Summary 'Principles of Corporate Finance' (Brealey, Myers, Allen)

Corporate
Finance

By
Laurens
van
der
Helm









,Ta ble
o f
co ntents

Chapter
1
–
Goals
and
governance
of
the
firm
........................................................................................................
3


Chapter
2
–
How
to
calculate
present
values
..........................................................................................................
3


Chapter
4
–
The
value
of
common
stocks
................................................................................................................
5


Chapter
5
–
Net
present
value
and
other
investment
criteria
.................................................................................
6


Chapter
6
–
Making
investment
decisions
with
the
net
present
value
rule
............................................................
8


Chapter
7
–
Introduction
to
risk
and
return
............................................................................................................
9


Chapter
8
–
Portfolio
theory
and
the
capital
asset
pricing
model
.........................................................................
11


Chapter
9
–
Risk
and
the
cost
of
capital
................................................................................................................
12


Chapter
10
–
Project
analysis
................................................................................................................................
14


Chapter
11
–
Investment,
strategy,
and
economic
rents
......................................................................................
14


Chapter
12
–
Agency
problems,
compensation,
and
performance
measurement
................................................
15


Chapter
13
–
Efficient
markets
and
behavioral
finance
.........................................................................................
17


Chapter
16
–
Payout
policy
....................................................................................................................................
19


Chapter
17
–
Does
debt
policy
matter?
.................................................................................................................
20


Chapter
18
–
How
much
should
a
corporation
borrow?
.......................................................................................
22


Chapter
19
–
Financing
and
valuation
...................................................................................................................
24


Chapter
25
–
Leasing
.............................................................................................................................................
26


Chapter
20
–
Understanding
options
....................................................................................................................
28


Chapter
21
–
Valuing
options
................................................................................................................................
28


Chapter
22
–
Real
options
.....................................................................................................................................
30


Chapter
31
–
Mergers
............................................................................................................................................
31


Chapter
32
–
Corporate
restructuring
...................................................................................................................
33


Chapter
33
–
Governance
and
corporate
control
around
the
world
.....................................................................
35


Chapter
34
–
Conclusion:
what
do
we
and
do
not
know
about
finance?
..............................................................
35








2


, Prin cip les
o f
C o rp o rate
Fin an ce
(B rea ley,
M yers
&
Allen )

Chapter
1
–
Goals
and
governance
of
the
firm


1.1
Corporate
investment
and
financing
decisions

Investment
decisions
are
basically
about
the
purchase
of
real
assets,
also
called
capital
budgeting
or
capital

expenditures
(CAPEX),
to
generate
returns
in
the
future.
Financing
decisions,
are
basically
about
raising
money

to
buy
real
assets.
The
choice
between
debt
and
equity
financing
is
called
the
capital
structure
decision.




Corporations
raise
equity
financing
in
two
ways:
by
the
issuing
new
shares
of
stock
or
by
taking
the
cash
flow

generated
by
its
existing
assets
and
reinvest
in
new
assets.
When
a
corporation
decides
to
pay
dividends
or
to

repurchase
shares,
it
makes
a
payout
decision.
The
market
capitalization
(or
market
cap)
of
a
company
is
it’s

worth
according
to
the
number
of
outstanding
shares
times
the
price
of
these
shares.




A
corporation
is
a
legal
entity,
which
is
owned
by
its
shareholders.
The
shareholders
have
limited
liability,

which
means
that
they
cannot
be
held
personally
responsible
for
the
corporation’s
liabilities.
The
separation
of

ownership
and
control
gives
corporations
permanence:
the
future
of
the
corporation
is
independent
of
the

managers
or
owners.
The
downside
of
the
separation
of
ownership,
is
the
agency
problem.



1.2
The
role
of
the
financial
manager
and
the
opportunity
cost
of
capital

In
this
book,
a
financial
manager
refers
to
anyone
responsible
for
an
investment
or
financing
decision.
The
role

of
a
financial
manager
is
to
mediate
between
the
financial
markets
(to
raise
funds
to
invest)
and
the
firm’s

operations
(making
money
out
of
its
real
assets).
The
decision
to
or
not
to
invest,
depends
on
the
rate
of
return

on
a
project.
The
opportunity
cost
of
capital
refers
to
the
minimum
rate
of
return
needed
to
convince
investors

to
invest
in
a
product.



1.3
Goals
of
the
corporation

Shareholders
delegate
the
authority
to
maximize
the
value
of
the
company
to
a
board
of
directors,
who

delegate
the
daily
management
of
the
firm
to
the
management.
The
interest
of
the
shareholders
and
the

management
often
conflict
(the
agency
problem).



1.4
Agency
problems
and
corporate
governance

The
agency
problem
arises
because
the
fundamental
objective
of
the
corporation,
maximizing
the
value
of
the

cash
invested
by
the
shareholders,
often
conflicts
with
the
managers’
personal
objectives.
Agency
costs
are

incurred
when
managers
do
not
attempt
to
maximize
firm
value
and
shareholders
incur
costs
to
monitor
the

managers’
performances.



Chapter
2
–
How
to
calculate
present
values


2.1
Future
values
and
present
values

The
most
basic
principle
of
finance
is
that
a
dollar
today
is
worth
more
than
a
dollar
tomorrow.
The
growth

rate,
the
interest,
that
is
earned
on
an
investment
is
called
the
compound
interest.
The
future
value
of
an

amount
of
money
M,
invested
for
t
years
with
an
interest
of
r
can
be
calculated.
It
is
also
possible
to
determine

how
much
to
invest
today
to
earn
a
certain
amount
of
money.







FV = M ! (1+ r)t

(future
value
of
money
with
t
for
the
number
of
years)





Ct 1

PV = = Ct !
(present
value
of
a
cash
flow
of
Ct
at
the
end
of
year
t)

(1+ r)t (1+ r)t





3