Excerpt
1
Chapter
1
(G
ener
al
Overv
iew)
Corporate
finance
=
area
of
finance
dealing
with
mon
etary
de
cisions
that
business
enterprises
make
and
the
tools
and
analysis
used
to
make
these
decisions
Agency
pr
obl
e
ms
=
confli
ct
of
interest
between
shareholders
and
other
stakeholders
Hur
d
le
rate
=
the
mi
nim
u
m
rate
of
return
on
a
project
or
investment
required
by
a
manager
or
in
ve
st
or
in
order
to
comp
e
n
sate
for
risk
Cost
of
capital
=
required
return
necessary
to
make
a
capi
tal
b
udg
eting
project
worthwhile
(includes
cost
of
deb
t
&
cost
of
equity
)
Oppor
tu
n
ity
cost
of
ca
p
it
al
=
cost
of
an
alternative
th
at
mus
t
be
fo
rgone
in
order
to
pu
rsu
e
a
certai
n
action
Chapter
2
(Ho
w
to
calculate
pres
ent
values)
PV
=
cash
flo
w
x
discoun
t
factor
Discou
nt
fac
tor
=
NPV
=
C
0
+
PV
FV
=
CF
(1+r)
t
Return
=
PV
(per
p.)
=
PV
(per
p.
st
ar
ti
n
g
ye
ar
t)
=
x
PV
(ann.)
=
EAR
=
(1
+
r)
t
1
APR
=
r
x
t
Prese
n
t
value
=
current
wor
th
of
a
future
cash
flow
given
a
specif
ic
rate
of
return
Perp
et
uity
=
financial
conc
ept
in
w
h
ich
cash
flow
is
theoretically
re
ce
iv
ed
forever
Annui
ty
=
an
asset
that
pa
ys
a
fixed
sum
each
year
for
a
specific
nu
m
b
er
of
years
Effective
a
nnu
al
in
te
re
st
ra
te
(EA
R
)=
interest
rate
th
at
is
annualized
using
compo
und
in
te
re
st
Annu
al
Perce
n
tag
e
Ra
te
(AP
R
)
=
in
te
rest
rate
that
is
annuali
zed
using
simple
in
te
rest
2
Chapter
3
(
V
aluing
b
o
nds
)
PV
=
+
+
...
+
.
YTM
=
.
=
IR
R
Price
of
bond
=
PV
(bond)
=
coupon
+
(t=years
to
m
aturity
)
1
+
r
no
m
=
(1
+
r
real
)
(1
+
i)
Bond
=
deb
t
in
ve
st
m
ent
in
which
an
in
vest
or
loans
money
to
an
en
ti
ty
(co
rpo
rate
or
governme
ntal)
that
borrows
the
funds
for
a
define
d
period
of
time
at
a
fixed
in
te
re
st
rat
e
Coupon
rate
=
interest
ra
te
of
bond,
ne
ver
chan
ges
within
maturi
ty
Market
yield
=
ge
neral
interest
level
(companies
pa
y
marke
t
yield
+
individual
risk)
Yield
to
ma
tur
it
y
=
a
long
term
bon
d
yield
expressed
as
an
annual
rate,
the
IRR
on
a
in
te
re
st
beari
n
g
ins
trume
nt
Spot
rate
=
ac
tu
al
interest
rate
today
Forwar
d
ra
te
=
in
te
re
st
rate,
fixed
today
, on
a
loan
mad
e
in
th
e
future
at
a
fixed
ti
me
Future
rate
=
spot
rate
that
is
ex
p
e
ct
ed
in
the
future
Dur
ati
on
=
w
eighted
avera
ge
of
the
tim
es
when
bon
d
's
cash
pay
m
ents
are
received
Nominal
interest
rate
=
ra
te
you
ac
tu
al
ly
pay
when
you
borrow
mon
ey
Real
in
te
re
st
rate
=
th
eoretical
rate
you
pay
when
yo
u
borrow
mo
ney,
as
deter
m
ined
by
supply
and
demand
including
inflation
Chapter
4
(Va
lu
e
of
common
stocks)
P
0
(n
ot
cons
tant
growth)
=
+
+
...
+
P
H
=
P
0
(c
ons
tant
growth)
=
+
+
...
+
x
r
=
+
g
=
divi
dend
yield
+
g
=
ROE
=
g
=
RO
E
x
plo
w
back
ra
tio
PV
(busi
n
ess)
=
...
+
PV
(f
ree
cash
flows)
PV
(
h
orizon/value)
Common
st
ock
=
ownership
shares
in
a
publi
cly
held
corporation
Prima
ry
market
=
mar
ket
for
the
sale
of
new
securities
by
corporations
Secondary
ma
rk
et
=
mark
et
in
which
pr
eviously
issued
securities
ar
e
trades
among
investors
Book
va
lu
e
=
net
worth
of
the
fir
m
a
cco
rding
to
the
balance
sheet
(backward
lo
oking
measur
e)
Market
value
=
depe
nds
on
future
divid
ends
that
shareholders
expect
to
receive,
forw
ard
looking
Dividen
d
=
period
ic
cash
d
istribution
fr
om
firm
to
shareholders
Market
value
bal
ance
sheet
=
fina
ncial
statement
using
market
value
of
assets
and
lia
bilities
Expec
ted
re
turn
=
perc
en
tag
e
yield
that
investor
forecasts
from
a
specific
inves
tment
over
a
set
period
of
time
(=
marke
t
ca
pitaliza
tion
rate)
Dividen
d
yield
=
shows
how
mu
ch
com
p
any
pays
out
in
divide
nds
each
year
relative
to
its
share
price
Payo
ut
rati
o
=
fraction
of
earning
paid
out
as
divid
e
nds
Plo
w
b
ack
ratio
=
fraction
of
earnings
re
ta
in
ed
by
th
e
firm
3
PVGO
=
P
0
Horiz
o
n
Va
lue
=
value
of
a
bond
at
maturity
or
of
an
asset
at
a
spe
cified
date,
ta
king
in
to
account
in
te
re
st
rates
&
current
value
of
the
ass
et
(assuming
stable
growth
ra
te)
Prese
n
t
value
of
growth
oppor
tu
n
iti
e
s
(PVGO)
=
net
present
value
of
a
firm's
future
in
ve
st
m
ent
Chapter
5
(N
PV
an
d
ot
her
inves
tment
cr
it
e
ria
)
0
=
C
0
+
+
+
...
+
Internal
rate
of
re
turn
(I
R
R
)
=
is
th
e
"r"
that
mak
es
the
NPV
=
0
Investment
eva
lu
at
ion
tec
hniq
u
es
:
NPV
IRR
(l
endi
ng/
borrowing,
multiple
Ro
R)
Payb
ack
(acc
epts
proje
cts
that
pay
ba
ck
in
desired
ti
me
frame,
but
ignores
la
ter
cash
flow
s
&
inflation)
Book
rat
e
of
return
(avera
ge
income
di
vided
by
average
book
value,
but
no
inflation)
Profi
tability
Index
(NPV
di
vided
by
inve
stment,
bu
t
what
happens
wi
th
unuse
d
cash)
Capital
rationing
=
limit
se
t
on
the
am
ount
of
fu
nds
available
for
investment
Soft
ra
ti
o
n
ing
=
limi
ts
on
available
funds
imposed
by
manage
me
nt
(fo
r
bigger
firms)
Har
d
ra
ti
o
n
ing
=
li
mits
on
available
funds
imposed
by
unavailabili
ty
of
funds
in
ca
pit
al
market
(fo
r
smaller
fir
m
s)
Chapter
6
(Investment
decisions
wi
th
the
NPV
ru
le
)
Working
Capital
=
current
assets
current
liabilities
Real
discoun
t
ra
te
=
1
Equival
e
n
t
annu
al
ann
u
ity
=
Annui
ty
fa
cto
r
=
Equival
e
n
t
annu
al
ann
u
ity
=
the
cash
fl
ow
per
period
with
the
same
present
value
as
the
actual
cash
flow
of
the
project
(e.g.
an
nual
costs
for
machin
e)
Chapter
7
(In
troducti
on
to
risk
and
re
turn)
Market
prem
ium
=
return
stock
market
risk
free
rate
Treasury
bills
(T
Bills)
=
short
term
US
govern
m
en
t
bon
d
(3
4
year
s),
risk
free,
bu
t
still
uncer
tainty
ab
ou
t
in
flation
Common
st
ock
=
normal
stock
Vari
ance
=
th
e
variance
of
the
marke
t
return
is
th
e
exp
ec
te
d
squared
4
Vari
ance
=
((expected
return
actual
re
tu
rn
)²
x
pro
b
ability
)
St
andard
de
via
tio
n
=
variance
Expec
ted
Po
rt
fo
lio
Re
tu
rn
=
(
x
1
r
1
)
+
(x
2
r
2
)
Por
tfoli
o
Vari
ance
=
x
1
2
1
2
+
2(x
1
x
2
p
12
1
2
)
+
x
2
2
2
2
Beta
=
deviation
fro
m
the
ex
p
e
ct
ed
return
St
andard
de
via
tio
n
=
is
the
square
root
of
the
variance
(risk!
)
Diversification
=
strategy
d
esigned
to
re
duce
risk
by
s
p
reading
th
e
portfolio
across
many
inve
stments
(at
le
ast
reduce
m
acroeconomi
c
influences)
Uniq
ue
risk
=
risk
factors
affecting
only
that
fir
m
, als
o
called
diver
sifiabl
e
risk
Market
ri
sk
=
economy
wid
e
sources
of
risk
that
affect
the
overall
stock
market,
also
called
sys
tem
atic
risk
Market
portf
o
lio
=
portfolio
of
all
assets
in
the
econo
m
y
Beta
=
se
nsiti
vity
of
a
stock's
return
to
the
return
on
the
marke
t
portfolio
(cal
culates
how
one
chosen
fluctuates
in
com
p
arison
to
market)
Chapter
8
(
P
ortf
olio
theory
&
capital
asset
pricing
model)
Sharpe
rati
o
=
SML
(CA
P
M
/
cost
of
e
quity
/
exp
e
cte
d
return)=
return
at
risk
free
rate
+
bet
a
(marke
t
retur
n
retur
n
at
risk
free
rate)
Markowi
tz
Portf
o
lio
Theory
=
combi
n
ing
stocks
into
portfolios
can
reduce
st
andard
deviation
(risk
)
throug
h
correlation
coefficie
n
ts
Efficient
frontier
=
portfolios
on
this
li
ne
will
offer
th
e
hig
h
est
expecte
d
return
for
any
level
of
risk
Securit
y
ma
rk
e
t
line
(SML)=
co
mbinati
o
n
of
risk
free
bonds
&
stock
portfolio
(in
question:
required
ROI
or
opportunity
cost
of
capital,
retur
n
)
=
relationship
betw
een
return
&
ris
k
Sharpe
rati
o
=
ratio
of
risk
premium
to
standard
deviation
(gives
us
the
one
portfolio
which
gives
us
the
SM
L)
Capital
ass
e
t
pricing
mo
d
e
l (CAPM)
=
mod
el
tha
t
desc
rib
es
the
relationship
betwee
n
risk
and
ex
p
e
ct
ed
retur
n
Arbitrage
pri
cing
model
=
assumes
that
each
stock's
return
d
epend
s
partly
on
pervasive
macroeconomic
infl
uences
and
on
events
that
are
uniqu
e
to
the
compa
n
y
Risk
pr
emiu
m
=
The
retur
n
in
excess
of
the
risk
free
rate
of
return
that
an
investment
is
ex
p
e
ct
ed
to
yield
(fo
rm
of
comp
ensa
tion
for
inves
tors
who
tolerate
the
extra
risk)
Three
Fa
ct
or
Model
=
factors
that
appear
to
de
termi
n
e
ex
p
e
ct
ed
returns:
Market
fa
ctor
(re
turn
on
market
risk
free
rate)
Size
factor
(r
eturn
on
small
return
on
large
firm
stocks)
Book
to
ma
rk
e
t
fac
tor
(r
e
turn
on
hi
gh
return
on
low
book
to
market
ratio
stocks)
Excerpt out of 9 pages
- Quote paper
- Laura Herrmann (Author), 2012, Corporate Finance. Summary of "Principles of Corporate Finance" by Brealey et al.(11th edition)", Munich, GRIN Verlag, https://www.grin.com/document/277872
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