Corporate Finance Demystified 2/E

by Troy Alton Adair

Overview

The simple way to master corporate finance

The math, the formulas, the problem solving . . . does corporate finance make your head spin? You're not alone. It's one of the toughest subjects for business students—which is why Corporate Finance DeMYSTiFieD is written in a way that makes learning it easier than ever.

This self-teaching guide first explains the basicprinciples of corporate finance, including accountingstatements, cash flows, and ratio analysis. Then, you'll learn all the specifics of more advanced practices like estimating future cash flows, scenario analysis, and option valuation. Filled with end-of-chapter quizzes and a final exam, Corporate Finance DeMYSTiFieD teaches you the ins-and-outs of this otherwise confounding subject in no time at all.

This fast and easy guide features:

• An overview of important concepts, such as time value of money, interest rate conversion, payment composition,and amortization schedules
• Easy-to-understand descriptions of corporate finance principles and strategies
• Chapter-ending quizzes and a comprehensive final exam to reinforce what you've learned and pinpoint problem areas
• Hundreds of updated examples with practical solutions

Simple enough for a beginner, but challenging enough for an advanced student, Corporate Finance DeMYSTiFieD is your shortcut to a working knowledge of this important business topic.

Product Details

ISBN-13:	9780071749077
Publisher:	McGraw Hill LLC
Publication date:	12/14/2010
Series:	Demystified
Edition description:	List
Pages:	304
Product dimensions:	9.28(w) x 10.52(h) x 0.73(d)

About the Author

Author Profile
Troy A. Adair, Jr., Ph.D. is the coordinator and primary instructor for corporate finance at Wilkes University. He is the author of Excel Applications to Accompany Corporate Finance with Excel Tutor (McGraw-Hill, 2004).

Read an Excerpt

Corporate Finance DeMYSTiFieD

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By Troy A. Adair Jr.

The McGraw-Hill Companies, Inc.

Copyright © 2011The McGraw-Hill Companies, Inc.
All rights reserved.
ISBN: 978-0-07-174907-7

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Excerpt

<h2>CHAPTER 1</h2> <p><b><i>What Is Corporate Finance?</i></p> <br> <p>CHAPTER OBJECTIVES</b></p> <p><i>At the end of this chapter, the reader should be able to:</i></p> <p>• Explain and illustrate the primary cash flows of finance</p> <p>• Detail and explain the four major subfields of finance</p> <p>• Compare and contrast the capital structure decision, the capital budgeting decision, and the dividend decision</p> <br> <p>When people first start studying finance, they usually have an idealized view (driven mainly by the movies they've seen and stories in the news about tycoons wheeling and dealing on Wall Street) of just what finance and financial markets are. They come to the class eager to start trading stocks, pricing options, transacting in the currency forwards, or simply cornering the market on orange juice futures. Even if they're lucky enough to have an introduction to finance which presents them with the correct "big picture," they're left feeling a little put out when they realize that the corporate finance they'll be studying is (in their initial opinion, at least) the least sexy subfield of finance.</p> <p>To prove this to yourself, wait until we've covered the four different subfields of finance below, then make a list of every movie involving finance that you've ever seen and divide the list up by the subfield most closely associated with each movie: corporate finance films are few and far between.</p> <p>In this chapter, we'll start out with the big picture first, making sure we know what finance is in the context of a diagram describing investment cash flows in our economy. Next, we'll use this same diagram to describe the different subfields of finance along with the major problems and decisions faced by each subfield. Then we'll focus more specifically on the problems and decisions of corporate finance, wrapping up with a discussion of why corporate finance is arguably the most important subtopic, and the one that you <i>should</i> study first.</p> <br> <p><b>What Is Finance?</b></p> <p>To understand what finance is, let's envision the economy as being composed of four types of people, where the types are defined based upon whether the people have "extra" money to invest in speculative ventures and/or whether they have potentially lucrative ideas of their own (or the time to implement them):</p> <p><b>1.</b> People with no extra money and no ideas</p> <p><b>2.</b> People with extra money but no ideas (or no time to implement any ideas)</p> <p><b>3.</b> People with ideas but not enough money</p> <p><b>4.</b> People with both ideas and extra money</p> <br> <p>Of these four types, Type 1 doesn't really play a direct part in finance. These people have just enough money to cover their own needs, and they have no ideas or time for investing in potential projects even if they did.</p> <p>We also won't normally talk much about Type 4. These people are interesting enough, but the problems and decisions that they face tend to be only a subset of those seen in the interaction between Type 2 and Type 3, where we will focus our attention.</p> <p>In such an economy, Type 2 and Type 3 can enter into a mutually beneficial agreement, in which those of Type 2 lend their extra money to those of Type 3, who will in turn invest that money in ventures or "projects," using the potential proceeds from those projects to repay those of Type 2.</p> <p>In our economy, those in Type 2 will often be individual investors, but they may also include such entities as venture capital funds, retirement funds, or insurance companies, all of which will typically have an excess of cash that they need to invest. To simplify our discussion, we will use the term <i>investors</i> to refer to any of these Type 2 entities.</p> <p>Similarly, although Type 3 may include individual entrepreneurs or government organizations formed to foster economic growth, we typically tend to think of it as being primarily composed of companies, many of which have employees or divisions whose primary job is to think up new money-making products or services; in large corporations, such divisions are usually referred to as the research and development, or R&D, division. Again, so as to further simplify our discussion, we will use the specific term <i>companies</i> to refer to any Type 3 entities.</p> <p>This mutually beneficial agreement between investors and companies is shown in <b>Figure 1-1</b>.</p> <p>Now, in the real world, the repayment of the investors is complicated by the presence of taxes aand by the fact that the company may need to reinvest some of the proceeds of the projects to continue operations, so actual cash flows tend to more closely resemble those shown in <b>Figure 1-2</b>.</p> <p>TThe study of this resulting system of cash flows is what finance is all about.</p> <p>The arrows in <b>Figure 1-2</b> correspond to decisions or choices that the various participants in this system must make, and we can visualize thhhhe various subfields of finance by considering the perspectives from which those decisions must be made.</p> <br> <p><b>The Subfields of Finance</b></p> <p>For example, consider the decisions faced by one of the investors whose perspective is indicated by the box shown in <b>Figure 1-3</b>. They have to decide which company or companies to invest in, what form (for example, buying stocks, bonds, and the like) that investment will take, and in what manner they wish to be repaid. Looking at these decisions from this perspective is called the study of investments.</p> <p>Companies face decisions concerning how to raise capital, what projects to invest in, and how to go about paying investors back. Looking at these decisions from their perspective, as shown in <b>Figure 1-4</b>, is called the study of corporate finance (or, sometimes, "financial management").</p> <p>There are two other perspectives that one can take when examining this system of cash flows: one is that of the financial institutions and markets (see <b>Figure 1-5</b>), which exist for the sole purpose of facilitating this flow of funds between the investors and the companies.</p> <p>The final subtopic of finance is one that considers the entire system of cash flows, but in a setting where the investors, companies, and/or projects involved are in different countries, as shown in <b>Figure 1-6</b>.</p> <p>Technically speaking, this study of international finance probably shouldn't be considered a separate subfield, but rather a gr
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Excerpted from Corporate Finance DeMYSTiFieD by Troy A. Adair Jr.. Copyright © 2011 by The McGraw-Hill Companies, Inc.. Excerpted by permission of The McGraw-Hill Companies, Inc..
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Table of Contents

Acknowledgments; Introduction; Part One: Introduction; Chapter 1. What Is Corporate Finance?; Chapter 2. Setting the Stage; Chapter 3. Accounting Statements and Cash Flows; Chapter 4. Common-Size, Common-Base Year, and Ratio Analysis; Part Two: "I Will Gladly Pay You $2 Tomorrow for $1 Today": The Time Value of Money; Chapter 5. Present and Future Value; Chapter 6. Compounding and Interest Rate Conversion: When What You've Got Isn't What You Need; Chapter 7. Payment Composition and Amortization Schedules; Part Three: Valuation; Chapter 8. Valuing Bonds; Chapter 9. Valuing Stocks; Chapter 10. Valuing Projects: The Capital-Budgeting Decision Rules; Part Four: Where Do Interest Rates Come From? Risk, Return, and the Cost of Capital; Chapter 11. Measuring Risk and Return; Chapter 12. Calculating Beta; Chapter 13. Analyzing the Security Market Line; Chapter 14. The Weighted Average Cost of Capital; Part Five: Advanced Topics in Corporate Finance; Chapter 15. Estimating Future Cash Flows; Chapter 16. Scenario Analysis and Sensitivity Analysis; Chapter 17. Option Valuation; Appendix A. Depreciation Charts; Appendix B. Values for the Standard Normal Cumulative Distribution Function; Final Exam; Answers to Quiz and Exam Questions; Index