FM212

Principles of Finance
Part 1 (Michaelmas Term):
Portfolio Choice and Asset Pricing
Part 2 (Lent Term):
Capital Budgeting and Corporate Finance
Some of the slides herein include material copyrighted by McGraw-Hill; all
such material used with explicit consent of McGraw-Hill.

Introduction
Course Number: FM212 (undergraduates) or
FM492 (postgraduates)
Textbook: Principles of Corporate Finance by Brealey,
Myers and Allen, tenth edition
Calendar: 10 Two-hour lectures in Michaelmas term
10 Two-hour lectures in Lent term
2 Two-hour review lectures in Spring term
Schedule: Friday 12 noon 1 pm
Lunch Break
Friday 2 pm 3 pm
Some of the slides herein include material copyrighted by McGraw-Hill; all
such material used with explicit consent of McGraw-Hill.

Course Requirements
* Attend 20 One-hour classes
* Hand in two written home-works in Michaelmas (#4,#8) and Lent (#4,#8) terms
*Final Exam: Answer 2 out of three questions from Part A; 2 out of three questions from
Part B
Course Grading:
FM212
1st (>70)
2:1 (60-69)
2:2 (50-59)
3rd (40-49)
Fail (<40)
FM492
Distinction (>70)
Merit (60-69)
Pass (50-59)
Fail (40-49)
Bad Fail (0-39)
Some of the slides herein include material copyrighted by McGraw-Hill; all
such material used with explicit consent of McGraw-Hill.

Introduction
Investors

Purchasing
securities

Securities
Markets

FM212
Part 1

Issuing
securities

Capital
Projects

Capital
investment

Corporations

FM212
Part 2

FM212
Principles of Corporate Finance

Introduction
Investors

Dividends
and interest
received

Securities
Markets

FM212
Part 1

Dividends
and interest
paid

Capital
Projects

Profits

Corporations

FM212
Part 2

FM212
Principles of Corporate Finance

List of Topics in Part 1

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Present Value
How to Calculate Present Values
Value of Bonds and Common Stocks
Risk, Return and the Cost of Capital
Portfolio Theory and Asset Pricing Equilibrium
The Six Lessons of Market Efficiency
Put and Call Options
Options Pricing Theory
Valuing Government Bonds
Forwards and Futures
FM212
Principles of Corporate Finance

List of Topics in Part 2

Capital Budgeting and the NPV Rule

Real Options
Payout Policy
Does Debt Policy Matter?
How Much Should A Firm Borrow?
The Many Different Types of Debt
Mergers, Corporate Governance, and Control
Initial Public Offerings
Risk Management and Hedging
FM212
Principles of Corporate Finance

Social Scientific Theory

The purpose of theory is to predict and
explain. A theory is not tested by the
reasonableness of its assumptions but by
its ability to predict accurately and explain.
Attribution Unknown

A model is to be used, not to be believed.

Milton Friedman
FM212
Principles of Corporate Finance

Random Variables and Probabilities

Risk is a core aspect of finance

Consider a random variable X(i) with m
possible outcomes i=1,2,3,,m

Pr(i) is the probability of outcomes X(i)

Pr(1)+Pr(2)+Pr(3)++Pr(m)=1

FM212
Principles of Corporate Finance

Expected Value of Random Variable

Expected value is the probability-weighted
average outcome

E(X)=X(1)Pr(1)+X(2)Pr(2)++X(m)Pr(m)

Expected cash flow (capital budgeting)
and expected return (portfolio
management) are key concepts in this
course

FM212
Principles of Corporate Finance

Summation Notation

Rather than write a long list of + signs it
is convenient to use a summation sign
m

y(i)

= y(1)

+ y(2)

+ ... + y(m)

i=1

Probabilities sum to one: Pr(i) = 1

Expected value is the probabilityweighted average: E[ X ] = Pr(i)X (i)
i =1

i =1

FM212
Principles of Corporate Finance