Financial management means planning, organizing, directing and controlling the financial activities of the enterprise.

How do you calculate a return?

  • Accounting = Actual data
  • Finance = Forecasting

Risk

Sock fund Bond fund

Systematic risk

Cannot be diversify. Economy, inflation, interest rates, etc..

Un systematic risk (non systematic)

RYou can diversify. Risk factors affect a limited number of assets. Includes labor strikes, part shortages.

Total risk

  • systematic
  • unsystematic

Total risk = systematic risk + nonsystematic risk Beta = systematic risk

Regression

Compare security returns vs return on market. Slide

Slope = Beta = How much does your security responds to the market. alpha = the better the manager in terms of producing return

Microsoft has a huge treasury department.

Single factor pricing model

Expected return on a security (extremely important)

Forecasting the return on the stick

Capital Asset Pricing Model

CAPM (7 start) Expected return on an individual security:

Ri = Rf + Bi x (Rm - Rf)

Rf = Risk free rate, like treasury bond. B of the secuirty Market risk premium (Rm - Rf)

Treasury bill backed by the government.

Rm = market return , s&p 500 for the last 80 years… ~ 9% Rf = Risk free rate

This is equal to risk premium

Microsoft Beta ~ 1.0

This means that this stock moves with the market. https://finance.yahoo.com/quote/MSFT?p=MSFT&.tsrc=fin-srch

Beta is the measure of systematic risk. You cannot get rid of this risk

A beta of 2 means the stock is more volatile.

Less than 1 means its less risky that is less

Vangard is known for index.

How do you value a stock.

Problem #1 in homework.

Stock, present value, of the future cash flows. FCF = Future Cash Flows Div = Divident

All dividends divided by

Constant growth model

p0 = Div1 / (R-g) <--- for homework 1
  • p0 = current price
  • Dev1 = next years dividend (either given, or calculated)
  • R =
  • g = growth rate of the company

Slide 7

Risk free rate, can be a ten year treasure bond. If not given we can use treasure bond.

Ri = 8.27 %

Bonds and bond valuation

Coupon Face value Junk bond Most bonds pay twice a year. Issue maturity WAC PVC

The weighted Average - Cost of capital

Measure of the risk of the bond.

When company has equity

Equity is common stock Debt is bond

Computing Yield to maturity.

  • N number of periods
  • PV present value, bond price
  • PMT payment, cupon payment for bond
  • FV face value

Market efficiency

Foundations of market efficiency

  • Investor rationality
  • Independence of events
  • Arbitrage

You and I are rational.

Shorting the stock: Borring money to buy stock. Betting the stock will go down. Consider cost of borrowing (sometimes 15%).

Types of efficiency

  • Weak form: Technical analysis is useless.
  • Semistrong form: Fundamental analysis. Fundamental research. Srubbing the income statements, public information, data, yahoo finance, conference call. High-frequency traders. People that use computers to trade the markets.
  • Strong form: Security prices reflect all information- public and private.

Martha Stewart insider trading ?

Blackout period/window. Close to earning report.

10b51 program. If you are on a board, you can sell automatically.

The behavioral challenge

Loss aversion bias

Loss aversion risk

Risk premium is high, you want to hold on your investments. I’m not going to sell it, im going to keep it until i make my money back.

Efficient meaning you cannot beat the market on a consistent basis.

Capital structure

How much cash does Apple have right ? 130 billion dollars in cash.

Capitalization of the company Value (V) = Bond (B) + Stock (S)

Financial leverage, EPS, AND ROE

The higher ROE the better. Debt can increase your ROE.

MM Proposition I (No taxes)

Vl = Vu

Leverage, unleavered

MM Proposition II (No taxes)

Rs = R0 + (B/S) (R0 - RB)

MM proposition I & II (with taxes)

VL = Vu + Tc * B

Unleavered equity means

Total Cash flow to investors

Cap structure

  • Government

  • Employees, pension plan
  • Suplliers, vendors
  • Senior debt holders
  • Junior
  • Preferred
  • Common stock holders

Efficient Market Hypothesis and why Delaware?

HP purchased Aruba (27 a share). Verition small hedge fund managers.

HP buys Aruba for $3b. Judge says that the company is only 17 per share. Verition displeased they want to use discounted cash flow ($33). This went to supreme court.

Dell and DFC globad had to pay up in other deals.

Veritions View point

Fundamental value vs informational value.

https://www.bankrate.com/ https://www.ft.com/

Series A === early early investors

Angel Investor vs Angel Investor Super Angels

Supersvisory Stress Test

Sensitivity Analysis of Liquidity Risk for Banks

European Central Bank. Supervisor for a large … eurpean … help rebuild trust in the eurpoean baking sector and increase the resilience of banks.

Euroizone debt crisis exposed instability and high liquidity risk.

Multiple IPOS at the same time: signaling

Digital Realty Trust Case

Real estate …

V_l = V + Tc * B

Modeling, how much is worth, I … assumnptions …

Segregate cashflos from current and expected new leases. Segregate… calculate discount rate for the different … Because of the risk, the current leases are lower discount rate. Future leases calculate future lesase.

Figure out the cashflows of these leases … for question 2.

EBIT = Earning Before Interest and Taxes…

  • Depreciation (non cash) +/- net working capital ————————————- Operating cashflows

Net working capital = Accounts Receivable + Sales Equipment Revenue + Prepaid Expenses - Accounts Payable - Deferred Service Revenue - Accrued Liabilities Balance Sheet = Current Assets - Current Liabilities

Use last year to determine terminal value, because the model is for 5 years… Use formula in chpater 6, slide 7.

Laste year is year 5…

Discount BEFI cashflow discount rate discount for 5 years….

discount rate == WAC ????

Green Thumb Industries

  • 100+ years of entrepreneurial expertise
  • Commitment to safety and quality
  • 11 manufacturing facilities
  • 71 retail locations

Jeff Bezos worked in wall street.

Junk bond, also known as a high yield or speculative bond. Is a d debt security issued by companies or governments.

Pros:

Earning before interest, Taxes, Depreciation and amortization.

Net Income

  • Interest expense
  • Taxes

  • Amortization

    EBITA

Community adjusted EBITDA

What is BitCoin. Staoshi Nakamoto.

Signaling.

IPO vs Share Buyback.

Insider activities.

Insider transactions

Yahoo finance, there is a “holders” -> “Insider transactions”.

Net Working Capital

References

  • https://www.investopedia.com/ask/answers/042215/what-are-benefits-company-using-equity-financing-vs-debt-financing.asp
  • https://www.investopedia.com/terms/e/equityfinancing.asp