Created 7/1/1996

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**http://www.j-bradford-delong.net/Intro_Finance/BAonethirty23.html**

**Six Important Concepts in Finance:**

- Net present value: if you could buy cash flows in the capital markets cheaper than you can generate them through your own operations and investments, you should do so. Net present value is a way of making sure that you engage in only those investments that cover their opportunity cost.
- The capital asset pricing model: beta; only undiversifiable risk is priced.
- Efficient capital markets--there are no money machines.
- Value additivity
- Capital structure and Modigliani Miller
- Options pricing theory--replicating portfolios

**Eleven Things We Do Not Know About Finance:**

- How do (should) companies decide what businesses they should be in?
- How can you plan to create the economic rents that generate positive NPVs?
- What truly determines project betas?
- Failures of the CAPM--risk and return.
- How important are the failures of efficient markets hypothesis?
- Is management an off-balance-sheet liability?
- Why so many new securities and new markets?
- Why pay dividends?
- How should a company manage risks?
- What is the value of liquidity?
- Why merger waves?

**Summary of Course:**

Discounted Cash Flow and Present Value

- Maximize present value
- Calculating present value
- Role of the capital market in making NPV a reasonable goal
- Moving wealth in time using an efficient capital market
- Valuing cash flows
- Using shortcuts--perpectuities and annuities; compounding intervals; compound interest
- Nominal and real interest rates
- Bonds as annuities plus a terminal payment
- Valuing stocks using the dividend-discount model
- The link between stock prices and earnings per share
- Present value of growth opportunities
- Why NPV is superior to IRR and payback
- Making investment decisions with NPV--machine problems; what to discount; deprecation, taxes, project analysis, project interactions.

Risk and the CAPM

- Measuring portfolio risk
- Calculating portfolio Risk
- Diversification and portfolio risk
- Capital Asset Pricing Model
- Beta
- Using betas

Interaction of Finance and Operations

- Sensitivity analysis
- Monte Carlos
- Decision trees
- NPVs and economic edges
- Project authorizations
- Biases in bureaucratic decision making
- Problems with accounting measures of profitability

Market Efficiency and Securities Issues

- Lessons of market efficiency
- Markets have no memory
- Trust market prices
- Read the entrails
- No financial illusions
- Do-it-yourself if possible
- High elasticity of demand for stocks
- Types of corporate securities
- Issuing corporate securities
- Why pay dividends?
- Why issue debt?
- How much should a firm borrow?
- What is the real cost of capital?

Options and Options Pricing

- Calls and puts
- What determines option value?
- Black-Scholes
- "Real" options
- Warrants and convertibles