Lessons in Corporate Finance: A Case Studies Approach to Financial Tools, Financial Policies, and Valuation

2016·5.85 MB·English

by  Paul Asquith

Lessons in
Corporate
Finance
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Lessons in
Corporate
Finance
A Case Studies Approach to Financial
Tools, Financial Policies, and Valuation
PAUl ASqUiTh
lAWrENcE A. WEiSS
cover image: © aniaostudio/iStockphoto
cover design: Wiley
copyright © 2016 by Paul Asquith and lawrence A. Weiss. All rights reserved.
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10 9 8 7 6 5 4 3 2 1
To those who taught me.
Paul
For Marilyn, my wife and best friend; Joshua; and Daniel; all of whom
I will love forever.
Larry

Contents
Preface xiii
Acknowledgments xv
About the Authors xvii
ChAPter 1
Introduction
Two Markets: Product and Capital 2
The Basics: Tools and Techniques 2
A Diagram of Corporate Finance 3
A Brief History of Modern Finance 4
Reading This Book 6
ChAPter 2
Determining a Firm’s Financial health (PIPeS-A)
The Conversation with the Banker Is Like a Job Interview 7
Starting with the Product Market Strategy 9
Is PIPES Profitable? 10
Doing the Math 10
Sources and Uses of Funds 12
Ratio Analysis 16
The Cash Cycle 21
Summary 24
ChAPter 3
Pro Forma Forecasts (PIPeS-B)
First, Let’s Take a Closer Look at Ratio Analysis 27
Pro Forma Forecasts 29
Circular Relationships 36
Back to (Forecasting) the Future 38
Projecting Out to 2014 and 2015 39
Evaluating the Loan 41
Summary 45
Appendix 3A: Accounting Is Not Economic Reality 47
ChAPter 4
the Impact of Seasonality on a Firm’s Funding (PIPeS-C) 53
Monthly Pro Forma Income Statements 54
Monthly Pro Forma Balance Sheets 56
A Different Picture of the Firm 65
vii
viii Contents
Summary 70
Appendix 4A: PIPES Monthly Pro Forma Income Statements and
Balance Sheets 2014 71
Appendix 4B: PIPES Monthly Pro Forma Income Statements and
Balance Sheets 2015 74
ChAPter 5
Why Financing Matters (Massey Ferguson)
Product Market Position and Strategy 77
Political Risk and Economies of Scale in Production 78
Massey Ferguson 1971–1976 79
Sustainable Growth 81
The Period after 1976 83
Conrad Runs Away 86
The Competitors 87
Back to Massey 90
Massey’s Restructuring 92
Postscript: What Happened to Massey 96
Summary 97
Appendix 5A: Massey Ferguson Financial Statements 99
ChAPter 6
An Introduction to Capital Structure theory
Optimal Capital Structure 104
M&M and Corporate Finance 107
Taxes 112
Costs of Financial Distress 120
The Textbook View of Capital Structure 125
The Cost of Capital 127
Summary 128
ChAPter 7
Capital Structure Decisions (Marriott Corporation and Gary Wilson)
Capital Structure 131
The Cost of Capital 138
How Firms Set Capital Structure in Practice 141
Corporate Financial Policies 142
Sustainable Growth and Excess Cash Flow 145
What to Do with Excess Cash? 146
Summary 148
Appendix 7A: Marriott Corporation Income Statements and
Balance Sheets 150
Appendix 7B: Marriott Corporation Selected Ratios 152
ChAPter 8
Investment Decisions (Marriott Corporation and Gary Wilson)
What Is the Correct Price? 154
How Should Marriott Buy Its Shares? 154