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Website: book.ivo-welch.info

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Copyright Ivo Welch, 2017. All Rights Reserved.

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1st Edition, “Corporate Finance: An Introduction,” ISBN-10 0321277996.
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2nd Edition, “Corporate Finance,” ISBN-10: 09840049-5-5, ISBN-13: 978-09840049-5-9.

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4th Edition, “Corporate Finance,” ISBN-13: 978-0-9840049-2-8. V2 (contains 17.4).

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Exact Date: Sunday 23rd July, 2017

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partment. He received his BA in Computer Science from Columbia University, and both his MBA and
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my wife Lily, and my three children, Arthur, Leonard and Greta.

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Preface

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Most corporate finance textbooks cover a similar canon of concepts, and my book is no

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exception. A quick glance at the table of contents will show you that most—though not all—of

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the topics in this book overlap with those in traditional finance textbooks and syllabi. That said,
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this book is intentionally different. It features many innovations in approach and emphasis. I

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firmly believe that it is the best introductory corporate finance book available anywhere and at

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any price. After you have used this book once, you will not want to go back. As far as I know, no

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one who has used this book has ever switched back unless forced to do so by a committee.

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This book is also an experiment in pricing. All major economics book publishers believe that

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professors do not care how much their textbooks cost. This book puts this belief to the test: its

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competitors cost $300 plus. This edition remains priced at $60 in print, and it is also available

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for free on the web. (This price is low enough to allow many students to keep this book even

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after they have completed the course.) Of course, professors should adopt this book not because

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of its price, but because it is simply the best corporate finance textbook today, with full instructor
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support materials, including a free course management and equiz website. e(

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Basic Organization

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Essential Corporate Finance covers all the topics of the usual corporate finance curriculum.

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However, as noted above, the organizing principle of moving from perfect to imperfect markets

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unifies the core chapters. This progression from financial “utopia” to the complex real world
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is especially apparent in the first three parts of the book and is revisited multiple times in the
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remaining parts.
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Part I: Value and Capital Budgeting shows how to work with rates of return and how to decide

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whether to take or reject projects in a perfect market under risk neutrality. Five chapters
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and annuities, capital budgeting, interest rates, uncertainty, and debt and equity in the
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absence of risk aversion.

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risk and expected returns in a perfect market. It first provides a historical backdrop of rates
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of return on various asset classes and some institutional background. It then proceeds to
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the key concepts of risk, reward, and diversification from an investor’s perspective; moves
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on to benchmarked costs of capital; and culminates with a discussion of the Capital Asset
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Part III: Value and Market Efficiency in an Imperfect Market describes what happens if the
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perfect market assumptions do not hold in our messier real world. Although the perfect
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market assumptions form the basis of most finance formulas (such as NPV and the CAPM)
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and have facilitated the development of finance into a modern science, they are not always
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realistic. Thus, in this part, two chapters examine the reality of information differences,
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noncompetitive markets, transaction costs, and taxes. The chapters also explain differences
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between efficient and inefficient markets, and between rational and behavioral finance.
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work, looks at financial statement analysis from a finance perspective, and considers the
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valuation technique of comparables.

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Part V: Capital Structure and Payout Policy considers the capital structure that firms should

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this should play out in an imperfect world of corporate taxes and other issues. Some
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market imperfections should push firms toward more equity and others toward more debt.

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Part VI: Projecting the Future shows how to think about the construction of pro formas. In a

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The Companion

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course in finance. This keeps the book short. Other material—even important material as long

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as it is impossible to cover in a first course—is now in a “Companion” book. This book is also
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available for free. Instructors can also print and distribute individual chapters. Formatting is the
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same as it is in this primary book, but update are only ever other edition or so. The companion
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includes such chapters as “International Finance,” which are a necessary checkbox for AACSB

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accreditation—but which no introductory finance course has ever found time to cover.
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The companion includes more detailed coverage of capital-structure dynamics, capital-

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structure patterns in the United States, investment banking and mergers & acquisitions, corporate

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governance, international finance, and options and risk management. It also includes appendices
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to Chapter 5 (how to extract and lock in forward rates, how to calculate bond durations, how

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to hedge interest risk, how to compound continuously, and how Treasuries are quoted in the

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real world); Chapter 8 (more explanations for the efficient frontier); and Chapter 10 (certainty

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equivalence, two-portfolio separation, the relation between the mean-variance efficient frontier

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Chapter 13 (more real-option decision trees); Chapter 14 (the Coca-Cola financials); Chapter 17

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(how CAPM, WACC, and NPV fit); and Chapter 18 (how to think of the discount factor on tax

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real option implementation and a provocative chapter on ethics.

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fail to realize this and study, and are then shocked when they fail the course.)

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joined the MBA program!) Struggling and anxiety along the way are necessary and maybe even
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Yet let me also disavow one misconception. It is not an instructor’s duty to be entertaining or
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and listen to TED lectures on pop culture, instead. Finance is not a passive or easy experience.
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PS: If your instructor is not using a syllabus.space site, you can register yourself and work with
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