Introduction to Corporate Finance

Ross et al.: Fundamentals

of Corporate Finance, Sixth

Edition, Alternate Edition

Front Matter Preface © The McGraw−Hill^23

Companies, 2002

CONTENTS xxiii

Present Value for Annuity Cash Flows 166
Annuity Tables 167
Finding the Payment 168
Finding the Rate 170
Future Value for Annuities 172
A Note on Annuities Due 173
Perpetuities 174
6.3 Comparing Rates: The Effect of
Compounding 176
Effective Annual Rates and Compounding 176
Calculating and Comparing Effective
Annual Rates 177
EARs and APRs 179
Taking It to the Limit: A Note on Continuous
Compounding 180
6.4 Loan Types and Loan Amortization 181
Pure Discount Loans 181
Interest-Only Loans 182
Amortized Loans 182
6.5 Summary and Conclusions 187

Chapter 7
Interest Rates and Bond Valuation 201

7.1 Bonds and Bond Valuation 201
Bond Features and Prices 202
Bond Values and Yields 202
Interest Rate Risk 206
Finding the Yield to Maturity:
More Trial and Error 208
7.2 More on Bond Features 211
Is It Debt or Equity? 212
Long-Term Debt: The Basics 212
The Indenture 213
Terms of a Bond 214
Security 214
Seniority 215
Repayment 215
The Call Provision 215
Protective Covenants 215
7.3 Bond Ratings 216
7.4 Some Different Types of Bonds 218
Government Bonds 218
Zero Coupon Bonds 219
Floating-Rate Bonds 220
Other Types of Bonds 222
7.5 Bond Markets 223
How Bonds Are Bought and Sold 224
Bond Price Reporting 224
7.6 Inflation and Interest Rates 228
Real versus Nominal Rates 228
The Fisher Effect 229
7.7 Determinants of Bond Yields 230
The Term Structure of Interest Rates 230

Bond Yields and the Yield Curve: Putting It All

Togethe r233

Conclusion 235

7.8 Summary and Conclusions 235

Chapter 8

Stock Valuation 243

8.1 Common Stock Valuation 243

Cash Flows 244

Some Special Cases 245

Zero Growth 245

Constant Growth 246

Nonconstant Growth 249

Components of the Required Return 251

8.2 Some Features of Common and

Preferred Stocks 253

Common Stock Features 253

Shareholder Rights 253

Proxy Voting 254

Classes of Stock 255

Other Rights 255

Dividends 255

Preferred Stock Features 256

Stated Value 256

Cumulative and Noncumulative Dividends 256

Is Preferred Stock Really Debt? 257

8.3 The Stock Markets 257

Dealers and Brokers 257

Organization of the NYSE 258

Members 258

Operations 259

Floor Activity 259

Nasdaq Operations 260

Nasdaq Participants 261

The Nasdaq System 261

Stock Market Reporting 263

8.4 Summary and Conclusions 264

PART FOUR

Capital Budgeting 271

Chapter 9

Net Present Value and Other Investment Criteria 273

9.1 Net Present Value 274

The Basic Idea 274

Estimating Net Present Value 275

9.2 The Payback Rule 278

Defining the Rule 278

Analyzing the Rule 280

Redeeming Qualities of the Rule 281

Summary of the Rule 281