Corporate Finance – A Practical Approach, Third Edition: CFA Institute Investment Series

Foreword xv Acknowledgments xix About the CFA Institute Investment Series xxi CHAPTER 1 Corporate Structures and Ownership 1 1. Introduction 1 2. Business Structures 2 3. Public and Private Corporations 12 4. Lenders and Owners 23 5. Summary 31 6. Practice Problems 32 CHAPTER 2 Introduction to Corporate Governance and Other ESG Considerations 35 1. Introduction 36 2. Stakeholder Groups 36 3. Principal--Agent and Other Relationships 41 4. Corporate Governance and Mechanisms to Manage Stakeholder Risks 51 5. Corporate Governance and Stakeholder Management Risks and Benefits 63 6. ESG Considerations in Investment Analysis 69 7. Environmental, Social, and Governance Investment Approaches 73 8. Summary 77 9. Practice Problems 79 CHAPTER 3 Working Capital & Liquidity 81 1. Introduction 81 2. Financing Options 82 3. Working Capital, Liquidity, and Short-Term Funding Needs 89 4. Liquidity and Short-Term Funding 95 5. Measuring Liquidity 99 6. Evaluating Short-Term Financing Choices 103 7. Summary 105 8. Practice Problems 105 CHAPTER 4 Capital Investments 109 1. Introduction 109 2. Types of Capital Investments 110 3. The Capital Allocation Process 114 4. Investment Decision Criteria 119 5. Common Capital Allocation Pitfalls 125 6. Corporate Use of Capital Allocation 126 7. Real Options 129 8. Summary 132 9. Practice Problems 133 CHAPTER 5 Capital Structure 139 1. Introduction 139 2. Factors Affecting Capital Structure 140 3. Capital Structure and Company Life Cycle 151 4. Modigliani--Miller Propositions 157 5. Optimal and Target Capital Structures 167 6. Stakeholder Interests 174 7. Summary 183 8. Practice Problems 183 CHAPTER 6 Measures of Leverage 189 1. Introduction 189 2. Leverage 190 3. Business and Sales Risks 192 4. Operating Risk and the Degree of Operating Leverage 194 5. Financial Risk, the Degree of Financial Leverage and the Leveraging Role of Debt 201 6. Total Leverage and the Degree of Total Leverage 205 7. Breakeven Points and Operating Breakeven Points 208 8. The Risks of Creditors and Owners 211 9. Summary 213 10. Practice Problems 214 CHAPTER 7 Cost of Capital: Foundational Topics 219 1. Introduction 219 2. Cost of Capital 220 3. Costs of the Various Sources of Capital 223 4. Estimating Beta 232 5. Flotation Costs 237 6. Methods in Use 239 7. Summary 240 8. Practice Problems 241 CHAPTER 8 Cost of Capital: Advanced Topics 249 1. Introduction 249 2. Cost of Capital Factors 250 3. Estimating the Cost of Debt 261 4. The ERP 268 5. The Cost of Equity (Required Return on Equity) 279 6. Mini-Case 1 293 7. Mini-Case 2 299 8. Practice Problems 300 CHAPTER 9 Analysis of Dividends and Share Repurchases 303 1. Dividends: Forms and Effects on Shareholder Wealth and Financial Ratios 304 2. Dividend Policy and Company Value: Theories 311 3. Other Theoretical Issues: Signaling 313 4. Other Theoretical Issues: Summary 320 5. Factors Affecting Dividend Policy in Practice 320 6. Payout Policies 327 7. Share Repurchases 332 8. Valuation Equivalence of Cash Dividends and Share Repurchase 338 9. The Dividend versus Share Repurchase Decision 339 10. Analysis of Dividend Safety 347 11. Summary 351 12. Practice Problems 353 CHAPTER 10 Business Models & Risks 359 1. Introductory Context/Motivation 359 2. What Is a Business Model? 359 3. Business Model Types 373 4. Business Models: Financial Implications 378 5. Business Risks 383 6. Macro Risk, Business Risk, and Financial Risk 384 7. Business Risk: A Closer Look 386 8. Financial Risk 389 9. Summary 392 10. Practice Problems 392 CHAPTER 11 The Firm and Market Structures 395 1. Analysis of Market Structures 395 2. Perfect Competition 401 3. Elasticity of Demand 403 4. Other Factors Affecting Demand 406 5. Consumer Surplus: Value Minus Expenditure 408 6. Supply Analysis, Optimal Price, and Output in Perfectly Competitive Markets 410 7. Long-Run Equilibrium In Perfectly Competitive Markets 416 8. Monopolistic Competition 418 9. Long-Run Equilibrium in Monopolistic Competition 421 10. Oligopoly and Pricing Strategies 422 11. The Cournot Assumption 425 12. The Nash Equilibrium 428 13. Oligopy Markets: Optimal Price, Output, and Long-Run Equilibrium 431 14. Monopoly Markets: Demand/Supply and Optimal Price/Output 434 15. Price Discrimination and Consumer Surplus 440 16. Monopoly Markets: Long-Run Equilibrium 442 17. Identification of Market Structure 443 18. Summary 446 19. Practice Problems 447 CHAPTER 12 Introduction to Industry and Company Analysis 451 1. Introduction 452 2. Uses of Industry Analysis 452 3. Approaches to Identifying Similar Companies 453 4. Industry Classification Systems 457 5. Describing and Analyzing an Industry and Principles of Strategic Analysis 465 6. External Influences on Industry 480 7. Company Analysis 489 8. Summary 493 9. Practice Problems 496 CHAPTER 13 Financial Statement Modeling 501 1. Introduction 502 2. Income Statement Modeling: Operating Costs 508 3. Modeling Operating Costs: Cost of Goods Sold and SG&A 512 4. Modeling Non-operating Costs and Other Items 520 5. Balance Sheet and Cash Flow Statement Modeling 525 6. Building a Financial Statement Model 531 7. Behavioral Finance and Analyst Forecasts 545 8. The Impact of Competitive Factors in Prices and Costs 551 9. Inflation and Deflation 561 10. Technological Developments 570 11. Long-Term Forecasting 580 12. Summary 584 13. Practice Problems 585 CHAPTER 14 Corporate Restructurings 593 1. Introduction 593 2. Corporate Evolution, Actions, and Motivations 594 3. Evaluating Corporate Restructurings 611 4. Modeling and Valuation 620 5. Evaluating Investment Actions 628 6. Evaluating Divestment Actions 640 7. Evaluating Restructuring Actions 647 8. Summary 653 9. Practice Problems 654 CHAPTER 15 Environmental, Social, and Governance (ESG) Considerations in Investment Analysis 659 1. Introduction 659 2. Ownership Structures and Their Effects on Corporate Governance 660 3. Evaluating Corporate Governance Policies and Procedures 666 4. Identifying ESG-Related Risks and Opportunities 670 5. Evaluating ESG-Related Risks and Opportunities 676 6. Summary 685 7. Practice Problems 686 CHAPTER 16 Intercorporate Investments 689 1. Introduction 689 2. Basic Corporate Investment Categories 690 3. Investments In Financial Assets: IFRS 9 692 4. Investments in Associates and Joint Ventures 695 5. Amortization of Excess Purchase Price, Fair Value Option, and Impairment 700 6. Transactions with Associates and Disclosure 705 7. Acquisition Method 709 8. The Consolidation Process 716 9. Financial Statement Presentation 722 10. Variable Interest and Special Purpose Entities 725 11. Additional Issues in Business Combinations That impair Comparability 729 12. Summary 730 13. Practice Problems 731 Glossary 743 References 757 About the Authors 763 About the CFA Program 769 Index 771

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