Corporate Finance: Theory & Practice (ISBN 0470092254)

Disappointing text:
This text is too weak at least in important topics like capital budgeting (risk analysis and real options, mainly), MM propositions and portfolio theory. The part on "scenario analysis and Monte Carlo simulation" took less than two pages, but the authors made a recommendation that is a big mistake: "the Monte Carlo Simulation should discount cash flows at the risk-free rate" to calculate the NPV distribution. This is true only if the cash-flows were simulated with risk-neutral stochastic process (i.e., processes with drift penalized by a risk-premium), but the book was referring to "real probability" simulations, so that the book statement is a mistake. Other example, the infantile critique on real options (p. 814): they associated real options (RO) with the internet bubble in 2000, and that RO explained that very high values. Of course RO adds the flexibility value to NPV, but the serious RO literature never supported that bubble. The perhaps best known RO article on internet firm valuation (on Amazon.com value) was Schwartz & Moon (Financial Analyst Journal, May/June 2000): using RO they estimated a price equal to $12.42, whereas the "bubble" stock market price (in 1999) was $76.125, a big difference... (see also Hull, 6th ed., p. 718). Other RO critique that I don't agree is: "estimating ... volatility, opportunity costs, etc., can be complicated". Apparently, the authors don't know that if you have data to estimate the risk-premium for the discount rate (using CAPM concepts, for example), you can use the SAME time series to estimate volatility. The popular approach to estimate this volatility is just a simple linear regression. In short, if the market is complete enough to calculate the traditional NPV, so is for RO valuation. There are much better textbooks available. The traditional Brealey & Myers' textbook remains an excellent choice, mainly for capital budgeting topics. Other good textbook alternatives are Ross et al (mainly for financial decisions, agency, etc.), Grinblatt & Titman (great in risk management), Bodie & Merton (introductory) and Benninga (Financial Modeling, a practical and correct book).

A great textbook!:
What a great book! The book, newsletter, and website are all very interesting and useful. The book is 48 chapters (about 1000 pages) full of corporate finance. I have to agree with the authors "It is a book in which theory and practice are constantly set off against each other...." I really like it. Especially the emphasis not so much on techniques ("which tend to shift and change over time.") Moreover, the authors also put out a monthly newsletter and have a web site that could stand alone as one of the best in the business.

A corporate finance:
The book's called "Corporate Finance - Theory and Practice" and it is, in my view, an excellent work for practitioners in the field. Unlike the other great tomes on the subject, it provides them with full explanations of the techniques involved, real time updates in a world of finance that is constantly changing, and an accounting environment undergoing a radical overhaul with the introduction of the new IFRS. Comments that the book fails to provide an in-depth analysis of the Modigliani and Miller's propositions and of portfolio theory don't even bear mentioning. Criticising it for its weakness in capital budgeting using the real options method or the scenario analysis and Monte Carlo simulation is laughable from the point of view of the practitioner. In fact, the whole market agrees that these methods are very difficult to put into practice. The real options method, for example, is only applicable in two or three clearly identified sectors (and is no substitute for traditional methods) given the difficulties involved in determining its parameters for a real asset. Stating that the volatility of a real project can be calculated simply by historical regression of the same series of data used for calculating the parameters of the cost of capital, is not credible for at least two reasons: i) the volatility of an asset is of course linked to its beta (and obviously not to market risk premium), but is not equal to it as it does not integrate the elements of risk specific to the asset and the volatility of a real asset cannot accordingly be approximated by the average volatility of companies in the sector, ii) only a prospective approach is recognised by the market today, and a historical estimation cannot be defended. Similarly, estimating the convenience yield for a real asset, a fundamental parameter for the real options method, is far from easy and is clearly not based on the same data as those used for calculating the cost of capital. The sensitivity of the method to its intrinsic parameters could easily lead to an over-valuation of the underlying real asset compared with a valuation carried out using the DCF method, which, despite its shortcomings, remains the only method that is universally used/recognised by the market. In conclusion, I found this to be a very comprehensive work which will fully meet the expectations of practitioners, especially when combined with the regular updates on its website ((...)) considered to be one of the best in the world by www.financeprofessor.com, and its monthly newsletter, in the constantly changing world of finance.

Written From a Different Perpective:
I have only read a few chapters on this book thus far, be cautious that this book is written from a European perspective (not stated anywhere on the advertising page. I won't dismiss this book immediately because it's written from a European perspective, however if you are looking to learn more about the US system, this may not be the book for you. I will definitely recommend it to those who know their basics very well in the world of accounting and finance and are looking to bridge together their understanding of the both continents. Most of the principles are the same regardless where you live, just be cautious of some items, such as your cash GL account not being the first item under current assets but rather the last.