Essentials of Corporate Finance 4th Aust PDF

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ASSURANCE OF LEARNING Assurance of learning is an important element of many accreditation standards. The fourth edition of Essentials of Corporate Finance is designed specifically to support your assurance of learning initiatives. Each chapter in the book begins with a list of numbered learning objectives that are aligned with the end-of-chapter problems and exercises. Every testbank question is also linked to one of these objectives, in addition to level of difficulty, topic area and AACSB skill areas.

AACSB STATEMENT McGraw-Hill Education (Australia) Pty Ltd is a proud corporate member of AACSB International. Understanding the importance and value of AACSB accreditation, the fourth edition of Essentials of Corporate Finance has sought to recognise the curriculum guidelines detailed in the AACSB standards for business accreditation by connecting selected questions in the testbank to the general knowledge and skill guidelines found in the AACSB standards. The statements contained in the testbank are provided only as a guide for the users of this text. The AACSB leaves content coverage and assessment within the purview of individual schools, the mission of the school and the faculty. While Essentials of Corporate Finance and the teaching package make no claim of any specific AACSB qualification or evaluation, we have, within the testbank, labelled selected questions according to six general knowledge and skills areas.1

1 AACSB International 2008, Eligibility procedures and accreditation standards for business accreditation, www.aacsb.edu.

Copyright © 2017 McGraw-Hill Education (Australia) Pty Ltd Additional owners of copyright are acknowledged in on-page credits. Every effort has been made to trace and acknowledge copyrighted material. The authors and publishers tender their apologies should any infringement have occurred. Reproduction and communication for educational purposes The Australian Copyright Act 1968 (the Act) allows a maximum of one chapter or 10% of the pages of this work, whichever is the greater, to be reproduced and/or For the full version: [email protected]

communicated by any educational institution for its educational purposes provided that the institution (or the body that administers it) has sent a Statutory Educational notice to Copyright Agency Limited (CAL) and been granted a licence. For details of statutory educational and other copyright licences contact: Copyright Agency Limited, Level 15, 233 Castlereagh Street, Sydney NSW 2000. Telephone: (02) 9394 7600. Website: www.copyright.com.au Reproduction and communication for other purposes Apart from any fair dealing for the purposes of study, research, criticism or review, as permitted under the Act, no part of this publication may be reproduced, distributed or transmitted in any form or by any means, or stored in a database or retrieval system, without the written permission of McGraw-Hill Education (Australia) Pty Ltd, including, but not limited to, any network or other electronic storage. Enquiries should be made to the publisher via www.mheducation.com.au or marked for the attention of the permissions editor at the address below.

National Library of Australia Cataloguing-in-Publication Data Creator: Ross, Stephen A, author. Title: Essentials of corporate finance / Stephen Ross, Rowan Trayler, Gerhard Van De Venter, Ron Bird, Randolph W. Westerfield, Bradford D. Jordan. Edition: 4th edition. ISBN: 9781743760956 (paperback) Subjects: Corporations—Finance. Industrial management. Business enterprises— Finance. Other Creators/Contributors: Trayler, Rowan M, author. Van de Venter, Gerhard, author. Bird, Ron, author. Westerfield, Randolph, author. Jordan, Bradford D, author. Dewey Number: 658.15

Published in Australia by McGraw-Hill Education (Australia) Pty Ltd Level 2, 82 Waterloo Road, North Ryde NSW 2113 Publisher: Jillian Gibbs Content developers: Lisa Coady and Isabella Mead Content producer: Natalie Crouch Permissions editor: Janet McKeown For the full version: [email protected]

Permissions coordinator: Haidi Bernhardt Copyeditor: Gillian Armitage Proofreader: Jess Ní Chuinn Indexer: Jon Jermey Cover and internal design: Jane Cameron, Fisheye Design Typeset in Chaparral Pro 10/12 by Nova Techset Private Limited, Bengaluru & Chennai, India Printed in China on 70 gsm matt art by CTPS

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ACKNOWLEDGMENTS We are indebted to our academic colleagues at the University of Technology Sydney and other institutions in Australia and New Zealand who contributed to the development of this adaptation, including: • Jozef Drienko, Australian National University • Gabrielle Parle, University of the Sunshine Coast • Bernard Bollen, University of New England and for their work on the previous edition: • John Ablett, University of Western Sydney • Zhian Chen, University of New South Wales • Philip Cheng, Australian National University • Deborah Cotton, University of Technology Sydney • Grant Cullen, Murdoch University • Bill Dimovski, Deakin University • Norah Ellery, University of Otago • Norton Grey, University of Tasmania • Rakesh Gupta, Central Queensland University • Ben Jacobsen, James Cook University • Buly Cardak, La Trobe University • Jenny Kofoed, Central Queensland University • Kirsten MacDonald, Lincoln University • Sian Owen, University of New South Wales • Toan Pham, University of New South Wales • Peter Phillips, University of Southern Queensland • Mike Poë, University of Technology Sydney • Tony Stanger, Flinders University • Max Tani, University of New South Wales • Tony van Eekelen, Deakin University • Scott Walker, University of Technology Sydney • Mark Werman, Massey University. The publication of a work such as this would not be possible without the enthusiasm of the team at McGraw-Hill. We thank our publisher, Jillian Gibbs, for her unfailing For the full version: [email protected]

support and enthusiasm—words cannot express our gratitude! We also thank our content developers, Lisa Coady and Isabella Mead, for their dedication to the project; designer, Jane Cameron, for organising our eye-catching cover and vibrant internal design; copy editor, Gillian Armitage and content producer Natalie Crouch, for their incredible professionalism and attention to detail; digital resources team including Sarah Mahoney and Bethany Ng and learning platform manager, Marisa Rey Bulen. We thank the marketing manager for business and economics, Andrea Tenconi for his enthusiasm in promoting the book internally and externally, and in guiding our promotional material. We sincerely thank these people for all their hard work.

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PREFACE Introductory finance courses have changed over the years, and the number of prerequisite subjects has been reduced to the point that a large number of students are studying finance with little or no business background or knowledge of accounting and/or economics. In addition, many of these students will not undertake any further finance courses. As a consequence, these courses need a special type of finance text— one that provides students with a broad coverage of the essential topics in a way that allows for their minimal preparation, while still providing an introduction for the intended finance majors. In 2006 a review of the burgeoning number of finance texts that have been prepared for the Australian and New Zealand markets confirmed our expectations that a satisfactory text did not exist in the local market to meet the special needs of these introductory finance courses. However, Ross, Westerfield and Jordan’s Essentials of Corporate Finance, a successful us textbook that has now been developed through nine editions, stood out for this particular segment. A key to its success is the use of stories based on real-world experiences, rather than a description of the theory, to develop the important finance concepts. In addition, its chatty writing style is much appreciated by students, particularly those with little preparation and/or those for whom English is a second language. However, this textbook did not provide an ideal solution for those teaching or studying an introductory finance course in Australia and New Zealand. While a large amount of finance theory is generic, the institutional environment and terminology used across countries is not. The solution was apparent: a local adaptation of the text, while being careful not to depart from its winning ways. The fruits of our labour are to be found in this text now in its fourth edition, which maintains the well-recognised Ross et al. formula, while using local terminology and explaining everything within an Australian and New Zealand setting. The Ross tradition of using real-world examples from Australia, New Zealand or well-recognised international companies has been incorporated. The subject of finance is distilled down to its bare ‘essentials’ while retaining a modern approach. The book is arranged in nine parts to enable a flexible approach to the subject material, allowing subject coordinators to decide the particular sequence. Each chapter begins with an overview of the chapter’s content and concludes with material that is an extension of the earlier material. In the event of insufficient time, the latter may be For the full version: [email protected]

omitted without affecting a basic coverage of the essential material. At the end of each chapter is a large selection of practical and theoretical problems of varying degrees of difficulty for students to solve. In addition, each major section concludes with a minicase that introduces a practical application of the material covered. Perhaps the most challenging aspect of writing this adaptation has been the incorporation of the Australian and the New Zealand imputation tax system. As the theoretical development of finance has largely been undertaken within the framework of a classical tax system, we chose to commence our discussion within this environment and then extend the discussion to incorporate an imputation tax system. Our approach to imputation has been to treat it at a basic level and not overly complicate the issue for students. We feel that we have successfully achieved our goal of producing a text that conveys the most important concepts and principles of finance at a level that is approachable for the widest possible audience in a package that realistically can be covered in a single term.

Gerh Van de Vent

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ABOUT THE ORIGINAL AUTHORS

Stephen A. Ross is the Franco Modigliani Professor of Finance and Economics at the Sloan School of Management, Massachusetts Institute of Technology. One of the most widely published authors in finance and economics, Professor Ross is recognised for his work in developing Arbitrage Pricing Theory and his substantial contributions to the discipline through his research in signalling, agency theory, option pricing and the theory of the term structure of interest rates, among other topics. A past president of the American Finance Association, he currently serves as an associate editor of several academic and practitioner journals. He is a trustee of CalTech and a co-author of Fundamentals of Corporate Finance 9e (US edition) and Corporate Finance 9e (US edition), both published by McGraw-Hill/Irwin.

Randolph W. Westerfield is Dean Emeritus of the University of Southern California’s Marshall School of Business and is the Charles B. Thornton Professor of Finance. He came to USC from the Wharton School, University of Pennsylvania, where he was the chairman of the finance department and a member of the finance faculty for 20 years. He is a member of several public company boards of directors including Health For the full version: [email protected]

Management Associates, Inc. and the Nicholas Applegate Growth Fund. His areas of expertise include corporate financial policy, investment management and stock market price behaviour. He is a co-author of Fundamentals of Corporate Finance 9e (US edition) and Corporate Finance 9e (US edition), both published by McGrawHill/Irwin.

Bradford D. Jordan is Professor of Finance and holder of the Richard W. and Janis H. Furst Endowed Chair in Finance at the University of Kentucky. He has a longstanding interest in both applied and theoretical issues in corporate finance and has extensive experience teaching all levels of corporate finance and financial management policy Professor Jordan has published numerous articles on issues such as cost of capital, capital structure and behaviour of security prices. He is a past president of the Southern Finance Association and he is a co-author of Fundamentals of Investments: Valuation and Management 5e, a leading investments text, also published by McGraw-Hill/Irwin.

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ABOUT THE AUSTRALIAN AUTHORS

Rowan Trayler is a Senior Lecturer in the UTS Business School at the University of Technology Sydney (UTS) and has held a number of administrative appointments, including Director of the Bachelor of Business and Director of the Master of Business in Finance. He has taught introductory finance courses to both undergraduate and postgraduate students at UTS for more than 28 years. His experience includes teaching small groups and executive MBA classes, and giving mass lectures for first year undergraduate finance students. He has also been a visiting lecturer at several universities in the United States and has conducted a number of in-house finance courses for non-finance executives. Rowan has extensive experience in the banking and finance industry and has several international publications to his name in these areas. He was a member of the New South Wales state committee of the Australasian Institute of Banking and Finance from 2000 to 2005. His teaching philosophy is closely aligned to the writing style of the Ross text and this Australian adaptation incorporates that style. Rowan has a straightforward and well-designed approach to teaching introductory finance courses, which students appreciate, and he is keen to embrace new technologies in teaching, including webbased resources.

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Gerhard Van de Venter, PhD, CFA, is the Head of the Finance Discipline Group at University of Technology Sydney (UTS). He began his career in South Africa as a financial analyst in the agricultural sector and later as a dealer on the Bond Exchange trading in fixed income securities. Gerhard’s academic career spans over 20 years where he has taught in the areas of finance, investments and ethics, and has published a number of papers and books in these fields. He was previously Director, Curriculum Projects, in the Education Division at CFA Institute and holds a PhD in finance from UTS.

Ron Bird began his academic career at Macquarie University in 1970, before moving to the Economics Faculty at the Australian National University (ANU) in Canberra in 1973, where he became a Professor in, and Head of, the Commerce Department. After leaving the ANU in 1988 (and subsequently being awarded the title of Emeritus Professor by that university), Ron embarked on a career in the private sector, including asset consulting with Towers Perrin and funds management with Westpac, before establishing a new funds management firm in conjunction with Grantham, Mayo, Van Otterloo (Boston). Ron returned to academia in 1999, joining UTS, where he is now Director of the Paul Woolley Centre for Capital Market Dysfunctionality. Ron was co-author of the first corporate finance text to be published in Australia and has authored copious articles in Australian and international journals. He has also made numerous conference presentations and held visiting positions at several For the full version: [email protected]

prestigious American, British and European universities. Ron maintains interests outside of the university and has been the academic adviser to several asset management firms and has undertaken consulting projects for the financial services sector more generally. His current research interests are directed towards arriving at a better understanding of the economic and social costs attributable to dysfunctional capital markets and financial institutions and the associated policy implications.

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HIGHLIGHTS OF THIS EDITION WE DESIGNED Essentials of Corporate Finance 4e to be as flexible and modular as possible. There are a total of nine parts and, generally speaking, the instructor is free to decide the particular sequence. Furthermore, within each part the first chapter generally contains an overview and survey. Thus, when time is limited, subsequent chapte...