Introduction to Corporate Finance, Abridged Edition

Book Preface

Welcome to the study of corporate fi nance: a fi eld with unmatched career opportunities that are as intellectually challenging as they are fi nancially rewarding. In this book, we explain how fi nancial managers apply a few key principles to make important business decisions. Our goals in introducing you to these principles are not only to impart useful knowledge, but also to convey our enthusiasm for our chosen fi eld, as well as help you explore whether a career in corporate fi nance is right for you.

Chapter 1 describes the roles that corporate fi nance experts play in a variety of businesses and industries. Most of what corporate fi nance professionals do on a day-to-day basis falls within one of the fi ve basic functions described in the chapter. We recommend that readers revisit the list of fi ve key functions as they work through this book. Most of the chapters place a heavy emphasis on just one or two of these functions, and it is a useful exercise to map the key concepts from each chapter back to the fi ve functions outlined in Chapter 1. It has been said that accounting is the language of business, and certainly it is true that fi nancial managers need to master accounting concepts and principles to do their jobs well.

Chapter 2 off ers a broad overview of the most important sources of accounting information: fi rms’ fi nancial statements. Our focus in this chapter is not on how accountants construct these statements (we leave that to your accounting professors). Instead, our goal is to illustrate why these statements are important to fi nancial managers and why fi nance places so much emphasis on cash fl ow rather than on measures of earnings, such as net income or earnings per share. We also demonstrate how companies can use the information from fi nancial statements to track their performance over time or to benchmark their results against those achieved by other firms.

Chapter 3 introduces one of the most fundamental concepts in fi nance called the time value of money. Simply put, the time value of money says that a dollar today is worth more than a dollar in the future. The reasoning behind this statement is straightforward. If you have a dollar in hand today, you can invest it and earn interest, so receiving the dollar now is better than having to wait for it. Because most business decisions involve costs and benefi ts that are spread out over many months or years, managers need a way to evaluate cash fl ows that the fi rm pays or receives at diff erent times. For example, a fi rm spends $1 million today to purchase an asset that will generate a stream of cash receipts of $225,000 over the next several years. Do the costs of this investment outweigh its benefi ts, or are the benefi ts high enough to justify the costs? Chapter 3 explains how managers can make valid cost/benefi t comparisons when cash fl ows occur at diff erent times and using diff erent rates of interest.