finance and, 326–329 Equity valuation, 76–81 flexible production, 566–567 capital structure and, 418 in business valuation process, 90–93 follow-on investment opportunities, evidence against efficient markets, comparables in, 77, 221 554–558 321–325 discounted-cash-flow (DCF) formula forecasting market values in, evidence for efficient markets, in, 78–86 268–273 318–321 dividends and, 78–86 purchases in, 567–569 exceptions to, 870–871 estimating capitalization rate, 78–79 Expectations theory of exchange, 680 forms of market efficiency, 317–318, stock price in, 75–76 Expectations theory of forward rates, 319–320 Equivalent annual cash flow, 141–145 682–683 irrelevance of dividends and, cost of excess capacity, 145 Expectations theory of term structure, 398–402 defined, 142 58–59 lessons of market efficiency, 329–333 inflation, 143 Expected returns price changes as random, 314–317 long- versus short-lived equipment, capital asset pricing model and, random walk hypothesis and, 142–143 192–199, 219–221 314–317 net present value analysis, 141–145 in measuring portfolio risk, 165 Efficient portfolios replacement decision, 144–145 Modigliani-Miller approach to borrowing and lending in, 190–192 in replacement decisions, 144–145 capital structure and, 458–460 defined, 189, 194 taxes and, 144 traditional approach to capital Egan-Jones Rating, 587n technological change, 143–144 structure and, 430–431 Ehrbar, A., 301n, 308 Equivalent annual cost, operating leases Experian, 588n, 762n Eichholtz, P., 221n and, 630–632 Export-Import Bank, 765 Eisner, Michael, 809 Erb, C., 694n Export insurance, 765 Eiteman, D. K., 697 Erwin, G. R., 434 Express Scripts, 378 Electronic bill presentation and Esty, B. C., 618 External financing, 748–749 payment (EBPP), 768 Ethics, market-timing scandal, 10–11 Extra dividends, 393 Index I-9

Exxon Mobil, 77, 174, 189, 193, 392, defined, 346 Financial planning, 731–749 395, 454, 708, 709, 710, 711 role in financing, 346–347 accounting approach to, 747–748 Ezzell, R., 485n, 493 Financial leases, 632–637 growth and external financing, advantages of, 626–628, 637–638 748–749 defined, 626 models for, 731–734 F example, 633 pitfalls of model design, 747 Fabozzi, F. J., 564n, 618, 640, 784 net value of lease, 636–637 short-term. See Short-term financial Face value, defined, 46 ownership of asset, 633–634 planning Factoring, 765 salvage value for depreciation, 637 Financial ratios, 708–724 Fair Isaac & Co., 588n, 762n as source of financing, 626 Du Pont system, 714–716 Fair price, 812 taxes and, 634 efficiency, 713–714, 723 Fallen angels, 587 valuing, 632–637 leverage, 716–718 Fama, Eugene F., 162n, 198n, 201n, Financial leverage liquidity, 718–719, 723 202, 202n, 336, 392n, 459n, 463n, defined, 419, 716 performance, 708–713, 723 683n, 870n effect in competitive tax-free Financial risk, 428 Fama-French three-factor model, economy, 419–424 Financial slack, 463–464 described, 201–203 Modigliani-Miller approach, defined, 463 Family control, 855 420–424 free cash flow and, 90–91, 463–464, Fanjul, G., 825n traditional approach, 419–424 476–478 Fannie Mae, 14, 329, 603–604, 774, 831 leverage ratios, 716–718, 723 Financial statements, 704–724 Fawcett, S. E., 367n measuring, 716–718 balance sheet, 706–707 FCX, 131 Financial managers, 6–7 cash flow adjustments for, 128–129 Federal agency securities, 773–774 agency problem in capital budgeting, income statement, 707–708 Federal Deposit Insurance Corporation 291–292 in merger analysis, 807 (FDIC), 586 careers in finance, 6–7 Financial structure. See Capital Federal Family Education Loan compensation plans for, 290–298 structure (FFEL), 586 efficient markets and, 333–335 Financing decisions. See also Capital Federal Home Loan Mortgage incentives and, 290–298 structure; Corporate financing; Corporation (Freddie Mac), 329, job titles of, 6–7 Debt financing; Efficient-market 603–604, 774, 831 lessons of market efficiency and, hypothesis; Equity financing; Federal National Mortgage Association 329–333 Leasing; Mergers and acquisitions (FNMA; Fannie Mae), 14, 329, market anomalies and, 321–325 adjusted present value (APV), 603–604, 774, 831 role of, 6–7 486–490 Federal Reserve Bank of separation of ownership and adjusting discount rate through New York, 328 management and, 5, 808, weighted average cost of capital FedEx, 253–254, 366, 709, 710 851–859 (WACC), 471–475 Ferguson, M., 579n value maximization and, 9–12, defined, 2 Fiat, 4, 175, 689 240–260 examples, 3 Fifth Third Bank, 779 value-maximization principle and, investing decisions versus, 134, 314 Financial Accounting Standards Board 9–12 mergers and, 800 (FASB), 629, 629n, 807 Financial markets, 356–357, 846–851. nature of, 4 Financial assets, 2, 356 See also International finance net present value and, 134–136 Financial Assistance Corporation, 773n crisis of 2007–2009, 13, 168, weighted-average cost of capital in, Financial distress, 447–460. See also 328–329, 355–356, 581, 602, 471–492 Bankruptcy 779–780, 876 First Data, 823 without bankruptcy, 452 financial institutions in, 356–357, First Gibraltar, 797 leasing and, 627 849–851 First-stage financing, 363 nature of, 447–448 initial public offerings (IPOs), Fiscal agent, 599n risk management and, 647 366–376 Fisher, Irving, 63–64, 682n trade-off theory of capital international capital markets, 377 Fisher Scientific, 830 structure, 448 investor protection and, 849–851 Fitch credit ratings, 65–66, 587–588 pecking-order theory versus, market-timing scandal, 10–11 Fixed-income market, 47 462–463 nature of, 6–7 Fixed-rate debt, 352 type of asset and, 457–458 operation of, 8 Flat (clean) price, 48n Financial engineering, 513 opportunity cost of capital and, 7–8 FleetBoston, 797 Financial futures contracts, pooling risk and, 357 Fleet Financial Group, 797 656–658 as source of financing, 346–347 Floating charge, 780 Financial hedging, 690 subprime crisis, 13, 168, 328–329, Floating-rate debt, 68, 352, 432, 601, Financial institutions, 356–357. 355–356, 779–780 660–661 See also Bank(s); Underwriters types of, 354–355 Floating-rate notes, 432, 601 I-10 Index

Floating-rate preferred stock, 776, 776n Fried, J., 308 speculation risk in, 666, 667 Flow-to-equity method of valuing Friedman, F., 859, 859n taxes in, 139 companies, 479 Froot, K. A., 323n, 650, 669, 682n, 697 Gertner, R., 828n Forcing conversion, 609 Full (dirty) price, 48n Giambi, Jason, 295 Ford, Henry, 851, 851n Full-service leases, 626 Gilson, R., 365n Ford Credit, 464, 690, 781 Fürstenberg, Carl, 11n Ginnie Mae, 773n Ford Motor Company, 12, 174, 189, Future, in equity valuation, 79–81 Glader, P., 129n 193, 378, 464, 689, 690, 781, 795, Futures contracts, 652–658 GlaxoSmithKline, 2, 3, 7, 296, 396 851, 857 commodity, 652–654, 657–658 Global bonds, 377 Forecasts exchanges for, 652–654 Global Crossing, 837 cash flow, 25–26, 103–104, 129, hedging with, 652–658, 664–666 Global markets. See International 475–476 mechanics of trading, 654–656 finance economic rents in, 273–283 speculation in, 666–668 Goedhart, M., 95, 493 market values in, 268–273 Futures exchanges, 652–654 Goetzmann, W. N., 161n, 179, 204 prediction markets, 331 Futures markets, 273 Gold, 648 Foreign bonds, 598 Future value investment decisions for, 271–273 Foreign Credit Insurance Association of annuity, 32–33 Golden parachutes, 812 (FCIA), 765 calculating, 21 Goldman Sachs, 90, 371 Foreign exchange risk, 676–694 defined, 21 Goldreich, D., 375n, 376n basic relationships, 678–681 net present value and, 25 Gompers, P. A., 366n, 383, 811n economic exposure, 688–690 Goodwill, 807 foreign exchange market, 676–678 Google, 89–90, 331, 331n, 348, 375, hedging currency risk, 687–690 G 375n, 392, 503–518, 525–538, 542, international investment decisions, Gabaix, X., 295n 709, 710, 711, 712, 793 690–694 Gadanecz, B., 779n Gordon, M. J., 82n transaction exposure, 688–690 Galai, D., 800n Governance. See Ownership Forelle, C., 540n Gale, D., 358, 860n, 864 and control Forward contracts, 652 Gallinger, G. W., 784 Government National Mortgage financial, 658–660 Garber, Peter, 871n Association (GNMA; forward rate agreements (FRAs), Gaspar, V., 861n Ginnie Mae), 773n 658–659 Gates, Bill, 28 Government-sponsored enterprises forward rates, 677–678 Gavazza, A., 632n (GSEs), 773–774 homemade, 659–660 Gearing. See Financial leverage Goyal, V., 463n simple, 652 GE Capital Aviation Services, 625 Graham, John R., 104, 120, 160n, 196n, speculation in, 666–668 GE Capital Corporation, 781 306, 306n, 308, 394n, 402n, 405n, Forward interest rate, 658–659 Geltner, D., 221n 412, 447, 447n, 459n, 467, 609n, Forward premium, 678, 680 Genentech, 366, 793 609–610, 646n, 733n Forward prices, 652 General cash offers, 376–377 Grant, R. M., 274n Forward rate, 677–678 costs of, 378 Great Depression, 355 expectations theory of, 682–683 market reaction to, 378–380 Greenspan, Alan, 327n Forward rate agreements shelf registration, 377 Grenadier, S. R., 641n (FRAs), 658–659 General Electric (GE), 75, 76, 77, 129, Grinstein, Y., 405n Forward rate of interest, 58n 306n, 392, 580–581, 714, 781, Gromb, D., 862n France 806, 837 Grossman, S. J., 321n bond duration, 51–52 Generally accepted accounting Growth industries, 860–861 compounding intervals in, 46–47 principles (GAAP), 76, 292 Growth rates government bond valuation, 46–47 General Motors (GM), 12, 14, 66, 296, internal, 748–749 Frank, M., 463n 397, 464, 580, 597–598, 689, sustainable, 748–749 Franks, J. R., 451, 451n, 636n, 805n, 733, 781, 795, 831, 837, 838, 840 Growth stocks, 87, 196 840n, 842n, 853n General Motors Acceptance Gruber, M. J., 204, 320n, 585n, 586n Freddie Mac, 329, 603–604, 774, 831 Corporation (GMAC), 832n Grullon, G., 396n Free cash flow (FCF), financial slack General Services Administration Guiso, L., 11n and, 90–91, 463–464, 476–478 (GSA), 773n Free-rider problem, 293 Germany H Freescale Semiconductor, 834 futures contracts in, 656–657 Freixas, X., 846n net present value calculations Habib, M., 619 French, Kenneth R., 162n, 198n, 199n, in, 139 Habib Bank, 830 201n, 202, 202n, 325n, 336, 392n, ownership and control in, 852–855 Hall, B. H., 815n 459n, 463n, 870n short-termism in, 860 Hall, B. J., 307 Index I-11

Haltiwanger, R. S., 825n Home Depot, The, 295, 723 Index futures, 657 Hamada, R. S., 486n Honda, 689 Indirect quote, 677 Hansen, Robert S., 371n, 378n Honeywell, 345, 345n, 351, 353, 806 Industrial and Commercial Bank Hard rationing, 118–119 Horizontal mergers, 792 of China, 830–831 Harford, J., 817 Horizon value Industry consolidation, mergers and, Harper, J. T., 831n estimating, 91–92, 93, 476–479 797–798 Harrah’s Entertainment, 823 market-book ratios and, 92 Industry costs of capital, 481 Harris, M., 179, 233, 336, 383, 434, price-earnings ratio and, 92 Inefficiency, eliminating, 796–797 466, 467 Hoshi, T., 852, 852n, 861n, 864 Inefficiency, mergers and, 796–797 Harris, R. S., 694n, 805n Hostile takeover bids, 809–813 Inflation Hart, O., 358, 841n Host Marriott, 606 in bond valuation, 59–63 Hartmann, P., 846n, 861n Hotchkiss, E. S., 839n, 844 Consumer Price Index (CPI), 60, 62 Hart-Scott-Rodino Antitrust Act Houston, J. F., 797n expected, 686–687 of 1976, 805–806 Howe, Christopher D., 252n international rates, 60–61, 64 Harvey, Campbell R., 104, 120, 160n, HSBC, 626, 724n in net present value analysis, 131–132 196n, 306, 306n, 308, 394n, 412, Huang, J., 585n nominal interest rates and, 63–64 459n, 467, 609n, 609–610, Huang, M., 200n, 326n, 585n in term structure of interest rates, 59 694n, 733n Hub Power Company (Hubco), 613–615 Inflation rates Haushalter, G. David, 648, 648n Hudson’s Bay Company, 4 equivalent annual cash flow, 143 Hazard analysis, 590 Hull, J. C., 545, 670 exchange rates and, 681 HBOS, 370, 380, 793 Hurdle rate. See Opportunity cost of interest rates and, 59–63, 682 Healey, B. P., 784 capital Information asymmetries, 460–462, Health Markets, 834 Hurricane Andrew, 650 805 Healy, Paul M., 396, 396n, 724, 815, Hurricane Katrina, 650 Information effect. See also Signaling 815n, 861n, 864 Hypbank, 797 investor response to, 322–325 Hedge funds, 327, 328 Hyperinflation, 60 market reaction to stock issues, Hedge ratio, 527, 664–665 Hyundai, 689, 858 378–380 Hedging for mergers, 805 defined, 645–646, 652 in payout policy, 395–396, 397 as firm risk, 873 I in semistrong market efficiency, with futures contracts, 652–658 Ibbotson, R. G., 179, 383 317–318 pros and cons of, 653 Iberia, 175 in sensitivity analysis, 244 in risk management, 648 IBES, 82n in share repurchase plans, 396–397 setting up hedge, 664–666 IBM, 62n, 185–186, 227, 296n, 392, 555, in strong form of market efficiency, Hedging currency risk, 687–690 583, 598, 625, 663–664, 808 318, 322–325 economic exposure, 688–690 Icahn, Carl, 15, 809, 809n value of, in sensitivity analysis, 244 example, 687 ICE (Intercontinental Exchange), 654 in weak form of market efficiency, transaction exposure, 688–690 Ihrig, J., 697 317, 329–330 Heineken, 175 IKEA, 4, 274 Information technology (IT), Hellman, T., 365n ImClone Systems, 796 expenditure on, 128 Hellwig, M., 11n Imputation tax system, 407–409 Initial public offerings (IPOs) Helyar, J., 823n, 844 InBev SA, 793 arranging, 367–369 Hercules, 779 Incentives. See also Stock options auctions of, 375–376 Heritage-Crystal Clear, 378 financial distress and, 452–453 bookbuilding for, 375 Herman Miller Corporation, 301 for financial managers, 290–298 hot periods for, 374–375 Hershey, 334n leveraged buyouts (LBOs) and, 825 sale of, 372–374 Hewlett-Packard, 378, 567 as options, 518 underpricing of, 372–374 Higgins, R. C., 800n payout policy and, 403–404 underwriters of, 368, 370–371 Hill, N. C., 784 Incidental effects, 129 winner’s curse and, 373–374, 376 Hilton, 823, 832, 834 Inco, 813 Installment plan costing, 30 Hirshleifer, J., 874n Income statement Institutional investors Historic data described, 707–708 initial public offerings and, 369 on capital markets, 156–163, 192 in estimating cash flow, 129, 737–738 private placements and, 381–382 on mergers, 814–815 leasing and, 629–630 Insurance, 648–650 Hodges, Stewart D., 276n, 636n Income stocks, 87 catastrophe bonds, 650 Hogfeld, P., 856n Incremental net present value, 129–131 changing strategy, 650 Holderness, Clifford, 347, 347n Indenture, bond, 599–600 export, 765 Hollywood Entertainment, 806 Indexed bonds, 61–62, 687n portfolio, 540 Holmstrom, B., 817 Index funds, 320–321 risk transfer and, 648–649 I-12 Index

Intangible assets imputation tax systems, 407–409 Iowa Electronic Markets, 331 as investments, 128 inflation rates by country, 60–61, 64 Irrevocable letter of credit, 761 in mergers, 807 initial public offerings, 373, 375–376 Irvine, P., 354n Intel, 281, 366, 733 international money markets, Ishii, J. L., 811n Intercontinental Exchange (ICE), 654 772–773 Issued and outstanding shares, 345 Interest coverage, 717 leasing in, 638 Issued but not outstanding shares, 345 Interest rate parity, 679–680, 682 net present value in other Isuzu, 689 Interest rate risk, in bond currencies, 139 ITT, 834, 835 valuation, 53–59 ownership and control, 851–859 Interest rates, 778–779. See also Term privatization in, 830–831 structure of interest rates security issues, 373, 375–376, 377 J in bond valuation, 49–53, 59–64 stakeholder value maximization, Jackson, G., 852n exchange rates and, 679–680 11–12 Jaguar, 813 Fisher’s theory of, 63–64 standard deviations of stocks in, 167 James, C., 293n inflation rates and, 59–63, 682 stock market returns, 167 James, C. M., 797n nominal versus real, 59–63 stock repurchases, 395 Japan Interest rate swaps, 660–662 takeover activity in Europe, 813 bubbles in, 325 Interest tax shields, 440–447 venture capital markets, 365–366 country cost of capital and, 694 personal taxes and, 444–447 International Financial Reporting foreign bonds in, 598 value of, 491–492 Standards (IFRS), 705 ownership and control in, 851–852 value of stockholders’ equity, International Monetary Fund (IMF), 65 short-termism in, 860 443–444 International Organization of Securities Japan Bank for International Intermediaries, 356–357 Commissions (IOSCO), 395n, 705 Cooperation, 614 Internal capital market, 835–837 International projects. See Project Japan Credit Rating Agency, 587n Internal funds, 342–343 finance Jaquier, E., 159n Internal growth rate, 748–749 International risk, 676–696 Jarmin, R. S., 825n Internal rate of return (IRR), 103, foreign exchange risk, 676–694 Jarrell, G., 93n, 396, 396n, 397n 107–115 basic relationships, 678–681 J. C. Penney, 599–604, 612, 709, 710 calculation of, 108–109 economic exposure, 688–690 J. D. Edwards & Co., 810 defined, 108 foreign exchange market, 676–678 Jenkinson, T., 383 internal rate of return rule, 109 hedging currency risk, 687–690 Jensen, Michael C., 292n, 308, 403n, in lending versus borrowing, 109–110 transaction exposure, 688–690 464, 464n, 825n, 841, 841n, 843 modified, 111n political risk, 694–696 Jeter, Derek, 295 more than one opportunity cost of International Securities Exchange Jobs and Growth Tax Relief capital, 113–114 (ISE), 503n Reconciliation Act of 2003, 407n multiple rates of return and, 110–111 International Strategy & Investment Jochec, Marek, 252n for mutually exclusive projects, Group, 368 John, K., 844 111–113 International Swap Dealers Association Johnson, B., 725 net present value and, 107–115 (ISDA), 648 Johnson, E. J., 326n spreadsheet functions, 118 International Swaps and Derivatives Johnson, Ross, 823–824, 825 verdict on, 114–115 Association, 660n Johnson, S., 349n, 859, 859n, 864 Internal Revenue Service (IRS), 354, Intrade, 331 Johnson & Johnson, 77, 174, 189, 193, 405, 479n, 634, 634n, 771, 775 Inventory management, 758–760 214n, 214–215, 221–222, 283, International Accounting Standards trade-off in, 758–759 709, 710 Board (IASB), 629n, 705 in working capital valuation, 134–135 Jorion, P., 161n International finance. See also names Inventory turnover, 713 J. P. Morgan, 355, 371, 396, 397, of specific countries Investment decisions. See also Capital 580n, 593n accounting standards, 705 budgeting; Capital budgeting and J. P. Morgan Chase, 397, 772 adjusted present value, 489–490 risk; Project finance Jump risks, 650 betas for foreign stocks, 175–176 capital budgeting process for, Junior debt, 352 bubbles in, 324–325 241–243 Junk bonds, 65, 481, 579, 587, cash management, 770 defined, 2 823–824, 825 CEO compensation, 294–296 examples, 3 Jurek, J., 780n corporate debt ratios, 344 financing decisions versus, 134, 314 Just-in-time inventory, 760 discount rates for international investment trade-off, 7–8 projects, 227 nature of, 2–3 K exchange risk and, 690–694 net present value and. See Net present financial futures contracts, 656–657 value (NPV), investment Kadant Corp., 830 financial markets and institutions, decisions and Kahneman, D., 326n 846–851 Investment grade bonds, 65 Kalay, A., 412 Index I-13

Kallberg, J. G., 750 leveraged leases, 626, 638–639 Ljungqvist, A., 375n, 383 Kane, A., 159n nature of leases, 625–626 Lloyds TSB, 793 Kaneko, T., 376n as off-balance-sheet financing, 629 LME (London Metal Exchange), 654 Kansas City Board of Trade (KC), 654 operating leases, 626, 630–632 Loan guarantees, 586 Kansas City Southern Railroad, 219, reasons for, 626–630 Loan sales, 779 481 in theory of optimal capital Lochhead, S., 379n Kaplan, S. N., 296n, 365n, 450–451, structure, 465 Lockbox systems, 770 451n, 489, 489n, 817, 825, 825n, Lee, D. S., 397n Lockheed, 130 843 Leeson, Nick, 666 Lockheed Martin, 806 Karow, K. A., 434 Legal systems, 805–806 Lognormal distributions, 186n Kashyap, A., 852, 852n, 861n, 864 Lehman Brothers, 5, 355, 432n, London interbank offered rate (LIBOR), Kay, John A., 274, 274n, 302n 771, 781, 837 352, 659n, 660n, 773, 778–779 KC (Kansas City Board of Trade), 654 Leibowitz, M. L., 95 London Metal Exchange (LME), 654 Kedia, S., 836n Lemmon, M. L., 296n, 412, 459n, 463n London Stock Exchange, 75, 860 Keiretsu, 851–852 Lenovo, 2, 3, 14, 813 Longfellow, Henry Wadsworth, 8 Keller, M. R., 567n, 569n Lerner, J., 366n, 383, 825n, 833n Long-lived assets Kendall, Maurice G., 314, 314n, 315, 318 Lessard, D. R., 697 multiple risk-adjusted discount rates Keown, A., 319n Lettau, M., 169n for, 230–232 Kester, W. C., 261 Lev, B., 223n single risk-adjusted discount rate for, Kinder Morgan, 823 Leverage 229–232 Kindleberger, C., 871n financial. See Financial leverage Long Term Capital Management Kiska, Wendy, 586 operating, 222–223, 248–249 (LTCM), 328, 333 KKR (Kohlberg Kravis Roberts & Co.), Leveraged buyouts (LBOs), 455, 489, Long-term financial planning, 743–748 823–824 716 choosing a plan, 747–748 Klein, M., 615n characteristics of, 826 contingency planning, 743–744 Knoeber, C. R., 811n examples, 823–825 example, 744–748 Kogelman, S., 95 incentives and, 825 need for, 743–744 Kohlberg Kravis Roberts & Co. (KKR), junk bonds and, 823–824, 825 pitfalls in model design, 747 823–824 other stakeholders and, 825 spreadsheet functions, 745–746 Koller, T., 95, 493 taxes and, 825 Long-term financing decisions. See Kosowski, R., 320n, 867n Leveraged leases, 626, 638–639 Corporate financing Kothari, S. P., 318n Leveraged restructurings, 826 Lookback options, 544 Kozlowski, Dennis, 13 Leverage ratios, 716–718, 723 Loomis, C., 282n KPMG, 76 Levi, M. D., 697 Lopez-de-Salanes, F., 347n, 404n, 850, Kraakman, R., 855n Levine, R., 859n, 864 850n, 855, 855n, 856n, 864 Krahnen, J. P., 864 Levi Strauss, 366 LoPucki, Lynn, 840n Krigman, L., 368n Lewis, C. M., 610n, 618 LOT (Polish state airline), 795 Kroger, 806 Lewis, K. K., 697 Lottery winnings, 30–31 Kryvorizhstal, 830 Li, F., 572 Loughran, R., 323n Kulatilaka, N., 566n, 572 Liabilities, current, 480–481 Loughran, T., 373n, 374n, 380n, 381n Kumar, A., 402n, 405n LIBOR (London Interbank Lowe’s Companies, 705–724 Kumar, P., 606n Offered Rate), 352, 659n, 660n, Lu, Qi, 335n Kuroki, F., 852n 773, 778–779 Lucas, Deborah, 586 Lichtenberg, F., 815n Lucent Technologies, 827, 828 L Lie, E., 540n Luehrman, T. A., 493 Life cycle of firm, payout policy Lufthansa, 653 Laclede Group Inc., 84 and, 410 Luxottica Group SpA, 607 Lamont, O. A., 835, 835n LIFFE (Euronext LIFFE), 654, 655 LVMH, 2, 2n, 3, 4, 175 Landier, A., 295n Limited liability, 5 Land Rover, 813 Limited partnership, 349–350, 365, La Porta, R., 347n, 404n, 850, 850n, 855, 832–837 M 855n, 856n, 864 Lindahl, F. W., 332n Macaulay duration, 51 Large-firm effect, 201–203 Linear programming (LP), 117, 189 Mackie-Mason, J., 459n LaSalle Bank, 797 Lintner, John, 192n, 192–193, MacKinlay, A. C., 318n Law of conservation of value, 421–424, 394n, 398n Macquerie Bank, 832 867–868 Liquidation value, 479 Maddaloni, A., 846n Law of one price, 54–55 Liquidity, value of, 873–874 Madoff, Bernard, 11 LBOs. See Leveraged buyouts (LBOs) Liquidity ratios, 718–719, 723 Majd, S., 564n Leasing, 353, 625–640 Litzenberger, R. H., 406n Majluf, N. S., 380n financial leases, 626, 632–637 Live Nation, 793 Majority voting, 347 I-14 Index

Maksimovic, V., 462n, 830, 830n McConnell, J. J., 434, 600n, 616n, 632n, Miles, J. A., 828n Malkiel, B. G., 169n, 320n, 336 641, 797, 797n Milgrom, P., 383 Management buyouts McDonald, R. L., 545, 572 Mill, John Stuart, 869 (MBOs), 822–823 McDonald’s, 77 Miller, Merton H., 398, 398n, 406, Mandelker, G. N., 223n McGuire, William, 540 406n, 409, 409n, 418, 420n, 435, Mann, C., 585n, 586n MCI, 861 440–446, 443n, 446n, 483–486, Mann, S. V., 784 McKinnell, Henry, 295 485n, 617, 646 Mannesmann, 295–296 McKinsey & Company, 300 Miller, N. G., 221n Marcus, A. J., 159n McNichols, Maureen F., 589n, 590, Miller, S. C., 779n Maremount, Mark, 793n 590n Minneapolis Grain Exchange (MGEX), Margin, in futures trading, 654 Mead Johnson Nutrition, 829 654 Margrabe, W., 557n Medium-term notes, 774, 775, 782 Minton, B. A., 688n, 689n, 690 Mariner Energy, 378 Megginson, W., 377n, 383, 831n, 843, Miranda, J., 825n Marketable securities, management 844 Mirant Corp., 450, 450n of, 771–776 Mehra, J., 160n Miranti, P. J., Jr., 834n Market capitalization, 4, 78–79, 708 Mehra, R., 160n, 179 Mishler, L., 784 Market efficiency. See Efficient-market Mehta, P., 859, 859n Mishra, D. R., 694n hypothesis Mei, J., 224n Mitchell, M., 805, 805n, 813, 813n, Market portfolio, stocks in, 196n Melholra, V., 828n 815, 817 Market risk, 867 Mellon Financial Corporation, 795 Mitchell, M. L., 817 beta in measuring, 174–177 Mercedes Automobil Holding, 853 Mitsubishi, 689 defined, 170 Merck, 442–446, 459, 793 Mitsubishi Estate Company, 457n portfolio diversification and, 173–174 Mergers and acquisitions, 792–816 Mitsui & Co., 613–614 spreadsheet functions in antitrust law and, 805–806 Mittal Steel, 813 estimating, 231 dubious motives for, 798–800 Mittelstaedt, F., 725 Market risk premium economy and, 814–815 Miyajima, H., 852n defined, 192 estimating gains and costs of, 801– Mizuho Bank, 794 expected, 192 805, 813–816 Modified accelerated cost recovery historic, 156–163, 192 form of acquisition, 806–807 system (MACRS), 136–138, 139 in three-factor model, 202 junk bonds and, 481, 579, 587, Modified duration, 52–53 Market-timing scandal, 10–11 823–824, 825 Modified internal rate of return, 111n Market-to-book ratio, 77, 92, 708–709 key mergers, 793 Modigliani, F., 398, 398n, 418, 420n, Market value, 268–273 list of, 793 420–433, 440–446, 443n, Cadillac/movie star parable, 269 mechanics of mergers, 805–808 483–486, 485n, 646 in capital budgeting problems, merger accounting, 807–808 Modigliani-Miller (MM) approach 268–273 sensible motives for, 792–798 to capital structure, 418, 420–424 in investment decisions, 269–273 synergies in, 794 law of conservation of value, Market value added, 708 takeover battles and tactics, 421–424 Market Volatility Index (VIX), 541–542 808–814 Proposition 1, 421–424, Markowitz, Harry M., 185, 185n waves of, 814–815, 874 429–430, 432, 443–444 Mark to market, futures contract, 654 Mergerstat, 814n Proposition 2, 425–428, Marriott Corporation, 606 Merrill Lynch, 13, 14, 295, 371, 377, 429–430, 433 Marsh, P. R., 60n, 64n, 156, 156n, 157n, 793, 797 rebalancing and, 485 161n, 164n, 167n, 179, 284, 685n Merton, Robert C., 358, 535n, 572, 583, risk-return trade-off, 458–460 Mars Inc., 793 870, 870n taxes in, 443–444 Marston, F. C., 694n Metallgesellschaft, 666, 666n, 667 violations of, 433 Martin, K. J., 797, 797n Metrick, A., 383, 811n, 833n to payout policy, 398–402 Marx, Karl, 282 Mezzanine financing, 364 Moeller, S. B., 813n Mason, S. P., 572 MGEX (Minneapolis Grain Exchange), Moffett M. H., 697 Master limited partnership, 349–350 654 Mohan, N., 823n, 825, 825n Masulis, R. W., 383, 469n, 800n MGM, 481 Mola, S., 381n Matthews, J., 603n MGRM, 667 Money machines, 56–57 Mauer, D. C., 733n Mian, S. L., 765n, 784 Money market, 771 Maug, E., 854, 854n Michaels, 834 Money-market investments, 771–776 Mayer, C., 846n, 853n Michaely, R., 368n, 394n, 396n, 405n, calculating yield on, 771–772 Mayers, D., 870 409n, 412 types of, 773–776 Mazda, 861 Microsoft, 15, 315–318, 392, 404, 407n, yields on, 772 MBNA, 797 733, 771, 771n Monte Carlo simulation, 249–253 McCain, John, 331 Mikkelson, W. H., 397n defined, 249 McCardle, K. F., 813, 813n Miles, J., 485n, 493 example, 250–253 Index I-15

Montgomery, C., 836, 836n NBB Bankcorp, 797 Net present value rule, 127–145 Monthly income preferred stock NCR, 827, 828 application of, 132–139 (MIPS), 354 Negative NPV, 873 statement of, 25 Moody’s bond ratings, 65–66, 579, 587, Negotiable certificates of deposit (CDs), Net return on investment, 299 599, 617, 762, 781 774, 775 Netter, J. M., 831n Moody’s KMV, 591–592, 592n Nenova, Tatiana, 348–349, 349n, 857, Net working capital, 130, 707, 757. Mooradian, R. M., 844 857n See also Working capital Moore, J., 841n Nestlé, 175, 334n Net-working-capital-to-total-assets, 719 Moral hazard risk, 649–650 Net current assets, 707 Neuberger, A. J., 273n Morck, R., 864 Net leases, 626 Neuer Markt, 365–366 Morgan Stanley, 370, 371 Net operating profit after tax (NOPAT), Nevitt, P. K., 640 Morris, J. R., 750 711n New issues Mortgage-backed securities (MBSs), 329 Net present value (NPV), 101–105. See costs of, 371 Mortgage bonds, 601, 601n also Net present value rule; Present efficient-market hypothesis and, Mortgage pass-through certificates, 602 value (PV) 322–323 Mortgages capital budgeting decisions and, primary, 75, 354. See also Initial calculating annual payments, 31–32 240–260, 866 public offerings (IPOs) subprime crisis of 2007–2009, 13, decision trees, 253–260 secondary, 75, 354 168, 328–329, 355–356, 602, forecasting economic rents, Newmont, 174, 175, 189–190, 193 779–780 273–283 Newmont Mining, 378 Motorola, 809 forecasting market values, 268–273 New projects. See also Capital Mulally, Alan, 464 Monte Carlo simulation, 249–253 budgeting; Capital rationing Mulherin, J. H., 817 process for, 241–243 incidental effects of, 129 Mullainathan, S., 859, 859n real options, 253–260, 554–571 New securities, 872 Mullins, D. W., Jr., 329n, 333, 333n sensitivity analysis, 243–249 New York Board of Trade, 653n Multiple discriminant analysis, 590 defined, 23 New York Mercantile Exchange Municipal bonds, 65 financing decisions and, 134 (NYMEX), 653, 653n, 654, 656 Müntefering, Franz, 824n investment decisions and, 101–119, New York Stock Exchange (NYSE), 4, 7, Murphy, K. J., 307, 308 127–145 75, 75n, 196, 349–350 Murphy, T., 760n alternatives to, 103 New York Times, The, 90 Mutual funds book rate of return versus, 104 New York Yankees, 295 average annual returns, 320–321 cash flow in, 134–136 Ng, O. K., 761n closed-end, 76n, 871 depreciation and, 131, 132, 133, Nicor, 84 index, 320–321 136–138 Niculita, A. V., 493 market-timing scandal, 10–11 example, 132–139 Nielsen, 834 open-end, 76n, 871n forecasting economic rents, Nikkei 225 Index, 325 returns on, 320–321 273–283 Nimmo, R., 594 specialization of, 320–321 incentives, 290–298 Nippon Telegraph and Telephone variants, 76 inflation and, 131–132 (NTT), 366, 831 Mutually exclusive projects, internal internal rate of return and, Nissan, 689, 852 rate of return and, 111–113 107–115 Nocco, B. W., 669 Myers, Stewart C., 163, 226n, 242, internal rate of return versus, Nokia, 75n, 175 380n, 463n, 467, 486n, 564n, 636n, 107–115 Nominal discount rate, 143 747–748, 799n, 801n, 862n, 869 investment versus financing Nominal rates of interest, 59–63 decisions, 134, 314 inflation and, 63–64 key points concerning, 103–104 real rates of interest versus, 59–63 N market values in, 268–273 Non-negotiable time deposits, 774 Nagel, S., 402n multiple cash flows, 25–26 Norfolk Southern, 84, 219 “Naked” call options, 215n payback analysis versus, 105–106 Norli, Ø., 383 Nanda, V., 375n, 828n review of basics, 101–105 Norstar Bancorp, 797 Narayanan, P., 594 taxes and, 136–138 Northrup Grumman, 806 Nardelli, Robert, 295 timing, 140–141 Northwest Natural Gas Co., 82–83, 84 Nasdaq (National Association of key features, 103–104 Notes Securities Dealers Automated in merger analysis, 801–805 defined, 601 Quotations System), 75, 76, 325n, for other countries/currencies, 139 medium-term, 774, 775, 782 365–366, 541 production option and, 566–567 Treasury, 47–49 Nasdaq Composite Index, 871 project analysis, 138–139 Notional principal, 661 NationsBank, 797 project risk and, 869 NPV. See Net present value (NPV) NatWest Bancorp, 797 review, 101–103 NTT (Nippon Telephone and Naveen, L., 296n sensitivity analysis and, 244 Telegraph), 366, 831 I-16 Index

NWA, Inc., 823 call options, 526–528 Payback period, 103, 105–107 NYMEX (New York Mercantile dividends in, 543 application of, 105–106 Exchange), 653, 653n, 654, 656 option values at a glance, 542–543 determining, 105–106 NYSE Euronext, 75n risk and, 517–518, 527–528, 529, 593 payback rule and, 105–107 simple option-valuation model, Payment mechanism, 356 O 526–530 Payout policy, 4, 391–410 stock value and, 513–518 capital structure and, tax-free OATs (Obligations Assimilables du types of options, 543–544 economy, 419–424 Trésor), 46–47 Option valuation, 525–544 choice of, 391–392 Obama, Barack, 331 Oracle Corporation, 14, 539, 810–811 controversy concerning, 397–402, O’Brien, T. J., 694n Orangina, 834 872–873 Ofek, E., 325n, 836n Original issue discount bonds, 600n irrelevance of dividends, 398–402 Ofer, A. B., 396n Osaka Securities Exchange (OSE), 655 pro-dividend payout, 402–404 Off-balance-sheet liabilities, 629, OSE (Osaka Securities Exchange), 655 deciding on, 394–395 871–872 Osobov, I., 392n efficient-market hypothesis and, Offering price, 371 Otobai Company, 243–249 398–402 Office Depot, 806 Outsourcing, 795 information content of, 395–396, 397 O’Hara, M., 368n Overconfidence bias, 326 life cycle of the firm and, 410 Old Mutual, 14 Overhead, in net present value method of payment, 392–393 Omidyar, Pierre, 374 analysis, 131 Modigliani-Miller approach to, ONGC, 830 Overpricing, 334 398–402 Open-end mutual funds, 76n, 871n Over-the-counter (OTC) market, 325, pecking order of financing choices Operating expenses, 104 354, 541–542 and, 462 Operating leases, 630–632 Owens Corning, 539–540 share repurchase, 393–394, 396–397 defined, 626 Owens-Illinois, 823 stock repurchases, 392–393 example, 630–631 Ownership and control. See also taxes on dividends and, 404–409 lease-or-buy decision and, 631–632 Agency problem Payout ratio, 83, 403–404. See also Operating leverage, 248–249 corporate governance and, 851–859 Payout policy, controversy asset beta and, 222–223 distribution, 346–347 concerning break-even points and, 248–249 dual-class equity in, 857–858 Pecking order of financing choices, defined, 248 family control, 855 460–465 Operating profit margin, 715 in Germany, 852–855 financial slack, 463–464, 476–478 Operational hedging, 690 in Japan, 851–852 impact of asymmetric information, Opler, Tim, 733, 733n of leased assets, 633–634 460–462 Opportunity cost of capital. See also pyramids in, 855–856 implications of, 462 Discount rate risk and short-termism and, 859–860 Pemex, 651 business risk and, 491 transparency and, 861–862 Penman, S., 725 defined, 23 Pension Benefit Guarantee Corporation example, 27 (PBGC), 586, 837 financing decisions and, 314 P PeopleSoft, 810–812 internal rate of return and, 113–114 Pacific Gas & Electric, 82n, 772, 837 PepsiCo, 77, 806 nature of, 7–8 Pakistan State Oil Company, 613–614 Performance measurement, 298–306 net present value and, 103–104, Palepu, Krishna G., 815, 815n, 861n, accounting measures of performance, 105, 130 864 298–299, 298–306 payback period and, 105 Palm, 829 incentives and. See Incentives; Optimization models, 743 palmOne, 829 Stock options Option(s), 502–518. See also Convertible PalmSource, 829 Performance ratios, 708–713, 723 bonds; Option pricing models; Panchapegesan, V., 840n Perkins, C. A., 571 Option valuation; Real options; Panunzi, F., 862n Perks, 291 Stock options; Warrants Paramount, 812 Perpetuities, 27–28 default puts, 583 Parkinson, K., 750 defined, 27 reducing risk with, 651 Parmalat, 862 growing, 33 spotting, 512–513 Parrino, R., 844 valuation of, 27–28, 29 strategies for using, 507–513 Partch, M. M., 397n Peso loans, 679 types of, 543–544 Partnerships, 5n, 349–350, 832–837 Petersen, M. A., 766n, 784 Option delta, 527, 529, 531, 532 Par value, 345 Petraeus, General, 296 Option equivalents, 526–530 Pastor, L., 375n Pettway, R., 376n Option pricing models, 513–518, 868 Patel, J., 306, 306n Peugeot, 14, 689 binomial method, 530–534 Pattenden, K., 406n Pfizer, 66, 128, 295, 792, 793 Black-Scholes formula, 535–542 Paulson, John, 328n Phaup, Marvin, 586 Index I-17

Philips, 315, 316, 318 Present value (PV), 20–39. See also weighted-average cost of capital Phillips, G., 830, 830n Adjusted present value (APV); (WACC), 216–221 Piedmont Natural Gas Co., 84 Net present value (NPV) Project life, abandonment value and, Pierce, Thomas, III, 633 of annuities, 28–31 564–565 Pindyck, R. S., 261, 566n, 572 in bond valuation, 46–49 Project risk, 214–216, 221–227, 869 Pinkerton, J., 319n calculating, 21, 23 Prospect theory, 326 Pinkowitz, L., 733n, 733–734, 784 defined, 22 Prospectus, 369, 371 Pinnacle Foods, 834 of investment opportunity, 23 Prowse, S., 853n Plains All American Pipeline, LP, in Monte Carlo simulation, 253 Proxy fights, 809 349–350 net present value, 23–27 PRS Group, 694 Playing for time game, in financial net present value rule, 25, 127–145 Prudhoe Bay Royalty Trust, 350 distress, 455 nominal interest rates and, 59–63 PSA, 14 P&O, 806 opportunity cost of capital and, 27 Public Company Accounting Poison pill defense, 810–811, 812 of perpetuity, 27–28, 29 Oversight Board (PCAOB), Poison-put clauses, 606 rate of return rule, 25 293, 293n Poison put defense, 812 rates of return and, 23, 25 Public corporations, 5 Political risk, 694–696 real interest rates and, 59–63 Purchase method of merger accounting, Ponzi, Charles, 11n risk and, 24–25 807–808 Ponzi schemes, 11, 11n Present value of growth opportunities Purchasing power parity, 681, 681n, Pooling risks, 357, 648–650 (PVGO), 88–90, 254, 306n, 683–686, 688n Porsche, 4, 327 479n, 872 Pure plays, 221 Porter, Michael E., 274, 274n, 284, in business valuation, 92–93 Puri, M., 365n 860n calculating, 88–90 Put-call parity, 509–510 Portfolio insurance, 540 defined, 88 Putnam Investments, 10–11 Portfolio risk, 156–178 examples of growth opportunities, Put options beta and, 174–177, 192–199 88–90 in reducing risk, 651 betas for foreign stocks, 175–176 Price-earnings (P/E) ratio, 77, 92 relationship between call prices calculating, 170–174 PricewaterhouseCoopers, 365n and, 529 diversification and, 168–170, 173– Primary issues, 75, 354. See also Initial selling, 505–506 174, 177–178 public offerings (IPOs) valuation of, 528–529 historic performance of capital Primary markets, 75, 354 Puttable bonds, 603, 605 markets and, 156–163 Principal, 46, 869 PV. See Present value (PV) individual securities and, 174–177 Private benefits, 291–292, 347–349 PVGO. See Present value of growth measuring, 163–177 Private equity, 831–837 opportunities (PVGO) relationship to return, 192–195 Private-equity deals, 832–837 Pyramids, 855–856 standard deviation in, 163–166, 167, Private-equity partnerships, 832–837 168, 176–177 Private placements, 381–382 variance in, 163–166 Privatization, 830–831 Q Portfolio theory, 185–192, 326 Privileged subscription issues, 380–381 Qantas, 832 borrowing and lending in, 190–192 Probabilities, beliefs about, 326 QQQQs, 76 developing portfolios, 186–190 Procter & Gamble (P&G), 333–334 Quadratic programming, 189 efficient portfolios in, 188–190, Procurement, 567–569 Qualified institutional buyers, 382 190–192, 194 Production option, 256, 566–567 Qualified opinions, 292 standard deviation and, 185–186, Profitability index, 103, 104, 115–116 QUBES, 76 191n Profitability measures, 109, 298–306 Quick ratio, 719 variance and, 188n biases in, 301–306 Quiet period, 368n Portfolio variance, 163–166, 173–174 calculating, 303–304 Quinenco, 858 Position diagrams, 503–504, 506 economic value added (EVA), QVC, 812 profit diagrams versus, 506–507 298–301 Postaudits, in capital budgeting net return on investment, 299 process, 242–243 Profit diagrams, 505–512 R Postbank, 830 Profit margin, 714–715 Poterba, J. M., 325n Profit maximization, 764 Raghaven, Anita, 607n Powers, E., 828n Project analysis, net present value Rainbow options, 544 Pratt, S. P., 493 and, 138–139 Rajan, R. G., 291n, 358, 462n, 462–463, Preferred stock, 350, 354 Project beta, 214–215 766n, 784, 850–851, 859n, floating-rate, 776, 776n Project cost of capital, 214–215 861n, 864 Prenegotiated bankruptcies, 840 Project finance Rajgopal, S., 306, 306n, 308 Prepackaged bankruptcies, 840 discount rates for international Ramaswamy, K., 406n Prescott, E. C., 179 projects, 227 Random walk hypothesis, 314–317, 867 I-18 Index

Rate of return Replicating portfolio, 527 option pricing and, 517–518, accounting, 711–712 Repurchase agreements (repos), 774, 776 527–528, 529 calculating, 157–159 Repurchase programs. See Share political, 694–696 on levered equity, 425–427 repurchases; Stock repurchases pooling, 357 present value and, 23, 25 Research and development (R&D), portfolio. See Portfolio risk Rate of return rule, statement of, 25 expenditure on, 128 present value and, 24–25 Rates of return. See also specific types Reserve Primary Fund, 432n, 771 project, 214–216, 221–227 of return Residual income. See Economic short-termism and, 859–860 Ratings and Investment value added (EVA) in term structure of interest rates, 59 Information, 587n Restrictive voting rights, 812 Risk-free rate of interest, 509n Rau, P. K., 325n Restructuring, 822–842 Risk management, 645–668 Rauh, J. D., 296n asset sales, 830 agency problem, 646, 647–648 Ravenscroft, D. J., 815, 815n bankruptcy, 448–452 commodity futures contracts, Ravid, S. A., 842n carve-outs, 829–830 652–654 Raviv, A., 466 leveraged buyouts, 822–826 derivatives in, 648, 666–668 Raytheon, 806 private-equity deals, 832–837 evidence on, 648 RBS, 371 privatization, 830–831 financial futures contracts, 656–657 Real assets, 2 spin-offs, 828 forward contracts, 652, 658–660 Real estate Return on assets (ROA), 299n, 711, hedging asset backed securities, 602 712, 715 defined, 645–646, 652 investment decisions for, 269–271 Return on capital (ROC), 299n, financial, 690 optimal timing for development of, 710, 711 with futures contracts, 652–658 560–561 Return on equity (ROE), 83, 711, 712, setting up hedge, 664–666 Real estate investment trusts (REITs), 717–718 insurance, 540, 648–650 221, 350 Return on investment (ROI) international risks in, 676–696 Real options, 253–260, 554–571 biases in, 301–306, 305–306 options, 651 abandonment option, 254–256, measuring, 305–306 reasons for, 645–648 561–566 net, 299 swaps, 660–664 conceptual problems, 569–571 Reverse stock splits, 349 Risk-neutral option valuation, decision trees and, 253–260 Revolving credit, 777 527–528 default risk, 581–586 Revsine, L., 725n Risk premium defined, 253 Reynolds, 806 dividend yields and, 162–163 expansion option, 253–254, 554–558, Rhee, S. G., 223n historic, 192 567–569, 744 Rhie, Jung-Wu, 589n, 590, 590n market. See Market risk premium production option, 256, 566–567 Rice, E. M., 870 in Sharpe ratio, 191 timing option, 256–257, 558–561 Richardson, M. W., 325n, 358 Risk-return trade-off, financial leverage Real rate of interest, determinants Riddiough, T. J., 560n and, 419–424 of, 62–63 Rights issues, 380–381 Risk shifting game, in financial distress, Real rates of interest Rights offerings, 380–381 453–454 in bond valuation, 59–63 Right to default, 448 Ritter, J. R., 323n, 371, 371n, 373n, indexed bonds and, 61–62 Rio Tinto, 793, 830 374n, 379n, 380n, 383 nominal rates of interest versus, Risk. See also International risk; RJR Nabisco, 456, 822, 823–825 59–63 Portfolio risk Road show, 369 Rebalancing debt, 484–485 attitudes toward, 326–327 Robert Bosch, 853 Receivables turnover, 714 capital asset pricing model (CAPM) Roberts, M. R., 459n, 777n Refco, 837 and, 192–199 Roche, 690–694, 793 Registered bonds, 600 capital budgeting and. See Capital Rockefeller Center, 457n Registration statement, 369, 371 budgeting and risk Rockefeller Center Properties, 457n Regular cash dividends, 393 company, 214–216 Rodriguez, Alex, 295 Reinhart, Carmen M., 355, 355n, 358, compound rates of return and, Roe, M., 841n 875, 875n 158–159 Röell, A., 864 Reinvestment rate, in capital budgeting, counterparty, 652, 655 Rogalski, R. J., 610n, 618 113n default, 65–68, 581–586 Rogers, D. A., 653, 653n Relative tax advantage of debt, 443–444 default risk and, 583–586 Rogoff, Kenneth, 355, 355n, 358, 697, Relevering beta, 484, 485n diversifiable (unique), 170, 174–177, 698, 875, 875n Renault, 689 224, 867 Roll, Richard, 322, 322n, 870n Rental leases, 626 expected return and, 192–195 Rosenfeld, J., 354n Repayment provisions, 663–665 foreign exchange, 676–694 Rosenthal, L., 323n Replacement decisions, equivalent of foreign investments, 227 Rosetta Stone, 378 annual cash flow and, 144–145 market. See Market risk Ross, Stephen, 200 Index I-19

Royal Bank of Scotland, 14, 296 Schultze, George J., 841n value maximization and, 9–12, Royal Dutch Petroleum, 323, 328 Schwartz, E. S., 273n, 566n, 572, 240–260 Royal Dutch Shell, 3, 75, 296, 395 604n, 618 Share repurchases, 342 Rozeff, M., 403n Schwartz, S. L., 325, 325n, 871n growth in use, 393 Ruback, Richard S., 336, 489, 489n, 493, Schwert, G. W., 336 information content of, 396–397 815, 815n, 825, 825n Sealed Air Corporation, 826 method of using, 393–394 Rubinstein, M. E., 336 SEC. See U.S. Securities and Exchange Shark-repellent charter, 811 Rule 10b-18, 393n Commission (SEC) Sharpe, William F., 192n, 192–193 Rule 144A, 382, 598 Secondary issues, 376–381 Sharpe ratio, 191 Rule 415, 377 Secondary markets, 75 Shaw, W. H., 368n Rule of signs, 110n Second-stage financing, 364 Shawmut National, 797 Rydqvist, K., 373n Secured debt, 601 Shefrin, H., 403n Ryngaaert, M. D., 797n Securities. See Marketable securities Shelf registration, 377 and specific types Shell, 2, 4, 7 Securities Act of 1933, 369n Shell Transport & Trading, 323, 328 S Security, for bank loans, 780 Shiely, J. S., 308 Safeway Stores, 681, 823 Security market line Shiller, Robert J., 163n, 327n, 336 Sagner, J., 784 defined, 193 Shin, B., 615n Sahlman, W. A., 383 stocks not lying on, 194–195 Shivdasani, A., 323n, 828n Sale-and-leaseback arrangements, 626 Security Pacific, 797 Shleifer, A., 291n, 336, 347n, 404n, Salvage value Self-liquidating loans, 777 830n, 831n, 850, 850n, 855, 855n, abandonment options and, 564–565 Semiannual coupons, 47–49, 600 856n, 864 depreciation and, 131, 132, 133 Semiannual interest payment, 47–49, Short sales, 327 leasing and, 637 600, 600n Short squeeze, 327 in net present value analysis, 131, 132 Semistrong form of market efficiency, Short-term debt, 480 in replacement decisions, 145 317–318 Short-term financial planning, 731–734 Samsung, 14, 858 Senbet, L., 844 cash and, 855–859 Samurai bonds, 598 Senior debt, 352, 601–603 cash budgeting, 737–740 Santayana, George, 355n Senior management. See also Board of evaluating plan, 741–742 Santos, T., 200n, 326n directors; Chief executive officers example, 740–742 Sapienza, P., 11n (CEOs); Chief financial officers leases in, 626–627 Sarbanes-Oxley Act of 2002 (SOX), 14, (CFOs) options, 740 292n, 293, 367, 368, 833 CEO compensation by country, 294 options for, 740 Sarkozy, 295 as off-balance-sheet liability, short-term financial planning Sartoris, W. L., 784 871–872 models, 742–743 Saunders, A., 594 Sensitivity analysis, 138, 243–249 sources of short-term borrowing, Savor, Pavel, 335n in arbitrage pricing theory, 200 740–743 SBC, 348 break-even analysis, 245–248 working capital and, 855–859 SBC Communications, 827 defined, 244 Short-termism, 306, 859–860 Scannapieco, D., 844 limits to, 245 Shoven, J. B., 539n Scenario analysis, 245 operating leverage and, 248–249 Showa Shell, 666 Schaefer, A. M., 69 scenario analysis, 245 Shyam-Sunder, L., 380n, 463n Schaefer, S. M., 670 in three-factor model, 202–203 “Siamese twins,” 323, 324 Schall, L. D., 800n value of information, 244 Siegel, D. R., 396n, 815n Schallheim, J. S., 632n, 640, 641n Separation of ownership and Sight drafts, 761 Scharfstein, D., 669, 828n, 852, 852n management, 5, 808, 851–859 Signaling, 363. See also Information Scherer, F. M., 815, 815n Sercu, P., 697 effect Schering-Plough, 793 Seward, J. K., 610n, 618, 844 dividends and, 395–396, 406–407 Scherr, F. C., 784 SGX (Singapore Exchange), 655 share repurchase and, 396–397 Schlarbaum, G. G., 600n Shapiro, A. C., 697 Simkins, B., 669 Schlingemann, F. P., 813n Shapiro, E., 82n Sindelar, J. L., 383 Schmidt, R. H., 864 Shareholders Singal, V., 844 Schneider, C., 854, 854n all stakeholders versus, 11–12 Singapore Exchange (SGX), 655 Schoat, A., 463n, 833n best interests of, 9–12 Singh, R., 375n Schofield, Adrian, 653, 653n defined, 2n Singleton, K. J., 594 Scholes, Myron S., 393n, 406, 406n, limited liability of, 808 Sinking funds, 603 409, 409n, 525, 526, 526n, 535n, pressure on board of directors, 15 Sivakumar, L., 828n 535–543, 868 role of, 808 Six Flags, 577–579, 591 Schranzk, D., 579n separation of ownership and Skeel, D., 841n Schreffler, R., 760n management, 5, 808, 851–859 Skinner, D. J., 410n, 412, 612n I-20 Index

Sleijpen, O., 861n in portfolio theory, 190–192, 191n Stock splits, reverse, 349 Small Business Administration in Sharpe ratio, 191 Stohs, M. H., 733n (SBA), 586, 773n Standard error, 158n Stonehill, A. I., 697 Small-firm effect of estimated beta, 217–219 Stonier, J. E., 567n, 568n, 569n described, 201–203 Standard of profitability, 109 Stored-value cards, 768 three-factor model and, 201–203 Standard & Poor’s bond ratings, 587– Straight-line depreciation, 132–133, 628 Smart, S. B., 377n 588, 601 Stretching payables, 738, 740 Smit, H., 570n, 572 Standard & Poor’s Composite Index, Stripped bonds, 50–51, 55–56 Smith, Clifford W., Jr., 641, 646n, 324, 722, 758n Stromberg, P., 365n, 842n, 843 650n, 765n, 784 Standard & Poor’s Compustat, Strong form of market efficiency, 318, Smith, K. V., 784 392n, 722n 319–320, 322–325 Smith, R. L., 761n Standard & Poor’s credit ratings, 56, Structured investment vehicles (SIVs), Smithson, C. H., 669, 670 65–66, 762, 781n 718, 782 So, J., 615n Standard & Poor’s 500 Index, 76, 541 Stulz, R. M., 179, 233, 336, 383, 434, Société Générale, 854 Standards, accounting, 705 467, 669, 670, 694n, 733n, 813n Soft rationing, 117 Staples, 806 Subordinated debt, 352, 601, 610 Sogo, 861 Starbucks, 14, 169–170, 174, 189, 193, Subprime mortgage crisis, 13, 168, Sole proprietorships, 5n 592–593 328–329, 355–356, 779–780 Sony, 129, 175, 315, 316, 318, 354, 852n Starwood Hotel & Resorts, 378 Sufi, A., 777n, 779n Southern California Edison, 772 State Bank of Pakistan, 613–614 Sumitomo, 855 South Jersey Industries Inc., 84 Statman, M., 403n Sumitomo Bank, 861 Southland, 823 Staunton, M., 60n, 64n, 156, 156n, Sumitomo Corporation, 851 Southwestern Bell, 827 157n, 161n, 164n, 167n, 179, 685n Sumitomo Metal Industries, 851 Southwest Gas Corp., 84 Stein, J., 610n Summit Bancorp, 797 SPDRs (Standard & Poor’s Depository Stein, Jeremy C., 334n, 669, 843 Sundaresan, A., 69 Receipts), 76 Stern, J. M., 69, 308, 332n Sundgren, S., 842n Special dividends, 393 Stern-Stewart, 299–301 SunGard, 834 Special-purpose entities (SPEs), 353, Stertz, Bradley A., 794n Sunk costs, in net present value 458, 638–639, 861 Stigler, George, 460 analysis, 130 Specific risk, defined, 170 Stiglin, L., 825n Sun Microsystems, 392 Spindt, P. A., 375n Stiglitz, J. E., 321n Sun Trust Banks, 779 Spinning, 371, 382 Stock dividends, 393 Supermajority, 812 Spin-offs, 828 Stockholders. See Shareholders Surplus funds, in mergers, 796 Spitzer, Eliot, 372 Stockholders’ equity, interest tax shields Sussman, O., 451, 451n Spot prices, 652, 657–658 and value of, 443–444 Sustainable growth rate, 748–740 Spot rate Stock market returns, 164 Suzuki, 689 defined, 54 Stock options, 502–518. See also Option Svancar, H., 856n of exchange, 677, 680, 691 pricing models Swaminathan, B., 396n law of one price and, 54–55 Black-Scholes model for valuing, 539 Swaps, 660–664 Spread, 371, 378 call options, 503–504, 526–528 credit default, 580–581 Spreadsheet functions incentives created by, 518 currency, 663 bond valuation, 67 in management compensation, interest rate, 660–662 discounting cash flows, 37–38 297–298 total return, 663–664 estimating market risk, 231 position diagrams, 503–504, 506 Swatch Group, 4 estimating stock risk, 231 profit diagrams, 505–512 Sweep programs, 767 internal rate of return, 118 put options, 505 Swiss Bank Corp., 798 long-term financial planning, strategies for using, 507–513 Swiss Re, 14 745–746 Stock price Syndicated loans, 779 Sprint, 806 dividend payout ratio and, 403–404 Synergies, in mergers and Stafford, E., 780n, 805, 805n, 813, in equity valuation, 75–76 acquisitions, 794 813n, 815, 817 link between earnings per share Systematic risk. See Market risk Staggered board, 812 and, 87–90 Stakeholders, value maximization, market reaction to stock issues, 11–12 378–380 T Standard deviation option values and, 513–518 Taggart, R. A., Jr., 493 defined, 163 underpricing of initial public Takeover premium, 319 of foreign stocks, 167, 168 offerings, 372–374 Takeovers, 809–813 in measuring portfolio risk, 163–166 Stock repurchases, 392–393 value maximization and, 14–15 portfolio, 163–166, 171–172 irrelevance, 401–402 Tangible assets, in mergers, 807 Index I-21

Tata Group, 813, 858 Tetlow, R. S., 834n stripped, 50–51, 55–56 Tata Motors, 75 Texaco, 837 yield spread between corporate bonds Tauron Polska Energia, 830 Texas Pacific Group, 823, 832 and, 66, 579–581 Taweel, Kevin, 859 TFX (Tokyo Financial Futures yield to maturity trends, 49 Taxes Exchange), 655 Treasury notes, semiannual on capital gains, 406–407 Thaler, R. H., 200n, 326n, 336, 682n interest, 47–49 on corporations Thermo Electron, 829–830 Treynor, Jack, 192n, 192–193 alternative minimum tax (AMT), Thomas Lee, 823 Triantis, A. J., 261, 560n, 855n 136, 628 Thompson Co., 823 Trigeorgis, L., 570n, 572 capital structure and, 440–444 Thomson Reuters, 371n Troubled Asset Relief Program deferred, 479n Thorburn, K. S., 817, 843, 844 (TARP), 397 depreciation rules, 136–138 Thornburg, Karin, 451n Trump Hotels & Casinos Resorts, 840 equivalent annual cash flow 3Com, 829 Trust deed, 599–600 and, 159 Three-factor model, 201–203 Trusts, 350 financial leases, 634 Ticketmaster, 793 TSE (Tokyo Stock Exchange), 75, 655 investment decisions and, Time deposits, 774, 775 Tufano, Peter, 434, 648, 648n 136–138 Time drafts, 761 Tufts Center for the Study of Drug leveraged buyouts (LBOs) and, 825 Times-interest-earned ratio, 717 Development, 258n in merger analysis, 808 Time value of money, 21, 103–104 Tunneling, 858–859 weighted-average cost of Time Warner, 335, 793, 828. See also AOL Tversky, A., 326n capital, 433 Timing option, 256–257, 558–561 TWA, 838–839 on dividends, 404–409 net present value and investment Twite, T., 406n in Germany, 139 timing, 140–141 TXU, 823 imputation tax system, 407–409 Timmerman, A., 320n, 867n Tyco, 13 on individuals, leverage and, TIPS (Treasury Inflation-Protected 444–447 Securities), 62 on partnerships, 350 Titman, S., 435, 805n U on REITs, 350 Tokyo Financial Futures Exchange UBS, 14, 298, 348, 371, 798 weighted-average cost of capital, 220 (TFX), 655 Underpricing, 334 Tax-exempt municipal notes, 774, 775 Tokyo Gas, 794 Underwriters, 368, 370–371 Tax preferences, 136–138 Tokyo Stock Exchange (TSE), 75, 655 Undiversifiable risk. See Market risk Tax Reform Act of 1986, 407n TomTom, 792–793 Unfunded obligations, 353 Tax shields Torous, W. N., 840n Unicredit, 798 depreciation, 136–138, 627, 631n, 633 Total capitalization, 709–710 Uniform-price auctions, 376 interest, 440–447, 491–492 Total expected profit, 764 Union Pacific, 2, 3, 84, 219–221, 433 nature of, 440–444 Total return swaps, 663–664 Unique (diversifiable) risk, 170, 174–177, Taylor, A. M., 698 Towers Perrin, 294n, 297n 224, 867 Taylor, M. P., 698 Toyota, 2, 3, 4, 11n, 12, 30, 75, 214, United Airlines (UAL), 450, 653, 837 TDC, 834 296, 689, 690, 760 United Auto Workers (UAW), 838 Technological change TPG, 823 United Biscuits, 834 equivalent annual cash flow and, Trade acceptances, 761 United Health Group Inc., 540 143–144 Trade credit, 760 United Kingdom exploiting new technology, 276–283 Trade-off theory of capital structure, 448 accounting standards in, 705 Tehranian, H., 380, 380n Tranches, 779–780 compounding intervals in, 47–49 Tele Atlas, 792–793 Transaction exposure, 688–690 United States Telefonica de Argentina, 175 Transparency, 861–862 accounting standards in, 705 Temporary abandonment, 565–566 TransUnion, 588n, 762n country cost of capital and, 694 Tender offer, 809–810 Trans Union Corporation, 812n dividend yields, 162–163 Terms of sale, 760–761 Trans World Airlines, 627 historic performance of capital Term structure of interest rates, 53–59 Travelport, 834 markets, 156–163 in bond valuation, 53–59 Travlos, N., 805n inflation in, 59–60 defined, 53 Treasurer, 6–7 initial public offerings (IPOs) in, 374, expectations theory of, 58–59 Treasury bills, 47, 157–159, 773, 774 375–376 explaining, 57–59 Treasury bonds. See also Bond valuation market risk premium in, 162–163 inflation in, 59 duration, 52 mergers in, 814 law of one price, 54–55 historic performance of capital mutual fund returns, 320–321 measuring, 55–56 markets, 157–159 payout policy in, 391–392 risk in, 59 indexed, 61–62 stock market returns in, 164 Tetley Tea, 813 present value formulas and, 47–49 venture capital financing in, 364–366 I-22 Index

U.S. Census Bureau, 343n, 758n Venture capital, 362–366 WCE (Winnipeg Commodity U.S. Department of Defense, 806 market for, 364–366 Exchange), 654 U.S. Federal Reserve, 355, 769, stages of financing, 363–365 Weak form of market efficiency, 317, 773, 778n Venture Economics, 366 329–330 U.S. Federal Trade Commission (FTC), Verizon, 743 Weather Channel, 834 805–806 Verizon Wireless, 793 Weighted-average cost of capital U.S. Food and Drug Administration Veronesi, P., 375n (WACC), 216–221, 428–433, (FDA), 257–258 Vertical mergers, 792–793, 795 471–492, 711 U.S. Justice Department, 805–806, Viacom, 812 adjusting, 484–486 810–811 Viasis Health Care, 830 rebalancing, 484–485 U.S. Robotics, 829 Villalonga, B., 836n unlevering and relevering cost of U.S. Securities and Exchange Virgin Atlantic, 221 equity, 484, 485n Commission (SEC) Virgin Group, 221–222 after-tax, 220, 433, 471–475 accounting and reporting Virgin Megastores, 221 in business valuation process, standards, 14 Vishny, R. W., 291n, 404n, 830n, 831n, 475–479 Rule 10b-18, 393n 850, 850n, 864 calculating, 471–473 Rule 144A, 382, 598 Viskanta, T., 694n common mistakes in using, Rule 415, 377 Viswanathan, S., 813, 813n 482–484 standards, 705 Vives, X., 11n defined, 216, 425 U.S. Shoe Corp., 607 Vlasic, Bill, 794n flow-to-equity valuation method U.S. Supreme Court Volatility. See also Beta versus, 479 ruling on returns to equity owners, bond, 52–53 industry costs of capital, 481 82n implied, 541–542 minimizing, 424–425 state laws on voting rights, 813 Volcker, Paul, 49 practical applications, 490–492 U.S. Treasury, 580n Volkswagen (VW), 327, 689, 744 questions concerning, 479–482, Unlevering beta, 428, 484, 485n Volpin, P., 855n 490–492 Unocal, 806 Voluntary Employees’ Beneficiary review of assumptions for, 474–475 U.S. Trust, 797 Association (VEBA), 841 Weiss, Lawrence A., 450, 451n, 837n, USAirways Group, Inc., 5n Voting procedures, 347–349 839n, 844 US Bank, 779 Voting rights Welch, I., 410n, 844, 874n common stock, 348 Wells Fargo, 2, 3, 793 preferred stock, 350 Wells Fargo Bank, 779 V Wensley, R., 284 Vale, 813, 830 W Wermers, R., 320n, 867n Va Linux, 370–371 Werner, I., 840n Valuation horizon, 91–92, 93, Wachovia Bank, 3, 13, 793 Wessels, D., 95, 493 476–479 Waiting-period defense, 812 Western Electric, 827 Value additivity, 421, 867–868 Wakeman, L. M., 641n West Japan Railway Company, 830 company cost of capital and, 214 Wald, J. K., 459n Weston, J. F., 697, 817 defined, 178 Wallenberg family, 856, 856n WGL Holdings Inc., 84 diversification and, 177–178 Wall Street Journal, The, 20, 47–48, 76, Whaley, R. E., 541 economic value added (EVA), 366, 368, 835 White, H., 320n, 867n 298–301 Wal-Mart, 2, 3, 7–8, 9, 66, 77, 378, 709, White, M. J., 837n Value at risk (VA), 592–593 710, 767 Whited, T. M., 828n Value Line, 82n Walt Disney Company, 174, 189, 193, Whole Foods Market, 806 Value maximization 217–219, 809 Wild Oats Market, 806 agency problem in, 10–11, 13–15 Warga, A., 606n Wilhelm, W. J., Jr., 383 as goal of corporation, 9–12 Warner, J. B., 318n, 451n Williams, J. B., 82n, 398n, 420n Value stocks, 196 Warrants, 353, 611–612 Williams Act of 1968, 809, 810n Van Dijk, M. A., 323n, 324n dividends and, 610 Williamson, R., 733n, 733–734, 784 Vanguard 500 Index Fund, 321 reasons for issuing, 611–612 William Wrigley, 793 Variability, measuring, 166–168 valuing, 539–540 Wilmott, P., 545 Variable-rate demand bonds (VRDBs), Warther, V. A., 396n Wings Holdings, 823 774, 775 Washington Mutual, 13, 837 WinnDixie, 806 Variance Washington Public Power Supply Winner’s curse, 373–374, 376 defined, 163 System (WPPSS), 775n Winnipeg Commodity Exchange in measuring portfolio risk, 163–166 Water and Power Development (WCE), 654 portfolio, 163–166, 173–174 Authority (WAPDA), 613–614 Winters, L. A., 817 in portfolio theory, 188n Watts, R. L., 332n Wizman, Thierry, 606n Index I-23

Wolfers, J., 331n Wright, Orville, 282 Yield to maturity Wolfson, M. A., 393n Wruck, E. G., 308, 451n bond valuation, 49 Womack, K. L., 368n Wruck, K. H., 826n, 839n, 844 default risk and, 583–586 Wongsunwai, W., 833n Wulf, J., 291n defined, 47 Wooley, S., 284 Wurgler, J., 336, 402n, 409n, 463n Yoshimori, M., 12n Woolridge, J. R., 828n Wyeth, 792, 793 Yuan, K., 870n Woolworth, 66 Working capital, 757–782 cash, 766–770 X Z characteristics of, 737–740 Zeckhauser, R., 306, 306n Xerox, 709, 710 credit management, 760–766 Zell, Sam, 4 Xstrata, 380–381, 381n defined, 130, 134–135, 757 Zender, J. F., 459n, 463n Xu, Y., 169n in estimating cash flows, 134–136 Zero-coupon bonds, 50–51, estimating requirements for, 130 55–56, 600 inventory, 758–760 Y Zero NPV, 873 investments in, 134–136 Zero-stage financing, 362–363 marketable securities, 771–776 Yahoo!, 14, 15, 325n Zero-sum game, 645–646 mistakes in estimating, 135–136 Yankee bonds, 598 Zhao, O., 379n net, 130, 707, 757 Yasuda, A., 833n Zheng, L., 870n short-term borrowing sources, 777–782 Yermack, D., 540n Zhu, N., 844 tracing changes in cash, 734–737 Yeung, B., 864 Zhu, Q., 870n Workouts, 840 Yield Ziemba, W. T., 325, 325n, 871n World Bank, 614, 696, 696n convenience, 658 Zingales, Luigi, 11n, 358, 452, 452n, WorldCom, 65, 367, 806, 837, 861 dividend, 82, 159–163 462n, 462–463, 850–851, 859n, World Trade Center terrorist attacks on money-market investments, 772 861n, 864 (2001), 650 Yield spread, 66, 579–581 Z-scores, 590