Principles of Corporate Finance 11th Global Edition

1. Corporate finance is all about maximizing value.
2. The opportunity cost of capital sets the standard for investments.
3. A safe dollar is worth more than a risky dollar.
4. Smart investment decisions create more value than smart financing decisions.
5. Good governance matters.

Investors will not entrust the firm with their savings unless they are confident that management will act ethically on their behalf. Successful firms have governance systems that help to align managers’ and shareholders’ interests.

Managers are not endowed with a special value-maximizing gene. They will consider their own personal interests, which creates a potential conflict of interest with outside shareholders. This conflict is called a principal–agent problem. Any loss of value that results is called an agency cost.

Of course, the objective of wealth maximization does not justify unethical behavior. Shareholders do not want the maximum possible stock price. They want the maximum honest share price.

Corporations face two principal financial decisions. First, what investments should the corporation make? Second, how should it pay for the investments? The first decision is the investment decision; the second is the financing decision.

For example, corporate finance is “all about valuation,” not only for the reasons just listed, but because value maximization is the natural financial goal of the corporation.

Agency costs are incurred when (1) managers do not attempt to maximize firm value and (2) shareholders incur costs to monitor the managers and constrain their actions.

Fortunately there is a natural financial objective on which almost all shareholders agree: Maximize the current market value of shareholders’ investment in the firm.

Therefore the shareholders have limited liability, which means that they cannot be held personally responsible for the corporation’s debts

The value did not come from sophisticated financing. Microsoft’s financing strategy is very simple: it carries no debt to speak of and finances almost all investment by retaining and reinvesting cash flow.