Lessons in Corporate Finance. A Case Studies Approach to Financial Tools, Financial Policies, and Valuation. Wiley Finance

  • ID: 3610250
  • Book
  • 496 Pages
  • John Wiley and Sons Ltd
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Praise for Lessons in Corporate Finance

"Lessons in Corporate Finance presents the technical concepts in a very thoughtful manner that, combined with the case illustrations, provide a real window into the world in which CFOs operate every day."
Daniel J. Brennan, Executive Vice President and Chief Financial Officer, Boston Scientific

"Asquith and Weiss provide a highly readable, clear, and practical treatment of corporate finance. This book will help any manager make better investment and financing decisions."
Steven Neil Kaplan, Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance, The University of Chicago Booth School of Business

"Lessons in Corporate Finance, by Asquith and Weiss, provides an intuitive, step–by–step introduction to both the tools and theory of finance. The clarity of the presentation is not surprising given the fact that it is by two academics who changed the theory and practice of corporate finance in the 1980s and 1990s. While clearly useful as a textbook, it is even more suited to finance practitioners who may not be familiar with all the underpinnings of finance theory."
Matthew E. Zames, Chief Operating Officer, JP Morgan Chase & Co.

Join the Discussion on the Essentials of Corporate Finance

Lessons in Corporate Finance is a one–of–a–kind instructive experience, developed by two top educators in finance, that uses examples of actual companies to discuss the theory, tools, and techniques that enable chief financial officers (CFOs) to consistently make valuable decisions.

The deliberate question–and–answer format develops your intuitive understanding of the fundamental principles and tools of corporate finance to ensure a solid foundation for real–world practice and advanced study. Fulfill every major role of a CFO by making good investment and financing decisions, as well as ensuring a consistent cash flow with the ability to:

  • Identify sources of funding and corporate capital structure
  • Use strategic management to increase a company′s value to shareholders
  • Efficiently apply the tools and analysis methods for allocation
  • Value a firm and project in a variety of different ways within four main families

Go beyond the traditional textbook with Lessons in Corporate Finance, and prepare yourself to meet the academic and practical demands of the real business world.

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Preface xiii

Acknowledgments xv

About the Authors xvii

CHAPTER 1 Introduction

Two Markets: Product and Capital 2

The Basics: Tools and Techniques 2

A Diagram of Corporate Finance 3

A Brief History of Modern Finance 4

Reading This Book 6

CHAPTER 2 Determining a Firm s Financial Health (PIPES–A)

The Conversation with the Banker Is Like a Job Interview 7

Starting with the Product Market Strategy 9

Is PIPES Profi table? 10

Doing the Math 10

Sources and Uses of Funds 12

Ratio Analysis 16

The Cash Cycle 21

Summary 24

CHAPTER 3 Pro Forma Forecasts (PIPES–B)

First, Let s Take a Closer Look at Ratio Analysis 27

Pro Forma Forecasts 29

Circular Relationships 36

Back to (Forecasting) the Future 38

Projecting Out to 2014 and 2015 39

Evaluating the Loan 41

Summary 45

Appendix 3A: Accounting Is Not Economic Reality 47

CHAPTER 4 The Impact of Seasonality on a Firm s Funding (PIPES–C) 53

Monthly Pro Forma Income Statements 54

Monthly Pro Forma Balance Sheets 56

A Different Picture of the Firm 65

Summary 70

Appendix 4A: PIPES Monthly Pro Forma Income Statements and Balance Sheets 2014 71

Appendix 4B: PIPES Monthly Pro Forma Income Statements and Balance Sheets 2015 74

CHAPTER 5 Why Financing Matters (Massey Ferguson)

Product Market Position and Strategy 77

Political Risk and Economies of Scale in Production 78

Massey Ferguson 1971 1976 79

Sustainable Growth 81

The Period after 1976 83

Conrad Runs Away 86

The Competitors 87

Back to Massey 90

Massey s Restructuring 92

Postscript: What Happened to Massey 96

Summary 97

Appendix 5A: Massey Ferguson Financial Statements 99

CHAPTER 6 An Introduction to Capital Structure Theory

Optimal Capital Structure 104

M&M and Corporate Finance 107

Taxes 112

Costs of Financial Distress 120

The Textbook View of Capital Structure 125

The Cost of Capital 127

Summary 128

CHAPTER 7 Capital Structure Decisions (Marriott Corporation and Gary Wilson)

Capital Structure 131

The Cost of Capital 138

How Firms Set Capital Structure in Practice 141

Corporate Financial Policies 142

Sustainable Growth and Excess Cash Flow 145

What to Do with Excess Cash? 146

Summary 148

Appendix 7A: Marriott Corporation Income Statements and Balance Sheets 150

Appendix 7B: Marriott Corporation Selected Ratios 152

CHAPTER 8 Investment Decisions (Marriott Corporation and Gary Wilson)

What Is the Correct Price? 154

How Should Marriott Buy Its Shares? 154

The Loan Covenants 158

The Impact of the Product Market on Financial Policies 159

The Capital Market Impact and the Future 161

Summary 166

CHAPTER 9 Financial Policy Decisions (AT&T: Before and after the 1984 Divestiture)

Background on AT&T 172

M&M and the Practice of Corporate Finance 172

Old (Pre–1984) AT&T 174

New (Post–1984) AT&T 189

Summary 202

Appendix 9A: Development of AT&T Pro Formas 1984 1988

(Expected–Case) 203

CHAPTER 10 The Impact of Operating Strategy on Corporate Finance Policy (MCI)

A Brief Summary 207

A Brief History of MCI 209

Convertible Preferred Stock and Convertible Bonds 215

Interest Rates and Debt Ratios 218

Leases 219

Financing Needs of the New MCI 220

MCI s Financing Choice 231

MCI Postscript 232

Summary 233

Appendix 10A: Development of MCI s Pro Formas 1984 1988 235

CHAPTER 11 Dividend Policy (Apple Inc.)

The Theory of Dividend Policy 239

Empirical Evidence 243

Apple Inc. and the Decision on Whether to Pay Dividends 246

What Did Apple Do? 258

Summary 258

CHAPTER 12 A Continuation of Capital Structure Theory

The Tax Shield of Debt 262

The Costs of Financial Distress 263

Transaction Costs, Asymmetric Information, and Agency Costs 265

Asymmetric Information and Firm Financing 268

Agency Costs: Manager Behavior and Capital Structure 274

Leverage and Agency Confl icts between Equity

and Debt Holders 277

The Amount of Financing Required 281

Summary: An Integrated Approach 284

CHAPTER 13 The Time Value of Money: Discounting and Net Present Values

The Time Value of Money 287

Net Present Value (NPV) 292

Payback 298

Projects with Unequal Lives 299

Perpetuities 301

Summary 302

CHAPTER 14 Valuation and Cash Flows (Sungreen A)

Investment Decisions 303

How to Value a Project 304

The Weighted Average Cost of Capital (WACC) 315

Terminal Values 316

Summary 318

CHAPTER 15 Valuation (Sungreen B)

Sungreen s Projected Cash Flows 319

The Weighted Average Cost of Capital (WACC) 320

Twin Firms 325

The Cost of Equity 328

The Cost of Debt 330

The Final Valuation 332

Strategic Analysis 333

Summary 334

CHAPTER 16 Valuation Nuances

Cash Flow Nuances 337

Cost of Capital Nuances 339

Nuances on Calculating the Cost of Equity: Levering and Unlevering Beta 344

Separating Cash Flows and Terminal Values 348

Nuances of Terminal Value Methods 349

Other Valuation Techniques: DCF Variations 355

Real Options (aka Strategic Choices) 358

Summary 360

CHAPTER 17 Leveraged Buyouts and Private Equity Financing (Congoleum)

Congoleum: A Short History 363

Leading Up to the LBO: What Makes a Firm a Good LBO Target? 364

Details of the Deal 367

Postscript: What Happened to LBOs? 381

Summary 382

Appendix 17A: Congoleum s Pro Formas with and without the LBO 385

Appendix 17B: Highlights of the Lazard Fairness Opinion 391

CHAPTER 18 Mergers and Acquisitions: Strategic Issues (The Dollar Stores)

The Three Main Competitors 393

Recent History 394

Shopping a Firm/Finding a Buyer 397

Summary 400

CHAPTER 19 Valuing an Acquisition: Free Cash Flows to the Firm (The Dollar Stores)

The Bid for Family Dollar 401

Free Cash Flows to the Firm 403

Estimating the Cost of Capital 411

Discounted Cash Flows 415

Terminal Values 416

The Three Pieces 418

Summary 419

Appendix 19A: Family Dollar Pro Forma Financial Statements with Authors Constant Debt Ratio 420

CHAPTER 20 Understanding Free Cash Flows (The Dollar Stores)

Comparing the Free–Cash–Flows Formulas 423

Back to Discount Rates 425

On to Free Cash Flows to Equity 427

Discounting the Free Cash Flows to Equity 430

Summary 431

Appendix 20A: Family Dollar Pro Forma Free Cash Flows to Equity with Constant Debt Ratio 432

CHAPTER 21 Mergers and Acquisitions: Execution (The Dollar Stores)

The Time Line 433

Managerial Discretion 436

Activist Shareholders 438

The Federal Trade Commission (FTC) 440

Shareholder Lawsuits 441

The Vote 442

Summary 443

Appendix 21.A: Key Events in the Bidding for Family Dollar during 2014 and 2015 444

CHAPTER 22 Review

Chapters 2 4: Cash Flow Management Financial Tools 446

Chapters 5 12: Financing Decisions and Financial Policies 446

Chapters 13 21: Valuation 450

Tools and Concepts Discussed in This Book 453

Finance as Art, Not Science 454

Bottom Lines 454

An Intelligent Approach to Finance 455

Keeping Current 456

Larry s Last (Really a True) Story 457

Paul s Theory of Pies 457

Rules to Live By 458

Glossary 461

Index 469

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PAUL ASQUITH is the Gordon Y. Billard professor of finance at M.I.T.′s Sloan School. He is a specialist in corporate finance and has written on all areas of corporate finance including mergers, LBOs, equity issues, dividend policy, and more.

LAWRENCE A. WEISS is professor of International Accounting at The Fletcher School of Law and Diplomacy at Tufts University. He is a specialist in accounting and finance and has written on corporate bankruptcy, firm performance, international accounting, mergers, and more.

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