Corporate finance
How does a company decide what to build, how to pay for it, and what to return to owners?
16 of 16 chapters published
Chapters
Beginner
- What a firm is decidingEvery subject so far looked at a company from outside. This one sits in the chair: three decisions, repeated forever, and one objective that is less obvious than it sounds.
- Time value applied to projectsQuantitative methods derived the discounting machinery. Here it meets a real decision, and the hard part turns out to be neither the arithmetic nor the formula but deciding which cash flows belong in it.
- Net present valueOne number that answers the question properly: how much value does this create today? Every other appraisal rule in this subject is a degraded version of it, kept for reasons worth knowing.
- IRR, and where it misleadsThe most popular appraisal measure and the most dangerous. It is a percentage, which is why people like it, and a percentage is exactly the wrong unit for a question about value.
- Payback, and the restThe method every textbook dismisses and every company uses. It is wrong as an appraisal rule and informative as a risk measure, and understanding which is which makes it worth keeping.
Intermediate
- Estimating project cash flowsThe appraisal rules are arithmetic. The forecast is the decision. This builds a project cash flow line by line, including the tax shield and the working capital that most first attempts forget.
- Cost of debtThe easiest input to the discount rate, and still routinely got wrong. What matters is what the company would pay to borrow today, after tax — not what it is paying on loans taken years ago.
- Cost of equity, and CAPM in practiceThe hardest number in finance, because nobody is contractually owed it. CAPM gives a procedure, and the honest conclusion is that its output is a range rather than a figure.
- WACC, derivedThe single rate at which a project is discounted, built from the two costs and the weights between them. It is also the most misapplied number in finance, for one reason worth stating precisely.
- Capital structure: Modigliani-Miller, and what it assumesThe most famous result in corporate finance says the debt-equity mix does not matter. It is obviously false, and understanding exactly why it is false is the only way to think clearly about leverage.
- Why leverage has limitsDebt magnifies returns in both directions, and the asymmetry is the point — the upside is a multiple and the downside is an ending. This is the arithmetic of that asymmetry.
Advanced
- Dividend policyA dividend is not a return earned; it is a transfer of value already there. Which raises a question most investors never ask — why does it change the share price at all, and what is the company really signalling?
- Buybacks as a financing decisionA buyback is an investment in the company's own shares, and like any investment it creates value only at the right price. SEBI's limits are the frame it happens inside.
- Working capital managementThe least glamorous decision and the one that most often decides whether a company survives. Growth consumes cash, and the cash conversion cycle is the measure of how much.
- Mergers and acquisitionsThe largest decisions a firm makes, and the ones most reliably destructive of value. The arithmetic of why is simple: the acquirer pays the premium today and earns the synergies later, if at all.
- Valuing a company you might buyThe whole subject applied to one decision, and the end of Phase 1. Three methods that disagree, a discipline for using them, and what the foundations were for.