Fundamentals of Corporate Finance
Fundamentals of Corporate
Finance
Third Edition
Richard A. Brealey
Bank of England and London Business School
Stewart C. Myers
Sloan School of Management
Massachusetts Institute of
Technology
Alan J. Marcus
Wallace E. Carroll School of
Management Boston College
with additional material from
Fundamentals of Corporate Finance, Alternate Fifth Edition
Essentials of Corporate Finance, Second Edition
1|Page
,Selected material from
FUNDAMENTALS OF CORPORATE FINANCE, Third Edition
with additional material from
FUNDAMENTALS OF CORPORATE FINANCE, Alternate Fifth
Edition ESSENTIALS OF CORPORATE FINANCE, Second Edition
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Printed in the United
States of America. Ex- cept as permitted under the United States Copyright Act of 1976, no part of
this publication may be reproduced or distrib- uted in any form or by any means, or stored in a
data base retrieval system, without prior written permission of the pub- lisher.
This book contains select material from:
Fundamentals of Corporate Finance, Third Edition by Richard A. Brealey, Stewart C. Myers, and Alan J.
Marcus. Copyright
© 2001, 1999, 1995, by The McGraw-Hill Companies, Inc.
Fundamentals of Corporate Finance, Alternate Fifth Edition by Stephen A. Ross, Randolph W.
Westerfield, and Bradford D. Jordan. Copyright © 2000, 1998, 1995, 1993, 1991 by The McGraw-
Hill Companies, Inc.
Essentials of Corporate Finance, Second Edition by Stephen A. Ross, Randolph W. Westerfield, and
Bradford D. Jordan. Copyright © 1999 by The McGraw-Hill Companies, Inc. Previous edition © 1996
by Richard D. Irwin, a Times Mirror Higher Education Group, Inc. company.
All reprinted with permission of the publisher.
ISBN 0-07-553109-7
Sponsoring Editor: Christian
Perlee Production Editor: Nina
Meyer
, Fundamentals of Corporate Finance
Contents
Future Value of Multiple Cash Flows
SECTION 1 1 Present Value of Multiple Cash Flows
Level Cash Flows: Perpetuities and
The Firm and the Annuities
Financial Manager 3
Organizing a Business 4
Sole Proprietorships 4
Partnerships 5
Corporations 5
Hybrid Forms of Business Organization 6
The Role of the Financial Manager 7
The Capital Budgeting
Decision 8 The Financing
Decision 9
Financial Institutions and Markets 10
Financial Institutions 10
Financial Markets 11
Other Functions of Financial Markets and
Institutions 12
Who Is the Financial Manager? 13
Careers in Finance 15
Goals of the Corporation 17
Shareholders Want Managers to
Maximize Market Value 17
Ethics and Management Objectives 19
Do Managers Really Maximize Firm
Value? 21 Snippets of History 25
Summary 25
Related Web Links
2
8 Key Terms 28
Quiz 28
Practice Problems 29
Solutions to Self-Test Questions 31
The Time Value of Money33
Future Values and Compound Interest
34
Present Values38
Finding the Interest Rate44
Multiple Cash Flows46
3|Page
, What Is Financial Planning? 82
Financial Planning Focuses on the Big
Picture 83 Financial Planning Is Not Just
How to Value Perpetuities 50 Forecasting 84 Three Requirements for
How to Value Annuities 51 Effective Planning 84
Annuities Due 54
Future Value of an Annuity 57 Financial Planning Models 86
Components of a Financial Planning Model
Inflation and the Time Value of Money 61 87 An Example of a Planning Model 88
Real versus Nominal Cash Flows An Improved Model 89
61 Inflation and Interest Rates
63 Valuing Real Cash Payments Planners Beware 93
65 Real or Nominal? 67 Pitfalls in Model Design 93
The Assumption in Percentage of Sales
Effective Annual Interest Rates 67
Models 94 The Role of Financial Planning
Summary 69 Models 95
Related Web Links
External Financing and Growth 96
69 Key Terms 70
Quiz 70 Summary 100
Practice Problems 72 Related Web Links
Challenge Problems 75 101 Key Terms 101
Solutions to Self-Test Questions Quiz 101
77 Minicase 79 Practice Problems 102
Challenge Problems 106
Financial Planning 81 Solutions to Self-Test Questions 106
iii
Fundamentals of Corporate
Finance
Third Edition
Richard A. Brealey
Bank of England and London Business School
Stewart C. Myers
Sloan School of Management
Massachusetts Institute of
Technology
Alan J. Marcus
Wallace E. Carroll School of
Management Boston College
with additional material from
Fundamentals of Corporate Finance, Alternate Fifth Edition
Essentials of Corporate Finance, Second Edition
1|Page
,Selected material from
FUNDAMENTALS OF CORPORATE FINANCE, Third Edition
with additional material from
FUNDAMENTALS OF CORPORATE FINANCE, Alternate Fifth
Edition ESSENTIALS OF CORPORATE FINANCE, Second Edition
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Printed in the United
States of America. Ex- cept as permitted under the United States Copyright Act of 1976, no part of
this publication may be reproduced or distrib- uted in any form or by any means, or stored in a
data base retrieval system, without prior written permission of the pub- lisher.
This book contains select material from:
Fundamentals of Corporate Finance, Third Edition by Richard A. Brealey, Stewart C. Myers, and Alan J.
Marcus. Copyright
© 2001, 1999, 1995, by The McGraw-Hill Companies, Inc.
Fundamentals of Corporate Finance, Alternate Fifth Edition by Stephen A. Ross, Randolph W.
Westerfield, and Bradford D. Jordan. Copyright © 2000, 1998, 1995, 1993, 1991 by The McGraw-
Hill Companies, Inc.
Essentials of Corporate Finance, Second Edition by Stephen A. Ross, Randolph W. Westerfield, and
Bradford D. Jordan. Copyright © 1999 by The McGraw-Hill Companies, Inc. Previous edition © 1996
by Richard D. Irwin, a Times Mirror Higher Education Group, Inc. company.
All reprinted with permission of the publisher.
ISBN 0-07-553109-7
Sponsoring Editor: Christian
Perlee Production Editor: Nina
Meyer
, Fundamentals of Corporate Finance
Contents
Future Value of Multiple Cash Flows
SECTION 1 1 Present Value of Multiple Cash Flows
Level Cash Flows: Perpetuities and
The Firm and the Annuities
Financial Manager 3
Organizing a Business 4
Sole Proprietorships 4
Partnerships 5
Corporations 5
Hybrid Forms of Business Organization 6
The Role of the Financial Manager 7
The Capital Budgeting
Decision 8 The Financing
Decision 9
Financial Institutions and Markets 10
Financial Institutions 10
Financial Markets 11
Other Functions of Financial Markets and
Institutions 12
Who Is the Financial Manager? 13
Careers in Finance 15
Goals of the Corporation 17
Shareholders Want Managers to
Maximize Market Value 17
Ethics and Management Objectives 19
Do Managers Really Maximize Firm
Value? 21 Snippets of History 25
Summary 25
Related Web Links
2
8 Key Terms 28
Quiz 28
Practice Problems 29
Solutions to Self-Test Questions 31
The Time Value of Money33
Future Values and Compound Interest
34
Present Values38
Finding the Interest Rate44
Multiple Cash Flows46
3|Page
, What Is Financial Planning? 82
Financial Planning Focuses on the Big
Picture 83 Financial Planning Is Not Just
How to Value Perpetuities 50 Forecasting 84 Three Requirements for
How to Value Annuities 51 Effective Planning 84
Annuities Due 54
Future Value of an Annuity 57 Financial Planning Models 86
Components of a Financial Planning Model
Inflation and the Time Value of Money 61 87 An Example of a Planning Model 88
Real versus Nominal Cash Flows An Improved Model 89
61 Inflation and Interest Rates
63 Valuing Real Cash Payments Planners Beware 93
65 Real or Nominal? 67 Pitfalls in Model Design 93
The Assumption in Percentage of Sales
Effective Annual Interest Rates 67
Models 94 The Role of Financial Planning
Summary 69 Models 95
Related Web Links
External Financing and Growth 96
69 Key Terms 70
Quiz 70 Summary 100
Practice Problems 72 Related Web Links
Challenge Problems 75 101 Key Terms 101
Solutions to Self-Test Questions Quiz 101
77 Minicase 79 Practice Problems 102
Challenge Problems 106
Financial Planning 81 Solutions to Self-Test Questions 106
iii
