Fundamental Principles of Finance

The course focuses on developing knowledge and broad understanding of key topics in corporate finance as well as the role of financial management within companies. It also enables students to fully understand how corporate finance relates to other corporate managerial activities, the nature of financial decisions companies make, implementation of investment appraisal techniques, the importance of capital structure and their implications for the company.

In addition, students should be able to demonstrate knowledge and understanding of time value of money and its implications and apply various investment appraisal techniques used by financial managers and discuss their importance for the company. Additionally, they should be able to understand the valuation process of financial assets and discuss the importance of cost of capital and its implications for company financing decisions.

In the second half of the course, we will cover the basics of investments. We will discuss the trade-off between risk and expected return and present empirical facts on broad stock and bond indexes. Then, we will discuss the construction of optimal portfolios based on a risky asset and several risky assets and stress the importance of diversification. The Capital Asset Pricing Model will be presented next, and the concept of systematic risk will be developed. Finally, we will briefly discuss the use of derivative contracts in risk management.

With the successful completion of the course, students will be sufficiently capable to:

• analyze and evaluate the role and purpose of financial management in businesses and the nature of financial decisions made by businesses
• understand the concept of time value of money
• understand the investment decision-making process in modern businesses and make investment decisions by applying different investment appraisal techniques
• evaluate bonds and stocks and compare stock valuation results from different approaches
• calculate the weighted average cost of capital of the company based on its capital structure
• understand the relationship between the average compensation from an investment and the associated risk
• be familiar with basic empirical facts on stock and bond returns
• understand how portfolios of individual assets are formed and how to evaluate the expected return and risk of portfolios
• appreciate the value of diversification
• be familiar with the Capital Asset Pricing Model and the concept of systematic risk
• understand the basics of derivative products and how they can be used to manage risk