Introduction to Finance

Mathematics corresponding to B-level from Upper Secondary School.

Furthermore, the student must understand and be able to apply central concepts from introductory statistics such as: sampling and sampling distributions; descriptive statistics; elementary probability rules; discrete and continuous random variables and respective theoretical distributions (e.g. Normal, Binomial); expected values (the mean), variance, covariance, and correlation; confidence intervals; hypothesis testing; linear regression; and the student must be able to apply these concepts independently in concrete problems. These competences have typically been obtained in Social and Economic Statistics. In addition, the student should be able to perform basic operations in a spreadsheet program like Microsoft Excel.

The purpose of the course is to provide the student with knowledge about investors’ and corporations’ financial decision problems subject to uncertainty regarding the economic consequences in the future caused by financial decisions.
 
Financial decisions require knowledge of the financial market, its instruments, and the valuation of these. Financial problems are, e.g., investors’ portfolio choice and corporations’ capital budgeting (real investment) and capital structure decisions.

When working with anthropology and markets, it will often be relevant to be able to analyze whether it is economically worthwhile to pursue a proposed project. To find an answer it is necessary to be able to compute cash flows, determine the correct discount factor, and understand the role of the financing of these projects in this decision making process.

The course provides sufficient knowledge within finance for enrolment in the cand.merc. programme offered at SDU.

The subject covers three main areas: 1) Interest rates and time value of money, 2) Financial markets, financial instruments and pricing of these and 3) Valuation of real assets, companies' investment choices and capital structure.

Main themes are as follows:

1. Interest rates and time value of money:

    Discounting, annuities and perpetuities.
    Internal rate of return and effective yield.
    Accrual of interest and interest compounding.
    Discrete and continuous rates.

2. Financial markets, financial instruments and their pricing:

    Capital market efficiency.
    Optimal portfolio choice (risk vs. return: choosing an efficient portfolio of securities) under uncertainty.
    Mean-variance analysis.
    Pricing of financial assets (securities eg. Stocks and bonds) under uncertainty.


3. Valuation of real assets, firm’s choice of investment (capital budgeting), and capital structure:

    Valuation of risk free assets and projects.
    Valuation of risky assets and projects.
    Choice of real investment and (simple) tax effects in valuation.
    Capital structure theory in a Perfect Market and Costs of Capital.


Please notice that the content of the subject predominantly takes its point of departure in an international context.

The student must be able to account for theory and carry out analyzes in relation to the subject content (see below).

1. Interest rates and time value of money:

    Explain the concept time value of money.

    Explain the net-present value (NPV) and the internal rate of return (IRR) rule in the context of economic decision making.

2. Financial markets, financial instruments and their pricing:

    Explain, apply and assess the importance of the Law of One Price.

    Explain the functioning of the capital market and its importance to the pricing of financial assets, including making simple analyzes based on the Law of One Price.

    Evaluate and compare different investments (projects and firms)

1. Interest rates and time value of money:

    Calculate value of cash flows (e.g. PV and NPV of cash flows)
    Calculate internal rate of return and effective yield.
    Carry out calculations relating to interest rate in cases of non-annual terms of payments, e.g., with continuous compounding.


2. Financial markets, financial instruments and their pricing:

    Can perform simple bond analyses, valuation and term structure analyses.
    Valuing stocks taking into account, inter alia, systematic and non-systematic risk and various risk factors.
    Can analyze an investor’s portfolio choice under uncertainty in simple settings (eg. mean-variance analysis) including CAPM and Multifactor Models of Risk.

3. Valuation of real assets, corporations’ choice of investment (capital budgeting), and capital structure:

    Identify and analyze cash flows for real investments based on an incremental perspective.
    Identify, calculate and analyze the optimal capital structure of a firm, both without and including taxes and tax shields.
    Determine, calculate and analyze the cost of capital of a firm by including, inter alia, capital structure and systematic risk (beta).
    Carry out valuation of real investments both without and including tax and debt

When accounting for theory and doing the analysis, the student must be able to explain very clearly the preconditions and the individual elements of the analysis by means of explanatory text and by specifying the formulas used and explaining how they are used to solve the problems.

The course builds on the textbook "Corporate Fiannce" by Berk & DeMarzo. The courses uses the textbook and the online learning aids provided by MyFinanceLab. For students who want to purchase the full package ordering the following package is the right choice:

Package including acces to MyFinanceLab and eText: ISBN-13: 9781292163031
 
The package includes:

    Corporate Finance, Global Edition, 4/E Berk & DeMarzo ISBN-10: 1292160160 • ISBN-13: 9781292160160 ©2017 • Paper, 1152 pp.
    Corporate Finance, Pearson eText, Global Edition, 4/E Berk & DeMarzo ISBN-10: 1292160217  • ISBN-13: 9781292160214 ©2017 • Online.
    MyFinanceLab - Instant Access - for Corporate Finance, Global Edition, 4/E, Berk & DeMarzo ISBN-10: 1292160233  • ISBN-13: 9781292160238.

For students who would like to use second hand books or have a need for an offline version of the e-book, we will provide additional information using itslearning to explain how the best get access to the different elements of the reading materials.

The purpose of the lectures is to provide an overview of the subject's theory and methods and to provide knowledge about the key concepts and contexts. Furthermore, the lectures are organized and conducted to support a suitable academic progression during the semester. This ensures that the students are given a solid academic foundation for their studies.

In the exercise classes, students will be helped to solve the exercises. The students will be helped to identify and use the correct methods when solving the exercise problems. The students' own efforts will be an essential foundation for the teaching in exercise classes. It is therefore expected that the students, before attending the exercises, have attempted to solve all the exercises.

Scheduled classes:
2x2 lecture hours for 5 weeks, 1x2 lecture hours for the following 10 weeks and 2 class exercises per week for 15 weeks. Minor variations in the scheduled classes can occur in the weeks where an online webinar is offered.

In 3 of the teaching weeks, there will be conducted an online 2-hour webinar via Adobe Connect. The specific weeks will be stated in the lecture plan uploaded on Itslearning. In the weeks where the webinar is conducted there will be 3 lecture hours (2+1) and 1 class exercise.

Workload:
The ECTS is 5 equaling 135 SAT, broken down as follows:
Lectures including preparation: 60 hours.
Exercises and MCQ-tests including preparation: 60 hours.
Exam including preparation: 15 hours.

This corresponds to an average weekly workload of 6.5 hours during the semester, including the exam.