Archives for November 2020

I have a new book, out this week: Corporate Finance Made Simple (print version, Kindle version).

As you can tell from the name, the book is primarily focused on finance in a business context, but, in writing it, I chose to give particular emphasis to topics that play important roles in personal finance as well (e.g., the concept of net present value).

Also, while corporate finance naturally focuses on corporations, many of the concepts still apply to other types of businesses, such as partnerships or LLCs.

What is Corporate Finance, and Why Should You Care?

Corporate finance is primarily concerned with two broad topics: how businesses access capital (i.e., money) to fund their operations and how businesses choose to use the capital that they have.

There are two basic ways in which a business can raise capital: it can borrow money (including by issuing bonds), or the existing owners can sell a share of the business (i.e., issue stock). Part 1 of the book discusses the pros and cons of each option — and how businesses find a balance between the two.

Part 2 discusses capital budgeting, which is the process of evaluating potential projects or investments (i.e., potential ways in which a business can use its limited capital).

Part 3 discusses valuation of the two most fundamental financial instruments: stocks and bonds. Note that this is closely related to the topics from Part 1, except that now we’re looking from the perspective of the investor (i.e., the party providing the capital).

In other words, in this book you’ll learn things such as:

• What stock and bond prices actually represent — and why they behave the way they do;
• Why some profitable corporations pay dividends, while others do not;
• Techniques that can be useful for your own financial planning (for instance, an understanding of present value is critical to doing any sort of Social Security analysis).

What’s the Difference between Finance and Accounting?

The purpose of accounting is largely to provide internal and external users with financial information about a business (e.g., financial statements). Finance is one field that uses that information. A business’s finance professionals are constantly looking at the business’s own financial information to make decisions such as whether to pay a dividend to shareholders, whether to pay down debt, whether to borrow more money, and so on. And in many cases financial professionals will look at financial statements of other businesses as well (e.g., to evaluate whether their firm should acquire the other business).

One difference between accounting and finance is that accounting is primarily concerned with recording and reporting events that have already happened, whereas finance is primarily concerned with making projections and plans about the future.

Another key distinction between accounting and finance is that, in finance, we are not required to follow any specific set of official rules (such as Generally Accepted Accounting Principles or International Financial Reporting Standards that must be followed in accounting). We are instead free to use whatever calculation methods we want, in order to get the necessary information to make the decisions we have to make.

If this sounds interesting to you, I’d encourage you to buy a copy: Corporate Finance Made Simple.

For those curious, the full table of contents is as follows:

Part One: Raising Capital

1. Raising Capital by Borrowing

• Bank loans
• Bonds
• Bond terminology
• Cost of borrowing
• Risk of borrowing

2. Raising Capital by Selling Equity

• Common stock
• Shareholder rights
• Cost of equity
• Preferred stock
• Private placements & venture capital
• Going public
• Primary and secondary markets

3. Dividend Policy

• Retained earnings are a source of capital
• Dividend dates
• Stock repurchases

4. Capital Structure

• Debt-to-equity ratio
• Risk
• Cost of capital
• Calculating weighted average cost of capital

Part Two: Deploying Capital: Capital Budgeting

5. Evaluating a Project: Forecasting Cash Flow

• Which cash flows are relevant?
• After-tax cash flows

6. Time Value of Money: Discounted Cash Flow

• Future value
• Present value
• Discount rates
• Key present value takeaways

7. Net Present Value

• Making decisions based on NPV
• Discount rate and risk level
• WACC as a discount rate

8. Other Capital Budgeting Methods

• Internal rate of return (IRR)
• Payback period
• Discounted payback period
• Profitability index

Part Three: The Investor’s Perspective

9. Bond Valuation

• Just an NPV calculation
• Current yield and yield to maturity
• Credit risk premium
• Bond pricing
• Maturity risk premium
• Yield curves

10. Stock Valuation

• Dividend discount model
• Earnings-based valuation
• Asset-based valuation
• Capital asset pricing model (CAPM)

11. Efficient Markets

• Price changes and new information
• Stock market efficiency
• Expectations are “priced in”

Conclusion: Accessing and Deploying Capital

Appendix: Financial Ratios

Take a look on Amazon: Corporate Finance Made Simple.