STEPHEN A. ROSS Sloan School of Management, Massachusetts Institute of Teclmology Stephen A. Ross is the Franco Modigliani Professor of Financial 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, as well as for having de substantial contributions to the discipline through his research in signaling, agency theory, option pricing, and the theory of the term struc-ture 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 prac-titioner journals and is a trustee of CalTech. RANDOLPHW.WESTERFIELD Marshall Schoolof 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. Professor Westerfield came to USC from the Wharton School, University of Pennsylvania, where he was the chairn of the finance department and member of the finance faculty for 20 years. He has been a member of several public company boards of directors, including Health Management Associates, Inc., and Oak Tree Finance, LLC. His areas of expertise include corporate financial policy, investment nagement, and stock rket price behavior. JEFFREY F.JAFFE Wharton School of Business, University of Pennsylvania Jeffrey F. Jaffe has been a frequent contributor to the finance and economics literatures in such journals as the Quarterly Economic Journal, The Jounal of Finance, The Journal of Financial and Quantitative Analysis, The Journal of Financial Econonics, and The Financial Analysts Journal. His best-known work concerns insider trading, where he showed both that corporate insiders earn abnorl profitsfrom their trades and that regulation has little effect on these profits.He has also de contributions concerning initial public offerings, regulation of utilities, the behavior of rket kers, the fluc-tuation of gold prices, the theoretical effectof inflation on interest rates,the empirical effect of inflation on capitalasset prices, the relationship between all-capitalization stocks and the January effect, and the capital structure decision. he teaching and the practice of corporate finance are more challenging and exciting than ever before. The last decade has seen fundamental changes in I financial rkets and financial instruments.In the early years of the 21st cen-tury, we still see announcements in the financial press about takeovers, junk bonds, financial restructuring, initial public offerings, bankruptcies, and derivatives. In addition, there are the new recognitions of "real"options, private equity and venture capital, subprime mortgages, bailouts, and credit spreads As we have learned in the recent global credit crisis and stock rket collapse, the world's financial rkets are more integrated than ever before. Both the theory and practice of corporate finance have been moving ahead with uncommon speed, and our teaching must keep pace. These developments have placed new burdens on theteaching of corporate finance. On one hand, the changing world of finance kes it more difficult to keep terials up to date. On the other hand, the teacher must distinguish the pernent from the temporary and avoid the temptation to follow fads. Our solution to this problem is to emphasize the modern fundamentals of the theory of finance and ke the theory come to life with contemporary examples. Increasingly, ny of these examples are outside the United States. All too often the beginning student views corporate finance as a collection of unrelated topics that are unified largely because they are bound together between the covers of one book. We want our book to embody and reflect the in principle of finance: Namely, that good financial decisions will add value to the firm and to shareholders and bad financial decisions will destroy value. The key to understanding how value is added ordestroyed is cash flows. To add value, firms must generate more cash than they use. We hope this simple principle is nifest in all parts of this book. The Intended Aunce of This Book This book has been written for the introductory courses in corporate finance at the MBA level and for the intermediate courses in ny undergraduate programs. Some instructors will find our text appropriate for the introductory course at the under-graduate level as well. We assume that most students either will have taken, or will be concurrently enrolled in, courses in accounting, statistics, and economics. This exposure will help students understand some of the more difficult terial. However, the book is self-contained, and a prior knowledge of these areas is not essential. The only thet-ics prerequisite is basic algebra. New to Tenth Edition All chapter openers and examples have been updated to refloct the financial trends and turbulence of the last several years. In addition, we have updated the end-of-chapter problems and questions in every chapter. We have tried to incorporate the ny exciting new research findings in corporate finance. Several chapters have been extensively rewritten. · Chapter 9 Stock Valuation. This chapter now adds a description of how dis- counted cash flow can be used to determine the value of an entire enterprise in addition to individual common stocks. We also introduce the important concept of comparable firms and show how to use rket data on comparablefirms to bolster discounted cash flow methods. We try to organize the terial so that instructors can choose which best fits their lesson plan. · Chapter 10 Risk and Return: Lessons from Market History. We continue to update and internationalize our discussion of historical risk and return since these updates are far from routine. One of our focal points is the equity risk premium (ERP). With better historical data and more countries included, our estites of the ERP are on stronger footing. · Chapter 13 has been retitled, from Risk, Cost of Capital, and Capital Budgeting to Risk, Cost of Capital, and Valuation. We introduce the concept of the weighted average cost of capital (Ra) and show how it can be used along with discounted cash flow to value both an entire enterprise as well as individual projects. · Chapter 15 Long-Term Financing. The introduction has been extensively rewritten to introduce the basic features of debt and equity as well as recent trends and innovations. · Chapter 17 Capital Structure: Limits to the Use of Debt has been rewritten to incorporate some new and important empirical and theoretical work on capital structure. It is now much clearer to us that actual capital structures vary a lot over time and are much less stable than previously thought. This instability is strongly correlated to investment needs and opportunities and also suggests a greater need for financial flexibility than was previously thought to be necessary. We incor-porate some recent research on international leverage ratios. Among 39 different countries, the U.S. has the fourth lowest. · Chapter 19 Dividends and Other Payouts. We introduce the financial life cycle notion that most high-growth firms with external financial needs don't pay dividends or buy back shares, and low-growth firms with excess cash flows do pay dividends and/or buy back shares. This simple fact sometimes is lost in determin-ing why firms actually pay or do not pay dividends and buy back shares. We use new data incorporating the financial crisis and also when corporate earnings turn negative. Interestingly,in our study,the level of dividends did not change much but share repurchases fell off. · Chapter 20 has been retitled from Issuing Securities to the Public to Raising Capital. We build on the financial life cycle idea, introducing private equity and venture capital as early ways to raise funds in a firm's life cycle. Later on, successful firms will do an initial public offering (IPO) and seasoned equity offers(SEO).