FIN12 Principles of Finance
The course consists of four parts. The first part focuses on the valuation of investment projects. After covering the NPV rule, we will study how to choose between investment projects when there are resource constraints or when projects are mutually exclusive. We will then turn to fundamentals of capital budgeting and deal with topics such as cash flow calculations, break-even analysis and sensitivity analysis.
The second part of the course deals with the valuation of different types of financial securities. After covering fixed income securities and the yield curve, we will focus on methods to value common stocks as well as options, futures and other derivatives.
The next part will introduce students to the trade-off between risk and return. We will first study portfolio theory, including topics such as diversification, systematic and idiosyncratic risk. Then we will cover the Capital Asset Pricing Model (CAPM) and consider applications of the CAPM. Students will be exposed to key concepts including market efficiency and arbitrage.
The final part of the course centers on corporate finance and focuses on firms' optimal financing decisions and cost of capital, payout policy, and risk management.
The goal of the course is to give students knowledge of the basic principles of finance. This includes
- Knowledge of firms' capital budgeting and financing decisions
- Understanding how capital markets function and may be utilized
- Understanding the pricing of financial securities (stocks, bonds, options, futures and other derivatives) and their risk characteristics
- Knowledge of important relationships in currency markets
- Understanding the basic trade-offs involved in corporate financing decisions
Students should acquire the skills to:
- Analyze investment projects using different decision criteria such as the NPV rule
- Use basic tools of capital budgeting
- Critically apply various valuation methods for financial securities
- Analyze optimal portfolio choices and understand the implications and limits of market efficiency.
- Manage risks using derivatives and other financial instruments
Students should develop the competence to:
- Use the ideas and techniques of financial economics to deal with applied real-world problems.
Lectures, five review sessions, four homework assignments.
Only offered to incoming exchange students
Credit reduction due to overlap
Requirements for course approval
There will be four written homework assignments during the term, to be solved either individually or in groups of three to four students. Each approved hand-in will give 5 points, for a maximum total score of 20 points. The write-ups are graded on a approved/not approved basis (5 or 0 points). To earn course approval, a student must earn at least 10 out of a total of 20 points on the homework assignments.
4 hour written school exam in English. The final exam will have a maximum score of 100 points. Students are allowed to bring a calculator with empty memory.
Autumn, not offered autumn 2018.
Associate Professor Konrad Raff, Department of Finance, NHH