This book describes the theory and practice of corporate finance. We hardly need to explain why financial managers need to master the practical aspects of their job, but we should spell out why down-to-earth managers need to bother with theory. Managers learn from experience how to cope with routine problems. But the best managers are also able to respond to change. To do so you need more than time-honored rules of thumb; you must understand why companies and financial markets behave the way they do. In other words, you need a theory of finance.

Does that sound intimidating? It shouldn’t. Good theory helps you to grasp what is going on in the world around you. It helps you to ask the right questions when times change and new problems need to be analyzed. It also tells you which things you do not need to worry about. Throughout this book we show how managers use financial theory to solve practical problems.

Of course, the theory presented in this book is not perfect and complete—no theory is. There are some famous controversies where financial economists cannot agree. We have not glossed over these disagreements.

We set out the arguments for each side and tell you where we stand. Much of this book is concerned with understanding what financial managers do and why. But we also say what financial managers should do to increase company value. Where theory suggests that financial managers are making mistakes, we say so, while admitting that there may be hidden reasons for their actions. In brief, we have tried to be fair but to pull no punches.

CHANGES IN THE NINTH EDITION

Principles is written for students of financial management. For many readers it is their first look at the world of finance. Therefore, in each edition we try to make the book simpler, clearer, and more fun to read. But the book is also used extensively as a reference and guide for practicing managers around the world. Therefore, we strive to make each edition more comprehensive and authoritative. We believe that this edition is better for both the student and the practicing manager.

What is new about the ninth edition beyond the obvious updating? First, we have reordered and rearranged coverage of important topics. Chapter 4 is now devoted entirely to interest rates and the valuation of government bonds. This chapter skips over default risk, but we return to it in Chapter 24, Credit Risk and the Value of Corporate Debt. We think that readers will find it more convenient to cover interest rates and bond valuation in one early chapter. This change also means that Chapter 5 can be devoted solely to the valuation of common stocks. This chapter now also includes an introduction to the use of DCF models to value entire businesses as well as individual stocks. We save the complications of valuing leveraged businesses for Chapter 20.

We now cover capital-budgeting procedures earlier, in Chapter 11 rather than 13. Chapter 13 focuses exclusively on agency problems and management incentives. For example, it now includes a section on the pressure for corporations to manage earnings. Each edition of this book develops new themes and ideas. Over the years the literature on finance has focused more on understanding what financial managers do and the reasons for their actions. In other words, finance has become more positive and less normative. For example, in recent years there have been a number of useful surveys of firms’ capital investment practices, payout policies, decisions to go public, and their choice of capital structure. We review these surveys and look at how they cast light on competing theories.

This edition builds on other changes from earlier editions. We recognize that financial managers increasingly work in an international environment and therefore need to be familiar with differences in institutional structure and corporate practice. Chapters 28 (Managing International Risks) and 34 (Governance and Corporate Control around the World) are exclusively devoted to international issues. However, there are also many more places in this edition where we draw cross-border comparisons or use non-U.S. examples to illustrate a point. We hope that this material will both provide a better understanding of the wider financial environment and be useful to our many readers around the world.

We have also put more emphasis on behavioral finance. Chapter 14 includes an expanded treatment of the topic including a new discussion of the limits to arbitrage. This change is reflected in the new chapter title, “Market Efficiency and Behavioral Finance.” But readers will find many other places in the book where we draw on behavioral finance to help explain some of what companies and their shareholders do in practice. You will also encounter changes in Part 9 of the book, which includes the chapters on financial planning and the management of working capital. For example, the discussion of financial statements and ratios now shows common-size balance sheets and income statements for a sample of major industries.

In Chapter 30 coverage of working capital management has been rearranged, with an expanded section on inventory management. The discussion of bank lending in Chapter 31 has been substantially rewritten. For example, there is an expanded description of syndicated lending, bank loan sales, and the use of collateralized loan obligations (CLOs).

In each edition we refer to recent events that have provoked discussion or controversy. For example, we have included in this edition discussion of the impacts of Sarbanes-Oxley, private equity, the backdating of stock options, the growth in the market for credit derivatives, and the spinning of IPOs by investment banks. In some of these cases we have added a Finance in the News box containing an apposite extract from the financial press. We noted that in each edition we try to make the material more enjoyable to read and easier to understand. In many cases this just means continued minor improvements to the writing and revisions to the diagrams and tables. But we have also significantly reworked several of the early chapters. For instance, in Chapter 3 you will find the present value formulas are explained more fully and illustrated with more examples.

As every first-grader knows, it is easier to add than to subtract, so to make way for new topics we have needed to make some judicious pruning. We hope that these deletions will be largely invisible.

MAKING LEARNING EASIER

Each chapter of the book includes an introductory preview, a summary, and an annotated list of suggestions for further reading. There is a quick and easy quiz, practice questions on both numerical and conceptual topics, and a few challenge questions. Many questions use financial data on actual companies, which the reader can download from Standard & Poor’s educational version of Market Insight. Answers to the quiz questions may be found at the end of the book, along with a glossary and tables for calculating present values and pricing options. We have also provided for each chapter concept review questions and have keyed these to the page in the book where the topic is discussed. Sample questions are shown at the end of each chapter. The full set of Concept Review Questions is available on the book’s Web site, http://www.mhhe.com/bma9e .

The book also contains ten end-of-chapter minicases (one more than in the previous edition). These include specific questions to guide the case analysis. Answers to the mini-cases are available to instructors on the book’s Web site. A number of the tables in the text are now shown as Excel spreadsheets. In these cases an equivalent “live” spreadsheet is contained on the book’s Web site. Readers can use these live spreadsheets to understand better the calculations behind the table and to see the effect of changing the underlying data. A number of end-of-chapter questions ask the student to use the spreadsheets to check that they understand the effect of changing inputs. The 35 chapters in this book are divided into 11 parts. Each part includes a short introduction that explains the sequence of topics. Parts 1 to 3 of the book cover valuation and capital investment decisions, and Parts 4 to 8 discuss long-term financing. Part 9 focuses on financial planning and short-term financial decisions. Part 10 looks at mergers and corporate control. Part 11 concludes. We realize that instructors will wish to select from these topics and many will prefer a different sequence. Therefore, we have ensured that the text is modular, so that topics can be introduced in several logical orders. For example, there should be no difficulty in reading the material on financial statement analysis and short-term financial decisions before the chapters on valuation and capital investment.