Introduction 1 About This Book 1 Foolish Assumptions 2 Icons Used in This Book 3 New to this Edition 4 Beyond the Book 4 Where to Go from Here 4 Part 1: What''s Unique about Corporate Finance 5 Chapter 1: The Tale of Corporate Finance 7 Telling a Story with Numbers 7 Characterizing Motivations 10 The role of financial institutions 11 Defining investing 11 Setting the Stage 12 Chapter 2: Introducing Finance Land 15 Visiting the Main Attractions in Finance Land 15 Corporations 16 Depository institutions 17 Insurance companies 18 Securities firms 20 Underwriters 21 Funds 22 Financing institutions 23 Exchanges 25 Regulatory bodies 25 Federal Reserve and U.S Treasury 26 Getting a Job in Finance Land 28 Accounts payable and/or receivable 28 HR and payroll 29 Analysts 29 Auditors 29 Adjusters 29 Bookkeepers and accountants 29 Modelers and scientists 30 Economists and consultants 30 Traders 30 Treasurers 30 Bankers and more 31 Visiting the Finance Land Information Center 31 Internet sources 31 Print sources 32 Human sources 33 Chapter 3: Pitching Your Story for Money 35 Raising Capital 35 Diving into Debt 36 Asking the right people for money 37 Making sure the loan pays off in the long run 38 Looking at loan terms 39 Schmoozing Investors 40 Selling stock to the public 40 Looking at the different types of stock 42 Having Your Wish Granted 43 Part 2: Making a Statement 45 Chapter 4: Staying Balanced 47 Introducing the Balance Sheet 47 Evaluating the Weights on the Balance Scale 48 Understanding Assets 49 Current assets 49 Long-term assets 51 Intangible assets 53 Other assets 54 Learning about Liabilities 54 Current liabilities 54 Long-term liabilities 56 Eyeing Owners'' Equity 56 Preferred shares 56 Common shares 57 Treasury shares 57 Additional paid-in capital 57 Retained earnings 58 Finding Financial Zen 58 Chapter 5: Incoming Income 59 Adding It Up 59 Gross profit 60 Operating income 62 Earnings before interest and taxes (EBIT). 63 Net income 64 Earnings per share 65 Supplemental notes 66 Putting the Income Statement to Good Use 66 Chapter 6: Going with the (Cash) Flow 67 Moving Along Three Smooth Flows 67 Operating cash flows 68 Investing cash flows 69 Financing cash flows 70 Combining the three types of operations to get the net change in cash 71 Reaching Your Destination 72 Chapter 7: Mastering Metrics 75 Paying the Bills 75 Days sales in receivables 76 Accounts receivables turnover 77 Accounts receivables turnover in days 78 Days sales in inventory 78 Inventory turnover 79 Inventory turnover in days 80 Operating cycle 80 Working capital 81 Current ratio 82 Acid test ratio (aka Quick Ratio). 82 Cash ratio 83 Sales to working capital 83 Operating cash flows to current maturities 84 Working Your Assets 85 Net profit margin 85 Total asset turnover 86 Return on assets 86 Operating income margin 87 Operating asset turnover 88 Return on operating assets 88 Return on total equity 89 Return on common equity 89 DuPont equation 90 Fixed asset turnover 91 Return on investment 91 Gross profit margin 92 Operating ratio 93 Percent earned on operating property 93 Operating revenue to operating property ratio 94 Long-term debt to operating property ratio 95 Chapter 8: Calculating Capital 97 Sizing Up Shareholders 97 Financial leverage 98 Earnings per common share 98 Operating cash flows per share 99 Price to earnings ratio 100 Percentage of earnings retained 101 Dividend payout 102 Dividend yield 102 Book value per share 103 Cash dividend coverage ratio 104 Banking on Metrics 104 Earning assets to total assets ratio 105 Net interest margin 105 Loan loss coverage ratio 106 Equity to total assets ratio 107 Deposits times capital 107 Loans to deposits ratio 108 Keeping Debt Healthy 109 Times interest earned 109 Fixed charge coverage 110 Debt ratio 110 Debt to equity ratio 111 Debt to tangible net worth 111 Operating cash flows to total debt 112 Equity multiplier 113 Part 3: Valuations on the Price Tags of Business 115 Chapter 9: Determining Present and Future Values: Time Is Money 117 Losing Value over Time 118 Inflation 118 Interest rates 119 Predicting Future Value 120 Simple interest 120 Compound interest 121 Calculating the Present Value 121 A closer look at earnings 122 Discounted cash flows 123 Chapter 10: Calling in the Cavalry 125 Budgeting Capital 126 Rating Your Returns 127 Looking at costs 128 Calculating revenue 128 Calculating the accounting rate of return 128 Making the most of the internal rate of return through modification 130 Netting Present Values 132 Calculating NPV over time 132 Managing the project''s value 133 Paying It Back 134 Allocating Capital 134 Calculating the equivalent annual cost 135 Considering liquid assets 136 Managing Projects 137 Value schedule metrics 137 Budget metrics 139 Chapter 11: Bonding Over Business 143 Exploring the Different Types of Bonds 143 Considering corporate bonds 144 Gauging government bonds 144 Clipping coupon bonds 147 Backing up with assets 147 Converting bonds 148 Calling it in with callable bonds 149 Putting in the effort: puttable bonds 149 Registering the bearer 150 Counting on forgiveness with catastrophe bonds 150 Junking bad bonds 150 Reviewing Bond Rates 151 Reading Bond Information 153 Understanding Bond Valuation 156 Chapter 12: Savvy Stock Sales 159 Exchanging Stocks 159 Looking at the Different Types of Orders 160 Market order 161 Stop and limit orders 161 Pegged order 162 Time-contingent order 163 Comparing Long and Short Stocks 163 Buying long 163 Buying on margin 164 Selling short 164 Defining Caps and Sectors 165 Caps 165 Sectors 166 Raging Bulls and Grizzly Bears 167 Beating Stock Indices?.168 Imagining the Value of Stocks 168 Surveying equity valuation models 169 Checking out corporate analysis 170 Evaluating industry performance 170 Factoring in stock market fluctuations 171 Considering macroeconomics 171 Chapter 13: Pricing Probability from Derived Value 173 Deriving Value 173 Keeping Your Options Open 174 Choosing between put and call 175 Valuing an option 176 Paying It Forward 177 Agreeing to forward 177 Valuing a forward 178 Standardizing the Future 179 Predicting futures 179 Valuing futures 180 Swapping Numbers 180 Managing risk with swaps 181 Generating revenue with swaps 182 Valuing a swap 182 Part 4: A Wonderland of Risk Management 183 Chapter 14: Managing Uncertainty 185 Understanding that Risk Is Unavoidable 185 Risking Your Interest with Inflation 186 Minimizing Market Risk 187 Giving Credit Where It''s Due 188 Getting Shady with Off-Balance-Sheet Risk 190 Factoring in Foreign Exchange Risk 190 Transaction risk 191 Translation risk 191 Other foreign exchange risk 192 Identifying Operating Risk 193 Looking at Liquidity Risk 194 Sorting Your Customer''s Laundry 195 Chapter 15: Through the Looking Glass of Modern Portfolio Theory 197 Delving into Portfolio Basics 198 Surveying portfolio management strategies 198 Looking at modern portfolio theory 199 Understanding passive versus active management 200 Joking about Market Efficiency 200 Risking Returns 202 Looking at the trade-off between risk and return 202 Diversifying to maximize returns and minimize risk 203 Considering risk aversion 205 Measuring risk 208 Optimizing Portfolio Risk 212 Reaching the efficient frontier 213 Innovating risk management 214 Chapter 16: Financially Engineering Yourself Deeper Down the Rabbit Hole 217 Making Securities Out of Anything 218 You can securitize everything 218 Slicing securities into tranches 219 Splicing Hybrids 220 The mixed-interest class of hybrids 220 Single asset class hybrids 221 Indexed-back CDs 222 Bundling Assets 222 Pass-through certificates 223 Multi-asset bundles 223 Unbundling 224 Exploring Exotics 224 Options 225 Swaps contracts 225 Loans 226 Engineering Finances 226 Moving into Computational Finance 228 <.