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FIN 301: EXAM 1
Finance
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the management of money (raising, overseeing, investing)
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three primary areas of finance
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1) corporate finance
2)investments
3) institutions and markets
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Basic Corporate Financial decisions
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1) investment
2) financing
3) dividend
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financial toolbox
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-acctg stmt and ratios
-present value
-risk and return models
-spreadsheet modeling
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importance of financial markets
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Agricultural, Energy, Gold, Currencies Capital
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Debt capital markets
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raising money by issuing bonds
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equity capital markets
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raise capital by issuing stock. allicator of risk capital in economy
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Role of capital markets
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1)Markets allocate capital
2)Role of government (regulator, investor)
3)Stock price reflect stock values
4)Creating shareholder value
5)Current market issues (financial crisis etc
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Four common elements of financial crises
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1) excessive investment
2)easy financing
3) govt bailout
4) it will happen again
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Warren Buffet Case Study
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Brk.A stock = over 100,000 a share..company owns other companies like geico
Buffett likes companies w/ barriers to entry, evaluates companies by profit margin and return on equity
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Principle 1 of finance
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Higher Returns Require Taking More Risk
Key Number to know – annual stock market return = 10%
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principle 2 of finance
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efficient capital markets are tough to beat--current stock prices reflect all publicly known info
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principle 3 of finance
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rational investors are risk averse. higher std dev means more risk
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Principle 4 of finance
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supply and demand drive stock prices in the short run
fundamentals drive stock price in long run
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principle 5 of finance
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corporate finance and governance: corp managers should make decisions that maximize shareholder value
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princple 6
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transaction costs, taxes and inflation are enemies --can reduce real return on investments
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principle 7
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time and the value of money are closely related
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principle 8
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asset allocation is a very important decision. money put in stocks bonds or cash
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principle 9
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asset diversification reduces risk
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principle 10
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an asset pricing model should be used to value investments
CAPM- indicator to investments on how much they should expect in return on investments
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traditional/rational finance
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becker, cochran
models of rational individual behavior
free markets- L-T growth
Missed seeing financial crisis coming
rational expectations,
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Behavioral finance
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thaler, shiller
based on emotions and bias
people can be irratoinal
proof= financial crisis
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who believes in traditional finance
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investment bankers
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Controller duties vs treasurer duties
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controller- planning and control, financial stmts, acctg
treasurer- cash and investingm working cpital mgmt- finance
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the new corporate finance, elements of new environment
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advances in technology
growth in investment
deregulation and growth of global markets
greater econimic volatility and risk
insitutionalization of markets
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academic advances in finance
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more models applied
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key strategic financial decisions for a company
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1) working capital mgmt (short term financial.. customers suppliers etc)
2) capital budgeting (investing assets)
3) capital structure (managing debt and equity)
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market cap
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value on stock market
#sharesxshare price
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managements tenets
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efficiency
accountability
stake in company
greed is good
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dual challenges of management
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product/service markets--> creating high value products at competitve rices
capital markets--> privide good return on investments
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challenges to shareholder value
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-too much focus on market expectations
-short term horizon
-financial crises
-financial scandals
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how do you create shareholder value
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percent return on investments > cost of capital
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corporate governance
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system of rules practices and processes by which company directed and controlled
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The agency problem
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seperation of ownership(stockholders) and control(mgmt)
assets are owned by stockholders but controlled by managers
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agency costs
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1) small scale--mgmt perks
2)large scale--big things
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control mechanisms
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internal- board of directors
audited financial systems
stock value based compensation
external- hostile takeovers
proxy contest--gain control of another companies board
shareholder activism large investor buys stock
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corporate governance in 80s
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solved by hostile takeovers
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managerial defense mechanisms
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poison pill- making stock very expensive to make unappealing
golden parachutes- provide compensation to top level execs if control changes
white knight- target company finds friendly merger candidate
pac-man- comp a going for b.. b goes for a
green mail- target company purchases acquirers shares at premium over market price
crown jewwels- company sells off bigger assets
self tender- target company purchases outstanding shares from shareholders
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corp gov in 90s
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a lot of ceos fired, mgmt stock ownership
solution was shared governance,,,lining interest of investors and mgmt
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global models of capitalism
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United states- fluid capital~minority shareholders elect board
japan germany- large equity holders, very few takeovers
rest of world- majority equity owners
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2000s
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problems with scandals becauese tring to keep up with wallstreet expectations
surbanes oxley act--made mgmt accountable for acuracy of financial stmts
after crash housing bubble then big crisis
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who is to blame for financial crisis
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alll
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biggest acctg firm
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deloitte
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gaap
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so that things can be comparable
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balance sheet
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reports resources of company(assets), liabilities and equity
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administrative control
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assess financial health of business
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resource allocation
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money efficiently being used
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management stewardship
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mgmt doing well?
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book vs market value on balance sheet
two sets of books one for taxes one for investors
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taxes--excellerated depr
investors- straight line depr
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gross profit
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sales-cogs
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eps
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net income/#shares
diluted eps~number of shares including those given to execs
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Stmt of cash flows
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1) three source of cash (oper, inv, financing)
2) most companies source of cash=opp activities
3) primary use of cash for companies = investing
4) companies balance cash inflows and outflows with financing activities--buy stock
5) net change in cash= CFO+I+F
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ISSUES IN ACCOUNTING
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1) depreciation as source of cash
2) what is goodwill= value you pay for a company is more than book value of assets for company
3) deferred taxes-
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Common size income statement accounts computed as % of
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sales
detect trends, make comparisons
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common size balance sheet
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expressed as % of total assets...
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measure efficiency of managment
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activity
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ratios most interest of supplier
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liquidity
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financial leverage ratios
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measure risk on financing.. extent to which firm uses debt to finance stuff
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profibility ratios
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asses managers performance
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valuation ratios
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determine value investors place on cmpany
PE ratio= stock price/ EPS ____>driven by expected growth
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