Corporate Financial Management, Second Edition

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9780130832269: Corporate Financial Management, Second Edition

This book, from the former editors of FMA's Journal of Financial Management, is the first to integrate the major developments made in finance in the last twenty years, such as principal-agent considerations, asymmetric information considerations, and contingent claims analysis. The format parallels that of competitors, but the new material is woven into, and enriches, the traditional presentations. This is also the first corporate finance textbook to truly marry practice with theory, by having a full-time practitioner author. The volume provides an overview of corporate financial management and details accounting, cash flows, and taxes, the financial environment, principles, and fundamental concepts, valuation, risk & return, financial securities, options, valuing contingencies and financial contracting, as well as capital budgeting, strategic asset allocation, capital structure and dividend policy, managing the firm and long-term financing. For business professionals.

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About the Author:

Douglas R. Emery is Bank of America Scholar, Professor of Finance, and Finance Department Chair in the School of Business at the University of Miami. For six and a half years, He and John Finnerty were the editors of Financial Management, the signature journal of the Financial Management Association International (FMA). This is their fifth book and their second with John Stowe. Their most recent book together, Debt Management: A Practitioner's Guide, was published by Harvard Business School Press in 2001. In addition to having been an editor, Doug serves or has served as an Associate Editor of Journal of Financial Research, The Financial Review, Journal of Applied Finance, Financial Practice and Education, and FMA Online. He has also served as President of the Southern Finance Association and the Eastern Finance Association, and has been a Director of FMA. His research has been published in a wide variety of journals, including the Journal of Finance, Journal of Financial and Quantitative Analysis, Financial Management, Journal of Financial Research, Journal of Accounting Research, Journal of Banking and Finance, Journal of Applied Corporate Finance, Journal of Applied Finance, Decision Sciences, Psychometrika, and the Journal of Marketing Research.

John D. Finnerty is a Principal of Analysis Group/Economics and a Professor of Finance in the Graduate School of Business Administration at Fordham University. He has previously worked for Morgan Stanley & Co., Lazard Freres & Co., Houlihan Lokey Howard & Zukin, PricewaterhouseCoopers, and was the Chief Financial Officer of the College Savings Bank. He currently serves as an Editor of FMA Online and on the advisory boards of the Journal of Portfolio Management and The Financier. He has served as President of the Fixed Income Analysts Society and has been a Director of the Financial Management Association. He has authored, co-authored, or co-edited nine other books, including Debt Management: A Practitioner's Guide. His research has been published in a wide variety of journals, including the Journal of Money, Credit and Banking, Journal of Financial and Quantitative Analysis, Financial Management, Journal of Applied Finance, Journal of Portfolio Management, and Management Science. He co-holds four patents on financial products.

John D. Stowe is Associate Dean, Professor of Finance, and past chair of the finance department in the College of Business at the University of Missouri-Columbia. He has also taught at the University of Oklahoma, Florida International University, University of California-Irvine, and the University of Houston. He is a CFA charterholder. He currently serves as an associate editor of Financial Review and is a past president of the Southwestern Finance Association. In addition to his books with Doug and John, he has recently co-authored Analysis of Equity Investments: Valuation. He has published his research in several journals, including the Journal of Finance, Journal of Financial and Quantitative Analysis, Financial Management, Journal of Financial Research, Journal of Investing, Journal of Risk and Insurance, Journal of Economics and Business, Journal of Business Finance and Accounting, Managerial and Decision Economics, and Organizational Behavior and Human Decision Processes.

Excerpt. © Reprinted by permission. All rights reserved.:

The field of finance has evolved over the past 50 years from basic descriptions of observed practice. Today, it is a sound body of concepts and theory that helps us understand finance. The world of finance continues to evolve at a dizzying pace. Changes in the economic environment and in the practice of finance occur daily. Consider stock price movements over the last several years and scandals at Enron, ImClone, Tyco, and WorIdCom. How can you prepare for such a rapidly changing field? This text offers a set of fundamental tenets designed to help you develop intuition about decision making that will hold true through future evolutions in the financial world. Our principles of finance provide an integrated view of the theory of finance so that financial decision making can be treated as an application of this basic understanding.

Corporate Financial Management shows how to apply this `ready intuition' to the world of financial management. For example, the first principle, the Principle of Self-Interested Behavior, is the most basic. Without this principle, we cannot explain financial behavior. Regrettably, some people misapply this principle. In your career, you are likely to face illegal "opportunities" to make literally millions of dollars by, for example, insider trading. Our Principle of Self-Interested Behavior explicitly excludes such behavior: individuals should obey the rules and regulations to ensure legal—and ethically sound—behavior. There is nothing wrong with pursuing self-interested behavior—provided you play by the rules. Recent scandals demonstrate the importance of corporate governance, and highlight the relevance of our chapter on agency theory, which is based on the Principle of Self-Interested Behavior.

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 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 theory and their ability to apply it 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 the introductory course, and/or as a text for advanced classes as well as being a reference for other work in the business school curriculum.

We assume throughout the book a familiarity with the standard prerequisites in business/ management programs: college-level algebra, financial accounting, microeconomics, and statistics. Although we assume 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 provide an easily accessed summary of the important dimensions and concepts connected with particular topics.

IMPORTANT CHANGESS AND IMPROVEMENTS IN THE SECOND EDITION

This edition reflects feedback from users and changes within the corporate world and the issues students encounter today.

  • REAL OPTIONS. 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 introduction into real options. For example, we use option concepts in agency theory, capital budgeting, and capital structure, among many others. Options analysis is one of the most valuable technologies available in finance.
  • AGENCY THEORY. We include a separate chapter on agency theory and principal-agent problems. Throughout the book, we 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 downfall of Enron.
  • CAPITAL BUDGETING. In response to users and reviews, capital budgeting is covered earlier in this edition.
  • MINICASES. A Minicase has been added to 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.
  • PROBLEM SETS. Problems are organized into three different levels of difficulty, from basic to advanced, to help faculty and students determine appropriate material to review more efficiently. 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. Selected solutions are included at the end of the text.
  • QUESTIONS. These are in addition to the problem sets. The questions are intended to be answered verbally, without calculations. 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 may require a little more thought because they are more complex, more subtle, or, occasionally, sneaky.
  • CURRENCY. All of the examples, tables, and figures have been updated to include the current laws, regulations, and data.
  • 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.

OTHER FEATURE

  • 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 fundamental learning device for many business students.
  • 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. We have provided the equation summaries on the website for this second edition.
  • 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. Therefore, the concepts and principles developed in this book are readily applicable 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 to operate.
  • A PRACTITIONER'S PERSPECTIVE. John Finnerty has worked almost 30 years in the world of finance and, thus, brings a unique perspective to this book. Based on this first-hand experience, John brings the real world of business into the classroom.

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: two of the latest six prizes have been awarded for work in the area of asymmetric information, and one has been awarded for work in options. 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 imp...

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