Brealey−Meyers: Front Matter Preface © The McGraw−Hill
Principles of Corporate Companies, 2003
Finance, Seventh Edition
PREFACE
This book describes the theory and practice of corpo- Once understood, good theory is common sense.
rate finance. We hardly need to explain why financial Therefore we have tried to present it at a common-
managers should master the practical aspects of their sense level, and we have avoided proofs and heavy
job, but we should spell out why down-to-earth, red- mathematics. There are no ironclad prerequisites for
blooded managers need to bother with theory. reading this book except algebra and the English lan-
Managers learn from experience how to cope guage. An elementary knowledge of accounting, sta-
with routine problems. But the best managers are tistics, and microeconomics is helpful, however.
also able to respond to change. To do this you need
more than time-honored rules of thumb; you must CHANGES IN THE SEVENTH EDITION
understand why companies and financial markets This book is written for students of financial man-
behave the way they do. In other words, you need a agement. For many readers, it is their first look at the
theory of finance. world of finance. Therefore in each edition we strive
Does that sound intimidating? It shouldn’t. to make the book simpler, clearer, and more fun to
Good theory helps you grasp what is going on in read. But the book is also used as a reference and
the world around you. It helps you to ask the right guide by practicing managers around the world.
questions when times change and new problems Therefore we also strive to make each new edition
must be analyzed. It also tells you what things you more comprehensive and authoritative.
do not need to worry about. Throughout this book We believe this edition is better for both the stu-
we show how managers use financial theory to dent and the practicing manager. Here are some of
solve practical problems. the major changes:
Of course, the theory presented in this book is not We have streamlined and simplified the exposi-
perfect and complete—no theory is. There are some tion of major concepts, with special attention to
famous controversies in which financial economists Chapters 1 through 12, where the fundamental con-
cannot agree on what firms ought to do. We have not cepts of valuation, risk and return, and capital bud-
glossed over these controversies. We set out the main geting are introduced. In these chapters we cover
arguments for each side and tell you where we stand. only the most basic institutional material. At the
ix
, Brealey−Meyers: Front Matter Preface © The McGraw−Hill
Principles of Corporate Companies, 2003
Finance, Seventh Edition
x PREFACE
same time we have rewritten Chapter 14 as a free- Of course, as every first-grader knows, it is easier
standing introduction to the nature of the corpora- to add than to subtract, but we have pruned judi-
tion, to the major sources of corporate financing, and ciously. Some readers of the sixth edition may miss a
to financial markets and institutions. Some readers favorite example or special topic. But new readers
will turn first to Chapter 14 to see the contexts in should find that the main themes of corporate fi-
which financial decisions are made. nance come through with less clutter.
We have also expanded coverage of important
topics. For example, real options are now introduced MAKING LEARNING EASIER
in Chapter 10—you don’t have to master option- Each chapter of the book includes an introductory
pricing theory in order to grasp what real options are preview, a summary, and an annotated list of sug-
and why they are important. Later in the book, after gestions for further reading. There is a quick and
Chapter 20 (Understanding Options) and Chapter 21 easy quiz, a number of practice questions, and a few
(Valuing Options), there is a brand-new Chapter 22 challenge questions. Many questions use financial
on real options, which covers valuation methods and data on actual companies accessible by the reader
a range of practical applications. through Standard & Poor’s Educational Version of
Other examples of expanded coverage include be- Market Insight. In total there are now over a thou-
havioral finance (Chapter 13) and new international sand end-of-chapter questions. All the questions re-
evidence on the market-risk premium (Chapter 7). We fer to material in the same order as it occurs in the
have also reorganized the chapters on financial plan- chapter. Answers to the quiz questions may be
ning and working capital management. In fact we found at the end of the book, along with a glossary
have revised and updated every chapter in the book. and tables for calculating present values and pric-
This edition’s international coverage is ex- ing options.
panded and woven into the rest of the text. For ex- We have expanded and revised the mini-cases
ample, international investment decisions are now and added specific questions for each mini-case to
introduced in Chapter 6, right alongside domestic guide the case analysis. Answers to the mini-cases
investment decisions. Likewise the cost of capital are available to instructors on this book’s website
for international investments is discussed in Chap- (www.mhhe.com/bm7e).
ter 9, and international differences in security issue Parts 1 to 3 of the book are concerned with valua-
procedures are reviewed in Chapter 15. Chapter 34 tion and the investment decision, Parts 4 to 8 with
looks at some of the international differences in fi- long-term financing and risk management. Part 9 fo-
nancial architecture and ownership. There is, how- cuses on financial planning and short-term financial
ever, a separate chapter on international risk man- decisions. Part 10 looks at mergers and corporate
agement, which covers foreign exchange rates and control and Part 11 concludes. We realize that many
markets, political risk, and the valuation of capital teachers will prefer a different sequence of topics.
investments in different currencies. There is also a Therefore, we have ensured that the text is modular,
new international index. so that topics can be introduced in a variety of orders.
The seventh edition is much more Web-friendly For example, there will be no difficulty in reading the
than the sixth. Web references are highlighted in the material on financial statement analysis and short-
text, and an annotated list of useful websites has term decisions before the chapters on valuation and
been added to each part of the book. capital investment.
,Brealey−Meyers: Front Matter Preface © The McGraw−Hill
Principles of Corporate Companies, 2003
Finance, Seventh Edition
PREFACE xi
We should mention two matters of style now to Financial Analysis Spreadsheet Templates
prevent confusion later. First, the most important fi- (F.A.S.T.)
nancial terms are set out in boldface type the first Mike Griffin of KMT Software created the templates
time they appear; less important but useful terms are in Excel. They correlate with specific concepts in the
given in italics. Second, most algebraic symbols rep- text and allow students to work through financial
resenting dollar values are shown as capital letters. problems and gain experience using spreadsheets.
Other symbols are generally lowercase letters. Thus Each template is tied to a specific problem in the text.
the symbol for a dividend payment is “DIV,” and the
Solutions Manual
symbol for a percentage rate of return is “r.”
ISBN 0072468009
The Solutions Manual, prepared by Bruce Swensen,
SUPPLEMENTS
Adelphi University, contains solutions to all practice
In this edition, we have gone to great lengths to en-
questions and challenge questions found at the end
sure that our supplements are equal in quality and
of each chapter. Thoroughly checked for accuracy,
authority to the text itself.
this supplement is available to be purchased by your
Instructor’s Manual students.
ISBN 0072467886
The Instructor’s Manual was extensively revised and Study Guide
updated by C. R. Krishnaswamy of Western Michi- ISBN 0072468017
gan University. It contains an overview of each chap- The new Study Guide was carefully revised by
ter, teaching tips, learning objectives, challenge ar- V. Sivarama Krishnan of Cameron University and
eas, key terms, and an annotated outline that contains useful and interesting keys to learning. It in-
provides references to the PowerPoint slides. cludes an introduction to each chapter, key concepts,
examples, exercises and solutions, and a complete
Test Bank
chapter summary.
ISBN 0072468025
The Test Bank was also updated by C. R. Krish- Videos
naswamy, who included well over 1,000 new multiple- ISBN 0072467967
choice and short answer/discussion questions based The McGraw-Hill/Irwin Finance Video Series is a
on the revisions of the authors. The level of difficulty is complete video library designed to bring added
varied throughout, using a label of easy, medium, or points of discussion to your class. Within this profes-
difficult. sionally developed series, you will find examples of
how real businesses face today’s hottest topics, like
PowerPoint Presentation System
mergers and acquisitions, going public, and careers
Matt Will of the University of Indianapolis pre-
in finance.
pared the PowerPoint Presentation System, which
contains exhibits, outlines, key points, and sum- Student CD-ROM
maries in a visually stimulating collection of slides. Packaged with each text is a CD-ROM for students
Found on the Student CD-ROM, the Instructor’s that contains many features designed to enhance the
CD-ROM, and our website, the slides can be edited, classroom experience. Three learning modules from
printed, or rearranged in any way to fit the needs of the new Finance Tutor Series are included on the CD:
your course. Time Value of Money Tutor, Stock and Bond Valuation
, Brealey−Meyers: Front Matter Preface © The McGraw−Hill
Principles of Corporate Companies, 2003
Finance, Seventh Edition
xii PREFACE
Tutor, and Capital Budgeting Tutor. In each module, HTML—a universal Web language. Next, choose
students answer questions and solve problems that your favorite of three easy-to-navigate designs and
not only assess their general understanding of the your Web home page is created, complete with on-
subject but also their ability to apply that understand- line syllabus, lecture notes, and bookmarks. You can
ing in real-world business contexts. In “Practice even include a separate instructor page and an as-
Mode,” students learn as they go by receiving in- signment page.
depth feedback on each response before proceeding to PageOut offers enhanced point-and-click features
the next question. Even better, the program antici- including a Syllabus Page that applies real-world
pates common misunderstandings, such as incorrect links to original text material, an automated grade
calculations or assumptions, and then provides feed- book, and a discussion board where instructors and
back only to the student making that specific mistake. their students can exchange questions and post an-
Students who want to assess their current knowledge nouncements.
may select “Test Mode,” where they read an extensive
evaluation report after they have completed the test. ACKNOWL EDGMENTS
Also included are the PowerPoint presentation We have a long list of people to thank for their help-
system, Financial Analysis Spreadsheet Templates ful criticism of earlier editions and for assistance in
(F.A.S.T.), video clips from our Finance Video Series, preparing this one. They include Aleijda de Cazen-
and many useful Web links. ove Balsan, John Cox, Kedrum Garrison, Robert
Instructor’s CD-ROM Pindyck, and Gretchen Slemmons at MIT; Stefania
ISBN 0072467959 Uccheddu at London Business School; Lynda
We have compiled many of our instructor supple- Borucki, Marjorie Fischer, Larry Kolbe, James A.
ments in electronic format on a CD-ROM designed Read, Jr., and Bente Villadsen at The Brattle Group,
to assist with class preparation. The CD-ROM in- Inc.; John Stonier at Airbus Industries; and Alex Tri-
cludes the Instructor’s Manual, the Solutions Man- antis at the University of Maryland. We would also
ual, a computerized Test Bank, PowerPoint slides, like to thank all those at McGraw-Hill/Irwin who
video clips, and Web links. worked on the book, including Steve Patterson, Pub-
lisher; Rhonda Seelinger, Executive Marketing Man-
Online Learning Center
(www.mhhe.com/bm7e)
ager; Sarah Ebel, Senior Developmental Editor; Jean
This site contains information about the book and the Lou Hess, Senior Project Manager; Keith McPherson,
authors, as well as teaching and learning materials Design Director; Joyce Chappetto, Supplement Co-
for the instructor and the student, including: ordinator; and Michael McCormick, Senior Produc-
tion Supervisor.
PageOut: The Course Website Development We want to express our appreciation to those in-
Center and PageOut Lite structors whose insightful comments and sugges-
www.pageout.net
tions were invaluable to us during this revision:
This Web page generation software, free to adopters,
Noyan Arsen Koc University
is designed for professors just beginning to explore
Penny Belk Loughborough University
website options. In just a few minutes, even the most Eric Benrud University of Baltimore
novice computer user can have a course website. Peter Berman University of New Haven
Simply type your material into the template pro- Jean Canil University of Adelaide
vided and PageOut Lite instantly converts it to Robert Everett Johns Hopkins University
Principles of Corporate Companies, 2003
Finance, Seventh Edition
PREFACE
This book describes the theory and practice of corpo- Once understood, good theory is common sense.
rate finance. We hardly need to explain why financial Therefore we have tried to present it at a common-
managers should master the practical aspects of their sense level, and we have avoided proofs and heavy
job, but we should spell out why down-to-earth, red- mathematics. There are no ironclad prerequisites for
blooded managers need to bother with theory. reading this book except algebra and the English lan-
Managers learn from experience how to cope guage. An elementary knowledge of accounting, sta-
with routine problems. But the best managers are tistics, and microeconomics is helpful, however.
also able to respond to change. To do this you need
more than time-honored rules of thumb; you must CHANGES IN THE SEVENTH EDITION
understand why companies and financial markets This book is written for students of financial man-
behave the way they do. In other words, you need a agement. For many readers, it is their first look at the
theory of finance. world of finance. Therefore in each edition we strive
Does that sound intimidating? It shouldn’t. to make the book simpler, clearer, and more fun to
Good theory helps you grasp what is going on in read. But the book is also used as a reference and
the world around you. It helps you to ask the right guide by practicing managers around the world.
questions when times change and new problems Therefore we also strive to make each new edition
must be analyzed. It also tells you what things you more comprehensive and authoritative.
do not need to worry about. Throughout this book We believe this edition is better for both the stu-
we show how managers use financial theory to dent and the practicing manager. Here are some of
solve practical problems. the major changes:
Of course, the theory presented in this book is not We have streamlined and simplified the exposi-
perfect and complete—no theory is. There are some tion of major concepts, with special attention to
famous controversies in which financial economists Chapters 1 through 12, where the fundamental con-
cannot agree on what firms ought to do. We have not cepts of valuation, risk and return, and capital bud-
glossed over these controversies. We set out the main geting are introduced. In these chapters we cover
arguments for each side and tell you where we stand. only the most basic institutional material. At the
ix
, Brealey−Meyers: Front Matter Preface © The McGraw−Hill
Principles of Corporate Companies, 2003
Finance, Seventh Edition
x PREFACE
same time we have rewritten Chapter 14 as a free- Of course, as every first-grader knows, it is easier
standing introduction to the nature of the corpora- to add than to subtract, but we have pruned judi-
tion, to the major sources of corporate financing, and ciously. Some readers of the sixth edition may miss a
to financial markets and institutions. Some readers favorite example or special topic. But new readers
will turn first to Chapter 14 to see the contexts in should find that the main themes of corporate fi-
which financial decisions are made. nance come through with less clutter.
We have also expanded coverage of important
topics. For example, real options are now introduced MAKING LEARNING EASIER
in Chapter 10—you don’t have to master option- Each chapter of the book includes an introductory
pricing theory in order to grasp what real options are preview, a summary, and an annotated list of sug-
and why they are important. Later in the book, after gestions for further reading. There is a quick and
Chapter 20 (Understanding Options) and Chapter 21 easy quiz, a number of practice questions, and a few
(Valuing Options), there is a brand-new Chapter 22 challenge questions. Many questions use financial
on real options, which covers valuation methods and data on actual companies accessible by the reader
a range of practical applications. through Standard & Poor’s Educational Version of
Other examples of expanded coverage include be- Market Insight. In total there are now over a thou-
havioral finance (Chapter 13) and new international sand end-of-chapter questions. All the questions re-
evidence on the market-risk premium (Chapter 7). We fer to material in the same order as it occurs in the
have also reorganized the chapters on financial plan- chapter. Answers to the quiz questions may be
ning and working capital management. In fact we found at the end of the book, along with a glossary
have revised and updated every chapter in the book. and tables for calculating present values and pric-
This edition’s international coverage is ex- ing options.
panded and woven into the rest of the text. For ex- We have expanded and revised the mini-cases
ample, international investment decisions are now and added specific questions for each mini-case to
introduced in Chapter 6, right alongside domestic guide the case analysis. Answers to the mini-cases
investment decisions. Likewise the cost of capital are available to instructors on this book’s website
for international investments is discussed in Chap- (www.mhhe.com/bm7e).
ter 9, and international differences in security issue Parts 1 to 3 of the book are concerned with valua-
procedures are reviewed in Chapter 15. Chapter 34 tion and the investment decision, Parts 4 to 8 with
looks at some of the international differences in fi- long-term financing and risk management. Part 9 fo-
nancial architecture and ownership. There is, how- cuses on financial planning and short-term financial
ever, a separate chapter on international risk man- decisions. Part 10 looks at mergers and corporate
agement, which covers foreign exchange rates and control and Part 11 concludes. We realize that many
markets, political risk, and the valuation of capital teachers will prefer a different sequence of topics.
investments in different currencies. There is also a Therefore, we have ensured that the text is modular,
new international index. so that topics can be introduced in a variety of orders.
The seventh edition is much more Web-friendly For example, there will be no difficulty in reading the
than the sixth. Web references are highlighted in the material on financial statement analysis and short-
text, and an annotated list of useful websites has term decisions before the chapters on valuation and
been added to each part of the book. capital investment.
,Brealey−Meyers: Front Matter Preface © The McGraw−Hill
Principles of Corporate Companies, 2003
Finance, Seventh Edition
PREFACE xi
We should mention two matters of style now to Financial Analysis Spreadsheet Templates
prevent confusion later. First, the most important fi- (F.A.S.T.)
nancial terms are set out in boldface type the first Mike Griffin of KMT Software created the templates
time they appear; less important but useful terms are in Excel. They correlate with specific concepts in the
given in italics. Second, most algebraic symbols rep- text and allow students to work through financial
resenting dollar values are shown as capital letters. problems and gain experience using spreadsheets.
Other symbols are generally lowercase letters. Thus Each template is tied to a specific problem in the text.
the symbol for a dividend payment is “DIV,” and the
Solutions Manual
symbol for a percentage rate of return is “r.”
ISBN 0072468009
The Solutions Manual, prepared by Bruce Swensen,
SUPPLEMENTS
Adelphi University, contains solutions to all practice
In this edition, we have gone to great lengths to en-
questions and challenge questions found at the end
sure that our supplements are equal in quality and
of each chapter. Thoroughly checked for accuracy,
authority to the text itself.
this supplement is available to be purchased by your
Instructor’s Manual students.
ISBN 0072467886
The Instructor’s Manual was extensively revised and Study Guide
updated by C. R. Krishnaswamy of Western Michi- ISBN 0072468017
gan University. It contains an overview of each chap- The new Study Guide was carefully revised by
ter, teaching tips, learning objectives, challenge ar- V. Sivarama Krishnan of Cameron University and
eas, key terms, and an annotated outline that contains useful and interesting keys to learning. It in-
provides references to the PowerPoint slides. cludes an introduction to each chapter, key concepts,
examples, exercises and solutions, and a complete
Test Bank
chapter summary.
ISBN 0072468025
The Test Bank was also updated by C. R. Krish- Videos
naswamy, who included well over 1,000 new multiple- ISBN 0072467967
choice and short answer/discussion questions based The McGraw-Hill/Irwin Finance Video Series is a
on the revisions of the authors. The level of difficulty is complete video library designed to bring added
varied throughout, using a label of easy, medium, or points of discussion to your class. Within this profes-
difficult. sionally developed series, you will find examples of
how real businesses face today’s hottest topics, like
PowerPoint Presentation System
mergers and acquisitions, going public, and careers
Matt Will of the University of Indianapolis pre-
in finance.
pared the PowerPoint Presentation System, which
contains exhibits, outlines, key points, and sum- Student CD-ROM
maries in a visually stimulating collection of slides. Packaged with each text is a CD-ROM for students
Found on the Student CD-ROM, the Instructor’s that contains many features designed to enhance the
CD-ROM, and our website, the slides can be edited, classroom experience. Three learning modules from
printed, or rearranged in any way to fit the needs of the new Finance Tutor Series are included on the CD:
your course. Time Value of Money Tutor, Stock and Bond Valuation
, Brealey−Meyers: Front Matter Preface © The McGraw−Hill
Principles of Corporate Companies, 2003
Finance, Seventh Edition
xii PREFACE
Tutor, and Capital Budgeting Tutor. In each module, HTML—a universal Web language. Next, choose
students answer questions and solve problems that your favorite of three easy-to-navigate designs and
not only assess their general understanding of the your Web home page is created, complete with on-
subject but also their ability to apply that understand- line syllabus, lecture notes, and bookmarks. You can
ing in real-world business contexts. In “Practice even include a separate instructor page and an as-
Mode,” students learn as they go by receiving in- signment page.
depth feedback on each response before proceeding to PageOut offers enhanced point-and-click features
the next question. Even better, the program antici- including a Syllabus Page that applies real-world
pates common misunderstandings, such as incorrect links to original text material, an automated grade
calculations or assumptions, and then provides feed- book, and a discussion board where instructors and
back only to the student making that specific mistake. their students can exchange questions and post an-
Students who want to assess their current knowledge nouncements.
may select “Test Mode,” where they read an extensive
evaluation report after they have completed the test. ACKNOWL EDGMENTS
Also included are the PowerPoint presentation We have a long list of people to thank for their help-
system, Financial Analysis Spreadsheet Templates ful criticism of earlier editions and for assistance in
(F.A.S.T.), video clips from our Finance Video Series, preparing this one. They include Aleijda de Cazen-
and many useful Web links. ove Balsan, John Cox, Kedrum Garrison, Robert
Instructor’s CD-ROM Pindyck, and Gretchen Slemmons at MIT; Stefania
ISBN 0072467959 Uccheddu at London Business School; Lynda
We have compiled many of our instructor supple- Borucki, Marjorie Fischer, Larry Kolbe, James A.
ments in electronic format on a CD-ROM designed Read, Jr., and Bente Villadsen at The Brattle Group,
to assist with class preparation. The CD-ROM in- Inc.; John Stonier at Airbus Industries; and Alex Tri-
cludes the Instructor’s Manual, the Solutions Man- antis at the University of Maryland. We would also
ual, a computerized Test Bank, PowerPoint slides, like to thank all those at McGraw-Hill/Irwin who
video clips, and Web links. worked on the book, including Steve Patterson, Pub-
lisher; Rhonda Seelinger, Executive Marketing Man-
Online Learning Center
(www.mhhe.com/bm7e)
ager; Sarah Ebel, Senior Developmental Editor; Jean
This site contains information about the book and the Lou Hess, Senior Project Manager; Keith McPherson,
authors, as well as teaching and learning materials Design Director; Joyce Chappetto, Supplement Co-
for the instructor and the student, including: ordinator; and Michael McCormick, Senior Produc-
tion Supervisor.
PageOut: The Course Website Development We want to express our appreciation to those in-
Center and PageOut Lite structors whose insightful comments and sugges-
www.pageout.net
tions were invaluable to us during this revision:
This Web page generation software, free to adopters,
Noyan Arsen Koc University
is designed for professors just beginning to explore
Penny Belk Loughborough University
website options. In just a few minutes, even the most Eric Benrud University of Baltimore
novice computer user can have a course website. Peter Berman University of New Haven
Simply type your material into the template pro- Jean Canil University of Adelaide
vided and PageOut Lite instantly converts it to Robert Everett Johns Hopkins University
