Handbook of Corporate Finance: A Business Companion to Financial Markets, Decisions and Techniques

The book will be structured around the four key financial issues facing management: * In what projects are we going to invest our shareholders money (capex)? * How do we create and measure shareholder value creation? * What type of finance should we raise? * How do we manage financial risk? Contents Introduction * Overview of the book * Enthusiasm for financial knowledge * The four key issues * Outline Chapter 1. What are we aiming at? * The objective of the firm * Variety of objectives: those admitted to (and those kept quiet) * Why should we aim for shareholder wealth? * What is shareholder wealth? * Profit maximisation is not the same as shareholder wealth maximisation * Getting manager's objectives aligned with shareholder's objectives PART 1 -- WHAT INVESTMENTS SHOULD WE MAKE? Chapter 2. State-of-the-art project assessment techniques * How do you know whether an investment generates value for shareholders? * Time is money * Discounted cash flow * State-of-the-art technique 1: net present value * State-of-the-art technique 2: internal rate of return * So which is better: NPV or IRR? Appendix 2.1 Mathematical tools for finance Simple and compound interest Present value Determining the interest rate The investment period Annuities Perpetuities Chapter 3. Traditional appraisal techniques * What businesses actually use * Payback * Accounting rate of return * Why internal rate of return is still popular Chapter 4. Investment decision-making in real organisations * The managerial art of investment selection * Strategy * Social context * Expense * Stifling the entrepreneurial spirit * Intangible benefits * The stages of investment decisions * Generation of ideas * Development and classification * Screening * Appraisal * Report and authorisation * Implementation * Post completion audit Chapter 5. Allowing for risk * What is risk? * Adjusting for risk through the discount rate * Sensitivity analysis * Scenario analysis * Probability analysis * Standard deviation * What risk techniques do managers actually use? PART 2 SHAREHOLDER VALUE Chapter 6. Value managed companies versus earnings managed companies * The pervasiveness of the value approach * Case studies: FT100 companies creating value and destroying value * Why shareholder value? * Earnings-based management's failings: * Dicey accounting * Throwing money in * Ignoring the time value of money * Ignoring risk * ROCE has limitations * Focusing on earnings is not the same as value * How a business creates value * The five actions to create value Chapter 7. Strategic position * Strategic business unit management * Do we have any strong business franchises? * Industry attractiveness * The strength of our resources * The TRRACK system * The life cycle of value potential * Strategic choice * What use is the head office? Chapter 8. Value creation within strategic business units * Using cash flow to measure value * Shareholder value analysis * Economic profit * Economic value added (EVA) Chapter 9. Value measures for the entire firm * Total shareholder return * Wealth added index * Market value index * Market to book ratio Chapter 10. What is the company's cost of capital? * The required rate of return * The cost of equity capital * The capital asset pricing model * Gordon growth model * The cost of retained earnings * Debt capital * Preference shares * The weighted average cost of capital, WACC * What the WACC tells you * Applying WACC to strategic business units and projects * What do managers actually do? * Implementation issues * How large is the equity premium? * Which risk free rate? * How reliable are the CAPM and beta? * Fundamental beta Chapter 11. Mergers: impulse, regret and success * The merger decision * You say merger, I say acquisition * Types of merger * Merger statistics * What drives firms to merge? * Synergy * Market power * Economies of scale * Internalisation of transactions * Entering new markets and industries * Tax * Risk diversification * Bargain buying * Inefficient management * Managerial benefits * Hubris * Survival * Free cash flow * Third party motives * Do the shareholders of acquiring firms gain from mergers? * Managing mergers * The three stages of a merger * Problem areas in merger management * Why do mergers fail to generate value for acquiring shareholders? Chapter 12. The merger process * The City code on takeovers and mergers * Action before the bid * The bid * After the bid * Defence tactics * Paying for the targets shares: cash or shares? Chapter 13. Valuing companies * The two skills * Valuation using net asset value * Dividend valuation methods * How do you estimate future growth? * Price-earnings ratio methods * Valuation using cash flow * Owner earnings method * Valuing unquoted shares * Unusual companies * Managerial control changes the valuation Chapter 14. What pay-outs should we make to shareholders? * The other extreme * Some muddying factors * Clientele effects * Taxation * Information conveyance * Agency effects * Scrip dividends * Share buy-backs and special dividends * A round up of the arguments PART 3 -- FINANCE RAISING Chapter 15. Debt finance available to firms of all sizes * Bank finance * Attractive features * Overdraft * Term loans * Factors for a firm to consider * Cost * Security * Repayment terms * Trade credit * Factoring * Hire purchase * Leasing * Sale and leaseback Chapter 16. Debt finance from the financial markets * Bonds * Syndicated loans * Credit ratings * Mezzanine debt and high yield debt * Convertible bonds * International sources of debt finance * Foreign bonds * Eurobonds * Commercial paper * Project finance * Securitisation Chapter 17. Raising equity finance * To float or not to float? * Equity capital's advantage over debt * Floating on the Official List * What manager need to consider: * Prospectus * Conditions imposed and new responsibilities * You might be rejected as unsuitable * Hiring a sponsor * Paying underwriters * Hiring a broker * Accountants and solicitors rub their hands in glee * Registrars * Continuing obligations after floatation * Methods of issue * Timetable of a new offer * How does flotation on AIM differ * How much does it cost? * Rights issues * Placings and open offers * Scrip issue * Business angels * Venture capital * What returns do venture capitalists expect? * What types of business are they interested in? * What rates of return do they look for? * What rates of return do they achieve? * Structuring a VC deal * Exits * Power over managers * What else do they bring to the party? PART 4 -- MANAGING RISK Chapter 18. The financial risks managers have to deal with * The value of reducing the impact of adverse events * Financial planning * Reducing fear of financial distress * Some risks are not rewarded * Business risk * Insurable risk * Currency risk * Interest rate risk * Risk in the financial structure * Is it better to borrow long or short? * To match or not to match? * Currency of borrowing * Fixed or floating? * Retained earnings as financing option * The dangers of gearing Chapter 19. Options * An intuitive understanding * Share options * Corporate uses of options * Real options Chapter 20. Using derivatives to manage risk * Forwards * Futures * Marking to market and margins * Settlement * Managing interest rate risk with futures * Forward rate agreements * Caps, collars and floors * Swaps for long term hedging Chapter 21. Managing exchange rate risk * The impact of currency rate changes on the firm * Volatility in foreign exchange * The currency markets * Understanding the exchange rate tables in the FT * Covering in the forward market * Types of foreign exchange risk * Managing risk * Invoicing in the home currency * Do nothing * Netting * Matching * Leading and lagging * Hedging strategies * Forward market hedge * Money market hedge * Futures market hedge * Options hedge * Managing translation risk * Managing economic risk