Corporate Finance
The Basic Accounting Statements
There are three basic accounting statements that summarize information about a firm. The first is the balance sheet which summarizes the assets owned by a firm, the value of these assets and the mix of financing, debt and equity, used to finance these assets at a point in time.
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Discount Rates for International Projects
Which is riskier for an investor in the United States—the Standard and Poor’s Composite Index or the stock market in Egypt? If you answer Egypt, you’re right, but only if risk is defined as total volatility or variance. But does investment in Egypt have a high beta? How much does it add to the risk of a diversified portfolio held in the United States?
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Where Positive Net Present Values Come From
Why is an M.B.A. student who has learned about DCF like a baby with a hammer? Answer: Because to a baby with a hammer, everything looks like a nail. Our point is that you should not focus on the arithmetic of DCF and thereby ignore the forecasts that are the basis of every investment decision. Senior managers are continuously bombarded with requests for funds for capital expenditures.
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Risk, Return, and the Opportunity Cost of Capital
Financial analysts are blessed with an enormous quantity of data on security prices and returns. For example, the University of Chicago’s Center for Research in Security Prices (CRSP) has developed a file of prices and dividends for each month since 1926 for every stock that has been listed on the New York Stock Exchange (NYSE) Read more»
Making Investment Decisions with the Net Present Value Rule
Up to this point we have been concerned mainly with the mechanics of discounting and with the net present value rule for project appraisal. We have glossed over the problem of deciding what to discount. When you are faced with this problem, you should always stick to three general rules Read more»
Finance and the Financial Manager
Not all businesses are corporations. Small ventures can be owned and managed by a single individual. These are called sole proprietorships. In other cases several people may join to own and manage a partnership. However, we talk about corporate finance. So we need to explain what a corporation is.
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Sensible Motives for Mergers
Mergers that take place between two firms in the same line of business are known as horizontal mergers. Recent examples include bank mergers, such as Chemical Bank’s merger with Chase and Nationsbank’s purchase of BankAmerica. Other headline-grabbing horizontal mergers include those between oil giants Exxon and Mobil, and between British Petroleum (BP) and Amoco.
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What is a lease?
Leases come in many forms, but in all cases the lessee (user) promises to make a series of payments to the lessor (owner). The lease contract specifies the monthly or semiannual payments, with the first payment usually due as soon as the contract is signed. The payments are usually level, but their time pattern can be tailored to the user’s needs. Read more»
Nominal and Real Rates of Interest
If you invest $1,000 in a bank deposit offering an interest rate of 10 percent, the bank promises to pay you $1,100 at the end of the year. But it makes no promises about what the $1,100 will buy. That will depend on the rate of inflation over the year. If the prices of goods and services increase by more than 10 percent, you have lost ground in terms of the goods that you can buy.
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