Foundations of Finance │ Comprehensive Study Guide
FOUNDATIONS OF FINANCE
━━━━━━━━━━━━━━━━━━━━━━━━━━━━
Complete Study Guide with Worked Examples & Visual Diagrams
Suitable for FINN1011 and similar introductory finance modules
Universal study resource for undergraduate finance students
Core Topics Covered:
Time Value of Money │ Bond & Stock Valuation │ Investment Appraisal
Risk & Return │ CAPM │ Cost of Capital │ Capital Structure │ Dividends
📚 NOTE: Always check your module guide for specific assessment details and reading lists. These
notes cover fundamental finance concepts applicable to most introductory finance courses.
Page 1
, Foundations of Finance │ Comprehensive Study Guide
Contents
PART A: FOUNDATIONS
1. Introduction to Finance & The Corporation
2. Time Value of Money
3. Valuation: Bonds
4. Valuation: Stocks
PART B: INVESTMENT DECISIONS
5. Investment Appraisal: NPV
6. Investment Appraisal: IRR & Payback
PART C: RISK & RETURN
7. Risk & Uncertainty
8. Portfolio Theory & Diversification
9. CAPM & the Security Market Line
PART D: FINANCING DECISIONS
10. Cost of Capital & WACC
11. Capital Structure Theories
12. Dividend Policy
PART E: REFERENCE
13. Formula Sheet
14. Worked Examples
Page 2
, Foundations of Finance │ Comprehensive Study Guide
PART A: Foundations
1. Introduction to Finance & The Corporation
1.1 What is Finance?
Finance is the study of how individuals, businesses, and governments allocate resources over time. The
core questions in finance are:
• What investments should a firm make? (Capital Budgeting)
• How should these investments be financed? (Capital Structure)
• How should profits be distributed to shareholders? (Dividend Policy)
1.2 The Corporate Form
A corporation is a legal entity separate from its owners. Key characteristics:
Feature Description
Limited Liability Shareholders' liability limited to their investment
Transferability Shares can be bought and sold easily
Unlimited Life Corporation continues regardless of ownership changes
Double Taxation Profits taxed at corporate level, then dividends taxed at personal
level
1.3 The Goal of the Firm
Primary Goal: Maximise shareholder wealth (maximise the market value of existing shareholders'
equity).
This is achieved by making investment decisions that increase the firm's value and generate positive
returns above the cost of capital.
1.4 The Agency Problem
The agency problem arises from the separation of ownership (shareholders) and control (managers).
Managers may pursue their own interests rather than shareholders'.
Solutions to the Agency Problem:
• Performance-based compensation (stock options, bonuses)
• Board of directors monitoring
• Threat of takeover (market for corporate control)
• Long-term employment contracts
Page 3
FOUNDATIONS OF FINANCE
━━━━━━━━━━━━━━━━━━━━━━━━━━━━
Complete Study Guide with Worked Examples & Visual Diagrams
Suitable for FINN1011 and similar introductory finance modules
Universal study resource for undergraduate finance students
Core Topics Covered:
Time Value of Money │ Bond & Stock Valuation │ Investment Appraisal
Risk & Return │ CAPM │ Cost of Capital │ Capital Structure │ Dividends
📚 NOTE: Always check your module guide for specific assessment details and reading lists. These
notes cover fundamental finance concepts applicable to most introductory finance courses.
Page 1
, Foundations of Finance │ Comprehensive Study Guide
Contents
PART A: FOUNDATIONS
1. Introduction to Finance & The Corporation
2. Time Value of Money
3. Valuation: Bonds
4. Valuation: Stocks
PART B: INVESTMENT DECISIONS
5. Investment Appraisal: NPV
6. Investment Appraisal: IRR & Payback
PART C: RISK & RETURN
7. Risk & Uncertainty
8. Portfolio Theory & Diversification
9. CAPM & the Security Market Line
PART D: FINANCING DECISIONS
10. Cost of Capital & WACC
11. Capital Structure Theories
12. Dividend Policy
PART E: REFERENCE
13. Formula Sheet
14. Worked Examples
Page 2
, Foundations of Finance │ Comprehensive Study Guide
PART A: Foundations
1. Introduction to Finance & The Corporation
1.1 What is Finance?
Finance is the study of how individuals, businesses, and governments allocate resources over time. The
core questions in finance are:
• What investments should a firm make? (Capital Budgeting)
• How should these investments be financed? (Capital Structure)
• How should profits be distributed to shareholders? (Dividend Policy)
1.2 The Corporate Form
A corporation is a legal entity separate from its owners. Key characteristics:
Feature Description
Limited Liability Shareholders' liability limited to their investment
Transferability Shares can be bought and sold easily
Unlimited Life Corporation continues regardless of ownership changes
Double Taxation Profits taxed at corporate level, then dividends taxed at personal
level
1.3 The Goal of the Firm
Primary Goal: Maximise shareholder wealth (maximise the market value of existing shareholders'
equity).
This is achieved by making investment decisions that increase the firm's value and generate positive
returns above the cost of capital.
1.4 The Agency Problem
The agency problem arises from the separation of ownership (shareholders) and control (managers).
Managers may pursue their own interests rather than shareholders'.
Solutions to the Agency Problem:
• Performance-based compensation (stock options, bonuses)
• Board of directors monitoring
• Threat of takeover (market for corporate control)
• Long-term employment contracts
Page 3
