Principles of Corporate Finance

969 Pages·2010·15.842 MB·English

by  Richard A. Brealey, Stewart C. Myers, Franklin Allen

BREALEY MYERS ALLEN
BREALEY
MYERS
The World of Finance in the Palm of Your Hand
ALLEN
Principles of Corporate Finance is the worldwide leading text that describes the theory and
practice of corporate fi nance. Throughout the book, the authors show how managers use
fi nancial theory to solve practical problems and to manage change by showing not just how P
but why companies and management act as they do.
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Additions and updates to the Tenth Edition include:
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Every chapter has been reviewed and revised to refl ect the credit crisis, and many Princippples
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chapters have been rewritten for added simplicity and better fl ow. Please see the Preface ppp
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for details. e
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most helpful Excel functions and spreadsheets when applying fi nancial concepts. sss
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Numbered and Titled Examples are now called out and featured within chapters to further
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illustrate concepts.
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A new 4-color design, more real world examples, and increased international coverage o
TENTH EDITION
make the book even more appealing and relevant to today’s students.
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Principles
of
Corporate Finance
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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 , Jaffe , and Jordan Saunders and Cornett
Corporate Finance: Core Principles and Applications Financial Institutions Management: A Risk
Adair
Second Edition Management Approach
Excel Applications for Corporate Finance
Seventh Edition
First Edition Ross , Westerfield , and Jordan
Essentials of Corporate Finance Saunders and Cornett
Block , Hirt , and Danielsen
Seventh Edition Financial Markets and Institutions
Foundations of Financial Management
Fourth Edition
Thirteenth Edition Ross , Westerfield , and Jordan
Fundamentals of Corporate Finance
Brealey , Myers , and Allen
Ninth Edition
Principles of Corporate Finance International Finance
Tenth Edition Shefrin
Behavioral Corporate Finance: Decisions That Eun and Resnick
Brealey , Myers , and Allen Create Value International Financial Management
Principles of Corporate Finance, Concise First Edition Fifth Edition
Second Edition
White Kuemmerle
Brealey , Myers , and Marcus
Financial Analysis with an Electronic Calculator Case Studies in International Entrepreneurship:
Fundamentals of Corporate Finance
Sixth Edition Managing and Financing Ventures in the
Sixth Edition
Global Economy
Brooks Investments First Edition
FinGame Online 5.0
Robin
Bodie , Kane , and Marcus
Bruner Essentials of Investments International Corporate Finance
Case Studies in Finance: Managing for Eighth Edition First Edition
Corporate Value Creation
Sixth Edition Bodie , Kane , and Marcus
Investments Real Estate
Chew Eighth Edition
The New Corporate Finance: Where Theory Brueggeman and Fisher
Meets Practice Hirt and Block Real Estate Finance and Investments
Third Edition Fundamentals of Investment Management Fourteenth Edition
Ninth Edition
Cornett , Adair , and Nofsinger Ling and Archer
Finance: Applications and Theory Hirschey and Nofsinger Real Estate Principles: A Value Approach
First Edition Investments: Analysis and Behavior Third Edition
Second Edition
DeMello
Cases in Finance Jordan and Miller Financial Planning and Insurance
Second Edition Fundamentals of Investments: Valuation and
Management Allen , Melone , Rosenbloom , and
Grinblatt (editor) Fifth Edition Mahoney
Stephen A. Ross, Mentor: Influence through
Retirement Plans: 401(k)s, IRAs, and Other
Generations Stewart , Piros , and Heisler
Deferred Compensation Approaches
Running Money: Professional Portfolio
Grinblatt and Titman Management Tenth Edition
Financial Markets and Corporate Strategy First Edition Altfest
Second Edition
Personal Financial Planning
Sundaram and Das
Higgins Derivatives: Principles and Practice First Edition
Analysis for Financial Management First Edition
Harrington and Niehaus
Ninth Edition
Risk Management and Insurance
Kellison Financial Institutions and Markets Second Edition
Theory of Interest
Rose and Hudgins Kapoor , Dlabay , and Hughes
Third Edition
Bank Management and Financial Services Focus on Personal Finance: An Active
Kester , Ruback , and Tufano Eighth Edition Approach to Help You Develop Successful
Case Problems in Finance Financial Skills
Rose and Marquis
Twelfth Edition Third Edition
Money and Capital Markets: Financial
Ross , Westerfield , and Jaffe Institutions and Instruments in a Global Kapoor , Dlabay , and Hughes
Corporate Finance Marketplace Personal Finance
Ninth Edition Tenth Edition Ninth Edition
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Principles
of
Corporate Finance
TENTH EDITION
Richard A. Brealey
Professor of Finance
London Business School
Stewart C. Myers
Robert C. Merton (1970) Professor of Finance
Sloan School of Management
Massachusetts Institute of Technology
Franklin Allen
Nippon Life Professor of Finance
The Wharton School
University of Pennsylvania
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PRINCIPLES OF 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 © 2011, 2008, 2006, 2003, 2000, 1996, 1991, 1988, 1984, 1980
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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.
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ISBN 978-0-07-353073-4
MHID 0-07-353073-5
Vice president and editor-in-chief: Brent Gordon
Publisher: Douglas Reiner
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Library of Congress Cataloging-in-Publication Data
Brealey, Richard A.
Principles of corporate finance / Richard A. Brealey, Stewart C. Myers, Franklin
Allen.—10th ed.
p. cm.—(The McGraw-Hill/Irwin series in finance, insurance, and real estate)
Includes index.
ISBN-13: 978-0-07-353073-4 (alk. paper)
ISBN-10: 0-07-353073-5 (alk. paper)
1. Corporations—Finance. I. Myers, Stewart C. II. Allen, Franklin, 1956-III. Title.
HG4026.B667 2011
658.15—dc22 2009048209
www.mhhe.com
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To Our Parents
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About the Authors
◗ Richard A. Brealey ◗ Stewart C. Myers ◗ Franklin Allen
Professor of Finance at the Robert C. Merton (1970) Profes- Nippon Life Professor of Finance
London Business School. sor of Finance at MIT’s Sloan at the Wharton School of the
He is the former president of the School of Management. He is past University of Pennsylvania. He
European Finance Association president of the American Finance is past president of the Am erican
and a former director of the Association and a research asso- Finance Association, Western
American Finance Association. ciate of the National Bureau of Finance Association, and So ciety
He is a fellow of the British Economic Research. His research for Financial Studies. His
Academy and has served as a has focused on financing deci- research has focused on financial
special adviser to the Governor sions, valuation methods, the cost innovation, asset price bubbles,
of the Bank of England and of capital, and financial aspects comparing financial systems, and
director of a number of financial of government regulation of busi- financial crises. He is a scientific
institutions. Other books writ- ness. Dr. Myers is a director of adviser at Sveriges Riksbank (Swe-
ten by Professor Brealey include Entergy Corporation and The den’s central bank).
Introduction to Risk and Return from Brattle Group, Inc. He is active as
Common Stocks. a financial consultant.
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Preface
◗
This book describes the theory and practice of What is new in the tenth edition? First, we have
corporate finance. We hardly need to explain why rewritten and refreshed several basic chapters. Content
financial managers have to master the practical aspects remains much the same, but we think that the revised
of their job, but we should spell out why down-to- chapters are simpler and flow better. These chapters
earth managers need to bother with theory. also contain more real-world examples.
Managers learn from experience how to cope with
• Chapter 1 is now titled “Goals and Governance of
routine problems. But the best managers are also able
the Firm.” We introduce financial management by
to respond to change. To do so you need more than
recent examples of capital investment and financ-
time-honored rules of thumb; you must understand
ing decisions by several well-known corporations.
why companies and financial markets behave the way
We explain why value maximization makes sense
they do. In other words, you need a t heory of finance.
as a financial objective. Finally, we look at why
Does that sound intimidating? It shouldn’t. Good
good governance and incentive systems are needed
theory helps you to grasp what is going on in the
to encourage managers and employees to work
world around you. It helps you to ask the right ques-
together to increase firm value and to behave
tions when times change and new problems need to
ethically.
be analyzed. It also tells you which things you do n ot
• Chapter 2 combines Chapters 2 and 3 from the
need to worry about. Throughout this book we show
ninth edition. It goes directly into how pres-
how managers use financial theory to solve practical
ent values are calculated. We think that it is bet-
problems.
ter organized and easier to understand in its new
Of course, the theory presented in this book is not
presentation.
perfect and complete—no theory is. There are some
• Chapter 3 introduces bond valuation. The material
famous controversies where financial economists can-
here has been reordered and simplified. The chap-
not agree. We have not glossed over these disagree-
ter focuses on default-free bonds, but also includes
ments. We set out the arguments for each side and tell
an introduction to corporate debt and default risk.
you where we stand.
(We discuss corporate debt and default risk in more
Much of this book is concerned with understand-
detail in Chapter 23.)
ing what financial managers do and why. But we also
• Short-term and long-term financial planning are
say what financial managers s hould do to increase
now combined in Chapter 29. We decided that
company value. Where theory suggests that finan-
covering financial planning in two chapters was
cial managers are making mistakes, we say so, while
awkward and inefficient.
admitting that there may be hidden reasons for their
• Chapter 28 is now devoted entirely to financial
actions. In brief, we have tried to be fair but to pull
analysis, which should be more convenient to
no punches.
instructors who wish to assign this topic early in
This book may be your first view of the world of mod-
their courses. We explain how the financial state-
ern finance theory. If so, you will read first for new ideas,
ments and ratios help to reveal the value, profit-
for an understanding of how finance theory translates
ability, efficiency, and financial strength of a real
into practice, and occasionally, we hope, for entertain-
company (Lowe’s).
ment. But eventually you will be in a position to make
financial decisions, not just study them. At that point The credit crisis that started in 2007 dramatically
you can turn to this book as a reference and guide. demonstrated the importance of a well-functioning
financial system and the problems that occur when it
◗ Changes in the Tenth Edition ceases to function properly. Some have suggested that
the crisis disproved the lessons of modern finance.
We are proud of the success of previous editions of On the contrary, we believe that it was a wake-up
Principles, and we have done our best to make the call—a call to remember basic principles, including the
tenth edition even better. importance of good systems of governance, proper
vii
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viii Preface
management incentives, sensible capital structures, needed to make some judicious pruning. We will not
and effective risk management. tell you where we have cut out material, because we
We have added examples and discussion of the hope that the deletions will be invisible.
crisis throughout the book, starting in Chapter 1
◗ Making Learning Easier
with a discussion of agency costs and the importance
of good governance. Other chapters have required Each chapter of the book includes an introductory
significant revision as a result of the crisis. These preview, a summary, and an annotated list of sug-
include Chapter 12, which discusses executive com- gested further reading. The list of possible candidates
pensation; Chapter 13, where the review of market for further reading is now voluminous. Rather than
efficiency includes an expanded discussion of asset trying to list every important article, we have largely
price bubbles; Chapter 14, where the section on listed survey articles or general books. More specific
financial institutions covers the causes and progress references have been moved to footnotes.
of the crisis; Chapter 23, where we discuss the AIG Each chapter is followed by a set of basic questions,
debacle; and Chapter 30, where we note the effect of intermediate questions on both numerical and
the crisis on money-market mutual funds. conceptual topics, and a few challenge questions.
The first edition of this book appeared in 1981. Basic Answers to the odd-numbered basic questions appear
principles are the same now as then, but the last three in an appendix at the end of the book.
decades have also generated important changes in the- We have added a Real-Time Data Analysis section
ory and practice. Research in finance has focused less to chapters where it makes sense to do so. This section
on what financial managers should do, and more on now houses some of the Web Projects you have seen
understanding and interpreting what they do in prac- in the previous edition, along with new Data Analy-
tice. In other words, finance has become more positive sis problems. These exercises seek to familiarize the
and less normative. For example, we now have careful reader with some useful Web sites and to explain how
surveys of firms’ capital investment practices and pay- to download and process data from the Web. Many of
out and financing policies. We review these surveys and the Data Analysis problems use financial data that the
look at how they cast light on competing theories. reader can download from Standard & Poor’s Educa-
Many financial decisions seem less clear-cut than tional Version of Market Insight, an exclusive part-
they were 20 or 30 years ago. It no longer makes sense nership with McGraw-Hill.
to ask whether high payouts are always good or always The book also contains 10 end-of-chapter mini-
bad, or whether companies should always borrow less cases. These include specific questions to guide the
or more. The right answer is, “It depends.” Therefore case analyses. Answers to the mini-cases are available
we set out pros and cons of different policies. We ask to instructors on the book’s Web site.
“What questions should the financial manager ask Spreadsheet programs such as Excel are tailor-made
when setting financial policy?” You will, for example, for many financial calculations. Several chapters now
see this shift in emphasis when we discuss payout deci- include boxes that introduce the most useful financial
sions in Chapter 16. functions and provide some short practice questions.
This edition builds on other changes from earlier We show how to use the Excel function key to locate
editions. We recognize that financial managers work the function and then enter the data. We think that
more than ever in an international environment and this approach is much simpler than trying to remem-
therefore need to be familiar with international dif- ber the formula for each function.
ferences in financial management and in financial Many tables in the text appear as spreadsheets. In
markets and institutions. Chapters 27 (Managing these cases an equivalent “live” spreadsheet appears
International Risks) and 33 (Governance and Cor- on the book’s Web site. Readers can use these live
porate Control around the World) are exclusively spreadsheets to understand better the calculations
devoted to international issues. We have also found behind the table and to see the effects of changing the
more and more opportunities in other chapters to draw underlying data. We have also linked end-of-chapter
cross-border comparisons or use non-U.S. examples. questions to the spreadsheets.
We hope that this material will both provide a better We conclude the book with a glossary of financial
understanding of the wider financial environment and terms.
be useful to our many readers around the world. The 34 chapters in this book are divided into 11
As every first-grader knows, it is easier to add than parts. Parts 1 to 3 cover valuation and capital invest-
to subtract. To make way for new topics we have ment decisions, including portfolio theory, asset
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Preface ix
pricing models, and the cost of capital. Parts 4 to 8 Alon Brav D uke University
cover payout policy, capital structure, options (includ- Jean Canil U niversity of Adelaide
ing real options), corporate debt, and risk manage- Celtin Ciner U niversity of North Carolina, Wilmington
ment. Part 9 covers financial analysis, planning, and John Cooney T exas Tech University
working-capital management. Part 10 covers mergers Charles Cuny W ashington University, St. Louis
and acquisitions, corporate restructuring, and corpo- John Davenport R egent University
rate governance around the world. Part 11 concludes. Ray DeGennaro U niversity of Tennessee, Knoxville
We realize that instructors will wish to select topics Adri DeRidder G otland University
and may prefer a different sequence. We have there- William Dimovski D eakin University, Melbourne
fore written chapters so that topics can be introduced David Ding N anyang Technological University
in several logical orders. For example, there should Robert Duvic U niversity of Texas at Austin
be no difficulty in reading the chapters on financial Alex Edmans U niversity of Pennsylvania
analysis and planning before the chapters on valua- Susan Edwards G rand Valley State University
tion and capital investment. Robert Everett J ohns Hopkins University
Frank Flanegin R obert Morris University
◗ Acknowledgments Zsuzanna Fluck M ichigan State University
Connel Fullenkamp D uke University
We have a long list of people to thank for their help- Mark Garmaise U niversity of California, Los Angeles
ful criticism of earlier editions and for assistance in Sharon Garrison U niversity of Arizona
preparing this one. They include Faiza Arshad, Alei- Christopher Geczy U niversity of Pennsylvania
jda de Cazenove Balsan, Kedran Garrison, Robert George Geis U niversity of Virginia
Pindyck, Sara Salem, and Gretchen Slemmons at Stuart Gillan U niversity of Delaware
MIT; Elroy Dimson, Paul Marsh, Mike Staunton,
Felix Goltz E dhec Business School
and Stefania Uccheddu at London Business School;
Ning Gong Melbourne Business School
Lynda Borucki, Michael Barhum, Marjorie Fischer,
Levon Goukasian P epperdine University
Larry Kolbe, Michael Vilbert, Bente Villadsen, and
Gary Gray P ennsylvania State University
Fiona Wang at The Brattle Group, Inc.; Alex Trian-
C. J. Green Loughborough University
tis at the University of Maryland; Adam Kolasinski
Mark Griffiths T hunderbird, American School of
at the University of Washington; Simon Gervais at
I nternational Management
Duke University; Michael Chui at The Bank for Inter-
Re-Jin Guo U niversity of Illinois, Chicago
national Settlements; Pedro Matos at the University
Ann Hackert I daho State University
of Southern California; Yupana Wiwattanakantang
Winfried Hallerbach E rasmus University, Rotterdam
at Hitotsubashi University; Nickolay Gantchev, Tina
Milton Harris U niversity of Chicago
Horowitz, and Chenying Zhang at the University of
Mary Hartman B entley College
Pennsylvania; Julie Wulf at Harvard University; Jin-
Glenn Henderson U niversity of Cincinnati
ghua Yan at Tykhe Capital; Roger Stein at Moody’s
Donna Hitscherich C olumbia University
Investor Service; Bennett Stewart at EVA Dimensions;
Ronald Hoffmeister A rizona State University
and James Matthews at Towers Perrin.
James Howard U niversity of Maryland, College Park
We want to express our appreciation to those
George Jabbour G eorge Washington University
instructors whose insightful comments and suggestions
Ravi Jagannathan N orthwestern University
were invaluable to us during the revision process:
Abu Jalal S uffolk University
Neyaz Ahmed U niversity of Maryland Nancy Jay M ercer University
Anne Anderson L ehigh University Kathleen Kahle U niversity of Arizona
Noyan Arsen K oc University Jarl Kallberg N YU, Stern School of Business
Anders Axvarn G othenburg University Ron Kaniel D uke University
Jan Bartholdy A SB, Denmark Steve Kaplan U niversity of Chicago
Penny Belk L oughborough University Arif Khurshed M anchester Business School
Omar Benkato B all State University Ken Kim U niversity of Wisconsin, Milwaukee
Eric Benrud U niversity of Baltimore C. R. Krishnaswamy W estern Michigan University
Peter Berman U niversity of New Haven George Kutner M arquette University
Tom Boulton M iami University of Ohio Dirk Laschanzky U niversity of Iowa
Edward Boyer T emple University David Lins U niversity of Illinois, Urbana
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