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Corporate Finance, 8th Canadian Edition by Ross Test Bank

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Test Bank for Corporate Finance, 8th Canadian Edition, 8ce by Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Gordon Roberts TEST BANK ISBN-13: 9781259270116 Full chapters included CHAPTER 1 I... ntroduction to Corporate Finance Executive Summary 1.1 WHAT IS CORPORATE FINANCE? The Balance-Sheet Model of the Firm Capital Structure The Financial Manager Identification of Cash Flows Timing of Cash Flows Risk of Cash Flows Concept Questions 1.2 CORPORATE SECURITIES ASCONTINGENT CLAIMS ON TOTAL FIRM VALUE Concept Questions 1.3 BUSINESS ORGANIZATION FORMS The Sole Proprietorship The Partnership The Corporation The Income Trust Concept Questions 1.4 GOALS OF THE CORPORATE FIRM Agency Costs and the Set-of-Contracts Viewpoint Managerial Goals Separation of Ownership and Control In Their Own Words: B. Espen Eckbo on corporate governance Concept Questions 1.5 FINANCIAL INSTITUTIONS,FINANCIAL MARKETS, AND THE CORPORATION Financial Institutions Money Versus Capital Markets Primary Versus Secondary Markets Listing Foreign Exchange Market Concept Questions 1.6 TRENDS IN FINANCIAL MARKETS AND MANAGEMENT In Their Own Words: Maria Strömqviston hedge funds and the financial crisis of 2008 Concept Question 1.7 OUTLINE OF THE TEXT 1.8 SUMMARY AND CONCLUSIONS Appendix 1A Taxes CHAPTER 2 Accounting Statements and Cash Flow Executive Summary 2.1 THE STATEMENT OF FINANCIAL POSITION Liquidity Debt Versus Equity Value Versus Cost Concept Questions 2.2 STATEMENT OF COMPREHENSIVE INCOME International Financial Reporting Standards Non-Cash Items Time and Costs Concept Questions 2.3 NET WORKING CAPITAL Concept Questions 2.4 FINANCIAL CASH FLOW Concept Questions 2.5 SUMMARY AND CONCLUSIONS Minicase: Cash Flows at Eshopwise Ltd. Appendix 2A Financial Statement Analysis Appendix 2B Statement of Cash Flows CHAPTER 3 Financial Planning and Growth Executive Summary 3.1 WHAT IS FINANCIAL PLANNING? Concept Questions 3.2 A FINANCIAL PLANNING MODEL: THE INGREDIENTS 3.3 THE PERCENTAGE OF SALES METHOD The Statement of Comprehensive Income The Statement of Financial Position Concept Questions 3.4 WHAT DETERMINES GROWTH? Concept Questions Some Caveats on Financial Planning Models In Their Own Words: Robert C. Higgins on sustainable growth 3.5 SUMMARY AND CONCLUSIONS Minicase: Ratios and Financial Planning at East Coast Yachts Part 2 Value and Capital Budgeting CHAPTER 4 Financial Markets and Net Present Value: First Principles of Finance Executive Summary 4.1 THE FINANCIAL MARKET ECONOMY The Anonymous Market Market Clearing Concept Questions 4.2 MAKING CONSUMPTION CHOICES OVER TIME Concept Questions 4.3 THE COMPETITIVE MARKET How Many Interest Rates Are There in a Competitive Market? Concept Questions 4.4 THE BASIC PRINCIPLE Concept Question 4.5 PRACTISING THE PRINCIPLE A Lending Example A Borrowing Example Concept Questions 4.6 ILLUSTRATING THE INVESTMENT DECISION Concept Questions 4.7 CORPORATE INVESTMENT DECISION MAKING Concept Question 4.8 SUMMARY AND CONCLUSIONS CHAPTER 5 The Time Value of Money Executive Summary 5.1 THE ONE- PERIOD CASE Concept Questions 5.2 THE MULTIPERIOD CASE Future Value and Compounding The Power of Compounding: A Digression Present Value and Discounting Finding the Number of Periods The Algebraic Formula Concept Questions 5.3 COMPOUNDING PERIODS Compounding Over Many Years Continuous Compounding (Advanced) Concept Questions 5.4 SIMPLIFICATIONS Perpetuity Growing Perpetuity Annuity Mortgages Using Annuity Formulas Growing Annuity Concept Questions 5.5 WHAT IS A FIRM WORTH? 5.6 SUMMARY AND CONCLUSIONS Minicase: The MBA Decision CHAPTER 6 How to Value Bonds and Stocks Executive Summary 6.1 DEFINITION AND EXAMPLE OF A BOND 6.2 HOW TO VALUE BONDS Pure Discount Bonds Level-Coupon Bonds Consols Concept Questions 6.3 BOND CONCEPTS Interest Rates and Bond Prices Yield to Maturity Current Yield Holding-Period Return The Present Value Formulas for Bonds Concept Questions 6.4 THE PRESENT VALUE OF COMMON STOCKS Dividends Versus Capital Gains Valuation of Different Types of Stocks 6.5 ESTIMATES OF PARAMETERS IN THE DIVIDEND DISCOUNT MODEL Where Does g Come From? Where Does r Come From? A Healthy Sense of Skepticism 6.6 GROWTH OPPORTUNITIES NPVGOs of Real Companies Growth in Earnings and Dividends Versus Growth Opportunities Dividends or Earnings: Which to Discount? The No-Dividend Firm 6.7 THE DIVIDEND GROWTH MODEL AND THE NPVGO MODEL (ADVANCED) The Dividend Growth Model The NPVGO Model Summary 6.8 COMPARABLES Price–Earnings Ratio Concept Questions 6.9 VALUING THE ENTIRE FIRM 6.10 STOCK MARKET REPORTING 6.11 SUMMARY AND CONCLUSIONS Minicase: Stock Valuation at Ragan Engines Appendix 6A The Term Structure of Interest Rates Concept Question CHAPTER 7 Net Present Value and Other Investment Rules Executive Summary 7.1 WHY USE NET PRESENT VALUE? Concept Questions 7.2 THE PAYBACK PERIOD RULE Defining the Rule Problems With the Payback Method Managerial Perspective Summary of Payback Concept Questions 7.3 THE DISCOUNTED PAYBACK PERIOD RULE 7.4 THE AVERAGE ACCOUNTING RETURN Defining the Rule Analyzing the Average Accounting Return Method Concept Questions 7.5 THE INTERNAL RATE OF RETURN Concept Question 7.6 PROBLEMS WITH THE INTERNAL RATE OF RETURN APPROACH Definition of Independent and Mutually Exclusive Projects Two General Problems Affecting Both Independent and Mutually Exclusive Projects Problems Specific to Mutually Exclusive Projects Redeeming Qualities of the Internal Rate of Return A Test Concept Questions 7.7 THE PROFITABILITY INDEX Concept Questions 7.8 THE PRACTICE OF CAPITAL BUDGETING 7.9 SUMMARY AND CONCLUSIONS Minicase: BC Copper Mining CHAPTER 8 Net Present Value and Capital Budgeting Executive Summary 8.1 INCREMENTAL CASH FLOWS Cash Flows—Not Accounting Income Sunk Costs Opportunity Costs Side Effects Allocated Costs Concept Questions 8.2 THE MAJESTIC MULCH ANDCOMPOST COMPANY: AN EXAMPLE An Analysis of the Project Which Set of Books? A Note on Net Working Capital Interest Expense Concept Questions 8.3 INFLATION AND CAPITAL BUDGETING Interest Rates and Inflation Cash Flow and Inflation Discounting: Nominal or Real? Concept Questions 8.4 ALTERNATIVE DEFINITIONS OF OPERATING CASH FLOW The Bottom-Up Approach The Top-Down Approach The Tax Shield Approach Conclusion 8.5 APPLYING THE TAX SHIELDAPPROACH TO THE MAJESTICMULCH AND COMPOST COMPANY PROJECT Present Value of the Tax Shield on Capital Cost Allowance Total Project Cash Flow Versus Tax Shield Approach Concept Questions 8.6 INVESTMENTS OF UNEQUAL LIVES: THE EQUIVALENT ANNUAL COST METHOD The General Decision to Replace (Advanced) Concept Question 8.7 SUMMARY AND CONCLUSIONS Minicase: Beaver Mining Company Minicase: Goodweek Tires Inc. Appendix 8A Capital Cost Allowance Appendix 8B Derivation of the Present Value of the Capital Cost Allowance Tax Shield Formula CHAPER 9 Risk Analysis, Real Options, and Capital Budgeting Executive Summary 9.1 DECISION TREES Concept Questions 9.2 SENSITIVITY ANALYSIS, SCENARIO ANALYSIS, AND BREAK-EVEN ANALYSIS Sensitivity Analysis and Scenario Analysis Break-Even Analysis Concept Questions Break-Even Analysis, Equivalent Annual Cost, and Capital Cost Allowance 9.3 MONTE CARLO SIMULATION Step 1: Specify the Basic Model Step 2: Specify a Distribution for Each Variable in the Model Step 3: The Computer Draws One Outcome Step 4: Repeat the Procedure Step 5: Calculate Net Present Value 9.4 REAL OPTIONS The Option to Expand The Option to Abandon Timing Options Real Options in the Real World Concept Questions 9.5 SUMMARY AND CONCLUSIONS Minicase: Bunyan Lumber, LLC Part 3 RISK CHAPTER 10 Risk and Return: Lessons From Market History Executive Summary 10.1 RETURNS Dollar Earnings Percentage Returns or Rate of Return Concept Questions 10.2 HOLDING- PERIOD RETURNS Concept Questions 10.3 RETURN STATISTICS Concept Question 10.4 AVERAGE STOCK RETURNS AND RISK- FREE RETURNS Concept Questions 10.5 RISK STATISTICS Variance and Standard Deviation Normal Distribution and Its Implications for Standard Deviation Value at Risk Further Perspective on Returns and Risk Concept Questions 10.6 MORE ON AVERAGE RETURNS Arithmetic Versus Geometric Averages Calculating Geometric Average Returns Arithmetic Average Return or Geometric Average Return? Concept Question 10.7 2008: A YEAR OF FINANCIAL CRISIS 10.8 SUMMARY AND CONCLUSIONS Minicase: A Job at Deck Out My Yacht Corporation CHAPTER 11 Risk and Return: The Capital Asset Pricing Model Executive Summary 11.1 INDIVIDUAL SECURITIES 11.2 EXPECTED RETURN, VARIANCE, AND COVARIANCE Expected Return and Variance Covariance and Correlation Concept Questions 11.3 THE RISK AND RETURN FOR PORTFOLIOS The Example of Supertech and Slowpoke The Expected Return on a Portfolio Variance and Standard Deviation of a Portfolio Concept Questions 11.4 THE EFFICIENT SET FOR TWO ASSETS Application to International Diversification Concept Questions 11.5 THE EFFICIENT SET FOR MANY SECURITIES Variance and Standard Deviation in a Portfolio of Many Assets Concept Questions 11.6 DIVERSIFICATION: AN EXAMPLE Risk and the Sensible Investor Concept Questions 11.7 RISK- FREE BORROWING AND LENDING The Optimal Portfolio Concept Questions 11.8 MARKET EQUILIBRIUM Definition of the Market Equilibrium Portfolio Definition of Risk When Investors Hold the Market Portfolio The Formula for Beta A Test Concept Questions 11.9 RELATIONSHIP BETWEENRISK AND EXPECTED RETURN (CAPITAL ASSET PRICING MODEL) Expected Return on Market Expected Return on Individual Security Concept Questions 11.10 SUMMARY AND CONCLUSIONS Minicase: A Job at Deck Out My Yacht, Part 2 CHAPTER 12 An Alternative View of Risk and Return: The Arbitrage Pricing Theory Executive Summary 12.1 FACTOR MODELS: ANNOUNCEMENTS, SURPRISES, AND EXPECTED RETURNS Concept Questions 12.2 RISK: SYSTEMATIC AND UNSYSTEMATIC Concept Questions 12.3 SYSTEMATIC RISK AND BETAS Concept Questions 12.4 PORTFOLIOS AND FACTOR MODELS Portfolios and Diversification Concept Questions 12.5 BETAS AND EXPECTED RETURNS The Linear Relationship The Market Portfolio and the Single Factor Concept Question 12.6 THE CAPITAL ASSET PRICINGMODEL AND THE ARBITRAGE PRICING THEORY Differences in Pedagogy Differences in Application Concept Questions 12.7 PARAMETRIC APPROACHES TO ASSET PRICING Empirical Models Style Portfolios Concept Questions 12.8 SUMMARY AND CONCLUSIONS Minicase: The Fama–French Multifactor Model and Mutual Fund Returns CHAPTER 13 Risk, Return, and Capital Budgeting Executive Summary 13.1 THE COST OF EQUITY CAPITAL Concept Questions 13.2 ESTIMATION OF BETA Concept Question Beta Estimation in Practice Stability of Beta Using an Industry Beta Concept Questions 13.3 DETERMINANTS OF BETA Cyclicality of Revenues Operating Leverage Financial Leverage and Beta Concept Questions 13.4 EXTENSIONS OF THE BASIC MODEL The Firm Versus the Project: Vive la différence The Cost of Debt The Cost of Preferred Stock The Weighted Average Cost of Capital The Capital Structure Weights Taxes and the Weighted Average Cost of Capital Concept Question 13.5 ESTIMATING THE COST OF CAPITAL FOR SUNCOR ENERGY Concept Question 13.6 FLOTATION COSTS AND THE WEIGHTED AVERAGE COST OF CAPITAL The Basic Approach Flotation Costs and Net Present Value Internal Equity and Flotation Costs 13.7 REDUCING THE COST OF CAPITAL What Is Liquidity? Liquidity, Expected Returns, and the Cost of Capital Liquidity and Adverse Selection What the Corporation Can Do Concept Questions 13.8 SUMMARY AND CONCLUSIONS Minicase: The Cost of Capital for Goff Communications Inc. Appendix 13A Economic Value Added and the Measurement of Financial Performance Part 4 Capital Structure and Dividend Policy CHAPTER 14 Corporate Financing Decisions and Efficient Capital Markets Executive Summary 14.1 CAN FINANCING DECISIONS CREATE VALUE? Concept Question 14.2 A DESCRIPTION OF EFFICIENT CAPITAL MARKETS Foundations of Market Efficiency Concept Questions 14.3 THE DIFFERENT TYPES OF EFFICIENCY The Weak Form The Semistrong and Strong Forms Some Common Misconceptions About the Efficient Market Hypothesis Concept Questions 14.4 THE EVIDENCE The Weak Form The Semistrong Form The Strong Form Concept Questions 14.5 THE BEHAVIOURAL CHALLENGE TO MARKET EFFICIENCY Concept Question 14.6 EMPIRICAL CHALLENGES TO MARKET EFFICIENCY Concept Question 14.7 REVIEWING THE DIFFERENCES In Their Own Words: A random talk with Burton Malkiel 14.8 IMPLICATIONS FOR CORPORATE FINANCE Accounting and Efficient Markets The Timing Decision Speculation and Efficient Markets Information in Market Prices Concept Question 14.9 SUMMARY AND CONCLUSIONS Minicase: Your Retirement Plan at Deck Out My Yacht CHAPTER 15 Long-Term Financing: An Introduction Executive Summary 15.1 COMMON STOCK Authorized Versus Issued Common Stock Retained Earnings Market Value, Book Value, and Replacement Value Shareholders' Rights Dividends Classes of Shares In Their Own Words: Shares climb as Stronach to give up voting control Concept Questions 15.2 CORPORATE LONG-TERM DEBT: THE BASICS Interest Versus Dividends Is It Debt or Equity? Basic Features of Long-Term Debt Different Types of Debt Repayment Seniority Security Indenture Concept Questions 15.3 PREFERRED SHARES Stated Value Cumulative and Non-Cumulative Dividends Are Preferred Shares Really Debt? Preferred Shares and Taxes Beyond Taxes Concept Questions 15.4 INCOME TRUSTS Income Trust Income and Taxation 15.5 PATTERNS OF LONG-TERM FINANCING Concept Questions 15.6 SUMMARY AND CONCLUSIONS CHAPTER 16 Capital Structure: Basic Concepts Executive Summary 16.1 THE CAPITAL STRUCTURE QUESTION AND THE PIE MODEL Concept Question 16.2 MAXIMIZING FIRM VALUEVERSUS MAXIMIZING SHAREHOLDER INTERESTS Concept Question 16.3 FINANCIAL LEVERAGE AND FIRM VALUE: AN EXAMPLE Leverage and Returns to Shareholders The Choice Between Debt and Equity A Key Assumption Concept Questions 16.4 MODIGLIANI AND MILLER: PROPOSITION II (NO TAXES) Risk to Equityholders Rises With Leverage Proposition II: Required Return to Equityholders Rises With Leverage Modigliani and Miller: An Interpretation In Their Own Words: Merton Miller on the MM results Concept Questions 16.5 TAXES The Basic Insight Taxation of Corporate Income Present Value of the Tax Shield Value of the Levered Firm Expected Return and Leverage Under Corporate Taxes The Weighted Average Cost of Capital and Corporate Taxes Stock Price and Leverage Under Corporate Taxes Concept Questions 16.6 SUMMARY AND CONCLUSIONS Minicase: Stephenson Real Estate Recapitalization CHAPTER 17 Capital Structure: Limits to the Use of Debt Executive Summary 17.1 COSTS OF FINANCIAL DISTRESS Bankruptcy Risk or Bankruptcy Cost? Concept Questions 17.2 DESCRIPTION OF COSTS Direct Costs of Financial Distress: Legal and Administrative Costs of Liquidation or Reorganization Indirect Costs of Financial Distress Agency Costs Concept Questions 17.3 CAN DEBT COSTS BE REDUCED? Protective Covenants Consolidation of Debt Concept Question 17.4 INTEGRATION OF TAXEFFECTS AND FINANCIAL DISTRESS COSTS Pie Again Concept Questions 17.5 SIGNALLING Concept Questions 17.6 SHIRKING, PERQUISITES, AND BAD INVESTMENTS: A NOTE ON AGENCY COST OF EQUITY Effect of Agency Costs of Equity on Debt-to-Equity Financing Free Cash Flow Concept Questions 17.7 THE PECKING- ORDER THEORY Rules of the Pecking Order Implications Concept Questions 17.8 GROWTH AND THE DEBT-TO- EQUITY RATIO No Growth Growth Concept Question 17.9 PERSONAL TAXES The Miller Model Concept Question 17.10 HOW FIRMS ESTABLISH CAPITAL STRUCTURE Concept Questions 17.11 SUMMARY AND CONCLUSIONS Minicase: McKenzie Restaurants Capital Budgeting CHAPTER 18 Valuation and Capital Budgeting for the Levered Firm Executive Summary 18.1 ADJUSTED PRESENT VALUE APPROACH Concept Questions 18.2 FLOW TO EQUITY APPROACH Step 1: Calculating Levered Cash Flow Step 2: Calculating r[sup(S)] Step 3: Valuation Concept Questions 18.3 WEIGHTED AVERAGE COST OF CAPITAL METHOD Concept Question 18.4 A COMPARISON OF THE ADJUSTEDPRESENT VALUE, FLOW TO EQUITY, AND WEIGHTED AVERAGE COST OF CAPITAL Caveat: Adjusted Present Value, Flow to Equity, and Weighted Average Cost of Capital Do Not Always Y A Guideline Concept Questions 18.5 ADJUSTED PRESENT VALUE EXAMPLE Concept Question 18.6 CAPITAL BUDGETING WHENTHE DISCOUNT RATE MUST BE ESTIMATED Concept Question 18.7 BETA AND LEVERAGE The Project Is Not Scale Enhancing Concept Question 18.8 SUMMARY AND CONCLUSIONS Minicase: The Leveraged Buyout of Cheek Products Ltd. CHAPTER 19 Dividends and Other Payouts Executive Summary 19.1 DIFFERENT TYPES OF DIVIDENDS 19.2 STANDARD METHOD OF CASH DIVIDEND PAYMENT Concept Questions 19.3 THE BENCHMARK CASE: AN ILLUSTRATION OF THE IRRELEVANCE OF DIVIDEND POLICY Current Policy: Dividends Set Equal to Cash Flow Alternative Policy: Initial Dividend Is Greater Than Cash Flow The Indifference Proposition Homemade Dividends A Test Dividends and Investment Policy Concept Questions 19.4 REPURCHASE OF STOCK Dividend Versus Repurchase: Conceptual Example Dividends Versus Repurchases: Real-World Considerations Concept Questions 19.5 PERSONAL TAXES, ISSUANCE COSTS, AND DIVIDENDS Firms Without Sufficient Cash to Pay a Dividend Firms With Sufficient Cash to Pay a Dividend Summary of Personal Taxes Concept Questions 19.6 REAL- WORLD FACTORS FAVOURING A HIGH- DIVIDEND POLICY Desire for Current Income Behavioural Finance Agency Costs Information Content of Dividends and Dividend Signalling Concept Question 19.7 THE CLIENTELE EFFECT:A RESOLUTION OF REAL- WORLD FACTORS? Concept Questions In Their Own Words: Why Inc. pays no dividend Why Rogers Communications pays dividends 19.8 WHAT WE KNOW AND DO NOT KNOW ABOUT DIVIDEND POLICY Corporate Dividends Are Substantial Fewer Companies Pay Dividends Corporations Smooth Dividends Some Survey Evidence on Dividends 19.9 PUTTING IT ALL TOGETHER 19.10 STOCK DIVIDENDS AND STOCK SPLITS Some Details on Stock Splits and Stock Dividends Value of Stock Splits and Stock Dividends Reverse Splits Concept Questions 19.11 SUMMARY AND CONCLUSIONS Minicase: Electronic Timing Ltd. Part 5 Long-Term Financing CHAPTER 20 Issuing Equity Securities to the Public Executive Summary 20.1 THE PUBLIC ISSUE 20.2 THE BASIC PROCEDURE FOR A NEW ISSUE The Prompt Offering Prospectus System Alternative Issue Methods Concept Questions 20.3 THE CASH OFFER Types of Underwriting The Selling Period The Overallotment Option Investment Banks The Offering Price and Underpricing The Decision to Go Public Pricing Initial Public Offerings Underpricing: A Possible Explanation In Their Own Words: Jay Ritter on IPO underpricing around the world Concept Questions 20.4 THE ANNOUNCEMENT OF NEWEQUITY AND THE VALUE OF THE FIRM 20.5 THE COST OF ISSUING SECURITIES The Costs of Going Public: A Case Study Concept Questions 20.6 RIGHTS The Mechanics of a Rights Offering Subscription Price Number of Rights Needed to Purchase a Share The Value of a Right Ex-Rights Value of Rights After Ex-Rights Date The Underwriting Arrangements Effects on Shareholders Cost of Rights Offerings Concept Questions 20.7 THE PRIVATE EQUITY MARKET Private Placement The Private Equity Firm Venture Capital Suppliers of Venture Capital Stages of Financing Some Venture Capital Realities Concept Questions 20.8 SUMMARY AND CONCLUSIONS Minicase: East Coast Yachts Goes Public CHAPTER 21 Long-Term Debt Executive Summary 21.1 LONG-TERM DEBT: A REVIEW 21.2 THE PUBLIC ISSUE OF BONDS The Basic Terms Security Seniority Protective Covenants The Sinking Fund The Call Provision Concept Questions 21.3 BOND REFUNDING Should Firms Issue Callable Bonds? Calling Bonds: When Does It Make Sense? Concept Questions 21.4 BOND RATINGS Junk Bonds Concept Questions 21.5 SOME DIFFERENT TYPES OF BONDS Zero-Coupon Bonds Floating-Rate Bonds Financial Engineering and Bonds Concept Questions 21.6 DIRECT PLACEMENT COMPARED TO PUBLIC ISSUES Concept Questions 21.7 LONG-TERM SYNDICATED BANK LOANS Concept Question 21.8 SUMMARY AND CONCLUSIONS Minicase: Financing the Expansion of East Coast Yachts With a Bond Issue CHAPTER 22 Leasing Executive Summary 22.1 TYPES OF LEASES The Basics Operating Leases Financial Leases Concept Questions 22.2 ACCOUNTING AND LEASING Concept Questions 22.3 TAXES AND LEASES Concept Questions 22.4 THE CASH FLOWS OF FINANCIAL LEASING The Incremental Cash Flows Concept Questions 22.5 A DETOUR ON DISCOUNTINGAND DEBT CAPACITY WITH CORPORATE TAXES Present Value of Risk-Free Cash Flows Optimal Debt Level and Risk-Free Cash Flows (Advanced) Concept Question 22.6 NET PRESENT VALUE ANALYSISOF THE LEASE- VERSUS- BUY DECISION The Discount Rate Asset Pool and Salvage Value 22.7 DEBT DISPLACEMENT AND LEASE VALUATION The Basic Concept of Debt Displacement (Advanced) Optimal Debt Level in the TransCanada Taxis Example (Advanced) 22.8 DOES LEASING EVER PAY? THE BASE CASE 22.9 REASONS FOR LEASING Good Reasons for Leasing Bad Reasons for Leasing Leasing Decisions in Practice Concept Question 22.10 SOME UNANSWERED QUESTIONS Are the Uses of Leases and of Debt Complementary? Why Are Leases Offered by Both Manufacturers and Third-Party Lessors? Why Are Some Assets Leased More Commonly Than Others? 22.11 SUMMARY AND CONCLUSIONS Minicase: The Decision to Lease or Buy at Warf Computers Ltd. Part 6 Options, Futures, and Corporate Finance CHAPTER 23 Options, Futures, and Corporate Finance Options and Corporate Finance: Basic Concepts Executive Summary 23.1 OPTIONS 23.2 CALL OPTIONS The Value of a Call Option at Expiration Concept Questions 23.3 PUT OPTIONS The Value of a Put Option at Expiration Concept Questions 23.4 SELLING OPTIONS 23.5 STOCK OPTION QUOTATIONS Long-Term Equity Anticipation Securities 23.6 COMBINATIONS OF OPTIONS Concept Questions 23.7 VALUING OPTIONS Bounding the Value of an American Call The Factors Determining Call Option Values A Quick Discussion of Factors Determining Put Option Values Concept Questions 23.8 AN OPTION PRICING FORMULA A Two-State Option Model The Black–Scholes Model Concept Questions 23.9 STOCKS AND BONDS AS OPTIONS The Firm Expressed in Terms of Call Options The Firm Expressed in Terms of Put Options A Resolution of the Two Views A Note on Loan Guarantees Concept Questions 23.10 INVESTMENT IN REAL PROJECTS AND OPTIONS Concept Question 23.11 CONTINGENT VALUE RIGHTS,MERGERS, AND CORPORATE DECISIONS Concept Question 23.12 SUMMARY AND CONCLUSIONS Minicase: Clissold Industries Options CHAPTER 24 Options and Corporate Finance: Extensions and Applications Executive Summary 24.1 EXECUTIVE STOCK OPTIONS Why Options? Executive Compensation: Where Are We Now? In Their Own Words: Jim Middlemiss on options backdating Valuing Executive Compensation Concept Question 24.2 VALUING A START- UP Concept Questions 24.3 MORE ABOUT THE BINOMIAL MODEL Heating Oil 24.4 SHUTDOWN AND REOPENING DECISIONS Valuing a Gold Mine The Abandonment and Opening Decisions Valuing the Simple Gold Mine 24.5 SUMMARY AND CONCLUSIONS Minicase: Exotic Cuisines Employee Stock Options CHAPTER 25 Warrants and Convertibles Executive Summary 25.1 WARRANTS Concept Question 25.2 THE DIFFERENCE BETWEENWARRANTS AND CALL OPTIONS How the Firm Can Hurt Warrant Holders Concept Questions 25.3 WARRANT PRICING AND THEBLACK–SCHOLES MODEL (ADVANCED) Concept Question 25.4 CONVERTIBLE BONDS Concept Question 25.5 THE VALUE OF CONVERTIBLE BONDS Straight Bond Value Conversion Value Option Value Concept Questions 25.6 REASONS FOR ISSUINGWARRANTS AND CONVERTIBLES Convertible Debt Versus Straight Debt Convertible Debt Versus Common Stock The "Free Lunch" Story The "Expensive Lunch" Story A Reconciliation Concept Questions 25.7 WHY ARE WARRANTS AND CONVERTIBLES ISSUED? Matching Cash Flows Risk Synergy Agency Costs Backdoor Equity Concept Question 25.8 CONVERSION POLICY Concept Questions 25.9 SUMMARY AND CONCLUSIONS Minicase: S&S Air's Convertible Bond CHAPTER 26 Derivatives and Hedging Risk Executive Summary 26.1 DERIVATIVES, HEDGING, AND RISK The Impact of Financial Risk: The Credit Crisis of 2007–09 26.2 FORWARD CONTRACTS Concept Questions 26.3 FUTURES CONTRACTS Concept Questions 26.4 HEDGING Hedging With Futures Versus Hedging With Options Concept Questions 26.5 INTEREST RATE FUTURES CONTRACTS Pricing of Government of Canada Bonds Pricing of Forward Contracts Futures Contracts Hedging in Interest Rate Futures Concept Questions 26.6 DURATION HEDGING The Case of Zero-Coupon Bonds The Case of Two Bonds With the Same Maturity but With Different Coupons Duration Matching Liabilities With Assets Duration in Practice Concept Questions 26.7 SWAP CONTRACTS Interest Rate Swaps Currency Swaps Concept Question Credit Default Swaps Exotics Movement Toward Exchange Trading for Swaps 26.8 ACTUAL USE OF DERIVATIVES 26.9 SUMMARY AND CONCLUSIONS Minicase: Williamson Mortgage Inc. Part 7 Financial Planning and Short-Term Finance CHAPTER 27 Short-Term Finance and Planning Executive Summary 27.1 TRACING CASH AND NET WORKING CAPITAL 27.2 DEFINING CASH IN TERMS OF OTHER ELEMENTS The Sources and Uses of Cash Statement Concept Questions 27.3 THE OPERATING CYCLE AND THE CASH CYCLE Interpreting the Cash Cycle Concept Questions 27.4 SOME ASPECTS OF SHORT-TERM FINANCIAL POLICY The Size of the Firm's Investment in Current Assets Alternative Financing Policies for Current Assets Current Assets and Liabilities in Practice Concept Questions 27.5 CASH BUDGETING Cash Outflow The Cash Balance Concept Questions 27.6 THE SHORT-TERM FINANCIAL PLAN Short-Term Planning and Risk Short-Term Borrowing In the Absence of Short-Term Borrowing Concept Questions 27.7 SUMMARY AND CONCLUSIONS Minicase: Keafer Manufacturing Working Capital Management CHAPTER 28 Cash Management Executive Summary 28.1 REASONS FOR HOLDING CASH The Speculative and Precautionary Motives The Transaction Motive Costs of Holding Cash Cash Management Versus Liquidity Management Concept Questions 28.2 MANAGING THE COLLECTION AND DISBURSEMENT OF CASH Electronic Data Interchange: The End of Float? Accelerating Collections Controlling Disbursements Ethical and Legal Questions Concept Questions 28.3 INVESTING IDLE CASH Seasonal or Cyclical Activities Planned Expenditures Characteristics of Short-Term Securities Some Different Types of Money Market Securities In Their Own Words: Credit crisis made in Canada Concept Questions 28.4 SUMMARY AND CONCLUSIONS Minicase: Cash Management at Richmond Ltd. CHAPTER 29 Credit Management Executive Summary 29.1 TERMS OF THE SALE Why Trade Credit Exists The Basic Form Credit Period Cash Discounts Credit Instruments Concept Questions 29.2 THE DECISION TO GRANT CREDIT: RISK AND INFORMATION The Value of New Information About Credit Risk Future Sales Concept Question 29.3 OPTIMAL CREDIT POLICY Credit Insurance Concept Question 29.4 CREDIT ANALYSIS Credit Information Credit Evaluation and Scoring Concept Questions 29.5 COLLECTION POLICY Average Collection Period Aging Schedule Collection Effort Concept Question 29.6 OTHER ASPECTS OF CREDIT POLICY Factoring How to Finance Trade Credit Concept Question 29.7 SUMMARY AND CONCLUSIONS Minicase: Credit Policy at Braam Industries Part 8 SPECIAL TOPICS CHAPTER 30 Mergers and Acquisitions Executive Summary 30.1 THE BASIC FORMS OF ACQUISITIONS Merger or Consolidation Acquisition of Stock Acquisition of Assets A Classification Scheme A Note on Takeovers Concept Questions 30.2 THE TAX FORMS OF ACQUISITIONS Determinants of Tax Status Taxable Versus Tax-Free Acquisitions Concept Questions 30.3 ACCOUNTING FOR ACQUISITIONS The Acquisition Method Concept Questions 30.4 DETERMINING THE SYNERGY FROM AN ACQUISITION 30.5 SOURCES OF SYNERGY FROM ACQUISITIONS Revenue Enhancement Cost Reduction Tax Gains Lower Cost of Capital Concept Question 30.6 CALCULATING THE VALUE OF THE FIRM AFTER AN ACQUISITION Avoiding Mistakes 30.7 A COST TO SHAREHOLDERS FROM REDUCTION IN RISK The Base Case The Case Where One Firm Has Debt How Can Shareholders Reduce Their Losses From the Coinsurance Effect? Concept Question 30.8 TWO "BAD" REASONS FOR MERGERS Earnings Growth Diversification Concept Questions 30.9 THE NET PRESENT VALUE OF A MERGER Cash Common Stock Cash Versus Common Stock Concept Question Defensive Tactics Divestitures The Control Block and the Corporate Charter Standstill Agreements Exclusionary Offers and Non-Voting Stock Going Private and Leveraged Buyouts Other Defensive Devices Concept Question 30.10 SOME EVIDENCE ON ACQUISITIONS Do Acquisitions Benefit Shareholders? The Managers Versus the Shareholders Real Productivity Concept Questions 30.11 SUMMARY AND CONCLUSIONS Minicase: The Birdie Golf–Hybrid Golf Merger CHAPTER 31 Financial Distress Executive Summary 31.1 WHAT IS FINANCIAL DISTRESS? Concept Questions 31.2 WHAT HAPPENS IN FINANCIAL DISTRESS? Concept Questions 31.3 BANKRUPTCY LIQUIDATION AND REORGANIZATION Bankruptcy Liquidation Bankruptcy Reorganization Agreements to Avoid Bankruptcy Concept Questions 31.4 CURRENT ISSUES IN FINANCIAL DISTRESS Private Workout or Bankruptcy: Which Is Better? Holdouts Complexity Lack of Information Prepackaged Bankruptcy Concept Questions 31.5 THE DECISION TO SEEK COURTPROTECTION: THE CASE OFCANWEST GLOBALCOMMUNICATIONS CORPORATION Concept Questions 31.6 SUMMARY AND CONCLUSIONS CHAPTER 32 International Corporate Finance Executive Summary 32.1 TERMINOLOGY Concept Question 32.2 FOREIGN EXCHANGE MARKETS AND EXCHANGE RATES Exchange Rates Types of Transactions Concept Questions 32.3 THE LAW OF ONE PRICE AND PURCHASING POWER PARITY Concept Questions 32.4 INTEREST RATES AND EXCHANGE RATES The Dollar Investment The Euro Investment The Forward Discount and Expected Spot Rates Exchange Rate Risk More Advanced Short-Term Hedges The Hedging Decision in Practice Concept Questions 32.5 INTERNATIONAL CAPITAL BUDGETING Foreign Exchange Conversion Unremitted Cash Flows The Cost of Capital for International Firms Concept Questions 32.6 INTERNATIONAL FINANCING DECISIONS Short-Term and Medium-Term Financing International Bond Markets In Their Own Words: Merkel: Europe faces historic test in euro crisis Concept Questions 32.7 REPORTING FOREIGN OPERATIONS Concept Question 32.8 POLITICAL RISK 32.9 SUMMARY AND CONCLUSIONS [Show More]

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Corporate Finance, 1st Middle East Edition 1e Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Jorg Bley (Test Bank)

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