Quantitative Corporate Finance [2 ed.] 3030435466, 9783030435462

Table of contents :
Why a Second Edition of Quantitative Corporate Finance?
Contents
About the Authors
Introduction: Capital Formation, Risk, and the Corporation
Financial Mathematics and Theory
Growth and Survival of the Firm
Risk and Uncertainty Inherent in Finance
Types of Business Risk
Financial Risk
Division of Risk, Income, and Control
Profitability and Risk
Areas Covered in This Book
References
The Corporation and Other Forms of Business Organization
The Sole or Single Proprietorship
The Partnership
The Limited Partnership
The Corporation, Its Basic Characteristics
Chartering the Corporation
Administrative Organization
Major Rights of the Shareholders
The Advantages of the Corporate Form
References
The Corporation Balance Sheet
The Balance Sheet
Assets
Liabilities and Stockholder Equity
Book Value of Common Stock
Summary and Conclusions
References
The Annual Operating Statements: The Income Statement and Cash Flow Statement
Form and Content of the Income Statement
Retained Earnings vs. Dividends
Income Statement in the World of Business: IBM, Boeing, and Dominion Energy
Annual Cash Flow Statement
US Firm Cash Flow Analysis, 1971-2018
Summary
References
Financing Current Operations and Efficiency Ratio Analysis
Working Capital Concepts
Quantitative Working Capital Models: Cash Management
Sources of Net Working Capital
Working Capital Management and Efficiency Ratio Analysis
Financial Ratios and the Perceived Financial Health of Firms
The Time Series of Ratios in the United States, 1962-2017
Profitability Ratios in Industry
Limitations of Ratio Analysis
Working Capital Analysis and Granting Credit
A Summary of Ratio Analysis
Appendix
References
Financing Current Operations and the Cash Budget
Sources of Short-Term Financing
Trade Credit
Bank Credit
Other Forms of Short-Term Financing
The Cash Budget
Capital and New Issue Markets
The Secondary Markets
The Primary Market
The Originating House
The Underwriting Group
The Selling Group
Other Aspects of Investment Banking
Best Effort vs. Firm Commitment or Underwriting Basis
Initial Public Offerings (IPOs)
Expansion of a Privately Held Firm into a Public Corporation
The Problem of Control
Promotion of a Subsidiary by Parent Corporations
Formation of a Joint Subsidiary by Two or More Parent Companies
The SEC and the Flotation of New Issues
Secondary Flotations
Issuing Securities Through Rights
Stock Tenders
Costs of Floating an Issue
Regulation of the Capital Markets
Securities Act of 1933
The Securities Exchange Act of 1934
Banking Act (Glass-Steagall Act) of 1933
Glass-Steagall Act Amended
Retail Brokerage Houses
Public Utility Act of 1935
The Maloney Amendment, 1938
The Investment Company Act of 1940
Sarbanes-Oxley Act of 2002
The Capital Market as a Source of Funds
The Debate on the Optimal Organization of the Capital Market
Capital Markets and Long-Term Economic Growth
References
The Equity of the Corporation: Common and Preferred Stock
Common Stock
Rewards to Common Shareholders
The Corporate Sector: A Net Exporter of Funds
Corporate Exports
Definitions of the Value of Common Shares
Stock Prices and Dividends: An Example
Noncash-Paying Growth Shares
Valuing a Dividend-Paying Growth Stock
Illustration of the Valuation of a Dividend-Paying: Growth Stock-Shoreham Inc.
Super Growth Cannot Be Infinite
The Paradox of the Low Current Return on Growth Options
Risk and Returns to Growth Investments
The Cost of Capital to a Growth Firm
The Cost of Common Stock Financing: The Norm
Preferred Stock
Features of Preferred Stock
Rational for Preferred Stock Financing
Convertible Preferred
Protective Features on Preferred Shares
Floating New Common Equity Issues
Advantage of New Share Financing
References
Long-Term Debt
Bonds
Other Types of Long-Term Debt
Long-Term Lease
Lease Accounting: Recent Changes
The Cost of Debt Capital
Level and Structure of the Interest Rates
The Call Feature on Bonds
Convertible Bonds and Bonds with Warrants Attached
The Advantages and Disadvantages of Long-Term Debt
Malkiel´s Bond Theorems
Retirement of Debt
Reference
Debt, Equity, the Optimal Financial Structure, and the Cost of Funds
A Most Misleading Relationship
Definition of Leverage: Profits and Financial Risk
Illustrations of Leverage: Return and Risk
Surrogate Evidence on the Development of ``Optimum´´ Financial Structure
The Pure Theory of the Optimal Financial Structure
Modigliani and Miller: Constant Capital Costs
The Optimal Capital Structure and the M&M Hypothesis
Empirical Factors Influencing Financial Structures
Measures for Approximating Financial Risk
Outside Financing Capacity
References
Investing in Assets: Theory of Investment Decision-Making
Net Present Value and the Internal Rate of Return
Mutually Exclusive Projects
Difference in Project Size
Differing Duration of the Inflows
Lowest Annualized Total Costs
The Irrational Fixed Capital Budget
Operating Practice and the Internal Rate of Return
Real Investments and the Cost of Funds
Applying Investment Theory
CFO Practice
Current Costs of the ``Optimum´´ Financial Mix
Adjusting the Capital Mix and Costs for Individual Project
Closing or Continuing Operations
Stability of Forecasts: Risk of the Investment
The Theory of Dealing with Risk
Risk-Adjusted Discount Rate
Risk-Return Distribution
Certainty Equivalence
Maximum Loss and Reversibility
Gross Uncertainty
Market Risk
The Effect of Taxes on the Financial Structure
Costing the Components of the Financial Mix
Investments Under Negative Interest Rates and Hyperinflation
Summary
Problems
References
Regression Analysis and Estimating Regression Models
Estimating an Ordinary Least Square Regression Line
Autocorrelation
Estimating Multiple Regression Lines
Influential Observations and Possible Outliers and the Application of Robust Regression
The Conference Board Composite Index of Leading Economic Indicators and Real US GDP Growth: A Regression Example
Summary and Conclusions
Appendix 1: Least Angle Regression
Appendix 2: The US Leading Economic Indicators
BCI-01 Average Weekly Hours, Manufacturing
BCI-05 Average Weekly Initial Claims for Unemployment Insurance
BCI-08 Manufacturers´ New Orders, Consumer Goods and Materials (in 1982 $)
BCI-130 ISM New Order Index
BCI-33 Manufacturers´ New Orders, Non-defense Capital Goods Excl. Aircraft (in 1982 $)
BCI-29 Building Permits, New Private Housing Units
BCI-19 Stock Prices, 500 Common Stocks
BCI-107 Leading Credit Index
BCI-129 Interest Rate Spread, 10-Year Treasury Bonds Less Federal Funds
BCI-125 Avg. Consumer Expectations for Business and Economic Conditions
Regression Appendix 3
References
Time Series Modeling and the Forecasting Effectiveness of the US Leading Economic Indicators
Basic Statistical Properties of Economic Series
The Autoregressive and Moving Average Processes
ARMA Model Identification in Practice
Leading Economic Indicators (LEI) and Real GDP Analysis: The Statistical Evidence of the Initial Period, 1970-2002
Updating the Forecasting Effectiveness of Time Series Modeling: Studies of the US Real GDP, 1959Q2-2018Q3
Forecasting Effectiveness of Time Series Modeling Using Autometrics and SCA Model the US Unemployment Rate, 1959Q2-2018Q3
Causality Testing of the US Unemployment, 1959Q2-2018Q2
Summary and Conclusions
Time Series Analysis Appendix 1: Table 19 (Continued) with Identified Outliers
Time Series Analysis Appendix 2: Table 22 (Continued)
References
Risk and Return of Equity and the Capital Asset Pricing Model
Calculating Holding Period Returns
Minimizing Risk
An Introduction to Modern Portfolio Theory
Expected Returns vs. Historic Mean Returns
Fundamental Analysis and Stock Selection
Modern Portfolio Theory and GPRD: An Example of Markowitz Analysis
Further Estimations of a Composite Equity Valuation Model: The Roles of Analysts Forecasts and Momentum in Stock Selection
REG8 Model
REG9 Model
REG10 Model
Summary and Conclusions
Appendix: The Three-Asset Case
References
Multifactor Risk Models and Portfolio Construction and Management
The Barra System
Barra Model Mathematics
Risk Prediction with MFMs
The Barra Multifactor Model and Analysts´ Forecasts, Revisions, and Breadth
Early Alternative Multi-Beta Risk Models
APT Approach
Applying the Blin and Blender APT Model
Applying the Blin and Blender APT Model, Barra, and Axioma: The McKinley Capital Management (MCM) Horse Race Tests
Why Use the Axioma Statistical Model?
Alpha Alignment Factor
Axioma AAF Applications
Summary and Conclusions
Appendix 1: US-E3 Descriptor Definitions
Volatility
Momentum
Size
Size Nonlinearity
Trading Activity
Growth
Earnings Yield
Value
Earnings Variability
Leverage
Currency Sensitivity
Dividend Yield
Non-estimation Universe Indicator
Appendix 2: Factor Alignment Problems and Quantitative Portfolio Management
References
Options
The Malkiel-Quandt Notation
The Binominal Option Pricing Model
The More Traditional Black and Scholes Option Pricing Model Derivation
Black and Scholes Model Calculation
The OPM and Corporate Liabilities
References
Real Options
The Option to Delay a Project
Implications of Viewing the Right to Delay a Project as an Option
Abandonment Value
Options in Investment Analysis/Capital Budgeting
References
Mergers and Acquisitions
Noneconomic Motives for Combinations
Holding Companies
A Merger History of the United States
Using an Accounting Basis
The Economic Basis for Acquisitions
Theories of Conglomerate Mergers
Combinations Correcting Economic or Financial Imbalances
Combinations Increasing Market Dominance
Combinations for Tax Advantages
The Larson-Gonedes Exchange Ratio Model
Valuation of a Merger Candidate
Testing for Synergism
Do Mergers Enhance Shareholder Wealth?
Divestment and Spinoff
Summary and Conclusions
References
Corporate Restructing: Leveraged Buyouts, Liquidations, Failures, and Bankruptcies
Voluntary Liquidation
A Liquidation Example
Remaining in Business
Failure
Informal Remedies
Bankruptcy
Bankruptcy Procedures
Priorities in Liquidation
Reorganization
Analysis of the Plan
Feasibility
Fairness
Analysis of the Reorganization
Summary
References
Corporation Growth and Economic Growth and Stability
Factors in Economic Growth
Savings and Real Investment
Corporation Investment Spending and Economic Stability
Monetary Policy, the Cost of Capital, and the Firm Investment Process
Economic Growth and Firm Growth
Firm Growth and Economic Growth
References
International Business Finance
Currency Exchange Rates
International Diversification
International Stock Selection and Portfolio Construction and Optimization
International Corporate Finance Decisions
References
Management-Stockholder Relations: Is Optimal Behavior All That Is Necessary?
General Agreement and Potential Conflicts in Management and Control
Areas of Potential Conflict
Executive Compensation
Board of Directors
Stock Options
Bonuses
Risky Acquisitions
Turning Agents into Owners
The Diseconomies of Financial Scams
Insider Trading
Stockholder Remedies
To Whom Is Management Responsible?
Summary and Conclusions
Appendix: Socially Responsible Investing
From Raw to Normalized Score Definitions
Raw Score
Normalized Scores
Fama- and French-Weighted Portfolios
A Return to Optimized Portfolio Construction and Management
CTEF MVTaR with Normalized KLD Criteria
KLD STATS
Strength and Concern (Positive and Negative Indicator) Ratings
ESG Ratings´ Definitions
Qualitative Issue Areas
Diversity (DIV-)
Strengths
Concerns
Human Rights (HUM-)
Strengths
Concerns
References
Index

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