covered in prerequisite courses.
Also, although an understanding of mathematics is necessary, we
facilitate the learning process by providing simple examples and
analogies. By providing both
verbal/logical and mathematical descriptions, we hope to enlist each
student’s “learning strength,”
as well as have the descriptions reinforce one another.
Finally, this book has been written with the intent that it will
become a useful future reference
tool for students as they move through their business careers. The
explanations, information,
applications, minicases, and problem sets provide a valuable reference
source for material not covered
in class; and the chapter summaries highlight the important dimensions
and concepts connected
with each topic.
The applications in this text come from the real business world—many
pulled from today’s headlines—and are designed to illustrate
how financial principles are useful and immediately applicable. We
tell you about executive stock options at McDonalds, financing decisions
by firms such as PepsiCo, American Airlines, and CBS, and investment
decisions made by firms such as Boeing and Disney.
Whether it is a manager evaluating a capital budgeting project, a
chief executive officer studying a merger, a corporate treasurer deciding
what type of security to issue, an investment banker determining the
structure of a new security, a bond trader deciding which bonds to
buy, or a stock portfolio manager deciding which stocks to sell, it
is their grasp of financial concepts and their ability to apply them
in any situation that distinguishes the successful people.
INTENDED AUDIENCE
Corporate Financial Management was written for use in corporate
finance and financial management courses in MBA and undergraduate
programs. There is an abundance of material, so the book can be used
in introductory as well as advanced classes, and become a reference
source for future classes and throughout your career. Corporate
Financial Management is distinguished in several specific ways,
including its careful integration of recent developments in financial
analysis and practice (including agency theory, asymmetric information,
and contingent claims analysis) into a corporate finance text; its
bridging the gap between theory and practice through its coauthorship
team; and its student-friendly presentations of new, and also established,
topics.
We assume a familiarity with the standard prerequisites in business/management
programs: college-level algebra, financial accounting, microeconomics,
and statistics. Although we assume xvi students have this background,
we provide reminders of basic definitions and concepts that were covered
in prerequisite courses. Also, although an understanding of mathematics
is necessary, we
facilitate the learning process by providing simple examples and
analogies. By providing both
verbal/logical and mathematical descriptions, we hope to enlist each
student’s “learning strength,”
as well as have the descriptions reinforce one another.
Finally, this book has been written with the intent that it will
become a useful future reference
tool for students as they move through their business careers.
The explanations, information,
applications, minicases, and problem sets provide a valuable reference
source for material not covered
in class; and the chapter summaries highlight the important dimensions
and concepts connected
with each topic.
IMPORTANT
IMPROVEMENTS AND DISTINCTIVE FEATURES IN THE FIFTH EDITION
The fifth edition reflects feedback from users, changes within
the financial world, and the issues
students encounter today:
• BRIDGING THE GAP BETWEEN THEORY AND PRACTICE. This book is unique
in
that our author team includes real-world practitioner perspective.
John Finnerty has spent the
last 30 years working as a practitioner in the world of finance.
Among other positions, he has
been a partner with PricewaterhouseCoopers, worked in investment
banking for Morgan
Stanley, and served as CFO of The College Saving Bank. John’s
first-hand experience brings
the real world of business into this book—and into your classroom.
In addition, John Stowe
provides a professional institution perspective, having been Head
of Curriculum Development
for the CFA Institute.
• THE IMPORTANCE OF RESEARCH. The things we teach you in this book
are based on
an extensive body of research done by many professors over many years.
The end-of-chapter
bibliographies cite important contributions to our understanding
of finance. Of course, like
every field, there is always more to learn, so we indicate in the
text what is known, what is
believed, and what is still being debated.
• PROBLEM SETS. Problems are organized into three different levels
of difficulty, from basic
to advanced, to help faculty and students determine more efficiently
appropriate material to
review. Level A problems are basic. They review the chapter material
and can be answered by
direct reference to the text material. Level B problems also relate
fairly closely to the material
in the chapter but are somewhat more complex. Level C problems are
advanced extensions of
material presented in the chapter. The level C problems are designed
to challenge the students
with complex situations, puzzles, or the examination of more subtle
implications of the material
in the chapter. Occasionally, problems are drawn from material in
earlier chapters to reinforce
the retention of important concepts. Solutions to selected problems
can be found online
at www.wohlpublishing.com/emery.
• QUESTIONS. These are in addition to the problem sets. The questions
are intended to be
answered without calculations. As with the problems, to help faculty
and students, the questions
are divided by level of difficulty into two groups. The first group
of questions should be
answerable by direct reference to the chapter. Questions in the second
group require more
thought because they are more complex, more subtle, or, occasionally,
sneaky.
• AGENCY THEORY. Our treatment of agency theory goes well beyond
that of other books.
We are the only text that has a separate chapter on agency theory
and principal-agent problems,
to our knowledge. In addition, we weave the concepts into the very
fabric of our text,
and explicitly show how the important insights from this material
can be used to solve many
practical problems throughout the rest of the book.
• CORPORATE GOVERNANCE. Corporate governance issues are examined
in the context of
agency theory. For example, we describe some of the manager-stockholder
conflicts that contributed
to the downfalls of firms like Enron and the venerable 233-year-old
Barings Bank.
• CAPITAL MARKET EFFICIENCY. Stock market movement,
especially in the last two
decades, has caused people to question the efficiency of the capital
markets. The text has been
updated throughout to reflect these issues. Despite many questions,
the principle of market
efficiency is an important concept. The principle gives us the
best starting point for analysis, as
shown by Modigliani and Miller. Further, it reminds us to look
for information that can be
contained in market prices. It also reminds us that, to the extent
markets are efficient, we can
be price takers and focus on our comparative advantage. Deviations
from market efficiency,
which happen occasionally in financial markets and frequently in
nonfinancial markets, provide
opportunities for corporate and personal gain.
• CALCULATORS AND EXCEL. We facilitate the use of both calculators
and spreadsheets.
Calculator boxes illustrating computations appear throughout the
text. Problems especially
suited for being solved by Excel are identified and grouped at
the ends of Level B and Level C
end-of-chapter problem sets.
• CURRENCY. The examples, tables, and figures have been updated,
and reflect current laws,
regulations, and data.
• REAL OPTIONS. Real options are a critical source of value, particularly
in capital budgeting.
We use the term option in its broadest sense: any right without
an obligation attached to it.
This definition allows us to apply the important insights of option
theory to a wide variety of
topics and provides a natural entrée into real options. For
example, in addition to capital budgeting,
we use option concepts in agency theory and capital structure,
among many others. We
believe options analysis is one of the most valuable technologies
available in finance.
• MINICASES. A Minicase has been included at the end of almost
every chapter as a direct
application of the material in that chapter.
• BULLETED SUMMARIES. The chapter summaries are given in bulleted,
rather than narrative,
format to facilitate student review.
• FOCUS ON PRINCIPLES. These boxes set the stage in the beginning
of each chapter by
highlighting how particular finance principles apply to the chapter
material. They highlight
such things as looking for capital budgeting projects that offer
a valuable new idea or
use a firm’s comparative advantage, and seeing the value of
real options in a capital budgeting
project. The Focus on Principles boxes also help students develop
and apply financial
intuition.
• KEY TERMS. Important words and phrases are bolded the first
time they appear and
included in the glossary.
• PRINCIPLES OF FINANCE. In Chapter 2, we describe the 12 principles
of finance that
provide the foundation for learning finance.
• EXAMPLES. Numerous examples are included in each chapter. They
illustrate the concepts
as well as the computational details needed to apply the concepts.
Good numerical examples
are a critical learning device.
• NUMBERED EQUATIONS. Important equations are numbered when they
appear in the
text.
• EQUATION SUMMARIES. Following each chapter is an equation summary
that reprints all of
the numbered equations in the chapter. Students can use these to
study, and many professors
expressed the importance of these summaries for their classroom
instruction. The equation summaries
are also provided electronically on the website.
• INTERNATIONALIZATION. It is imperative that today’s companies
incorporate into their
decision making the specific constraints and additional market
imperfections introduced by
operating in an international economy. The principles of finance
do not stop at the border—
the concepts and principles developed in this book readily apply
to international transactions.
With this in mind, we treat the international aspects of finance
throughout the book as both a
point of view and a particular market environment in which the
firm operates.
THIS BOOK’S OVERRIDING GOAL
We wrote Corporate Financial Management with an overriding goal
of modernizing the teaching
of finance. In particular, we believe the revolution in financial
research involving asymmetric
information, options, and agency theory should be brought into
the classroom. Since the first
edition was written, the Nobel prize in economics has offered substantial
validation for our view:
eight of the latest fourteen prizes have involved this revolution
in financial research. This book
can enrich the teaching of finance by weaving these important research
advances into the very
fabric of the traditional financial management course.
Certainly these research advances are very important—but they
are also fascinating. They
are immediately applicable and relevant to the real world, as we
have witnessed with scandals at
Enron, ImClone, Tyco, and WorldCom. Our book offers the excitement
of this profoundly
important material directly to the student. These concepts, integrated
throughout, can and
should be understood within the context of finance.
The other business/management disciplines have enthusiastically
embraced the idea of a
corporation as a set of stakeholders. Beyond accounting, areas
such as organizational behavior,
strategic management, business law, marketing, and production continue
to integrate the implications
of agency theory, options, and asymmetric information into their
views of the organizational
world. This makes the principal-agent framework a natural way for
integrating the business/
management areas. Therefore, this book offers the chance for the
core finance class to play a
central role in the curriculum. |
