An intuitive introduction to fundamental corporate finance concepts and methods

Lessons in Corporate Finance, Second Edition offers a comprehensive introduction to the subject, using a unique interactive question and answer-based approach. Asking a series of increasingly difficult questions, this text provides both conceptual insight and specific numerical examples. Detailed case studies encourage class discussion and provide real-world context for financial concepts. The book provides a thorough coverage of corporate finance including ratio and pro forma analysis, capital structure theory, investment and financial policy decisions, and valuation and cash flows provides a solid foundational knowledge of essential topics. This revised and updated second edition includes new coverage of the U.S. Tax Cuts and Jobs Act of 2017 and its implications for corporate finance valuation.

Written by acclaimed professors from MIT and Tufts University, this innovative text integrates academic research with practical application to provide an in-depth learning experience. Chapter summaries and appendices increase student comprehension. Material is presented from the perspective of real-world chief financial officers making decisions about how firms obtain and allocate capital, including how to:

* Manage cash flow and make good investment and financing decisions

* Understand the five essential valuation methods and their sub-families

* Execute leveraged buyouts, private equity financing, and mergers and acquisitions

* Apply basic corporate finance tools, techniques, and policies

Lessons in Corporate Finance, Second Edition provides an accessible and engaging introduction to the basic methods and principles of corporate finance. From determining a firm's financial health to valuation nuances, this text provides the essential groundwork for independent investigation and advanced study.

PAUL ASQUITH is the Gordon Y. Billard professor of finance at M.I.T.'s Sloan School. He is a specialist in corporate finance and has written on all areas of corporate finance including mergers, LBOs, equity issues, dividend policy, and more.

LAWRENCE A. WEISS is professor of International Accounting at Tufts University. He is a specialist in accounting and finance and has written on corporate bankruptcy, firm performance, international accounting, mergers, and more.

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Praise for Lessons in Corporate Finance

"Lessons in Corporate Finance presents the technical concepts in a very thoughtful manner that, combined with the case illustrations, provide a real window into the world in which CFOs operate every day."
Daniel J. Brennan, Executive Vice President and Chief Financial Officer, Boston Scientific

"Asquith and Weiss provide a highly readable, clear, and practical treatment of corporate finance. This book will help any manager make better investment and financing decisions."
Steven Neil Kaplan, Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance, The University of Chicago Booth School of Business

"Lessons in Corporate Finance, by Asquith and Weiss, provides an intuitive, step-by-step introduction to both the tools and theory of finance. The clarity of the presentation is not surprising given the fact that it is by two academics who changed the theory and practice of corporate finance in the 1980s and 1990s. While clearly useful as a textbook, it is even more suited to finance practitioners who may not be familiar with all the underpinnings of finance theory."
Matthew E. Zames, President, Cerberus Capital Management, Former COO, JP Morgan Chase & Co.

What is New in the Second Edition?

The second edition of this book differs from the first in two significant ways.

First, there is new material throughout, including a new chapter on bankruptcy and restructuring. The new chapter covers the institutional rules (i.e., laws) and economics around firms that enter into financial distress and must restructure or file for bankruptcy. It also covers the two principal sections of U.S. bankruptcy law.

The second, and more significant, change is in response to the 2018 Tax Cuts and Jobs Act, passed in the United States in December 2017. This law took effect in January 2018 and represents a major change in the U.S. corporate tax code. Not only did it lower the maximum U.S. corporate tax rate from 35% to 21%, it also substantially altered the corporate tax shield from debt. The law reduces the advantages of debt financing and raises the cost of capital to many firms. This means the methodology used to value a large percentage of firms must also change substantially. These changes, and how to treat them, are covered throughout the book.

The deliberate question-and-answer format develops your intuitive understanding of the fundamental principles and tools of corporate finance.

Inhalt

About the Authors xiii

Acknowledgments xv

Preface xvii

Chapter 1 Introduction 1

Two Markets: Product and Capital 2

The Basics: Tools and Techniques 3

A Diagram of Corporate Finance 4

A Brief History of Modern Finance 5

Reading This Book 6

Part One Financial Health of a Firm and Cash Flow Management

Chapter 2 Determining a Firm's Financial Health (PIPES-A) 11

The Conversation with the Banker Is Like a Job Interview 11

Starting with the Product Market Strategy 13

Is PIPES Profitable? 14

Doing the Math 14

Sources and Uses of Funds 16

Ratio Analysis 20

The Cash Cycle 26

Summary 28

Chapter 3 Pro Forma Forecasts (PIPES-B) 31

First, Let's Take a Closer Look at Ratio Analysis 31

Pro Forma Forecasts 33

Circular Relationships 40

Back to (Forecasting) the Future 42

Projecting Out to 2018 and 2019 43

Evaluating the Loan 45

Summary 50

Appendix 3A: Accounting Is Not Economic Reality 52

Chapter 4 The Impact of Seasonality on a Firm's Funding (PIPES-C) 57

Monthly Pro Forma Income Statements 58

Monthly Pro Forma Balance Sheets 60

A Different Picture of the Firm 68

Summary 72

Appendix 4A: PIPES Monthly Pro Forma Income Statements and Balance Sheets, 2018 73

Appendix 4B: PIPES Monthly Pro Forma Income Statements and Balance Sheets, 2019 76

Part Two Firm Financing and Financial Policies

Chapter 5 Why Financing Matters (Massey Ferguson) 81

Product Market Position and Strategy 81

Political Risk and Economies of Scale in Production 82

Massey Ferguson, 19711976 83

Sustainable Growth 85

The Period after 1976 87

Conrad Runs Away 90

The Competitors 91

Back to Massey 93

Massey's Restructuring 96

Postscript: What Happened to Massey 100

Summary 100

Appendix 5A: Massey Ferguson Financial Statements 102

Chapter 6 An Introduction to Capital Structure Theory 107

Optimal Capital Structure 108

M&M and Corporate Finance 111

Taxes 116

Costs of Financial Distress 126

The Textbook View of Capital Structure 131

The Cost of Capital 133

Summary 134

Chapter 7 Capital Structure Decisions (Marriott Corporation and Gary Wilson) 137

Capital Structure 137

The Cost of Capital 144

How Firms Set Capital Structure in Practice 147

Corporate Financial Policies 148

Sustainable Growth and Excess Cash Flow 151

What to Do with Excess Cash? 152

Summary 154

Appendix 7A: Marriott Corporation Income Statements and Balance Sheets 156

Appendix 7B: Marriott Corporation Selected Ratios 158