Corporate finance can be summarized by four principles or cornerstones. Applying these principles , executives can figure out the value creating answers to most corporate finance questions, such as which business strategy to pursue, whether to undertake a proposed acquisition, or whether to repurchase shares.
What are the four cornestones of finance ?
1. The Core of Value : Companies create value by investing capital from investors to generate
future cash flows at rates of return exceeding the cost of that capital.
2. The Conservation of Value : Value is created for shareholders when companies generate higher
cash flows, not by rearranging investors’ claim of cash flows.
3. The Expectations Treadmill : A company’s performance in the stock market is driven by changes
in the stock market’s expectations not just the company’s actual
4. The best Owner : The value of business depends on who is managing it and what strategy they
Adapted from Value: The Four Cornerstones of Corporate Finance by Tim Koller, Richard Dobbs, and Bill Huyett.