Finance 135

Finance 135, often titled something like "Introduction to Corporate Finance" or "Financial Management," is a foundational course in most business and finance degree programs. It serves as a crucial stepping stone for understanding the core principles and tools used in making financial decisions within a corporation.

The central theme revolves around maximizing shareholder wealth. Every decision a company makes, from investing in new equipment to deciding on dividend payouts, should theoretically contribute to this primary goal. Finance 135 introduces the concepts of time value of money, risk and return, and valuation, all viewed through the lens of achieving shareholder value.

One of the first topics covered is the time value of money. This fundamental principle acknowledges that money received today is worth more than the same amount received in the future. Inflation erodes purchasing power, and more importantly, money today can be invested to earn a return, growing to a larger sum in the future. Students learn how to calculate present values, future values, annuities, and perpetuities, essential for evaluating investment opportunities and loan terms.

Understanding risk and return is another cornerstone. No investment is guaranteed. Higher potential returns typically come with higher risk. The course explores different measures of risk, such as standard deviation and beta, and examines the relationship between risk and the required rate of return investors demand. The Capital Asset Pricing Model (CAPM) is often introduced as a way to estimate the expected return on an investment based on its risk profile.

Capital budgeting is a significant portion of the curriculum. This involves evaluating potential investment projects, such as purchasing new equipment or expanding into a new market. Students learn techniques like Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period to assess the profitability and feasibility of different projects. NPV, which calculates the present value of expected cash flows minus the initial investment, is often emphasized as the superior method due to its direct link to maximizing shareholder wealth.

Working capital management focuses on the efficient management of a company's short-term assets and liabilities. This includes managing inventory, accounts receivable, and accounts payable. The goal is to ensure the company has sufficient liquidity to meet its short-term obligations while minimizing costs and maximizing returns on these assets. For instance, students learn about inventory management techniques like Economic Order Quantity (EOQ) and strategies for optimizing cash flow.

The course also delves into the basics of financial statement analysis. Understanding how to read and interpret the balance sheet, income statement, and statement of cash flows is crucial for evaluating a company's financial performance and making informed investment decisions. Students learn to calculate financial ratios like profitability ratios, liquidity ratios, and solvency ratios to assess a company's strengths and weaknesses.

Finally, Finance 135 often introduces basic concepts of capital structure, including the mix of debt and equity a company uses to finance its operations. The course may touch upon the Modigliani-Miller theorem, which explores the relationship between capital structure and firm value, as well as factors that influence a company's optimal capital structure, such as tax shields and bankruptcy costs.

In conclusion, Finance 135 provides a solid foundation in the fundamental principles of corporate finance, equipping students with the analytical tools and knowledge necessary to make sound financial decisions and understand the financial implications of business operations.