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