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8/27%–%Corporate%Finance%Finance%–%management%of%money,%generating%cash/investing%cash/managing%financial%resources%3(Areas(of(Finance%–%1)%Corporate%Finance%2)%Institutions%&%Markets%3)%Investments%%Financial%Tool%Box%–%1)%accounting%statements%and%ratios%2)%present%value%3)%risk%and%return%models%4)%spread%sheet%modeling%The%importance%of%financial%markets%–%corn%is%a%commodity%so%it’s%price%elastic;%price%of%energy%(oil)%has%é;%gold%prices%éduring%the%crisis%as%people%were%scared%so%they%bought%gold%to%store%value;%currencies%fluctuate%%Debt(capital(markets%–%raising%$%by%issuing%bonds,%interest%rates%reflect%the%base%cost%of%capital%in%econom y,%30%yea r%treasury%rateê%%Equity(capital(markets%–%raising%$%by%issuing%stocks,%allocator%of%risk%capital%in%economy,%essential%to%financial%growth,%barometer%of%economic%health%%The(role(of(capital(markets(–((1)%Capitalism%–%markets%allocate%capital%%2)%Government%–%regulator,%investor,%market%control%3)%Stock%prices%reflect%stock%values,%operating%efficiency,%info/price%efficien cy %4)%Creating%shareholder%value%–%%4)%Current%market%issues%–%financial%cr isis,%in sid e r%tra d ing ,%h igh %fre q ue n cy %tra d ing%%Free%market%–%1)Hong%Kong%2.%Singapore%/%Government%controlled%–%1.%NK%2.%Zimbabwe%%Financial(crises%–%from %ho u sin g%and%mortgage%crisis,%to%subprime,%credit%crunch%and%recession%• Tulip%bulb%mania%–%NetherlandsW%luxu ry %item %a n d%s ymbol%of%status ,%pric e%é%dramatically,%then%ê%when%no%one%bought%them%• South%sea%company%–%England%–%to%reduce%gove rnment%debt%and%po liticians%trade%rum ors%to%pu sh%price%up,%dramatic%éê%• Tech%Stock%bubble%–%US%–%tech%stocks%declined %80%%I%na%year%• Asian%market%collapse%–%larg e%ê%values%of%currency%became%expensive%as%investors%flock%to%market,%large%investm e n ts %by %A s ian %fu n d s%%%Four(elements(of(Financial(Crisis(–(1. 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Generates%a%lot%of%cash%flows%%2.1:(Higher(returns(require(taking(more(risk((Annual%rate%of%return%of%stock%market%–%10%%W%(change %in%price%+%dividend)/(initial%price)%%%2.2:(Efficient(capital(markets(are(tough(to(beat(current%stock%prices%reflect%all%publicly%available%information%and%prices%react%completely,%correctly,%and%instantane ously%to%incorp orate%the%rece ipt%of%new%information%%2.3:(Rational(investors(are(risk(averse(Risk%aversion%means%that%a%rational%investor%prefers%less%risk%to%more%risk%%Stock%A:%mean%return%10%,%STD%10%%VS%Stock%B:%mean%return%10%,%STD%20%%=%Stock%B%is%more%risky%%2.4:(Supply(and(demand(drive(stock(prices(in(the(short(run((Short%run,%a%stock’s%price%may%be%influenced%by%temporary%and%extreme%supply%and%demand%imbalance%OR%by%the%stock%market’s%reaction%to%new%inform ation;%ma y%not%affect%the%true%longWterm %valu e,%RAN D O M %W A LK %Long%run,%stock%prices%are%driven%by%EARNINGS%%%2.5:(Corporate(finance(and(governance:(corporate(managers(should(make(decisions(that(maximize(shareholder(value(Buffett%–%managers%have%fiduciary%responsibility%to%act%in%shareholder’s%interests%%2.6:(Transaction(cost,(taxes(and(inflation(are(the(ENEMIES(Transaction%costs%and%the%effects%of%taxes%and%inflation%can%greatly%reduce%the%real%returns%on%your%investments%%%2.7:(Time(and(the(value(of(money((A%dollar%today%is%worth%more%than%a%dollar%tomorrow%Compounding%Value%–%Future%Value;%Present%Value%(mostly%used%fin%tools)%–%FV%=%PV%*%(1+r)^n%%2.8:(Asset(allocation(is(a(very(important(decision(Asset%allocation%involves%dividing%investments%funds%among%different%asset%classes,%the%asset%allocation%decision%reflects%beliefs%about%the%anticipated%risk%and%return%of%asset%classes,%over%90%%in%fund%per for m a n ce %is%d ue %to %as set %allo ca tio n.%B a sic :%cas h,%st oc k,%bonds%%%2.9:(Asset(diversification(will(reduce(risk(Diversify%holdings%–%spread%wea lth%amo ng%a%num b er%of%different%investm e n ts .%Go a l%to %d ive rs e%is %to %invest%in%a%group%of%assets%that%provides%you%with%the%best%return%possible%given%a%level%of%risk.%MORE%STOCKS,%LOWER%STD,%LOWER%RISK%%2.10:(An(asset(pricing(be(used(to(value(investments((CAPM%Capital%Asset%pricing%model%–%simple%mo del%that%estimates%the%rate%of%return%an%investor%should%expect%to%receive%on%a%risky%asset;%its%principal%purpose%is%to%determine%the%discou nt%rate%to%use%for%valuation%of%assets% %POSITIVE%relationship%between%beta%and%expected%return%%%Mind(Over(Money:(Traditional(vs.(Behavioral(Finance(%Traditional**Behavioral*Financial%Professors%Mutual%funds%Wtry%to%find%opportunity%to%beat%the%market%Equity%traders%Wwhat’s%happening%on%second%to%second%basis,%Emotions%CFOs%%%Investmen t%Bankers%Whow%they%make%money%by%issuing%stocks%%%%Greed%vs.%Fear%–%behavioral%finance,%lead%to%financial%crisis%9/03%–%Corporate%Finance,%Creating%shareholder%value,%and%corporate%governance%Microsoft%bought%Nokia;%Verizon%bought%Vodafone%%%CFO(–(vice(president((Treasurer%(financial%planning)%–%capital%budgets,%ST%LT%capital%requirements,%cash%management,%working%capital%Controller%(accounting)%–%financial%state m e n ts%a nd %re p or ts,%fin an c ial%sy ste ms,%operating %b ud g et s,%au d its%a n d%ta x es %%The(Financial(Environment%é%from%1960 %–%2000%%%The(New(Corporate(Finance(–(Elements(of(the(New(Environment((• Advances%in%Technology%• Growth%in%Investmen ts%• Growth%in%Global%Markets%• Greater%Economic%Volatility%and%Risk%• New%Complex%financial%instr u m e n ts%%• Institutionalization %of%markets%%%Academic(Advances%in%Finance%é%from %19 6 0 %–%2000%–%more%tools%available%to%use:%financial%engineering…etc%%The(CFO(as(Financial(Engineer((Traditional%roles%–controller/treasurer%Expanded%roles%–%%• Corporate%strategist%W%assist%in%strategy%formulation%• Financing%and%Capitalization%–%the%capital%can%fund%strategic%plan%• Risk%Management%–%hedge%risks%in%markets%when%appropriate%• Growth%and%Acquisitions%–%provide%for%the%growth%opportunities%%%2012(CFOs(Lougbridge%–%IBM%– %moving%forward%%Tome%–%Home%Depot%–%redirected %capital%spend


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PSU FIN 301 - Corporate Finance

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