Principles of Corporate Finance

Who it is for

If your Executive MBA finance course lists this book, buy it. Most of the problem sets, lecture slides and exam questions in a course built on it will assume its notation and its order of topics. Fighting that with a different text costs more evenings than it saves.

The second reader is the finance professional who wants one book on the shelf that settles arguments. When a business unit claims its project clears the hurdle rate, or a banker explains why the deal adds value, this is the book that tells you what the textbook answer is and why.

It is an advanced book in the corporate finance sequence. It assumes you are comfortable with algebra and a spreadsheet, and it moves at the pace of a graduate course.

Who should skip it

Skip it if you are not taking a finance course. Reading forty hours of textbook on your own, without problem sets and a professor to force the pace, is a plan most people abandon somewhere around the cost of capital.

Skip it also if you need intuition before formulas. A manager who has never built a discounted cash flow will get more from a book that explains what the numbers mean in a budget review, then come back here when the course starts.

The ideas that matter

Net present value is the decision rule

The book's spine is simple: a project is worth doing if the present value of its cash flows exceeds what it costs. Everything else is refinement. For a manager, the useful discipline is that payback periods, accounting returns and "strategic value" all have to answer to that test , and the authors are blunt about why the alternatives mislead.

Risk is priced by what you cannot diversify

The treatment of risk and return, built around portfolio theory and the capital asset pricing model, explains why the discount rate on a project should reflect the risk of that project, not the risk of the company as a whole. This is the idea I would most want a division head to absorb. A single company-wide hurdle rate quietly subsidizes the risky projects and starves the safe ones.

Capital structure matters less than people think, and then more

The Modigliani-Miller propositions argue that, in a frictionless world, how you finance the firm does not change its value. The book then adds back taxes, the costs of financial distress and the incentive problems between managers, lenders and shareholders . The sequence teaches a habit worth keeping: start from the case where something does not matter, then name exactly which friction makes it matter.

Options are everywhere in a business

The chapters on options and real options show that the right to delay, expand or abandon a project has value a static NPV misses . Anyone who has argued for a pilot plant or a phased market entry has been making a real-options argument without the vocabulary. This book supplies it.

The authors admit what finance does not know

The final chapter lists open problems in the field rather than closing with false confidence . For a textbook that is unusual, and it is a good model for how to present a forecast to a board.

Where it is wrong or dated

The capital asset pricing model sits at the center of the risk chapters, and its empirical record is weak. Eugene Fama and Kenneth French's 1992 paper in the Journal of Finance found that beta did little to explain the cross-section of average stock returns . The book discusses the alternatives, but a reader can still leave believing the cost of equity is more precise than it is.

Its view of the firm is the financial economist's view. It says comparatively little about how capital budgets are actually fought over: the sandbagged forecasts, the projects sized to fall just under an approval threshold, the hurdle rate set by negotiation. That is not a flaw in a textbook, but it is a gap a manager has to fill from experience.

Older editions carry dated examples and market data. The core theory changes slowly between editions; the case companies, interest-rate levels and regulatory references do not age well.

On editions: the book first appeared in 1981 under Brealey and Myers, with Franklin Allen joining as co-author in a later edition . New editions arrive every few years . The NPV, risk-and-return, capital structure and options material is largely the same from one edition to the next . What changes is chapter numbering, end-of-chapter problems, examples and supporting online material.

That is why I recommend an older edition, bought used, for most readers. This is a textbook-priced book new. One or two editions back usually costs a fraction of that and teaches the same finance. Check three things before you buy: whether your professor assigns problems by number from the current edition, whether the course requires an online homework access code that a used copy will not include , and whether the international edition sold cheaply in some markets matches the chapter order of the domestic one . If none of those apply, buy old.

If you only have a weekend

Do not try to read this book in a weekend. Pick the four ideas a manager uses and read only those parts.

Start with the chapters on present value and on why NPV beats other investment criteria . Then read the chapters on risk and return and on the cost of capital, including the discussion of company versus project discount rates . Then read the opening chapters of the capital structure section, where Modigliani-Miller is set out and then complicated by taxes and distress . Finish with the final chapter on what finance does and does not know .

Skip the worked problems on the first pass. Come back to them when an assignment is due.

What to read instead

If you are not in a course, or the course has not started, read Financial Intelligence first. It explains what the numbers mean for someone who has to make decisions with them, with no expectation that you will derive anything. It is the better choice for a manager who wants to hold their own in a budget meeting next month.

If what you need is valuation rather than the full finance course, The Little Book of Valuation covers the practical method in a fraction of the length, and Valuation is the practitioner's reference once you are building models for real.