Corporate Finance. Summary of "Principles of Corporate Finance" by Brealey et al.(11th edition)"


Exam Revision, 2012
9 Pages

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
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

Details

Title
Corporate Finance. Summary of "Principles of Corporate Finance" by Brealey et al.(11th edition)"
College
Stralsund University of Applied Sciences
Author
Year
2012
Pages
9
Catalog Number
V277872
ISBN (eBook)
9783656705796
File size
534 KB
Language
English
Notes
Querformat!
Tags
summary, corporate, finance
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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