Pamela Peterson Drake

James Madison University | JMU · Department of Finance and Business Law

The Capital Purchase Program (CPP) was intended to enhance capital and preserve lending capacity of banks, but the role of this program in affecting the risk of participating banks has been unresolved. We address this issue by investigating the market’s long-term perception of risk for financial institutions participating in the CPP. Leading up to...

Valuing a Stream of Future Cash FlowsValuing a PerpetuityAnnuitiesSummary?Try It? SolutionsProblems

Some Basic ConceptsEstimating a Portfolio's Expected ReturnMeasuring Portfolio RiskPortfolio DiversificationChoosing a Portfolio of Risky AssetsIssues in the Theory of Portfolio SelectionBehavioral Finance and Portfolio TheoryThe Bottom LineSolutions to Try It! ProblemsQuestions

The Base Interest RateThe Term Structure of Interest RatesTerm Structure of Interest Rates TheoriesSwap Rate Yield CurveThe Bottom LineSolutions to Try It! problemsQuestions

Characteristics of an Asset Pricing ModelThe Capital Asset Pricing ModelThe Arbitrage Pricing Theory ModelSome Principles to Take AwayThe Bottom LineSolutions to Try It! ProblemsQuestions

Investment Decisions and Owners' WealthThe Capital Budgeting ProcessDetermining Cash Flows from InvestmentsCapital Budgeting TechniquesThe Bottom LineSolutions to Try It! ProblemsQuestions

Capital Markets and Capital Market TheoryFinancial ManagementInvestment ManagementOrganization of This BookThe Bottom LineQuestions

Strategy and ValueThe Budgeting ProcessBudgetingPerformance EvaluationStrategy and Value CreationThe Bottom LineQuestions

Valuing a BondConventional Yield MeasuresValuing Bonds that have Embedded OptionsThe Bottom LineSolutions to Try It! ProblemsQuestions

Forms of Business EnterpriseThe Objective of Financial ManagementThe Bottom LineSolutions to Try It! ProblemsQuestions

The Financial SystemThe Role of Financial MarketsThe Role of Financial IntermediariesTypes of Financial MarketsThe Bottom LineQuestions

Futures and Forward ContractsOptionsSwapsThe Bottom LineAppendix: Black-Scholes Option Pricing ModelSolutions to Try It! ProblemsQuestions

Domestic Nonfinancial SectorsNonfinancial BusinessesDomestic Financial SectorsForeign InvestorsThe Bottom LineQuestions

The Net Present ValueThe Profitability IndexThe Internal Rate of ReturnSummary?Try It? SolutionsProblems

Fact or Fiction: It Pays to Get an MBAFact or Fiction: Leasing a Car Costs Less than Buying a CarFact or Fiction: Gold has Always Been a Good InvestmentSummary

Why the Time Value of Money?Calculating the Future ValueCalculating a Present ValueDetermining the Unknown Interest RateThe Time Value of a Series of Cash FlowsAnnuitiesLoan AmortizationInterest Rates and YieldsThe Bottom LineSolutions to Try It! ProblemsQuestions

CompoundingCalculator and Spreadsheet SolutionsFrequency of CompoundingSummary“Try It” SolutionsProblems

Preparing the CalculatorThe BasicsFinancial FunctionsTipsTroubleshooting Problems

Bond BasicsCalculating the Yield to MaturityIssuesInterest RatesYield CurvesSummary“Try It” SolutionsProblems

The BasicsTime Value of Money FunctionsCash Flow FunctionsOther Useful Functions for Financial Mathematics

Valuing a Deferred AnnuityAnnuities with AnnuitiesA Bit of RealismSummary“Try It” SolutionsProblems

What's in a Value? The Basics of Stock ValuationReturn on StocksSummary“Try It” SolutionsProblems

Loan AmortizationInterest Rates on LoansDetermining the Number of PeriodsVariations on the ThemeSummary“Try It” SolutionsProblems

Annualized Rates of InterestDetermining the Unknown Interest RateRulesSummary“Try It” SolutionsProblems

DiscountingDiscounting More Than One Future ValueDetermining the Number of Compounding PeriodsSummary“Try It” SolutionsProblems

Evaluation TechniquesNet Present ValueProfitability IndexInternal Rate of ReturnModified Internal Rate of ReturnPayback PeriodDiscounted Payback PeriodIssues in Capital BudgetingComparing TechniquesCapital Budgeting Techniques in PracticeCapital Budgeting and the Justification of New TechnologyIncorporating Risk into Capital Budgeting AnalysisSumma...

Created by the experienced author team of Frank Fabozzi and Pamela Peterson Drake, Finance examines the essential elements of this discipline and makes them accessible to a wide array of readers-from seasoned veterans looking for a review to newcomers needing to get their footing in finance. Divided into four comprehensive parts, this reliable reso...

Discounted Cash Flow ModelsRelative Valuation Methods Key PointsQuestions

EarningsDividendsThe U.S. Equity MarketsTrading MechanicsTrading CostsStock Market IndicatorsKey PointsQuestions

Strategy and ValueFinancial Planning and BudgetingImportance of Financial PlanningBudgeting ProcessSales ForecastingSeasonal ConsiderationsBudgetingPro Forma Financial StatementsLong-Term Financial PlanningFinancial ModelingPerformance EvaluationStrategy and Value CreationSummary

Stock Market IndicatorsTop-Down vs. Bottom-up ApproachesFundamental vs. Technical AnalysisPopular Stock Market StrategiesPassive StrategiesEquity-Style ManagementTypes of Stock Market StructuresThe U.S. Stock Markets: Exchanges and OTC MarketsTrading MechanicsSummary

Using Stock Options and Index Options in Equity Portfolio ManagementUsing Interest Rate Options in Bond Portfolio ManagementSummaryAppendix: Pricing Models on Options on Physicals and Futures Options

Futures and Forward ContractsOptionsSwapsCap and Floor AgreementsSummaryAppendix: Black-Scholes Option Pricing Model

The Investment Management ProcessThe Theory of Portfolio SelectionTracking ErrorMeasuring and Evaluating PerformanceSummary

Management of Cash and Marketable SecuritiesCash ManagementMarketable SecuritiesManagement of Accounts ReceivableInventory ManagementSummary

Forms of Business EnterpriseThe Objective of Financial ManagementThe Agency RelationshipDividend and Dividend PoliciesSpecial Considerations in International Financial ManagementSummary

The Importance of the Time Value of MoneyDetermining the Future ValueDetermining the Present ValueDetermining the Unknown Interest RateDetermining the Number of Compounding PeriodsThe Time Value of a Series of Cash FlowsValuing Cash Flows with Different Time PatternsLoan AmortizationThe Calculation of Interest Rates and YieldsPrinciples of Valuatio...

The financial meltdown that began in 2007 revealed problems with the financial guarantee insurers and regulation of these insurers. Financial guarantee insurers, with business models dependent on AAA-credit ratings, were exposed to risks that threatened those ratings. These insurers had four primary sources of risk: the proportion of structured fin...

The intent of the Financial Services Modernization Act of 1999 (FSM) was to strengthen the overall financial services sector by allowing financial firms to diversify across industries within the financial sector. Similar to other studies of the reaction to this Act, we observe that investors consider the FSM to be good news. More interestingly, we...

The recent market turmoil has brought attention to how deregulation of the financial sector affects risk. The purpose of our study is to examine the market's perception of risk associated with deregulation. We accomplish this by decomposing security risk around deregulation into idiosyncratic and systematic risk. We examine deregulation of several...

Public attention has been directed recently at the market for medical malpractice insurance, yet disagreement persists over whether this market has changed and, if so, what has caused this change. In this study, we examine factors that affect the market for this insurance, including the growth in premiums, losses, and investment earnings, and loss...

The majority of a company's investment in current assets, however, is tied up in accounts receivable and inventory. Both the accounts receivable and inventory represent investments that are necessary for day-to-day operations of the business. A company extends credit, and thus has accounts receivable, to encourage customers to purchase its goods or...

A company invests in capital projects in order to increase stockholder value by investing in projects that generate cash flows in the future whose present value exceeds the present value of the cash flows needed to make the investment. When it invests in new capital projects, it expects the future cash flows to be greater than without this new inve...

Evaluating whether a company should invest in a capital project requires an analysis of whether the project adds value to the company. Essential in the analysis of the attractiveness of a capital project is an assessment of the project's risk. The analysis of the risk of a project is challenging because most capital projects are unique and a projec...

Many corporations pay cash dividends to their shareholders and, despite the tax consequences of these dividends and the fact that these funds could otherwise be plowed back into the corporation for investment purposes, these dividends are often viewed as a signal of the corporation's future prosperity. Corporations may also “pay” stock dividends or...

There are several techniques that are used in practice to evaluate capital budgeting proposals. These include the payback and discounted payback techniques, net present value technique, profitability index technique, internal rate of return technique, and modified internal rate of return technique. While used in practice, some of these techniques a...

Financial management decisions of most firms are not confined to domestic borders. Many financing and investment decisions involve economies and firms outside a firm's own domestic borders either directly, through international transactions, or indirectly, through the effects of international issues on the domestic economy. International financial...

Investment and financing decisions require the valuation of investments and the determination of yields on investments. Necessary for the valuation and yield determination are the financial mathematics that involve the time value of money. With these mathematics, we can translate future cash flows to a value in the present, translate a value today...

Corporate financial managers continually invest funds in assets and these assets produce income and cash flows that the company may then either reinvest in more assets or distribute to the owners of the company. Capital budgeting decisions involve the long-term commitment of a company's scarce resources in capital investments. These decisions play...

A company's strategy plan is a method of achieving the goal of maximizing shareholder wealth. This strategic plan requires both long-term and short-term financial planning that brings together forecasts of the company's sales with financing and investment decision-making. Budgets, such as the cash budget and the production budget, are used to manag...

A business invests in new plant and equipment to generate additional revenues and income—the basis for its growth. One way to pay for investments is to generate capital from the company's operations. Earnings generated by the company belong to the owners and can either be paid to them—in the form of cash dividends—or plowed back into the company. T...

Dividends are cash payments made by a corporation to its owners. Though cash dividends are paid to both preferred and common shareholders, most of the focus of the attention is on the dividends paid to the residual owners of the corporation, the common shareholders. Dividends paid to common and preferred shareholders are not legal obligations of a...

Inventory management involves a tradeoff between the benefits of having sufficient inventory to meet demand and the costs of inventory (for example, the opportunity cost of funds, storage, and obsolescence). Models of inventory management, such as the economic order quantity model and the just-in-time technique, can be used to analyze and minimize...

Franco Modigliani and Merton Miller provided a theory of capital structure that provides a framework for the discussion of the factors most important in a company's capital structure decision: taxes, financial distress, and risk. Though this theory does not provide a prescription for capital structure decisions, it does offer a method of examining...

Financial analysis involves the selection, evaluation, and interpretation of financial data and other pertinent information to assist in evaluating the operating performance and financial condition of a company. The operating performance of a company is a measure of how well a company has used its resources—its assets, both tangible and intangible—...

An objective of financial analysis is to assess a company's operating performance and financial condition. The information that is available for analysis includes economic, market, and financial information. But some of the most important financial data are provided by the company in its annual and quarterly financial statements. These choices make...

We investigate differences in purchase premiums and returns of common stock the day following the offer expiration of firms conducting Dutch auction self-tender offers to see whether firms overpay for shares in fixed-price offers. After controlling for the proportion of shares sought and firm size, no statistically significant differences in premiu...

We discuss the evolution of the Gramm-Leach-Bliley Act and examine its effect on the insurance industry. We observe an increase in shareholder wealth for the industry as a whole and for industry segments. Additionally, we document a decrease in risk across the insurance industry following events associated with the Act. We also identify the types o...

The intent of the Financial Modernization Act of 1999 is to reform the financial services sector by lowering barriers among the financial industries and strengthening the overall financial services sector. We observe that, in general, the market considers the FSM Act to be good news. We also observe that merger activity peaked in 1997, following lo...

The quantitative study of how people acquire and invest their money borrows a great deal from the hard sciences. The authors, two professors of finance, explain the many connections between their relatively young discipline and the more traditional fields of mathematics and physics. They also describe their research on the pricing of certain comple...

A system of bank supervision and regulation should protect taxpayers and the financial system without imposing unnecessary costs on banks. This article focuses on whether existing capital regulations, one of the primary tools of bank supervision and regulation, are imposing unnecessary costs on banks. In particular, the capital requirements may be...

An important concern in portfolio management is the number of securities needed to create a well-diversified portfolio. The number of securities that constitute a well-diversified portfolio, however, varies widely among studies. It is demonstrated that past conclusions are highly sensitive to the methodology used in quantifying diversification. Thi...

Since the early 1980s U.S. bank regulators have focused increasingly on the adequacy of banks' capital ratios. This article begins with a review of the changes to U.S. capital regulations and theoretical models for determining banks' capital strategy. The authors then survey numerous studies that examine banks' responses, and the costs associated w...

We examine the reaction of stocks and the responses of financial analysts' earnings forecasts to securities recommended as "Stock Highlights" by VALUE LINE INVESTMENT SURVEY. Significant abnormal returns appear around the publication of stock highlights. Stock price responses are relatively efficient and permanent. Using earnings exception data pro...

In their analysis of self-tender offers. Howe et al. (1992) reject the free cash flow hypothesis. We expand their analysis in two ways, exploring implications of using long-run measures of Tobin's q as opposed to current q's and incorporating cash flow signalling. We find that acceptance or rejection of the free cash flow hypothesis is sensitive to...

In this study we examine two factors affecting variance increases following stock distributions: changing bid-ask spreads and the true variability of the underlying value of the firm. Employing data from the CRSP NASDAQ and NMS files, we find a relatively minor role for changing spreads. Increases in true variances are the major component of varian...

In this study the authors analyze reverse stock splits and demonstrate that the total risk of returns to reverse splitting securities declines after the split, yet systematic risk remains essentially unchanged. In general, securities have negative abnormal stock returns at reverse split announcements, though smaller companies have stronger negative...

This study examines the role of the medium of exchange in the explanation of returns and the distribution of wealth between parties in mergers and acquisitions. The wealth changes of shareholders of acquiring and acquired firms is examined for 272 mergers consummated between 1980 and 1986. We find that the distribution of the wealth gains does not...

This study examines two-stage acquisitions, focusing upon first- and second-stage excess returns for both acquired and acquiring firms, and analyzing the relation between acquisition returns and ownership interest. The evidence suggests that target-firm shareholders do not free ride. Evidence is also provided indicating that premiums are paid by th...

Event study methodology has been one of the most frequently used tools in financial research in recent years. This study provides a review of the present state of knowledge and practice with respect to event study methodology. Many variations of this methodology are discussed, as well as special issues and applications. Recommendations for implemen...

This study provides evidence on the wealth effects of reincorporation and the association of these wealth effects with motives to change the state of incorporation. There are no wealth effects observed on the announcement of the change for shareholders of corporations that change as part of a set of measures to defend against a pending or possible...

Bank regulators in the United States and other major industrial nations have agreed on a framework for regulating bank capital, proposing that all banking organizations maintain common equity and perpetual preferred capital equal to 4 percent of risk-adjusted assets. This proposal raises important questions about the effect of different capital def...

This study examines security price reactions to the adoption of new-issue dividend reinvestment plans. The sample is broken down into three subsamples: nonutilities, utilities adopting plans prior to May 1981, and utilities adopting plans after July 1981. For the nonutility corporations, no significant market reaction is observed. The utilities ado...

This study examines the effect of issuing common stock on shareholder wealth under two alternative methods of registration, shelf registration under the Securities and Exchange Commission's Rule 415 and the traditional method of registering shares for immediate sale. The stock price reactions accompanying security registrations and offerings over t...

Miller and Scholes (1978) hypothesize that the marginal tax rate on dividend income may be less than the marginal rate of tax on capital gains. Their hypothesis is dependent upon individuals utilizing existing provisions of the Code which serve to reduce the taxation of dividends. In this study, estimates of the marginal and effective rates of tax...

This study offers an alternative method of calculating marginal personal tax rates through the pairing of nontaxable (industrial development and pollution control) and taxable corporate bonds. This procedure is shown to produce matched bond pairs that are comparable. Two hundred pairs of bonds are examined from the second quarter of 1973 through th...

Prevailing theories in finance and economics suggest that leases and debt are substitutes; an increase in one should led to a compensating decrease in the other. In particular, there are three views on the magnitude of the substitution coefficient. Standard finance theory treats cash flows from lease obligations as equivalent to debt cash flows, th...

The candidate should be able to: a. define and explain leverage, business risk, sales risk, operating risk, and financial risk; b. calculate and interpret the degree of operating leverage, the degree of financial leverage, and the degree of total leverage; c. characterize the operating leverage, financial leverage, and total leverage of a company g...