Corporate finance: the core

800 Pages·71.083 MB·English

by  Berk, Jonathan B., DeMarzo, Peter M

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Berk-DeMarzo_CF2e_EP_FRONT 12/11/09 1:46 AM Page 02
COMMON SYMBOLS AND NOTATION
A market value of assets, premerger P price of security i
i
total value of acquirer P/E price-earnings ratio
APR annual percentage rate PMT annuity spreadsheet notation
B risk-free investment for cash flow
in the replicating portfolio PV present value; annuity spreadsheet
C cash flow, call option price notation for the initial amount
Corr(R ,R ) correlation between returns of iand j q dividend yield
i j
Cov(R ,R ) covariance between returns of iand j p risk-neutral probability
i j
CPN coupon payment r interest rate, discount rate of cost
D market value of debt of capital
d debt-to-value ratio Ri return of security i
Divt dividends paid in year t Rmkt return of the market portfolio
dis discount from face value RP return on portfolio P
E market value of equity RATE annuity spreadsheet notation
for interest rate
EAR effective annual rate
r , r equity and debt costs of capital
EBIT earnings before interest and taxes E D
r risk-free interest rate
EBITDA earnings before interest, taxes, f
depreciation, and amortization ri required return or cost of capital
of security i
EPS earnings per share on date t
t
r unlevered cost of capital
E[R ] expected return of security i U
i
r weighted average cost of capital
F, F one-year and T-year forward wacc
T
exchange rate S stock price, spot exchange rate,
value of all synergies
FCF free cash flow at date t
t
SD(R ) standard deviation (volatility)
FV future value, face value of a bond i
of return of security i
g growth rate
T option expiration date, maturity date,
I initial investment or initial capital
market value of target
committed to the project
U market value of unlevered equity
Int interest expense on date t
t V enterprise value on date t
IRR internal rate of return t
Var(R) variance of return R
K strike price
x portfolio weight of investment in i
k interest coverage ratio, compounding i
YTC yield to call on a callable bond
periods per year
YTM yield to maturity
L leasepayment,marketvalueofliabilities
α alpha of security i
ln natural logarithm i
β β beta of debt or equity
MV total market capitalization of security i D, E
i
β beta of security iwith respect to
N number of cash flows, terminal date, i
the market portfolio
notational principal of a swap contract
βP beta of security iwith respect to
N number of shares outstanding of s
i portfolio P
security i
β beta of unlevered firm
NPER annuity spreadsheet notation U
for the number of periods or dates Δ shares of stock in the replicating portfolio;
of the last cash flow sensitivity of option price
to stock price
NPV net present value
σ volatility
P price, initial principal or deposit,
or equivalent present value, τ tax rate
put option price τ marginal corporate tax rate
c
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Corporate
FinanCe:
tHe Core
FOURTH EDITION
GlObal EDITION
A01_BERK8334_04_GE_FM.indd 3 8/22/16 8:34 PM
the pearson Series in Finance
Berk/DeMarzo† Gitman/Zutter† McDonald
Corporate Finance* Principles of Managerial Finance* Derivatives Markets
Corporate Finance: The Core* Principles of Managerial Finance––Brief Fundamentals of Derivatives Markets
Berk/DeMarzo/Harford† Edition* Mishkin/Eakins†
Fundamentals of Corporate Finance* Haugen Financial Markets and Institutions
Brooks† TOhffe aInndef Wfichieynt Stock Market: What Pays Moffett/Stonehill/Eiteman†
Financial Management: Core Concepts* Modern Investment Theory Fundamentals of Multinational Finance
Pennacchi
Copeland/Weston/Shastri Holden
Theory of Asset Pricing
Financial Theory and Corporate Policy Excel Modeling in Corporate Finance
Excel Modeling in Investments Rejda/McNamara†
Dorfman/Cather Hughes/MacDonald Principles of Risk Management
Introduction to Risk Management International Banking: Text and Cases and Insurance
and Insurance
Hull† Smart/Gitman/Joehnk†
Eakins/McNally Fundamentals of Futures and Options Markets Fundamentals of Investing*
Corporate Finance Online* Options, Futures, and Other Derivatives Solnik/McLeavey
Eiteman/Stonehill/Moffett† Keown Global Investments
Multinational Business Finance* Personal Finance: Turning Money into Wealth* Titman/Keown/Martin
Fabozzi Keown/Martin/Petty† Financial Management: Principles
Bond Markets: Analysis and Strategies Foundations of Finance: The Logic and Applications*
and Practice of Financial Management* Titman/Martin
Foerster† Madura Valuation: The Art and Science
Financial Management: Concepts Personal Finance* of Corporate Investment Decisions
and Applications*
Marthinsen Weston/Mitchel/Mulherin
Frasca Risk Takers: Uses and Abuses of Financial Takeovers, Restructuring, and Corporate
Personal Finance Derivatives Governance
*denotes titles with Log onto www.myfinancelab.com to learn more.
†Global Edition available
A01_BERK8334_04_GE_FM.indd 4 8/22/16 8:34 PM
The NaTure aNd
Corporate
ProPerTies of soils
FinanCe:
fifTeeNTh ediTioN
Global ediTioN
tHe Core
FOURTH EDITION
Ray R. Weil
ProfessoGr olf SOoilb Scaienlce EDITION
University of Maryland
Nyle C. Brady (late)
JOPNrofesasor oTf SoHil ScaienceN, Em erbitusE Rk
Cornell University
STaNFORD UNIvERSITy
PETER D maRzO
e
STaNFORD UNIvERSITy
HHaarrllooww,, EEnnggllaanndd •• LLoonnddoonn •• NNeeww YYoorrkk •• BBoossttoonn •• SSaann FFrraanncciissccoo •• TToorroonnttoo •• SSyyddnneeyy •• DDuubbaaii •• SSiinnggaappoorree •• HHoonngg KKoonngg
TTookkyyoo •• SSeeoouull •• TTaaiippeeii •N Newew D Deelhlhi i• •C Caappee T Toowwnn • •S Saaoo P Paauulolo • •M Meexxicicoo C Citityy • • M Maaddrriidd •• AAmmsstteerrddaamm •• MMuunniicchh •• PPaarriiss •• MMiillaann
A01_BRAD2232_04_SE_FMA.in0d1d_B E3RK8334_04_GE_FM.indd 5 7/29/16 8:06 P8M/22/16 8:34 PM
To Rebecca, Natasha, and Hannah, for the love and for being there —J. b.
To kaui, Pono, koa, and kai, for all the love and laughter —P. D.
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ISBN 10: 1-292-15833-6
ISBN 13: 978-1-292-15833-4
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1 0 9 8 7 6 5 4 3 2 1
17 16
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Brief Contents
part 1 Chapter 1 The Corporation 34
introDUCtion Chapter 2 Introduction to Financial Statement analysis 55
Chapter 3 Financial Decision making and the law of One Price 93
part 2 Chapter 4 The Time value of money 130
tiMe, MoneY, Chapter 5 Interest Rates 175
anD intereSt rateS Chapter 6 valuing bonds 205
part 3 Chapter 7 Investment Decision Rules 244
VaLUinG proJeCtS Chapter 8 Fundamentals of Capital budgeting 271
anD FirMS Chapter 9 valuing Stocks 309
part 4 Chapter 10 Capital markets and the Pricing of Risk 350
Chapter 11 Optimal Portfolio Choice and the Capital asset
riSK anD retUrn
Pricing model 389
Chapter 12 Estimating the Cost of Capital 439
Chapter 13 Investor behavior and Capital market Efficiency 477
part 5 Chapter 14 Capital Structure in a Perfect market 520
Chapter 15 Debt and Taxes 551
CapitaL StrUCtUre
Chapter 16 Financial Distress, managerial Incentives,
and Information 583
Chapter 17 Payout Policy 629
part 6 Chapter 18 Capital budgeting and valuation with leverage 672
aDVanCeD VaLUation Chapter 19 valuation and Financial modeling: a Case Study 723
7
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Detailed Contents
part 1 introDUCtion ■ International Financial Reporting
Standards 56
Chapter 1 the Corporation 34 ■ INTERvIEw with Ruth Porat 57
Types of Financial Statements 58
1.1 the Four types of Firms 35
2.2 the Balance Sheet 58
Sole Proprietorships 35
Assets 59
Partnerships 36
Liabilities 60
Limited Liability Companies 37
Stockholders’ Equity 61
Corporations 37
Market Value Versus Book Value 61
Tax Implications for Corporate Entities 38
Enterprise Value 62
■ Corporate Taxation Around
the World 39 2.3 the income Statement 62
1.2 ownership Versus Control of Earnings Calculations 63
Corporations 39
2.4 the Statement of Cash Flows 64
The Corporate Management Team 39
Operating Activity 65
■ INTERvIEw with David Viniar 40
Investment Activity 66
The Financial Manager 41
Financing Activity 66
■ GlObal FINaNCIal CRISIS
The Dodd-Frank Act 42 2.5 other Financial Statement
information 67
The Goal of the Firm 42
Statement of Stockholders’ Equity 67
The Firm and Society 43
Management Discussion and
Ethics and Incentives within
Analysis 68
Corporations 43
Notes to the Financial
■ GlObal FINaNCIal CRISIS
Statements 68
The Dodd-Frank Act on Corporate
Compensation and Governance 44 2.6 Financial Statement analysis 69
■ Citizens United v. Federal Election Profitability Ratios 69
Commission 44
Liquidity Ratios 70
■ Airlines in Bankruptcy 46
Working Capital Ratios 71
1.3 the Stock Market 46 Interest Coverage Ratios 72
Primary and Secondary Stock Markets 47 Leverage Ratios 73
Traditional Trading Venues 47 Valuation Ratios 75
■ INTERvIEw with ■ COmmON mISTakE
Frank Hatheway 48 Mismatched Ratios 75
New Competition and Market Operating Returns 76
Changes 49
The DuPont Identity 78
Dark Pools 50
2.7 Financial reporting in practice 80
MyFinanceLab 51 ■ Key Terms 51 ■ Enron 80
Further Reading 52 ■ Problems 52 WorldCom 80
Sarbanes-Oxley Act 81
Chapter 2 introduction to Financial
■ GlObal FINaNCIal CRISIS
Statement analysis 55 Bernard Madoff’s Ponzi Scheme 82
Dodd-Frank Act 82
2.1 Firms’ Disclosure of Financial
i nformation 56 MyFinanceLab 83 ■ Key Terms 84 ■
Preparation of Financial Further Reading 85 ■ Problems 85 ■
Statements 56 Data Case 92
8
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Contents 9
Chapter 3 F inancial Decision Making Rule 2: Moving Cash Flows Forward
in Time 133
and the Law of one price 93
Rule 3: Moving Cash Flows Back
3.1 Valuing Decisions 94 in Time 134
Analyzing Costs and Benefits 94 ■ Rule of 72 135
Using Market Prices to Determine Cash Applying the Rules of Time Travel 136
Values 95
4.3 Valuing a Stream of Cash Flows 138
■ When Competitive Market Prices
4.4 Calculating the net present Value 141
Are Not Available 97
■ USING EXCEl Calculating Present
3.2 interest rates and the time Value Values in Excel 142
of Money 97
4.5 perpetuities and annuities 143
The Time Value of Money 97
Perpetuities 143
The Interest Rate: An Exchange Rate
■ Historical Examples of
Across Time 97
Perpetuities 144
3.3 present Value and the npV Decision ■ COmmON mISTakE Discounting One
rule 100 Too Many Times 146
Net Present Value 100 Annuities 146
The NPV Decision Rule 101 ■ Formula for an Annuity Due 149
NPV and Cash Needs 103 Growing Cash Flows 149
3.4 arbitrage and the Law of one price 104 4.6 U sing an annuity Spreadsheet
Arbitrage 104 or Calculator 154
Law of One Price 105 4.7 non-annual Cash Flows 156
3.5 no-arbitrage and Security 4.8 Solving for the Cash payments 157
prices 105 4.9 the internal rate of return 160
Valuing a Security with the Law ■ USING EXCEl
of One Price 105 Excel’s IRR Function 163
■ An Old Joke 109
MyFinanceLab 164 ■ Key Terms 165 ■
The NPV of Trading Securities
and Firm Decision Making 109 Further Reading 166 ■ Problems 166 ■
Data Case 172
Valuing a Portfolio 110
■ GlObal FINaNCIal CRISIS appendix Solving for the number of
Liquidity and the Informational periods 173
Role of Prices 111
■ Arbitrage in Markets 112
Chapter 5 interest rates 175
Where Do We Go from Here? 113
MyFinanceLab 114 ■ Key Terms 115 ■ 5.1 interest rate Quotes and
adjustments 176
Further Reading 115 ■ Problems 115
The Effective Annual Rate 176
appendix the price of risk 119
■ COmmON mISTakE Using the
Risky Versus Risk-Free Cash Flows 119 Wrong Discount Rate in the Annuity
Arbitrage with Transactions Costs 124 Formula 177
Annual Percentage Rates 178
5.2 application: Discount rates
and Loans 180
part 2 tiMe, MoneY, anD
5.3 the Determinants of interest
intereSt rateS rates 181
■ GlObal FINaNCIal CRISIS Teaser
Chapter 4 the time Value of Money 130 Rates and Subprime Loans 182
Inflation and Real Versus Nominal
4.1 the timeline 131 Rates 182
4.2 the three rules of time travel 132 Investment and Interest Rate
Policy 183
Rule 1: Comparing and Combining
Values 132 The Yield Curve and Discount Rates 184
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