chapter 1, fundamentals by ross et. al. 3040.02 notes by a.p. palasvirta, ph.d
TRANSCRIPT
Chapter 1, Fundamentals by Ross et. al.
3040.02 notes by A.P. Palasvirta, Ph.D.
Corporate Finance Investments International finance Derivatives
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Time value of money Capital Budgeting Risk and Return Capital Stucture
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Markets Valuation Portfolio Selection Equity Valuation Model
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Exchange Rate Exchange Markets Parity Conditions & Exposure Foreign (Direct & Portfolio) Investment
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Options Option Strategies Futures Swaps
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What are the responsibilities of the CEO Strategic management (create a business
plan) Tactical management (implement strategy)
Capital budgetingWhat projects to take onHow much to spend on research and
development Financing
Debt, equityShort-term, long-term
Working capital managementCurrent asset managementCurrent liability management
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Information requirementsPro forma income statement tracks
expected cash flows for the length of the investment Pro forma means guesses about what these will
bePositive cash flows (revenues)Negative cash flows (costs)
Weighted average cost of capital What return the firm will have to pay investors
on average whether equity or bond holders Needed to discount future cash flows back to the
present
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Where the firms obtains its financingSome financing options
Retain earnings Issue new equity Issue debt
Bills (discount, zero-coupon) Bonds (debentures, coupon bonds)Mortgage bonds
Bank financing Sale of assets Lease
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Equity versus debt financingRisk of default
Equity holders lose control of the firm GM, Ford, Citibank
Lower cost of financing Interest cost lower Tax deductibility of interest payments
Measures debt ratiodebt to equity ratioTimes interest earned (TIE ratio)
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Current asset managementCashMarketable securitiesReceivables Inventories (input & output)
Current liability managementPayablesAccrual accounts
Wages, salaries Interest payments Taxes Benefits (pensions, health insurance)
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sole proprietorshipcomplete controlunlimited liability
general partnershipall partners share in gains and lossesunlimited liability
limited partnership liability limited to amount contributed to
partnership
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articles on incorporationset out basics of the firm, name, etc.
bylaws rules determining how the organization is to
be run ownership based on shares owned
limited liability to the value of the sharesshares easily traded on exchanges
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long-term - increase the value of the firmMaximize PV of net cash flows of the firm
increase revenues and other incomecapital budgeting decisions adding new
projects decrease costs
substituting less expensive for more expensive factors
reduce the weighted average cost of capital
ethical questionsgreen solutions?
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conflict between principal and agentmanagement hired by stockholders to
maximize valuemanagement would prefer to maximize
benefits direct agency costs
diversion of resources to managememtcost of monitoring (auditing function)
managerial compensation corporate control
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Managerial compensationOptimal compensation
Salary Stock options Bonuses
Who controls the firmStockholders?Board of directors?CEO?
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stockholders management labor customers suppliers tax authorities (local, provincial,
national) Neighbors
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Short-term instrumentsCommercial bills
Finance general liquidity needs Issued through investment banks, traded in
secondary marketsLines of credit
Finance general liquidity needs Issued through commercial banks, traded in
secondary marketsBankers acceptances
Trade credit Issued through commercial banks, traded in
secondary markets
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Coupon bondsFinance general long-term financing needs Issued through investment banks, traded in
secondary markets Mortgage bonds
Finance specific capital intensive projects Issued through investment banks, traded in
secondary markets Preferred & common stock
Finance both general and specific needs Issued through investment banks, traded in
secondary markets
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chartered banks lines of credit loansexport financing
investment bankscommercial billsbondspreferred stockcommon stock)
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insurance companies discountmortgages receivablesbankers acceptances
auction markets (central location)TSE, CDNX, NYSE, etc.
over-the-counter (OTC) markets foreign exchange marketsNASDAQ (dealers hold position in assets)
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compartmentalize riskoptions truncate the return distribution forwards & forwards
eliminate the price volatility generally at a cost (bid-ask) spread
swaps
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