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Modern Corporate Finance
Theory and Practice

v9.0 Donald R. Chambers and Nelson J. Lacey
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Chapter 1 Introduction to Modern Corporate Finance

Alphabet, Inc., a collection of companies, the largest of which is Google, is one of the world’s most recognized corporations. With a basic product generating a staggering number of daily clicks, and with a market capitalization—the market’s estimate of the total net worth of the company—at about $1.7 trillion; the operation of the company presents a formidable task. What rules guide financial managers at companies like Google?

This question provides an appropriate starting point with which to introduce Modern Corporate Finance: Theory and Practice. Our text builds a foundation of knowledge through principles that can be used to address corporate financial issues such as these:

  1. How can corporate managers attempt to satisfy the wishes of hundreds of thousands of the firm’s investors dispersed throughout the United States, Europe, and beyond?

  2. To which new projects should the firm commit resources?

  3. Given that projects often take years to develop, how can the passage of time be incorporated into the decision to invest?

  4. Given that return on investment must be estimated, how can risk be incorporated into the decision to invest?

  5. Because cash inflows and cash outflows often occur in different cycles, how can the cash cycle be best managed?

  6. Can the particular mix of financial securities issued to finance projects affect the overall value of the firm?

  7. Does the set of rules change when projects are managed outside the United States?

Although these are complicated questions, the economic principles that underlie all of them are few in number and have common elements. Chapter 1 “Introduction to Modern Corporate Finance” introduces these principles by defining modern corporate financial management and addressing the following questions:

  1. What is finance?

  2. Who uses finance?

  3. What do financial managers do? What is meant by “modern”?

  4. What is the goal or purpose of the corporation?

Chapter 1 “Introduction to Modern Corporate Finance” also discusses the economic foundations of finance and overviews the process of building models.