EXAM PREPARATION
GUIDE: FUNDAMENTALS OF
CORPORATE FINANCE (14TH
EDITION)
Comprehensive Pro-Level Review for Ross, Westerfield, and Jordan
Prepared for: Advanced Corporate Finance Candidates, Academic Practitioners, and Financial
Analysts Subject Matter: Corporate Finance Theory, Valuation, Capital Budgeting, Risk
Management, and Capital Structure Edition Scope: Chapters 1 through 27
LEGAL DISCLAIMER
This professional exam preparation guide is a derivative educational work developed for
independent study and academic review. It is based on the pedagogical frameworks and
theoretical concepts presented in Fundamentals of Corporate Finance, 14th Edition, by Stephen
A. Ross, Randolph W. Westerfield, and Bradford D. Jordan. This document is not affiliated with,
authorized by, endorsed by, or sponsored by McGraw-Hill Education or the respective authors.
The content herein—including the High-Yield Toolkit, practice questions, and analytical
commentaries—is original material designed to supplement, not replace, the official textbook. All
references to specific chapters, formulas, or proprietary models are used strictly for identification
,and educational commentary under the doctrine of Fair Use. The "Expert Analysis" and
"Industry Bridges" reflect independent professional interpretations of financial theory and
practice. Users should consult the primary text for definitive source material and official problem
sets.
PART I: THE HIGH-YIELD TOOLKIT
This section deconstructs the semester’s most chemically volatile concepts—those high-value
topics where student understanding frequently fractures under exam pressure. We move
beyond mere definitions to explore the mechanical interdependencies that define modern
corporate finance.
Module A: Financial Statement Analysis & The Cash Flow
Identity
Chapters 1–4
The most pervasive conceptual error in early finance education is the conflation of accounting
cash flow (from the Statement of Cash Flows) with financial cash flow (Cash Flow from Assets).
The 14th Edition emphasizes that the financial manager acts as a gatekeeper between the
financial markets and the firm's operations.
,The Fundamental Identity of Corporate Finance The identity \text{CF(A)} \equiv \text{CF(B)}
+ \text{CF(S)} is an accounting tautology that must hold true. If the firm generates cash (Assets),
that cash must be paid out to the providers of capital (Creditors and Stockholders).
Cash Flow Component Formulaic Derivation Common Exam Trap
Operating Cash Flow (OCF) \text{EBIT} + \text{Depreciation} Deducting Interest: Students
- \text{Taxes} often subtract interest here
because it's a "cost." In finance,
interest is a financing flow, not
an operating one. OCF
represents the cash generating
power of the core business
independent of how it is
financed.
Net Capital Spending (NCS) \text{End. Net Fixed Assets} - Ignoring Depreciation: Since
\text{Beg. Net Fixed Assets} + the balance sheet shows net
\text{Depreciation} fixed assets (book value), the
change in the balance sheet
number understates actual
spending by the amount of
depreciation. You must add
depreciation back to find the
gross purchase.
Change in NWC \text{End. NWC} - \text{Beg. Sign Errors: An increase in
NWC} NWC (e.g., buying more
inventory than you sell) is a
cash outflow. Students often
treat asset growth as a positive
cash flow.
, The Growth Rate Trap: Internal vs. Sustainable Financial modeling relies heavily on growth
assumptions. The text distinguishes between growth funded internally versus growth funded by
maintaining the capital structure.
● Internal Growth Rate: The maximum growth rate a firm can achieve without any external
financing of any kind. This assumes the firm grows solely by reinvesting retained
earnings.
○
● Sustainable Growth Rate: The maximum growth rate a firm can achieve without issuing
new equity while maintaining a constant debt-to-equity ratio. This implies that as equity
grows via retained earnings, the firm borrows new debt to keep the D/E ratio fixed.
Insight: The SGR is almost always higher than the IGR because it leverages the retained
earnings with new debt.
Module B: Valuation Architectures
Chapters 5–8
The Bond Pricing Seesaw The relationship between price and yield is non-linear and convex.
This convexity (though not explicitly calculated in introductory courses) explains why price gains
from rate drops exceed price losses from equivalent rate hikes.
● Premium Bonds: Coupon Rate > YTM. Price > Par. The bond price will decline toward
par as it approaches maturity (pull-to-par effect).
● Discount Bonds: Coupon Rate < YTM. Price < Par. The bond price will accrete (rise)
toward par as it approaches maturity.
GUIDE: FUNDAMENTALS OF
CORPORATE FINANCE (14TH
EDITION)
Comprehensive Pro-Level Review for Ross, Westerfield, and Jordan
Prepared for: Advanced Corporate Finance Candidates, Academic Practitioners, and Financial
Analysts Subject Matter: Corporate Finance Theory, Valuation, Capital Budgeting, Risk
Management, and Capital Structure Edition Scope: Chapters 1 through 27
LEGAL DISCLAIMER
This professional exam preparation guide is a derivative educational work developed for
independent study and academic review. It is based on the pedagogical frameworks and
theoretical concepts presented in Fundamentals of Corporate Finance, 14th Edition, by Stephen
A. Ross, Randolph W. Westerfield, and Bradford D. Jordan. This document is not affiliated with,
authorized by, endorsed by, or sponsored by McGraw-Hill Education or the respective authors.
The content herein—including the High-Yield Toolkit, practice questions, and analytical
commentaries—is original material designed to supplement, not replace, the official textbook. All
references to specific chapters, formulas, or proprietary models are used strictly for identification
,and educational commentary under the doctrine of Fair Use. The "Expert Analysis" and
"Industry Bridges" reflect independent professional interpretations of financial theory and
practice. Users should consult the primary text for definitive source material and official problem
sets.
PART I: THE HIGH-YIELD TOOLKIT
This section deconstructs the semester’s most chemically volatile concepts—those high-value
topics where student understanding frequently fractures under exam pressure. We move
beyond mere definitions to explore the mechanical interdependencies that define modern
corporate finance.
Module A: Financial Statement Analysis & The Cash Flow
Identity
Chapters 1–4
The most pervasive conceptual error in early finance education is the conflation of accounting
cash flow (from the Statement of Cash Flows) with financial cash flow (Cash Flow from Assets).
The 14th Edition emphasizes that the financial manager acts as a gatekeeper between the
financial markets and the firm's operations.
,The Fundamental Identity of Corporate Finance The identity \text{CF(A)} \equiv \text{CF(B)}
+ \text{CF(S)} is an accounting tautology that must hold true. If the firm generates cash (Assets),
that cash must be paid out to the providers of capital (Creditors and Stockholders).
Cash Flow Component Formulaic Derivation Common Exam Trap
Operating Cash Flow (OCF) \text{EBIT} + \text{Depreciation} Deducting Interest: Students
- \text{Taxes} often subtract interest here
because it's a "cost." In finance,
interest is a financing flow, not
an operating one. OCF
represents the cash generating
power of the core business
independent of how it is
financed.
Net Capital Spending (NCS) \text{End. Net Fixed Assets} - Ignoring Depreciation: Since
\text{Beg. Net Fixed Assets} + the balance sheet shows net
\text{Depreciation} fixed assets (book value), the
change in the balance sheet
number understates actual
spending by the amount of
depreciation. You must add
depreciation back to find the
gross purchase.
Change in NWC \text{End. NWC} - \text{Beg. Sign Errors: An increase in
NWC} NWC (e.g., buying more
inventory than you sell) is a
cash outflow. Students often
treat asset growth as a positive
cash flow.
, The Growth Rate Trap: Internal vs. Sustainable Financial modeling relies heavily on growth
assumptions. The text distinguishes between growth funded internally versus growth funded by
maintaining the capital structure.
● Internal Growth Rate: The maximum growth rate a firm can achieve without any external
financing of any kind. This assumes the firm grows solely by reinvesting retained
earnings.
○
● Sustainable Growth Rate: The maximum growth rate a firm can achieve without issuing
new equity while maintaining a constant debt-to-equity ratio. This implies that as equity
grows via retained earnings, the firm borrows new debt to keep the D/E ratio fixed.
Insight: The SGR is almost always higher than the IGR because it leverages the retained
earnings with new debt.
Module B: Valuation Architectures
Chapters 5–8
The Bond Pricing Seesaw The relationship between price and yield is non-linear and convex.
This convexity (though not explicitly calculated in introductory courses) explains why price gains
from rate drops exceed price losses from equivalent rate hikes.
● Premium Bonds: Coupon Rate > YTM. Price > Par. The bond price will decline toward
par as it approaches maturity (pull-to-par effect).
● Discount Bonds: Coupon Rate < YTM. Price < Par. The bond price will accrete (rise)
toward par as it approaches maturity.
