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PREFACE, iii
Part 1. Introduction to Financial Management, 1
Chapter 1. An Overview of Financial Management, 2
Striking the Right Balance, 2
PUTTING THINGS IN PERSPECTIVE, 3
1.1. Forms of Business Organization, 4
1.2. Stock Prices and Shareholder Value, 6
1.3. Intrinsic Values, Stock Prices, and Compensation Plans, 8
1.4. Some Important Trends, 11
Is Shareholder Wealth Maximization a Worldwide Goal?, 12
1.5. Business Ethics, 12
What Companies Are Doing, 13
Consequences of Unethical Behavior, 13
How Should Employees Deal with Unethical Behavior?, 14
Protection for Whistle-Blowers, 15
1.6. Conflicts between Managers and Stockholders, 16
1.7. The Role of Finance in the Organization, 17
TYING IT ALL TOGETHER, 18
Part 2. Fundamental Concepts in Financial Management, 23
Chapter 2. Time Value of Money, 24
Will You Be Able to Retire?, 24
PUTTING THINGS IN PERSPECTIVE, 24
2.1. Time Lines, 25
2.2. Future Values, 26
1. Step-by-Step Approach, 27
2. Formula Approach, 27
Simple versus Compound Interest, 27
3. Financial Calculators, 28
4. Spreadsheets, 28
Hints on Using Financial Calculators, 29
Graphic View of the Compounding Process, 30
2.3. Present Values, 31
Graphic View of the Discounting Process, 33
2.4. Finding the Interest Rate, I, 34
2.5. Finding the Number of Years, N, 35
2.6. Annuities, 35
2.7. Future Value of an Ordinary Annuity, 36
2.8. Future Value of an Annuity Due, 38
2.9. Present Value of an Ordinary Annuity, 39
2.10. Finding Annuity Payments, Periods, and Interest Rates, 40
Finding Annuity Payments, PMT, 40
Finding the Number of Periods, N, 41
Finding the Interest Rate, I, 41
2.11. Perpetuities, 42
2.12. Uneven Cash Flows, 44
2.13. Future Value of an Uneven Cash Flow Stream, 46
2.14. Solving for I with Uneven Cash Flows, 47
2.15. Semiannual and Other Compounding Periods, 48
2.16. Comparing Interest Rates, 50
2.17. Fractional Time Periods, 52
2.18. Amortized Loans, 52
TYING IT ALL TOGETHER, 54
INTEGRATED CASE, 62
First National Bank, 62
Chapter 3. Financial Statements, Cash Flow, and Taxes, 64
Doing Your Homework with Financial Statements, 64
PUTTING THINGS IN PERSPECTIVE, 65
3.1. A Brief History of Accounting and Financial Statements, 65
3.2. Financial Statements and Reports, 66
3.3. The Balance Sheet, 68
3.4. The Income Statement, 72
3.5. Net Cash Flow, 75
3.6. Statement of Cash Flows, 75
Massaging the Cash Flow Statement, 78
3.7. Statement of Retained Earnings, 78
3.8. Uses and Limitations of Financial Statements, 79
Financial Analysis on the Internet, 80
3.9. Modifying Accounting Data for Investor and Managerial Decisions, 81
Operating Assets and Operating Capital, 81
Operating Cash Flows, 84
Free Cash Flow, 84
3.10. MVA and EVA, 86
3.11. The Federal Income Tax System, 87
Corporate Taxes, 87
Personal Taxes, 87
Interest Paid, 87
Interest Earned, 88
Dividends Paid, 88
Dividends Received, 88
Tax Loss Carry-Back and Carry-Forward, 88
Capital Gains, 88
Depreciation, 89
Small Businesses, 89
TYING IT ALL TOGETHER, 89
INTEGRATED CASE, 95
D’Leon Inc., Part I, 95
Chapter 4. Analysis of Financial Statements, 100
Lessons Learned from Enron and WorldCom, 100
PUTTING THINGS IN PERSPECTIVE, 102
4.1. Ratio Analysis, 102
4.2. Liquidity Ratios, 103
Current Ratio, 103
Quick, or Acid Test, Ratio, 104
4.3. Asset Management Ratios, 104
Inventory Turnover Ratio, 105
Days Sales Outstanding, 106
Fixed Assets Turnover Ratio, 106
Total Assets Turnover Ratio, 107
4.4. Debt Management Ratios, 108
Total Debt to Total Assets, 110
Times-Interest-Earned Ratio, 110
EBITDA Coverage Ratio, 111
4.5. Profitability Ratios, 112
Profit Margin on Sales, 112
Global Perspectives: Global Accounting Standards: Can One Size Fit All?, 113
Return on Total Assets, 114
Basic Earning Power (BEP) Ratio, 114
Return on Common Equity, 115
4.6. Market Value Ratios, 115
Price/Earnings Ratio, 116
Price/Cash Flow Ratio, 116
Market/Book Ratio, 116
4.7. Trend Analysis, 118
4.8. Tying the Ratios Together: The Du Pont Equations, 118
4.9. Comparative Ratios and “Benchmarking”, 121
Looking for Warning Signs within the Financial Statements, 123
4.10. Uses and Limitations of Ratio Analysis, 124
4.11. Problems with ROE, 125
EVA and ROE, 126
4.12. Looking Beyond the Numbers, 128
TYING IT ALL TOGETHER, 129
INTEGRATED CASE, 136
D’Leon Inc., Part II, 136
Chapter 5. Financial Markets and Institutions, 141
A Strong Financial System Is Necessary for a Growing and Prosperous Economy, 141
PUTTING THINGS IN PERSPECTIVE, 142
5.1. An Overview of the Capital Allocation Process, 143
5.2. Financial Markets, 145
Types of Markets, 145
Recent Trends, 146
5.3. Financial Institutions, 148
5.4. The Stock Market, 153
Citigroup Built to Compete in a Changing Environment, 154
The Physical Location Stock Exchanges, 154
The NYSE and Nasdaq Combine Forces with the Leading Online Trading Systems, 155
The Over-the-Counter and the Nasdaq Stock Markets, 156
5.5. The Market for Common Stock, 157
Types of Stock Market Transactions, 157
5.6. Stock Markets and Returns, 160
Stock Market Reporting, 160
Stock Market Returns, 162
5.7. Stock Market Efficiency, 163
Levels of Market Efficiency, 163
Measuring the Market, 164
Implications of Market Efficiency, 166
Is the Stock Market Efficient?, 167
A Closer Look at Behavioral Finance Theory, 168
TYING IT ALL TOGETHER, 169
INTEGRATED CASE, 170
Smyth Barry & Company, Part I, 170
Part 3. Financial Assets, 173
Chapter 6. Interest Rates, 174
Low Interest Rates Encourage Investment and Stimulate Consumer Spending, 174
PUTTING THINGS IN PERSPECTIVE, 175
6.1. The Cost of Money, 175
6.2. Interest Rate Levels, 176
6.3. The Determinants of Market Interest Rates, 180
The Real Risk-Free Rate of Interest, r*, 181
The Nominal, or Quoted, Risk-Free Rate of Interest, r_RF, 182
Inflation Premium (IP), 182
Default Risk Premium (DRP), 183
An Almost Riskless Treasury Bond, 184
Liquidity Premium (LP), 186
Maturity Risk Premium (MRP), 186
6.4. The Term Structure of Interest Rates, 187
6.5. What Determines the Shape of the Yield Curve?, 189
The Links between Expected Inflation and Interest Rates: A Closer Look, 192
6.6. Using the Yield Curve to Estimate Future Interest Rates, 193
6.7. Other Factors that Influence Interest Rate Levels, 196
Federal Reserve Policy, 196
Federal Budget Deficits or Surpluses, 196
International Factors, 197
Business Activity, 197
Global Perspectives: Measuring Country Risk, 198
6.8. Investing Overseas, 199
6.9. Interest Rates and Business Decisions, 199
TYING IT ALL TOGETHER, 201
INTEGRATED CASE, 206
Smyth Barry & Company, Part II, 206
Chapter 7. Bonds and Their Valuation, 207
Sizing Up Risk in the Bond Market, 207
PUTTING THINGS IN PERSPECTIVE, 208
7.1. Who Issues Bonds?, 208
7.2. Key Characteristics of Bonds, 209
Par Value, 210
Coupon Interest Rate, 210
Maturity Date, 210
Call Provisions, 211
Sinking Funds, 211
Other Features, 212
7.3. Bond Valuation, 213
7.4. Bond Yields, 216
Yield to Maturity, 216
Yield to Call, 217
Current Yield, 218
7.5. Changes in Bond Values Over Time, 218
7.6. Bonds with Semiannual Coupons, 222
7.7. Assessing a Bond’s Riskiness, 223
Interest Rate Risk, 223
Reinvestment Rate Risk, 225
Comparing Interest Rate and Reinvestment Rate Risk, 226
7.8. Default Risk, 227
Various Types of Corporate Bonds, 228
Bond Ratings, 229
Bankruptcy and Reorganization, 233
7.9. Bond Markets, 234
TYING IT ALL TOGETHER, 236
INTEGRATED CASE, 243
Western Money Management Inc., 243
Chapter 8. Risk and Rates of Return, 244
No Pain No Gain, 244
PUTTING THINGS IN PERSPECTIVE, 245
8.1. Stand-Alone Risk, 246
Probability Distributions, 247
Expected Rate of Return, 248
Measuring Stand-Alone Risk: The Standard Deviation, 250
Using Historical Data to Measure Risk, 252
Measuring Stand-Alone Risk: The Coefficient of Variation, 254
Risk Aversion and Required Returns, 255
The Trade-Off between Risk and Return, 256
8.2. Risk in a Portfolio Context, 257
Expected Portfolio Returns, r̂_p, 258
Portfolio Risk, 259
The Benefits of Diversification Are More Important Than Ever, 263
Diversifiable Risk versus Market Risk, 263
The Concept of Beta, 266
Global Perspectives: The Benefits of Diversifying Overseas, 270
8.3. The Relationship between Risk and Rates of Return, 271
Estimating the Market Risk Premium, 272
The Impact of Inflation, 275
Changes in Risk Aversion, 275
Changes in a Stock’s Beta Coefficient, 277
8.4. Some Concerns about Beta and the CAPM, 277
8.5. Some Concluding Thoughts: Implications for Corporate Managers and Investors, 278
TYING IT ALL TOGETHER, 280
INTEGRATED CASE, 286
Merrill Finch Inc., 286
Chapter 9. Stocks and Their Valuation, 289
Searching for the Right Stock, 289
PUTTING THINGS IN PERSPECTIVE, 290
9.1. Legal Rights and Privileges of Common Stockholders, 290
Control of the Firm, 290
The Preemptive Right, 291
9.2. Types of Common Stock, 292
9.3. Common Stock Valuation, 292
Definitions of Terms Used in Stock Valuation Models, 293
Expected Dividends as the Basis for Stock Values, 294
9.4. Constant Growth Stocks, 296
Illustration of a Constant Growth Stock, 296
Dividend and Earnings Growth, 297
When Can the Constant Growth Model Be Used?, 298
9.5. Expected Rate of Return on a Constant Growth Stock, 299
9.6. Valuing Stocks Expected to Grow at a Nonconstant Rate, 300
Evaluating Stocks That Don’t Pay Dividends, 304
9.7. Valuing the Entire Corporation, 305
The Corporate Valuation Model, 306
Other Approaches to Valuing Common Stocks, 308
Comparing the Total Company and Dividend Growth Models, 308
9.8. Stock Market Equilibrium, 310
Changes in Equilibrium Stock Prices, 311
9.9. Investing in International Stocks, 313
9.10. Preferred Stock, 315
Global Perspectives: Investing in Emerging Markets, 316
TYING IT ALL TOGETHER, 316
INTEGRATED CASE, 322
Mutual of Chicago Insurance Company, 322
Part 4. Investing in Long-Term Assets: Capital Budgeting, 327
Chapter 10. The Cost of Capital, 328
Creating Value at GE, 328
PUTTING THINGS IN PERSPECTIVE, 329
10.1. An Overview of the Weighted Average Cost of Capital, 329
10.2. Basic Definitions, 331
10.3. Cost of Debt, r_d(1 – T), 332
10.4. Cost of Preferred Stock, r_p, 333
Funny-Named Preferred-Like Securities, 334
10.5. Cost of Retained Earnings, r_s, 335
The CAPM Approach, 336
Dividend-Yield-plus-Growth-Rate, or Discounted Cash Flow (DCF), Approach, 336
Bond-Yield-plus-Risk-Premium Approach, 339
How Much Does It Cost to Raise External Capital?, 340
10.6. Cost of New Common Stock, r_e, 340
Add Flotation Costs to a Project’s Cost, 341
Increase the Cost of Capital, 341
When Must External Equity Be Used?, 342
10.7. Composite, or Weighted Average, Cost of Capital, WACC, 343
10.8. Factors That Affect the WACC, 344
Factors the Firm Cannot Control, 344
Factors the Firm Can Control, 344
Global Perspectives: Global Variations in the Cost of Capital, 345
10.9. Adjusting the Cost of Capital for Risk, 346
10.10. Some Other Problems with Cost of Capital Estimates, 348
TYING IT ALL TOGETHER, 349
INTEGRATED CASE, 355
Coleman Technologies Inc., 355
Chapter 11. The Basics of Capital Budgeting, 357
Competition in the Aircraft Industry, 357
PUTTING THINGS IN PERSPECTIVE, 358
11.1. Generating Ideas for Capital Projects, 358
11.2. Project Classifications, 359
11.3. The Net Present Value (NPV) Criterion, 360
11.4. Internal Rate of Return (IRR), 363
11.5. Comparison of the NPV and IRR Methods, 364
NPV Profiles, 364
NPV Rankings Depend on the Cost of Capital, 365
Independent Projects, 367
Mutually Exclusive Projects, 367
11.6. Multiple IRRs, 369
11.7. Modified Internal Rate of Return (MIRR), 371
11.8. Payback Period, 373
11.9. Conclusions on Capital Budgeting Methods, 375
11.10. Decision Criteria Used in Practice, 376
11.11. Using Capital Budgeting Techniques in Other Contexts, 377
11.12. The Post-Audit, 378
TYING IT ALL TOGETHER, 379
INTEGRATED CASE, 385
Allied Components Company, 385
Chapter 12. Cash Flow Estimation and Risk Analysis, 387
Home Depot Keeps Growing, 387
PUTTING THINGS IN PERSPECTIVE, 388
12.1. Background on the Project, 388
12.2. Project Analysis, 390
Input Data, Part 1, 390
Depreciation Schedule, Part 2, 390
Salvage Value Calculations, Part 3, 391
Projected Cash Flows, Part 4, 392
Appraisal of the Proposed Project, Part 5, 393
12.3. Other Points on Cash Flow Analysis, 394
Cash Flow versus Accounting Income, 394
Timing of Cash Flows, 395
Incremental Cash Flows, 395
Replacement Projects, 395
Sunk Costs, 395
Opportunity Costs, 396
Externalities, 396
12.4. Estimating Project Risk, 397
12.5. Measuring Stand-Alone Risk, 398
Sensitivity Analysis, 398
Scenario Analysis, 400
Monte Carlo Simulation, 401
Global Perspectives: Capital Budgeting Practices in the Asian/Pacific Region, 402
12.6. Different Capital Structures, 403
12.7. Incorporating Risk into Capital Budgeting, 403
TYING IT ALL TOGETHER, 404
INTEGRATED CASE, 409
Allied Food Products, 409
APPENDIX 12A Tax Depreciation, 413
Chapter 13. Real Options and Other Topics in Capital Budgeting, 415
Keeping Your Options Open, 415
PUTTING THINGS IN PERSPECTIVE, 416
13.1. Introduction to Real Options, 416
13.2. Abandonment/Shutdown Options, 417
13.3. Investment Timing Options, 419
13.4. Growth Options, 420
13.5. Flexibility Options, 421
13.6. Comparing Mutually Exclusive Projects with Unequal Lives, 422
Replacement Chains, 422
Equivalent Annual Annuities (EAA), 423
Conclusions about Unequal Lives, 424
13.7. The Optimal Capital Budget, 424
TYING IT ALL TOGETHER, 426
INTEGRATED CASE, 431
21st Century Educational Products, 431
Part 5. Capital Structure and Dividend Policy, 435
Chapter 14. Capital Structure and Leverage, 436
Debt: Rocket Booster or Anchor?, 436
PUTTING THINGS IN PERSPECTIVE, 437
14.1. The Target Capital Structure, 437
14.2. Business and Financial Risk, 439
Business Risk, 439
Operating Leverage, 441
Financial Risk, 444
14.3. Determining the Optimal Capital Structure, 450
WACC and Capital Structure Changes, 450
The Hamada Equation, 452
The Optimal Capital Structure, 453
14.4. Capital Structure Theory, 456
Yogi Berra on the M&M Proposition, 457
The Effect of Taxes, 457
The Effect of Potential Bankruptcy, 458
Trade-Off Theory, 459
Signaling Theory, 460
Using Debt Financing to Constrain Managers, 461
14.5. Checklist for Capital Structure Decisions, 462
Global Perspectives: Taking a Look at Global Capital Structures, 465
14.6. Variations in Capital Structures, 465
TYING IT ALL TOGETHER, 466
INTEGRATED CASE, 472
Campus Deli Inc., 472
Chapter 15. Distributions to Shareholders: Dividends and Share Repurchases, 478
Microsoft Shifts Gears and Begins to Unload Part of Its Vast Cash Hoard, 478
PUTTING THINGS IN PERSPECTIVE, 479
15.1. Dividends versus Capital Gains: What Do Investors Prefer?, 479
Dividend Irrelevance Theory, 480
Reasons Some Investors Prefer Dividends, 480
Reasons Some Investors May Prefer Capital Gains, 481
15.2. Other Dividend Policy Issues, 482
Information Content, or Signaling, Hypothesis, 482
Clientele Effect, 482
15.3. Establishing the Dividend Policy in Practice, 483
Setting the Target Payout Ratio: The Residual Dividend Model, 483
Global Perspectives: Dividend Yields Around the World, 488
Earnings, Cash Flows, and Dividends, 489
Payment Procedures, 490
15.4. Dividend Reinvestment Plans, 493
15.5. Summary of Factors Influencing Dividend Policy, 494
Constraints, 494
Investment Opportunities, 494
Alternative Sources of Capital, 495
Effects of Dividend Policy on r_s, 495
15.6. Stock Dividends and Stock Splits, 495
Stock Splits, 496
Stock Dividends, 496
Effect on Stock Prices, 497
15.7. Stock Repurchases, 498
The Effects of Stock Repurchases, 498
Stock Repurchases Soar in 2004, 499
Advantages of Repurchases, 500
Disadvantages of Repurchases, 501
Conclusions on Stock Repurchases, 501
TYING IT ALL TOGETHER, 502
INTEGRATED CASE, 508
Southeastern Steel Company, 508
Part 6. Working Capital and Financial Planning, 511
Chapter 16. Working Capital Management, 512
Best Buy Successfully Manages Its Working Capital, 512
PUTTING THINGS IN PERSPECTIVE, 512
16.1. Working Capital Terminology, 513
16.2. The Cash Conversion Cycle, 513
Calculating the Targeted CCC, 514
Calculating the Actual CCC, 515
Some Firms Operate with Negative Working Capital!, 516
16.3. Alternative Current Asset Investment Policies, 517
16.4. Alternative Current Asset Financing Policies, 518
Maturity Matching, or “Self-Liquidating,” Approach, 519
Aggressive Approach, 519
Conservative Approach, 519
Choosing between the Approaches, 521
16.5. The Cash Budget, 521
16.6. Cash and Marketable Securities, 525
Currency, 526
Demand Deposits, 526
Marketable Securities, 527
16.7. Inventories, 528
Supply Chain Management, 529
16.8. Accounts Receivable, 530
Credit Policy, 530
Setting and Implementing the Credit Policy, 531
Monitoring Accounts Receivable, 532
16.9. Accounts Payable (Trade Credit), 534
16.10. Bank Loans, 537
Promissory Note, 537
Line of Credit, 538
Revolving Credit Agreement, 538
Costs of Bank Loans, 539
16.11. Commercial Paper, 541
16.12. Accruals (Accrued Liabilities), 542
16.13. Use of Security in Short-Term Financing, 542
TYING IT ALL TOGETHER, 543
INTEGRATED CASE, 548
Ski Equipment Inc., 548
Chapter 17. Financial Planning and Forecasting, 552
Forecasting Apple’s Future, 552
PUTTING THINGS IN PERSPECTIVE, 553
17.1. Strategic Planning, 553
17.2. The Sales Forecast, 555
17.3. The AFN Equation, 556
Key Determinants of External Funds Requirements, 558
Excess Capacity Adjustments, 558
17.4. Forecasted Financial Statements, 560
Initial Forecast: “Business as Usual”, 560
17.5. Using Regression to Improve Financial Forecasts, 563
17.6. Using Individual Ratios in the Forecasting Process, 565
Modifying Accounts Receivable, 565
Modifying Inventories, 566
Other “Special Studies”, 566
TYING IT ALL TOGETHER, 567
INTEGRATED CASE, 572
New World Chemicals Inc., 572
Part 7. Special Topics in Financial Management, 577
Chapter 18. Derivatives and Risk Management, 578
Using Derivatives to Manage Risk, 578
PUTTING THINGS IN PERSPECTIVE, 579
18.1. Reasons to Manage Risk, 579
18.2. Background on Derivatives, 582
Global Perspectives: Barings and Sumitomo Suffer Large Losses in the Derivatives Market, 583
18.3. Options, 584
Option Types and Markets, 584
Factors That Affect the Value of a Call Option, 586
Exercise Value versus Option Price, 586
18.4. Introduction to Option Pricing Models, 589
Expensing Executive Stock Options, 590
18.5. The Black-Scholes Option Pricing Model (OPM), 592
OPM Assumptions and Equations, 592
OPM Illustration, 594
18.6. Forward and Futures Contracts, 596
18.7. Other Types of Derivatives, 600
Swaps, 600
Structured Notes, 601
Inverse Floaters, 602
Credit Instruments Create New Opportunities and Risks, 603
18.8. Risk Management, 603
An Approach to Risk Management, 605
Microsoft’s Goal: Manage Every Risk!, 606
18.9. Using Derivatives to Reduce Risks, 607
Security Price Exposure, 607
Commodity Price Exposure, 610
The Use and Misuse of Derivatives, 610
TYING IT ALL TOGETHER, 611
INTEGRATED CASE, 613
Tropical Sweets Inc., 613
Chapter 19. Multinational Financial Management, 615
U.S. Firms Look Overseas to Enhance Shareholder Value, 615
PUTTING THINGS IN PERSPECTIVE, 616
19.1. Multinational or Global Corporations, 616
19.2. Multinational versus Domestic Financial Management, 619
19.3. The International Monetary System, 621
International Monetary Terminology, 621
Current Monetary Arrangements, 622
19.4. Foreign Exchange Rate Quotations, 623
Cross Rates, 624
Interbank Foreign Currency Quotations, 625
19.5. Trading in Foreign Exchange, 626
Spot Rates and Forward Rates, 626
19.6. Interest Rate Parity, 627
19.7. Purchasing Power Parity, 629
19.8. Inflation, Interest Rates, and Exchange Rates, 630
19.9. International Money and Capital Markets, 631
International Credit Markets, 631
Hungry for a Big Mac? Go to China!, 632
Stock Market Indices Around the World, 634
International Stock Markets, 635
19.10. International Capital Budgeting, 636
19.11. International Capital Structures, 638
19.12. Multinational Working Capital Management, 639
Cash Management, 639
Credit Management, 640
Inventory Management, 641
TYING IT ALL TOGETHER, 642
INTEGRATED CASE, 646
Citrus Products Inc., 646
Chapter 20. Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles, 648
Taking a Wild Ride with Amazon’s Convertible Debt, 648
PUTTING THINGS IN PERSPECTIVE, 649
20.1. Preferred Stock, 650
Basic Features, 650
Other Types of Preferred Stock, 652
Advantages and Disadvantages of Preferred Stock, 652
20.2. Leasing, 653
Types of Leases, 653
Funny-Named Preferred-Like Securities, 654
Financial Statement Effects, 656
Evaluation by the Lessee, 657
Factors That Affect Leasing Decisions, 660
20.3. Warrants, 661
Initial Market Price of a Bond with Warrants, 662
Use of Warrants in Financing, 663
Wealth Effects and Dilution Due to Warrants, 664
The Component Cost of Bonds with Warrants, 666
Problems with Warrant Issues, 666
20.4. Convertibles, 667
Conversion Ratio and Conversion Price, 667
The Component Cost of Convertibles, 668
Use of Convertibles in Financing, 672
Convertibles and Conflicts of Interest, 673
20.5. A Final Comparison of Warrants and Convertibles, 673
20.6. Reporting Earnings When Warrants or Convertibles Are Outstanding, 674
TYING IT ALL TOGETHER, 675
INTEGRATED CASE, 681
Fish & Chips, Inc., Part I, 681
Fish & Chips, Inc., Part II, 681
Chapter 21. Mergers and Acquisitions, 683
Procter & Gamble Acquires Gillette, 683
PUTTING THINGS IN PERSPECTIVE, 684
21.1. Rationale for Mergers, 685
Synergy, 685
Tax Considerations, 685
Purchase of Assets below Their Replacement Cost, 686
Diversification, 686
Managers’ Personal Incentives, 686
Breakup Value, 687
21.2. Types of Mergers, 687
21.3. Level of Merger Activity, 687
21.4. Hostile versus Friendly Takeovers, 689
21.5. Merger Regulation, 690
21.6. Merger Analysis, 691
Valuing the Target Firm, 692
Setting the Bid Price, 695
More Than Just Financial Statements, 697
Post-Merger Control, 698
21.7. Financial Reporting for Mergers, 699
Purchase Accounting, 699
Income Statement Effects, 700
Tempest in a Teapot?, 701
21.8. The Role of Investment Bankers, 702
Arranging Mergers, 702
Developing Defensive Tactics, 702
Establishing a Fair Value, 703
Financing Mergers, 703
Arbitrage Operations, 704
21.9. Do Mergers Create Value? The Empirical Evidence, 704
The Track Record of Recent Large Mergers, 705
21.10. Corporate Alliances, 706
21.11. Leveraged Buyouts, 706
21.12. Divestitures, 707
Types of Divestitures, 707
Divestiture Illustrations, 707
Global Perspectives: Governments Are Divesting State-Owned Businesses to Spur Economic Efficiency, 708
TYING IT ALL TOGETHER, 710
INTEGRATED CASE, 713
Smitty’s Home Repair Company, 713
Appendixes, A-1
Appendix A. Solutions to Self-Test Questions and Problems, A-1
Appendix B. Answers to Selected End-of-Chapter Problems, A-27
Appendix C. Selected Equations and Data, A-30
Index, I-1

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