A way of thinking about finance

We are very pleased with the success of the first five editions of the book. It has encouraged us to retain the approach in order to explain corporate finance to students and professionals. There are four key features that distinguish this book from the many other corporate finance textbooks available on the market today:

• Our strong belief that financial analysis is part of corporate finance. Pierre Vernimmen, who was mentor and partner to some of us in the practice of corporate finance, understood very early on that a good financial manager must first be able to analyse a company's economic, financial and strategic situation, and then value it, while at the same time mastering the conceptual underpinnings of all financial decisions.
• Corporate Finance is neither a theoretical textbook nor a practical workbook. It is a book in which theory and practice are constantly set off against each other, in the same way as in our daily practice as investors at Monestier capital and Natixis, as board members of several listed and unlisted companies, and as teachers notably at HEC Paris business school.
• Emphasis is placed on concepts intended to give you an understanding of situations, rather than on techniques, which tend to shift and change over time. We confess to believing that the former will still be valid in 20 years' time, whereas the latter will, for the most part, be long forgotten!
• Financial concepts are international, but they are much easier to grasp when they are set in a familiar context. We have tried to give examples and statistics from all around the world to illustrate the concepts.

The five sections

This book starts with an introductory chapter reiterating the idea that corporate financiers are the bridge between the economy and the realm of finance. Increasingly, they must play the role of marketing managers and negotiators. Their products are financial securities that represent rights to the firm's cash flows. Their customers are bankers and investors. A good financial manager listens to customers and sells them good products at high prices. A good financial manager always thinks in terms of value rather than costs or earnings.

Section I goes over the basics of financial analysis, i.e. understanding the company based on a detailed analysis of its financial statements. We are amazed at the extent to which large numbers of investors neglected this approach during the latest stock market euphoria. When share prices everywhere are rising, why stick to a rigorous approach? For one thing, to avoid being caught in the crash that inevitably follows.

The return to reason has also returned financial analysis to its rightful place as a cornerstone of economic decision-making. To perform financial analysis, you must first understand the firm's basic financial mechanics (Chapters 2). Next you must master the basic techniques of accounting, including accounting principles, consolidation techniques and certain complexities (Chapters 6), based on international (IFRS) standards now mandatory in over 80 countries, including the EU (for listed companies), Australia, South Africa and accepted by the SEC for US listing. In order to make things easier for the newcomer to finance, we have structured the presentation of financial analysis itself around its guiding principle: in the long run, a company can survive only if it is solvent and creates value for its shareholders. To do so, it must generate wealth (Chapters 9 and 10), invest (Chapter 11), finance its investments (Chapter 12) and generate a sufficient return (Chapter 13). The illustrative financial analysis of the Italian appliance manufacturer Indesit will guide you throughout this section of the book.

Section II reviews the basic theoretical knowledge you will need to make an assessment of the value of the firm. Here again, the emphasis is on reasoning, which in many cases will become automatic (Chapters 15): efficient capital markets, the time value of money, the price of risk, volatility, arbitrage, return, portfolio theory, present value and future value, market risk, beta, etc. Then we review the major types of financial securities: equity, debt and options, for the purposes of valuation, along with the techniques for issuing and placing them (Chapters 20).

Section III, is devoted to value, to its theoretical foundations and to its computation. Value is the focus of any financier, both its measure and the way it is shared. Over the medium term, creating value is, most of the time, the first aim of managers (Chapters 26).

In Section IV, “Corporate financial policies”, we analyse each financial decision in terms of:

• value in the context of the theory of efficient capital markets;
• balance of power between owners and managers, shareholders and debtholders (agency theory);
• communication (signal theory).

Such decisions include choosing a capital structure, investment decisions, cost of capital, dividend policy, share repurchases, capital increases, hybrid security issues, etc.

In this section, we draw your attention to today's obsession with earnings per share, return on equity and other measures whose underlying basis we have a tendency to forget and which may, in some cases, be only distantly related to value creation. We have devoted considerable space to the use of options (as a technique or a type of reasoning) in each financial decision (Chapter 32).

When you start reading Section V, “Financial management”, you will be ready to examine and take the remaining decisions: how to create and finance a start-up, how to organise a company's equity capital and its governance, buying and selling companies, mergers, demergers, LBOs, bankruptcy and restructuring (Chapter 40). Lastly, this section presents working capital management, cash management, the management of the firm's financial risks and its operational real estate assets (Chapter 49).

Last but not least, the epilogue addresses the question of the links between finance and strategy.

Suggestions for the reader

To make sure that you get the most out of your book, each chapter ends with a summary and a series of problems and questions (over 800 with the solutions provided). We've used the last page of the book to provide a crib sheet (the nearly 1,000 pages of this book summarised on one page!). For those interested in exploring the topics in greater depth, there is an end-of-chapter bibliography and suggestions for further reading, covering fundamental research papers, articles in the press, published books and websites. A large number of graphs and tables (over 100!) have been included in the body of the text and these can be used for comparative analyses. Finally, there is a fully comprehensive index.

An Internet site with huge and diversified content

www.vernimmen.com provides free access to tools (formulas, tables, statistics, lexicons, glossaries); resources that supplement the book (articles, prospectuses of financial transactions, financial figures for over 16,000 European, North American and emerging countries, listed companies, thesis topics, thematic links, a list of must-have books for your bookshelf, an Excel file providing detailed solutions to all of the problems set in the book); plus problems, case studies and quizzes for testing and improving your knowledge. There is a letterbox for your questions to the authors (we reply within 72 hours, unless, of course, you manage to stump us!). There are questions and answers and much more. The site has its own internal search engine, and new services are added regularly.

A teachers' area provides teachers with free access to case studies, slides and an Instructor's Manual, which gives advice and ideas on how to teach all of the topics discussed in the book.

A free monthly newsletter on corporate finance

Since (unfortunately) we can't bring out a new edition of this book every month, we have set up the Vernimmen.com Newsletter, which is sent out free of charge to subscribers via the web. It contains:

• A conceptual look at topical corporate finance problems (e.g. accounting for operating and capital leases, financially managing during a deflation phase).
• Statistics and tables that you are likely to find useful in the day-to-day practice of corporate finance (e.g. corporate income tax rates, debt ratios in LBOs).
• A critical review of a financial research paper with a concrete dimension (e.g. the real effect of corporate cash, why don't US issuers demand European fees for their IPOs?).
• A question left on the vernimmen.com site by a visitor plus a response (e.g. Why do successful groups have such a low debt level? What is an assimilation clause?).
• A catch up of our last posts on LinkedIn and Facebook.

Subscribe to www.vernimmen.com and become one of the many readers of the Vernimmen.com Newsletter.

And lastly a LinkedIn and Facebook page

We publish daily comments on financial news that we deem to be of interest, answer questions from web-users and publish finance- and business-related quotes. These could come in useful when preparing for a job interview or serve as food for thought for those of you wanting to take time out and think about what's going on in the corporate and financial world.

Many thanks

• To Maurizio Dallocchio and Antonio Salvi, our co-authors of the previous editions (whose many hectic activities have led them to be unable to participate in the current work).
• To Patrice Carlean-Jones, Matthew Cush, Anthony de Rauville, Sandra Dupouy, Robert Killingsworth, Franck Megel, François Meunier, Pascale Mourvillier, John Olds, Françoise Quiry, Pierre Quiry, Gita Roux, Steven Sklar, Marc Vermeulen, Julie Watremez and students of the HEC Paris for their help in improving the manuscript since its inception.
• To Gemma Valler and Purvi Patel, our editors, to Elaine Bingham, Manikandan Kuppan and for their help to improve the manuscript.
• To Altimir Perrody, the vernimmen.com webmaster.
• Our colleagues at Natixis New York and HEC, in particular Blaise Allaz, Olivier Bossard, Lily Cheung, Paul Monange, Michael Moravec, Yohan Quere, Alessandra Rey and Robert White.
• Thanks to the BNP Paribas Chair in Corporate Finance at HEC Paris for its support.
• And last but not least to Françoise and Anne-Valérie; our children Paul, Claire, Pierre, Philippe, Soazic, Solène and Aymeric and our many friends who have had to endure our endless absences over the last years, and of course Catherine Vernimmen and her children for their everlasting and kind support.

We hope that you will gain as much enjoyment from your copy of this book – whether you are a new student of corporate finance or are using it to revise and hone your financial skills – as we have had in editing this edition and in expanding the services and products that go with it.

We wish you well in your studies!

Paris, New York, December 2021

Pascal Quiry      Yann Le Fur