MIF Pre-Course Training

Study Guide: Fundamentals of Finance

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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

The Fundamentals of Finance course is designed to introduce you to or refresh your

knowledge of basic corporate finance and investments. Topics covered are outlined above.
The course has 12 units, each being based on a chapter of the textbook we are using (see
below). For each unit, you will have to complete an assignment at MyFinanceLab, an elearning platform that accompanies the book.
2

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)

See blackboard for more information on the textbook.

3 Study Guide
3.1

Financial Statements (Chapter 2)

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

Test your knowledge:

Review chapter summary
Review some of the chapter problems
Do practice exercises on MyFinanceLab
Do assignment on MyFinanceLab

3.2

Arbitrage and Financial Decision Making (Chapter 3)

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:

Sections 3.1 to 3.5

Further reading (optional): Appendix

Test your knowledge:

Review chapter summary
Review some of the chapter problems
Do practice exercises on MyFinanceLab
Do assignment on MyFinanceLab

3.3

The Time Value of Money (Chapter 4)

Key concepts:
Timelines
Discounting and compounding
Annuities and perpetuities
Internal rate of return
Finance functions in Excel
Read:

All sections

Test your knowledge:

Review chapter summary
Review some of the chapter problems
Do practice exercises on MyFinanceLab
Do assignment on MyFinanceLab

3.4

Interest Rates (Chapter 5)

Key concepts:
Effective annual rates (EAR) versus annual percentage rates (APR)
Loan amortization
Opportunity cost of capital (Section 5.5)
Read:

Sections 5.1, 5.2, and 5.5

Further reading (optional): Sections 5.3 and 5.4, Appendix

Test your knowledge:

Review chapter summary
Review some of the chapter problems
Do practice exercises on MyFinanceLab
Do assignment on MyFinanceLab

3.5

Investment Decision Rules (Chapter 6)

Key concepts:
NPV rule
IRR rule and its problems
Choosing between projects
Read:

Sections 6.1 to 6.4

Further reading (optional): Section 6.5

Test your knowledge:

Review chapter summary
Review some of the chapter problems
Do practice exercises on MyFinanceLab
Do assignment on MyFinanceLab

3.6

Fundamentals of Capital Budgeting (Chapter 7)

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:

All sections & Appendix

Note on Cash Flows and Valuation (blackboard site)

Test your knowledge:

Review chapter summary
Review some of the chapter problems
Do practice exercises on MyFinanceLab
Do assignment on MyFinanceLab

3.7

Valuing Bonds (Chapter 8)

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

Test your knowledge:

Review chapter summary
Review some of the chapter problems
Do practice exercises on MyFinanceLab
Do assignment on MyFinanceLab

3.8

Valuing Stocks (Chapter 9)

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)

Test your knowledge:

Review chapter summary
Review some of the chapter problems
Do practice exercises on MyFinanceLab
Do assignment on MyFinanceLab

3.9

Capital Markets and the Pricing of Risk (Chapter 10)

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

Test your knowledge:

Review chapter summary
Review some of the chapter problems
Do practice exercises on MyFinanceLab
Do assignment on MyFinanceLab

10

3.10 Estimating the Cost of Capital (Chapter 12)

Key concepts:
Equity cost of capital
Market portfolio
Market risk premium
Beta estimation
Debt cost of capital
Asset/unlevered cost of capital and beta
Cash, net debt, and beta
Industry asset betas
Pre-tax and after-tax weighted average cost of capital
Read:

All sections
Further reading (optional): Appendix

Test your knowledge:

Review chapter summary
Review some of the chapter problems
Do practice exercises on MyFinanceLab
Do assignment on MyFinanceLab

11

3.11 Capital Structure in Perfect Markets (Chapter 14)

Key concepts:
Concept of perfect capital markets (no taxes, etc.)
Equity versus debt financing in perfect capital markets
Modigliani-Miller I
Modigliani-Miller II
Capital structure fallacies
Conservation of value principle
Read:

All sections
Optional: McKinsey Tutorial on Value Creation (link on blackboard site)

Test your knowledge:

Review chapter summary
Review some of the chapter problems
Do practice exercises on MyFinanceLab
Do assignment on MyFinanceLab

12

3.12 Debt and Taxes (Chapter 15)

Key concepts:
Interest tax shield
Valuation of interest tax shield: permanent debt versus target debt-equity ratio
Recapitalizations and tax benefits
Read:

Sections 15.1 to 15.3

Further reading (optional): Sections 15.4 and 15.5

Test your knowledge:

Review chapter summary
Review some of the chapter problems
Do practice exercises on MyFinanceLab
Do assignment on MyFinanceLab

13

3.13 Financial Options (Chapters 20, 21)

Key concepts:
Option contracts and payoffs
Put-call parity
Exercising options early
Binomial option pricing model
Black-Scholes
Risk-neutral probabilities
Read:

Sections 20.1 to 20.5, Sections 21.1 to 21.3

Further reading (optional): Sections 15.4 and 15.5

Test your knowledge:

Review chapter summary
Review some of the chapter problems
Do practice exercises on MyFinanceLab
Do assignment on MyFinanceLab

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
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Checklist
Unit

Chapter

Read chapter

Understood key
concepts

Did MyFinanceLab
assignment

10

10

12

11

14

12

15

13

20,21

15