CONTENTS INTRODUCTION 1 INTRODUCTION TO ACCOUNTING 9. List of Examples Acknowledgments Preface

Size: px

Start display at page:

Download "CONTENTS INTRODUCTION 1 INTRODUCTION TO ACCOUNTING 9. List of Examples Acknowledgments Preface"

Poppy Carroll
5 years ago
Views:

1 CONTENTS List of Examples Acknowledgments Preface xix xxv xxvii INTRODUCTION 1 PART ONE ACCOUNTING AND FINANCIAL STATEMENT ANALYSIS 7 CHAPTER 1 INTRODUCTION TO ACCOUNTING 9 A. Importance of Accounting 9 B. Financial Accounting Statements 9 C. Uses and Limitations 13 D. Case Application 15 Francis v. United Jersey Bank (Part I) 15 CHAPTER 2 BALANCE SHEET 19 A. Balance Sheet Equation 19 B. Assets and Liabilities 20 C. Equity 21 D. Historical Cost and Market Value 24 E. How the Balance Sheet Works 27 F. Working Capital and Capital Assets 30 G. McDonald s Balance Sheet 32 H. Case Application 34 Francis v. United Jersey Bank (Part II) 34 United States v. Simon 36 Kahan v. United States Sugar Corp. 42 Klang v. Smith s Food & Drug Centers 44 xi

2 CHAPTER 3 INCOME STATEMENT 49 A. Income Statement Equation 49 B. How the Income Statement Works 50 C. What Is Profit? 53 D. Accrual Accounting 55 E. Depreciation and Amortization 56 F. Capitalized Costs 62 G. McDonald s Income Statement 64 H. Case Application 66 In re WorldCom, Inc. Securities Litigation 66 CHAPTER 4 CASH FLOW STATEMENT 69 A. Cash Is King 69 B. Cash Flow from Operations 70 C. Cash Flow from Investing 72 D. Cash Flow from Financing 73 E. Putting the Cash Flows Together 74 F. McDonald s Cash Flow Statement 76 G. Case Application 78 Smith v. Van Gorkom (Part I) 78 In re Enron Corp. Securities, Derivative & ERISA Litigation 80 CHAPTER 5 FINANCIAL STATEMENT ANALYSIS 83 A. Profitability Analyses Margin analyses Return on assets and equity (ROA and ROE) Earnings per share (EPS) How margin analysis is used 86 B. Liquidity and Solvency Working capital analysis Debt service analysis Leverage analysis 90 C. Case Application 91 Ryder Move Management, Inc. v. United States 92 CHAPTER 6 CREATING FINANCIAL STATEMENTS 97 A. Interconnections of Financial Statements Income statement and balance sheet Income statement and cash flow statement 98 xii

3 3. Cash flow and balance sheet Kingsfield Inc. Example 99 B. T-Accounts, Debits, and Credits 107 C. Accounting for Capital Transactions Capital raise Retirement or Repurchase of Securities Legal Capital 114 D. Auditing and Certified Financial Statements 115 E. McDonald s Auditor Opinion and Reports on Internal Controls 116 F. Case Application 119 SEC v. World-Wide Coin Investments, Ltd. 119 PART TWO PRINCIPLES OF FINANCE AND VALUATION 129 CHAPTER 7 RISK AND RETURN 131 A. What Is Finance? 131 B. Risk Aversion 132 C. Risk 134 D. Return 135 E. Diversification of Risk 138 F. Case Application 139 Joy v. North 139 Credit Lyonnais Bank Nederland, N.V. v. Pathe Comm n Corp. 141 CHAPTER 8 TIME VALUE OF MONEY 145 A. Basic Principle of TVM Future value Present value Annuity Perpetuity formula Using time value tables 153 B. What s the Point? 157 C. Case Application 159 O Shea v. Riverway Towing Co. 159 In re Vanderveer Estates Holding, LLC 163 CHAPTER 9 VALUATION 169 A. Conceptualizing the Value of a Firm Liquidation value Book value 171 xiii

4 3. Market value Market cap versus firm value Theoretical value 173 B. Cost of Capital (or What Is R?) Costs of debt and preferred stock Cost of equity and CAPM Weighted average cost of capital 187 C. Theoretical Valuation Based on Discounted Cash Flow (DCF) Free cash flow Discounting free cash flow Sensitivity analysis 191 D. Market-Based Valuation and Multiples Analysis Market cap multiples Firm value multiples Using multiples to value companies 196 E. Valuation Process Valuation studies Part science, part art 200 F. The Law of One Price and Arbitrage 203 G. Case Application 205 Agranoff v. Miller 206 Cede & Co. v. Technicolor, Inc. (1990) 209 Cede & Co. v. Technicolor, Inc. (2003) 217 In re Pullman Const. Indus. Inc. 218 CHAPTER 10 ECONOMICS OF THE FIRM 227 A. Efficiency Efficiency defined Limited liability of shareholders Business judgment rule 228 B. Efficiency of Firm Structure Reason why firms exist Separation of ownership and control Agency cost 233 C. Capital Structure Capital structure irrelevance (and relevance) Agency cost and the role of debt Leverage buyout (LBO) and debt financing Conflict between creditors and equityholders 245 D. Case Application 247 Metropolitan Life Ins. Co. v. RJR Nabisco Inc. 247 Graham v. Allis-Chalmers Mfg. Co. 251 xiv

5 PART THREE FINANCIAL INSTRUMENTS AND CAPITAL MARKETS 257 CHAPTER 11 FINANCIAL INSTRUMENTS I (DEBT AND EQUITY) 259 A. Financial Instruments 259 B. Debt Types of debt Common terms and issues Bonds and bond indentures Securitization Bond pricing and yield to maturity 267 C. Preferred Stock Hybrid nature of preferred stock Common terms and issues Uses of preferred stock 275 D. Common Stock Common terms Typical transactions 280 E. Case Application 282 S.E.C. v. W.J. Howey Co. 282 Sharon Steel Corp. v. Chase Manhattan Bank, N.A. 286 CHAPTER 12 FINANCIAL INSTRUMENTS II (DERIVATIVES) 293 A. Options Call option Put option Derivatives as zero sum transactions 297 B. Option Valuation Put-call parity Determinants of option value Principle of Black-Scholes 302 C. Forward and Futures Contracts 305 D. Uses of Derivatives Speculation Hedging 307 E. Case Application 310 Brane v. Roth 311 Weiss v. Swanson 312 High River L.P. v. Mylan Labs., Inc. 315 xv

6 CHAPTER 13 CAPITAL MARKETS 321 A. Capital Markets What are financial markets? Size of markets Function of markets Primary and secondary markets 324 B. Equity Markets Public equity markets Private equity markets 326 C. Credit Markets Money markets Bank loan markets Bond markets Credit ratings 333 D. Derivatives, Currency, and Commodities Markets Exchange-traded market OTC market 336 E. Major Participants in the Capital Markets Issuers and investors Exchanges and trading platforms Investment banks Credit rating agencies, accountants, and lawyers Regulators 341 F. Efficient Capital Market Hypothesis (ECMH) 342 G. Case Application 343 In re Bear Stearns Cos., Securities, Derivative & ERISA Litigation 344 Kamin v. American Express 351 Basic, Inc. v. Levinson 354 PART FOUR CORPORATE TRANSACTIONS AND BUSINESS STRATEGY 359 CHAPTER 14 CORPORATE TRANSACTIONS 361 A. Capital Raising Reasons for capital raising Going public or going private Capital raising process and the lawyer s role 366 B. Mergers and Acquisitions What is M&A? Rationale for M&A Accretion and dilution 369 xvi

7 4. M&A process and the lawyer s role 370 C. Restructuring 376 D. Capital Budgeting Net present value (NPV) Internal rate of return (IRR) 379 E. Case Application 381 Escott v. BarChris Construction Corp. 382 Smith v. Van Gorkom (Part II) 390 Katz v. Oak Industries, Inc. 397 CHAPTER 15 BUSINESS STRATEGY 405 A. Defining Business Strategy Strategic thinking and business strategy The problem of business sustainability What is business strategy? Relevance of strategy to the lawyer 409 B. Porter s Five Forces Threat of new entrants Bargaining power of suppliers Bargaining power of customers Threat of substitutes Competition among competitors 412 C. SWOT Analysis 412 D. From Strategy to Business Model What is a business model? Business plan in the transactional context 414 E. Case Application 416 United States v. Paramount Pictures, Inc. 416 Glossary 423 xvii

Fundamental Issues in Real Estate Investment Analysis

C O N T E N T S PREFACE XVii P A R T O N E Fundamental Issues in Real Estate Investment Analysis C H A P T E R 1 The Real Estate Investment Decision 2 Investment Analysis: Art and Science 3 Who Are Real