Corporate finance PDF
Preview Corporate finance
Corporate Finance The McGraw-Hill/Irwin Series in Finance, Insurance, and Real Estate Stephen A. Ross Franco Modigliani Professor of Finance and Economics Sloan School of Management Massachusetts Institute of Technology Consulting Editor Financial Management Ross, Westerfield, and Jaffe Saunders and Cornett Corporate Finance Financial Institutions Management: A Risk Adair Ninth Edition Management Approach Excel Applications for Corporate Finance Sixth Edition First Edition Ross, Westerfield, Jaffe, and Jordan Corporate Finance: Core Principles and Applications Saunders and Cornett Block, Hirt, and Danielsen Second Edition Financial Markets and Institutions Foundations of Financial Management Fourth Edition Thirteenth Edition Ross, Westerfield, and Jordan Essentials of Corporate Finance Brealey, Myers, and Allen Sixth Edition International Finance Principles of Corporate Finance Ninth Edition Ross, Westerfield, and Jordan Eun and Resnick Fundamentals of Corporate Finance International Financial Management Brealey, Myers, and Allen Ninth Edition Fifth Edition Principles of Corporate Finance, Concise First Edition Shefrin Kuemmerle Behavioral Corporate Finance: Decisions that Create Case Studies in International Entrepreneurship: Brealey, Myers, and Marcus Value Managing and Financing Ventures in the Global Fundamentals of Corporate Finance First Edition Economy Sixth Edition First Edition White Brooks Financial Analysis with an Electronic Calculator FinGame Online 5.0 Real Estate Sixth Edition Bruner Brueggeman and Fisher Case Studies in Finance: Managing for Corporate Investments Real Estate Finance and Investments Value Creation Thirteenth Edition Sixth Edition Bodie, Kane, and Marcus Essentials of Investments Ling and Archer Chew Eighth Edition Real Estate Principles: A Value Approach The New Corporate Finance: Where Theory Meets Third Edition Practice Bodie, Kane, and Marcus Third Edition Investments Financial Planning and Insurance Eighth Edition Cornett, Adair, and Nofsinger Allen, Melone, Rosenbloom, and Mahoney Finance: Applications and Theory Hirt and Block Retirement Plans: 401(k)s, IRAs, and Other First Edition Fundamentals of Investment Management Deferred Compensation Approaches Ninth Edition DeMello Tenth Edition Cases in Finance Hirschey and Nofsinger Altfest Second Edition Investments: Analysis and Behavior Personal Financial Planning Second Edition Grinblatt (editor) First Edition Stephen A. Ross, Mentor: Influence through Jordan and Miller Harrington and Niehaus Generations Fundamentals of Investments: Valuation and Risk Management and Insurance Grinblatt and Titman Management Second Edition Financial Markets and Corporate Strategy Fifth Edition Second Edition Kapoor, Dlabay, and Hughes Financial Institutions and Markets Focus on Personal Finance: An active approach to Higgins help you develop successful financial skills Analysis for Financial Management Rose and Hudgins Third Edition Ninth Edition Bank Management and Financial Services Eighth Edition Kapoor, Dlabay, and Hughes Kellison Personal Finance Theory of Interest Rose and Marquis Ninth Edition Third Edition Money and Capital Markets: Financial Institutions and Instruments in a Global Marketplace Kester, Ruback, and Tufano Tenth Edition Case Problems in Finance Twelfth Edition Corporate Finance Ninth E dition Stephen A. Ross Sloan School of Management Massachusetts Institute of Technology Randolph W. Westerfi eld Marshall School of Business University of Southern California Jeffrey Jaffe Wharton School of Business University of Pennsylvania CORPORATE FINANCE Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020. Copyright © 2010, 2008, 2005, 2002, 1999, 1996, 1993, 1990, 1988 by The McGraw-Hill Companies, Inc. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 0 DOW/DOW 0 9 ISBN 978-0-07-338233-3 MHID 0-07-338233-7 Vice president and editor-in-chief: B rent Gordon Publisher: D ouglas Reiner Executive editor: M ichele Janicek Director of development: Ann Torbert Development editor: E lizabeth H ughes Vice president and director of marketing: Robin J. Zwettler Marketing director: Sankha B asu Senior marketing manager: Melissa S . Caughlin Vice president of editing, design and production: S esha Bolisetty Lead project manager: C hristine A. V aughan Production supervisor: Michael R . McCormick Interior designer: Pam Verros Lead media project manager: B rian N acik Cover image: © Veer Typeface: 1 0/12 Times Roman Compositor: Macmillan Publishing Solutions Printer: R. R. Donnelley Library of Congress Cataloging-in-Publication Data Ross, Stephen A. Corporate fi nance / Stephen A. Ross, Randolph W. Westerfi eld, Jeffrey Jaffe. -- 9th ed. p. cm. -- (The McGraw-Hill/Irwin series in fi nance, insurance and real estate) Includes index. ISBN-13: 978-0-07-338233-3 (alk. paper) ISBN-10: 0-07-338233-7 (alk. paper) 1. Corporations—Finance. I. Westerfi eld, Randolph. II. Jaffe, Jeffrey F., 1946- III. Title. HG4026.R675 2010 658.15 -- dc22 2009028916 www.mhhe.com To our family and friends with love and gratitude. About the Authors STEPHEN A. ROSS Sloan School of Management, M assachusetts Institute of Tech- nology Stephen A. Ross is the Franco Modigliani Professor of Financial Econom- ics at the Sloan School of Management, Massachusetts Institute of Technology. One of the most widely published authors in finance and economics, Professor Ross is recognized for his work in developing the arbitrage pricing theory, as well as for hav- ing made substantial contributions to the discipline through his research in signaling, agency theory, option pricing, and the theory of the term structure of interest rates, among other topics. A past president of the American Finance Association, he cur- rently serves as an associate editor of several academic and practitioner journals and is a trustee of CalTech. RANDOLPH W. WESTERFIELD Marshall School of Business , University of Southern California Randolph W. Westerfield is Dean Emeritus of the University of Southern California’s Marshall School of Business and is the Charles B. Thornton Professor of Finance. Professor Westerfield came to USC from the Wharton School, University of Pennsylvania, where he was the chairman of the finance department and member of the finance faculty for 20 years. He was also elected to membership in the Financial Economists Roundtable. He has been a member of several public company boards of directors, including Health Management Associates, Inc., William Lyon Homes, and the Nicholas Applegate Growth Fund. His areas of expertise include corporate financial policy, investment management, and stock market price behavior. JEFFREY F. JAFFE Wharton School of Business , University of Pennsylvania Jeffrey F. Jaffe has been a frequent contributor to the finance and economics literatures in such journals as the Quarterly Economic Journal , The Journal of Finance, The Journal of Financial and Quantitative Analysis, The Journal of Financial Economics , and The Financial Analysts Journal . His best-known work concerns insider trading, where he showed both that corporate insiders earn abnormal profits from their trades and that regulation has little effect on these profits. He has also made contributions concerning initial public offerings, regulation of utilities, the behavior of market makers, the fluc- tuation of gold prices, the theoretical effect of inflation on interest rates, the empirical effect of inflation on capital asset prices, the relationship between small-capitalization stocks and the January effect, and the capital structure decision. vi Preface T he teaching and the practice of corporate finance are more challenging and exciting than ever before. The last decade has seen fundamental changes in financial markets and financial instruments. In the early years of the 21st cen- tury, we still see announcements in the financial press about takeovers, junk bonds, financial restructuring, initial public offerings, bankruptcies, and derivatives. In addi- tion, there are the new recognitions of “real” options, private equity and venture capi- tal, subprime mortgages, bailouts, and credit spreads. As we have learned in the recent global credit crisis and stock market collapse, the world’s financial markets are more integrated than ever before. Both the theory and practice of corporate finance have been moving ahead with uncommon speed, and our teaching must keep pace. These developments have placed new burdens on the teaching of corporate finance. On one hand, the changing world of finance makes it more difficult to keep materials up to date. On the other hand, the teacher must distinguish the permanent from the temporary and avoid the temptation to follow fads. Our solution to this problem is to emphasize the modern fundamentals of the theory of finance and make the theory come to life with contemporary examples. Increasingly, many of these examples are outside the United States. All too often the beginning student views corporate finance as a collection of unrelated topics that are unified largely because they are bound together between the covers of one book. As in the previous editions, our aim is to pre- sent corporate finance as the working of a few integrated and powerful institutions. The Intended Audience of This Book This book has been written for the introductory courses in corporate finance at the MBA level and for the intermediate courses in many undergraduate programs. Some instructors will find our text appropriate for the introductory course at the under- graduate level as well. We assume that most students either will have taken, or will be concurrently enrolled in, courses in accounting, statistics, and economics. This exposure will help students understand some of the more difficult material. However, the book is self-contained, and a prior knowledge of these areas is not essential. The only mathematics prerequi- site is basic algebra. New to Ninth Edition • Separate chapters on bonds and stocks. • Expanded material on bonds and stocks moved after capital budgeting for better flow. • Integrated short-term finance, credit, and cash management. • An introduction to integrated long-term debt and long-term finance. • More Excel example problems integrated into the chapters. Chapter 1 Introduction to Corporate Finance • N ew material on corporate governance and regulation, includ- ing Sarbanes-Oxley. Chapter 3 Financial Statements Analysis and Financial Models • U pdated and modernized financial statement analysis informa- tion, including EBITDA and enterprise value (EV). vii viii Preface Chapter 4 Discounted Cash Flow Valuation • Several new spreadsheet applications. • Appendix 4B on using financial calculators (on Web site). Chapter 8 New chapter, Interest Rates and Bond Valuation • Added coverage of TIPS. • Added coverage of term structure of interest rates. • New material on credit risk. • Updated coverage on how bonds are bought and sold. Chapter 9 New chapter, Stock Valuation • More on the link between dividends, cash flow, and value. • More applications using real-world companies. • New section on the retention decision and shareholder value. • New material on stock market trading and reporting. Chapter 10 Risk and Return: Lessons from Market History • N ew material on the global stock market collapse of 2008. Chapter 11 Return and Risk: The Capital Asset Pricing Model • Improved and expanded discussion of diversification and unsys- tematic and systematic risk. Chapter 12 An Alternative View of Risk & Return: The Arbitrage Pricing Model • New box feature on factor models by Kenneth French. Chapter 13 Risk, Cost of Capital, and Capital Budgeting • Added material on the market risk premium. • Expanded coverage of flotation cost. • Added material on preferred stock. • New section discussing the case of non-dividend–paying stocks and the cost of capital. Chapter 14 Efficient Capital Markets and Behavioral Challenges • More material on current global market collapse. Chapter 15 Long-Term Financing: An Introduction • Expanded and updated coverage of common stock and long- term corporate debt. • Updated trends in capital structure. Chapter 25 Derivatives and Hedging Risk • Added credit default swaps (CDS) material. Chapter 30 Financial Distress • Added the Z-model. In this edition of Corporate Finance , we have Pedagogy updated and improved our features to pre- sent material in a way that makes it coherent and easy to understand. In addition, C orporate Finance is rich in valuable learning tools and support, to help students succeed in learning the fundamentals of financial management. RT III CHAPTER 10 A P Risk and Return Lessons from Market History Chapter Opening With the S&P 500 Index down about 39 percent and the NASDAQ Index down about 41 per- cent in 2008, stock market performance overall was not very good. In fact, the loss on the Vignettes S&P 500 was the worst since 1937, and the loss for the NASDAQ was the worst in its rela- tively short history. Overall, the declines in U.S. stock markets wiped out about $6.9 trillion in equity during 2008. Of course, some stocks did worse than others. For example, stock Each chapter begins with a contemporary in insurance giant American International Group (AIG) fell over 97 percent during the year, and stock in mortgage giants Fannie Mae and Freddie Mac both dropped about 98 per- vignette that highlights the concepts in the cent. Even so, it was a great year for investors in biopharmaceutical company Emergent chapter and their relevance to real-world BioSolutions, Inc., whose stock gained a whopping 461 percent. And investors in gas and oil company Mexco Energy Corp., had to be energized by the 211 percent gain of the stock. examples. These examples show that there were tremendous potential profi ts to be made during 2008, but there was also the risk of losing money—and lots of it. So what should you, as a stock market investor, expect when you invest your own money? In this chapter, we study more than eight decades of market history to fi nd out. 10.1 Returns Dollar Returns Suppose the Video Concept Company has several thousand shares of stock out- standing and you are a shareholder. Further suppose that you purchased some of the shares of stock in the company at the beginning of the year; it is now year-end and you want to figure out how well you have done on your investment. The return you get on an investment in stocks, like that in bonds or any other investment, comes in two forms. How did the market As the owner of stock in the Video Concept Company, you are a part owner of do today? Find out at the company. If the company is profitable, it generally could distribute some of its finance.yahoo.com. profits to the shareholders. Therefore, as the owner of shares of stock, you could receive some cash, called a dividend, during the year. This cash is the income com- ponent of your return. In addition to the dividends, the other part of your return is the capital gain —or, if it is negative, the capital loss (negative capital gain)—on the investment. For example, suppose we are considering the cash flows of the investment in Fig- ure 10.1, showing that you purchased 100 shares of stock at the beginning of the year at a price of $37 per share. Your total investment, then, was: C = $37 × 100 = $3,700 0 300 x
The list of books you might like
