On Tuesday, March 24, 2015, the share price of Google rose 2%, a roughly $8 billion increase in the value of the firm's equity. Was the large increase in Google's equity value because the firm's profits were up? No. Was the positive stock price reaction due to some good news about a new Google product? No. The reaction was due to Google's announcement that it was hiring Ruth Porat as its new chief financial officer (CFO). Why would the hiring of a new CFO cause Google's stock price to jump? According to the Wall Street Journal, Wall Street hoped the new CFO would bring “fiscal control at a company long known for its free spending ways.”1
Lessons in Corporate Finance is about the principal decisions in corporate finance (in other words, the decisions of CFOs like Google's Ruth Porat). These decisions focus on how to decide in which projects the firm should invest, how to finance those investments, and how to manage the firm's cash flows. This is an applied book that will use real-world examples to introduce the financial tools needed to make value-enhancing business decisions.
The book is designed to explain the how and why of corporate finance. While it is primarily aimed at finance professionals, it is also ideal for non-financial managers who have to deal with financial professionals. The book provides a detailed view of the inner functioning of corporate finance for anyone with an interest in understanding finance and what financial professionals do. The book would fit well in a second course in finance, as supplemental readings to an executive education course, or as a self-study book on corporate finance (e.g., for those studying for the CFA or similar certifications). The authors believe that any business professional, even someone with a degree in finance, will find the book to be a valuable review.
The second edition of the book differs from the first in two significant ways. The first is that there is new material throughout, including a new chapter (Chapter 13) 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 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 firms must also change substantially. These changes, and how to treat them, are covered throughout the book. Table 17.1 shows that these changes affect a substantial percentage of firms.
While this book can be read without extensive knowledge of accounting or finance, it is written for those with at least a basic knowledge of accounting and finance terminology.