Corporate finance Suppose you decide to start a firm to make tennis balls. To do this, you hire managers to buy raw materials, and you assemble a workforce that will produce and sell finished tennis balls. In the language of finance, you make an investment in assets such as inventory, machinery, land, and labor. The amount of cash you invest in assets must be matched by an equal amount of cash raised by financing. When you begin to sell tennis balls, your firm will generate cash. This is the basis of value creation. The purpose of the firm is to create value for you, the owner. The firm must generate more cash flow than it uses. The value is reflected 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. The assets of the firm are on the left-hand side of the balance sheet. These assets can be thought of as current and fixed. Fixed assets are those that will last a long time, such as buildings. Some fixed assets are tangible, such as machinery and equipment. Other fixed assets are intangible, such as patents, trademarks, and the quality of management. The other category 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. Unless you have overproduced, they will leave the firm shortly. Before a company can invest in an asset, it must obtain financing, which means that it must raise the money to pay for the investment. The forms of financing are represented on the right-hand side of the balance sheet. A firm will issue (sell) pieces of paper called debt(loan agreements) or equity shares (stock certificates). Just as assets are classified as longlived or short-lived, so too are liabilities. A