Corporate finance : principles and practice

520 Pages·2016·9.6 MB·English

by  Head

CORPORATE
FINANCE
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CORPORATE
FINANCE

PRINCIPLES AND PRACTICE
Seventh edition
Denzil Watson and

Antony Head

Sheffield Hallam University
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PEARSON EDUCATION LIMITED
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First published under the Financial Times Pitman Publishing Imprint 1998 (print)
Second edition published under the Financial Times Prentice Hall Imprint 2001 (print)
Third edition published 2004 (print)
Fourth edition published 2007 (print)
Fifth edition published 2010 (print)
Sixth edition published 2013 (print and electronic)
Seventh edition published 2016 (print and electronic)
© Pearson Education Limited 2001, 2010 (print)
© Pearson Education Limited 2013, 2016 (print and electronic)
The rights of Denzil Watson and Antony Head to be identified as author of this work has been asserted by
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ISBN: 978-1-292-10303-7 (print)
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NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION
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AbOuT ThE AuThORs
Denzil Watson is a Principal Lecturer in Finance in the Sheffield Business School
at Sheffield Hallam University (www.shu.ac.uk). Denzil has been teaching finance
since he joined Hallam in 1991, having completed his BA(Hons) in Economics
and MA(Hons) in Money, Banking and Finance at Sheffield University in the
1980s. He has taught financial management, corporate finance, risk manage-
ment, microeconomics and financial markets for 25 years over a range of under-
graduate, postgraduate and distance learning modules.
Finance is by no means Denzil’s only passion. He is a committed traveller, hav-
n
w
ing now visited 50 countries including ones as diverse as Peru, Syria, Uzbekistan, Bro
Vietnam, Laos and the Chinese Silk Road. Travel photography is also high up on dy
n
A
his list as can be witnessed by the covers of this book and its previous four edi- o:
ot
h
tions. He is a keen Urbexer and, along with his co-author, a long-time suffering P
Derby County fan.
His other great love is music. He can be found fronting Sheffield post-New Wave indie group RepoMen
(http://repomen.bandcamp.com) or listening to the likes of Joy Division, The Stranglers, The Perfect
Disaster, Luke Haines, Gogol Bordello, That Petrol Emotion, Sleaford Mods, The Undertones, Dead
Kennedys, The Clash and other fine bands. His inspirations include his mother Doreen, his sadly departed
father Hugh, Kevin Hector, Ian Curtis, Michael Palin, Aung San Suu Kyi, Joe Strummer and John Peel. Denzil
lives with his wife Dora and their two children, Leonardo and Angelina.
Antony Head is an Associate Lecturer in the Sheffield Business School at Sheffield
Hallam University, having formerly been a Principal Lecturer in Financial
Management there and Leader of the Financial Accounting and Management
Accounting Subject Group. Tony joined Hallam after various jobs, which included
spells as a chemical engineer and health-food shop proprietor. His higher educa-
tion began in Sheffield, where he took an honours degree in Chemical Engineering n
o
and Fuel Technology at Sheffield University in the early 1970s. ats
W
Since then Tony has completed an MBA and a PGCFHE and can be found nzil
e
teaching financial management, corporate finance and risk management as o: D
required on undergraduate, postgraduate and professional modules at Sheffield hot
P
Hallam University.
Tony, like Denzil, has a number of interests outside of academia. He is a dedicated Derby County fan and
a season ticket holder at Pride Park. His musical tastes are wide and varied, including Bob Dylan, Miles
Davis, King Crimson, David Sylvian, Mahler and Bruckner. Tony lives with his wife Sandra and has a daugh-
ter Rosemary, a son Aidan, a step-daughter Louise, step-sons Michael and Robert, and five grandchildren:
Joshua, Isaac, Elizabeth, Amelia and Magnus.
v
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CONTENTs
Preface xiii
Acknowledgements xv
1 The finance function 1
Learning objectives 1
Introduction 2
1.1 Two key concepts in corporate finance 2
1.2 The role of the financial manager 5
1.3 Corporate objectives 8
1.4 How is shareholder wealth maximised? 11
1.5 Agency theory 13
1.6 Corporate governance 20
1.7 Conclusion 26
Key points 28
Self-test questions 30
Questions for review 31
Questions for discussion 32
References 32
Recommended reading 33
2 Capital markets, market efficiency and ratio analysis 34
Learning objectives 34
Introduction 35
2.1 Sources of business finance 35
2.2 Capital markets 38
2.3 Capital market efficiency 42
2.4 Assessing financial performance 54
2.5 Conclusion 73
Key points 73
Self-test questions 75
Questions for review 76
Questions for discussion 77
References 78
Recommended reading 80
vii
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CONTENTS
3 short-term finance and the management of working capital 81
Learning objectives 81
Introduction 82
3.1 The objectives of working capital management 82
3.2 Working capital policies 82
3.3 Working capital and the cash conversion cycle 88
3.4 Overtrading 90
3.5 Managing inventory 91
3.6 Managing cash 95
3.7 Managing receivables 99
3.8 Conclusion 105
Key points 105
Self-test questions 106
Questions for review 107
Questions for discussion 108
References 110
Recommended reading 110
4 Long-term finance: equity finance 111
Learning objectives 111
Introduction 112
4.1 Equity finance 112
4.2 The stock exchange 114
4.3 Rights issues 119
4.4 Scrip issues, share splits, scrip dividends and
share repurchases 126
4.5 Preference shares 129
4.6 Conclusion 132
Key points 133
Self-test questions 134
Questions for review 135
Questions for discussion 136
References 138
Recommended reading 138
5 L ong-term finance: debt finance, hybrid
finance and leasing 139
Learning objectives 139
Introduction 140
5.1 Bonds, loan notes, loan stock and debentures 140
5.2 Bank and institutional debt 146
5.3 International debt finance 149
5.4 Convertible bonds 149
viii
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CONTENTS
5.5 Warrants 153
5.6 The valuation of fixed-interest bonds 154
5.7 The valuation of convertible bonds 156
5.8 Leasing 158
5.9 Evaluating the financial effect of financing choices 165
5.10 Conclusion 167
Key points 167
Self-test questions 169
Questions for review 170
Questions for discussion 171
References 172
Recommended reading 172
6 An overview of investment appraisal methods 174
Learning objectives 174
Introduction 175
6.1 The payback method 175
6.2 The return on capital employed method 177
6.3 The net present value method 180
6.4 The internal rate of return method 183
6.5 A comparison of the NPv and IRR methods 187
6.6 The profitability index and capital rationing 191
6.7 The discounted payback method 196
6.8 Conclusion 197
Key points 197
Self-test questions 198
Questions for review 199
Questions for discussion 201
References 203
Recommended reading 203
7 Investment appraisal: applications and risk 204
Learning objectives 204
Introduction 205
7.1 Relevant project cash flows 205
7.2 Taxation and capital investment decisions 207
7.3 Inflation and capital investment decisions 212
7.4 Investment appraisal and risk 215
7.5 Appraisal of foreign direct investment 222
7.6 Empirical investigations of investment appraisal 228
7.7 Conclusion 231
Key points 232
Self-test questions 233
ix
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