Chapter Abstracts - Ch. 1. Financial Decision Making
Chapter One covers financial decision making: the nature of financial decisions including the value base and the 'model' approach and the structure of the text; the decision process including the first necessary condition, the second necessary condition, valuation of alternatives; financial decision making including the decision objective, maximizing shareholder wealth, defining wealth, the role of accounting profit, the time dimension, the objective hierarchy and a fundamental assumption; and technology and financial decision making. - Ch. 2. Decision Objectives
Chapter Two covers decision objectives: wealth maximization and the company including maximizing versus satisfying; ownership and control; regulation of the relationship between directors and shareholders including fiduciary responsibilities, annual reports and independent external audit, stock exchange rules, directors' transactions, the 'City Code' on takeovers and mergers, the Cadbury, Greenbury and Hampel Reports on Corporate Governance, the Combined Code; incentive scheme criteria including types of scheme; and when incentive schemes and regulation are ineffective. - Ch. 3. Traditional Methods
Chapter Three covers traditional methods of investment appraisal: a warning; a warning including working capital, advantages of payback, the decision criterion, disadvantages of payback, the time value of money; and return on capital employed including advantages of ROCE and disadvantages of ROCE. - Ch. 4. Investment-Consumption Decision Model
Chapter Four covers investment-consumption decision model: introduction to the model including the basic assumptions; the time value of money; the basic graphical analysis including the single-owner firm case, introduction of indifference curves; introduction of capital markets, the financial market line; the separation theorem including graphical derivation of the decision rule and the multi-owner firm; the conclusions of the basic model including introducing uncertainty; and payback and ROCE. - Ch. 5. DCF Approach
Chapter Five covers the discounted cash flow approach: net present value including the discounting process, a discounting example, calculating present values, the timing of cash flows and the NPV decision rule; alternative interpretations of NPV including NPV and the investment-consumption model, the graphical interpretation; internal rate of return including the IRR model, estimating the IRR via linear interpolation, the IRR decision rule and IRR and the investment-consumption model; discounted payback; and truncated NPV. - Ch. 6. NPV and IRR
Chapter Six covers net present value and internal rate of return: NPV and project interdependence including NPV and mutually exclusive projects and interlinked projects; IRR rule and interdependent projects including incremental cash flows, use of the IRR, IRR and incremental cash flows and the 'opportunity cost of cash' assumption; extending the time horizon including average and marginal rates of return; multiple IRRs including extended yield method; other problems with the IRR rule; the modified IRR; NPV versus IRR - conclusion; and the replacement cycle problem including optimal replacement cycle and repair versus replace. - Ch. 7. Cash Flows
Chapter Seven covers project cash flows: investment appraisal and inflation including the problem of inflation, 'real' and 'market' rates of interest and two possible approaches; inflation and the IRR rule; investment appraisal and taxation including the impact of tax; financing cash flows including writing-down allowances, 'profit' tax charge; and investment appraisal and the relevant cash flow including guiding rules. - Ch. 8. Capital Rationing
Chapter Eight covers capital rationing: introduction to capital rationing including capital market borrowing; hard and soft capital rationing; single-period capital rationing including examples of benefit-cost ratios, divisibility assumption, mutually exclusive investments, single-period rationing and the IRR; multi-period capital rationing including soft capital rationing, the opportunity cost of capital dilemma, the LP solution to capital rationing, the assumptions behind LP, the dual values and two applications of dual values. - Ch. 9. Simple Risk Techniques
Chapter Nine covers simple risk techniques: risk and return; expected net present value, limitations of ENPV, value of additional information; the abandonment decision; sensitivity analysis including the decision pivot point, limitations of sensitivity analysis; the risk-adjusted discount rate including risk and return, the problems and certainty-equivalents. - Ch. 10. Risk and Return
Chapter Ten covers risk and return: introduction to uncertainty including a simple approach and a caution; the expected utility model including investors' behaviour axioms, utility function construction, the shape of the utility function and individual choice amongst risky investments; risk, return and the investment decision including return on investment, expected returns, risk, downside risk, risk and expected utility, required assumptions and limitation of the analysis. - Ch. 11. Portfolio Theory
Chapter Eleven covers portfolio theory: two-asset portfolios including risk and expected return, the covariance, the covariance calculation, the risk-reduction effect and dominance; multi-asset portfolios including a three-asset portfolio, a graphical representation, considerations of practicality; introduction of a risk-free investment including a two-asset portfolio, the risky-riskless boundary, a riskless asset plus a risky portfolio, the possibility of borrowing, combined borrowing and lending possibilities; the capital market line including the separation theorem, the market portfolio, the assumptions, the market price of risk, market portfolio risk; and diversification within companies. - Ch. 12. CAPM
Chapter Twelve covers the capital asset pricing model: the security market line including derivation of the security market line, the CML and the SML; the CAPM expression including interpreting systematic and unsystematic risk, the determinants of the systematic risk level; the beta value, interpreting beta, portfolio betas, measurement of beta, the alpha coefficient, the beta value, beta stability, a further estimation approach; the validity of the CAPM including the assumptions behind the CAPM, the empirical evidence, sources of information about beta; arbitrage pricing theory; and betas and project investment appraisal including the project discount rate, the project beta, adjusting beta and one final point. - Ch. 13. Option Valuation
Chapter Thirteen covers option valuation: the basic characteristics of options including types of options; option terminology including call options and put options, exchange-traded options and OTC options and 'American' and 'European' options; the valuation of options including the intrinsic value of a call, the intrinsic value of a put, minimum intrinsic value, in-, out- and at-the-money, the time value, the market value, determinants of intrinsic value, determinants of the time value and determinants of the market value; the Black and Scholes model including using the model, model assumptions, adjusting the model for dividends and valuing put options; the building blocks of investment including investing in shares, investing in risk-free bonds, investing in call options in the shares, investing in put options in the shares, the fundamental relationship and a risk-free investment portfolio; put-call parity theorem including put-call parity equation; using share options including speculating with calls, limiting downside risk, speculating with puts, combining calls and puts, writing (selling) options; the option 'Greeks' including Delta or the hedge ratio, Gamma, Theta, Vega, Rho (or phi); and the binomial model. - Ch. 14. Interest Rate Risk
Chapter Fourteen covers interest rate risk: introduction to interest rate risk including definition; the money markets; forward loans; forward rate agreements including other uses of FRAs, the market in FRAs, a final point; interest rate guarantees, pricing IRGs, FRAs versus IRGs; option contract markets; interest rate futures including hedge efficiency, maturity mismatch, a strip hedge, margin; caps, collars and floors including interest rate caps, interest rate collars and interest rate floors; and interest rate swaps including swaptions, quality spread or coupon swaps and advantages and disadvantages. - Ch. 15. Financial Markets
Chapter Fifteen financial markets: market efficiency including definition, importance of market efficiency, levels of market efficiency; market efficiency and share dealing; the empirical evidence of EMH including weak efficiency, semi-strong efficiency and strong efficiency; the term structure of interest rates including the yield to maturity, the yield curve and spot interest rates; and pure expectations hypothesis including forward interest rates, the Fisher Effect, taxes and transaction costs, liquidity preference and segmented markets. - Ch. 16. The Cost of Capital
Chapter Sixteen covers the cost of capital: the financing decision including types of long-term finance; the cost of equity capital including physical and financial investments, the required return on equity capital and defining the cost of equity capital; expected return, dividends and market price including workings of the stock market, a changing required return, the share price-return relationship and the shareholder and the market; applying the dividend valuation model including the model, bid and offer prices, cum dividend and ex dividend, the dividend growth model, the dividend growth rate, a changing dividend growth rate and the cost of retained earnings; CAPM and the cost of equity capital; CAPM versus the DVM; the cost of debt capital including debt versus equity capital, the interest valuation model, 'plain vanilla' bonds, pricing bonds, the opportunity cost of debt capital, the cost of irredeemable debt capital, the cost of redeemable debt, semi-annual interest payments, discount or zero coupon bonds, low coupon bonds, the impact of corporation tax, unquoted debt, floating rate debt, implicit and explicit costs of debt capital; cost of preference shares; and convertible debt including some definitions, advantages of convertibles and cost of convertible debt. - Ch. 17. Weighted Average Cost of Capital
Chapter Seventeen covers weighted average cost of capital: the project discount rate including ill-equity financed companies, two limiting assumptions, mixed capital structure companies, a constant capital structure and 'pool of funds' concept; the calculation of K0 including the formal derivation, the assumptions behind the use of the WACC; the WACC and project risk including the absence of tax. Also covered in the appendix is: differing corporate and private costs of debt including financing via debt capital, introducing tax, debt capital in the perfect market case, debt capital in the imperfect market case, the extreme use of debt capital and the role of WACC. - Ch. 18. Capital Structure in a Simple World
Chapter Eighteen covers capital structure in a simple world: an optimal capital structure including the total market value model, gearing and V0 in a no-tax world and the assumptions; business and financial risk including asset betas and gearing, gearing and KE and the graphical relationship; the arbitrage proof including an arbitrage example, reverse arbitrage, two further points, conclusion and assumptions and a rising cost of debt. - Ch. 19. Capital Structure in a Complex World
Chapter Nineteen covers capital structure in a complex world: taxation and capital structure including taxation and the WACC, the cost of equity capital and the graphical relationship; using the M and M equations, arbitrage in a taxed world; M and M in the real world including agency costs, bankruptcy costs, debt capacity and tax exhaustion; and further views on capital structure including the traditional view of capital structure and corporate and personal taxes. - Ch. 20. Capital Structure in Practice
Chapter Twenty covers capital structure in practice: the pecking order theory including the issue of timing, market signals, the financing dilemma and 'pecking order' rules; real-world considerations; earnings per share and gearing including risk and return, the use of judgement and interest cover ratio; and degree of operating gearing including business and financial risk and the meaning of DOG. - Ch. 21. Investment and Financing Interactions
Chapter Twenty One covers investment and financing interactions: company valuation and investment appraisal; the dividend and interest valuation model; adjusted present value model; the M and M valuation model; the traditional valuation model; approaches to investment appraisal including maintaining the gearing ratio, dividend flow approach, APV approach, NPV approach, a changing capital structure, adjusted present value and the base-case discount rate; asset betas and gearing including asset betas and tax, applying the APV technique, a more complex example; risk-adjusted WACC; and lease or purchase decision including financial and operating leases and evaluating a financial lease. - Ch. 22. Dividend Decision
Chapter Twenty Two covers the dividend decision: dividend policy in perfect capital markets including dividends as a residual, dividend patterns and the valuation model; traditional view of the dividend decision including an arbitrage criticism and the possibility of external finance; dividend policy in an imperfect market including 'Clientele' effect, dividends as signals and tax considerations; and the empirical evidence. - Ch. 23. Acquisition Activity
Chapter Twenty Three covers acquisition decisions: synergy including revenue synergy, cost synergy, tax synergy and financial synergy; valuing synergy; acquisition premiums; organic growth versus growth via acquisition including advantages of acquisition-led growth and disadvantages of acquisition-led growth; the coinsurance effect including the all-equity situation, the geared situation, size of the coinsurance effect and the coinsurance effect and target shareholders; bootstrapping EPS including diversification; takeover defence including early warning system, City Code, three-stage defence strategy, defence document, the bid represents an undervaluation, unacceptable offer terms, anti-competitive and 'White Knight' defence the target; and financing acquisitions including cash offer and share-for-share exchange. - Ch. 24. Company Valuation
Chapter Twenty Four covers company valuation: asset basis including problems with the asset basis; earnings basis including current EAIT, unusual events, owner-managers, the suitable multiple and problems with the earnings basis; dividend basis including problems with the dividend basis; free cash flow basis including advantages and disadvantages of the FCF basics; intellectual capital including value of intellectual capital, market to book, Tobin's 'q' quotient and calculated intangible value (CIV). - Ch. 25. Foreign Exchange
Chapter Twenty Five covers foreign exchange: exchange rates including buying rates and selling rates, inverting exchange rates and cross rates; foreign exchange markets including discounts and premiums, rates of depreciation and appreciation and exchange/delivery of currencies; exchange rate systems including clean and dirty floats and the ERM and EMU; and determinants of FX rates including supply and demand, interest rates and inflation. - Ch. 26. FX Hedging
Chapter Twenty Six covers foreign exchange hedging: transaction risk hedging including do nothing, natural hedging or netting, swaps, forward market hedging, money market hedging, comparing hedges, leading hedge and another money market hedge; FX futures contracts including a futures hedge and margin; forward versus futures; FX options contracts including over-the-counter options, traded currency options, calls and puts, exercise price; setting up an option hedge, an importer case and an important variation; early exercise; contingent exposure to FX risk; and traded options versus OTC options. - Ch. 27. Foreign Direct Investment
Chapter Twenty Seven covers foreign direct investment: domestic versus foreign projects, the basic approach; project cash flows including overseas currency finance; project discount rate including foreign projects in a taxed world, a simpler approach and translation risk; economic risk; country/political risk; and management charges and transfer pricing.
|
Comments
Post a Comment
Silahkan tulis komentar anda, gunakan bahasa yang baik dan enak dibaca. Terimakasih...!