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Corporate Finance Demystified offers a comprehensive introduction to corporate finance principles, the time value of money, including present value, amortization schedules, and more. This self-teaching guide comes complete with key points, background information, quizzes at the end of each chapter, and even a final exam. Simple enough for beginners but challenging enough for advanced students, this is a lively and entertaining brush-up, introductory text, or classroom supplement.
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CORPORATE FINANCE DEMYSTIFIED
By Jr. Troy A. Adair
The McGraw-Hill Companies, Inc.Copyright © 2006The McGraw-Hill Companies
All rights reserved.
Excerpt<h2>CHAPTER 1</h2> <p><b>What Is Corporate Finance?</b></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 the 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>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>1. People with no extra money and no ideas.</p> <p>2. People with extra money but no ideas (or no time to implement any ideas).</p> <p>3. People with ideas but not enough money.</p> <p>4. People with both ideas and extra money.</p> <br> <p>The first type doesn't really play a direct part in finance: they have just enough money to cover their needs, and have no ideas or time for investing in potential projects even if they did.</p> <p>We also won't normally talk much about the fourth type. They're interesting enough, but the problems and decisions they face tend to be but a subset of those seen in the interaction between the second and third types, where we focus the vast majority of our concentration.</p> <p>In such an economy, the second type, which we'll call "investors" for reasons that will shortly be obvious, and the third type ("companies") can enter into a mutually beneficial agreement whereby the investors lend their extra money to the companies, who will in turn invest that money in ventures or projects, using the potential proceeds from those projects to repay the investors, as 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 and by the fact that the company may need to reinvest some of the proceeds of the projects to continue operation, so actual cash flows tend to more closely resemble those shown in <b>Figure 1-2</b>.</p> <p>The 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 the 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 caash 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 group of situations best considered as part of the other three subfields. However, it's been a relatively recent adddddition to both the major financial textbooks and to curriculums in finance departments around the country; in both cases, the easiest approach to covering this was to treat it as a separate subfield of finance, and so it remains today.</p> <br> <p><b>The Parts of Corporate Finance</b></p> <p>This approach of visualizing the parts of finance by taking different perspectives on this diagram can even be further extended to the areas within each subfield. For example, there are three arrows or a group of arrows within or interacting with the corporate finance perspective shown in <b>Figure 1- 4</b>. These correspond to the three major types of decisions faced by companies' financial managers, which are shown in <b>Figure 1-7</b>.</p> <p>Now, we can't just call these decisions by these names, of course—that would make it too simple and would drastically reduce the consulting fees that we can charge. So, instead, we have to give them the more impressive-sounding names shown in <b>Figure 1-8</b>.</p> <p>See, aren't these terms much more impressive (even though they do mean exactly the same things)?</p> <br> <p><b>So, Why Is This So Complicated?</b></p> <p>The story underlying the system of cash flows is a little more complicated than we've made it sound so far. In particular, investors know exactly how much they're going to pay for a stock or a bond in a company, but they don't know how much they're going to get back or when they'll receive it (see <b>Figure 1- 9</b>).</p> <br> <p><b>Why Are We Studying Corporate Finance?</b></p> <p&
Excerpted from CORPORATE FINANCE DEMYSTIFIED by Troy A. Adair Jr.. Copyright © 2006 by The McGraw-Hill Companies. Excerpted by permission of The McGraw-Hill Companies, Inc..
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Table of Contents
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
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
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
Answers to Quiz and Exam Questions