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Introduction ................................................................................................................................. 1
Textbook ...................................................................................................................................... 1
Study Guide ................................................................................................................................. 2
3.1
Financial Statements (Chapter 2) ..................................................................................... 2
3.2
Arbitrage and Financial Decision Making (Chapter 3) ................................................. 3
3.3
The Time Value of Money (Chapter 4) .......................................................................... 4
3.4
Interest Rates (Chapter 5) ................................................................................................. 5
3.5
Investment Decision Rules (Chapter 6).......................................................................... 6
3.6
Fundamentals of Capital Budgeting (Chapter 7) ........................................................... 7
3.7
Valuing Bonds (Chapter 8) ............................................................................................... 8
3.8
Valuing Stocks (Chapter 9) ............................................................................................... 9
3.9
Capital Markets and the Pricing of Risk (Chapter 10) ................................................ 10
3.10 Estimating the Cost of Capital (Chapter 12)................................................................ 11
3.11 Capital Structure in Perfect Markets (Chapter 14) ...................................................... 12
3.12 Debt and Taxes (Chapter 15) ......................................................................................... 13
3.13 Financial Options (Chapters 20, 21) ............................................................................. 14
4
Further Reading......................................................................................................................... 15
5
Checklist ..................................................................................................................................... 15
1
Introduction
Textbook
The Fundamentals of Finance course requires you to purchase the following book:
Berk/DeMarzo, 2010, Corporate Finance, 2nd edition, Pearson Education
(including MyFinanceLab student access code card)
Key concepts:
Balance sheet & fundamental balance sheet equation
Types of assets and liabilities
Market versus book value
Balance sheet analysis
Enterprise value
Income statement and income statement analysis
Statement of cash flows; change in cash and cash equivalents
Cash versus non-cash expenses
Read:
All sections
You may also want to give chapter 1 a quick read
3.2
Key concepts:
Market prices and decision-making
Time value of money
Net present value
Arbitrage and the Law of One Price
No-arbitrage and securities prices
Short sales
Value-additivity
Read:
3.3
Key concepts:
Timelines
Discounting and compounding
Annuities and perpetuities
Internal rate of return
Finance functions in Excel
Read:
All sections
3.4
Key concepts:
Effective annual rates (EAR) versus annual percentage rates (APR)
Loan amortization
Opportunity cost of capital (Section 5.5)
Read:
3.5
Key concepts:
NPV rule
IRR rule and its problems
Choosing between projects
Read:
3.6
Key concepts:
Capital budgeting
Incremental earnings
Unlevered net income
Opportunity costs and externalities, sunk costs
Free cash flow & calculation of free cash flows
Accelerated depreciation
Sensitivity and scenario analysis
Read:
3.7
Key concepts:
Bond prices, yields, and coupons
Zero coupon bonds and coupon bonds (annual and semi-annual coupons)
Bonds trading at par, at a discount, or at a premium
Bond price dynamics
Bond arbitrage and pricing of bonds
Read:
All sections
Further reading (optional): Appendix
3.8
Key concepts:
Dividend discount model
Total return = Capital Gain Rate + Dividend Yield = Cost of Capital
Enterprise Valuation Approach / Free Cash Flow Valuation
Excess cash versus operating cash (footnote 6)
Weighted Average Cost of Capital
Valuation based on comparables
Market efficiency
Read:
All sections
Note on Cash Flows and Valuation (blackboard site)
3.9
Key concepts:
Measures of risk and return
Computing historical return
Variance and volatility of returns
Tradeoff between risk and return
Diversifiable versus systematic risk
No arbitrage and the risk premium
Beta, Cost of Capital, and CAPM
Read:
All sections
Further reading (optional): chapter 11
10
All sections
Further reading (optional): Appendix
11
All sections
Optional: McKinsey Tutorial on Value Creation (link on blackboard site)
12
13
14
Further Reading
Here are some hints for further reading in case you wish to prepare more (all of the topics
below will be covered in subsequent courses):
Chapter 5, Section 5.3 on determinants of interest rates
Chapter 11 on portfolio selection and the CAPM
Chapter 13 on behavioral finance
Chapters 16 and 17 on capital structure and payout policy
Chapters 23 and 24 on equity and debt financing
5
Checklist
Unit
Chapter
Read chapter
Understood key
concepts
Did MyFinanceLab
assignment
10
10
12
11
14
12
15
13
20,21
15