Finance Fundamentals: Complete guide fundamentals of finance

Explore the concept and structure of business from finance, and compare accounting versus finance balance sheets, focusing on assets in place, present assets, growth assets, and cash flows.

Present assets are valued by their expected future cash flows rather than historical cost, so their current value can be far below or equal to the amount invested.

Explore growth assets as investments whose future value exceeds funding cost, and see how excess returns determine positive, zero, or negative value relative to the cost of capital.

Debt funds assets by borrowing money, and it differentiates from equity through three criteria: contractual payment commitments, potential loss of control if repayments fail, and favorable tax treatment of interest.

Equity represents your own money backing the asset side, giving you skin in the game and a claim on residual cash flows, with dividends decided by management in public companies.

Explore the corporate life cycle from startup to decline, mapping six stages to revenue, earnings, and profitability milestones, including breakeven and peak profitability.

Trace how the balance sheet evolves with corporate lifecycle, from growth assets to assets in place, while equity dominates early and leverage rises, culminating in asset liquidation to pay debt.

Finance is forward looking, based on future cash flows rather than historical cost; balance sheet shows assets in place and growth assets funded by debt and equity through corporate lifecycle.

Learn why cash flows differ from accounting earnings due to expense classifications, and apply three steps: add back depreciation, deduct capital expenditures, and adjust changes in non-cash working capital.

Compute cash flows from accounting earnings by adjusting net profit for depreciation, capital expenditures, and working capital changes such as debtors and creditors.

Explore contractual, residual, and contingent cash flows, including fixed or variable payments, free cash flow to equity, and probability based valuations using binomial or Monte Carlo simulations.

Define risk as a chance of negative outcomes and explore its dual nature with reward, explaining risk management, risk aversion, loss aversion, break-even effect, and framing effects.

Explore how to measure risk in finance using the mean-variance framework, convert risk into a risk premium, and compare expected versus actual returns.

Explore form-specific and market risks in business investments. Learn how diversification reduces firm-specific risk but cannot eliminate macroeconomic risk.

Explore how diversification lowers portfolio risk by combining two stocks with different standard deviations and a correlation of 0.20, revealing how mean-variance principles shape portfolio standard deviation.

Identify the marginal investor as the price influencer and how diversification shapes portfolio risk. See how the capital asset pricing model links single-stock risk to overall portfolio risk.

Explore the capital asset pricing model and the market portfolio, linking diversification, risk aversion, and two-asset choices to beta-driven expected returns via the CAPM formula.

Apply the capital asset pricing model to a practical Apple example, calculating expected return from a risk-free rate, market return, and beta using Nasdaq data.

Explains the time value of money, driven by behavior, inflation, and uncertainty. Dollars today are worth more than tomorrow due to present consumption preference and rising prices.

Learn how to calculate the time value of money by discounting future cash flows to present value using discount rate, with compounding reversals and practical examples.

Explain how the discount rate brings future cash flows to present value, illustrating time value of money and the impact of current consumption preference, inflation, and uncertainty.

Explore how the discount rate embodies opportunity cost and the time value of money, guiding how present value is formed by discounting future cash flows to today.

Learn to calculate the present value of various cash flows, including simple cash flows, annuities, perpetuities, and growing perpetuities, using discounting formulas and real-world examples.

Assess how measuring risk guides investing decisions, review diversification and the CFP model, and explain measuring an asset's risk by comparing its return to the total market.

Explore the valuation of bonds, including default risk, risk-free government bonds, and discounting coupons at the risk-free market rate to value principal and interest payments.

Value a risk-free government bond by discounting 10 years of 40-dollar coupons and a 1000-dollar face value at a 3 percent market rate.

Determine the yield to maturity, the discount rate that makes the present value of coupons and principal equal to the current market price.

Calculate yield on a bond by dividing the coupon payment by its current market price. For a forty-dollar coupon and a two-hundred market price, the yield is 3.83 percent.

Explore how bond convexity causes asymmetric price responses to interest-rate changes, and compare how maturity and coupon rate affect bond sensitivity in pricing.

Explore the valuation of call options, explaining the right to buy or sell an underlying asset at a fixed strike price before expiration, and how payoffs and breakeven arise.

Explore put options, their right to sell at a fixed strike price, premiums, and expiration, with payoff dynamics showing profit when prices fall below the strike minus premium.

Explore how three underlying asset variables—price of the asset, expected dividends, and volatility—shape option value, along with how strike price, time to expiration, and interest rates affect calls and puts.

Learn to value equity using free cash flow to equity, contrast it with free cash flow to the firm, and adjust for taxes, depreciation, capex, working capital, and net debt.

Explore how valuation of equity uses cost of equity and free cash flows to equity, including why debt affects FCF and how marginal investors set prices.

Apply the free cash flow to equity (fcfe) calculation to a practical ABC Limited example, adjusting depreciation, capex, and net debt repayments to determine cash available to equity shareholders.

Inflation erodes the real value of cash flows by rising prices; measure it with a changing basket using CPI, PPI, and GDP deflator, noting weights and potential biases.

Compare real and nominal cash flows and returns, and show how inflation converts nominal gains into real returns, using compounding examples and the idea that inflation is a hidden tax.

Learn how to convert nominal cash flows to real cash flows and vice versa by incorporating inflation and compounding, using the real rate formula and present value calculations.

Analyze inflation's impact on finance by moving between real and nominal cash flows and rates, using the real rate plus inflation; in high inflation, prioritize real returns.

Explore the sixth pillar of finance, interest rates, and identify four groups: market set rates, market influenced rates, entity-set rates, and negotiated rates, anchored by the bond market.

Understand the Fisher equation, where nominal interest equals real interest plus expected inflation, and see how inflation and real GDP growth drive rates beyond central bank actions.

Explore how the yield curve graphs market yields against bond maturities and explains why an inverted curve signals fears of slower growth and potential recession.

Explore how the sixth pillar of finance explains currency inflation differences, exchange rates, real returns, and interest rates, with examples and forward-market forecasting.

Forecast exchange rates to manage earnings in different currencies using forward contracts. Apply currency consistency and parity concepts, including interest rate parity and purchasing power parity.

Explains interest rate parity as an arbitrage condition linking forward and current exchange rates with US and euro interest rates, implying dollar depreciation when US rates are higher.

Apply purchasing power parity to forecast future exchange rates by comparing inflation rates, showing the rupee depreciates about 9% against the dollar as Indian inflation outpaces U.S. inflation.