Corporate Finance By Ross Westerfield And Jaffe

Working Through Ross Westerfield And Jaffe's Corporate Finance Textbook

Corporate Finance By Ross Westerfield And Jaffe

The book is 800 pages long. The problems are what take the time. I spent three semesters going through it cover to cover because that is what your syllabus demands, and I picked up some things along the way that the back-of-the-book solutions don't really explain. The core of the text rests on discounted cash flow analysis and the cost of capital. Ross builds everything from first principles rather than throwing formulas at you immediately. Chapter by chapter you get time value of money, then bond valuation, then stock valuation, then net present value and internal rate of return. The capital asset pricing model shows up around chapter eight or nine depending on the edition. Modigliani Miller is treated seriously, which matters because a lot of finance programs skim over it. Here is what most people miss. The textbook presents beta as a stable, quantifiable number you can look up and plug into a model. In practice, historical beta is noisy as hell. I ran into this when valuing a mid-cap manufacturing firm for a capstone project. The company had just undergone a major shift from debt-heavy to debt-light financing over the prior two years, and the raw beta from Yahoo Finance was sitting around 1.4. If I used that unadjusted, the WACC would come out too high and the valuation would be conservative to the point of being wrong. I ended up regressing the stock returns against the market returns using only the most recent 36 months of data, then adjusting for the leverage change using Hamada's equation. The unlevered beta from three years ago was significantly lower, and the re-levered figure landed closer to 1.05. The difference mattered enough to change the go-or-no-go decision on the project. Another thing that trips people up is the relationship between IRR and NPV when projects are mutually exclusive. The textbook walks through the crossover rate carefully, but students still default to IRR because the calculator gives you the number faster. During one of my grading sessions I saw a student choose a project with a higher IRR that had a negative NPV at the firm's actual cost of capital. The IRR rule fails under reinvestment rate assumptions that don't match reality. Stick with NPV. Always.

The chapters on options and real options get a lighter treatment in most editions, but they are where the book starts diverging from pure formula application. Chapter 20 in the 12th edition covers employee stock options and Black-Scholes in a way that actually connects to corporate decisions. If you skip ahead too fast here you will lose the thread for the later chapters on capital structure policy. For the capital structure section, the tradeoff theory versus pecking order debate is presented fairly. The real world is messier. I worked with a small private firm once where the owners wanted to finance expansion with retained earnings first, then debt, then equity only as a last resort. That is textbook pecking order behavior. But when we calculated the tax shield value of additional debt, the numbers supported a much more leveraged position than management was comfortable with. The theoretical optimum and the practical optimum did not align. The book does not cover this friction explicitly because it is not a math problem. Working through the problem sets, you will notice that the end-of-chapter questions range from straightforward to genuinely difficult. The harder ones often require building out a multi-year DCF model in Excel. My suggestion is to build every DCF from scratch rather than relying on pre-made templates. I once lost two days trying to debug a classmate's spreadsheet where the terminal value was being discounted back only one year instead of to the present. The numbers looked reasonable at a glance. They were wrong.

How to actually study this book efficiently

Do not read it like a novel. Go through each chapter in this order: read the summary first to understand what the learning objectives are, then read the main text, then attempt the problems without looking at the solutions. The solutions manual is helpful but it skips steps for most of the intermediate problems. You need to see the skipped steps because that is where the mistakes hide. The companion spreadsheets and test bank that instructors use are often available through the publisher's website if you have a course access code. They are not free but they save you time on homework problems that would otherwise take an hour each. If you are using this book for self-study rather than a course, pair it with a free resource like the MIT OpenCourseWare finance lectures. Ross and Westerfield explain things from an academic perspective that is rigorous but sometimes abstract. The lecture videos ground the concepts in applied examples.

There is a version of this book co-authored with Jordan now, so if you are buying a used copy check the edition and authors list carefully. The content differs slightly between editions and the problem sets are not identical. Make sure you are not solving problems from an edition that does not match your course materials. The 12th edition runs about $200 new and $60 to $80 used. The digital version is cheaper but the interactive problem features only work with the latest edition and require an active access code. If you are on a tight budget, the 11th edition covers the same core material and the WACC formulas have not changed since then. The only major difference is the treatment of behavioral finance, which gets more coverage in the newer editions but is not central to the finance curriculum. I used this book for my CFA Level 2 preparation as well. The corporate finance sections overlap heavily with the equity valuation and corporate issuer topics on the exam. Going through the problem sets a second time with the exam in mind helped me catch gaps I had missed during my undergrad. The book is dense enough that a single pass does not cover everything.