Prof. Rasa Karapandza, PhD
The primary goal of the Finance I course is to introduce students to the principles of valuation and capital market theory. The course concentrates on developing the tools needed to analyze the financial decisions firms face. Lectures, readings and homework introduce financial markets and financial market terminology; discounting and present value analysis; capital budgeting; asset valuation; the historical behavior of security returns, diversification and portfolio theory. After taking this class students should be able to fully understand the concept of Net Present Value (NPV). They should be able to calculate NPV of an arbitrary cash flow stream. They should be able to understand the concept of Internal Rate of Return (IRR), and make investment decisions based on a NPV and IRR and understand the drawbacks of both methodologies. Students are also expected to understand the fundamental relationship between risk and return, Capital Asset Pricing Model and multifactor models. Students should also be able to understand the concept of term structure of interest rates and learn how the yield curve is constructed and how price of bonds is determined. We also discuss the ability of the firm to maximize its value by changing capital structure, and teaches the theory and practice of firm valuation. We overview the patterns of firm financing, financing instruments, and different financing options specific to each life-stage of the firm. We continue with discussing the principal terminology and concepts related to mergers, acquisitions and company restructuring. The main deviations from the Modigliani–Miller irrelevance theorem are then used to demonstrate under which conditions capital structure decisions could add value to a firm. After developing an understanding of the concept of weighted average cost of capital (WACC), and the practice of its calculation, the methods of project and firm valuation and their application in practice are mastered. This involves learning how to determine the relevant cash flows and match them with the appropriate discount rate, and mastering the concepts of free cash flows, adjusted present value, and real options.