Foundations of Finance

Module code: MN1019

This module will introduces you to the fundamental concepts and models in financial theory. We will study some key concepts in finance, such as efficiency, trends and cyclicality, and discuss critically the three forms of market efficiency. Successively, we will study interest rates, the impact of inflation on interest rates, dividends, and illustrate the capital structure of a company. Then, we will come to the concept of present value of cash flows, and will study in detail the fundamental bond valuation models discussing, at the same time, various applications through exercises and practical examples. 

A similar study will be performed in the case of the fundamental share valuation models. Some of the fundamental techniques of capital budgeting decision will also be studied from a foundational perspective, focusing on the major methods, namely, net present value (NPV) and internal rate of return (IRR) methods. Finally, we will include the impact of risk on capital budgeting decisions. After reviewing some basic notions of statistics and probability theory, we will discuss the basic measures of risk, incorporating them into the mean-variance model. We will conclude with an extensive study of the capital asset pricing (CAPM) model. Relevant applications of both models will also be illustrated.

Topics covered

  • Market efficiency
  • Time value of money
  • Bond valuation models
  • Share valuation models
  • Capital budgeting decisions
  • Risk value of capital
  • Mean-variance model
  • Capital asset pricing model

Learning

  • 20 hours of lectures
  • 8 hours of seminars
  • 172 hours of guided independent study

Assessment

  • Essay (30%)
  • Exam, 1½ hours (70%)