(Download pdf) Corporate Finance Asia Pacific Edition John Graham full chapter pdf docx

Corporate Finance: Asia-Pacific Edition
John Graham
Visit to download the full and correct content document:
https://ebookmass.com/product/corporate-finance-asia-pacific-edition-john-graham/
More products digital (pdf, epub, mobi) instant
download maybe you interests ...
(eBook PDF) Management, 7th Asia-Pacific Edition by

John R. Schermerhorn
https://ebookmass.com/product/ebook-pdf-management-7th-asia-
pacific-edition-by-john-r-schermerhorn/
Corporate Finance - European Edition David Hillier
https://ebookmass.com/product/corporate-finance-european-edition-
david-hillier/
Marketing research 4th Asia- Pacific edition. Edition

William Zikmund
https://ebookmass.com/product/marketing-research-4th-asia-
pacific-edition-edition-william-zikmund/
Principles of Microeconomics, Asia-Pacific Edition N.

Gregory Mankiw
https://ebookmass.com/product/principles-of-microeconomics-asia-
pacific-edition-n-gregory-mankiw/
Principles of Microeconomics, 8th asia-pacific edition
Joshua Gans
https://ebookmass.com/product/principles-of-microeconomics-8th-
asia-pacific-edition-joshua-gans/
Principles of corporate finance Brealey
https://ebookmass.com/product/principles-of-corporate-finance-
brealey/
Fundamentals of Corporate Finance (Berk, DeMarzo &

Harford, The Corporate Finance Series) 4th Edition –
Ebook PDF Version
https://ebookmass.com/product/fundamentals-of-corporate-finance-
berk-demarzo-harford-the-corporate-finance-series-4th-edition-
ebook-pdf-version/
Fundamentals of Management 6th Asia-Pacific Edition

Edition Danny Samson
https://ebookmass.com/product/fundamentals-of-management-6th-
asia-pacific-edition-edition-danny-samson/
Corporate finance 12th Edition Randolph W Westerfield
https://ebookmass.com/product/corporate-finance-12th-edition-
randolph-w-westerfield/
CORPORATE FINANCE
BE UNSTOPPABLE CORPORATE
The up-to-date content in this book
helps you to get the knowledge
you need to succeed.
FINANCE THIRD
ASIA-PACIFIC
EDITION
Shows you how financial management

really works using a dynamic, modern
and practical approach to help
prepare you for a career in finance
Provides insight into how senior

financial executives apply many of
the concepts and techniques that
are presented throughout the text
Includes many examples of how you

may utilise key chapter ideas in your
own life
GUNASINGHAM
STUDY HACK
GRAHAM
I always limit myself to 45 minutes of study
ADAM
at a time, then take a 10 minute break
before starting again.
EDITION
ASIA-PACIFIC
THIRD
Sam, student, Brisbane
ISBN 978-0170446075
JOHN GRAHAM • CHRISTOPHER ADAM • BRINDHA GUNASINGHAM

9 7 8 01 7 0 4 4 6 07 5
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
CORPORATE
FINANCE THIRD
ASIA-PACIFIC
EDITION
CORPORATE
FINANCE THIRD
ASIA-PACIFIC
EDITION
JOHN GRAHAM • CHRISTOPHER ADAM • BRINDHA GUNASINGHAM
Corporate Finance © 2021 Cengage Learning Australia Pty Limited
3rd Asia-Pacific Edition
John Graham Copyright Notice
Chris Adam This Work is copyright. No part of this Work may be reproduced, stored in a
Brindha Gunasingham retrieval system, or transmitted in any form or by any means without prior written
permission of the Publisher. Except as permitted under the Copyright Act 1968, for
example any fair dealing for the purposes of private study, research, criticism or
Head of content management: Dorothy Chiu review, subject to certain limitations. These limitations include: Restricting the
Content manager: Geoff Howard copying to a maximum of one chapter or 10% of this book, whichever is greater;
Content developer: James Cole/Christin Quirk providing an appropriate notice and warning with the copies of the Work
Project editor: Sutha Surenddar disseminated; taking all reasonable steps to limit access to these copies to people
Editor: Julie Wicks authorised to receive these copies; ensuring you hold the appropriate Licences
Proofreader: Anne Mulvaney issued by the Copyright Agency Limited (“CAL”), supply a remuneration notice to
Permissions/Photo researcher: Catherine Kerstjens/Corrina Gilbert CAL and pay any required fees. For details of CAL licences and remuneration
Cover designer: Nikita Bansal notices please contact CAL at Level 11, 66 Goulburn Street, Sydney NSW 2000,
Project designer: Nikita Bansal Tel: (02) 9394 7600, Fax: (02) 9394 7601
Text designer: Stella Vassiliou Email: info@copyright.com.au
Cenveo Publisher Services Website: www.copyright.com.au
Any URLs contained in this publication were checked for currency For product information and technology assistance,
during the production process. Note, however, that the publisher in Australia call 1300 790 853;
cannot vouch for the ongoing currency of URLs. in New Zealand call 0800 449 725
For permission to use material from this text or product, please email
aust.permissions@cengage.com
National Library of Australia Cataloguing-in-Publication Data

Creator: Graham, John R., author.
Title: Corporate finance / John R. Graham, Christopher Adam, Brindha
Gunasingham.
Edition: 3rd Asia-Pacific edition
ISBN: 9780170446075 (paperback)
Includes index.
Other Creators/Contributors:
Adam, Christopher, author. Gunasingham, Brindha, author.
Cengage Learning Australia

Level 7, 80 Dorcas Street
South Melbourne, Victoria Australia 3205
Cengage Learning New Zealand

Unit 4B Rosedale Office Park
331 Rosedale Road, Albany, North Shore 0632, NZ
For learning solutions, visit cengage.com.au
Printed in Singapore by C.O.S. Printers Pte Ltd.

1 2 3 4 5 6 7 24 23 22 21 20
BRIEF CONTENTS
PART 1
INTRODUCTION 3
CHAPTER 1: THE SCOPE OF CORPORATE FINANCE 4
CHAPTER 2: FINANCIAL STATEMENT AND CASH FLOW ANALYSIS 29
CHAPTER 3: THE TIME VALUE OF MONEY 66
SOUND BITES: ETHICS IN CORPORATE FINANCE – PART 1 114
PART 2
VALUATION, RISK AND RETURN 117
CHAPTER 4: VALUING BONDS 119
CHAPTER 5: VALUING SHARES 153
CHAPTER 6: THE TRADE-OFF BETWEEN RISK AND RETURN 183
CHAPTER 7: RISK, RETURN AND THE CAPITAL ASSET PRICING MODEL 220
CHAPTER 8: OPTIONS 256
PART 3
CAPITAL BUDGETING 301
CHAPTER 9: CAPITAL BUDGETING PROCESS AND DECISION CRITERIA 302
CHAPTER 10: CASH FLOW AND CAPITAL BUDGETING 348
CHAPTER 11: RISK AND CAPITAL BUDGETING 391
PART 4
FINANCIAL STRATEGY 427
CHAPTER 12: RAISING LONG-TERM FINANCING 429
CHAPTER 13: CAPITAL STRUCTURE 465
CHAPTER 14: LONG-TERM DEBT AND LEASING 499
CHAPTER 15: PAYOUT POLICY 534
CHAPTER 16: EXCHANGE RATES AND INTERNATIONAL INVESTMENT
DECISIONS 564
CHAPTER 17: MERGERS, ACQUISITIONS AND CORPORATE CONTROL 589
Brief Contents v
ONLINE CHAPTERS
PART 5
FINANCIAL LIFECYCLE 637
CHAPTER 18: FINANCIAL PLANNING 639
CHAPTER 19: INTRODUCTION TO FINANCIAL RISK MANAGEMENT 671
CHAPTER 20: ENTREPRENEURIAL FINANCE AND VENTURE CAPITAL 701
CHAPTER 21: CASH CONVERSION, INVENTORY AND RECEIVABLES
MANAGEMENT729
CHAPTER 22: CASH, PAYABLES AND LIQUIDITY MANAGEMENT 762
CHAPTER 23: INSOLVENCY AND FINANCIAL DISTRESS 788
vi Brief Contents
CONTENTS
Guide to the text xxi
Guide to the online resources xxv
Preface xxvii
About the authors xxx
Acknowledgements xxxii
PART 1
INTRODUCTION 3
CHAPTER 1 THE SCOPE OF CORPORATE FINANCE 4
1.1 Corporate Finance Elements and Functions 5

1.1a Elements and Structure of Corporate Finance Learning 5
1.1b The Five Basic Corporate Finance Functions 7
1.1c Debt and Equity: The Two Flavours of Capital 10
1.1d The Role of Financial Intermediaries in Corporate Finance 11
1.2 Goals for the Corporate Financial Manager 12

1.2a What Should a Financial Manager Try to Maximise? 12
1.2b How Can Agency Costs be Controlled in Corporate Finance? 14
1.2c Ethics are Important in Corporate Finance 15
1.3 The Role of Corporate Finance in Business 17

1.3a How Finance Interacts with other Functional Business Areas 18
1.3b Legal Forms of Business Organisation 18
1.3c Special Forms of Business Organisation 21
1.4 Career Opportunities In Finance 22

1.4a Corporate Finance 23
1.4b Commercial Banking 23
1.4c Investment Banking 24
1.4d Money Management 25
1.4e Consulting 26
Study Tools 26
Problems 27
CASE STUDY The Scope of Corporate Finance 28

CHAPTER 2 FINANCIAL STATEMENT AND CASH FLOW ANALYSIS 29
2.1 Financial Statements 30

2.1a Balance Sheet 31
2.1b Income Statement 33
2.1c Statement of Retained Earnings 34
2.1d Statement of Cash Flows 35
2.1e Notes to Financial Statements 35
Contents vii
2.2 Cash Flow Analysis 36
2.2a The Company’s Cash Flows 36
2.2b Developing and Interpreting the Statement of Cash Flows 40
2.3 Assessing Financial Performance Using Ratio Analysis 42

2.3a Using Financial Ratios 42
2.3b Liquidity Ratios 43
2.3c Activity Ratios 43
2.3d Debt Ratios 46
2.4 Profitability Ratios 47

2.4a Dupont System of Analysis 49
2.5 Market Ratios 52
2.6 Corporate Taxes 54

2.6a Ordinary Corporate Income 54
2.6b Corporate Capital Gains 54
Study tools 55
Problems 60
CASE STUDY Financial Statement and Cash Flow Analysis 65

CHAPTER 3 THE TIME VALUE OF MONEY 66
3.1 Introduction to the Time Value of Money 67
3.2 Future Value of a Lump Sum Received Today 68

3.2a The Concept of Future Value 68
3.2b The Equation for Future Value 69
3.2c A Graphic View of Future Value 71
3.3 Present Value of a Lump Sum Received in the Future 72

3.3a The Concept of Present Value 72
3.3b The Equation for Present Value 73
3.3c A Graphic View of Present Value 74
3.4 Additional Applications Involving Lump Sums 75
3.5 Future Value of Cash Flow Streams 78

3.5a Finding the Future Value of a Mixed Stream 78
3.5b Types of Annuities 80
3.5c Finding the Future Value of an Ordinary Annuity 80
3.5d Finding the Future Value of an Annuity Due 83
3.6 Present Value of Cash Flow Streams 85

3.6a Finding the Present Value of a Mixed Stream 85
3.6b Finding the Present Value of an Ordinary Annuity 87
3.6c Finding the Present Value of an Annuity Due 89
viii Contents
3.6d Finding the Present Value of a Perpetuity 90
3.6e Finding the Present Value of a Growing Perpetuity 93
3.7 Advanced Applications of Time Value 94

3.7a Compounding More Frequently than Annually 94
3.7b Stated Versus Effective Annual Interest Rates 96
3.7c Calculating Deposits Needed to Accumulate a Future Sum 98
3.7d Loan Amortisation 99
Study Tools 102
Problems 106
CASE STUDY Present Value 111
Real-World Case Study: All in the Family 112
Sound Bites: Ethics in Corporate Finance – Part 1 114
PART 2
VALUATION, RISK AND RETURN 117
CHAPTER 4 VALUING BONDS 119
4.1 Valuation Basics 120

4.1a The Fundamental Valuation Model 121
4.2 Bond Prices and Interest Rates 123

4.2a Bond Vocabulary 123
4.2b The Basic Equation (Assuming Annual Interest) 124
4.2c Semiannual Compounding 127
4.2d Bond Prices and Interest Rates 129
4.3 Types of Bonds 134

4.3a By Issuer 135
4.3b By Features 136
4.4 Bond Markets 141

4.4a Bond-Price Quotations 141
4.4b Bond Ratings 142
4.5 The Term Structure of Interest Rates 144

4.5a The Yield Curve 144
4.5b Using the Yield Curve to Forecast Interest Rates 146
4.5c The Liquidity Preference and Preferred Habitat Theories 147
4.5d Conclusion 148
Study Tools 148
Problems 150
CASE STUDY Bond Purchase Decision 152
Contents ix
CHAPTER 5 VALUING SHARES 153
5.1 The Essential Features of Preferred and Ordinary Shares 154
5.2 Valuing Preferred and Ordinary Shares 156

5.2a Preferred Share Valuation 156
5.2b Ordinary Share Valuation Equation 158
5.2c Zero Growth 159
5.2d Constant Growth 160
5.2e Variable Growth 161
5.2f How to Estimate Growth 164
5.2g What If there are No Dividends? 165
5.3 The Free Cash Flow Approach to Ordinary Share Valuation 166
5.4 Other Approaches to Ordinary Share Valuation 168

5.4a Liquidation Value, Book Value and Residual Income
Measurement 168
5.4b Market Multiples of Comparable Companies 169
5.5 Primary and Secondary Markets for Equity Securities 173

5.5a Investment Banking Functions and the Primary Market 174
5.5b Secondary Markets for Equity Securities 175
5.5c Social Investing through Equity 177
Study Tools 178
Problems 179
CASE STUDY Valuing Shares 182

CHAPTER 6 THE TRADE-OFF BETWEEN RISK AND RETURN 183
6.1 Understanding Returns 186

6.1a The Components of Total Return 186
6.1b Dollar Returns and Percentage Returns 187
6.2 The History of Returns (Or, How To Get Rich Slowly) 189
6.2a Nominal and Real Returns on Shares, Bonds and Bills 189
6.2b The Risk Dimension 191
6.3 Volatility and Risk 195

6.3a The Distribution of Historical Share Returns 195
6.3b The Variability of Equity Returns 197
6.4 The Power of Diversification 200

6.4a Systematic and Unsystematic Risk 200
6.4b Risk and Return Revisited 206
Study Tools 210
Problems 212
CASE STUDY The Trade-Off between Risk and Return 219
x Contents
CHAPTER 7 RISK, RETURN AND THE CAPITAL ASSET PRICING MODEL 220
7.1 Expected Returns 222

7.1a The Historical Approach 222
7.1b The Probabilistic Approach 223
7.1c The Risk-Based Approach 224
7.2 Risk and Return for Portfolios 231

7.2a Portfolio Expected Return 231
7.2b Portfolio Risk 234
7.3 Pulling It All Together: The CAPM 237
7.4 Are Share Returns Predictable? 246

Study Tools 247
Problems 250
CASE STUDY Risk, Return and the Capital Asset Pricing Model (CAPM) 255
CHAPTER 8 OPTIONS 256
8.1 Options Vocabulary 258

8.1a Option Trading 260
8.1b Option Prices 261
8.2 Option Payoff Diagrams 264

8.2a Call Option Payoffs 264
8.2b Put Option Payoffs 265
8.2c Payoffs for Portfolios of Options and Other Securities 267
8.2d Put–Call Parity 269
8.3 Qualitative Analysis of Option Prices 273

8.3a Factors that Influence Option Values 273
8.4 Option Pricing Models 276

8.4a The Binomial Model 277
8.4b The Black–Scholes Model 282
8.5 Options In Corporate Finance 285

8.5a Employee Share Options 285
8.5b Warrants and Convertibles 286
8.5c Other Option Types 289
Study Tools 291
Problems 292
CASE STUDY Options 294
Real-World Case Study: Sharing the Business 295
Contents xi
PART 3
CAPITAL BUDGETING 301
CHAPTER 9 CAPITAL BUDGETING PROCESS AND DECISION CRITERIA 302
9.1 Introduction to Capital Budgeting 303

9.1a Traits of Ideal Investment Criteria 304
9.1b A Capital Budgeting Problem 305
9.2 Net Present Value and Economic Value Added 306

9.2a Net Present Value Calculations 306
9.2b Pros and Cons of NPV 311
9.2c Economic Value Added 312
9.3 Internal Rate of Return 313

9.3a Finding a Project’s IRR 313
9.3b Advantages of the IRR Method 317
9.3c Problems with the Internal Rate of Return 318
9.3d IRR, NPV and Mutually Exclusive Projects 321
9.4 Profitability Index 324

9.4a Calculating the Profitability Index 324
9.5 Payback Methods 327

9.5a The Payback Decision Rule 327
9.5b Pros and Cons of the Payback Method 328
9.5c Discounted Payback 329
9.6 Accounting-Based Methods 330

9.6a Accounting Rate of Return 330
9.6b Pros and Cons of the Accounting Rate of Return 331
9.7 Capital Budgeting In Practice 332

9.7a Payback Period 333
9.7b Internal Rate of Return 333
9.7c Additional Analysis 334
9.7d Conclusion 334
Study Tools 336
Problems 339
CASE STUDY Capital Budgeting Process and Techniques 347

CHAPTER 10 CASH FLOW AND CAPITAL BUDGETING 348
10.1 Types of Cash Flows 349

10.1a Cash Flow Versus Accounting Profit 349
10.1b Depreciation 353
10.1c Fixed Asset 355
10.1d Net Working Capital 356
10.1e Terminal Value 357
xii Contents
10.2 Incremental Cash Flows 360
10.2a Sunk Costs 361
10.2b Opportunity Costs 361
10.2c Cannibalisation 362
10.3 Cash Flows for Protect IT Ltd 363

10.3a Year 0 Cash Flow 366
10.3b Year 1 Cash Flow 366
10.3c Year 2 Cash Flow 367
10.3d Terminal Value 368
10.3e Protect IT Project NPV 369
10.4 Special Problems in Capital Budgeting 369

10.4a Capital Rationing 370
10.4b Equipment Replacement and Equivalent Annual Cost 371
10.4c Excess Capacity 374
10.5 The Human Face of Capital Budgeting 375

Study Tools 377
Problems 380
CASE STUDY Cash Flow and Capital Budgeting 389

CHAPTER 11 RISK AND CAPITAL BUDGETING 391
11.1 Choosing the Right Discount Rate 393

11.1a Cost of Equity 393
11.1b Weighted Average Cost of Capital (WACC) 398
11.1c The WACC, the CAPM and Taxes 401
11.1d The Risk-Adjusted Discount Rate and Cost of Capital 402
11.2 A Closer Look at Risk 403

11.2a Breakeven Analysis 403
11.2b Sensitivity Analysis 405
11.2c Scenario Analysis 407
11.2d Decision Trees 407
11.3 Real Options 409

11.3a Why NPV May not Always Give the Right Answer 409
11.3b Types of Real Options 410
11.3c The Surprising Link between Risk and Real Option Values 412
11.4 Strategy and Capital Budgeting 413

11.4a Competition and NPV 413
11.4b Strategic Thinking, Real Options and Systemic Risk 414
Study Tools 416
Problems 419
CASE STUDY Cost of Capital and Project Risk 421
Contents xiii
Real-World Case Study: Cannibals in the Market! 422
PART 4
FINANCIAL STRATEGY 427
CHAPTER 12 RAISING LONG-TERM FINANCING 429
12.1 The Basic Choices in Long-Term Financing 430

12.1a The Need to Fund a Financial Deficit 433
12.1b The Choice Between Internal and External Financing 433
12.1c Raising Capital From Financial Intermediaries or on Capital Markets 433
12.1d The Expanding Role of Securities Markets in Corporate Finance 437
12.2 Investment Banking and the Public Sale of Securities 439

12.2a Conflicts of Interest Facing Investment Banks 443
12.2b Legal Rules Governing Public Security Sales 443
12.3 The Market for Initial Public Offerings (IPOS) 445

12.3a Patterns Observed in the US IPO Market 447
12.3b The Investment Performance of US Initial Public Offerings 447
12.3c Non-US Initial Public Offerings 449
12.3d International Share Issues 450
12.3e Share Issue Privatisations 451
12.3f Advantages and Disadvantages of an IPO 452
12.3g Specialised Initial Public Offerings: Ecos, Spin-Offs, Reverse
Lbos and Tracking Stocks 455
12.4 Seasoned Equity Offerings 457

12.4a Share Price Reactions to Seasoned Equity Offerings 458
12.4b Rights Offerings 458
12.4c Private Placements 458
Study Tools 460
Problems 462
CASE STUDY Raising Long-Term Financing 464

CHAPTER 13 CAPITAL STRUCTURE 465
13.1 Financial Leverage and Its Effects 467

13.1a How Leverage Increases the Risk of Expected Earnings Per Share 469
13.1b The Fundamental Principle of Financial Leverage 470
13.1c Leverage Increases Expected Return – but Does It Increase Value? 471
13.2 The Modigliani and Miller Propositions 472

13.2a M&M Proposition I: Capital Structure Irrelevance 473
13.2b M&M Proposition II: How Increasing Leverage Affects
The Cost of Equity 474
13.2c Does Debt Policy Matter? 475
xiv Contents
13.3 The M&M Capital Structure Model with Taxes 476
13.3a The M&M Model With Corporate Taxes 477
13.3b Determining the Present Value of Interest Tax Shields 478
13.3c The M&M Model with Corporate and Personal Taxes 480
13.4 The Trade-Off Model of Capital Structure 481

13.4a Costs of Insolvency and Financial Distress 481
13.4b Agency Costs and Capital Structure 484
13.4c The Trade-Off Model Revisited 485
13.4d Does the Trade-Off Model Guide Practice? 486
13.5 The Pecking-Order Theory 488

13.5a Assumptions Underlying the Pecking-Order Theory 489
13.5b Evidence on Pecking-Order and Trade-Off Theories 490
13.6 Do We Have a Winning Model? 491

Study Tools 492
Problems 495
CASE STUDY Adding Value with Capital Structure 498

CHAPTER 14 LONG-TERM DEBT AND LEASING 499
14.1 Characteristics of Long-Term Debt Financing 500

14.1a The Choice between Public and Private Debt Issues 500
14.1b Loan Covenants 501
14.1c Cost of Long-Term Debt 503
14.2 Corporate Loans 504

14.2a Term Loans 504
14.2b Syndicated Loans 505
14.3 Corporate Bonds 508

14.3a Popular Types of Bonds 508
14.3b Legal Aspects of Corporate Bonds 509
14.3c Methods of Issuing Corporate Bonds 510
14.3d General Characteristics of a Bond Issue 511
14.3e High-Yield Bonds 512
14.3f International Corporate Bond Financing 513
14.3g Bond Refunding Options 514
14.4 Leasing 520

14.4a The Basic Lease 521
14.4b Lease Arrangements 522
14.4c The Lease Contract 523
14.4d The Lease-Versus-Purchase Decision 523
14.4e Effects of Leasing on Future Financing 525
14.4f Advantages and Disadvantages of Leasing 526
Study Tools 527
Contents xv
Problems 530
CASE STUDY Long-Term Debt and Leasing 533

CHAPTER 15 PAYOUT POLICY 534
15.1 Payout Policy Fundamentals 536

15.1a Cash Dividend Payment Procedures 536
15.1b Types of Dividend Payout Policies 539
15.1c Bonus Shares and Share Splits 541
15.1d Share Repurchases 542
15.2 F
actors Affecting Dividend and Share Repurchase Decisions 543
15.2a CFO Views on Dividends and Repurchases 543
15.2b Further Evidence on Dividend and Share Repurchase Practices 544
15.3 Dividends in Perfect and Imperfect Worlds 546

15.3a Payout Policy Irrelevance in a World with Perfect Capital Markets 546
15.3b Miller and Modigliani Meet the (Imperfect) Real World 548
15.4 Real-World Influences on Payout Policy 551

15.4a Personal Income Taxes 552
15.4b Trading and Other Transactions Costs 552
15.4c The Residual Theory of Dividends 554
15.4d Paying Dividends as a Means of Communicating Information 554
15.4e What Type of Information is Being Communicated? 554
15.4f Dividend Payments as Solutions to Agency Problems 555
15.5 Payout Policy: Key Lessons 556

Study Tools 556
Problems 558
CASE STUDY Dividend Policy 563

CHAPTER 16 EXCHANGE RATES AND INTERNATIONAL
INVESTMENT DECISIONS 564
16.1 Exchange Rate Fundamentals 566

16.1a Fixed Versus Floating Exchange Rates 566
16.1b Exchange Rate Quotes 566
16.1c The Foreign Exchange Market 573
16.1d Natural Exchange Rate Risk Hedges 576
16.2 Long-Term Investment Decisions 579

16.2a Capital Budgeting 579
16.2b Cost of Capital 581
Study Tools 582
Problems 584
CASE STUDY International Financial Management 585
Real-World Case Study: ‘Plane’ and Simple? 586

xvi Contents
CHAPTER 17 MERGERS, ACQUISITIONS AND CORPORATE CONTROL 589
17.1 Merger Waves and International Acquisition Activity 592

17.1a International Activity 595
17.2 Why Do Companies Make Acquisitions? 597

17.2a Explaining Mergers and Acquisitions 598
17.2b Calculating the Effect of a Merger on Earnings Per Share 604
17.3 Do Mergers Create Value? 606

17.3a Merger Valuation Methods 606
17.3b Shareholder Gains (or Losses) in Mergers – Returns
to Bidder and Target 608
17.3c Method of Payment 609
17.3d Returns to Bondholders 611
17.3e How do Target CEOs Make Out? 611
17.4 Merger and Acquisition Transaction Details 612

17.4a Types of Mergers 612
17.4b LBOS, MBOS and Recapitalisations 614
17.4c Takeover Defences and Divestitures 615
17.5 Accounting Treatment of Mergers and Acquisitions 617
17.6 Regulation of Mergers and Acquisitions 619

17.6a Antitrust Regulation 619
17.6b International Regulation of Mergers and Acquisitions 621
17.6c Other Legal Issues Concerning Corporate Control 622
17.7 Corporate Governance 623

17.7a Duties of the Board in the Context of M&A 623
Study Tools 625
Problems 626
CASE STUDY Mergers, Corporate Control and Corporate Governance 631
Real-World Case Study: Restructuring Finances to End Litigation 632
ONLINE CHAPTERS
PART 5
FINANCIAL LIFECYCLE 637
CHAPTER 18 FINANCIAL PLANNING 639
18.1 Overview of the Planning Process 641

18.1a Successful Long-Term Planning 642
18.1b The Role of Finance in Long-Term Planning 642
Contents xvii
18.2 Planning for Growth 643
18.2a Sustainable Growth 643
18.2b Pro Forma Financial Statements 648
18.3 Planning and Control 653

18.3a Short-Term Financing Strategies 653
18.3b The Cash Budget 656
Study Tools 662
Problems 666
CASE STUDY Financial Planning 670

CHAPTER 19 INTRODUCTION TO FINANCIAL RISK MANAGEMENT 671
19.1 Overview of Financial Risk Management 673

19.1a Risk Factors 673
19.1b The Hedging Decision 674
19.2 Forward Contracts 678

19.2a Forward Prices 679
19.2b Currency Forward Contracts 680
19.2c Interest Rate Forward Contracts 683
19.3 Futures Contracts 684

19.3a Hedging with Futures Contracts 688
19.3b Concerns When Using Futures Contracts 688
19.4 Options and Swaps 690

19.4a Options 690
19.4b Swaps 691
19.5 Financial Engineering 695

Study Tools 696
Problems 698
CASE STUDY Risk Management 700

CHAPTER 20 ENTREPRENEURIAL FINANCE AND VENTURE CAPITAL 701
20.1 The Challenges of Financing Entrepreneurial

Growth Companies 702
20.2 Venture Capital and Private Equity Financing 704

20.2a Types of Venture Capital Funds 706
20.2b Investment Patterns of Venture Capital and
Private Equity Companies 708
20.2c Industrial and Geographic Distribution of Venture Capital Investment 708
20.2d Venture Capital and Private Equity Investment by
Stage of Company Development 710
20.2e The Economic Effect of Venture Capital and Private Equity Investment 712
xviii Contents
20.3 The Organisation and Operations of Venture Capital and
Private Equity Companies 713
20.3a Organisation and Funding of Venture Capital
and Private Equity Limited Partnerships 713
20.3b How Venture Capitalists and Private Equity Managers Structure their
Investments 714
20.3c Why Venture Capitalists and Private Equity Managers Use Convertible
Securities 716
20.3d The Pricing of Venture Capital and Private Equity Investments 717
20.3e The Profitability of Venture Capital and Private Equity Investments 718
20.3f Exit Strategies Employed by Venture Capitalists and Private
Equity Managers 719
20.4 International Markets for Venture Capital

and Private Equity 722
20.4a European Venture Capital and Private Equity
Fund Raising and Investment 722
20.4b Venture Capital and Private Equity Markets Outside the United States
and Western Europe 723
Study Tools 725
Problems 727
CASE STUDY Entrepreneurial Finance and Venture Capital 728

CHAPTER 21 CASH CONVERSION, INVENTORY AND RECEIVABLES
MANAGEMENT 729
21.1 The Cash Conversion Cycle 731

21.1a Operating Cycle 731
21.1b Cash Conversion Cycle 732
21.1c Shortening the Cash Conversion Cycle 734
21.2 Cost Trade-Offs In Short-Term Financial Management 735
21.3 Inventory Management 737

21.3a Investing in Inventory 737
21.3b Techniques for Controlling Inventory 738
21.4 Accounts Receivable Standards and Terms 741

21.4a Effective Accounts Receivable Management 742
21.4b Credit Standards 743
21.4c Credit Terms 748
21.5 Collecting, Monitoring and Applying Cash to Receivables 750

21.5a Collection Policy 750
21.5b Credit Monitoring 750
21.5c Cash Application 753
Study Tools 754
Problems 757
CASE STUDY Cash Conversion, Inventory and Receivables Management 761

Contents xix
CHAPTER 22 CASH, PAYABLES AND LIQUIDITY MANAGEMENT 762
22.1 Cash Management 764

22.1a Float 765
22.1b Cash Position Management 765
22.2 Collections 768

22.2a Types of Collection Systems 768
22.2b Lockbox Systems 769
22.2c Cash Concentration 770
22.2d Funds Transfer Mechanisms 771
22.3 Accounts Payable and Disbursements 773

22.3a Overview of the Accounts Payable Process 773
22.3b Cash Discounts 774
22.3c Disbursement Products and Methods 775
22.3d Developments in Accounts Payable and Disbursements 776
22.4 Short-Term Investing and Borrowing 778

22.4a Motives for Holding Cash and Short-Term Investments 778
22.4b Short-Term Investing 778
22.4c Short-Term Borrowing 779
Study Tools 782
Problems 785
CASE STUDY Liquidity Management 787

CHAPTER 23 INSOLVENCY AND FINANCIAL DISTRESS 788
23.1 Insolvency and Business Failure 789
23.2 Insolvency Processes 791

23.2a The Voluntary Administrator’s Role (Australia) 792
23.2b Deed of Arrangement 796
23.2c Other Processes in External Administration 798
23.2d Affected Parties in Administration 799
23.3 Priority of Claims 801
23.4 Predicting Insolvency 804

Study Tools 806
Problems 807
CASE STUDY Insolvency and Financial Distress 810

Glossary G-1
Name and company index I-1
Subject index I-4
xx Contents
Guide to the text
As you read this text you will find a number of features in every
chapter to enhance your study of corporate finance and help
you understand how the theory is applied in the real world.
PART OPENING FEATURES
Part openers introduce each of the chapters within Understand how key concepts are connected across
the part and give an overview of how they relate to all chapters in the part by viewing the Concept map.
each other.
MARKE
T IN
TER
AC
TIO
N
PART 1
ME UN
TI CE
RT
AI
N
Part 1 Introduction
TY
1 The Scope of Part 2 Valuation, Risk
Corporate Finance and Return
2 Financial Statement 4 Valuing Bonds
and Cash Flow Analysis 5 Valuing Shares
3 The Time Value of 6 The Trade-off Between
Money Risk and Return
MARKE
7 Risk, Return and the Capital
SH
Asset Pricing Model
CA
8 Options
Introduction
ONLINE CHAPTERS
Part 5 Financial Lifecycle
1 The Scope of Corporate Finance 18 Financial Planning Measuring and Part 3 Capital Budgeting
9 Capital Budgeting Process
19 Introduction to
Financial Risk managing value and Decision Criteria
2 Financial Statement and Cash Flow Analysis Management
20 Entrepreneurial
over time and with 10 Cash Flow and Capital
Budgeting
Finance and Venture uncertainty 11 Risk and Capital Budgeting
3 The Time Value of Money

ME
Capital
TI
21 Cash Conversion,
Inventory and
Receivables Management
22 Cash, Payables and Liquidity Part 4 Financial Strategy
Welcome to the study of corporate finance. The first section of Chapter 1, section 1.1, Management 12 Raising Long-term Financing
23 Insolvency and Financial Distress
In this book, you will learn the key concepts, gives an outline of what you may encounter 13 Capital Structure
14 Long-term Debt and Leasing
tools and practices that guide the decisions in that chapter and also in Chapters 2 and 3, 15 Payout Policy
of financial managers. Our goal is not only to which together comprise Part 1 of this 16 Exchange Rates and
introduce you to corporate finance, but also learning adventure.

Part 1 Introduction
International Investment
to help you explore career opportunities in

Decisions
1 The Scope of
17 Mergers, Acquisitions and
Part 2 Valu
this exciting field.
Corporate Control
2 Financial Statement 4 Valuing
and Cash Flow Analysis
MA
RK 5 Valuing
6 The Tr
ET
3 The Time Value of
INT
ERA
Risk an
CTIO
N
Money
7 Risk, R
SH
Corporate finance is the art of measuring and Asset P

CA
managing value over time and with uncertainty 8 Option

After you have worked through the part, revisit the ethics Cash is the physical measure of value, which is embedded in the
in corporate finance in the NEW Sound bites: ethics in SOUNDflow

BITES: ETHICS IN
of Time and affected by Uncertainty. Exchange of value
occurs through Market interaction.
corporate finance to apply your knowledge with several CORPORATE FINANCE – PART 1
2
WRITTEN BY BORIS BIELER
Assignments. Part 5 Financial Lifecycle
corporate governance
Boris Bieler has over twenty years of risk
18 Financial Planning
and ethics in banking. He
management experience mainly gained
is currently a member of
in senior audit leadership roles at foreign
Measuring and
19 Introduction the advisory to
Financial
Boris studied at the University of Bayreuth Risk
board at the
corporate and investment banks in Australia.
department of accounting
and corporate governance
managing value
in Germany and at the University of Warwick
over time and with
3
Management
in England. He is a CFA charter holder, a Fellow at Macquarie University.
20 Entrepreneurial
of CPA Australia (FCPA) and a signatory of the He has contributed to
BK-CLA-GRAHAM_3E-200087-Chp01.indd 3
Banking and Finance Oath (BFO) in Australia.
He has been a speaker and chairperson at
8/13/20 8:35 PM
Finance
publications on ethics and the banking royal
and
commission Venture
in Australia released on the uncertainty
conferences held by the Institute of Internal CFA Institute’s online portals and the BFO
Auditors Australia and CPA Australia and has
Capitalnewsletter.
21withCash
supported the CFA Institute globally their Conversion,
Boris has been working on youth education
programs and curriculum. Boris has also been and mentoring initiatives and is passionate
a guest lecturer and panellist at Macquarie Inventory and his knowledge to students and
about sharing
University and University of Technology Sydney assisting them with their first steps into the
on topics around auditing, risk management,
corporate world.
22 Cash, Payables and Liquidity Part 4 Financial
WEEK 1 INTO JANE WONG’S M&A
Management ANALYST ROLE
12 Raising Long
23positionInsolvency and Financial
an integral partDistress
Jane Wong has just secured a full-time
as a mergers and acquisitions (M&A) analyst in
framework and are of
everyone’s day-to-day activity. Jane was willing
13 Capital Struc
an Asia-Pacific-wide operating corporate and to embrace them as she could relate to them. 14 Long-term D
investment bank. Taking her technical expertise The module ‘Sound bites – Ethics in Corporate
for granted, Jane Wong’s job interviews focused Finance’ follows Jane Wong’s on-boarding process
15 Payout Polic
on the company’s values, and how those values
were formalised in the company’s governance
and consists of five case studies that can be 16 Exchange Ra
found at the end of each part of this text:
framework. After the introductory training Guide to the TextInternationa
xxi
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or
andduplicated, inexpected
group discussions on whole or in part.Part
employee 1 – The02-200-202
WCN Framework: Codifying the
behaviour, all new hires were asked to attest to Employer’s Expectation on Staff Behaviour Decisions
the company’s code of ethics and conduct. At the
end of a busy first week, Jane and her manager
Par t 2 – The Histor y: Past Examples of 17 Mergers, Ac
Unethical Decision-Making
then formalised her performance indicators,
CHAPTER OPENING FEATURES
Gain an insight into how corporate finance theories relate Identify the key concepts you will engage with through the
to the real world through the What companies do at the Learning objectives at the start of each chapter.
beginning of each chapter.
LEARNING OBJECTIVES
THE TIME VALUE OF

After studying this chapter, you will be able to:
3
LO3.1 understand how a dollar today is not the LO3.4 describe how different patterns of future
MONEY
same value as a dollar tomorrow cash flows (lump sums, payments each
explain that a delay in receiving cash over period for finite intervals (annuities),
LO3.2
time means its value must increase to and payments each period forever
compensate the cash receiver who cannot (perpetuities)) can allow us to simplify the
engage in other investment projects while present value formulae
waiting – hence values of cash today are LO3.5 understand how to calculate a cumulative
compounded into the future value of cash flows at a future date
LO3.3 understand that the converse of LO3.6 understand how to calculate a cumulative
compounding – paying more for future value of cash flows at the present date
cash than having its value today – is describe how combinations of cash flow
LO3.7
LEARNING OBJECTIVES
discounting, that is, reducing the value of patterns can be calculated with some
future cash if it is to be received today simplifications of the relevant formulae.
WHAT COMPANIES DO
3.1 INTRODUCTION TO THE TIME VALUE OF MONEY
LO3.1
After studying this chapter, yo
TRANSPORTS OF DELIGHT?
Find the main heading covering
In business, most decisions that financial managers face involve trading off costs and benefits that are spread
understand how a do
In March 2008, Meyrick and Associates, a 5 calculating the difference between the base
consulting group, together with EconSearch
and Steer Davies Gleave, presented a report
case and each other option.
The project received considerable public
each learning outcome quickly with
out over time. Companies have to decide whether the initial cost of building a new factory or launching a new
advertising campaign is justified by the long-term benefits that result from the investment. In the East–West LO3.1
on a range of transport options for the East–
West Link to the Victorian State Government.
attention, especially when, following a 2014
election and change of government, it was LO icons.
Link example outlined in this chapter’s ‘What Companies Do’ box, the investment by Australia’s Victorian
State Government was to be for a multimillion-dollar commitment over a period of several years, with the same value as a dolla
The East–West Link was a planned major revealed that the initial business case for impacts lasting decades. Because of the long time horizon involved, there was a great deal of uncertainty
infrastructure project that would affect
transport and traffic patterns for millions
the project predicted a loss of 45 cents for
every dollar invested. Further analyses were
about the likelihood of the project being a success. In general, financial managers for major projects need a
quantitative framework for evaluating cash inflows and outflows that occur at different times over many LO3.2 explain that a delay in
years. It turns out that this framework is just as useful to typical consumers in their everyday lives as it is to
time means its valu
of people who live and work in the city of conducted to incorporate wider economic
Melbourne over many decades. The report benefits stemming from the project, including executives in huge, multinational corporations.
summarised extensive analyses undertaken reduced travel and commercial times; but the The most important idea in Chapter 3 is that money has time value. This simply means that it is better to
to evaluate the benefits and costs of the
base case and the various other options
return from the project increased only to
84 cents for each dollar invested.
have $1 today than to receive $1 in the future. The logic of this claim is straightforward – if you have $1 in
hand today, you can invest it and earn interest, which means that you will have more than $1 in the future.
compensate the cash
engage in other inves
for developing this new piece of transport The use of present value analysis is central Thus, the time value of money is a financial concept recognising that the value of a cash receipt (or payment) time value of money
infrastructure, and described a series of to any project in which a decision must be depends not only on how much money you receive, but also on when you receive it. Financial concept that
explicitly recognises that
present values that had been determined. made on whether or not to commit scarce A simple example illustrates the essence of the time value of money. Suppose you have $100 today, and
waiting – hence valu
$1 received today is worth
For example, one piece of analysis was of the financial resources to an investment that will you can put that sum into an investment that pays 5% interest per year. If you invest $100 now, by the end of more than $1 received in
present value of public transport revenue produce a long stream of cash payments in the future
one year you will earn $5 in interest (0.05 × $100 = $5). Your $100 initial investment will have grown to $105 in
compounded into the

accrued by each option. It was determined by: the future. This chapter will show you the key
one year ($5 in interest plus the original $100 investment). In a sense, then, receiving $100 now is equivalent
1 estimating revenue per day for the base concepts that underpin our use of present
to receiving $105 in one year. Whether you receive $100 now and invest it at 5%, or whether you have to wait
case and for each option value analysis.
a year to receive $105, you wind up with the same amount of cash. In this case, we would say that $105 is the future value
2
3
estimating revenue per year for each option
discounting the future cash flows
Sources: Meyrick and Associates, East West Needs Assessment Economic Benefits
and Costs Analysis – Technical Report, March 2008, https://www.ptua.org.au/
files/2008/PTUA_EWLNA_submission_20080715.pdf, accessed 24 June 2019.
future value of $100 invested for one year at 5%. More generally, the future value is the value of a cash receipt
or payment as at some future date. LO3.3 made today measured understand that
The value of an investment
at a specific future date,

4 estimating the yearly increase of revenue
We can reframe the above example to illustrate another dimension of the time value of money. Suppose
compounding – pay
accounting for interest
for each option earned over the life of the
you have no money today, but you expect to receive $105 in one year. Suppose also that a bank is willing to
FEATURES WITHIN CHAPTERS

investment
cash than having it

discounting, that is, r
3: The Time Value of Money 67
Analyse practical applications of concepts through the Check your understanding of the content by answering
future cash if it is to b
Finance in the real world examples.
the Concept review questions as you progress through
8/14/20 BK-CLA-GRAHAM_3E-200087-Chp03.indd
10:58 PM 67 8/14/20 10:58 PM
the chapter.
FINANCE IN THE REAL WORLD LO3.6 C ON C EP T REV I EW QUESTI ON S
CFO SURVEY EVIDENCE (II)
Surveys of corporate financial managers around the world reveal both major similarities and
significant differences in the use of various capital budgeting techniques. The graph below
10 You are given a mixed cash flow stream and an interest rate, and you are asked to calculate both
the present and future values of the stream. Explain how the two numbers you calculate are
related.
LO3.1 3.1 INTRODUCT
documents how frequently managers in Australia, the United States, the United Kingdom, 11 How is the present value of an annuity due related to the present value of an identical ordinary
annuity?
In business, most decisions tha
Germany, France and Brazil use internal rate of return, net present value, payback period, real
option analysis and accounting rate of return. IRR and NPV are used by over 70% of managers
12 Does a perpetuity pay an infinite amount of cash? Why is the present value of a perpetuity not
out over time. Companies have

of Australian and US companies and by a majority, or near-majority, of Brazilian and British
infinite?
managers; but the propensity to use either of these theoretically preferred methods of capital
advertising campaign is justifie

budgeting decision making is below 50% in all other countries. The payback method is one of the 13 How would you calculate the present value of a perpetuity that had payments that were
most frequently employed decision-making tools in other countries. declining by a fixed percentage each year?
Link example outlined in this c

Capital budgeting techniques (by country)
Australia TH I N K I N G CAP QUESTI ON

State Government was to be fo
Brazil
France 3 Some companies (such as IBM) have issued bonds that are perpetuities. What sort of
IRR
Germany information do you think the companies have to tell investors in the market about the
impacts lasting decades. Becau

UK
USA perpetuities to convince them to buy them?
about the likelihood of the pro

Australia
Brazil
France
NPV
quantitative framework for ev

Germany
UK
USA
LO3.7 3.7 ADVANCED APPLICATIONS OF TIME VALUE
Australia
Brazil The techniques we have studied thus far have many different applications in business as well as in personal
years. It turns out that this fram
executives
finance. Some of those applications involve compounding interest more frequently than once per year. When
in huge, multination
France
xxii Guide to the
Payback Text
Germany
UK Copyright 2021 Cengage Learning. All Rights Reserved. May interest
not becompounds
copied, more often, the
scanned, orstated interest rate
duplicated, in on a loan or
whole or an
ininvestment
part. WCN doesn’t always accurately
02-200-202
The most important idea in
measure the true rate of return, or the effective rate of interest. In this section, we relax the assumption
USA
Australia maintained so far that interest compounds once per year, and we examine several additional applications of
Brazil
How did Google’s equity achieve such spectacular performance? At least in theory, a company’s share
FEATURES WITHIN CHAPTERS price ought to reflect the underlying performance of the company (as well as investors’ expectations about
future performance). The next example shows how to use Equation 3.1 to develop a simple measure of how
Google performed as a company from 2004 to 2018.
EXAMPLE
More Google Calculations
In 2004, the year of its IPO, Google generated total Notice here that we are still solving for r, just
revenue of about $3.2 billion. Fourteen years later, the as we did in the previous example. In this case,
company reported 2018 revenues of about the interpretation of r is a little different. It is not
$137 billion. What was the annual growth rate in the rate of return (or the rate of interest) on some
Google’s revenues during this period? Again, we apply investment, but rather the compound annual growth
Examine how theoretical concepts have been used in Equation 3.1, substituting the values that we know as rate between Google’s 2004 and 2018 revenues. It
practice through the Example boxes. follows: is a simple measure of how fast the company was
growing during this period. Repeating the algebraic
FV = PV(1 + r) n
manipulations (spreadsheet keystrokes) from the
$137 = $3.2(1 + r) 7 prior example, we can determine that Google’s
($137 ÷ $3.2) (1 ÷ 7) = (1 + r) revenues increased at an annual rate of 71% from
1.71 = 1 + r 2004 to 2018.
r = 0.71 = 71%
Sources: Google, https://abc.xyz/investor/static/pdf/2018Q4_alphabet_earnings_release.pdf. Accessed 25 June 2019.
A final example illustrates how you might use Equation 3.1 to make a wise decision when confronted with
different options for borrowing money to purchase a consumer durable good.
EXAMPLE
END-OF-CHAPTER FEATURES T i m e Va l u e o f B o r r o w i n g s
You observe a new piece of equipment available $5,200 at the end of the year. You save $160 by
from a manufacturer for a price of $5,200 for using your credit card and repaying the credit
immediate delivery, but payment due in one year; card company $5,040 next year rather than
At the end of each chapter you will find several tools to help you to review, practise and extend your knowledge of or the equipment could be collected immediately, paying the retailer $5,200. Another way to frame
the key learning objectives. but payment now would be $4,500. You can
charge your credit card with the amount of
this problem is to determine the implicit interest
rate that the retailer is charging if you accept the
$4,500 to obtain the discount, but you need to offer to pay $5,200 in one year. The retailer is
Review your understanding of the key chapter topics with Test your knowledge and consolidate your learning
pay 12% interest in one year for using the card. Is essentially lending you $4,500 today (the amount
it cheaper for you to pay $4,500 now with credit that you would be charged if you paid up-front),
the Summary. through the Important equations, Self-test problems,
card interest of 12%, or to pay nothing now and but you have to pay the full price at the end of one
pay $5,200 in one year? year. In this case, Equation 3.1 looks like this:
Questions and Problems.
Once again, let’s write down Equation 3.1 $5,200 = $4,500(1 + r) 1
and plug in values that we know. You can spend ($5,200 ÷ $4,500) – 1 = r
$4,500 today and pay 12% interest for a year. In
0.1556 = 15.56% = r
IMPORTANT
this case, we could EQUATIONS
write Equation 3.1 as follows:
IMPORTANT EQUATIONS
STUDY TOOLS FV = $4,500(1 + 0.12) 1EQUATIONS
TABLE OF IMPORTANT = $5,040
TABLE OF IMPORTANT EQUATIONS
Solving for r, the implicit interest rate charged
by the retailer, we obtain a rate of 15.56%. If you
Borrowing $4,500 today on CF1your CFcredit card
CF3 CFn borrow at a rate of 12% using your credit card,
can
9.1 NPV = CF0 + CF 1 + CF 2 + CF 3 + .... + CF n
2
SUMMARY will cost you $5,040 in one year.

( ) ( ) ( )
1 The second
9.1 NPV = CF0 + 1+ r 1 + 1+ r 2 + 1+ r 3 + .... + then
2 3
( )
1+ r n that is preferable to accepting the retailer’s
n
LO9.1 ■■ The capital budgeting process involves generating, reviewing, analysing, selecting and implementing
option is to pay nothing
ST9-2 today1+ and
r ispay
Nader International
( ) ( ) ( )
+ r the 1retailer
1considering+investing
r in loan,
1two which
+ r assets: ( )
carries
A and a rate
B. The initial of annual
outlay, 15.56%.
cash flows and annual depreciation for each asset appears in the following table for the assets’
long-term investment proposals that are consistent with the company’s strategic goals. CF1 CF CF3 CFn
assumed
9.2 IRR five-year
= r, where NPV =lives.
$0 =Nader
CF0 +willCF
use straight-line
+ CF2 2 + depreciation + over eachrasset’s
= IRR five-year life.
CF3 3 + ... CFn n ; Nader’s
( ) ( ) ( ) ( ) 3: The Time Value of Mon
1
The company requires
= $0a=10%
CF0 return
+ 1+ r1on1 +
each of2 those
■■ Other things being equal, managers would prefer an easily applied capital budgeting technique that 9.2 IRR = r, where NPV 1+ r 2 + 1equally risky
+ r 3 + ... + 1assets.
+ r ; r = IRR maximum
considers cash flow, recognises the time value of money, fully accounts for expected risk and return
Q9-6
What
payback period is 2.5 years, its
1+ r ( ) ( ) ( )
maximum discounted
minimum accounting rate of return is 30%.
1+ r
payback
1+ r 1+ r ( )
period is n3.25 years and its
and, when applied, leads to higher share prices. CF1are the CFpotential CF3faults in using
CFn the IRR as a capital budgeting technique? Given these faults,
whyCF + technique
is this CF2 2 + CF
2
+A ... + CF
so 3popular
ASSET among corporate managers?ASSET B
■■ Though simplicity is a virtue, the simplest approaches to capital budgeting do not always lead
( ) ( ) ( ) ( )
1 n
+ 1FLOW
1+ r1 1CASH
YEAR + ... + 1+ rn n
+ r 2 + 1+ r3 3DEPRECIATION CASH FLOW DEPRECIATION
companies to make the best investment decisions.
Q9-7
9.3 PI Why
=
0 1+ r
is
Reconcile
9.3 PI =
the NPV
1+ r( ) ( ) ( )
considered
–$200,000
this
1+ r
CF
result with the
to be r
prevalence
( )
1–+theoretically
of the
superior to all other capital budgeting techniques?
–$180,000
use of IRR
–
in practice. How would you respond to
8/14
LO9.2 ■■ Sophisticated techniques include net present value (NPV), internal rate of return (IRR) and profitability 1 $70,000 CF
0
$40,000 $80,000 $36,000
index (PI). These methods often give the same accept–reject decisions, but do not necessarily your CFO if she instructed
0
you to use the IRR technique to make capital budgeting decisions on
rank projects the same. They all focus on cash flows, rather than accounting earnings, and make projects
2 with 80,000
cash flow streams40,000 that alternate between
90,000 inflows and outflows?
36,000
appropriate adjustments for time.

3
SELF-TEST PROBLEMS
90,000 40,000 30,000 36,000
Q9-8 Outline the differences between NPV, IRR and PI. What are the advantages and disadvantages of
■■ The NPV gives a direct estimate of the change in shareholder wealth resulting from a given
SELF-TEST
4
Answerseach
PROBLEMS
to these
90,000
technique? Doproblems’
‘Self-test they agree
40,000
with
and theregard
40,000
to simple
‘Concept review’accept
36,000
or reject
questions decisions?
throughout the chapter appear on
5 100,000 40,000 40,000 36,000
investment and provides a straightforward way to control differences in risk among alternatives. Answers
the
Q9-9 to these
Student
Under ‘Self-test
Companion
what problems’
Website.
circumstances and
will thetheNPV,‘Concept
IRR and review’ questionsprovide
PI techniques throughout the chapter
different appear on
capital budgeting
However, it does not provide a means for incorporating the value of managerial flexibility during the the Student Companion
a Calculate
decisions? What Website.
the payback period for each asset, assess its acceptability and indicate which asset is
areisthe underlyinginvesting
causes of
ST9-1 JK Products
best, using thePtypayback
Ltd considering
period. in the
eitherdifferences often found
of two competing in thethat
projects ranking of
will allow the
life of a project. mutually exclusive
ST9-1 bJK Products
company to Pty Ltdprojects
eliminate using NPV
is considering
a production and IRR?
investing
bottleneck in either
and meetof twothecompeting projectsfor
growing demand
Calculate the discounted payback for each asset, assess its acceptability and indicate which
that
itswill allow the
products.
■■ The NPV is calculated as the sum of the discounted cash flows, as shown in important Equation 9.1.
Q9-10 company
The
Can you
asset to eliminate
company’s
name
is best, some
using a production
engineering
theindustriesdepartment
discounted where bottleneck
payback. thenarrowed
payback and the
meet
period the growing
alternatives demand
down
is unavoidably to two:
long? forStatus
its products.
Quo (SQ)
■■ The EVA is a variant of NPV analysis, which essentially calculates an investment’s NPV on a year-by- The
and company’s
High Tech engineering
(HT). Working department
with the narrowed
accounting the
and alternatives
finance down
personnel,
c Assuming that each year’s net income equals cash flow minus depreciation, calculate the to
the two: Status
company’s Quo
CFO (SQ)
Q9-11 and
In statistics,
High Tech you learn about Type the
I of
and Type II flows
errors. A SQ
Type Ipersonnel,
error occurs when a statistical test
year basis. It uses the economic profit, rather than just focusing on accounting profit, and thus allows developed
accounting rate (HT).
the of Working
following
return from with
estimates
each asset, accounting
the cash
assess andforfinance
its acceptability and
and HT over
indicate the
the
which company’s
relevant
asset is CFO time
six-year
rejects
developed
horizon. a The
hypothesis
best, using thecompany
the when
following
accounting has the hypothesis
estimates
anof11%
rate required
return. is return,
of the cash actually
flowsand true.
for SQAand
views Type II error
HT
these over occurs
the
projects whensix-year
relevant
as equally a risky.
test fails
time
for the cost of capital. The EVA is equal to the cash flow less the product of the cost of capital and
toCompare
reject The
dhorizon.
a and
hypothesis
company that is
anactually
hasfindings false. We
11%inrequired can apply
return, and this
views type
these ofprojects
thinking to equally
as capital budgeting.
risky.
invested capital. contrast your parts (a), (b) and (c). Which asset would you recommend
A to
Type I error PROJECT
occurs when SQ a company rejects PROJECT
anWhy? HT
investment project that would actually
Nader, assuming that they are mutually exclusive?
LO9.3 ■■ The IRR is the rate of return which sets the NPV (or sum of the discounted cash flows) to zero, as enhance
YEAR shareholderPROJECT SQ CASH
wealth. A Type II errorPROJECT
FLOWS occurs whenHT a company accepts a value-decreasing
shown in important Equation 9.2. QUESTIONS
investment,
0YEAR which should have
–$670,000 been
CASH rejected.
FLOWS –$940,000
■■ The IRR approach makes an appropriate adjustment for the time value of money and allows a0 Describe the features –$670,000 of the payback rule–$940,000
that could lead to Type I errors.
Q9-1 For1 a company that uses $250,000 $170,000
the NPV rule to make investment decisions, what consequences result
managers to make explicit, quantitative adjustments for differences in risk across different projects.
ifbthe Describe the features
21 company misestimates
of the payback rule that
200,000shareholders’ required returns
$250,000 could lead to Type II errors.
180,000and consistently applies a discount
$170,000
However, using the IRR approach can occasionally lead to poor investment decisions when projects rate that is ‘too high’?
c23 Which error do you think
200,000 is more likely to occur when companies use payback analysis? Does
180,000
have cash flow streams alternating between negative and positive values. The IRR technique may 170,000 200,000
Q9-2 ‘Cash your
flow answer depend
projections more on the
than length
a few years of
outthe
are cut-off
not payback
worth period?
the paper they’reYou canon.
written assume a ‘typical’
provide sub-optimal project rankings when different investments have very different scales or when 43 170,000
150,000 200,000
250,000
Therefore,
projectusing payback
cash analysis,meaning
flow stream, which ignores
thatlong-term
most cash cash flows, is occur
outflows more reasonable than
in the early years of a
the timing of cash flows varies dramatically from one project to another. making45 wild guesses, as150,000 250,000
one has to do in the NPV approach.’
project. 130,000 300,000Respond to this comment.
■■ Although the NPV and IRR techniques give the same accept or reject decisions, these techniques do Q9-3 56 analysts can massage
‘Smart 130,000 300,000
the numbers in NPV analysis
130,000 to make any project’s NPV look positive.
550,000
not necessarily agree in ranking mutually exclusive projects. IRR techniques weight earlier cash flows Q9-12 Holding the cut-off period fixed, which method has a more severe bias against long-lived projects,
It is6 better to use a simpler approach, such as payback or
130,000 accounting rate of return, that gives
550,000
higher (since they are discounted less), and this can result in differences between rankings using each payback
a Calculate
analysts or discounted
fewer degrees payback?
the netofpresent
freedomvalue (NPV) of each
to manipulate project,Respond
the numbers.’ assess toitsthis
acceptability
comment. and indicate which
technique. Because of its lack of mathematical, scale and timing problems, the most straightforward a Calculate
project is the net
best, present
using NPV.value (NPV) of each project, assess its acceptability and indicate which
Q9-4 In what way is the NPV consistent with the principle of shareholder wealth maximisation? What
and, theoretically, the best decision technique is net present value (NPV). b project
Calculate
happens is the
to the best,
value using
internal
of NPV.
rate ofifreturn
a company (IRR)
a positive of project
NPV each project, assess
is accepted? its acceptability
If a negative and indicate
NPV project
LO9.4 ■■ The profitability index is a close cousin of the NPV approach, but it suffers from the same scale
problem as the IRR approach. The PI is calculated as shown in important Equation 9.3. It is the sum
PROBLEMSis accepted?
b Calculate the internal
which project is best, rate
usingof IRR.
which project is best, using IRR.
Acparticular
return (IRR) of each project, assess its acceptability and indicate
Q9-5 Calculate the profitability
company’s index
shareholders (PI) ofaeach
demand project,
10% return on assess its acceptability
their investment, given and indicate which
of the discounted cash flows from Period 1 onwards, indexed by the modulus of the cash flow at time the
c company’s
project isrisk.
Calculate the However, this index
profitability
best, using PI. company
(PI) has historically
of each project,generated
assessreturns in excess ofand indicate which
its acceptability
zero. NET PRESENT
d project
Draw the isVALUE
shareholder expectations,
best,profile
NPV using with an average return on its portfolio of investments of 20%.
PI.project SQ and HT on the same set of axes, and use this diagram to
for
a Looking back, what kind of share-price performance would you expect to see for this
LO9.5, LO9.6 ■■ Capital budgeting techniques include the payback period, discounted payback period and accounting P9-1 d company?
Draw
Calculatethe
explaintheNPV
whynet profile
the NPV for
present and project
the IRR
value SQ and
show
(NPV) HT on
for different
the the same set offor
preferences
following 20-year axes, and
these
projects. use
two this diagram
mutually
Comment the to
onexclusive
rate of return, which are less sophisticated techniques, because they do not explicitly deal with the explain
projects.why the NPV
Discuss thisand the IRRin
difference show different
terms of bothpreferences for these
the ‘scale problem’ two
and mutually
the ‘timing exclusive
problem’.
bacceptability of each.
A new investment Assumearises,
opportunity that and
the the
company hasfinancial
company’s an opportunity cost of that
analysts estimate 14%.
time value of money and are not tied to the company’s wealth-maximisation goal. projects.
e the
Which of Discuss
project’s the this
twowill
return
difference
mutually in terms
exclusive of reject
both
projects the ‘scale
would you problem’
recommend and the
that JK‘timing problem’.
Products
a Initial cash outlay isbe 15%. The
$15,000; CEO inflows
cash wants toare the project
$13,000 per because
year. it would lower
LO9.7 ■■ A single complete example can illustrate how the different measures of value can be calculated, and e the
Which of theaverage
undertake?
company’s two mutually
Why? exclusive
return and thereforeprojects
lower thewould you recommend
company’s that
share price. How doJKyouProducts
b respond?
Initial cash outlay is $32,000; cash inflows are $4,000 per year.
how investment decisions that add value to an enterprise can be identified. undertake? Why?
c Initial cash outlay is $50,000; cash inflows are $8,500 per year.
338 PART 3: CAPITAL BUDGETING
P9-2 Michael’s Bakery is evaluating a new electronic oven. The oven requires an initial 9: cash outlay
Capital Budgeting Process and Decision Criteria 3
of $19,000, and will generate after-tax cash inflows of $4,000 per year for eight years. For Budgeting
9: Capital each Process and Decision Criteria 3
336 PART 3: CAPITAL BUDGETING of the costs of capital listed: (1) calculate the NPV; (2) indicate whether to accept or reject the
BK-CLA-GRAHAM_3E-200087-Chp09.indd 338 machine; and (3) explain your decision. 13/08/20 8:43 PM
a The cost of capital is 10%.

BK-CLA-GRAHAM_3E-200087-Chp09.indd 337 13/08/20 8:
b The
BK-CLA-GRAHAM_3E-200087-Chp09.indd 337 cost of capital is 12%. 13/08/20 8:
BK-CLA-GRAHAM_3E-200087-Chp09.indd 336 13/08/20 8:43 PM
c The cost of capital is 14%.
Guide to the Text xxiii

9: Capital Budgeting Process and Decision Criteria 3
END-OF-CHAPTER FEATURES
Analyse Case studies and Real-world case studies that present issues in context, encouraging you to integrate the v
concepts discussed in the chapter and apply them to the workplace.
CASE S T UDY
CAPITAL BUDGETING PROCESS AND TECHNIQUES
REAL-WORLD CASE STUDY
Contact Manufacturing Ltd is considering two alternative 2 Calculate the net present value (NPV) of each project, and ALL IN THE FAMILY
investment proposals. The first proposal calls for a major based on this criterion, indicate which project you would
renovation of the company’s manufacturing facility. The second recommend for acceptance.
The Egibi family operated a series of businesses officials responsible for maintaining the canals
involves replacing just a few obsolete pieces of equipment in
3 Calculate the internal rate of return (IRR) of each project, of quite diverse natures over five generations, and collecting fees from their users in which the
the facility. The company will choose one project or the other
and based on this criterion, indicate which project you and left a reasonable record of its activities family paid the officials to pay the government,
this year, but it will not do both. The cash flows associated with
would recommend for acceptance. for us to analyse. The start of the business is in return for the right to extract the fees
each project appear below and the company discounts project
4 Calculate the profitability index (PI) of each project, and not particularly clear, although it seems that it in kind. In effect, the Egibis set up a strong
cash flows at 15%.
based on this criterion, indicate which project you would came from a marriage link when a man of some shipping, storage and food-processing network,
recommend for acceptance. means married a less wealthy woman and took with tax-farming as a sideline operation. This
YEAR RENOVATE REPLACE up business with his brother-in-law. The Egibi work built enough financial support from the
5 Overall, you should find conflicting recommendations brother-in-law claims to have taught his sororal external market that, in two generations, the
0 –$9,000,000 –$2,400,000 based on the various criteria. Why is this occurring? nephew to read and write, and later adopted family was considered one of the wealthiest
1 3,000,000 2,000,000 6 Chart the NPV profiles of these projects. Label the him, but without granting him an inheritance in the country adjacent to the capital city. The
2 3,000,000 800,000 intersection points on the x- and y-axes and the share beside his three natural sons. In the primary organisational structure used by the
crossover point. following generations, the eldest sons married Egibis was the partnership arrangement, with
3 3,000,000 200,000
upward, to women ‘of good families’ who had local entrepreneurs who specialised in related
4 3,000,000 200,000 7 Based on this NPV profile analysis, and assuming the
good connections and provided rich dowries. production, such as beer-brewing or buying
WACC is 15%, which project would you recommend for
5 3,000,000 200,000 By contrast, their daughters were married off local crops, and selling them in the capital. The
acceptance? Why?
to business partners with dowries that typically businesses maintain working capital at steady
8 Based on this NPV profile analysis, and assuming the cost only a fraction of what their eldest sons levels and distribute profits to the individual
ASSIGNMENT WACC is 25%, which project would you recommend for received. partners, to allow them to invest on their own
1 Calculate the payback period of each project and, based acceptance? Why? in other businesses.
The Egibis invested their profits in farmland,
on this criterion, indicate which project you would 9 Discuss the important elements to consider when which they rented out on a sharecropping To extend their own investments, the Egibis
recommend for acceptance. deciding between these two projects. basis. The leasing arrangements focused on moved into real estate. They developed a
the long term, and encouraged tenants on special relationship with the household of
their lands to invest in cultivating more capital- the local crown prince, and acquired a house
intensive crops, shifting from grain to dates. adjacent to the crown prince’s palace. They
The Egibis effected this substitution of planting arranged a loan-rental mortgage transaction by
by allowing the tenants to pay little rent in the borrowing the funds from the man who rented
early years of a contract, substituting short- the house, with the rent corresponding to the
term grain rents for higher, long-term returns usual interest charge of 20%, which covered
CASE STUDY from date palms, which take several years to

mature and yield a crop. The date palms also
require a good supply of water, and need to be
asset price, rent and carrying charges for the
property. The tenant was the administrator
of the crown prince’s palace. Because the
The Scope of Corporate Finance.................. Ch 1, p. 28 Raising Long-Term Financing.................. Ch 12, p. 464

grown near rivers and irrigation canals.
Over the years, the Egibis also obtained
Egibis were not debtors in financial distress,
the transaction was effectively an interest-
licences from the government to become tax free loan, and did not require any real flow of
Financial Statement and Cash Adding Value with Capital and to Structure........ Ch 13, p. 498
farmers – that is, they were allowed to collect
taxes on behalf of the government
funds until the debt was eventually repaid. The
contract was occasionally renewed, and ran for
remit a (large) fraction to the government many decades.
Flow Analysis................................................ Ch 2, p. 65 Long-Term Debt andbusiness
Leasing.
while keeping the remainder. The Egibi family
concentrated its tax-farming in .................. Chsons,14,
among the fourth-generation p. 533
When the Egibi family wealth was divided
the family
rural areas along the canals of the country, owned 16 houses in the capital city and a
Present Value.............................................. Ch 3, p. 111 Dividendhiring
Policy. .........................................
boats and boatmen to transport goods.
Landowners had to pay specific rates to Chover15, p. 563
major rural town, along with other agricultural
land, as well as having control more than
maintain canals and the local irrigation system. 100 employees. In some ways, this story is
Bond Purchase Decision............................ Ch 4, p. 152 International Financial Management....... Ch 16, p. 585
The Egibis set up contracts with the local certainly not a unique one of a rise to wealth
9: Capital Budgeting Process and Decision Criteria 347

Valuing Shares............................................ Ch 5, p. 182 112 Mergers, Corporate Control and
PART 1: INTRODUCTION
The Trade-Off Between Risk and

BK-CLA-GRAHAM_3E-200087-Chp09.indd 347 13/08/20 8:43 PM Corporate Governance..............................Ch 17, P. 631
Return......................................................... Ch 6, p. 219 Financial Planning.................................... Ch 18, p. 670
BK-CLA-GRAHAM_3E-200087-Chp03.indd 112 8/14/20 10:58 PM
Risk, Return and the Capital Asset Risk Management.....................................Ch 19, P. 700
Pricing Model (CAPM)................................. Ch 7, p. 255
Entrepreneurial Finance and
Options........................................................ Ch 8, p. 294 Venture Capital ........................................ Ch 20, p. 728
Capital Budgeting Process and Cash Conversion, Inventory and
Techniques.................................................. Ch 9, p. 347 Receivables Management........................ Ch 21, p. 761
Cash Flow and Capital Liquidity Management.............................. Ch 22, p. 787
Budgeting........................................ Ch 10, pp. 389–390
Insolvency and Financial
Cost of Capital and Project Risk............... Ch 11, p. 421 Distress........................................... Ch 23, pp. 810–811
REAL-WORLD CASE STUDY

All In the Family................................ Ch 3, pp. 112–113 ‘Plane’ And Simple?........................ Ch 16, pp. 586–588
Sharing the Business........................ Ch 8, pp. 295–296 Restructuring Finances to End
Cannibals in The Market!......................... Ch 11, p. 422 Litigation................................................... Ch 17, p. 632
xxiv Guide to the Text

Guide to the online resources
FOR THE INSTRUCTOR
Cengage is pleased to provide you with a selection of resources

that will help you prepare your lectures and assessments.
These teaching tools are accessible via cengage.com.au/instructors
for Australia or cengage.co.nz/instructors for New Zealand.
MINDTAP
Premium online teaching and learning tools are available on the MindTap platform - the personalised eLearning
solution.
MindTap is a flexible and easy-to-use platform that helps build student confidence and gives you a clear picture of their
progress. We partner with you to ease the transition to digital – we’re with you every step of the way.
The Cengage Mobile App puts your course directly into students’ hands with course materials available on their
smartphone or tablet. Students can read on the go, complete practice quizzes or participate in interactive real-time
activities.
MindTap for Corporate Finance is full of innovative resources to support critical thinking, and help your students move
from memorisation to mastery! Includes:
• Polling questions
• Smart videos
• Concept review questions
• Revision quizzes
• Problem sets (in Aplia)
Now the simplicity and reliability of Aplia is available in the premier eLearning platform, MindTap.
Engage your students at every stage of the course with study exercises and assignments that connect concepts to the
real world and provide an unmatched level of feedback.
Assessments offer automatic grading of every question with immediate explanations that link back to the online text so
that students can review concepts.
MindTap is a premium purchasable eLearning tool. Contact your
Cengage learning consultant to find out how MindTap can transform
your course.
INSTRUCTOR’S MANUAL
The Instructor’s manual includes:
• Learning objectives • Suggested class discussions and projects
• Chapter outlines • Videos
• Key questions • Websites and readings
• Case question solutions
Guide to the Online Resources xxv

COGNERO®-BASED TEST BANK
A bank of questions has been developed in conjunction with the text for creating quizzes, tests and exams for your
students. Create multiple test versions in an instant and deliver tests from your LMS, your classroom, or wherever you
want using Cognero. Cognero test generator is a flexible online system that allows you to import, edit, and manipulate
content from the text’s test bank or elsewhere, including your own favourite test questions.
SMART VIDEOS
Industry expert talking-head videos.
POWERPOINT™ PRESENTATIONS
Use the chapter-by-chapter PowerPoint slides to enhance your lecture presentations and handouts by reinforcing the
key principles of your subject.
ARTWORK FROM THE TEXT

Add the digital files of graphs, tables, pictures and flow charts into your learning management system, use them in
student handouts, or copy them into your lecture presentations.
FOR THE STUDENT
MINDTAP
MindTap is the next-level online learning tool that helps you get better grades!
MindTap gives you the resources you need to study – all in one place and available when you need them. In the MindTap
Reader, you can make notes, highlight text and even find a definition directly from the page.
If your instructor has chosen MindTap for your subject this semester, log in to MindTap to:
• Get better grades
• Save time and get organised
• Connect with your instructor and peers
• Study when and where you want, online and mobile
• Complete assessment tasks as set by your instructor.
When your instructor creates a course using MindTap, they will let you
know your course link so you can access the content. Please purchase
MindTap only when directed by your instructor. Course length is set by
your instructor.
MindTap for Corporate Finance includes Aplia – the online homework
and assessment solution that helps you to better prepare for class and
exams.
xxvi Guide to the Online Resources

PREFACE
Finance matters! All business students – and, increasingly, members of the general public –
need to understand finance. Whether you are working to evaluate a potential investment,
an alternative marketing campaign or a new product decision, you can benefit from an
understanding of introductory finance. In your personal life, too, whether you want to
estimate the amount to save to buy a new car or home, or you want to decide whether to
buy shares, bonds or both for your retirement account, you may make better decisions if
you have a grasp of concepts of finance.
As instructors (and former students), however, we realise that finance can be an
intimidating subject, especially for students who are challenged by quantitative material.
The initial goal in writing this book was to change that perception by reducing the
intimidation factor and clearly communicating the excitement and relevance that finance
holds for each of us. We hope to continue that excitement and relevance with this new
edition.
In previous years, the US editions received two types of feedback, suggesting that
they achieved their objective of creating an effective, user-friendly text. Many users told
the authors, first, about their positive experiences with the book, and, second, that the
book continued to experience strong and growing success in the market. This success
carried over to the first and second Asia–Pacific editions, published in 2014 and 2017
respectively, and we are grateful to all those who bought the book and who gave us their
comments on it.
In this third Asia–Pacific edition, we aim to build on the book’s earlier success to
establish it as a market-leading corporate finance text. We strongly believe that this third
edition offers the up-to-date pedagogy and features necessary to achieve these goals.
NEW DISTINGUISHING FEATURES OF THE BOOK

This book shows you how the concepts you have learned in your fundamental business
courses – such as economics, statistics and accounting – directly connect to finance.
Understanding these linkages should allow you to quickly realise that you already know
more about finance than you think you do! To help you recognise the practicality of the
concepts covered in this book, chapters include many illustrations of how you may utilise
key chapter ideas in your own lives. In this third Asia–Pacific edition, we have updated
examples and cases. We have continued to use the ‘flow chart’ from the second Asia-
Pacific edition for the overall learning pattern of the book, so that you can see at a glance
where the current topic you are reading fits into the universe of finance knowledge. We
have adjusted questions and problems at the ends of chapters; and we have continued to
bring into our discussions materials reflecting existing and emerging finance practice
across the Asia-Pacific region.
In addition to the major cases at the end of each Part of the book, we have introduced
new cases which focus on ethical issues in finance, as a growing field in the finance
literature and practice.
Every student needs some extra explanation or support at different points in this course.
Consequently, an outstanding technology package accompanies this book (see the Resources
Guide for further details) to allow you to learn and absorb material at your own pace.
Preface xxvii
Included in this technology package are many video clips of finance professionals and
scholars, each of whom contributes to the picture of just how often financial issues affect
today’s world.
CORE PRINCIPLES AND FEATURES

To accomplish our goal of making this the most effective, student-friendly introductory
finance textbook in the market today, we followed several core principles when writing
and revising the text and designing its support package.
●● Pique your interest, as students of finance, and demonstrate the relevance of important
concepts and techniques. We feel that it’s important to begin each chapter with a recent
practical illustration that stimulates your interest in the chapter. The chapters of
this book each begin with a story pulled from recent headlines that illustrates a key
chapter concept in an applied setting.
In order to make it clear that the concepts and techniques presented in this text
are not merely academic abstractions, but rather are used by industry practitioners,
we have included in most chapters a feature called ‘Finance in the Real World’. It adds
reality to your learning experience by providing insight into how senior financial
executives apply many of the concepts and techniques that are presented throughout
the book.
We also strive to provide you with a smooth bridge between concepts and practice
by including demonstrations that are labelled ‘Example’. These illustrations, many of
which use real data from well-known companies, take concepts and make them easy
to understand within interesting and relevant contexts.
The third edition of the Asia-Pacific version of the text also includes a new set
of cases which encourage the reader to think about ethical issues involved with
financial decisions. These have been created by Boris Bieler, a new contributor to
the book. Called ‘Sound Bites: Ethics in Corporate Finance’, the cases are located at the end
of each of the five Parts of the book (Part V being online – see the Resources Guide for further
details), Each financial ethics case links back to the initial set-up at the end of Part I, and
provides a new decision situation for Jane Wong, the central actor in the cases. Following
each case, we give a set of Assignments for student activity, and, in the accompanying
technology package (see the Resources Guide for further details) a collection of Polling
Questions which may be used to spark discussion in a tutorial or seminar.
●● Maximise the pedagogical and motivational value of technology. Technology

accompanying textbooks may often impede learning and classroom delivery rather
than facilitate student interest and understanding. At times, the mental investment
required to learn enough about text technology can cancel out one’s ability to absorb
the most important finance concepts. In other cases, students may focus too much on
what a particular technology can do, rather than what it should do. With this in mind,
we have developed an accompanying technology package which engages, motivates
and at times entertains readers, while helping them master financial concepts in their
own time and at their own pace. Most of all, as authors of the Asia-Pacific text, we
wanted to take primary responsibility for integrating the technology seamlessly with
the text’s most important concepts and techniques.
xxviii Preface
To meet this principle, please refer to the Resources Guide on p. xxi to see a sample
of the rich content that you can access.
●● Provide a truly global perspective, viewed through an Asia-Pacific lens. The economic
world is shrinking – particularly with respect to financial transactions. Formerly
centrally planned economies are moving towards becoming market economies. Many
developing nations are making rapid economic progress using markets-based methods.
Financial markets play an increasingly important role in the ongoing globalisation of
business and finance. Against this backdrop of change, some aspects of business still
vary significantly in different markets; for example, the Australian or New Zealand
company stock exchange listing rules and aspects of the new issues markets are
very different from those in the US markets. As future practitioners in this region,
we feel it is important for you to understand these distinctions. Rather than grouping
international issues into a chapter or two, we have integrated a global perspective,
while providing an Asia-Pacific focus, throughout the book.
●● Consider students’ prerequisites and connect with the courses you have taken to finance.
Experienced financial managers consistently tell us that they need people who can
see the big picture and who can recognise connections across functional disciplines.
To help you develop a larger sense of what finance is about, why it is relevant to your
business studies, and to ease your transition into your own chosen fields, we highlight
concepts that most students will have learned in their introductory economics,
statistics and accounting courses. We then connect these concepts to finance.
●● Inspire students to think beyond the book and explore some of these concepts in more
depth. To help you do this, throughout the text we have included ‘stretch’ questions in
the margin near the related discussion. These questions, which are labelled ‘Thinking
cap questions’, are intended to encourage you to think beyond the direct explanation
of the text about applied issues in finance. These insights may also be relevant for job
interviews that you may be undertaking; you can use these to prepare for interviews
or can ask these questions about the organisation during an interview.
For additional learning enhancements, see the Guide to the Text and Guide to the
Online Resources on p. xxi and p. xxv respectively.
Preface xxix
ABOUT THE AUTHORS
J o h n R . G r a h a m is the D. Richard Mead Professor of Finance at Duke University where he
also serves as the Director of the CFO Global Business Outlook survey. He is co-editor of the
Journal of Finance and has published more than four dozen scholarly articles in journals
such as the Journal of Financial Economics, the Review of Financial Studies, the Journal of
Finance, the Journal of Accounting and Economics, and many others. His papers have won
multiple research awards, including the Jensen Prize for the best corporate finance paper
published in the Journal of Financial Economics and the Brattle prize for the best corporate
finance paper in the Journal of Finance. Professor Graham is also a Research Associate
with the National Bureau of Economic Research, Vice President of the Western Finance
Association, and has been recognised for outstanding teaching and faculty contributions
at Duke and the University of Utah.
C h r i s t o p h e r A d a m , Fellow of the Royal Society of New South Wales, is Emeritus Professor

of Finance at the UNSW Sydney Business School. Before his recent retirement, Chris
was also Associate Dean for Academic Programs in the UNSW Business School. He has
published research in a number of academic journals in Economics and Finance, with a
focus on macroeconomics, international finance and financial strategy. Chris has won
several scholarships, research grants and teaching awards, including the AGSM Alumni
Outstanding Teaching Award for 2003 and the AGSM Executive Programs Excellence
Award 2010. He is Deputy Director of the Institute of Global Finance. Chris has been a
consultant to a range of organisations in Australia and overseas in the mining, financial,
education and consulting sectors and government. He has been a Director of ORIX
Australia Corporation Ltd (OACL) and Chair of its Remuneration Committee. He has also
been a member of the Academic Board for the S P Jain School of Global Management, and is
currently a member of the Academic Board of the Australian College of Applied Psychology
(Navitas). Chris holds a Bachelor of Economics degree with First Class Honours from the
University of Western Australia, and earned his MA and PhD degrees in Economics from
Harvard University. He was a Fulbright Scholar while at Harvard, and is currently a
Crimson Fellow of the Harvard Club of Australia.
B r i n d h a G u n a s i n g h a m is the founder and Managing Director of FitzBiz Investment

Analysis & Strategy and FitzBiz Consulting Pty Ltd, and the Chief Executive Officer of
Good Lioness. She provides strategic and investment consulting services to corporate
and financial services clients in Australia, Asia, the US and the UK. She has held senior
positions in the corporate finance and funds management industries, including Global
Head of Research at AMP Henderson Private Capital and Australasian Head of Research at
PricewaterhouseCoopers Financial Advisory Services. Through her consulting business,
research and teaching, she focuses on various aspects of corporate finance, including:
assessing strategic change and growth options, acquisition opportunities, and merger
xxx About the Authors

synergies; evaluating alternative assets and investments; and assisting with risk
management. She has published articles in various finance industry journals, and she is
also a co-author of Investment Analysis and Portfolio Management. Brindha was a former
Dean (Undergraduate) and Professor of Economics, and member of the Academic Board, at
S P Jain School of Global Management in Sydney, Singapore and Dubai. Brindha has been
awarded numerous scholarships and prizes, including a teaching excellence award at the
University of New South Wales. She holds MA and Honours degrees in Economics from the
University of Cambridge; a MSc. degree in Asia Pacific Economics from the University of
London and a PhD degree in Banking and Finance from the University of New South Wales
and the University of Sydney. Brindha is a Chartered Financial Analyst (CFA) charter
holder and a Graduate Member of the Australian Institute of Company Directors. She is a
Past President and past director of the CFA Society of Sydney.
The original US editions and the first two Asia-Pacific editions of this text (called
Introduction to Corporate Finance) had a further author, Scott B. Smart. He is the Whirlpool
Finance Faculty Fellow at the Kelley School of Business at Indiana University. Scott has
published many articles in leading accounting and finance journals, and his work has been
cited internationally. He has also won more than a dozen teaching awards. Scott’s consulting
clients include Intel and Unext. He holds a PhD from Stanford University.
B o r i s B i e l e r who has authored the "Sound Bites: Ethics in Corporate Finance" cases at the
end of each Part has over 20 years of risk management experience, mainly gained in senior
audit leadership roles at foreign corporate and investment banks in Australia.
Boris studied at the University of Bayreuth in Germany and at the University of
Warwick in England. He is a CFA charter holder, a Fellow of CPA Australia (FCPA) and a
signatory of the Banking and Finance Oath (BFO) in Australia.
He has been a speaker and chairperson at conferences held by the Institute of Internal
Auditors Australia and CPA Australia, and has supported the CFA Institute globally
with their programs and curriculum. Boris has also been a guest lecturer and panellist at
Macquarie University and University of Technology Sydney on topics around auditing,
risk management, corporate governance and ethics in banking. He is currently a member
of the advisory board at the department of accounting and corporate governance at
Macquarie University.
He has contributed to publications on ethics and the banking royal commission in
Australia released on the CFA Institute’s online portals and the BFO newsletter.
Boris has been working on youth education and mentoring initiatives, and is passionate
about sharing his knowledge with students and assisting them with their first steps into
the corporate world.
About the Authors xxxi

ACKNOWLEDGEMENTS
Cengage Learning and the authors would like to thank the following reviewers (and
several anonymous reviewers) for their incisive and helpful feedback:
●● Gurmeet S Bhabra, University of Otago
●● Debajyoti Chakrabarty, Charles Darwin University
●● Elson Goh, Curtin University
●● May Hu, Deakin University
●● Charles Koh, Macquarie University
●● Shawgat S. Kutubi, Charles Darwin University
●● Asjeet Lamba, University of Melbourne
●● Mirela Malin, Griffith University
●● Sagarika Mishra, Deakin University
●● Hoa Nguyen, Deakin University
●● Dr. Gabrielle Parle, University of the Sunshine Coast
Every effort has been made to trace and acknowledge copyright. However, if any
infringement has occurred, the publishers tender their apologies and invite the copyright
holders to contact them.
xxxii Acknowledgements
MARKE
T IN
TER
AC
TIO
N
ME UN
TI CE
RT
AI
N
Part 1 Introduction
TY
1 The Scope of Part 2 Valuation, Risk
2 Financial Statement 4 Valuing Bonds
and Cash Flow Analysis 5 Valuing Shares
3 The Time Value of 6 The Trade-off Between
Money Risk and Return
7 Risk, Return and the Capital
SH
Asset Pricing Model

CA
8 Options
ONLINE CHAPTERS
Part 5 Financial Lifecycle
Part 3 Capital Budgeting
18 Financial Planning Measuring and 9 Capital Budgeting Process
19 Introduction to
Financial Risk managing value and Decision Criteria
10 Cash Flow and Capital
Management over time and with Budgeting
20 Entrepreneurial
Finance and Venture uncertainty 11 Risk and Capital Budgeting
Capital
21 Cash Conversion,
Inventory and
22 Cash, Payables and Liquidity Part 4 Financial Strategy
Management 12 Raising Long-term Financing
23 Insolvency and Financial Distress
13 Capital Structure
14 Long-term Debt and Leasing
15 Payout Policy
16 Exchange Rates and
International Investment
Decisions
17 Mergers, Acquisitions and
Corporate Control
MA
RK
ET
INT
ERA
CTIO
N
Corporate finance is the art of measuring and

managing value over time and with uncertainty
Cash is the physical measure of value, which is embedded in the
flow of Time and affected by Uncertainty. Exchange of value
occurs through Market interaction.
2
PART 1
Introduction
1 The Scope of Corporate Finance
2 Financial Statement and Cash Flow Analysis
3 The Time Value of Money
Welcome to the study of corporate finance. The first section of Chapter 1, section 1.1,
In this book, you will learn the key concepts, gives an outline of what you may encounter
tools and practices that guide the decisions in that chapter and also in Chapters 2 and 3,
of financial managers. Our goal is not only to which together comprise Part 1 of this
introduce you to corporate finance, but also learning adventure.
to help you explore career opportunities in
this exciting field.
3
THE SCOPE OF
1 CORPORATE FINANCE
WHAT COMPANIES DO
A P P L E I N C . : A P P L E E P S R E A C H E S A L L-T I M E H I G H AT $ 4 .1 8
January 2019 – Apple today announced of our geographic segments. That’s a great
financial results for its fiscal 2019 first quarter, testament to the satisfaction and loyalty of
ended 29 December 2018. The company our customers, and it’s driving our Services
posted quarterly revenue of US$84.3 billion, business to new records thanks to our large
a decline of 5% from the year-ago quarter, and fast-growing ecosystem.’
and quarterly earnings per diluted share of ‘We generated very strong operating cash
US$4.18, up 7.5%. International sales accounted flow of US$26.7 billion during the December
for 62% of the quarter’s revenue. quarter and set an all-time EPS [earnings per
Revenue from iPhone® declined 15% share] record of US$4.18’, said Luca Maestri,
from the prior year, while total revenue from Apple’s CFO. ‘We returned over US$13 billion
all other products and services grew 19%. to our investors during the quarter through
Services revenue reached an all-time high of dividends and share repurchases. Our net cash
US$10.9 billion, up 19% over the prior year. balance was US$130 billion at the end of the
Revenue from Mac® and Wearables, Home and quarter, and we continue to target a net cash
Accessories also reached all-time highs, growing neutral position over time.’
9% and 33%, respectively, and revenue from Source: ‘Apple Reports First Quarter Results.’ Press release. 29 January 2019.
iPad® grew 17%. https://www.apple.com/newsroom/2019/01/apple-reports-
first-quarter-resaults/. Accessed 9 June 2019.
‘While it was disappointing to miss our
This sort of analysis of corporate
revenue guidance, we manage Apple for
performance contains a great deal of
the long term, and this quarter’s results
information, although the particular meaning
demonstrate that the underlying strength
of these details may be lost in the wave of
of our business runs deep and wide’, said
terminology. This press release contained
Tim Cook, Apple’s CEO. ‘Our active installed
accounting data, financial data, product data
base of devices reached an all-time high of
and customer satisfaction data. How do we
1.4 billion in the first quarter, growing in each
decode these sets of information? This text wish to know what the given corporation is
focuses on corporate financial performance, doing with its shares (buying them back or
but necessarily draws on the other sets of selling more of them) and such other aspects
information given out by corporations. We as whether the corporation is working in
shall examine in this book how important a domestic market or has international
it is to consider cash flows (particularly exposure, as Apple clearly does (62% of its
distinctly from net income or profit measures sales revenue in this quarter came from
as supplied in accounting data), why we may international sales).
LEARNING OBJECTIVES
After studying this chapter, you will be able to:
LO1.1 describe how companies obtain funding assess the costs and benefits of the
from financial intermediaries and markets, principal forms of business organisation
and discuss the five basic functions that and explain why limited liability companies,
financial managers perform with publicly traded shares, dominate
define agency costs and explain how economic life in most countries
LO1.2
shareholders monitor and encourage LO1.4 see the diverse career opportunities
corporate managers to maximise available to finance majors.
shareholder wealth
LO1.3 appreciate how finance interacts with
other functional areas of any business,
LO1.1 1.1 CORPORATE FINANCE ELEMENTS AND FUNCTIONS

As you begin your learning journey in corporate finance using this book, it is useful to have an overview of the
content you will cover. This chapter offers guidelines in two dimensions: a summary of key corporate finance
ideas, and a consideration of applications of corporate finance ideas as they have emerged in actual markets
around the world. In this first section of the chapter, we outline the content of the central ideas or elements
of corporate finance. In the following sections, we consider how those ideas have been used to define what a
corporate financial manager does and how that role interacts with other functional business areas; and then
we review what business (corporate) entities have emerged to implement the ideas. This review leads us back
to close Chapter 1 with a summary of career opportunities that may exist for people in corporate finance.
1 .1 a ELEMENTS AND STRUCTURE OF CORPORATE FINANCE LEARNING

The order of chapters in this book is built on our view of the central concepts that underpin corporate finance.
Foundations are laid in Part 1, with the key ideas in Chapter 1. In corporate finance, we depend a great deal on
measurement – if we can measure concepts, we may be better able to manage them – so in Chapter 2 we outline
the key (accounting) measures that are relevant for finance. The principal focus in corporate finance is on
cash flows in an organisation, but their measurement is developed from traditional accounting concepts such
1: The Scope of Corporate Finance 5

as net income. We then take the concept of cash flow and introduce you in Chapter 3 to the primary insight
of finance, the time value of money, which allows us to compare cash flows at different times, to see if value
is being added to an organisation by its decisions, or if value is being reduced. These three chapters complete
Part 1.
Because applications of the time value of money come in many different forms based on the huge variety
of financial instruments that have been created over human history, we explore some of the most important
applications in Part 2 of the book. Here we review the valuation of bonds (Chapter 4) and of shares (Chapter 5),
before adding a further element central to finance, the concept of risk (Chapter 6). With the concept of risk
in hand, we explore two major applications of financial value and risk, by studying the capital asset pricing
model (Chapter 7) and options (Chapter 8).
In Part 3, we turn to a primary decision process arising for corporate entities: how to decide which
investments – typically large, long-term commitments of funds with cash returns that extend over many
years into the future – should be undertaken. The key insight from Parts 1 and 2 is that investments that
add net present value (NPV) to the firm are most preferred. If an individual or corporation has to choose
just one among several positive NPV investments, then the one with the largest NPV is most preferred.
This whole area of analysis is covered under the heading of Part 3, Capital Budgeting. In Part 3 we examine
many examples of the challenges which arise when measuring the present value of uncertain cash inflows
and outflows associated with various types of investment. Naturally, risk is a constant companion in this
exploration of how to measure value from future commitments, and we explain how risk can be calculated and
incorporated in the present value formulations.
Then we come to Part 4 Financial Strategy. Successful business organisations arise from the commitment
of their managers to undertake activities which add value to the organisations through investments; but
those investments often cannot be undertaken without new funding (cash inflows) being contributed to the
organisation. The funds may come from existing activities which generate net positive cash flows; or they
may arise in concert with the start of new activities; or the funds may need to be newly contributed by sources
external to the organisation. When we consider these different funds suppliers, we are talking about financial
strategy. The external funds suppliers, in particular, are very important to almost all organisations, and so
Part 4 examines the various ways a modern corporation can raise funds externally from groups or persons who
are not currently part of the corporation, but who are willing to commit the funds and trust the corporation’s
management to create a positive return for them. Some of these external funds may be borrowed, and some
may be given. The borrowed funds are typically repaid over time, with appropriate returns to the funds’
suppliers. The funds which are given are exchanged for ownership in the corporation – shares of various
types – to which an expected return is attached, but not guaranteed. The return to the shareholders may be
directly in cash or other shares, a form of dividend; or it may be in terms of a rising value of the shares so the
shareholders can obtain a capital gain from selling the shares in the future.
By conquering the content of Parts 1, 2, 3 and 4, we are now in a good position to understand the essential
operations of modern corporate finance. The subject, however, is much larger than its essential features.
Thanks to many generations of thinkers and financial activists over the past 150 or more years, we have seen
the emergence of some new pathways for understanding advanced features of corporate finance. One of these
pathways is tackled in Part 5, under the heading of Financial Lifecycle. When we examined organisations’
financial activities in both capital budgeting and financial strategy in Parts 1–4, we tended to focus on
established businesses that were already operating in their markets. But all organisations start somewhere
and at some time, and should have the ability to create a financial plan as they consider the financing of these
beginning businesses and their hopeful later growth. This area of study has now developed into a specific
topic, entrepreneurial finance and venture capital, that we argue should be reviewed in a thorough corporate
finance book; so we provide that review in Part 5. We also examine financial issues arising later in the
6 PART 1: INTRODUCTION
corporate lifecycle, with growing businesses that have moved past their foundation; and we go on to consider
what financial activities are involved with organisations that are in financial distress or, further, are sliding
into insolvency and are liable for liquidation, ending their lives.
As corporate finance has evolved over recent years, there has emerged a growing concern that its
practitioners may need to take a wider, societal view of the impacts of their activities in capital markets. A
way to explain such a view in this text has been to include case studies of ethics in each of the five parts of the
text. These ethics case studies have been created by a colleague of the main authors, Mr Boris Bieler. What is
the key message of these studies? They represent an intensified focus on integrating ethics into management
decisions and employee behaviour across the financial services industry, including the corporate finance
sector. By their inclusion in the text, they aim to discourage repetition of past events of unethical activities,
and to make current and future practitioners conscious of the ethical implications of their work. The finance
sector has increasingly revisited expected norms and values for guiding employees’ behaviour which is
monitored, rewarded and disciplined. Through the cases, we hope to help meet the increasing community
expectations of the finance industry, which is further evidenced in regulators’ enforcement actions and more
prescriptive standards.
The cases presented at the end of each part follow a logical pattern for learning. At the end of Part 1, we
have a case that introduces a framework for dealing with ethical issues in finance; at the end of Part 2, once
you have gained more knowledge about the key ideas of corporate finance, the case reviews some history on
ethical issues; and Part 3’s case expands on a series of activities in corporate management that encounter
ethical questions, using your knowledge of capital budgeting from the chapters in Part 3. Part 4’s case
addresses expectations about ethical behaviour that have emerged from a number of reviews of behaviour in
corporate finance in several countries; and the case for Part 5 gives a good summary of what may be expected
to emerge in the interaction between ethics and finance in coming years.
1 .1 b THE FIVE BASIC CORPORATE FINANCE FUNCTIONS

Although corporate finance is defined generally as the activities involved in managing cash (money) that corporate finance
flows through a business, a more precise description notes that the practice of corporate finance involves
The activities involved in
managing cash (money) that
five basic functions: financing, financial management, capital budgeting, risk management and corporate flows through a business
governance. Nearly every topic covered in this text focuses on one or more of these five functions.
Financing
The financing function involves raising capital to support a company’s operations and investment programs. financing function
A key aspect of this activity, known as the capital structure decision, involves determining and maintaining Raising capital to support a
company’s operations and
the mix of debt and equity securities that maximises the company’s overall market value. Businesses raise investment programs
money either externally, from creditors or shareholders, or internally, by retaining and reinvesting profits. venture capitalists
Companies in Australia and other developed economies raise about two-thirds of their required financing Professional investors who
specialise in making high-
internally, but the financing function focuses primarily on external financing. Large companies enjoy varied risk, high-return investments
opportunities to raise money externally, either by selling equity (ordinary or preferred shares) or by issuing in rapidly growing
entrepreneurial businesses
debt, which involves borrowing money from creditors. When companies are young and small, they usually
must raise equity capital privately, from friends and family, or from professional investors such as venture initial public offering (IPO)
Companies offering shares
capitalists. Venture capitalists specialise in making high-risk, high-return investments in rapidly growing for sale to the public for the
entrepreneurial businesses. After companies reach a certain size, they may ‘go public’ by conducting an first time by selling shares
to outside investors and
initial public offering (IPO) of shares – selling shares to outside investors and listing them for trade on a stock listing them for trade on a
exchange. After going public, companies can raise funds by selling additional shares. stock exchange

Financial Management
financial management The financial management function involves managing the company’s operating cash flows as efficiently
function
as possible. A key responsibility of the financial management function is to ensure that the company has
managing the company’s enough funds on hand to support day-to-day operations. This involves obtaining seasonal financing, building
operating cash flows as
adequate inventories to meet customer demand, paying suppliers, collecting from customers and investing
efficiently and effectively as
possible surplus cash, all while maintaining adequate cash balances. Effectively managing the day-to-day financial
activities of the company requires not only technical and analytical skills, but also people skills, since almost
every aspect of this activity involves building and maintaining relationships with customers, suppliers,
lenders and others.
Capital Budgeting
capital budgeting The capital budgeting function, often called the investment function, involves selecting the best projects
function
in which to invest the company’s funds based on expected risk and return. It is a critical function for two
selecting the best projects reasons. First, the scale of capital investment projects is often quite large. Second, companies can prosper in a
in which to invest the
competitive economy only by seeking out the most promising new products, processes and services to deliver
company’s funds based
on their expected risk and to customers. Companies such as Telstra, BHP Billiton, Woolworths and Hills Industries regularly make large
return. Also called the capital investments, the outcomes of which drive the value of their companies and the wealth of their owners.
investment function
For these and other companies, the annual capital investment budget can total several billion dollars.
The capital budgeting process breaks down into three steps:
1 Identifying potential investments.
2 Analysing the set of investment opportunities and selecting those that create the most shareholder value.
risk management 3 Implementing and monitoring the selected investments.

function
The long-term success of most companies depends on mastering all three steps.
identifying, measuring and Not surprisingly, capital budgeting is also the area where managers have the greatest opportunity to
managing the company’s
create value for shareholders by acquiring assets that yield benefits greater than their costs.
exposure to all types of
risk to maintain an optimal
risk–return trade-off, and Risk Management
therefore to maximise
share value The risk management function involves identifying, measuring and managing the company’s exposure to
risk shifting all types of risk to maintain an optimal risk–return trade-off, and therefore maximise share value. Common
When an organisation risks include losses that can result from adverse interest rate movements, changes in commodity prices and
pays another entity or
person to restore a loss of
fluctuations in currency values. The techniques for managing these risks are among the most sophisticated
value due to unforeseen of all corporate finance practices. The risk management task begins with quantifying the sources and size of
circumstances
a company’s risk exposure and deciding whether to simply accept these risks, or to actively manage them.
risk spreading, Risks can be managed in two ways: risk shifting and risk spreading, or diversification. Risk shifting
or diversification
When an organisation involves you or your organisation paying another entity to take on the risk and to compensate you in case
undertakes a number of negative outcomes occur. This is insurance. Some risks are easily insurable, such as the risk of loss due to fire,
risk ventures at the same
time and the likelihood employee theft or product liability, because there is much history of their occurrence, meaning probabilities
of all the ventures of loss are calculable.
simultaneously failing and
reducing organisational Risk spreading involves combining activities that give rise to risks in such a way that the overall risk of
value is very low the combination is less than the risk of each item in the combination. This is also called diversification.
hedge For example, rather than use a sole supplier for a key production input, a company might choose to
To diversify risks by using
contract with several suppliers, even if doing so means purchasing the input above the lowest attainable
financial instruments to
offset market risks such as price. However, most companies’ risk management practices focus on market-driven risks. Risk managers,
interest rate and currency
who typically work as part of a company’s treasury staff, use complex financial instruments to hedge, or
fluctuations
offset, market risks such as interest rate and currency fluctuations.
Corporate Governance
The corporate governance function involves developing company-wide structures and incentives that corporate governance
function
influence managers to behave ethically and make decisions that benefit shareholders. The existence of a
well-functioning corporate governance system is extremely important. Good management does not occur in developing company-wide
a vacuum. Instead, it results from a corporate governance system that hires and promotes qualified, honest structures and incentives
that influence managers
people and structures employees’ financial incentives to motivate them to maximise company value. to behave ethically and
An optimal corporate governance system is difficult to develop in practice, not least because the make decisions that benefit
shareholders
incentives of shareholders, managers and other stakeholders often conflict. A company’s shareholders
want managers to work hard and protect shareholders’ interests, but it is rarely profitable for any individual
shareholder to expend time and resources monitoring managers to see if they are acting appropriately. An
individual shareholder would personally bear all the costs of monitoring management, but the benefit of such
monitoring would accrue to all shareholders. This is a classic example of the collective action problem that collective action
problem
arises in most relationships between shareholders and managers. Likewise, managers may feel the need to
When individual
increase the wealth of owners, but they also want to protect their own jobs. Managers, rationally, do not want shareholders bear all
to work harder than necessary if others will reap most of the benefits. Finally, managers and shareholders the costs of monitoring
management, but the
may effectively run a company to benefit themselves at the expense of creditors or other stakeholders who do benefit of such monitoring
not have a direct say in corporate governance. accrues to all shareholders
As you might expect, several mechanisms have been designed to mitigate these problems. A strong board
of directors is an essential element in any well-functioning governance system because it is the board’s
duty to hire, fire, pay and promote senior managers. The board develops fixed (salary) and incentive (bonus-
and share-based) compensation packages to align managers’ and shareholders’ incentives. Auditors play a
governance role by certifying the validity of companies’ financial statements.
For example, in Australia, the independent national governmental body charged with oversight of
corporate activities is the Australian Securities and Investments Commission (ASIC). ASIC’s role is Australian Securities
and Investments
to enforce and regulate company and financial services laws to protect Australian consumers, investors
Commission (ASIC)
and creditors; to be the corporate, markets and financial services regulator. It was created in 1998 from an The Australian government
earlier national regulator, and had further functions added to its portfolio in 2002 for credit protection, entity charged with
enforcing and regulating
oversight of the Australian Securities Exchange (ASX) in 2009 and of the newest stock exchange, Chi-X, company and financial
in 2011. The ASX was created by the merger of the Australian Stock Exchange and the Sydney Futures services laws to protect
Australian consumers,
Exchange in July 2006, and is today one of the world’s top 10 listed exchange groups measured by market investors and creditors,
capitalisation. and being the corporate,
markets and financial
Just as companies struggle to develop an effective corporate governance system, so too do countries. services regulator for
Governments establish legal frameworks that either encourage or discourage the development of competitive Australia
businesses and efficient financial markets. For example, a legal system should permit efficiency-enhancing Australian Securities
Exchange (ASX)
mergers and acquisitions, but should block business combinations that significantly restrict competition. It
The primary stock exchange
should provide protection for creditors and minority shareholders by limiting the opportunities for managers operating in Australia for
or majority shareholders to expropriate wealth. trading shares in publicly
listed companies
We will discuss each of the five major finance functions at length in this text, and we hope you come
to share our enthusiasm about the career opportunities that corporate finance provides. Never before has
finance been as fast-paced, as technological, as international, as ethically challenging or as rigorous as it is
today, and the market seems to be responding. A notable recent pattern in Australian university education has
been that more students are currently enrolled in undergraduate and postgraduate business and management
education courses than in any other broad field such as science, engineering or arts.

FINANCE IN THE REAL WORLD
ACCENTURE IN THE REAL WORLD: ACCENTURE’S VIEW OF FINANCE’S CHALLENGES
In a survey by Accenture, analysis found that the following issues were central to the finance
function in the organisation and the role of the CFO in managing it.
M A N AG I N G VO L AT I L I T Y
Finance functions have made significant progress in their ability to navigate some of the powerful
external forces that affect performance, including the challenge of permanent volatility.
T H E R I S E O F D I G I TA L O N T H E C F O AG E N DA
Digital technology – which may include cloud computing or software as a service (SaaS), big data
and/or analytics, mobility and social media – is having a profound impact on the finance function’s
performance.
N AV I GAT I N G C O M P L E X I T Y
Complexity, in its various guises, is the biggest challenge finance organisations face today. But it is
also an opportunity. High-performance businesses must find ways of navigating complexity – by
standardising and optimising processes to streamline and simplify the organisation.
H I G H - P E R F O R M A N C E B U S I N E S S E S H AV E M O R E I N F L U E N T I A L C F O s
Finance leaders at high-performance businesses are particularly likely to have seen their influence
grow in key strategic activities.
Source: Accenture. Used with permission. https://www.accenture.com/t20150523T021053__w__/us-en/_acnmedia/Accenture/Conversion-Assets/DotCom/

Documents/Global/PDF/Digital_2/Accenture-2014-High-Performance-Finance-Study-CFO-Architect-Business-Value.PDF. Accessed 18 October 2015.
1 .1 c DEBT AND EQUITY: THE TWO FLAVOURS OF CAPITAL

debt capital Companies have access to two broad types of capital: debt and equity. Debt capital includes all of a company’s
Long-term borrowed
long-term borrowing from creditors. The borrower is obliged to pay interest, at a specified annual rate, on the
money
full amount borrowed (called the loan’s principal), as well as to repay the principal at the debt’s maturity.
These payments must be made according to a predetermined schedule, and creditors have a legally enforceable
claim against the company. If the company defaults on any of its debt payments, creditors can take legal
action to force repayment. In some cases, this means that creditors can push the borrowing company into
bankruptcy, forcing them out of business and into selling (liquidating) their assets to raise the cash needed
to satisfy creditor claims.
equity capital Investors contribute equity capital in exchange for ownership interests in the company. Equity
An ownership interest
remains permanently invested in the company. The two basic sources of equity capital are ordinary shares
purchased by an investor,
usually in the form of and preferred shares. Ordinary shareholders (Australian and UK terminology), or common stockholders (US
ordinary or preferred
terminology), bear most of the company’s risk because they receive returns on their investments only after
shares, that is expected
to remain permanently creditors and preferred shareholders are paid in full. Similar to creditors, preferred shareholders are promised a
invested specified annual payment on their invested capital. Unlike debt, preferred shareholders’ claims are not legally
enforceable, so these investors cannot force a company to become insolvent if a scheduled preferred share
dividend is not paid. If a company becomes insolvent and must be liquidated, preferred shareholders’ claims are
paid off before any money is distributed to ordinary shareholders, but after creditors’ claims have been paid.
1 .1 d THE ROLE OF FINANCIAL INTERMEDIARIES IN CORPORATE FINANCE
In Australia and most developed countries, companies can obtain debt capital by selling securities, either
directly to investors or through financial intermediaries. A financial intermediary is an institution that financial intermediary
raises capital by issuing liabilities against itself, and then uses the capital raised either to make loans to An institution that raises
capital by issuing liabilities
companies and individuals or to buy various types of investments. Financial intermediaries include banks, against itself, and then
insurance companies, savings and loan institutions, credit unions, mutual funds and pension funds. But the uses the capital raised
either to make loans to
best-known financial intermediaries are commercial banks, which issue liabilities such as demand deposits companies and individuals
(cheque accounts) to companies and individuals and then lend these funds to companies, governments and or to buy various types of
investments
households.
In addition to making corporate loans, financial intermediaries provide a variety of financial services
to businesses. By accepting money in demand deposits received from companies and individuals, banks
eliminate their depositors’ need to hold large amounts of cash for use in purchasing goods and services. Banks
also act as the backbone of a nation’s payments system by facilitating the transfer of money between payers
and payees, providing transaction information and streamlining large-volume transactions such as payroll
disbursements.
The Growing Importance of Financial Markets

The role of traditional intermediaries such as banks as providers of debt capital to companies has been
declining for decades. During 2007–2011, this source of debt capital contracted severely in many countries as
the effects of global financial turbulence spread around the world. Many banks stopped lending to customers,
especially during the latter part of 2008, and this caused a severe liquidity crisis for many companies.
Recovery, from 2009 onward, has seen some increases in lending, but only trending towards the levels before
2007. Stock market valuations also varied greatly over time, but strongly growing economies such as China
were able to sustain long-term trends of growth relative to overall gross domestic product even with some
declines, as shown in Figure 1.1.
For several decades, non-financial companies have increasingly turned to capital markets for external
financing. This shift towards greater reliance on market-based external funding has resulted in the growth
of mutual funds and superannuation funds – both financial intermediaries that are major purchasers of the
securities of non-financial companies.
FIGURE 1.1 SHARE MARKET CAPITALISATION FOR CHINA 1994–2017
Even as China was exposed to the global financial crisis during 2007–2011, and its share market value declined from
a peak of nearly 80% of its gross domestic product in 2007 to 40% in 2013, the overall value of the ratio was on an
upward trend from the mid-1990s through to at least 2017.
80
70
60
50
Per cent
40
30
20
10
0
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: World Bank, Stock Market Capitalization to GDP for China [DDDM01CNA156NWDB], retrieved from FRED, Federal Reserve Bank of St. Louis;
https://fred.stlouisfed.org/series/DDDM01CNA156NWDB, March 26, 2020.

primary-market When companies sell securities to investors in exchange for cash, they raise capital in primary-market
transactions
transactions. In such transactions, companies actually receive the proceeds from issuing securities, so these
Cash sales of securities to
investors by a company to are true capital-raising events. Once companies issue securities, investors can sell them to other investors.
raise capital
Trades between investors, called secondary-market transactions, generate no new cash flow for the
company, so they are not true capital-raising events. Most share market trades are secondary-market trades,
whereas a large fraction of all bond market trades are capital-raising primary-market transactions.
LO1.1 CO NCE P T RE V I E W QUESTION S

1 List and briefly describe the five basic corporate finance functions. What is the general
secondary-market relationship among them?
transactions
Trades between investors 2 Which of the five basic corporate finance functions might be considered non-traditional? Why do
that generate no new cash
flow for the company
you think these functions have become so important in recent years?
3 What is a financial intermediary? Why have these institutions been steadily losing market share
to capital markets as the principal source of external financing for companies?
LO1.2 1.2 GOALS FOR THE CORPORATE FINANCIAL MANAGER

In widely held companies, the owners typically do not manage the company. This raises the interesting
question: whose interests should managers serve – those of shareholders, creditors, customers or
employees? The traditional answer given in finance textbooks is that managers should operate the
company in a way that maximises shareholder wealth. As a practical matter, that recommendation is
difficult to implement, partly because managers may be tempted to pursue their own interests rather
than shareholders’ interests.
In the sections that follow, we first evaluate profit maximisation, and then describe shareholder wealth
maximisation. Next, we discuss the agency costs arising from potential conflicts between shareholders,
managers and other stakeholders (such as bondholders). Finally, we consider the role of ethics in corporate
finance, including a brief look at how some recent legislation affects financial management.
1 .2 a WHAT SHOULD A FINANCIAL MANAGER TRY TO MAXIMISE?

Should a financial manager try to maximise corporate profits, shareholder wealth or something else? Here,
we hope to convince you that managers should seek, within some ethical and legal bounds, to maximise
shareholder wealth but with an awareness of social goals that may arise, such as supporting ‘green finance’. A
narrow focus simply on cash flows generated only by corporate activities may in fact reduce corporate value.
Maximise Profit?
Some people believe that the manager’s objective is to maximise profits, and it is common to see compensation
plans designed so that managers receive larger bonuses for increasing reported earnings. To achieve profit
maximisation, the financial manager takes those actions that make a positive contribution to the company’s
profits. Thus, for each alternative, the financial manager should select the one with the highest expected
profit. From a practical standpoint, this objective translates into maximising earnings per share (EPS), the
Another random document with
no related content on Scribd:
Circumspection towards women, in travel or elsewhere, or, better
still, indifference towards women, is the standardized attitude of
American husbands. In marriage, too, a relationship of status rather
than of attention to the fluctuations of personality, indifference to
psychical experience, is a not uncommon marital trait. American men
in general, as Europeans have noted, are peculiarly indifferent to the
psychology of women. They are also peculiarly sentimental about
women, a trait quite consistent with indifference or ignorance, but
one which, in view of American prostitution and the persistent
exclusion of many women from equal opportunities for education and
for life, gives an ugly look of hypocrisy to the trumpeters of American
chivalry.
And yet subject the American concept of chivalry to a little
scrutiny and the taunt, at least of hypocrisy, will miss the mark. For
the concept is, both actually and historically, a part of the already
noted classification of women as more or less sequestered, on the
one hand, and unsequestered or loose on the other, as
inexperienced and over-experienced or, more accurately, partially
over-experienced. In this classification the claims of both classes of
women are settled by men on an economic basis, with a few
sentimentalities about womanhood, pure or impure, thrown in for
good measure. The personality of the woman a man feels that he is
supporting, whether as wife or prostitute, may, theoretically, be
disregarded and, along with her personality, her capacity for sexual
response. Whether as a creature of sin or as an object of chivalry, a
woman becomes a depersonalized, and, sexually, an unresponsive
being.
People sometimes forget this when they discuss the relations
between men and women in this country, and especially the
sexlessness or coldness of American women. They forget it in
arguing against the feminizing of education, the theatre, literature,
etc., meaning, not that women run the schools or are market for the
arts, but that immature, sexless women are in these ways too much
to the fore. In part at least it is thanks to chivalry or to her “good and
considerate husband” that the American woman, the non-wage
earner at least, does not grow up, and that it is possible for so many
women to marry without having any but the social consequences of
marriage in mind. One surmises that there are numbers, very large
numbers, of American women, married as well as unmarried, who
have felt either no stirring of sex at all or at most only the generalized
sex stir of pre-adolescence. What proportion of women marry “for a
home” or to escape from a home, or a job, and what proportion
marry for love? After marriage, with the advent of children, what of
these proportions?
Marriage for a home or for the sake of children, chivalry,
“consideration” for the wife, all these attitudes are matters of status,
not of personality, and to personality, not to status, love must look,
since love is an art, not a formula. It often seems that in American
culture, whether in marriage or out, little or no place is open to this
patient, ardent, and discerning art, and that lovers are invariably put
to flight. Even if they make good their escape, their adventure is
without social significance, since it is perforce surreptitious. Only
when adventurers and artists in love are tolerated enough to be able
to come out from under cover, and to be at least allowed to live, if
only as variants from the commonplace, may they contribute of their
spirit or art to the general culture.
Elsie Clews Parsons
THE FAMILY
THE American family is the scapegoat of the nations. Foreign
critics visit us and report that children are forward and incorrigible,
that wives are pampered and extravagant, and that husbands are
henpecked and cultureless. Nor is this the worst. It only skims the
surface by comparison with the strictures of home-grown criticism.
Our domestic arbiters of every school have a deeper fault to find:
they see the family as a crumbling institution, a swiftly falling
bulwark. Catholic pulpits call upon St. Joseph to save the ruins and
Puritan moralists invoke Will Carlton, believing in common with most
of our public guardians that only saints and sentimentalism can help
in such a crisis. Meanwhile the American family shows the usual
tenacity of form, beneath much superficial change, uniting in various
disguises the most ancient and the newest modes of living. In
American family life, if anywhere, the Neolithic meets the modern
and one needs to be very rash or very wise to undertake the nice job
of finding out which is which. But one at least refuses to defeat one’s
normal curiosity by joining in the game of blind-man’s buff, by means
of which public opinion about the family secures a maximum of
activity along with a minimum of knowledge.
A little science would be of great help. But popular opinion does
not encourage scientific probing of the family. In this field, not
honesty but evasion is held to be the best policy. Rather than
venture where taboo is so rife and the material so sensitive,
American science would much rather promote domestic dyes and
seedless oranges. It is true that we have the Federal Census with its
valuable though restrained statistics. But even the census has
always taken less interest in family status and family composition,
within the population, than in the classification of property and
occupation and the fascinating game of “watching Tulsa grow.” In no
country is the collection of vital statistics so neglected and sporadic
and the total yield of grab-bag facts so unamenable to correlation.
Through the persistent effort of the Children’s Bureau, this situation
has been considerably improved during the past ten years; so that
now there exist the so-called “registration areas” where births,
marriages, and deaths are actually recorded. For the country as a
whole, these vital facts still go unregistered. The prevailing
sketchiness in the matter of vital statistics is in distinct contrast to the
energy and thoroughness with which American political machinery
manages to keep track of the individual who has passed the age of
twenty-one.
One of the tendencies, statistically verified, of the native family is
its reduction in size. In the first place the circumference of the family
circle has grown definitely smaller through the loss of those
adventitious members, the maiden aunt and the faithful servant. The
average number of adult females in the typical household is
nowadays just one. The odd women are out in the world on their
own; they no longer live “under the roofs” of their brothers-in-law.
Miss Lulu Bett is almost an anachronism in 1920. The faithful servant
has been replaced by the faithless one, who never by any chance
remains long enough to become a familial appendage, or else she
has not been replaced at all. Even “Grandma” has begun to manifest
symptoms of preferring to be on her own. Thus the glory of the
patriarchal household has visibly departed, leaving only the
biological minimum in its stead.
In the dwindling of this ultimate group lies the crux of the matter.
The American grows less and less prolific, and panicky theorists can
already foresee a possible day when the last 100 per cent. American
Adam and the last 100 per cent. American Eve will take their
departure from our immigrationized stage. It is providentially
arranged—the maxim tells us—that the trees shall not grow and
grow until they pierce the heavens; but is there any power on the job
of preventing the progressive decline of the original Anglo-Saxon
stock even to the point of final extinction? This is a poignant doubt in
a country where the Anglo-Saxon strain enjoys a prestige out of all
proportion to its population quota. The strain may derive what
comfort it can from the reflection that the exit of the Indian was
probably not due to birth control.
Still, birth control is not new. If it did not originate with the
Indians, it did at least with the Puritans. As the census books and
genealogy books show, every succeeding American generation has
manifested a tendency to reduce the birth-rate. The new aspects of
the situation are the acceleration of the tendency and the
propaganda for family limitation by artificial methods. In the birth
registration area, which includes twenty-three States, the number of
births for the year 1919 compared with those for 1918 showed a
slump of seven per cent. Also the current assumption that children
are more numerous on farms, where they are an economic asset,
than they are in cities, where they became an economic handicap,
has recently received a startling correction through a survey made
by the Department of Agriculture. Among the surprises of the study,
says the report, was the small number of children in farm homes:
—“Child life is at a premium in rural districts.” The farm is not the
national child reserve it has been supposed to be. As far as the
salaried class is concerned, it has stood out as the national pace-
setter in family limitation. The editorial writer of the New York Times,
who may be trusted for a fairly accurate statement of the standards
of this group, justifies its conduct thus: “Unless the brain-worker is
willing to disclass his children, to subject them to humiliation, he
must be willing to feed, clothe, and educate them during many years.
In such circumstances, to refuse parenthood is only human.” It
therefore remains for the manual worker, who cannot obtain from his
Church the same absolution that the suburban resident can obtain
from his Times, to produce the bulk of the population. This, as a
whole, is not yet stationary; the recent census estimates an annual
excess of births over deaths throughout the United States amounting
to about one per cent. What will the next decade do with it?
A peculiar feature of the American propaganda for birth control is
its specific advocacy of artificial methods. The defenders of this
cause have been compelled, it appears, to define a position which
would be self-evident in any society not incorrigibly Puritan. People
who regard celibacy as a state of grace and celibacy within marriage
as a supreme moral victory are still growing, it would seem, on every
bush. This unwholesome belief must have its effect upon the birth
control methods of the married population. It is a matter of
speculation how many marriages succumb to its influence, especially
after the birth of a second or third child; but there is reason to believe
that the ascetic method is by no means uncommon. You cannot hold
up an ideal before people steadily for forty years without expecting
some of them to try to follow it. This kind of rigorous negativism
passes for morality in America and finds its strongest devotees
among the middle-aged and the heads of families. Such people are
greatly shocked at the wild conduct of the young who are certainly
out of bounds since the war; but the most striking feature of the
current wave of so-called immorality is the exposure of the
bankruptcy of ideals among the older generation. There are thirty
million families in the United States; presumably there are at least
sixty million adults who have experimented with the sexual
relationship with the sanction of society. But experience has taught
them nothing if one may judge by the patented and soulless
concepts which still pass for sexual morality among people who are
surely old enough to have learned about life from living it.
The population policies of the government are confined to the
supply through immigration. A few years ago, an American president
enunciated population policies of his own and conducted an
energetic though solitary campaign against “race suicide.” But no
faction rallied to his standard, no organization rose up to speed his
message. His bugle-call was politely disregarded as the personal
idiosyncrasy of a popular president who happened to be the proud
father of six children. Mr. Roosevelt was evidently out of tune with his
own generation, as, no doubt, Mr. Washington was with his, for
exactly the opposite reason. But the more retiring nature of our first
president saved him from the egoistic error of regarding his own
familial situation as the only proper and desirable example. The
complete failure of Mr. Roosevelt’s crusade is significant. There are
clerical influences in America which actively fight race suicide, but
with these obscurantist allies the doughty son of a Dutch Reform
family had too little else in common. Among the men of his own class
he stirred not an echo. Is it because the American husband is too
uxorious or too indifferent? I have heard a married man say, “It is too
much to expert of any woman;” and still another one explain, “The
Missis said it was my turn next and so we stopped with one.” Or is
there any explanation in the fact that the American father tends more
and more to spend his life in a salaried job and has little land or
business to bequeath? Whatever the reason, the Business Man is in
accord with the Club Woman on the subject of birth control, in
practice if not in theory.
So far as relative distribution of income is concerned, the
families of the United States fare much as those in the industrial
countries of Europe. In 1910, the same relative inequality of wealth
and income existed in feudal Prussia and democratic America. The
richest fifth of the families in each country claimed about half the
income while the poorest two-thirds of the families were thankful for
about one-third. The same law of economic relativity falls alike on
the just American and the unjust Prussian. But the American family,
it appears, is in every case two or three times better off than the
corresponding family in Prussia. You must multiply Herr Stinnes by
two to get a Judge Gary and the wealth of a Silesian child labourer is
only half that of a Georgia mill-child. This economic advantage of our
American rich and poor alike is measured chiefly in dollars and
marks and not in actual standards of living. It is apparently difficult to
get real standards of living out into the open; otherwise the superior
fortune of American families of every estate might be less evident.
Some of us who may have visited middle-class Prussian people only
half as well off as ourselves probably did not commiserate the poor
things as they deserved. My hostess, I recall, had eight hundred
dollars a year on which she maintained an apartment of two rooms,
bath, and kitchen; kept a part-time maid; bought two new suits’ a
year; drove out in a hired carriage on Sunday; and contributed
generously to a society which stirred up women to call themselves
Frau instead of Fräulein. Any “single woman” in an American city of
equal size who could have managed as much in those days on
fifteen hundred a year would certainly have deserved a thumping
thrift-prize.... And then there were all those poor little children in a
Black Forest village, who had to put up with rye bread six days in the
week and white bread only on Sundays. Transported to America,
they might have had package crackers every day and ice-cream
sandwiches on Sunday. One wonders whether the larger income of
the American family is not largely spent on things of doubtful value
and pinchbeck quality.
According to theory, the income of the family normally belongs to
the man of the house. According to theory, he has earned it or
derived it from some lawful business enterprise. “The head of the
family ordinarily divides income between himself and his various
dependents in the proportion that he deems best,” says Mr. Willford
King. The American husband has a peculiarly unblemished
reputation as a provider—and probably deserves it. Certainly few
husbands in the world are so thoughtful of their widows; they invest
extensively in life insurance but rarely in annuities against a period of
retirement. Trust Companies remind them through advertisements
every day to make their wills, and cemetery corporations nag them
incessantly to buy their graves. “Statistics show that women outlive
men!” says the promoter of America’s Burial Park. “They show that
the man who puts off the selection of a burial place leaves the task
to the widow in her grief. For the man it is easy now—for the woman
an ordeal then.” The chivalry of the business man leads him to
contrive all sorts of financial mechanisms for his widow’s
convenience and protection. His will, like his insurance policy, is in
her favour. Unlike the European husband, he hates to leave the
man’s world of business and to spend his declining years in the
society of his wife. After he is dead, she is welcome to his all, but so
long as he lives he keeps business between them.
Though in life and death a generous provider, he is not a
systematic one. Financial arrangements between husband and wife
are extremely casual. As the dowry hardly exists, so a regular cash
allowance is very rare. He loves to hold the purse-strings and let her
run the bills. This tendency is known in the outside business world,
and the American wife, therefore, enjoys a command of credit which
would amaze any solvent foreign housekeeper. She has accounts on
every hand. She orders food by telephone or through the grocer’s
boy and “charges it.” The department store expects her to have a
charge account, and gives her better service if she does. For
instance, the self-supporting woman who is, for obvious reasons,
more inclined to pay as she goes, finds herself discriminated against
in the matter of returning or exchanging goods. In numerous ways,
the charge account has the inside track. This would not seem
strange if credit were limited to the richest fraction. But that is not the
case; almost every housewife in the country has credit, from the
Newport ladies to the miners’ wives who “trade at the company
store.” The only difference is that, in the case of these two extremes
—Newport and the company store—longer credit than ususal seems
to be the rule. In the meantime, the preaching of thrift to the
American housewife goes on incessantly by apostles from a
business world which is largely organized on the assumption that
she does not possess it and which would be highly disconcerted if
she actually developed it. American business loves the housewife for
the same reason that it loves China—that is, for her economic
backwardness.
The record of the American husband as a provider is not uniform
for all classes. In Congress it is now and then asserted with
appropriate oratory that there are no classes in America. This is
more or less true from the point of view of a Cabin Creek vote-getter,
who lives in a factitious political world, where economic realities fail
to penetrate; to him middle-class and working-class are much the
same since they have equal rights not to “scratch the ticket.” But the
economist finds it convenient, as has been said, to classify the
totality of American families in definite income-groups corresponding
to the Prussian classes. As one descends the income scale one
finds that the American husband no longer fulfils his reputation for
being sole provider for his family. According to Edgar Sydenstricker,
“less than half of the wage-earners’ families in the United States,
whose heads are at work, have been found to be supported by the
earnings of the husband or father.” The earnings of the mother and
the children are a necessary supplement to bring the family income
up to the subsistence level. Half the workingmen, who have dutifully
“founded” families, cannot support them. According to the latest
figures published, it costs $2,334 a year to keep a family of five in
New York. Have the young Lochinvars of the tenements never heard
of those appalling figures? Very likely they have a premonition, if not
an actual picture of the digits. In any case they have their mothers to
warn them. “Henry’s brought it on himself,” said the janitress. “He
had a right not to get married. He had his mother to take care of
him.” If he had only chosen bachelorhood, he might have lived at
home in comfort and peace on his twenty-five a week. But having
chosen, or been chosen by, Mrs. Henry instead, it is now up to the
latter to go out office-cleaning or operating, which she very
extensively does. It is estimated that since the war fully one-third of
all American women in industry are married.
Going back up the scale to the middle-class wife, we find new
influences at work upon her situation. Custom has relaxed its
condemnation of the economically independent wife, and perhaps it
is just as well that it has done so. For this is the class which has
suffered the greatest comparative loss of fortune, during the last
fifteen years. “If all estimates cited are correct,” writes Mr. Willford
King, “it indicates that, since 1896, there has occurred a marked
concentration of income in the hands of the very rich; that the poor
have relatively lost but little; but that the middle class has been the
principal sufferer.” It is, then, through the sacrifices of our middle-
class families that our very richest families have been able to
improve their standard of living. The poor, of course, have had no
margin on which to practise such benevolence, but the generous
middle-class has given till it hurts. The deficit had to be relieved, the
only possible way being through the economic utilization of the
women. At first daughters became self-supporting, while wives still
tarried in the odour of domestic sanctity; then wives came to be
sporadically self-supporting. The war, like peace still bearing hardest
on the middle-class, enhanced all this. Nine months after the
armistice, fifty per cent. more women were employed in industry than
there were in the year before the war.
In America, we have no surplus women. The countries of
western Europe are each encumbered with a million or two, and their
existence is regarded as the source of acute social problems. What
shall be done with them is a matter of earnest consideration and
anxious statecraft. America has been spared all this. She has also
no surplus men—or none that anybody has ever heard of. It is true
that the population in 1910 consisted of ninety-one millions, of whom
forty-seven millions were men and forty-four were women. There
were three million more men than women, but for some reason they
were not surplus or “odd” men and they have never been a
“problem.” The population figures for 1920,—one hundred and five
millions,—have not yet been divided by sexes, but the chances are
that there is still a man for every woman in the country, and two men
apiece for a great number of them. However, no one seems to fear
polyandry for America as polygamy is now feared in Europe.
The situation is exceptional in New England where the typical
European condition is duplicated. Beyond the Berkshire Hills, all the
surplus women of America are concentrated. In the United States as
a whole there are a hundred and five men for each one hundred
women, but in New England the balance shifts suddenly to the other
side. Within the present century, a gradual increase has taken place
in the masculine contingent owing to immigration. But the chances of
marriage have not correspondingly improved, for matches are rarely
made between New England spinsters and Armenian weavers or
Neapolitan bootblacks.
In America only the very rich and the very poor marry early.
Factory girls and heiresses are, as a rule, the youngest brides. It is
generally assumed that twenty-four for women and twenty-nine for
men are the usual ages for marriage the country over. Custom varies
enormously, of course, in so polyglot a population. Now and then an
Italian daughter acquires a husband before the compulsory
education law is through with her. In such cases, however, there is
apparently a gentleman’s agreement between the truant officer and
the lady’s husband which solves the dilemma. At the opposite
extreme from these little working-class Juliets are the mature brides
of Boston. As the result of a survey covering the last ten years, the
registrar of marriage licenses discovered that the women married
between twenty-seven and thirty-three and the men between thirty
and forty. Boston’s average marriage age for both sexes is over
thirty. This does not represent an inordinate advance upon the
practice of the primitive Bostonians. According to certain American
genealogists, the Puritans of the 17th century were in no great haste
to wed—the average age of the bride being twenty-one and of the
bridegroom twenty-five. The marriage age in the oldest American city
has moved up about ten years in a couple of centuries. The change
is usually ascribed to increasing economic obstacles, and nobody
questions its desirability. Provided that celibacy is all that it seems to
be, the public stands ready to admire every further postponement of
the marriage age as evidence of an ever-growing self-control and the
triumphant march of civilization.
In the majority of marriages, the American wife outlives her
husband. This is partly because he is several years older than she
and partly because she tends to be longer-lived than he. Americans
of the second and third generation are characterized by great
longevity,—the American woman of American descent being the
longest-lived human being on earth. Consequently the survivors of
marriage are more likely to be widows than widowers. In the census
of 1910, there were about two million and a half widows of forty-five
or over as compared with about one million widowers of
corresponding age. Nor do they sit by the fire and knit as once upon
a time; they too must “hustle.” Among the working women of the
country are a million and a quarter who are more than forty-five and
who are probably to a very large extent—though the census provides
no data on the subject—economically independent widows. As was
said before, “Grandma” too is on her own nowadays.
The widow enjoys great honour in American public life, although
it usually turns out to be rather a spurious and sentimental homage.
Political orators easily grow tearful over her misfortunes. For
generations after the Civil War, the Republican Party throve on a
pension-system which gathered in the youngest widow of the oldest
veteran, and Tammany has always understood how to profit from its
ostentatious alms-giving to widows and orphans. From my earliest
childhood, I can recollect how the town-beautifiers, who wanted to
take down the crazy board fences, were utterly routed by the
aldermen who said the widow’s cow must range and people must
therefore keep up their fences. Similarly, the Southern States have
never been able to put through adequate child labour laws because
the widow’s child had to be allowed to earn in order to support his
mother. All this sentimentalism proved to be in time an excellent
springboard for a genuine economic reform—the widow’s pension
systems of the several states which would be more accurately
described as children’s pensions. The legislatures were in no
position to resist an appeal on behalf of the poor widow and so nicely
narcotized were they by their traditional tender-heartedness that they
failed to perceive the socialistic basis of this new kind of widow’s
pensions. Consequently America has achieved the curious honour of
leading in a socialistic innovation which European States are now
only just beginning to copy. Maternity insurance, on the other hand,
has made no headway in America although adopted years and even
decades ago in European countries. With us the obstacle seems to
be prudishness rather than capitalism—it makes a legislator blush to
hear childbirth spoken of in public while it only makes him cry to hear
of widowhood.
One aspect of widowhood is seldom touched upon and that is its
prevention. Aged widows, on the whole, in spite of their soap-boxing
and their wage-earning, are a very lonely race. Why must they bring
it on themselves by marrying men whose expectation of life is so
much less than theirs? And yet so anxious are the marrying people
to observe this conventional disparity of age, that if the bride
happens to be but by three months the senior of the bridegroom,
they conceal it henceforth as a sort of family disgrace. Even if this
convention should prove to be immutable, is there nothing to be
done about the lesser longevity of the American male? There is a life
extension institute with an ex-president at the head but, as far as I
am aware, it has never enlisted the support of the millions reported
by the census as widows, who surely, if anybody, should realize the
importance of such a movement. It is commonly assumed that the
earlier demise of husbands is due to the hazardous life they lead in
business and in industry; but domestic life is not without its hazards,
and child-bearing is an especially dangerous trade in the United
States, which has the highest maternal death-rate of seventeen
civilized countries. If American husbands were less philosophical
about the hardships of child-bed—the judgment of Eve and all that
sort of thing—and American wives were less philosophical about
burying their husbands—the Lord hath given and the Lord hath taken
away and so on—it might result in greater health and happiness for
all concerned.
But the main trouble with American marriage, as all the world
knows, is that divorce so often separates the twain before death has
any chance to discriminate between them. The growing prevalence
of divorce is statistically set forth in a series of census investigations.
In 1890, there was one divorce to every sixteen marriages; in 1900,
there was one to every twelve marriages; and in 1916, there was
one to every nine marriages. The number of marriages in proportion
to the population has also increased during the same period, though
not at a rate equal to that of divorce. But divorce, being so much
younger than marriage, has had more room to grow from its first
humble scared beginnings of fifty years ago. Queen Victoria’s frown
had a very discouraging effect on divorce in America; and Mrs.
Humphry Ward, studying the question among us in the early 20th
century, lent her personal influence towards the arrest of the
American evil. We also have raised up on this side of the water our
own apostles against divorce, among whom Mr. Horace Greeley
perhaps occupies the first and most distinguished place. But in spite
of all heroic crusades, divorce has continued to grow. One even
suspects that the marked increase in the marriage rate is partly—
perhaps largely—due to the remarriage of the divorced. At any rate,
they constitute new and eligible material for marriage which formerly
was lacking.
The true cause of the increase of divorce in America is not easy
to come by. Commissions and investigations have worried the
question to no profitable end, and have triumphantly come out by the
same door by which they went in. That seems to be the test of a
successful divorce inquiry; and no wonder, for the real quest means
a conflict with hypocrisy and prejudice, fear and taboo, which only
the intrepid spirit of a John Milton or a Susan B. Anthony is able to
sustain. The people who want divorces and who can pay for them
seem to be able to get them nowadays, and since it is the truth only
that suffers the situation has grown more tolerable.
In the meantime, there are popular impressions and
assumptions which do not tally with the known facts. It is assumed
that divorce is frequent in America because it is easy, and that the
logical way to reduce it would be to make it difficult. Certain States of
the West have lenient divorce laws but other States have stringent
laws, while South Carolina abolished divorce entirely in 1878. On the
whole, our laws are not so lenient as those of Scandinavia, whose
divorce rate is still far behind that of the United States. Neither is
divorce cheap in America; it is enormously expensive. Therefore for
the poor it is practically inaccessible. The Domestic Relations Courts
do not grant divorce and the Legal Aid Societies will not touch it. The
wage-earning class, like the inhabitants of South Carolina, just have
to learn to get along without it. Then there is another belief, hardly
justified by the facts, that most divorced wives get alimony. Among
all the divorces granted in 1916, alimony was not even asked for by
73 per cent. of the wives and it was received altogether by less than
20 per cent. of them. The statistics do not tell us whether the actual
recipients of alimony were the mothers of young children or whether
they were able-bodied ladies without offspring. The average
American divorce court could not be trusted to see any difference
between them.
The war has naturally multiplied the actions for divorce in every
country. It was not for nothing that the British government called the
stipends paid to soldiers’ wives “separation allowances.” The war-
time conditions had a tendency to unmake marriages as well as to
make them. The momentary spread of divorce has revived again the
idea of a uniform divorce law embodied in an amendment to the
Federal Constitution. As no reasonable law can possibly be hoped
for, the present state of confusion is infinitely to be preferred as
affording at least some choice of resources to the individual who is
seeking relief. If there were any tendency to take divorce cases out
of the hands of the lawyers, as has been done with industrial
accidents, and to put it into domestic relations courts where it
belongs; if there were the least possibility of curbing the vested
interest of the newspapers in divorce news; if there were any
dawning appreciation of the absurdity of penalizing as connivance
the most unanswerable reason for divorce, that is, mutual consent; if
there were any likelihood that the lying and spying upon which
divorce action must usually depend for its success would be viewed
as the grossest immorality in the whole situation; if there were any
hope whatever that a statesman might rise up in Congress and, like
Johan Castberg of Norway, defend a legal measure which would
help ordinary men and women to speak the truth in their personal
relationships—if there were any prospect that any of these
influences would have any weight in the deliberations of Congress,
one might regard the possibilities of Federal action with a gleam of
hope. But since nothing of the kind can be expected, the best that
can happen in regard to divorce in the near future is for Congress to
leave it alone. There is a strong tradition in the historical suffrage
movement of America which favours liberal divorce laws and which
makes it improbable that a reactionary measure could gain sufficient
support from the feminine electorate. Since the majority of those who
seek divorce in this country are women, it seems to put them
logically on the side of dissoluble marriage.
Though home is a sacred word in America, it is a portable affair.
Migration is a national habit, handed down and still retained from the
days when each generation went out to break new ground. The
disasters of the Civil War sent Southern families and New England
families scurrying to the far West. The development of the railway
and express systems produced as a by-product a type of family life
that was necessarily nomadic. The men of the railway
“Brotherhoods” have always been marrying men, and their families
acquired the art of living on wheels, as it were. Rich farmers of the
Middle West retire to spend their old age in a California cottage
surrounded by an orange grove—and the young farmers move to the
city. The American family travels on any and every excuse. The
neurotic pursuit of health has built up large communities in Colorado,
Arizona, and other points West. Whole families “picked up,” as the
saying goes, and set out for the miraculous climate that was to save
one of its members from the dreaded tuberculosis—and then later
had to move again because somebody’s heart couldn’t stand the
“altitude.” The extreme examples of this nomadic habit are found
among the families of the very poor and the very rich, who have
regular seasonal migrations. The oyster canners and strawberry-
pickers have a mobility which is only equalled by that of the Palm
Beachers. And finally there is the curious practice of New England
which keeps boarders in the summer-time in order that it may be
boarded by Florida in the winter-time.
By contrast with all this geographical instability, the stable sway
of convention and custom stands out impressively. With each
change of environment, family tradition became more sacred.
Unitarians who moved to Kansas were more zealous in the faith than
ever, and F.F.V.’s who settled in Texas were fiercely and undyingly
loyal to the memory of Pocahontas. Families that were always losing
their background, tried to fixate in some form the ancestral prestige
which threatened always to evaporate. Organizations composed of
the Sons and Daughters of the Revolution, of the descendants of the
Pilgrims, of Civil War Veterans, of the Scions of the Confederacy,
and so on, sprang up and flourished on the abundant soil of family
pride. All of which means that pioneering brought no spiritual
independence or intellectual rebirth, and that new conditions were
anxiously reformulated under the sanction of the old. Above all,
sanction was important. That incredible institution, the “society
column” of the local newspaper, took up the responsibility where the
Past laid it down. Stereotyped values of yesterday gave way to
stereotyped values of to-day. This was the commercial opportunity of
a multitude of home journals and women’s magazines which
undertook—by means of stories, pictures, and advertisements—to
regiment the last detail of home life. But the perforated patterns, the
foods “shot from guns,” and all the rest of the labour-saving
ingenuities which came pouring into the home and which were
supposed to mean emancipation for mothers and their families,
brought little of the real spirit of freedom in their wake. Our
materialistic civilization finds it hard to understand that liberty is not
achieved through time-saving devices but only through the love of it.
But the notorious spoiling of the American child—some one says
—is not that a proper cradle of liberty for the personality? A spoilt
child may be a nuisance, but if he is on the way towards becoming a
self-reliant, self-expressive adult, the “American way” of bringing up
children may have its peculiar advantages. But a spoilt child is really
a babyish child, and by that token he is on the way towards
becoming a childish adult. Neither is his case disposed of simply by
adjudging him a nuisance; the consequence of his spoiling carry
much further than that. They are seen, for instance, in malnutrition of
the children of the American rich—a fact which has but recently been
discovered and which came as a great surprise to the experts. “In
Chicago,” one of them tells us, “it was found that a group of foreign
children near the stockyards were only 17 per cent. underweight,
while in the all-American group near the University of Chicago they
were 57 per cent. below normal.” The same condition of things was
found in a select and expensive boarding school in the
neighbourhood of Boston. A pathetic commentary—is it not?—on a
country which leads the world in food-packing and food-profits, that it
should contain so many parents who, with all the resources of the
earth at their command, do not know how to feed their own children.
Surely, the famous American spoiling has something to do with this.
Whether it may not also be behind the vast amount of mental
disturbance in the population may well be considered. The asylums
are suddenly over-crowded. The National Committee for Mental
Hygiene suggests for our consolation that this may be because the
asylums are so much more humane than they used to be and the
families of the sufferers are more willing than formerly to consign
them to institutions.
It is the fashion to attribute all these mental tragedies to the
strain of business life and industry, and more recently to war-shock.
But if we are to accept the results of the latest psychological
research, the family must receive the lion’s share of blame. The
groundwork for fatal ruptures in the adult personality is laid in
childhood and in the home which produced the victim. For many
years the discussion of American nerves has hinged on the hectic
haste of business and industrial life, on the noise and bustle and lack
of repose in the national atmosphere. But we have neglected to
accuse the family to its face of failing to protect the child against the
cataclysms of the future while it had the chance.
The tremendous influence of the family on the individuals, old
and young, composing it is not merely a pious belief. We are, alas,
what our families make us. This is not a pleasant thought to many
individuals who have learned through bitter experience to look on
family relationships as a form of soul imprisonment. Yet it seems to
be an incontestable fact that personality is first formed—or deformed
—in the family constellation. The home really does the job for which
the school, the press, the church, and the State later get the credit. It
is a smoothly articulated course from the cradle onward, however, in
which the subjugated parent produces a subjugated child, not so
much by the rod of discipline—which figures very little in American
family life—but by the more powerful and pervasive force of habit
and attitude. Parents allow themselves to be a medium for
transmitting the incessant pressure of standards which allow no
room for impulse and initiative; they become the willing instrument of
a public mania for standardization which tries to make every human
soul into the image of a folded pattern. The babe is moulded in his
cradle into the man who will drop a sentimental tear, wear a white
carnation, and send a telegram on Mother’s Day—that travesty of a
family festival which shames affection and puts spontaneous feeling
to the blush.
As the family itself grows smaller, this pressure of mechanistic
and conventional standards encroaches more closely upon the child.
A sizeable group of brothers and sisters create for themselves a
savage world which is their best protection against the civilization
that awaits them. But with one or two children, or a widely scattered
series, this natural protection is lost. The youngster is prematurely
assimilated to the adult world of parents who are nowadays, owing to
later marriage, not even quite so young as formerly they were. It is a
peculiarity of parents, especially of mothers, that they never entertain
a modest doubt as to whether they might be the best of all possible
company for their children. And obviously the tired business man
cannot properly substitute in the evenings for a roistering, shouting
brother who never came into the world at all; nor can all the
concentrated care of the most devoted mother take the place of the
companionship and discipline which children get from other children.
These considerations deserve more attention than they usually
receive in connection with the falling birth-rate. The figures mean
that the environment of the young child is being altered in a
fundamental respect. Parents of small families need to take effective
steps to counteract the loss. Practical things, like nursery schools,
would be a help. But, chiefly, if parents will insist on being
companions of their children, they need themselves to understand
and practise the art of common joy and happiness.
Katharine Anthony

(Download pdf) Corporate Finance Asia Pacific Edition John Graham full chapter pdf docx

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

(Download pdf) Corporate Finance Asia Pacific Edition John Graham full chapter pdf docx

Uploaded by

Copyright:

Available Formats

Corporate Finance: Asia-Pacific Edition

(eBook PDF) Management, 7th Asia-Pacific Edition by

Corporate Finance - European Edition David Hillier

Marketing research 4th Asia- Pacific edition. Edition

Principles of Microeconomics, Asia-Pacific Edition N.

Principles of corporate finance Brealey

Fundamentals of Corporate Finance (Berk, DeMarzo &

Fundamentals of Management 6th Asia-Pacific Edition

Corporate finance 12th Edition Randolph W Westerfield

Shows you how financial management

Provides insight into how senior

Includes many examples of how you

JOHN GRAHAM • CHRISTOPHER ADAM • BRINDHA GUNASINGHAM

JOHN GRAHAM • CHRISTOPHER ADAM • BRINDHA GUNASINGHAM

National Library of Australia Cataloguing-in-Publication Data

Cengage Learning Australia

Cengage Learning New Zealand

For learning solutions, visit cengage.com.au

Printed in Singapore by C.O.S. Printers Pte Ltd.

1.1 Corporate Finance Elements and Functions 5

1.2 Goals for the Corporate Financial Manager 12

1.3 The Role of Corporate Finance in Business 17

1.4 Career Opportunities In Finance 22

CASE STUDY The Scope of Corporate Finance 28

2.1 Financial Statements 30

2.3 Assessing Financial Performance Using Ratio Analysis 42

2.4 Profitability Ratios 47

2.5 Market Ratios 52

2.6 Corporate Taxes 54

CASE STUDY Financial Statement and Cash Flow Analysis 65

3.1 Introduction to the Time Value of Money 67

3.2 Future Value of a Lump Sum Received Today 68

3.3 Present Value of a Lump Sum Received in the Future 72

3.4 Additional Applications Involving Lump Sums 75

3.5 Future Value of Cash Flow Streams 78

3.6 Present Value of Cash Flow Streams 85

3.7 Advanced Applications of Time Value 94

CASE STUDY Present Value 111

Real-World Case Study: All in the Family 112

Sound Bites: Ethics in Corporate Finance – Part 1 114

4.1 Valuation Basics 120

4.2 Bond Prices and Interest Rates 123

4.3 Types of Bonds 134

4.4 Bond Markets 141

4.5 The Term Structure of Interest Rates 144

CASE STUDY Bond Purchase Decision 152

5.1 The Essential Features of Preferred and Ordinary Shares 154

5.2 Valuing Preferred and Ordinary Shares 156

5.4 Other Approaches to Ordinary Share Valuation 168

5.5 Primary and Secondary Markets for Equity Securities 173

CASE STUDY Valuing Shares 182

6.1 Understanding Returns 186

6.3 Volatility and Risk 195

6.4 The Power of Diversification 200

CASE STUDY The Trade-Off between Risk and Return 219

7.1 Expected Returns 222

7.2 Risk and Return for Portfolios 231

7.3 Pulling It All Together: The CAPM 237

7.4 Are Share Returns Predictable? 246

8.1 Options Vocabulary 258

8.2 Option Payoff Diagrams 264

8.3 Qualitative Analysis of Option Prices 273

8.4 Option Pricing Models 276

8.5 Options In Corporate Finance 285