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Lessons in Corporate Finance: A Case Studies Approach to Financial Tools, Financial Policies, and Valuation, 2nd Edition

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Lessons in Corporate Finance: A Case Studies Approach to Financial Tools, Financial Policies, and Valuation, 2nd Edition

Paul Asquith, Lawrence A. Weiss

ISBN: 978-1-119-53783-0 March 2019 560 Pages

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Description

An intuitive introduction to fundamental corporate finance concepts and methods

Lessons in Corporate Finance, Second Edition offers a comprehensive introduction to the subject, using a unique interactive question and answer-based approach. Asking a series of increasingly difficult questions, this text provides both conceptual insight and specific numerical examples. Detailed case studies encourage class discussion and provide real-world context for financial concepts. The book provides a thorough coverage of corporate finance including ratio and pro forma analysis, capital structure theory, investment and financial policy decisions, and valuation and cash flows provides a solid foundational knowledge of essential topics. This revised and updated second edition includes new coverage of the U.S. Tax Cuts and Jobs Act of 2017 and its implications for corporate finance valuation.

Written by acclaimed professors from MIT and Tufts University, this innovative text integrates academic research with practical application to provide an in-depth learning experience. Chapter summaries and appendices increase student comprehension. Material is presented from the perspective of real-world chief financial officers making decisions about how firms obtain and allocate capital, including how to:

  • Manage cash flow and make good investment and financing decisions
  • Understand the five essential valuation methods and their sub-families
  • Execute leveraged buyouts, private equity financing, and mergers and acquisitions
  • Apply basic corporate finance tools, techniques, and policies

 Lessons in Corporate Finance, Second Edition provides an accessible and engaging introduction to the basic methods and principles of corporate finance. From determining a firm’s financial health to valuation nuances, this text provides the essential groundwork for independent investigation and advanced study. 

About the Authors xiii

Acknowledgments xv

Preface xvii

Chapter 1 Introduction 1

Two Markets: Product and Capital 2

The Basics: Tools and Techniques 3

A Diagram of Corporate Finance 4

A Brief History of Modern Finance 5

Reading This Book 6

Part One Financial Health of a Firm and Cash Flow Management

Chapter 2 Determining a Firm’s Financial Health (PIPES-A) 11

The Conversation with the Banker Is Like a Job Interview 11

Starting with the Product Market Strategy 13

Is PIPES Profitable? 14

Doing the Math 14

Sources and Uses of Funds 16

Ratio Analysis 20

The Cash Cycle 26

Summary 28

Chapter 3 Pro Forma Forecasts (PIPES-B) 31

First, Let’s Take a Closer Look at Ratio Analysis 31

Pro Forma Forecasts 33

Circular Relationships 40

Back to (Forecasting) the Future 42

Projecting Out to 2018 and 2019 43

Evaluating the Loan 45

Summary 50

Appendix 3A: Accounting Is Not Economic Reality 52

Chapter 4 The Impact of Seasonality on a Firm’s Funding (PIPES-C) 57

Monthly Pro Forma Income Statements 58

Monthly Pro Forma Balance Sheets 60

A Different Picture of the Firm 68

Summary 72

Appendix 4A: PIPES Monthly Pro Forma Income Statements and Balance Sheets, 2018 73

Appendix 4B: PIPES Monthly Pro Forma Income Statements and Balance Sheets, 2019 76

Part Two Firm Financing and Financial Policies

Chapter 5 Why Financing Matters (Massey Ferguson) 81

Product Market Position and Strategy 81

Political Risk and Economies of Scale in Production 82

Massey Ferguson, 1971–1976 83

Sustainable Growth 85

The Period after 1976 87

Conrad Runs Away 90

The Competitors 91

Back to Massey 93

Massey’s Restructuring 96

Postscript: What Happened to Massey 100

Summary 100

Appendix 5A: Massey Ferguson Financial Statements 102

Chapter 6 An Introduction to Capital Structure Theory 107

Optimal Capital Structure 108

M&M and Corporate Finance 111

Taxes 116

Costs of Financial Distress 126

The Textbook View of Capital Structure 131

The Cost of Capital 133

Summary 134

Chapter 7 Capital Structure Decisions (Marriott Corporation and Gary Wilson) 137

Capital Structure 137

The Cost of Capital 144

How Firms Set Capital Structure in Practice 147

Corporate Financial Policies 148

Sustainable Growth and Excess Cash Flow 151

What to Do with Excess Cash? 152

Summary 154

Appendix 7A: Marriott Corporation Income Statements and Balance Sheets 156

Appendix 7B: Marriott Corporation Selected Ratios 158

Chapter 8 Investment Decisions (Marriott Corporation and Gary Wilson) 159

What Is the Correct Price? 160

How Should Marriott Buy Its Shares? 160

The Loan Covenants 164

The Impact of the Product Market on Financial Policies 165

The Capital Market Impact and the Future 167

Summary 173

Chapter 9 Financial Policy Decisions (AT&T: Before and After the 1984 Divestiture) 177

Background on AT&T 178

M&M and the Practice of Corporate Finance 178

Old (pre-1984) AT&T 180

New (post-1984) AT&T 195

Summary 207

Appendix 9A: Development of AT&T Pro Formas, 1984–1988 (Expected-Case) 208

Chapter 10 The Impact of Operating Strategy on Corporate Finance Policy (MCI) 211

A Brief Summary 211

A Brief History of MCI 213

Convertible Preferred Stock and Convertible Bonds 218

Interest Rates and Debt Ratios 222

Leases 223

Financing Needs of the New MCI 223

MCI’s Financing Choice 234

MCI Postscript 235

Summary 236

Appendix 10A: Development of MCI’s Pro Formas, 1984–1988 238

Chapter 11 Dividends and Stock Repurchases (Apple Inc.) 241

The Theory of Dividend Policy 241

Empirical Evidence 245

Apple Inc. and the Decision on Whether to Pay Dividends 248

What Did Apple Do about Dividends? 260

What Happened Next 261

Summary 264

Chapter 12 A Continuation of Capital Structure Theory 265

The Tax Shield of Debt 266

The Costs of Financial Distress 267

Transaction Costs, Asymmetric Information, and Agency Costs 269

Asymmetric Information and Firm Financing 272

Agency Costs: Manager Behavior and Capital Structure 279

Leverage and Agency Conflicts between Equity and Debt Holders 281

Start with the Amount of Financing Required 286

Summary 288

Chapter 13 Restructuring and Bankruptcy: When Things Go Wrong (Avaya Holdings) 291

When Things Go Wrong 291

The Key Economic Principle of Bankruptcy Is to Save Viable Firms 297

When Should a Firm File for Bankruptcy? 297

The Rules of Bankruptcy 300

Maintaining the Value of a Firm in Bankruptcy 303

Avaya Emerges from Bankruptcy 304

Summary 306

Appendix 13A: The Creditors Coordination Problem 308

Part Three Investments and Valuation

Chapter 14 The Time Value of Money: Discounting and Net Present Values 311

The Time Value of Money 311

Net Present Value (NPV) 316

Payback 322

Projects with Unequal Lives 323

Perpetuities 325

Summary 326

Chapter 15 Valuation and Cash Flows (Sungreen A) 327

Investment Decisions 327

How to Value a Project 328

The Weighted Average Cost of Capital (WACC) 340

Terminal Values 341

Summary 343

Chapter 16 Valuation (Sungreen B) 345

Sungreen’s Projected Cash Flows 345

The Weighted Average Cost of Capital (WACC) 346

Twin Firms 351

The Cost of Equity 354

The Cost of Debt 357

The Final Valuation 358

Strategic Analysis 360

Summary 361

Chapter 17 Valuation Nuances 363

Cash Flow Nuances 363

Cost of Capital Nuances 365

Nuances on Calculating the Cost of Equity: Levering and Unlevering Beta 371

Separating Cash Flows and Terminal Values 376

Nuances of Terminal Value Methods 376

Other Valuation Techniques: DCF Variations 383

Real Options (aka Strategic Choices) 386

Summary 389

Chapter 18 Leveraged Buyouts and Private Equity Financing (Congoleum) 391

Congoleum: A Short History 391

Leading up to the LBO: What Makes a Firm a Good LBO Target? 392

Details of the Deal 395

Postscript: What Happened to LBOs? 409

Summary 411

The World Keeps Changing 412

Appendix 18A: Congoleum’s Pro Formas with and without the LBO 414

Appendix 18B: Highlights of the Lazard Fairness Opinion 420

Chapter 19 Mergers and Acquisitions: Strategic Issues (The Dollar Stores) 423

The Three Main Competitors 423

Recent History 424

Shopping a Firm/Finding a Buyer 428

Summary 431

Chapter 20 Valuing an Acquisition: Free Cash Flows to the Firm (The Dollar Stores) 433

The Bid for Family Dollar 433

Free Cash Flows to the Firm 435

Estimating the Cost of Capital 443

Discounted Cash Flows 448

Terminal Values 448

The Three Pieces 451

Summary 452

Appendix 20A: Family Dollar Pro Forma Financial Statements with Authors’ Constant Debt Ratio 453

Chapter 21 Understanding Free Cash Flows (The Dollar Stores) 455

Comparing the Free-Cash-Flows Formulas 455

Back to Discount Rates 457

On to Free Cash Flows to Equity 459

Discounting the Free Cash Flows to Equity 462

Summary 463

Appendix 21A: Family Dollar Pro Forma Free Cash Flows to Equity with Constant Debt Ratio 464

Chapter 22 Mergers and Acquisitions: Execution (The Dollar Stores) 465

The Time Line 465

Managerial Discretion 468

Activist Shareholders 470

The Federal Trade Commission (FTC) 472

Shareholder Lawsuits 473

The Vote 474

Summary 475

Appendix 22A: Key Events in the Bidding for Family Dollar, 2014–2015 476

Chapter 23 Review 477

Chapters 2–4: Cash Flow Management—Financial Tools 478

Chapters 5–13: Financing Decisions and Financial Policies 478

Chapters 14–22: Valuation 482

Tools and Concepts Discussed in This Book 485

Finance as Art, Not Science 486

Bottom Lines 487

An Intelligent Approach to Finance 487

Keeping Current 488

Larry’s Last (Really a True) Story 489

Paul’s Theory of Pies 490

Rules to Live By 490

Glossary 493

Index 503