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Strategic Corporate Finance: Applications in Valuation and Capital Structure


Praise for Strategic Corporate Finance

"Tracking stocks. Gross underwriting leverage. Float. The complex language of Wall Street can be daunting to even the most seasoned practitioner. In this clear and concise guidebook, Justin Pettit successfully deciphers the critical elements of how to enhance a company's value using capital markets."
—Professor David Wessels, The Wharton School, coauthor of Valuation: Measuring and Managing the Value of Companies

"Justin Pettit is one of the brightest corporate finance minds in America today. Justin has an unparalleled ability to help lay people understand and apply financial theory in a way that drives real bottom-line results."
—Brian Walker, President and CEO, Herman Miller Inc.

"On subjects ranging from capital budgeting and valuation to risk management and capital structure, Justin Pettit does an impressive job of translating principles of corporate finance theory into practical methods for implementing them."
—Don Chew, Editor, Journal of Applied Corporate Finance, Morgan Stanley

"This book does an outstanding job covering the key aspects of corporate finance and offers a refreshingly real-world approach to many of the important questions facing multinationals today. Students and finance professionals alike would benefit from understanding this material and putting it into practice."
—Jason Bristow, Treasurer,

"This is a reference book that should be on the desk of every finance professional. It is clear Pettit's work is grounded in solid finance theory, but he takes the next step we wish from every author . . . into the real world. He translates his diverse banking and consulting experience into easy-to-understand finance strategy you can immediately apply on the job."
—Michael Collins, Managing Director and Head of Corporate Equity Risk Management, Société Générale Corporate and Investment Banking

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.

List of Figures.

List of Tables.


About the Author.

PART ONE: Managing the Left-Hand Side of the Balance Sheet.

Chapter 1: The Cost Of Capital.

Calculation Pitfalls.

Market Risk Premium (MRP).

Toward a Better Beta.

The "Riskless Rate"

The Cost of Debt.

Global Capital Costs.

WACC and Hurdle Rates.

Chapter 2: Fix: Finding Your Sources of Value.

Why Shareowner Value?

Performance Measurement Pitfalls.

Measuring Economic Profit and Value.

Analyzing the Corporate Portfolio.

Incorporating the Cost of Capacity.

Value-Based Strategies and Tactics.

Managing for Value.

Balancing Performance with Value.

Chapter 3: Sell: Creating Value Through Divestiture.

Divestiture Creates Value.

Sources of Value: Motives for Divestiture.

Alternative Methods of Disposition.

What Works Best for Whom?

What Happens Longer Term?

Practical Impediments to Divestiture.

Financial Policy Considerations.

Tax Considerations and Structural Refinements.

Chapter 4: Grow: How To Make M&A Pay.

M&A Today.

Transactions that Create Value.

M&A Fact and Fallacy.

RX for the "Conglomerate Discount."

EVA and M&A.

How ‘‘Serial Acquirers’’ Create Value.

Financial Policy Considerations.

Financing Growth.

Chapter 5: Cash and The Optimal Capital Structure.

Trends and Implications.

How Much Is Too Much?

The Costs and Benefits of Excess Cash.

How the Market Views Excess Cash.

Optimal Capital Allocation.

PART TWO: Managing the Right-Hand Side of the Balance Sheet.

Chapter 6: An Executive’s Guide to Credit Ratings.

Trends and Implications.

Empirical Evidence.

Limitations of Quantitative Credit Analysis.

What Metrics Matter Most?

Case Study: Treatment of Pension and Postretirement Liabilities.

Multivariate Credit Models.

Industry Considerations.

Case Study: Property and Casualty Insurance.

Application Issues.

How to Manage Your Agencies.

Case Study: Illustration of Secured and Unsecured Notching.

Chapter 7: Today’s Optimal Capital Structure.

Value-Based Financial Policy.

Less Debt Is Now "Optimal."

Extend Duration When Rates Are Low.

Maintain Financial Liquidity to "Insure" Your Equity.

A New Perspective on Equity.

Case Study: Does Tech Need Debt?

Chapter 8: Dividends and Buybacks: Calibrating Your Shareholder Distributions.

The Cash Problem.

Dividends Are Back.

How Dividends and Buybacks Create Value.

Should You Increase Your Dividend?

How Large Should Your Buyback Program Be?

How to Execute Your Share Repurchase Program.

Chapter 9: The Stock Liquidity Handbook.

Measuring Stock Liquidity.

The "Liquidity Discount."

Implications of Stock Illiquidity.

Solutions to Illiquidity.

Stock Splits.

PART THREE: Managing the Enterprise.

Chapter 10: Strategic Risk Management: Where ERM Meets Optimal Capital Structure.

The Value of Risk Management.

Mapping and Modeling Risk.

Managing to a Benchmark.

External Considerations and Constraints.

ERM Case Study: Metallgesellschaft AG.

Capital Structure Solutions.

Chapter 11: Best Practices In Hedging.

Which "Exposure" to Hedge.

Hedge Horizon.

Hedge Ratio.

Options versus Forwards.

Accounting Considerations.


Chapter 12: ERM Case Study: Reengineering The Corporate Pension.

Why Now?

The Problems with Equity.

The Case for More Bonds.

Optimal Capital Structure Reprise.

Capital Markets Solutions.

The Boots Case.

Why It Still Hasn’t Happened.

APPENDIX A: Resources.

Tools and Portals.

New Research and Literature Search.

Economic Research and Data.

News and Market Data.

Corporate Governance and Compensation.

Other Agencies.