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Fundamentals of Corporate Finance, 2nd Edition


Fundamentals of Corporate Finance, 2nd edition, reflects the reality that finance, as an intellectual discipline, continues to be challenged by the experiences and events of market activity. Following the global financial crisis, managers are operating in relatively uncertain times.

The text helps you develop the intuition and analytical skills necessary to effectively apply financial tools in real-world decision-making situations. It provides a fully integrated framework for understanding how value creation relates to all aspects of corporate finance: whether it be evaluating an investment opportunity, determining the appropriate financing for a business, or managing working capital. This unique and integrated framework also enables you to develop problem-solving and decision-making skills.

This text has three core objectives:
1. Provide you with an intuitive framework for understanding fundamental finance concepts,
2. Show you how to analyse and solve finance problems and
3. Develop a skill set where you can apply the results of analysis to make good financial decisions.

In addition to these key objectives, students will obtain a greater understanding of finance
concepts through the following features:

  • Demonstration problems — examples that will provide opportunities to develop and refine
    problem solving skills.
  • Decision-making examples — based on a range of business experiences with a focus on the decision-making process of the financial manager.
  • Worked examples — that support key concepts and student learning.

Wiley wishes you success in your finance studies.

Robert Parrino is the Lamar Savings Centennial Professor of Finance in the McCombs School of Business, University of Texas at Austin. He is the Associate Editor of the Journal of Corporate Finance and the Journal of Financial Research. He has experience in the application of corporate finance concepts in a variety of business situations and researches on corporate governance, financial policies, restructuring, mergers and acquisitions, and private equity markets.

David S. Kidwell is Professor of Finance and Dean Emeritus at the Curtis L. Carlson School of Management, University of Minnesota. He has over 30 years’ experience in financial education, as a teacher, researcher and administrator. He has published in leading journals such as Journal of Finance, Journal of Financial Economics, Journal of Financial and Quantitative Analysis, Financial Management and Journal of Money, Credit and Banking.

Hue Hwa Au Yong is a Senior Lecturer in the Department of Accounting and Finance at Monash University. Prior to this, she completed her PhD in the area of risk management at Monash University. Her research has been published in several international peer reviewed journals including Journal of International Financial Markets, Institutions and Money, Australian Journal of Management and International Review of Financial Analysis. She specialises in teaching corporate finance. In 2009, she was awarded the Faculty of Business and Economics Dean’s Commendation for Outstanding Teaching.

Michael Dempsey is a Professor of Finance in the Department of Economics, Finance and Marketing at RMIT University. Prior to this he was with Monash University and Griffith University, having previously been at Leeds University, United Kingdom. He also has many years’ experience working for the petroleum exploration industry in the Middle East, Egypt, Aberdeen and London. His PhD was obtained in Astrophysics. His teaching responsibilities have been in corporate and investment fi nance, international fi nance, derivatives and fi nancial engineering. He is an active researcher and research supervisor in the area of fi nancial markets and the formation of asset prices, where he has continued to publish as well as referee major journal articles.

Samson Ekanayake is a Senior Lecturer in finance at Deakin University. He has been teaching business and corporate finance at Deakin since 1992 and also served as the Discipline Leader for Finance until July 2010. Samson has won several awards for teaching excellence in business fi nance and was nominated for Faculty Awards for innovative teaching in 2010. His research interests include corporate finance, management control and enterprise risk management. Before joining Deakin University, he held senior managerial positions in accounting and finance in several reputed companies. To name a few, he was the fi nance manager of Mitsubishi Olayan Machinery Industries, Corporate Treasurer of The Finance Company, and Economist of Fiji Sugar Corporation. Samson is a Chartered Accountant and a Certifi ed Practising Accountant. He completed his post-graduate studies at The University of Lancaster in England.

Jennifer Kofoed is a Lecturer in the School of Business and Law at Central Queensland University. She has over twelve years teaching experience and specialises in teaching corporate finance and auditing and professional practice. In 2008, she was awarded the Faculty of Business and Informatics Award for Teaching Excellence and Central Queensland University’s Innovative Teacher of the Year Award. Jenny was awarded an ALTC Citation for Outstanding Contributions to Student Learning in 2009. Her research interests focus on improving her teaching strategies to maximise student learning. In 2009, she was awarded an Outstanding Paper Award at the World Conference on Educational Media & Technology in Honolulu and the Edith Cowan Authentic Learning Award at the Higher Education Research and Development Society of Australasia Conference in Darwin.

Nigel Morkel-Kingsbury is a Lecturer in the Department of Banking and Finance at Monash University. He is an experienced educator at both graduate and undergraduate levels, specialising in teaching corporate finance and international study programs. His research interests and publications include the following areas: Central bank transparency and interest rates — the topic of his doctoral thesis; monetary policy; corporate finance; and initial public off erings.

James Murray previously taught at Monash University, and has also tutored at Swinburne University of Technology and Lincoln University. He completed his PhD in the area of dividend policy at Monash University. His research interests primarily relate to the role of the legal and tax environment in corporate finance.

About the authors xi

Preface xiii

Organisation and coverage xv

Applications at a glance xviii

How to use this book xx

Acknowledgements xxiii

Student and lecturer resources xxiv

Selected abbreviations and notation xxv

PART 1. Introduction

CHAPTER 1. The financial manager and the company 2

PART 2. Foundations

CHAPTER 2. The financial system and the level of interest rates 30

CHAPTER 3. Financial statements, cash flows and tax 56

CHAPTER 4. Analysing financial statements 88

PART 3. Valuation of future cash flows and risk

CHAPTER 5. The time value of money 138

CHAPTER 6. Discounted cash flows and valuation 178

CHAPTER 7. Risk and return 222

CHAPTER 8. Bond valuation and the structure of interest rates 266

CHAPTER 9. Share valuation 302

PART 4. Capital budgeting decisions

CHAPTER 10. The fundamentals of capital budgeting 334

CHAPTER 11. Cash flows and capital budgeting 380

CHAPTER 12. Evaluating project economics and capital rationing 416

CHAPTER 13. The cost of capital 448

PART 5. Working capital management and financing decisions

CHAPTER 14. Working capital management 486

CHAPTER 15. How companies raise capital 520

CHAPTER 16. Capital structure policy 548

CHAPTER 17. Dividends and dividend policy 584

PART 6. Business formation, valuation and financial planning

CHAPTER 18. Business formation, growth and valuation 608

CHAPTER 19. Strategic financial planning and forecasting 646

PART 7. Options and corporate finance and international decisions

CHAPTER 20. Options and corporate finance 684

CHAPTER 21. International financial management 714

Appendix A: Present value and future value tables 746

Appendix B: Solutions to self-study problems 754

Glossary 777

Index 785