Preface

The past 40 years have seen a substantial change in how corporate financial managers (CFOs, treasurers, comptrollers) make investment decisions. Where the rule used to be to simply earn enough money on an investment, with enough being defined by various rules of thumb, one’s intuition, or as simply any amount greater than the investment itself. Today, corporate financial managers use substantially more sophisticated frameworks to determine whether an investment is worthwhile or to determine at what price an investment is worthwhile. These frameworks entail the integration of basic finance principles with accounting, asset pricing models, and probabilistic and statistical techniques. One of the most powerful enabling factors for this trend is the increase in the availability of data and computational tools. Although valuation frameworks have existed for several decades, the lack of data, and to some extent, the lack of computational tools, made the application of these frameworks all but impossible. That has changed considerably today. In fact, the application of valuation frameworks has gone beyond the simple corporate budgeting context and has extended to mergers and acquisitions (M&A); private equity transactions, such as leveraged buyouts (LBOs); investment banking; and commercial real estate and infrastructure transactions. As a result, anyone working in corporate treasury, strategic planning, underwriting, M&A, private equity, or strategic consulting needs to understand the valuation techniques of modern corporate finance.

This book is intended for a reader who has some understanding of basic financial management, such as the role and application of discounted cash flows (DCF). We start from the DCF framework and build up to the valuation models that are widely used in practice. Instead of simply telling you what is done, this book focuses on explaining to you why the frameworks used in practice are valid and why certain shortcuts are taken.

This is not a general corporate finance book. Corporate finance is a huge field, and even those books that try to just give an overview of the whole field tend to be hundreds of pages long. Instead, this book focuses specifically on valuation. We cover as much about corporate finance as needed to develop the valuation techniques widely used in practice. However, we try to keep this book tight and focused, and therefore rarely stray into the field of corporate finance beyond valuation.

Readers are expected to have some basic mathematical knowledge of algebra, probability, and statistics. Nothing beyond this level of mathematics is assumed in the book. Where certain mathematical techniques are needed, we develop and explain these as we go along.

We hope that you find this a valuable starting point for learning about the broad and extremely rich field of corporate finance. Both academics and practitioners have published a great deal of literature published about corporate finance. The research in this field ongoing, and as a result, the knowledge base in this field continues to grow every day.