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This course cannot be combined with Corporate Finance and Behaviour (ECB2FIN).
Contents
This course offers a framework to systematically tackle the financial problems of corporations and individuals. It introduces you to the financial issues faced by corporations, like investing in real assets and acquiring the funds to pay for these investments. In addition, it gives you a broad introduction to how financial markets work and how financial assets like bonds and equity are valued by investors. Using financial theory you will learn to analyse and solve the basic problems of corporate finance.
Corporate finance studies two broad questions of the corporation: First, in which assets should the corporation invest (capital budgeting decision)? From a wide array of possible investment projects, a corporation needs to select projects that increase shareholders wealth. Obviously, the available projects differ in timing and size of the expected cash flows. You will learn how to compare and select investment projects. Second, how is the corporation going to pay for these assets (financing decision)? A firm can use internally available funds, or it can issue new equity or debt capital. The overall mix of capital is often referred to as the firm’s capital structure, which is a crucial firm characteristic. The capital used by the firm is provided by investors: you will learn how investors determine the value of equity and bonds, and how to tackle the relationship between risk and returns.
Topics to be covered in the course are:
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Firm performance: financial statements and financial ratios;
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The time value of money and the net present value (NPV) concept;
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The valuation of financial assets (stocks and bonds);
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Risk and return in financial markets;
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The CAPM and the cost of capital;
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Capital structure choice (debt versus equity);
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Capital budgeting and investment decisions.
Learning objectives
At the end of the course the student is able to:
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Compound and discount streams of cash flows;
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Calculate the NPV of an asset;
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Value financial assets: stocks, bonds and options;
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Apply the CAPM and estimate a firm’s beta;
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Interpret the relation between risk and return;
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Calculate a project’s cash flows and the cost of capital;
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Select investment projects;
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Determine the optimal capital structure;
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Describe the functioning of financial markets;
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Apply the acquired knowledge in a valuation project of an existing company, using Excel (doing academic research skill). Students are assumed to have basic Excel skills.
Format
Lecture (2 hours per week) and tutorials (2 hours per week). The lectures will be used to cover the theory of finance and financial management in depth. The tutorials are devoted to discuss home assignments and to solve additional exercises. Note that the focus is not on providing the correct answers, but on training students’ skills in using the appropriate strategy and instruments in arriving at the solution. On top of this, students are expected to work around 2 hours per week on the virtual tutorial platform Connect. Students have to do a practical assignment which includes the academic skills writing (in English) and doing academic research. Additional meetings to support students with the assignments may be scheduled.
Assessment method
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Midterm exam (in the 5th course week; 30% of the final grade);
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Final exam (in the last course week; 40% of the final grade);
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Practical assignment related to academic skills (30% of the final grade).
Effort requirements
There are two effort requirements you need to pass to be allowed to take the retake exam. First, active participation in the tutorials is expected. Students have to prepare the exercises. Students will be randomly chosen to explain their solution during the tutorials.
Effort requirement 1: Prepare and attend at minimum 6 (out of 8) tutorials to get a ‘pass’.
Effort requirement 2: Make the online Connect Tutorials using McGraw-Hill’s Connect by the end of each tutorial week.
Language of instruction
English.
Students are expected to have knowledge of:
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Financial Accounting (ECB1IBE)
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Mathematics (ECB1WIS)
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MS Excel. The course requires Excel skills: Students need to know how to make graphs in Excel and perform calculations by means of cell referencing.
Note that especially for students without an economics background this is an intensive and challenging course. To the extent students lack knowledge of Financial Accounting, Mathematics and Excel, students are expected to compensate for this on their own.
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