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2023 | Book

Corporate Finance

Fundamentals of Value and Price

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About this book

This book on corporate finance systemically integrates firms' approach toward the market, the value fundamentals of investors, and the pricing dynamics of financial markets. The reader is first introduced to an illustration and analysis of some of the main models used in corporate finance and in asset pricing. The text moves to define the core analysis and valuation techniques to demonstrate how integrating the fields of corporate finance and asset pricing allows us to make comprehensive and precise valuations over time.

The textbook combines rigorous quantitative analysis with effective use of graphics to aid intuitive understanding, as well as didactic elements to help grasp the theoretical framework. Suitable for advanced undergraduate and graduate students, as well as financial analysts and advisors, investors, and bankers, the book also provides an overview of Mergers and Acquisitions (M&A), IPO, and Private Equity to help illustrate the theoretical concepts in practice.

Table of Contents

Frontmatter

Economic and Financial Analysis of the Firm

Frontmatter
1. Production Functions, Cost Minimization, and Profit Maximization
Abstract
The production function of the firm must always be defined on the basis of the technological constraints: they limit the firm’s ability to produce the output as well as a defined level of it. Therefore, the technology analysis refers to the right definition of technological constraints and their impact on the production system.
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2. Cost Structure of the Firm
Abstract
The term “cost” is one of the most commonly used even if it is also very ambiguous. The cost can be defined as a measurement in monetary terms of the amount of resources used for a specific purpose. Therefore, the term cost requires the presence of three main structural elements:
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3. Variance Analysis and Economic Performance
Abstract
The Variance Analysis (VA) measures the firm’s economic performance in progress on the basis of the difference between the forecast and actual revenues and costs. Specifically, the variance analysis is based on the difference between revenues and costs:
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4. Economic and Financial Dynamic Analysis: Operating Income and Net Income
Abstract
Commonly, the Financial Analysis of the firm is based on the Financial Statements and then it is focused on the past performance of the firm and it uses an accounting approach.
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5. Economic and Financial Dynamic Analysis: Invested Capital and Capital Structure
Abstract
The second step of the Economic and Financial Dynamics (EFD) analysis of the firm is the analysis of the financial dynamic. It is based on two parts:
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6. Economic and Financial Dynamic Analysis: Free Cash-Flow to the Firm and Free Cash-Flow to Equity
Abstract
The analysis of the Free Cash-Flow to the Firm (FCFF) and the Free Cash-Flow to Equity (FCFE) is the second part of the analysis of the Financial Dynamic of the firm. It is the most relevant part of the entire Economic and Financial Dynamic (EFD) analysis because it summarizes all economic and capital movements in terms of cash-flows that they are the most relevant object of analysis by investors.
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7. Financial Ratios
Abstract
In the Asset Side perspective, we measure the return on invested capital in the firm’s assets by using three main financial ratios: (1) Return on Investment (ROI); (2) Return on Operating Invested Capital (ROIC); and (3) Return on Assets (ROA).
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8. Investment Analysis Rules
Abstract
An investment refers to the purchase of long-lived asset or simpler asset that can be tangible, intangible, or financial.
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Risk and Return in the Capital Markets

Frontmatter
9. Mean-Variance Portfolio Analysis
Abstract
The mean-variance approach is the most widely used in the portfolio selection (Markowitz, 1952; Tobin, 1958).
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10. Efficient Frontier
Abstract
The construction of the efficient frontier is the first step of the analysis. We will develop the analysis by considering three main cases:
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11. Optimum Portfolio
Abstract
The mean-variance approach does not define the optimum portfolio for each investor. The efficient frontier identifies the efficient portfolios among them the investor must choices on the basis of its preference about risk. This choice depends on the investor’s behaviour and preference about the risk. The definition of the degree of risk aversion of investor is out of the data input of mean-variance approach.
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12. Single Index Model
Abstract
The research about portfolio theory (core of the theory was presented in a pioneering paper by Markowitz in 1956) was focusing on two main directions: the first concerns a simplification of the amount and type of input data needed for portfolio’s analysis; the second concerns the simplification of the computational procedure needed to determine the optimal portfolio.
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13. Capital Asset Pricing Model: Standard Form
Abstract
The Capital Asset Pricing Model (CAPM) is the most common and the easiest of the equilibrium models. It was developed independently by Sharpe (1964), Lintner (1965a, b), Mossin (1966). Indeed, we commonly refer to the Sharpe–Lintner–Mossin form of general equilibrium relationship in the capital markets in discussing the standard CAPM. The CAPM is one of the most relevant contribution to understand how capital markets function.
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14. Capital Asset Pricing Model: Non-standard Form
Abstract
The CAPM may be descriptive of the equilibrium returns on a macro level, but it is not to micro level with regard to the individual investor behaviour. Indeed, most investors hold portfolio of risky assets that is different from the market portfolio.
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Money, Interest Rates and Bond Market

Frontmatter
15. Demand for Money, Supply of Money, and Equilibrium Interest Rate
Abstract
Central Banks (CBs) are the government authorities in charge of monetary policy and then they play a key role in the financial markets.
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16. Behaviour of Interest Rates
Abstract
There are some common elements to the several types of Bonds. Commonly, each type of bond can be defined on the basis of five main elements:
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17. Risk and Term Structure of Interest Rates
Abstract
In the previous chapter, we have considered one interest rate. Unfortunately, there are a lot of bonds on which interest rates are different. It requires to understand the relationships among the various interest rates in order to decide which bonds to purchase and which ones to sell. Two are the mains:
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Financial Policies and Capital Structure Choices

Frontmatter
18. Firm Financing: Equity and Debt
Abstract
The company’s ownership is represented by the stock certificate. Therefore, the company’s owners hold stock certificates that indicate their shares of ownership and they are called Shareholders’ Equity or Stockholders’ Equity.
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19. Capital Structure Choice and Company Value
Abstract
One of the most relevant question in corporate finance concern the capital structure choices and then how a firm should choose the sect of securities to raise capital on market.
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20. Payout Policy
Abstract
Firm must decide how to use the free cash-flows generated. The general rules statue that if firm has new positive-NPV (Net Present Value) investment opportunities, it should reinvest these free cash-flows by increasing the firm’s enterprise value.
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21. Cost of Capital
Abstract
The Cost of Capital plays a key role in the firm’s valuation based on the discounted cash-flow models.
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Valuation

Frontmatter
22. Firm Valuation Approach
Abstract
Firm is able to create value over time if the expected return on invested capital is greater than the cost of capital invested in the firm’s activities.
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23. Equity Valuation Models
Abstract
The shareholder’s value is function of two variables:
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24. Firm Valuation Models
Abstract
The Discounted Cash-Flow (DCF) model can be applied in Asset Side (DCFAS) perspective other than in the Equity Side (DCFES) perspective as analyzed in the previous chapter. While in the Equity Side perspective, we estimate the Equity Value of the firm, in the Asset Side perspective, we estimate the entire Firm Value. Consequently, while in Equity valuation we consider the perspective of the shareholders only, in the Enterprise valuation, we consider the perspective of all investors in equity and debt of the firm.
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25. Multiples Valuation
Abstract
The relative valuation estimates the Equity and Firm value of the company on the basis of multiples approach. It is based on the comparison between the company and the current market price of comparable companies.
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Options

Frontmatter
26. Financial Options
Abstract
Financial Options today are one of the most important traded financial assets on market. They are introduced of publicly traded on the Chicago Board Options Exchange (CBOE) in 1973.
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27. Option Pricing
Abstract
In this contest, we use three main techniques to price option:
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Special Topics

Frontmatter
28. Mergers & Acquisitions
Abstract
The competitive success of the company is strictly related to its capability to growth in a structural way over time. The company growth can be realized by following an organic growth process (internal growth process) or by Mergers & Acquisitions (M&A) deal (external growth process).
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29. Private Equity, Venture Capital, and Hedge Fund
Abstract
The most common Private equity definition is an investor who provides equity capital to non-listed companies in stock market with the main aim to develop the company realizing a capital gain (if the sales price of share is higher than its buy price) at the time of investment exit.
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30. Initial Public Offering
Abstract
The Initial Public Offering (IPO) refers to the listing of company’s shares on a regulated capital market. By the IPO the company raises equity capital by listing its shares to be traded by all investors on a recognized stock exchange and becoming public company.
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Backmatter
Metadata
Title
Corporate Finance
Author
Pasquale De Luca
Copyright Year
2023
Electronic ISBN
978-3-031-18300-3
Print ISBN
978-3-031-18299-0
DOI
https://doi.org/10.1007/978-3-031-18300-3