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For a complete list of titles, please visit www.mhprofessional.com. DeMystified_Series_List.indd ii 9/25/10 12:29 PM Corporate Finance DeMYSTiFieD® Troy A. Adair, Jr. New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or re- trieval system, without the prior written permission of the publisher. ISBN: 978-0-07-176083-6 MHID: 0-07-176083-0 The material in this eBook also appears in the print version of this title: ISBN: 978-0-07-174907-7, MHID: 0-07-174907-1. All trademarks are trademarks of their respective owners. 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Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages. This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise. All there is to know about financial statements— without the headache! Contents Acknowledgments Introduction Chapter 1 Four Basic Financial Statements Chapter 2 Basic Concepts Chapter 3 The Income Statement Chapter 4 The Balance Sheet: Classifications and Concepts Chapter 5 The Balance Sheet: A Closer Examination Chapter 6 Statement of Cash Flows Chapter 7 Reading the Financial Statements: The Auditors’ Reports and Financial Statement Footnotes Chapter 8 Analysis of Financial Statements Chapter 9 Additional Issues Chapter 10 Fraudulently Misstated Financial Statements Final Exam Answers to Quiz and Final Exam Questions Index The DeMYSTiFieD series helps students master complex and difficult subjects. Each book is filled with chapter quizzes, final exams, and user friendly content. Whether you want to master Spanish or get an A in Chemistry, DeMYSTiFieD will untangle confusing subjects, and make the hard stuff understandable. Intermediate Accounting DeMYSTiFieD Geri B. Wink, CPA and Laurie Corradino *4#/t Corporate Finance DeMYSTiFieD , 2e Troy A. Adair, Jr., Ph.D. *4#/t Investing DeMYSTiFieD, 2e Paul J. Lim *4#/t Six Sigma DeMYSTiFieD, 2e Paul Keller *4#/t DeMYSTiFieD / Corporate Finance DeMYSTiFieD / Adair / 907-1 / Front Matter DeMYSTiFieD / Corporate Finance DeMYSTiFieD / Adair / 907-1 / Front Matter To my wife, Kieran, the love of my life, for her understanding and support throughout the writing of this book. About the Author Troy A. Adair, Jr., Ph.D., is the Director of Educational Initiatives for the Jay S. Sidhu School of Business and Leadership at Wilkes University in Wilkes-Barre, Pennsylvania. He has taught the introductory corporate finance course at Wilkes University, the University of Michigan, Alma College, Hofstra University, and Indiana University. He received his B.S. degree in Computers/Information Science from the University of Alabama at Birmingham, his M.B.A. from the University of North Dakota, and his Ph.D. in Finance from Indiana University. Dr. Adair has written articles on bank regulator self-interest, analyst earnings per share forecasting, and capital budgeting in continuous time, and is the author of Excel Applications in Corporate Finance and Excel Applications in Investments, and a coauthor of Finance: Applications and Theory. [...]...Contents Acknowledgments Introduction Part I Introduction xiii xv 1 chapter 1 What Is Corporate Finance? What is Finance? The Subfields of Finance The parts of Corporate Finance So, Why is This So Complicated? Why Are We Studying Corporate Finance? Quiz 4 6 9 10 11 12 chapter 2 Setting the Stage 15 chapter 3 Accounting Statements and Cash Flows 23 Basic Forms of... Corporate finance c Financial institutions and markets d International finance Chapter 1 W h at Is C o r p o r at e F i n a n c e ? 7 A movie about a stockbroker who aided investors in picking which firms to invest in would most likely involve which subfield of finance? a Investments b Financial institutions and markets c Corporate finance d International finance 8 A movie about a dashing young corporate. .. introduction to finance which presents them with the correct “big picture,” they’re left feeling a little put out when they realize that the corporate finance they’ll be studying is (in their initial opinion, at least) the least sexy subfield of finance To prove this to yourself, wait until we’ve covered the four different subfields of finance below, then make a list of every movie involving finance that... and decisions faced by each subfield Then we’ll focus more specifically on the problems and decisions of corporate finance, wrapping up with a discussion of why corporate finance is arguably the most important subtopic, and the one that you should study first What Is Finance? To understand what finance is, let’s envision the economy as being composed of four types of people, where the types are defined... exactly the same things)? Corporate finance Companies How are we going to raise the money? What are we going to do with it when we’ve got it? Projects Investors Retained earnings How do we go about paying it back? Taxes Figure 1-7 • Major decisions of corporate finance Coupon payments, dividends & stock repurchases 9 10 Co r p o r at e F i n a n c e De mys tified Corporate finance Companies Capital... that, and students in corporate finance classes who are already being asked to read far too much background material will love it, but, if you don’t fall into one of those two classes, please be aware that this book offers an intentionally designed bare-bones approach to corporate finance xv xvi Co r p o r at e F i n a n c e Demystified How to Use This Book When you first start a finance class, you get... subfield of finance? a Investments b Financial institutions and markets c Corporate finance d International finance 9 Investors are best thought of as: a People with ideas but not enough money b People with both ideas and extra money c People with no extra money and no ideas d People with extra money but no ideas (or no time to implement any ideas) 10 Capital budgeting decision rules in corporate finance. .. wanted to know about corporate finance; instead, it’s intended to be a concise, understandable introduction to the basic concepts of corporate finance that are the most widely applicable and most crucial to our intended audience As such, it tends to “cut to the chase” fairly quickly, explaining things in an almost blunt manner that often ignores some of the extra “stuff” that other finance textbooks will... What is the more formal name used for describing the corporate finance decision concerning how to raise the money? a The capital structure decision b The capital budgeting decision c The dividend decision d The retained earnings decision 3 Which of the following statements concerning the cash flows of finance best describes why the study of corporate finance is so difficult? a Both the cash flows to... of funds between the investors and the companies The final subtopic of finance is one that considers the entire system of cash flows, but in a setting where the investors, companies, and/or projects involved are in different countries, as shown in Figure 1-6 Companies Investors Corporate finance or Projects Figure 1-4 • Corporate finance Financial management 7 8 Co r p o r at e F i n a n c e Demys tified . DeMYSTiFieD / Corporate Finance DeMYSTiFieD / Adair / 907-1 / Front Matter Corporate Finance DeMYSTiFieD DeMYSTiFieD / Corporate Finance DeMYSTiFieD. to corporate finance. DeMYSTiFieD / Corporate Finance DeMYSTiFieD / Adair / 907-1 / Front Matter xvi CORPORATE FINANCE DeMYSTiFieD DeMYSTiFieD / Corporate