Finance

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Finance

Corporate Fiance

David Whitehurst UMIST

Volume 1

abc McGraw-Hill/Irwin

McGraw-Hill Primis ISBN: 0-390-32000-5 Text: Corporate Finance, Sixth Edition Ross-Westerfield-Jaffe

This book was printed on recycled paper.

Finance



Copyright ?2003 by The McGraw-Hill Companies, Inc. All rights reserved. Printed in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without prior written permission of the publisher.

This McGraw-Hill Primis text may include materials submitted to McGraw-Hill for publication by the instructor of this course. The instructor is solely responsible for the editorial content of such materials.

111 FINA ISBN: 0-390-32000-5

Finance

Volume 1

Ross-Westerfield-Jaffe ? Corporate Finance, Sixth Edition

Front Matter

1

Preface

1

I. Overview

8

Introduction

8

1. Introduction to Corporate Finance

9

2. Accounting Statements and Cash Flow

29

II. Value and Capital Budgeting

51

Introduction

51

3. Financial Markets and Net Present Value: First Principles of Finance

(Adv.)

52

4. Net Present Value

72

5. How to Value Bonds and Stocks

108

6. Some Alternative Investment Rules

146

7. Net Present Value and Capital Budgeting

175

8. Strategy and Analysis in Using Net Present Value

206

III. Risk

225

Introduction

225

9. Capital Market Theory: An Overview

226

10. Return and Risk: The Capital-Asset-Pricing Model

248

11. An Alternative View of Risk and Return: The Arbitrage Pricing

Theory

291

12. Risk, Cost of Capital, and Capital Budgeting

313

IV. Capital Structure and Dividend Policy

343

Introduction

343

13. Corporate-Financing Decisions and Efficient Capital Markets

345

14. Long-Term Financing: An Introduction

377

15. Capital Structure: Basic Concepts

396

16. Capital Structure: Limits to the Use of Debt

428

17. Valuation and Capital Budgeting for the Levered Firm

474

18. Dividend Policy: Why Does It Matter?

501

V. Long-Term Financing

539

Introduction

539

19. Issuing Securities to the Public

540

iii

20. Long-Term Debt

569

21. Leasing

592

VI. Options, Futures, and Corporate Finance

617

Introduction

617

22. Options and Corporate Finance: Basic Concepts

618

23. Options and Corporate Finance: Extensions and Applications

656

24. Warrants and Convertibles

680

25. Derivatives and Hedging Risk

701

VII. Financial Planning and Short-Term Finance

736

Introduction

736

26. Corporate Financial Models and Long-Term Planning

737

27. Short-Term Finance and Planning

751

28. Cash Management

776

29. Credit Management

803

VIII. Special Topics

820

Introduction

820

30. Mergers and Acquisitions

821

31. Financial Distress

859

32. International Corporate Finance

877

iv

Ross-Westerfield-Jaffe: Corporate Finance, Sixth Edition

Front Matter

Preface

? The McGraw-Hill

1

Companies, 2002

Preface

The teaching and the practicing of corporate finance are more challenging and exciting than ever before. The last decade has seen fundamental changes in financial markets and financial instruments. In the early years of the 21st century, we still see announcements in the financial press about such matters as takeovers, junk bonds, financial restructuring, initial public offerings, bankruptcy, and derivatives. In addition, there is the new recognition of "real" options (Chapters 21 and 22), private equity and venture capital (Chapter 19), and the disappearing dividend (Chapter 18). The world's financial markets are more integrated than ever before. Both the theory and practice of corporate finance have been moving ahead with uncommon speed, and our teaching must keep pace.

These developments place new burdens on the teaching of corporate finance. On one hand, the changing world of finance makes it more difficult to keep materials up to date. On the other hand, the teacher must distinguish the permanent from the temporary and avoid the temptation to follow fads. Our solution to this problem is to emphasize the modern fundamentals of the theory of finance and make the theory come to life with contemporary examples. Increasingly, many of these examples are outside the United States. All too often, the beginning student views corporate finance as a collection of unrelated topics that are unified largely because they are bound together between the covers of one book. As in the previous editions, our aim is to present corporate finance as the working of a small number of integrated and powerful institutions.

THE INTENDED AUDIENCE OF THIS BOOK

This book has been written for the introductory courses in corporate finance at the MBA level, and for the intermediate courses in many undergraduate programs. Some instructors will find our text appropriate for the introductory course at the undergraduate level as well.

We assume that most students either will have taken, or will be concurrently enrolled in, courses in accounting, statistics, and economics. This exposure will help students understand some of the more difficult material. However, the book is self-contained, and a prior knowledge of these areas is not essential. The only mathematics prerequisite is basic algebra.

NEW TO THE SIXTH EDITION

Following are the key revisions and updates to this edition:

? A complete update of all cost of capital discussions to emphasize its usefulness in capital budgeting, primarily in Chapters 12 and 17.

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