Corporate finance is at the heart of every business decision that involves money, resources and growth. Its core objectives are to control costs, manage financial risk and maximize profitability while creating long-term value for shareholders. Professionals who work in corporate finance have a strong impact on day-to-day operations and business strategies. From determining which projects receive funding, to guiding investments in technology, to making critical decisions about hiring and workforce needs, corporate finance plays a decisive role in a company’s success. The text serves as an ultimate guide to navigating the complexities of corporate financial management. It is built around the philosophy that the best financial executives whether CFOs, investment bankers, or strategic planners do not merely memorize formulas. Instead, they develop a sharp intuition for recognizing the economic principles that dictate business outcomes. The book breaks down complex investment mechanics into a practical, actionable framework for investors. Evaluates how individual securities operate and explores the mathematics of blending them into optimally balanced portfolios.
Clifford Smith is a distinguished American economist and educator. He served as the Epstein Professor of Business Administration and Professor of Finance. He is globally recognized for his pioneering research in corporate financial policy, risk management, and the structure of financial contracts. He developed foundational frameworks for corporate dividend policy and capital structure. Co-authored seminal papers defining why firms hedge financial risks. Analyzed how incentive structures impact corporate governance and performance. He has published over 90 articles in top-tier finance and economics journals. Served as an editor for the Journal of Financial Economics for decades. Received numerous teaching awards for making complex financial theories accessible. Advised major corporations and institutions on risk strategy and financial architecture. In Modern Corporate Finance: Theory and Practice, Smith bridges rigorous academic theory with real-world corporate application. The text emphasizes how financial managers use derivatives, capital budgeting, and strategic financing to maximize shareholder value. Professor Smith has research interests in the fields of corporate financial policy, derivative securities and financial intermediation. He is an advisory editor of the Journal of Financial Economics; an associate editor of the Journal of Risk and Insurance, Financial Practice and Education, the Review of International Economics, the Journal of Financial Services Research, the Journal of Derivatives, and the Journal of Financial Research; a member of the editorial board of the Review of International Economics; and a member of the advisory board of the Journal of Applied Corporate Finance, The Financier, Contemporary Finance Digest, and The Arbitrageur. His paper, “Trading Cost for Listed Options: The Implications for Market Efficiency” (with Susan M. Phillips), was awarded the Pomerance Prize for Excellence in Options Research by the Chicago Board Options Exchange for 1999; his paper, “On the Convergence of Insurance and Finance Research.”
Preface 1. THE FINANCE FUNCTION 1.1 Introduction 1.2 Two key concepts in corporate finance 1.3 The role of the financial manager 1.4 Corporate objectives 1.5 How is shareholder wealth maximised? 1.6 Agency theory 1.7 Corporate governance 1.8 Conclusion 2. CAPITAL MARKETS, MARKET EFFICIENCY AND RATIO ANALYSIS 2.1 Introduction 2.2 Sources of business finance 2.3 Capital markets 2.4 Capital market efficiency 2.5 Assessing financial performance 2.6 Conclusion 3. SHORT-TERM FINANCE AND THE MANAGEMENT OF WORKING CAPITAL 3.1 Introduction 3.2 The objectives of working capital management 3.3 Working capital policies 3.4 Working capital and the cash conversion cycle 3.5 Overtrading 3.6 The management of inventory 3.7 The management of cash 3.8 The management of receivables 3.9 Conclusion 4. LONG-TERM FINANCE: EQUITY FINANCE 4.1 Introduction 4.2 Equity finance 4.3 The stock exchange 4.4 Rights issues 4.5 Scrip issues, share splits, scrip dividends and share repurchases 4.6 Preference shares 4.7 Conclusion 5. LONG-TERM FINANCE: DEBT FINANCE, HYBRID FINANCE AND LEASING 5.1 Introduction 5.2 Bonds, loan stock and debentures 5.3 Bank and institutional debt 5.4 International debt finance 5.5 Convertible bonds 5.6 Warrants 5.7 The valuation of fixed-interest bonds 5.8 The valuation of convertible bonds 5.9 Leasing 5.10 onclusion 6. AN OVERVIEW OF INVESTMENT APPRAISAL METHODS 6.1 Introduction 6.2 The payback method 6.3 The return on capital employed method 6.4 The net present value method 6.5 The internal rate of return method 6.6 A comparison of the NPV and IRR methods 6.7 The profitability index and capital rationing 6.8 The discounted payback method 6.9 Conclusion 7. INVESTMENT APPRAISAL: APPLICATIONS AND RISK 7.1 Introduction 7.2 Relevant project cash flows 7.3 Taxation and capital investment decisions 7.4 Inflation and capital investment decisions 7.5 Investment appraisal and risk 7.6 Appraisal of foreign direct investment 7.7 Empirical investigations of investment appraisal 7.8 Conclusion 8. PORTFOLIO THEORY AND THE CAPITAL ASSET PRICING MODEL 8.1 Introduction 8.2 The measurement of risk 8.3 The concept of diversification 8.4 Investor attitudes to risk 8.5 Markowitz’s portfolio theory 8.6 Introduction to the capital asset pricing model 8.7 Using the CAPM to value shares 8.8 Empirical tests of the CAPM 8.9 Conclusion 9. THE COST OF CAPITAL AND CAPITAL STRUCTURE 9.1 Introduction 9.2 Calculating the cost of individual sources of finance 9.3 Calculation of weighted average cost of capital 9.4 Average and marginal cost of capital 9.5 The CAPM and investment appraisal 9.6 Practical problems with calculating WACC 9.7 WACC in the real world 9.8 The cost of capital for foreign direct investment 9.9 Gearing: its measurement and significance 9.10 The concept of an optimal capital structure 9.11 The traditional approach to capital structure 9.12 Miller and Modigliani (I): the net income approach 9.13 Miller and Modigliani
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