Value: The Four Cornerstones of Corporate Finance

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Why Value Value?

There's no disputing that value is the defining metric in a market economy. When people invest, they expect the value of their investment to increase by an amount that sufficiently compensates them for the risk they took, as well as for the time value of their money. This is true for all types of investments, including bonds, bank accounts, real estate, or company shares.1

Therefore, knowing how to create and measure value is an essential tool for executives. If we've learned anything from the latest financial crisis, and from periods of economic bubbles and bursts in our history, it's that the laws of value creation and value measurement are timeless. Financial engineering, excessive leverage, the idea during inflated boom times that somehow the old rules of economics no longer apply—these are the misconceptions upon which the value of companies are destroyed and entire economies falter.

In addition to their timelessness, the ideas in this book about creating and measuring value are straightforward. Mathematics professor Michael Starbird is noted for his saying: “The typical 1,200 page calculus text consists of two ideas and 1,198 pages of examples and applications.” Corporate finance is similar. In our view, it can be summarized by four principles or cornerstones.2 Applying these principles, executives can figure out the value-creating answers to most corporate finance questions, such as which business strategy to pursue, whether to undertake a proposed acquisition, ...