Preface

The text contains a number of distinctive features. First, it presents the essential points of finance theory and reinforces these points with hands-on applications. Second, the text focuses on essential material, a contrast with other corporate finance texts whose thirty chapters or more organized under eight to ten broad headings leave the instructor with the task of figuring out what to cover in a semester’s work. Third, each chapter contains two demonstration problems that take the student step-by-step to the solution, review questions, extensive problem sets, and discussion questions to be used both inside and outside the classroom. And last, short illustrative videos highlighting key learning objectives are available throughout.

The twenty-one chapters of this text introduce modern corporate finance, cover the firm’s investment decision, the firm’s financing decision, the working capital decision, and special topics. The introductory section of the text defines corporate finance, introduces contracts and markets, and includes a separate chapter on corporate ethics. Chapter 1 “Introduction to Modern Corporate Finance” presents an innovative approach that derives, through economic principles, a set of decision rules for corporate managers who are making decisions for shareholders. Chapter 2 “Markets and Contracts” discusses contracts and markets, including the concept of efficient markets, and sets forth the view of ownership through the corporation with contracting and agency relationships. Chapter 3 “Corporate Ethics and Shareholder Wealth Maximization” on ethics doesn’t attempt to teach right or wrong behavior but instead provides a framework with which to bring ethics into the corporate discussion.

The next main section provides the conceptual and analytical building blocks to finance. Chapter 4 “The Time Value of Money” on the time value of money delivers the message that money through time should be considered different commodities that cannot be added to or subtracted from each other. Applications are next as Chapter 5 “The Valuation of Financial Securities” shows how to value financial assets. The basics of options are introduced in Chapter 6 “Introduction to Options” as a way to illustrate limited liability—how the firm’s equity can be viewed as an option on the firm’s assets—as well as setting the stage for a more complete understanding of bankruptcy and firm financing.

This edition of the text includes four chapters in the area of capital budgeting. Chapter 7 “The Techniques of Capital Budgeting” draws an important distinction between financial assets and real assets, discusses how value can be created, and introduces the various techniques of capital budgeting. Chapter 8 “Estimating Project Cash Flows” details the estimation of project cash flows, while Chapter 9 “Real Options” illustrates how projects can be best modeled as real options, offering a more rich set of decisions in the valuation of real assets. Chapter 10 “Advanced Topics in Capital Budgeting” concludes this section with advanced topics in capital budgeting.

A common theme in Chapter 11 “Risk and Diversification” and Chapter 12 “Modern Portfolio Theory and the Capital Asset Pricing Model” is the separation of total risk into systematic and unsystematic components, and the use of the capital asset pricing model to “price” systematic risk. Chapter 13 “Financial Leverage”, Chapter 14 “Financing: Why Might it Matter”, and Chapter 15 “The Dividend Decision” cover the firm’s financing and dividend decisions, first in perfect markets and next incorporating market imperfections such as taxes and bankruptcy.

Chapters 16 through 21 offer a menu of topics from which instructors can rank-order according to their own preferences. To the extent possible, these chapters have been designed so that they can be used at various parts of the course. Chapters 16 through 18 cover more traditional finance material such as financial analysis, working capital management, and corporate financial planning. Chapters 19 to 21 cover three special topics: international finance, mergers, and financial engineering.

A special feature of the text is the boxed material in “Windows” and “Workshops.” Windows provide extra detail related to the chapter material without interrupting the flow of the chapter. They are available to be “opened” and studied at the appropriate time. Workshops present step-by-step financial problem solving. Workshops are used to detail methods of problem solving as well as to embed fundamental principles in finance, such as operating leverage and financial leverage, within chapters.

Twenty-five years ago, we set out to create a text that brings the modernist movement in finance to first-time learners. As we now look back, it is clear that while much has changed, the keystones of that first edition remain in place. In a nutshell, readers of Modern Corporate Finance v9.0, will encounter a user-friendly corporate finance text with innovative chapter structure, simple pedagogy, and a few unique features combining to produce a distinctive test.

Specific revisions and updates to version 9.0 include:

In summary, version 9.0 of Modern Corporate Finance: Theory and Practice launches a new era for a textbook that for a quarter of a century has demonstrated its value through careful attention to detail and tremendous student reactions to its supportive learning structure and accessibility.

Modern Corporate Finance v9.0 is accompanied by a robust supplements program that augments and enriches both the teaching and student learning experiences. The authors personally prepared all of the supplements to ensure accuracy and to ensure full alignment with the book’s narrative. Faculty should contact their FlatWorld sales representative or FlatWorld support at support@flatworld.com for more information or to obtain access to the supplements upon adoption.