Brealey, Myers. Principles of Corporate Finance. 7th edition

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Brealey−Meyers:

Principles of Corporate

Finance, Seventh Edition

Back Matter Index

Companies, 2003

INDEX 1063

Ford, Henry, 982

Ford Motor, 23, 859, 932

Forecasts

cash flow, 93, 125

economic rents in, 292–303

establishing consistent, 314

market values in, 287–292

reducing bias in, 314–315

Forward contracts, 764–765

forward rate agreements (FRAs), 764

homemade, 764–765

speculation in, 773–775, 953

Forward interest rate, 678–679

Forward rate agreements (FRAs), 764

Foster, G., 238n, 245, 839

FPL Group, 440

Franklin Savings Association, 668n

Franks, J. R., 722n, 723n, 724, 745,

943n, 982–983, 983n, 984n,

986n, 989

Franks, R., 725

Freddie Mac, 708

Free cash flow (FCF), 75–76, 514–515

Free-cash-flow problem, 317

Free-rider problem, 318

French, K. R., 179, 202n, 208–210, 212, 245,

434–435, 510n, 999, 999n

Frenkel, J. A., 807

Friend, I., 206n

Froot, K. A., 757n, 777, 793n, 807

Fruit of the Loom, 719

Full-service leases, 730

Futures contracts, 758–764

commodity, 759–760, 762–764, 814

financial, 759–760, 761–762

hedging with, 758–764, 769–773

mechanics of trading, 761

speculation in, 775

websites, 814

Futures prices

commodity futures, 762–764

financial futures, 761–762

Galai, D., 517, 647n, 658, 937n

Gallinger, G. W., 873

Gates, Bill, 385, 982

Gearing; See Financial leverage

General cash offers, 414–419

costs of, 417

market reaction to, 418–419

shelf registration, 414–415

General Electric, 3, 59–60, 120–121, 319,

404, 944

General Mills, 75

General Motors, 3, 4, 23, 224–226, 360, 932

General Motors Acceptance Corporation

(GMAC), 866n

Georgia Pacific Corporation, 972n

Getty Oil, 24n

Getty Petroleum, 509

Gibbons, M. R., 212

Gibbs, L., 501n

Gillette, 313

Gilson, R., 405n

Hedging

defined, 755, 755n

with futures contracts, 758–764

setting up hedge, 769–773

Helyar, J., 958, 965n, 989

Herman Miller Corporation, 324

Hershey, 362

Hertz, D. B., 263, 263n

Herzel, L., 950n, 958

Hewlett-Packard, 365–366, 632

HFS, Inc., 318n

Hicks, J. R., 680n

Higgins, R. C., 937n

Hill, C., 716n

Hill, N. C., 873

Hirschleifer, D., 1004n

Hirshleifer, J., 26

Hirtle, B., 436n

Historic data

on capital markets, 153–160, 194

websites, 252

Hite, G., 971n

Ho, T. S. Y., 694

Hodges, Stewart D., 295n, 745

Holderness, Clifford, 982n

Hollifield, B., 496n

Hollywood Entertainment, 944

Homonoff, R., 903

Honeywell, 944

Horizontal mergers, 930, 931

Horizon value

estimating, 77

market-book ratios and, 78

price-earnings ratio and, 77–78

Horrigan, J. O., 839

Hoshi, T., 986, 986n

Host Marriott Corp., 712

Hotchkiss, E. S., 721n

Household Finance, 866n

Houston, J. F., 931n

Howe, C. D., 266n, 267n, 313n

Huang, J., 689n

Huang, M., 359n, 689n

Hull, J., 583

Human assets, in mergers, 930–931

Hurdle rate; see Opportunity cost of

capital

Hutchison, S., 887n

Ibbotson, R. G., 411, 411n, 426

Ibbotson Associates, Inc., 45n, 153–156,

161n, 162n, 164n, 179

IBES, 66n

IBM, 435, 574, 952, 1000

Icahn, Carl, 948n

Ikenberry, D., 440n

Imputation tax system, 454

Incentives

dividend policy and, 448

for financial managers, 316–320, 448

golden parachutes, 949

leveraged buyouts (LBOs) and, 967

as options, 575–576

Incidental effects, 120–121

Ginnie Mae, 897n

Ginsberg, A. R., 685n, 966n

Glaxo Smith Kline, 313

Goetzmann, W. N., 158n

Gold, investment decisions for, 289–292

Golden parachutes, 949

Goldman Sachs, 3n

Goldreich, D., 413n, 426

Gompers, P. A., 405n, 425

Goodwill, 945

Gordon, M. J., 65n, 82

Governance and control, 981–986

defined, 963

in the U.S., 981–982

Government National Mortgage

Association (GNMA; Ginnie

Mae), 897n

Government regulation, market

imperfections due to, 480–481

Grabbe, J. O., 806

Graham, B., 447, 447n

Graham, John R., 221n, 496, 497, 497n, 517

Grant, E. L., 140

Gray market, 412n

Great Depression, 46, 164

Green, R. C., 496n

Greenmail, 435

Greenmail defense, 947

Green Mountain Coffee, 753

Greenspan, Alan, 360

Grenadier, S. R., 745

Grinblatt, M. S., 366n

Growth rates

internal, 837

sustainable, 837–838

Growth stocks, 70, 202

Gruber, M. J., 206–208, 211, 212, 355n,

371, 996n

Gulf, 948

Gultekin, N. B., 206n

H. J. Heinz Company, 360, 383–384,

389, 390

Habib, M., 724

Hall, B. H., 955n

Hall, B. J., 319n, 320n

Hamada, R. S., 483

Hansen, R., 410n

Hard rationing, 109

Harper, J. T., 973n

Harris, M., 517

Harris, R. S., 83, 943n

Hart, O., 385n, 396, 723n

Hart-Scott-Rodino Antitrust Act of

1976, 943

Harvey, C., 221n

Harvey, C. R., 804n

Hausman, W. H., 916n

Hawawini, G., 371

Hax, A. C., 279, 839

Healey, P. B., 873

Healy, P. M., 367, 367n, 439, 439n, 832n,

839, 955n

Hedge ratio, 593, 770

Brealey−Meyers:

Principles of Corporate

Finance, Seventh Edition

Back Matter Index

Companies, 2003

Income bonds, 705n

Income statement

described, 820–821

in estimating cash flow, 125, 856

Income stocks, 70

Incremental net present value, 120–122

Indenture, bond, 702–704

Index arbitration, 361

Indexed bonds, 668–669

Industry beta, 226

Industry costs of capital, 530–531, 534–535,

548–549

Inflation

in bond valuation, 668–671, 681

Consumer Price Index (CPI), 45–46

equivalent annual cost and, 133–134

in net present value analysis, 122–124

trends in, 381–382

Information

asymmetric, 511–513, 942–943

for capital budgeting decisions, 314–316

in dividend policy, 438–441

impact of asymmetric, 511–513

for mergers, 942–943

in semistrong market efficiency, 351,

353–356, 357–358

in share repurchase plans, 439–441

value of, in sensitivity analysis,

256–257

Information asymmetries, 8–9

Information technology (IT)

as outside capital budgeting process, 312

website on, 342

Ingersoll, J. E., 658, 683n, 761n

Initial public offerings (IPOs), 405–414

arranging, 406–407

auctions of, 413–414

bookbuilding for, 412–413

costs of, 410

sale of, 407–408

underpricing of, 410–412

underwriters of, 408–409, 412–413, 415

websites on, 430

winner’s curse and, 412, 414n

Institutional investors

dividend policy and, 453

initial public offerings and, 407

private placements and, 419–420

venture capital and, 404

Insurance, 755–758

credit, 920

portfolio, 361

risk transfer and, 756–757

Intangible assets, in mergers, 944–945

Integer (zero-one) programming, 108

Intel, 301, 404

Interest-capitalization tax, 702

Interest-equalization tax, 702

Interest-rate options, 563

Interest rate risk, in bond valuation,

671–674, 676, 677, 678–683

Interest rates; see also Term structure of

interest rates

on bank loans, 868

in bond valuation, 47–49, 668–683

interest-rate ceilings and, 481

Jump risks, 756–757

Junk bonds, 529–530, 685–686, 966

Junker, G. R., 903

Just-in-time inventory, 890n

Kahneman, D., 358n

Kaiser Aluminum, 966n

Kaiser Industries, 934

Kalay, A., 457, 713n

Kallberg, J. G., 903

Kamphuis, R., 361n, 371

Kane, A., 82

Kaplan, S. N., 160n, 320, 320n, 405n, 426,

501, 501n, 538, 538n, 966n, 967,

967n, 984n, 988

Kaplanis, E., 233n

Kashyap, A., 986, 986n

Kaufman, A., 964n

Kay, J. A., 328n, 336

Keim, D. B., 371

Keller, J. J., 930n

Keller, M. R., 631n, 633n

Kellogg, 73

Kendall, Maurice G., 347–348, 351

Keown, A., 353n, 354n

Kester, W. C., 279

Kettler, P., 839

King, B. F., 179

Kmart, 719

KMV, 692

Kogelman, S., 82

Kohlberg Kravis Roberts & Co. (KKR),

964n, 965, 977–979

Koller, T., 83

Kraft Food, 971

Kraus, A., 724, 885n, 902

Krigman, L., 408n

Kroger, 944

Kulatilaka, N., 279, 636

Lakonishok, J., 440n

Lamont, O., 975, 975n, 976, 976n

Lands End, 23

LaPorta, Rafael, 818, 818n, 981, 981n,

986, 986n

Large-firm effect, 356

Last-in, first-out (LIFO) inventory

valuation, 368

Law of conservation of value, 468–469, 996

Laya, J., 331n, 336

Lease, R. C., 387n

Leasing, 729–745

financial leases, 730, 733, 737–744

nature of leases, 729–730

operating leases, 729, 733, 734–737

reasons for, 730–734

websites, 751

Leavenworth, R. S., 140

Lee, D. S., 441n

Lee, I., 417, 417n

nominal versus real, 45–46, 122–124,

668–671

websites, 926

Interest rate swaps, 765–768

Interest tax shields, 489–497, 543

nature of, 489–491

personal taxes and, 495–497

value of, 539–540

value of stockholders’ equity, 491–493

Intermediaries, 393–395

Internal capital market, 975–976

Internal funds, 379

Internal growth rate, 837

Internal rate of return (IRR), 93, 96–105

application of, 105

calculation of, 97

defined, 96

internal rate of return rule, 98

in lending versus borrowing, 98–99

modified, 101n

multiple rates of return and, 99–101

for mutually exclusive projects, 101–104

net present value and, 97–105

opportunity cost of capital versus, 98n

term structure of interest rates and,

104–105

Internal Revenue Service, 528n

Interval measure, 823

Inventory, as collateral, 869

Inventory management, 851–852, 890–892

Inventory turnover, 823

Inventory valuation

FIFO (first-in, first-out), 368

LIFO (last-in, first-out), 368

Investment decisions

capital budgeting process for, 311–314

financing decisions versus, 126, 346–347

net present value and; see Net present

value (NPV), investment

decisions and

websites, 150

Ireson, W. G., 140

Irrational exuberance, 360

Issued and outstanding shares, 383

Issued but not outstanding shares, 383

ITT, 974, 976

J. P. Morgan, 775

Jagannathan, M., 436n

James, C. M., 318n, 867n, 931n

Janssen, C., 885n, 902

Jarrell, G., 440, 440n, 949n, 954n

Jarrow, R., 583

J.C. Penney, 703n

Jenkinson, T., 379n, 989

Jensen, Michael C., 26, 203n, 211, 212, 317,

317n, 319–320, 366n, 367n, 514–515,

515n, 517, 723, 723n, 954n, 958,

966n, 988

Johnson, E. J., 359n

Johnson, Ross, 965, 967

Johnson, S., 387n

Jorion, P., 158n, 796n, 807

1064 INDEX

Brealey−Meyers:

Principles of Corporate

Finance, Seventh Edition

Back Matter Index

Companies, 2003

INDEX 1065

Legal capital, 434

Lehmann, B., 807

Lehn, K., 954n

Leibowitz, M. L., 82

Leland, H. E., 402n

Lerner, J., 405n, 425

Lessard, D. L., 540n, 807

Lev, B., 238n

Leverage

financial; see Financial leverage

operating, 237–238, 261–262

Leveraged buyouts (LBOs), 505–506, 509,

538, 543, 964–967

examples, 964, 965–966

incentives and, 967

junk bonds and, 966

other stakeholders and, 967

taxes and, 966–967

Leveraged leases, 730

Leveraged restructurings, 967–968

Leverage ratios, 823, 824–825

Levich, R. M., 807

Levis, M., 413n

Levi Strauss, 406

Levy, H., 238n

Lewellen, W. G., 745, 937n

Lewis, C. M., 657n, 658

Lewis, K. K., 807

Liabilities, current, 529

LIBOR (London Interbank Offered Rate),

391, 764n, 868

Lichtenberg, F., 955n

Liebman, J. B., 319n, 320n

Limited liability, 4, 978n

Limited partnership, 388, 978–979

Limited private partnerships, 404

Lindahl, F. W., 368, 368n

Linear programming (LP), 107–109, 191–192

Lines of credit, 390

Lintner, John, 195, 195n, 211, 437–438,

441n, 456

Lipin, S., 952n

Liquidity-preference theory of term

structure, 680

Liquidity premium, 680

Liquidity ratios, 823, 825–826

Litwin, S. M., 958

Litzenberger, R. H., 212, 451, 451n

Ljungqvist, A., 989

Lo, A. W., 680n

Load factors, fluctuations in, 138–139

Loan guarantees, 689–690

Loan sales, 868

Lochhead, S., 417, 417n

Lock-box system, 884–885

Lockheed Corporation, 121, 261,

689–690, 943

Logue, D. E., 989

London Interbank Offered Rate (LIBOR),

391, 764n, 868

Long, M. S., 508n, 745

Long hedge, 758

Long-lived assets

multiple risk-adjusted discount rates for,

242–243

present value of, 33–36

historic, 153–160, 194

in three-factor model, 209

Market-to-book ratio, 78, 823, 830

Market to market, futures contract, 761

Market value, 820

in capital budgeting problems, 287–292

Market-value ratios, 823, 829–830

Markowitz, H. M., 187n, 191, 211

Marr, W., 954n

Marriott Corp., 712

Marsh, P. R., 124n, 158, 158n, 159n, 179,

363, 363n

Marsh, Terry A., 437n, 456

Marston, F. C., 83

Martin, K. J., 933n

Mason, S. P., 636

Master limited partnership, 388

Masulis, R. W., 366n, 496, 517, 937n

Mathews, J., 707n

Maturity factoring, 920

Mauer, D. C., 701n

Mayer, C., 982–983, 983n, 984n, 986n, 989

Mayers, D., 999n

MBNA, 972

McAdams, A., 885n, 902

McConnell, J. J., 387n, 649n, 705n, 717n,

737n, 745, 933n, 954n

McDonald’s, 435

McGowan, J. I., 336

McGuckin, R., 955n

McInnes, J. M., 839

McKinsey & Company, 263, 323

Meckling, W. H., 26, 517

Medium-term notes, 871, 896

Megginson, W. L., 973n, 988

Mehra, R., 158n, 204n

Mei, J., 206–208, 212

Mello, A., 777

Merck, 233–234

Mergers and Acquisitions, 927, 929n

Mergers and acquisitions, 929–958

dubious motives for, 934–937

economy and, 953–955

efficient-market hypothesis and, 365–366

estimating gains and costs of, 938–943,

956–958

junk bonds and, 529–530, 685–686, 966

key mergers, 929

mechanics of mergers, 943–946

sensible motives for, 930–934

takeover battles and tactics, 946–953

waves of, 1003–1004

Merton, Robert C., 179, 396, 437n, 456, 583,

610, 636, 694, 999, 999n

Mesa Petroleum, 947–948, 967

Metromedia Fiber Network, 691–692

Metropolitan Life Insurance, 713

Mezzanine financing, 403–404

Mian, S. L., 920n, 921

Michaely, R., 408n, 426, 439, 439n, 457

Microsoft, 3, 73, 74, 187–188, 348–351, 385,

434, 508, 982

Mikkelson, W. H., 369n, 387n, 441n

Miles, J., 527, 527n, 542n, 553, 971n

Milgrom, P., 426

Mill, John Stuart, 998

single risk-adjusted discount rate for,

240–242

Long-Term Capital Management (LTCM),

893–894, 1003

Long-term financing decisions; see

Corporate financing

Loomis, C., 302n

Lopez-de-Silanes, A., 981n, 986, 986n

Lorie, J. H., 100n, 111

Lotus Corporation, 952

Loughran, R., 411n, 419n

Loughran, T., 426

Lowenstein, L., 954n

Lowenstein, R., 894n

Lubin, S., 318n

Lucent, 23, 969

Luehrman, T. A., 552

Lummer, S. L., 900n

Lund, D., 763n

Lutz, F. A., 679n

Lutz, V. C., 679n

LYON (liquid yield option note), 648–649

Macaulay, F., 676n

MacBeth, J. D., 212

Mackie-Mason, J., 510n

MacKinlay, A. C., 680n

Macroeconomic factors, in arbitrage

pricing theory, 206–208

Magee, J., 275n

Maier, S. F., 873, 902

Majd, S., 629n

Majluf, N. S., 418n, 426, 517, 839

Majority voting, 385–386

Maksimovic, V., 972, 972n, 973n

Malburg, C. R., 903

Malitz, I., 508n

Malkiel, B. G., 355n

Management buyouts (MBOs), 964–967

Mandelker, G. N., 238n

Manegold, J., 237n

Mann, G., 887n

Manville, 500

Marcus, A. J., 82

Maremount, Mark, 930n

Margrabe, W., 620n

Markel, F. L., 335

Marketable securities, in short-term

financial planning, 852–853

Market capitalization rate, 61–62

Market efficiency; see Efficient-market

hypothesis

Marketing, as outside capital budgeting

process, 313

Market risk

beta in measuring, 173–174

defined, 168

portfolio diversification and, 172–173

Market risk premium

in arbitrage pricing theory, 207

defined, 194

expected, 205

Brealey−Meyers:

Principles of Corporate

Finance, Seventh Edition

Back Matter Index

Companies, 2003

Miller, Merton H., 26, 82, 291n, 441–443,

451, 451n, 452, 452n, 457, 465n, 482,

483, 492n, 495, 495n, 517, 745, 777,

892n, 903, 997

Miller, N. C., 869n

Miranti, P. J., Jr., 974n

Mishler, L., 921

Mitchell, M., 943n, 952, 952n, 958

Mitsubishi Estate Company, 508n

Modified accelerated cost recovery system

(MACRS), 127–129

Modified internal rate of return, 101n

Modigliani, F., 82, 441–443, 457, 465n, 482,

483, 492n, 517, 997

Modigliani-Miller (MM) approach

to capital structure, 465, 467–475

law of conservation of value, 468–469

Proposition I, 469–473, 480, 491, 524,

533–534

Proposition II, 473, 534

risk-return trade-off, 473–475

taxes in, 491–493

violations of, 480–481

to dividend policy, 441–447, 452–455

Mohan, N., 965n, 967

Money machines, 35

Money market, 5n, 895

Money-market funds, 481

Money-market investments, 893–899

calculating yield on, 894

types of, 895–899

Monsanto, 971

Monte Carlo simulation, 263–268

decision trees and, 277–278

defined, 263

example, 263–268

Montgomery, C., 979, 979n

Moody’s bond ratings, 684–685, 706, 911–912

Moore, J., 723n

Moral hazard risk, 756

Morck, R., 982n

Mortgage bonds, 705

Mortgage pass-through certificates, 707

Moss, J. D., 888n

MSN Money, 74n

Mullins, D. W., Jr., 363n, 370, 370n, 418n,

426, 654n, 903

Multiple-discriminant analysis, 913–914

Murphy, K., 319–320

Murrin, J., 83

Muscarella, C., 954n

Mutually exclusive projects

internal rate of return and, 101–104

project interactions, 136–139

Myers, S. C., 68n, 82, 179, 223n, 239n, 245,

267n, 275n, 313n, 418n, 426, 513n,

514n, 517, 552, 629n, 745, 836, 839,

935n, 936n, 938n, 988

NASDAQ (National Association of

Securities Dealers Automated

Quotations System), 60, 360, 405

National Gypsum, 967

New issues

efficient-market hypothesis and,

357–358, 363–364, 379

primary, 393; see also Initial public

offerings (IPOs)

secondary, 59, 393

New York Stock Exchange (NYSE), 59–60,

153, 166, 199, 361

Ng, O. K., 909n

Nguyen, S., 955n

Nichols, N. A., 268n, 279

Nominal rates of interest, 45–46, 122–124,

668–671

Non-negotiable time deposits, 896

Northrup Grumman, 943

Northwest Airlines, 966n

Notes

defined, 705

medium-term, 871, 896

money-market, 896

Notional principal, 766

Novell, 930

Nutter, J. M., 988

Nyborg, K. G., 414n

Occidental Petroleum, 947

Odean, T., 359n

Ofek, E., 975, 975n

Off-balance-sheet financing, 732–733

Offering price, 410

Office Depot, 944

O’Hara, M., 408n, 426

O/ksendal, B., 763n

Old-line factoring, 920

One-factor model of bond returns, 677–678

Operating expenses, 94

Operating leases, 734–737

defined, 729

example, 734–736

lease-or-buy decision and, 736–737

Operating leverage

asset beta and, 237–238

break-even points and, 261–262

Opportunity cost of capital

adjusted present value and, 543–544

business risk and, 549–550

calculating, 524–525, 549

debt-equivalent discounted cash flow

and, 547

defined, 15

example, 16–18

financing decisions and, 346

internal rate of return versus, 98n

net present value and, 93, 121–122

weighted average cost of capital and,

524–525

Optimization models, 866

Option delta, 593, 598, 600, 772–773

Option equivalents, 592–596

Option pricing models, 577–582,

591–610, 997

binomial method, 596–602

Black-Scholes formula, 602–607, 997

Nationsbank, 930

NCR, 930, 969

Negotiable certificates of deposit (CDs),

896, 898

Nelson, C. R., 693

Nelson, E., 318n

Nemhauser, G. L., 902

Net book value (NBV), 330, 828

Net convenience yield, 762–763

Net current assets, 820

Net float, 883

Net present value (NPV), 995, 998; see also

Net present value rule; Present

value

capital budgeting decisions and,

255–342

decision trees, 268–278

forecasting economic rents, 292–303

forecasting market values, 287–292

Monte Carlo simulation, 263–268

process for, 311–314

real options, 268–278, 617–636

sensitivity analysis, 255–262

defined, 15

financing decisions and, 126, 362–363

investment decisions and, 91–140

accounting income and, 93–94, 119–120

alternatives to, 93

book rate of return versus, 94

calculating, 36

cash flow in, 93–94, 119–122, 126–127

depreciation and, 124–126, 127–129

equivalent annual cost and, 131–136

example, 124–131

forecasting economic rents, 292–303

incentives, 316–320, 448

inflation and, 122–124

information needed by decision

makers, 314–316

internal rate of return and, 96–105

investment versus financing

decisions, 126, 346–347

key points concerning, 93

market values in, 288–292

payback analysis versus, 94–96

review of basics, 91–94

taxes and, 129–130

in merger analysis, 938–943, 956–958

production option and, 630–634

project interactions and, 136–139

reconciliation of current and future

consumption, 19–21

Net present value, capital budgeting

decisions and, 255–342

Net present value rule, 17, 18–22

application of, 21

statement of, 17

Net profit margin, 823, 828

Net return on investment, 321–325

Netscape, 410–411

Netter, J. M., 973n

Net working capital, 820, 851; see also

Working capital

Net-working-capital-to-total-assets, 823

Neuberger, A. J., 292n

Nevitt, P. K., 724, 745

Newhall Land and Farming, 388

1066 INDEX

Brealey−Meyers:

Principles of Corporate

Finance, Seventh Edition

Back Matter Index

Companies, 2003

INDEX 1067

debt valuation and, 686–689, 690

dividends in, 608–609

option values at a glance, 607–609

put options, 572

risk and, 581–582, 593–595

simple option-valuation model,

591–596

stock value and, 577–582

Options, 561–664; see also Convertible

bonds; Option pricing models;

Real options; Stock options;

Warrants

commodity, 563

currency, 563

default puts, 573–575

interest-rate, 563

spotting, 575–576

Orange County, California, 364–365, 897n

Order cost, 890

Original issue discount (OID) bonds,

705n

Orr, D., 892n, 903

Orvice, V., 914n

Overconfidence bias, 359

Overhead, in net present value analysis, 122

Over-the-counter (OTC) market, 60,

393, 405

Owers, J., 971n

Pacific Gas & Electric, 65n, 502, 719

PacifiCorp, 932

Pacman defense, 947

Pagano, M., 406n

Palepu, K. G., 367, 367n, 439, 439n, 832n,

839, 955n

Panetta, F., 406n

Paramount, 950

Parkinson, K. L., 903

Parrino, R., 989

Parsons, J., 777

Partch, M. M., 369n, 441n

Participations, 868

Partnerships, 5, 5n, 388, 404, 978–979

Patell, J. M., 353, 353n

Payback period, 93, 94–96

application of, 95

determining, 94

payback rule and, 95–96

Payback ratio, 66

Pay-in-kind (PIK) bonds, 718

Payment float, 882

Payout fixed by contract, 546

Payout ratio, 66, 445, 829; see also Dividend

policy, controversy concerning

Pecking order of financing choices,

511–515

financial slack, 514–515

impact of asymmetric information,

511–513

implications of, 513–514

Penn Central, 893

Pennzoil, 24n

Pension Benefit Guarantee Corporation, 720

in calculating economic income, 330

in common stock valuation, 60–80

compound interest and, 40–45

current versus future consumption and,

19–21

justification of, 22

of long-lived assets, 33–36

in Monte Carlo simulation, 266

net present value, 15–21

net present value rule, 17, 18–22, 93

nominal interest rates and, 45–46,

122–124

opportunity cost of capital and, 17–18

of perpetuities, 37–38

rate-of-return rule, 17, 21

rates of return and, 15, 16–17

real interest rates and, 45–46

risk and, 15–16

Present value of growth opportunities

(PVGO), 71–74

in business valuation, 78–79

calculating, 72–73

defined, 71

example growth opportunities, 73–74

Price-earnings ratio (P/E), 829

defined, 75, 823

horizon value based on, 77–78

Primary issues, 393; see also Initial public

offerings (IPOs)

Primary markets, 59, 393

Principal, 47

Principal-agent problem, 8, 23

Private benefits, 317, 386

Private equity partnerships, 978–979

Private placements, 419–420, 713–714

Privatization, 973

Privileged subscription issues, 421–422

Probabilities, beliefs about, 359

Procter & Gamble, 1

Procurement, 631

Production option, 272–273, 630–634

Profitability index, 93, 106–107

Profitability measures, 321–334

biases in, 326–329, 331–333

calculating, 329–334

economic value added (EVA), 322–325

errors in, 333–334

net return on investment, 321–322

Profitability ratios, 823, 828–829

Profit diagrams, 569, 570

Profit maximization, 22, 24n

Progress payments, 909–910

Project authorizations, 312

Project beta, 222–223

Project cost of capital, 222–223

Project finance, 540, 714–717

Project interactions, 136–139

fluctuating load factors, 138–139

optimal timing of investment, 137–138

Project life, abandonment value and, 629

Project risk, 222–223, 998

Prospectus, 407, 410, 422–425

Prowse, S., 982n, 989

Proxy contests, 386

Proxy fight, 946–947

Prudhoe Bay Royalty Trust, 389

Public corporations, 3–4

Percentage-of-sales model, 832–834

Performance measurement, 321–334

accounting measures of performance,

321–324

stock price in, 320

Perks, 317

Perotti, E., 989

Perpetuities, 37–38

defined, 37

valuation of growing, 37–38, 64

Petersen, M. A., 919n, 921

Pfizer, 196, 222–223, 233–234, 491–493, 497,

508, 510

Pharmacia, 971

Philip Morris, 325, 431, 971

Phillips, G., 972, 972n, 973n

Phillips Petroleum, 948–949, 967

Pickens, Boone, 947–949, 967

PIK (pay in kind), 965

Pillsbury, 75

Pindyck, R. S., 279, 630n, 636, 763n

Pinkerton, J., 353n, 354n

Pinnacle West Corp., 65–67

Pisapia, R. J., 888n

Playing for time game, in financial

distress, 505

Playing the float, 883

Plowback ratio, 66

Pogue, G. A., 839, 866n, 873

Pohlman, R. A., 335

Poison pill defense, 949, 950

Poison-put clauses, 713, 950

Portfolio beta, 226

Portfolio insurance, 361

Portfolio performance, historic, 154–157

Portfolio risk, 153–179

calculating, 169–172

diversification and, 165–168, 171–172,

177–178

historic performance of capital markets

and, 153–160

individual securities and, 172–177

measuring, 160–168

Portfolio theory, 187–194

borrowing and lending in, 192–194,

197–198

developing portfolios, 188–192

efficient portfolios in, 191–194,

196–197, 204

standard deviation and, 187, 193n,

196–197

variance and, 189n

Position diagrams, 566, 567, 568–570, 575

Postaudits, in capital budgeting process,

313–314

Poulsen, A., 949n

Pratt & Whitney, 120–121

Preferred stock, 231n, 389

convertible, 649

floating-rate, 899–900

Prescott, E. C., 158n, 204n

Present value, 14–21; see also Net present

value (NPV)

of annuities, 38–40

best interests of shareholders and, 23–25

in bond valuation, 47–49

calculating, 14–15

Brealey−Meyers:

Principles of Corporate

Finance, Seventh Edition

Back Matter Index

Companies, 2003

Purchase method of merger accounting,

944–945

Put options, 566–568

default, 573–575

relationship between call prices and,

595–596

selling, 568

valuation of, 572, 594–596

Puttable bonds, 710

PVGO; see Present value of growth

opportunities (PVGO)

Pyle, D. H., 402n

Quadratic programming, 192

Quaker Oats, 323, 324

Qualified institutional buyers, 420

Qualified opinions, 318

Quick ratio, 823, 826

Quiet period, 408n

QVC, 950

Qwest, 969n

Rajan, R. G., 382, 382n, 396, 919n, 921

Ralston Purina Company, 702–705,

707–708, 711, 713–714

Ramaswamy, K., 451, 451n

Random walk hypothesis, 347–350

Rate-of-return rule

application of, 21

statement of, 17

Rates of return

on levered equity, 477–480

present value and, 15, 16–17

Ravenscroft, D. J., 954, 954n

Raviv, A., 517

Raytheon, 943

Real assets, 5, 394, 618–622

Real estate

asset backed securities, 707

financial distress and, 508

interest-rate ceilings and, 481

investment decisions for, 288–289

optimal timing for development of,

624–625

Real estate investment trusts (REITs), 389

Real options, 268–278, 617–636

abandonment option, 270–271, 625–630

decision trees and, 277–278

defined, 269

expansion option, 269–270, 563, 617–622,

630–634

production option, 272–273, 630–634

timing option, 271–272, 622–625

websites, 664

Real rates of interest, 45–46, 122–124,

668–669, 670–671

Real-time gross settlement (RTGS)

system, 887

Rebalancing debt, 535–536, 542

Risk-free rate of interest, 192–194

Risk management, 753–814, 1002

forward contracts, 764–765

hedging

defined, 755, 755n

with futures contracts, 758–764

setting up hedge, 769–773

insurance, 755–758

speculation and, 773–776, 953

swaps, 765–769

Risk premium

historic, 157–160, 194

market; see Market risk premium

Risk-return trade-off, financial leverage

and, 473–475

Risk shifting game, in financial distress, 504

Ritter, J. R., 357n, 410, 410n, 411n, 417, 417n,

419n, 426

RJR Nabisco, 505–506, 713, 718, 965–967

Road show, 407

Roberts, H. V., 348n

Robichek, A. A., 270n, 331n

Roche, 232–234, 800–803

Rock, K., 426, 457

Rockefeller, John D., 971

Rockefeller Center, 508n

Rogalski, R. J., 657n, 658

Rogerson, W. P., 323n

Rogoff, K., 807

Roll, Richard, 201n, 212, 356–357, 357n,

361n, 366n, 367n, 670n, 680n, 954n,

999n

Rolls Royce, 120–121

Romaine, C., 546n

Roosevelt, Theodore, 971

Rosenfeld, J., 971n

Ross, I., 886n

Ross, Stephen A., 204, 212, 683n, 761n

Ruback, Richard S., 538, 538n, 553,

947n, 950n, 954n, 955n, 958,

967, 967n

Ruback, S., 160n

Rubinstein, M. E., 244, 583

Rule 144A, 420, 701–702

Rydquist, K., 411n

Ryngaaert, M. D., 931n

Safeway Stores, 966n

Sahlman, W. A., 426

Saidenberg, M. R., 867n

Sale-and-leaseback arrangements, 730

Sales-to-assets ratio, 823, 826–827

Sales-to-net-working-capital, 823

Salomon Brothers, 24–25

Salvage value

abandonment options and, 627–628

depreciation and, 124, 739, 742–743

Santiago, E. S., 335

Santos, T., 359n

Sara Lee, 972, 972n

Sarig, O., 687n

Sarnat, M., 238n

Sartoris, W. L., 873

Receivables turnover, 823

Record date, dividend, 433

Red herring, 407n

Reebok, 167–171, 175–177, 188–190

Registered bonds, 704

Registration statement, 407, 410

Regular cash dividends, 434

Reinhardt, U. E., 121n, 140, 261, 261n,

279, 689n

Relative tax advantage of debt, 494–495

Relevering beta, 535

Rental leases, 730

Repayment provisions, 707–708

Repeat orders, credit decisions with, 916–918

Replacement decisions, equivalent annual

cost and, 135–136

Replicating portfolio, 593

Repurchase agreements (repos), 896,

898–899

Repurchase defense, 948

Repurchase programs; see Share

repurchases

Research and development (R&D)

Monte Carlo simulation for, 267–268

as outside capital budgeting process,

312–313

Residual income; see Economic value

added (EVA)

Restrictive covenants, 710–713

Restructuring defense, 948, 950

Restructurings, leveraged, 967–968

Return on assets (ROA), 823, 828–829, 830

Return on equity (ROE), 66, 823, 828,

830–831

Return on investment (ROI)

biases in, 326–327, 331–333

example of use, 326–329

measuring, 329–334

net, 321–325

Revco, 967

Reverse stock splits, 388

Revolving credit, 867

Reynolds, 944

Rhee, S. G., 238n

Rice, E. M., 999n

Riddiough, T. J., 624n, 625n

Rights issues, 421–422

Ripp, Robert, 952

Risk, 151–252, 998–999

attitudes toward, 358–359

avoiding, 317

capital asset pricing model (CAPM) and,

195–205

capital budgeting and; see Capital

budgeting and risk

company, 222–223

compound rates of return and, 156–157

counterparty, 768

default, 153–154, 683–692

expected return and, 194–210

market; see Market risk

option pricing and, 581–582, 593–595

pooling, 395

portfolio; see Portfolio risk

present value and, 15–16

project, 222–223, 998

unique, 168, 174–175

1068 INDEX

Brealey−Meyers:

Principles of Corporate

Finance, Seventh Edition

Back Matter Index

Companies, 2003

INDEX 1069

Savage, L. J., 100n, 111

SBC Communications, 969n

Scenario analysis, 258–259

Schaefer, S. M., 673n, 681n, 694, 777

Schall, L. D., 179, 937n

Schallheim, J. S., 737n, 745

Scharfstein, D., 777, 986, 986n

Scherer, F. M., 954, 954n

Scherr, F. C., 873

Schlarbaum, G. G., 705n

Schleifer, A., 24n, 973n

Schnabel, C., 304

Schneller, M. A., 658

Schoenholtz, K. L., 694

Scholes, Myron S., 212, 369, 434n, 451, 451n,

452, 452n, 457, 564n, 583, 591, 592,

610, 647n, 839, 997

Schueller, M. I., 647n

Schwartz, E. S., 292n, 636, 649n, 656n, 658,

709n, 710n, 724

Sealed Air Corporation, 968

Sears Roebuck, 969

Secondary issues, 393, 406, 414–419

Secondary markets, 59, 393

Second-stage financing, 403

Secured debt, 392, 706, 868–869

Securities, 5

Securities and Exchange Commission

(SEC), 407, 414–415, 419, 420,

701–702, 721, 980n

Securitizations, 868

Security market line

defined, 195

stocks not lying on, 197–198

Segall, J., 1003n

Self-liquidating loans, 867

Semistrong form of market efficiency, 351,

353–356, 357–358

Senior debt, 391–392, 705–706, 711

Senior management

compensation of, 320

derivatives positions and, 775

information needed by, 315–316

mergers and, 933, 946–953

as off-balance-sheet liability,

1000–1001

Sensitivity analysis, 255–262

in arbitrage pricing theory, 207–208

break-even analysis, 259–262

defined, 256

limits to, 257–258

scenario analysis, 258–259

in three-factor model, 209–210

value of information and, 256–257

Separation of ownership and management,

4, 7–9, 22

Separation theorem, 194, 194n

Sercu, P., 806, 807

Sesit, M. R., 417n

Seward, J. K., 657n, 658, 989

Shapiro, A. C., 758n, 807

Shapiro, E., 65n, 82

Shareholders

best interests of, 23–25

limited liability of, 4

profit maximization and, 22

role of, 4

Sources and uses of funds, 821–822,

856–857

Spatt, C. S., 707n

Special dividends, 434

Specialists, 60

Speculation, 773–776, 953

Spin-offs, 969–971

Spot interest rate, 674

Spot prices, 759

commodity futures, 762–764

financial futures, 761–762

Spread, 410

Sprint, 944

Stafford, E., 943n, 952, 952n, 958

Standard and Poor’s bond ratings,

684–685, 706, 911–912

Standard and Poor’s Composite Index, 157,

160, 348, 349

Crash of 1987 and, 361–362

historic performance of capital markets,

154–157

Standard deviation

defined, 161

diversification in reducing, 165–168

portfolio, 160–163, 170

in portfolio theory, 187, 193n, 196–197

Standard error, 156n, 224

Standard Oil, 971

Staples, 944

Statman, M., 166n, 179, 448n

Staunton, M., 158, 158n, 159n, 179

Stein, Jeremy C., 657n, 777, 988

Stephens, C., 436n

Stern, J., 368n

Stern-Stewart, 322n, 323, 325n

Stertz, B. A., 946n

Stigler, George J., 24n, 510

Stiglin, L., 966n

Stiglitz, J. E., 483

Stigum, M., 903

Stock dividends

described, 434

efficient-market hypothesis and,

366–367

websites on, 559

Stock exchanges, 59–60, 150

Stockholders’ equity, interest tax shields

and value of, 491–493

Stock index futures, 761–762

Stock options, 564–572; see also Option

pricing models

call options, 564–566, 568, 572

financial alchemy with, 570–572

position diagrams, 566, 567, 568–570, 575

profit diagrams, 569, 570

put options, 566–568, 572

selling, 568

Stock price

in credit analysis, 912

dividend payout ratio and, 445

efficient-market hypothesis and,

364–365

in equity valuation, 70–75

market reaction to stock issues, 418–419

option values and, 577–582

senior management compensation

based on, 320

separation of ownership and

management, 4, 7–9, 22

value maximization and, 23–25

Share repurchases

growth in use, 435–436

information content of, 439–441

stock price and, 445–447

taxes on, 435

tax implications of, 450

Shark-repellent charter, 949, 950

Sharpe, William F., 82, 195, 195n, 211,

238n, 245

Shaw, W. H., 408n

Shayam-Sunder, L., 419n

Shearson Lehman Hutton, 965

Sheehan, Dennis, 982n

Shefrin, H., 448n

Shelf registration, 414–415

Shepro, R. W., 950n, 958

Sherman, A. E., 412n

Sherman, S. P., 500n

Shiller, Robert J., 360, 360n, 371, 694

Shleifer, A., 317n, 360n, 371, 971n, 981n,

982n, 986, 986n, 989

Short hedge, 758

Short sales, 568, 568n

Short-term financial planning, 851–873

cash and, 854–859

cash budgeting, 859–862

evaluating plan, 865–867

long-term financing and, 853–854

options for, 862–863

short-term financial planning models,

865–866

sources of short-term borrowing,

866–871

websites, 926

working capital and, 851–853, 854–859

Short-term financial planning models,

865–866

Shyam-Sunder, L., 514n, 517

Siegel, D. F., 777, 955n

Siegel, D. R., 777

Simple interest, defined, 40

Sindelar, J. L., 411, 411n, 426

Singal, V., 989

Sinking funds, 707–708

Siu, J. A., 958

Skinner, D., 434n, 439n

Small-firm effect

described, 202n

as market anomaly, 356–357

three-factor model and, 208–210

Smidt, S., 140

Smith, Clifford W., Jr., 24n, 419n, 517, 724,

757n, 777, 920n, 921

Smith, J. K., 909n, 910n

Smith, K. V., 873

Smith, R. L., 909n

Smithson, C. H., 777

Smucker, 362

Sobotka, S. P., 304

Soft rationing, 108–109

Sole proprietorships, 5

Solicitation of consent to merge, 951

Solomon, E., 100n, 111, 331n, 336

Soter, D., 440n

Brealey−Meyers:

Principles of Corporate

Finance, Seventh Edition

Back Matter Index

Companies, 2003

Stock price continued

share repurchases and, 445–447

underpricing of initial public offerings,

410–412

Stock splits

efficient-market hypothesis and,

366–367

reverse, 388

Stohs, M. H., 701n

Stonehill, A. I., 806

Stonier, J. E., 631n, 633n

Strahan, P. E., 867n

Straight-line depreciation, 125, 129–130

Stretching payables, 860–861, 863

Stripped bonds, 674, 678, 717

Stromberg, P., 405n, 426

Strong form of market efficiency, 351,

354–356

Stultz, R. M., 386n, 777

Subordinated debt, 391–392, 706, 711

Summers, B. M., 903

Summers, L. H., 24n

Sunbeam, 23

Sundaresan, A., 693

Sundaresan, S., 414n, 693

Sunk costs, in net present value analysis, 121

Sun Microsystems, 404, 434

Supermajority, 386, 950

Surface Transportation Board, U.S., 530–531

Surplus cash, 854

Surplus funds, in mergers, 933

Sustainable growth rate, 837–838

Swaps, 765–769

credit derivatives, 765, 769

default, 765, 769

interest rate, 765–768

Sweeney, R., 807

Syndicated loans, 868

Taggart, R. A., 363, 363n, 553

Taxes

adjusted present value (APV) and, 550

alternative systems of, 453–455

on capital gains, 435, 448–452

on corporations, 4

alternative minimum tax (AMT),

128–129, 731–732

capital structure and, 489–497

deferred, 528n

depreciation rules, 127–128, 129–130,

132n, 739, 742–743

dividends and, 435, 448–452

equivalent annual cost and, 135

financial leases, 739–740

intercorporate dividends and, 450n, 452

interest-capitalization, 702

interest-equalization, 702

investment decisions and, 127–130

leveraged buyouts (LBOs) and,

966–967

in merger analysis, 945–946

weighted-average cost of capital, 231

on individuals, leverage and, 493–497

stripped, 674, 678, 717

TIPS (Treasury Inflation-Protected

Securities), 668–669

Treasury shares, 383

Treynor, Jack, 195, 195n

Triantis, A. J., 624n, 625n, 636

Trigeorgis, L., 636

Trust deed, 702–704

Trusts, 389

Tully, Shawn, 323n

Turnbull, S. M., 239n, 245, 583

Tversky, A., 358n

TWA, 721, 723n

Two-tier offers, 947

Tyco International, 648–649, 952, 974

Umlauf, S., 414n

Underpricing, 410–412

Underwriters, 408–409, 412–413, 415

Uniform-price auctions, 413–414

Union Pacific Corporation, 226–227, 231

Unique (diversifiable) risk, 168, 174–175,

205, 235

United States General Accounting

Office, 776n

U.S. Justice Department, 943, 944, 954

United States Navy, 732

United States Surface Transportation

Board, 227n

University of Chicago, Center for Research

in Security Prices, 153–154

Unlevering beta, 535

Uppal, R., 806

Upton, C. W., 291n, 745

Utah Power & Light, 932

Uttal, B., 406n

Va Linux, 409

Valuation horizon, 76–78

Value additivity, 468, 523

defined, 177–178, 996

diversification and, 177–178, 934

economic value added (EVA), 322–325

mergers and, 934, 956–958

Value Line, 66n

Value stocks, 202

Vander Weide, J. H., 873, 902

Van Horne, C., 270n

Variability

Black-Scholes formula to estimate

option, 606–607

diversification in reducing, 165–168

measuring, 163–165

Variable-rate demand bonds (VRDBs), 896,

897–898

Variance

defined, 160

portfolio, 160–163, 170, 171–172

in portfolio theory, 189n

on partnerships, 388

on REITs, 389

on share repurchases, 450

Tax-exempt municipal notes, 896, 897–898

Tax preferences, 128–129

Tax Reform Act of 1986, 127–129, 490

Tax shields

depreciation, 127–128, 132n, 546–547, 731

interest, 489–497, 539–540, 543

Technological change

equivalent annual cost and, 134–135

exploiting new technology, 295–303

Technology stocks, 360

Tehranian, H., 418, 418n

Temporary abandonment, 629–630

Temporary conglomerates, 977–980

Tender offer, 947

Term loans, 867–868

Terms of sale, 909–910

Term structure of interest rates, 35–36

in bond valuation, 671–674, 678–683

expectations theory of, 679–680

inflation and, 681

internal rate of return and, 104–105

liquidity-preference theory, 680

measuring, 673–674

relationships between bond returns,

681–683

Tetlow, R. S., 974n, 975n

Texaco, 24n, 509

Thaler, R. H., 359n, 371, 439, 439n, 793n

Thermo Electron, 969, 972, 972n

Thomas, J. K., 357n, 358n

Three-factor model, 208–210

Times-interest-earned, 823, 825

Time value of money, 93

websites, 150

Timing of investment, 137–138

Timing option, 271–272, 622–625

TIPS (Treasury Inflation-Protected

Securities), 668–669

Titman, S., 366n, 758n, 943n

Tobin, J., 194n

Torous, W. N., 722n, 723n, 724, 725

Total capitalization, 380, 529

Tracking stock, 972

Trade acceptances, 911

Trade credit, 851

Trade-off theory of capital structure, 497,

508–510

Training and personnel development,

as outside capital budgeting

process, 313

Transfer of value, in dividend policy, 442

Trans Union Corporation, 950n

Travlos, N., 943n

Treasurer, 6

Treasury bills, 896

described, 897

historic performance of capital

markets, 155

Treasury bonds; see also Bond valuation

historic performance of capital markets,

154–157

indexed, 668–669

present value formulas and, 47–49

riskiness of, 164n

1070 INDEX

Brealey−Meyers:

Principles of Corporate

Finance, Seventh Edition

Back Matter Index

Companies, 2003

INDEX 1071

Vasicek, O., 683n

Venture capital, 401–405

first-stage financing, 402–403

market for, 404–405

mezzanine financing, 403–404

second-stage financing, 403

websites on, 430

Venture Economics, 405

Verizon, 969n

Vermaelen, T., 440n

Vertical mergers, 930, 931–932

Viacom, 950

Vishny, R. W., 317n, 360n, 971n, 973n,

981n, 982n, 989

Viskanta, T., 804n

Vlasic, B., 946n

Volatility, in bond valuation, 674–678

Voting procedures, 385–388

W. T. Grant, 815

Wack, P., 832n

Wald, J. K., 510n

Waldman, R. A., 685n, 966n

Wall Street Journal, The, 60, 405, 975–976

Wal-Mart, 73

Walt Disney Company, 320, 434n, 772–773,

871n, 930

Walt Disney Productions, 73n

Warga, A., 687n

Warner, J. B., 353n, 501n, 724

Warner, Jerrold, 947n

Warrants, 392, 643–648

convertibles versus, 654–655

dilution and, 645, 646–648

dividends and, 644

reasons for issuing, 655–657

Warther, V. A., 439n

Washington Public Power Supply System

(WPPSS), 897n

WinnDixie, 944

Winner’s curse, 412, 414n

Wizman, Thierry, 713n

Wolfson, M. A., 353, 353n, 434n

Womack, K. L., 408n

Woolridge, J. R., 971n

WordPerfect, 930

Working capital

characteristics of, 858

components of, 851–853

defined, 121, 126

in estimating cash flows, 126–127

net, 820, 851

tracing changes in, 855–857

WorldCom, 665, 944

Wruck, K. H., 502n, 721n, 968n

Xerox, 23

Yahoo!, 360

Yergin, D., 971n

Yield to maturity, 48, 672–673

Young, F. M., 903

Yuan, K., 1000n

Zero-one (integer) programming, 108

Zhao, O., 417, 417n

Zheng, L., 1000n

Zhu, Q., 1000n

Z-scores, 913–914

Watts, R. L., 368n, 517

Weak form of market efficiency, 351,

363–364

Weather derivatives, 718

Weighted-average cost of capital

(WACC), 231

defined, 476

minimizing, 476–477

Weighted average cost of capital (WACC),

322n, 523, 524–536, 548

adjusting, 532–536

rebalancing, 535–536, 542

unlevering and relevering cost of

equity, 535

calculating, 524–527, 549

common mistakes in using, 532

flow-to-equity valuation method versus,

531–532

industry costs of capital, 530–531,

534–535, 548–549

questions concerning, 528–530

review of assumptions for, 527

website on, 559

Weingartner, H. M., 111

Weisbach, M. S., 436n

Weiss, Lawrence A., 501, 501n, 502n, 721n,

722n, 724, 724n, 725

Welch, I., 158n, 411n, 453n, 1004n

Western Electric, 969

Weston, J. E., 745

Weston, J. F., 958

Weyerhauser, 73

White, M. J., 720n, 724, 724n

White knight defense, 947, 950

Wickes Corporation, 723

Wiegner, Kathleen K., 73n

Wiig, K. M., 279

Wilford, D. S., 777

Williams, J. B., 65n, 82, 441n, 465n

Williams Act of 1968, 947, 947n

Brealey−Meyers:

Principles of Corporate

Finance, Seventh Edition

Back Matter Formulas

Companies, 2003

SOME USEFUL FORMULAS

Perpetuity (3-2)

The value of a perpetuity of $1 per year is:

Annuity (3-2)

The value of an annuity of $1 per period for t years

(t-year annuity factor) is:

A Growing Perpetuity

(the “Gordon” model) (3-2)

If the first period’s cash flow is $1 at year 1 and if

cash flows thereafter grow at a constant rate of g

in perpetuity,

Continuous Compounding (3-3)

If r is the continuously compounded rate of inter-

est, the present value of $1 received in year t is:

Equivalent Annual Cost (6-3)

If an asset has a life of t years, the equivalent

annual cost is:

Measures of Risk (7-2 to 7-4)

Variance of returns = σ

= expected value of (r˜ – r)

Standard deviation of returns = = σ

Covariance between returns of stocks 1 and 2

= σ

= expected value of [(r˜

– r

)(r˜

– r

)]

2variance

PV 1costs2

t-year annuity factor

PV 

r  g

PV 



r 11  r2

PV 

Correlation between returns of stocks 1 and 2:

Beta of stock i = β

The variance of returns on a portfolio with

proportion x

invested in stock i is:

Capital Asset Pricing Model (8-2)

The expected risk premium on a risky invest-

ment is:

r – r

= β(r

– r

)

Unlevering Betas (9-3 and 19-1)

where

D and E = the market values of debt and

equity (V = D + E)

Weighted Average Cost of Capital (9-3 and 19-1)

WACC = r

(1 – T

)D/V + r

E/V

where

and r

= the expected returns on debt and equity

= the marginal rate of corporate tax

D and E = the market values of debt and equity

(V = D + E)

MM’s Proposition II (17-2 and 19-3)

The required return on equity (r

) increases in

line with the debt–equity ratio calculated using

market values (D/E):

= r + (r – r

)D/E

where r is the opportunity cost of capital.

␤

assets

 ␤

debt

b ␤

equity

i1

j1

␴

␳



␴

(The section number indicates the principal reference in the text.)