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Corporate FinanceFundamentals

Stephen A. RossMassachusetts Institute of Technology

Randolph W. WesterfieldUniversity of Southern California

Bradford D. JordanUniversity of Kentucky

g n McGraw-Hillrrftia irwin

Boston Burr Ridge, IL Dubuque, IA Madison, Wl New York San Francisco St. LouisBangkok Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico CityMilan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto

Coverage

This book was designed and developed explicitly for a first course in business or corporate finance,for both finance majors and non-majors alike. In terms of background or prerequisites, the book isnearly self-contained, assuming some familiarity with basic algebra and accounting concepts, whilestill reviewing important accounting principles very early on.The organization of this text has beendeveloped to give instructors the flexibility they need.

Just to get an idea of the breadth of coverage in the seventh edition of Fundamentals, the follow-ing grid presents, for each chapter, some of the most significant new features as well as a few selectedchapter highlights. Of course, in every chapter, opening vignettes, boxed features, in-chapterillustrated examples using real companies, and end-of-chapter material have been thoroughly up-dated as well.

'..hapters Selected Topics of Interest

» l •:A.RT ONE Overview of Corporate Finance

er Iduction to Corporate

-fanance

Chapter 2Financial Statements.Taxes,and Cash Flow

Goal of the firm and agency problems.

Ethics, financial management, and executivecompensation.

New m/m-case: Cash Flows and FinancialStatements at Sunset Boards, Inc.

Cash flow vs. earnings.

Market values vs. book values.

Benefits to You

Stresses value creation as the most funda-mental aspect of management and describesagency issues that can arise.

Brings in real-world issues concerning con-flicts of interest and current controversiessurrounding ethical conduct and manage-ment pay.

New case written for this edition reinforceskey cash flow concepts in a small-businesssetting.

Clearly defines cash flow and spells out thedifferences between cash flow and earnings.

Emphasizes the relevance of market valuesover book values.

» l iRTTWO Financial Statements and Long-Term Financial Planning

'Chapter 3.Working with FinancialStatements

New section: Expanded Du Pont analysis.

New material: Du Pont analysis for realcompanies using data from S&P Market Insight

Ratio and financial statement analysis usingsmaller firm data.

New section expands the basic Du Pontequation to better explore the interrelation-ships between operating and financialperformance.

New analysis shows students how to get anduse real-world data, thereby applying keychapter ideas.

Uses firm data from RMA to show studentshow to actually get and evaluate financialstatements benchmarks.

Coverage (continued)

Chapters

Chapter 4Long-Term Financial Planningand Growth

Selected Topics of Interest

New mini<ase: Financial Planning atS&SAir,lnc.

New material: Explanation of alternativeformulas for sustainable and internal growthrates.

Thorough coverage of sustainable growth as aplanning tool.

PART THREE Valuation of Future Cash FlowsChapter 5Introduction to Valuation:The Time Value of Money

Chapter 6Discounted Cash FlowValuation

Chapter 7Interest Rates and BondValuation

Chapter 8Stock Valuation

First of two chapters on time value of money.

Second of two chapters on time valueof money.

New material: "Clean" vs."dirty" bond pricesand accrued interest.

New material: NASD's new TRACE system

and transparency in the corporate bond

market.

New material: "Make-whole" call provisions.

New min'hcase: Financing S&S Air's ExpansionPlans with a Bond Issue.

Stock valuation

NYSE and Nasdaq Market operations

PART FOUR Capital Budgeting

Chapter 9Net Present Value andOther Investment Criteria

First of three chapters on capital budgeting.

NPV, IRR, payback, discounted payback, andaccounting rate of return.

Benefits to You

New case written for this edition illustratesthe importance of financial planning in asmall firm.

Explanation of growth rate formulas clearsup a common misunderstanding about theseformulas and the circumstances under whichalternative formulas are correct.

Provides a vehicle for examining theinterrelationships between operations,financing, and growth.

Relatively short chapter introduces just thebasic ideas on time value of money to getstudents started on this traditionally difficulttopic.

Covers more advanced time value topicswith numerous examples, calculator tips, andExcel spreadsheet exhibits. Contains manyreal-world examples.Clears up the pricing of bonds betweencoupon payment dates and also bond marketquoting conventions.

Up-to-date discussion of new developmentsin fixed income with regard to price, volume,and transactions reporting.

Up-to-date discussion of relatively new typeof call provision that has become verycommon.

New case written for this edition examinesthe debt issuance process for a small firm.

Thorough coverage of constant and non-constant growth models.

Up-to-date description of major stockmarket operations

Relatively short chapter introduces key ideason an intuitive level to help students withthis traditionally difficult topic.

Consistent, balanced examination ofadvantages and disadvantages of variouscriteria.

"hapters

Chapter 10Making Capital InvestmentDecisions

Selected Topics of Interest

Project cash flow.

Alternative cash flow definitions.

Special cases of DCF analysis.

New min'hcase: Conch Republic Electronics.

Sources of value.

Scenario and sensitivity "what-if" analyses.

Break-even analysis.

Benefits to You

» l 'ART FIVE Risk and Return

Chapter 12Some Lessons from CapitalMarket History

r 13i, Risk, and the

irity Market Line

Chapter 14Options and CorporateFinance

New section: Geometric vs. arithmetic returns.

Capital market history.

Market efficiency.

Diversification, systematic and unsystematic

risk.

Beta and the security market line.

New mini<ase: S&S Air's Convertible Bond.

Stock options, employee stock options, and

real options.

Option-embedded securities.

Thorough coverage of project cash flows andthe relevant numbers for a project analysis.

Emphasizes the equivalence of variousformulas, thereby removing commonmisunderstandings.

Considers important applications of chaptertools.

New case written for this edition analyzescapital budgeting issues and complexities.

Stresses the need to understand the eco-nomic basis for value creation in a project.

Illustrates how to actually apply and inter-

pret these tools in a project analysis.

Covers cash, accounting, and financial break-

even levels.

Discusses calculation and interpretation ofgeometric returns. Clarifies commonmisconceptions regarding appropriate use ofarithmetic vs. geometric average returns.Extensive coverage of historical returns,volatilities, and risk premiums.Efficient markets hypothesis discussed alongwith common misconceptions.

Illustrates basics of risk and return in astraightforward fashion.

Develops the security market line with anintuitive approach that bypasses much of theusual portfolio theory and statistics.

New case written for this edition examinessecurity issuance issues for a small firm.

Discusses the basics of these importantoption types.

Describes the different types of option foundin corporate securities.

-<\RT SIX Cost of Capital and Long-Term Financial Policy

er 15t of Capital

New discussion: geometric vs. arithmeticgrowth rates.

Cost of capital estimation.

Both approaches are used in practice. Clearsup issues surrounding growth rate estimates.

Contains a complete.Web-based illustrationof cost of capital for a real company.

Coverage (concluded)

Chapters

Chapter 16Raising Capital

Chapter 17Financial Leverage andCapital Structure Policy

Chapter 18Dividends and DividendPolicy

Selected Topics of Interest

New discussion: Dutch auction IPOs.

New discussion: IPO "quiet periods."

New discussion: rights vs. warrants.

IPO valuation.

Basics of financial leverage.

Optimal capital structure.

Financial distress and bankruptcy.

New mini<ase: Cost of Capital for HubbardComputer, Inc.

New material: Very recent survey evidence ondividend policy.

New material: Effect of new tax laws.

Dividends and dividend policy.

Benefits to You

Explains uniform price auctions using recent

Google IPO as an example.

Explains the SEC's quiet period rules.

Clarifies the option-like nature of rightsprior to their expiration dates.

Extensive, up-to-date discussion of IPOs,

including the 1999-2000 period.

Illustrates effect of leverage on risk and

return.

Describes the basic trade-offs leading to anoptimal capital structure.

Briefly surveys the bankruptcy process.New case written for this edition analyzescost of capital estimation for a non-publicfirm.

New survey results show the mostimportant (and least important) factorsconsidered by financial managers in settingdividend policy.

Discusses implications of new, lowerdividend, and capital gains rates.

Describes dividend payments and the factorsfavoring higher and lower payout policies.

PART SEVEN Short-Term Financial Planning and Management

Chapter 19Short-Term Finance andPlanning

Chapter 20Cash and LiquidityManagement

Chapter 21Credit and InventoryManagement

Operating and cash cycles.

Short-term financial planning.

Float management.

Cash collection and disbursement.

New min'Kase: Piepkorn ManufacturingWorking Capital Management.

Credit management

Inventory management

Stresses the importance of cash flow timing.

Illustrates creation of cash budgets and

potential need for financing.

Thorough coverage of float management anc

potential ethical issues.

Examination of systems used by firms tohandle cash inflows and outflows.

New case written for this edition evaluatesworking capital issues for a small firm.

Analysis of credit policy and implementation

Brief overview of important inventoryconcepts.

Chapters Selected Topics of Interest Benefits to You

PART EIGHT Topics in Corporate Finance

Chapter 22International CorporateFinance

Chapter 23fitisk Management: An

ion to Financial

Chapter 24Option Valuation

Chapter 25Mergers and Acquisitions

Chapter 26Leasing

Foreign exchange.

International capital budgeting.

Exchange rate and political risk.

Volatility and risk.

Hedging with forwards, options, and swaps.

Put-call parity and Black-Scholes.

Options and corporate finance.

New material: Alternatives to mergers andacquisitions.

New material: Defensive tactics.

New section: Divestitures and restructurings.

Mergers and acquisitions.

New material: Synthetic leases

Leases and lease valuation.

Covers essentials of exchange rates andtheir determination.

Shows how to adapt basic DCF approach tohandle exchange rates.

Discusses hedging and issues surroundingsovereign risk.

Illustrates need to manage risk and some ofthe most important types of risk.

Shows how many risks can be managed withfinancial derivatives.

Develops modern option valuation andfactors influencing option values.

Applies option valuation to a variety ofcorporate issues, including mergers andcapital budgeting.

Covers strategic alliances and joint venturesand why they are important alternatives.

Expanded discussion of anti-takeoverprovisions.

Important actions such as equity carve-outs,spins-offs, and split-ups are examined.

Develops essentials of M&A analysis,including financial, tax, and accounting issues.

Discusses controversial practice of custom-tailored,"off-balance-sheet" financing.

Essentials of leasing, good and bad reasonsfor leasing, and NPV of leasing are examined.