Lecture on Finance Theory

Welcome and Course Introduction

• Presented by Sloan School, MIT, for course 15.401: Finance Theory
• Designed primarily for first-year MBA students

Instructor Background

• 20 years at MIT in finance group
• Previously taught at Wharton School and has a PhD in Economics from Harvard
• Graduated Yale in 1980, majoring in Economics

Importance of Finance

• Finance is unique in its practical application to management problems
• Core to everything in business and management
• Finance is lifeblood and lingua franca of business

Audience Expectation and Engagement

• Primarily first-year MBA students, some non-finance background expected
• Aim to make finance intriguing and engaging

Initial Motivation and Personal Story

• Comparison of finance to trying ice cream for the first time
• Finance as intellectually rigorous and extremely practical

Course Structure

• 13 weeks total
• Four main components: Households, Financial Intermediaries, Non-financial Corporations, and Capital Markets
• Two main financial challenges: Asset Valuation and Asset Management
• Time and Risk as essential elements in finance
• Introduction to six basic principles of finance

Important Individuals in Finance

• James Simons: Mathematician and founder of Renaissance Technologies
• Warren Buffett: Investor and CEO of Berkshire Hathaway, known for simple arithmetic in valuation
• Jack Welch: Former CEO of General Electric, transformed company valuation

Financial Analysis Framework

• Emphasis on valuation and management
• Understanding the fundamental challenges of financial analysis:
  • Valuation
  • Management
  • Time and risk factors

Demonstration of Price Discovery Mechanism

• Anonymous auction to illustrate market valuation process
• Discussion on lack of transparency and its impact on value

Practical and Personal Application of Course Content

• Corporate financial decisions: Raising, investing, and managing cash flows
• Personal financial decisions: Applying corporate frameworks to personal finance

Course Materials and Expectations

• Readings from Brigham, Myers’ chapters, and additional materials provided in syllabus
• Emphasis on participation, discussions, case study, and exams
• Midterm (25%) and Final Exam (55%) with a focus on problems and their solutions

Study Tips and Effective Learning Strategies

• Study theory and practice finance as active learning
• Integration of practical seminars (“Practice of Finance”)
• Review and revisit lecture notes regularly

Finance Principles Overview

• Principle 1: No free lunch in finance
• Principle 2: Individuals prefer more money, sooner, with less risk
• Principle 3: Self-interest drives financial agents
• Additional Principles: Explored later in the course regarding market imperfections and efficiencies

Conclusion

• Emphasis on the practical importance and application of finance in real-world scenarios
• Encouragement to engage actively and apply concepts personally for effective learning

Upcoming Reading Assignment

• Read chapters 1 and 2 of Brigham, Myers