Corporate Finance ^{5th Ed.}

Corporate Finance, by Ross, Westerfield, and Jaffe emphasizes the modern fundamentals of the theory of finance, while providing contemporary examples to make the theory come to life. The authors aim to present corporate finance as the working of a small number of integrated and powerful intuitions, rather than a collection of unrelated topics. They develop the central concepts of modern finance: arbitrage, net present value, efficient markets, agency theory, options, and the trade-off between risk and return, and use them to explain corporate finance with a balance of theory and application. The well-respected author team is known for their clear, accessible presentation of material that makes this text an excellent teaching tool.

• Part I: Overview

1. Introduction to Corporate Finance
1. What is Corporate Finance?
• The Balance-Sheet Model of the Firm
• Capital Structure
• The Financial Manager
2. Corporate Securities as Contingent Claims on Total Firm Value
3. The Corporate Firm
• The Sole Proprietorship
• The Partnership
• The Corporation
4. Goals of the Corporate Firm
• Agency Costs and the Set-of-Contracts Perspective
• Managerial Goals
• Separation of Ownership and Control
• Do Shareholders Control Managerial Behavior?
5. Financial Markets
• The Primary Market: New Issues
• Secondary Markets
• Exchange Trading of Listed Stocks
• Listing
6. Outline of the Text
2. Accounting Statements and Cash Flow
1. The Balance Sheet
• Accounting Liquidity
• Debt versus Liquidity
• Value versus Cost
2. The Income Statement
• Generally Accepted Accounting Principles
• Noncash Items
• Time and Costs
3. Net Working Capital
4. Financial Cash Flow
5. Summary and Conclusions
• Appendix 2A: Financial Statement Analysis
• Appendix 2B: Statement of Cash Flows
• Appendix 2C: U.S. Federal Tax Rates

• Part II: Value and Capital Budgeting

3. Financial Markets and Net Present Value: First Principles of Finance (Advanced)
1. The Financial Market Economy
• The Anonymous Market
• Market Clearing
2. Making Consumption Choices Over Time
3. The Competitive Market
• How Many Interest Rates Are There in a Competitive Market?
4. The Basic Principle
5. Practicing the Principle
• A Lending Example
• A Borrowing Example
6. Illustrating the Investment Decision
7. Corporate Investment Decision‑Making
8. Summary and Conclusions
4. Net Present Value
1. The One-Period Case
2. The Multiperiod Case
• Future Value and Compounding
• The Power of Compounding: A Digression
• Present Value and Discounting: The Algebraic Formula
3. Compounding Periods
• Distinction between Stated Annual Interest Rate and Effective Annual Interest Rate
• Compounding over Many Years
• Continuous Compounding (Advanced)
4. Simplifications
• Perpetuity
• Growing Perpetuity
• Annuity
• Growing Annuity
• Case Study: Making the Decision to Convert Lottery Prize Winnings: The Case of the Singer Asset Finance Company
5. What Is a Firm Worth?
6. Summary and Conclusions
5. How to Value Bonds and Stock
1. Definition and Example of a Bond
2. How to Value Bonds
• Pure Discount Bonds
• Level-Coupon Bonds
• Consols
3. Bond Concepts
• Interest Rates and Bond Prices
• Yield to Maturity
• Bond Market Reporting
4. The Present Value of Common Stocks
• Dividend versus Capital Gains
• Valuation of Different Types of Stocks
5. Estimates of Parameters in the Dividend-Discount Model
• Where Does g Come From?
• Where Does r Come From?
• A Healthy Sense of Sketicism
6. Growth Opportunities
• Growth in Earnings and Dividends versus Growth Opportunities
• Dividends or Earnings: Which to Discount?
• The No-Dividend Firm
7. The Dividend Growth Model and the NPVGO Model (Advanced)
• The Dividend Growth Model
• The NPVGO Model
• Summation
8. Price-Earnings Ratio
9. Stock Market Reporting
10. Summary and Conclusions
• Appendix 5A: The Term Structure of Interest Rates, Spot Rates, and Yield to Maturity
6. Some Alternative Investment Rules
1. Why Use Net Present Value?
2. The Payback Period Rule
• Defining the Rule
• Problems with the Payback Method
• Managerial Perspective
• Summary of the Payback Period Rule
3. The Discounted Payback Period Rule
4. The Average Accounting Return
• Defining the Rule
• Analyzing the Average Accounting Return Method
5. The Internal Rate of Return
6. Problems with the IRR Approach
• Definition of Independent and Mutually Exclusive Projects
• Two General Problems Affecting Both Independent and Mutually Exclusive Projects
• Problems Specific to Mutually Exclusive Projects
• Redeeming Qualities of the IRR
• A Test
7. The Profitability Index
8. The Practice of Capital Budgeting
9. Summary and Conclusions
7. Net Present Value and Capital Budgeting
1. Incremental Cash Flows
• Cash Flows — Not Accounting Income
• Sunk Costs
• Opportunity Costs
• Side Effects
2. The Baldwin Company: An Example
• An Analysis of the Project
• Which Set of Books?
• A Note on Net Working Capital
• Interest Expense
3. Inflation and Capital Budgeting
• Interest Rates and Inflation
• Cash Flow and Inflation
• Discounting: Nominal or Real?
4. Investments of Unequal Lives: The Equivalent Annual Cost Method
• The Equivalent Annual Cost Method
• Replacement Chain
• The General Decision to replace (Advanced)
5. Summary and Conclusions
• Appendix 7A: Depreciation
8. Strategy and Analysis in Using Net Present Value
1. Corporate Strategy and Positive NPV
• Corporate Strategy and the Stock Market
• How Firms Can Learn about NPV from the Stock Market: The AT&T Decision to Acquire NCR and to Change Its CEO
2. Decision Trees
3. Sensitivity Analysis, Scenario Analysis, and Break-Even Analysis
• Sensitivity Analysis and Scenario Analysis
• Break-Even Analysis
4. Options
• The Option to Expand
• The Option to Abandon
• Discounted Cash Flows and Options
5. Summary and Conclusions

• Part III: Risk

9. Capital Market Theory: An Overview
1. Returns
• Dollar Returns
• Percentage Returns
2. Holding-Period Returns
3. Return Statistics
4. Average Stock Returns and Risk-Free Returns
5. Risk Statistics
• Variance
• Normal Distribution and Its Implications for Standard Deviation
6. Summary and Conclusions
10. Return and Risk: The Capital-Asset-Pricing Model (CAPM)
1. Individual Securities
2. Expected Return, Variance, and Covariance
• Expected Return and Variance
• Covariance and Correlation
3. The Return and Risk for Portfolios
• The Example of Supertech and Slowpoke
• The Expected on a Portfolio
• Variance and Standard Deviation of a Portfolio
4. The Efficient Set for Two Assets
5. The Efficient Set for Many Securities
• Variance and Standard Deviation in a Portfolio of Many Assets
6. Diversification: An Example
• Risk and the Sensible Investor
7. Riskless Borrowing and Lending
• The Optimal Portfolio
8. Market Equilibrium
• Definition of the Market-Equilibrium Portfolio
• Definition of Risk When Investors Hold the Market Portfolio
• The Formula for Beta
• A Test
9. Relationship between Risk and Expected Return (CAPM)
• Expected Return on Market
• Expected Return on Individual Security
10. Summary and Conclusions
• Appendix 10A: Is Beta Dead?
11. An Alternative View of Risk and Return: The Arbitrage Pricing Theory
1. Factor Models: Announcements, Surprises, and Expected Returns
2. Risk: Systematic and Unsystematic
3. Systematic Risk and Betas
4. Portfolios and Factor Models
• Portfolios and Diversification
5. Betas and Expected Returns
• The Linear Relationship
• The Market Portfolio and the Single Factor
6. The Capital Asset Pricing Model and the Arbitrage Pricing Theory
• Differences in Pedagogy
• Differences in Application
7. Parametric Approaches to Asset Pricing
• Empirical Models
• Style Portfolios
8. Summary and Conclusions
12. Risk, Return, and Capital Budgeting
1. The Cost of Equity Capital
2. Estimation of Beta
• Real-World Betas
• Stability of Beta
• Using an Industry Beta
3. Determinants of Beta
• Cyclicality of Revenues
• Operating Leverage
• Financial Leverage and Beta
4. Extensions of the Basic Model
• The Firm versus the Project: Vive la Différence
• The Cost of Capital with Debt
5. Estimating International Paper's Cost of Capital
• Cost of Equity and Debt
• Determining r_wacc
6. Summary and Conclusions

• Part IV: Capital Structure and Dividend Policy

13. Corporate-Financing Decisions and Efficicent Capital Markets
1. Can Financing Decisions Create Value?
2. A Description of Efficient Capital Markets
3. The Different Types of Efficiency
• The Weak Form
• The Semistrong and Strong Forms
• Some Common Misconceptions about the Efficient-Market Hypothesis
4. The Evidence
• The Weak Form
• The Semistrong Form
• The Strong Form
5. Implications for Corporate Finance
• Accounting and Efficient Markets
• The Timing Decision
• Price-Pressure Effects
6. Summary and Conclusions
14. Long-Term Financing: An Introduction
1. Common Stock
• Par and No-Par Stock
• Authorized versus Issued Common Stock
• Capital Surplus
• Retained Earnings
• Market Value, Book Value, and Replacement Value
• Shareholders' Rights
• Dividends
• Classes of Stock
2. Corporate Long-Term Debt: The Basics
• Interest versus Dividends
• Is It Debt or Equity?
• Basic Features of Long-Term Debt
• Different Types of Debt
• Repayment
• Seniority
• Security
• Indenture
3. Preferred Stock
• Stated Value
• Cumulative and Noncumulative Dividends
• Is Preferred Stock Really Debt?
• The Preferred-Stock Puzzle
4. Patterns of Financing
5. Recent Trends in Capital Structure
• Which Are Best: Book or Market Values?
6. Summary and Conclusions
15. Capital Structure: Basic Concepts
1. The Capital-Structure Question and The Pie Theory
2. Maximizing Firm Value versus Maximizing Stockholder Interests
3. Financial Leverage and Firm Value: An Example
• Leverage and Returns to Shareholders
• The Choice between Debt and Equity
• A Key Assumption
4. Modigliani and Miller: Proposition II (No Taxes)
• Risk to Equityholders Rises with Leverage
• Proposition II: Required Return to Equityholders Rises with Leverage
• Example Illustrating Proposition I and Proposition II
• MM: An Interpretation
5. Taxes
• The Basic Insight
• The Quirk in the Tax Code
• Present Value of the Tax Shield
• Value of the Levered Firm
• Expected Return and Leverage under Corporate Taxes
• The Weighted Average Cost of Capital r_wacc and Corporate Taxes
• Stock Price and Leverage under Corporate Taxes
6. Summary and Conclusions
16. Capital Structure: Limits to the Use of Debt
1. Costs of Financial Distress
• Bankruptcy Risk or Bankruptcy Cost?
2. Description of Costs
• Direct Costs of Financial Distress: Legal and Administrative Costs of Liquidation or Reorganization
• Indirect Costs of Financial Distress
• Agency Costs
3. Can Costs of Debt Be Reduced?
• Protective Covenants
• Consolidation of Debt
4. Integration of Tax Effects and Financial Distress Costs
• Pie Again
5. Shirking, Perquisites, and Bad Investments: A Note on Agency Cost of Equity
• Investments: A Note on Agency Costs of Equity
• Effect of Agency Costs of Equity on Debt-Equity Financing
• Free Cash Flow
6. Growth and the Debt-Equity Ratio
• No-Growth
• Growth
7. Personal Taxes
• The Miller Model
8. How Firms Establish Capital Structure
9. Summary and Conclusions
17. Valuation and Capital Budgeting for the Levered Firm
1. Adjusted Present Value Approach
2. Flows to Equity Approach
• Step 1: Calculating Levered Cash Flow (LCF)
• Step 2: Calculating r_s
• Step 3: Valuation
3. Weighted Average Cost of Capital Method
4. A Comparison of the APV, FTE, and WACC Approaches
• A Suggested Guideline
5. Capital Budgeting for Projects that are Not Scale-Enhancing
6. APV Example
• All-Equity Value
• Additional Effects of Debt
7. Beta and Leverage
• The Project Is Not Scale-Enhancing
8. Summary and Conclusions
• Appendix 17A: The Adjusted-Present-Value Approach to Valuing Leveraged Buyouts
18. Dividend Policy: Why Does It Matter?
1. Different Types of Dividends
2. Standard Method of Cash Dividend Payment
3. The Benchmark Case: An Illustration of the Irrelevance of Dividend Policy
• Current Policy: Dividends Set Equal to Cash Flow
• Alternative Policy: Initial Dividend Is Greater than Cash Flow
• The Indifference Proposition
• Homemade Dividends
• A Test
• Dividends and Investment Policy
4. Taxes, Issuance Costs, and Dividends
• Firms without Sufficient Cash to Pay a Dividend
• Firms with Sufficient Cash to Pay a Dividend
• Summary on Taxes
5. Repurchase of Stock
• Dividend versus Repurchase
• Relationship between EPS and Market Value
• Taxes
• Targeted Repurchase
• Repurchase as Investment
6. Expected Return, Dividends, and Personal Taxes
• Empirical Evidence
7. Real-World Factors Favoring a High-Dividend Policy
• Desire for Current Income
• Uncertainty Resolution
• Tax Arbitrage
• Agency Costs
8. A Resolution of Real-World Factors?
• Information Content of Dividends: A Brainteaser with Practical Applications
• The Clientele Effect
9. What We Know and Do Not Know About Dividend  Policy
• Corporations Smooth Dividends
• Dividends Provide Information to the Market
• A Sensible Dividend Policy
• Case Study: How Firms Make the Decision to Pay Dividends: The Case of Apple Computer
10. Summary and Conclusions
• Appendix 18A: Stock Dividends and Stock Splits

• Part V: Long-Term Financing

19. Issuing Equity Securities to the Public
1. The Public Issue
• The Basic Procedure for a New Issue
2. Alternative Issue Methods
3. The Cash Offer
• Investment Bankers
• The Offering Price
• Underpricing: The Case of Conrail and Shiva
• Underpricing: A Possible Explanation
4. The Announcement of New Equity and the Value of the Firm
5. The Cost of  New Issues
6. Rights
• The Mechanics of a Rights Offering
• Subscription Price
• Number of Rights Needed to Purchase a Share
• Effects of Rights Offering in Price of Stock
• Effects on Shareholders
• The Underwriting Arrangements
7. The New-Issues Puzzle
8. Shelf Registration
9. The Private Equity Market
• Private Placement
• The Private Equity Firm
• Suppliers of Venture Capital
• Stages of Financing
• Case Study: The Decision to Do an Initial Public Offering (IPO): The Case of Medstone International, Inc.
10. Summary and Conclusions
20. Long-Term Debt
1. Long Term Debt: A Review
2. The Public Issue of Bonds
• The Basic Terms
• Security
• Protective Covenants
• The Sinking Fund
• The Call Provision
3. Bond Refunding
• Should Firms Issue Callable Bonds?
• Calling Bonds: When Does It Make Sense?
4. Bond Ratings
• Junk Bonds
5. Some Different Types of Bonds
• Floating-Rate Bonds
• Deep-Discount Bonds
• Income Bonds
6. Direct Placement Compared to Public Issues
7. Summary and Conclusions
21. Options and Corporate Finance: Basic Concepts
1. Options
2. Call Options
• The Value of a Call Option at Expiration
3. Put Options
• The Value of a Put Option at Expiration
4. Selling Options
5. Reading The Wall Street Journal
6. Combinations of Options
7. Valuing Options
• Bounding the Value of a Call
• The Factors Determining Call-Option Values
• A Quick Discussion of Factors Determining Put-Option Values
8. An Option‑Pricing Formula
• A Two-State Option Model
• The Black-Scholes Model
9. Stocks and Bonds as Options
• The Firm Expressed in Terms of Call Options
• The Firm Expressed in Terms of Put Options
• A Resolution of the Two Views
• A Note on Loan Guarantees
10. Capital-Structure Policy and Options
• Selecting High-Risk Projects
• Milking the Firm
11. Investment in Real Projects and Options
12. Summary and Conclusions
22. Options and Corporate Finance: Extensions and Applications
1. Executive Stock Options
• Why Options?
• Valuing Executive Compensation
2. Flexible Production
• Automobile Production
3. Waiting to Invest
• The Real Estate Developer
• Analyzing the Decisions
4. The Binomal or General Two-State Approach to Project Valuation
• Setting Up the Binomial Model
• The Risk-Neutral Approach to Valuation
• Building the Tree
• Filling Out the Tree
• Working Back the Tree
• Simulation
5. Shutdown and Reopening Decisions
• Valuing a Gold Mine
• The Abandonment and Opening Decisions
• Valuing the Simple Gold Mine
6. Summary and Conclusions
23. Warrants and Convertibles
1. Warrants
2. The Difference between Warrants and Call Options
• How the Firm Can Hurt Warrant Holders
3. Warrant Pricing and the Black-Scholes Model (Advanced)
4. Convertible Bonds
5. The Value of Convertible Bonds
• Straight Bond Value
• Conversion Value
• Option Value
6. Reasons for Issuing Warrants and Convertibles
• Convertible Debt versus Straight Debt
• Convertible Debt versus Common Stock
• The "Free Lunch" Story
• The "Expensive Lunch" Story
• A Reconciliation
7. Why are Warrants and Convertibles Issued?
• Matching Cash Flows
• Risk Synergy
• Agency Costs
8. Conversion Policy
9. Summary and Conclusions
24. Leasing
1. Types of Leases
• The basics
• Operating Leases
• Financial Leases
2. Accounting and Leasing
3. Taxes, the IRS, and Leases
4. The Cash Flows of Leasing
5. A Detour on Discounting and Debt Capacity with Corporate Taxes
• Present Value of Riskless Cash Flows
• Optimal Debt Level and Riskless Cash Flows (Advanced)
6. NPV Analysis of the Lease-versus-Buy Decision
• The Discount Rate
7. Debt Displacement and Lease Valuation
• The Basic Concept of Debt Displacement (Advanced)
• Optimal Debt Level in the Xomox Example (Advanced)
8. Does Leasing Ever Pay: The Base Case
9. Reasons for Leasing
• Good Resons for Leasing
• Bad Reasons for Leasing
10. Some Unanswered Questions
• Are the Uses of Leases and of Debt Complementary?
• Why Are Leases Offered by Both Manufacturers and Third-Party Lessors?
• Why Are Some Assets Leased More than Others?
11. Summary and Conclusions
• Appendix 24A: APV Approach to Leasing
25. Derivates and Hedging Risk
1. Forward Contracts
2. Futures Contracts
3. Hedging
4. Interest-Rate Futures Contracts
• Pricing of Treasury Bonds
• Pricing of Forward Contracts
• Futures Contracts
• Hedging in Interest-Rate Futures
5. Duration Hedging
• The Case of Zero-Coupon Bonds
• The Case of Two Bonds with the Same Maturity but woth Different Coupons
• Duration
• Matching Liabilities with Assets
6. Swap Contracts
• Interest-Rate Swaps
• Currency Swaps
• Exotics
7. Summary & Conclusions

• Part VI: Financial Planning and Short-Term Finance

26. Corporate Financial Models and Lon-Term Planning
1. What Is Corporate Financial Planning?
2. A Financial Planning Model: The Ingredients
3. What Determines Growth?
4. Some Caveats of Financial Planning Models
5. Summary & Conclusions
27. Short-Term Financing and Planning
1. Tracing Cash and Net Working Capital
2. Defining Cash in Terms of Other Elements
• The Sources-and-Uses-of-Cash Statement
3. The Operating Cycle and the Cash Cycle
4. Some Aspects of Short-Term Financial Policy
• The Size of the Firm's Investment in Current Assets
• Alternative Financing Policies for Current Assets
• Which Is Best?
5. Cash Budgeting
• Cash Outflow
• The Cash Balance
6. The Short-Term Financial Plan
• Unsecured Loans
• Secured Loans
• Other Sources
7. Summary & Conclusions
28. Cash Management
1. Reasons for Holding Cash
2. Determining the Target Cash Balance
• The Baumol Model
• The Miller-Orr Model
• Othr Factors Influencing the Target Cash Balance
3. Managing the Collection and Disbursement of Cash
• Accelerating Collections
• Delaying Disbursements
• Disbursement Float ("Playing the Float Game")
• Zero-Balance Accounts
• Drafts
• Ethical and Legal Questions
4. Investing Idle Cash
• Seasonal or Cyclical Activities
• Planned Expenditures
• Different Types of Money-Market Securities
5. Summary & Conclusions
• Appendix 28A: Adjustable-Rate Preferred Stock, Auction-Rate Preferred Stock, and Floating-Rate Certificates of Deposit
29. Credit Management
1. Terms of the Sale
• Credit Period
• Cash Discounts
• Credit Instruments
2. The Decision to Grant Credit: Risk and Information 
• The Value of New Information about Credit Risk
• Future Sales
3. Optimal Credit Policy
4. Credit Analysis
• Credit Information
• Credit Scoring
5. Collection Policy
• Average Collection Period
• Aging Schedule
• Collection Effort
• Factoring
6. How to Finance Trade Credit
7. Summary & Conclusions

• Part VII: Special Topics

30. Mergers and Acquisitions
1. The Basic Forms of Acquisitions
• Merger or Consolidation
• Acquisition of Stock
• Acquisition of Assets
• A Classification Scheme
• A Note on Takeovers
2. The Tax Forms of Acquisitions
3. Accounting for Acquisitions
• The Purchase Method
• Pooling of Interests
• Purchase or Pooling of Interests: A Comparison
4. Determining the Synergy from an Acquisition
5. Source of Synergy from Acquisitions
• Revenue Enhancement
• Cost Reduction
• Tax Gains
• The Cost of Capital
6. Calculating the Value of the Firm after an Acquisition
• Acquisition
• Avoiding Mistakes
7. A Cost to Stockholders from Reduction in Risk
• The Base Case
• One Firm Has Debt
• How Can Shareholders Reduce Their Losses from the Coinsurance Effect?
8. Two "Bad" Reasons for Mergers
• Earning Growth
• Diversification
9. The NPV of a Merger
• Cash
• Common Stock
• Cash versus Common Stock
10. Defensive Tactics
• The Corporate Charter
• Repurchase Standstill Agreements
• Exclusionary Self-Tenders
• Going Private and Leveraged Buyouts
• Other Devices and Jargon of Corporate Takeovers
11. Some Evidence on Acquisitions
• Do Acquisitions Benefit Shareholders?
• The Short Run
• The Long Run
12. The Japanese Keiretsu
13. Summary and Conclusions
• Minicase: U.S. Steel's Acquisition of Marathon Oil
31. Financial Distress
1. What Is Financial Distress?
2. What Happens in Financial Distress?
3. Bankruptcy Liquidation and Reorganization
• Bankruptcy Liquidation
• Bankruptcy Reorganization
4. Private Workout or Bankruptcy: Which Is Best?
• The Marginal Firm
• Holdouts
• Complexity
• Lack of Information
5. Prepackaged Bankruptcy
• Case Study: The Decision to File for Bankruptcy: The Case of Revco
6. Summary and Conclusions
• Appendix 31-A: Predicting Corporate Bankruptcy: The Z-score model
32. International Corporate Finance
1. Terminology
2. Foreign Exchange Markets and Exchange Rates
• Exchange Rates
• Types of Transactions
3. The Law of One Price and Purchasing-Power Parity
4. Interest Rates and Exchange Rates: Interest Rate Parity
• The Dollar Investment
• The Deutschmark Investment
• The Forward-Discount and Expected Spot Rates
• Exchange-Rate Risk
• Which Firms Hedge Exchange-Rate Risk?
5. International Capital Budgeting
• Foreign Exchange Conversion
• Unremitted Cash Flows
• The Cost of Capital for International Firms
6. International Financial Decisions
• Short-Term and Medium-Term Financing
• International Bond Markets
7. Reporting Foreign Operations
8. Summary and Conclusions
• Appendix A: Mathematical Tables
• Appendix B: Selected Answers to End-of-Chapter Problems

More and more advanced forumlas than in Brealey/Myers. Could be read separately or as a complement.