Finance 1 for Business
Summary of all chapters and articles covered in the course during 2023-2024.
Week 1: Introducing Corporate Finance, Financial Statement Analysis, Financial Markets and Arbitrage 2
Chapter 1: The Corporation 2
Chapter 2: Introduction to Financial Statement Analysis 4
Chapter 3: Arbitrage and Financial Decision-Making 10
Article 1: Hart and Zingales (2017) 14
Week 2: Time Value of Money, Interest Rates, and Bonds 15
Chapter 4: The Time Value of Money 15
Chapter 5: Interest Rates 18
Chapter 6: Valuing Bonds 21
Week 3: Investment Decision Rules and Capital Budgeting 26
Chapter 7: Investment Decision Rules 26
Chapter 8: Fundamentals of Capital Budgeting 29
Article 2: Graham & Harvey (2002) 32
Week 5: Valuing Stocks, Risk and Return, and Modern Portfolio Theory 34
Chapter 9: Stocks 34
Chapter 10: Capital Markets and the Pricing of Risk 38
Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model 41
Week 6: CAPM, Investor Behaviour and Capital, and Market Efficiency 46
Chapter 12: Estimating the Cost of Capital 46
Chapter 13: Investor Behaviour and Capital Market Efficiency 48
Week 7: Working Capital Management, and Short-Term Financial Planning 52
Chapter 26: Working Capital Management 52
Chapter 27: Short-Term Financial Planning 55
Formula Sheet 57
, Week 1: Introducing Corporate Finance, Financial Statement Analysis, Financial Markets and Arbitrage
Chapter 1: The Corporation
There are four major types of firms:
1. A sole proprietorship is a business owned and run by one person, who has unlimited liability. There is
no separation between owner and firm, and the life of a sole proprietorship is bound to the life of the
owner.
2. A partnership is a sole proprietorship with more than one owner. All partners have unlimited liability.
A partnership ends if one of the partners dies or withdraws unless alternatives such as a buyout have
been arranged.
• A limited partnership is a partnership with two kinds of members, general partners are the
same as in a regular partnership, and limited partners, who have limited liability, are only
liable for their investment, but they hold no management authority and cannot be legally
involved in the managerial decision-making.
3. A limited liability company means that the owner’s liability is limited to their investment. There are
two types: private and public. Private limited liability companies are not allowed to trade their shares
on the stock exchange.
4. A corporation is a legally defined artificial being, separate from its owners. Ownership is divided into
shares (stock), all outstanding shares make up the equity of the corporations. Biggest advantage of a
corporation is the free trade of shares. Corporations pay taxes, so shareholders essentially pay taxes
twice (the classical system). So called S-corporations only pay taxes once under an exemption law,
whereas C-corporations pay taxes twice. A board of directors has the ultimate-decision authority and
is appointed by shareholders. The goal of the firm is to maximise shareholder value. Bankruptcy for a
corporation can be simply seen as a change in ownership, not a failure.
Sole Proprietorship Partnership Limited Liability Company Corporation
1 person = manager More than one Through shares (cannot be Through shares (traded at
Ownership
owner person traded) an organised exchange)
Personal liability of All partners are Shareholders are not liable Shareholders are not liable
Liability
owner personally liable for firm’s debts for firm’s debts
Separation Ownership &
No No Yes Yes
Control
Legal Entity No No Yes Yes
Taxation Income tax Income tax Corporate and income tax Corporate and income tax
Corporate management team:
1. CEO: runs the corporation by instituting the rules and policies set by the board of directors.
2. CFO: most senior financial manager, often reports directly to the CEO.
3. Financial manager: responsible for
, • (1) investment decision: shape what the firm does,
• (2) financing decisions: how to pay for the investments, and
• (3) cash management: ensure that the firm has enough cash for its day-to-day obligation.
There are problems of ethics and incentives within corporations. An agency problem arises when managers,
despite being hired as the agents of shareholders, put their own self-interest ahead of the interests of
shareholders (an ethical dilemma). An agency problem can be solved by (1) minimising the decisions that carry
own self-interest for the manager or (2) linking the compensation of top managers to the corporation’s profits
or stock price.
The stock market (or stock exchange) determines the price of shares of the public companies. It provides
liquidity to shareholders. An investment is liquid if it is possible to sell it quickly and easily at the price for which
you could buy it. There are primary and secondary stock markets. On the primary stock market, corporations
themselves sell stock to shareholders. After this initial transaction the stocks are traded on the secondary stock
market, where shareholders trade with each other. Stock is bought at the ask price (the price that the seller
asks) and sold at the bid price (the price that the buyer bids). This is called the bid-ask spread. The bid-ask
spread is a transaction cost that investors pay to trade.
The stock price is a barometer for corporate leaders, that gives them feedback on their shareholders’ opinions
of their performance. Low stock prices create the profit opportunity of a hostile takeover (or corporate
raiders). This is when an individual or organization purchases a large fraction of the stock and acquires enough
votes to replace the board of directors and the CEO.
, Chapter 2: Introduction to Financial Statement Analysis
There are three types of financial statements: the balance sheet, the income statement, and the cash flow
statement.
A balance sheet (or statement of financial position) lists the firm’s assets and liabilities at a given point in time.
The left side of the balance sheet always displays assets, and the right side always displays liabilities and
shareholders’ equity.
𝐴𝑠𝑠𝑒𝑡𝑠 = 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠′ 𝑒𝑞𝑢𝑖𝑡𝑦
Current assets: cash or assets that can be converted within one year
1. Cash / marketable securities: short-term, low-risk investments.
2. Accounts receivable: amounts owed to the firm by customers who have purchased goods or
services on credit.
3. Inventories: raw materials as well as work-in-progress and finished goods.
4. Long-term assets: net property, plant, and equipment. They produce tangible benefits for
more than one year.
Current liabilities: liabilities that will be satisfied within one year
1. Accounts payable: the amounts owed to suppliers for products or services purchased
with credit.
2. Short-term debt (or notes payable) and current maturities of long-term debts: all
repayments of debt that will occur within the next year
3. Items such as salary or taxes that are owed but have not yet been paid and deferred or
unearned revenue.
Long-term liabilities
1. Long-term debt: any loan or debt obligation with a maturity of more than a year
2. Capital leases: long-term lease contracts that obligate the firm to make regular lease
payments in exchange for use of an asset
3. Deferred taxes: taxes that are owed but have not yet been paid
Stockholders’ equity (book value of equity). It is unlikely that the balance sheet provides us with the
true value of the firm's equity because
• (1) assets might be valued based on their historical cost rather than their true value
today which might be different to book value (e.g., a building might increase in price).
This is true for property, plant, equipment and goodwill; and
• (2) many of the firm's valuable assets are not captured on the balance sheet (e.g.,
expertise of employees, firm's reputation, relationship with customer and suppliers…).
