Business Finance

In this core finance course, we explore the fundamental principles of finance, focusing on the key concepts of the time value of money and the risk-return tradeoff. This 'tools' course equips you with the necessary skills to analyze a wide variety of financial decisions. We place a significant emphasis on learning how to think systematically about financial valuation and how to apply these insights to a range of business (e.g., capital budgeting decisions) and personal (e.g., retirement planning, automobile and mortgage loans) financial problems.

Throughout the course, we:

  • Delve into the various types of financial management decisions and study the pivotal role of a financial manager within a firm
  • Investigate financial statements, calculate and interpret key ratios to gain a deep understanding of financial health
  • Unravel the complexities of the time value of money and use this vital technique to make informed decisions across personal and business contexts
  • Evaluate financial assets and cultivate the skills required to accurately value these resources
  • Scrutinize potential investment opportunities and assess their feasibility for capital budgeting purposes

Topics Covered

Financial Statements, Taxes, & Cash Flow

This section marks the commencement of our journey into the world of Business Finance. We delve into the heart of any business, its financial statements, comprising the Balance Sheet, the Income Statement, and the Statement of Cash Flows. Each financial statement serves as a window into the company's fiscal health, offering unique insights. Students will not only familiarize themselves with the vital components of these financial statements but also understand their intricate composition. We will elucidate how these statements interrelate and how they can be leveraged to create an informed financial strategy. Furthermore, this section will explore key balance sheet calculations to evaluate a company's liquidity, efficiency, and financial structure. In addition, we will discuss the role of taxes and their impact on business decisions, and the critical role of cash flow in a company's ongoing viability and growth. This module promises to arm students with the knowledge to analyze and interpret real-world financial data, laying the groundwork for subsequent advanced topics in Business Finance.

Common Size Statements & Financial Ratio Analysis

This part of the course focuses on developing a deeper understanding of financial statements. We'll learn how to create common size balance sheets and income statements, which standardize financial figures to allow for easy comparisons between different companies or periods. We'll explore why these common size statements are useful and how they can provide valuable insights into a business's performance. We'll also spend time learning about different financial ratios. These ratios help to measure various aspects of a company's financial health, such as its profitability, liquidity, and efficiency. Students will learn how to calculate these ratios and understand what they mean in the context of business performance. Finally, we'll break down the return on equity (ROE) into its components using the DuPont Identity. This allows us to see exactly what is driving a company's ROE and provides a more nuanced view of a business's profitability. This section of the course equips students with the tools to perform detailed financial analysis, a critical skill in business finance.

Time Value of Money

This part of the course dives into one of the most fundamental concepts in finance: the time value of money. We'll explore the principle that money available today is worth more than the same amount in the future due to its potential earning capacity. We'll learn about key related concepts like interest rates, compounding, discounting, present value, and future value. We'll understand how these ideas can be used to evaluate investments, make decisions about loans and financing, and plan for future financial needs. By the end of this section, students will be able to calculate present and future values for different types of cash flows, and understand how to use these techniques in real-world financial decision-making. This knowledge will be particularly important when we later discuss topics like bond and stock valuation.

Bond Valuation & Analysis

Building on the principles of Time Value of Money, this section delves into the specifics of bond valuation. A bond represents a stream of future cash flows, and understanding how to value these cash flows is key to determining the worth of a bond. We'll start with understanding what a bond is, the characteristics of bonds, and how they function as a form of long-term debt for companies or government entities. We'll learn about bond features such as face value, coupon rate, and maturity. Then, we'll apply the concepts of present and future values to calculate the intrinsic value of bonds. We'll work on how to determine the discount rate or yield to maturity for a bond, and understand the relationship between bond prices and interest rates. By the end of this section, students will be able to accurately value bonds and understand the factors that influence bond prices in the financial market. This section lays a crucial foundation for understanding fixed income securities and for the upcoming section on stock valuation.

Stock Valuation

Taking our understanding of Time Value of Money and Bond Valuation to the next level, this part of the course ventures into the realm of equity finance with a deep dive into stock valuation. In this section, we will start by familiarizing ourselves with the basic concepts of stocks, the meaning of company ownership they entail, and the different categories of stocks available. We will go over key ideas such as dividends, capital gains, and distinguish between common and preferred stocks. Transitioning from there, we will harness the principles of Time Value of Money to learn various models of stock valuation, such as the Dividend Discount Model (DDM) and the Price/Earnings model. This will help us understand how future dividends and earnings can be brought to their present values to find the intrinsic worth of a stock. In addition, we will explore the notion of market efficiency and how it affects stock prices, giving students a comprehensive understanding of stock market dynamics. By the end of this chapter, students will have the practical skills to assess and calculate the intrinsic value of stocks, an indispensable skill set for roles in equity research, investment management, or corporate finance.

Capital Budgeting

This section introduces students to capital budgeting, a critical decision-making process used by businesses to evaluate potential large-scale investments or expenditures. These might include buying new machinery, launching a new product, or expanding into a new market. We will explore different capital budgeting techniques like the Payback Period, Net Present Value (NPV), Internal Rate of Return (IRR), and Profitability Index. These techniques will demonstrate how to evaluate the feasibility and profitability of proposed projects using time value of money principles. We'll also discuss how businesses can prioritize different investment opportunities when resources are limited, and consider risk factors in the decision-making process. By the end of this section, students will be able to assess potential investments and understand the long-term financial implications of these decisions, a skill that is vital for any future manager or entrepreneur.

Risk and Return in Past Investments

This part of the course delves into the core concepts of risk and return, fundamental aspects to consider when evaluating past investments. We'll learn how to calculate the returns from an investment and how to assess the risks associated with it. We'll start by discussing the difference between expected and actual returns, and why they may differ. We'll also look at how to calculate the average rate of return and how this can be used to assess an investment's performance over time. Next, we'll delve into risk, focusing on the variability of returns. We'll understand what it means for an investment to be high risk or low risk, and we'll learn about standard deviation as a measure of investment risk. We'll also cover the relationship between risk and return, and introduce the concept of the risk-reward tradeoff. This will include an introduction to portfolio theory and the benefits of diversification. By the end of this section, students will be able to analyze past investments in terms of their risk and return, a crucial skill for anyone involved in investing or managing a portfolio
Chad Dulle
Chad Dulle
PhD Candidate in Financial Economics