Finance
This document is a summary of the book Corporate Finance by Jonathan Berk and
Peter DeMarzo. Second Edition, Global Edition. Published by Pearson, 2010.
Contents
Chapter 1: The Corporation.............................................................................................. 2
Chapter 2: Introduction to financial statement analysis...................................................5
Chapter 3: Arbitrage and Financial decision making......................................................10
Chapter 4: The time value of money.............................................................................. 13
Chapter 5: Interest rates................................................................................................ 16
Chapter 6: Investment decision rules............................................................................. 19
Chapter 7: Fundamentals of capital budgeting..............................................................22
Chapter 8: Valuing bonds............................................................................................... 26
Chapter 9: Valuing stocks............................................................................................... 32
Chapter 10: Capital makers and the pricing of risk........................................................38
Chapter 11: Optimal portfolio choice and the capital asset pricing model.....................43
Chapter 12: Estimating the cost of capital.....................................................................49
Chapter 13: Investor behavior and capital market efficiency.........................................53
, Finance
Chapter 1: The Corporation
Focus of the book: how people in corporations make financial decisions.
1.1The four types of firms
Sole proprietorship = a business owned and run by one person; usually very small
with few employees. They are the most common type of firm in the world (71%). Key
characteristics:
o Straightforward to set up >> many new businesses use this organizational form
o Limitation: there is no separation between the firm and the owner – the firm can
have only one owner. If there are other investors, they cannot hold an ownership
stake in the firm.
o The owner has unlimited personal liability for any of the firm’s debts. If the firm
defaults on any debt payment, the lender can require the owner to repay the
loan from personal assets. An owner who cannot afford to repay the loan must
declare personal bankruptcy
o The life is limited to the life of the owner. Also difficult to transfer ownership of a
sole proprietorship.
Partnership = identical to a sole proprietorship except it has more than one owner.
Key features:
o All partners are liable for the firm’s debt (unlimited liability). A lender can require
any partner to repay all the firm’s outstanding debts
o The partnership ends on the death or withdrawal of any single partner; though
partners can avoid liquidation if the partnership agreement provides for
alternatives such as a buyout of a deceased or withdrawn partner.
Limited partnership = a partnership with two kinds of owners, general partners and
limited partners. General partners have the same rights and privileges as partners in a
(general) partnership – they are personally liable for the firm’s debt obligations. Limited
partners have limited liability = their liability is limited to their investment. Their
private property cannot be seized to pay off the firm’s outstanding debts. The death or
withdrawal of a limited partner does not dissolve the partnership and a limited
partner’s interest is transferable. A limited partner has no management authority and
cannot legally be involved in the managerial decision making for the business.
Limited liability company = the owner’s liability is limited to their investment and
they cannot be held personally liable for the firm’s debts. Two types of limited liability
companies:
o Private companies
Owners are not allowed to trade their shares on an organized exchange
o Public companies
Owners are allowed to trade their shares on an organized exchange
Corporation / company is a legally defined, artificial being = a judicial person or legal
entity, separate from its owners. It has many of the legal powers that people have.
Because a corporation is a legal entity separate and distinct from its owners, it is
responsible for its own obligations; the owners of a corporation are not liable for any
obligations the corporation enters into. The corporation is not liable for any personal
obligations of its owners.
Formation
This document is a summary of the book Corporate Finance by Jonathan Berk and
Peter DeMarzo. Second Edition, Global Edition. Published by Pearson, 2010.
Contents
Chapter 1: The Corporation.............................................................................................. 2
Chapter 2: Introduction to financial statement analysis...................................................5
Chapter 3: Arbitrage and Financial decision making......................................................10
Chapter 4: The time value of money.............................................................................. 13
Chapter 5: Interest rates................................................................................................ 16
Chapter 6: Investment decision rules............................................................................. 19
Chapter 7: Fundamentals of capital budgeting..............................................................22
Chapter 8: Valuing bonds............................................................................................... 26
Chapter 9: Valuing stocks............................................................................................... 32
Chapter 10: Capital makers and the pricing of risk........................................................38
Chapter 11: Optimal portfolio choice and the capital asset pricing model.....................43
Chapter 12: Estimating the cost of capital.....................................................................49
Chapter 13: Investor behavior and capital market efficiency.........................................53
, Finance
Chapter 1: The Corporation
Focus of the book: how people in corporations make financial decisions.
1.1The four types of firms
Sole proprietorship = a business owned and run by one person; usually very small
with few employees. They are the most common type of firm in the world (71%). Key
characteristics:
o Straightforward to set up >> many new businesses use this organizational form
o Limitation: there is no separation between the firm and the owner – the firm can
have only one owner. If there are other investors, they cannot hold an ownership
stake in the firm.
o The owner has unlimited personal liability for any of the firm’s debts. If the firm
defaults on any debt payment, the lender can require the owner to repay the
loan from personal assets. An owner who cannot afford to repay the loan must
declare personal bankruptcy
o The life is limited to the life of the owner. Also difficult to transfer ownership of a
sole proprietorship.
Partnership = identical to a sole proprietorship except it has more than one owner.
Key features:
o All partners are liable for the firm’s debt (unlimited liability). A lender can require
any partner to repay all the firm’s outstanding debts
o The partnership ends on the death or withdrawal of any single partner; though
partners can avoid liquidation if the partnership agreement provides for
alternatives such as a buyout of a deceased or withdrawn partner.
Limited partnership = a partnership with two kinds of owners, general partners and
limited partners. General partners have the same rights and privileges as partners in a
(general) partnership – they are personally liable for the firm’s debt obligations. Limited
partners have limited liability = their liability is limited to their investment. Their
private property cannot be seized to pay off the firm’s outstanding debts. The death or
withdrawal of a limited partner does not dissolve the partnership and a limited
partner’s interest is transferable. A limited partner has no management authority and
cannot legally be involved in the managerial decision making for the business.
Limited liability company = the owner’s liability is limited to their investment and
they cannot be held personally liable for the firm’s debts. Two types of limited liability
companies:
o Private companies
Owners are not allowed to trade their shares on an organized exchange
o Public companies
Owners are allowed to trade their shares on an organized exchange
Corporation / company is a legally defined, artificial being = a judicial person or legal
entity, separate from its owners. It has many of the legal powers that people have.
Because a corporation is a legal entity separate and distinct from its owners, it is
responsible for its own obligations; the owners of a corporation are not liable for any
obligations the corporation enters into. The corporation is not liable for any personal
obligations of its owners.
Formation
