PDF Finance and the Firm, An introduction to Corporate Finance, Edward W. Davis, John Pointon, Oxford Un

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    Finance and the Firm, An introduction to Corporate Finance, Edward W. Davis, John Pointon, Oxford University Press
    453 pages
     
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  2. huyhuu

    huyhuu Moderator Staff Member

    CONTENTS
    Part I. Introduction
    1. Introduction 3
    How do we choose between alternative investments? 3
    The Investment process 4
    The concept of an investor’s required rate of return 4
    How does risk affect investment criteria? 5
    Can the choice of finance affect the value of the firm? 6
    Recommendations for further reading 7
    References 7
    Part II. Investment Appraisal
    Introduction to Part II 10
    2. Compound Interest and Present Value
    Introduction 11
    The time value of money 11
    Capital growth 12
    Present values 13
    How to determine the rate of interest 15
    The investment period 15
    Annuities 16
    Discounting monthly, daily, and continuously 17
    Conclusion 19
    Exercises 19
    Appendix 21
    3. Net Present Value and Internal Rate of Return
    Capital projects and the separation theorem 23
    Example 24
    Net present value and internal rate of return for a single-period investment 25
    The net present value method in a multi-period setting 27
    The internal rate of return in a multi-period setting 30
    Multiple solutions and imaginary roots 32
    Ranking problems 33
    Summary 35
    Recommendations for further reading 36
    References 36
    Exercises 37
    4. Relevant Cash Flows
    Introduction 38
    The difference between profit and cash flow 38
    Depreciation 39
    Working capital 39
    Accounting rate of return 44
    How does this relate to the internal rate of return? 45
    Cash flows beyond the payback period 46
    Cash flows from lost opportunities 49
    The irrelevance of sunk costs 50
    Relevant cash flows when comparing assets with different life
    spans 51
    Summary 54
    Recommendations for further reading 55
    References 55
    Exercises 56
    Appendix 58
    5. Inflation in Project Appraisal
    Introduction 59
    Specific inflation, general inflation, and the discount rate 59
    Discounting the money cash flows 62
    Discounting the real cash flows 63
    Uniform rates of inflation 65
    Conclusion 67
    Recommendations for further reading 68
    References 68
    Exercises 68
    6. Capital Rationing
    Introduction 70
    One-period constraint 71
    Multi-period constraints 71
    Extensions to the basic programming model 73
    Summary 75
    Recommendations for further reading 75
    References 75
    Exercises 76
    7. Introduction to Risk Analysis
    Introduction 78
    The mean return of the project 78
    The standard deviation of the project’s return 79
    The risk of insolvency 81
    The mean net present value and its standard deviation 83
    Decision trees: how to calculate net present values when there
    are sequential decisions 85
    Risk-adjusted discount rates and certainty equivalents 88
    Summary 90
    Recommendations for further reading 91
    References 91
    Exercises 91
    8. Risk within a Portfolio Framework
    Introduction 93
    The combined risk of two projects 93
    Correlation between two projects 95
    Finding the minimum variance of a portfolio of two securities 97
    The variance of a large portfolio 98
    Systematic and unsystematic risk 99
    The efficient market portfolio 102
    The capital asset pricing model 103
    The use of the capital asset pricing model in multi-period
    investments 107
    Converting cash flows into certainty equivalents using the
    capital asset pricing model (CAPM) 110
    Limitations of the capital asset pricing model in project
    appraisal 111
    The traditional capital asset pricing model 112
    What happens if we relax some of the assumptions? 112
    Should we ignore tax? 113
    Multi-period problems 113
    An efficient market portfolio 113
    Arbitrage pricing 114
    For managers or shareholders: which risk matters? 114
    Summary 115
    Recommendations for further reading 117
    References 117
    Exercises 118
    Appendices 120
    9. Taxation and Project Appraisal
    Introduction 122
    The general effects of tax upon investment and finance 123
    A cash flow tax system 124
    Taxation and risk 128
    Corporation tax in the UK 132
    Capital allowances 132
    Working capital 134
    The imputation system 136
    Project interactions and financing methods 138
    Conclusion 138
    Recommendations for further reading 139
    References 140
    Exercises 140
    Appendix 143
    10. Conclusion on Investment Appraisal
    Why do we use the net present value rule? 144
    Which cash flows are relevant to the project? 144
    Perfect and imperfect capital markets 145
    How do we take account of risk? 146
    Does the theory hold in practice? 146
    Part III. Financial Policy
    Introduction to Part III 150
    I I. Valuation of Stocks and Shares
    Introduction 151
    The basic share valuation model 152
    A constant dividend valuation model 154
    Constant growth in dividends 155
    Split growth in dividends 156
    Dividend growth versus capital gains 157
    Earnings valuation models 158
    Taxation and the cost of equity capital 162
    Debenture stock: nominal and current yields 164
    Summary 167
    Recommendations for further reading 167
    Exercises 167
    Appendices . 169
    12. Capital Structure
    Introduction 170
    The weighted average cost of capital 171
    The marginal cost of capital and investment criteria 171
    Should the firm’s overall cost of capital be dependent upon
    its capital structure? 172
    Modigliani’s and Miller’s argument upon the relevance of
    debt capital 173
    Capital structure and the capital asset pricing model 177
    Tax and capital structure 178
    Do the potential costs of bankruptcy offset the tax advantages
    of debt? 183
    Capital structure under imperfect markets and uncertainty:
    How valid is the assumption of a perfect market? 185
    Managerial motives and the use of debt 188
    Agency costs arising from the reaction of capital suppliers 188
    Information signalling 189
    Conclusion 189
    Recommendations for further reading 190
    References 191
    Exercises 192
    13. Dividend Policy and Valuation
    Introduction 194
    Dividends and retained earnings: The neo-classical approach 195
    Dividend policy under uncertainty: The behavioural approach 199
    Dividends, taxation, and the value of the firm 200
    Dividends and valuation under uncertainty: Information
    signals 204
    Summary 206
    Recommendations for further reading 206
    References 207
    Exercises 207
    Appendices 209
    14. Conclusion on Financial Policy
    Cost of capital 210
    Capital structure 210
    Taxation distortions in capital structure decisions 211
    Other imperfections 211
    Dividend policy 212
    Taxation implications of dividend policy 212
    Management communication 212
    Part IV. Sources of Finance
    Introduction to Part IV 214
    15. Financial Intermediaries and Markets
    Introduction 215
    The creation of financial claims 216
    The nature of financial transactions 217
    Intermediation and asset transformation 218
    An outline of financial markets 219
    Forward, futures, and options markets 222
    The term structure of interest rates 223
    Conclusion 227
    Recommendations for further reading 228
    References 228
    Exercises 229
    16. Maturity Choice and Hedging Strategies
    Introduction 230
    Cash flows and capital requirements 231
    Hedging policies: Maturity matching of assets and liabilities 232
    Interest rate risk exposure 234
    The substitution effect in corporate financing policy 235
    The use of financial futures to hedge interest rate risk
    exposure 236
    Summary 239
    Recommendations for further reading 240
    References 240
    Exercises 240
    17. International Finance: Management of Exchange Risk
    Introduction 242
    Definitions of currency risk 242
    The generation of transaction exposure through trade 244 Influence of interest rates and inflation upon exchange rates 246 Financial instruments available to manage transaction risk:
    The use of forward currency markets 250
    The significance of currency options 252
    Currency options trading 254
    Conclusion 259
    Recommendations for further reading 260
    References 260
    Exercises 261
    Appendix 263
    18. Short-Term Borrowing
    Introduction 264
    Trade credit 265
    Bill finance and acceptance credits 267
    Money market borrowing: Commercial paper and
    inter-company loans 268
    Loans and overdrafts 269
    Effective interest rates 270
    The negotiation of ‘excess’ credit facilities 273
    Hard-core overdraft borrowing 274
    Factoring 275
    Security 278
    Summary 279
    Recommendations for further reading 280
    References 280
    Exercise 280
    19. Medium-Term Finance
    Introduction 281
    Term loans 281
    Advantages to the borrower 283
    Hire-purchase 285
    Leasing 285
    Operating leases 286
    Contract hire 286
    Financial leasing 286
    Rental payment schedules 287
    Rental costs 289
    Leasing rentals in an equilibrium framework 290
    The discount rate 291
    Tax losses 292
    Capital allowances 293
    Residual values 296
    The lessor’s implicit interest rate and the lessee’s finance
    charges 296
    The net present value to the lessee 296
    The net present value to the lessor 297
    Summary 298
    Recommendations for further reading 299
    References 299
    Exercises 300
    Appendices 301
    20. Longer-Term Debt
    Introduction 303
    Loan capital 303
    Interest costs 306
    Credit rating 306
    Syndicated loans and Euro-bond issues 309
    Junk bonds and leveraged buy-outs 310
    Preference shares 311
    Conclusion 313
    Recommendations for further reading 314
    References 314
    Exercises 314
    21. Equity Capital and the Stock Exchange
    Introduction 315
    Ordinary shares 315
    The ownership of quoted ordinary shares 318
    Market channelling efficiency 319
    The efficient markets theory 320
    Summary 321
    Recommendations for further reading 322
    References 322
    Exercises 323
    22. Equity Finance: The New Issue Market
    Introduction 324
    Stock Exchange admission requirements 325
    The issuing process 326
    Markets in ‘unlisted’ securities 328
    Method of issue 329
    Underwriting 331
    Costs of issue 331
    Summary 336
    Recommendations for further reading 337
    References 337
    Exercises 338
    23. Rights Issues
    Introduction 339
    Effect on shareholder net wealth 342
    Underwriting and the cost of capital 345
    Capitalization issues and stock splits 348
    Scrip dividends 349
    Summary 350
    Recommendations for further reading 350
    References 350
    Exercises 351
    24. Convertibles and Share Options
    Introduction 352
    Convertibles 353
    Setting the value of a convertible 353
    Option pricing 356
    Summary 362
    Recommendations for further reading 363
    References 363
    Exercises 364
    Part V. Mergers and Conclusion
    25. Mergers and Take-overs
    Introduction 369
    Economic/strategic definitions of mergers and take-overs 369
    Shareholder wealth maximization motives 372
    Synergy 373
    Market power 375
    Finance for acquisitions 376
    What form of consideration should be offered in making an acquisition? 378
    What are the implications of financing an acquisition? 379
    Take-over procedures and control in the UK 381
    Summary 383
    Recommendations for further reading 383
    References 384
    Exercises 384
    26. Conclusion
    Introduction 386
    Assumptions of the theory of finance 386
    Implications of the theory 387
    Imperfections in the real world 388
    Business finance and investment: The relevance of equilibrium analysis 390
    Concluding remarks 391
    References 392
    Appendices
    Appendix I 395
    Appendix II 397
    Appendix III 399
    Appendix IV 401
    Appendix V 403
    Author Index 419
    Subject Index 423
     

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