Corporate Finance

WHY STUDY CORPORATE FINANCE? No matter what your role in a corporation, an understanding of why and how financial decisions are made is essential. The focus of this book is how to make optimal corporate financial decisions. In this part of the book, we lay the foundation for our study of corporate finance. We begin, in Chapter 1, by introducing the corporation and related business forms. We then examine the role of financial managers and outside investors in decision making for the firm. To make optimal decisions, a decision maker needs information. As a result, in Chapter 2, we review an important source of information for corporate decision-making—the firm’s financial statements. We then introduce the most important idea in this book, the concept of the absence of arbitrage or Law of One Price in Chapter 3.

The Law of One Price allows us to use market prices to determine the value of an investment opportunity to the firm. We will demonstrate that the Law of One Price is the one unifying principle that underlies all of financial economics and links all of the ideas throughout this book. We will return to this theme throughout our study of Corporate Finance.