Acknowledgments xv

About the Authors xvii

CHAPTER 1 Introduction 1

PART I FINANCE IN A CERTAINTY WORLD WITH A PERFECT CAPITAL MARKET 13

CHAPTER 2 Consumer Financial Decisions 15

CHAPTER 3 Creating Wealth by Investing in Productive Opportunities 31

CHAPTER 4 How Investors Value Firms 50

CHAPTER 5 Firm Financing Decisions in a Perfect Capital Market 78

CHAPTER 6 Firm Investment Decisions 102

PART II FINANCIAL SYSTEM 119

CHAPTER 7 Financial Systems, Governance, and Organization 121

CHAPTER 8 Market, Intermediary, and Internal Governance 151

PART III TOOLS FOR COPING WITH RISK 177

CHAPTER 9 The Microeconomic Foundations of Financial Economics 179

CHAPTER 10 Contingent Claims and Contingency Strategies 199

CHAPTER 11 Risk and Risk Management 216

CHAPTER 12 On Choosing Risk Measures 234

PART IV SELECTION AND PRICING OF RISKY ASSETS 255

CHAPTER 13 Mean-Variance Portfolio Choice 257

CHAPTER 14 Capital Asset Pricing Model 287

CHAPTER 15 The APTand Factor Models 317

CHAPTER 16 General Principles of Asset Pricing 339

CHAPTER 17 Pricing Corporate Securities 366

PART V DERIVATIVE INSTRUMENTS 383

CHAPTER 18 Pricing Derivatives by Arbitrage: Linear Payoff Derivatives 385

CHAPTER 19 Pricing Derivatives by Arbitrage: Nonlinear Payoff Derivatives 414

PART VI CAPITAL MARKET IMPERFECTIONS AND THE LIMITS TO ARBITRAGE 449

CHAPTER 20 Capital Market Imperfections and Financial Decision Criteria 451

CHAPTER 21 Impediments to Arbitrage 479

PART VII CAPITAL STRUCTURE DECISIONS IN IMPERFECT CAPITAL MARKETS 499

CHAPTER 22 When Capital Structure Decisions Matter 501

CHAPTER 23 Financing Decisions in Practice 522

CHAPTER 24 Financial Contracting and Deal Terms 545

PART VIII INCORPORATING RISK IN CAPITAL BUDGETING DECISIONS 577

CHAPTER 25 Capital Expenditure Plans in a Risky World 579

CHAPTER 26 Evaluating Project Risk in Capital Budgeting 607

SUBJECT INDEX 639

AUTHOR INDEX 650

FINANCE APPENDICES WEB-APPENDIX A Deal Terms 653

WEB-APPENDIX B Corporate Debt Funding Instruments 658

WEB-APPENDIX C Investment Bankers and the Issuance of Securities 665

WEB-APPENDIX D Credit Risk 668

WEB-APPENDIX E Financial Statements 677

WEB-APPENDIX F Financial Ratio Analysis 682

WEB-APPENDIX G Estimating Cash Flows of Capital Budgeting Projects 692

WEB-APPENDIX H Merger and Acquisition Strategies 697

WEB-APPENDIX I Conglomerates as a Means of Overcoming Capital Market Imperfections 701

WEB-APPENDIX J Lease Financing 705

MATHEMATICAL AND STATISTICAL APPENDICES

WEB-APPENDIX K Taylor Series Approximation 716

WEB-APPENDIX L Some Elementary Concepts Involving Probability 717

WEB-APPENDIX M Continuous Probability Distributions 722

WEB-APPENDIX N Continuous Interest Rates 730

WEB-APPENDIX O Fundamentals of Matrix Algebra 733

WEB-APPENDIX P Principal Component Analysis in Finance 745

SUBJECT INDEX (WEB-APPENDIX A TO P) 751

AUTHOR INDEX (WEB-APPENDIX A TO P) 754