Corporate Finance 11th Edition Ross Test Bank

Product Details:

• ISBN-10 ‏ : ‎ 9353163544
• ISBN-13 ‏ : ‎ 978-9353163549
• Author:   Ross (Author), Westerfield (Author), Jordan (Author)

Custom edition for Oregon State University class BA 360. McGraw-Hill Create, publisher, 2018.

Corporate Finance 11th Edition Ross Solutions Manual

Table of Content:

Accounting Liquidity 22 Debt versus Equity 23 Value versus Cost 23 
2.2 The Income Statement24 
Pa r t I
Overview 1 
Chapter 1
 Introduction to Corporate Finance 2 Executive Summary 2
1.1 What Is Corporate Finance?
3 
Generally Accepted Accounting Principles 25
Noncash Items 25 Time and Costs 25 
2.3 Net Working Capital 
26
2.4 Financial Cash Flow 
26
2.5 The Accounting Statement of Cash Flows
29 
The Balance-Sheet Model of the Firm 3 Capital Structure 4 The Financial Manager 
5 
1.2 Corporate Securities as Contingent Claims on Total Firm Value 
Cash Flow from Operating Activities 29 Cash Flow from Investing Activities 30 
Cash Flow from 
Financing Activities 30 
2.6 Summary and Conclusions 
31
Appendix 2A Financial Statement Analysis
34
9Appendix 2B U.S. Federal Tax Rates
42
1.3 The Corporate Firm 
10
The Sole Proprietorship 10 The Partnership 10 
Chapter 3
Financial Planning and Growth
 The Corporation 11 Case Study: Making the Decision to Become a 
Corporation:The 
Case of PLM International, Inc. 12 
44
Executive Summary 44
3.1 What Is Financial Planning?
44
3.2 A Financial-Planning Model: The Ingredients
45 
1.4 Goals of the Corporate Firm
14
Agency Costs and the Set-of-Contracts Perspective 14 Managerial Goals 15 
Separation of Ownership 
and Control 15 Do Shareholders Control Managerial Behavior? 16 
1.5 Financial Markets 
17 
3.3 The Percentage Sales Method
47
The Income Statement 48 The Balance Sheet 49 
3.4 What Determines Growth? 
51
3.5 Some Caveats of Financial-Planning Models
54
The Primary Market: New Issues 17 
3.6 Summary and Conclusions
55
Secondary Markets 
18
Exchange Trading of Listed Stocks 18 Listing 18 
1.6 Outline of the Text 
19 
Chapter 2
Accounting Statements and Cash Flow 21 
Executive Summary 21
2.1 The Balance Sheet
21 
Pa r t II
Value and Capital Budgeting 59 
Chapter 4
Net Present Value 60 
Executive Summary 60
4.1 The One-Period Case
60 
The Dividend Growth Model 123 The NPVGO Model 123 Summation 125 
5.8 Price-Earnings Ratio 
125 
4.2 The Multiperiod Case 
63
Future Value and Compounding 63 The Power of Compounding: A Digression
67
Present Value and Discounting 68 The Algebraic Formula 71 
5.9 Stock Market Reporting
127
4.3 Compounding Periods
 72 Distinction between Stated Annual Interest 
Rate and Effective 
Annual Interest Rate 73 Compounding over Many Years 73 Continuous Compounding 
(Advanced) 74 
4.4 Simplifications 
5.10 Summary and Conclusions
128
Appendix 5A The Term Structure of Interest Rates, Spot Rates, and Yield to 
Maturity 134 
Chapter 6
Some Alternative Investment Rules 144 
Executive Summary 144
6.1 Why Use Net Present Value?
144 
 
75
Perpetuity 75 Growing Perpetuity 77 Annuity 79 Growing Annuity 83 Case Study: 
Making the 
Decision to Convert Lottery Prize Winnings:The Case of the Singer Asset Finance 
Company 85
4.5 What Is a Firm Worth?
86 
6.2 The Payback Period Method
146
Defining the Rule 146 Problems with the Payback Method 147 Managerial 
Perspective 
148 Summary of 
Payback 148
4.6 Summary and Conclusions
87 
6.3 The Discounted Payback Period Method
149
Appendix 4A Net Present Value: First Principles of Finance 94 
Chapter 5
How to Value Bonds and Stocks 106 
Executive Summary 106
5.1 Definition and Example of a Bond
106 
6.4 The Average Accounting Return Method
149
Defining the Rule 149 Analyzing the Average Accounting Return Method 151 
6.5 The Internal Rate of Return 
152
6.6 Problems with the IRR Approach
 154 Definition of Independent and Mutually 
Exclusive Projects
 154 Two General Problems Affecting Both 
Independent and Mutually 
Exclusive Projects 154 Problems Specific to Mutually Exclusive Projects 159 
Redeeming Qualities of IRR 
163 A Test 163 
6.7 The Profitability Index 
5.2 How to Value Bonds 
106
Pure Discount Bonds 106 Level-Coupon Bonds 107 Consols 109 
5.3 Bond Concepts 
110164 
Interest Rates and Bond Prices 110 Yield to Maturity 110 Bond Market Reporting 
111 
Calculation of Profitability Index 164 
6.8 The Practice of Capital Budgeting 
166
5.4 The Present Value of Common Stocks
112 
6.9 Summary and Conclusions
168
Dividends versus Capital Gains 112 Valuation of Different Types of Stocks 113 
5.5 Estimates of Parameters in the Dividend-Discount Model 116 Where Does g 
Come From? 
Chapter 7
Net Present Value and Capital Budgeting 178 
Where Does r Come From? 118 
116Executive Summary 178
7.1 Incremental Cash Flows
 178 Cash Flows?Not Accounting Income 178 Sunk 
Costs 179 
Opportunity Costs 179 
A Healthy Sense of Skepticism 118 
5.6 Growth Opportunities 
119 Growth in Earnings and Dividends versus Growth Opportunities 121
Dividends or Earnings:Which to Discount? 122
The No-Dividend Firm 122 
5.7 The Dividend-Growth Model and the NPVGO Model (Advanced) 123 
Side Effects 179 Allocated Costs 180 
7.2 The Baldwin Company:An Example 
180
An Analysis of the Project 182
Which Set of Books? 184 A Note on Net Working Capital 185 Interest Expense 186 
7.3 The Boeing 777: A Real-World Example 
186 
9.6 Summary and Conclusions
249
Appendix 9A The Historical Market Risk Premium: The Very Long Run 253 
 
7.4 Inflation and Capital Budgeting
189 
Chapter 10
Return and Risk: The Capital-Asset-Pricing Model (CAPM) 255
Interest Rates and Inflation 189 Cash Flow and Inflation 191 Discounting: 
Nominal 
or Real? 191
7.5 Investments of Unequal Lives:The Equivalent Annual Cost Method
 193 The General Decision to Replace (Advanced) 
195 
Executive Summary 255 
10.1 Individual Securities 
255
10.2 Expected Return,Variance, and Covariance
256 
 
7.6 Summary and Conclusions 
197 
Expected Return and Variance 256 Covariance and Correlation 258 
20610.3 The Return and Risk for Portfolios 
261 
Minicases: Goodweek Tires, Inc.
I. Q. Inc. 
207 
The Example of Supertech and Slowpoke 261
 Jimmy?s Hot Dog Stand 208 Appendix 7A Depreciation 209 
The Expected Return on a Portfolio
 261 Variance and Standard Deviation of a 
Portfolio 262
 
10.4 The Efficient Set for Two Assets 
265 
Chapter 8
Risk Analysis, Real Options, and Capital Budgeting 211 
10.5 The Efficient Set for Many Securities
270
Variance and Standard Deviation in a Portfolio of Many Assets 271
 
10.6 Diversification:An Example 
272 
Executive Summary 211
8.1 Decision Trees 
Risk and the Sensible Investor 275 
21110.7 Riskless Borrowing and Lending 
276 
8.2 Sensitivity Analysis, Scenario Analysis, and Break-Even Analysis 213 
Sensitivity Analysis and Scenario Analysis 214 Break-Even Analysis 216 
8.3 Monte Carlo Simulation 
219 
The Optimal Portfolio 
278
10.8 Market Equilibrium
 280 Definition of the Market-Equilibrium 
Portfolio
 280 Definition of Risk When Investors Hold the 
Market Portfolio 281
8.4 Options 
223
The Option to Expand 223 The Option to Abandon 224 Timing Options 226 
8.5 Summary and Conclusions 
227 
The Formula for Beta 283 A Test 283 
10.9 Relationship between Risk and Expected Return (CAPM) 284
Expected Return on Market 284 Expected Return on Individual Security 284 
10.10 Summary and Conclusions 
287 
Pa r t III
Risk 233 
Chapter 9
Capital Market Theory: An Overview 234 
Executive Summary 234
9.1 Returns
235 
Appendix 10A Is Beta Dead?
295
Chapter 11
An Alternative View of Risk and Return: The Arbitrage Pricing Theory 297 
Dollar Returns 235 Percentage Returns 237 
9.2 Holding-Period Returns 
239 
Executive Summary 297 
11.1 Factor Models:Announcements, Surprises, and Expected Returns 298 
11.2 Risk: Systematic and Unsystematic 
299
9.3 Return Statistics 
244 
11.3 Systematic Risk and Betas
300
11.4 Portfolios and Factor Models
303 
9.4 Average Stock Returns and Risk-Free Returns 246 
9.5 Risk Statistics 
247 
Portfolios and Diversification 305 
11.5 Betas and Expected Returns 
307 
Variance 247 Normal Distribution and Its Implications for Standard Deviation 248 
The Linear Relationship 307 The Market Portfolio and the Single Factor 309
11.6 The Capital-Asset-Pricing Model and the Arbitrage Pricing Theory 310 
13.2 A Description of Efficient Capital Markets
351 
Differences in Pedagogy 310 Differences in Application 310 
11.7 Empirical Approaches to Asset Pricing 
311 
Foundations of Market Efficiency 352 
13.3 The Different Types of Efficiency 
354
The Weak Form 
355 
Empirical Models 311 Style Portfolios 313 
The Semistrong and Strong Forms 356 Some Common Misconceptions about the 
Efficient-Market 
Hypothesis 357 
13.4 The Evidence 
358 
11.8 Summary and Conclusions
313 
Chapter 12
Risk, Cost of Capital, and Capital Budgeting 
The Weak Form 
358
 318 
The Semistrong Form 360 The Strong Form 363 
13.5 The Behavioral Challenge to Market Efficiency 364 
13.6 Empirical Challenges to Market Efficiency 
366
Executive Summary 318 
12.1 The Cost of Equity Capital 
318 
13.7 Reviewing the Differences
370 
12.2 Estimation of Beta 
321 
Representativeness 371 Conservatism 371
13.8 Implications for Corporate Finance
371 
Real-World Betas 323 Stability of Beta 323 Using an Industry Beta 324 
1. Accounting Choices, Financial Choices, and Market Efficiency 372 
2. The Timing Decision373 
12.3 Determinants of Beta
326
3. Speculation and Efficient Markets 375 
Cyclicality of Revenues 326 Operating Leverage 327 Financial Leverage and Beta 
328 
12.4 Extensions of the Basic Model 
330 
4. Information in Market Prices 377
13.9 Summary and Conclusions
378 
Chapter 14
Long-Term Financing: An Introduction 384 
The Firm versus the Project:Vive la Difference 330
The Cost of Capital with Debt 331 
12.5 Estimating International Paper?s Cost of Capital 333 Cost of Equity and 
Debt 333 Determining rWACC
334 
Executive Summary 384 
14.1 Common Stock 
384
12.6 Reducing the Cost of Capital
334
What Is Liquidity? 335 Liquidity, Expected Returns, and the Cost of Capital 335 
Liquidity and Adverse 
Selection 336 What the Corporation Can Do 336 
12.7 Summary and Conclusions 
338 
Par and No-Par Stock 384 Authorized versus Issued Common Stock 385 Capital 
Surplus 385 Retained 
Earnings 385 Market Value, Book Value, and Replacement Value 386 Shareholders? 
Rights 387
Dividends 388 Classes of Stock 388 
14.2 Corporate Long-Term Debt: The Basics 
389 
Minicase: AlliedProducts 
341
Appendix 12A Economic Value Added and the Measurement of Financial Performance 
343 
Pa r t IV
Capital Structure and Dividend Policy 347 
Chapter 13
Corporate-Financing Decisions and Efficient Capital Markets 
Interest versus Dividends 389 Is It Debt or Equity? 390 Basic Features of Long-
Term Debt 390 
Different Types of Debt 390 Repayment 391 Seniority 391 Security 391 Indenture 
391 
14.3 Preferred Stock 
392
 349
Executive Summary 349 
13.1 Can Financing Decisions Create Value? 
349 
Stated Value 392 Cumulative and Noncumulative Dividends 392
16.3 Can Costs of Debt Be Reduced?
441 
Is Preferred Stock Really Debt? 393 The Preferred-Stock Puzzle 393 
14.4 Patterns of Financing 
394
14.5 Recent Trends in Capital Structure
398 
Protective Covenants 441 Consolidation of Debt 442 
16.4 Integration of Tax Effects and Financial Distress Costs 442 Pie Again 
444 
39916.5 Signaling 
445 
Which Are Best: Book or Market Values? 398
14.6 Summary and Conclusions 
16.6 Shirking, Perquisites, and Bad Investments: A Note on Agency Cost of Equity 
447 Effect of Agency Costs of Equity on Debt-Equity Financing 449 Free Cash Flow 
449 
16.7 The Pecking-Order Theory 
450 
Chapter 15
Capital Structure: Basic Concepts 
402
Executive Summary 402 
15.1 The Capital-Structure Question and the Pie Theory 402 
15.2 Maximizing Firm Value versus Maximizing Stockholder Interests 403 
15.3 Financial Leverage and Firm Value: An Example 405 Leverage and Returns to 
Shareholders 405 The Choice between Debt and Equity 407 A Key Assumption 409 
15.4 Modigliani and Miller: Proposition II (No Taxes) 409 Risk to Equityholders 
Rises 
with Leverage 409 Proposition II: Required Return to Equityholders Rises with 
Leverage 410 Example 
Illustrating Proposition I and Proposition II 412 MM: An Interpretation 416 
Rules of the Pecking Order 452 Implications 452 
16.8 Growth and the Debt-Equity Ratio 
453
No-Growth 454 Growth 454 
16.9 Personal Taxes 
456
The Miller Model 458 
16.10 How Firms Establish Capital Structure 461 
16.11 Summary and Conclusions 
464
Appendix 16A Some Useful Formulas of Financial Structure 472 Appendix 16B The 
Miller Model and the Graduated Income Tax 473 
Chapter 17
Valuation and Capital Budgeting for the Levered Firm 
15.5 Taxes 
419
The Basic Insight 419 The Quirk in the Tax Code 419 Present Value of the Tax 
Shield 420 Value of 
the Levered Firm 421 Expected Return and Leverage under Corporate Taxes 422 The 
Weighted 
Average Cost of Capital rWACC and Corporate Taxes 424 Stock Price and Leverage 
under Corporate 
Taxes 424 
15.6 Summary and Conclusions 
426
 477
Executive Summary 477 
17.1 Adjusted-Present-Value Approach 
477
17.2 Flow-to-Equity Approach
479
Step 1: Calculating Levered
 Cash Flow (LCF) 479 Step 2: Calculating rS 480
Chapter 16
Capital Structure: Limits to the Use of Debt 433 
Step 3:Valuation 
480
17.3 Weighted-Average-Cost-of-Capital Method
480 
 
 
Executive Summary 433 
16.1 Costs of Financial Distress 
433 Bankruptcy Risk or Bankruptcy Cost? 433 
17.4 A Comparison of the APV, FTE, and WACC Approaches 481 A Suggested Guideline 
482 
17.5 Capital Budgeting When the Discount Rate Must Be Estimated 485 
17.6 APV Example 
486
43617.7 Beta and Leverage 
 
16.2 Description of Financial Distress Costs
Direct Costs of Financial Distress: Legal and Administrative Costs of 
Liquidation or Reorganization 436 
Indirect Costs of Financial Distress 437 Agency Costs 438 
490
The Project Is Not Scale-Enhancing 491 
17.8 Summary and Conclusions 
492
Appendix 17A The Adjusted-Present-Value Approach to Valuing Leveraged Buyouts 
497
Pa r t V
Long-Term Financing 539 
Chapter 19
Issuing Securities to the Public 540 
Executive Summary 540 
19.1 The Public Issue 
540 The Basic Procedure for a New Issue 540 
19.2 Alternative Issue Methods 
Chapter 18
Dividends and Other Payouts 
502
Executive Summary 502 
18.1 Different Types of Dividends 
502
18.2 Standard Method of Cash Dividend Payment 503 
18.3 The Benchmark Case:An Illustration of the Irrelevance of Dividend 
Policy 504 Current Policy: Dividends Set Equal to Cash Flow 505 Alternative 
Policy: Initial 
Dividend Is Greater than Cash Flow
505
The Indifference Proposition 506 Homemade Dividends 507 A Test 508 Dividends and 
Investment 
Policy 509 
18.4 Repurchase of Stock 
509 
 
541
19.3 The Cash Offer 
543
Investment Banks 545 The Offering Price 547 Underpricing: A Possible Explanation 
548
19.4 The Announcement of New Equity and the Value of the Firm 550 
19.5 The Cost of New Issues 
551
Dividend versus Repurchase: Conceptual Example 511 Dividends versus Repurchases: 
Real World 
Considerations 512 
18.5 Personal Taxes, Issuance Costs, and Dividends 513 Firms without Sufficient 
Cash to Pay a Dividend 513 Firms with Sufficient Cash to Pay a Dividend 514 
Summary on Personal 
Taxes 516 
19.6 Rights 
553
The Mechanics of a Rights Offering 554 Subscription Price 554 Number of Rights 
Needed to 
Purchase a Share 555 Effect of Rights Offering on Price of Stock 555 Effects on 
Shareholders 557 
The Underwriting Arrangements 557 
19.7 The Rights Puzzle 
557
18.6 Real-World Factors Favoring a High-Dividend Policy 517 Desire for Current 
Income 
517 Behavioral Finance 517 Agency Costs 519 Information Content of Dividends and 
Dividend 
Signaling 519 
18.7 The Clientele Effect:A Resolution of Real-World Factors? 522 
18.8 What We Know and Do Not Know about Dividend Policy 523 Corporate Dividends 
Are Substantial 523 Fewer Companies Pay Dividends 525 Corporations Smooth 
Dividends 526 
Payouts Provide Information to the Market 527 A Sensible Payout Policy 527 Case 
Study: How 
Firms Make the Decision to Pay Dividends:The Case of Apple Computer 528 
19.8 Shelf Registration 
559
19.9 The Private Equity Market
560
Private Placement 560 The Private Equity Firm 561 Suppliers of Venture Capital 
561 Stages of Financing 
563 Case Study: The Decision to Do an Initial Public Offering (IPO): The Case of 
Medstone International, Inc. 564
19.10 Summary and Conclusions
566 
Chapter 20
Long-Term Debt 569 
Executive Summary 569 
20.1 Long-Term Debt:A Review 
569
20.2 The Public Issue of Bonds
570 
 
18.9 Summary and Conclusions
531 
The Basic Terms 571 Security 572 Protective Covenants 573 The Sinking Fund 573 
The Call Provision 574 
Appendix 18A Stock Dividends and Stock Splits 535
20.3 Bond Refunding 
574 
Pa r t VI
Options, Futures, and Corporate Finance 617 
Chapter 22
Options and Corporate Finance: Basic Concepts 618 
Should Firms Issue Callable Bonds? 574 Calling Bonds:When Does It Make Sense? 
577
20.4 Bond Ratings 
578
Junk Bonds 579 
20.5 Some Different Types of Bonds 
585
Floating-Rate Bonds 585 Deep-Discount Bonds 586 Income Bonds 587 
20.6 Direct Placement Compared to Public Issues 
Executive Summary 618 
58722.1 Options 
618
58822.2 Call Options
 619 The Value of a Call Option at Expiration 619 
22.3 Put Options 
620 The Value of a Put Option at Expiration 620 
22.4 Selling Options 
20.7 Long-Term Syndicated Bank Loans
20.8 Summary and Conclusions
590 
Chapter 21
Leasing 593 
Executive Summary 593 
21.1 Types of Leases 
593 
 
622
22.5 Reading The Wall Street Journal
623
22.6 Combinations of Options
623
22.7 Valuing Options 
626 
The Basics 593 Operating Leases 594 Financial Leases 595 
21.2 Accounting and Leasing 
596 
Bounding the Value of a Call 626 The Factors Determining Call-Option Values 627 
A Quick 
Discussion of Factors Determining Put-Option Values 630 
22.8 An Option-Pricing Formula 
631 
21.3 Taxes, the IRS, and Leases
597
21.4 The Cash Flows of Leasing
598
A Two-State Option Model 631 The Black-Scholes Model 634 
22.9 Stocks and Bonds as Options 
638 The Firm Expressed in Terms of Call Options 639 The Firm Expressed in Terms 
of Put Options 
641 A Resolution of the Two Views 642 A Note on Loan Guarantees 643 
21.5 A Detour on Discounting and Debt Capacity with Corporate Taxes 600 Present 
Value of Riskless Cash Flows 600 Optimal Debt Level and Riskless Cash Flows 
(Advanced) 601 
21.6 NPV Analysis of the Lease-versus-Buy Decision 602 The Discount Rate 602 
21.7 Debt Displacement and Lease Valuation 602 The Basic Concept of Debt 
Displacement (Advanced) 602 Optimal Debt Level in the Xomox Example (Advanced) 
604 
21.8 Does Leasing Ever Pay: The Base Case 
606 
 
22.10 Capital-Structure Policy and Options 
644
Selecting High-Risk Projects 644 
22.11 Mergers and Options 
645
22.12 Investment in Real Projects and Options 647 
22.13 Summary and Conclusions 
649 
21.9 Reasons for Leasing 
607
Good Reasons for Leasing 607 Bad Reasons for Leasing 610 
21.10 Some Unanswered Questions611 
Chapter 23
Options and Corporate Finance: Extensions and Applications 655
Are the Uses of Leases and of Debt Complementary? 611 
Executive Summary 655 
23.1 Executive Stock Options655
Why Are Leases Offered by Both Manufacturers and Third-Party Lessors? 611
Why Are Some Assets Leased MoreThan Others? 611 
Why Options? 655 Valuing Executive Compensation 657 
23.2 Valuing a Start-Up 
659
21.11 Summary and Conclusions
611 
23.3 More on the Binomial Model
662
Appendix 21A APV Approach to Leasing
614 
Heating Oil 662
23.4 Shutdown and Reopening Decisions
669 
25.5 Duration Hedging 
713
Valuing a Gold Mine 669 The Abandonment and Opening Decisions 669 Valuing the 
Simple Gold 
Mine 671 
23.5 Summary and Conclusions 
675 
The Case of Zero-Coupon Bonds 713 The Case of Two Bonds with the Same Maturity 
but with Different 
Coupons 714
Duration 715 Matching Liabilities with Assets 717 
25.6 Swaps Contracts 
719 
Chapter 24
Warrants and Convertibles 677 
Executive Summary 677 
24.1 Warrants 
677 
Interest-Rate Swaps 719 Currency Swaps 721 Exotics 722 
25.7 Actual Use of Derivatives 
723
24.2 The Difference between Warrants and Call Options 679 How the Firm Can Hurt 
Warrant Holders 681 
25.8 Summary and Conclusions
724 
Pa r t VII
Short-Term Finance 729 
Chapter 26
Short-Term Finance and Planning 730 
Executive Summary 730 
26.1 Tracing Cash and Net Working Capital 
730 
24.3 Warrant Pricing and the Black-Scholes Model (Advanced) 681
24.4 Convertible Bonds 
682
24.5 The Value of Convertible Bonds
683
Straight Bond Value 683 Conversion Value 684 Option Value 685 
24.6 Reasons for Issuing Warrants and Convertibles 686 Convertible Debt versus 
Straight Debt 686 
26.2 Defining Cash in Terms of Other Elements
732 
Convertible Debt versus Common Stock 
The Sources-and-Uses-of-Cash 733 
68726.3 The Operating Cycle and the Cash Cycle 
734
26.4 Some Aspects of Short-Term Financial Policy
737 
The ?Free Lunch? Story 
687
The ?Expensive Lunch? Story 688
A Reconciliation 689 
24.7 Why Are Warrants and Convertibles Issued? 
689 
The Size of the Firm?s Investment in Current Assets 737 Alternative Financing 
Policies for Current Assets 
740 Which Is Best? 742 
26.5 Cash Budgeting 
Matching Cash Flows 689 Risk Synergy 689 Agency Costs 690 Backdoor Equity 690 
24.8 Conversion Policy 
 
742
Cash Outflow 743 The Cash Balance 743 
69126.6 The Short-Term Financial Plan 
744
24.9 Summary and Conclusions
692 
Chapter 25
Derivatives and Hedging Risk 696 
Executive Summary 696
Derivatives, Hedging, and Risk 696 
Unsecured Loans 744 Secured Loans 745 Other Sources 745 
26.7 Summary and Conclusions746 
 
 
25.1 Forward Contracts 
697 
Chapter 27
Cash Management 753 
Executive Summary 753 
27.1 Reasons for Holding Cash 
754 
25.2 Futures Contracts 
698
25.3 Hedging 
703
Case Study: Making the Decision to Use Derivatives:The Case of 
Metallgesellschaft 705 
25.4 Interest-Rate Futures Contracts 
706 
27.2 Determining the Target Cash Balance
754
The Baumol Model 755 The Miller-Orr Model 758 Other Factors Influencing the 
Target Cash Balance 
760 
27.3 Managing the Collection and Disbursement of Cash 761 Accelerating 
Collections 764 
Pricing of Treasury Bonds 
707
Pricing of Forward Contracts 707 Futures Contracts 709 Hedging in Interest-Rate 
Futures 709
Delaying Disbursements 767 Disbursement Float (?Playing the Float Game?) 767 
Zero-Balance 
Accounts 768 Drafts 768 Ethical and Legal Questions 769 The Internet:Will It 
Eliminate Float? 769 
Acquisition of Assets 798 A Classification Scheme 798 A Note on Takeovers 798 
29.2 The Tax Forms of Acquisitions 
799
29.3 Accounting for Acquisitions
801 
27.4 Investing Idle Cash 
769 
The Purchase Method 801 
29.4 Determining the Synergy from an Acquisition 802 
29.5 Source of Synergy from Acquisitions 
802 
Seasonal or Cyclical Activities 770 Planned Expenditures 770 Different Types of 
Money-Market 
Securities 771 
27.5 Summary and Conclusions 
772
Appendix 27A Adjustable-Rate Preferred Stock, Auction-Rate Preferred Stock, and 
Floating-Rate Certificates of Deposit 775 
Chapter 28
Credit Management 779 
Executive Summary 779 
28.1 Terms of the Sale 
779 
Revenue Enhancement 802 Cost Reduction 803 Tax Gains 805 The Cost of Capital 806 
29.6 Calculating the Value of the Firm after an Acquisition 806 Avoiding 
Mistakes 807 
29.7 A Cost to Stockholders from Reduction in Risk 808 The Base Case 809 One 
Firm Has Debt 810 How Can Shareholders Reduce Their Losses from the Coinsurance 
Effect? 810 
29.8 Two ?Bad? Reasons for Mergers 
811 
Credit Period 780 Cash Discounts 781 Credit Instruments 782 
28.2 The Decision to Grant Credit: Risk and Information 783 The Value of New 
Information about Credit Risk 785 Future Sales 785 
28.3 Optimal Credit Policy 
Earnings Growth 811 Diversification 811 
29.9 The NPV of a Merger812
Cash 812 Common Stock 814 Cash versus Common Stock 815 
78629.10 Defensive Tactics 
815
Divestitures 815 The Corporate Charter
816
Repurchase Standstill Agreements 816 Exclusionary Self-Tenders
 817 Going Private and Leveraged Buyouts 817 
Other Devices and 
Jargon of Corporate Takeovers 818 
28.4 Credit Analysis 
788
Credit Information 788 Credit Scoring 789 
28.5 Collection Policy 
789
Average Collection Period 789 Aging Schedule 790 Collection Effort 791
Factoring 791 
28.6 How to Finance Trade Credit 
791 
 
29.11 Some Evidence on Acquisitions 
818 Do Acquisitions Benefit Shareholders? 819 The Short Run 819 
28.7 Summary and Conclusions
792
The Long Run 820 Real Productivity 821 
29.12 The Japanese Keiretsu 
821 
Pa r t VIII
Special Topics 795 
Chapter 29
Mergers and Acquisitions 796 
Executive Summary 796 
29.1 The Basic Forms of Acquisitions 
797 
29.13 Summary and Conclusions
823
Minicase: U.S. Steel?s Acquisition of Marathon Oil
828 
Chapter 30
Financial Distress 830 
Executive Summary 830 
30.1 What Is Financial Distress? 
830 
Merger or Consolidation 797 Acquisition of Stock 797 
30.2 What Happens in Financial Distress?
832
30.3 Bankruptcy Liquidation and Reorganization
834
Bankruptcy Liquidation 834 Bankruptcy Reorganization 836 
30.4 Private Workout or Bankruptcy: Which Is Best? 839 The Marginal Firm 840 
Holdouts 840 Complexity 840 Lack of Information 840 
30.5 Prepackaged Bankruptcy 
841
Case Study: The Decision to File for Bankruptcy: The Case of Revco 842 
30.6 Summary and Conclusions 
843 
Foreign Exchange Conversion 858 Unremitted Cash Flows 860 The Cost of Capital 
for International 
Firms 860 
31.6 International Financial Decisions 
862
Short-Term and Medium-Term Financing 863 
Appendix 30A Predicting Corporate Bankruptcy: The Z-Score Model 845 
International Bond Markets 863 
31.7 Reporting Foreign Operations 
865
31.8 Summary and Conclusions
866 
Chapter 31
International Corporate Finance 847 
Executive Summary 847 
31.1 Terminology 
847 
Appendix A Mathematical Tables 871 
 
31.2 Foreign Exchange Markets and Exchange Rates 849 Exchange Rates 849 Types of 
Transactions 851 
31.3 The Law of One Price and Purchasing-Power Parity 851 
31.4 Interest Rates and Exchange Rates: Interest-Rate Parity 854 The Dollar 
Investment 854 The Switzerland Franc Investment 854 The Forward-Discount and 
Expected Spot 
Rates 856 Exchange-Rate Risk 856 Which Firms Hedge Exchange-Rate Risk? 857 
31.5 International Capital Budgeting 
858 
 
Appendix B Solutions to Selected End-of-Chapter Problems 887 Glossary 891 Name 
Index 909 Subject Index 914

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