PRINCIPLES OF CORPORATE FINANCE BREALEY MYERS 8E

Present ValueDiscount Factor = DF = PV of $1Discount Factors can be used to compute the present value ofany cash flow.DFrt=+11( )15Valuing an Office BuildingStep 1: Forecast cash flowsCost of building = C0 = 350Sale price in Year 1 = C1 = 400Step 2: Estimate opportunity cost of[r]

the event of a default, the trustee to these issues can repossess the company’s as-sets in order to pay off the debt.Most long-term bond issues have a sinking fund. This means that the companymust set aside enough money each year to retire a specified number of bonds. Asinking fund red[r]

to pay?These questions lead to deep issues that will keep economists simmering for years. But we can givegeneral answers and at the same time present some fundamental ideas.Why should the financial manager care about these ideas? Who needs to know how bonds arepriced as long as the bond market is ac[r]

CHAPTER 23 Warrants and Convertibles 65519See J. D. Finnerty, “The Case for Issuing Synthetic Convertible Bonds,” Midland Corporate Finance Jour-nal 4 (Fall 1986), pp. 73–82.20Here is another “Heads I win, tails you lose” argument. You are an investor. Your broker calls you withan offe[r]

cent, but Magna can borrow at 9 percent. The expected inflation rate is 4 percent.Ms. Magna thinks the plane will be worth $300,000 after five years. But if the con-tract with the mining company is not renewed (there is a 20 percent probability of thisoutcome at year 1), the plane will have t[r]

shortfall might mean only an unexpected trip to the bank, but if financing is hard to obtain on short no-tice, the company might need to cut back its capital expenditure program. In extreme cases an un-hedged setback could trigger financial distress or even bankruptcy. Banks and bondholders are awar[r]

Currency SpeculationOutland Steel’s currency exposure arose naturally from its business activity, but therisk was avoidable; it could have been hedged using either the forward markets or theloan markets. Sometimes, however, companies deliberately take on currency risk inthe hope of gain. Now[r]

portunity to postpone investment might be summarized as “an American call ona perpetuity with a constant dividend yield.” Of course, not all real problemshave such easy option analogues, but we can often approximate complex deci-sion trees by some simple package of assets and options.[r]

and the tax on bondholders’ and stockholders’ personal income. The corporatetax favors debt; the personal tax favors equity.• A project’s debt capacity depends on how well it does. When profits exceedexpectations, the firm can borrow more; if the project fails, it won’t supportany debt. If the futur[r]

take out an option to buy live cattle. A company that wishes to limit its future borrowing costs mighttake out an option to sell long-term bonds. And so on. In Chapter 27 we will explain how firms em-ploy options to limit their risk.Second, many capital investments include an embedded option to expa[r]

is $2 million, and the current, appraised market value of the land is $1.7 million. Theland is currently used as a parking lot, generating just enough money to cover real es-tate taxes. The annual standard deviation is 15 percent and the interest rate 12 percent.How much is your call worth? U[r]

cial markets are less important in such countries. The volume of external fi-nancing is low. Financing tends to flow instead through banks, within large, di-versified companies, or among members of groups of associated companies.Many of these companies or groups are contr[r]

pany also had a strong poison pill.34AlliedSignal held out an olive branch, hinting that price was flexible if AMP wasready to talk turkey. But the offer was rebuffed. A tender offer went out to AMP share-holders, and 72 percent accepted. However, the terms of the offer did not require Allied[r]

in negative-NPV investments and bureaucratic excess. The present value ofgrowth opportunities (PVGO) was negative!We do not mean to portray managers as leeches soaking up cash flows meantfor investors. Managers commit their human capital to the firm and rightfully ex-pect a reasonable cash return on[r]

the document. The signed acknowledgment is known as a(n) ______ ______. Sometimesthe seller may ask ______ ______ bank to sign the document. In this case it is known asa(n) ______ ______. The fourth form of contract is used principally in overseas trade.The customer’s bank sends the exporter[r]

Fundamentals of Corporate Finance, by Brealey, Myers and Marcus, provides students with a solid framework of theory and application to use well after they complete the course. This author team is known for their outstanding research, teaching efforts, and worldrenowned finance textbooks, so its no s[r]

terest rates, sources of finance, and so on. Firms are increasingly using comput-erized financial models to help in this process. The models range from simplespreadsheet programs that merely help with the arithmetic to linear program-ming models that help to find the best financial pla[r]

To produce order out of chaos, financial analysts calculate a few key financial ratios that summa-rize the company’s financial strengths and weaknesses. These ratios are no substitute for a crystalball, but they do help you to ask the right questions. For example, when the firm needs a loan f[r]

could fall. So companies sometimes add another wrinkle to floating-rate pre-ferred. Instead of being tied rigidly to interest rates, the dividend can be resetperiodically by means of an auction which is open to all investors. Existingshareholders can enter the auction by stating the mi[r]

money in risky ventures.Some assets, like good commercial real estate, can pass through bankruptcy andreorganization largely unscathed; the values of other assets are likely to be consid-erably diminished. The losses are greatest for the intangible assets that are linkedto the health of