Principles of Corporate Finance

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Principles of Corporate Finance
Principles of Corporate Finance - bookcover.jpg
Hardcover, 12th edition
Author Richard Brealey, Stewart Myers, Franklin Allen
CountryUnited States
LanguageEnglish
SeriesMcGraw-Hill/Irwin Series in Finance, Insurance and Real Estate
SubjectFinance
GenreTextbook
Publisher McGraw-Hill/Irwin
Publication date
January 5, 2016 (12th edition)
Media typePrint, e-book
Pages976 pp.
ISBN 978-1259144387
Followed byFundamentals of Corporate Finance 

Principles of Corporate Finance is a reference work on the corporate finance theory edited by Richard Brealey, Stewart Myers, and Franklin Allen. [1] [2] The book is one of the leading texts that describes the theory and practice of corporate finance. It was initially published in October 1980 and now is available in its 13th edition. Principles of Corporate Finance has earned loyalty both as a classroom tool and as a professional reference book.

Stewart Clay Myers is the Robert C. Merton (1970) Professor of Financial Economics at the MIT Sloan School of Management. He is notable for his work on capital structure and innovations in capital budgeting and valuation, and has had a "remarkable influence" on both the theory and practice of corporate finance. Myers, in fact, coined the term "real option". He is the co-author with Richard A. Brealey and Franklin Allen of Principles of Corporate Finance, a widely used and cited business school textbook, now in its 11th edition. He is also the author of dozens of research articles.

Franklin Allen, is a British economist and academic. Since 2014, he has been Professor of Finance and Economics, and Executive Director of the Brevan Howard Centre at Imperial College London. He was the Nippon Life Professor of Finance and Economics at the Wharton School of the University of Pennsylvania. He is most active in the research areas of financial innovations, asset price bubbles, the comparison of financial systems, and financial crises.

Corporate finance area of finance dealing with the sources of funding and the capital structure of corporations

Corporate finance is an area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources. The primary goal of corporate finance is to maximize or increase shareholder value. Although it is in principle different from managerial finance which studies the financial management of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms.

Contents

Overview

The book covers a wide range of aspects relevant to corporate finance, illustrated by examples and case studies. The text starts with explaining basic finance concepts of value, risk, and other principles. Then the issues become more and more complex, from project analysis and net present value calculations, to debt policy and option valuation. Other discussed topics include mergers and acquisitions, principal–agent problems, credit risk, working capital management, etc. The book concludes with a discussion on the current limitations of the corporate finance theory.

In finance, the net present value (NPV) or net present worth (NPW) applies to a series of cash flows occurring at different times. The present value of a cash flow depends on the interval of time between now and the cash flow. It also depends on the discount rate. NPV accounts for the time value of money. It provides a method for evaluating and comparing capital projects or financial products with cash flows spread over time, as in loans, investments, payouts from insurance contracts plus many other applications.

Mergers and acquisitions transactions in which the ownership of companies, other business organizations or their operating units are transferred or combined

Mergers and acquisitions (M&A) are transactions in which the ownership of companies, other business organizations, or their operating units are transferred or consolidated with other entities. As an aspect of strategic management, M&A can allow enterprises to grow or downsize, and change the nature of their business or competitive position.

Principal–agent problem Agency Problem

The principal–agent problem, in political science and economics occurs when one person or entity, is able to make decisions and/or take actions on behalf of, or that impact, another person or entity: the "principal". This dilemma exists in circumstances where agents are motivated to act in their own best interests, which are contrary to those of their principals, and is an example of moral hazard.

Related Research Articles

Financial economics is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on both sides of a trade". Its concern is thus the interrelation of financial variables, such as prices, interest rates and shares, as opposed to those concerning the real economy. It has two main areas of focus: asset pricing and corporate finance; the first being the perspective of providers of capital, i.e. investors, and the second of users of capital.

The Modigliani–Miller theorem is an influential element of economic theory; it forms the basis for modern thinking on capital structure. The basic theorem states that in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed. Since the value of the firm depends neither on its dividend policy nor its decision to raise capital by issuing stock or selling debt, the Modigliani–Miller theorem is often called the capital structure irrelevance principle.

Adjusted present value (APV) is a valuation method introduced in 1974 by Stewart Myers.

In Economics and Accounting, the cost of capital is the cost of a company's funds, or, from an investor's point of view "the required rate of return on a portfolio company's existing securities". It is used to evaluate new projects of a company. It is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet.

Capital structure

Capital structure in corporate finance is the way a corporation finances its assets through some combination of equity, debt, or hybrid securities.

In corporate finance, the return on equity (ROE) is a measure of the profitability of a business in relation to the equity, also known as net assets or assets minus liabilities. ROE is a measure of how well a company uses investments to generate earnings growth.

In financial economics, asset pricing refers to a formal treatment and development of two main pricing principles, outlined below, together with the resultant models. There have been many models developed for different situations, but correspondingly, these stem from general equilibrium asset pricing or rational asset pricing, the latter corresponding to risk neutral pricing.

Financial modeling is the task of building an abstract representation of a real world financial situation. This is a mathematical model designed to represent the performance of a financial asset or portfolio of a business, project, or any other investment.

Valuation using discounted cash flows is a method of estimating the current value of a company based on projected future cash flows adjusted for the time value of money. The cash flows are made up of the cash flows within the forecast period together with a continuing or terminal value that represents the cash flow stream after the forecast period.

In corporate finance, the pecking order theory postulates that the cost of financing increases with asymmetric information.

The following outline is provided as an overview of and topical guide to finance:

Richard A. Brealey is a British economist and author. He is an Emeritus Professor at the London Business School and a Fellow of the British Academy. He is widely known for his Principles of Corporate Finance, coauthored with Stewart C. Myers and Franklin Allen, a text that "has earned tremendous loyalty as both a classroom tool and a professional reference work".

Alan J. Marcus is an American economist, currently the Mario J. Gabelli Professor at Boston College and an author of several textbooks widely used in finance and MBA programs internationally, including Fundamentals of Corporate Finance with Stewart Myers and Richard A. Brealey.

In corporate finance, Hamada’s equation, named after Robert Hamada, is used to separate the financial risk of a levered firm from its business risk. The equation combines the Modigliani-Miller theorem with the capital asset pricing model. It is used to help determine the levered beta and, through this, the optimal capital structure of firms.

Jack Lawrence Treynor was an American economist who served as the President of Treynor Capital Management in Palos Verdes Estates, California. He was a Senior Editor and Advisory Board member of the Journal of Investment Management, and was a Senior Fellow of the Institute for Quantitative Research in Finance. He served for many years as the editor of the CFA Institute's Financial Analysts Journal.

Net operating assets (NOA) are a business's operating assets minus its operating liabilities. NOA is calculated by reformatting the balance sheet so that operating activities are separated from financing activities. This is done so that the operating performance of the business can be isolated and valued independently of the financing performance. Management is usually not responsible for creating value through financing activities unless the company is in the finance industry, therefore reformatting the balance sheet allows investors to value just the operating activities and hence get a more accurate valuation of the company.

Break-even, often abbreviated as B/E in finance, is the point of balance making neither a profit nor a loss. The term originates in finance but the concept has been applied in other fields.

References

  1. Principles of Corporate Finance (The Mcgraw-Hill/Irwin Series in Finance, Insurance, and Real Estate). ASIN   0078034760.CS1 maint: ASIN uses ISBN (link)
  2. "Principles Of Corporate Finance by Richard A. Brealey, Stewart C. Myers". goodreads.com . Retrieved 2015-03-02.