Corporate Finance: Theory and Practice

Corporate FINANCE Corporate Finance: Theory and Practice continues to hold sway as one of the most popular financial textbooks available, thanks to its four unique features: A balanced blend of theory and practice: the authors hold academic positions at top-ranking universities and business schools and are also financial managers, private investors or sit on the boards of listed and unlisted companies. A presentation of concepts that explain situations, followed by a discussion of techniques in a direct and succinct style. Content enriched by the www.vernimmen.com website, which, with 1,500 daily visitors, is one of the world's leading sites for teaching finance. Free monthly finance updates with The Vernimmen.com Newsletter , which currently has over 60,000 subscribers. The authors draw on their dual experience to enhance and expand the content of this book through the inclusion of new chapters on financing start-ups and implementing a debt policy. "I discovered finance with 'The Vernimmen' about 30 years ago. Since then the different versions have accompanied me throughout my career and throughout the world. Not only was the alignment of the successive editions looking good in my different offices but I must confess I have opened and cherished each of them. Whether an investment banker, a CFO in a universal bank, or, more simply, a world banker…" —BERTRAND BADRE, MANAGING DIRECTOR AND CFO OF THE WORLD BANK "I opened my first Vernimmen in 1982. After having spent just a few weekends reading it, I felt better equipped for my role in financial management at Paribas. Now at Apax, the Vernimmen remains my companion in my search for value creation (key in the private equity industry)." —MONIQUE COHEN, ASSOCIATED DIRECTOR, APAX PARTNERS "Vernimmen's Corporate Finance is an outstanding clear and complete manual, a wonderful merger of practice and theory. Its coverage of the market aspects of corporate finance distinguishes its content, but its treatment of all the material makes it essential reading for the student, financier or industrialist." —HOWARD JONES, SENIOR RESEARCH FELLOW IN FINANCE AT SAÏD BUSINESS SCHOOL, UNIVERSITY OF OXFORD "The book itself covers all the important techniques that a financial manager must have in his repertoire of tools. The exposition is clear and concise and, most importantly, relies on commonsense reasoning throughout. This is not a book with obscure formulae, yet is still rigorous and at the same time a model of clarity." —RICHARD ROLL, JOEL FRIED PROFESSOR OF APPLIED FINANCE AT UCLA ANDERSON

Preface viii Frequently Used Symbols xii 1 What is Corporate Finance? 1 Section I Financial Analysis 15 Part One Fundamental Concepts in Financial Analysis 17 2 Cash Flow 19 3 Earnings 29 4 Capital Employed and Invested Capital 44 5 Walking Through from Earnings to Cash Flow 57 6 Getting to Grips with Consolidated Accounts 71 7 How to Cope with the Most Complex Points in Financial Accounts 89 Part Two Financial Analysis and Forecasting 115 8 How to Perform a Financial Analysis 117 9 Margin Analysis: Structure 143 10 Margin Analysis: Risks 166 11 Working Capital and Capital Expenditures 181 12 Financing 202 13 Return on Capital Employed and Return on Equity 216 14 Conclusion of Financial Analysis 236 Section II Investors and Markets 243 Part One Investment Decision Rules 245 15 The Financial Markets 247 16 The Time Value of Money and Net Present Value 268 17 The Internal Rate of Return 285 Part Two The Risk of Securities and the Required Rate of Return 299 18 Risk and Return 301 19 The Required Rate of Return 329 Part Three Financial Securities 347 20 Bonds 349 21 Other Debt Products 371 22 Shares 386 23 Options 406 24 Hybrid Securities 428 25 Selling Securities 446 Section III Value 471 26 Value and Corporate Finance 473 27 Measuring Value Creation 492 28 Investment Criteria 510 29 The Cost of Capital 528 30 Risk and Investment Analysis 545 31 Valuation Techniques 558 Section IV Corporate Financial Policies 589 Part One Capital Structure Policies 591 32 Capital Structure and the Theory of Perfect Capital Markets 593 33 Capital Structure, Taxes and Organisation Theories 605 34 Debt, Equity and Options Theory 622 35 Working Out Details: The Design of The Capital Structure 641 Part Two Equity Capital 659 36 Returning Cash to Shareholders 661 37 Distribution in Practice: Dividends and Share Buy–Backs 677 38 Share Issues 695 39 Implementing a Debt Policy 708 Section V Financial Management 725 Part One Corporate Governance and Financial Engineering 727 40 Setting Up a Company or Financing Start–Ups 729 41 Choice of Corporate Structure 748 42 Initial Public Offerings (iPOs) 770 43 Corporate Governance 783 44 Taking Control of a Company 797 45 Mergers and Demergers 820 46 Leveraged Buyouts (LBOs) 837 47 Bankruptcy and Restructuring 852 Part Two Managing Working Capital, Cash Flows and Financial Risks 867 48 Managing Working Capital 869 49 Managing Cash Flows 881 50 Managing Financial Risks 900 Epilogue—Finance and Strategy 925 Top 20 Largest Listed Companies 933 Contents 941 Index 951