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Corporate Finance: Theory and Practice - 2nd Edition
This web site is designed to support "Corporate Finance: Theory and Practice". The publisher is John Wiley and Sons. You can navigate the site by either going to individual chapters and getting supporting material by chapter, or by going to the supporting material directly. On a personal note, I would like to apologize for a particulary buggy first printing. If you have one, please download the update to it by clicking here. The supporting material include:

  1. Chapter Outlines and overheads: These are saved as pdf files, and you need Adobe Acrobat to read them. You can download Adobe Acrobat by going to the Adobe site. (www.adobe.com) The overheads are categorized by topic, rather than chapter. To go to overheads, click here.
  2. Answers to Concept Checks/ Critical Thinking: These are the answers to the concept checks in the chapters. The concept checks are categorized by chapter, and specify the page number on the book on which the concept appears.
  3. Derivations and Discussion: These represent interesting questions that often come up in the context of the specified topic, with discussions and analyses.
  4. Readings: These are readings from business and academic publications that supplement the specific topic.
  5. Solutions: This portion of the site is accessible only to instructors, with a password. If you are reading the book on your own, you can email me at adamodar@stern.nyu.edu and I will supply you with the password.
  6. Powerpoint Presentations: These are power point presentations that are designed for use by instructors. You will need the password to download these as well.
  7. Spreadsheets: These are spreadsheets that supplement the topic. They are in Microsoft Excel 95 format, and can be used on either a Mac or Windows system.
  8. Datasets: These are useful datasets to supplement each chapter. They generally include industry averages for key variables and represent updates on many of the tables in the book.
  9. Real Companies, Real Time: This is an example of the concepts in this chapter applied to a specific company.

You can read the preface to the book by clicking here. You can also look at a readers' guide by clicking here and at the corrections in the first printing here; if you have a later printing, these errors should have been fixed. If you are an instructor using this book, please click here.

You can pick the chapter that you would like to go to, to see illustrations, solutions and other supporting material.
Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6
Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12
Chapter 13 Chapter 14 Chapter 15 Chapter 16 Chapter 17 Chapter 18
Chapter 19 Chapter 20 Chapter 21 Chapter 22 Chapter 23 Chapter 24
Chapter 25 Chapter 26 Chapter 27 Chapter 28    

Or you can pick the material that you are interested in.
Spreadsheets Overheads Concept Checks Datasets References
Solutions Derivations and Discussion Critical Thinking Real Companies, Real Time Powerpoint Presentations

Chapter 1: The Foundations
Overheads
Introduction to Corporate Finance
Companies: Background
  1. Boeing
  2. The Home Depot

Chapter 2: The Objective
Topic  Details
Overheads Download as pdf file
In Practice (Illustrations) In Practice 2.1: Analyzing Two Boards: Boeing and Home Depot
Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

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
  4. Stock Price or Value Maximization
Real Companies, Real Time Analyzing a Company's Corporate Governance Structure

Chapter 3: The Time Value of Money
Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 3.1: The Power of Compounding - Stocks, Bonds and Bills
In Practice 3.2: The Present Value Effects of Higher Discount Rates
In Practice 3.3: Estimating Effective Interest Rates on Mortgage Loans
In Practice 3.4: APR Legislation Prior to 1968, banks
In Practice 3.5 : Individual Retirement Accounts (IRA)
In Practice 3.6 : Estimating the Present Value of Annuities
In Practice 3.7 : Making Sense of Sports Contracts
In Practice 3.8 : How Do They Do That? Lottery Prizes
In Practice 3.9: Present Value of Multiple Annuities
In Practice 3.10: Cash Discount versus a Lower Interest Rate - An Automobile Loan
In Practice 3.11: The Value of A Gold Mine
In Practice 3.12: Valuing a Project with Growing Cash Flows

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets
Spreadsheets pvcalc.xls: Estimate the present value of a growing annuity
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion  
Readings The Time Value of Money (Motley Fool)
Real Companies, Real Time  

Chapter 4: Understanding Financial Statements
Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 4.1: Measuring Asset Value
In Practice 4.2: Measuring the Value of the Research Asset
In Practice 4.3: Measuring Liabilities and Equity
In Practice 4.4: The Debt Value of Operating Leases
In Practice 4.5: Measures of Earnings
In Practice 4.6: Adjusted Earnings
In Practice 4.7: Estimating Return on Capital
In Practice 4.8: ROC by division - Boeing in 1998
In Practice 4.9: ROE Computations
In Practice 4.10: Working Capital Turnover Ratios - Boeing and Home Depot
In Practice 4.11: Interest and Fixed Charge Coverage Ratios
In Practice 4.12: Book Value Debt Ratios and Variants- Boeing and Home Depot

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets mgnroc.xls: Operating margins, turnover ratios and returns on capital of firms in the United States, classified by industry.
rocroe.xls: Return on capital, debt equity ratios, book interest rates and returns on equity of firms in the United States, classified by industry.
wcdata.xls: Working capital ratios for firms in the United States, classified by industry.
covratio.xls: Interest coverage and fixed charge coverage ratios for firms in the United States, classified by industry.
dbtfund.xls: Book value debt ratios and market value debt ratios for firms in the United States, classified by industry.
Spreadsheets R&Dconv.xls: Convert research and development expenses from operating to capital expenses.
Oplease.xls: Convert operating lease expenses into debt.
finratio.xls: Compute the profitability ratios for a firm, based upon financial statement data.
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion
  1. Adjusting operating income for operating leases
  2. Adjusting operating income for R&D expenses
Readings
  1. Measuring Earnings
  2. The Content of an Annual Report
  3. Accounting under assault
  4. Operating Leases as Debt
Real Companies, Real Time Accounting Information and Financial Analysis

Chapter 5: Value and Price
Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 5.1: Valuing a Zero Coupon Treasury Bond
In Practice 5.2: Valuing a Default-free Coupon Bond
In Practice 5.3: Valuing a Coupon Bond with Default Risk
In Practice 5.4: Value of a Finite-Lived Asset: A Home Depot Store
In Practice 5.5: Valuing Equity in a Finite-Life Asset
In Practice 5.6: Valuing a Stable Growth Stock with Dividends
In Practice 5.7: Valuing a Dividend-paying Stock with High Growth in Dividends
In Practice 5.8: Valuing Equity using FCFE
In Practice 5.9: Valuing an Asset with Stable Growth
In Practice 5.10: Valuing a Firm in High Growth
In Practice 5.11: Payoff Diagram for a Listed Option on Boeing
In Practice 5.12: An Example of Binomial valuation

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets  
Spreadsheets bondval.xls: Value a bond.
ddmst.xls: Value a stable growth dividend paying stock, using a dividend discount model.
ddm2st.xls: Value a dividend paying stock, using a 2-stage dividend discount model.
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion  
Readings
  1. Crazy Markets
  2. Dumb Investors, Smart Markets?
Real Companies, Real Time  

Chapter 6: The Basics of Risk
Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 6.1: Calculation of standard deviation using historical returns: Boeing and the Home Depot
In Practice 6.2: Extending the two-asset case - Boeing and The Home Depot
In Practice 6.3: Variance of a portfolio as a function of the number of assets
In Practice 6.4: Effects of adding individual investments to a Market Portfolio

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets optvar.xls: Standard deviations and variances of stocks in various sectors in the United States.
ratingfins.xls: Key financial ratios by bond rating class for the United States in the most recent period for which the data is available.
ratings.xls: There is a dataset on the web that summarizes default spreads by bond rating class for the most recent period.
Spreadsheets  
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion  
Readings
  1. Operating Risk as a Measure of Risk
  2. Market Risk and Time Horizon
  3. Investors must recall risk
  4. Diversfication matters
  5. Can you diversify and pick stocks at the same time?
Real Companies, Real Time Analyzing a firm's stockholder base

Chapter 7: The Basics of Risk

Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 7.1: Estimating CAPM risk parameters for Boeing
In Practice 7.2: Measuring Operating Leverage for the Home Depot
In Practice 7.3: Effects of Leverage on betas: Boeing
In Practice 7.4: Estimating Bottom-up Betas
In Practice 7.5: Beta of a Firm After an Acquisition: Boeing and McDonnell Douglas
In Practice 7.6: Estimating Accounting Betas InfoSoft
In Practice 7.7: Estimating the Cost of Equity
In Practice 7.8: Estimating the Costs of Debt
In Practice 7.9: Calculating the Cost Of Preferred Stock: General Motors Co.
In Practice 7.10: Breaking down a convertible bond into debt and equity components: Amazon Inc
In Practice 7.11: Difference between market value and book value debt ratios
In Practice 7.12: Estimating Cost of Capital

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets histretSP.xls: Summarizes historical returns on stocks, T.Bonds and T.Bills going back to 1926.
ctryprem.xls: Contains the updated ratings for countries and the risk premiums associated with each.
histimpl.xls: Shows the inputs used to calculate the premium in each year for the U.S. market.
betas.xls: Updated betas and unlevered betas by business sector in the United States.
spearn.xls: Earnings changes, by year, for the S&P 500 going back to 1960.
Spreadsheets implprem.xls: This spreadsheet allows you to estimate the implied equity premium in a market.
risk.xls.Run a regression of stock returns against market returns and estimate risk parameters.
levbeta.xls.Estimate the unlevered beta for a firm and compute the betas as a function of the leverage of the firm.
ratings.xls: This spreadsheet allows you to estimate the synthetic rating and cost of debt for any firm.
wacccalc.xls: This spreadsheet allows you to convert book values of debt into market values.
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)
  4. Historical Risk Premiums revisited
Real Companies, Real Time Developing a Firm's Risk Profile

Chapter 8: Estimating Hurdle Rates for Projects
Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 8.1: Identifying the Marginal Investor
In Practice 8.2: Using A Company's Risk Profile For The Project : The Home Depot
In Practice 8.3: The Pure Play Approach to estimating Divisional Betas
In Practice 8.4: Estimating Accounting Betas : Boeing Defense Project
In Practice 8.5: Estimating the Beta for Home Depot Expo Store
In Practice 8.6: Using Fundamental Information to Predict Betas for Projects The Home Depot
In Practice 8.7: Estimating Debt Ratios and Costs of Debt for Projects
In Practice 8.8: Estimating Cost of Capital for Projects
In Practice 8.9: Estimating Certainty Equivalent Factors

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets inshold.xls: Average institutional and insider holding, by industry group, for firms in the United States.
betas.xls: Unlevered betas, by industry group, for firms in the United States.
wacc.xls: Costs of debt, costs of equity, debt ratios and costs of capital, by industry group, for firms in the United States.
Spreadsheets accbeta.xls: Estimate the accounting beta on a division or firm.
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion  
Readings
  1. What makes your stock price go up or down?
Real Companies, Real Time Division and Project Analysis

Chapter 9: Estimating Earnings and Cashflows on Projects
Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 9.1: Using current projects to estimate expected revenues on a new project
In Practice 9.2: Scenario Analysis with the Boeing Super Jumbo Jet
In Practice 9.3: Boeing Super Jumbo Jet: From Forecasts to After-tax Operating Income
In Practice 9.4: Estimating Net Income on a Project: A Home Depot Store Analysis
In Practice 9.5: Estimating Cash Flows for an On-line Software Store: InfoSoft
In Practice 9.6: Dealing with Allocated Costs
In Practice 9.7: Estimating Cash Flows to Firm for the Super Jumbo- Boeing
In Practice 9.8: Estimating Cash Flows to Equity for a New Store: The Home Depot
In Practice 9.9: Straight Line versus Accelerated Depreciation

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets  
Spreadsheets capbudg.xls: Estimate the cash flows to the firm on a project
capbudgeq.xls: Estimate the cash flows to equity on a project
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
Readings
  1. A Project Evaluation Outline
Real Companies, Real Time Estimating Earnings and Cashflows

Chapter 10: Investment Decision Rules
Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 10.1: Hurdle Rates for Projects
In Practice 10.2: Estimating and Using Return on Capital in Decision Making: Boeing
In Practice 10.3: Estimating Return on Equity Home Depot Store
In Practice 10.4: Cash ROC on Boeing Super Jumbo Investment
In Practice 10.5: Estimating Payback for the InfoSoft Online
In Practice 10.6: NPV from the Firm's standpoint - InfoSoft On-line
In Practice 10.7: NPV From The Firm's Standpoint Boeing's Super Jumbo
In Practice 10.8: NPV from the Equity Investors' Standpoint- The Home Depot Store
In Practice 10.9: NPV Calculation With Time-Varying Discount Rates
In Practice 10.10: Estimating the IRR based on Cash Flows to Firm Boeing Super Jumbo
In Practice 10.11: Estimating IRR Based upon Cash Flows to Equity The Home Depot
In Practice 10.12: Multiple IRR Projects
In Practice 10.13: NPV and IRR for projects of different scale

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets  
Spreadsheets capbudg.xls: Estimate the average return on capital, NPV and IRR on a project
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion
  1. ROC, Cost of Capital, NPV and EVA
  2. ROE, Cost of Equity and Equity EVA
  3. Equity Analysis versus Firm Analysis
  4. Net Present Value, IRR or Modified IRR
Readings
  1. NPV versus IRR
Real Companies, Real Time Analyzing Investment Decision Rules

Chapter 11: Investment Analysis with Inflation and Exchange Rate Risk

Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 11.1: Nominal and Real Cash Flows - Effects on NPV
In Practice 11.2: Effects of Inflation on Project NPV - Depreciation Tax Benefits
In Practice 11.3: Estimating the Cost of Equity and Capital for a Foreign Project
In Practice 11.4: A Home Depot Store in Chile
In Practice 11.5: The Home Depot Store In Chile: A Dollar Analysis
In Practice 11.6: Estimating Cash Flows with Taxes and Remittance Constraints: The Home Depot
In Practice 11.7: Hedging Transactions Exposure at Boeing

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets ctryprem.xls: Country risk premiums, by country, that can be used to adjust discount rates.
Spreadsheets currconv.xls: Estimate expected exchange rates, based upon purchasing power parity.
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion
  1. Currency Effects on Investment Analysis
  2. Real versus Nominal Investment Analysis
Readings  
Real Companies, Real Time Analyzing Inflation and International Risk

Chapter 12: Project Interactions, Side Costs and Side Benefits

Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 12.1: Mutually Exclusive Revenue Generating Projects with equal lives
In Practice 12.2: Mutually Exclusive Cost Minimizing Projects with equal lives
In Practice 12.3: Differential Cash Flows NPV and IRR
In Practice 12.4: Project Replication to compare projects with different lives
In Practice 12.5: Equivalent Annuities To Choose Between Projects With Different Lives
In Practice 12.6: Using Equivalent Annuities as a General Approach for Multiple Projects
In Practice 12.7: Analyzing a Replacement Decision
In Practice 12.8: Using the Profitability Index to select projects
In Practice 12.9: Estimating the Opportunity Cost for a Resource with a Current Alternative Use
In Practice 12.10: Estimating the Opportunity Cost for Excess Capacity
In Practice 12.11: Estimating the Costs of Product Cannibalization The Boeing Corporation
In Practice 12.12: Estimating the Costs of Product Cannibalization The Home Depot
In Practice 12.13: Cash Flow Synergies with Existing Projects

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets  
Spreadsheets eqann.xls: Compare projects with different lives, using the equivalent annuity approach.
replace.xls: This spreadsheet allows you to analyze a replacement decision.
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?
Readings  
Real Companies, Real Time  

Chapter 13: Investments in Non-cash Working Capital

Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 13.1: Net versus Non-Cash Working Capital: Boeing and the Home Depot
In Practice 13.2: Estimating Working Capital Requirements for Projects
In Practice 13.3: Working Capital and Project Cash Flows
In Practice 13.4: Working Capital Changes and Net Present Value
In Practice 13.5: Working Capital Tradeoffs
In Practice 13.6: Comparing Working Capital Ratios across Firms
In Practice 13.7: Estimating the Optimum Level of Inventory
In Practice 13.8: Analyzing a Change in Inventory Policy
In Practice 13.9: Inventory Policy: Peer Group Analysis
In Practice 13.10: Decision to Offer credit
In Practice 13.11: Estimating the Cost of Offering Credit

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets wcdata.xls: Working capital ratio as a percent of sales by sector for the United States.
inventory.xls: Inventory holdings as a percent of firm value, revenues and total assets in various sectors in the United States.
accrec.xls: Accounts receivable as a percent of revenues, and receivable days for various sectors in the United States.
accpay.xls: Accounts payable as a percent of sales, and the net credit days (receivable days payable days) in various sectors in the United States.
Spreadsheets wcopt.xls: Estimate the optimal holding of working capital for a firm.
invopt.xls: Estimate the optimal inventory level for a firm, with a safety stock.
creditopt.xls: Estimate the effect on firm value of changing the credit policy of a firm.
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion  
Readings  
Real Companies, Real Time Analyzing Working Capital Policy

Chapter 14: Investments in Cash and Marketable Securities

Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 14.1: Optimal Cash Balance for a Firm with a Steady Cash Usage Rate
In Practice 14.2: Optimal Cash Balance For A Firm With Uncertain Cash Flows
In Practice 14.3: Effect of Cash Balance on Firm Value
In Practice 14.4: Cash Invested at below market rates
In Practice 14.5: Discount for Poor Investments in the Future
In Practice 14.6: Can cash balances increase value? The Internet Industry
In Practice 14.7: Analyzing Boeing's and The Home Depot's Cash Balances

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets cash.xls: Cash holdings as percent of revenues, firm value and total assets in various sectors in the United States.
Spreadsheets cashopt.xls: Estimate the optimal cash balance for a firm using the Baumol model and the Miller-Orr Model.
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion  
Readings  
Real Companies, Real Time Analyzing Cash and Marketable Securities

Chapter 15: Investment Returns and Corporate Strategy

Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 15.1: Estimating the returns and NPV on an existing investment
In Practice 15.2: Estimating CFROI for The Home Depot
In Practice 15.3: Evaluating Current Investments.
In Practice 15.4: Assessing Competitive Advantages: Boeing and the Home Depot
In Practice 15.5: Analyzing an Existing Project: The Home Depot

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets EVA.xls: Summarizes, by sector, returns on equity and capital as well as costs of equity and capital.
Spreadsheets cfroi.xls: Estimate the CFROI for a firm.
evacalc.xls: Estimate the economic value added for a firm.
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion
  1. ROC, Cost of Capital, NPV and EVA
  2. ROE, Cost of Equity and Equity EVA
Readings
  1. EVA as elixir
Real Companies, Real Time Analyzing A Firm's Existing Investments

Chapter 16: An Overview of Financing Choices

Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 16.1: Cash Flows on a Lease versus Buy Decision
In Practice 16.2: Decomposing a Convertible Bond - Debt and Equity Components
In Practice 16.3: Existing Financing Choices for Boeing, the Home Depot and InfoSoft

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets  
Spreadsheets convbond.xls: Decompose a convertible bond into debt and equity components.
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 Convertible
  4. Special Purpose Entities
Readings  
Real Companies, Real Time Analyzing A Firm's Current Financing Choices

Chapter 17: The Financing Process

Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 17.1: The Initial Public Offering for United Parcel Service
In Practice 17.2: Valuing a Rights Offering Tech Temp Inc.

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets finUS.xls: There is a dataset on the web that has aggregate internal and external financing, for US firms, from 1975 to the present.
Spreadsheets rights.xls: Estimate the ex-rights price and the value per right, in a rights issue
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion  
Readings  
Real Companies, Real Time Examining a Firm's Financial Transitions

Chapter 18: The Financing Mix: Trade-Offs and Theory

Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 18.1: The Debt Trade Off at Boeing, the Home Depot and InfoSoft
In Practice 18.2: A Life Cycle Analysis of Financing

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets  
Spreadsheets  
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion
  1. Dilution as a Bogey
Readings
  1. Indirect Bankruptcy Costs: KMart
Real Companies, Real Time Capital Structure Choices

Chapter 19: The Optimal Financing Mix

Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 19.1: Estimating Debt Capacity Based Upon Operating Income Distribution
In Practice 19.2: WACC, Firm Value, and Leverage
In Practice 19.3: Analyzing the Capital Structure for Boeing March 1999
In Practice 19.4: Analyzing the Capital Structure for The Home Depot March 1999
In Practice 19.5: Sensitivity Analysis on Boeing's Optimal Debt Ratio
In Practice 19.6: Estimating the Optimal Debt Ratio for InfoSoft
In Practice 19.7: Applying the Cost of Capital Approach to J.P. Morgan
In Practice 19.8: Effects of Leverage, ROE, and Cost of Equity on The Home Depot
In Practice 19.9: Using the Adjusted Present Value Approach to calculate Optimal Debt Ratio for Boeing in 1999.
In Practice 19.10: Estimating Home Depot's debt ratio using the crosssectional approach

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets mgnroc.xls: Operating margins and returns on capital by industry group in the United States for the most recent quarter.
dbtfund.xls: Market value and book value debt ratios, by industry, in addition to other relevant characteristics.
dbtreg.xls: Latest debt ratio regression across the entire market.
Spreadsheets captstr.xls: Compute the optimal debt ratio firm value for any firm, using the same information used for Boeing. It has updated interest coverage ratios and default spreads built in.
diffret.xls: Compute the differential returns at various debt ratios.
apv.xls: Compute the value of a firm, with leverage, using the adjusted present value approach.
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  
Real Companies, Real Time The Optimal Financing Mix

Chapter 20: Financing Mix and Choices

Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 20.1: Debt Capacity and Takeovers
In Practice 20.2: A Recapitalization to Increase Debt Ratio : Nichols Research
In Practice 20.3: Strategies for Increasing Debt Ratio: The Home Depot
In Practice 20.4: A Strategy for Reducing Debt Ratio: Time Warner
In Practice 20.5: Calculating Duration for Boeing Super Jumbo Investment
In Practice 20.6: Coming Up With The Financing Details: The Home Depot
In Practice 20.7: Estimating the Right Financing Mix for Boeing

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets dursect.xls: Results of regressing firm value against macroeconomic variables, by sector, for U.S. companies.
Spreadsheets divdebt.xls: Estimate the effects of changing dividend policy or capital expenditures on debt ratios over time.
dursect.xls: Estimate the sensitivity of firm value and operating income to changes in macro-economic variables.
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
  4. MIPS: Is this debt or is this equity?
Real Companies, Real Time Mechanics of Moving to the Optimal

Chapter 21: Dividend Policy

Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 21.1: Dividend Capture: Texas Utilities

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets divUS.xls: Dividend yields and payout ratios for U.S. companies from 1960 to the present.
Spreadsheets  
Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion  
Readings  
Real Companies, Real Time The Trade Off on Dividend Policy

Chapter 22: Analyzing Cash Returned to Stockhoders

Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 22.1: Dividends and Stock Buybacks: The Home Depot and Boeing
In Practice 22.2: Estimating Free Cash Flows to Equity - The Home Depot & Boeing
In Practice 22.3: Comparing Dividend Payout Ratios to FCFE Payout Ratios: The Home Depot and Boeing
In Practice 22.4: Evaluating Project Quality at Boeing and The Home Depot
In Practice 22.5: Analyzing Boeing's Dividend Policy
In Practice 22.6: Analyzing the Home Depot's Dividend Policy
In Practice 22.7: Analyzing Boeing And The Home Depot's Dividend Payout Using Comparable Firms
In Practice 22.8: Analyzing Boeing And The Home Depot's Dividend Payout Using The Cross Section

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets

divfcfe.xls: Dividends, cash returned to stockholders and free cash flows to equity, by sector, in the United States.
divfund.xls: Dividend yields and payout ratios, by sector, for U.S. companies.

Spreadsheets

dividends.xls: Estimate the free cash flow to equity and the cash returned to stockholders for a period of up to 10 years.

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
  1. Microsoft: Should it pay dividends?
Real Companies, Real Time A Framework for Analyzing Dividends

Chapter 23: Beyond Cash Dividends: Buyouts, Spin Offs and Divestitures

Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 23.1: Dividends versus Equity Repurchases
In Practice 23.2: The Effect of a Divestiture on Value

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets

 

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  
Real Companies, Real Time Choosing between different ways of returning cash to the stockholders

Chapter 24: Valuation: Principles and Practice

Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 24.1: Estimating Operating Income for Firms
In Practice 24.2: Effective and Marginal Tax Rates for Firms
In Practice 24.3: Measuring Reinvestment at Firms
In Practice 24.4: Measuring the Reinvestment Rate, Return on Capital and Expected Growth Rate
In Practice 24.5: Costs of Debt, Equity and Capital
In Practice 24.6: Length of High Growth Period
In Practice 24.7: Stable Growth Inputs
In Practice 24.8: Value of Non-Operating Assets
In Practice 24.9: Value of Equity Options
In Practice 24.10: Estimating the Illiquidity Discount at InfoSoft
In Practice 24.11: Valuing Boeing
In Practice 24.12: Valuing the Home Depot
In Practice 24.13: Valuing InfoSoft
In Practice 24.14: Comparing PE ratios and growth rates across firms: Software companies
In Practice 24.15: Price to Book Value Ratios and Return on Equity: Aerospace/Defense Firms
In Practice 24.16: Applying Market Regression to Estimate Multiples

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets

taxrate.xls: Average effective tax rates by industry group in the United States for the most recent quarter.
fundgrEB.xls: Reinvestment rates and return on capital by industry group in the United States for the most recent quarter.
wacc.xls: Costs of capital for firms in the United States, categorized by industry group.
cash.xls: Value of cash and marketable securities by industry group in the United States for the most recent quarter.
pe.xls: PE ratios and PEG ratios by industry group in the United States for the most recent quarter.
pbv.xls: Price to book ratios and returns on equity by industry group in the United States for the most recent quarter.
ps.xls: Price to sales ratios and margins by industry group in the United States for the most recent quarter.
multregr.xls: Latest regression of multiples against fundamentals for the United States for the most recent quarter.

Spreadsheets

R&Dconv.xls: Convert R&D expenses from operating to capital expenses.
OpLease.xls: Convert operating leases from operating expenses to financial expenses.
warrants.xls: Value the options outstanding in a firm, allowing for the dilution effect.
fcffginzu.xls: Compute the value of a firm and the value of equity per share. It has built into it, converters for operating leases and research and development expenses.
fcfeginzu.xls: Value the equity in a firm directly, using cash flows to equity and a cost of equity.
divginzu.xls: Value the equity in a firm, using the dividend discount model.
eqmult.xls: Estimate the equity multiples for a firm, given its fundamentals.
firmmult.xls: Estimate the firm value multiples for a firm, given its fundamentals.

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 Go to equity readings
Real Companies, Real Time Valuation

Chapter 25: Value Enhancement: Tools and Techniques

Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 25.1: Potential for value creation
In Practice 25.2: Operating Margin Comparisons
In Practice 25.3: Tax Burden and Valuation
In Practice 25.4: Non-Cash Working Capital
In Practice 25.5: Reinvestment Rates, Return on Capital and Value: Boeing, The Home Depot and Infosoft
In Practice 25.6: Potential for Increasing the Length of the High Growth Period
In Practice 25.7: The Effect of Financing Mix on Value
In Practice 25.8: A Value Enhancement Plan: Boeing, The Home Depot and Infosoft
In Practice 25.9: Discounted Cashflow Value and Economic Value Added
In Practice 25.10: An EVA Valuation of Boeing

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets

cfbasics.xls: There is a dataset on the web that summarizes operating margins, tax rates and non-cash working capital as a percent of revenues by industry group for the United States.
fundgrEB.xls: There is a dataset on the web that summarizes returns on capital and reinvestment rates by industry group for the United States.
wacc.xls: There is a dataset on the web that summarizes debt ratios and costs of capital by industry group for the United States.
eva.xls: There is a dataset on the web that summarizes economic value added by industry group for the United States.

Spreadsheets

valenh.xls: This spreadsheet allows you to estimate the approximate effect of changing the way a firm is run on its value.
fcffeva.xls: This spreadsheet allows you to convert a discounted cash flow valuation into an EVA valuation, and vice versa.
cfroi.xls: This spreadsheet allows you to estimate the cash flow return on investment for a firm or project.

Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion
  1. Is there a "best way" to restructure?
  2. Under what conditions will your estimate of firm value be the same using both EVA and DCF approaches?
Readings
  1. Microsoft learning cost-cutting from GE
  2. Learning from the Super Companies
  3. Dare to keep your stock price low
  4. EVA as elixir
  5. An EVA debate
Real Companies, Real Time Value Enhancement

Chapter 26: Acquisitions and Takeovers

Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 26.1: A Status Quo Valuation of Digital
In Practice 26.2: The Value of Control at Digital
In Practice 26.3: Value of Control
In Practice 26.4: Valuing Synergy: Compaq and Digital

In Practice 26.5: Tax Benefits of writing up Asset Values after Takeover: Congoleum Inc.
In Practice 26.6: Setting the Exchange Ratio
In Practice 26.7: Valuing A Leveraged Buyout: Congoleum Inc.

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets

 

Spreadsheets

synergy.xls: Estimate the approximate value of synergy in a merger or acquisition.
exchratio.xls: Estimate the exchange ratio on an acquisition, given the value of control and synergy.
merglbo.xls: Evaluate the cash flows and the value of a leveraged buyout.

Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion  
Readings
  1. Synergy in Mergers
  2. The Keys to Success in M & A: The KPMG Report
  3. Stocks versus Cash Acquisitions: The Performance of Acquirers
  4. New Rules on Goodwill
  5. CEO Egos and Big Mergers
Real Companies, Real Time Acquisition Analysis

Chapter 27: Real Options in Corporate Finance

Topic  Details
Overheads Download as pdf file
In Practice (Illustrations)

In Practice 27.1: Valuing the Option to Delay a Project
In Practice 27.2: Valuing a Patent: Avonex in 1997
In Practice 27.3: Valuing an Oil Reserve
In Practice 27.4: Valuing an Option to Expand: The Home Depot France
In Practice 27.5: Valuing an Option to Abandon
In Practice 27.6: Valuing Equity as an Option
In Practice 27.7: Valuing Equity as an option - Eurotunnel
In Practice 27.8: Valuing Financial Flexibility at the Home Depot

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets

optvar.xls: Standard deviations in firm value and equity value by industry group in the United States

Spreadsheets

delay.xls: Estimate the value of an option to delay an investment.
product.xls: Estimate the value of a patent.
natres.xls: Estimate the value of an undeveloped natural resource reserve.
expand.xls: Estimate the value of the option to expand a project to cover new markets or new products.
abandon.xls: Estimate the value of the option to abandon an investment.
equity.xls: Estimate the value the equity in a troubled firm as an option.
finflex.xls: Estimate the value of financial flexibility as an option.

Solutions to Problems Download as pdf file
Derivations, In-Practice Questions and Discussion
  1. When is the option to delay a project a valuable option?
  2. When is the option to expand a project a valuable option?
  3. The Right Option Pricing Model to Use in Valuing Real Options
  4. Are strategic considerations valuable options?
Readings
  1. Making real options real
  2. Literature on real options in venture capital and R&D
  3. Real Options and Business Strategy
  4. How much is flexibility worth?
  5. Get Real
Real Companies, Real Time Real Options in the Firm

Chapter 28: Back to First Principles

Overheads
The Lessons of Corporate Finance
Companies: Background
  1. Boeing
  2. The Home Depot

Overheads
Topic Chapters
The Objective of the Firm Chapter 2
Tools for Corporate Finance Chapter 3-5
Measuring Risk in Investments Chapter 6-7
Measuring Returns on Investments Chapters 8-15
Capital Structure Chapter 16-20
Dividend Policy Chapter 21-23
Valuation Chapter 24-25
Mergers and Acquisitions Chapter 26
Real Options Chapter 27

Derivations and Discussion

             
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