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The Five Principles of Corporate Finance

Prof. Ian Giddy, New York University

This simple note identifies the five factors that help maximise shareholder value. The perspective is one of finance --- my perspective, since I teach finance -- but these principles, I believe, should be among the core strategies of every corporate executive.

The Five Princliples
  1. qInvest in projects that yield a return greater than the minimum acceptable hurdle rate – also known as the required return on capital, or WACC
    • The hurdle rate should be higher for riskier projects and reflect the financing mix used - owners’ funds (equity) or borrowed money (debt)
    • Returns on projects should be measured based on cash flows generated and the timing of these cash flows;
  2. Sell assets or businesses that are worth more outside the firm than within; buy businesses worth more inside the company than outside
    • Acquisition gains come form operating synergies or control restructuring, net of costs
  3. Choose a financing mix that minimizes the weighted average cost of capital, while as far as possible matching the business being financed.
  4. If there are not enough investments that earn the hurdle rate, return the cash to stockholders
    • The form of returns - dividends and stock buybacks - will depend upon the stockholders’ characteristics
  5. Minimize unnecessary financial risks.
    • The business of business is to take business risks. Financial risks, once identified, can be hedged at little or no cost, using financing or derivative instruments. | | | | contact
Copyright ©2006 Ian Giddy. All rights reserved.