Corporate Finance in 2018
Finance is the funding a business needs to start, run or expand. It includes the mix of debt and equity, working capital management and long-term fixed assets planning.
Learn the fundamentals of corporate finance from a market leader. Ross’s clear writing, intuition-building examples and unified valuation approach help students understand the principles behind the latest financial concepts.
Global Growth
As economies around the world become increasingly interconnected, globalization has impacted many aspects of corporate finance. For example, the need to manage cross-border investments and business operations has increased the need for corporate financial managers to be familiar with international finance and banking.
Another important aspect of globalization is population growth and demographic changes, which can affect labor inputs needed for economic expansion. This is a major driver of current economic trends, as global economic activity continues to shift from advanced economies with aging populations to large emerging markets with growing workforces.
This trend has also influenced the way companies are expanding. The number of completed mergers and acquisitions declined globally in the first quarter of 2020, while announced FDI greenfield investment has dropped as well. In addition, completed and planned repurchases of stock have decreased. Short-term financing activities include issuing debt and issuing equity through options, private placements, shelf-registered offerings, tender offers, exchange offers and share buybacks.
Technology Disruption
Technology disruption is a reality that impacts all industries. The term is based on the theory of Harvard Business School professor Clayton Christensen that emerging technologies and business models often challenge and eventually upend established markets, companies and habits.
Examples of disruptive technologies include e-commerce, online news sites and ride-sharing apps. These innovations replace older systems or habits because of their superior attributes that are readily apparent to early adopters. Upstarts rather than established companies usually produce disruptive technologies.
The emergence of disruptive technologies is accelerating. Cloud computing, for example, allows files to be stored on the internet instead of local devices and can be accessed from any location. Other emerging technologies promise to transform industries, such as nanotechnology, which enables the manipulation of matter at an atomic or molecular level.
Companies can prepare for technological disruption by creating a consistent digital culture and training employees in new technology development. They can also increase their agility by focusing on collaborative processes, recognizing that a go-it-alone approach is unsustainable.
Capital Allocation
How a company spends its financial resources is an integral part of corporate finance. Successful capital allocation is about delivering long-term value to investors, stakeholders and customers while mitigating risk. This is done by evaluating potential investments and choosing those that align with strategic objectives.
Effective capital allocation requires a balance of discipline and flexibility. For example, companies may need to shore up the balance sheet or invest in innovation and future growth. Leaders must be able to prioritize these goals and make sound, timely decisions in the face of change and uncertainty.
High performers use governance mechanisms to ensure a rigorous and unbiased capital allocation process. These include addressing cognitive biases such as framing decisions narrowly or relying on readily available information, anchoring decisions, and falling into groupthink (the tendency to follow the leader or discourage dissent). They also establish accountability, institute feedback loops, and invest in data management and analysis tools that provide the firepower needed for accurate decision-making.
Shareholder Value
Increasing shareholder value is one of the key objectives of management. But the way this is done can vary greatly from company to company. Some companies might pursue this objective through acquisitions while others might try to improve profits by making efficient decisions. Either way, the overall goal should be to create a higher stock price and increase investor returns.
As a term, shareholder value has become synonymous with maximizing returns on investments. However, this is not always the best course of action for businesses to take. For example, focusing too much on shareholder returns could lead to short-term gains at the expense of long-term growth and competitiveness.
This book has been designed and developed for a first course in corporate finance, covering the fundamentals of financial analysis, investment decisions, and the valuation of firms. It is nearly self-contained, requiring only that students have basic algebra and accounting skills and providing them with an intuitive foundation for the principles at work in the market.