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Principles of Finance (2024-2025)

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About Course

212407 Principles of Finance

Course objectives:
The objective of this course is to provide students with the basic concept in finance, analytical
tools used in business finance, sources, and uses of finance. The course would assist to
understand the basic principles of inflow and outflow of funds and their applications and also
help to quantify relevant risks and return. This course will further encourage the students to
proceed towards the advanced issues in financial management.
Course Learning Outcomes (CLOs)
After successful completion of this course, students will be able to:
CLO-1 Explain the fundamental concepts, goals, and functions of business finance and financial strategy.
CLO-2 Analyze the financial environment, including financial markets, institutions, and government policies.
CLO3 Apply the concept of time value of money to value different financial instrumentsand cash flows.
CLO-4 Evaluate various types of financial risk and return using quantitative risk assessment tools.
CLO-5 Compute the cost of different sources of capital and determine a firm‘s weighted average cost of capital (WACC).
CLO-6 Illustrate the use and implications of CAPM, APM, and related pricing models in financial decision-making.
CLO-7 Identify and differentiate among various sources of short-term, mid-term, and long term financing.
CLO-8 Apply capital budgeting techniques such as NPV and IRR to make investment decisions.
CLO-9 Analyze a firm’s capital structure and assess the impact on EPS using EBIT-EPS approach.
CLO-10 Explain the roles and operations of financial institutions in Bangladesh and
globally.
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Course Content

Chapter-1 Introduction
Goals and Functions of Business Finance; The Financial Manager; Objectives of Finance; The Financial Strategy Process; Impact of Financial Markets and Other External Factors on a Business‘s Financial Strategy; Functions of Business Finance; Functions of the financial officers; Goal of Finance:Profit Maximization vs. Shareholders‘ Wealth maximization; Ethics in Business Finance; The Agency Problems.

Chapter-2 Financial Environment
Markets and Institutions: The Financial Markets, Types of Markets: Primary Markets vs. Secondary Markets; Financial Institutions; The Stock Market; Fiscal Environment; Corporate Taxation; Government Investment Policy.

Chapter-3 Concepts in Valuation
Time Value of Money; Time Lines; Future Value and Compounding; Present Value and Discounting; Opportunity Cost Rate; Fair/Equilibrium Value; Net Present Value (NPV); Future and Present Values of an Annuity; Perpetuities—Amortized Loan and Amortization Schedule; Market Value, Economic Value.

Chapter-4 Concepts of Return and Risk
Uncertainty, Risk and Return; Risk-free and Risk-adjusted Return; Bond Returns; Return from a Stock Investment; Types of Risks: Business Risk and Financial Risk, Total Risk and Specific Risk, Diversifiable Risk and Systematic Risk, Single-Asset Risk and Portfolio Risk; Risk Measurement: Variance, Standard Deviation and Coefficient of Variation.

Chapter-5 Cost of Capital
Concepts of Cost; Comparison; Costs of Different Financing sources; Cost of Debt; Cost of Irredeemable Debentures; Cost of Redeemable Debentures; Cost of Bank Loans and Overdrafts; Cost of Preferred Stock; Cost of Common Equity; Cost of Retained Earnings; CAPM Approach; Bond: Yield-plus-Risk - Premium Approach, Dividend-Yield-plusGrowth-Rate; Discounted Cash Flow (DCF) Approach; Cost of Newly Issued Common Stock or External Equity; Weighted Average Cost of Capital (WACC); Rationale for WACC; Marginal Cost of Capital (MCC); MCC Schedule, Break Points; Factors affecting the Cost of Capital, Different Uses of Cost of Capital. Capital Structure and its Costs.

Chapter-6 Pricing Models
Capital Assets Pricing Model Assumption, Expected Return and Risk on a Risky Asset, the Security Market Line, Arbitrage Pricing Model (APM), Assumptions of the Theory, The CAPM and APM, A Multifactor APM, Empirical Tests of the APM.

Chapter-7.1 Short Term Financing
Short-term Financing: Characteristics and sources of short term finance, Spontaneous sources of finance, Formal financing, Secured financing and Unsecured financing.

Chapter-7.2 Mid Term Financing
Characteristics and sources of mid-term finance,

Chapter-7.3 Long-term Financing
Characteristics and sources of long term finance, equity financing, Preference share financing and debt financing. Concepts of Warranties, Covenants, Guarantees; Financing Problems of Small Firms

Chapter- 8 Investment Decision
Considerable Factors in investment decision or Capital Budgeting; The Capital Budgeting Decision Process-The relevant cash flows, finding initial investment, finding the operating cash inflows, finding the terminal cash flow, summarizing the relevant cash flows. Ways of evaluating investment proposal or Project Appraisal; Methods used for Capital Budgeting- Pay Back Period, Net Present Value (NPV), Internal Rate of Return (IRR), and Comparing NPV and IRR. etc.

Chapter-9 Capital Structure Decision
The firm‘s capital structure-The EBIT-EPS approach to capital structure, Choosing the Optimal Capital Structure.

Chapter-10 Financial institutions
Functions and performances of financial institutions in Bangladesh and in the world.

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