day 3 in the am # 1 / 34 international corporate finance international corporate finance (icf)

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Day 3 in the am # 1 / 34 International Corporate Finance International International Corporate Finance Corporate Finance (ICF) (ICF)

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Day 3 in the am # 1 / 34International Corporate Finance

InternationalInternationalCorporate Finance (ICF)Corporate Finance (ICF)

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AgendaAgenda Friday – (Sessions am: 8:30-12:00, am: 1:30-5:00)

am: Structures, Statements, Value, Analysis, Currency pm: Time & Currency Discounting/Trading of Money

Saturday – (Sessions am: 8:30-12:00, am: 1:30-5:00) am: Workshop on Evaluating Financials. Discussion of the RMB pm: Internal Operations: Cash Management & Project Evaluation

Sunday – (Sessions am: 8:30-12:00, am: 1:30-5:00) am: Workshop on Financial Projections and Raising Capital pm: External Operations: Markets’ instruments and practices

Monday – (Sessions am: 8:30-12:00, am: 1:30-5:00) am: Understanding the "NEW ECONOMY" pm: Reviewing important points. Final Exam.

On the Internet at: http://cha4mot.com/ICF0411

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US Securities MarketUS Securities Market A securities market is a place where you buy or sell financial assets such as

bonds, stocks, options, or futures.

Examples of securities exchanges: New York Stock Exchange (NYSE) American Stock Exchange (AMEX) Chicago Board of Trade (CBT)

Over the Counter (OTC) market National Association of Securities Dealers (NASDAQ)

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Securities VocabularySecurities Vocabulary

Money Markets or “cash” Fixed Income Capital Markets (Bond Markets) Equity Capital Markets (Stock Markets) Stock Indexes Derivative Securities Markets International markets

and Primary market (IPOs) Secondary market (subsequent offerings)

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Money Market InstrumentsMoney Market Instruments

MMIs are: short term, liquid, low risk, popular

Money Market Instrument Market Value ($Billion, 1999)

Certificates of Deposit $1,574.4

Commercial Paper $715.0

Treasury Bills $371.2

Repurchase Agreements $272.1

Eurodollar Deposits $149.4

Bankers’ Acceptances $14.0 Source: Economic Report of the President, 1999

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US Treasury BillsUS Treasury Bills

Short-term government debt securities

Sold through auction by the U.S. Treasury

Maturity of one year or less

Discount bonds (no coupons)

Minimum denomination is $10,000

Tax-exempt at the state and local level

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BondsBonds Based on who the issuer is. Treasury Notes and Bonds

Both pay semiannual coupons Notes are 1-10 years maturity Bonds are 10-30 years maturity

Federal Agency Debt Mortgage and student loan agencies

Municipal Bonds Tax-exempt at the federal, state, and local level

Corporate Bonds Default risk; credit rating

Mortgage-Backed Securities

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Distribution of US BondholdersDistribution of US Bondholders

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Mutual FundsMutual Funds

What is a mutual fund? An investment company that pools the funds of individual investors

and buys securities or other assets on their behalf.

What are the benefits? Diversification of investments Lower transaction costs Book-keeping and reports Professional Management

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StocksStocks

Common Stocks Shareholder or Owner of the firm Residual Claimant Limited Liability

Preferred Stocks Fixed Dividends Cumulative Dividend Provisions No voting power Liquidation Preference

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NYSE Listing RequirementsNYSE Listing Requirements

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NASDAQ Listing RequirementsNASDAQ Listing Requirements

NMS SmallCap

Pre-tax Income $1 Mil $750,000

Total Assets $6 Mil $4 Mil

Shares Held Publicly 1.1 Mil 1 Mil

Shareholders of Record 400 300

Market Value of Shares $8 Mil $5 Mil

Price of Stock $5 $4

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SpreadSpread

BID ASK

30.25 30.375

The spread, or difference between a stock’s BID and ASK price, represents the capital risk a market participant undertakes when buying or selling a stock.

Spread = .125

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Transaction OrdersTransaction Orders

Market orders are simply buy and sell orders that are to be executed immediately at current market prices.

Limit orders specify the limits on the prices at which they are willing to buy or sell a stock.

Stop loss orders are similar to limit orders in that they will not be executed unless the stock hits a price limit.

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DerivativesDerivatives

A derivative is a financial asset that is derived from an existing traded asset.

A futures contract is an agreement made today to buy or sell an asset at a future time period at a price specified today.

An option contract is an agreement that gives the owner the right, but not the obligation, to buy or sell an asset at a specified price for a set period of time.

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Short SalesShort Sales

Short sales allow investors to profit from a decline in a security’s price by selling securities they do not own.

How? By borrowing from another investor.

SEC Rules: Short sale must be identified to the exchange “Marked to market” each day Executed only on an uptick

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LiquidityLiquidity

Liquidity is a broad concept that generally denotes the ability to trade large quantities quickly, at low cost, and without moving the price.

Liquidity becomes an issue when the number of shares held is large, trading is halted (for an announcement or irregularity), or the float is very small.

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Global MarketsGlobal Markets

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Stock IndexesStock Indexes Nikkei 225 (Japan) FTSE (Financial Times of London)

100 largest stocks on the London Stock Exchange DAX (Germany) CAC 40 (France) Hang Seng Index (HK) Dow Jones Industrial (US) Dow Jones Transportation (US) Standard & Poor 500 (US) Wilshire 5000 (US)

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Emerging MarketsEmerging Markets

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Depository ReceiptsDepository Receipts

American Depository Receipts (ADRs)A security issued in USA to represent shares of a foreign stock

International Depository Receipt (IDR) A negotiable, bank-issued certificate representing ownership of

stock securities by an investor outside the country of origin. An IDR is the non-U.S. equivalent of an ADR.

Global Depository Receipt (GDR)A bank issued certificate in more than one country for shares in a foreign

company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the bank branches. Similar to and IDR and an ADR.

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ADR Purchase MechanicsADR Purchase Mechanics

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Dow – Nikkei 1976-1989Dow – Nikkei 1976-1989

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Dow – Nikkei 1989-2002Dow – Nikkei 1989-2002

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P/E Ratio vs P/E Ratio vs Δ Δ E/ShareE/Share

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Nikkei 90s vs Dow 30sNikkei 90s vs Dow 30s

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Yen vs Dollar for 1942-2001Yen vs Dollar for 1942-2001

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Stock Market Discussion IStock Market Discussion I

What makes a price? Perception of future price

usually based on future earnings/share (amount, predictability)

biased by market conditions (bull/bear, liquidity, group, …) reputation and position of the individual company absolute price (<$5 vs. >$100) and liquidity

What makes a return? Selling at a profit (costs, taxes, conversion, …) Timing (it is no help to say this is the most important factor)

Honesty (it is a crime to sell based on inside information)

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Long Term Returns by ClassLong Term Returns by Class

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P/E Ratio 1870-2002P/E Ratio 1870-2002

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P/E Ratio DistributionP/E Ratio Distribution

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P/E Ratio vsP/E Ratio vs Δ Δ E/ShareE/Share

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Stock Market Discussion IIStock Market Discussion II

What makes money (for you, personally)? Invest in the following companies:

Emerging, important industry (internet, e-commerce, …)

After the industry consolidation to 2 - 4 majors!Hedge if early, otherwise just go with the leader!Remain for at least 10 years; ask is 100x valuation possible? If you had IBM, Xerox, Walmart, … >24% annually10 years= 10x, 20 years= 100x, Walmart was 1,000x!Even if losing money (e.g., AOL), but look at CASH!Two years ago I picked SOHU (@$1.80); it is still a hold.SOHU at $100.00 in 2010 is still 20% compounded annually

This obvious formula is a secret because only you make money (brokers don’t, funds don’t, and news doesn’t matter)!

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Concluding RemarksConcluding Remarks

Questions and Answers

Thank you, again.

You can find a copy of this lecture (1,100 KB) on the Internet at:

http://cha4mot.com/ICF0411

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Kondratieff Long WaveKondratieff Long Wave

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Kondratieff CycleKondratieff Cycle