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 ESSENTIALS OF CORPORATE FINANCE

Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221

Avenue of the Americas, New York, NY, 10020. Copyright © 2011, 2008, 2007, 2004, 2001, 1999, 1996
by The McGraw-Hill Companies, Inc. All rights reserved. No part of this publication may be reproduced
or distributed in any form or by any means, or stored in a database or retrieval system, without the prior
written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or
other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers
outside the United States.

This book is printed on acid-free paper.

1 2 3 4 5 6 7 8 9 0 WCK/WCK 1 0 9 8 7 6 5 4 3 2 1 0

ISBN 978-0-07-338246-3
MHID 0-07-338246-9

Vice president and editor-in-chief: Brent Gordon

Publisher: Douglas Reiner
Executive editor: Michele Janicek
Director of development: Ann Torbert
Development editor: Elizabeth Hughes
Vice president and director of marketing: Robin J. Zwettler
Marketing director: Sankha Basu
Senior marketing manager: Melissa Caughlin
Vice president of editing, design, and production: Sesha Bolisetty
Lead project manager: Christine A. Vaughan
Lead production supervisor: Carol A. Bielski
Cover and interior designer: Pam Verros
Lead media project manager: Brian Nacik
Cover image: © Veer
Typeface: 10/12 Times Roman
Compositor: MPS Limited, A Macmillan Company
Printer: World Color Press Inc.

Library of Congress Cataloging-in-Publication Data

Ross, Stephen A.
Essentials of corporate finance / Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan.
-- 7th ed.
p. cm. -- (The McGraw-Hill/Irwin series in finance, insurance, and real estate)
Includes index.
ISBN-13: 978-0-07-338246-3 (alk. paper)
ISBN-10: 0-07-338246-9 (alk. paper)
1. Corporations—Finance. I. Westerfield, Randolph. II. Jordan, Bradford D. III. Title.
HG4026.R676 2011
658.15-dc22

2009049816

www.mhhe.com
About the Authors

Stephen A. Ross
Sloan School of Management, Franco Modigliani Professor of Finance and Economics, Massachusetts
Institute of Technology

Stephen A. Ross is the Franco Modigliani Professor of Finance and Economics at the Sloan School of
Management, Massachusetts Institute of Technology. One of the most widely published authors in finance
and economics, Professor Ross is recognized for his work in developing the Arbitrage Pricing Theory
and his substantial contributions to the discipline through his research in signaling, agency theory, option
pricing, and the theory of the term structure of interest rates, among other topics. A past president of the
American Finance Association, he currently serves as an associate editor of several academic and
practitioner journals. He is a trustee of CalTech.

Randolph W. Westerfield
Marshall School of Business, University of Southern California

Randolph W. Westerfield is Dean Emeritus of the University of Southern California’s Marshall

School of Business and is the Charles B. Thornton Professor of Finance. He came to USC from the
Wharton School, University of Pennsylvania, where he was the chairman of the finance department and a
member of the finance faculty for 20 years. He is a member of several public company boards of directors
including Health Management Associates, Inc., and the Nicholas Applegate Growth Fund. His areas of
expertise include corporate financial policy, investment management, and stock market price behavior.
 Bradford D. Jordan
Gatton College of Business and Economics, University of Kentucky

Bradford D. Jordan is Professor of Finance and holder of the Richard W. and Janis H. Furst Endowed
Chair in Finance at the University of Kentucky. He has a long-standing interest in both applied and
theoretical issues in corporate finance and has extensive experience teaching all levels of corporate
finance and financial management policy. Professor Jordan has published numerous articles on issues
such as the cost of capital, capital structure, and the behavior of security prices. He is a past president of
the Southern Finance Association, and he is coauthor of Fundamentals of Investments: Valuation and
Management, 5th edition, a leading investments text, also published by McGraw-Hill/Irwin.
From the Authors

When we first wrote Essentials of Corporate Finance, we thought there might be a small niche for a
briefer book that really focused on what students with widely varying backgrounds and interests needed to
carry away from an introductory finance course. We were wrong. There was a huge niche! What we
learned is that our text closely matches the needs of instructors and faculty at hundreds of schools across
the country. As a result, the growth we have experienced through the first six editions of Essentials has
far exceeded anything we thought possible.
With the seventh edition of Essentials of Corporate Finance, we have continued to refine our focus
on our target audience, which is the undergraduate student taking a core course in business or corporate
finance. This can be a tough course to teach. One reason is that the class is usually required of all
business students, so it is not uncommon for a majority of the students to be nonfinance majors. In fact, this
may be the only finance course many of them will ever have. With this in mind, our goal in Essentials is
to convey the most important concepts and principles at a level that is approachable for the widest
possible audience.
To achieve our goal, we have worked to distill the subject down to its bare essentials (hence, the
name of this book), while retaining a decidedly modern approach to finance. We have always maintained
that the subject of corporate finance can be viewed as the working of a few very powerful intuitions. We
also think that understanding the “why” is just as important, if not more so, than understanding the “how,”
especially in an introductory course. Based on the gratifying market feedback we have received from our
previous editions, as well as from our other text, Fundamentals of Corporate Finance (now in its ninth
edition), many of you agree.
By design, this book is not encyclopedic. As the table of contents indicates, we have a total of 18
chapters. Chapter length is about 30 pages, so the text is aimed squarely at a single-term course, and most
of the book can be realistically covered in a typical semester or quarter. Writing a book for a one-term
course necessarily means some picking and choosing, with regard to both topics and depth of coverage.
Throughout, we strike a balance by introducing and covering the essentials (there’s that word again!)
while leaving some more specialized topics to follow-up courses.
The other things we have always stressed, and have continued to improve with this edition, are
readability and pedagogy. Essentials is written in a relaxed, conversational style that invites the students
to join in the learning process rather than being a passive information absorber. We have found that this
approach dramatically increases students' willingness to read and learn on their own. Between larger and
larger class sizes and the ever-growing demands on faculty time, we think this is an essential (!) feature
for a text in an introductory course.
Throughout the development of this book, we have continued to take a hard look at what is truly
relevant and useful. In doing so, we have worked to downplay purely theoretical issues and minimize the
use of extensive and elaborate calculations to illustrate points that are either intuitively obvious or of
limited practical use.
As a result of this process, three basic themes emerge as our central focus in writing Essentials of
Corporate Finance:

An Emphasis on Intuition

We always try to separate and explain the principles at work on a commonsense, intuitive level
before launching into any specifics. The underlying ideas are discussed first in very general terms and
then by way of examples that illustrate in more concrete terms how a financial manager might proceed in a
given situation.

A Unified Valuation Approach

We treat net present value (NPV) as the basic concept underlying corporate finance. Many texts stop
well short of consistently integrating this important principle. The most basic and important notion, that
NPV represents the excess of market value over cost, often is lost in an overly mechanical approach that
emphasizes computation at the expense of comprehension. In contrast, every subject we cover is firmly
rooted in valuation, and care is taken throughout to explain how particular decisions have valuation
effects.

A Managerial Focus

Students shouldn’t lose sight of the fact that financial management concerns management. We
emphasize the role of the financial manager as decision maker, and we stress the need for managerial
input and judgment. We consciously avoid “black box” approaches to finance, and, where appropriate,
the approximate, pragmatic nature of financial analysis is made explicit, possible pitfalls are described,
and limitations are discussed.
Today, as we prepare to once again enter the market, our goal is to stick with and build on the
principles that have brought us this far. However, based on an enormous amount of feedback we have
received from you and your colleagues, we have made this edition and its package even more flexible
than previous editions. We offer flexibility in coverage and pedagogy by providing a wide variety of
features in the book to help students to learn about corporate finance. We also provide flexibility in
package options by offering the most extensive collection of teaching, learning, and technology aids of any
corporate finance text. Whether you use just the textbook, or the book in conjunction with other products,
we believe you will find a combination with this edition that will meet your current as well as your
changing needs.
Stephen A. Ross
Randolph W. Westerfield
Bradford D. Jordan
 Organization of the Text

We designed Essentials of Corporate Finance to be as flexible and modular as possible. There are a
total of nine parts, and, in broad terms, the instructor is free to decide the particular sequence. Further,
within each part, the first chapter generally contains an overview and survey. Thus, when time is limited,
subsequent chapters can be omitted. Finally, the sections placed early in each chapter are generally the
most important, and later sections frequently can be omitted without loss of continuity. For these reasons,
the instructor has great control over the topics covered, the sequence in which they are covered, and the
depth of coverage.
Just to get an idea of the breadth of coverage in the seventh edition of Essentials, the following grid
presents for each chapter some of the most significant new features, as well as a few selected chapter
highlights. Of course, in every chapter, figures, opening vignettes, boxed features, and in-chapter
illustrations and examples using real companies have been thoroughly updated as well. In addition, the
end-of-chapter material has been completely revised.
Learning Solutions

In addition to illustrating relevant concepts and presenting up-to-date coverage, Essentials of

Corporate Finance strives to present the material in a way that makes it engaging and easy to understand.
To meet the varied needs of the intended audience, Essentials of Corporate Finance is rich in valuable
learning tools and support.
Each feature can be categorized by the benefit to the student:

Real financial decisions

Application tools
Study aids

REAL FINANCIAL DECISIONS

We have included two key features that help students connect chapter concepts to how decision
makers use this material in the real world.

Chapter-Opening Vignettes
Each chapter begins with a contemporary real-world event to introduce students to chapter concepts.

Reality Bytes Boxes

Most chapters include at least one Reality Bytes box, which takes a chapter issue and shows how it is
being used right now in everyday financial decision making.
APPLICATION TOOLS

Because there is more than one way to solve problems in corporate finance, we include many sections
that encourage students to learn or brush up on different problem-solving methods, such as financial
calculator and Excel spreadsheet skills.

Chapter Cases
Located at the end of most chapters, these cases focus on hypothetical company situations that embody
corporate finance topics. Each case presents a new scenario, data, and a dilemma. Several questions at
the end of each case require students to analyze and focus on all of the material they learned from the
chapters in that part. Great for homework or in-class exercises and discussions!

Work the Web

These in-chapter boxes show students how to research financial issues using the Web and how to use
the information they find to make business decisions. New to this edition, now all of the Work the Web
boxes also include interactive follow-up questions and exercises.
 Explanatory Web Links
These Web links are provided in the margins of the text. They are specifically selected to accompany
text material and provide students and instructors with a quick way to check for additional information
using the Internet.

What’s On the Web?

These end-of-chapter activities show students how to use and learn from the vast amount of financial
resources available on the Internet.

Calculator Hints
Calculator Hints is a self-contained section occurring in various chapters that first introduces students
to calculator basics and then illustrates how to solve problems with the calculator. Appendix D goes into
more detailed instructions by solving problems with two specific calculators.
 Spreadsheet Strategies
The unique Spreadsheet Strategies feature is also in a self-contained section, showing students how to
set up spreadsheets to solve problems—a vital part of every business student’s education.

Spreadsheet Templates
Indicated by an Excel icon next to applicable end-of-chapter questions and problems, spreadsheet
templates are available for selected problems on the Student Edition of the book’s Web site,
www.mhhe.com/rwj. For even more spreadsheet examples, check out Excel Master, also available on the
Web site.

STUDY AIDS

We want students to get the most from this book and this course, and we realize that students have
different learning styles and study needs. We therefore present a number of study features to appeal to a
wide range of students.

Learning Objectives
Each chapter begins with a number of learning objectives that are key to the student’s understanding of
the chapter. Learning objectives are also linked to end-of-chapter problems and test bank questions.

Pedagogical Use of Color

We continue to use a full color palette in Essentials not only to make the text more inviting, but, more
importantly, as a functional element to help students follow the discussion. In almost every chapter, color
plays an important, largely self-evident role. A guide to the use of color is found on the back endsheets.

Critical Thinking Questions

Every chapter ends with a set of critical thinking questions that challenge the students to apply the
concepts they have learned in the chapter to new situations.
 Concept Questions
Chapter sections are intentionally kept short to promote a step-by-step, building-block approach to
learning. Each section is then followed by a series of short concept questions that highlight the key ideas
just presented. Students use these questions to make sure they can identify and understand the most
important concepts as they read.

Numbered Examples
Separate numbered and titled examples are extensively integrated into the chapters. These examples
provide detailed applications and illustrations of the text material in a step-by-step format. Each example
is completely self-contained so that students don’t have to search for additional information. Based on our
classroom testing, these examples are among the most useful learning aids because they provide both
detail and explanation.

Summary Tables
These tables succinctly restate key principles, results, and equations. They appear whenever it is
useful to emphasize and summarize a group of related concepts.

Key Terms
 These are printed in blue the first time they appear, and are defined within the text and in the margin.

Key Equations
These are called out in the text and identified by equation numbers. Appendix B shows the key
equations by chapter.

Highlighted Phrases
Throughout the text, important ideas are presented separately and printed in a green box to indicate
their importance to the students.

Chapter Summary and Conclusions

These paragraphs review the chapter’s key points and provide closure to the chapter.

Chapter Review and Self-Test Problems

Review and self-test problems appear after the chapter summaries. Detailed answers to the self-test
problems immediately follow. These questions and answers allow students to test their abilities in
solving key problems related to the content of the chapter.
 End-of-Chapter Questions and Problems
We have found that many students learn better when they have plenty of opportunity to practice. We
therefore provide extensive end-of-chapter questions and problems—now linked to Learning Objectives.
The questions and problems are generally separated into three levels—Basic, Intermediate, and
Challenge. All problems are fully annotated so that students and instructors can readily identify particular
types. Throughout the text, we have worked to supply interesting problems that illustrate real-world
applications of chapter material. Answers to selected end-of-chapter problems appear in Appendix C.
Another random document with
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 Instructions To Potential Users
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Footnotes:
[1] This value varies with experimental environment of core.
[2] This value varies with experimental environment of core.
[3] P1: Center of Glory Hole; P2: Core Surface (11.3 cm from
Core Center); P3: 1 meter from Core Center.
[4] These values are approximate and meant for qualitative
comparison only.
[5] P1: Center of Glory Hole; P2: Core Surface; P3: 1 Meter from
Core Center.
[6] Ionization and elastic recoil processes contribute roughly equal
amounts to the total kerma.
[7] P1: Center of Glory Hole; P2: Core Surface; P3: 1 Meter from
Core Center.
[8] Representative data. Actual values influenced by core
operating history.
 Transcriber’s Notes:

The illustrations have been moved so that they do not break up paragraphs and so
that they are next to the text they illustrate.
Typographical and punctuation errors have been silently corrected.
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