Course Introduction: 15.401 Finance Theory

Lecturer: Sloan School, MIT

Course Goals

• Designed for first-year MBA students, particularly those interested in a career in finance or curious about finance.
• Aim: To convince students of the importance of finance in all business and management decisions.
• No prior finance background assumed. Those with no finance experience are especially welcomed.
• The challenge: To make finance captivating and practical for all students.

Lecturer's Background

• 20 years at MIT Finance Group
• Previously taught at Wharton for 4 years
• Ph.D. in Economics from Harvard University
• Economics major from Yale, graduated in 1980

Importance of Finance

• Unique in its practical application to management problems
• Core of business operations and decisions
• The objective: Finance is indispensable for financial management

Approach to Teaching Finance

• Similar to introducing someone to a new, enjoyable experience (like ice cream to a fussy eater)
• Rigorous yet extremely practical subject
• Over 13 weeks, cover material considered indispensable for careers in finance

Teaching Ratings

• The true value of the course might be recognized years later, once students are in their careers
• Learning finance will make management decisions smarter

Lecture Overview

• Motivation for studying finance
• Introduction to key characters and elements in finance
• Fundamental challenges of financial analysis (valuation and management of assets)
• Framework for thinking about financial challenges

Key Points

• Finance is fundamentally about mathematics plus money
• Importance of time and risk in finance decisions
• Case Studies: James Simons, Warren Buffett, and Jack Welch

Financial Market Mechanics

• Mechanism of price discovery demonstrated through an auction
• Understanding valuation and its relevance to real-world scenarios

Financial Analysis Framework

• The economy consists of four components: households, financial intermediaries, non-financial corporations, and capital markets
• Financial analysis involves two fundamental challenges: valuation and management
• Income statement and balance sheet as tools
• Corporate financial decisions: Cash flow management

Course Structure

• Section B: Valuation, discounting, net present value, pricing of various securities
• Section C: Introduction of risk into the valuation framework
• Section D: Application of principles to corporate finance
• Final lecture: Integration of financial theories with market imperfections

Course Requirements and Grading

• Lectures and Readings: Active participation expected
• Case Study: Worth 10% of the grade
• Midterm and Final Exams: 25% and 55% respectively
• Problem Sets: Practice problems provided, no regular problem set submissions

Advice for Success

• Treat finance practically and personally
• Engage in both group and individual study
• Active participation in class, ask questions
• Stay up-to-date with readings and lecture notes
• Optional Pro Seminar on the practice of finance for practical insights and career information

Upcoming Tasks

• Read: Brilliant & Myers, Chapters 1 and 2
• Next Lecture Topics: Motivation for finance, key characters in finance, and outline of financial analysis framework