Essentials of Corporate Finance 9th Edition
George Zimmer, founder of The Men’s Wearhouse, for years appeared in television ads promising “You’re going to like the way you look. I guarantee it.” But, in mid-2013, Zimmer evidently didn’t look so good to the company’s board of directors, which abruptly fired him. It was reported that Zimmer had a series of disagreements with the board, including a desire to take the company private. Evidently, Zimmer’s ideas did not “suit” the board.
Understanding Zimmer’s journey from the founder of a clothing store that used a cigar box as a cash register, to corporate executive, and finally to ex-employee takes us into issues involving the corporate form of organization, corporate goals, and corporate control, all of which we discuss in this chapter. You’re going to learn a lot if you read it. We guarantee it.
To begin our study of financial management, we address two central issues. First: What is corporate, or business, finance, and what is the role of the financial manager? Second: What is the goal of financial management?
FINANCE: A QUICK LOOK
Before we plunge into our study of “corp. fin.,” we think a quick overview of the finance field might be a good idea. Our goal is to clue you in on some of the most important areas in finance and some of the career opportunities available in each. We also want to illustrate some of the ways finance fits in with other areas such as marketing, management, and accounting.
The Four Basic Areas
Traditionally, financial topics are grouped into four main areas:
1. Corporate finance
3. Financial institutions
4. International finance
We discuss each of these next.
Corporate Finance The first of these four areas, corporate finance, is the main subject of this book. We begin covering this subject with our next section, so we will wait until then to get into any details. One thing we should note is that the term corporate finance seems to imply that what we cover is only relevant to corporations, but the truth is that almost all of the topics we consider are much broader than that. Maybe business finance would be a little more descriptive, but even this is too narrow because at least half of the subjects we discuss in the pages ahead are really basic financial ideas and principles applicable across all the various areas of finance and beyond.
Investments Broadly speaking, the investments area deals with financial assets such as stocks and bonds. Some of the more important questions include:
1. What determines the price of a financial asset, such as a share of stock?
2. What are the potential risks and rewards associated with investing in financial assets?
3. What is the best mixture of the different types of financial assets to hold?
Students who specialize in the investments area have various career opportunities. Being a stockbroker is one of the most common. Stockbrokers often work for large companies such as Merrill Lynch, advising customers on what types of investments to consider and helping them make buy and sell decisions. Financial advisers play a similar role, but are not necessarily brokers.
Portfolio management is a second investments-related career path. Portfolio managers, as the name suggests, manage money for investors. For example, individual investors frequently buy into mutual funds. Such funds are simply a means of pooling money that is then invested by a portfolio manager. Portfolio managers also invest and manage money for pension funds, insurance companies, and many other types of institutions. Security analysis is a third area. A security analyst researches individual investments, such as stock in a particular company, and makes a determination as to whether the price is right. To do so, an analyst delves deeply into company and industry reports, along with a variety of other information sources. Frequently, brokers and portfolio managers rely on security analysts for information and recommendations.
These investments-related areas, like many areas in finance, share an interesting feature. If they are done well, they can be very rewarding financially (translation: You can make a lot of money). The bad news, of course, is that they can be very demanding and very competitive, so they are definitely not for everybody.
Part one overview of financial management
1 Introduction to Financial Management 1
part two understanding financial statements and cash flow
2 Financial Statements, Taxes, and Cash Flow 22
3 Working with Financial Statements 51
part three valuation of future cash flows
4 Introduction to Valuation: The Time Value of Money 97
5 Discounted Cash Flow Valuation 122
part four valuing stocks and bonds
6 Interest Rates and Bond Valuation 165
7 Equity Markets and Stock Valuation 205
part five capital budgeting
8 Net Present Value and Other Investment Criteria 236
9 Making Capital Investment Decisions 274
part six risk and return
10 Some Lessons from Capital Market History 309
11 Risk and Return 349
part seven long-term financing
12 Cost of Capital 388
13 Leverage and Capital Structure 423
14 Dividends and Dividend Policy 455
15 Raising Capital 485
part eight short-term financial management
16 Short-Term Financial Planning 518
17 Working Capital Management 550
part nine topics in business finance
18 International Aspects of Financial Management 586
A Mathematical Tables 612
B Key Equations 620
C Answers to Selected End-of-Chapter Problems 623
D Using the HP-10B and TI BA II Plus Financial Calculators 627
Name Index 630 Subject Index 631
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