Corporate Finance Primer
This appendix is a summary of the work from Aswath Damodaran’s book Applied Corporate Finance (John Wiley & Sons, 1999, as updated in its second edition, 2006). Readers who want to expand their understanding of Damodaran’s book may want to obtain a copy for reference.
Damodaran starts his text with a confession of a few of his biases. He believes that theory, and the models that flow from it, should provide us with the tools to understand, analyze, and solve problems. The test of a model or theory then should not be based on its elegance, but upon its usefulness in problem solving. Second, in his view, the core principles of corporate finance are commonsense ones and have changed little over time. That should not be surprising. Corporate finance, as a discipline, is only a few decades old, while people have been running businesses for thousands of years. It would be exceedingly presumptuous of us to believe that they were in the dark until corporate theorists came along and told them what to do.
His book tells a story, which essentially summarizes the corporate finance view of the world. It classifies all decisions made by any business into three groups (see Figure A.1
)—decisions on where to invest the resources of funds that the business has raised (the investment decision), decisions on where and how to raise funds to finance these investments (the financing decision), and decisions on how much and in what form to return funds back to ...