Fundamentals of Corporate Finance 2nd Edition Parrino Test Bank

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Product details:

• ISBN-10 ‏ : ‎ 0470933267
• ISBN-13 ‏ : ‎ 978-0470933268
• Author: Robert Parrino (Author), David S. Kidwell (Author), Thomas Bates (Author)

Fundamentals of Corporate Finance, 2nd Edition offers an innovative integration of conceptual understanding and problem-solving… of intuition and decision-making… of the authors’ industry and classroom/research experience…with current real-world examples and online practice. Authors Robert Parrino, David Kidwell, and Thomas Bates believe that students who understand the intuition underlying the basic concepts of finance are better able to develop the critical judgments necessary to apply financial tools in real decision- making situations.  Their text develops intuitive thinking while simultaneously helping students develop problem solving and computational skills. It then shows students how to apply intuition and analytical skills to decision making while integrating it all with valuation and building shareholder value.

Table of contents:

Chapter 1
Introduction to Corporate Finance 1
1.1 Corporate Finance and the
Financial Manager 2
What Is Corporate Finance? 2
The Financial Manager 2
Financial Management Decisions 2
Capital Budgeting 2
Capital Structure 3
Working Capital Management 4
Conclusion 4
1.2 Forms of Business Organization 4
Sole Proprietorship 5
Partnership 5
Corporation 6
A Corporation by Another Name . . . 7
1.3 The Goal of Financial Management 8
Possible Goals 8
The Goal of Financial Management 9
A More General Goal 9
1.4 The Agency Problem and Control
of the Corporation 10
Agency Relationships 10
Management Goals 10
Do Managers Act in the Stockholders? Interests? 12
Managerial Compensation 12
Control of the Firm 13
Conclusion 14
Stakeholders 14
1.5 Financial Markets and the Corporation 14
Cash Flows to and from the Firm 14
Primary versus Secondary Markets 15
Primary Markets 15
Secondary Markets 16
1.6 Summary and Conclusions 17
Chapter 2
Financial Statements, Taxes,
and Cash Flow 20
2.1 The Balance Sheet 21
Assets: The Left-Hand Side 21
Liabilities and Owners? Equity: The Right-Hand Side 21
>>
Net Working Capital 22
Liquidity 23
Debt versus Equity 24
Market Value versus Book Value 24
2.2 The Income Statement 25
GAAP and the Income Statement 26
Noncash Items 27
Time and Costs 27
2.3 Taxes 29
Corporate Tax Rates 29
Average versus Marginal Tax Rates 29
2.4 Cash Flow 31
Cash Flow from Assets 32
Operating Cash Flow 32
Capital Spending 33
Change in Net Working Capital 33
Conclusion 34
A Note on "Free" Cash Flow 34
Cash Flow to Creditors and Stockholders 34
Cash Flow to Creditors 34
Cash Flow to Stockholders 35
An Example: Cash Flows for Dole Cola 36
Operating Cash Flow 36
Net Capital Spending 37
Change in NWC and Cash Flow from Assets 37
Cash Flow to Stockholders and Creditors 38
2.5 Summary and Conclusions 39
PART TWO
Financial Statements and Long-Term
Financial Planning
Chapter 3
Working with Financial Statements 48
3.1 Cash Flow and Financial Statements:
A Closer Look 49
Sources and Uses of Cash 49
The Statement of Cash Flows 51
3.2 Standardized Financial Statements 53
Common-Size Statements 53
Common-Size Balance Sheets 54
Common-Size Income Statements 54
Common-Size Statements of Cash Flows 55
Common?Base Year Financial Statements:
Trend Analysis 55
Combined Common-Size and Base-Year Analysis 56
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3.3 Ratio Analysis 56
Short-Term Solvency, or Liquidity, Measures 57
Current Ratio 58
The Quick (or Acid-Test) Ratio 59
Other Liquidity Ratios 59
Long-Term Solvency Measures 60
Total Debt Ratio 60
A Brief Digression: Total Capitalization versus
Total Assets 61
Times Interest Earned 61
Cash Coverage 61
Asset Management, or Turnover, Measures 62
Inventory Turnover and Days? Sales in Inventory 62
Receivables Turnover and Days? Sales in Receivables 63
Asset Turnover Ratios 64
Profitability Measures 64
Profit Margin 65
Return on Assets 65
Return on Equity 65
Market Value Measures 66
Price-Earnings Ratio 66
Market-to-Book Ratio 67
Conclusion 68
3.4 The Du Pont Identity 68
A Closer Look at ROE 68
An Expanded Du Pont Analysis 70
3.5 Using Financial Statement Information 71
Why Evaluate Financial Statements? 72
Internal Uses 72
External Uses 72
Choosing a Benchmark 72
Time-Trend Analysis 72
Peer Group Analysis 73
Problems with Financial Statement Analysis 77
3.6 Summary and Conclusions 78
Chapter 4
Long-Term Financial Planning
and Growth 90
4.1 What Is Financial Planning? 91
Growth as a Financial Management Goal 91
Dimensions of Financial Planning 92
What Can Planning Acccomplish? 93
Examining Interactions 93
Exploring Options 93
Avoiding Surprises 93
Ensuring Feasibility and Internal Consistency 93
Conclusion 94
4.2 Financial Planning Models: A First Look 94
A Financial Planning Model:The Ingredients 94
Sales Forecast 94
Pro Forma Statements 94
Asset Requirements 95
Financial Requirements 95
The Plug 95
Economic Assumptions 95
A Simple Financial Planning Model 95
4.3 The Percentage of Sales Approach 97
The Income Statement 97
The Balance Sheet 98
A Particular Scenario 99
An Alternative Scenario 100
4.4 External Financing and Growth 102
EFN and Growth 104
Financial Policy and Growth 106
The Internal Growth Rate 106
The Sustainable Growth Rate 107
Determinants of Growth 108
A Note on Sustainable Growth Rate Calculations 109
4.5 Some Caveats Regarding Financial
Planning Models 111
4.6 Summary and Conclusions 111
PART THREE
Valuation of Future Cash Flows
Chapter 5
Introduction to Valuation:
The Time Value of Money 124
5.1 Future Value and Compounding 125
Investing for a Single Period 125
Investing for More Than One Period 125
A Note on Compound Growth 131
5.2 Present Value and Discounting 132
The Single-Period Case 132
Present Values for Multiple Periods 133
5.3 More on Present and Future Values 136
Present versus Future Value 136
Determining the Discount Rate 137
Finding the Number of Periods 141
5.4 Summary and Conclusions 144
Chapter 6
Discounted Cash Flow Valuation 149
6.1 Future and Present Values of
Multiple Cash Flows 150
Future Value with Multiple Cash Flows 150
Present Value with Multiple Cash Flows 153
A Note on Cash Flow Timing 156
6.2 Valuing Level Cash Flows:
Annuities and Perpetuities 157
Present Value for Annuity Cash Flows 157
Annuity Tables 159
Finding the Payment 160
Finding the Rate 162
Future Value for Annuities 163
A Note on Annuities Due 164
Perpetuities 165
6.3 Comparing Rates:The Effect
of Compounding 167
Effective Annual Rates and Compounding 167
Calculating and Comparing Effective
Annual Rates 168
EARs and APRs 170
Taking It to the Limit: A Note on
Continuous Compounding 171
6.4 Loan Types and Loan Amortization 172
Pure Discount Loans 172
Interest-Only Loans 173
Amortized Loans 173
6.5 Summary and Conclusions 178
Chapter 7
Interest Rates and Bond
Valuation 192
7.1 Bonds and Bond Valuation 193
Bond Features and Prices 193
Bond Values and Yields 193
Interest Rate Risk 197
Finding the Yield to Maturity: More Trial
and Error 198
7.2 More on Bond Features 203
Is It Debt or Equity? 203
Long-Term Debt: The Basics 203
The Indenture 205
Terms of a Bond 205
Security 206
Seniority 206
Repayment 206
The Call Provision 207
Protective Covenants 207
7.3 Bond Ratings 208
7.4 Some Different Types of Bonds 209
Government Bonds 209
Zero Coupon Bonds 210
Floating-Rate Bonds 211
Other Types of Bonds 212
7.5 Bond Markets 214
How Bonds Are Bought and Sold 214
Bond Price Reporting 216
A Note on Bond Price Quotes 219
7.6 Inflation and Interest Rates 219
Real versus Nominal Rates 219
The Fisher Effect 220
7.7 Determinants of Bond Yields 221
The Term Structure of Interest Rates 221
Bond Yields and the Yield Curve: Putting
It All Together 223
Conclusion 225
7.8 Summary and Conclusions 226
Chapter 8
Stock Valuation 233
8.1 Common Stock Valuation 234
Cash Flows 234
Some Special Cases 236
Zero Growth 236
Constant Growth 236
Nonconstant Growth 239
Components of the Required Return 241
8.2 Some Features of Common and
Preferred Stocks 243
Common Stock Features 243
Shareholder Rights 243
Proxy Voting 244
Classes of Stock 245
Other Rights 245
Dividends 245
Preferred Stock Features 246
Stated Value 246
Cumulative and Noncumulative Dividends 246
Is Preferred Stock Really Debt? 247
8.3 The Stock Markets 247
Dealers and Brokers 247
Organization of the NYSE 248
Members 248
Operations 249
Floor Activity 249
NASDAQ Operations 250
NASDAQ Participants 251
Stock Market Reporting 252
8.4 Summary and Conclusions 254
PART FOUR
Capital Budgeting
Chapter 9
Net Present Value and Other
Investment Criteria 261
9.1 Net Present Value 262
The Basic Idea 262
Estimating Net Present Value 263
9.2 The Payback Rule 266
Defining the Rule 266
Analyzing the Rule 267
Redeeming Qualities of the Rule 268
Summary of the Rule 269
9.3 The Discounted Payback 269
9.4 The Average Accounting Return 272
9.5 The Internal Rate of Return 274
Problems with the IRR 278
Nonconventional Cash Flows 278
Mutually Exclusive Investments 280
Redeeming Qualities of the IRR 282
9.6 The Profitability Index 283
9.7 The Practice of Capital Budgeting 284
9.8 Summary and Conclusions 286
Chapter 10
Making Capital Investment
Decisions 295
10.1 Project Cash Flows:A First Look 296
Relevant Cash Flows 296
The Stand-Alone Principle 296
10.2 Incremental Cash Flows 296
Sunk Costs 297
Opportunity Costs 297
Side Effects 298
Net Working Capital 298
Financing Costs 298
Other Issues 299
10.3 Pro Forma Financial Statements and Project
Cash Flows 299
Getting Started: Pro Forma Financial
Statements 299
Project Cash Flows 300
Project Operating Cash Flow 301
Project Net Working Capital and Capital
Spending 301
Projected Total Cash Flow and Value 301
10.4 More on Project Cash Flow 302
A Closer Look at Net Working Capital 302
Depreciation 305
Modified ACRS Depreciation (MACRS) 305
Book Value versus Market Value 307
An Example: The Majestic Mulch and
Compost Company (MMCC) 308
Operating Cash Flows 309
Change in NWC 309
Capital Spending 310
Total Cash Flow and Value 310
Conclusion 312
10.5 Alternative Definitions of Operating
Cash Flow 312
The Bottom-Up Approach 313
The Top-Down Approach 313
The Tax Shield Approach 314
Conclusion 314
10.6 Some Special Cases of Discounted
Cash Flow Analysis 314
Evaluating Cost-Cutting Proposals 315
Setting the Bid Price 316
Evaluating Equipment Options with
Different Lives 319
10.7 Summary and Conclusions 321
Chapter 11
Project Analysis and
Evaluation 330
11.1 Evaluating NPV Estimates 331
The Basic Problem 331
Projected versus Actual Cash Flows 331
Forecasting Risk 331
Sources of Value 332
11.2 Scenario and Other What-If Analyses 333
Getting Started 333
Scenario Analysis 334
Sensitivity Analysis 336
Simulation Analysis 337
11.3 Break-Even Analysis 337
Fixed and Variable Costs 338
Variable Costs 338
Fixed Costs 339
Total Costs 339
Accounting Break-Even 341
Accounting Break-Even:
A Closer Look 342
Uses for the Accounting Break-Even 343
11.4 Operating Cash Flow, Sales Volume,
and Break-Even 344
Accounting Break-Even and Cash Flow 344
The Base Case 344
Calculating the Break-Even Level 344
Payback and Break-Even 345
Sales Volume and Operating Cash Flow 345
Cash Flow, Accounting, and Financial
Break-Even Points 346
Accounting Break-Even Revisited 346
Cash Break-Even 346
Financial Break-Even 347
Conclusion 347
11.5 Operating Leverage 349
The Basic Idea 349
Implications of Operating Leverage 349
Measuring Operating Leverage 349
Operating Leverage and Break-Even 351
11.6 Capital Rationing 352
Soft Rationing 352
Hard Rationing 352
11.7 Summary and Conclusions 353
PART FIVE
Risk and Return
Chapter 12
Some Lessons from Capital
Market History 361
12.1 Returns 362
Dollar Returns 362
Percentage Returns 364
12.2 The Historical Record 366
A First Look 367
A Closer Look 368
12.3 Average Returns: The First Lesson 372
Calculating Average Returns 372
Average Returns: The Historical Record 372
Risk Premiums 373
The First Lesson 373
12.4 The Variability of Returns: The Second
Lesson 374
Frequency Distributions and Variability 374
The Historical Variance and Standard Deviation 375
The Historical Record 377
Normal Distribution 377
The Second Lesson 379
Using Capital Market History 379
12.5 More on Average Returns 380
Arithmetic versus Geometric Averages 380
Calculating Geometric Average Returns 381
Arithmetic Average Return or Geometric
Average Return? 382
12.6 Capital Market Efficiency 383
Price Behavior in an Efficient Market 383
The Efficient Markets Hypothesis 385
Some Common Misconceptions about the EMH 385
The Forms of Market Efficiency 387
12.7 Summary and Conclusions 388
Chapter 13
Return, Risk, and the Security
Market Line 394
13.1 Expected Returns and Variances 395
Expected Return 395
Calculating the Variance 397
13.2 Portfolios 398
Portfolio Weights 399
Portfolio Expected Returns 399
Portfolio Variance 400
13.3 Announcements, Surprises, and
Expected Returns 402
Expected and Unexpected Returns 402
Announcements and News 403
13.4 Risk: Systematic and Unsystematic 404
Systematic and Unsystematic Risk 404
Systematic and Unsystematic Components of Return 405
13.5 Diversification and Portfolio Risk 406
The Effect of Diversification: Another Lesson from
Market History 406
The Principle of Diversification 407
Diversificaton and Unsystematic Risk 408
Diversification and Systematic Risk 408
13.6 Systematic Risk and Beta 409
The Systematic Risk Principle 409
Measuring Systematic Risk 410
Portfolio Betas 411
13.7 The Security Market Line 412
Beta and the Risk Premium 412
The Reward-to-Risk Ratio 413
The Basic Argument 414
The Fundamental Result 416
The Security Market Line 417
Market Portfolios 417
The Capital Asset Pricing Model 418
13.8 The SML and the Cost of Capital:
A Preview 420
The Basic Idea 420
The Cost of Capital 420
13.9 Summary and Conclusions 421
Chapter 14
Options and Corporate Finance 430
14.1 Options: The Basics 431
Puts and Calls 431
Stock Option Quotations 431
Option Payoffs 433
14.2 Fundamentals of Option Valuation 436
Value of a Call Option at Expiration 436
The Upper and Lower Bounds on a Call
Option?s Value 437
The Upper Bound 437
The Lower Bound 437
A Simple Model: Part I 438
The Basic Approach 439
A More Complicated Case 439
Four Factors Determining Option Values 440
14.3 Valuing a Call Option 441
A Simple Model: Part II 441
The Fifth Factor 442
A Closer Look 443
14.4 Employee Stock Options 444
ESO Features 444
ESO Repricing 445
14.5 Equity as a Call Option on the
Firm?s Assets 445
Case I: The Debt Is Risk-Free 446
Case II: The Debt Is Risky 446
14.6 Options and Capital Budgeting 448
The Investment Timing Decision 448
Managerial Options 450
Contingency Planning 451
Options in Capital Budgeting: An Example 452
Strategic Options 453
Conclusion 453
14.7 Options and Corporate Securities 454
Warrants 454
The Difference between Warrants and Call Options 454
Earnings Dilution 455
Convertible Bonds 455
Features of a Convertible Bond 455
Value of a Convertible Bond 455
Other Options 457
The Call Provision on a Bond 457
Put Bonds 458
Insurance and Loan Guarantees 458
14.8 Summary and Conclusions 459
PART SIX
Cost of Capital and Long-Term
Financial Policy
Chapter 15
Cost of Capital 468
15.1 The Cost of Capital: Some Preliminaries 469
Required Return versus Cost of Capital 469
Financial Policy and Cost of Capital 469
15.2 The Cost of Equity 470
15.3 The Costs of Debt and Preferred Stock 474
The Cost of Debt 474
The Cost of Preferred Stock 475
15.4 The Weighted Average Cost of Capital 476
15.5 Divisional and Project Costs of Capital 485
The SML and the WACC 485
Divisional Cost of Capital 486
The Pure Play Approach 487
The Subjective Approach 488
15.6 Flotation Costs and the Weighted Average Cost
of Capital 489
The Basic Approach 489
Flotation Costs and NPV 490
15.7 Summary and Conclusions 492
Chapter 16
Raising Capital 499
16.1 The Financing Life Cycle of a Firm:
Early-Stage Financing and Venture Capital 500
Venture Capital 500
Some Venture Capital Realities 501
Choosing a Venture Capitalist 501
Conclusion 502
16.2 Selling Securities to the Public:
The Basic Procedure 502
16.3 Alternative Issue Methods 503
16.4 Underwriters 505
16.5 IPOs and Underpricing 509
16.6 New Equity Sales and the Value of
the Firm 515
16.7 The Costs of Issuing Securities 516
16.8 Rights 520
16.9 Dilution 526
16.10 Issuing Long-Term Debt 528
16.11 Shelf Registration 529
16.12 Summary and Conclusions 530
Chapter 17
Financial Leverage and Capital
Structure Policy 536
17.1 The Capital Structure Question 537
17.2 The Effect of Financial Leverage 538
17.4 M&M Propositions I and II with
17.5 Bankruptcy Costs 552
Direct Bankruptcy Costs 553
Indirect Bankruptcy Costs 553
17.6 Optimal Capital Structure 554
17.7 The Pie Again 558
The Extended Pie Model 559
Marketed Claims versus Nonmarketed Claims 560
17.8 Observed Capital Structures 560
17.9 A Quick Look at the Bankruptcy Process 562
17.10 Summary and Conclusions 565
Chapter 18
Dividends and Dividend Policy 572
18.1 Cash Dividends and Dividend
18.2 Does Dividend Policy Matter? 576
18.3 Real-World Factors Favoring
18.4 Real-World Factors Favoring
18.5 A Resolution of Real-World Factors? 583
18.6 Establishing a Dividend Policy 585
18.7 Stock Repurchase: An Alternative
18.8 Stock Dividends and Stock Splits 593
18.9 Summary and Conclusions 597
PART SEVEN
Short-Term Financial Planning
and Management
Chapter 19
Short-Term Finance and Planning 605
19.1 Tracing Cash and Net Working Capital 606
19.2 The Operating Cycle and the Cash Cycle 607
19.3 Some Aspects of Short-Term
19.4 The Cash Budget 619
19.5 Short-Term Borrowing 622
19.6 A Short-Term Financial Plan 626
19.7 Summary and Conclusions 627
Chapter 20
Cash and Liquidity Management 637
20.1 Reasons for Holding Cash 638
20.2 Understanding Float 639
20.3 Cash Collection and Concentration 646
20.4 Managing Cash Disbursements 651
20.5 Investing Idle Cash 652
20.6 Summary and Conclusions 655
Appendix 20A Determining the Target
Chapter 21
Credit and Inventory Management 670
21.1 Credit and Receivables 671
21.2 Terms of the Sale 672
21.3 Analyzing Credit Policy 676
21.4 Optimal Credit Policy 679
21.5 Credit Analysis 681
21.6 Collection Policy 684
21.7 Inventory Management 685
21.8 Inventory Management Techniques 687
21.9 Summary and Conclusions 695
PART EIGHT
Topics in Corporate Finance
Chapter 22
International Corporate Finance 709
22.1 Terminology 710
22.2 Foreign Exchange Markets and
22.3 Purchasing Power Parity 716
22.4 Interest Rate Parity, Unbiased Forward Rates,
22.5 International Capital Budgeting 723
22.6 Exchange Rate Risk 726
Managing Exchange Rate Risk 728
22.7 Political Risk 729
22.8 Summary and Conclusions 729
Index I-1

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