Lessons in Corporate Finance

CHAPTER 22 Review

Our final chapter presents a review, after which the reader can determine whether the book accomplished the goals we promised in Chapter 1.

This book presents the basic tools for understanding (and hopefully doing) finance. We introduced the reader to corporate finance by noting its primary functions are summarized by three main tasks:

1. How to make good investment decisions
2. How to make good financing decisions
3. How to manage the firm’s cash flows while doing the first two

We noted that cash flow is like air, and earnings are like food. An organization needs both to survive, but although a firm can exist for a while without earnings, it will die quickly without cash. A firm must ensure that it does not run out of cash. We next defined making good investment decisions as deciding where the firm should put (invest) its cash, that is, what projects/products to invest in and produce. Finally, we said making good financing decisions means deciding where the firm should obtain the cash for its investments.

Importantly, financial strategy and business strategy need to be consistent. We explained that each firm operates in two primary markets—the product market and the financial market—and that you can’t do corporate finance properly without also understanding the product market in which a firm operates. Thus, when thinking about corporate finance, a firm must first determine its product market goals. Only then, once the product market goals are set, can management ...