The Handbook of Corporate Finance Second Edition

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
o Strategy
o Social context
o Expense
o Stifling the entrepreneurial spirit
o Intangible benefits
· The stages of investment decisions
o Generation of ideas
o Development and classification
o Screening
o Appraisal
o Report and authorisation
o Implementation
o 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:
o Dicey accounting
o Throwing money in
o Ignoring the time value of money
o 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
o The capital asset pricing model
o Gordon growth model
o 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
o How large is the equity premium?
o Which risk free rate?
o 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?
o Synergy
o Market power
o Economies of scale
o Internalisation of transactions
o Entering new markets and industries
o Tax
o Risk diversification
o Bargain buying
o Inefficient management
o Managerial benefits
o Hubris
o Survival
o Free cash flow
o 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
o Attractive features
o Overdraft
o Term loans
o 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:
o Prospectus
o Conditions imposed and new responsibilities
o You might be rejected as unsuitable
o Hiring a sponsor
o Paying underwriters
o Hiring a broker
o Accountants and solicitors rub their hands in glee
o Registrars
o 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
o What returns do venture capitalists expect?
o What types of business are they interested in?
o What rates of return do they look for?
o What rates of return do they achieve?
o Structuring a VC deal
o Exits
o Power over managers
o 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
o Financial planning
o Reducing fear of financial distress
o Some risks are not rewarded
· Business risk
· Insurable risk
· Currency risk
· Interest rate risk
· Risk in the financial structure
o Is it better to borrow long or short?
o To match or not to match?
o Currency of borrowing
o Fixed or floating?
o Retained earnings as financing option
o 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
o Invoicing in the home currency
o Do nothing
o Netting
o Matching
o Leading and lagging
· Hedging strategies
o Forward market hedge
o Money market hedge
o Futures market hedge
o Options hedge
· Managing translation risk
· Managing economic risk