1 · Exam map COURSE.JSON · BRIEF
| Assessment | Weight / format |
|---|---|
| Four peer-reviewed tasks | 15%; three highest of four count |
| Mid-semester Examination | 25%; 60-minute in-person MCQ |
| Final Examination | 60%; 120-minute in-person examination |
Permitted materials: not confirmed for this offering in the course materials we hold — check the exam instructions on the LMS.
Source: Semester 2, 2026 course and assessment materials held; operational instructions remain authoritative.
2 · Universal finance method ALL CHAPTERS
| If asked to… | Lead with… | Finish with… |
|---|---|---|
| move one cash flow | PV / FV | valuation date |
| price promised cash flows | discount each flow | yield + risk assumptions |
| value equity | expected dividends | growth/return sensitivity |
| rank projects | incremental NPV | matched project risk |
| draw options | payoff first | premium → profit |
Exam cue A calculator output is not a method. Make variables, units, signs, denominator and comparison reconstructable.
3 · Time value of money CH 1
Time value of money: cash at different dates has different value because of opportunity cost and risk. FV compounds a present amount forward; PV discounts a future amount to its current equivalent.
FV = PV × (1 + r)ⁿ
| Symbol | Meaning | Check |
|---|---|---|
| PV / FV | value at stated date | currency + date |
| r | rate per period | decimal; same unit |
| n | number of periods | matches r and flows |
Controlling limit: rate, period count and cash-flow frequency must use the same time unit. Predict direction: positive r makes PV below FV for a positive future receipt.
4 · Annuities, loans, bonds CH 2
Annuity = finite sequence of equal cash flows at regular intervals. Amortisation allocates each payment between interest and principal. Bond yield is the rate equating promised cash flows with current price under stated assumptions.
| Object | Setup | What can break |
|---|---|---|
| Annuity | equal amount + regular interval | timing/frequency mismatch |
| Loan | payment = interest + principal | confusing balance with payment |
| Bond | coupon stream + face value | quoted yield convention |
Bond decision language
- Write the actual dated cash flows before naming premium or discount.
- If coupon rate is below required yield, the worked guide case prices below face value.
- Price is conditional on promised cash flows and the yield; default and reinvestment risk remain.
Exam cue Convert quoted yields and payment frequency consistently. Never discount a semiannual or monthly flow with an unconverted annual rate.
5 · Debt checklist CH 2 FAQ
| Translate | List every coupon and maturity principal on one timeline. |
|---|---|
| Calculate | Discount each flow using yield per matching period. |
| Interpret | Compare computed price with face value; state assumptions. |
| Stress | Change yield or timing; ask whether the price label reverses. |
| Loan schedule | Split each payment between interest and principal; track the remaining balance. |
| Direction check | Predict the result before arithmetic; test a limiting case or independent calculation. |
| Boundary | Convert quoted yield and payment frequency consistently; default and reinvestment risk remain. |
Remember: the promised coupon is not the required yield. The yield is the discount rate that reconciles price and the full cash-flow stream.
6 · Equity valuation CH 3
Ordinary share = residual ownership claim with uncertain distributions and terminal value. The dividend discount model values equity as the PV of expected future dividends. Market information changes expectations and prices with varying speed and quality.
| Input | Meaning / direction | Trap |
|---|---|---|
| D₁ | next-period dividend; ↑ raises P₀ | using current dividend |
| r | required return; ↑ lowers P₀ | calling it realised return |
| g | sustainable growth; ↑ raises P₀ | allowing g ≥ r |
| r−g | assumption gap | small gap makes value sensitive |
Controlling limit: a small change in long-run growth or required return can dominate the estimate. Report the assumptions with the value; do not present a point estimate as unconditional.
Market-information judgement
Information matters through expected dividends, growth and required return. When a fact changes, identify which input moves, predict the direction of price, then recalculate only the affected lines.
Exam cue “P₀ = $X, conditional on D₁, sustainable g, required r and r > g.” This closes both the arithmetic and the interpretation.
7 · Valuation comparison CH 1–3
| Claim | Cash flow | Key uncertainty |
|---|---|---|
| Single sum | one dated FV | rate / horizon |
| Bond | coupons + face | yield, default, reinvestment |
| Ordinary share | expected dividends | growth + required return |
| Constant-growth share | expected D₁ and perpetual g | a narrow r−g gap amplifies sensitivity |
| Information shock | revise affected D₁, g or r | predict direction, then recalculate |
Across all three, value at one date is the organising idea. Timing and risk belong in the setup, not as an afterthought.
8 · Risk, return, diversification CH 4
Expected return = probability-weighted average of possible returns. Variance = expected squared deviation from the mean. Covariance = how two security returns move together. Diversification is therefore about co-movement, not merely the number of securities.
| Question | Required information | Safe conclusion |
|---|---|---|
| Expected return? | weights + component expected returns | weighted average |
| Portfolio risk? | volatilities + covariance/correlation | not a weighted average |
| Diversification? | pattern of co-movement | depends on covariance |
Boundary checks
- Weights should sum to one for the stated portfolio.
- Expected return should lie consistently with the weights and component returns in the guide's long-only example.
- Do not infer variance from expected return alone.
- Historical estimates may not represent future distributions or extreme dependence.
Exam cue State the missing information. “10.4% expected return” does not answer a risk question without volatilities and co-movement.
9 · Risk vocabulary CH 4–5
| Total uncertainty | Return distribution, not merely its mean. |
|---|---|
| Diversifiable component | Reduced through combining assets whose returns do not move identically. |
| Systematic risk | Market-related risk remaining after broad diversification. |
| Beta | Sensitivity to market-return movements under the fitted model. |
Sequence: describe expected return → quantify co-movement → identify what diversification removes → price remaining systematic exposure with CAPM.
10 · CAPM and asset pricing CH 5
Systematic risk is market-related risk remaining after broad diversification. Beta measures an asset return's sensitivity to market-return movements under the fitted model. CAPM links required return to the risk-free return and beta-scaled market premium.
| Line | Operation | Interpretation |
|---|---|---|
| 1 | E(Rₘ) − R_f | market premium |
| 2 | βᵢ × premium | compensation for exposure |
| 3 | + R_f | model-required return |
Labels matter: expected, required and realised return are different. A CAPM output is a model-based opportunity cost for stated systematic exposure, not a guaranteed forecast.
Limit: beta and the market premium are estimates, and CAPM omits other possible priced risks. When beta or the premium changes, predict the direction before calculating.
11 · Capital budgeting + WACC CH 6
Incremental cash flow changes because the project is undertaken. NPV is PV of those project cash flows less the initial investment. WACC is the market-value weighted required return on debt and equity under stated tax and risk conditions.
| NPV | Decision within assumptions | What to say |
|---|---|---|
| > 0 | adds value at stated r | accept if risk/flows fit |
| = 0 | boundary | inspect assumptions |
| < 0 | does not meet stated r | reject within setup |
Exam cue Corporate WACC or financing weights may be inappropriate for a project with different risk. Near-zero NPV calls for sensitivity analysis, not false precision.
12 · Leverage + payout CH 7
Financial leverage uses fixed-claim financing and changes risk and return borne by equity holders. Capital structure is the debt/equity/other financing mix. Payout policy chooses dividends, repurchases and retention.
| Observation | Valid inference | Invalid shortcut |
|---|---|---|
| R_A > R_D in expectation | leverage can raise expected R_E | “value must rise” |
| more fixed claims | equity distribution is magnified | only the mean rises |
| higher EPS mechanically | recheck risk and financing effects | higher firm value proven |
Carry default, taxes, agency effects and financial flexibility into the conclusion. Payout also trades current distribution against retained investment needs; the accounting label alone does not settle value.
13 · Options + basic hedging CH 8
Call = right, not obligation, to buy at strike K by/at expiry. Put = right, not obligation, to sell. Payoff is contract value at exercise before premium or costs.
P_T = max(K − S_T, 0)
| Position | Payoff step | Profit step |
|---|---|---|
| Long call | max(S_T−K,0) | subtract premium |
| Long put | max(K−S_T,0) | subtract premium |
14 · Final answer audit GUIDE STRATEGY
| Translation | Dates, signs, units, observed vs derived values. |
|---|---|
| Calculation | Formula named; substitutions visible; magnitude plausible. |
| Interpretation | Decision answers the question and names assumptions. |
| Counter-case | Identify the input or limit that could reverse it. |