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1.2. The game plan – a jumbo jet taking off

Course video 3 of 59

In Week 1 we propose the game plan for our study of value. Then we analyze the key assumptions for the general valuation model. We focus on the understanding of the sources of value and the fundamental ideas of investor’s choice, the opportunity cost of capital, risk and return. We discuss the importance of time and expectations in determining value. Then we discuss the present value approach to studying the projects’ value and choice. We present the general PV formula and introduce the key concept of net present value (NPV) as a criterion of the choice of good investment projects. Then we study some most widely used shortcuts and apply the formulas to find the NPV’s of certain projects that play a special role in valuation. We end up with the general NPV formula and discuss the challenges in using it.

Principles of Corporate Finance – A Tale of Value

Moscow Institute of Physics and Technology

Course 2 of 5 in the Understanding Modern Finance Specialization

The study of Corporate Finance seems to be a very generic part of business education. Still, it either falls in the trap of intimidating formulas or is superficially journalistic. Both extremes preclude the understanding of the core finance ideas, concepts, and models. This Course is an attempt to avoid the above extremes. We discuss the core basis and mechanisms of modern corporate finance in a learner-friendly way. We will analyze the market’s most fundamental problems, realize the intrinsic interests and preferences of investors, reveal the true meaning of specific financial terms, and uncover important issues that are so often ignored in choosing and valuing investment projects. The learners will gain insight into the essence of corporate finance. They will be able to use the obtained knowledge and skills to successfully advance in their career at a financial institution, as well as in the area of financial management at non-financial businesses.

Taught By

Konstantin Kontor
Director and Professor of Finance and Strategy

Transcript

Well, this course is structured in a way that

we not only start from the most basic and then move on to more advanced things,

but I would even compare that in

the metaphoric way to the process of a jumbo jet taking off.

You know, it starts very slowly.

We have started off turbines and then,

there's a very slow taxi,

and then goes to the runway and then turbines are on.

And then, it slowly runs, runs,

runs, and then takes off and then goes up very quickly.

So, that is sound what we will be doing.

First of all, as in all financial courses,

we will have to put

together assumptions and

framework.

The thing is that, remember,

when we talked about capital markets,

we made some major assumptions about the market,

about the people, and when the set of assumptions we proceeded.

We will do the same here although,

some of the assumptions would be different.

Then, within this framework,

we will introduce

the General Valuation Approach.

Well, most of you dealt with that before.

You know that, it will be around the concept of

Net Present Value or NPV, but not only that.

Then, equipped with that,

in a weeks one through three,

we will study this approach.

And from the most simplistic example,

simple cases, to stocks and bonds.

Well, that will be the most general approach,

and most of bonds here will be riskless.

And then from here,

we will go to the two investment projects,

and that will be sort of the first part of this course.

And then, you know, this specialization is not designed for the beginners.

So, you have to have some relevant experience,

and maybe you've been really looking for anything of that.

There you go. So, week four is about risk and return.

So, this is something, again,

that you might have known but we will do that in a consistent way.

And then, week five is about options.

And finally, I'll put it in red,

that week six will be advanced valuation.

When I talk about anything advanced,

this is not to just tell you that we'll be doing something very cool if you will.

But because we can approach advanced assets,

only knowing this part and that part,

because we will see that in some cases,

just the use of the NPV approach,

will unfortunately, be not sufficient.

Now, that all sounds sort of a repetition of what

you otherwise could have read in our outline,

but I specifically did that with only one purpose.

To a significant extent,

our previous course was interesting in itself.

You could watch these videos and sometimes would go

without some of the exercises because it

seemed to be in many cases, self-explanatory and clear.

Unfortunately, this course is no longer such an easy ride.

So here, without solving problems on your assignments,

your progress will be slow and

you won't be able to reach some of the understanding of these points,

because sort of further weeks,

especially week five and six,

they do require the knowledge of all this, and this way,

you'll be able to successfully proceed even

without the fundamental mathematical background,

because I'll do that for you in these first weeks.

Again, you don't have to be scared by that.

This is just the game plan,

and starting the next episode, we will again,

you we will turn on the engine and start to taxi up ,

We will talk about the assumptions.

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