WHAT IS CORPORATE FINANCE?

Suppose you decide to start a firm to make tennis balls. To do this, you hire managers tobuy raw materials, and you assemble a workforce that will produce and sell finished tennisballs. In the language of finance, you make an investment in assets such as inventory, ma-chinery, land, and labor. The amount of cash you invest in assets must be matched by anequal amount of cash raised by financing. When you begin to sell tennis balls, your firmwill generate cash. This is the basis of value creation. The purpose of the firm is to createvalue for you, the owner. The firm must generate more cash flow than it uses. The value isreflected in the framework of the simple balance-sheet model of the firm.

The Balance-Sheet Model of the Firm
Suppose we take a financial snapshot of the firm and its activities at a single point in time.Figure 1.1 shows a graphic conceptualization of the balance sheet, and it will help intro-duce you to corporate finance.

The assets of the firm are on the left-hand side of the balance sheet. These assets canbe thought of as current and fixed. Fixed assets are those that will last a long time, such asbuildings. Some fixed assets are tangible, such as machinery and equipment. Other fixedassets are intangible, such as patents, trademarks, and the quality of management. The othercategory of assets, current assets, comprises those that have short lives, such as inventory.The tennis balls that your firm has made but has not yet sold are part of its inventory. Unlessyou have overproduced, they will leave the firm shortly.
Before a company can invest in an asset, it must obtain financing, which means that itmust raise the money to pay for the investment. The forms of financing are represented onthe right-hand side of the balance sheet. A firm will issue (sell) pieces of paper called debt。