Strategic Corporate Finance

JUSTIN PETTIT draws on his fifteen years of senior advisory experience as an investment banker and management consultant. He advises corporate boards and executives on matters of capital structure, financial policy, valuation, and strategy. He also lectures on topics in advanced corporate finance to graduate and undergraduate students at universities in the New York area.

• Preface xiList of Figures xiiiList of Tables xvAcknowledgments xviiAbout the Author xixPART ONE Managing the Left-Hand Side of the Balance SheetCHAPTER 1 The Cost Of Capital 3Calculation Pitfalls 3Market Risk Premium (MRP) 5Toward a Better Beta 10The ‘‘Riskless Rate’’ 13The Cost of Debt 14Global Capital Costs 16WACC and Hurdle Rates 23CHAPTER 2 Fix: Finding Your Sources of Value 26Why Shareowner Value? 27Performance Measurement Pitfalls 28Measuring Economic Profit and Value 30Analyzing the Corporate Portfolio 35Incorporating the Cost of Capacity 39Value-Based Strategies and Tactics 43Managing for Value 45Balancing Performance with Value 52CHAPTER 3 Sell: Creating Value Through Divestiture 54Divestiture Creates Value 56Sources of Value: Motives for Divestiture 58Alternative Methods of Disposition 60What Works Best for Whom? 63What Happens Longer Term? 64Practical Impediments to Divestiture 65Financial Policy Considerations 70Tax Considerations and Structural Refinements 70CHAPTER 4 Grow: How To Make M&A Pay 73M&A Today 73Transactions that Create Value 77M&A Fact and Fallacy 81RX for the ‘‘Conglomerate Discount’’ 86EVA and M&A 88How ‘‘Serial Acquirers’’ Create Value 90Financial Policy Considerations 93Financing Growth 94CHAPTER 5 Cash and The Optimal Capital Structure 97Trends and Implications 98How Much Is Too Much? 100The Costs and Benefits of Excess Cash 105How the Market Views Excess Cash 108Optimal Capital Allocation 109PART TWO Managing the Right-Hand Side of the Balance SheetCHAPTER 6 An Executive’s Guide to Credit Ratings 117Trends and Implications 117Empirical Evidence 123Limitations of Quantitative Credit Analysis 123What Metrics Matter Most? 126Case Study: Treatment of Pension and Postretirement Liabilities 131Multivariate Credit Models 133Industry Considerations 135Case Study: Property and Casualty Insurance 135Application Issues 137How to Manage Your Agencies 137Case Study: Illustration of Secured and Unsecured Notching 139CHAPTER 7 Today’s Optimal Capital Structure 141Value-Based Financial Policy 141Less Debt Is Now ‘‘Optimal’’ 143Extend Duration When Rates Are Low 146Maintain Financial Liquidity to ‘‘Insure’’ Your Equity 149A New Perspective on Equity 151Case Study: Does Tech Need Debt? 154CHAPTER 8 Dividends and Buybacks: Calibrating Your Shareholder Distributions 160The Cash Problem 162Dividends Are Back 163How Dividends and Buybacks Create Value 165Should You Increase Your Dividend? 171How Large Should Your Buyback Program Be? 178How to Execute Your Share Repurchase Program 181CHAPTER 9 The Stock Liquidity Handbook 187Measuring Stock Liquidity 188The ‘‘Liquidity Discount’’ 191Implications of Stock Illiquidity 192Solutions to Illiquidity 193Stock Splits 195PART THREE Managing the EnterpriseCHAPTER 10 Strategic Risk Management: Where ERM Meets Optimal Capital Structure 203The Value of Risk Management 204Mapping and Modeling Risk 209Managing to a Benchmark 213External Considerations and Constraints 216ERM Case Study: Metallgesellschaft AG 219Capital Structure Solutions 220CHAPTER 11 Best Practices In Hedging 224Which ‘‘Exposure’’ to Hedge 225Hedge Horizon 230Hedge Ratio 232Options versus Forwards 233Accounting Considerations 235Implementation 236CHAPTER 12 ERM Case Study: Reengineering The Corporate Pension 238Why Now? 239The Problems with Equity 240The Case for More Bonds 243Optimal Capital Structure Reprise 246Capital Markets Solutions 248The Boots Case 251Why It Still Hasn’t Happened 252APPENDIX AResources 254Tools and Portals 254New Research and Literature Search 254Economic Research and Data 254News and Market Data 254Corporate Governance and Compensation 255Other Agencies 255Endnotes 256References 268Index 277