Brealey, Myers. Principles of Corporate Finance. 7th edition
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Brealey−Meyers:
Principles of Corporate
Finance, Seventh Edition
Back Matter Global Index
© The McGraw−Hill
Companies, 2003
debt ratio, 382, 510
international security issues, 415–417
in other currencies, 391
Debt ratio, 382, 510
Denmark, risk premium in, 159
Derivative securities; see Forward contracts; Futures contracts;
Swaps
Deutsche Bank, 982–984
beta, 174
variability of stock market returns, 166
Dividend policy
dividend changes, 439
minority shareholders and, 448n
share repurchases, 436
taxes on dividends and, 454
Dollar loans, 790
E
Economic exposure, 799–800
Efficient-market hypothesis
elasticity of demand and, 369
stock market indexes and, 351, 352
Egypt, country risk and, 232
Elf Aquitaine, 929
Equal real interest rates, 797
Equity financing
common stock
initial public offerings (IPOs), 406, 409, 411
international security issues, 415–417
rights offerings, 421–422
venture capital, 405
internal funds, 379
Eurobonds, 391, 702
Eurocurrency, 391
Europe (general); see also names of specific countries
European Monetary Union (EMU), 702, 787n
Euros
eurobonds versus, 391
printing, 131n
Eurotunnel, 253
Exchange rates; see also Foreign exchange risk
changes in, 791–792
interest rates and, 790
Exotic securities
asset-backed securities, 707
bonds, 717–718, 757
catastrophe bonds, 757
Expectations theory of exchange, 791
Expectations theory of forward rates, 793–794
Export-Import Bank (Ex-Im Bank), 920
Export-Import Bank of Japan, 715–716
Expropriation risk, 805
F
Fiat, 416
beta, 174
variability of stock market returns, 166
Financial architecture
international differences in, 1004
Financial futures, 760
Financial markets
location of, 6
new European exchanges, 405
Financial planning, 835
Finland, variability of stock market returns, 166
Floating-rate preferred stock, 900
Ford, 805
Foreign banks, 895, 898
Foreign bonds, 701–702
Japan, 702
names, 702
Switzerland, 702
Foreign Credit Insurance Association (FCIA), 920
Foreign exchange risk, 787–805
basic relationships, 789–797
currency speculation, 800
economic exposure, 799–800
exchange risk and investment decisions, 800–805
foreign exchange market, 787–789
hedging currency risk, 797–800
transaction exposure, 799
Foreign investment in the U.S., 232–234
Forward contracts, speculation in, 773–775
Forward discount, 788
Forward premium, changes in spot rates and, 790–791
Forward rate, 788
expectations theory of, 793–794
France
bond interest payments, 42
civil-law system, 981
company debt ratio, 382
futures contracts, 760
political risk, 804
privatizations, 973
return on IPOs, 411
rights offerings, 421–422
risk premium in, 159
tax accounting in, 130n
variability of stock market returns, 166
venture capital markets, 405
France Telecom, 929, 973
Friedrich, John, 870
Futures contracts, 759, 760
speculation in, 775
Futures market, 788, 814
G
Germany
accounting standards, 817–818
bankruptcy procedures, 724
bond interest payments, 42
company debt ratio, 382
Daimler/Chrysler merger, 946, 984
economic exposure in, 799–800
efficient-market hypothesis and, 352
futures contracts, 760
internal funds financing, 379
leases, 732–733
off-balance-sheet financing, 732–733
ownership and control in, 982–984
political risk, 804
return on IPOs, 411
Brealey−Meyers:
Principles of Corporate
Finance, Seventh Edition
Back Matter Global Index
© The McGraw−Hill
Companies, 2003
Germany continued
risk premium in, 159
speculation in, 773–775
syndicated loans, 868
taxes on dividends, 454
variability of stock market returns, 166
venture capital markets, 405
Volkswagen sale, 973
Glaxo Welcome, 929
Global markets
average market risk premia, 158–159
betas for foreign stocks, 174
initial public offerings (IPOs), 409, 411
international security issues, 415–417
spin-offs in, 969
standard deviations of stocks, 165, 166, 183
Greece, return on IPOs, 411
H
Hedging currency risk, 797–800, 801n
currency speculation, 800
economic exposure, 799–800
example, 798–799
transaction exposure, 799
Holland
noncash retail payments, 882
political risk, 804
return on IPOs, 411
risk premium in, 159
variability of stock market returns, 166
Hong Kong
ownership of corporation, 385
return on IPOs, 411
Hub Power Company (Hubco), 714–716, 805n
Hyundai, 980
I
Imputation tax system, 454
India
political risk, 804
return on IPOs, 411
Indexed bonds, 669, 797
Indonesia, political risk, 804
Inflation, in Yugoslavia, 46
Inflation rates
exchange rates and, 791–792
interest rates and, 792–793
Initial public offerings (IPOs), 406, 409, 411
Insurance
catastrophe bonds, 757
changing strategy, 757–758
Interest-equalization tax, 702
Interest rate parity, 790, 793
Interest rates
exchange rates and, 790
inflation rates and, 792–793
Internal funds, 379
International banking facilities (IBFs), 895
International bonds, 391
International capital markets, 415–417
International cash management, 888–889
International Fisher effect, 792n
International money market, 894–895
International projects, discount rates for, 232–234
International risk, 787–806
foreign exchange risk, 787–805
basic relationships, 789–797
currency speculation, 800
economic exposure, 799–800
exchange risk and investment decisions, 800–805
foreign exchange market, 787–789
hedging currency risk, 797–800
transaction exposure, 799
political risk, 803–805, 814
Investment decisions
exchange risk and international, 800–805
in other currencies/countries, 130–131
Iraq, political risk, 804
Ireland
government acquisition of Bula Mines, 123–124
risk premium in, 159
Israel, stock issuance outside, 416–417
Italy
classes of stock, 386–388
company debt ratio, 382
ownership of corporation, 385
return on IPOs, 411
risk premium in, 159
variability of stock market returns, 166
J
Japan
bank solvency concerns, 670n
bonds, 702, 717
company debt ratio, 382
country cost of capital and, 234
dividend changes, 439
efficient-market hypothesis and, 352
futures contracts, 760
initial public offerings (IPOs), 406
interest rates, 48
internal funds financing, 379
ownership and control in, 984–986
political risk, 804
privatizations, 973
return on IPOs, 411
rights offerings, 421
risk premium in, 159
senior manager compensation in, 320
share repurchases, 436
speculation in, 775
tax accounting in, 130n
variability of stock market returns, 166
K
KLM
beta, 174
variability of stock market returns, 166
Korea
conglomerates in, 980
return on IPOs, 411
1054 GLOBAL INDEX
Brealey−Meyers:
Principles of Corporate
Finance, Seventh Edition
Back Matter Global Index
© The McGraw−Hill
Companies, 2003
GLOBAL INDEX 1055
L
Lafarge, 421–422
Laidlaw Inc., 887
Leasing, 732–733, 744
Leeson, Nick, 775
LIBOR (London Interbank Offered Rate), 391, 764n, 895
London Interbank Offered Rate (LIBOR), 391, 764n, 895
LOT (Polish state airline), 932
Lukoil, 818
LVMH
beta, 174
variability of stock market returns, 166
M
Malaysia, bond ratings in, 685
Mannesmann, 868, 929
Market risk, average historic, 158–159
Mercedes Automobil Holding, 982
Mergers and acquisitions
antitrust law and, 944
Daimler/Chrysler, 946, 984
foreign antitrust laws, 944
human assets in, 931
key mergers, 929
Metallgesellschaft, 774
Mexico
ownership of corporation, 385
return on IPOs, 411
uniform-price auctions, 414
Mitsui & Co., 714–715
Money machines, 791–792
Money market, international, 894–895, 900
N
National Power, 714–715
National Safety Council of Australia, 870
NatWest, 868
Nestlé, 3, 5–6
beta, 174
variability of stock market returns, 166
Net present value (NPV), investment decisions and, other
countries/currencies, 130–131
New York Stock Exchange (NYSE), 416, 818
Nippon Telegraph and Telephone (NTT), 406, 973
Nokia
beta, 174
variability of stock market returns, 166
Norway, exotic securities, 717–718
NTT (Nippon Telephone and Telegraph), 406, 973
NTT DoCoMo, 406n
O
Off-balance-sheet financing, 732–733
Orange, 929
Ownership and control
in Germany, 982–984
in Japan, 984–986
around the world, 986
P
Pakistan, project finance, 714–716
Pakistan State Oil Company, 714–715
Participations, 808
Perpetuities, 37–38
Poland
country risk and, 232
LOT vertical integration, 932
privatizations, 973
Political risk, 803–805, 814
Portfolio risk
average historic market risk premium, 158–159
betas for foreign stocks, 174
standard deviation of stocks, 165, 166, 183
Portugal, mergers and acquisitions in, 931
Preferred stock, floating-rate, 900
Private benefits, 386–388
Privatization, 973
Privileged subscription issues, 421–422
Project finance, 714–717
adjusted present value (APV) and, 540
common features, 716
Pakistan example, 714–716
role of, 716–717
PRS Group, 804
Purchasing power parity, 792, 794–797
Puttable loans, 710
Q
Quinenco, 980
R
Radcom Ltd., 416–417
Real assets, location of, 5–6
Real interest rates, 669, 797
Registered shares, 387
Repatriation risk, 805
Reverse stock splits, 388
Rights offerings, 421–422
Risk, of foreign investments, 232; see also International risk
Robert Fleming, 415–416
Russia
accounting standards, 818
default on bank loans, 867
political risk, 804
privatizations, 973
tunneling in, 388
voting contests, 388
S
Samsung, 980
Securitization, 868
Senior managers, compensation in Japan, 320
Share repurchases, 436
Showa Shell, 775
Singapore, return on IPOs, 411
SmithKline Beecham, 929
Brealey−Meyers:
Principles of Corporate
Finance, Seventh Edition
Back Matter Global Index
© The McGraw−Hill
Companies, 2003
Sony, 3, 416
beta, 174
variability of stock market returns, 166
Spain, risk premium in, 159
Speculation
currency, 800
dangers of, 773–775
Spot rates of exchange, 788
forward premium and, 790–791
Standard deviation, of foreign stocks, 165, 166, 183
Standards, accounting, 817–818
Stock exchanges, 405
Stock market indexes, efficient-market hypothesis and, 351, 352
Stock splits, reverse, 388
Sumitomo Corporation, 775, 984–986
Swaps, currency, 768
Sweden
bankruptcy procedures, 724
risk premium in, 159
share repurchases, 436
Switzerland
corporate bonds, 702, 757
currency speculation, 800
exchange risk and international investment decisions, 800–805
foreign investments in the U.S., 232–234
franc spot and forward rates, 794
leases, 744
Nestlé location of assets, 5–6
return on IPOs, 411
risk premium in, 159
tunneling in, 387
variability of stock market returns, 166
voting contests, 387
T
Taiwan, return on IPOs, 411
Taxes, 4
on dividends, 454
in France, 130n
imputation tax system, 454
interest-equalization, 702
in Japan, 130n
Telebras, 969
Telefonica de Argentina
beta, 174
variability of stock market returns, 166
Telefonos de Mexico, 416
Thailand, country risk and, 232
Total Fina, 929
Tranches, 717–718
Transaction exposure, 799
Tunneling, 387, 388
Turkey
inflation and exchange rates, 795
interest rates, 48
U
Underwriters, 409, 412, 415–416
Unilever, 3
Union Bank of Switzerland (UBS), 387
United Kingdom
accounting standards, 817
bankruptcy procedures, 724
bond interest payments, 42
Bowie bonds, 707, 717
common-law system, 981
company debt ratio, 382
efficient-market hypothesis and, 352, 363, 369
equity versus debt financing in, 363–364
futures contracts, 760
initial public offerings (IPOs), 406, 412
internal funds financing, 379
perpetuities in, 37
political risk, 804
real and nominal exchange rate, 796
real and nominal interest rates, 669
return on IPOs, 411
risk premium in, 159
speculation in, 775
variability of stock market returns, 166
venture capital markets, 405
Universal banking, 983
V
Venezuela, country risk and, 232
Venture-capital markets, 405
Vertical integration, 932
Vodafone Airtouch, 868, 929
Volkswagen, 3, 973
Voting rights, 386–388
W
Wellcome Trust, 415–416
Winterthur, 757
World Bank, 715–716, 805, 805n
Y
Yen loans, 790
Yugoslavia, inflation in 1993, 46
1056 GLOBAL INDEX
Brealey−Meyers:
Principles of Corporate
Finance, Seventh Edition
Back Matter Index
© The McGraw−Hill
Companies, 2003
A
Abandonment option, 270–271, 625–630
project life and, 629
temporary, 629–630
valuation of, 625–628
ABC, 930
Absolute priority, 502n
Abuaf, N., 796n
Accelerated depreciation, 127–128
Accounting beta, 237
Accounting changes, efficient-market
hypothesis and, 367–368
Accounting income
cash flows versus, 119–120
in merger analysis, 944–945
tax income versus, 129–130
Accounts payable, 860–861, 863
Accounts receivable, 851, 859–860
Accrued interest, 704–705
Acid-test ratio, 823, 826
Ackerman, S. Rose, 954n
Adjusted cost of capital, 543–544
Adjusted present value (APV), 523,
536–544
additions to debt capacity, 537–538
application of, 540–543, 550
base case, 536, 541
financing rules, 541–543
general definition of, 544
hurdle rates and, 543–544
issue costs and, 537
review of, 539–540
taxes and, 550
value of interest tax shields, 539–540
Adler, M., 807
Adverse selection risk, 756
Agarwal, R., 973n
Agency costs, 8
compensation plans, 318–320
monitoring, 317–318
types of, 316–317
Agency theory, 997–998
Aglion, P., 723n
Alchian, A. A., 103n, 111
Alcoa, 944
Alderson, M. J., 900n
Alexander, G. J., 82
Allen, F., 453n
Allen, J., 989
Allen, Robert E., 930n
Allied Crude Vegetable Oil Refining
Corporation, 869
AlliedSignal, 951–952
Allocated overhead, in net present value
analysis, 122
Allstate, 969
Alpha, efficient market hypothesis and, 353
Alternative minimum tax (AMT), 128–129,
731–732
Altman, Edward I., 501, 501n, 685n, 686n,
724, 914, 914n, 921, 966n
Amazon, 74n, 151, 165, 172, 191, 648,
650–651
American Airlines, 944
American calls, 564–565, 607, 608–609
American Express, 965
American puts, 594n, 607
American Stock Exchange (AMEX), 153
Amoco, 884
AMP, Inc., 951–952, 963
Amram, M., 279, 636
Andrade, G., 501, 501n, 943n, 952n, 958
Andress, G., 966n
Angel investors, 404
Annually compounded rate, 44–45, 48–49
Annual percentage rate (APR), 42
Annuities, 38–40; see also Equivalent
annual cost
defined, 38
valuation of, 38–40
Anthony, R., 323n
Antikarov, R. S., 636
Antitrust law
mergers and, 943–944
settlements, 969
AOL Time Warner, 563, 564–572, 577, 580,
592–609, 945, 954
Apex One, 930
Apple Computer Inc., 407n
Appropriation requests, 312
Arbitrage pricing theory (APT), 204–208
capital asset pricing model versus, 206
defined, 204
example of, 206–208
Archer Daniels Midland, 434
Arithmetic averages, risk and, 156–157
Articles of incorporation, 4
Asquith, Paul A., 363n, 367, 367n, 370,
370n, 418n, 426, 506n, 654, 654n,
658, 713n
Asset-backed securities, 707
Asset beta, 234–238
Asset sales, 972–973
Asset turnover ratio, 823, 826–827
Assignment of loans, 868
Asymmetric information, 511–513,
942–943
AT&T, 434n, 448, 930, 969, 970, 972
At the money options, 592
Auctions, initial public offering, 413–414
Auditors, qualified opinions, 318
Auerbach, A. J., 955n
Authorized share capital, 383
Autocorrelation coefficient, 348n
Automated Clearinghouse (ACH)
system, 888
Automatic dividend reinvestment plans
(DRIPs), 434
Availability float, 882
Average collection period, 823, 827
B
Babiak, H., 438, 438n
Bachelier, Louis, 347n, 566, 566n, 573
Bailey, J. V., 82
Bait and switch game, in financial distress,
505–506
Baker, G. P., 958, 979, 979n, 989
Balance sheet
described, 819–820
equity categories, 385–386
Ball, Ray J., 817–818, 818n
Baltensperger, E., 657n
Bank(s)
borrowing and lending via, 394–395
concentration banking, 883–885
electronic funds transfer and, 886–888
float and, 883–885
as intermediaries, 393–395
mergers of, 931
paying for services, 889
payment mechanism and, 394
pooling risk and, 395
restrictions on corporations, 384–385
websites, 926
BankAmerica, 930
Bankers’ acceptances (BAs), 896,
898, 911
Bank loans, 862–863, 866–869
Bank of America, 3
Bankruptcy
costs of, 498–503
direct versus indirect, 501–503
evidence of, 500–501
financial leases and, 739
nature of, 498–500
predicting, 913–914
procedures for, 719–724
websites, 751
Banz, Rolf, 202n
Barberis, N., 359n, 360n
Barclay, M. J., 517
Barclays Bank, 894
Baskin, J., 517, 974n
Baskin-Robbins, 999
Baumol, William J., 891–892, 903
Bautista, A. J., 745
Bearer bonds, 704
Beaver, W. H., 237n, 839
Bechtel, 406
Behavioral finance, 358–360
Bell Laboratories, 969
Bell South, 969n
Benartzi, L., 439, 439n
Berger, P., 975, 975n
Berglof, E., 989
Berkshire Hathaway, 934, 934n
Bernard, V. L., 357n, 358n, 832n, 839
Bernardo, A. E., 453n
Beta
accounting, 237
asset, 234–238
cash-flow, 237
changes in capital structure and,
229–230
company, 222–223
consumption, 203–204
covariance and, 175–177
defined, 173, 197
1057
INDEX
Brealey−Meyers:
Principles of Corporate
Finance, Seventh Edition
Back Matter Index
© The McGraw−Hill
Companies, 2003
1058 INDEX
Beta continued
equity, 549
hedging, 773
impact of borrowing on, 197–198
industry, 226
market risk and, 173–174
past returns in estimating, 225
portfolio, 226
portfolio risk and, 174–177, 195–205
project, 222–223
relevering, 535
setting discount rates without
calculating, 234–238
unlevering, 535
Bhagat, S., 971n
Bhandari, J. S., 724, 724n
Bhattacharya, S., 457
Bhutto, Benazir, 716
Biddle, G. C., 368, 368n
Bierman, H., 140, 745, 916n
Billington, Corey A., 632
Binomial method of option pricing, 596–602
Black-Scholes model and, 606
decision trees and, 601–602
defined, 596
general binomial method, 601
two-stage, 596–601
using, 625–626, 626–628
Biogen, 301
B.J. Services, 643–645
Black, B., 405n
Black, Fischer, 199n, 200n, 201n, 212, 452,
452n, 457, 564n, 583, 591, 592, 610,
647n, 705n, 997
Black box, nature of, 255
Black Monday (1987), 165, 361–362
Black-Scholes option pricing model,
602–607, 997
binomial method and, 606
development of, 602–604
to estimate variability, 606–607
using, 604–605, 618–622
for warrants, 644–648
websites, 664
Blake, C. R., 355n
Blockbuster, 944
Blue-sky laws, 407
Boardman, A., 501n
Board of directors
mergers and, 946–953
monitoring of agency costs, 317–318
role of, 4, 7, 23
voting procedures and, 385–388
Bodie, Z., 82, 333n, 336
Boeing, 192, 360, 943
Boesky, Ivan, 953
Bognanno, M. L., 320n
Bond(s)
corporate; see Corporate bonds
riskiness of, 164n
Treasury; see Treasury bonds
Bond ratings, 684–685, 706, 751, 911–912
Bond valuation
default risk in, 153–154, 683–692
indexed bonds, 668–669
inflation in, 668–671
Capital asset pricing model (CAPM),
195–205, 995–996, 999
alternatives to, 205–210
arbitrage pricing theory (APT) versus, 206
assumptions behind, 202–203
capital structure and, 227–231
cost of equity capital and, 224–227
defined, 195
equity beta and, 549
estimates of expected returns in,
195–196, 226–227
opportunity cost of capital and, 549
review of, 196–197
security market line and, 195, 197–198
tests of, 199–202
weighted average cost of capital and, 549
Capital budget
defined, 311
investments outside, 312–313
postaudits, 313–314
project authorizations, 312
Capital budgeting, 5, 7; see also Capital
budgeting problems; Capital
budgeting and risk; Investment
decisions; Net present value
(NPV), investment decisions and
book rate of return in, 93–94
capital rationing in, 105–109
information needed for, 314–316
internal rate of return in, 93, 96–105
net present value analysis in, 91–94,
119–140
payback period in, 93, 94–96
process for, 311–314
Capital budgeting problems, 255–342; see
also Net present value (NPV),
investment decisions and
capital investment process, 311–314
decision trees, 268–278
forecasting economic rents, 292–303
incentives, 316–320, 448
information needed by decision makers,
314–316
market values in assessing, 287–292
Monte Carlo simulation, 263–268
performance measurement, 321–334
real options, 268–278, 617–636
sensitivity analysis, 255–262
Capital budgeting and risk, 220–244
capital structure and, 227–231
company cost of capital, 222–223,
227–231
discounted cash flow and, 239–243
measuring cost of equity capital,
224–227
project cost of capital, 222–223
setting discount rates without
calculating beta, 234–238
Capital gains taxes, 435, 448–452
Capital investments, 94
Capitalization rate, in common stock
valuation, 64–65
Capital markets, 5n
historic performance of, 153–160, 194
reconciliation of current and future
consumption, 19–21
interest rates in, 47–49, 668–683
option pricing models in, 686–689, 690
present value formulas in, 47–49
term structure of interest rates in,
671–674, 678–683
websites, 150
Bookbuilding, 412–413
Book depreciation, 330, 333
Book rate of return, 93–94
Book-to-market effect, 202n
Book-to-market ratio, 202, 202n
Book value, 330, 820
Bootstrap game, in mergers, 936
Borison, A., 636
Borrowing and lending; see also Debt
financing; Financing decisions
banks and, 394–395
in capital structure, 227–231
internal rate of return and, 98–99
in portfolio theory, 192–194, 197–198
Borucki, L. S., 68n, 82, 223n
Bower, J. L., 316, 316n, 335
Boyco, M., 973n
Brattle Group, Inc., 67n
Break-even analysis, 259–262
defined, 259
operating leverage and, 261–262
Break-even cash flow, 543–544
Break-even points, 261–262
Brealey, R. A., 681n, 724, 836
Breeden, Douglas T., 203, 212
Brennan, Michael J., 449n, 457, 636, 656n,
658, 709n, 710n, 724, 763n
Bridge loans, 867
Brigham, E., 440n
Brown, G. W., 807
Brown, K. C., 900n
Brown, S. J., 353n
Bruner, R., 958
Buffett, Warren, 302–303, 934n
Burlington Industries, 966n
Burrough, B., 958, 965n, 989
Business risk, opportunity cost of capital
and, 549–550
Business valuation process
discounted cash flow (DCF) in, 75–80
websites, 150
Bussard, R. N., 866n, 873
Butler, G. F., 631n, 633n
C
Cadillac, 287–288
California Air Resources Board (CARB),
131–132
Call options, 564–566
relationship between put prices and,
595–596
selling, 568
valuation of, 572
Call protection, 653
Call provisions, 708–710
Campbell, J. Y., 680n, 694
Campeau Corporation, 686, 967
Brealey−Meyers:
Principles of Corporate
Finance, Seventh Edition
Back Matter Index
© The McGraw−Hill
Companies, 2003
INDEX 1059
Capital rationing, 105–109
defined, 105
example, 105–108
linear programming in, 107–109,
191–192
profitability index in, 106–107
quadratic programming in, 192
Capital structure, 227–231, 465–521, 997; see
also Debt policy
beta and changes in, 229–230
changes in, 379–382
defined, 465
discount rates and, 230–231
Modigiliani-Miller approach to, 465,
467–475
restructuring debt, 712
trade-off theory of capital structure, 497,
508–510
websites on, 430, 559
Careers in finance
financial manager, 5–7
website, 150
Cargill, 406
Carhart, Mark, 354, 355n
Carleton, W. T., 839
Carlson, J. B., 436n
Carrow, K. A., 717n
Carrying cost, 890
Carve-outs, 971–972
Cash, 854–859
in short-term financial planning, 852–853
surplus, 854
tracing changes in, 854–855
Cash balance
determining optimal, 889–893
minimum operating, 862
surplus, 854
Cash budgeting, 859–862
inflow, 859–860
outflow, 860–862
Cash-flow beta, 237
Cash flows; see also Discounted cash
flow (DCF)
accounting income versus, 119–120
defined, 119
discounting safe, nominal, 544–548
estimating incremental, 120–122, 126–127
forecasting, 93, 125
in Monte Carlo simulation, 266
in net present value analysis, 93–94,
119–122, 126–127
profits and, 857–858
surplus-funds mergers and, 933
Cash in and run game, in financial
distress, 505
Cash management, 881–902
in collections, 883–885, 918–920
in disbursement, 885–886
electronic funds transfer, 886–888
floating-rate preferred stock in, 899–900
inventory decision and, 890–892
investing idle cash, 893–895
just-in-time, 890n, 891–892
money-market investments in, 893–899
paying for bank services, 889
trade-off in, 892–893
categories of, 385–386
classes of, 386–388
dividends; see Dividend(s)
equity financing
initial public offerings (IPOs), 405–414
rights issues, 421–422
secondary issues, 414–419
trust, 389
venture capital, 401–405
historic performance of capital markets,
154–157
ownership of corporation, 384–385
trading of, 59–60
voting procedures, 385–388
Company beta, 222–223
Company cost of capital, 222–223
capital structure and, 227–231
defined, 222, 227
determining, 222–223
website, 252
Company risk, 222–223
Compaq, 365–366
Comparables, 619–620
Compensating balances, 889
Compensation plans
accounting measures of performance
and, 321–334
golden parachutes, 949
incentives for managers and, 318–320
stock price and, 320
Complementary resources, of merger
candidates, 932
Compounded rates of return, risk and,
156–157
Compound interest, 40–45
compounding intervals, 42–45, 48–49
defined, 40
present value and, 40–45
Concentration banking, 883–885
Confidence intervals, 224
Conflicts of interest
eliminating, 316
principal-agent problem, 8, 23
Conglomerate mergers, 930
Conglomerates, 974–981
bottom line on, 981
defined, 963
financial architecture of, 977
pros and cons of U.S., 974–976
temporary, 977–980
Conoco, 406
Conrad, Joseph, 805n
Conrail, 973
Consumer Price Index (CPI), 45–46
Consumption beta, 203–204
Continental Airlines, 719
Contingent issues, 657
Continuously compounded rate, 43–44
Contracts, 24n
Controller, 6
Convenience yield, 762–763
Converse Inc., 930
Conversion ratio, 648
Convertible bonds, 392, 648–657
dilution and, 651–652
dividends and, 652–653
value of liquidity, 1002–1003
websites, 926
Cash ratio, 823, 826
Catastrophe bonds, 757
Cendant Corporation, 318, 318n
Certainty equivalents, 239–240, 292, 594n
Chandler, A., 974n, 975n
Chapter 7 bankruptcy, 720
Chapter 11 bankruptcy, 720–723
Chase Manhattan Bank, 366, 367n, 930, 931
Chemical Bank, 930, 931
Chen, C. R., 965n
Chen, H. C., 410, 410n
Chesbrough, H., 404n
Chevron Corp., 976
Chew, D. H., Jr., 368n
Chicago Board Options Exchange (CBOE),
564, 607, 664
Chief executive officers (CEOs)
compensation of, 320
mergers and, 933, 946–953
Chief financial officers (CFOs), 7, 418–419
Childs, P. D., 624n, 625n
CHIPS, 887–888
Chrysler, 509, 509n, 932, 946
Chung, K. S., 958
Cifelli, A., 723n
Cisco, 434
Cissell, H., 50
Cissell, R., 50
Citibank, 972
Citicorp, 435, 481, 969
Cities Service, 947–949
Citigroup, 435
Citron, Robert, 364–365, 365n, 897n
Clark, D., 930n
Class A stocks, 386
Class B stocks, 386
Clayton Act of 1914, 943
Clinton, K., 807
Closely-held corporations, 3–4
Coca-Cola, 169–171, 175–177, 188–190,
192, 205
Cochrane, J. H., 202n, 405n
Coffee, J. C., Jr., 954n
Cole, R. H., 921
Collateral, 392
bank loan, 868–869
bond, 706
Collateralized mortgage obligations
(CMOs), 707
Collateral trust bonds, 706
Collections, 883–885, 918–920
College Retirement Equities Fund
(CREF), 951
Comcast, 972
Comment, R., 440, 440n
Commercial credit instruments, 910–911
Commercial drafts, 910–911
Commercial paper, 869–871, 893, 896, 898
Commodity futures contracts, 759–760,
762–764, 814
Commodity options, 563
Common stock, 383–388; see also Equity
valuation; Portfolio risk; Stock
options
Brealey−Meyers:
Principles of Corporate
Finance, Seventh Edition
Back Matter Index
© The McGraw−Hill
Companies, 2003
Convertible bonds continued
forcing conversion, 653–654
mandatory convertibles, 649
reasons for issuing, 655–657
types of, 648–649
valuation of, 649–651
warrants versus, 654–655
Convertible preferred stock, 649
Coonter, P. H., 347n
Cooper, A. I., 233n
Cooper, I. A., 724
Copeland, T. E., 83, 636, 745
Corbett, J., 379n
Cornelli, F., 413n, 426
Cornett, M. M., 418, 418n
Cornuejols, G., 902
Corporate bonds; see also Bond valuation
bond terms, 704–705
callable, 653, 708–710
call provisions, 708–710
convertible, 392, 648–657
default puts and, 573–575
domestic and foreign, 701–702
historic performance of capital markets,
154–157
indenture, 702–704
junk, 529–630, 685–686, 966
private placements, 419–420,
713–714
puttable, 710
ratings, 684–685, 706, 751, 911–912
repayment provisions, 707–708
restrictive covenants, 710–713
riskiness of, 164n
security of, 705–706
seniority of, 705–706
sinking fund provisions, 707–708
trading, 47
types, 705–706
websites, 751
Corporate financing, 377–430; see also
Financing decisions
capital structure and, 379–382
debt, 389–392; see also Corporate bonds
equity, 383–389
initial public offerings, 405–414
secondary offerings, 414–419
venture capital, 401–405
financial institutions in, 393–395
financial markets and, 392–393
internal funds, 379
links between short-term financing and,
853–854
websites on, 430
Corporate venturers, 404
Corporations; see also Shareholders; Taxes,
on corporations
financial manager in, 5–7
nature of, 3–4
separation of ownership and
management, 4, 7–9
Cost of capital
capital structure and, 227–231
company, 222–223, 227–231
defined, 15
example, 16–18
project, 222–223
private placements, 419–420, 713–714
secondary offerings, 414–419
short-term, 866–871
bank loans, 862–863, 866–869
commercial paper, 869–871
medium-term notes, 871
stretching payables, 860–861, 863
Debt policy
costs of financial distress, 497–510
bankruptcy, 498–503
without bankruptcy, 503–507
nature of financial distress, 497
trade-off theory of capital structure,
497, 508–510
varying with type of asset, 507–508
effect of leverage in competitive tax-free
economy, 465–482
Modigliani-Miller approach, 472–475
traditional approach, 476–481
pecking order of financing choices,
511–515
financial slack, 514–515
impact of asymmetric information,
511–513
implications of, 513–514
taxes and, 489–497
interest tax shields and stockholders’
equity, 491–493
personal taxes, 493–497
Debt ratio, 380–382, 823, 824–825, 937
Debt valuation, 667–693
bond prices and, 674–678
default risk in, 683–692
bond ratings, 684–685
government loan guarantees, 689–690
junk bonds, 685–686
option pricing and risky debt,
686–689, 690
duration in, 674–678
government loan guarantees, 689–690
inflation in, 669–670, 681
interest rate risk and, 671–674, 676, 677,
678–683
nominal rate of interest and, 669–670
option pricing models in, 686–689, 690
real rate of interest and, 668–669,
670–671
term structure of interest rates and,
671–674, 678–683
volatility in, 674–678
yield to maturity and, 672–673
Decision trees, 268–278
abandonment option, 271, 272
binomial method of option pricing and,
601–602
defined, 269
example of uses, 273–276
expansion option, 269
Monte Carlo simulation and, 277–278
pros and cons of, 276–277
uses of, 273
Default; see also Bankruptcy
lenders and, 391–392
Default options, 573–575, 937
Default risk, 153–154, 683–692
bond ratings, 684–685
calculating probability of default, 690–692
rate of return and, 15
using historic evidence to evaluate,
157–160
Cost of equity capital, 65, 224–227
Cottle, S., 447n
Counterparties, 766, 767
Counterparty risk, 768
Covariance
beta and, 175–177
in calculating portfolio risk, 169–170, 172
defined, 169, 169n
Cox, J. C., 683n, 705n, 761n
Coy, P., 632n
Crabbe, L., 708n
Crash of 1987, 165, 361–362, 409, 435
Credit analysis, 911–914
Credit decision, 914–918
Credit derivatives, 765, 769
Credit insurance, 920
Credit management, 909–921
collection policy in, 918–920
commercial credit instruments, 910–911
credit analysis in, 911–914
credit decision in, 914–918
terms of sale in, 909–910
websites, 926
Credit option, 769n
Credit rationing, 657n
Crown Cork, 530
CUC International, Inc., 318n
Culp, C., 777
Cum dividend, 433
Cumulative capital requirements,
853–854
Cumulative preferred stock, 389
Cumulative voting, 385–386
Currency options, 563
Current assets, 819–820, 851–853
Current liabilities, 529, 820, 853
Current ratio, 823, 826
Cusatis, P., 971n
Cyclicality, asset beta and, 237
Cyclical stocks, 207
D
Data-mining, 202
Data snooping, 202
Datastream, 326n
Days in inventory, 823, 827
DeAngelo, H., 434n, 439n, 496n, 517
DeAngelo, L., 434n, 439n
Debentures, defined, 705
Debt capacity
additions to, 537–538
determining, 547–548
Debt-equity ratio (D/E), 473, 532–536, 823,
824–825
Debt financing, 389–392, 665–751; see also
Bond(s); Debt valuation; Financial
leases; Leasing
asset-backed securities, 707
capital structure changes and, 379–382
debt ratio and, 380–382
forms of debt, 390–392
1060 INDEX
Brealey−Meyers:
Principles of Corporate
Finance, Seventh Edition
Back Matter Index
© The McGraw−Hill
Companies, 2003
INDEX 1061
in credit analysis, 912–914
government loan guarantees, 689–690
option pricing model and, 686–689, 690
restrictive covenants, 710–711
websites, 751
Default swaps, 765, 769
Deferred taxes, 528n
Degrees of freedom, 161n
Delaware corporate law, 4n
Dell Computer, 73, 74, 166–168, 168n,
173–174, 224–226
Denis, D. J., 989
Depreciation, 124–126
accelerated, 127–128
biases in calculating returns, 330, 333
salvage value, 124, 739, 742–743
straight-line, 125, 129–130
Depreciation tax shields, 127–128, 132n,
546–547, 731
Derivatives; see Forward contracts; Futures
contracts; Swaps
Descartes, René, 100n
Devarajan, S., 291n
Dewenter, K. L., 439n
Dhrymes, P. J., 206n
Diageo, 75
Diamond, D., 391n
Dick, C. L., Jr., 839
Dill, D. A., 745
Dilution
in convertible valuation, 651–652
in warrant valuation, 645, 646–648
Dimson, E., 124n, 158, 158n, 159n, 179
Disbursement float, 882
Disbursements, controlling, 885–886
Discounted cash flow (DCF)
in bond valuation, 47–49
in business valuation, 75–80
in common stock valuation, 60–61, 64,
65–80
debt-equivalent, 544–548
defined, 34
problems in option pricing, 591–592
risk and, 239–243
multiple risk-adjusted discount rates
and, 242–243
single risk-adjusted discount rate
and, 240–242
Discounted-cash-flow rate of return; see
Internal rate of return (IRR)
Discounted payback rule, 96
Discount factor, 14, 34–36
Discount rate; see also Opportunity cost of
capital
avoiding fudge factors in, 235–237
capital structure and, 230–231
setting without calculating beta,
234–238
Discriminatory auctions, 413–414
Diversifiable (unique) risk, 168, 174–175,
205, 235
Diversification
limits to, 171–172
market risk and, 172–173
mergers and, 934
portfolio risk and, 165–168, 171–172,
177–178
Eastman Kodak, 23, 649–654
Eckel, C., 989
Eckel, D., 989
Economic income, 329–331
Economic rents
example, 295–303
forecasting, 292–303
Economic value added (EVA), 322–325
applying to companies, 325
calculating, 322–323
pros and cons of, 323–325
websites on, 342
Economies of scale, in mergers, 931
Edwards, F., 777
Efficiency ratios, 823, 826–827
Efficient-market hypothesis, 347–370, 996
anomalies and financial managers,
356–363
capital structure and, 465
evidence for efficient markets,
351–356
exceptions to, 1000
forms of market efficiency, 351
irrelevance of dividends and, 441–447,
452–455
lessons of market efficiency, 363–370
random walk hypothesis and,
347–350
Efficient portfolios, 191–194, 196–197, 204
Ehrbar, A., 324n, 336
Ehrenberg, R. G., 320n
Eisner, Michael, 73n, 320, 320n
Eiteman, D. K., 806
Elasticity of demand, efficient-market
hypothesis and, 368–370
Electronic Bill Presentation and Payment
(EBPP), 886n
Electronic funds transfer (EFT), 886–888
Ellis, K., 408n, 426
Elton, E. J., 206–208, 211, 212, 355n
Empire building, 317
Englander, E. J., 964n
Enron, 685, 719
Epstein, L., 903
Equipment trust certificates, 706
Equity beta, 549
Equity financing; see also Equity valuation
capital structure changes and, 379–382
common stock, 383–388
initial public offerings (IPOs),
405–414
rights issues, 421–422
secondary issues, 414–419
trust, 389
venture capital, 401–405
in financial distress situations, 504–505
new issues and, 379
partnership, 388
preferred stock, 389
Equity valuation, 60–80
in business valuation process, 75–80
current price and, 61–62
discounted-cash-flow (DCF) formula in,
60–61, 64, 65–80
dividends and, 60–80
estimating capitalization rate, 64–65
future price and, 62–64
value additivity and, 177–178, 934
Divestiture, 969
Dividend(s)
in business valuation, 79–80
in common stock valuation, 60–80
in convertible valuation, 652–653
current price and, 61–62
estimating growth of, 65–70
future price and, 62–64
in option pricing, 608–609
payout ratio, 66; see also Dividend policy,
controversy concerning
preferred stock, 389
types of, 434
in warrant valuation, 644
Dividend policy, 433–456
capital structure and, tax-free economy,
465–475
controversy concerning, 441–455,
1001–1002
anti-dividend payout, 441, 448–452
irrelevance of dividends, 441–447,
452–455
pro-dividend payout, 441, 447–448
efficient-market hypothesis and,
441–447, 452–455
information content of, 438–441
method of payment, 433–436
model for determining, 434–435
payers and nonpayers, 434–435
pecking order of financing choices
and, 513
share repurchase, 435–436, 439–441,
445–447, 450
Dividend yield, 64–65, 823, 829–830
Dixit, A. K., 279, 630n, 636
Dodd, D. L., 447, 447n
Dodd, Peter, 947n
Doherty, N. A., 757n
Donaldson, G., 839
Dow Corning, 723
Dow Jones Industrial Average, 361
Downes, D. H., 839
Drexel Burnham Lambert, 686
Duffie, D., 777
Duke Energy, 758
Dunbar, N., 894n
Dunn, K. B., 707n
DuPont, 1, 406
Dupont system, 830–831
Durand, D., 82, 465n, 478n, 482
Duration
in bond valuation, 674–678
in hedging, 771
Dutch auction, 435n
E
E. F. Hutton, 883
Earnings announcements, 357
Earnings per share (EPS)
in equity valuation, 70–75
mergers and, 935
Earnings-price ratio, 71
Eastern Airlines, 500–502, 502n, 721
Brealey−Meyers:
Principles of Corporate
Finance, Seventh Edition
Back Matter Index
© The McGraw−Hill
Companies, 2003
Equity valuation continued
stock price and earnings per share in,
70–75
websites, 150
Equivalent annual cost, 131–136
calculating, 133
defined, 132
of excess capacity, 136
inflation and, 133–134
long- versus short-lived equipment,
132–135
operating leases and, 734–737
in replacement decisions, 135–136
taxes and, 135
technological change and, 134–135
Equivalent loans, 545–547, 740–742
Erb, C., 804n
Esty, B. C., 724
Ethics
concerns for, 24
principal-agent problem, 8, 23
European calls, 564, 595–596, 608
European puts, 607
Evans, M. D. D., 807
Evanson, P., 440n
Event risks, 713
Evergreen credit, 867
Excess capacity, equivalent annual cost
and, 136
Ex dividend, 433
Exotic securities
asset-backed securities, 707
bonds, 717–718
stripped bonds, 674, 678, 717
success of, 1001
and violation of Modigliani-Miller
approach to capital structure, 480
Expansion decision
exploiting new technology in, 295–303
forecasting market values in, 287–292
Expansion option, 269–270, 563
flexible production, 630–634
follow-on investment opportunities,
617–622
Expectations theory of term structure,
679–680
Expected returns
capital asset pricing model and,
195–205, 226–227
Modigliani-Miller approach to capital
structure and, 472–473
traditional approach to capital structure
and, 477–480
Extra dividends, 434
Exxon Mobil, 73, 165, 172, 174, 192, 196,
205, 224–226, 435, 930
Ezzell, R., 527, 527n, 542n, 553
F
Fabozzi, F. J., 629n, 724, 745, 903
Factoring, 919–920
Faircloth, G., 951n, 952n
Fair Isaacs, 912
Fama, Eugene F., 26, 179, 202n, 208–210,
212, 239n, 245, 360n, 366n, 367n,
financial institutions in, 393–395
nature of, 5, 5n
pooling risk and, 395
types of, 392–393
Financial planning, 831–837
accounting approach to, 832–836
alternative business plans, 831
percentage-of-sales model, 832–834
pitfalls of model design, 832–834
short-term; see Short-term financial
planning
websites, 926
Financial ratios, 822–831
Financial slack, 514–515
defined, 514
free cash flow and, 75–76, 514–515
Financial statements, 817–822
balance sheet, 819–820
in credit analysis, 912–914
income statement, 820–821
in merger analysis, 944–945
qualified opinions and, 318
sources and uses of funds, 821–822,
856–857
websites, 926
Financial structure; see Capital structure
Financing decisions, 5, 345–430; see also
Capital structure; Corporate
financing; Debt financing;
Efficient-market hypothesis;
Equity financing; Leasing
adjusted present value (APV), 523,
536–544
adjusting discount rate through
weighted average cost of capital
(WACC), 523, 524–536
investing decisions versus, 126, 346–347
mergers and, 936–937
NPV and, 126, 362–363
weighted-average cost of capital in,
524–536
Finnerty, J. D., 655n
Finnerty, J. E., 903
Fiorina, Carly, 365–366
First-in, first-out (FIFO) inventory
valuation, 368
First-stage financing, 402–403
First USA, 972
Fisher, A. C., 291n
Fisher, F. M., 336, 546n
Fisher, Irving, 26, 668–671, 681, 792n
Fisher, L., 366n, 367n
Fisher, M. L., 902
Fixed-rate debt, 391
Flaspohler, D. C., 50
Float, 883–885
creation of, 881–883
managing, 883
Floating charge, 869
Floating-rate debt, 390–391
Floating-rate notes, 481
Floating-rate preferred stock, 899–900
Florida Power & Light Company, 440
Flow-to-equity method of valuing
companies, 531–532
Food and Drug Administration (FDA),
267–268
371, 434–435, 438, 438n, 466n, 483,
510n, 680n, 694, 999, 999n
Fama-French three-factor model
described, 208–210
website, 252
Fannie Mae, 708, 897
Federal agency securities, 896, 897
Federal Deposit Insurance Corporation
(FDIC), 895
Federal Home Loan Bank (FHLB), 897
Federal National Mortgage Association
(Fannie Mae), 708, 897
Federal Trade Commission (FTC), 943
FedEx, 269
Fedwire, 887–888
Financial Accounting Standards Board
(FASB), 733, 944–945
Financial architecture
of conglomerates in the U.S., 977
defined, 963
of leveraged buyouts and
restructurings, 968
Financial assets, 394; see also Securities
Financial distress, 497–510
bankruptcy, 498–503
without bankruptcy, 503–507
nature of, 497
trade-off theory of capital structure, 497,
508–510
type of asset and, 507–508
Financial futures contracts, 759–760,
761–762
Financial institutions, 384–385, 393–395
Financial leases, 737–744
advantages of, 743–744
bankruptcy and, 739
defined, 730, 733
example, 737–738
ownership of asset, 738–739
salvage value for depreciation, 739
as source of financing, 730
taxes and, 739–740
valuing, 740–742
Financial leverage, 229–230, 824
effect in competitive tax-free economy,
465–482
Modigliani-Miller approach,
467–475
traditional approach, 476–481
leverage ratios, 823, 824–825
Financial managers, 5–7
book profitability and, 333–334
careers in finance, 5–7, 150
compensation plans for, 318–320
incentives and, 316–320
information problems of, 314–316
job titles of, 6–7
lessons of market efficiency and,
363–370
market anomalies and, 356–363
profit maximization and, 22
reading done by, 11
role of, 5–6
separation of ownership and
management and, 4, 7–9, 22
value maximization and, 23–25, 311–335
Financial markets, 392–395
1062 INDEX