Pike Robert, Neal Bill. Corporate finance and investment: decisions and strategy
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Index 755
primary capital markets 25
principal-agent relationship 11
Prindl, A. 625
private equity firms 425–6
private placing 420
profit after tax (PAT) 50
profit and loss accounts 50
profit before interest and tax (PBlT) 485, 514
profit centre treasuries (PCTs) 326
profit margins 52
profit retention 10
profitability index 127–8, 732
profitability ratios 52
project appraisal
ARR methods 159–60
DCF techniques 157–9
fixed overheads 150
incremental cash flow analysis in 148–50
and inflation 153–4
payback period in 160–2
portfolio analysis in 233–4
replacement decisions 151–3
and taxation 155–7
project finance 178
project risk factors 288, 732
proprietorial companies 412, 732
prospective earnings yield 728
prospectuses 423, 425
protective puts 303
provisions 732
proxy beta 732
Pruitt, S.W. 290–1
psychology of economics 671
purchasing power parity 732
pure play technique 285
put options 299–300
put-call parity 304–5
Qantas Airways 501–2
quadratic programming 231
Quaker Oats Company 10, 98, 271–2
quick assets 53
quick ratio 338
quotation seeking 421–4
quoted companies 421–2
Radebaugh, L.H. 656
random walk theory 732
Rank-Hovis-McDougal 94
Rappaport, A. 47, 109, 279
real assets 6, 732
real options 311, 732
Really Useful Group 100
rebate clauses 392
receivership 499–500
recognised investment exchanges (RlEs) 32
record day 448, 732
redeemable shares 416
redemption yield 437
Redhead, K. 47, 316
regulation of markets 32
Reichmann, Paul 127
Reimann, B.C. 290–2
re-invoicing centres 616
relevant risk 732
Rensburg plc 419
re-packaging finance 27
replacement chain approach 164–5
replacement cost 92
replacement decisions 151–3
replacement investment 279–80
replacement proposals in capital investment 185
required return
assessment of 250–4
traditional view of 489–92
reserves 416, 732
residual income 160
residual theory of dividends 455–6, 732–3
resourceful, evaluative, maximising model (REMM) 662
restrictive covenants 432
retail banking 27
retained earnings 733
retained profits 8, 50
return on capital employed (ROCE) 52, 129
return on equity 54, 487–8
return from holding shares 239–40
return on shareholder’s funds 54
revaluation reserves 416
revenue sensitivity 286, 733
revolving credit facility 384, 733
rights issues 425–9, 733
and dividends 460–1
rights lapse 428
risk
adjusted NPV 208–9
attitudes to 197–8
expected net present value (ENPV) 197
in factoring 385–6
in financial decisions 16–17
and financial gearing 486–9
in long-term finance 413
measurement of 200–3
multi-period cash flows 212–14
and return 226–7, 239–42
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756 Index
risk (continued)
and time-value of money 62
scenario analysis 206
sensitivity analysis 204–6
simulation analysis 207
types of 198–200
risk-adjusted discount rate 208–9
risk aversion 197, 663
in portfolio theory 222
with share options 302–4
risk avoidance 331
risk exposure 330
risk-free assets 255–7, 733
risk management 330–7
and derivatives 332–4
and hedging 334–5
interest rate management 335–7
stages in 330–2
risk minimisation policy 613
risk premiums 16, 249, 733
risk reduction 27, 331
risk retention 331
risk sharing 616
risk transfer 331
R.J. Reynolds Tobacco 121
Robbie, K. 583
Robbins, S. 636
Rodriguez, R.M. 625
Roll, R. 40, 266
Ross, S.A. 40, 260, 262, 504
Rowntree’s (company) 94
Royal Bank of Scotland 567
Royal Dutch Shell Group 181
Ruback, R.S. 570, 582
Rugman, A.M. 656
Rutherford, B.A. 103
Rutterford, J. 406, 443, 506
safety stocks 366
Saigol, Lina 181
Sainsbury’s (company) 442
sale-and-leaseback (SAL) 441–3
sale-and manage-back 442–3
Sanyo Electric 175–6
Sarbanes-Oxley Act (2002) 15
Sarnat, M. 164, 212
Sartoris, W. 374
Savage, L.J. 138
scale economies 549, 733
scenario analysis 206
Scholes, M. 308, 316
Schumpeter, Joseph 15
Scottish & Newcastle (company) 550, 580
scrip dividends 465–6, 733
scrip issues 430, 727
second-round financing 421
secondary capital markets 25
secondary leases 392
Securicor (company) 575
securitisation 29–30, 434, 733
security market line (SML) 249, 733
seed capital 421
segmental beta 284
Seiyo Food Systems 549
self-administered pension schemes 28
self-deception 666, 670
sell-offs 576
Seminole Indian tribe 435
semi-variance 202
sensitivity analysis 204–6, 733
and multi-period capital rationing 140, 142–3
separation theorem 83, 256
Shao, L.P. 656
Shapiro, A.C. 625, 656
share buybacks 562, 733
share exchanges for financing takeovers 553
share options 12, 16, 297–304
and corporate finance 309–10
and futures 334
as a hedge 302–4
pricing of 304–9
speculative use of 300–2
terminology 299
share premium accounts 415, 733
share splits 430, 733
share valuation 669
share warrants 309
shareholder value, maximisation of 10
shareholder value analysis (SVA) 109–12, 733
cost of equity 272–3
hurdle rates 290–1
investment categories in 279–80
required return 276–8
tailored discount rates 283–9
taxation and the CAPM 288–9
value drivers in 278–80
shareholder wealth and social responsibility 13–14
shareholders’ funds 50, 414–17
authorised and issued share capital 414
ordinary shares 414–15
preference shares 415–16; see also dividends
Sharpe, P. 236
Sharpe, W.E. 231, 234, 238
Sherlund, Rick 471
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Index 757
short- and medium-term finance
bank credit 382–5
bill finance 387–9
factoring 385–6
hire purchase 389–91
for international trade 402–5
invoice discounting 386–7
leasing 391–402
trade credit 380–2
short selling 733
short-term asset management
cash management 367–73
inventory management 362–7
investment 373
trade credit 354–61
short-term investment 373
short-termism 43–4
shortage costs 344
Siemens (company) 561
sight drafts 403–4
signalling 504, 663, 733
Silicon Valley 471
simple interest 63
simulation analysis 207
single-period cash flows 200–2
Sirower, Mark 574–5
Sistema (company) 422
Skapinker, Michael 574–5
Smith, Adam 13
Smith, K.V. 348
SmithKline Beecham 236
social efficiency of markets 34
social responsibility 13–14
Solnik, B.H. 243
South Sea Bubble 41
special purpose vehicles (SPVs) 434
specific risk 241–2, 733
speculators 330
spin-offs 577
spot-forward swaps 618
spot markets 596
spot rates 733
spread 596–7, 733
standard deviation 200–1, 240
start-up capital 421
statutory proposals for capital investment 185
sterling/dollar option rates 619
sterling exchange rates 594–5
Stern Stewart (consultancy) 111
Stewart, Rod 434
Stobaugh, R. 636
Stock Exchange Automated Quotations (SEAQ) system
31, 46, 733
Stock Exchange Electronic Trading Service (SETS) 31
Stock Exchange introduction 424
stock splits 430, 733
stockholding periods 53
stockouts 366
Stonewall plc 610
straddles 303
strategic exposure 642–3, 732
strategic investment options 313–14
strategic opportunities 560
strategic portfolio analysis 174
strategic proposals for capital investment 185
strategy in financial decisions 17–19
strike prices 299, 619
Strong, N. 261, 266
Sudarsanam, P.S. 570, 583
sunk costs 149, 663, 733
supplier credit days 53
sustainable competitive advantage 174
Swalm, R.O. 233, 291
swaps 334, 621–3
Swire, D.J. 18
Swiss franc rates against sterling 594
switchover costs 635
SWOT analysis 559, 561
synergies 549, 733
systematic returns 246–7
systematic risk 241, 733
and security valuation 244–8
tailored discount rates in SVA 283–9
Takeover Code 547, 733
Takeover Panel 32, 547, 733
takeovers
acquisition criteria 560–1
bidding 561–2
creation of value 548–50
defence tactics 561–2
evaluation of bids 554–7
failure of 557–8
financing of bids 552–3
hostile 547–8, 777
motives for 548–52
regulation of 545–7
strategy for 557–62
waves of activity 542–8
taking-up rights 428
tangible fixed assets 48–9
tax breaks 733
tax credits 733
tax irrelevance thesis 463
tax shield 493, 520, 522, 733
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758 Index
taxation 46
as cash flow 155–7
and dividend growth model 275–6
and foreign investment 639–41
in project appraisal 155–7
Taylor, S.J. 261
technical analysis 36–7
exchange rate forecasting 608
technical efficiency of markets 34
term structure of interest rates 73, 78–9
terms of trade 356
Tesco (company) 46, 442
Tetley (company) 631
Theakston’s (company) 550
theoretical ex-rights price (TERP) 427, 733
theory and practice of finance 665
Thomas, S.H. 163
time-value of money 62–3, 304, 664, 733
times interest earned 482
timing options 314, 416
tin parachutes 562
Tobin, J. 77, 234, 571
Tomkins, C.R. 164, 406
total shareholder return (TSR) 239–40, 734
Toyota (company) 367
Tozer Kemsley Milbourn (company) 569
trade credit 734
cash discounts 357–8
collection policy 358–60
credit periods 356
credit standards 356–7
debtors as security 360
management of 354–61
reasons for 354–5
for short- and medium-term finance 380–2
Trade and Industry, Department of 43, 384, 570
Trade and Industry, Secretary of State for 545–6
trade-off theory 505
trade sales 421
traded options 299
traditional economic model of human behaviour 662
traditional options 299
traditional theory of capital structure 480, 491, 734
traits of behaviour 666
transaction exposure 598, 734
transfer prices 734
translation exposure 598–9, 734
Treasury bills 16, 196, 734
treasury function 324–6
banking relationships 329
cash operating cycle 340–1
centralisation 325
funding 326–8
overtrading 346–7
predicting failure 339–40
risk management 330–7
working capital management 337–9
working capital policy 342–6
Tricks, Henry 454–5
Trigeoris, L. 316
Triton Energy 550
Trump Hotels 500
two-factor model 262
uncertainty 196
undercapitalisation 346
underlying options 297
understocking 362
undervaluation 548
underwriting 427
Unilever (company) 580
unit trusts 29, 734
United Nations Conference on Trade and Development
(UNCTAD) 631
unprofitable projects and strategies 669
unquoted companies
raising equity finance 417–21
valuation of 103
unsystematic returns 246–7
Usinor (company) 543
Ustunel, Sarpel 96
utility and risk 197
Vaga, T. 42
valuation 89–90
of cash flows 98–100
DCF approach to 100–3
dividend valuation model 104–5
of earnings streams 96–7
and EBITDA 98
and free cash flow 101–3
problem of 89–90
of shares 104–5
of unquoted companies 103
use of published accounts for 90–6
value additivity 548
value-based management 734
value creation process 575–6
value drivers 110, 278–80
value gaps 573–5
and bidding 574–5
and corporate parenting 573
and financial management 573
and stock market efficiency 575
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Index 759
Van Home, J. 255
Van Ryzin, Garrett 206
variable costs 199
Venables, Terry 513
vendor placing 425
venture capital 419–21, 734
and MBOs 577–8
venture capital trusts 418–19
Vereinsbank 542
vertical integration 549, 734
Virgin Group 100, 147, 196
Vneshtorgbank 439
Vodafone (company) 92, 468, 567
volatility of share prices 299
Volkswagen (company) 593
Waitrose (company) 13
Walters, A. 583
warrants 437–8, 734
Waste Management 580
Waters, Richard 471
wealth, measurement of 61
Weaver, S.C. 188–9
weighted average cost of capital (WACC) 490–1, 496–8,
694, 734
calculation of 527–30
and capital structure 514
and debt/equity ratio 515–17, 534–5
and FDI 653–4
and gearing 529–30
MM on 514–17
required conditions for 496
at Tomkins plc 496
Weingartner, H. 138
welfare proposals for capital investment 185
Wessex Water 580
Weston, J.F. 47, 234, 266, 443, 473, 506, 534
Whitbread plc 278, 285
‘white knights’ 562, 734
wholesale banks 27–8
Whyte, A.M. 657
Wiedersheim-Paul, F. 634
Wilkie, A.D. 251, 288–9
Wilson, M. 636, 656
Wilson Committee 134
Wolfe, M. 164
Woolridge, J. 465
working capital 50, 734
investment in 279
management of 337–9
in project appraisal 150
working capital costs 34
working capital policy 342–6
World Bank 76
World Trade Organisation 251
Worldcom (company) 92
Wright, M. 583
writing-down allowances 156, 390, 398
Xu, X.G. 261, 266
yen rates against sterling 594
yield 46, 734
yield curves 78–9, 328–9, 734
z-scores 339–40, 734
zero coupon bonds 433, 734
zero-sum game, options as 620
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FORMULAE
Asset or Activity ungeared
Constant-Growth Dividend Valuation Model (Dividend Growth Model):
Cost of equity in a geared firm (MM Proposition 1: no tax):
Cost of equity in a geared firm – MM with tax:
Covariance of Returns of a Two-Asset Portfolio:
Expected Return from a Two-asset Portfolio:
or (spot rate minus forward premium)
Interest Rate Parity:
Purchasing Power Parity:
Risk-minimising Portfolio Weightings:
Security Market Line (CAPM):
Standard deviation of a Two-asset Portfolio:
(if a perpetuity)
Total Shareholder Return:
Value of a Geared Firm – MM with tax:
Weighted Average Cost of Capital:
Or
Zero-Growth Dividend Valuation Model: P
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