Introduction/Preface

This book is a unique book for an introductory course in finance. Although this book is primarily intended for undergraduate students, it is equally useful to graduate students studying corporate finance for the first time. The book demonstrates key corporate finance concepts as well as finance Excel functions and the application of those functions through activities. In this sense, the book can be helpful for anybody (including those with prior background in corporate finance) willing to learn and solve corporate finance problems using an Excel environment.

In this book, we develop theoretical concepts in corporate finance through various real-world examples. Most of our examples relate to the aviation business. However, these examples can be generalized to any other business. We also provide videos that discuss the key concepts of the chapters and walk readers through solving example problems. In addition to these examples, each chapter has self-assessment questions that will help readers quickly assess whether they grasped the key concepts.

At the end of each chapter, there are downloadable Excel activities that will be valuable tools for active learning opportunities. Most of the problems in activities can be solved using built-in Excel files included in the book. In the videos, we demonstrate the essential Excel functions which can be used to solve the given assignment. At the end of the book, we provide a glossary of key terms which will benefit readers in reviewing important terminologies. By providing this range of resources, we hope to provide you, the readers, and your students with multiple pathways to learning about corporate finance. The design also practices what we value as teachers in our courses: opportunities to learn, try, and try again.

The book is divided into three parts:

Part A covers the foundations of corporate finance. This part includes four chapters: Chapter 1 (Corporate Finance and Corporations), Chapter 2 (Financial Markets and Institutions), Chapter 3 (Accounting and Finance) and Chapter 4 (Financial Ratios). In this part, we introduce corporations focusing on their financial aspects, discuss the basic structures and functions of different types of financial markets and institutions, analyze major financial market events in the recent past, introduce major financial statements, elaborate on the connections among the financial statements and discuss financial ratios. This part enables readers to understand corporations, financial markets, and financial institutions and provides a rounded background to analyze firms’ financial statements so that they form a context to evaluate part B.

Part B covers valuations and capital budgeting. This part includes 4 chapters: Chapter 5 (Time Value of Money), Chapter 6 (Bonds), Chapter 7 (Stocks), Chapter 8 (Company Investment and Project Management) and Chapter 9 (Cash Flow Analysis). In this part, we introduce the building block of capital budgeting and valuations: the time value of money. The “time value of money” concept will be pivotal in navigating bond and stock valuations and making company investment decisions. Valuation of stocks, bonds and preferred stocks are important in corporate finance as companies rely on these financial assets to raise capital. So, companies use these valuations to make financing and capital budgeting decisions. More specifically, this part introduces cash flows, annuities, nominal and effective rates, an overview of the bond market, the cash flow of bonds, the riskiness of bonds and bond returns. Next, we provide an overview of stock markets, explain key variables related to the stock market, introduce valuation of stocks using dividend discount model, compute expected return from investing in stock and compare growth and value stocks. We also take cognizance of the personal aspects of these concepts and introduce small personal finance applications that may be interesting to a student/ reader. Next, we introduce the concepts of net present value (NPV), internal rate of return (IRR), payback period, discounted payback period and profitability index measures which are useful measures in making project management decisions. In order to use measures such as NPV and IRR, we need to compute the concepts of incremental cash flows due to investments, working capital and operations which we discuss in Chapter 9. We also add inflation aspect in time value of money. In this way, Part B provides all tools necessary to accomplish security valuations and project capital budgeting decisions, which are critical for analysis in Part C.

Part C discusses the concepts of risk and returns in finance, and we deduce how we arrive at a weighted average cost of capital for the projects. Both of these aspects provide a snapshot of how new projects can be profitable and how cost determines this profitability. These chapters provide background on how riskiness is related to the cost for borrowers or equivalently, return for investors. In this part of the book, we define risk, quantify or measure risk, discuss various types of risks associated with investments in financial assets, distinguish between firm-specific risk and market risk and, more importantly, relate risk with the concept of interest rate. Depending on the circumstances, interest rates may arise in different forms, such as the discount rate, cost of capital or opportunity cost of capital, rate of return or return on investment. We develop these seemingly investment-related concepts in corporate finance because firms raise funds for the projects using stocks or bonds, or other financial assets, and these concepts are essential in determining the cost of capital, or more specifically, weighted average cost of capital for the project as different types of financial assets have different risks and tax treatments.

In all, the book provides concepts on what corporate firms are, how audiences learn about the firms using their financial statements and financial ratios, how companies make decisions on project choices and how financial markets help raise funding for the corporations needed to accomplish companies’ new ventures. Examples are designed to mirror real-world uses of these concepts in-action, with emphasis on the aviation industry. These concepts are the basic building blocks of corporate finance and are essential for understanding any prospective or current financial manager.