Financial

Management
Theory & Practice

15e

E U G E N E F. B R I G H A M
University of Florida

MICHAEL C. EHRHARDT
University of Tennessee

Australia • Brazil • Mexico • Singapore • United Kingdom • United States

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 Brief Contents

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Preface xix

PART 1 THE COMPANY AND ITS PART 3 STOCKS AND OPTIONS 239
ENVIRONMENT 1
CHAPTER 6 Risk and Return 241
CHAPTER 1 An Overview of Financial Web Extensions 6A: Continuous Probability
Management and the Financial Distributions
Environment 3
Web Extensions 6B: Estimating Beta with a Financial
1A: An Overview of Derivatives
Web Extensions Calculator
CHAPTER 2 Financial Statements, Cash Flow,
CHAPTER 7 Corporate Valuation and Stock
and Taxes 57
Valuation 293
Web Extension 2A: The Federal Income Tax System for
Web Extension 7A: Derivation of Valuation
Individuals
Equations
CHAPTER 3 Analysis of Financial
CHAPTER 8 Financial Options and Applications
Statements 101
in Corporate Finance 343

PART 2 FIXED INCOME SECURITIES 137 PART 4 PROJECTS AND THEIR

CHAPTER 4 Time Value of Money 139 VALUATION 373
Web Extensions 4A: The Tabular Approach CHAPTER 9 The Cost of Capital 375
4B: Derivation of Annuity Formulas Web Extension 9A: The Required Return Assuming
4C: Continuous Compounding Nonconstant Dividends and Stock
Repurchases
CHAPTER 5 Bonds, Bond Valuation, and
Interest Rates 193 CHAPTER 10 The Basics of Capital Budgeting:
Evaluating Cash Flows 413
Web Extensions 5A: A Closer Look at Zero Coupon
and Other OID Bonds Web Extension 10A: The Accounting Rate of Return
(ARR)
Web Extensions 5B: A Closer Look at TIPS: Treasury
Inflation-Protected Securities CHAPTER 11 Cash Flow Estimation and Risk
Web Extensions 5C: A Closer Look at Bond Risk: Analysis 453
Duration Web Extension 11A: Certainty Equivalents and Risk-
Adjusted Discount Rates
Web Extensions 5D: The Pure Expectations Theory and
Estimation of Forward Rates

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 vi Brief Contents

CHAPTER 20 Hybrid Financing: Preferred

PART 5 CORPORATE VALUATION AND Stock, Warrants, and
GOVERNANCE 501 Convertibles 819

CHAPTER 12 Corporate Valuation and Financial Web Extensions 20A: Calling Convertible Issues
Planning 503
CHAPTER 13 Corporate Governance 541
PART 9 STRATEGIC FINANCE IN
A DYNAMIC ENVIRONMENT 847
PART 6 CASH DISTRIBUTIONS AND CHAPTER 21 Dynamic Capital Structures and
CAPITAL STRUCTURE 563 Corporate Valuation 849

CHAPTER 14 Distributions to Shareholders: Web Extensions 21A: Projecting Consistent Debt and
Dividends and Repurchases 565 Interest Expenses
CHAPTER 22 Mergers and Corporate
CHAPTER 15 Capital Structure Decisions 607
Control 873
Web Extension 15A: Degree of Leverage
CHAPTER 23 Enterprise Risk
Web Extension 15B: Capital Structure Theory: Management 911
Arbitrage Proofs of the Modigliani-
CHAPTER 24 Bankruptcy, Reorganization, and
Miller Theorems
Liquidation 947
Web Extensions 24A: Multiple Discriminant
PART 7 MANAGING GLOBAL Analysis
OPERATIONS 653
PART 10 SPECIAL TOPICS 979
CHAPTER 16 Supply Chains and Working
Capital Management 655 CHAPTER 25 Portfolio Theory and Asset Pricing
Web Extension 16A: Secured Short-Term Financing Models 981
CHAPTER 17 Multinational Financial CHAPTER 26 Real Options 1015
Management 705 Web Extensions 26A: The Abandonment Real
Option

PART 8 TACTICAL FINANCING Web Extensions 26B: Risk-Neutral Valuation

DECISIONS 749
CHAPTER 18 Public and Private Financing: Initial APPENDIXES
Offerings, Seasoned Offerings, and
Investment Banks 751 APPENDIX A Solutions to Self-Test Problems 1041
APPENDIX B Answers to End-of-Chapter
Web Extensions 18A: Rights Offerings
Problems 1075
CHAPTER 19 Lease Financing 791 APPENDIX C Selected Equations 1085
Web Extensions 19A: Leasing Feedback APPENDIX D Values of the Areas under the
Web Extensions 19B: Percentage Cost Analysis Standard Normal Distribution
Web Extensions 19C: Leveraged Leases Function 1099

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 Brief Contents vii

GLOSSARY AND INDEXS WEB CHAPTERS:

Glossary 1101 CHAPTER 27 Providing and Obtaining Credit

Name Index 1149 CHAPTER 28 Advanced Issues in Cash
Subject Index 1153 Management and Inventory
Control
CHAPTER 29 Pension Plan Management
CHAPTER 30 Financial Management in Not-
for-Profit Businesses

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 Contents
© Panda3800/Shutterstock.com

Preface xix CHAPTER 2

Financial Statements, Cash Flow,
and Taxes 57
PART 1 THE COMPANY AND ITS Box: Intrinsic Value, Free Cash Flow, and
ENVIRONMENT 1 Financial Statements 58
Financial Statements and Reports 58
CHAPTER 1
The Balance Sheet 59
An Overview of Financial
Box: The Great Recession of 2007: Let s Play
Management and the Financial
Hide-and-Seek! 62
Environment 3
The Income Statement 62
The Five-Minute MBA 4
Statement of Stockholders’ Equity 65
Finance from 40,000 Feet Above 4
Box: Financial Analysis on the Web 66
The Corporate Life Cycle 5
Statement of Cash Flows 66
Governing a Corporation 10
Box: Filling in the GAAP 69
Box: Be Nice with a B-Corp 12
Net Cash Flow 70
Box: Taxes and Whistleblowing 14
Free Cash Flow: The Cash Flow Available for
An Overview of Financial Markets 14
Distribution to Investors 70
Claims on Future Cash Flows: Types of Financial
Box: Sarbanes-Oxley and Financial Fraud 76
Securities 16
Performance Evaluation 78
Claims on Future Cash Flows: The Required Rate
of Return (The Cost of Money) 20 The Federal Income Tax System 84
The Functions of Financial Institutions 24 Box: When It Comes to Taxes, History Repeats
and Repeals Itself! 86
Financial Markets 29
Summary 89
Overview of the U.S. Stock Markets 33
Web Extension
Trading in the Modern Stock Markets 34
2A: The Federal Income Tax System for
Box: Measuring the Market 42 Individuals
Finance and the Great Recession of 2007 42
Box: Anatomy of a Toxic Asset 50 CHAPTER 3
The Big Picture 52 Analysis of Financial Statements 101
e-Resources 53 Box: Intrinsic Value and Analysis of Financial
Summary 53 Statements 102
Web Extensions Financial Analysis 102
1A: An Overview of Derivatives Liquidity Ratios 104

ix

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 x Contents

Asset Management Ratios 106 Finding Annuity Payments, Periods, and Interest
Debt Management Ratios 109 Rates 162
Box: The Great Recession of 2007: The Price Is Box: Variable Annuities: Good or Bad? 163
Right! (Or Wrong!) 110 Box: Using the Internet for Personal Financial
Profitability Ratios 114 Planning 164
Box: The World Might Be Flat, but Global Uneven, or Irregular, Cash Flows 165
Accounting Is Bumpy! The Case of IFRS versus Future Value of an Uneven Cash Flow Stream 168
FASB 115 Solving for I with Irregular Cash Flows 169
Market Value Ratios 116 Semiannual and Other Compounding Periods 170
Trend Analysis, Common Size Analysis, and Box: Truth in Lending: What Loans Really Cost 173
Percentage Change Analysis 120 Fractional Time Periods 174
Tying the Ratios Together: The DuPont Amortized Loans 175
Equation 123
Box: What You Know Is What You Get: Not in
Comparative Ratios and Benchmarking 124 Payday Lending 176
Uses and Limitations of Ratio Analysis 125 Growing Annuities 178
Box: Ratio Analysis on the Web 126
Box: The Great Recession of 2007: An Accident
Looking Beyond the Numbers 126 Waiting to Happen: Option Reset Adjustable Rate
Summary 127 Mortgages 179
Summary 181
Web Extensions
PART 2 FIXED INCOME SECURITIES 137 4A: The Tabular Approach
4B: Derivation of Annuity Formulas
CHAPTER 4 4C: Continuous Compounding
Time Value of Money 139
Box: Corporate Valuation and the Time Value of
Money 140 CHAPTER 5
Bonds, Bond Valuation, and Interest
Time Lines 140
Rates 193
Future Values 141
Box: Intrinsic Value and the Cost of Debt 194
Box: Hints on Using Financial Calculators 145
Who Issues Bonds? 194
Present Values 149
Box: Betting With or Against the U.S.
Box: It s a Matter of Trust 150 Government: The Case of Treasury Bond Credit
Finding the Interest Rate, I 153 Default Swaps 196
Finding the Number of Years, N 154 Key Characteristics of Bonds 196
Perpetuities 154 Bond Valuation 200
Annuities 155 Changes in Bond Values Over Time 205
Future Value of an Ordinary Annuity 156 Box: Chocolate Bonds 208
Box: The Power of Compound Interest 159 Bonds with Semiannual Coupons 208
Future Value of an Annuity Due 159 Bond Yields 209
Present Value of Ordinary Annuities and Annuities The Pre-Tax Cost of Debt: Determinants of Market
Due 160 Interest Rates 212

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 Contents xi

The Risk-Free Interest Rate: Nominal (rRF) and Box: The Benefits of Diversifying Overseas 263
Real (r *) 213 The Relationship between Risk and Return in the
The Inflation Premium (IP) 214 Capital Asset Pricing Model 263
The Maturity Risk Premium (MRP) 216 Box: Another Kind of Risk: The Bernie Madoff
The Default Risk Premium (DRP) 219 Story 271

Box: Insuring with Credit Default Swaps: Let the The Efficient Markets Hypothesis 272
Buyer Beware! 221 The Fama-French Three-Factor Model 276
Box: The Great Recession of 2007: U.S. Treasury Behavioral Finance 280
Bonds Downgraded! 223 The CAPM and Market Efficiency: Implications for
Box: The Few, the Proud, the AAA-Rated Corporate Managers and Investors 282
Companies! 225 Summary 283
The Liquidity Premium (LP) 225 Web Extensions
Box: The Great Recession of 2007: Fear and 6A: Continuous Probability Distributions
Rationality 226
6B: Estimating Beta with a Financial Calculator
The Term Structure of Interest Rates 226
Financing with Junk Bonds 228
Bankruptcy and Reorganization 228 CHAPTER 7
Corporate Valuation and Stock
Summary 229
Valuation 293
Web Extensions
Box: Corporate Valuation and Stock Prices 294
5A: A Closer Look at Zero Coupon and Other OID
Bonds Legal Rights and Privileges of Common
5B: A Closer Look at TIPS: Treasury Inflation- Stockholders 294
Protected Securities Types of Common Stock 295
5C: A Closer Look at Bond Risk: Duration Stock Market Reporting 296
5D: The Pure Expectations Theory and Valuing Common Stocks—Introducing the Free
Estimation of Forward Rates Cash Flow (FCF) Valuation Model 297
The Constant Growth Model: Valuation When
PART 3 STOCKS AND OPTIONS 239 Expected Free Cash Flow Grows at a Constant
Rate 300
CHAPTER 6
Risk and Return 241 The Multistage Model: Valuation when Expected
Short-Term Free Cash Flow Grows at a
Box: Intrinsic Value, Risk, and Return 242
Nonconstant Rate 305
Investment Returns and Risk 242
Application of the FCF Valuation Model to
Measuring Risk for Discrete Distributions 243 MicroDrive 309
Risk in a Continuous Distribution 247 Do Stock Values Reflect Long-Term or Short-Term
Box: What Does Risk Really Mean? 249 Cash Flows? 315
Using Historical Data to Estimate Risk 249 Value-Based Management: Using the Free Cash Flow
Box: The Historic Trade-Off between Risk and Valuation Model to Identify Value Drivers 316
Return 252 Why Are Stock Prices So Volatile? 319
Risk in a Portfolio Context 252 Valuing Common Stocks with the Dividend
The Relevant Risk of a Stock: The Capital Asset Growth Model 320
Pricing Model (CAPM) 256 The Market Multiple Method 328

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 xii Contents

Comparing the FCF Valuation Model, the Box: How Effective Is the Effective Corporate Tax
Dividend Growth Model, and the Market Rate? 382
Multiple Method 329 Cost of Preferred Stock, rps 384
Preferred Stock 330 Cost of Common Stock: The Market Risk
Summary 331 Premium, RPM 384
Web Extensions Using the CAPM to Estimate the Cost of Common
7A: Derivation of Valuation Equations Stock, rs 388
Using the Dividend Growth Approach to Estimate
CHAPTER 8 the Cost of Common Stock 390
Financial Options and Applications in
The Weighted Average Cost of Capital
Corporate Finance 343 (WACC) 393
Box: The Intrinsic Value of Stock Options 344 Box: Global Variations in the Cost of Capital 395
Overview of Financial Options 344 Adjusting the Cost of Equity for Flotation
The Single-Period Binomial Option Pricing Costs 395
Approach 347 Privately Owned Firms and Small Businesses 397
Box: Financial Reporting for Employee Stock The Divisional Cost of Capital 398
Options 348
Estimating the Cost of Capital for Individual
The Single-Period Binomial Option Pricing Projects 401
Formula 353
Managerial Issues and the Cost of Capital 402
The Multi-Period Binomial Option Pricing
Summary 404
Model 355
The Black-Scholes Option Pricing Model Web Extensions
(OPM) 357 9A: The Required Return Assuming Nonconstant
Dividends and Stock Repurchases
Box: Taxes and Stock Options 362
The Valuation of Put Options 363
CHAPTER 10
Applications of Option Pricing in Corporate The Basics of Capital Budgeting:
Finance 365
Evaluating Cash Flows 413
Summary 367
Box: Corporate Valuation and Capital
Budgeting 414
PART 4 PROJECTS AND THEIR An Overview of Capital Budgeting 414
VALUATION 373 The First Step in Project Analysis 416
Net Present Value (NPV) 417
CHAPTER 9 Internal Rate of Return (IRR) 419
The Cost of Capital 375 Modified Internal Rate of Return (MIRR) 426
Box: Corporate Valuation and the Cost of
Profitability Index (PI) 429
Capital 376
Payback Period 430
The Weighted Average Cost of Capital 376
How to Use the Different Capital Budgeting
Choosing Weights for the Weighted Average Cost Methods 432
of Capital 378
Other Issues in Capital Budgeting 435
After-Tax Cost of Debt: rd 1 T and
rstd 1 T 379 Summary 441

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
 Contents xiii

Web Extensions Additional Funds Needed (AFN) Equation

10A: The Accounting Rate of Return (ARR) Method 523
Forecasting When the Ratios Change 526
CHAPTER 11
Summary 530
Cash Flow Estimation and Risk
Analysis 453 CHAPTER 13
Corporate Governance 541
Box: Project Valuation, Cash Flows, and Risk
Analysis 454 Box: Corporate Governance and Corporate
Valuation 542
Identifying Relevant Cash Flows 454
Agency Conflicts 542
Analysis of an Expansion Project 459
Corporate Governance 545
Box: Mistakes in Cash Flow Estimation Can Kill
Innovation 466 Box: Would the U.S. Government Be an Effective
Board Director? 550
Risk Analysis in Capital Budgeting 467
Box: The Dodd-Frank Act and Say on Pay 552
Measuring Stand-Alone Risk 467
Box: The Sarbanes-Oxley Act of 2002 and
Sensitivity Analysis 468
Corporate Governance 553
Scenario Analysis 471
Box: International Corporate Governance 555
Monte Carlo Simulation 474
Employee Stock Ownership Plans (ESOPs) 557
Project Risk Conclusions 477
Summary 560
Replacement Analysis 478
Real Options 480
Phased Decisions and Decision Trees 482 PART 6 CASH DISTRIBUTIONS AND
Summary 485 CAPITAL STRUCTURE 563
Web Extensions CHAPTER 14
11A: Certainty Equivalents and Risk-Adjusted Distributions to Shareholders: Dividends
Discount Rates and Repurchases 565
Box: Uses of Free Cash Flow: Distributions to
PART 5 CORPORATE VALUATION AND Shareholders 566
GOVERNANCE 501 An Overview of Cash Distributions 566
CHAPTER 12 Procedures for Cash Distributions 568
Corporate Valuation and Financial Cash Distributions and Firm Value 571
Planning 503 Clientele Effect 575
Box: Corporate Valuation and Financial Signaling Hypothesis 576
Planning 504
Implications for Dividend Stability 577
Overview of Financial Planning 504
Box: The Great Recession of 2007: Will Dividends
Financial Planning at MicroDrive, Inc. 506 Ever Be the Same? 578
Forecasting Operations 508 Setting the Target Distribution Level: The Residual
Evaluating MicroDrive’s Strategic Initiatives 512 Distribution Model 578
Projecting MicroDrive’s Financial Statements 515 The Residual Distribution Model in Practice 580
Analysis and Selection of a Strategic Plan 519 A Tale of Two Cash Distributions: Dividends
The CFO’s Model 521 versus Stock Repurchases 581

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 xiv Contents

The Pros and Cons of Dividends and Overview of Supply Chain Management 656
Repurchases 590 Using and Financing Operating Current Assets 658
Box: Dividend Yields around the World 592 The Cash Conversion Cycle 662
Other Factors Influencing Distributions 592 Box: Some Firms Operate with Negative Working
Summarizing the Distribution Policy Decision 594 Capital! 667
Stock Splits and Stock Dividends 595 Inventory Management 668
Box: The Great Recession of 2007: Talk About a Receivables Management 669
Split Personality! 596 Box: Supply Chain Finance 671
Dividend Reinvestment Plans 598 Accruals and Accounts Payable (Trade Credit) 673
Summary 599 Box: A Wag of the Finger or Tip of the Hat? The
Colbert Report and Small Business Payment
CHAPTER 15 Terms 674
Capital Structure Decisions 607
The Cash Budget 677
Box: Corporate Valuation and Capital
Structure 608
Cash Management and the Target Cash
Balance 681
An Overview of Capital Structure 608
Box: Use It or Lose Part of It: Cash Can Be
Business Risk and Financial Risk 610
Costly! 682
Capital Structure Theory: The Modigliani and
Miller Models 614 Cash Management Techniques 682
Box: Yogi Berra on the MM Proposition 616 Managing Short-Term Investments 685
Capital Structure Theory: Beyond the Modigliani Box: Your Check Isn t in the Mail 686
and Miller Models 618 Short-Term Financing 687
Capital Structure Evidence and Implications 623 Short-Term Bank Loans 688
Estimating the Optimal Capital Structure 628 Commercial Paper 692
Anatomy of a Recapitalization 634 Use of Security in Short-Term Financing 692
Box: The Great Recession of 2007: Summary 693
Deleveraging 639
Web Extensions
Risky Debt and Equity as an Option 639
16A: Secured Short-Term Financing
Managing the Maturity Structure of Debt 642
Summary 645
CHAPTER 17
Web Extensions Multinational Financial Management 705
15A: Degree of Leverage
Box: Corporate Valuation in a Global Context 706
15B: Capital Structure Theory: Arbitrage Proofs
of the Modigliani-Miller Theorems Multinational, or Global, Corporations 706
Multinational versus Domestic Financial
PART 7 MANAGING GLOBAL Management 707
OPERATIONS 653 Exchange Rates 709
Exchange Rates and International Trade 714
CHAPTER 16
Supply Chains and Working Capital The International Monetary System and Exchange
Management 655 Rate Policies 715
Box: Corporate Valuation and Working Capital
Trading in Foreign Exchange 720
Management 656 Interest Rate Parity 722

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 Contents xv

Purchasing Power Parity 724 Web Extensions

Box: Hungry for a Big Mac? Go to Ukraine! 725 18A: Rights Offerings
Inflation, Interest Rates, and Exchange Rates 726
International Money and Capital Markets 726 CHAPTER 19
Lease Financing 791
Box: Greasing the Wheels of International
Business 727 Types of Leases 792
Box: Stock Market Indices around the World 731 Tax Effects 795
Multinational Capital Budgeting 732 Financial Statement Effects 796
Box: Consumer Finance in China 733 Box: Off-Balance Sheet Financing: Is It Going to
Disappear? 798
Box: Double Irish with a Dutch Twist 735
Evaluation by the Lessee 799
International Capital Structures 737
Evaluation by the Lessor 804
Multinational Working Capital Management 738
Other Issues in Lease Analysis 806
Summary 741
Box: What You Don t Know Can Hurt
You! 807
Box: Lease Securitization 809
PART 8 TACTICAL FINANCING
Other Reasons for Leasing 810
DECISIONS 749
Summary 811
CHAPTER 18 Web Extensions
Public and Private Financing: Initial 19A: Leasing Feedback
Offerings, Seasoned Offerings, and 19B: Percentage Cost Analysis
Investment Banks 751 19C: Leveraged Leases
The Financial Life Cycle of a Start-Up
Company 752 CHAPTER 20
The Decision to Go Public 753 Hybrid Financing: Preferred Stock,
The Process of Going Public: An Initial Public Warrants, and Convertibles 819
Offering 755
Preferred Stock 820
Equity Carve-Outs: A Special Type of IPO 765
Box: The Romance Had No Chemistry, but It Had
Other Ways to Raise Funds in the Capital a Lot of Preferred Stock! 822
Markets 766
Box: Hybrids Aren t Only for
Box: Where There s Smoke, There s Fire 770
Corporations 823
Investment Banking Activities 771
Warrants 824
Box: The Great Recession of 2007: What Was the
Role of Investment Banks? 773 Convertible Securities 830
The Decision to Go Private 773 A Final Comparison of Warrants and
Refunding Operations 775 Convertibles 837
Box: TVA Ratchets Down Its Interest Reporting Earnings When Warrants or
Expenses 779 Convertibles Are Outstanding 838
Managing the Risk Structure of Debt with Project Summary 839
Financing 781 Web Extensions
Summary 782 20A: Calling Convertible Issues

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 xvi Contents

Who Wins: The Empirical Evidence 898

PART 9 STRATEGIC FINANCE IN
Box: Merger Mistakes 898
A DYNAMIC ENVIRONMENT 847
Corporate Alliances 899
CHAPTER 21 Divestitures 900
Dynamic Capital Structures and
Holding Companies 901
Corporate Valuation 849
Summary 902
Box: Corporate Valuation and Capital Structure
Decisions 850
The Adjusted Present Value (APV) Approach 850 CHAPTER 23
Enterprise Risk Management 911
The Modigliani and Miller Models 853
Box: Corporate Valuation and Risk
The Compressed Adjusted Present Value (CAPV)
Management 912
Model 855
Reasons to Manage Risk 912
Multistage Valuation When the Capital Structure Is
Stable 856 An Overview of Enterprise Risk
Management 915
Illustration of the Three Valuation Approaches for
A Framework for Enterprise Risk
a Constant Capital Structure 860
Management 917
Analysis of a Dynamic Capital Structure 866 Categories of Risk Events 920
Summary 867 Foreign Exchange (FX) Risk 922
Web Extensions Commodity Price Risk 923
21A: Projecting Consistent Debt and Interest Interest Rate Risk 927
Expenses
Box: The Game of Truth or LIBOR 933
Project Selection Risks 935
CHAPTER 22
Managing Credit Risks 938
Mergers and Corporate Control 873
Risk and Human Safety 940
Rationale for Mergers 874
Summary 941
Types of Mergers 877
Level of Merger Activity 877 CHAPTER 24
Hostile versus Friendly Takeovers 878 Bankruptcy, Reorganization, and
Merger Regulation 879 Liquidation 947
Overview of Merger Analysis 881 Financial Distress and Its Consequences 948
Estimating a Target’s Value 882 Issues Facing a Firm in Financial Distress 949
Setting the Bid Price 886 Settlements without Going through Formal
Analysis When the Capital Structure Bankruptcy 950
Changes during the Explicit Forecast Federal Bankruptcy Law 952
Period 888 Reorganization in Bankruptcy (Chapter 11 of
Taxes and the Structure of the Takeover Bid 889 Bankruptcy Code) 953
Box: Tempest in a Teapot? 891 Liquidation in Bankruptcy 962
Financial Reporting for Mergers 892 Box: A Nation of Defaulters? 966
Analysis for a “True Consolidation” 895 Anatomy of a Bankruptcy: Transforming the GM
The Role of Investment Bankers 896 Corporation into the GM Company 967

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 Contents xvii

Other Motivations for Bankruptcy 968 The Growth Option: An Illustration 1027
Some Criticisms of Bankruptcy Laws 969 Concluding Thoughts on Real Options 1033
Summary 970 Summary 1034
Web Extensions Web Extensions
24A: Multiple Discriminant Analysis 26A: The Abandonment Real Option
26B: Risk-Neutral Valuation
PART 10 SPECIAL TOPICS 979
CHAPTER 25 APPENDIXES
Portfolio Theory and Asset Pricing
Appendix a Solutions to Self-Test Problems 1041
Models 981
Appendix b Answers to End-of-Chapter
Box: Intrinsic Value, Risk, and Return 982
Problems 1075
Efficient Portfolios 982 Appendix c Selected Equations 1085
Choosing the Optimal Portfolio 987 Appendix d Values of the Areas under the Standard
The Basic Assumptions of the Capital Asset Pricing Normal Distribution Function 1099
Model 990
The Capital Market Line and the Security Market
Line 991 GLOSSARY AND INDEXES

Calculating Beta Coefficients 995 Glossary 1101

Box: Skill or Luck? 996 Name Index 1149
Empirical Tests of the CAPM 1004 Subject Index 1153
Arbitrage Pricing Theory 1006
Summary 1009 WEB CHAPTERS:
Chapter 27 Providing and Obtaining Credit
CHAPTER 26 Chapter 28 Advanced Issues in Cash
Real Options 1015 Management and Inventory Control
Valuing Real Options 1016 Chapter 29 Pension Plan Management
The Investment Timing Option: An Chapter 30 Financial Management in Not-for-
Illustration 1017 Profit Businesses

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.