Finance
Core Concepts
Finance covers corporate finance and financial management. Key topics:
- Time value of money: present value, future value, annuities.
- Capital budgeting: NPV, IRR, payback period, profitability index.
- Cost of capital: WACC, cost of equity (CAPM), cost of debt.
- Capital structure: Modigliani-Miller theorems, trade-off theory.
- Dividend policy: residual theory, clientele effect.
- Working capital management: cash conversion cycle, inventory management.
Common Traps
- NPV is preferred over IRR for mutually exclusive projects.
- IRR can be misleading with non-conventional cash flows (multiple IRRs).
- WACC uses market values, not book values.
- Sunk costs are excluded from capital budgeting.
- Opportunity costs should be included.
Worked Example
A project requires an initial investment of BGN 100,000 and generates cash inflows of BGN 30,000 per year for 5 years. The discount rate is 10%. NPV = -100,000 + 30,000 × annuity factor (10%, 5 years). Annuity factor = 3.791. NPV = -100,000 + 113,730 = BGN 13,730. Since NPV > 0, accept the project. Rule of thumb: Accept projects with positive NPV; for mutually exclusive projects, choose the highest NPV.