Lessons in Corporate Finance E-Book

Paul Asquith

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 1134

Veröffentlichungsjahr: 2016

Beschreibung

A discussion-based learning approach to corporate finance fundamentals Lessons in Corporate Finance explains the fundamentals of the field in an intuitive way, using a unique Socratic question and answer approach. Written by award-winning professors at M.I.T. and Tufts, this book draws on years of research and teaching to deliver a truly interactive learning experience. Each case study is designed to facilitate class discussion, based on a series of increasingly detailed questions and answers that reinforce conceptual insights with numerical examples. Complete coverage of all areas of corporate finance includes capital structure and financing needs along with project and company valuation, with specific guidance on vital topics such as ratios and pro formas, dividends, debt maturity, asymmetric information, and more. Corporate finance is a complex field composed of a broad variety of sub-disciplines, each involving a specific skill set and nuanced body of knowledge. This text is designed to give you an intuitive understanding of the fundamentals to provide a solid foundation for more advanced study. * Identify sources of funding and corporate capital structure * Learn how managers increase the firm's value to shareholders * Understand the tools and analysis methods used for allocation * Explore the five methods of valuation with free cash flow to firm and equity Navigating the intricate operations of corporate finance requires a deep and instinctual understanding of the broad concepts and practical methods used every day. Interactive, discussion-based learning forces you to go beyond memorization and actually apply what you know, simultaneously developing your knowledge, skills, and instincts. Lessons in Corporate Finance provides a unique opportunity to go beyond traditional textbook study and gain skills that are useful in the field.

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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.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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ISBN 978-1-119-20741-2 (Hardcover) ISBN 978-1-119-20743-6 (ePDF) ISBN 978-1-119-20742-9 (ePub)

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

Note

Acknowledgments

About the Authors

Chapter 1: Introduction

Two Markets: Product and Capital

The Basics: Tools and Techniques

A Diagram of Corporate Finance

A Brief History of Modern Finance

Reading This Book

Notes

Chapter 2: Determining a Firm’s Financial Health (PIPES-A)

The Conversation with the Banker Is Like a Job Interview

Starting with the Product Market Strategy

Is PIPES Profitable?

Doing the Math

Sources and Uses of Funds

Ratio Analysis

The Cash Cycle

Summary

Notes

Chapter 3: Pro Forma Forecasts (PIPES-B)

First, Let’s Take a Closer Look at Ratio Analysis

Pro Forma Forecasts

Circular Relationships

Back to (Forecasting) the Future

Projecting Out to 2014 and 2015

Evaluating the Loan

Summary

Appendix 3A: Accounting Is Not Economic Reality

Notes

Chapter 4: The Impact of Seasonality on a Firm’s Funding (PIPES-C)

Monthly Pro Forma Income Statements

Monthly Pro Forma Balance Sheets

A Different Picture of the Firm

Summary

Appendix 4A: PIPES Monthly Pro Forma Income Statements and Balance Sheets 2014

Appendix 4B: PIPES Monthly Pro Forma Income Statements and Balance Sheets 2015

Notes

Chapter 5: Why Financing Matters (Massey Ferguson)

Product Market Position and Strategy

Political Risk and Economies of Scale in Production

Massey Ferguson 1971–1976

Sustainable Growth

The Period after 1976

Conrad Runs Away

The Competitors

Back to Massey

Massey’s Restructuring

Postscript: What Happened to Massey

Summary

Appendix 5A: Massey Ferguson Financial Statements

Notes

Chapter 6: An Introduction to Capital Structure Theory

Optimal Capital Structure

M&M and Corporate Finance

Taxes

Costs of Financial Distress

The Textbook View of Capital Structure

The Cost of Capital

Summary

Notes

Chapter 7: Capital Structure Decisions (Marriott Corporation and Gary Wilson)

Capital Structure

The Cost of Capital

How Firms Set Capital Structure in Practice

Corporate Financial Policies

Sustainable Growth and Excess Cash Flow

What to Do with Excess Cash?

Summary

Appendix 7A: Marriott Corporation Income Statements and Balance Sheets

Appendix 7B: Marriott Corporation Selected Ratios

Notes

Chapter 8: Investment Decisions (Marriott Corporation and Gary Wilson)

What Is the Correct Price?

How Should Marriott Buy Its Shares?

The Loan Covenants

The Impact of the Product Market on Financial Policies

The Capital Market Impact and the Future

Summary

Notes

Chapter 9: Financial Policy Decisions (AT&T: Before and After the 1984 Divestiture)

Background on AT&T

M&M and the Practice of Corporate Finance

Old (pre-1984) AT&T

New (Post-1984) AT&T

Summary

Appendix 9A: Development of AT&T Pro Formas 1984–1988 (Expected-Case)

Notes

Chapter 10: The Impact of Operating Strategy on Corporate Finance Policy (MCI)

A Brief Summary

A Brief History of MCI

Convertible Preferred Stock and Convertible Bonds

Interest Rates and Debt Ratios

Leases

Financing Needs of the New MCI

MCI’s Financing Choice

MCI Postscript

Summary

Appendix 10A: Development of MCI’s Pro Formas 1984–1988

Notes

Chapter 11: Dividend Policy (Apple Inc.)

The Theory of Dividend Policy

Empirical Evidence

Apple Inc. and the Decision on Whether to Pay Dividends

What Did Apple Do?

Summary

Notes

Chapter 12: A Continuation of Capital Structure Theory

The Tax Shield of Debt

The Costs of Financial Distress

Transaction Costs, Asymmetric Information, and Agency Costs

Asymmetric Information and Firm Financing

Agency Costs: Manager Behavior and Capital Structure

Leverage and Agency Conflicts Between Equity and Debt Holders

The Amount of Financing Required

Summary: An Integrated Approach

Coming Attractions

Notes

Chapter 13: The Time Value of Money: Discounting and Net Present Values

The Time Value of Money

Net Present Value (NPV)

Payback

Projects with Unequal Lives

Perpetuities

Summary

Notes

Chapter 14: Valuation and Cash Flows (Sungreen A)

Investment Decisions

How to Value a Project

The Weighted Average Cost of Capital (WACC)

Terminal Values

Summary

Notes

Chapter 15: Valuation (Sungreen B)

Sungreen’s Projected Cash Flows

The Weighted Average Cost of Capital (WACC)

Twin Firms

The Cost of Equity

The Cost of Debt

The Final Valuation

Strategic Analysis

Summary

Notes

Chapter 16: Valuation Nuances

Cash Flow Nuances

Cost of Capital Nuances

Nuances on Calculating the Cost of Equity: Levering and Unlevering Beta

Separating Cash Flows and Terminal Values

Nuances of Terminal Value Methods

Other Valuation Techniques: DCF Variations

Real Options (aka Strategic Choices)

Summary

Notes

Chapter 17: Leveraged Buyouts and Private Equity Financing (Congoleum)

Congoleum: A Short History

Leading Up to the LBO: What Makes a Firm a Good LBO Target?

Details of the Deal

Postscript: What Happened to LBOs?

Summary

Appendix 17A: Congoleum’s Pro Formas with and without the LBO

Appendix 17B: Highlights of the Lazard Fairness Opinion

Notes

Chapter 18: Mergers and Acquisitions: Strategic Issues (The Dollar Stores)

The Three Main Competitors

Recent History

Shopping a Firm/Finding a Buyer

Summary

Notes

Chapter 19: Valuing an Acquisition: Free Cash Flows to the Firm (The Dollar Stores)

The Bid for Family Dollar

Free Cash Flows to the Firm

Estimating the Cost of Capital

Discounted Cash Flows

Terminal Values

The Three Pieces

Summary

Appendix 19A: Family Dollar Pro Forma Financial Statements with Authors’ Constant Debt Ratio

Notes

Chapter 20: Understanding Free Cash Flows (The Dollar Stores)

Comparing the Free-Cash-Flows Formulas

Back to Discount Rates

On to Free Cash Flows to Equity

Discounting the Free Cash Flows to Equity

Summary

Appendix 20A: Family Dollar Pro Forma Free Cash Flows to Equity with Constant Debt Ratio

Notes

Chapter 21: Mergers and Acquisitions: Execution (The Dollar Stores)

The Time Line

Managerial Discretion

Activist ShareholderS

The Federal Trade Commission (FTC)

Shareholder Lawsuits

The Vote

Summary

Appendix 21.A: Key Events in the Bidding for Family Dollar during 2014 and 2015

Notes

Chapter 22: Review

Chapters 2–4: Cash Flow Management—Financial Tools

Chapters 5–12: Financing Decisions and Financial Policies

Chapters 13–21: Valuation

Tools and Concepts Discussed in This Book

Finance as Art, Not Science

Bottom Lines

An Intelligent Approach to Finance

Keeping Current

Larry’s Last (Really a True) Story

Paul’s Theory of Pies

Rules to Live By

Notes

Glossary

Index

EULA

List of Tables

Chapter 2

Table 2.1A

Table 2.1B

Table 2.2

Table 2.3A

Table 2.3B

Table 2.4A

Table 2.4B

Table 2.5

Chapter 3

Table 3.1A

Table 3.1B

Table 3.2A

Table 3.2B

Table 3.A

Table 3.3B

Table 3.4

Table 3.5

Table 3A.1

Table 3A.2

Table 3A.3A

Table 3A.3B

Table 3A.3C

Table 3A.3D

Table 3A.3E

Chapter 4

Table 4.1

Table 4.2

Table 4.3

Table 4.4

Table 4.5

Table 4.6

Table 4.7

Table 4.8

Table 4.9

Chapter 5

Table 5.1

Table 5.2

Table 5.3

Chapter 6

Table 6.1

Table 6.2

Table 6.3

Table 6.4

Table 6.5

Chapter 7

Table 7.1

Chapter 8

Table 8.1

Table 8.2

Chapter 9

Table 9.1

Table 9.2

Table 9.3

Table 9.4

Table 9.5

Table 9.6

Table 9.7

Table 9.8

Table 9.9

Table 9.10

Table 9.11

Table 9.12

Table 9.13

Table 9.14

Table 9A.1

Table 9A.2

Table 9A.3

Chapter 10

Table 10.1

Table 10.2

Table 10.3

Table 10.4

Table 10.5

Table 10.6

Table 10.7

Table 10A.1

Table 10A.2

Table 10A.3

Chapter 11

Table 11.1

Table 11.2

Table 11.3

Chapter 14

Table 14.1

Table 14.2

Table 14.3

Table 14.4

Table 14.5

Table 14.6

Table 14.7

Chapter 15

Table 15.1

Table 15.2

Table 15.3

Table 15.4

Chapter 17

Table 17.1

Table 17.2

Table 17.3

Table 17.4

Table 17.5

Table 17.6

Table 17.7

Table 17.8

Table 17.9

Table 17A.1

Table 17A.2

Table 17A.3

Table 17A.4

Table 17A.5

Chapter 18

Table 18.1

Table 18.2

Table 18.3

Chapter 19

Table 19.1

Table 19.2

Table 19.3

Table 19.4

Table 19.5

Table 19.6

Table 19.7

Table 19A.1

Table 19A.2

Table 19A.3

Table 19A.4

Chapter 20

Table 20.1

Table 20A.1

List of Illustrations

Chapter 1

Figure 1.1 Schematic of Corporate Finance

Chapter 5

Figure 5.1 Massey 1971–1976

Figure 5.2 Massey’s Performance 1970–1982

Figure 5.3A Massey Ferguson Stock Prices 1971–1982

Figure 5.3B Massey Ferguson' Market Capitalization 1971–1982

Figure 5.4 Schematic of Corporate Finance

Chapter 6

Figure 6.1 Capital Structure of NYSE Corporations 1983–2013

Figure 6.2 Source of Funds of NYSE Corporations 1983–2013

Figure 6.3 “Textbook” View of Optimal Capital Structure

Chapter 7

Figure 7.1 Capital Structure Costs

Figure 7.2 Capital Structure Costs

Figure 7.3 Capital Structure Impact on Stock Price

Chapter 12

Figure 12.1 Stock Price Reaction to Equity Issue Announcements

Figure 12.2 Seasoned Equity Offerings (SEOs) 1970–1996

Figure 12.3 Initial Public Offerings (IPOs) 1960–1999

Guide

Cover

Table of Contents

Preface

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Preface

On Tuesday, March 24, 2015, the share price of Google rose 2%, a roughly $8 billion increase in the value of the firm’s equity. Was the large increase in Google’s equity value because the firm’s profits were up? No. Was the positive stock price reaction due to some good news about a new Google product? No. The reaction was due to Google’s announcement that it was hiring Ruth Porat as its new chief financial officer (CFO). Why would the hiring of a new CFO cause Google’s stock price to jump? According to the Wall Street Journal, Wall Street hoped the new CFO would bring “fiscal control at a company long known for its free spending ways.”1

Lessons in Corporate Finance is about the principal decisions in corporate finance (in other words, the decisions of CFOs like Google’s Ruth Porat). These decisions focus on: how to decide in which projects the firm should invest, how to finance those investments, and how to manage the firm’s cash flows. This is an applied book that will use real-world examples to introduce the financial tools needed to make value-enhancing business decisions.

The book is designed to explain the how and why of corporate finance. While it is primarily aimed at finance professionals, it is also ideal for nonfinancial managers who have to deal with financial professionals. The book provides a detailed view of the inner functioning of corporate finance for anyone with an interest in understanding finance and what financial professionals do. The book would fit well in a second course in finance, as supplemental readings to an executive education course, or as a self-study book on corporate finance (e.g., those studying for the CFA or similar certifications). The authors believe that any business professional, even someone with a degree in finance, will find the book to be a valuable review.

While the book can be read without extensive knowledge of accounting or finance, the book is written for those with at least a basic knowledge of accounting and finance terminology.

Note

1

See Rolfe Winkler, Justin Baer, and Vipal Monga, “Google Turns to Wall Street for New Finance Chief,”

Wall Street Journal

, March 24, 2015,

www.wsj.com/articles/google-turns-to-wall-street-for-new-finance-chief-142721757110/21/2015

.

Acknowledgments

We both owe considerable debts to our instructors, in particular:

Paul wants to thank those who taught him finance and how to teach, especially:

Gene Fama, Milton Friedman, Al Mandelstamm, David W. Mullins Jr., Henry B. Reiling, and George Stigler.

Larry wants to thank those who taught him, especially:

Paul Asquith, Carliss Y. Baldwin, Roger C. Bennett, David Fewings, Michael Jensen, Robert Kaplan, Norman Keesal, Vivienne Livick, C. Harvey Rorke, and Howard H. Stevenson.

Paul and Larry also wish to thank Amar Bhide (Tufts University) and Laurent Jacque (Tufts University) for reading the book and for their many comments and suggestions. We are also grateful to Jacqueline Donnelly, Bridgette Hayes, and Stephanie Landers, who corrected many of our editorial mistakes and helped make our prose easier to read, and Michael Duh and Heidi Pickett, who helped ensure our numbers are consistent. A special thanks is also owed to the John Wiley & Sons editorial team—most notably Tula Batanchiev (associate editor) and Steven Kyritz (senior production editor) for their guidance and enthusiasm.

About the Authors

Paul Asquith is the Gordon Y. Billard Professor of Finance at MIT’s Sloan School where he has been on the faculty for 27 years and is also a Research Associate of the National Bureau of Economic Research.

At the Sloan School, he served as Senior Associate Dean and as Chairman of Sloan’s Building Committee. He teaches in the finance area, most recently Introduction to Corporate Finance. Professor Asquith has also developed and taught three other courses at MIT: Advanced Corporate Finance, Mergers and Acquisitions, and Security Design. He previously taught at Harvard University for 10 years, at the University of Chicago, and at Duke University. He is the recipient of 14 Teaching Excellence Awards from MIT, Harvard, and Duke. He is also the inaugural recipient of MIT’s Jamieson Prize for Excellence in Teaching.

Professor Asquith received his BS from Michigan State University and his AM and PhD from the University of Chicago. A member of the American Accounting Association, the American Finance Association, and the Financial Management Association, Professor Asquith was regularly a discussant at financial conferences. In 1985, he spent one semester at Salomon Brothers while on sabbatical from Harvard University. Professor Asquith was formerly a Director of Aurora National Life Assurance Company. He has advised many corporations including Citicorp, IBM, Merck, Morgan Guaranty, Price Waterhouse, Royal Bank of Canada, Salomon Brothers, Toronto Dominion Bank, and Xerox, and has also served as an expert witness in both Federal Court and the Delaware Chancery Court.

Current research interests include regulated transparency in capital markets. His published articles include “Original Issue High Yield Bonds: Aging Analyses of Defaults, Exchanges, and Calls,” which won the 1989 Journal of Finance’s Smith-Breeden award, and “Information Content of Equity Analyst Reports” in the Journal of Financial Economics, several articles on corporate mergers, corporate dividend policy, the timing of corporate equity issues, stock splits, corporate call policy for convertible debt and short sales in debt and equity markets. Professor Asquith was previously Associate Editor of the Journal of Financial Economics, the Journal of Financial and Quantitative Analysis, and Financial Management. He was also Director of the Financial Services Research Center at MIT.

Lawrence A. Weiss is Professor of International Accounting at The Fletcher School of Law and Diplomacy at Tufts University. Professor Weiss has taught introductory courses to advanced financial accounting as well as managerial accounting and finance courses. He previously taught at Georgetown University, IMD, HEC Lausanne, MIT’s Sloan School, INSEAD, Tulane, Babson, and McGill University. He received the teacher of the year award while on the faculty of MIT and was repeatedly nominated for Best Professor at Fletcher, INSEAD, and Tulane University.

Professor Weiss received his BCom, Diploma in Public Accounting, and MBA from McGill University and his doctorate in Business Administration from Harvard University. He began his career as a Canadian Chartered Accountant (equivalent to a CPA in the United States) working for KPMG. A member of the American Accounting Association, he has been a discussant and has presented numerous papers. Professor Weiss is a recognized expert on U.S. corporate bankruptcy, and has testified before the U.S. Congress on bankruptcy reform. He has also advised corporations on their costing systems, and served as an expert witness in both civil and criminal cases.

Current research has three themes: The reorganization of financially distressed firms; operations management; and the transition from country-specific accounting standards (Local GAAP) to one set of global standards (IFRS). His published work includes: “Bankruptcy Resolution: Direct Costs and Violation of Priority of Claims,” which won a Journal of Financial Economics All-Star Paper award; “Value Destruction in the New Era of Chapter 11” in the Journal of Law Economics and Organizations; and “On the Relationship between Inventory and Financial Performance in Manufacturing Companies,” in the International Journal of Operations Management. His book Corporate Bankruptcy: Economic and Legal Perspectives is published by Cambridge University Press. His book Accounting for Fun and Profit: How to Read and Understand Financial Statements is being published by Business Expert Press (2016). Professor Weiss has also published op-eds in the New York Times, the (Toronto) Globe and Mail, and at HBR.org.

CHAPTER 1Introduction

This book is a basic corporate finance text but unique in the way the subject is presented. The book’s format involves asking a series of increasingly detailed questions about corporate finance decisions and then answering them with conceptual insights and specific numerical examples.

The book is structured around real-world decisions that a chief financial officer (CFO) must make: how firms obtain and use capital. The primary functions of corporate finance can be categorized into three main tasks:

How to make good investment decisions

How to make good financing decisions

How to manage the firm’s cash flows while doing the first two

Taking the last point first, cash is essential to a firm’s survival. In fact, cash flow is much more important than earnings. A firm can survive bad products, ineffective marketing, and weak or even negative earnings and stay in business as long as it has cash flow. Not running out of cash is an essential part of corporate finance. It requires understanding and forecasting the nature and timing of a firm’s cash flows. For example, at the turn of the century, dot-coms were almost all losing large sums of money. However, financial analysts covering these firms focused primarily not on earnings but on what is called “burn rates” (i.e., the rate at which a firm uses up or “burns” cash). There is an old saying in finance: “You buy champagne with your earnings, and you buy beer with your cash.” Cash is the day-to-day lifeblood of a firm. Another way to say this is that cash is like air, and earnings are like food. Although an organization needs both to survive, it can exist for a while without earnings but will die quickly without cash.