Taxes and Transaction Costs The Black-Scholes option pricing model ignores taxes and transaction
Taxes and Transaction Costs The Black-Scholes option pricing model ignores taxes and transaction
costs. The model can be modified to account for taxes, but the problem is that there is not just one tax rate. Transaction costs include both com- missions and the bid-ask spreads for the underlying asset and the option, as well as other costs associated with trading options.
5 In the case of known dividends, a shortcut to adjust the Black-Scholes model is to reduce the stock price by the present value of the dividends. Fischer Black suggested
an approximation technique to value a call option for a dividend-paying stock. A more accurate model for pricing call options in the case of known dividends has been developed by several researchers.
Index
10K filings, 127 After-tax interest rate, 911 10-K report, 879
AG. See Aktiengellschaft 10Q filings, 127
Agencies
explanation. See Dividends Abarbanell, Jeffrey S., 792
relationship, 560 Abel-Noser database, 788
Agencies, relationship, 17–23 Abnormal profit, 44
cost, 18–19
Acceleration option, 504
definition, 17
Accounting problems, 17–18 accrual method, usage, 374
Agents, 560
considerations, 925–926
definition, 17
earnings, 779 Aharony, Joseph, 555 income, 375
AIC. See All-in-cost irregularities, 21
Aktiengellschaft (AG), 833 principles/assumptions, 125–127
Allied Products Corporation, Annual Report (1991), profit, 14–15
contrast. See Economic profit All-inclusive income concept, 138 rules, 926
All-in-cost (AIC). See also Debt; Funds basis, 551
Alternative leases, comparison, 910–911 standards, 848
Alternative trading systems, 40–41 Accounts method, analysis, 955–960
Altman, Edward I., 610 Accounts payable, 132, 949
AMA. See American Management Association days, number, 694
Amazon.com, 946, 948 increase, 376
American depositary receipt (ADR), 843–844 management, 692–695
American depositary share (ADS), 844 payments, 950
American Express, EPS (2001), 782 turnover, 693
American Management Association (AMA), 726 Accounts receivable, 129, 651, 706–708
American option, 89 management, 739–740
definition, 473
monitoring, 659–661 American Stock Exchange, 844 turnover ratio, 740, 741
Ammons, Janice L., 777 Accrual accounting, 126
Amortization. See Loan Accrued expenses, 132
definition, 131
Accumulated depreciation, 131 schedule, 491–493 Acid-test ratio, 734
Amortizing loan. See Fully amortizing loan Acquisitions, 763
Amortizing structure, 488 Activity ratios, 739–742
Analysts
Actual EPS, 786–787 forecasting ability, 785–789 Add back expenses, 745
forecasts, 783–792 Additional paid-in capital, 134
beating, 776 Add-on interest, 685–686
Ang, James, 559
Adjustable rate dividends, 573 Annual percentage rate (APR), 152–154, 183–187 Adjustable-rate preferred stock (ARPS), 573
calculation, 682–683, 707, 709 Adjusted discount rate, 910
Annual yield, 228 Adjustment factor, 325
yield-to-maturity, contrast, 240 ADR. See American depositary receipt
Annualized basis, 682 ADS. See American depositary share
Annualized interest rates, contrast. See Effective Advertising expenditures, 737
interest rates After-tax basis, 745
Annuities. See Ordinary annuity After-tax dollars, 320
amount, multiplication, 172
Index
Annuities (Cont.) Backup servicer, 873 due, valuation, 179–180
Bad debts
factor, 198. See also Future value; Present value
expense, 737
tables, usage, 174–177 probability, 656 future value, 171
risk, 654
usage, 168–174 Baker, H. Kent, 843 valuation. See Deferred annuities
Balance sheet, 127–128, 588, 749, 948. See also value, determination, 169
Common size; Pro forma balance sheet AOL Time Warner, 753
account retained earnings, 320 APM. See Arbitrage Pricing Model
information, providing, 143 Appreciation. See Capital
shareholder equity, impact, 132 right. See Stocks
Ball, Ray, 777
APR. See Annual percentage rate Balloon payment, 491 Arbitrage Pricing Model (APM), 299–301
Bank loan-marketable securities, 954 Arithmetic average return, 151, 202–203
Bankers, acceptances, 29, 703–705 ARPS. See Adjustable-rate preferred stock
Banking. See Concentration; Global banking; Invest- Arthur Anderson, obstruction of justice, 21
ment; Merchant banking Asian currency option, 855
Banking Act of 1933, 61 Asset-backed securities, 32, 861, 867–868
Bankruptcy, 267, 606. See also Chapter 11 bank- evaluation, rating agencies (considerations), 871–
ruptcy; Enron; Texaco 873
amount, 618
transactions, 873 costs, 610–612 Assets, 128–132. See also Current assets; Noncur-
risk, 564
rent assets; Other assets Bankruptcy Reform Act of 1978, 610 acquisition, 364–366
Bankruptcy remote entities, 867 cost, 364, 391
Banks. See Clearinghouse; Money center banks demand, 68
activities, regulation. See Commercial banks disposition, 366–370
CDs, 155
cash flow, 366 financing, 695–697 gross amount, 898
forms, comparison, 697–699 management, 740–741
holding companies, 58, 893 pricing, 292–301
loan, 695. See also Syndicated bank loan interaction. See Financial decision making
selection, 641
model, 339 services. See Commercial bank services return, covariance, 287
Base interest rate, 69 securitization, 706, 862
Basic earning power, 726 types, 620
ratio, 723
valuation, marketplace role, 199–201
Basic EPS, 782
valuation, principles, 195–201 Basic valuation equation, 150 questions, 208–210
Basu, Sanjoy, 795 value, 245–247. See also Underlying asset
Baumol Model, 632–637, 640 change, 201
Baumol, William J., 632 volatility, 245
Bautista, Alberto J., 903 At-risk investment, 901
Bearer bonds, 495 At-the-money option, 246
Before-tax basis, 662 Auction
Bell Atlantic, dividends (growth rate), 163 preferred stock, 573
Benchmark, usage, 750–753 process, 64, 500
Benke Jr., R.L., 837 Audit. See Post-completion audit
Berkshire Hathaway, stock purchase, 222 Authorized shares, 535
Bermuda option, 89 Autoliv, Inc., 811
Berry, Michael A., 787 Autoregressive models, 789
Best efforts arrangement, 62 Beta, 295–298, 325. See also Common stock
Available-for-sale securities, 132
definition, 295
Average annual return, 202, 238
measure, 296
Average collection period, 659 Biased expectations theories, 77–78 Average cost, 129
Bird in the hand theory, 557, 558 Average credit sales per day, 731
Black, Fischer, 472, 561 Average day COGS, 730
Black-Scholes option pricing formula, 476 Average day purchases on credit, 732
Black-Scholes option-pricing model, 474 Average rate currency option, 855
Blanket indenture, 496 Average return. See Arithmetic average return; Geo-
Bloomberg, 783
metric average return Board of directors, 966. See also Classified board Average tax rate, 109
of directors classification, 541
Index
Bond issues term origination, 938 designing, 512–521
types, 961
features/provisions, 496–508 Buildings, setup charges, 382 refunding, 524
Bullet loan, 491
Bond series, 496 Bullet payment, 491 Bond-equivalent basis, 233, 237, 846
Bullet structure, 488 Bond-equivalent yield, 233, 313
Burmeister, Edwin, 300 Bondholder, role, 31
Business
Bonding costs, 18–19
enterprise
Bonds, 495–526. See also Income; Investment-
forms, 6–17
grade bonds; Noninvestment-grade bonds; prevalence, 11–12 Secured bonds
entity, establishment, 833–834 contrast. See Fixed-rate bonds
finance, 3
convertibility, 506–508 financing flexibility, 138 denominations, 496–497
forms, 10–11
designing, derivative instruments (usage), 516–520 risk, 258–262, 357, 558, 611 distinction. See Notes
increase, 616 high quality, 70 interest, 229
Calculators, usage, 174–177. See also Financial markets, 43
calculators convention, 233
Call options, 89. See also Long call position; Short medium grade, 70
call position offering, warrants usage, 520–521
definition, 473
par value, 239 purchase, 92–93 prime, 70
writing/selling, 93 rating systems, 508–510
Call the issue, right, 503 retirement, 523–526
Callability. See Preferred stock returns, 234–240
Callable bonds, 243–245 security, 501
Callable preferred stock, 576 seniority, 502
Calls
time path, 241 exercising, 576 upper medium grade, 70
feature, 226, 243. See also Preferred stock valuation
mechanism, 502–503 maturity, approaching, 240–241
premium, receiving, 270 yields, change, 242–243
price, 226, 244, 576 yield, 236
provision, 72
Bonus, compensation, 19
risk, 258, 270
Book earnings, equipment leasing impact, 893 Campbell, John Y., 793 Book value, 131, 336. See also Equity
Cancelable operating lease, 890 market value, contrast, 743–744
Cap
Borrowed funds, 905 agreements, 101–103 Borrowers, creditworthiness, 710
interpretation, 102 Borrowing. See Longer-term borrowing
motivation, 103 arrangement. See Financial institutions
Capacity, 658
company dependence, 811 analysis, 510–511 effective cost, 681–682
Capital. See Additional paid-in capital; Working impact, 893
capital
maturity, length, 710 appreciation, 225 Borrow-to-buy decision, comparison. See Leases
components, 603 Bought deal, mechanics, 64
changes. See Working capital Bouncing, 639
gains, 116–118, 366–367, 382 Break-even point, 410
expectations, 368 Break-points, determination, 330
investment, 356 Brealey, Richard, 907
leases, current portion, 132 Broker/dealer functions, 54
marginal cost, 345. See also Shareholders Brown, Lawrence D., 787
estimation. See Du Pont Browning, E.S., 793
problems, 333–335 Budgeting, 934, 948–955
marginal efficiency, 308 approval/authorization, 359
markets. See Real-world capital markets practices, 966
securities, 29–33 relationship. See Financial planning
project, 356
Budgets raising, average cost, 329 development, 938
rationing. See Internal rate of return; Modified manuals, usage, 966
internal rate of return
Index
requirements, relief, 866 questions, 621–624 schedule, marginal cost, 327–333
relationship. See Interest; Personal taxes source, cost determination (integrative example),
taxes, relationship, 594–605 337–345
types, 616–617 stock, 135
usage, 328, 583 yield, 219–221, 224, 558
Capitalization. See Thin capitalization Capital Asset Pricing Model (CAPM), 293–299,
avoidance, 889–890, 913 324, 326
rate, 596
DVM, estimates reconciliation, 344–345 CAPM. See Capital Asset Pricing Model limitations, 298–299
Captive finance companies, 54, 862 usage, 341–344. See also Common stock
Captive finance subsidiaries, 664 Capital budget, 946. See also Optimal capital bud-
Captive leasing, 893 get
Carrybacks. See Net operating loss carrybacks dollar limit, 401
Carrying costs, 665 limitation, 426
Carryovers, 119–120 proposal, 359
Cash
Capital budgeting, 355, 358–363, 847–848, 912 account, change, 957 decision, risk incorporation, 469–477
balances, holding (reasons), 631–632 evaluation techniques, 400–436
budget, 949–955 Hirshleifer Company, integrative example, 385–
statements, 965 389
collections, estimation, 949 analysis, 387
components, 129 problem, 385–387
costs, 632
process, stages, 359–360 dividends, 547–549, 561 questions, 392–398
equivalents, 129 risk, relationship, 451
forecasting, 630 questions, 481–484
holding
Williams 5&10, integrative example, 380–385
cost, 634
analysis, 382–385 opportunity cost, 635 problem, 380–382
investment, determination, 632–637 Capital budgeting techniques, 399
needs, monitoring, 630–631 comparison, 436–441
outflow, 372, 947, 951 practice, 441–442
selection, 439–441 Cash flow (CF). See Discretionary cash flow; End- Capital component
of-period cash flow; Incremental cash flow; costs, determination, 310–326
Investment; Net cash flows; Net free cash proportion, determination, 309–310
flow; Operating cash flow; Projects; Uneven integrative example, 335–337
cash flows Capital Corporation, expected values, 592
adjustment, 478 Capital cost, 14, 307, 326–335, 805
analysis, 797
adjustment, 470–471 questions, 817–819 calculation, 470
calculation, 182–183 definition, 400
change. See Expenses determination, 333
characteristics. See Options; Securities estimation, Du Pont (integrative example), 335–
consequences, 903 346
differences. See Investment fluctuation, 318
discounted payback, consideration, 406–407 overrun, 923
estimation, 389–392 questions, 347–352
financing activities, usage, 140–143 return, 358
generation, 959 Capital expenditures, 361
information, usage, 814–816 adjustment, 808
interest coverage ratio, 746 coverage ratio, 812
investing activities, usage, 140–143 effect, 814
investments, 363–380 Capital leases, accounting, 897–899
IRR consideration, 427 Capital market line (CML), 294
leasing, impact, 893 Capital structure, 310, 848–849. See also Observed
measure, 812
capital structures; Optimal capital structure measurement, difficulties, 797–799 conclusions, 612–615
MIRR consideration, 435 financial distress, relationship, 606–612
NPV consideration, 412–413 financial leverage, relationship, 587–591
operating activities, usage, 139–140 prescription, 619–620
patterns. See Customers proportions, 330
payback consideration, 404
Index
Cash flow (Cont.) Check clearing process, 641–643 perpetual stream, valuation, 177–179
Check processing, 641 PI consideration, 417–418
Circuit City Stores, annual report (1999), 897 present value, 399, 414
Circulating capital, 128, 627 questions, 392–398
Citibank, 99
reduction, 266 Class B stock, 538 reinvestment, 425
Classified board of directors, 541 series, time value, 164–177
Classified stocks, 534, 538–539 simplifications, 379–380
valuation, 177 Close corporation, definition, 9, 536 stress, 873
Closed-end investment companies, 66 techniques. See Discounted cash flow techniques
Closely held corporation, definition, 9, 536 time line representation, 166
CML. See Capital market line usage. See Free cash flow; Investment returns
Coca-Cola, 823, 946, 947 usefulness. See Financial analysis
book value, 136 valuation, time patterns (usage), 177–183
Coefficient of variation. See Variation value, determination, 434
Coggin, T. Daniel, 791, 792 volatility, 475
COGS. See Cost of goods sold Cash flow (CF) risk, 258–268
Coleco Industries, 940–941 coefficient of variation, 459–460
Collar, 573
range, 455–456 Collateral, 29, 489, 511, 658, 705 relationship, 452–454
credit quality, 871–872 standard deviation, 456–459
factors, 710
statistical measures, 455–460
par value, 875
Cash flow (CF) riskiness trust bond, 501 discounted payback consideration, 409–410
Collateralization. See Overcollateralization IRR consideration, 427
Collection
MIRR consideration, 435–436
costs, 663
NPV consideration, 413 period. See Average collection period payback consideration, 404
Collection policies, 657–659 PI consideration, 418
benefits, 662
Cash flow (CF) timing, 425 change, analysis, 661–662 discounted payback consideration, 407–408
considerations, 663–664 IRR consideration, 428
costs, 662–663 MIRR consideration, 435
Commercial banks. See Domestic commercial banks; NPV consideration, 413
Foreign commercial banks payback consideration, 404
activities, regulation, 60–61 PI consideration, 418
services, 59–60 Cash flow to capital expenditures ratio, 812
Commercial paper, 28, 699–702 Cash flow to debt ratio, 813, 814
notes, 699
Cash inflows, 383 Commitment fee, 688 creation, 372
Committed line of credit, 696 present value. See Investment
Cash management, 627, 630–644
swaps, 100
questions, 648–650 Commodity Futures Trading Commission (CFTC), techniques, 640–643
Category killers, 763 Common equity, 479, 534 Caterpillar Financial Asset Trust 1997-A, 877–879
change, 957
Caterpillar Financial Services Corporation, 877 Common shareholders, available earnings, 137 CDs. See Certificates of deposit
Common shares outstanding, number, 780 Certainty equivalents, 477–478
Common size
NPV, 478 analysis, 747–748. See also Wal-Mart Stores Certificates of deposit (CDs), 28–29, 52. See also
balance sheet, 747 Banks; Eurodollars; Negotiable CDs; Yan-
income statement, 748 kee CDs
Common stock, 135, 336, 533 Certificates of indebtedness. See Indebtedness
beta, 296
CFAR ratio. See Fitch IBCA characteristics, 534–545 CFTC. See Commodity Futures Trading Commission
cost, 344
Chapter 11 bankruptcy, 610
definition, 30
Chattel mortgage, 708, 709 investment return, calculation, 221
Index
Common stock (Cont.) ratio, 506, 575 market value, 337
value, 507, 575 outstanding, 134
Convertibility, 496. See also Bonds; Preferred stock owners, 211
Convertible bond, 72, 249, 506 present value, 214
Convertible preferred stock, 575. See also Manda- question, 566–570
tory convertible preferred stock returns, 221–225
Copyrights, definition, 131 share price volatility, 521
Corporate bond, 248 shares, authorization, 539
Corporate democracy, 543–545 stated value, 134
Corporate entities, tax considerations, 833–837 valuation, 213–225
Corporate finance, 3 Common stock, cost, 320–326, 339–345
Corporate financing, 60 CAPM, usage, 324–326
Corporate income tax rates, 834–835 determination, 334
Corporate taxable income, 110–111 dividend valuation model, usage, 321–324
Corporations, 8–10 Company-specific risk, 295
taxes, 116
Comparative advantage, 935–936
Correlation
Compensating balance, 631, 686–688
coefficient
Competition, degree. See Markets definition, 288 Competitive advantage, 935–936
usage, 289
Competitive bidding underwriting, 64
definition, 288
Competitors, terms, 657 Correspondent bank, 642 Complementary projects, 363
Cost of capital. See Capital Component percentage, 722
Cost of goods sold (COGS), 136, 376, 671, 732, ratios, 742–744
959. See also Average day COGS Compound average annual return, 152
Cost of products sold, 136 Compound factor, 150
Costco Wholesale, 754 tables, 157–161
Counterparty, 86
Compound interest, 149, 680
risk, 87
Compounding. See Continuous compounding Coupon bonds, 232, 238–240, 845. See also Straight factor, 162
coupon
frequency, 152–154, 157 Coupon rate, 227, 229, 235, 338 periods, 150, 152
explanation, 498 number, determination, 163–164
Comprehensive income, 138 yield, relationship, 230 Comptroller of the Currency, 50
Coupons, 227, 498 Office, 60
payment, creation. See Equity linked coupon Concentration
payment
banking, 642 reset formula, 500 risk, 872
swaps. See Currency Conditional sale leases, 884
usage, 31
Connor, Gregory, 300
yield, 235
Conroy, Robert, 792
Covariance
Consensus earnings forecast, 783–784
definition, 284
Consensus EPS, 786–787
dividing, 289
Construction Covenants, 496, 511–512, 696 financing costs, 927
inclusion. See Long-term debt; Short-term debt phase. See Project financing
Coverage ratios, 722, 744–746. See also Capital Consumer price index (CPI), 756
expenditures; Cash flow; Fixed charge cov- Contingent projects, 363
erage ratio; Interest Contingent voting rights, 577
CPI. See Consumer price index Continuous compounding, 154
Cragg, J.G., 789
Contracting costs Credit. See Letter of credit; Revolving credit definition, 57
backup line, 710 reduction, 56–57
capacity, preservation, 889–890 Contracts. See Forward contracts; Underlying for
costs, 652–657 the contract
days, number, 659–660, 731 Controlled disbursements. See Disbursements
effective cost, 691 Conventional factoring, 707
enhancement, 867, 874–877. See also External Conversion. See Preferred stock
credit enhancement; Internal credit premium, 575
enhancement price, 507. See also Effective conversion price;
form, 874, 876 Markets; Stated conversion price
exposures. See Project financing
Index
Credit (Cont.) Davis, Henry A., 928, 929 extension, 655
Day, George S., 937 reasons, 652
Days sales outstanding (DSO), 659 impact objective, 924–925
Dealer
implicit cost. See Trade credit
credit, 651
letter. See Letter of credit functions. See Broker/dealer functions line, 696
market, definition, 36 period, 663
quality. See Collateral
definition, 31
ratings, 508–512 Debt. See Refinancing debt; Secured debt risk, 267
all-in-cost, 315 sources, 927
cost, 311–318, 338–339 spread, 70
displacement, dollar-for-dollar basis, 907 support. See Third-party credit support
equity, contrast, 583–587 terms, 657
Credit policies, 657–659 liability. See Project debt benefits, 662
offerings, yields, 338 change, 661–662
raising, cost, 334 analysis, 661–662
ratings, 508–512 considerations, 663–664
ratio, 585, 757 costs, 662–663
retirement, 502–506 establishment, 661–662
risk. See Bad debts Credit Suisse First Boston (CSFB), 519–520
servicing, 921
Creditors, role, 849 Debt obligations. See Short-term debt Creditworthiness. See Borrowers; Issuers
definition, 500
evaluation, 658
meeting, 138
Cross-currency pooling, 849 overview, 487–489 Crossing networks, 41
Debt securities, 271 Crossover discount rate, 415
interest promise, 231 Crossover rate, solution, 415
ranking, 212
CSFB. See Credit Suisse First Boston valuation, 227. See also Long-term debt securities Cumulative dividends, noncumulative dividends
Debtholder, role, 31 (contrast), 574
Debtor, 488
Cumulative preferred stock, 574 Debt-to-assets ratio, 585, 742, 746 Cumulative voting, 540–541
Debt-to-equity ratio, 743, 746, 761, 899 Currency
Declaration date, 546 bonds. See Dual currency bonds
Default risk, 258, 267–268, 646 coupon swaps, 854
Defeasance, 504–505 exchange risk, 923
Deferred annuities, valuation, 180–183 forward contracts, 850
Deferred charges, 128 futures contracts, 850
Deferred interest, 500–501 option. See Asian currency option; Average rate
bonds, 500
currency option; Lookback currency Deferred taxes, 133–134 option
liabilities, 114
contracts, 854–855
Deficit, 824
risk, 258, 275, 830–831 Degree of financial leverage (DFL), 263–264, 267 hedging, 850–855
Degree of operating leverage (DOL), 259–262, 267 swaps, 99–100, 851–854
Degree of total leverage (DTL), 266–267 agreement, 852
Delivery date, 84–85 market, 854
Delivery plan. See Three-day delivery plan transferring, restrictions, 640
Dell, cash flow, 141 Current assets, 128–130, 733–735
Delta Airlines, 946, 947 Current capital, 627
Denominations. See Bonds Current liabilities, 132–133, 733, 734. See also
Deposit institutions, 58–61 Other current liabilities
Depository institutions, 54 Current ratio, 733
Depository Institutions Deregulation and Mone- Custom leases, 895
tary Control Act of 1980 (DIDMC), 59 Customers
Deposits, present value calculation, 167 cash flow patterns, 657
Depreciation, 110, 131, 372–374, 808. See also goodwill, 668
Accumulated depreciation; Straight-line Cybercash, 53
depreciation
Index
Depreciation (Cont.) risk, interaction, 282–290 calculation, 732
usage. See Risk reduction comparison, 373
Diversified portfolio, 324 impact, 829–830
Dividend payout (DPO), 548–549 recapture, 117, 366–368, 387
ratio, 220
schedule, 904 Dividend reinvestment plan (DRP), 549 tax shield, 116, 372, 377
Dividend valuation method (DVM), 321 change, 388
Dividend Valuation Model (DVM), 213–220 timing, 116
estimates, reconciliation. See Capital Asset Pric- taxation purposes, 113–116
ing Model Derivative instruments, 32–33, 83, 522
usage, 340–341 usage. See Bonds
Dividend valuation model, usage. See Common Derivatives
stock
introduction, 83 Dividend-paying company, 835 questions, 104–106
Dividends, 533, 546–565. See also Adjustable rate Detachable warrant, 248, 520
dividends; Cash; Cumulative dividends; Fixed DFL. See Degree of financial leverage
dividends; Noncumulative dividends DIDMC. See Depository Institutions Deregulation
agency explanation, 557, 560 and Monetary Control Act of 1980
components, 603 Digicash, 53
contrast. See Cumulative dividends Dill, David A., 903
declaration. See Preferred stock Diluted EPS, 782
growth, 323, 344 Dilutive securities, 780–783
rate, 216, 334. See also Future dividends Direct cash flow. See Leasing
increase, 561
Direct investments, 54. See also Indirect invest- irrelevance theory, 557–558 ments
payment
Direct method, usage, 800 mechanics, 546–547 Direct paper, 701
question, 557–561 Direct quotation, 829
policy, 553–561 Directors. See Independent directors; Inside direc-
present value, 217 tors; Outside directors
puzzle, 561
Disbursements, control, 642–645
rate, 225
Discount. See Underwriter discount reset spread, 573 interest, 683–685
shift. See Stocks percentage, 653
signalling explanation, 557, 559–560 period, 694
tax preference explanation, 557–559 rate, 52, 205, 414, 429. See also Adjusted dis-
yield, 219–221, 224, 323, 558 count rate; Crossover discount rate
Dividends per share (DPS), 548 calculation, 238, 242, 597
growth, 553
window, 52 Dividends received deduction, 559 Discount factor tables, 157–161
Dividends-received deduction, 111–113 Discounted basis, usage, 28
Dodd, David L., 794 Discounted cash flow techniques, 439
DOL. See Degree of operating leverage Discounted payback
Dollar
consideration. See Cash flow; Cash flow riskiness;
interest, 712
Cash flow timing limit. See Capital budget consistency. See Owner wealth maximization
principal, 712
decision rule, 406
worth, 147
evaluation technique, 406–410 Dollar net interest spread, 869 period, 400, 405–410
Dollar-for-dollar gain/loss, 91 Discounting
Domestic commercial banks, 862 factor, 162
Domestic currency, 640 usage, 156
relative value, 275 Discounts, costs, 652–654
Domino effect, 664 Discretionary cash flow, 802
Doubtful accounts, allowance, 129 Dispersion, 455–456
Dowen, Richard J., 778 Distress cost, theory/practice reconciliation. See
DPO. See Dividend payout Interest
DPS. See Dividends per share Distributed profits, tax credit, 835
Drafts, 703
Distributions. See Stocks Dravid, Ajay, 552 Diversifiable risk, 258, 290. See also Nondiversifi-
Dreman, David N., 787 able risk
DRP. See Dividend reinvestment plan Diversification, 281–292, 828
DSO. See Days sales outstanding definition, 56, 288
DTL. See Degree of total leverage
Index
Du Pont Effective conversion price, 507 capital cost, example. See Capital cost
Effective cost, 687 capital, marginal cost estimation, 345
Effective interest cost, 692 system, 725–729
Effective interest rates, annualized interest rates Dual currency bonds, 497
(contrast), 185–187 Dually listed stocks, 39
Efficient frontier, 291 Dugan, Michael T., 815
Efficient markets, 44–46 Dun & Bradstreet, 658
definition, 44
Dutch auction, 500, 562 interaction. See Shares DVM. See Dividend valuation method; Dividend
EFTA. See European Free Trade Association Valuation Model
EI. See Employee involvement Eisner, Michael (bonus payment), 776 EAR. See Effective annual rate
Electronic cash, 53 Earnings
Electronic collection, 642 acceleration. See Financial reporting purposes
Electronic communications networks (ECNs), 41 analysis, 775
Elton, Edwin, 785, 792 questions, 796
Embedded option, 72, 503 forecasts. See Consensus earnings forecast
Employee involvement (EI), 670 management, potential, 776–780
Employment taxes, 107 measures, 775–776
EMS. See European Monetary System momentum, 785
EMU. See Economic and Monetary Union quality, 811
End-of-period cash flow, 165, 206, 426 reporting, 776
Engineering phase. See Project financing surprises, 777
Enron
market reaction, 778 bankruptcy, 928 torpedo, 785
effect. See Project financing yield, 792–793
Environmental Protection Agency (EPA), 362 Earnings before interest and taxes depreciation and
EOQ. See Economic Order Quantity amortization (EBITDA), 798–799, 814
EPA. See Environmental Protection Agency Earnings before interest and taxes (EBIT), 137, 723,
EPS. See Earnings per share 748, 776
Equipment
calculations, 726–728, 744–745 disposal, 387, 890–891, 913 determination, 808
leases, types, 884–887 Earnings per share (EPS), 590, 780–783. See also
obligation, 501 Actual EPS; Basic EPS; Consensus EPS;
setup charges, 382 Diluted EPS; Primary EPS
technical obsolescence, 923 contrast. See Shares
trust debt, 501 forecasting, 789–791
Equipment leasing, 883 indifference point, 592
flexibility/convenience, 891–893 usage, 220–221
impact. See Book earnings; Cash flow Eastman, Kent, 799
maintenance problems, elimination, 892–893 Easton, Peter D., 779
management, restrictions, 891 EBIT. See Earnings before interest and taxes
questions, 914–916 EBITDA. See Earnings before interest and taxes
regulatory ease, 892 depreciation and amortization
Equity, 29–30, 128, 134–136. See also Common E-cash, 53
equity; Owner equity; Shareholders; Stock- ECNs. See Electronic communications networks
holders
E-commerce leases, 892
beta, 466–468
Economic and Monetary Union (EMU), 832 specification, 467 Economic conditions, 452
book value, 134–136 Economic life, 382
contrast. See Debt classification, 360–361
cost, 323
Economic Order Quantity (EOQ) Model, 632, 666– calculation, 343 670
income, 603
Economic profit marginal cost, 331 accounting profit, contrast, 14–15
markets, 38–43 definition, 14
risk takers, 919 Economic value-added (EVA), 15
statement. See Shareholders Economic well-being, measurement, 13–14
swaps, 519
EDS, spinoff, 538 total debt-to-market value, 754 Edwards, J.D., 837
Equity linked coupon payment, creation, 519–520 EEC. See European Economic Community
Equivalent loan, 907. See also Leases Effective annual rate (EAR), 185–187, 206–207
concept, 908–910 calculation, 682–692
EU. See European Union
Index
Eurobonds, 495 Factor model. See Fundamental factor model; issue, cost calculation, 845–846
Macroeconomic factor model; Statistical market, 844–846
factor model Eurodollars, 52
Factor tables. See Compound factor; Discount fac- bonds, 845–846
tor tables
CDs, 29 usage. See Annuities Euroequity issues, 844
Factoring, 707–708. See Conventional factoring; Euromarket, 839
Maturity
European Central Bank, 832
Fahey, Liam, 937
European Economic Community (EEC), 832 Fair market value. See Leased asset European Free Trade Association (EFTA), 826, 828
Fama, Eugene F., 44, 76, 795 European Monetary System (EMS), 832
Farm Equip Corporation, 99 European option, 89
FAS. See Financial Accounting Standards definition, 473
FASB. See Financial Accounting Standards Board European Union (EU), 826, 832
FDIC. See Federal Deposit Insurance Corporation Euros, 832–835
Federal Deposit Insurance Corporation (FDIC), Euroyen bonds, 845
EVA. See Economic value-added Federal Home Loan Bank Board, 58 Evaluation techniques. See Capital budgeting
Federal income tax requirements. See True lease Event risk, 875
transactions Exchanges, 35–36. See also Stock exchanges
Federal Open Market Committee (FOMC), 50–51 rates, 828–830
Federal Reserve Board, 60 risk, 830–831
Federal Reserve System, 49–53 system. See Managed floating exchange rate
money supply, interaction, 51–53 system
Fiduciary duty, 18 Exchange-traded options, OTC options (contrast),
Field warehouse loan, 708–709 90–91
FIFO. See First in, first out Excise taxes, 107
Finance, mathematics, 147 Ex-dividend date, 547
questions, 188–192 Executive compensation, 19–21
Financial Accounting Standards Board (FASB), Executory costs, 896
505, 513, 925 Exercise price, 89, 245, 473, 521
exposure draft (2002), 926 Exercise value, 101
recommendations, 799 Exotic options, 855
requirement, 617 Expansion
Statement No. 13, 889, 896 financing ability, 138
Statement No. 94, 617 projects, 361–362
Financial Accounting Standards (FAS) No. 13, Expected cash flow, 276, 435, 456
896–897, 902, 913 Expected future cash flow, 416
implementation, interpretation (role), 899–900 Expected return, 275–277, 281–292, 341. See also
Financial advisers, 894 Portfolio
Financial analysis, 5 definition, 5
cash flow, usefulness, 811–816 impact, 257
integrative example. See Wal-Mart Stores questions, 302–306
introduction, 3 Expected risk-free rate, 344
issues, 847
Expected value, 456–458 questions, 24–26 Expenditures, 258
worth, 45
Expenses Financial asset, 861 cash flow, change, 376
Financial calculators, usage, 161–162, 204–205 change, 371, 377
Financial condition, statement, 127–128 Expiration date, 89
Financial decision making, asset pricing (interac- Export taxes, 107
tion), 301 Export-import quotas, 671
Financial derivatives, usage. See Interest rates Expropriation, 924
Financial distress, 584 External credit enhancement, 874
costs, 606
External market, 837, 839 probability, 612 relationship. See Capital structure
Fabozzi, Frank J., 219, 300, 791, 883, 918, 920, Financial futures, 84 922–924, 927
Financial insolvency, 924 Face value, 496
Financial institutions, 3, 53–67 definition, 28, 212
definition, 33
Facility leases, 895 money (cost), 49 Factor, definition, 707
questions, 80–82 services, 54
Index
Financial institutions (Cont.) Financing, source, 138 specialized collateralized borrowing arrangement,
Firm commitment, 62 711–713
First in, first out (FIFO), 129, 776 types, 66–67
Fitch IBCA, 509, 646, 701, 808, 871 Financial intermediaries, role, 54–58
CFAR ratio, 813–814 Financial leverage, 584, 723. See also Degree of
research reports, 808 financial leverage; Wal-Mart Stores
Fixed asset turnover ratio, 741 ratios, 742–747
Fixed charge coverage ratio, 745, 746 relationship. See Capital structure; Market risk
Fixed costs, 261
risk, relationship, 591–594 Fixed dividends, 573 Financial management, 3–5. See also International
Fixed exchange rate system, 829 financial management
Fixed-rate bonds, 515, 518 interaction. See Owner wealth maximization
floating-rate bonds, contrast, 514–515 introduction, 3
Fixed-rate payments, 515, 854 objective, 12–13
Floaters. See Inverse floaters questions, 24–26
Floating exchange rate system, 829 Financial markets, access (increase), 843
Floating lien, 708, 709 Financial modeling, 961–966
Floating rates, 488–490, 500 Financial planning, 933. See also Long-term financial
Floating-rate bonds, 518 planning
contrast. See Fixed-rate bonds budgeting, relationship, 937–961
Floats, definition, 641 practices, 966
Floor, 489
questions, 967–971 agreements, 101–103, 102 seasonal considerations, 946–948
motivation, 103 Financial position, statement, 128
planning, 708
Financial ratio analysis, 721 Flotation costs, 314, 327, 560 questions, 765–774
consideration, 346 usage, 748–754
inclusion, 320
Wal-Mart (1996-2001), example, 750
payment, 319
Financial ratios. See Wal-Mart Stores FOMC. See Federal Open Market Committee usage, 948
Ford Motor Company, 670 Financial reporting purposes, earnings acceleration,
Forecasted sales, usage, 950 866, 868–871
Forecasting. See Cash; Sales Financial results, example, 141
ability. See Analysts Financial risk, 258, 262–265, 467, 743
regression, usage, 941–945 cost, 335
Forecasts. See Analysts; Management impact, 558
error, 943
interaction. See Operating risk extrapolative statistical models, 789–792 Financial Services Modernization (FSM) Act of
Foreign commercial banks, 862 1999, 60
Foreign currency, 828–833, 840 Financial slack, 619–620
relative value, 275 Financial statements, 125. See also Pro forma finan-
risk, 848
cial statements Foreign exchange risk, 852, 923 filing. See Securities and Exchange Commission
Foreign market, 837 notes, 143–144
Foreign tax credit, 835 questions, 144–145
Form 10-K, 536
Financing. See Bank financing; Corporate financ-
Form 10-Q, 536
ing; Institutional financing; Long-term Forward contracts, 84–89. See also Currency; Long- take-out financing; Project financing;
dated forward contracts Secured financing; Unsecured financing;
contrast. See Futures contracts Individual financing
Forward market, 831 activities
Forward rates, 73–76 cash flow, 140
hedgeable rate, 76 usage. See Cash flow
Forward start interest rate swap, 523 agreement, 928
Foster, Benjamin P., 816 behavior, 618–619
Franks, Julian R., 905 costs, 801. See also Construction; Inventories
Free cash flow, 560, 805–806. See also Net free flexibility. See Business
cash flow
management. See Short-term financing calculation, 807–808 obtaining, speed, 892
usage, 812
sources, 811 Free trade, advocacy, 826 strategy, 934
French, Kenneth R., 794 subsidiaries, 862
Frequency distribution, 464–465 types. See Inventories
Fridson, Martin S., 802, 813
Index
FSM. See Financial Services Modernization Act of Global capital market, 839 1999
Global economy, 824–827 Full payout leases, operating leases (contrast), 887
Global equity market, 841–844 Fully amortizing loan, 491
Global market
Fundamental factor model, 300–301 financing, 837–846 Funding costs
funds (raising), motivation, 839–841 global market integration, implications, 841
integration, implication. See Funding costs reduction, potential, 866–867
GMAC. See General Motors Acceptance Corporation Funding sources, diversification, 866, 867
GmbH. See Gesellschaft mit beschrankter Haftung Funds
Gold, Barry, 928
all-in-cost, 845 Good faith money, 87 opportunity costs, 521, 662
Goods, credit/demand, 656–657 Future cash flows, 357. See also Expected future
Goodwill, 110. See also Customers cash flow; Investment
definition, 131
estimation, 474 Gordon, Myron, 215 present value, 224
Gosh, Chinmoy, 555 risk, 416
Gosman, Martin L., 777 uncertainty, 400
Government interference, 924 Future dividends
Graham, Benjamin, 794 growth rate, 220–221, 340
Gramm-Leach-Bliley (GLB) Act of 1999, 60 present value, 322
Grinblatt, Mark, 552 Future value (FV)
Gross domestic product (GDP), 945 annuity factor, 170–173
Gross domestic production (GDP), 756 calculation, 430, 434
Gross plant/equipment, 131 determination, 148–155
Gross profit, 136, 748 multiple rates, 154–155
margin, 736, 738 present value, contrast, 185
Gross spread, 62
value, 157 Growth rate. See also Bell Atlantic Futures
definition, 150
markets, 44 discussion, 162 price, 84
Gruber, Martin, 785, 792 trading, mechanics, 84–87
Guaranteed investment contract (GIC), 152 usage. See Risk
Guarantees. See Third-party guarantees Futures contracts, 84–89, 850. See also Currency
Guideline lease, 885 contrast. See Options
Gulf States Utilities, cash problems, 574 forward contracts, contrast, 87
Gultekin, M., 785 options, difference, 98 risk/return characteristics, 88
Half-year convention, 114 FV. See Future value
Hamada, Robert S., 466, 468 Hara, Lloyd F., 642
GAAP. See Generally accepted accounting principles Harris, Robert, 792 GATT. See General Agreement on Tariffs and Trade
Harris, Trevor S., 779 GDP. See Gross domestic product; Gross domestic
Hawkins, Chuck, 936 production
Hedgeable rates, 76. See also Forward rates General Agreement on Tariffs and Trade (GATT),
Hedging, 831. See also Currency; Interest rates; 826
Long-dated foreign currency exposure General commercial partnership, 833
Hidden costs, 652 General Electric
High grade, definition, 70 book value, 136
High quality. See Bonds earnings, 779
High-risk lending, 922 General Motors Acceptance Corporation (GMAC),
High-yield bonds, 510 664, 701
Hirshleifer Company General Motors, class E share (exchange), 538
facilities, replacement, 385–389 General obligation bonds, 32
integrative example. See Capital budgeting General partnerships, 7
Historical cost, 126 Generally accepted accounting principles (GAAP),
Historical data
125, 847 analysis, usage, 966 Geometric average return, 151, 202–203
usage, 945
Gesellschaft mit beschrankter Haftung (GmbH), 833 HMFC. See Hyundai Motor Finance Company Gibson Greetings, losses, 83
Hodges, Stewart D., 905 GIC. See Guaranteed investment contract
Holding cost, 632 Glass-Steagall Act, 60, 61
Hurdle rate, 469
GLB. See Gramm-Leach-Bliley Act of 1999 Hurley, William J., 219 Global banking, 60
Hyundai Motor Finance Company (HMFC), 664
Index
IAS. See International Accounting Standards
taxability, 72
Ibbotson, Roger, 300
value, 242
I/B/E/S information, 788 Interest on accumulated interest, 149 IBM
Interest on interest, 149 Global Financing, 863
Interest rates, 452, 489–490. See also After-tax manufacturer-lessor, 890
interest rate; Base interest rate; Nominal product development/introductions, 945
interest rate; Periodic interest rate sales, 944–945
calculation, 67, 183–187 IDRs. See International depositary receipts
contrast. See Effective interest rates Image-based processing, 644
costs (hedging), financial derivatives (usage), IMF. See International Monetary Fund
Implicit costs, 652, 690 determinants, 68 Implicit interest, 316
determination, 162–163 dependence, 317
reset formula, 488 Import taxes, 107
risk, 258, 271–273, 646 Income. See Interest; Net income
structure, 68–78 bonds, 501
swaps, 99, 516. See also Forward start interest concept. See All-inclusive income concept
rate swap determination. See Taxable income
term structure, 71–79 statement, 136–138. See also Common size; Pro
yields, interactions, 67–68 forma income statement
Interest-earning asset, usage, 91 bypassing, 132
Interest-free loan, 653 taxes, 107, 800
Interest-only loan, 491 Incorporation, articles, 8
Interest-only strip, 868–870, 879 Incremental cash flows, 363–364, 399
Intermediate debt, 487 Incremental OCF, calculation, 384–385
questions, 528–532 Indebtedness, 30–32, 488
Intermediate-term debt, 892 certificates, 495
Internal credit enhancement, 874 Indenture, 244. See also Blanket indenture
Internal market, 837 agreement, 495–496
Internal rate of return (IRR), 202, 308, 400, 420– Independent directors, definition, 8
429. See also Investment; Modified inter- Independent finance companies, 862
nal rate of return; Multiple IRR Independent projects, 363
capital rationing, 426–427 Indifference point. See Earnings per share
consideration. See Cash flow; Cash flow riski- Indirect investments, 54
ness; Cash flow timing Indirect method, usage, 800
consistency. See Owner wealth maximization Indirect quotation, 829
decision rule, 423–427 Individual banking, 59
evaluation technique, 427–428 Inflation, impact, 274–275
explanation, 911 Information processing cost
method, 441, 469 definition, 57
mutually exclusive projects, 424–426 reduction, 56–57
program, 911
Initial margin, 86, 87 representation, 422 Initial public offering (IPO), 539, 844
testing, 423
Inside information, definition, 45 Internal return objectives, meeting, 926 Insider directors, definition, 8
Internal Revenue Code (IRC), 108, 119–120, 900 Institutional banking, 59–60
Section 163, 598 Intangible assets, 131
Section 172, 604 Intercompany transactions, 836–837
Internal Revenue Service (IRS), 108, 114, 501, 900 Interest. See Add-on interest; Deferred interest;
requirements, 891 Discount; Single payment interest
Revenue Ruling 55-540, 901 cost. See Effective interest cost
Revenue Rulings, 902 coverage ratio, 744–746
Internally generated funds, 618 deductibility, capital structure (relationship), 598–
International Accounting Standards (IAS), 847 600
International depositary receipts (IDRs), 843–844 expected risk free rate, 341
International financial management, 823 expense, 801, 835–836
questions, 857–860 income, 800
International market, 839 payments, 249, 267, 497–501
International Monetary Fund (IMF), 826 tax deductibility, 405, 613
In-the-money option, 246 tax shield, 600–602. See also Present value of
Intrinsic value, 95. See also Options the interest tax shield
Inventories, 129, 375, 708–710 distress cost, theory/practice reconciliation, 616–
associated costs, 665–666 618
change, 957
Index
Inventories (Cont.) Issued shares, 535 cost, 666
Issuers
days, number, 671–672, 730, 733 costs, understanding, 78–79 financing
definition, 61
cost, 709–710 perceived creditworthiness, 70 types, 708–709
Issues
holding expected liquidity, 72 costs, 665
underwriting, traditional process. See New issues reasons, 664–665
ITC. See Investment tax credit management, 849 model. See Just-In-Time Inventory Model
Japanese Ministry of Finance, 838 reordering cost, 669
J.C. Penney, 754, 763 shortage, 667
Jensen, Michael, 608, 805 turnover
JIT. See Just-In-Time calculation, 749
Job Creation and Worker Assistance Act of 2002, 114 ratio, 671, 739, 741
Joint venture, definition, 11 Inventories management, 651, 664–672, 739
Jointly owned projects, reasons, 920 models, 666–671
Jones, Charles P., 777 consideration, 670–671
Jones, Frank J., 300 monitoring, 671–672
Junk bonds, 510
questions, 673–678 Just-In-Time (JIT) Inventory Model, 669–670 Inverse floaters, 500 Investing activities, usage. See Cash flow
Keefe, Victoria, 840 Investment. See Capital; Long-term investment;
KG. See Kommanditgesellschaft Reinvestment; Short-term investment
KGaA. See Kommanditgellschaft auf Aktien activities, 800
Kmart, 754, 763, 935 bankers, definition, 61
Kommanditgellschaft auf Aktien (KGaA), 833 banking, 61–64
Kommanditgesellschaft (KG), 833 cash flow, 201, 364–366, 387–389
Kwatinetz, Michael, 899 change, 411 differences, 415
Largay III, J.A., 815 cash inflow, present value, 410
Last in, first out (LIFO), 129, 776 companies, 66. See also Closed-end investment
Latané, Henry A., 777 companies; Open-end investment companies
Law of one price, 831 cost, 203
Lead time, 668
decisions, 195, 357–358 Leased asset, fair market value, 897 definition, 131
Leases. See Net leases; Non-tax-oriented leases; determination. See Cash
Synthetic leases; Tax-oriented true leases future cash flow, 412
accounting. See Capital leases; Operating leases IRR, 421
borrow-to-buy decision, comparison, 903–912 needs, 934
brokers, 894
opportunities, 270, 357, 474 classification, 896 payback period, 404
comparison. See Alternative leases present value, 164, 197–199
contract, 912
problems, 356–358 contrast. See Full payout leases; Single-investor profiles, 414–415
leases
projects, classification, 360–363
definition, 133
dependence classification, 362–363 equivalent loan, 908 screening/selection, 359
expenses, 737
strategy, 933 payments. See Minimum lease payments; Periodic value, 282
lease payments; Tailor-made lease payments yield, 421
reduction, 885 Investment returns, 195, 201–207, 222
programs, 894–895 even cash flows, usage, 203–204
qualifications, 901 no intermediate cash flows, usage, 201–203
term, 900
questions, 208–210 transactions. See True lease transactions uneven cash flows, usage, 204–205
lessees, financial reporting, 895–900 Investment tax credit (ITC), 118–119
types. See Equipment Investment-grade bonds, 70, 510. See also Nonin-
valuation, 903–912 vestment-grade bonds
approach, 911–912 IPO. See Initial public offering
model. See Net present value IRC. See Internal Revenue Code
Leasing. See Captive leasing IRR. See Internal rate of return
companies. See Specialized leasing companies IRS. See Internal Revenue Service
costs, 888–889
Index
Leasing (Cont.) Long call position, 92 direct cash flow, 903–907
Long futures, 88
valuation, 907–908 Long position, 88 process, explanation, 883–884
Long put position, 93 reasons, 888–893
Long-dated foreign currency exposure, hedging, 850 Lender
Long-dated forward contracts, 851 definition, 30
Longer-term borrowing, 891 relationship. See Risk
Long-run planning, 938 Lessees, 883
Long-term contract, 274 financial reporting. See Leases
Long-term debt, 336, 487, 617, 747, 926 Lessors, 883
change, 957
types, 893–894 covenants, inclusion, 958 Letter of credit, 697
current portion, 132 Level payment, 490
questions, 528–532 Leverage. See Degree of financial leverage; Degree
reliance, 763
of operating leverage Long-term debt securities, valuation, 226–245 effect, 591–592
Long-term financial planning, 961 quantification, 592–594
Long-term indebtedness, 132 Leveraged leases, 886–887
Long-term investment, 360 contrast. See Single-investor leases
Long-term liabilities, 133 Liabilities, 128, 132–134. See also Current liabili-
Long-term planning, 938 ties; Deferred taxes; Long-term liabilities
Long-term prepaid expenses, 131–132 LIBOR. See London Interbank Offered Rate
Long-term take-out financing, 922 Life insurance companies, 67
Long-term trends, projection, 945 LIFO. See Last in, first out
Long-term U.S. Treasury bond, yield, 469 Limited liability, 535
Lookback currency option, 855 impact, 612
Lublin, Joann S., 20 role, 606–609 Limited liability company (LLC), 10, 833
M1, components, 51 formation, 8
M2, components, 51 Limited partnerships, 7, 833. See also Master lim-
M3, components, 51 ited partnership
Maastricht Treaty, 826, 832 Line of credit. See Credit
Macroeconomic factor model, 300 Liquid assets, 729
MACRS. See Modified accelerated cost recovery Liquidation value, 572. See also Preferred stock
system
Liquidity, 729–736. See also Issues; Wal-Mart Mail interception, 644 Stores
Maintenance margin, 86 measures, 733–735
Maintenance problems, elimination. See Equipment ratios, 735–736, 815
leasing
risk, 646 Malatesta, Paul H., 545 theory, 77–78
Malkiel, Burton, 789 Listed stocks, 38. See also Dually listed stocks
Managed floating exchange rate system, 829 LLC. See Limited liability company
amount, 698 performance, evaluation, 935 definition, 488
personnel, 922 origination fee, 688
Manager motivation, 19–21 payments, determination, 908
Mandated projects, 361 Local taxes, 120–121
Mandatory convertible preferred stock, 576 Lockboxes
Margin. See Initial margin; Maintenance margin; advances, 644–645
Quoted margin; Variation margin networks, 644
requirements, 86–87 system, 641, 643–644. See also Nonbank lock-
Marginal corporate tax rate, 615 box systems
Marginal cost. See Capital; Equity; Stocks Logue, Dennis E., 543
Marginal efficiency. See Capital London Interbank Offered Rate (LIBOR), 99, 102,
Marginal tax rate, 109, 311, 601, 904 489–490
increase, 616
LIBOR-based financing, 854 Markel, F. Lynn, 389 one-year, 100
Market efficiency
quoted rates, 695 semi-strong form, 45 six-month, 516–518
strong form, 45 usage, 500
weak form, 45
London Stock Exchange, 842 Market risk, 295, 297, 324. See also Projects
Index
Market risk (Cont.) Miller-Orr Model, 632, 637–640 compensation, 470
limits, 637–639 contrast. See Stand-alone risk
Minimum lease payments, 897–899 estimation, 465–466
present value, 897 financial leverage, relationship, 466–468
MIRR. See Modified internal rate of return premium, 295, 325
M&M. See Modigliani & Miller Model Market value, 13, 336. See also Common stock;
MMDAs. See Money market deposit accounts Preferred stock; Shareholders
Model Business Corporations Act, 9 contrast. See Book value
Modern Portfolio Theory (MPT), 290–301 proportions, usage, 337
Modified accelerated cost recovery system (MACRS), Market value added (MVA), 15
113–114, 372 Marketability risk, 43
usage, 380, 385 Marketable securities, 129, 375, 627, 645–647
Modified internal rate of return (MIRR), 207, 269, questions, 648–651
400, 429–436 risk, relationship, 645–646
capital rationing, 439 types, 646–647
consideration. See Cash flow; Cash flow riskiness; Markets
Cash flow timing activity, statistical data, 839
consistency. See Owner wealth maximization competition, degree, 360
decision rule, 434–435 conditions, 452
evaluation technique, 435–436 conversion price, 575
mutually exclusive projects, 438–439 equilibrium, 200
Modigliani & Miller (M&M) Model, 594–595 financing. See Global market
Modigliani, Franco, 557, 594, 595 indicators. See Stocks
Monetary policy, 49 interaction. See Securities
Money. See Good faith money line. See Capital market line; Security Market Line
cost, 67–79. See also Financial institutions portfolio, 294
future, 53
purchases. See Open market purchases
supply
questions, 47–48 definition, 51 reaction. See Stocks
interaction. See Federal Reserve System securities. See Capital market securities; Money
time value, 219, 245, 400, 416, 469 segmentation theory, 78
Money center banks, 38 share, 763
Money market deposit accounts (MMDAs), 52 surveys, 945–946
Money market instruments Marking a position to market, 86
definition, 500
Marking to market, 86
usage, 500
Markowitz, Harry M., 292, 300 Money market securities, 699–705 Master leases, 892, 895
Money markets, 38 Master limited partnership, 10
funds, 66
Masulis, Ronald H., 552, 603 mutual funds, 52 Matching principle, 126
securities, 28–29 Material adverse change, 702
Monitoring costs, 560 Mattel, Inc., 679–680
Monsanto, sweetener division sale, 936 Annual Reports (1991 / 2001), 359
Moody’s Investors Service, 508–509, 646, 701, 871 Maturity. See Original maturity; Term to maturity;
Mortgage, 501
Yield-to-maturity Motorola, cash flow, 141 approaching. See Bonds
Multifactor risk models, 299, 340 date, 497
Multinational companies, 827 definition, 28
Multinational firms, 827–828 factoring, 707
Multiple IRR, 428–429 intermediation, 55–56
Multiple rates. See Future value length. See Borrowing
Murphy, Mary G., 777 spread, 71
Mutual funds, 66. See also Money markets value, 228, 242, 496
Mutual savings banks, 58 definition, 28
Mutually exclusive projects, 363, 419. See also McConville, Daniel J., 814
Internal rate of return; Modified internal McNichols, Maureen, 552
rate of return Meckling, William H., 608
MVA. See Market value added Merchandise credit, 651
Myers, Stewart C., 471, 619, 903, 907 Merchant banking, 61 Mergers, 763
NAFTA. See North American Free Trade Agree- Microsoft Corporation, EPS, 783
ment
Miller, Merton H., 557, 559, 594, 595, 603, 637 National Association for Security Dealers Auto- Model. See Modigliani & Miller Model
mated Quotation (NASDAQ), 540
Index
National Conference of Commissioners of Uniform Notional amount, 98–102 State Laws, Model act, 9
Notional principal amount, 98 National market, 837
NPV. See Net present value Nationally Recognized Statistical Rating Organi-
NRSROs. See Nationally Recognized Statistical zations (NRSROs), 508, 571, 701–702
Rating Organizations NCFs. See Net cash flows
NutraSweet Company, 936 Negotiable CDs, 28–29
NYSE. See New York Stock Exchange Net accounts receivable, 129 Net cash flows (NCFs), 379
Observed capital structures, 617–618 Net free cash flow (NFCF), 808–811
Obsolescence, 360 Net income, 748, 958
risk, 890–891
Net interest spread, 868 elimination, 913 Net leases, 884. See also Triple net lease
Occupational Health and Safety Agency (OSHA), Net operating cycle, 630, 733
Net operating loss, 604 OCFs. See Operating cash flows carrybacks, 119–120
OEA, Inc., 811–813 Net plant assets, 131
OECD. See Organization on Economic Cooperation Net plant/equipment, 131
and Development Net present value (NPV), 400, 410–412, 904. See
Off-balance sheet, 924 also Certainty equivalents; Strategic NPV
Off-balance sheet SPVs, 928 consideration, 416. See also Cash flow; Cash
Offene Handelgellschaft (oHG), 833 flow riskiness; Cash flow timing
Office of Thrift Supervision, 58 consistency. See Owner wealth maximization
Office rent, 737
decision rule, 412–416 Offshore leases, 895 evaluation technique, 412–414
Offshore market, 839 lease valuation model, 912
oHG. See Offene Handelgellschaft technique, 475, 912
Ohlson, James A., 779 Net profit margin, 727–728, 738
Open market operations, 52 Net working capital, 374, 729
Open market purchases, 562 change, 388
Open-end investment companies, 66 Net working capital-to-sales ratio, 734, 735
Operating activities, 374 Nevitt, Peter K., 883, 918, 920, 922–924, 927
usage. See Cash flow New issues, underwriting (traditional process), 61–62
Operating cash flows (OCFs), 260, 364, 370–374, New York Stock Exchange (NYSE), 540, 842, 844
NFCF. See Net free cash flow calculation. See Incremental OCF Nike, 946, 947
change, calculation, 377–379 Nominal interest rate, 183–184
reduction, 266
Nominal rate, 682 Operating costs. See Wal-Mart Stores Nonbank lockbox systems, 644
Operating cycle, 729–733, 735. See also Net oper- Non-cash expenses, 808
ating cycle Noncumulative dividends, contrast. See Cumulative
Operating earnings, 137, 723 dividends
taxes, deductions, 810 Noncumulative preferred stock, 574
Operating income, 137 Noncurrent assets, 128, 130–132
Operating leases, 897. See also Cancelable operat- Nondiversifiable risk, 258, 290
ing lease
Nondividend-paying stocks, 558 accounting, 897 Noninvestment-grade bonds, 70, 510
contrast. See Full payout leases Nonoperating cash flows, 951
Operating leverage, 265, 611–612. See also Degree Nonparticipating preferred stock, contrast. See
of operating leverage Participating preferred stock
Operating loss carrybacks. See Net operating loss Nonresident corporations, 121
Operating profit, 137 Non-Rule 144A offerings, 66
margin, 726, 737–738 Non-tax-oriented leases, 884–885, 888, 913
Operating project. See Turn-key operating project Nontaxpaying position, 905
Operating risk, 258, 259, 357, 611 Non-traditional maturities, 497
financial risk, interaction, 265–267 Non-U.S. exchange-listed companies, 847
Operational budgeting, 938 Non-U.S. taxation, 121–122
Opportunity cost, 91, 362, 370. See also Cash; No-par stock, 535
Funds
Norsk Data, 842 Optimal capital budget, 333 North American Free Trade Agreement (NAFTA),
Optimal capital structure, 614 826–828
Options, 89–98, 576–577. See also At-the-money Notes, 495–526. See also Secured notes
option; In-the-money option; Real options bonds, distinction, 31
cash flow characteristics, 211–225 holder, role, 31
challenges, 476–477
Index
Options (Cont.)
trading, 318
contracts. See Currency Participating preferred stock, nonparticipating contrast. See Exchange-traded options
preferred stock (contrast), 574–575 exercising, 246
Partnerships, 7–8. See also General partnerships; expiration, 472
Limited partnerships; Master limited part- futures contracts, contrast, 91
nership
inclusion, 71 Patents, definition, 131 intrinsic value, 96–97
Payables, days (number), 732 markets, 44
Payback
premium, 89 consideration. See Cash flow; Cash flow riski- price, 89
ness; Cash flow timing components, 95–97
consistency. See Owner wealth maximization purchase. See Call options; Put options
duration. See Post-payback duration return characteristics, 91–95
period, 400, 402–405. See also Discounted pay- risk characteristics, 91–95
back; Investment time premium, 97
decision rule, 403 usage. See Risk
evaluation technique, 404 valuation, 211, 245–250
writer, 89 delinquencies, 873 writing/selling. See Call options; Put options
mechanism
Ordering cost, 665–666 definition, 57 Ordinary annuity, 170, 179
providing, 57–58 present value, determination, 181
structure, 873
Organization on Economic Cooperation and Devel- Payoff period, 402 opment (OECD), 836
Payout ratio, 553 Original maturity, definition, 28
P/E. See Price-earnings Originators, 863
Pecking order, 619 Orr, Daniel, 637. See also Miller-Orr Model
Penny stocks, 40, 552 OSHA. See Occupational Health and Safety Agency
Pension funds, 66 Oster, Patrick, 936
Percent-of-sales method, 959–960 Other assets, 128
Perfect market, 557, 595 Other current liabilities, 130
Performance shares, 19 Out-of-pocket costs, 619
Periodic interest rate, 154 Out-of-the-money options, 782
Periodic lease payments, 903 Outside directors, 543
Periodic payments, 925 definition, 8
Permanent working capital, 679 Outstanding shares, 536
Perpetual annuity, present value, 178 Overcollateralization, 875
Perpetual preferred stock, 318, 572 Over-depreciating, 117
Perpetual warrants, 520 Overnight repo, 711
Perpetuity, definition, 177 Over-the-counter (OTC) contract, 99
Personal taxes, capital structure (relationship), 602– Over-the-counter (OTC) instrument, 87
Over-the-counter (OTC) markets, 35–36, 40, 90, 855 Peterson, David, 552, 559 Over-the-counter (OTC) options, contrast. See
Peterson, Pamela, 552, 559 Exchange-traded options
Pettit, Richardson, 555 Over-the-road vehicles, tax-oriented TRAC lease,
P&G. See Procter & Gamble 884
Philbrick, D.R., 788 Owner equity, 583
Physical deterioration, 360 Owner wealth, increase, 413
PI. See Profitability index Owner wealth maximization, 357–358, 420, 661,
Pier 1 Imports, losses, 83 936–937
Planning process, evaluation, 935 discounted payback consistency, 410
Pohlman, Randolph A., 389 financial management, interaction, 16–17
Poison puts, 506
IRR consistency, 428 Political hurdles, reduction, 828 MIRR consistency, 436
Political risk, 848 NPV consistency, 413–414
Portfolio. See Diversified portfolio payback, consistency, 404
asset
PI consistency, 418–420 standard deviation, 287 weight, 287
Palmon, Dan, 899
definition, 280
Par value, 134, 496, 535. See also Bonds; Collat- diversification, 454 eral; Preferred stock
expected return, 298 definition, 28
risk, 258, 290–292
Index
Portfolio (Cont.) Price elasticity, 656 size, 290–292
Price-earnings (P/E) ratio, 218, 792–795 standard deviation, 287–288
Primary EPS, 782 variance, 287
Primary markets, 33–35 Position, liquidation, 85
definition, 35
Positive net present value projects, 805 regulation, 62–647 Post-auditing, 935
Prime. See Bonds
Post-completion audit, 360
Prime rate, 695
Post-payback duration, 403
Principal
Post-retirement, 133 amount, 226–227 PPP. See Purchasing power parity
definition, 17, 28, 488 Precautionary balance, 631
payments, 249, 267 Preemptive rights, 542
repayment. See Scheduled principal repayment offering, 65
Principals (owners), 560 Preferred dividend arrearages, 574
Private corporation, 536 Preferred equity, cost determination, 318
Private placement, 33. See also Securities Preferred habitat theory, 77–78
definition, 65
Preferred stock, 336, 571. See also Auction; Con- Privately-held corporation, 536 vertible preferred stock; Cumulative pre-
Pro forma balance sheet, 955 ferred stock; Noncumulative preferred
Pro forma financial statements, 955, 965 stock; Perpetual preferred stock; Remar-
Pro forma income statement, 955 keted preferred stock
Probability distribution, 279, 955 call features, 576–577
comparison, 459 callability, 576
specification. See Taxation/taxes contrast. See Participating preferred stock
Procter & Gamble (P&G) conversion, 576–577
capital investment, 807–808 convertibility, 575–576
cash flows, 800–802 corporate use, 578–579
relationship, 807 cost, 318–320, 339
depreciation/amortization, 807 cumulative feature, 212
fiscal year, 800, 809 definition, 30
income taxes, 810 dividends, 211, 776
liquidation value, 572 change, 737 market value, 337
efficiency, achievement, 828 origination, 571
Professional corporation, 10 packaging features, 578
Profit margin. See Gross profit; Net profit margin par value, 572
ratios, 736
questions, 580–582 Profitability. See Wal-Mart Stores share, value, 225–226
ratios, 736–739, 815 valuation, 225–226
Profitability index (PI), 400, 416–420 voting rights, 577
consideration. See Cash flow; Cash flow riskiness; Premium. See Market risk; Risk
Cash flow timing receiving. See Calls
consistency. See Owner wealth maximization value, 228
decision rule, 417 Prepaid expenses, 130
evaluation technique, 417–420 Prepayment risk, 258, 270
method, 438
Present value of the interest tax shield (PVITS), Profit/loss (P&L) statement, 136 601–602
Progressive tax, 109 Present value (PV), 13, 148, 364, 436. See also
Project debt, liability, 925 Cash flows; Future dividends; Investment;
Project financing, 917 Minimum lease payments
benefits, 927
annuity construction phase, 921 factor, 170–173, 422
credit exposures, 920–922 table, usage, 421
definition, 918–919 calculation, 182. See also Deposits
disincentives, 928 contrast. See Future value
engineering phase, 920, 921 determination, 155–162. See also Ordinary
Enron, effect, 928–929 annuity
key elements, 922–923 projects. See Positive net present value projects
operations, 921 usage. See Perpetual annuity
questions, 930–931 value, 157
risk phases, 920–921 Prevalence, 11–12
start-up financing, 920, 921
Index
Projected benefit obligation, 133 Liquidity; Profitability; Return-on-invest- Projects. See Complementary projects; Contingent
ment ratios projects; Expansion; Independent projects;
analysis, 812–814. See also Financial ratio anal- Mandated projects; Replacement projects
ysis
cash flows, 389 classification, 721–723 delay, risk, 923
selection/interpretation, 753–754 economics, 920
Real estate investment trust (REIT), 66 failures, causes, 923–924
Real options, 471–474 finance, 917
example, 474–476 market risk
Real options valuation (ROV), 471–472 measurement, 465–469
Realized returns, 235–237 required return, 470
Real-world capital markets, 841 risk, 434, 442
Receivables
assessment, 478–480 assignment, 706 measurement, 455–469
averages, 660
stand-alone risk, measurement, 455–465 management, 651–664 tracking, 359
questions, 673–678 Promoters, 918
Record date, 546
Property taxes, 896
Red herring, 63
Property-casualty insurers, 67 Reference rate, 99, 488 Prospectus, analysis, 62–63
Refinancing debt, 615 Proxy
Refunding. See Bond issues card, 540
Registered bonds, 495 fight, 545
Public corporation, 536 calculations, 343 definition, 9
usage. See Forecasting Public warehouse loan, 709
Regulated entities, 866 Publicly held corporation, definition, 9
Regulation D, 65
Publicly-held corporation, 536 Regulatory hurdles, reduction, 828 Publicly-traded corporations, 537
Regulatory problems, 927 Purchase option, absence, 897
Reinvestment
Purchases, days (number), 949 annual percentage, 432–433 Purchasing power parity (PPP), 831–832
assumption, 205–207 variation, 832
plans. See Dividend reinvestment plan Purchasing power risk, 258, 274–275, 646
rate risk, 268–270, 646 Pure auction process, 36
risk, 258, 268, 513 Pure expectations theory, 77
REIT. See Real estate investment trust Pure-play, usage, 468–469
Relevant risk, 293 Put options, 89, 247
Remarketed preferred stock, 573 definition, 473
Remote disbursement, 642 purchase, 93–95
Rendleman, Richard J., 777 writing/selling, 95
Repatriation, restrictions, 848 Put position. See Long put position; Short put position
Repayment schedule, 490–494 Put provision, 72, 502, 505–506
Replacement projects, 361–362 Putable bond, 249, 505
Repo. See Repurchases PV. See Present value
Repurchases. See Stocks agreement (repo), 705, 711–713 Qualcomm, 777
rate, 711
Quality spread, 70
date, 711
Quantum Corporation, Annual Report (1996), 358
price, 711
Quick ratio, 734 Required rate of return (RRR), 213, 221, 225, 453. Quoted margin, 488
See also Returns explanation, 357, 405 Railroads, creditors, 571
usage, 315
Range. See Cash flow risk Required return. See Project market risk definition, 278
Research and development (R&D), 474–477 Rating. See Credit; Debt
Reserve account, 875 agencies, 508
Reserve funds, 876–877 considerations. See Asset-backed securities
Reserve requirement, 52 assigning, factors, 510–512
Reset
systems. See Bonds
date, 488
Ratios. See Activity ratios; Component percentage
period, 488
ratios; Coverage ratios; Financial leverage; spread. See Dividends
Index
Residual loss, 19
neutrality, 281
Residual value, 885 periods, lenders (relationship), 921–922 Resources
phases. See Project financing access, 828
preference, 280 allocation, 937
premium, 69–72, 294, 596–598 Restricted stock grant, 19
explanation, 453 Retained earnings, 135–138, 320, 327
representation, 325 Retained funds, 321
questions, 302–306 Return on assets, 723–724, 727–728
reduction, diversification (usage), 56 Return on equity, 724
relationship. See Capital budgeting; Cash flow; Return on investments, 431. See also Investment
Financial leverage; Marketable securities returns
takers. See Equity Return-on-asset ratios, 723–724
time value, 219 Return-on-investment ratios, 723–729
Risk-adjusted rate, 469–471 Returns. See Bonds; Common stock; Realized
Risk-free asset, 293 returns; Wal-Mart Stores
Risk-free rate. See Expected risk-free rate characteristics. See Futures contracts; Options
Roll, Richard, 300 covariance, 289
Ross, Stephen A., 299 definition, 151
ROV. See Real options valuation form, 201
RRR. See Required rate of return internal rate. See Internal rate of return
Rule 144A offerings, 66. See also Non-Rule 144A objectives, meeting. See Internal return objec-
offerings
tives Rule 415 registration, 63 rate. See Internal rate of return; Modified inter-
Ryngaert, Michael, 545 nal rate of return; Required rate of return ratio, 722
SA. See Societe annonyme required rate, 219–220
Saatchi & Saatchi, 842 risk, interaction, 275–279
Safety stock, 637, 668 outcomes, standard deviation (usage), 277–
Salary, compensation, 19 279
Sale-and-leaseback transactions, 895 Revenue bonds, 32
Sales
Revenue Rulings. See Internal Revenue Service
cost, 136
Revenues, 258 forecasting, 940–946 change, 370–371, 377, 384
generation, 136 generation, 136
growth, 944
Reverse stock split, 551 leases. See Conditional sale leases Revolving credit, 696
price, changes, 737 agreement, 696
risk, 258, 357, 611 Ricardo, David, 935
volume, changes, 737 Ricks, W.E., 788
Sales to inventory ratio, 739 Rights
Salomon Smith Barney, 928 definition, 248
Sampling distribution, 465 offering, 542. See also Preemptive rights
Sam’s Clubs, 754
Risk. See Cash flow risk; Interest rates; Purchasing Samson, William D., 815 power risk; Reinvestment; Relevant risk
Santiago, Emmanuel S., 389 assessment. See Projects
SARL. See Societe a responsabilitie limitee aversion, 199, 280–281
Savings and loan (S&L) associations, 58 bearing, return/tolerance, 280–281
Savings deposit, 52 characteristics. See Futures contracts; Options
Scale differences, 438–439 classification, 361–362
Scenario analysis, 461 compensation, 301
Scheduled principal repayment, 491 contrast. See Stand-alone risk
Schlitz Brewing Company, 937 control instruments, 32
Scholes, Myron, 472, 559 explanation, 5, 257, 451–452
Scott Paper, 842
hedging. See Currency SCPA. See Societe en commandite par actions impact, 257–275, 281–292
SCS. See Societe en nom collectif incorporation. See Capital budgeting
Sears Roebuck and Company, 754, 763, 939–940 interaction. See Diversification; Returns
Seasonal considerations. See Financial planning; levels, 478
Strategy planning management
SEC. See Securities and Exchange Commission futures, usage, 88–89
Secondary markets, 33–35 options, usage, 97–98
definition, 34–35 measurement. See Project market risk; Projects
Secured bonds, 31 models. See Multifactor risk models
Secured debt, 489
Index
Secured financing, 705–710
price
Secured loan, 690 earnings per share (contrast), 14–15 Secured notes, 31
efficient markets, interaction, 16 Securities, 27–29. See also Asset-backed securities;
repurchase. See Targeted share repurchase Dilutive securities
stated value, 134 cash flow characteristics, 211–225
Sharpe, William F., 292, 293 creation. See Synthetic fixed-rate security; Syn-
Shiller, Robert J., 793 thetic floating-rate security
Short call position, 93 markets, 33–46
Short futures, 88
definition, 28 Short position, 88 interaction, 27
Short put position, 95 private placement, 65–66
Short-term basis, 849 questions, 47–48
Short-term construction lenders, 922 valuation, 211. See also Long-term debt securi-
Short-term debt
ties covenants, inclusion, 958 questions, 251–256
obligation, 487 Securities Act of 1933, 62, 65
Short-term financing, 939 Securities and Exchange Commission (SEC), 10,
actual costs, 710–711 127, 495, 701
costs, 680–689 financial statements, filing, 537
management, 679 petition, 544
questions, 714–718 regulations, 62, 892
Short-term investment, 360, 954 Rule 14a-6/14a-7, 540
Short-term loans, 132 Securities Exchange Act of 1934, 65, 540
Short-term security, 701 Regulation 14A, 540
Sight draft, 703
Rule 14a-8, 544 Signalling explanation. See Dividends Securitization, 32
Silver, Andrew A., 861 absence, 871
Simple interest, 149, 680 Security. See Bonds
Simulation analysis, 464–465, 954 Security Market Line (SML), description, 296
Single payment interest, 683 Seller/servicer, quality, 871, 873
Single payment loan, 683, 695 Semiannual U.S. coupon payments, 852
Single-investor leases, 913 Senior bond classes, 865
leveraged leases, contrast, 886–887 Seniority. See Bonds
Sinking fund, 503–504, 577–578, 745 level, 710
call price, 504, 577 Senior-subordinate structure, 865, 875–876
payments, 267
Sensitivity analysis, 461–463, 954
provision, 502
usage, 460 requirement, 503 Serial debt issue, 496
Size effect, 299
Servicers. See Backup servicer Small-ticket retail market, 888 Services, credit/demand, 656–657
Smith, Kimberly J., 391 Servicing, 863–864
SML. See Security Market Line Settlement date, 84–85
Social responsibility. See Shareholders Setup charges. See Buildings; Equipment
Societe a responsabilitie limitee (SARL), 834 Set-up expenditures, 364
Societe annonyme (SA), 834 Seward, James K., 543
Societe en commandite par actions (SCPA), 834 Share price volatility. See Common stock
Societe en nom collectif (SCS), 834 Shareholders, 533
Software packages, 965 available earnings. See Common shareholders
Sole proprietorships, 6 base, increase, 843
S&P. See Standard & Poor’s definition, 8, 29
SPE. See Special purpose entity equity, 128
Special purpose entity (SPE), 917 impact. See Balance sheet
consolidation, 926 market value, 13
Special purpose vehicle (SPV), 864, 867, 917. See statement, 143
also Off-balance sheet SPVs rights plans, 545
Specialist, definition, 36 wealth maximization, 21, 961
Specialized collateralized borrowing arrangement. capital, marginal cost, 333
See Financial institutions social responsibility, 22–23
Specialized leasing companies, 893 Shares. See Outstanding shares; Performance shares
Speculative balance, 631 definition, 8
Speculative bonds, 510 number, 535–536. See also Treasury stock
Sponsored projects, reasons, 920 authorization, 135
Sponsors, 918
issued/outstanding, 135 Spot rates. See U.S. Treasury
Index
Spreadsheet programs, usage, 313 Straight coupon, 227, 498 SPV. See Special purpose vehicle
bond, 228–234 Staggered board of directors, 541
Straight-line depreciation, 114 Stand-alone risk
Strategic NPV, 472 market risk, contrast, 453–454
Strategic plan, 933 measurement. See Projects
Strategy, 935–937 Standard & Poor’s (S&P), 509, 646, 871
comparative/competitive advantages, 935–936 500 Stock Index, 342, 519, 788
Strategy planning, 933 Daily Stock Price Record, 339
questions, 967–971 P/E, usage, 783
seasonal considerations, 946–948 Standard deviation, 457. See also Cash flow risk
Strike price, 89, 246, 473 calculation, 279–280, 288
Structured finance transactions definition, 278
borrowing, 861 interaction. See Variance
questions, 880–881 interpretation, 465
definition, 861–863 usage. See Returns
example, 877–879 Standard lease, provisions, 894–895
illustration, 863–865 Standby underwriting arrangement, 64
usage, reasons, 865–871 Start-up period, 924
Structured financing, 861 Start-up phase. See Project financing
Structured note, 516 State taxes, 120–121
Subordinate bond classes, 865 Stated conversion price, 506
Subordinated bond, 502 Stated rate, 682
Subscription price, 64 Stated value, 535, 572. See also Common stock; Shares
Succursale, 834
Statement of Financial Accounting Standard (SFAS)
Sunk cost, 365
No. 4, 526 Supervoting shares, 539 No. 52, 847
Swaps, 98–101. See also Commodity; Currency No. 76, 505
swaps; Interest rates No. 95, 799
interpretation, 100–101 No. 109, 111
Statistical data. See Markets Swary, Itzhak, 555 Statistical factor model, 300
Syndicated bank loan, 30 Statistical measures. See Cash flow risk
Synthetic fixed-rate security, creation, 516–518 Statistical models, extrapolation. See Forecasts
Synthetic floating-rate security, creation, 516–518 Stewart III, G. Bennett, 15
Synthetic leases, 902 Stickney, C.P., 815
Systematic risk, 295. See also Unsystematic risk Stockbrokers, commission, 223 Stockholders, 533
Tailor-made lease payments, 891 equity, 128
Take-and-pay contract, 925 Stock-out, allowance, 668
Take-or-pay contract, 925 Stocks. See Classified stocks; Dually listed stocks;
Target Stores, 754, 763 Listed stocks; Penny stocks
Targeted block repurchase, 563 appreciation right, 19
Targeted share repurchase, 563 classification, 538–539
Tax credit. See Distributed profits distributions, 550–553
illustration, 904 market reaction, 552–553
Tax expense, deferment, 810 dividends, 550–551
Tax Reform Act of 1986, 604, 834 shift, 551
Taxable income, determination, 835–837 exchanges, 39
Taxation/taxes, 107, 848. See also Deferred taxes; grant. See Restricted stock grant
Local taxes; Non-U.S. taxation; Progres- market indicators, 41–43
sive tax; State taxes option, 19
prices, 779 capital structure, relationship. See Personal taxes purchasing right, 542–543
change, 371–374 repurchases, 561–565
clientele, 559
methods, 561–563 code, change, 391 reasons, 563–565
considerations, 927. See also Corporate entities return, sensitivity, 341
credits, 118–119, 364 schedule, marginal cost, 330
deductibility. See Interest split, 551–552. See also Reverse stock split
havens, 122, 834 valuation. See Common stock; Preferred stock
law. See U.S. taxation law Stojanovic, Dusan, 702
preference explanation. See Dividends
Index
Taxation/taxes (Cont.) Treaty on European Union of 1992, 832 purposes. See Depreciation
Trigeogis, Lenos, 477 questions, 122–124
Triple net lease, 884 rates. See Average tax rate; Corporate income
True lease transactions, federal income tax require- tax rates; Marginal tax rate; U.S. federal
ments, 900–902 taxation rates
True return, 152
probability distribution, specification, 463 Trust companies, 66 relationship. See Capital structure
Trust Indenture Act of 1939, 495 shield, 367. See also Depreciation; Interest;
Trust receipts loan, 708 Present value of the interest tax shield;
Trustee, definition, 66 Unused tax shields
Turn-key operating project, 922 Tax-oriented leases, 888. See also Non-tax-ori-
Turnover rate, 761 ented leases
Turnover ratios, 722, 815. See also Accounts receiv- Tax-oriented TRAC lease. See Over-the-road vehicles
able; Fixed asset turnover ratio; Inventories; Tax-oriented true leases, 885–887, 900, 913
Total asset turnover ratio T-bills. See U.S. Treasury Technical obsolescence. See Equipment
Umapathy, Srinivasan, 966 Technology. See Untested technology
Temporary working capital, 679 degree, 451–452 Tender offer, 561–562
Uncommitted line of credit, 696 Term loans, 489–494
Underlying asset, value, 472 Term repo, 711
Underlying for the contract, 84 Term structure. See Interest rates
Underwriter discount, 62 shape, determinants, 76–78
Underwriting. See Competitive bidding underwriting Term to maturity, 70–71, 496–497
arrangement. See Standby underwriting arrange- Terminal value, 436
ment
Texaco, bankruptcy, 610
definition, 34
Therrien, Lois, 936 process, variations, 64 Thin capitalization, 836
service, 54
Third-party credit support, 862 standards, 863 Third-party guarantees, 862, 874–875
traditional process. See New issues Three-day delivery plan, 547
Uneven cash flows, 168–170 Tiers, 702
Unsecured financing, 689–705 Time deposit, 52
Unsecured loan, 690 Time draft, 703
Unsystematic risk, 295 Time patterns, usage. See Cash flow
Untested technology, 922 Time premium, 95. See also Options
Unused tax shields, 603–605 Time to maturity, 245
U.S. coupon payments. See Semiannual U.S. cou- Time value. See Cash flow; Money; Risk
pon payments Time Warner, offering, 543
U.S. federal taxation rates, 108–118 Times interest-covered ratio, 744
U.S markets, 36–37 Timing, 780, 781
U.S. taxation law, 108 Titman, Sheridan, 552
U.S. Treasury
Total asset turnover ratio, 740–741 bills (T-bills), 28, 710 Total debt-to-assets ratio, 742
bond, purchase, 268 Total quality control (TQC), 670
debt issuer, 69
Total risk, 453 securities. See Zero-coupon Treasury securities Toys ’R Us, 672
spot rates, 73
TQC. See Total quality control U.S.-dollar-denominated debt, 851 Trade credit, 651, 690–695, 763
Useful life, 360
cost, 690–692 implicit cost, 655–656
Valuation allowance, 111 Tradeoff theory, 617–618
Valuation equation. See Basic valuation equation Tranches, 844, 864
Value Line information, 788 Transactions
Value Line Investment Survey, 343, 791, 798 balance, 631
Van Arsdell, Paul M, 937 cost, 633
Vardharaj, Raman, 300 avoidance, 849
Variable costs, 261 demand, 68
Transfer prices, 836–837 square root, 279 Treasury stock, 135, 536
standard deviation, interaction, 279–281 shares, number, 135
Variation, coefficient, 460, 592. See also Cash flow risk
Index
1007
Variation margin, 86 Weighted cost of capital (WCC), 326–327 Vaughan, Mark D., 702
What if scenario, 462 VBernard, Victor, 792
Williams 5&10
Vendor leases, 895 expansion, 380–385 Visibility, increase, 843
integrative example. See Capital budgeting Volatility. See Cash flow; Common stock
Williams, John Burr, 215 estimation, 475, 476
Woolridge, J. Randall, 555 Voting. See Cumulative voting; Preferred stock
Working assets, 128 rights, 534, 539–541. See also Contingent vot-
Working capital, 356, 627, 679, 729. See also Net ing rights
working capital; Permanent working capi- tal; Temporary working capital
WACC. See Weighted average cost of capital change, 374–377, 384, 808–809 Walkling, Ralph A., 545
concept, 799
Wal-Mart Stores, Inc., 130, 803 conservation, 889, 913 activity, 760–761
increase, 376
Annual Report, 804 management, 798, 849–850 book value, 136
cash flow, 141
W.T. Grant, 815
common size analysis, 762–763 companies, opening, 827
Yahoo! Finance, 343, 754, 784 economy, 755–756
Yankee CDs, 29
example (1996-2001). See Financial ratio analysis Yield. See Annual yield; Bond-equivalent yield; financial analysis, integrative example, 754–764
Capital; Dividends; Earnings financial leverage, 761–762
calculation, 67 financial ratios, 756–763
change. See Bonds industry, 754–755
definition, 31
liquidity, 758–759 interaction. See Interest rates operating costs, 759
relationship. See Coupon rate profitability, 759–760
Yield curve, 72
return, 757–758
spread, 71
warehouses, investment, 935 Yield-to-call, 243–245 Walt Disney Company, 130, 753, 946, 947
Yield-to-maturity, 231–232, 243–245 Annual Report (2001), 121, 750
calculation, 233–234, 237–238 cash flow, 141
change, 241
forecasts (1999), 784 contrast. See Annual yield Ward, Terry J., 816
definition, 312
Warehouse loan. See Field warehouse loan; Public warehouse loan
Zacks, analyst forecast, 784 Warner, Jerold B., 610
Zacks Investment Research, 788 Warrant, 248, 520, 542. See also Detachable war-
ZBA. See Zero-balance account rant; Perpetual warrants
Zero-balance account (ZBA), 645 life, 521
Zero-coupon bonds, 227, 234, 237–238, 498–499 usage. See Bonds
return, 236
Watts, Stephanie A., 777
structure, 513
WCC. See Weighted cost of capital usage, 513–514 Wealth maximization. See Shareholders
Zero-coupon debt, 31 Weighted average cost of capital (WACC), 326–
Zero-coupon notes, 227 327, 479
Zero-coupon securities, 73 Weighted average number of shares outstanding,
Zero-coupon Treasury securities, 75 781
Zweignierderlassung, 833