Springer Texts in Business and Economics Mark K Pyles Applied Corporate Finance Questions, Problems and Making Decisions in the Real World Springer Texts in Business and Economics For further volumes: http://www.springer.com/series/10099 Mark K Pyles Applied Corporate Finance Questions, Problems and Making Decisions in the Real World Mark K Pyles Associate Professor of Finance College of Charleston Charleston, SC, USA ISSN 2192-4333 ISSN 2192-4341 (electronic) ISBN 978-1-4614-9172-9 ISBN 978-1-4614-9173-6 (eBook) DOI 10.1007/978-1-4614-9173-6 Springer New York Heidelberg Dordrecht London Library of Congress Control Number: 2013949157 © Springer Science+Business Media New York 2014 This work is subject to copyright All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed Exempted from this legal reservation are brief excerpts in connection with reviews or scholarly analysis or material supplied specifically for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work Duplication of this publication or parts thereof is permitted only under the provisions of the Copyright Law of the Publisher’s location, in its current version, and permission for use must always be obtained from Springer Permissions for use may be obtained through RightsLink at the Copyright Clearance Center Violations are liable to prosecution under the respective Copyright Law The use of general descriptive names, registered names, trademarks, service marks, etc in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use While the advice and information in this book are believed to be true and accurate at the date of publication, neither the authors nor the editors nor the publisher can accept any legal responsibility for any errors or omissions that may be made The publisher makes no warranty, express or implied, with respect to the material contained herein Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com) Preface One may question why I would choose to write a book involving issues in corporate finance, given the large number of excellent texts that already exist in the academic marketplace It is my hope that the answer to this question will be largely selfevident upon review of the text My intention is to complete a work that is unique in the field Many existing texts an excellent job of helping readers learn about issues in corporate finance, so my intention is not to simply recreate these products with a different cover The theory underlying this text is that any specific area of education is a tool, much like any other type of tool in any other facet of life And, as important as the characteristics defining these tools certainly are, it is application in a real world setting that is of most importance The attainment of knowledge has very little merit in the workplace without an accompanying understanding of the uses Perhaps the best way of stating the motivation behind completing this text is that I want students to learn corporate finance as though it is a verb, rather than as a noun As something you do, rather than something you know These words; however, without an accompanying plan of implementation, are nothing more than noble thoughts Thus, the reader will notice a two-pronged attack First, the text is written in a different voice than most Many instructors subconsciously teach finance as though all students learn the “finance way,” meaning they have quantitative minds and enjoy working with numbers However, this is certainly not true in many instances and creates a disconnect between the way we teach and the way many students learn The intent is to have a text that is readable and understandable; even if that means sacrificing some of the time-honored beliefs regarding the serious and stoic tone that often define academic texts The second prong of attack is changing the process for which material is presented This text is not based upon a modular structure Instead, we make a very concerted effort to create a continuous stream of events so that the reader can best understand the evolving processes that define corporate finance The end goal is that the student will have a comprehensive understanding of how the corporate financial cycle works Extraneous details will often be sacrificed for the sake of brevity and flow of information Should a reader be seeking a text that covers the width and depth of the minutiae involved in the discipline, I admit this book is not for you v vi Preface The elimination of this surplus material will provide space to create a fictional company by the name of Hack Back, Incorporated that will guide readers in an understandable and entertaining fashion The motivation is that students should have some interest in the “story” and will transfer this to interest in the topics The text is comprised of nine chapters In each, material is presented in a streamlined presentation and includes numerous examples to help illustrate the concepts In addition, when appropriate, the text includes “LOOK IT UP” boxes that encourage the reader to go outside the book and examine how the material being covered is relevant in the world around them “TECH HELP” boxes spread throughout the text help the reader learn how to use modern technology to help streamline problem solving The text will include (at the completion of each chapter) possible alternative endings of the Hack Back, Inc storyline, which are designed to encourage creative thinking and facilitate flexibility of instruction At the completion of each chapter is a series of CONCEPT QUESTIONS, which test the reader’s understanding of important topics covered Care is given to asking not only pure definitional questions Rather, the intent is to present thoughtprovoking questions so that an accurate answer will help ensure the reader goes beyond simply memorizing the material A set of PROBLEMS are also presented at the end of each chapter which involve mathematical components The difficulty of the problems ranges from relatively simple to relatively complex Charleston, SC, USA Mark K Pyles Acknowledgements Thanks to all the students that I have taught It is your support, suggestions, and criticisms that provide the basis for the materials in this text I look forward to teaching several thousand more just like you My understanding of finance is a derivative of the teachings of wonderful people that imparted their wisdom upon me I applaud them of their knowledge and thank them for their time I particularly am appreciative of the real “Dubarb Freeman,” without whom I would never be where I am today and the thought of writing a textbook would be laughable Special thanks goes to Pasha Sadeghian for valuable proofreading assistance Finally, and most importantly, I thank my wife Miranda and two sons, Stone and Dex You are my favorite things about life vii Contents In the Beginning 1.1 Types of Business Organizations 1.1.1 Sole Proprietorships 1.1.2 Partnerships 1.1.3 Corporations 1.2 Primary Markets and the Going-Public Process 1.2.1 Primary Versus Secondary Markets 1.2.2 Venture Capital 1.2.3 Underwriters 1.2.4 IPO Paperwork 1.2.5 After Issuance 1.3 The Goal of the Firm 1.3.1 The Only Appropriate Goal 1.3.2 Other Goals 1.4 Ownership and Control 1.5 The Corporate Finance Process 1.5.1 Capital Budgeting 1.5.2 Capital Structure 1.5.3 Working Capital Management 1 8 10 10 11 12 16 16 17 18 22 22 22 23 Financial Statement Analysis: What’s Right, What’s Wrong, and Why? 2.1 Finance and Accounting 2.2 Income Statement 2.2.1 Taxes 2.2.2 Depreciation 2.3 The Balance Sheet 2.4 Using Accounting Statements in Finance 2.5 Standardized Statements 29 29 30 32 34 36 37 39 ix Appendix (continued) Date 12/5/2008 12/8/2008 12/9/2008 12/10/2008 12/11/2008 12/12/2008 12/15/2008 12/16/2008 12/17/2008 12/18/2008 12/19/2008 12/22/2008 12/23/2008 12/24/2008 12/26/2008 12/29/2008 12/30/2008 12/31/2008 1/2/2009 1/5/2009 1/6/2009 1/7/2009 1/8/2009 1/9/2009 1/12/2009 1/13/2009 1/14/2009 1/15/2009 1/16/2009 1/20/2009 1/21/2009 1/22/2009 1/23/2009 1/26/2009 1/27/2009 1/28/2009 1/29/2009 1/30/2009 2/2/2009 2/3/2009 2/4/2009 2/5/2009 2/6/2009 2/9/2009 11/9/2009 11/10/2009 323 Price 33.60 34.79 34.41 35.34 34.79 35.06 33.24 36.26 34.95 35.03 35.14 34.46 33.67 34.15 34.17 34.15 35.64 35.48 35.48 34.95 35.43 33.29 34.17 33.55 33.66 33.78 32.68 34.86 34.58 33.71 35.74 33.61 35.43 34.83 34.83 36.31 34.35 33.50 35.55 34.77 33.72 35.31 35.25 35.29 52.23 51.43 Date 3/10/2009 3/11/2009 3/12/2009 3/13/2009 3/16/2009 3/17/2009 3/18/2009 3/19/2009 3/20/2009 3/23/2009 3/24/2009 3/25/2009 3/26/2009 3/27/2009 3/30/2009 3/31/2009 4/1/2009 4/2/2009 4/3/2009 4/6/2009 4/7/2009 4/8/2009 4/9/2009 4/13/2009 4/14/2009 4/15/2009 4/16/2009 4/17/2009 4/20/2009 4/21/2009 4/22/2009 4/23/2009 4/24/2009 4/27/2009 4/28/2009 4/29/2009 4/30/2009 5/1/2009 5/4/2009 5/5/2009 5/6/2009 5/7/2009 5/8/2009 5/11/2009 2/10/2010 2/11/2010 Price 36.94 35.83 37.40 35.71 36.06 38.58 38.16 35.54 35.99 40.25 38.20 38.53 39.22 38.11 37.96 38.65 38.54 39.42 39.16 39.45 38.21 39.45 40.53 40.09 39.06 39.58 38.93 40.64 38.41 40.22 39.91 39.93 42.08 41.02 41.35 45.46 43.10 43.47 47.36 46.00 46.07 45.93 46.37 44.53 46.18 46.81 Date 6/9/2009 6/10/2009 6/11/2009 6/12/2009 6/15/2009 6/16/2009 6/17/2009 6/18/2009 6/19/2009 6/22/2009 6/23/2009 6/24/2009 6/25/2009 6/26/2009 6/29/2009 6/30/2009 7/1/2009 7/2/2009 7/6/2009 7/7/2009 7/8/2009 7/9/2009 7/10/2009 7/13/2009 7/14/2009 7/15/2009 7/16/2009 7/17/2009 7/20/2009 7/21/2009 7/22/2009 7/23/2009 7/24/2009 7/27/2009 7/28/2009 7/29/2009 7/30/2009 7/31/2009 8/3/2009 8/4/2009 8/5/2009 8/6/2009 8/7/2009 8/10/2009 5/12/2010 5/13/2010 Price 47.41 45.39 47.19 46.57 42.56 44.15 42.43 44.09 43.56 39.67 42.70 42.29 44.94 42.71 43.32 43.09 42.96 41.65 43.41 41.43 40.64 42.60 42.19 43.76 43.35 46.06 45.13 44.94 46.88 46.66 45.77 48.08 47.66 46.88 46.93 46.36 48.70 47.76 48.47 48.33 47.66 47.27 48.82 47.99 51.01 51.16 Date Price 9/8/2009 49.34 9/9/2009 49.53 9/10/2009 49.67 9/11/2009 48.74 9/14/2009 49.21 9/15/2009 49.31 9/16/2009 51.23 9/17/2009 49.79 9/18/2009 50.41 9/21/2009 50.06 9/22/2009 50.53 9/23/2009 48.98 9/24/2009 49.95 9/25/2009 49.72 9/28/2009 51.54 9/29/2009 49.49 9/30/2009 49.66 10/1/2009 46.45 10/2/2009 47.57 10/5/2009 49.64 10/6/2009 49.70 10/7/2009 49.96 10/8/2009 50.37 10/9/2009 50.30 10/12/2009 50.50 10/13/2009 50.32 10/14/2009 52.74 10/15/2009 51.69 10/16/2009 50.92 10/19/2009 51.59 10/20/2009 50.72 10/21/2009 49.94 10/22/2009 51.55 10/23/2009 49.65 10/26/2009 49.69 10/27/2009 48.74 10/28/2009 48.43 10/29/2009 50.90 10/30/2009 47.06 11/2/2009 48.53 11/3/2009 49.38 11/4/2009 48.80 11/5/2009 50.41 11/6/2009 50.03 8/11/2010 55.99 8/12/2010 55.85 (continued) 324 (continued) Date 11/11/2009 11/12/2009 11/13/2009 11/16/2009 11/17/2009 11/18/2009 11/19/2009 11/20/2009 11/23/2009 11/24/2009 11/25/2009 11/27/2009 11/30/2009 12/1/2009 12/2/2009 12/3/2009 12/4/2009 12/7/2009 12/8/2009 12/9/2009 12/10/2009 12/11/2009 12/14/2009 12/15/2009 12/16/2009 12/17/2009 12/18/2009 12/21/2009 12/22/2009 12/23/2009 12/24/2009 12/28/2009 12/29/2009 12/30/2009 12/31/2009 1/4/2010 1/5/2010 1/6/2010 1/7/2010 1/8/2010 1/11/2010 1/12/2010 1/13/2010 1/14/2010 1/15/2010 1/19/2010 Appendix Price 51.40 47.91 49.71 50.29 50.17 49.72 48.23 48.73 49.32 49.29 49.56 47.50 48.95 49.97 47.98 48.07 48.52 48.50 47.70 48.20 48.32 48.37 48.45 48.26 48.37 47.75 48.04 48.18 48.17 48.24 48.41 48.39 48.43 48.57 47.72 49.81 49.43 49.36 49.86 49.73 49.97 50.05 50.49 50.47 49.71 50.25 Date 2/12/2010 2/16/2010 2/17/2010 2/18/2010 2/19/2010 2/22/2010 2/23/2010 2/24/2010 2/25/2010 2/26/2010 3/1/2010 3/2/2010 3/3/2010 3/4/2010 3/5/2010 3/8/2010 3/9/2010 3/10/2010 3/11/2010 3/12/2010 3/15/2010 3/16/2010 3/17/2010 3/18/2010 3/19/2010 3/22/2010 3/23/2010 3/24/2010 3/25/2010 3/26/2010 3/29/2010 3/30/2010 3/31/2010 4/1/2010 4/5/2010 4/6/2010 4/7/2010 4/8/2010 4/9/2010 4/12/2010 4/13/2010 4/14/2010 4/15/2010 4/16/2010 4/19/2010 4/20/2010 Price 45.86 47.45 45.41 44.48 45.66 44.72 43.25 43.84 42.72 43.46 45.17 45.05 45.03 45.05 46.71 46.34 46.34 46.33 47.33 45.70 45.92 47.18 47.09 46.13 46.43 47.27 47.23 46.71 45.33 46.29 46.64 47.10 47.03 47.19 48.27 47.78 47.22 48.33 48.21 47.99 48.46 50.05 48.72 43.51 46.80 48.04 Date 5/14/2010 5/17/2010 5/18/2010 5/19/2010 5/20/2010 5/21/2010 5/24/2010 5/25/2010 5/26/2010 5/27/2010 5/28/2010 6/1/2010 6/2/2010 6/3/2010 6/4/2010 6/7/2010 6/8/2010 6/9/2010 6/10/2010 6/11/2010 6/14/2010 6/15/2010 6/16/2010 6/17/2010 6/18/2010 6/21/2010 6/22/2010 6/23/2010 6/24/2010 6/25/2010 6/28/2010 6/29/2010 6/30/2010 7/1/2010 7/2/2010 7/6/2010 7/7/2010 7/8/2010 7/9/2010 7/12/2010 7/13/2010 7/14/2010 7/15/2010 7/16/2010 7/19/2010 7/20/2010 Price 48.78 49.38 48.79 51.21 47.84 51.86 49.78 51.31 49.67 52.72 50.36 49.30 53.02 51.95 49.47 49.83 51.03 51.00 52.71 52.14 51.92 53.66 53.05 52.77 52.75 51.52 49.58 51.45 50.75 51.46 50.82 49.25 47.78 53.03 52.16 53.43 56.11 54.57 53.80 55.28 55.26 54.76 53.70 52.35 54.36 54.23 Date Price 8/13/2010 55.98 8/16/2010 56.19 8/17/2010 58.01 8/18/2010 57.32 8/19/2010 55.45 8/20/2010 55.95 8/23/2010 55.55 8/24/2010 54.78 8/25/2010 55.13 8/26/2010 56.22 8/27/2010 57.54 8/30/2010 55.32 8/31/2010 56.57 9/1/2010 57.55 9/2/2010 57.57 9/3/2010 58.99 9/7/2010 58.24 9/8/2010 58.50 9/9/2010 58.54 9/10/2010 57.35 9/13/2010 58.13 9/14/2010 57.50 9/15/2010 58.36 9/16/2010 58.43 9/17/2010 57.78 9/20/2010 59.43 9/21/2010 59.28 9/22/2010 58.93 9/23/2010 58.78 9/24/2010 59.62 9/27/2010 59.06 9/28/2010 60.69 9/29/2010 60.18 9/30/2010 59.41 10/1/2010 60.95 10/4/2010 60.33 10/5/2010 61.51 10/6/2010 60.99 10/7/2010 61.05 10/8/2010 61.21 10/11/2010 61.41 10/12/2010 61.37 10/13/2010 62.16 10/14/2010 62.04 10/15/2010 62.24 10/18/2010 62.32 (continued) Appendix (continued) Date 1/20/2010 1/21/2010 1/22/2010 1/25/2010 1/26/2010 1/27/2010 1/28/2010 1/29/2010 2/1/2010 2/2/2010 2/3/2010 2/4/2010 2/5/2010 2/8/2010 2/9/2010 11/9/2010 11/10/2010 11/11/2010 11/12/2010 11/15/2010 11/16/2010 11/17/2010 11/18/2010 11/19/2010 11/22/2010 11/23/2010 11/24/2010 11/26/2010 11/29/2010 11/30/2010 12/1/2010 12/2/2010 12/3/2010 12/6/2010 12/7/2010 12/8/2010 12/9/2010 12/10/2010 12/13/2010 12/14/2010 12/15/2010 12/16/2010 12/17/2010 12/20/2010 12/21/2010 12/22/2010 325 Price 49.73 48.53 47.63 48.32 47.97 48.19 46.52 47.13 48.31 48.25 46.49 44.22 46.21 45.69 47.47 61.07 62.54 63.16 60.03 60.82 59.46 60.61 62.24 63.47 62.78 61.22 63.97 63.02 63.44 63.37 66.43 66.55 65.95 65.89 65.02 65.00 65.80 66.20 66.11 66.15 66.18 66.38 66.56 66.27 67.07 64.27 Date 4/21/2010 4/22/2010 4/23/2010 4/26/2010 4/27/2010 4/28/2010 4/29/2010 4/30/2010 5/3/2010 5/4/2010 5/5/2010 5/6/2010 5/7/2010 5/10/2010 5/11/2010 2/9/2011 2/10/2011 2/11/2011 2/14/2011 2/15/2011 2/16/2011 2/17/2011 2/18/2011 2/22/2011 2/23/2011 2/24/2011 2/25/2011 2/28/2011 3/1/2011 3/2/2011 3/3/2011 3/4/2011 3/7/2011 3/8/2011 3/9/2011 3/10/2011 3/11/2011 3/14/2011 3/15/2011 3/16/2011 3/17/2011 3/18/2011 3/21/2011 3/22/2011 3/23/2011 3/24/2011 Price 47.95 49.46 48.32 48.82 43.11 47.16 49.56 48.25 52.43 47.17 47.84 46.51 47.15 50.17 49.06 66.25 67.04 66.97 67.10 67.51 68.89 68.91 68.14 65.19 65.95 66.62 67.84 68.18 63.54 66.48 67.55 66.12 65.93 64.92 66.35 63.14 65.45 63.64 63.95 63.62 65.53 66.43 67.08 65.81 65.86 66.29 Date 7/21/2010 7/22/2010 7/23/2010 7/26/2010 7/27/2010 7/28/2010 7/29/2010 7/30/2010 8/2/2010 8/3/2010 8/4/2010 8/5/2010 8/6/2010 8/9/2010 8/10/2010 5/11/2011 5/12/2011 5/13/2011 5/16/2011 5/17/2011 5/18/2011 5/19/2011 5/20/2011 5/23/2011 5/24/2011 5/25/2011 5/26/2011 5/27/2011 5/31/2011 6/1/2011 6/2/2011 6/3/2011 6/6/2011 6/7/2011 6/8/2011 6/9/2011 6/10/2011 6/13/2011 6/14/2011 6/15/2011 6/16/2011 6/17/2011 6/20/2011 6/21/2011 6/22/2011 6/23/2011 Price 53.73 56.87 55.82 56.18 56.64 55.78 55.82 56.08 57.73 57.21 57.21 57.06 56.77 57.36 56.91 63.57 65.41 64.74 63.88 65.24 63.81 65.34 65.09 64.81 64.67 66.52 66.29 66.26 67.79 65.18 64.33 63.59 62.59 62.96 62.84 63.30 62.52 63.42 65.86 61.89 64.40 63.61 63.71 64.36 63.71 63.78 Date Price 10/19/2010 60.35 10/20/2010 63.70 10/21/2010 62.94 10/22/2010 62.00 10/25/2010 61.78 10/26/2010 59.55 10/27/2010 59.87 10/28/2010 61.32 10/29/2010 60.44 11/1/2010 62.05 11/2/2010 61.25 11/3/2010 61.72 11/4/2010 63.61 11/5/2010 62.92 11/8/2010 61.28 8/10/2011 55.52 8/11/2011 60.28 8/12/2011 60.79 8/15/2011 63.19 8/16/2011 62.05 8/17/2011 62.24 8/18/2011 59.00 8/19/2011 57.65 8/22/2011 59.24 8/23/2011 60.79 8/24/2011 62.24 8/25/2011 60.38 8/26/2011 62.93 8/29/2011 65.43 8/30/2011 63.87 8/31/2011 64.60 9/1/2011 63.74 9/2/2011 60.59 9/6/2011 60.66 9/7/2011 65.01 9/8/2011 60.05 9/9/2011 59.45 9/12/2011 60.27 9/13/2011 61.25 9/14/2011 61.42 9/15/2011 65.35 9/16/2011 63.89 9/19/2011 64.29 9/20/2011 64.37 9/21/2011 62.40 9/22/2011 61.02 (continued) 326 (continued) Date 12/23/2010 12/27/2010 12/28/2010 12/29/2010 12/30/2010 12/31/2010 1/3/2011 1/4/2011 1/5/2011 1/6/2011 1/7/2011 1/10/2011 1/11/2011 1/12/2011 1/13/2011 1/14/2011 1/18/2011 1/19/2011 1/20/2011 1/21/2011 1/24/2011 1/25/2011 1/26/2011 1/27/2011 1/28/2011 1/31/2011 2/1/2011 2/2/2011 2/3/2011 2/4/2011 2/7/2011 2/8/2011 11/8/2011 11/9/2011 11/10/2011 11/11/2011 11/14/2011 11/15/2011 11/16/2011 11/17/2011 11/18/2011 11/21/2011 11/22/2011 11/23/2011 11/25/2011 11/28/2011 Appendix Price 65.09 64.75 66.57 64.62 64.73 64.92 65.24 65.12 66.96 65.83 66.29 65.83 64.66 66.19 66.12 66.49 66.30 65.12 65.40 66.29 66.49 66.29 67.18 66.92 64.11 64.57 64.06 64.12 66.84 66.33 66.29 66.47 66.93 64.22 65.16 66.86 66.17 65.90 64.47 63.74 65.96 63.42 63.77 60.95 59.39 64.34 Date 3/25/2011 3/28/2011 3/29/2011 3/30/2011 3/31/2011 4/1/2011 4/4/2011 4/5/2011 4/6/2011 4/7/2011 4/8/2011 4/11/2011 4/12/2011 4/13/2011 4/14/2011 4/15/2011 4/18/2011 4/19/2011 4/20/2011 4/21/2011 4/25/2011 4/26/2011 4/27/2011 4/28/2011 4/29/2011 5/2/2011 5/3/2011 5/4/2011 5/5/2011 5/6/2011 5/9/2011 5/10/2011 Price 67.24 66.63 67.13 66.61 64.55 65.56 65.77 64.68 64.69 63.55 63.78 63.63 62.80 62.91 63.10 63.25 62.68 63.06 65.94 65.14 63.59 65.29 65.77 65.54 66.50 65.90 65.66 64.74 64.96 64.78 65.36 66.89 Date 6/24/2011 6/27/2011 6/28/2011 6/29/2011 6/30/2011 7/1/2011 7/5/2011 7/6/2011 7/7/2011 7/8/2011 7/11/2011 7/12/2011 7/13/2011 7/14/2011 7/15/2011 7/18/2011 7/19/2011 7/20/2011 7/21/2011 7/22/2011 7/25/2011 7/26/2011 7/27/2011 7/28/2011 7/29/2011 8/1/2011 8/2/2011 8/3/2011 8/4/2011 8/5/2011 8/8/2011 8/9/2011 Price 62.57 63.18 64.90 64.33 66.56 65.95 64.75 66.24 66.07 64.47 63.72 64.23 62.18 62.84 61.85 63.12 64.37 62.91 64.73 64.29 64.24 65.27 61.66 60.36 60.90 60.82 56.94 59.35 56.14 56.75 53.79 59.66 Date 9/23/2011 9/26/2011 9/27/2011 9/28/2011 9/29/2011 9/30/2011 10/3/2011 10/4/2011 10/5/2011 10/6/2011 10/7/2011 10/10/2011 10/11/2011 10/12/2011 10/13/2011 10/14/2011 10/17/2011 10/18/2011 10/19/2011 10/20/2011 10/21/2011 10/24/2011 10/25/2011 10/26/2011 10/27/2011 10/28/2011 10/31/2011 11/1/2011 11/2/2011 11/3/2011 11/4/2011 11/7/2011 Price 61.97 64.99 63.91 60.92 61.83 58.81 57.50 61.08 63.58 63.54 62.95 67.51 66.22 66.31 66.13 67.53 65.13 67.44 65.96 66.44 68.60 67.52 66.57 67.03 67.53 66.92 64.40 64.82 65.26 66.49 64.59 65.22 (continued) Appendix (continued) Date 11/29/2011 11/30/2011 12/1/2011 12/2/2011 12/5/2011 12/6/2011 12/7/2011 12/8/2011 12/9/2011 12/12/2011 12/13/2011 12/14/2011 12/15/2011 12/16/2011 12/19/2011 12/20/2011 12/21/2011 12/22/2011 12/23/2011 12/27/2011 12/28/2011 12/29/2011 12/30/2011 327 Price 62.89 65.63 64.88 63.67 64.13 63.80 62.67 59.45 61.49 58.01 58.93 58.78 58.58 59.15 56.07 60.06 57.94 57.98 58.24 58.02 57.85 58.52 58.22 Date Price Date Price Date Price Appendix Hack Back’s 2009 and 2010 Financial Statements Hack Back, Incorporated Income statement for years ending December 31, 2009 and 2010 Sales Cost of goods sold Depreciation EBIT Interest Taxable income Taxes (35 %) Net income Dividends Addition to retained earnings 2009 327,890,500 244,606,313 37,435,864 45,848,323 1,743,800 44,104,523 15,436,583 28,667,940 2,400,000 26,267,940 2010 402,456,525 327,599,611 41,385,900 33,471,014 2,015,435 31,455,579 11,009,453 20,446,126 5,040,000 15,406,126 Hack Back, Incorporated Balance sheet as of December 31, 2009 and 2010 Assets Liabilities 2009 2010 Current assets Current liabilities Cash 37,970,869 51,581,987 Long-term debt A/R 17,976,050 19,341,907 Total debt Inventory 102,987,500 140,891,891 Total 158,934,419 211,815,785 Equity current Fixed assets 147,505,203 118,872,674 Common stock 2009 20,435,135 28,197,000 48,632,135 2010 27,349,500 30,125,346 57,474,846 2009 223,200,000 2010 223,200,000 (continued) M.K Pyles, Applied Corporate Finance: Questions, Problems and Making Decisions in the Real World, Springer Texts in Business and Economics, DOI 10.1007/978-1-4614-9173-6, © Springer Science+Business Media New York 2014 329 330 Appendix (continued) Hack Back, Incorporated Balance sheet as of December 31, 2009 and 2010 Total $306,439,622 $330,688,459 Retained earnings assets Total equity Total liabilities and equity 34,607,487 50,013,613 257,807,487 273,213,613 $306,439,622 $330,688,459 Appendix Competitor and Industry Composite Financial Statements Bubba’s Golf Equipment, Incorporated Bubba’s Golf Equipment, Incorporated Income statement for year ending December 31, 2010 Sales 914,598,785 Cost of goods sold 583,971,324 Depreciation 142,432,424 EBIT 188,195,037 Interest 22,345,402 Taxable income 165,849,635 Taxes (35 %) 58,047,372 Net income 107,802,263 Dividends 24,569,000 Addition to retained earnings 83,233,263 Bubba’s Golf Equipment, Incorporated Balance sheet as of December 31, 2010 Assets Current assets Cash 178,970,498 A/R 94,341,907 Inventory 170,979,371 Total current 444,291,776 Fixed assets Total assets 610,605,363 $1,054,897,139 Liabilities Current liabilities Long-term debt Total debt 68,454,454 224,869,342 293,323,796 Equity Common stock Retained earnings Total equity Total liabilities and equity 636,120,000 125,453,343 761,573,343 $1,054,897,139 M.K Pyles, Applied Corporate Finance: Questions, Problems and Making Decisions in the Real World, Springer Texts in Business and Economics, DOI 10.1007/978-1-4614-9173-6, © Springer Science+Business Media New York 2014 331 332 Appendix PLC Golf, Incorporated PLC Golf, Incorporated Income statement for year ending December 31, 2010 Sales 284,567,934 Cost of goods sold 156,142,425 Depreciation 31,834,343 EBIT 96,591,166 Interest 12,434,523 Taxable income 84,156,643 Taxes (35 %) 29,454,825 Net income $54,701,818 Dividends 31,834,334 Addition to retained earnings 22,867,484 PLC Golf, Incorporated Balance sheet as of December 31, 2010 Assets Current assets Cash 46,834,334 A/R 70,352,534 Inventory 56,654,656 Total current 173,841,524 Fixed assets Total assets 125,510,685 $299,352,209 Liabilities Current liabilities Long-term debt Total debt 19,843,542 29,454,324 49,297,866 Equity Common stock Retained earnings Total equity Total liabilities and equity 204,600,000 45,454,343 250,054,343 $299,352,209 Industry Composite Industry composite Income statement for year ending December 31, 2010 Sales 653,343,346 Cost of goods sold 397,755,429 Depreciation 94,313,080 EBIT 161,274,837 Interest 23,856,512 Taxable income 137,418,325 Taxes (35 %) 48,096,414 Net income $89,321,911 Dividends 26,454,235 Addition to retained earnings 62,867,676 Appendix 333 Industry composite Balance sheet as of December 31, 2010 Assets Current assets Cash A/R Inventory Total current 155,547,894 88,994,234 127,589,745 372,131,873 Fixed assets Total assets 569,910,214 942,042,087 Liabilities Current liabilities Long-term debt Total debt 56,435,423 165,454,324 221,889,747 Equity Common stock Retained earnings Total equity Total liabilities and equity 641,700,000 78,452,340 720,152,340 $942,042,087 Index A Accounts receivable, 16, 44, 48, 49 Agency costs, problems, 6, 26–27 Amortization schedule, 123 Amortized loan, 121, 123, 127, 129 Annual percentage rate, 102, 126 Arithmetic returns, 196 Articles of incorporation, Ask price, 184 Asset, 31, 71, 108, 134, 159, 192, 241, 286 Asset utilization, 42, 43, 47–49, 54, 71, 72 Average tax rate, 33 B Balance sheet, 36–39, 45, 50, 59, 68, 72, 74–76, 255, 259, 263, 266, 291 Best efforts, 11 Beta, 222–226, 227, 229–231, 233–235, 246, 270, 278, 279 Bid price, 184 Board of directors, 10, 19–21 Bond, 6, 134, 160, 193, 242, 306 Bond ratings, 137, 138 Book-to-market ratio, 52, 54, 230 Book value, 35, 36, 42, 52, 54, 73, 84, 91, 230, 290, 291 Broker, 184, 185 C Callable bonds, 136, 145–148 Capital asset pricing model, 227–229, 246, 284 budgeting, 22–25, 32, 33, 37, 71, 285–311 gains component, 193 gains yield, 180, 194, 197 structure, 22–23, 45, 46, 53, 55, 133–153, 159–187, 241, 242, 249–251, 253, 255, 256, 259–270, 273, 274, 292 Cash flow assets, 72, 73, 75, 76, 78, 82, 83 creditors, 72, 77 shareholders, 72, 77–78, 252 Cash ratio, 44, 45, 54, 60, 68 Change in net working capital, 75–77 COGS See Cost of goods sold (COGS) Commission broker, 184, 185 Common-sized income statement, 39 Common stock, 15, 37, 38, 59, 68, 74, 134, 160–162, 167, 171, 192, 203, 208, 231, 243, 246, 247, 250–253, 255, 256, 259, 260, 269, 273 Compounding, 98, 99, 101–105, 107, 108, 110–113, 115, 147, 149, 295 Compound interest, 96, 97, 104 Confidence intervals, 200–203 Convertible bond, 150–151 Corporation, 4–7, 16, 19, 20, 22, 30, 32, 53, 74, 75, 77, 78, 116, 134, 135, 149, 204, 249, 262, 302 Correlation, 214–217, 221, 222, 224, 233 Correlation coefficent, 214, 217 Cost of goods sold (COGS), 31, 39, 48, 49, 54, 59, 74, 82, 86, 88 Coupon payments, 134–136, 141, 145, 146, 160, 193, 263 rate, 135, 139, 141–146, 152, 154, 161, 210, 248, 251 Covariance, 215, 223, 224 M.K Pyles, Applied Corporate Finance: Questions, Problems and Making Decisions in the Real World, Springer Texts in Business and Economics, DOI 10.1007/978-1-4614-9173-6, © Springer Science+Business Media New York 2014 335 336 Cumulative, 19, 110, 169, 196, 210 Cumulative voting, 19 Current ratio, 43–45, 54, 60, 68, 76 D Date of payment, 162 Date of record, 162 Days sales in inventory, 8, 54, 60, 68 in receivables, 49, 54, 60, 68 Dealer, 14, 184, 186 Debt-to-equity ratio, 45, 46, 54, 56, 60, 67, 68, 136–137, 139, 266, 282 Declaration date, 162 Depreciation, 31, 32, 34–36, 39, 42, 47, 49, 54, 59, 73–75, 82, 83, 86, 88, 91, 291 Direct public offering (DPO), 10 Discount bond, 142–144 Discounting, 55, 101, 105, 109, 117–125, 141–145, 148, 150, 152, 161, 167, 171, 173, 174, 176, 179, 205, 273, 288–289, 292, 293, 295, 299, 302, 307–311 Dividend payout ratio, 52, 54 yield, 53, 54, 60, 139, 180, 193, 194, 197, 247 Double taxation, Dutch auction, 11 E Earnings before interest and taxes (EBIT), 17, 31, 39, 40, 46, 47, 49, 54, 59, 73, 74, 82, 83, 86, 88 Earnings per share, 17, 21, 50, 51, 54, 60 Electronic communication networks (ECN), 186 Equity, 9, 36, 72, 134, 159, 192, 241, 306 Equity multiplier, 46, 54, 55, 60 Ex-dividend date, 162, 163 Expected cash flows, 64, 79–85, 117–119, 176, 263, 286, 292, 294, 297, 299, 303–306, 309 Expected returns, 22, 138, 210–214, 219–222, 226–230, 234, 235, 246, 258, 259, 267, 273, 276 F Face value, 134–136, 141–146, 149, 150, 154, 167, 169, 205, 247, 249 Index Firm commitment, 11, 37 Floor broker, 184 Floor trader, 185 Future value, 97–101, 107–111, 113, 115, 122, 161, 196, 213 G General partner, Geometric returns, 195–197, 210 Gordon growth model, 171–174, 178–179, 243, 244, 246 Government bonds, 135, 149, 150, 204 H Holding period return, 194, 196, 210 Homemade dividends, 163 I Income component, 192, 193 Indenture, 136–138, 140, 160 Inflation, 151, 206, 207, 211 Information content of dividends, 163 Initial public offering (IPO), 9–12, 20, 26, 138, 139, 160, 209, 231 Interest, 5, 30, 73, 95, 134, 160, 192, 242, 299 Interest only loan, 121–123, 135 Internal growth rate, 56, 57 Inventory, 23, 38, 44, 45, 48, 54, 59–63, 74, 83, 184 Inventory turnover, 48, 54, 60 IPO See Initial public offering (IPO) J Junk bonds, 138 L Liabilities, 2–6, 8, 31, 33, 36–38, 43, 44, 54, 59, 74–76, 80, 81, 83, 91, 159 Limited partner, 3, Liquidity, 40, 41, 43–45, 60, 75, 76, 83, 118, 183, 287, 288 Lockup agreement, 13 Long-term solvency, 40, 43, 45–47, 54, 61 Lump sum, 97–103, 105–110, 112, 114, 121, 130, 141, 144, 146, 148 Index M Marginal tax rate, 33 Market ratios, 40, 42, 43, 50–52, 54, 60, 62 risk premium, 228 value, 11, 14, 35, 36, 42, 43, 47, 51, 52, 84, 91, 141, 172, 177–179, 187, 230, 244, 250, 263 Market-to-book ratios, 52, 54, 230 Modified accelerated cost recovery system (MACRS), 34, 35 Municipal bonds, 150 N Net capital spending, 75, 83, 84, 88, 89, 117, 275, 306 Net income, 13, 17, 21, 31, 32, 39, 40, 49–55, 59, 62, 71–74, 81, 82, 86, 88, 290, 302 Net investment, 83, 87, 286–289, 291–295, 297, 299, 301 New York Stock Exchange, 183–186 Noncumulative, 169 O Offer price, 12, 13 Operating cash flow, 17, 73–75, 84, 87, 89, 90, 117, 139, 275, 306 Opportunity costs, 80, 81, 101, 118, 141, 288 Ordinary annuity, 111 P Par bond, 143 Partnership, 3–4, 8, 15 Perpetuity, 169, 176 Portfolio, 136, 196, 198, 208, 213–218, 220, 221, 224–225, 227, 229, 250 returns, 208 risk, 213–218 Preferred stock, 37, 169, 247, 248, 250, 251, 253, 269 Premium bond, 143, 144 Present value, 98, 100–101, 105, 107–110, 112, 114, 115, 117, 125, 141, 148, 173, 174, 176, 289, 292–296, 299, 302, 303, 307 Price ratios, 51 Price-to-earnings ratio, 50, 54, 60, 69 Primary market, 8–16 Principal, 95, 96, 97, 98, 116, 121–123, 135, 150 Principle of diversification, 221 Private debt, 23, 133, 134, 140, 249, 250, 256, 258, 273, 277, 279, 307 337 Private equity, 9, 10, 159–160, 249, 250 Profit, 2, 3, 12, 14, 16, 17, 21, 40–43, 47, 49, 50, 52–55, 60, 62, 63, 86, 87, 118, 122, 134, 137, 143, 163, 164, 178, 183, 192, 197, 253, 266, 268, 286, 290, 297, 302 Profitability ratios, 40, 42, 43, 49–50, 54, 60, 62 Profit margin, 49, 50, 54, 55, 60, 62 Pro forma statements, 81–82, 88 Prospectus, 11, 12 Proxy fights, 20 voting, 19, 20 Public debt, 23, 133–134, 138, 148, 149, 153, 160, 258, 276, 278 Public equity, 134, 159, 160, 169, 249 Pure discount loan, 120–124 Q Quick ratio, 43–45, 54, 60, 68 R Ratio analysis, 40–64 decomposition, 55 Receivables inventory, 23 Red herring, 12 Relevant cash flow, 80–82, 85, 160 Required rate of return, 135, 154, 161, 179, 180 Restrictive covenants, 136, 137 Retained earnings, 31, 32, 37–39, 52, 59, 74, 77, 78, 159, 243, 255, 256, 259, 273, 275, 277–279, 307 Retention ratio, 52, 54, 56, 60, 244 Return on assets (ROA), 55–57 Return on equity (ROE), 53, 55, 57, 244 Reward-to-risk ratio, 225, 226 Risk premium, 207, 228 ROA See Return on assets (ROA) ROE See Return on equity (ROE) S Sales, 9, 31, 72, 130, 159, 302 Sarbanes-Oxley Act, Seasoned equity offering (SEO), Secondary market, 8–9, 183 Securities and Exchange Commission (SEC), 11, 12, 15, 18, 135 Security market line (SML), 225–227 Security provisions, 136 Separate Trading of Registered Interest and Principal Securities (STRIPS), 150 338 Shareholder, 2, 5, 6, 9, 16–24, 30, 32, 36, 38, 40–42, 46, 47, 50, 52, 53, 55, 62, 63, 72, 73, 77–80, 86, 137, 139, 150, 151, 159, 160, 162–167, 169, 176, 178, 180–183, 231, 234, 242, 243, 252, 258, 263–270, 273, 276, 278, 279, 292, 294, 297, 300, 301, 303, 306, 311 Shares, 3, 37, 79, 135, 159, 192, 245, 305 Short term solvency, 41–45, 54 Simple interest, 96, 97 Sinking fund provision, 136, 154 SML See Security market line (SML) Sole proprietorship, 1–4, 6, 16 Specialist, 184–186 Spread, 9, 12, 17, 33, 61, 135, 186, 214, 220, 249, 284, 287 Stand-alone analysis, 80 Standard deviation, 200–202, 205, 213–219, 222, 233 Stock exchange, 183–187 Straight voting, 19 Sunk costs, 80, 81, 117 Sustainable growth rate, 56, 57, 246, 258 Systematic risk, 220–222, 225 T Taxable income, 31–34, 39, 59, 74, 82 Times interest earned ratio, 46, 47 Time value of money (TVOM), 95–99, 101, 102, 105, 107, 109–112, 114–116, 119, 122, 125, 170, 173, 196, 228, 286, 288, 292, 297, 302 Index Tombstone, 12 Total asset turnover (TATO), 47, 54, 55, 57, 60, 62 Total debt ratio, 45, 54, 60 Total percentage return (TPR), 194 TVOM See Time value of money (TVOM) U Underwriter, 10–12, 15, 37, 135, 138, 276, 278, 306 Universal trading platform, 185 Unlimited liability, 2, 4, 5, Unsystematic risk, 219–221 V Variance, 199, 200, 217, 223 Venture capital, 10 W Working capital management, 23–26 Y Yield to call (YTC), 146–148 Yield to maturity (YTM), 142–147, 152, 154, 181, 210, 248 Z Zero coupon bond, 148–150, 248–250 ... http://www.springer.com/series/10099 Mark K Pyles Applied Corporate Finance Questions, Problems and Making Decisions in the Real World Mark K Pyles Associate Professor of Finance College of Charleston Charleston,... understand the evolving processes that define corporate finance The end goal is that the student will have a comprehensive understanding of how the corporate financial cycle works Extraneous details... “proprietorship” indicates you have some type of proprietary skill that you can M.K Pyles, Applied Corporate Finance: Questions, Problems and Making Decisions in the Real World, Springer Texts in