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DeMYSTiFieD / Corporate Finance DeMYSTiFieD / Adair / 907-1 / Front Matter Corporate Finance DeMYSTiFieD® DeMYSTiFieD / Corporate Finance DeMYSTiFieD / Adair / 907-1 / Front Matter DeMYSTiFieD / Corporate Finance DeMYSTiFieD / Adair / 907-1 / Front Matter DeMYSTiFieD ® Series Accounting Demystified Advanced Statistics Demystified Algebra Demystified Alternative Energy Demystified ASP.NET 2.0 Demystified Biology Demystified Biotechnology Demystified Business Calculus Demystified Business Math Demystified Business Statistics Demystified C++ Demystified Calculus Demystified Chemistry Demystified Commodities Demystified Corporate Finance Demystified, 2e Data Structures Demystified Databases Demystified, 2e Differential Equations Demystified Digital Electronics Demystified Electricity Demystified Electronics Demystified Environmental Science Demystified Everyday Math Demystified Financial Accounting Demystified Financial Planning Demystified Financial Statements Demystified Forensics Demystified Genetics Demystified Grant Writing Demystified Hedge Funds Demystified Human Resource Management Demystified Intermediate Accounting Demystified Investing Demystified, 2e Java Demystified JavaScript Demystified Lean Six Sigma Demystified Linear Algebra Demystified Macroeconomics Demystified Management Accounting Demystified Marketing Demystified Math Proofs Demystified Math Word Problems Demystified Mathematica Demystified Matlab Demystified Microbiology Demystified Microeconomics Demystified Nanotechnology Demystified OOP Demystified Operating Systems Demystified Options Demystified Organic Chemistry Demystified Pharmacology Demystified Physics Demystified Physiology Demystified Pre-Algebra Demystified Precalculus Demystified Probability Demystified Project Management Demystified Public Speaking and Presentations Demystified Quality Management Demystified Real Estate Math Demystified Robotics Demystified Sales Management Demystified Six Sigma Demystified, 2e SQL Demystified Statistical Process Control Demystified Statistics Demystified Technical Analysis Demystified Technical Math Demystified Trigonometry Demystified UML Demystified Visual Basic 2005 Demystified Visual C# 2005 Demystified XML Demystified The Demystified Series publishes over 125 titles in all areas of academic study. For a complete list of titles, please visit www.mhprofessional.com. DeMystified_Series_List.indd ii 9/25/10 12:29 PM Corporate Finance DeMYSTiFieD® Troy A. Adair, Jr. New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or re- trieval system, without the prior written permission of the publisher. ISBN: 978-0-07-176083-6 MHID: 0-07-176083-0 The material in this eBook also appears in the print version of this title: ISBN: 978-0-07-174907-7, MHID: 0-07-174907-1. All trademarks are trademarks of their respective owners. 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Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages. This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise. All there is to know about financial statements— without the headache! Contents Acknowledgments Introduction Chapter 1 Four Basic Financial Statements Chapter 2 Basic Concepts Chapter 3 The Income Statement Chapter 4 The Balance Sheet: Classifications and Concepts Chapter 5 The Balance Sheet: A Closer Examination Chapter 6 Statement of Cash Flows Chapter 7 Reading the Financial Statements: The Auditors’ Reports and Financial Statement Footnotes Chapter 8 Analysis of Financial Statements Chapter 9 Additional Issues Chapter 10 Fraudulently Misstated Financial Statements Final Exam Answers to Quiz and Final Exam Questions Index The DeMYSTiFieD series helps students master complex and difficult subjects. Each book is filled with chapter quizzes, final exams, and user friendly content. Whether you want to master Spanish or get an A in Chemistry, DeMYSTiFieD will untangle confusing subjects, and make the hard stuff understandable. Intermediate Accounting DeMYSTiFieD Geri B. Wink, CPA and Laurie Corradino *4#/t Corporate Finance DeMYSTiFieD , 2e Troy A. Adair, Jr., Ph.D. *4#/t Investing DeMYSTiFieD, 2e Paul J. Lim *4#/t Six Sigma DeMYSTiFieD, 2e Paul Keller *4#/t DeMYSTiFieD / Corporate Finance DeMYSTiFieD / Adair / 907-1 / Front Matter DeMYSTiFieD / Corporate Finance DeMYSTiFieD / Adair / 907-1 / Front Matter To my wife, Kieran, the love of my life, for her understanding and support throughout the writing of this book. About the Author Troy A. Adair, Jr., Ph.D., is the Director of Educational Initiatives for the Jay S. Sidhu School of Business and Leadership at Wilkes University in Wilkes-Barre, Pennsylvania. He has taught the introductory corporate finance course at Wilkes University, the University of Michigan, Alma College, Hofstra University, and Indiana University. He received his B.S. degree in Computers/Information Science from the University of Alabama at Birmingham, his M.B.A. from the University of North Dakota, and his Ph.D. in Finance from Indiana University. Dr. Adair has written articles on bank regulator self-interest, analyst earnings per share forecasting, and capital budgeting in continuous time, and is the author of Excel Applications in Corporate Finance and Excel Applications in Investments, and a coauthor of Finance: Applications and Theory. [...]... Statements and Cash Flows 23 Basic Forms of Business organization Goal of the Financial Manager Agency relationships and Conflicts Quiz The Balance Sheet: Assets versus Liabilities The Balance Sheet: Short-Term versus Long-Term Accounts The income Statement Taxes Cash Flow From Assets Quiz 3 16 17 18 20 24 25 27 28 29 31 vii viii Co r p o r at e F i n a n c e Demystified chapter 4 Common-Size, Common-Base...   and Discounted Payback Average Accounting Return (AAR) Internal Rate of Return (IRR) 98 99 110 111 113 115 116 117 119 121 123 124 125 127 129 130 132 134 134 135 ix x Co r p o r at e F i n a n c e Demystified Modified IRR (MIRR) Profitability Index (PI) Quiz Part IV Where Do Interest Rates Come From? Risk, Return,   and the Cost of Capital chapter 11 Measuring Risk and Return Using the Past to Predict... it, but, if you don’t fall into one of those two classes, please be aware that this book offers an intentionally designed bare-bones approach to corporate finance xv xvi Co r p o r at e F i n a n c e Demystified How to Use This Book When you first start a finance class, you get the impression that finance is all about the math Well, it is and it isn’t: you do need to know how to do the math, and, for... Before-Tax Cost of Debt, RD Calculating the WACC A Note on Nominal versus Effective Rates Quiz 162 163 164 166 167 172 173 173 174 175 177 179 180 181 182 182 183 183 184 907-1 / Front Matter Content s Part V Advanced Topics in Corporate Finance 187 chapter 15 Estimating Future Cash Flows 189 chapter 16 Scenario Analysis and Sensitivity Analysis 201 chapter 17 Option Valuation 215 Sample Project Calculating... talked about affect those types of problems?” This book is divided into five major sections Depending upon the outline for your class, you may not need to cover some of the chapters in the last section, Advanced Topics in Corporate Finance,” and that’s OK However, you may also be tempted to skip some of the earlier material, particularly if you’ve had Time Value of Money in another class, or you have