Find the Full Original Textbook (PDF) in the link

below:
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Detailed Contents
Preface and Acknowledgments
Before All Else
0.1 Data Tables
0.2 What Is Getformula?
0.3 How to Put Getformula into Your Excel
Notebook
0.4 Saving the Excel Workbook: Windows
0.5 Saving the Excel Workbook: Mac
0.6 Do You Have to Put Getformula into Each
Excel Workbook?
0.7 Using Formulatext() Instead of Getformula
0.8 A Shortcut to Use Getformula and
Formulatext
0.9 Recording Getformula: The Windows Case
0.10 Recording Getformula: The Mac Case
0.11 Using R
I CORPORATE FINANCE
1 Basic Financial Analysis
1.1 Overview
1.2 Present Value and Net Present Value
1.3 The Internal Rate of Return (IRR) and Loan
Tables
1.4 Multiple Internal Rates of Return
1.5 Flat Payment Schedules
1.6 Future Values and Applications
1.7 A Pension Problem—Complicating the Future
Value Problem
1.8 Continuous Compounding
1.9 Discounting Using Dated Cash Flows
Exercises
2 Corporate Valuation Overview
2.1 Overview
2.2 Three Methods to Compute Enterprise Value
(EV)
2.3 Using Accounting Book Values to Value a
Company: The Firm’s Accounting Enterprise Value
2.4 The Efficient Markets Approach to Corporate
Valuation
2.5 Enterprise Value as the Present Value of the
Free Cash Flows: DCF “Top Down” Valuation
2.6 Free Cash Flows Based on Consolidated
Statement of Cash Flows
2.7 Free Cash Flows Based on Pro Forma
Financial Statements
2.8 Summary
Exercises
3 Calculating the Weighted Average Cost of
Capital (WACC)
3.1 Overview
3.2 Computing the Value of the Firm’s Equity, E
3.3 Computing the Value of the Firm’s Debt, D
3.4 Computing the Firm’s Tax Rate, TC
3.5 Computing the Firm’s Cost of Debt, rD
3.6 Two Approaches to Computing the Firm’s
Cost of Equity, rE
3.7 Three Approaches to Computing the
Expected Return on the Market, E(rM)
3.8 What’s the Risk-Free Rate rf in the CAPM?
3.9 Computing the WACC
3.10 When Don’t the Models Work?
3.11 Summary
Exercises
4 Pro Forma Analysis and Valuation Based on the
Discounted Cash Flow Approach
4.1 Overview
4.2 Setting the Stage—Discounting the Free
Cash Flow (FCF)
4.3 Simplified Approach Based on Consolidated
Statement of Cash Flows
4.4 Pro Forma Financial Statement Modeling
4.5 Using the FCF to Value the Firm and Its
Equity
4.6 Setting the Debt to Be the Absorbing Item and
Incorporating Target Debt/Equity Ratio into the Pro
Forma
4.7 Calculating the Return on Invested Capital
4.8 Project Finance: Debt Repayment Schedules
4.9 Calculating the Return on Equity
4.10 Tax Loss Carryforwards
4.11 Conclusion
Exercises
5 Building a Pro Forma Model: The Case of
Merck
5.1 Overview
5.2 Merck’s Financial Statements, 2015–2018
5.3 Analyzing the Financial Statements
5.4 A Model for Merck
5.5 Using the Model to Value Merck
5.6 Valuation Model for Merck Using Multiples
5.7 Summary
6 Financial Analysis of Leasing
6.1 Overview
6.2 A Simple but Misleading Example
6.3 Leasing and Firm Financing—the Equivalent-
Loan Method
6.4 The Lessor’s Problem: Calculating the
Highest Acceptable Lease Rental
6.5 Asset Residual Value and Other
Considerations
6.6 Mini-Case: When Is Leasing Profitable for
Both the Lessor and the Lessee?
6.7 Leveraged Leasing
6.8 A Leveraged Lease Example
6.9 Summary
Exercises
II BONDS
7 Bond’s Duration
7.1 Overview
7.2 Two Examples
7.3 What Does Duration Mean?
7.4 Duration Patterns
7.5 The Duration of a Bond with Uneven
Payments
7.6 Convexity of a Bond
7.7 Immunization Strategies
7.8 Summary
Exercises
8 Modeling the Term Structure
8.1 Overview
8.2 The Term Structure of Interest Rates
8.3 Bond Pricing Using the Equivalent Single
Bond Approach
8.4 Pricing with Several Bonds at the Same
Maturity
8.5 The Nelson-Siegel Approach of Fitting a
Functional Form to the Term Structure
8.6 The Properties of the Nelson-Siegel Term
Structure
8.7 Term Structure for Treasury Notes
8.8 Summary
Appendix: VBA Functions Used in This Chapter
9 Calculating Default-Adjusted Expected Bond
Returns
9.1 Overview
9.2 Calculating the Expected Return in a One-
Period Framework
9.3 Calculating the Bond Expected Return in a
Multi-period Framework
9.4 A Numerical Example
9.5 Experimenting with the Example
9.6 Computing the Bond Expected Return for an
Actual Bond
9.7 Semiannual Transition Matrices
9.8 Computing Bond Beta
9.9 Summary
Exercises
III PORTFOLIO THEORY
10 Portfolio Models—Introduction
10.1 Overview
10.2 Computing Descriptive Statistics for Stocks
10.3 Calculating Portfolio Means and Variances
10.4 Portfolio Mean and Variance—Case of N
Assets
10.5 Envelope Portfolios
10.6 Summary
Exercises
Appendix 10.1: Continuously Compounded versus
Geometric Returns
Appendix 10.2: Adjusting for Dividends
11 Efficient Portfolios and the Efficient Frontier
11.1 Overview
11.2 Some Preliminary Definitions and Notation
11.3 Five Propositions on Efficient Portfolios and
the CAPM
11.4 Calculating the Efficient Frontier: An Example
11.5 Three Notes on the Optimization Procedure
11.6 Finding the Market Portfolio: The Capital
Market Line (CML)
11.7 Computing the Global Minimum Variance
Portfolio (GMVP)
11.8 Testing the SML—Implementing Propositions
3–5
11.9 Efficient Portfolios without Short Sales
11.10 Summary
Exercises
Mathematical Appendix
12 Calculating the Variance-Covariance Matrix
12.1 Overview
12.2 Computing the Sample Variance-Covariance
Matrix
12.3 The Correlation Matrix
12.4 Four Alternatives to the Sample Variance-
Covariance Matrix
12.5 Alternatives to the Sample Variance-
Covariance: The Single-Index Model
12.6 Alternatives to the Sample Variance-
Covariance: Constant Correlation
12.7 Alternatives to the Sample Variance-
Covariance: Shrinkage Methods
12.8 Using Option Information to Compute the
Variance Matrix
12.9 Which Method to Compute the Variance-
Covariance Matrix?
12.10 Summing Up
Exercises
13 Estimating Betas and the Security Market Line
13.1 Overview
13.2 Testing the SML
13.3 Did We Learn Something?
13.4 The Non-efficiency of the “Market Portfolio”
13.5 So What’s the Real Market Portfolio? How
Can We Test the CAPM?
13.6 Conclusion: Does the CAPM Have Any Uses?
Exercises
14 Event Studies
14.1 Overview
14.2 Outline of an Event Study
14.3 An Initial Event Study: Procter & Gamble
Buys Gillette
14.4 A Fuller Event Study: Impact of Earnings
Announcements on Stock Prices
14.5 Using a Two-Factor Model of Returns for an
Event Study
14.6 Using Excel’s Offset Function to Locate a
Regression in a Data Set
14.7 Conclusion
15 The Black-Litterman Approach to Portfolio
Optimization
15.1 Overview
15.2 A Naive Problem
15.3 Black and Litterman’s Solution to the
Optimization Problem
15.4 BL Step 1: What Does the Market Think?
15.5 BL Step 2: Introducing Opinions—What Does
Joanna Think?
15.6 Using BL for International Asset Allocation
15.7 Summary
Exercises
IV OPTIONS
16 Introduction to Options
16.1 Overview
16.2 Basic Option Definitions and Terminology
16.3 Some Examples
16.4 Option Payoff and Profit Patterns
16.5 Option Strategies: Payoffs from Portfolios of
Options and Stocks
16.6 Option Arbitrage Propositions
16.7 Summary
Exercises
17 The Binomial Option Pricing Model
17.1 Overview
17.2 Two-Date Binomial Pricing
17.3 The State Prices
17.4 The Multi-period Binomial Model
17.5 Pricing American Options Using the Binomial
Pricing Model
17.6 Programming the Binomial Option Pricing
Model
17.7 Convergence of Binomial Pricing to the Black-
Scholes Price
17.8 Using the Binomial Model to Price Employee
Stock Options
17.9 Using the Binomial Model to Price
Nonstandard Options: An Example
17.10 Summary
Exercises
18 The Black-Scholes Model
18.1 Overview
18.2 The Black-Scholes Model
18.3 Programming the Black-Scholes Option
Pricing Model
18.4 Calculating the Volatility
18.5 Programming a Function to Find the Implied
Volatility
18.6 Dividend Adjustments to the Black-Scholes
18.7 “Bang for the Buck” with Options
18.8 The Black Model for Bond Option Valuation
18.9 Using the Black-Scholes Model to Price Risky
Debt
18.10 Using the Black-Scholes Formula to Price
Structured Securities
18.11 Summary
Exercises
19 Option Greeks
19.1 Overview
19.2 Defining and Computing the Greeks
19.3 Delta Hedging a Call
19.4 The Greeks of a Portfolio
19.5 Greek-Neutral Portfolio
19.6 The Relationship between Delta, Theta, and
Gamma
19.7 Summary
Exercises
Appendix 19.1: VBA for Greeks
Appendix 19.2: R Code for Greeks
20 Real Options
20.1 Overview
20.2 A Simple Example of the Option to Expand
20.3 The Abandonment Option
20.4 Valuing the Abandonment Option as a Series
of Puts
20.5 Valuing a Biotechnology Project
20.6 Summary
Exercises
V MONTE CARLO METHODS
21 Generating and Using Random Numbers
21.1 Overview
21.2 Rand() and Rnd: The Excel and VBA
Random-Number Generators
21.3 Scaling Uniformly Distributed Numbers
21.4 Generating Normally Distributed Random
Numbers
21.5 Norm.Inv: Another Way to Generate Normal
Deviates
21.6 Scaling Normally Distributed Numbers
21.7 Generating Correlated Random Numbers
21.8 What’s Our Interest in Correlation? A Small
Case
21.9 Multiple Random Variables with Correlation:
The Cholesky Decomposition
21.10 Multivariate Uniform Simulations
21.11 Summary
Exercises
22 An Introduction to Monte Carlo Methods
22.1 Overview
22.2 Computing π Using Monte Carlo
22.3 Programming the Monte Carlo Approach to
Estimate π
22.4 Another Monte Carlo Problem: Investment
and Retirement
22.5 A Monte Carlo Simulation of the Investment
Problem
22.6 Summary
Exercises
Appendix: Some Comments on the Value of π
23 Simulating Stock Prices
23.1 Overview
23.2 What Do Stock Prices Look Like?
23.3 Lognormal Price Distributions and Geometric
Diffusions
23.4 What Does the Lognormal Distribution Look
Like?
23.5 Simulating Lognormal Price Paths
23.6 Technical Analysis
23.7 Calculating the Parameters of the Lognormal
Distribution from Stock Prices
23.8 Summary
Exercises
Appendix: The Itô’s Lemma
24 Monte Carlo Simulations for Investments
24.1 Overview
24.2 Simulating Price and Returns for a Single
Stock
24.3 Portfolio of Two Stocks
24.4 Adding a Risk-Free Asset
24.5 Multiple Stock Portfolios
24.6 Simulating Savings for Pensions
24.7 Beta and Return
24.8 Summary
Exercises
25 Value at Risk (VaR)
25.1 Overview
25.2 The Three Types of VaR Models
25.3 VaR of an N-Asset Portfolio
25.4 Backtesting
26 Replicating Options and Option Strategies
26.1 Overview
26.2 Imperfect but Cashless Replication of a Call
Option
26.3 Simulating Portfolio Insurance
26.4 Some Properties of Portfolio Insurance
26.5 Digression: Insuring Total Portfolio Returns
26.6 Simulating a Butterfly
26.7 Summary
Exercises
27 Using Monte Carlo Methods for Option Pricing
27.1 Overview
27.2 Pricing Plain-Vanilla Options Using Monte
Carlo Methods
27.3 State Prices, Probabilities, and Risk-Neutrality
27.4 Pricing Plain-Vanilla Options—Monte Carlo
Binomial Model Approach
27.5 Pricing Asian Options
27.6 Barrier Options
27.7 Basket Options
27.8 Rainbow Options
27.9 Binary Options
27.10 Chooser Options
27.11 Lookback Options
27.12 Summary
Exercises
VI TECHNICAL
28 Data Tables
28.1 Overview
28.2 An Example
28.3 Creating a One-Dimensional Data Table
28.4 Creating a Two-Dimensional Data Table
28.5 An Aesthetic Note: Hiding the Formula Cells
28.6 Excel Data Tables Are Arrays
28.7 Data Tables on Blank Cells (Advanced)
28.8 Data Tales Can Stop Your Computer
Exercises
29 Matrices
29.1 Overview
29.2 Matrix Operations
29.3 Matrix Inverses
29.4 Solving Systems of Simultaneous Linear
Equations
Exercises
30 Excel Functions
30.1 Overview
30.2 Financial Functions
30.3 Dates and Date Functions
30.4 Statistical Functions
30.5 Doing Regressions with Excel
30.6 Conditional Functions
30.7 Reference Functions
30.8 Large, Rank, Percentile, and Percentrank
30.9 Count, CountA, Countif, Countifs, Averageif,
Averageifs
31 Array Functions
31.1 Overview
31.2 Some Built-In Excel Array Functions
31.3 Homemade Array Functions
31.4 Array Formulas with Matrices
Exercises
32 Some Excel Hints
32.1 Overview
32.2 Fast Copy: Filling in Data Next to Filled-In
Column
32.3 Filling Cells with a Series
32.4 Multi-line Cells
32.5 Multi-line Cells with Text Formulas
32.6 Writing on Multiple Spreadsheets
32.7 Moving Multiple Sheets of an Excel Notebook
32.8 Text Functions in Excel
32.9 Chart Titles That Update
32.10 Putting Greek Symbols in Cells
32.11 Superscripts and Subscripts
32.12 Named Cells
32.13 Hiding Cells (in Data Tables and Other
Places)
32.14 Formula Auditing
32.15 Formatting Millions as Thousands
32.16 Excel’s Personal Notebook: Automating
Frequent Procedures
32.17 Quick Number Formatting
33 Essentials of R Programming
33.1 Rule #1: Use the Provided Help for R
Functions
33.2 Installing a Package
33.3 Setting a Default Folder (Working Directory)
33.4 Understanding Data Types in R
33.5 How to Read a Table from a CSV File
33.6 How to Directly Import Stock Price Data to R
33.7 Defining a Function
33.8 Plotting Data in R
33.9 The apply Function
33.10 The lapply and sapply Functions
Selected References
Index

I CORPORATE FINANCE

1.1 Overview

This chapter aims to give you some finance basics

and their Excel implementation. If you have had a
good introductory course in finance, this chapter is
likely to be at best a refresher.1
This chapter covers:
• Net present value (NPV)
• Internal rate of return (IRR)
• Payment schedules and loan tables
 • Future value
• Pension and accumulation problems
• Continuously compounded interest
• Time-dated cash flows (Excel functions XNPV
and XIRR)
Almost all financial problems are centered around
finding the present value of a series of cash receipts
over time. The cash receipts (or cash flows, as we
will call them) may be certain or uncertain. The
present value of a cash flow Ft anticipated to be
received at time t is . The numerator of this
expression is usually understood to be the expected
cash flow at time t, and the discount rate r in the
denominator is adjusted for the riskiness of this
expected cash flow—the higher the risk, the higher
the discount rate.
The basic concept in present value calculations is
the concept of opportunity cost. Opportunity cost is
the return that would be required of an investment to
make it a viable alternative to other investments with
similar risk characteristics. In the financial literature,
there are many synonyms for opportunity cost;
among them are discount rate, cost of capital, and
interest rate. When applied to risky cash flows, we
will sometimes call the opportunity cost the risk-
adjusted discount rate (RADR) or the weighted
average cost of capital (WACC). It goes without
saying that this discount rate should be risk-adjusted
(i.e., the cost of capital should reflect the same risk
as the expected cash flow), and much of the
standard finance literature discusses how to do this.
As illustrated below, when we calculate the net
present value, we use the investment’s opportunity
cost as a discount rate. When we calculate the
internal rate of return, we compare the calculated
return to the investment’s opportunity cost to judge
its value.
1.2 Present Value and Net Present Value

Both of these concepts are related to the value

today of a set of future anticipated cash flows. As an
example, suppose we are valuing an investment that
promises $100 per year at the end of this and the
next four years. We suppose that these cash flows
are risk-free: There is no doubt that this series of five
payments of $100 each will actually be paid. If a
bank pays an annual interest rate of 4% on a 5-year
deposit, then this 4% is the investment’s opportunity
cost, the alternative benchmark return to which we
want to compare the investment. We can calculate
the value of the investment by discounting its cash
flows using this opportunity cost as a discount rate.

Find the Full Original Textbook (PDF) in the link

below:

CLICK HERE