## Essentials of Finance

Course Syllabus | BBA

## New Course

Pokhara University (PU)

**Course Title**: Essentials of Finance

**Course code:** FIN 131

**Credit hours:** 3

**Course Objectives**

This course aims to provide students with an understanding of fundamental concepts of business finance. It will lay the foundation in students for their specialization in finance and equip them adequately to undertake financial analysis and decisions.

**Course Description**

The course provides students opportunity to understand fundamental concepts of business finance and their application in financial decisions in business. This course focuses on the fundamentals of business finance, especially, introduction to finance, financial statement analysis, financial environment, fundamentals of risk and return, time value of money, cost of capital, bond valuation, stock valuation, and investment decision. Through lectures, readings and case studies students learn essentials of business finance and acquire skills for financial decision making.

**Course Outcomes**

By the end of this course, students should be able to:

understand fundamental nature of business finance;

understand the financial environment and its implication in financial decisions;

interpret the financial statements and carry out financial analysis of a corporation;

understand the concept of risk and return, and measure them for individual assets and portfolio of assets;

understand the concept of time value of money, gain the skill of computation, and apply them in solving business problems involving time value of money;

compute yields on securities and value them;

conceptualize component cost, overall cost and marginal cost of capital, and gain the skill on the calculation of these costs; and

understand the basics of investment decision and gain the fundamental skills of making investment decision.

**Course Contents**

**Unit 1: Introduction 4 hours**

Meaning of finance; Basic areas of finance; Finance functions; Finance in the organization structure of a firm; Forms of business organizations; The goals of financial management; Relationship with other functional departments; Career in finance.

**Unit 2: The Financial Environment: Markets, Institutions, Interest Rates and Taxes**

**5 hours**

Financial markets: concept and types; Financial institutions: concept, role in funds transfer, and types; Interest rates: level of interest rate, determinants of market interest rates, the term structure of interest rate and yield curve; Taxes: corporate tax, marginal tax and average tax.

**Unit 3: Financial Statement Analysis 6 hours**

Financial statements: balance sheet, income statement and cash flows statement; Modifying financial data for managerial decisions: net cash flows, operating assets and operating capital, net operating profit, free cash flows, market value added and economic value added; Financial analysis: types of ratios, Du-Pont identity, use and limitation of ratio analysis; Common-size financial statements.

**Unit 4: Risk and Return 6 hours**

Concept and measurement of return: rupee return, percentage return, average return, expected of return, required rate of return, nominal and real rate of return; Concept and measurement of risk: concept, types and measures of risk; Portfolio risk and return: concept of portfolio, portfolio risk and portfolio return, calculation of portfolio risk and return; Capital assets pricing model: estimation of required rate of return, the security market line.

**Unit 5: Time Value of Money 5 hours**

Future value and compounding: single period and multiple period, compound interest; Present value and discounting: single period and multiple period; Present value versus future value; Determining the discount rate; Finding the number of periods; Future value and present values of multiple cash flows; Present value for annuity; Annuity payments; Finding the number of payments; Finding the rate; Future value for annuity; Annuities due; Perpetuities: present value of perpetuity; The compounding rates: the effect of compounding periods; Effective annual rate and annual percentage rate; Amortization of loan.

**Unit 6: Bond and Stock Valuation 8 hours**

Concept and features of bond; Bond valuation: perpetual bond, zero coupon bond, coupon bond with a finite maturity, bond valuation with semi-annual interest; Discount and premium bond; and Bond yields: rate of return, current yield and capital gain yield, yield to maturity, Yield on call.

Features of common stock; Cash flows from common stock; Stock valuation for definite holding period; Valuation of stock for indefinite holding period: zero growth, constant growth and non-constant growth; Features of preferred stock; Valuation of preferred stock.

**Unit 7: Cost of Capital 4 hours**

Concept and uses of cost of capital; Cost of equity: the dividend growth model approach, the SML approach; Cost of debt and preferred stock; the weighted average cost of capital: the capital structure weight; and marginal cost of capital.

**Unit 8: Capital Investment Decisions 10 hours**

Concept of investment decisions; Generating investment project proposal; Process of capital budgeting decision; Classification of capital projects; Project cash flows: relevant cash flows, the stand-alone principle; Incremental cash flows: sunk cost, opportunity cost, net working capital, financing costs and other issues; Investment criteria: net present value, the payback rules, discounted payback period, the average accounting rate of return, the internal rate of return, and profitability Index.

**Basic Texts**

Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2012). Fundamentals of Corporate Finance (9th ed). New Delhi: Tata McGraw-Hill.

Brigham, E. F., & Ehrhardt, M. C. (2008). Financial Management: Theory and Practice (12th ed). Delhi: Clengage Learning.

**References**

Brealey, R.A., Myers S.C., Alen, F., & Mohanty, P. (2012). Principles of Corporate Finance (10th ed). New Delhi: McGraw-Hill Education (India).

Van Horne, J. C., & Wachowicz, J. R. (2009). Fundamentals of Financial Management, (13th ed). New Delhi: PHI Learning.

Paudel, R. B., Baral, K. J., Gautam, R. R. Rana, S. B. & Dahal K. B. (2013). Fundamentals of Financial Management. (3rd ed) Kathmandu: Asmita Book Publishers and Distributors.

Pradhan, R. S. (2014). Financial Management. (5th ed) Kathmandu: Buddha Education Publishers.

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