Applied Corporate Finance: A User's Manual
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Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6
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Spreadsheets Overheads Datasets References
Solutions Derivations and Discussion Live Case Study Powerpoint Presentations

Chapter 1: The Foundations
Overheads Big Picture
Companies: Background
  1. Disney
  2. Deutsche Bank
  3. Aracruz Celulose

Chapter 2: The Objective
Overheads Download as pdf file
Illustrations
Answers to Concept Questions 2.1 - 2.9
Data Sets
Spreadsheets
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion
  1. What is the difference between stock price maximization, firm value maximization and stockholder wealth maximization?
  2. What is the objective function in corporate finance for a private firm?
  3. What is the objective function for a non-profit organization?
  4. Are markets short term?
  5. What is the German/Japanese alternative to stockholder wealth maximization and does it work?
Readings
  1. Stop whining about Wall Street
  2. Bull Market Charges Ahead, lead by Activist Investors
  3. The Civilized Hostile Takeover
Live Case Study Analyzing a Company's Corporate Governance Structure

Chapter 3: The Basics of Risk
Overheads Download as pdf file
Illustrations 3.1: Calculation of Standard Deviation using Historical Returns
Answers to Concept Questions 3.1 - 3.6
Data Sets Interest Coverage Ratios, Ratings and Default Spreads
Spreadsheets
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion
  1. A Derivation of the Capital Asset Pricing Model
  2. Variants of the Capital Asset Pricing Model
  3. Testing the CAPM: Issues and Discussion
  4. More on the Arbitrage Pricing Model
  5. Estimating the Macro Economic Factors in a Multi-Factor Model
  6. Building a Regression Model
  7. Why not use bond betas to arrive at the cost of debt?
  8. Credit Scores as Alternatives to Bond Ratings
Readings
  1. Operating Risk as a Measure of Risk
  2. Market Risk and Time Horizon
  3. Investors must recall risk
Live Case Study Analyzing a Firm's Stockholders

Chapter 4: Risk Measurement and Hurdle Rates
Overheads Download as pdf file
Illustrations
Answers to Concept Questions 4.1 - 4.12
Data Sets
  1. Historical Returns on Stocks, Bonds and Bills: United States
  2. Country Ratings, Country Spreads and Equity Premiums
  3. Implied Premiums for the United States: 1960 - Present
  4. Unlevered and Levered Betas by Industry Group: United States
  5. Historical Earnings Changes per Year: S&P 500
Spreadsheets
  1. Estimating Implied Equity Premium in a Market
  2. Estimating CAPM parameters for a firm
  3. Unlevering and Levering Betas
  4. Estimating Synthetic rating for a firm
  5. Cost of Capital Estimation
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion Riskfree Rate
  1. Estimating the riskfree rate when the government is not default free
  2. Real versus Nominal Riskfree Rates

Risk Premium

  1. Geometric versus Arithmetic Risk Premiums: Which is better?
  2. The Mechanics of Implied Equity Premiums
  3. Estimating equity risk premium for an emerging market or a market with limited history?

Beta

  1. Setting Regression Parameters for Beta Estimates: How far back? Daily, weekly or monthly data?
  2. Why do beta estimates vary across services?
  3. What is the right market index to use?
  4. Historical Betas versus Expected Betas: Reversion and Financial Fundamentals
  5. Betas and Leverage: Derivation and Extensions
  6. Accounting Betas
  7. Estimating Bottom-up Betas

Cost of Debt

  1. What is debt?
  2. Which is a better estimate of the cost of debt - the rating-based interest rate or the yield to maturity on an issued bond?
  3. Estimating Synthetic Ratings

Weights

  1. Gross Debt or Net Debt
  2. Estimating market value of debt when debt is not traded
  3. Dealing with Operating Leases
  4. Estimating market value of equity
  5. Dealing with Preferred Stock
Readings
  1. Risk Premium in Emerging Markets
  2. Classic Rule of Risk Premium under Attack
  3. Are risk premiums too low? (Greenspan testimony)
Live Case Study Developing a Firm's Risk Profile

Chapter 5: Measuring Returns on Investments
Overheads Download as pdf file
Illustrations 5.4: Estimating Cash Flows for an On-line Book Ordering Service
5.5: Estimating Cash Flows to Firm on Disney Theme Park
5.6: Estimating Cash Flows to Equity for New Paper Plant: Aracruz
5.8: Using Return on Capital for Projects: Disney and Bookscape
5.9: Return on Equity: Aracruz
5.10: Evaluating Current Investments
5.11: Estimating Payback for Bookscape On-line Service
5.12: Estimating NPV on Project: Bookscape
5.13: Estimating NPV on Project: Disney Theme Park
5.14: Estimating NPV to Equity: Aracruz Paper Plant
5.15: NPV with time-varying discount rates
5.16: IRR on Disney Theme Park
5.17: IRR on Aracruz Paper Plant
5.18: Multiple IRR
5.19: NPV versus IRR: Projects of Different Scale
Answers to Concept Questions 5.1 - 5.14
Data Sets
  1. Operating Income and Cash Flows: By Sector
  2. EVA and Equity EVA: By Sector
Spreadsheets
  1. Estimating Cash Flows to Firm and Return Diagnostics on Project
  2. Estimating Cash Flows to Equity and Return Diagnostics on Project
  3. Present Value Calculator
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion
  1. Working Capital, Net Working Capital and Non-Cash Working Capital
  2. Operating versus Capital Expenditures
  3. Depreciation, Amortization and Other Non-cash Charges
  4. Capital Expenditures and Depreciation
  5. ROC, Cost of Capital, NPV and EVA
  6. ROE, Cost of Equity and Equity EVA
  7. Equity Analysis versus Firm Analysis
  8. Currency Effects on Investment Analysis
  9. Real versus Nominal Investment Analysis
  10. Net Present Value, IRR or Modified IRR
  11. Corporate Strategy and Project Quality
Readings
  1. Measuring Earnings
  2. The Content of an Annual Report
  3. EVA as elixir
Live Case Study Measuring a Firm's Investment Returns

Chapter 6: Estimating Side Costs and Benefits
Overheads Download as pdf file
Illustrations 6.1: Opportunity Costs at Bookscapes
6.2: Cash Flow Synergies: Bookscape
6.3: Valuing the Option to Expand: Disney
6.4: Valuing an Option to Abandon: Disney
Answers to Concept Questions 6.1 - 6.7
Data Sets
  1. Variances in Firm Value: By Sector
Spreadsheets
  1. Valuing the Option to Delay
  2. Valuing the Option to Expand
  3. Valuing the Option to Abandon
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion
  1. What is the cost of using excess capacity?
  2. How should we treat product cannibalization in capital budgeting?
  3. When is the option to delay a project a valuable option?
  4. When is the option to expand a project a valuable option?
  5. The Right Option Pricing Model to Use in Valuing Real Options
  6. Are strategic considerations valuable options?
Readings
  1. Synergy in Mergers
Live Case Study

Chapter 7: Capital Structure: An Overview of the Financing Decisions
Overheads Download as pdf file
Illustrations
Answers to Concept Questions 7.1-7.14
Data Sets
  1. Debt Ratios and Fundamentals
  2. Book and Market Debt Ratios By Industry
Spreadsheets
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion
  1. A Simple Test of Debt
  2. The Treatment of Hybrid Securities
  3. The Treatment of Warrants and Convertibles
  4. Valuing Flexibility
  5. Dilution as a Bogey
Readings
Live Case Study The Financing Choices

Chapter 8: Capital Structure: Model and Applications
Overheads Download as pdf file
Illustrations 8.1: Analyzing Disney's Optimal Capital Structure
8.2: Analyzing a Private Firm's Capital Structure: Bookscape
8.3: Analyzing a Financial Service Firm: Deutsche Bank
8.4: Analyzing Optimal Capital Structure: Aracruz Celulose
8.5: Analyzing Optimal Capital Structure with APV Approach
Answers to Concept Questions 8.1-8.7
Data Sets
  1. Cross Sectional Debt Ratio Regression for the US
Spreadsheets
  1. Optimal Capital Structure with WACC (Operating Income held constant)
  2. Optimal Capital Stucture with WACC (Operating Income allowed to vary)
  3. Optimal Capital Structure with APV
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion
  1. Extensions on the WACC Approach
  2. Building in Constraints
  3. Applying Cost of Capital Approach to Financial Service Firms
  4. Normalizing Earnings: Some Simple Approaches
  5. Getting Inputs for Present Value Approach
  6. Minimizing WACC versus Adjusted Present Value Approaches
  7. Building a Cross-Sectional Regression
Readings
Live Case Study Analyzing a Firm's Optimal Debt Ratio

Chapter 9: Capital Structure: The Financing Details
Overheads Download as pdf file
Illustrations 9.1: Debt Capacity and Takeovers
9.2: Changing Leverage Quickly
9.3: A Framework for Changing Leverage: Disney
9.4: A Framework for Changing Leverage: Time Warner
9.5: Working out the Financing Details
Answers to Concept Questions 9.1-9.11
Data Sets
  1. Macro Economic Data: Historical
  2. Sensitivity to Macro-economic Variables: By Industry
Spreadsheets
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion
  1. Determinants of whether a firm is a takeover target
  2. Determinants of whether a firm is under risk of bankruptcy
  3. Determinants of project quality
  4. Duration: Traditional Measure versus Regression
  5. Simple versus Multi-variate regression
Readings
  1. Stock Buybacks are not always good news
  2. Catastrophe Bonds
  3. Mismatching Financing: The Indonesian Experience
Live Case Study Developing a Firm's Financial Details

Chapter 10: The Determinants of Dividend Policy
Overheads Download as pdf file
Illustrations
Answers to Concept Questions 10.1-10.18
Data Sets
  1. Dividends and Earnings: S&P 500
  2. Dividend Yield and Payout Ratio: By Sector
Spreadsheets
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion
  1. Dividends versus Stock Buybacks: The Determinants
  2. Spin-offs, Split-offs and Divestitures: The Determinants
  3. Stock Dividends and Stock Splits
Readings
Live Case Study Analyzing a Firm's Dividend Trade Offs

Chapter 11: A Framework for Analyzing Dividend Policy
Overheads Download as pdf file
Illustrations 11.1: Estimating FCFE
11.2: Comparing Dividend Payout to FCFE Payout
11.3: Evaluating Project Quality
11.5: Analyzing Disney's dividend policy relative to comparable firms.
Answers to Concept Questions 11.1-11.9
Data Sets
  1. Dividend Policy and Fundamentals: By Sector
  2. Dividend Payout and FCFE Payout: By Sector
  3. Firms with poor projects, low dividends
  4. Firms with good project, low dividends
  5. Firms with poor projects, high dividends
  6. Firms with good projects, high dividends
  7. Cross-Sectional Dividend Regression
Spreadsheets
  1. FCFE versus Dividends: Historical Analysis
  2. Assessing Project Quality
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion
  1. An Intuitive Explanation of FCFE
  2. Estimating FCFE for a financial service firm
  3. Analyzing Project Quality for a Firm
Readings
Live Case Study Analyzing Dividend Policy

Chapter 12: Basics of Valuation
Overheads Download as pdf file
Illustrations 12.3: Estimating Growth Rate in EPS
12.4: Valuing a Firm in Stable Growth: Deutsche Bank
12.5: Valuing a Private Firm with 2-stage FCFE: Bookscape
12.6: Valuing a Private Firm with 2-stage FCFE: Aracruz
12.7: Estimating Growth in EBIT
12.8: Valuing a firm with 3-stage FCFF Model: Disney
12.10: Comparing PE ratios and Growth Rates
12.11: PBV Ratios and ROE: The Financial Services Sector
Answers to Concept Questions 12.1-12.15
Data Sets
  1. Fundamental Growth Rate in EPS: By Sector
  2. Fundamental Growth Rate in EBIT: By Sector
  3. Net Capital Expenditure Ratios: By Sector
  4. Working Capital: By Sector
  5. PE, PEG and Fundamentals: By Sector
  6. PBV, ROE and Fundamentals: By Sector
  7. PS, Net Margin and Fundamentals: By Sector
  8. Value/EBITDA: By Sector
Spreadsheets
  1. Model Chooser: Helps choose the right model for a firm
  2. Stable Growth DDM
  3. Two Stage DDM
  4. Three Stage DDM
  5. Stable Growth FCFE Model
  6. Two Stage FCFE
  7. Three Stage FCFE
  8. Stable Growth FCFF
  9. Two Stage FCFF
  10. Three Stage FCFF
  11. Capital Expenditure Estimator
  12. Estimating Equity Multiples
  13. Estimating Firm Value Multiples
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion
  1. How do you choose between firm and equity valuation?
  2. How do you estimate an expected growth rate?
  3. How do you estimate how long expected growth will last?
  4. What is terminal value and how is it estimated?
  5. What is a stable growth rate and why can it not be greater than the discount rate?
  6. What is an exit multiple andhow is it used in DCF valuation?
  7. What are the most common errors in dividend discount model valuation?
  8. What are the most common errors in FCFE/FCFF model valuation?
  9. How do you value a firm that is losing money?
  10. How do you value a financial service firm?
  11. How do you value a private firm?
Readings
Live Case Study Valuing a Firm

Spreadsheets
Risk Analysis
  1. Estimating Implied Equity Premium in a Market
  2. Estimating CAPM parameters for a firm
  3. Unlevering and Levering Betas
  4. Estimating Synthetic rating for a firm
  5. Cost of Capital Estimation
Return Estimation
  1. Estimating Cash Flows to Firm and Return Diagnostics on Project
  2. Estimating Cash Flows to Equity and Return Diagnostics on Project
  3. Present Value Calculator
  4. Valuing the Option to Delay
  5. Valuing the Option to Expand
  6. Valuing the Option to Abandon
Capital Structure
  1. Optimal Capital Structure with WACC (Operating Income held constant)
  2. Optimal Capital Stucture with WACC (Operating Income allowed to vary)
  3. Optimal Capital Structure with APV
Dividend Policy
  1. Analyzing Dividend Policy (looking at FCFE and Project Choice)
Valuation
  1. Model Chooser: Helps choose the right model for a firm
  2. Stable Growth DDM
  3. Two Stage DDM
  4. Three Stage DDM
  5. Stable Growth FCFE Model
  6. Two Stage FCFE
  7. Three Stage FCFE
  8. Stable Growth FCFF
  9. Two Stage FCFF
  10. Three Stage FCFF
  11. Capital Expenditure Estimator
  12. Estimating Equity Multiples
  13. Estimating Firm Value Multiples

Overheads
The Objective of the Firm
Measuring Risk in Investments
Measuring Returns on Investments
Capital Structure
Dividend Policy
Valuation

Solutions
Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6
Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12

Derivations and Discussion
General The Objective of the Firm Basics of Risk Appplying Risk and Return Models Measuring Returns Side Costs, Benefits and Options in Projects
Choices in Financing The Optimal Debt Ratio Moving to the Optimal Dividend Policy: Trade Offs Dividend Analysis Valuation