Table of Contents

Chapter 1 - Overview of Corporate Finance. 1

The Nature of Finance. 1

Corporate Finance Topics. 1

Financial Management 3

External Players. 5

The Balancing Act of Corporate Finance. 6

Chapter 2 - Capital Structure. 10

Optimal Capital Structure. 10

Capital Structure Analysis. 11

The Financial Leverage Concept 12

Leverage Risk. 15

Impact of Compensation on Leverage. 16

Line of Credit Issues. 16

Tax Shield Effects. 16

Future Financing Flexibility. 17

Market Timing. 17

Loan Covenant Issues. 17

Maturity Structure of Debt 17

Creditor Position Considerations. 18

Debt Paydown. 19

Cost of Capital Reduction. 19

Market Signals. 19

Planning for a Bond Rating. 20

Timing of Changes to the Capital Structure. 21

Chapter 3 - Financial Planning. 23

The Cash Forecast 23

The Short-Term Cash Forecast 24

The Medium-Term Cash Forecast 27

The Use of Averages. 28

The Reliability of Cash Flow Information. 28

The Impact of Special Events. 29

The Master Budget 30

The Budgeted Income Statement 30

Components of the Budgeted Balance Sheet 31

Additional Estimation Elements. 37

The Cash Line Item... 38

The Budgeted Balance Sheet 39

The Financing Budget 41

Chapter 4 - Early-Stage Financing. 44

Angel Investors. 44

Venture Capital 44

Dangers of Venture Capital 45

Chapter 5 - The Initial Public Offering. 48

Reasons for and Against an IPO.. 48

Preparation for the IPO.. 49

The Initial Public Offering. 51

Share Lockup Period. 55

Blue Sky Laws. 56

Chapter 6 - Other Capital Raising Alternatives. 59

Regulation D Stock Sales. 59

Regulation D Rules. 59

Regulation D Process Flow.. 59

The Form D Filing. 61

Rule 506(c) 62

The Accredited Investor. 63

Regulation A+ Overview.. 63

Private Investments in Public Equity. 64

Crowdfunding. 65

Requirements. 65

Disclosures. 66

Limits on Advertising and Promoters. 67

Restrictions on Resale. 68

Exemption from Section 12(g) 68

Bad Actor Disqualification. 68

Seasoned Equity Offerings. 69

The Rights Offering. 69

Dilution. 70

Chapter 7 - Debt Financing. 74

Overview of Debt Financing. 74

The Line of Credit 74

The Borrowing Base. 75

Invoice Discounting. 76

Factoring. 77

Receivables Securitization. 77

Inventory Financing. 78

Loan Stock. 79

Purchase Order Financing. 79

Hard Money Loans. 79

Mezzanine Financing. 80

The Long-Term Loan. 80

Bonds. 81

Agency Financing. 82

Debt for Equity Swaps. 83

Chapter 8 - Leasing. 85

The Lease Arrangement 85

The Lease or Buy Decision. 85

Leasing Concerns. 87

Leasing Advantages. 87

Chapter 9 - The Cost of Capital 90

Cost of Capital Derivation. 90

Cost of Debt 90

Cost of Preferred Stock. 91

Cost of Common Stock. 91

Weighted Average Cost of Capital 92

Variations in the Cost of Capital 92

Adjustments to the Cost of Capital 94

Cost of Capital as a Threshold Value. 95

Chapter 10 - Discounted Cash Flows. 98

Time Value of Money. 98

Present and Future Value Tables. 99

Net Present Value. 101

Internal Rate of Return. 102

Incremental Internal Rate of Return. 103

Terminal Value. 104

Inclusions in Cash Flow Analysis. 104

Chapter 11 - Working Capital Management 107

The Impact of Working Capital on Corporate Finance. 107

Accounts Receivable Enhancements. 107

Credit Enhancements. 108

Billing Enhancements. 109

Collection Enhancements. 109

Accounts Receivable Policies. 110

Inventory Enhancements. 110

Product Design. 111

Product Record Keeping. 112

Inventory Acquisition. 112

Inventory Ownership. 113

Manufacturing Process Flow.. 113

Fulfillment 113

Inventory Disposition. 114

Inventory Policies. 114

Departmental Cooperation. 115

Accounts Payable Enhancements. 115

Terms Renegotiation. 115

Early Payment Discounts. 116

Payment Processing Frequency. 117

Accounts Payable Policies. 117

Researching Working Capital Enhancements. 117

Working Capital Forecasting. 118

Working Capital Strategy. 118

Chapter 12 - Capital Expenditures. 121

Overview of Capital Expenditures. 121

Net Present Value Analysis. 122

Breakeven Analysis. 124

The Profitability Index. 125

The Payback Method. 125

Real Options. 127

Constraint Analysis. 129

Capital Expenditure Proposal Analysis. 130

The Outsourcing Decision. 131

Complex Systems Analysis. 132

Chapter 13 - Investment Alternatives. 134

Investment Guidelines. 134

Cash Availability Scenarios. 136

Investment Strategy. 137

Types of Investments. 140

Repurchase Agreements. 140

Time Deposits. 140

Certificates of Deposit 140

Bankers’ Acceptances. 140

Commercial Paper 141

Money Market Funds. 141

U.S. Government Debt Instruments. 141

State and Local Government Debt 142

Bonds. 142

The Primary and Secondary Markets. 143

The Effective Interest Rate. 143

The Discounted Investment Formula. 144

Chapter 14 - Dividends and Other Payouts. 146

Dividend Mechanics. 146

Types of Dividends. 147

The Investor Viewpoint 147

The Company Viewpoint 148

The Stock Buyback Option. 149

Deciding Between a Dividend and a Buyback. 150

The Stock Dividend. 151

Chapter 15 - Mergers and Acquisitions. 154

Acquisition Strategy. 154

The Sales Growth Strategy. 154

The Geographic Growth Strategy. 155

The Product Supplementation Strategy. 155

The Full Service Strategy. 156

The Vertical Integration Strategy. 156

The Adjacent Industry Strategy. 156

The Diversification Strategy. 157

The Market Window Strategy. 157

The Bolt-on Strategy. 158

The Low-Cost Strategy. 158

The Industry Roll-up Strategy. 158

Valuation of a Target Company. 159

Liquidation Value. 159

Real Estate Value. 159

Relief-from-Royalty Method. 160

Enterprise Value. 160

Multiples Analysis. 161

Discounted Cash Flows. 164

Replication Value. 166

Comparison Analysis. 167

The Strategic Purchase. 168

The Control Premium... 168

The Valuation Floor and Ceiling. 168

Payment Structures. 169

The Stock-for-Stock Exchange. 169

The Exchange Ratio. 170

Issues Impacting the Stock Payment Decision. 171

Stock Payment Based on Fixed Share Count or Fixed Price. 172

The Debt Payment 173

The Cash Payment 174

Practical Considerations. 174

Chapter 16 - Foreign Exchange Risk Management 177

Foreign Exchange Risk Overview.. 177

Foreign Exchange Risk Management 178

Take No Action. 178

Avoid Risk. 179

Shift Risk. 179

Time Compression. 180

Payment Leading and Lagging. 180

Build Reserves. 181

Maintain Local Reserves. 181

Hedging. 181

Types of Foreign Exchange Hedges. 182

Loan Denominated in a Foreign Currency. 182

The Forward Contract 183

The Futures Contract 184

The Currency Option. 184

The Cylinder Option. 186

Swaps. 186

Netting. 186

Chapter 17 - Interest Rate Risk Management 189

Interest Risk Overview.. 189

Interest Rate Risk Management 189

Take No Action. 189

Avoid Risk. 190

Asset and Liability Matching. 190

Hedging. 190

Types of Interest Rate Hedges. 190

The Forward Rate Agreement 190

The Futures Contract 192

The Interest Rate Swap. 194

Interest Rate Options. 195

Interest Rate Swaptions. 198

Chapter 18 - Supply Chain Financing. 201

Supply Chain Financing. 201

Chapter 19 - Corporate Finance Measurements. 204

Corporate Finance Metrics. 204

Cash Conversion Cycle. 204

Days Sales in Accounts Receivable. 205

Days Sales in Inventory. 206

Days Payables Outstanding. 206

Actual Cash Position versus Forecast 207

Earnings on Invested Funds. 208

Ability to Pay Measurements. 208

Interest Coverage Ratio. 209

Debt Service Coverage Ratio. 209

Fixed Charge Coverage Ratio. 210

Cash Coverage Ratio. 210

Debt to Equity Ratio. 211

Average Cost of Debt 212

Borrowing Base Usage. 213

Answers to Chapter Questions. 216

Glossary. 240

Index. 244