Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, which is the study of production, distribution, and consumption of goods and services; the discipline of financial economics bridges the two. Financial activities take place in financial systems at various scopes; thus, the field can be roughly divided into personal, corporate, and public finance.
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 share prices, interest rates and exchange rates, 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. It thus provides the theoretical underpinning for much of finance.
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 enterprise value of a firm is unaffected by how that firm is financed. This is not to be confused with the value of the equity of the firm. Since the value of the firm depends neither on its dividend policy nor its decision to raise capital by issuing shares 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. The idea is to value the project as if it were all equity financed ("unleveraged"), and to then add the present value of the tax shield of debt – and other side effects.
In economics and accounting, the cost of capital is the cost of a company's funds, or from an investor's point of view is "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.
In corporate finance, capital structure refers to the mix of various forms of external funds, known as capital, used to finance a business. It consists of shareholders' equity, debt, and preferred stock, and is detailed in the company's balance sheet. The larger the debt component is in relation to the other sources of capital, the greater financial leverage the firm is said to have. Too much debt can increase the risk of the company and reduce its financial flexibility, which at some point creates concern among investors and results in a greater cost of capital. Company management is responsible for establishing a capital structure for the corporation that makes optimal use of financial leverage and holds the cost of capital as low as possible.
Financial risk management is the practice of protecting economic value in a firm by managing exposure to financial risk - principally operational risk, credit risk and market risk, with more specific variants as listed aside. As for risk management more generally, financial risk management requires identifying the sources of risk, measuring these, and crafting plans to mitigate them. See Finance § Risk management for an overview.
Stewart Clay Myers is the Robert C. Merton 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.
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 those within the “explicit” forecast period, together with a continuing or terminal value that represents the cash flow stream after the forecast period. In several contexts, DCF valuation is referred to as the "income approach".
In corporate finance, the pecking order theory postulates that the cost of financing increases with asymmetric information.
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 co-authored Principles of Corporate Finance with Stewart C. Myers and Franklin Allen.
Alan J. Marcus is an American economist, and the first recipient of the Mario J. Gabelli Endowed Professorship at the Carroll School of Management at Boston College, where he currently teaches. He is 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. Marcus serves on the advisory board of the CFA Institute.
In corporate finance, Hamada’s equation is an equation used as a way 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. It was named after Robert Hamada, the Professor of Finance behind the theory.
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.
Break-even, often abbreviated as B/E in finance, is the point of balance making neither a profit nor a loss. Any number below the break-even point constitutes a loss while any number above it shows a profit. The term originates in finance but the concept has been applied in other fields.
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 is the area of finance that deals with the sources of funding, and 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.
Alex Edmans is a British academic and economist who is professor of finance at London Business School and Mercers' School Memorial Emeritus Professor of Business at Gresham College. He serves on the World Economic Forum Global Future Council on the Future of Responsible Investing and as a non-executive director of the Investor Forum. He is an elected Fellow of the Academy of Social Sciences and the Financial Management Association, Director of the American Finance Association and Vice President-Elect of the Western Finance Association.
In corporate finance, the present value of growth opportunities (PVGO) is a valuation measure applied to growth stocks. It represents the component of the company's stock value that corresponds to (expected) growth in earnings. It thus allows an analyst to assess the extent to which the share price represents the current business, and to what extent it reflects assumptions about the future. As a proportion of market cap, PVGO can then also be used in relative valuation, i.e. when comparing between two investments (see similar re PEG ratio).
