The chapters covered so far have focused on the asset side of the balance sheet. This chapter is the first of many chapters dealing with corporate financing decisions. The focus now shifts to raising funds to finance corporate investments. While both financing and investment decisions can add or destroy value; it is much harder to find positive NPV financing decisions. Financial markets are efficient and fiercely competitive. It is unlikely to find opportunities in these markets to make easy gains through financing decisions. While analyzing investment decisions, we have assumed away the financing question or taken the financing as given. The same approach, in reverse, is used for evaluating the financing decisions. With the investment decisions as given, what will be the best financing decision? The primary goal of maximizing the NPV remains the same.

Understanding market efficiency and its implications is key to understanding all financing decisions. The chapter explains the concept of market efficiency in detail and reviews the evidence supporting and contradicting market efficiency. The chapter concludes with the six lessons or the key implications of market efficiency for the corporate finance manager. The fundamental point made in this chapter is that owing to the extremely competitive nature of the financial markets, it will be very hard to find positive NPV financing opportunities.