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Lessons in Corporate Finance
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Table of Contents

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

About the Author

PAUL ASQUITH is the Gordon Y. Billard professor of finance at M.I.T.'s Sloan School. He is a specialist in corporate finance and has written on all areas of corporate finance including mergers, LBOs, equity issues, dividend policy, and more. LAWRENCE A. WEISS is professor of International Accounting at Tufts University. He is a specialist in accounting and finance and has written on corporate bankruptcy, firm performance, international accounting, mergers, and more.

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