Course Outline

1.1 PRINCIPLES OF FINANCE (Session 1, Course 1)

Jaap Spronk, professor of finance, EUR

Winfried G. Hallerbach, associate professor of finance, EUR

Marc B.J. Schauten, assistant professor of finance, EUR

spronk@few.eur.nl, hallerbach@few.eur.nl, schauten@few.eur.nl

http://www.finance-on-eur.nl

1. Introduction

This introductory course consists of eight sessions of each three hours. Students are also expected to spend an equivalent amount of time individually studying the literature and in groups preparing assignments and cases.

The course Principles of Finance in Session 1 has three objectives. Firstly, the curriculum of the Executive Masters in Financial Management program is introduced and organizational issues are discussed. Secondly, a detailed overview is presented of the most importantproblems in financial management. In this way this module lays the necessary foundation for the curriculum program. Thirdly, the course provides students with a conceptual understanding of financial economics, thus constituting a sound theoretical basis for analyzing financial management issues. The finance principles are illustrated by introducing the topics of valuation, risk management, finance and investment (corporate finance). The understanding of the practical aspects of financial management and the relationship between financial theory and practice will be enhanced through the use of assignments and case studies.

2. Course details

The course is structured in five parts:

1. General introduction

2. Introducing principles of finance

3. Cash flows and valuation (basics)

4. Financial risk management (basics)

5. Corporate finance (basics)

ad 1. General introduction:

discusses curriculum program and structure, introduces learning aids and provides a guide to the literature.

ad 2. Introducing principles of finance:

provides the student with a basic understanding of :

-the financial flows in the economy

-the roles of individual investors and entrepreneurs, of the firm and the financial
manager in the financial system

-the role and importance of financial markets

-financial-economic concepts and principles

-financial-economic decision making: how to structure decisions, how to derive
probability information, how to derive preference information.

Preparatory readings:

Brealey, Myers & Allen, Chapters 1-3

ad 3. Cash flows and valuation (basics):

This part is devoted to the description and valuation of capital investment projects and firms. Firstly the firm is described from a financial-economic viewpoint. The construction of a project or firm profile includes cash flow analysis, analyzing external sources of uncertainty and exploring the sources of value. Decision flexibility and game elements are also introduced. Secondly the valuation of capital investment projects and firms is discussed. Given the type of project and firm profiles as discussed in the first step, the science and art of valuation, including its limitations, can be exposed to its full glory. The importance of the opportunity cost of capital will be revealed. This part serves as an introduction to the course Corporate Finance I in module 3 of the curriculum.

Preparatory readings:

Brealey, Myers & Allen, Chapters 4, 5 and 6, and 19

ad 4. Financial risk management (basics):

An essential part of firm analysis involves the evaluation of its risk profile, including the study of the sources of risk, the exposures to these risks and the interrelationships between these risks. Risk analysis is part of the continuous learning process of any firm in a dynamic environment. The logical complement of risk analysis is the management of risk. This involves the design and implementation of a hedge strategy. In this context attention is paid to the rationale of risk management, the characteristics of a number of key derivatives (viz. options, forwards, futures and swap contracts), and the application of these instruments. This part serves as an introduction to the course Derivatives and Risk Management in module 3 of the curriculum.

Preparatory readings:

Brealey, Myers & Allen, Chapters 20, 21, 27 and 28

ad 5. Corporate finance (basics):

Given its strategy, its financial-economic profile and the inherent uncertainty, a firm?s financing needs can be estimated. Different ways of attracting funds will be discussed. Focus will be on venture capital and initial public offerings, as well as on more traditional instruments like bank loans and bonds. Attention will also be paid to capital structure issues. This part serves as an introduction to the courses Corporate Finance I in module 3 and Corporate Finance II in module 4 of the curriculum.

Preparatory readings:

Brealey, Myers & Allen, Chapters 13, 14 and 15

Upon completion of the course the students should be able to:

• understand the key financial concepts and principles
• grasp the relationship between cash flows, the opportunity cost of capital, and value
• apply basic concepts of valuation
• construct project / firm profiles, including a detailed risk profile
• motivate the role of risk management
• understand the characteristics of basic derivative instruments and their application
• understand a firm’s financing needs and opportunities in relation to its profile
• characterize basic financial instruments and their role in a firm’s financial structure

3. Course organization details

Group submissions

Students must form themselves into groups of four (4) and submit the names of their group members at the start of the second lecture. You should ensure that all members of the group are prepared prior to the lectures as students may be selected at random to represent the group.

Requirements for successful completion of the course

Students are expected to actively contribute during their group meetings and lecture sessions. In-class assignments / cases and participation provide the grading for the course. There is no final exam.

4. Course materials

Textbook:

BMA: Brealey, R.A., S.C. Myers & F. Allen, Corporate Finance, McGraw-Hill,New York, NY, 8th international edition 2006 (ISBN 0-07-111551-X)

Learning aid:

Brealey, R.A., S.C. Myers & F. Allen, Student CD-ROM Accompanying Corporate Finance, McGraw-Hill, New York NY, 8th int’l edition 2006

On this CD-Rom you will find a wealth of additional material, including quizzes with each chapter (with automatic correction), financial analysis spreadsheet templates and web links.

Case studies, workshop material and assignments:

Will be handed out during class.

The self tests available on the BMA CD-ROM are part of the assignments.