Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate Edition(^30) Front Matter Preface © The McGraw−Hill
Companies, 2002
Reducing Risk Exposure 783
Hedging Short-Run Exposure 784
Cash Flow Hedging: A Cautionary Note 785
Hedging Long-Term Exposure 786
Conclusion 786
23.3 Hedging with Forward Contracts 787
Forward Contracts: The Basics 787
The Payoff Profile 788
Hedging with Forwards 788
A Caveat 788
Credit Risk 789
Forward Contracts in Practice 790
23.4 Hedging with Futures Contracts 790
Trading in Futures 790
Futures Exchanges 791
Hedging with Futures 791
23.5 Hedging with Swap Contracts 793
Currency Swaps 793
Interest Rate Swaps 794
Commodity Swaps 794
The Swap Deale r794
Interest Rate Swaps: An Example 795
23.6 Hedging with Option Contracts 796
Option Terminology 796
Options versus Forwards 797
Option Payoff Profiles 797
Option Hedging 797
Hedging Commodity Price Risk with Options 797
Hedging Exchange Rate Risk with Options 800
Hedging Interest Rate Risk with Options 800
A Preliminary Note 800
Interest Rate Caps 800
Other Interest Rate Options 800
23.7 Summary and Conclusions 801
Chapter 24
Option Valuation 807
24.1 Put-Call Parity 807
Protective Puts 808
An Alternative Strategy 808
The Result 808
Continuous Compounding: A Refresher
Course 810
24.2 The Black-Scholes Option Pricing Model 813
The Call Option Pricing Formula 813
Put Option Valuation 816
A Cautionary Note 817
24.3 More on Black-Scholes 818
Varying the Stock Price 818
Varying the Time to Expiration 821
Varying the Standard Deviation 823
Varying the Risk-Free Rate 823
Implied Standard Deviations 824
24.4 Valuation of Equity and Debt in a Leveraged
Firm 825
Valuing the Equity in a Leveraged Firm 826
Options and the Valuation of Risky Bonds 827
24.5 Options and Corporate Decisions: Some
Applications 829
Mergers and Diversification 829
Options and Capital Budgeting 831
24.6 Summary and Conclusions 833
Chapter 25
Mergers and Acquisitions 841
25.1 The Legal Forms of Acquisitions 842
Merger or Consolidation 843
Acquisition of Stock 843
Acquisition of Assets 844
Acquisition Classifications 844
A Note on Takeovers 845
25.2 Taxes and Acquisitions 846
Determinants of Tax Status 846
Taxable versus Tax-Free Acquisitions 846
25.3 Accounting for Acquisitions 846
The Purchase Method 847
Pooling of Interests 847
More on Goodwill 847
25.4 Gains from Acquisition 849
Synergy 849
Revenue Enhancement 850
Marketing Gains 850
Strategic Benefits 850
Market Power 851
Cost Reductions 851
Economies of Scale 851
Economies of Vertical Integration 851
Complementary Resources 852
Lower Taxes 852
Net Operating Losses 852
Unused Debt Capacity 852
Surplus Funds 852
Asset Write-Ups 853
Reductions in Capital Needs 853
Avoiding Mistakes 853
A Note on Inefficient Management 854
25.5 Some Financial Side Effects of Acquisitions 854
EPS Growth 855
Diversification 856
25.6 The Cost of an Acquisition 856
Case I: Cash Acquisition 857
Case II: Stock Acquisition 857
Cash versus Common Stock 858
25.7 Defensive Tactics 859
The Corporate Charter 859
Repurchase and Standstill Agreements 859
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