You are previewing Corporate Finance Theory and Practice, Third Edition.
O'Reilly logo
Corporate Finance Theory and Practice, Third Edition

Book Description

Corporate Finance: Theory and Practice, 3rd Edition, the website www.vernimmen.com and the Vernimmen.com newsletter are all written and created by an author team who are both investment bankers/corporate financiers and academics.

This book covers the theory and practice of Corporate Finance from a truly European perspective. It shows how to use financial theory to solve practical problems and is written for students of corporate finance and financial analysis and practising corporate financiers. Corporate Finance: Theory and Practice, 3rd Edition is split into four sections covering the basics of financial analysis; the basic theories behind valuing a firm; the major types of financial securities (equity, debt & options) and, finally, financial management; how to organise a company's equity capital, buying and selling companies, M&A, bankruptcy and cash flow management.

Key features include:

A section on financial analysis – a Corporate Financier must understand a company based on a detailed analysis of its accounts. Large numbers neglected this approach during the last stock market bubble and were caught in the crash that inevitably followed. How many investors took the trouble to read Enron's annual report? Those who did found that it spoke volumes!

End of Chapter Summary, Questions and Answers, Glossary, European Case Studies

A supporting Website http://www.vernimmen.com with free access to statistics, a glossary & lexicon; articles, notes on financial transactions, basic financial figures for more than 10,000 European and US listed companies, thesis topics, a bibliography; case studies, Q&A; A letter box for your questions to the authors – a reply guaranteed within 72 hours

A free monthly newsletter on Corporate Finance sent out to subscribers to the site.

"The ebook version does not provide access to the companion files".

Table of Contents

  1. Cover Page
  2. Title Page
  3. Copyright
  4. About the authors
  5. Summary
  6. Introduction: Contrasts, Shocks, Threats and Opportunities
  7. Preface
  8. Frequently used symbols
  9. Chapter 1: WHAT IS CORPORATE FINANCE?
    1. THE FINANCIAL MANAGER IS FIRST AND FOREMOST A SALESMAN…
    2. … OF FINANCIAL SECURITIES …
    3. … VALUED CONTINUOUSLY BY THE FINANCIAL MARKETS
    4. MOST IMPORTANTLY, HE IS A NEGOTIATOR …
    5. … WHO NEVER FORGETS TO DO AN OCCASIONAL REALITY CHECK!
    6. … HE IS ALSO NOW A RISK MANAGER
  10. Section I: FINANCIAL ANALYSIS
    1. PART ONE: FUNDAMENTAL CONCEPTS IN FINANCIAL ANALYSIS
      1. Chapter 2: CASH FLOW
        1. CLASSIFYING COMPANY CASH FLOWS
        2. OPERATING AND INVESTMENT CYCLES
        3. FINANCIAL RESOURCES
      2. Chapter 3: EARNINGS
        1. ADDITIONS TO WEALTH AND DEDUCTIONS FROM WEALTH
        2. DIFFERENT INCOME STATEMENT FORMATS
      3. Chapter 4: CAPITAL EMPLOYED AND INVESTED CAPITAL
        1. THE BALANCE SHEET: DEFINITIONS AND CONCEPTS
        2. A CAPITAL-EMPLOYED ANALYSIS OF THE BALANCE SHEET
        3. A SOLVENCY-AND-LIQUIDITY ANALYSIS OF THE BALANCE SHEET
        4. A DETAILED EXAMPLE OF A CAPITAL-EMPLOYED BALANCE SHEET
      4. Chapter 5: WALKING THROUGH FROM EARNINGS TO CASH FLOW
        1. ANALYSIS OF EARNINGS FROM A CASH FLOW PERSPECTIVE
        2. CASH FLOW STATEMENT
      5. Chapter 6: GETTING TO GRIPS WITH CONSOLIDATED ACCOUNTS
        1. CONSOLIDATION METHODS
        2. CONSOLIDATION-RELATED ISSUES
        3. TECHNICAL ASPECTS OF CONSOLIDATION
      6. Chapter 7: HOW TO COPE WITH THE MOST COMPLEX POINTS IN FINANCIAL ACCOUNTS
        1. ACCRUALS
        2. CONSTRUCTION CONTRACTS
        3. CONVERTIBLE BONDS AND LOANS
        4. CURRENCY TRANSLATION ADJUSTMENTS
        5. DEFERRED TAX ASSETS AND LIABILITIES
        6. DILUTION PROFIT AND LOSSES
        7. EXCHANGEABLE BONDS
        8. GOODWILL
        9. IMPAIRMENT LOSSES
        10. INTANGIBLE FIXED ASSETS
        11. INVENTORIES
        12. LEASES
        13. MANDATORY CONVERTIBLE BONDS
        14. OFF-BALANCE-SHEET COMMITMENTS
        15. PENSIONS AND OTHER EMPLOYEE BENEFITS
        16. PERPETUAL SUBORDINATED LOANS AND NOTES
        17. PREFERENCE SHARES 18
        18. PROVISIONS
        19. STOCK OPTIONS
        20. TANGIBLE ASSETS
        21. TREASURY SHARES
    2. PART TWO: FINANCIAL ANALYSIS AND FORECASTING
      1. Chapter 8: HOW TO PERFORM A FINANCIAL ANALYSIS
        1. WHAT IS FINANCIAL ANALYSIS?
        2. ECONOMIC ANALYSIS OF COMPANIES
        3. AN ASSESSMENT OF A COMPANY'S ACCOUNTING POLICY
        4. STANDARD FINANCIAL ANALYSIS PLAN
        5. THE VARIOUS TECHNIQUES OF FINANCIAL ANALYSIS
        6. RATINGS
        7. SCORING TECHNIQUES
        8. EXPERT SYSTEMS
      2. Chapter 9: MARGIN ANALYSIS: STRUCTURE
        1. HOW OPERATING PROFIT IS FORMED
        2. HOW OPERATING PROFIT IS ALLOCATED
        3. COMPREHENSIVE INCOME
        4. FINANCIAL ASSESSMENT
        5. STANDARD INCOME STATEMENTS (INDIVIDUAL AND CONSOLIDATED ACCOUNTS)
        6. CASE STUDY: INDESIT
      3. Chapter 10: MARGIN ANALYSIS: RISKS
        1. HOW OPERATING LEVERAGE WORKS
        2. A MORE REFINED ANALYSIS PROVIDES GREATER INSIGHT
        3. FROM ANALYSIS TO FORECASTING: THE CONCEPT OF NORMATIVE MARGIN
        4. CASE STUDY: INDESIT 2
      4. Chapter 11: WORKING CAPITAL AND CAPITAL EXPENDITURES
        1. THE NATURE OF WORKING CAPITAL
        2. WORKING CAPITAL TURNOVER RATIOS
        3. READING BETWEEN THE LINES OF WORKING CAPITAL
        4. ANALYSING CAPITAL EXPENDITURES
        5. CASE STUDY: INDESIT 4
      5. Chapter 12: FINANCING
        1. A DYNAMIC ANALYSIS OF THE COMPANY'S FINANCING
        2. A STATIC ANALYSIS OF THE COMPANY'S FINANCING
        3. CASE STUDY: INDESIT 6
      6. Chapter 13: RETURN ON CAPITAL EMPLOYED AND RETURN ON EQUITY
        1. ANALYSIS OF CORPORATE PROFITABILITY
        2. LEVERAGE EFFECT
        3. USES AND LIMITATIONS OF THE LEVERAGE EFFECT
        4. CASE STUDY: INDESIT
      7. Chapter 14: CONCLUSION OF FINANCIAL ANALYSIS
        1. SOLVENCY
        2. VALUE CREATION
        3. FINANCIAL ANALYSIS WITHOUT THE RELEVANT ACCOUNTING DOCUMENTS
        4. CASE STUDY: INDESIT
  11. Section II: INVESTORS AND MARKETS
    1. PART ONE: INVESTMENT DECISION RULES
      1. Chapter 15: THE FINANCIAL MARKETS
        1. THE RISE OF CAPITAL MARKETS
        2. THE FUNCTIONS OF A FINANCIAL SYSTEM
        3. THE RELATIONSHIP BETWEEN BANKS AND COMPANIES
        4. THEORETICAL FRAMEWORK: EFFICIENT MARKETS
        5. ANOTHER THEORETICAL FRAMEWORK UNDER CONSTRUCTION: BEHAVIOURAL FINANCE
        6. INVESTORS' BEHAVIOUR
      2. Chapter 16: THE TIME VALUE OF MONEY AND NET PRESENT VALUE
        1. CAPITALISATION
        2. DISCOUNTING
        3. PRESENT VALUE AND NET PRESENT VALUE OF A FINANCIAL SECURITY
        4. THE NPV DECISION RULE
        5. WHAT DOES NET PRESENT VALUE DEPEND ON?
        6. SOME EXAMPLES OF SIMPLIFICATION OF PRESENT VALUE CALCULATIONS
      3. Chapter 17: THE INTERNAL RATE OF RETURN
        1. HOW IS INTERNAL RATE OF RETURN DETERMINED?
        2. INTERNAL RATE OF RETURN AS AN INVESTMENT CRITERION
        3. THE LIMITS OF THE INTERNAL RATE OF RETURN
        4. SOME MORE FINANCIAL MATHEMATICS: INTEREST RATE AND YIELD TO MATURITY
    2. PART TWO: THE RISK OF SECURITIES AND THE REQUIRED RATE OF RETURN
      1. Chapter 18: RISK AND RETURN
        1. SOURCES OF RISK
        2. RISK AND FLUCTUATION IN THE VALUE OF A SECURITY
        3. TOOLS FOR MEASURING RETURN AND RISK
        4. MARKET AND SPECIFIC RISK
        5. THE BETA COEFFICIENT
        6. PORTFOLIO RISK
        7. CHOOSING AMONG SEVERAL RISKY ASSETS AND THE EFFICIENT FRONTIER
        8. CHOOSING BETWEEN SEVERAL RISKY ASSETS AND A RISK-FREE ASSET: THE CAPITAL MARKET LINE
        9. HOW PORTFOLIO MANAGEMENT WORKS
      2. Chapter 19: THE REQUIRED RATE OF RETURN
        1. RETURN REQUIRED BY INVESTORS: THE CAPM 2
        2. PROPERTIES OF THE CAPM
        3. THE LIMITS OF THE CAPM
        4. MULTIFACTOR MODELS
      3. Chapter 20: THE TERM STRUCTURE OF INTEREST RATES
        1. FIXED-INCOME SECURITIES AND RISK
        2. THE DIFFERENT INTEREST RATE CURVES
        3. RELATIONSHIP BETWEEN INTEREST RATES AND MATURITIES
        4. A FLASHBACK
    3. PART THREE: FINANCIAL SECURITIES
      1. Chapter 21: BONDS
        1. BASIC CONCEPTS
        2. THE YIELD TO MATURITY
        3. FLOATING-RATE BONDS
        4. MEDIUM-TERM NOTES
        5. THE VOLATILITY OF DEBT SECURITIES
        6. DEFAULT RISK AND THE ROLE OF RATING
      2. Chapter 22: OTHER DEBT PRODUCTS
        1. SHORT-TERM MARKETABLE DEBT SECURITIES
        2. BANK DEBT PRODUCTS
        3. FINANCING LINKED TO AN ASSET OF THE FIRM
      3. Chapter 23: SHARES
        1. BASIC CONCEPTS
        2. MULTIPLES
        3. KEY MARKET DATA
        4. HOW TO PERFORM A STOCK MARKET ANALYSIS
        5. ADJUSTING PER SHARE DATA FOR TECHNICAL FACTORS
      4. Chapter 24: OPTIONS
        1. DEFINITION AND THEORETICAL FOUNDATION OF OPTIONS
        2. MECHANISMS USED IN PRICING OPTIONS
        3. ANALYSING OPTIONS
        4. PARAMETERS TO VALUE OPTIONS
        5. METHODS FOR PRICING OPTIONS
        6. TOOLS FOR MANAGING AN OPTIONS POSITION
      5. Chapter 25: HYBRID SECURITIES
        1. WARRANTS
        2. CONVERTIBLE BONDS
        3. PREFERENCE SHARES
        4. OTHER HYBRID SECURITIES
      6. Chapter 26: SELLING SECURITIES
        1. GENERAL PRINCIPLES IN THE SALE OF SECURITIES
        2. INITIAL PUBLIC OFFERINGS
        3. CAPITAL INCREASES
        4. BLOCK TRADES OF SHARES
        5. BONDS
        6. CONVERTIBLE AND EXCHANGEABLE BONDS
        7. SYNDICATED LOANS
  12. Section III: VALUE
    1. Chapter 27: VALUE AND CORPORATE FINANCE
      1. THE PURPOSE OF FINANCE IS TO CREATE VALUE
      2. VALUE CREATION AND MARKETS IN EQUILIBRIUM
      3. VALUE AND ORGANISATION THEORIES
      4. HOW CAN WE CREATE VALUE?
      5. VALUE AND TAXATION
    2. Chapter 28: MEASURING VALUE CREATION
      1. OVERVIEW OF THE DIFFERENT CRITERIA
      2. NPV, THE ONLY RELIABLE CRITERION
      3. FINANCIAL/ACCOUNTING CRITERIA
      4. MARKET CRITERIA
      5. ACCOUNTING CRITERIA
      6. PUTTING THINGS INTO PERSPECTIVE
    3. Chapter 29: INVESTMENT CRITERIA
      1. THE PREDOMINANCE OF NPV AND THE IMPORTANCE OF IRR
      2. THE MAIN LINES OF REASONING
      3. WHICH CASH FLOWS ARE IMPORTANT?
      4. OTHER INVESTMENT CRITERIA
    4. Chapter 30: THE COST OF CAPITAL
      1. THE COST OF CAPITAL AND THE RISK OF ASSETS
      2. ALTERNATIVE METHODS FOR ESTIMATING THE COST OF CAPITAL
      3. SOME PRACTICAL APPLICATIONS
      4. CAN CORPORATE MANAGERS INFLUENCE THE COST OF CAPITAL?
      5. COST OF CAPITAL: A LOOK AT THE EVIDENCE
    5. Chapter 31: RISK AND INVESTMENT ANALYSIS
      1. ASSESSING RISK THROUGH THE BUSINESS PLAN
      2. THE CONTRIBUTION OF REAL OPTIONS
    6. Chapter 32: VALUATION TECHNIQUES
      1. OVERVIEW OF THE DIFFERENT METHODS
      2. VALUATION BY DISCOUNTED CASH FLOW
      3. MULTIPLE APPROACH OR PEER-GROUP COMPARISONS
      4. THE SUM-OF-THE-PARTS METHOD (SOTP) OR NET ASSET VALUE (NAV)
      5. COMPARISON OF VALUATION METHODS
      6. PREMIUMS AND DISCOUNTS
  13. Section IV: CORPORATE FINANCIAL POLICIES
    1. PART ONE: CAPITAL STRUCTURE POLICIES
      1. Chapter 33: CAPITAL STRUCTURE AND THE THEORY OF PERFECT CAPITAL MARKETS
        1. THE VALUE OF CAPITAL EMPLOYED
        2. WHAT OUR GRANDPARENTS THOUGHT
        3. THE CAPITAL STRUCTURE POLICY IN PERFECT FINANCIAL MARKETS
      2. Chapter 34: CAPITAL STRUCTURE, TAXES AND ORGANISATION THEORIES
        1. THE BENEFITS OF DEBT OR THE TRADEOFF MODEL
        2. A MORE GLOBAL AND RELEVANT APPROACH
      3. Chapter 35: DEBT, EQUITY AND OPTIONS THEORY
        1. ANALYSING THE FIRM IN LIGHT OF OPTIONS THEORY
        2. CONTRIBUTION OF OPTIONS THEORY TO THE VALUATION OF EQUITY
        3. USING OPTIONS THEORY TO ANALYSE A COMPANY'S FINANCIAL DECISIONS
        4. ANALYSING THE FIRM'S LIQUIDITY
        5. RESOLVING CONFLICTS BETWEEN SHAREHOLDERS AND CREDITORS
      4. Chapter 36: WORKING OUT DETAILS: THE DESIGN OF THE CAPITAL STRUCTURE
        1. THE MAJOR CONCEPTS
        2. HOW TO CHOOSE A CAPITAL STRUCTURE
        3. EFFECTS OF THE FINANCING CHOICE ON ACCOUNTING AND FINANCIAL CRITERIA
        4. WORKING OUT THE DETAILS OF THE CAPITAL STRUCTURE
        5. CAPITAL STRUCTURE POLICIES: A LOOK AT THE EVIDENCE
    2. PART TWO: EQUITY CAPITAL
      1. Chapter 37: RETURNING CASH TO SHAREHOLDERS
        1. REINVESTED CASH FLOW AND THE VALUE OF EQUITY
        2. INTERNAL FINANCING AND RETURN CRITERIA
        3. WHY RETURN CASH TO SHAREHOLDERS?
      2. Chapter 38: DISTRIBUTION IN PRACTICE: DIVIDENDS AND SHARE BUY-BACKS
        1. DIVIDENDS
        2. EXCEPTIONAL DIVIDENDS, SHARE BUY-BACKS AND CAPITAL REDUCTION
        3. THE CHOICE BETWEEN DIVIDENDS, SHARE BUY-BACKS AND CAPITAL REDUCTION
      3. Chapter 39: SHARE ISSUES
        1. A DEFINITION OF A SHARE ISSUE
        2. SHARE ISSUES AND FINANCE THEORY
        3. OLD AND NEW SHAREHOLDERS
        4. SHARE ISSUES AND FINANCIAL CRITERIA
  14. Section V: FINANCIAL MANAGEMENT
    1. PART ONE: CORPORATE GOVERNANCE AND FINANCIAL ENGINEERING
      1. Chapter 40: CHOICE OF CORPORATE STRUCTURE
        1. SHAREHOLDER STRUCTURE
        2. HOW TO STRENGTHEN CONTROL OVER A COMPANY
        3. ORGANISING A DIVERSIFIED GROUP
        4. FINANCIAL SECURITIES' DISCOUNTS
      2. Chapter 41: INITIAL PUBLIC OFFERINGS (IPOS)
        1. TO BE OR NOT TO BE LISTED
        2. PREPARATION OF AN IPO
        3. EXECUTION OF THE IPO
        4. UNDERPRICING OF IPOS
        5. PUBLIC TO PRIVATE
      3. Chapter 42: CORPORATE GOVERNANCE
        1. WHAT DOES CORPORATE GOVERNANCE MEAN?
        2. CORPORATE GOVERNANCE AND FINANCIAL THEORIES
        3. VALUE AND CORPORATE GOVERNANCE
      4. Chapter 43: TAKING CONTROL OF A COMPANY
        1. THE RISE OF MERGERS AND ACQUISITIONS
        2. CHOOSING A NEGOTIATING STRATEGY
        3. TAKING OVER A LISTED COMPANY
      5. Chapter 44: MERGERS AND DEMERGERS
        1. ALL-SHARE DEALS
        2. THE MECHANICS OF ALL-SHARE TRANSACTIONS
        3. DEMERGERS AND SPLIT-OFFS
      6. Chapter 45: LEVERAGED BUYOUTS (LBOs)
        1. LBO STRUCTURES
        2. THE PLAYERS
        3. LBOs AND FINANCIAL THEORY
      7. Chapter 46: BANKRUPTCY AND RESTRUCTURING
        1. CAUSES OF BANKRUPTCY
        2. BANKRUPTCY AND FINANCIAL THEORY
        3. AN ILLUSTRATIVE EXAMPLE OF FINANCIAL RESTRUCTURING
    2. PART TWO: MANAGING CASH FLOWS, WORKING CAPITAL AND FINANCIAL RISKS
      1. Chapter 47: MANAGING CASH FLOWS
        1. THE BASICS
        2. CASH MANAGEMENT
        3. PLACEMENT OF CASH
        4. CASH MANAGEMENT WITHIN A GROUP
        5. THE CHANGING ROLE OF THE TREASURER
      2. Chapter 48: MANAGING WORKING CAPITAL
        1. A BIT OF COMMON SENSE
        2. MANAGING RECEIVABLES
        3. MANAGING TRADE PAYABLES
        4. INVENTORY MANAGEMENT
      3. Chapter 49: MANAGING FINANCIAL RISKS
        1. INTRODUCTION TO RISK MANAGEMENT
        2. MEASURING FINANCIAL RISKS
        3. PRINCIPLES OF FINANCIAL RISK MANAGEMENT
        4. ORGANISED MARKETS – OTC MARKETS
        5. RISK MANAGEMENT: THE EXAMPLE OF PROJECT FINANCING
  15. Epilogue—Finance and Strategy
    1. CORPORATE STRATEGIES
    2. SHAREHOLDERS
    3. THE MACROECONOMIC ENVIRONMENT
  16. Top 20 Largest Listed Companies
  17. Contents
  18. Index