Booth_f01.indd 2/19/2016 3:27:46 PM A personalized, adaptive learning experience WileyPLUS with ORION delivers easy-to-use analytics that help educators and students see strengths and weaknesses to give learners the best chance of succeeding in the course Photo credit: Monkey Business Images/Shutterstock Identify which students are struggling early in the semester Help students organize their learning and get the practice they need Measure outcomes to promote continuous improvement Educators assess the real-time engagement and performance of each student to inform teaching decisions Students always know what they need to work on With ORION’s adaptive practice, students quickly understand what they know and don’t know They can then decide to study or practice Eased on their proȴciency With visual reports, it’s easy for both students and educators to gauge problem areas and act on what’s most important www.ORION.wileyplus.com Booth_f01.indd 2/19/2016 3:27:46 PM Booth_f01.indd 2/19/2016 3:27:46 PM INTRODUCTION TO CORPORATE FINANCE MANAGING CANADIAN FIRMS IN A GLOBAL ENVIRONMENT Fourth Edition LAURENCE BOOTH University of Toronto SEAN CLEARY Queen’s University IAN RAKITA Concordia University Booth_f01.indd 3/3/2016 10:27:34 AM Copyright © 2016 John Wiley & Sons Canada, Ltd All rights reserved No part of this work covered by the copyrights herein may be reproduced, transmitted, stored, or used in any form or by any means—graphic, electronic, or mechanical—without the prior written permission of the publisher Any request for photocopying, recording, taping, or inclusion in information storage or retrieval systems of any part of this work shall be directed to the Canadian copyright licensing agency, Access Copyright For an Access Copyright licence, visit www.accesscopyright.ca or call toll‐free, 1.800.893.5777 Care has been taken to trace ownership of copyright material contained in this work The publishers will gladly receive any information that will enable them to rectify any erroneous reference or credit line in subsequent editions Financial statements from Canadian Pacific Railway Limited reproduced with permission Library and Archives Canada Cataloguing in Publication Booth, Laurence D., author Introduction to corporate finance: managing Canadian firms in a global environment/Laurence Booth (University of Toronto), W Sean Cleary (Queen’s University), Ian Rakita (Concordia University) — Fourth edition Includes bibliographical references and index Issued in print and electronic formats ISBN 978‐1‐119‐17128‐7(hardback).—ISBN 978‐1‐119‐25397‐6 (binder ready version).—ISBN 978‐1‐119‐25221‐4(pdf ) Corporations—Finance—Textbooks Business enterprises—Finance—Textbooks I Cleary, W Sean (William Sean), 1962‐, author II Rakita, Ian, 1953‐, author III Title IV Title: Corporate finance HG4026.B65 2016 658.15 C2016‐900015‐X C2016‐900016‐8 Production Credits Vice President and Director, Market Solutions: Veronica Visentin Executive Editor: Darren Lalonde Senior Marketing Manager: Anita Osborne Editorial Manager: Karen Staudinger Developmental Editor: Gail Brown Media Editor: Luisa Begani Assistant Editor: Ashley Patterson Production and Media Specialist: Meaghan MacDonald Cover and Interior Design: Joanna Vieira Typesetting: SPi Global Printing and Binding: RR Donnelley Cover Photos: world map, sorendls/Getty Images; American currency, YamabikaY/Shutterstock; pound notes, londondeposit/ Depositphotos; euro notes, Wara1982/Shutterstock; Australian currency, David Franklin/Getty Images; Japanese yen, Torsakarin/Depositphotos; Canadian currency, Joanna Vieira Printed and bound in the United States of America RRD 20 19 18 17 16 90 Eglinton Avenue East, Suite 300 Toronto, Ontario, M4P 2Y3 Canada Visit our website at: www.wiley.com Booth_f01.indd 2/19/2016 3:27:47 PM PREFACE In designing a textbook, we have tried to answer the basic question: What we want students to learn? In this respect, we are very much aware that the target audience for this textbook is made up of bright students who seek careers in business management predominantly in Canada This has dictated both what we have covered in the textbook and how we have tried to cover it A finance textbook designed for business students of necessity means that it should take a managerial focus In this respect, it is important to note that finance is built on three “legs”: accounting, law, and economics Accounting is the language of business, and financial analysts must be able to understand a firm’s financial statements This is a prerequisite to understanding anything in finance In fact, for most non‐financial companies, the terms “finance” and “accounting” are interchangeable This is reflected in chapters and 4 of the textbook, where we review the basic features of financial statements and financial analysis We this by studying a real Canadian company, Canadian Pacific Railway Limited (CP), and using its financial statements throughout the textbook both to illustrate and develop basic financial concepts We chose the financial statements of CP because its statements are relatively uncomplicated and easy for beginning students to understand However, if you go back 50 years, you will discover that introductory finance textbooks were heavily based on corporate and securities laws This is because financial securities are contracts and the terms of these contracts are partly determined by statute, while the ability to sell them to the general public and trade them in a market is determined by securities laws Understanding the basics of the legal system is critical for understanding how finance works in practice Here it is important to understand that there are differences between the United States and Canada that flow from differences in their legal systems Coercive tender offers, for example, occur in the United States but not in Canada, while bought deal underwritings are common in Canada, but not in the United States Behind most corporate and securities law, there has been an action that has enriched one person at someone else’s expense While economists politely refer to these actions as “wealth transfers,” more commonly they are referred to as “fraud.” The legal system is simply the entrenchment of society’s ethical or value system For this reason, the text includes a series of ethical issues for analysis and discussion If accounting provides the data, and the legal system provides the constraints on what can be done, economics provides most of the principles on how to get things done Understanding the workings of the economy—where we are in the business cycle, industry market structure, and the response of competitors—is all critical to understanding how financial markets behave and how firms manage their finances However, this is not a financial economics textbook We are not proving the existence of equilibrium, but rather we are providing a framework to solve real problems In this, we develop and use relevant accounting, legal, and economic skills that are used to solve financial problems faced by Canadians every day NEW TO THIS EDITION In the fourth edition of Introduction to Corporate Finance we welcome a new author The addition of a new author brings a new and fresh perspective and further enhances this already great Canadian-developed text Introduction to Corporate Finance, Fourth Edition, has been fully revised and updated to present the most current and relevant data and coverage of topics in the world of finance As well, the fourth edition has been revised to be even more user friendly and engaging Content has been restructured with additional subheadings in some chapters and the merger of some sections in others—all with the goal of further aiding comprehension and retention We continue to discuss the aftermath of the financial market “crash” of 2008‐9, as it is still uppermost in the minds of investors and regulators This is reflected, for example, in the continuing Booth_f01.indd 3/3/2016 10:29:15 AM vi PREFACE weakness in Europe and Japan and the weakness in commodity prices that has affected Western Canada and the value of the Canadian dollar These events have also caused both academics and professionals to re‐evaluate many strongly held beliefs about the efficiency of financial markets, the functioning of the banking system, and the role of regulation Canada was spared the enormous damage suffered in the United States, Europe, and the UK—a testament to the fundamental strength of the Canadian economy and financial system—but there are still lessons to be learned We have expanded our discussion of behavioural (neo‐Keynesian) finance in our discussion of market efficiency, as academics and professionals continue to question the central ideas of market efficiency In an effort to streamline this edition, we have reduced the number of Finance in the News features and added more recent ones to reflect current thinking in the field of finance and to help students put the material and topics being discussed into context Also new to this edition is our series of “Corner Suite” videos featuring interviews with leading professionals and experts in the field of finance We believe it is important to put the textbook’s content into context of what is done in practice in the real world of finance, and these videos help students to just that As well, we have created a series of “Office Hour” videos that walk students step‐by‐step through the solution of selected problems Both the “Corner Suite” and “Office Hour” videos are available in WileyPLUS with ORION We have also added case problems in selected chapters, which are intended to test students’ understanding of multiple concepts in a chapter ORGANIZATION OF THE TEXTBOOK There are underlying financial principles that every student of finance needs to know This text develops these principles first, and then applies them to business finance However, some instructors may prefer to cover the material in a different manner To add flexibility, we have designed the material into “parts.” Parts 1 and 2 are traditional We start with an overview of the financial system and business finance, before reviewing basic financial statements and financial analysis In parts to 5, we deviate from the traditional structure by developing a general understanding of discounted cash flow models, modern portfolio theory, and options and futures In our view, this is necessary to avoid undue duplication when discussing capital budgeting, corporate financing, and cost of capital In particular, a general introduction to options and futures is useful for discussing real options in capital budgeting, as well as hybrid securities in corporate financing In Part 6, we then apply these ideas to the acquisition of long‐lived assets (capital budgeting), in Part 7 to corporate financing, in Part 8 to financial policy, and in Part 9 to working capital management Furthermore, topics relating to international issues and ethics are integrated throughout the text In this way, none of the topics are “add ons,” pushed to the end of the textbook, to be rarely covered For those instructors who prefer a more traditional structure, the textbook is flexible enough that Part 6 on capital budgeting may easily be moved forward to follow Part 3 and the discussion of discounted cash flow models The discussion of modern portfolio theory and Part 4 may then be developed in conjunction with risk analysis in capital budgeting However, the disadvantage of this structure would be that Part 5, on futures and options, would be relegated to a special topic when in reality it is too important to be left to the end of the course ORIENTATION Many textbooks used in Canada are U.S textbooks adapted for a Canadian market In contrast, this text has been written from the ground up based on Canadian content and applications Booth_f01.indd 2/19/2016 3:27:50 PM PREFACE vii (such as the examples using Canadian Pacific Railway Limited, our featured company) Issues such as the day count, how to quote interest rates, takeover rules, and securities law continue to be different between Canada and the United States Canadians working for Canadian firms are expected to know what happens in Canada, as well as what happens in the United States However, Canadian content includes more than just describing different rules; it must also relate to current practice We include news articles in the Finance in the News features to bring to life the finance issues and topics covered in the textbook Relating basic issues to Canadian examples makes the material more relevant to students For example, it is more relevant to understand the specific issues facing Canadian pension plans and investors, than those faced by U.S or international investors, even though many of the general issues are the same On the other hand, in today’s global business environment, what happens around the world impacts Canadians Therefore, it is important to consider how global factors influence the Canadian environment, and hence the decisions made by Canadian managers and investors In fact, global influences are so great in Canada that all Canadian financial managers have to be aware of these issues We address this by integrating international issues on a topic‐ by‐topic basis, as they arise, rather than in a separate chapter where they are just “lumped together.” In this way, awareness of international issues develops naturally Finally, finance is a how‐to subject Students learn how to things in a finance course; for example, how to evaluate securities, how to manage short‐term cash, how to evaluate a plant expansion, and how to build a portfolio In helping students develop these skills, this textbook has an extensive set of examples and problems worked out to show how to solve these problems using a financial calculator Great care has been taken in an effort to specify calculator keystrokes that solve the textbook's examples in a simple, straightforward manner This approach is particularly important in the foundational Part 3, which deals with discounted cash flow valuation This section develops the basics in a cumulative manner, thus permitting the analysis of complex financial securities, while building students’ confidence in their ability to solve real problems We believe that this textbook will stimulate students to understand finance, as well as to apply it We believe that after working through this textbook, students will be able to solve basic financial problems, have the basic skills necessary to more advanced work in finance, and go on to add value to the firms for whom they will eventually work We hope this textbook will lead students to greater understanding of finance and that they will then share our enthusiasm for finance These are our reasons for writing this textbook We know that these are high standards for a finance textbook; if you feel we have not met these objectives, we welcome your feedback PEDAGOGICAL FEATURES Learning Objectives: These are listed at the start of each chapter and then integrated throughout the chapter to reinforce key concepts and help guide students’ learning Running Glossary: Key terms are highlighted throughout each chapter and defined in the text margin Concept Review Questions: At the end of each major section, questions are provided to help students check their understanding before moving on Examples: All examples in the text are numbered and labelled for easy reference, and include fully worked-out solutions Keystrokes for the TI BA II Plus financial calculator are included for each relevant example Chapter Summary: Each chapter concludes with a summary of the key concepts covered in that chapter, as well as a summary of the learning objectives Booth_f01.indd 2/19/2016 3:27:50 PM viii PREFACE Equations Summary: Equations are numbered, titled, and listed with page references at the end of each chapter Questions and Practice Problems: These are provided at the end of each chapter and allow students to practise and enhance their understanding and learning Questions and practice problems are identified according to the relevant chapter learning objective and practice problems are organized by level of difficulty WileyPLUS is an innovative, research‐based on‐line environment for effective teaching and learning WileyPLUS builds students’ confidence because it takes the guesswork out of studying by providing students with a clear roadmap: what to do, how to it, and if they did it right Students will take more initiative so you’ll have a greater impact on their achievement in the classroom and beyond Among its many features, this on‐line learning interface allows students to study and practise using the digital textbook, quizzes, and algorithmic exercises The immediate feedback helps students understand where they need to focus their study efforts We have standardized the chart of accounts to reduce complexity and to facilitate on‐line practice Based on cognitive science, WileyPLUS with ORION is a personalized adaptive learning experience that gives students the practice they need to build proficiency on topics while using their study time more effectively The adaptive engine is powered by hundreds of unique questions per chapter, giving students endless opportunities for practice throughout the course ORION is available with this text Wiley Custom Select Wiley Custom Select offers your students a cost‐efficient alternative to traditional texts In a simple three‐step process, create a solution containing the content you want, in the sequence you want, delivered in the way you want Visit http://customselect.wiley.com to learn more about Wiley Custom Select RESOURCES A full suite of resources are available in WileyPLUS with ORION As well, some resources are available on the textbook’s companion website, www.wiley.com/go/boothcanada For Instructors Solutions Manual: The solutions manual includes complete solutions to all end‐of‐chapter questions and practice problems in the textbook, as well as answers to the concept review questions Excel© solutions templates are also available for relevant problems in each chapter Test Bank: The test bank includes a rich selection of multiple choice, short answer, and practice problems, with full solutions These are coded by difficulty and knowledge level, with references to the relevant sections in the text The test bank is available as Word files and as a computerized test bank, in an easy‐to‐use test‐generating program PowerPoint© Presentations: A full series of PowerPoint© slides have been prepared for each chapter and includes key points from each chapter and worked‐out demonstration problems where applicable Booth_f01.indd 2/24/2016 3:45:45 PM Appendix Table A-1 Cumulative Normal Distribution Table Booth_c24.indd 869 d N(d) d N(d) d N(d) −3.00 0013 −1.42 0778 −0.44 3300 −2.95 0016 −1.40 0808 −0.42 3373 −2.90 0019 −1.38 0838 −0.40 3446 −2.85 0022 −1.36 0869 −0.38 3520 −2.80 0026 −1.34 0901 −0.36 3594 −2.75 0030 −1.32 0934 −0.34 3669 −2.70 0035 −1.30 0968 −0.32 3745 −2.65 0040 −1.28 1003 −0.30 3821 −2.60 0047 −1.26 1038 −0.28 3897 −2.55 0054 −1.24 1075 −0.26 3974 −2.50 0062 −1.22 1112 −0.24 4052 −2.45 0071 −1.20 1151 −0.22 4129 −2.40 0082 −1.18 1190 −0.20 4207 −2.35 0094 −1.16 1230 −0.18 4286 −2.30 0107 −1.14 1271 −0.16 4365 −2.25 0122 −1.12 1314 −0.14 4443 −2.20 0139 −1.10 1357 −0.12 4523 −2.15 0158 −1.08 1401 −0.10 4602 −2.10 0179 −1.06 1446 −0.08 4681 −2.05 0202 −1.04 1492 −0.06 4761 −2.00 0228 −1.02 1539 −0.04 4841 −1.98 0239 −1.00 1587 −0.02 4920 −1.96 0250 −0.98 1635 0.00 5000 −1.94 0262 −0.96 1685 0.02 5080 −1.92 0274 −0.94 1736 0.04 5160 −1.90 0287 −0.92 1788 0.06 5239 −1.88 0301 −0.90 1841 0.08 5319 −1.86 0314 −0.88 1894 0.10 5398 −1.84 0329 −0.86 1949 0.12 5478 −1.82 0344 −0.84 2005 0.14 5557 −1.80 0359 −0.82 2061 0.16 5636 −1.78 0375 −0.80 2119 0.18 5714 −1.76 0392 −0.78 2117 0.20 5793 −1.74 0409 −0.76 2236 0.22 5871 −1.72 0427 −0.74 2297 0.24 5948 −1.70 0446 −0.72 2358 0.26 6026 −1.68 0465 −0.70 2420 0.28 6103 −1.66 0485 −0.68 2483 0.30 6179 −1.64 0505 −0.66 2546 0.32 6255 −1.62 0526 −0.64 2611 0.34 6331 −1.60 0548 −0.62 2676 0.36 6406 d N(d) d N(d) d N(d) −1.58 0571 −0.60 2743 0.38 6480 −1.56 0594 −0.58 2810 0.40 6556 −1.54 0618 −0.56 2877 0.42 6628 −1.52 0643 −0.54 2946 0.44 6700 −1.50 0668 −0.52 3015 0.46 6773 −1.48 0694 −0.50 3085 0.48 6844 −1.46 0721 −0.48 3156 0.50 6915 −1.44 0749 −0.46 3228 0.52 6985 0.54 7054 1.18 8810 1.82 9556 0.56 7123 1.20 8849 1.84 9671 0.58 7191 1.22 8888 1.86 9686 0.60 7258 1.24 8925 1.88 9699 0.62 7324 1.26 8962 1.90 9713 0.64 7389 1.28 8997 1.92 9726 0.66 7454 1.30 9032 1.94 9738 0.68 7518 1.32 9066 1.96 9750 0.70 7580 1.34 9099 1.98 9761 0.72 7642 1.36 9131 2.00 9772 0.74 7704 1.38 9162 2.05 9798 0.76 7764 1.40 9192 2.10 9821 0.78 7823 1.42 9222 2.15 9842 0.80 7882 1.44 9251 2.20 9861 0.82 7939 1.46 9279 2.25 9878 0.84 7996 1.48 9306 2.30 9893 0.86 8051 1.50 9332 2.35 9906 0.88 8106 1.52 9357 2.40 9918 0.90 8159 1.54 9382 2.45 9929 0.92 8212 1.56 9406 2.50 9938 0.94 8264 1.58 9429 2.55 9946 0.96 8315 1.60 9452 2.60 9953 0.98 8365 1.62 9474 2.65 9960 1.00 8414 1.64 9495 2.70 9965 1.02 8461 1.66 9515 2.75 9970 1.04 8508 1.68 9535 2.80 9974 1.06 8554 1.70 9554 2.85 9978 1.08 8599 1.72 9573 2.90 9981 1.10 8643 1.74 9591 2.95 9984 1.12 8686 1.76 9608 3.00 9986 1.14 8729 1.78 9625 3.05 9989 1.16 8770 1.80 9641 2/19/2016 9:05:07 PM Booth_c24.indd 870 2/19/2016 9:05:07 PM Index A abandonment decisions, 495 ABC approach, 856 abnormal returns, 350 account manager, 48 accounting assumptions, 70–71 accounting break-even point, 513n accounting conventions, 65–68 accounting principles, 58–63 accounting scandals, 60–62 Accounting Standards for Private Enterprises (ASPE), 58–59 accounts receivable, 123, 849–855 acid test ratio, 113, 832 acquisition, 530, 541–542 see also mergers and acquisitions (M&A); takeovers active trading strategies, 362 adaptive dividend model, 802 adjustable rate convertible subordinated securities (ARCs), 684 after-tax cost of debt (k), 633 agency arguments, 771 agency costs, 38–39, 766 agency problems, 38, 770, 771 agency relationship, 38–39, 616 agency theory, 617, 804–805 agency transactions, 10 Akerlof, George, 602, 606 Alberta Stock Exchange (ASE), 18 Aliber, Robert, 359–360 Allied Irish Bank, 380n allocational efficiency, 343 alpha, 325, 325n Alpha Trading Systems Inc., 530 alternative trading mechanisms (ATMs), 22 Altman, Ed, 753 Altman Z score, 753, 754 amalgamations, 531–532 American Depository Receipts (ADRs), 789 American International Group, Inc (AIG), 43, 62, 399–400 American options, 425, 426n, 437n American Stock Exchange, 22 amortization, 71 amortization period, 166–167 amortization schedule, 165, 168 amortize, 165 analysts, 48 anchoring, 359 annual after-tax cash flows, 499 annual information forms (AIFs), 624 annual percentage cost of trade credit, 857 annuity, 153 annuity due, 156–158 growing annuities, 161 internal rate of return, 468 multiple annuities, 170–172 net present value, 465 ordinary annuities, 153–156 profitability index (PI), 472 annuity due, 156–158 anomalies, 346 approximate annual yield, 862 arbitrage, 342 arbitrage opportunities, 215, 215n, 605 arbitrage pricing theory (APT), 330–331 arbs, 538, 538n arithmetic average, 270 arithmetic mean, 270–271, 722 arm’s length, 552 Arthur Andersen LLP, 61 ask rate, 376n ASPE See Accounting Standards for Private Enterprises (ASPE) asset account, 494n asset-backed commercial paper (ABCP), 639–640 asset-based lending, 572, 573, 573f, 574–576 Index.indd 871 asset pricing models alternative asset pricing models, 327–331 arbitrage pricing theory (APT), 330–331 capital asset pricing model (CAPM) See capital asset pricing model (CAPM) efficient markets hypothesis, 328 asset purchase, 537 asset turnover ratio, 698 assets capital assets, 547 current assets, 77 financial assets, 5–7, 16 fixed assets, 123 household assets, 7t intangible assets, 458n long-lived assets, 458 marketable financial assets, 17 mutual fund assets, 13f non-marketable financial assets, 17 pension plan assets, 13t personal assets, real assets, risk-free asset, 311f, 312 tangible assets, 458 underlying asset, 375, 420 associates, 48 asymmetric information, 602–603 at the money, 417n attainable portfolios, 289 auction markets, 18 average collection period (ACP), 110, 832, 854 average days of revenues in payables ratio, 833, 835 average days revenues in inventory (ADRI), 111, 833 average returns, 269–271, 269t B backdating, 42, 43, 49, 441–442 backdoor listing, 613 backdoor underwriting, 613 Baker, Kent, 729 balance sheet, 64, 68–69, 695f Canada’s balance sheet, 4, 5t Canadian Pacific (CP), 76–80, 79f lease classification, effect of, 579–580 main balance sheet accounts, 694t balloon payment, 186, 643 Balsillie, Jim, 41n, 42–43, 49 Bank Act, 572, 575, 619n bank financing, 641–643 bank loans, 859 Bank of Canada, 226, 518, 634, 634n, 635n, 722, 730 bankers’ acceptances (BAs), 381, 638–640, 638t, 680, 861, 863 bankers’ acceptances futures contracts (BAX), 388 bankers’ ratio, 113 banking associates, 48 banking syndicate, 619 bankruptcy, 764–770 Bankruptcy and Insolvency Act (BIA), 765 banks See chartered banks Barrick Gold Corp., 42 Baruch, Bernard, 342 base interest rates, 201–202 Basel Committee on Banking Supervision, 39 basis point, 149 basis risk, 389 BC Gas, 644–647 BC Registry Services, 30n BCE Inc., 535 Bear Stearns Companies, Inc., 604, 640 bearer bonds, 604 “beat the market,” 352 behavioural finance, 342, 355–361 investor overconfidence and anchoring, 359 irrational forces, 357–358 market efficiency and speculative bubbles, 359–361 Berkshire Hathaway, 789 best efforts offering, 618 beta, 318, 319–322, 322t, 325, 328 beta coefficient, 721, 723 beta estimates, 723–726, 723f bid rate, 376n Big Six banks, 11, 11t bill of exchange, 638 binomial model, 442 binomial option pricing, 442–445, 513, 675 “bird in the hand” argument, 799–801, 800f Birinya, Laszlo Jr., 349 Black, Fischer, 419, 419n black markets, 340 Black-Scholes option pricing model, 419, 434–437, 513, 675 BlackBerry, 41 see also Research in Motion (RIM) block trades, 20 Bluenose Gold Corp., 823, 824 board of directors, 34, 38 best interests of the company, 766 defensive tactics, 539 dividend payments, 662, 671, 786 fiduciary duty, 537 and stakeholders, 37 statutory responsibilities, 34–35 BOD See board of directors boiler rooms, 607 Bombardier, 649, 650 bond indenture, 186 bond quotes, 195–197, 197t bond ratings, 206–207, 206f, 647–653 determination of, 648–649 empirical evidence, 650–653 interpretation of, 647–648 bond valuation with annual coupons, 189–191 bond price-yield curve, 193f bond quotes, 195–197, 195–197t cash prices vs quoted prices, 197–198 different coupon rates, 194–195 different terms to maturity, 193–194 discount, 190 equation, 189, 701 factors affecting bond prices, 192–197 interest rates, 193–195 premium, 190 with semi-annual coupons, 191 straight bond value (SBV), 677 and time to maturity, 193 using interest factors, 189 and yield to maturity, 189 bond yields, 198–201, 206, 210 bonds, 186 see also specific types of bonds additional bond features, 187–188 basic structure of bonds, 186–188 bond prices See bond valuation bond ratings, 206–207, 206f, 647–653 bond tables, 199n bond valuation See bond valuation bond yield components, 206 bond yields, 198–201, 206, 210 coupon-paying bond, 186, 186f current yield (CY), 200–201 issue-specific premiums, 210 liquidity premiums, 209 risk premiums, 206–210 security or protective provisions, 187 terminology, 186–187 yield to maturity, 198–200 book equity value to market value of equity (BVE/MVE), 330 book value per share (BVPS), 667, 698, 698n, 716 bookkeeping, 63–65 borrowers, 4, 14–16 borrowing, 6, 6f, 584n Boston Consulting Group, 717, 717f 3/3/2016 10:45:20 AM 872 INDEX bottom-up analysis, 460 bought deal, 618 Brandes, Charles, 328 break-even point (BEP), 108, 513n, 744–748 break-even sales growth rate, 828, 831 break fee, 536–537 Bristol-Myers Squibb Company, 71, 837 British Columbia Securities Commission (BCSC), 612 British North America Act, 609 brokers, 10, 18 Brost, Milowe, 607 bubbles, 249–250, 342, 356, 358, 359–361, 724 bucket shops, 607 Budget Control Act of 2011, 208n budget deficits, 501–502 Buffett, Warren, 114, 328, 398, 789 bullet payment, 186, 643 bunny warrants, 676 Burger King Worldwide, 548 burn rate, 830 business finance See corporate finance business organizations corporations, 34–35 partnerships, 31–32 sole proprietorships, 30–31 trusts, 32–33 types of, 30–35 business risk, 743 buy-side analysis, 341 BVPS See book value per share (BVPS) C call option, 416–422 basics, 416–418 call holder’s payoff, 416f, 417 firm as, for shareholders, 767, 767f option writer’s payoffs, 418, 418f price, 429, 437f values, 419–422, 420f warrants, 674 call prices, 187 callable bonds, 187, 216–217 Canada asset-based financing market, 573f banks, 23 Canada’s balance sheet, 4, 5t commodity futures trading, 387 corporate cash holdings, 848 credit rating, 208 default rates, average, 650t equipment and vehicle leasing market, 572f fraudulent activities, examples of, 608–609 international investments, 21t money market, 639t non-financial companies, 15–16, 16t post-IPO market, 623 “safe harbour” position, selective disclosure, 624–625 U.S dollar exposure, 377 Canada Business Corporations Act (CBCA), 34–35, 34n, 531, 532n, 660, 662, 663 Canada Pension Plan (CPP), 14 Canada Pension Plan Investment Board (CPPIB), 12, 44–45 Canada Revenue Agency (CRA), 31, 71, 84, 496, 497, 497t, 552, 574, 574n, 576, 604, 632, 633, 635n, 659, 680, 682, 683 Canada Savings Bond (CSB), 17, 213–214 Canadian accounting standards, 58–59 see also Accounting Standards for Private Enterprises (ASPE); International Financial Reporting Standards (IFRS) Canadian Bond Rating Service (CBRS), 637 Canadian Coalition for Good Governance (CCGG), 45 Canadian Depository for Securities (CDS), 530, 604, 604n, 612, 644 Canadian Derivatives Clearing Corporation (CDCC), 384 Canadian dollar, 375–376, 378 Canadian Finance and Leasing Association (CFLA), 572, 573, 590, 592 Index.indd 872 Canadian GAAP See generally accepted accounting principles (GAAP) Canadian Institute of Chartered Accountants (CICA), 563 Canadian National Railways Company (CN), 75, 102, 102t, 106t, 112t, 113, 114t, 118, 118t Canadian optional interest notes (COINs), 684–685 Canadian Pacific (CP) accompanying statements, 76 accounting statements, 75–83 balance sheet, 76–80, 79f balance sheet accounts as percentage of sales, 129t beta, 725, 725f cash flow statement, 80–83 commercial paper rating, 707n consolidated balance sheet, 79f consolidated statement of cash flows, 82f dividend payments, 786–787, 787f dividend yield, 118, 667–668 DuPont ratios, 99–101, 101t, 102t external financing requirements, 128–132 financing, 705–708, 706t forecast, 131t income statement, 80, 81f independent auditor’s report, 78f internal funds, investment, and dividends, 796, 796f investment and internal cash flow, 477f investment opportunities schedule, 728, 728f leverage ratios, 106t liquidity ratios, 114t Management’s Responsibility for Financial Reporting, 76, 77f market debt ratio, 726 productivity ratios, 112t quick ratio, 113 return on equity, 99 shareholders’ equity, 667t valuation of shares, 665–668 valuation ratios, 118t working capital ratios, 835–836 Canadian Securities Administrators, 400, 441–442 Canadian securities commissions, 539 Canadian Securities Transition Office, 609 Canadian tax system, 83–91 capital cost allowance (CCA) See capital cost allowance (CCA) capital gain, 86 capital loss, 86 CCA asset classes, 84–85 CCA recapture, 86 corporate income tax rates, 87–88t corporate taxes, 84–88 half-year rule, 84 personal tax, 88–90 provincial/territorial personal income tax rates, 89–90t undepreciated capital cost (UCC), 84 Canadian Trading and Quotation System Inc (CNQ), 20 Canadian Unlisted Board Inc., 20 capacity, 850 capacity reduction, 545 capex decisions See capital budgeting capital asset pricing model (CAPM), 314–315, 720, 755 capital market line (CML), 315–317, 315f cost of common equity, estimate of, 720–723 cost of external common equity, 727 cost of internal common equity, 726 criticisms, 329 equity cost equation, 764 Fama-French (FF) model, 330 market portfolio, 315–317 and market risk, 319–327 required returns, estimating, 324, 326 risk-adjusted performance, 317–318 security market line (SML), 323–327, 323f Sharpe ratio, 317–318 single-factor model, 327 single period, 721 capital assets, 547 capital budgeting, 45, 458 appropriate discount rate, 479–480 capital expenditure analysis, 45, 494–495 capital rationing, 476–480 cash flows, estimating and discounting, 496–507 chain replication approach, 473–474 contingent projects, 473 discounted cash flow (DCF) methodologies, 461 discounted payback period, 462–463 equivalent annual NPV (EANPV) approach, 474–476 evaluation of investment alternatives, 461–472 foreign direct investment (FDI), 480–482, 481f importance of, 458–461 independent projects, 472–476 and inflation, 514–518 interdependent projects, 473–476 internal rate of return (IRR), 466–471, 470t international considerations, 480–482 and leasing, 590 modified internal rate of return (MIRR), 470, 482–484, 484f mutually exclusive projects, 469, 469n net present value (NPV), 463–466, 468–471, 470t, 481n, 501, 504 payback period, 462–463, 481n process, 458–461 profitability index (PI), 471–472 real option valuation (ROV), 461 replacement decisions, 460, 503, 507–508 sensitivity to inputs, 509–514 survey results, 462f valuation by components, 503–507 capital cost (C0 ), 496 capital cost allowance (CCA), 71–72, 84–86, 84t, 86n, 494, 497, 499n, 514, 574, 586 CCA asset classes, 84–85, 84t, 497t CCA recapture, 86, 500 CCA tax shields, 499n, 503, 504, 586–588 capital expenditure analysis, 45, 494–495 see also capital budgeting capital expenditures, 458–461 see also capital budgeting capital gain, 86, 90, 267–268, 504 capital gain (loss) return, 268 Capital IQ key business ratios, 835, 835t capital lease, 707 capital loss, 86, 267–268 capital market line (CML), 315–317, 315f capital market securities, 17 capital markets, 48 capital rationing, 476–480 capital structure, 694–696, 751t agency costs, 766 determination of, 750–754 financial distress and bankruptcy, 764–770 financial leverage, 742–750 M&M, 754–760 M&M with taxes, 761–764 optimal capital structure, 774, 774f other factors, 770–772 and personal taxes, 775–776 in practice, 772–774 CAPM See capital asset pricing model (CAPM) captive finance companies, 572 carrying costs, 856 Case/Shiller U.S housing indexes, 387 cash, 844–848 Canadian corporate cash holdings, 848 cash balance “puzzle,” 847–848 management techniques, 846–847 optimal cash balance, 844–846 reasons for holding cash, 844 cash budget, 126n, 824–827, 825t, 826t cash changes, 828–829, 830f general working capital, 829 percentage of sales, 829 cash conversion cycle, 832, 834–835 cash cow, 718, 796, 830 2/13/2016 9:44:04 AM INDEX cash dividend payments, 786–787 cash flow bonds, 682 cash flow constraint, 795 cash flow from financing (CFF), 83, 579 cash flow from investing activities (CFI), 81 cash flow from operations (CFO), 74, 558, 579 cash flow statement, 72–75, 80–83, 577–579 cash flow-to-debt ratio (CFTD), 106, 752 cash flows, 154 adjustment of, 494 after capital cost allowance, 497–499, 497t after-tax basis, 494 annual after-tax cash flows, 499 cash flow from financing (CFF), 83, 579 cash flow from investing activities (CFI), 81 cash flow from operations (CFO), 74, 558, 579 cash flow variability, 546–547 discounted cash flows, 463 see also discounted cash flow (DCF) method discounting, 496–507 ending cash flow, ignoring tax implications, 500 ending cash flow, with tax implications, 500 ending (terminal) after-tax cash flow (ECFn), 499–501 estimation of, 496–507 expected annual after-tax cash flows (CFt), 497–499 free cash flow, 74–75, 83, 239n, 558, 795, 797 free cash flow to equity, 559 free cash flow valuation, 795 future cash flows, 496n, 852 income yield, 266 incremental cash flows, 464, 494, 507 inflation-adjusted cash flows, 514 initial after-tax cash flow (CF0), 496 marginal cash flows, 494, 507 multiple reversals in signs of, 469n negative cash flows, 496n present value of operating cash flows, 503 project interdependencies, 495 real cash flows, 514 single period free cash flow, 795 terminal after-tax cash flow, 499–501 traditional cash flow, 74, 81 cash forecast, 121–122 cash inflow, 496n, 828–832 cash outflow, 828–832 cash price, 197–198 cash transaction, 531 Cayne, James, 341 CBCA See Canada Business Corporations Act (CBCA) CCA See capital cost allowance (CCA) CFA Institute, 146n, 328 CFF See cash flow from financing (CFF) CFI See cash flow from investing activities (CFI) CFO See cash flow from operations (CFO) chain replication approach, 473–474 channels of intermediation, 9–11 character, 851 characteristic line, 320, 320f, 320n chartered banks, 11, 11t, 573n, 803 Chicago Board of Exchange (CBOE) Volatility Index (VIX) See VIX Index Chicago Board of Trade (CBOT), 386, 387 Chicago Board Options Exchange, 357 Chicago Mercantile Exchange (CME), 386 chief executive officer (CEO), 38, 40–42, 41t, 61, 611 chief financial officer (CFO), 46, 61, 461, 611, 696 Citigroup Inc., 11 clearing corporation, 383 closely held issuers, 613 closet indexing, 322n CME Group, 386, 387 CNSX Markets Inc., 20 COINs, 684–685 coins, 603n collar, 432, 432f, 433–434 collateral, 187 collateral trust bonds, 187 collection process, 854–855 commercial paper (CP), 635–638, 636f, 637t, 638t, 640, 641n, 659, 685, 707, 861–863 Index.indd 873 commodity, 381 commodity bond, 682 commodity forward contracts, 383 commodity futures trading, 387 common share valuation additional multiples, 250–253 approaches, 239t dividend discount model (DDM), 228–239 fundamental valuation, 245–247 multiples, use of, 240–245 price-earnings (P/E) approach, 240–245 relative valuation, 240, 245–247 relative value ratios, 250–253 valuation example, 245–248 valuation ratios, 250–253, 251f common shares, 17, 18, 226, 660 cost of See cost of equity vs long Canada bond, 267t required return, estimate of, 329t valuation See common share valuation Companies’ Creditors Arrangements Act (CCAA), 765 comparability, 66 comparative advantage, 391, 392 comparative statics, 426n compensation, 40–42, 41t competitive advantage, 460 competitive strategy, 459 complementary strengths, 546 compound interest, 145, 147f, 148f compounding, 145–149 discounting, 150–151 rates of return or holding periods, 151–153 compound return, 149 comps, 553 CompuCredit Holdings Corp., 810 conditional sales agreement, 574 conditions, 851 Conference Board, 616, 750, 773 confidentiality agreement, 536 conflicts between issuers and investors, 602–609 conglomerate merger, 542 consolidation method, 80n constant growth DDM, 231–232, 233–234, 711, 713, 714, 714t constant growth model (CGM), 711–713 Constitution Act, 609 consultants, 49 consumer price index (CPI), 202, 682 contango, 381 contingent liabilities, 538 contingent projects, 473 continuous disclosure, 624–625 contrarian strategies, 346 Contrepreneurs (Francis), 607 control block, 612, 612n controller, 47 convenience yield, 381, 381n conversion premium, 677 conversion price (CP), 676 conversion rate (CR), 676 conversion value (CV), 677 convertible bonds, 188, 676, 676t convertible securities, 676–680 corporate debt tax shield, 762 corporate finance, 24, 45–46 see also finance corporate finance associates, 49 corporate financing, 46, 48 corporate governance, 44–45, 61 corporate income tax rates, 87, 87–88t corporate taxes, 84–88, 761–764 corporations, 34–35 see also firm board of directors See board of directors goals of the corporation, 35–37 vs partnership, 34 correlation coefficient, 279, 280–281 impact of, 284f and portfolio standard deviation, 283–286 zero correlation coefficient, 285 cost leadership, 459 cost method, 80n 873 cost of capital, 483, 494, 700 see also weighted average cost of capital (WACC) cost of carry, 382 cost of common equity See cost of equity cost of equity, 757 from constant growth model, 711 cost of new equity (after issue costs), 712 growth models, 710–720 internal funds, 712 risk-based models, 720–730 unlevered equity, 758 cost of perpetuity preferreds, 705 costs of acquisition, 561 agency costs, 38–39, 766 of bankruptcy, 765–766 capital cost (C0), 496 carrying costs, 856 of common shares See cost of equity of debt, 704–705 direct costs, 38 direct costs of bankruptcy, 765 financial distress costs, 765 financing hierarchy costs, 686f fixed costs, 545 flotation costs, 703–704 indirect costs, 38 indirect costs of bankruptcy, 765 issuing costs, 547, 703–704, 704t non-equity component costs, 703–708 opportunity cost, 144, 495 of preferred shares, 705 shortage costs, 856 social costs, 607 storage costs, 381 sunk costs, 495 transaction costs, 803–804 counterparties, 391 counterparty risk, 376 coupon-paying bond, 186, 186f coupons, 187 covariance, 278, 279 covenant provisions, 187 covenants, 642 coverage ratio, 105–106, 106n, 708 covered call writing, 431–432, 431f covering, 377 CPMS, 348–349 credit corporate credit market, 858 credit decision, 849–850 credit policy, 829–831, 851–853 evaluation of credit information, 850–851 sources of credit information, 850 credit analysis, 849 credit crunch, 10, 23 credit default swap (CDS), 398–400 credit enhancements, 864 credit policy, 829–831, 851–853 credit rating agencies, 206–207, 206f, 637, 672 credit ratings, 206–208, 208t, 391 credit risk, 376 credit watch, 648 credit yield spread, 636–637 creditors, and bankruptcy, 766–768 creeping takeovers, 535 critical shareholder percentages, 533–534 cross-border (international) M&As, 542, 543f, 548 cross-default clause, 645 crossover rate, 469 Crown corporations, 14 cumulative provision, 672 currency swap, 394–396 current assets, 77 current liabilities, 80 current ratio, 113, 832 current yield (CY), 200–201 D daily resettlement, 384 daily VaR, 297 data room, 536 2/13/2016 9:44:04 AM 874 INDEX day trader, 269 DDM See dividend discount model (DDM) dealer markets, 18 dealer syndicate, 619 debentures, 187, 644 DeBondt, W., 346 debt, 761n, 773f after-tax cost of debt (k), 633 bank financing, 641–643 bank loans, 859 borrowing to buy stocks, 748 cost of debt, 704–705 and expected ROE, 745 funded debt, 643 lines of credit (LC), 641–642, 857n, 860 loan arrangements, 165–170 long-term debt, 643–647 meaning of debt, 632–634 short-term debt, 634–640, 643 tax deductibility, 633 term loans, 642–643 unsubordinated debt, 645 debt capacity, 547 debt-equity (D/E) ratio, 104 debt instruments, 16–17, 211–214 see also specific debt instruments debt markets, 17 debt ratings, 206 see also bond ratings debt ratio, 104 debt-to-equity ratio, 695, 695f, 747 debt-to-income ratio, 105 debtor-in-possession (DIP) financing, 765 decision tree, 512, 513f declaration date, 786 declining-balance CCA, 498 deep, 420 default free, 201 default rates, 650–651, 650t default recovery rates, 652t default risk, 206 default spread, 636–637 defensive tactics, 539–541 degree of total leverage (DTL), 107–108, 710 delta, 438 demand LC, 641 depreciation, 71, 547 derivatives, 376n, 398, 444 derivatives market, 399t, 400 detachable warrants, 676 Dex Universe Bond Index, 722 Dey Report, 37 differentiation, 460 dilution factor, 674–675 direct costs, 38 direct costs of bankruptcy, 765 direct intermediation, disaster “out” clause, 619 disclosure, 340, 624–625 discount, 190, 853–854, 858 discount factor, 150 discount rate, 144, 468, 479–480, 729, 729t discounted cash flow (DCF) method, 557–561, 582–583, 697, 711 discounted cash flow (DCF) methodologies, 461 discounted cash flow (DCF) model, 554 discounted free cash flow approach, 239t discounted payback period, 462–463 discounting, 150–151 distribution period, 620–621 distributions, 612–614 diversifiable risk, 291–292 diversification, 289–293, 290f, 549 dividend discount model (DDM), 229, 239t, 503 basic dividend discount model, 228–231 constant growth DDM, 231–232, 233–234, 711, 713, 714, 714t DDM inputs, estimating, 234–236 equation, 229, 236 implied rate of return, 232 inputs of constant growth DDM, 233–234 limitations of, 238–239 Index.indd 874 multi-stage growth DDM, 716–718 multiple-stage growth version, 236–238 over n periods, 229 required rate of return, estimating, 232 two-stage dividend growth, 237–238 value of growth opportunities, estimating, 232–233 dividend income, 668–669 dividend payout ratio, 116 dividend per share (DPS), 711 dividend reinvestment plan (DRIP), 788, 798 dividend-to-price approach, 239t dividend yield, 116, 266–267, 667, 792–793t dividends and dividend policy, 87, 90 adaptive dividend model, 802 aggregate dividends, 791–792, 791f “bird in the hand” argument, 799–801, 800f cash dividends, 786–787 dividend gross up, 90, 669 dividend growth, 230, 245–246 dividend payments, 124–126, 421–422, 662, 671, 786–790 dividend policy in practice, 802 dividend reinvestment plan (DRIP), 788, 798 forms of dividend payments, 786–790 free cash flow, 797 historical dividend data, 790–794 homemade dividends, 797–798, 803n Lintner equation, 802 M&M dividend irrelevance theorem, 794–798 relaxing the M&M assumptions, 803–808 repackaging dividend-paying securities, 807–808 residual dividend policy, 797 residual theory of dividends, 795–796 share repurchases, 809–810 signalling role of dividends, 804–806, 805f stock dividend, 788, 789–790 stock split, 788–790 taxes, 806, 806t “dividends-are-better” theory, 799 Dodd, David L., 240, 352 Dodd-Frank Wall Street Reform and Consumer Protection Act, 400 dog, 718 dog and pony shows, 620 domestic diversification, 289–292 Dominion Bond Rating Service (DBRS), 206, 206f, 637, 637t, 647, 647t, 649–652, 672, 681, 707n, 850, 864 Donaldson, Gordon, 38, 40, 752, 771 Dow Jones Industrial Average (DJIA), 360 downside risk, 662 Dreman, David, 355 dual-class shares, 666–667 due diligence, 536, 537, 540, 608 Dun & Bradstreet (D&B) Canada Limited, 850 DuPont equation (three-point), 235 DuPont system, 99–101, 99f, 235 duration, 195 Dutch Tulip Bulb bubble, 360 Dutta, Shantanu, 729 E earnings before interest and taxes (EBIT), 80, 251, 253, 557, 646, 709 earnings before interest, tax, depreciation, and amortization (EBITDA), 109n, 117, 251, 557, 752 earnings per share (EPS), 70, 115, 240, 562, 749–750 earnings yield, 696–697 EBIT See earnings before interest and taxes (EBIT) EBITDA See earnings before interest, tax, depreciation, and amortization (EBITDA) EBITDA multiple, 117–118 economic order quantity (EOQ) model, 856 economic rate of return, 466 economies of scale, 545 economies of scope, 545 effective annual rate, 162, 165 effective annual rate (with continuous compounding), 162 effective period rate (for any period f), 163–164 effective rates, 161–164 efficiency gains, 546 efficiency ratios, 107–109 efficient frontier, 286–289 new efficient set, 313–314 new (super) efficient frontier, 311–312, 312f with risk-free borrowing and lending, 308–310 risk-free investing, 310–312 separation theorem, 313–314 efficient market, 340, 350f, 476 efficient markets hypothesis (EMH), 328, 344 efficient portfolios, 288, 308f, 311f eligible, 669n Ellis, Charles, 352 ending (terminal) after-tax cash flow (ECFn), 499–501 energy markets, 388 Enron Corporation, 60–62 enterprise value multiple approach, 239t entity concept, 65 EPS indifference point, 749–750 equilibrium condition, 314 equipment trust certificates, 187 equity book value per share (BVPS), 115 equity cost equation, 764 equity instruments, 17 equity market capitalization (V0), 794 equity market value, 701 equity method, 80n equity multiplier (leverage ratio), 100 equity risk, 671 equity securities, 18, 226–227, 660 see also common shares; preferred shares equity traders, 49 equity valuation common share valuation See common share valuation equity securities, 226–227 preferred share valuation, 227–228 equivalent annual annuity (EAA) approach, 474n equivalent annual NPV (EANPV) approach, 474–476 Erdman, Paul, 605 Ernst & Young, 60 euro crisis, 23, 151 European Community, 15 European debt crisis, 207, 209 European options, 425, 426n, 437n event study, 350–351, 351f ex ante measures, 275 ex ante returns, 266–267 ex-dividend date, 786 ex post returns, 266–267 Excel, 125n amortization table, 166 Black-Scholes value, 436 duration function, 195n Solver function, 483n excess returns, 320n exchange-traded funds (ETFs), 362–363, 363f, 546 exchanges, 18 executive compensation, 40–42, 41t executive stock options (ESOs), 809 exempt market, 613 exemptions from prospectus requirement, 611 exercise, 416 exercise price, 416 expansion projects, 507 expectations theory, 205 expected annual after-tax cash flows (CFt), 497–499 expected earnings, 243 expected portfolio return, 276, 277, 277f, 310, 311 expected returns, 271–272, 276–286, 317f expected portfolio return See expected portfolio return for two-asset portfolio that includes borrowing at risk-free rate, 313 for two-asset portfolio that includes investment in risk-free asset, 312 on two-security portfolio, 276 expiration date, 416 2/13/2016 9:44:04 AM INDEX Export Development Corporation of Canada, 481 exposure, 377 extendible bonds, 188 extension M&A, 546 external financing requirements (EFR), 119, 127, 127f, 128–132 externalities, 36, 495 F face value, 187 factoring arrangements, 854, 860–861 fair disclosure, 624 fair market value (FMV), 551–554, 563 fairness opinion, 532 Fama, Eugene, 327, 328, 329 Fama-French (FF) model, 330 Fama-French risk factor, 355 family trust, 665 FASB See Financial Accounting Standards Board (FASB) Fed model, 719–720, 719f Federal Reserve, 718, 730 Fernandez, Pablo, 721, 723 Fidelity Magellan Fund, 358 fiduciary, 187 fiduciary duty, 537 finance, capital budgeting See capital budgeting corporate finance, 24, 45–46 defined, finance careers, 46–49 finance problems, types of, 153 financing sources, 694–699 innovative financing vehicles, 633–634 organization of finance function, 46–49 finance careers, 46–49 finance motive, 844 Financial Accounting Standards Board (FASB), 59, 67, 563 financial analysis see also ratios consistent financial analysis, 98 DuPont system, 99–101, 99f efficiency ratios, 107–109 framework for, 98–103 importance of, 97 leverage ratios, 103–107 liquidity ratios, 112–115 productivity ratios, 110–112 valuation ratios, 115–119 financial analysts, 48, 75 financial assets, 5–7, 16 marketable financial assets, 17 non-marketable financial assets, 17 financial break-even points, 744–748 financial calculators, 146n, 156n financial companies, 48–49 financial crises, 3, 14, 36, 360, 361, 398–400, 479, 639, 668, 730, 759n, 770, 855 financial distress, 764, 765, 766, 768, 768f costs, 765 financial flexibility, 804 financial forecasting, 119 formula forecasting, 126–128 long-run financial projections, 722t naïve forecast, 119–121 optimism bias, 235 percentage of sales method, 119–126 financial instruments, 16–17 financial intermediaries, 9, 10–14 financial leases, 574, 575, 576–577, 577t, 588–589 financial leverage, 100, 708–710, 742–750, 744f, 747f financial leverage risk premium, 758 financial management, 46 financial markets, 10, 17–20, 22–23 Financial Post, 673, 674, 676, 677, 678, 680, 711 financial ratios See ratios financial risk, 743 financial securities, 16–17 financial statements accompanying statements, 76 balance sheet, 64, 68–69, 76–80, 579–580, 694t Index.indd 875 Canadian Pacific (CP), 75–83 cash flow statement, 72–75, 80–83, 577–579 changing accounting assumptions, 70–71 consolidated statements, 695n filing of, 624 general themes of IFRS, 66–68 income statement, 69, 80, 81f, 577–579, 698–699, 698t lease classification, effect of, 577–581 management discussion and analysis (MD&A), 340 period of analysis, 65 preparation of, 68–75 tax statements, 71–72 financial structure, 694 financial system, 9f channels of intermediation, 9–11 intermediaries, 11–14 major borrowers, 14–16 overview, financials, 553 financing considerations, short-term, 857–865 financing decision, 314 financing hierarchy, 685, 686f financing sources, 694–699 capital structure, 694–696 derivation of required income statement, 698–699, 698t valuation equation, 696–697 firm see also corporations growth opportunities, 717f as input-output function, 35f levered firm, 757, 761 optimal capital structure, 774, 774f organization of transactions, 63–68 reduced risk, through diversification, 549 size, and M&A, 549 unlevered firm, 756, 760, 761 firm commitment offering, 618 firm value, 768–769, 768f, 775, 794–797 constant growth version, 559 long version, 559 and M&M, 754–757 multi-stage growth version, 559 fiscal year, 102n Fisher, Irving, 202 Fisher effect, 202 Fisher relationship, 202 five forces, 459 fixed asset turnover ratio, 111–112 fixed assets, 123 fixed burden coverage ratio, 752 fixed contractual commitments, 632 fixed costs, 545 fixed for floating interest rate swap, 392 fixed income traders, 49 float, 846 floating interest rate, 641 floating rate bonds (floaters), 213 floating rate preferred share, 671 floor value (FV), 677–678 flotation costs, 703–704 flow variables, 751 forecasting See financial forecasting foreign direct investment (FDI), 480–482, 481f foreign exchange rates, 374f foreign exchange risk, 390 former Canadian GAAP See generally accepted accounting principles (GAAP) formula forecasting, 126–128 FortisBC Energy Inc See BC Gas forward contract, 374 basic characteristics, 374–375 commodity forward contracts, 383 estimating forward rates, 380 vs futures contract, 390t interest rate parity (IRP), 380–381 pricing forward contracts, 381–383 using, 375–379 forward exchange rate, 380 forward interest rates, 401–403 875 forward market, 397 forward P/E ratio, 117 forward premium or discount, 380 forward rate agreements (FRA), 382n, 397, 403–405, 404t forward rate for storable commodities, 382 four-security portfolio, 287 fourth market, 20–21 Francis, Diane, 607 fraud, 42, 60–62, 603–609, 864 fraudulent conveyance, 538n free cash flow, 74–75, 83, 239n, 558, 795, 797 free cash flow approach, 239 free cash flow to equity, 559 free cash flow valuation, 795 Free Trade Agreement (FTA), 532, 791 French, Kenneth, 327, 328, 329 friendly acquisition, 536–537, 537f friendly takeovers, 536–538 Frist, Bill, 363–364 full-service leases, 574 fundamental analysis, 362 fundamental valuation, 245–247 funded debt, 643 future cash flows, 496n, 852 future value annuity due, 156–157 computation of, 145–149 future value (simple interest), 145 ordinary annuity, 154–155 future value interest factor (FVIF), 146, 149 futures contract, 383 vs forward contract, 390t futures contracts markets, 386–388 hedging, 388–390 major futures contracts and markets, 386t mechanics of, 383–385 short position, 384n trading, 388–390 G GAAP See generally accepted accounting principles (GAAP) gamma, 438, 438n Gazprom, 607n General Motors (GM), 36 general partnerships, 31–32 generally accepted accounting principles (GAAP), 58, 59n, 66, 67, 458n, 563, 591, 694, 695n see also U.S GAAP Generation Squeeze, 148 geographic roll-up, 545 geometric mean, 269n, 270–271, 722 Germany, 151, 209 Gilson, Stuart, 651 Glassman, James, 249–250 global financial community, 21–24 global financial markets, 22–23 global markets, 293–294 global recession, 11 going concern principle, 65 going private transaction, 531 gold prices, 440n Goldcorp, 439–440, 440t goodwill, 563, 564 Gordon, Myron, 711, 713, 799–800 Gordon model, 711 see also constant growth DDM government, Crown corporations, 14 debt, 14–15 debt defaults, 207 financing gaps, 602n provincial budget deficits, 501–502 Government of Canada bonds, 197, 202, 327, 388, 389–390 Government of Canada yield curves, 204, 205f government securities distributors (GSDs), 634 Graham, Benjamin, 114, 240, 328, 352 Great Depression, 341 Greece, 207, 207t, 208, 748n 2/13/2016 9:44:04 AM 876 INDEX the Greeks, 438–439 green-shoe option, 619 Greenspan, Alan, 360, 361 Greenwald, Bruce, 328 Gresham, Thomas, 603 Gresham’s law, 603, 603n “grey area” securities, 634 gross domestic product (GDP), 14, 208, 790–791, 791f gross profit margin, 108–109 Grossman-Stiglitz paradox, 342 group think, 341 growing annuities, 161 growing perpetuities, 160–161 growth models adjusting for growth, importance of, 710–711 constant growth model, 711–713 and cost of common equity, 710–720 Fed model, 719–720, 719f multi-stage growth models, 716–718 and return on equity (ROE), 713–716 growth opportunities, 232–233, 717–718, 717f, 718t growth stocks, 352 H half-year rule, 84 hard retraction, 681 Hassett, Kevin, 249–250 hedge ratio (h), 444 hedging, 376–377, 379, 388–390, 429–430 hierarchy principle, 648–649 high-yield bonds, 647 historical method, 298 holder of record, 786 holding periods, 151–153 homemade dividends, 797–798, 803n homemade leverage, 757 horizontal merger, 542 Hospital Corporation of America, 363–364 hostile takeovers, 538–541 households, 4, 7–8 assets, 7t liabilities, 7t personal assets, hurdle rate, 716 hybrid security, 673 see also specific types of hybrid security categorization of, 680–681 convertible securities, 676–680 creative hybrids, examples of, 681–685 financing hierarchy, 685, 686f warrants, 673–676, 673t I IASB See International Accounting Standards Board (IASB) IBM-World Bank currency swap, 394–395 ICE Futures Canada, 18, 387 IFRS See International Financial Reporting Standards (IFRS) illiquidity, 820 Imperial Oil Ltd., 515 implied rate of return, 232 implied volatility, 440 in the money, 417 income, 70 dividend income, 668–669 net income, 98–99, 253, 579, 699 operating income (OI), 109 income bonds, 681–682 income statement, 69, 80, 81f, 121–123, 577–579, 698–699, 698t income stripping, 807 Income Tax Act, 633–634 income trust, 32, 33f income yield, 266 incremental, 464 incremental cash flows, 494, 507 independent auditor’s report, 78f independent projects, 472–476 Index.indd 876 index mutual funds, 362 indexed bonds, 682 indifference analysis, 748–750 indifference point, 745, 745n indirect costs, 38 indirect costs of bankruptcy, 765 individuals, see also households Industry Canada, 30n industry norms, 835 inefficient market, 350f inflation, 495 and capital budgeting decisions, 514–518 inflation-adjusted cash flows, 514 information asymmetry problems, 770, 771 information circulars, 624 information problems, 547 informational efficiency, 343 initial after-tax cash flow (CF0), 496 initial cash outlay, 496 initial margin, 384 initial public offering (IPO), 48, 611 continuous disclosure, 624–625 discussion stage, 618 distribution period, 620–621 motivation for, 615–617 post-IPO market, 623–624 post-IPO regulation, 623–625 preliminary prospectus, 618–620 seasoned offerings, 625 short-form prospectus, 625 spinning, 622–623 stages of IPO process, 617–621 underpricing, 621–623, 622t waiting period, 620 innovation, 459 innovative financing vehicles, 633–634 insider trading, 354, 363–364, 610 insiders, 340n, 354 insolvency, 820 institutional markets, 10 insurance argument, 430–431 insurance companies, 12, 12t, 309 insurance markets, 309 insurance premiums, 309 intangible assets, 458n intangible considerations, 495 integer programming techniques, 477n inter-company investments, 80n Intercontinental Exchange (ICE), 18 interdependent projects, 473–476 interest for bond holders, 697 compound interest, 145–153, 147f, 148f open interest, 387 simple interest, 144–145, 147f, 148f interest coverage ratio, 106, 646 interest coverage restriction (ICR), 646 interest factors, 189 interest payments, 187 interest rate parity (IRP), 380–381, 382n interest rate parity (IRP) theory, 203–204, 214–215 interest rate risk, 195 interest rate swap, 391–394, 392t, 393t, 397t interest rates, 125n Bank of Canada, 634n base interest rates, 201–202 and bond prices, 193–195 Canadian interest rates, 401f determinants, 201–210 foreign interest rates, effect of, 203–204 forward interest rates, 401–403 global influences on, 203–204 and inflation, 203f nominal interest rates, 201 off-market interest rate, 683 reduction in, 730 risk-free interest rate, 422 risk-free rate (RF), 201–202 risk premiums, 206–210 strategic buys, and low interest rates, 541 term structure of interest rates, 204–206 intermediaries See intermediation intermediation, categories of intermediaries, 11–14 channels of intermediation, 9–11 chartered banks, 11 financial intermediaries, 9, 10–14 insurance companies, 12, 12t market intermediaries, 9–10, 11–14 mutual funds, 13–14, 13f pension funds, 12, 13t internal rate of return (IRR), 40, 198, 466–471, 470t international accounting standards, 58–59 see also International Financial Reporting Standards (IFRS) International Accounting Standards Board (IASB), 59, 67, 563 International Commodity Exchange (ICE), 386 international diversification, 292–293, 293f International Financial Reporting Standards (IFRS), 58–59, 66–68, 98, 576, 694 international M&As, 542 International Swap Dealers Association (ISDA), 395 Internet bubble, 342, 360, 724 intrinsic value (IV), 419 of a call, 419 of a put, 424 inventory, 123, 855–857 inventory management, 856–857 inventory policy, 831 inventory turnover ratio, 110–111, 833, 857 invested capital (IC), 104, 742 investment, 24 average risk investment, 479 capital budgeting See capital budgeting and cost of capital, 727–730 inter-company investments, 80n investing early, importance of, 153, 159 optimal investment, 477f reinvestment, 146 reinvestment opportunities, 483 risk-free investing, 310–312 temporary investments, 87 investment analysts, 48 investment banking, 48 investment banking market, 625–626 investment banks, 22–23, 103, 103f, 619n investment dealers, 48, 619n Investment Dealers Association, 248 investment decision, 314 investment grade, 647 investment-grade debt, 206 investment horizon, 269 Investment Industry Association of Canada (IIAC), 625–626 Investment Industry Regulatory Organization of Canada (IIROC), 248, 619 investment opportunities schedule (IOS), 477, 728 investor overconfidence, 359 investors and issuers, conflicts between, 602–609 IPOs See initial public offering (IPO) Irrational Exuberance (Shiller), 356, 360 irrational forces, 357–358 issue-specific premiums, 210 issuer bid, 531 issuers and investors, conflicts between, 602–609 issuing costs, 547, 703–704, 704t J Jamaica, 208 January effect, 347–348 Japanese bubble, 360 Jegadeesh, N., 347 Jensen’s alpha, 325 junk bonds, 647 just-in-time (JIT) inventory systems, 856 K Kahneman, Daniel, 356, 357 Keynes, John Maynard, 341–342, 342n, 356, 759n Khordovsky, Mikhail, 607n 2/13/2016 9:44:05 AM INDEX Kindleberger, Charles, 359 knockdown price, 552, 766 Kryzanowski, L., 346 L law of one price, 247n lawsuit, 611 Lazaridis, Mike, 41n, 43, 49 lead investment dealer, 619 leasing accounting for leases, 576–581 asset-based lending, 574–576 vs buying, 582–585 vs buying with monthly payments, 585–586 capital lease, 707 cars, 581–582 case example, 590–592 and CCA tax shields, 586–588 discounted cash flow (DCF) framework, 582–583 equipment and vehicle leasing market in Canada, 572f financial leases, 574, 575, 576–577, 577t, 588–589 financial statement effects of lease classification, 577–581 full-service leases, 574 leasing arrangements, 572–576 leveraged lease, 575–576, 575f motivation for, 589–592 operating leases, 574, 575, 576, 577t, 581, 583n positive NPV, 585 sale and leaseback (SLB) agreement, 575 legal factor, 681 legal for life rules, 647 Lehman Brothers Holdings Inc., 10, 23, 39, 43, 640 lemons market, 602–603, 606 lenders, lending, 6, 6f lessee, 156, 573 lessor, 573 letter of intent, 536 leverage See financial leverage leverage ratios, 100, 103–107, 103f, 104n, 106t leveraged buyouts (LBOs), 553 leveraged lease, 575–576, 575f leveraged recapitalization, 809 levered firm, value of, 757, 761 Lewis, Michael, 250 liabilities contingent liabilities, 538 current liabilities, 80 household liabilities, 7t long-term liabilities, 694–695 spontaneous liabilities, 120, 123 liability limited liability, 32, 766 unlimited liability, 30 liability account, 494n life insurance, 8, 12 limit orders, 620 limited liability, 32, 766 limited liability partnerships (LLPs), 31 limited partnerships, 31–32 limited voting shares, 663 lines of credit (LC), 641–642, 857n, 860 Lintner equation, 802 liquid yield option notes (LYONs), 683 liquidation valuation, 557 liquidation value investing, 114–115 liquidation values, 553 liquidity, 64, 112, 642, 820 liquidity preference theory, 205 liquidity premiums, 209 liquidity ratios, 112–115, 114t liquidity support, 638 listed company, 616 loan arrangements, 165–170 loans See debt lock-up agreement, 532 Index.indd 877 lock-up period, 619 London inter-bank offered rate (LIBOR), 381, 391, 392, 392n, 393, 397, 398 London Metal Exchange (LME), 381–382 London Stock Exchange (LSE), 530 long call plus short put payoffs, 427 long-form prospectus, 611 long-lived assets, 458 long (long position), 375–376, 378, 378f, 379, 385 Long-Term Capital Management (LTCM), 39, 43 long-term debt, 643–647 long-term discount rates, 325–327 long-term liabilities, 694–695 Loral Space & Communications Inc., 787 loss capital loss, 86, 267–268 operating loss, 87 paper losses, 269 terminal loss, 86, 500n loss aversion, 357–358 low-yield notes, 682–683 Lynch, Peter, 358 LYONs, 683 Lyons, William E., 603–604, 606 M Macintosh, Jeffrey, 660 Madoff, Bernard, 4, 602, 606, 626 Magna International, 666 maintenance margin, 384 Malkiel, Burton, 362 management alignment of interest with shareholders’ interest, 40–43 areas of disagreement, 40t executive compensation, 40–42, 41t financial management, 46 M&As, motivation for, 549 role of, 38–43 management buyouts (MBOs), 553 management discussion and analysis (MD&A), 340 Management’s Responsibility for Financial Reporting, 76, 77f manager, 48, 553 Manias, Panics, and Crashes (Kindleberger and Aliber), 359–360 margin call, 384 margin debt, 751n margin loans, 747n marginal cash flows, 494, 507 marginal cost of capital (MCC), 703–704, 728 margins, 384 mark to market, 269, 385 market capitalization, 19 market efficiency behavioural finance, 355–361 components of, 343 defining market efficiency, 340–343 efficient markets hypothesis (EMH), 328, 344 empirical evidence, 344–355 historical development, 341–342 implications of, 361–363 semi-strong form evidence, 350–353 and speculative bubbles, 359–361 strong form evidence, 353–354 underlying assumptions, 341 violations of semi-strong form efficiency, 352–353 violations of weak form efficiency, 346–349 weak form evidence, 345–349 market (enterprise) value to EBIT ratio, 251 market (enterprise) value to EBITDA ratio, 251 market equilibrium, 324–325 market failure, 602 market for corporate control, 546 market intermediaries, 9–10, 11–14 market orders, 620 market out clause, 619, 621 market portfolio, 314, 315–317 market price of risk, 316 market risk, 292, 292f, 319–327 877 market risk premium (MRP), 323, 326, 326f, 720, 764 market segmentations theory, 205 market-to-book (M/B) ratio, 117, 250–251, 553, 696, 701n market value of firm’s common equity (MVE), 330 market values, 701–702 market volatility, 357–358 marketable financial assets, 17 marketable securities, 123 markets auction markets, 18 black markets, 340 capital markets, 48 dealer markets, 18 debt markets, 17 derivatives market, 399t, 400 efficient markets See efficient market energy markets, 388 exempt market, 613 financial markets, 10, 17–20, 22–23 forward market, 397 fourth market, 20–21 futures contracts markets, 386–388 institutional markets, 10 insurance markets, 309 investment banking market, 625–626 lemons market, 602–603, 606 money market, 634–640, 639t, 643–647 mortgage market, options markets, 439–441 other markets, 20–21 over-the-counter (OTC) markets, 18, 375, 400 primary markets, 17–18 retail markets, 10 secondary markets, 18 swap markets, 394–398 third market, 20 Markowitz, Harry, 287–288, 328 masters of business administration (MBA), 48, 470–471 matching principle, 65, 68, 707 material changes, 624, 642 material facts, 343 materials requirement planning (MRP), 856 maturity rate, 187 MBA, 48, 470–471 McCoach, John, 823–824 medium of exchange, 144 medium-term note debentures (MTNs), 644–647 mental accounting, 359 merger, 530, 541–542 see also mergers and acquisitions (M&A); takeovers mergers and acquisitions (M&A), 48, 530 see also acquisition; merger; takeovers accounting differences, 556 accounting for acquisitions, 563–564 acquisition decision, 561–562 capital structures, differences in, 556–557 complementary strengths, 546 cross-border (international) M&As, 542, 543f, 548 discounted cash flow (DCF) approach, 557–561 earnings per share, effect on, 562 economies of scale, 545 economies of scope, 545 efficiency increases, 546 extension M&A, 546 fair market value, 551–554 financing synergy, 546–547 gains from, 549–551 liquidation valuation, 557 M&A activity, 543–544, 543f, 544t managerial motivations, 549 motivations for, 541–551 multiples valuation, 554–557 operating synergies, 545–546 over-capacity M&A, 545 pooling-of-interests method, 563 post-merger value, 550 2/13/2016 9:44:05 AM 878 INDEX purchase method, 563–564 shareholder value at risk (SVAR), 550–551 strategic M&As, 541 strategic realignments, 549 tax benefits, 547 valuation issues, 551–563 value creation motivations, 544–549 Merton, Robert, 419n method of comparables, 247n millennials, 148 Miller, Merton, 754–760, 775, 794 minimum variance frontier, 288, 288f minimum variance portfolio (MVP), 289, 308 minority interest, 80n, 695n minority shareholders, 534 Mississippi bubble, 360 M&M See Modigliani and Miller (M&M) irrelevance theorem M&M equity cost equation, 758 modern portfolio theory (MPT), 276 modified internal rate of return (MIRR), 470, 482–484, 484f Modigliani, Franco, 754–760, 794 Modigliani and Miller (M&M) irrelevance theorem, 754–760, 755t, 756t, 759f, 774 and cost of capital, 757–760 dividend irrelevance theorem, 794–798 firm value, 754–757 homemade dividends, 797–798 M&M equity cost, 762 relaxing the M&M assumptions, 803–808 with taxes, 761–764, 761t, 763f momentum, 347, 347f, 348–349 monetary value, 65 money channels of transfer, 10f medium of exchange, 144 money laundering, 151n risk value of money, 745 tax value of money, 670 time value of money See time value of money money market, 639t long-term debt, 643–647 short-term debt, 634–640 money market desk, 638 money market securities, 17, 861–863 moneyness of the call, 435 Monte Carlo simulation method, 298 Montier, James, 328 Montreal Exchange (MX), 18, 19, 384, 388, 436, 439, 530 Montreal Exchange Implied Volatility Index (VIXC) See VIXC Index Moody’s, 206, 206f, 637, 752–753, 753t, 850 moral hazard, 39 mortgage, 165–170, 645, 748n mortgage bonds, 187 mortgage market, multi-stage growth DDM, 716–718 multiples valuation, 553, 554–557 mutual funds, 13–14, 13f mutually exclusive projects, 469, 469n Myers, Stewart, 616–617, 771 N naïve diversification, 290 naïve forecast, 119–121 naked position, 375 National Association of Securities Dealers Automated Quotations (Nasdaq), 22, 360 National Association of Securities Dealers (NASD), 606 National Balance Sheet Accounts (NBSA), 6, negative beta, 321n negative cash flows, 496n negative pledge, 646 net bond proceeds, 704 net equity position, 80n net income, 98–99, 253, 579, 699 net payments, 393 net present value (NPV), 463–466, 468–471, 470t, 481n, 501, 504, 717, 851 Index.indd 878 credit, extension of, 851–852 valuation by components approach, 504–506 when k changes, 506 when operating cash flows are higher, 506–507 net profit margin, 100, 124, 125t net working capital (NWC), 112n, 494n, 496, 819 new product development decisions, 460 new (super) efficient frontier, 311–312, 312f New York Mercantile Exchange (NYMEX), 386 New York Stock Exchange (NYSE), 22, 386–387 Newton, Isaac, 358 Nicholls, Christopher, 660 no-arbitrage principle, 330 no-growth value, 232 no-shop clause, 536 nominal interest rates, 201 non-debt accounting items, 694 non-diversifiable risk, 292 non-equity component costs, 703–708 non-financial companies, 15–16, 16t, 46–47, 47f, 848 non-marketable financial assets, 17 non-systematic risk, 291–292 non-voting shares, 663–665 Nortel Networks Corporation, 41, 724, 724f, 724n, 789–790, 789n not-for-profit accounting, 59 notational amount, 384 NPV break-even analysis, 513 NPV break-even point, 513 O Obama, Barack, 43 odd lots, 788 off-balance-sheet financing, 576, 581 off-market interest rate, 683 offering memorandum, 536, 613 offsetting, 384 oil prices, 388 Oilexco Incorporated, 770 Oilexco North Sea Limited, 770 Ontario Securities Act, 533, 534, 535, 610 Ontario Securities Commission (OSC), 20, 65, 533, 545, 605, 610, 611, 614–615, 666, 789n Ontario Teachers’ Pension Plan, 535, 686–687 open account, 850 open interest, 387 operating cycle (OC), 834 operating income (OI), 109 operating LC, 641 operating leases, 574, 575, 576, 577t, 581, 583n operating leverage, 708–710 operating loss, 87 operating margin, 109 operating ratio, 109n operating synergies, 545–546 operational efficiency, 343 opportunity cost, 144, 495 optimal cash balance, 844–846 optimal investment, 477f optimism bias, 235 option premium, 419 option writer, 417 options American options, 425, 426n, 437n audit of options policies, 441–442 basic option positions, 426–427, 426f binomial option pricing, 442–445 Black-Scholes option pricing model, 434–437 call option, 416–422 European options, 425, 426n, 437n factors affecting option prices, 426t long call plus short put payoffs, 427 put-call parity, 426–434 put option, 422–426 risk-neutral probabilities, 445–446 short call plus long put payoffs, 427 options markets, 439–441 ordinary annuities, 153–156 ordinary least squares (OLS), 320n organization of finance function, 46–49 organization of transactions, 63–68 original issue discount bonds (OIDs), 682–683 out of the money, 417 over-capacity M&A, 545 over-the-counter (OTC) markets, 18, 375, 400 overallotment option, 619 overvalued, 324 P paper losses, 269 par value, 187 partnerships, 31–32, 34 passive investors, 552 passive portfolio management, 362 payables turnover ratio, 833 payback period, 462–463, 481n payment on interest rate swap, 393 payment policy, 831 payoff, 416 pecking order, 771 penny stocks, 607 pension accounting, 59 pension claims, pension funds, 12, 13t percent interest rate swap, 396t percentage of sales method, 119–126 perfect markets assumption, 803 see also Modigliani and Miller (M&M) irrelevance theorem perfect negative correlation, 286 period of analysis, 65 permanence factor, 680 perpetuities, 153, 158–159, 160–161, 696, 699, 707 perpetuity preferred share value, 701 perpetuity valuation equation, 696 personal assets, personal tax, 88–90 PIIGS (Portugal, Ireland, Italy, Greece, and Spain), 15 “plain vanilla” debt securities, 634 plain vanilla interest rate swap, 392 plowback ratio, 126–127 poison pill, 539, 539n political risk, 481, 481n political risk insurance (PRI), 481–482 Ponzi, Carlo, 605, 608, 612 Ponzi scheme, 605 pooling-of-interests method, 563 Porter, Michael, 459, 460 portfolio, 276 attainable portfolios, 289 beta, 321–322 diversification, 289–293 efficient frontier, 286–289 efficient portfolios, 288, 308f, 311f expected portfolio return, 276, 310, 311 four-security portfolio, 287 high momentum portfolio, 348–349t market portfolio, 314, 315–317 minimum variance portfolio (MVP), 289 modern portfolio theory (MPT), 276 monthly Canadian stock portfolio returns, 290–291t protection, 433 tangent portfolio, 311, 312f two-security portfolio, 276, 278, 286–287, 287f, 296f two-security portfolio frontiers, 295–296 weights, to obtain portfolio standard deviation, 286 portfolio beta, 321–322 portfolio managers, 48–49 portfolio risk, 276–286, 279f, 285f, 319f portfolio standard deviation, 278–280, 283–286, 285f, 295, 310 portfolio weight, 295 post-IPO market, 623–624 pre-emptive right, 660–662 precautionary motive, 844 preferred securities, 684 preferred shares, 17, 226, 660, 669–673 cost of, 705 features of, 671–673 2/13/2016 9:44:05 AM INDEX floating rate preferred share, 671 market price, 227 perpetuity preferred share value, 701 required return, 228 retractable preferred share, 671 straight preferred shares, 669–670, 672 valuation, 227–228 WACC with, 701 yields, 670t preliminary prospectus, 618–620 premium, 190 bond valuation, 190 conversion premium, 677 forward premium or discount, 380 insurance premiums, 309 issue-specific premiums, 210 liquidity premiums, 209 market risk premium (MRP) See market risk premium (MRP) option premium, 419 risk premiums See risk premiums prepaid bonds, 684 prepayments, 864 present value annuity due, 156–157 capital gains taxes paid, 504 of CCA tax shields, 503, 504 computation of, 150–151 of operating cash flows, 503 ordinary annuity, 154–155 present value annuity factor (PVAF), 155, 189 present value interest factor (PVIF), 150, 151, 189 present value of existing opportunities (PVEO), 716–718, 799 present value of growth opportunities (PVGO), 233, 716–718, 799 price bond prices See bond valuation call option, 429, 437f call prices, 187 exercise price, 416 gold prices, 440n house prices, 360f knockdown price, 552, 766 market price of risk, 316 option prices, 426t put option, 429, 437f random walk hypothesis, 345 selling price, 552 settlement price, 384 strike price, 416 T-bill price, 211 in terms of assets in place and present value of growth opportunities, 233 underlying asset price, 429 zero coupon bond, 212 price anchoring, 359 price/book (P/B) ratio, 328 price-change independence, 345 price-earnings (P/E) approach, 239t, 240–245 price-earnings (P/E) ratio, 116–117, 240–245, 243n, 247, 328, 553, 697n price-earnings (P/E) ratio (using constant growth DDM), 243 price per share, 699 price to book for perpetuity, 699 price-to-book-value approach, 239t price-to-cash-flow approach, 239t price-to-cash-flow (P/CF) ratio, 251 price-to-dividend approach, 239t price-to-sales approach, 239t price-to-sales (P/S) ratio, 251, 553 primary dealers, 634–635 primary market offerings, 610 primary markets, 17–18 prime lending rate, 641 principal outstanding, 166, 170 principal transactions, 10 private bankers, 48 private equity, 617 proactive methods, 554 productivity ratios, 110–112, 112t Index.indd 879 profit (loss) from long position, 376 profit (loss) from short position, 378 profit margin See net profit margin profit planning charts, 749 profitability index (PI), 471–472, 477 project interdependencies, 495 promised yields, 636 promissory note, 634 prospectus, 611, 612 protective covenants, 187 protective put, 430, 430f, 431 provincial budget deficits, 501–502 provincial/territorial personal income tax rates, 89–90t proxy circulars, 624 Public Company Accounting Oversight Board, 61 public financing, 643 pumping and dumping, 607 purchase fund provisions, 188 purchase method, 563–564 purchase-money mortgages, 645 pure play approach, 480 put-call parity, 426–434 put-call relationship, 429 put option, 422 payoffs, 422–424 price, 429, 437f put holder’s payoff, 423, 423f put writer’s payoff, 424 values, 424–426 PVEO See present value of existing opportunities (PVEO) PVGO See present value of growth opportunities (PVGO) Q Quebec Pension Plan (QPP), 14 quick ratio, 113, 832 quoted price, 197 quoted rates, 162 R Rajaratnam, Raj, 354 random diversification, 290 A Random Walk down Wall Street (Malkiel), 362 random walk hypothesis, 345 range, 273, 420 rate of return, 151–153 rational investors, 341 ratios see also financial analysis acid test ratio, 113, 832 asset turnover ratio, 698 average collection period (ACP), 110, 832, 854 average days of revenues in payables ratio, 833, 835 average days revenues in inventory (ADRI), 111, 833 bankers’ ratio, 113 break-even point (BEP), 108, 513n, 744–748 Capital IQ key business ratios, 835, 835t cash flow-to-debt ratio (CFTD), 106, 752 coverage ratio, 105–106, 106n, 708 and credit ratings, 752–754 current ratio, 113, 832 debt-equity (D/E) ratio, 104 debt ratio, 104 debt-to-equity ratio, 695, 695f, 747 debt-to-income ratio, 105 degree of total leverage (DTL), 107–108, 710 dividend payout ratio, 116 dividend yield, 116, 266–267, 667, 792–793t EBITDA multiple, 117–118 efficiency ratios, 107–109 equity book value per share (BVPS), 115 fixed asset turnover ratio, 111–112 fixed burden coverage ratio, 752 forward P/E ratio, 117 gross profit margin, 108–109 interest coverage ratio, 106, 646 interpretation of, 101–103 inventory turnover ratio, 110–111, 833, 857 879 lease classification, effect of, 580 leverage ratios, 100, 103–107, 103f, 104n, 106t liquidity ratios, 112–115, 114t market (enterprise) value to EBIT ratio, 251 market (enterprise) value to EBITDA ratio, 251 market-to-book (M/B) ratio, 117, 250–251, 553, 696, 701n net profit margin, 100, 124, 125t operating margin, 109 operating ratio, 109n payables turnover ratio, 833 plowback ratio, 126–127 price/book (P/B) ratio, 328 price-earnings (P/E) ratio, 116–117, 240–245, 243n, 247, 328, 553, 697n price-to-cash-flow (P/CF) ratio, 251, 553 price-to-sales (P/S) ratio, 251, 553 productivity ratios, 110–112, 112t “pure” ratios, 99n quick ratio, 113, 832 receivables turnover ratio, 110, 832, 833, 854 relative value ratios, 250–253 retention ratio, 126–127 return on assets (ROA), 99–100, 480, 698 return on equity (ROE) See return on equity (ROE) stock ratios, 104, 751 times interest earned (TIE), 105–106, 708 turnover ratio, 100, 101 valuation ratios, 115–119, 118t, 250–253, 251f working capital ratios, 112–113, 832–833 reactive methods, 553 real assets, real cash flows, 514 real option valuation (ROV), 461, 512–513 real rate of return, 202 real return bonds, 213, 682 receivables turnover ratio, 110, 832, 833, 854 recession, 11, 14, 23, 791 Registered Retirement Savings Plans (RRSPs), 682 regression analysis, 320 regression of project ROA, 480 reinvest, 146 reinvestment opportunities, 483 relative uncertainty, 275f relative valuation, 240, 245–247, 553 relative value ratios, 250–253 replacement decisions, 460, 503, 507–508 replacement projects, 507 reporting issuer, 613, 624 required earnings, 697 required rate of return, 144, 228, 316, 317f, 697, 716 common shares, 329t estimating, 232, 324 on a risky security, 226 research analysts, 248 Research in Motion (RIM), 41, 41n, 42–43, 49–50 residual owners, 662 residual theory of dividends, 795–796 restricted shares, 612 retail brokers, 48 retail markets, 10 retained earnings, 121 retention rates, 714–715, 715t retention ratio, 126–127 retirement problem, 173, 174 retractable bonds, 188 retractable preferred share, 671 return on assets (ROA), 99–100, 480, 698 return on assets (ROA) (DuPont), 100 return on equity (ROE), 98–101, 98n, 234, 234n, 235, 698, 699, 713–716, 742, 743, 744, 745, 799 return on equity (ROE) (DuPont), 101 return on invested capital (ROIC), 698, 742 return on investment (ROI), 40, 471, 743, 745–746, 745t, 746t, 760 2/13/2016 9:44:05 AM 880 INDEX returns, 697 abnormal returns, 350 annual returns, 1938 to 2014, 273f average returns, measurement of, 269–271 calculation of, 268 Canadian vs U.S stock returns, 282f capital gain (loss) return, 268 correlation between returns on stocks, 281f economic rate of return, 466 ex post vs ex ante returns, 266–267 examination of, 352 excess returns, 320n expected portfolio return, 310, 311 expected returns, 271–272, 276–286 measurement of, 266–273 T-bill returns vs Canadian stock returns, 282f total return, 268 Reuters, 661 revenue recognition, 65, 68 revolving LC, 642 rho, 438 Richardson, Stephen, 633 rights issues, largest, 661–662, 662t rights offering, 618, 661 risk average risk investment, 479 basis risk, 389 business risk, 743 counterparty risk, 376 credit risk, 376 default risk, 206 defined, 273n diversifiable risk, 291–292 downside risk, 662 equity risk, 671 financial risk, 743 foreign exchange risk, 390 hierarchy, 693 interest rate risk, 195 and leverage, 742–744 market price of risk, 316 market risk, 292, 292f, 319–327 measurement of, 273–276 non-diversifiable risk, 292 non-systematic risk, 291–292 operating and financial leverage, effects of, 708–710 portfolio risk, 276–286, 279f, 285f, 319f proposed risk management requirement, 328 reduced risk, through diversification, 549 risk-return trade-off, 37 systematic risk, 292, 325 total risk, 292, 292f of underlying asset, 420 unique risk, 291–292 risk-adjusted discount rate (RADR), 464, 480 risk-adjusted performance, 317–318 risk analysis techniques, 509f risk averse, 288, 289 risk aversion, 309, 357–358 risk-based models, 720 beta estimates, 723–726 capital asset pricing model (CAPM) See capital asset pricing model (CAPM) and cost of common equity, 720–730 risk-free borrowing and lending, 308–310 risk-free interest rate, 422 risk-free investing, 310–312 risk-free rate of return (RF), 201–202, 720 risk neutral, 445 risk-neutral probabilities, 445–446 risk premiums, 206–210, 226, 308, 758 risk-return trade-off, 37 risk value of money, 745 road shows, 620 rogue traders, 380n Roll, Richard, 329, 330 Roll’s critique, 329 Ross, S., 330 Royal Exchange, 381 royalty trust, 32 Rusnak, John, 380n Russia, 607n Index.indd 880 S Saadi, Samir, 729 sale and leaseback (SLB) agreement, 575 sales changes, and leverage, 708–710 sales growth, 828–829 sales people, 48 salvage value (SVn), 499, 500, 503, 582n Santa Claus Rally, 347–348 Sarbanes-Oxley Act (SOX), 61, 62 Saskatchewan Farm Security Act, 633 “say-on-pay” vote, 45 scenario analysis, 509–512 Scholes, Myron, 419, 419n Scotia Capital Markets, 653 seasoned bond issues, 653 seasoned offerings, 625 secondary market trading, 610 secondary markets, 18 secured financing, 572 Securities and Exchange Commission, 42, 603, 605, 609, 626, 837 securities law, 340, 340n securities legislation, 533–535, 609–615 securitizations, 639–640, 863–865 Security Analysis (Graham and Dodd), 114, 240, 345, 352 security analysts, 48 security market line (SML), 323–327, 323f, 720 long-term discount rates, estimate of, 325–327 and market equilibrium, 324–325 and security valuation, 325f using, 324 security offerings, 611–614 selective disclosure, 624–625 sell-side analysis, 341 selling group, 619 selling price, 552 selling the crown jewels, 540 semi-strong form EMH, 344 semi-strong form evidence, 350–353 senior vice-president of finance, 46 sensitivity analysis, 509–512 sensitivity to inputs, 509–514 separation of ownership from control, 616 separation theorem, 313–314 ServiceOntario, 30n set-off rights, 393 settlement price, 384 share repurchases, 809–810 share transaction, 531 shareholder rights, 660–662 shareholder rights plan, 539 shareholder value at risk (SVAR), 550–551 shareholder value maximization, 343 shareholders, and bankruptcy, 766–768, 767f shareholders’ equity, 98–99, 660–669, 667t shareholders’ interest, 40–43 shares see also specific types of shares classes of shares, 663–665 common shares See common shares dual-class shares, 666–667 preferred shares See preferred shares required new share issue, 794 share structure, 663 split shares, 808 value, calculation of, 665–669 see also common share valuation Sharpe, William, 314, 317, 318, 328 Sharpe ratio, 317–318 Shiller, Robert, 356, 360 short call plus long put payoffs, 427 short-form prospectus, 625, 644 short sellers, 686–687 short (short position), 313, 375, 377f, 378, 378f, 379, 384n, 385, 417 short-term debt, 634–640, 643 short-term financing considerations, 857–865 shortage costs, 856 SIFI (systemically important financial institutions), 39 signalling model, 804–806, 805f Simon, Tony, 823 simple interest, 144–145, 147f, 148f sin taxes, 14 single period free cash flow, 795 single period valuation model, 794 sinking fund provisions, 188 Sino-Forest Corp., 60, 613, 614–615 size effect, 353 slope of capital market line, 316 slowdown, 126 small and medium-sized enterprises (SMEs), 573, 590–592 small-cap stocks, 624n small firm in January effect, 353 snake bite effect, 358 social costs, 607 social interest argument, 37 social investments, 495 social welfare argument, 37 soft retraction, 681 sole proprietorships, 30–31 Sorenson, Gary, 607 South Sea Company, 249, 358, 360 sovereign debt ratings, 207–208, 208t S&P 500 Composite Index, 314 S&P 500 Index, 19, 294, 433 S&P/TSX 60 Index, 388, 398, 439, 440, 441, 441f, 792–793t S&P/TSX Composite Index, 19–20, 19f, 33, 240, 266, 294, 314, 347, 721, 723, 723f, 724, 747 S&P/TSX MidCap Index, 439 special dividend, 787 special-purpose vehicles (SPVs), 581, 639–640, 863–865 speculate, 375 speculative bubbles, 249–250, 359–361 see also bubbles speculative debt, 206 speculative motive, 844 spinning, 622–623 Spitzer, Eliot, 622–623 split shares, 808 spontaneous liabilities, 120, 123 spot contract, 374 spread, 206, 619 stable rating philosophy, 648 Standard & Poor’s (S&P), 19, 206, 206f, 208, 637, 647, 651, 652, 681, 685, 685t, 850 standard deviation, 269t, 270, 274–275 portfolio standard deviation, 278–280, 283–286, 285f, 295, 310 for two-asset portfolio that includes borrowing at risk-free rate, 313 for two-asset portfolio that includes investment in risk-free asset, 312 standard industry classifications (SIC), 835 standardized normal distribution, 297f standby offering, 618 star, 718 static trade-off, 768–770, 769f statistical tests, 345 Statistics Canada, 5, 6, 30, 105, 848 stochastic dominance, 746n stock dividend, 788, 789–790 stock exchanges, 18–20, 20f stock market crash, 294, 342 stock markets See stock exchanges stock price adjustments, 350–351 growth opportunities, 718t and growth prospects, 710t retention rates, and ROE, 715t stock price bubble, 360 stock ratios, 104, 751 stock split, 788–790 storage costs, 381 straight bond value (SBV), 677 straight-line method, 71 straight preferred shares, 669–670, 672 strategic investors, 553 strategic M&As, 541 strategic realignments, 549 strike price, 416 2/13/2016 9:44:05 AM INDEX Stronach, Frank, 666 strong form EMH, 344 strong form evidence, 353–354 sub-prime mortgage, 748n subjective factor, 681 subordination factor, 681 sunk costs, 495 sustainable growth rate (g*), 128, 234–235, 713 swap, 391 credit default swap (CDS), 398–400 currency swap, 394–396 evolution of swap markets, 394–398 interest rate swap, 391–394, 392t, 393t, 397t percent interest rate swap, 396t total return swap, 398 swap rate, 396 sweat equity, 617 synergy, 544, 546–547 synthetic positions, 429–433 System for Electronic Document Analysis and Retrieval (SEDAR), 611n, 624 systematic risk, 292, 325 T T-bill price, 211 T-bill yield, 211 T-bills See treasury bills (T-bills) takeovers, 530, 610 see also acquisition; merger; mergers and acquisitions (M&A) concerns, 533 creeping takeovers, 535 critical thresholds, 533–534 defensive tactics, 539–541 financing takeovers, 531 friendly takeovers, 536–538 hostile takeovers, 538–541 rules, 534–535 and securities legislation, 533–535 takeover bid, 534 types of takeovers, 530–532 tangent portfolio, 311, 312f tangible assets, 458 tax clienteles, 806 tax value of money, 670 taxes capital structure, and personal taxes, 775–776 corporate taxes, 761–764 and dividends, 806, 806t impact of, 761–764 tax benefits of M&As, 547 tax planning, 537 tax statements, 71–72 tax system See Canadian tax system technical analysis, 346, 362 Teck Resources, 439 tender, 534 tender offer, 538 term LC, 642 term loans, 642–643 term structure of interest rates, 204–206 term to maturity, 17, 187 terminal after-tax cash flow, 499–501 terminal loss, 86, 500n terms of credit, 851 TEV discount rate, 700 Thaler, R., 346 theta, 438 third market, 20 Thornton, John, 42 Tim Hortons, 548 time, 421 time horizon, 495 time value (TV), 419 time value of money, 144 annuities, 153–158 compound interest, 145–153, 147f comprehensive examples, 170–173 growing perpetuities, 160–161 investing early, importance of, 153, 159 loan or mortgage arrangements, 165–170 opportunity cost, 144 perpetuities, 158–159 Index.indd 881 quoted vs effective rates, 161–164 simple interest, 144–145, 147f, 148f timeliness, 66 times interest earned (TIE), 105–106, 708 Titman, S., 347 TMX Group Inc., 18–19, 530, 604n TMX Group Limited, 19 Tobin, James, 342n Tobin tax, 342n tombstone advertisements, 394 too big to fail, 36, 39 top-down analysis, 460–461 Toronto Futures Exchange, 388 Toronto Stock Exchange (TSX), 10, 18, 32–33, 37, 38, 266, 388, 613, 616, 665, 725 total enterprise value (TEV), 117–118, 699–700 total return, 268 total return swap, 398 total risk, 292, 292f trade, 611 trade credit, 822, 857–858 trading people, 48 traditional cash flow, 74, 81 trailing EPS, 117 transaction costs, 803–804 transactions, organization of, 63–68 transactions motive, 844 transfer agent, 644 treasurer, 47 treasury bills (T-bills), 211–212, 270, 310n, 391, 634–635, 638t trust preferred securities, 684 trusts, 32–33 TSX See Toronto Stock Exchange (TSX) TSX Group Inc., 18, 530 TSX Venture Exchange (TSVX), 18, 20, 607n, 616, 823–824 turnaround, 718 turnover ratio, 100, 101 Tversky, 356, 357 two-security portfolio, 276, 278, 286–287, 287f, 296f two-security portfolio frontiers, 295–296 U UCC See undepreciated capital cost (UCC) uncertainty, 460 undepreciated capital cost (UCC), 84, 500n, 503 underlying asset, 375, 420 underlying asset price, 429 underpricing, 621–623, 622t understandability, 66 undervalued, 324 underwrite, 619 underwriters, 619, 621 unique risk, 291–292 United States accounting standards, 59 see also U.S GAAP credit rating, 208 “debt hangover,” 855 directors, 534n house prices, 360f industry average leverage ratios, 106t industry average liquidity ratios, 114t industry average productivity ratios, 112t industry average valuation ratios, 118t investment banks, 22–23, 103, 103f leveraged leases, 576 market for Canada, 22 post-IPO market, 623 real estate bubble, 360 Sarbanes-Oxley Act (SOX) See Sarbanes-Oxley Act (SOX) Securities and Exchange Commission, 42 securities legislation, 609–610 T-bill yield, 211–212 Troubled Asset Relief Program (TARP), 400 unlevered equity, 758 unlevered firm, 756, 760, 761 unlevered value, 757 unlimited liability, 30 881 unsubordinated debt, 645 U.S GAAP, 59, 66, 67, 98, 576, 576n U.S Treasury, 809n V valuation see also specific valuation models bond valuation See bond valuation common share valuation See common share valuation by components, 503–507 existing and growth opportunities valuation, 799 fair market value, 551–554 liquidation valuation, 557 mergers and acquisitions (M&A), 551–563 multiples valuation, 553, 554–557 preferred shares, 227–228 proactive methods, 554 reactive methods, 553 real option valuation (ROV), 461, 512–513 relative valuation, 240, 245–247, 553 shares, 227–228, 665–669 see also common share valuation valuation equation, 696–697 valuation gap, and acquisitions, 538 valuation ratios, 115–119, 118t, 250–253, 251f valuation equation, 696–697 valuation ratios, 115–119, 118t, 250–253, 251f value at risk (VaR), 276, 297–298 Value Line Inc., 353 Value Line Investment Survey, 353 value of the call, 444 value stocks, 352 Vancouver Stock Exchange (VSE), 18, 607, 607n variance, 274 variation margin, 384 vega, 438 venture capital, 617 Venture Capital Markets Association, 823–824 verifiability, 66 vertical merger, 542 violations of semi-strong form efficiency, 352–353 violations of weak form efficiency, 346–349 VIX Index, 357, 440 VIXC Index, 357, 357f, 440 voting rights, 660, 663–664 voting shares, 663–665 W waiting period, 620 warrant holder payment, 674 warrants, 673–676, 673t wash sales, 607 Washington Mutual, Inc., 10 weak form EMH, 344 weak form evidence, 345–349 wealth distribution, weighted average cost of capital (WACC), 40, 477, 477n, 479–480, 494, 499n, 700, 726, 763 determination of, 699–701, 727 discount rate, 729, 729t equation, 700 financial distress and bankruptcy, 769 and firm’s financing decision, 759 and investment, 727–730 marginal cost of capital (MCC), 703–704, 728 market values, estimate of, 701–702 minimization through financing choices, 741 and M&M, 757–760, 759f, 762–763 non-equity component costs, estimate of, 703–708 with preferred shares, 701 what-if scenario analysis, 680 Where Were the Directors?, 37 white knight, 540 widows and orphans stocks, 806 Winnipeg Commodity Exchange, 18, 387 Winnipeg Stock Exchange (WSE), 18 The Wolf of Wall Street, 607 Wood, Arnold S., 361 2/13/2016 9:44:05 AM 882 INDEX working capital, 112, 494n ratios, 112–113, 832–833 see also working capital management working capital cycle, 844–845 working capital management, 819 accounts receivable, 849–855 cash and marketable securities, 844–848 cash budget, 824–827, 825t, 826t cash inflows and outflows, analysis of, 828–832 classic working capital problem, 822–824 importance of, 820–821 integrated approach, 822–827 inventory, 855–857 mismanagement of working capital, 820 Index.indd 882 in practice, 832–837 short-term financing considerations, 857–865 working capital ratios, 112–113, 832–833 World Bank, 394–395 WorldCom Corporation, 71 Y yield approximate annual yield, 862 bond yields, 198–201, 206, 210 convenience yield, 381, 381n credit yield spread, 636–637 current yield (CY), 200–201 dividend yield, 116, 266–267, 667, 792–793t earnings yield, 696–697 income yield, 266 preferred shares, 670t promised yields, 636 T-bill yield, 211 yield curve, 204–206, 205f yield to call (YTC), 216–217 yield to maturity (YTM), 189, 198–200, 202, 213, 704 Yukos, 607n Z zero-balance accounts, 847 zero coupon bonds, 212–213, 402f, 605 Zero Coupon (Erdman), 605 zero-sum game, 764 Zhang, H., 346 “zombie” companies, 823–824 2/13/2016 9:44:05 AM WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA ... 2/19/2016 3:27:46 PM Booth_ f01.indd 2/19/2016 3:27:46 PM INTRODUCTION TO CORPORATE FINANCE MANAGING CANADIAN FIRMS IN A GLOBAL ENVIRONMENT Fourth Edition LAURENCE BOOTH University of Toronto SEAN CLEARY... Toronto since 1978, Professor Booth has taught graduate courses in business finance, international financial management, corporate financing, mergers and acquisitions, financial management, financial. .. ENVIRONMENT Chapter 1: Chapter 2: An Introduction to Finance Business (Corporate) Finance 29 PART 2: FINANCIAL ANALYSIS TOOLS Chapter 3: Chapter 4: 55 Financial Statements 57 Financial Statement Analysis