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Finance Society Introduction to Finance Workshop (09.22.2011)

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  • Concept of opportunity costs – IMPORTANTWrite out the formula
  • Derive the perpetuity formula
  • Promote the finance fieldPrepare our members forthe various career opportunitiesWhether it be on the sell-side doing IB, S&T, or ResearchOr perhaps on the buy-side doing PE or HFConnect you with real-world professionals to share industry knowledge and experienceThe speakers that we will have come in are guys that are working in those very same jobs that most Stern students desire, so we will provide you with a great opportunity to learn firsthand what the different jobs on Wall Street are really likeBring together students with similar interests at all levelsThis is a society for people interested in finance, and we bring together people from every year – freshman through seniors This all sounds like a bunch of bullshit, but at the end of the day, we’re going to provide you with the necessary tools, resources, knowledge, support system to help you succeed in whatever career path you chooseBasically, we’re going to prepare you as best we can to get a job on Wall Street
  • Something new that we’re doing this year (or rather much improved)There will be an application for the mentorship program, which will go out shortly (so check your emails)We’re going to partner you with some of the superstars of the senior classGuys (and girls) who have worked in Investment Banking, Sales & Trading, and Equity research at places like MS, GS, CS, and JPMOne thing that I think helped me immensely was having friends who were older than me that had gone through the processThey helped me with basically everything, from what to write in an email to how long I should wait before following up with someoneAnd come spring semester, for you juniors, they helped me get through interviews by doing mocks, and lots of other thingsWe’re going to try to do the same thing for you guysMentors will hopefully help you with all of those thingsResume, cover letter helpNetworking helpEven possibly passing along a couple of internship opportunities that they had when they were freshmen and sophomoresAnd when you guys are going through OCR, the seniors who will be your mentors will also more likely than not be on their schools recruiting teams picking resumesIn the Fall, the mentorship program will not be open to freshmen, but we will be opening it up in the Spring (so freshmen stay tuned)
  • Something new that we’re doing this year (or rather much improved)There will be an application for the mentorship program, which will go out shortly (so check your emails)We’re going to partner you with some of the superstars of the senior classGuys (and girls) who have worked in Investment Banking, Sales & Trading, and Equity research at places like MS, GS, CS, and JPMOne thing that I think helped me immensely was having friends who were older than me that had gone through the processThey helped me with basically everything, from what to write in an email to how long I should wait before following up with someoneAnd come spring semester, for you juniors, they helped me get through interviews by doing mocks, and lots of other thingsWe’re going to try to do the same thing for you guysMentors will hopefully help you with all of those thingsResume, cover letter helpNetworking helpEven possibly passing along a couple of internship opportunities that they had when they were freshmen and sophomoresAnd when you guys are going through OCR, the seniors who will be your mentors will also more likely than not be on their schools recruiting teams picking resumesIn the Fall, the mentorship program will not be open to freshmen, but we will be opening it up in the Spring (so freshmen stay tuned)
  • Something new that we’re doing this year (or rather much improved)There will be an application for the mentorship program, which will go out shortly (so check your emails)We’re going to partner you with some of the superstars of the senior classGuys (and girls) who have worked in Investment Banking, Sales & Trading, and Equity research at places like MS, GS, CS, and JPMOne thing that I think helped me immensely was having friends who were older than me that had gone through the processThey helped me with basically everything, from what to write in an email to how long I should wait before following up with someoneAnd come spring semester, for you juniors, they helped me get through interviews by doing mocks, and lots of other thingsWe’re going to try to do the same thing for you guysMentors will hopefully help you with all of those thingsResume, cover letter helpNetworking helpEven possibly passing along a couple of internship opportunities that they had when they were freshmen and sophomoresAnd when you guys are going through OCR, the seniors who will be your mentors will also more likely than not be on their schools recruiting teams picking resumesIn the Fall, the mentorship program will not be open to freshmen, but we will be opening it up in the Spring (so freshmen stay tuned)
  • Something new that we’re doing this year (or rather much improved)There will be an application for the mentorship program, which will go out shortly (so check your emails)We’re going to partner you with some of the superstars of the senior classGuys (and girls) who have worked in Investment Banking, Sales & Trading, and Equity research at places like MS, GS, CS, and JPMOne thing that I think helped me immensely was having friends who were older than me that had gone through the processThey helped me with basically everything, from what to write in an email to how long I should wait before following up with someoneAnd come spring semester, for you juniors, they helped me get through interviews by doing mocks, and lots of other thingsWe’re going to try to do the same thing for you guysMentors will hopefully help you with all of those thingsResume, cover letter helpNetworking helpEven possibly passing along a couple of internship opportunities that they had when they were freshmen and sophomoresAnd when you guys are going through OCR, the seniors who will be your mentors will also more likely than not be on their schools recruiting teams picking resumesIn the Fall, the mentorship program will not be open to freshmen, but we will be opening it up in the Spring (so freshmen stay tuned)
  • Valuation is the at the core of what you do in financeYou are always trying to put a value on things in the market, whether it be trading a stock (based on if it’s under/overvalued), advising a company on whether or not to acquire another company, or giving your public view on a particular companyTwo methods – in practice, you’ll use a combo of both
  • Question – So, say you’re an investment banker. When your MD comes up to you and says, “what’s the valuation for the company?” what are you going to say?The most commonly cited metric (market cap) gives you the value of the company’s equity. When your looking at the total value of a company, your looking for its enterprise valueQuestion – Does everybody understand all of the components of EV? Think of it as the price a buyer would have to pay to acquire another company.Why deduct cash?
  • CompsWhy EV/EBITDA, why not Market Cap/EBITDA or EV/Net incomeConsistency (apples-to-apples) (full company to full company or stockholders to stockholders)
  • Give example of a transaction: e.g. increase in sales means increase in cash, decrease in inventory, increase in OEBalance Sheet is also a statement of financial position, shows the financial status of a firm at a particular instant in time; it’s a snapshot of the firmAssets: economic resources that the company expects to help generate future cash inflows, or reduce future cash outflowsLiabilities: economic obligations of the organization to outsiders e.g. debt that is owed to a bankOE: owners’ claim on the organization’s assets. Because debt holders have first claim on the assets, the owners’ claim is equal to the assets less the liabilities
  • This is an example of a firm’s balance sheet; shows everything that the firm owns.Most important thing about the balance sheet  IT MUST BALANCE!
  • An income statement is a report of all revenues and expenses pertaining to a specific time periodNet income is the famous bottom line – the remainder after deducting all expenses from revenuesPretty straightforward but important; essentially we start off with revenue from sales and deduct all expensesExpenses might not be as direct, for example depreciation  expenses are cash based or non-cash basedDepreciation is the systematic allocation of the acquisition cost of long-lived assets to the expense accounts of particular periods that benefit from the use of the assets
  • Page 184,200The statement of cash flows reports the cash receipts and cash payments of an entity during a particular period and classifies them as financing, investing and operating cash flows.Operating – transactions that affect the purchase, processing and selling of a company’s products and servicesInvesting – how to use capital e.g. acquiring or disposing PPE Financing – transactions that obtain resources for example by borrowing money The statement of cash flows show the performance of a company over a period of time.It focuses on the change in non-cash accounts to explain why the level of cash increased/decreased over a period. Cash is the most objective statementThe lifeline of a company
  • http://www.dummies.com/how-to/content/connecting-the-income-statement-and-balance-sheet.htmlhttp://www.dummies.com/how-to/content/connecting-balance-sheet-changes-with-cash-flows.htmlBig Picture: IS and CFS fill in the ‘gaps’ between 2 successive BSYou can think of the income statements as filling in the gaps between balance sheets. The balance sheets show the financial position of the company at discrete points in time and the income statements explain the changes that have taken place between those points. CFS is similar to the income statement, but it delivers a more objective perspective  all items are cash-based.Income statement shows how operating activities produce changes in retained earnings, while the statement of cash flows details the changes in the cash account. CFS is important. It is the lifeline of the firm! Firms need cash.
  • Buy side vs. Sell sideBuy side is investors (people with $$$)Sell is side those who help investors do things with that money (i.e. investment banks)IBD – help companies/PE shops raise capital or buy/sell companiesS&T – help investors buy/sell different products (stocks, bonds, etc.)Research – help investors make better investment decisions on buying/selling (similar to Equity S&T – often times, S&T will use an Equity Research report as a reason for why their client should buy a stock)Concept of the Chinese WallPrivate  IBDHave information that is not in the public sphereEx. Management financial projections – They might release bits and pieces in the press (which becomes public), but often times when they are doing a deal they will give their bankers there full and detailed estimates of their companyPublic  S&T, ResearchHave the same information that you and me haveThey make their bets and do their research based off of K’s and Q’sDoes everyone know what I mean by K’s and Q’s?
  • IBDIndustry (Coverage) vs. ProductsIndustry groups cover an industry (duh)Ex. Energy, Metals/Mining, Consumer & Retail, Technology/Media/& TelecomThey operate as covering clients and whatever needs those clients have (irrespective of the product – whether that be a debt or equity raising, issuing a dividend, or an M&A situation)Product groups cover a specific productBy product I mean M&A, Equity Issuance (Equity Capital Markets), Debt Issuance (DCM)Ex. M&A, ECM, DCM, Leveraged Finance, Financial Sponsors (sort of)They do not cover clients, but when an industry group suggests that a company do an M&A deal, often times the M&A group will execute the dealSome places have groups that do both (ex. Goldman, MS Media/Comm)The groups constantly work together, as both need each other and have an expertise in a certain area (whether it’s knowing the Oil & Gas space cold, or knowing how to execute an M&A transaction)Two main things that investment bankers do(1) Help companies get moneyHelp them do it in the best way possible (debt vs. equity – fundamental question of corporate finance)(2) Help companies figure out how to best use that moneyM&A (buying a company, selling itself, divesting assets)Also, restructuringKind of goes under bothHelp companies who are in financial distress (aka can’t pay their bills/debt) work out a way to easy their bill payments and get back to profitability (through debt restructuring, divesting assets, etc.)S&TI didn’t do S&T, but I’ll tell you what little I do know about itBuy/sell securities on behalf of clientsDistinction from prop trading – they use the firm’s money to buy/sell securities to make profits for themselvesS&T make money from fees (commission, spread)Market making – guarantee you will provide a bid/ask price if clients ask for itProviding liquidity!Diff securities = diff desksFICCEquitiesResearchJust as there are many different products (equity, fixed income, currencies), there are research analysts that cover those productsWrite very in-depth reports (much more in-depth than banking) and publish them for clientsOften times, their clients are the same clients as S&T and IBDBanking uses ER reports all the time in their own modelsDistinction: Public analysis of companies (vs. private – IBD)
  • Buyside – people with money (the client)PE, HF, MF, VCPE – buy equity in private companies, or if the company is public, buy the company whole and take it privateEx. KKR, Blackstone, TPG, CarlyleSide note: These guys do more than just PEHF – buy stocks, bonds, derivativesHedge (obviously)Ex. Soros, SAC Capital, Moore Capital, your very own PaulsonPaulson bet on the mortgage market one year, gold/different stocks the next year, etc.)VC – buy equity early-stage companiesPE and VC are similar; PE buys more established companies (ex. Stable cash flows, mature), VC buys companies that are just starting up or need new capital to fund growth (again, because they are young)Ex. Accel Partners, Union Square (Foursquare, Tumblr, Twitter, Zynga – social media focused)
  • Transcript

    • 1. Introduction to Finance
      September 22, 2011
    • 2. Agenda
      Introduction To Finance Presentation:
      Time Value of Money
      Discount Rates
      Valuation
      Accounting
      Wall Street
      Upcoming Events
      Meet the Mentors
      2
    • 3. Time Value of Money
      Introduction to Finance
    • 4. Dollar Today ≠ Dollar in One Year…Why?
      To adjust for the opportunity cost of capital, we use Present Value
      FVt is the “Future Value”, i– “Discount Rate”
      Key Concept: Time Value of Money
    • 5. The Power of Present Value
      You make 100k each year for the rest of your life, your discount rate is i = .05
      PV = (100k/1.05)+(100k/1.05^2)+(100k/1.05^3)+…
      “Perpetuity formula”, PV = 100k / .05 = $2M
      Conclusion:
      Finance === Present Value!!
    • 6. Understanding Discount RatesCAPM and WACC
      6
    • 7. Discount Rates
      Introduction to Finance
    • 8. Discount Rate Intuition
      Used to discount current and future cash flows (as shown earlier)
      r (“interest rate”) = risk free rate + risk premium
      When you take home mortgage, why can’t you borrow at the risk free rate?
      8
    • 9. Capital Asset Pricing Model (CAPM)
      Gives us the rate of return on some asset (could be a stock, bond, house, etc.)
      Three Components: Risk Free Rate (usually 10 year), Market Return (usually S&P), and Beta (see next slide)
      9
    • 10. What is Beta?
      “The Market Price of Risk”
      Beta is the measure of an asset’s sensitivity to the overall market
      Testing Yahoo Finance: Do a regression of yearly MSFT returns on S&P Returns, the slope should be ~equal to the beta listed
      10
    • 11. Weighted Average Cost of Capital (WACC)
      Calculating the asset beta at constant debt-to-value ratio:
      We take into account capital structure using this formula:
      11
    • 12. Valuation
      Introduction to Finance
    • 13. Valuation
      Why is it important?
      Valuation is at the heart of finance
      Common Terms
      Fair Value
      Intrinsic Value
      Two primary methods:
      (1) Comparables/Precedents
      (2) DCF
      Others include LBO, Replacement value, Sum-of-the-Parts
      13
    • 14. Valuation (cont’d)
      Enterprise Value
      Value of the operations of the company attributable to all providers of capital
      Enterprise Value = Equity Value + Debt – Cash
      Equity Value
      Portion of value attributable only to shareholders
      Equity Value = Share Price x Shares Outstanding
      14
    • 15. Valuation (cont’d)
      Comparable Company Analysis
      Look at how similar companies are being valued to derive a value for your company
      Common multiples: P/E, EV/EBITDA, EV/FCF
      DCF
      Trying to value a company today based on the cash flows it’s expected to produce in the future
      FCF, Terminal value, WACC
      15
    • 16. Accounting
      Introduction to Finance
    • 17. Balance Sheet
      17
      A = L + OE
    • 18. Balance Sheet (cont’d)
      18
    • 19. Income Statement
      19
      Revenue – Expenses
      = Net Income
    • 20. Cash Flow Statement
      20
      Operating,
      Investing,
      Financing
    • 21. How the 3 Statements Connect
      21
    • 22. Wall Street
      Introduction to Finance
    • 23. Wall Street
      Buy side vs. Sell side
      Private Equity, Hedge Funds  Buy side
      Investment Bank  Sell side
      Private vs. Public
      Chinese Wall within Investment Bank
      Investing Banking Division  Private
      Sales & Trading, Equity Research  Public
      23
    • 24. The Investment Bank
      24
      Investment Banking Division (IBD)
      Industry Groups vs. Product Groups
      Two main purposes:
      Raise capital
      Provide strategic advice
      Sales & Trading (S&T)
      Buy/sell securities on behalf of clients
      Many different securities, many different desks
      Equities
      FICC
      Research
      Fundamental analysis
      Public (vs. IBD – private)
    • 25. The Buy Side
      25
      People with money to invest
      Private Equity, Hedge Funds, Venture Capital
      Private Equity – buy equity in private companies
      Hedge Funds – buy equity/debt in public companies through complex hedging strategies
      Venture Capital – buy equity in early-stage companies
    • 26. Wrap-Up:
      Present Value === Finance!
      CAPM and WACC are used to determine the discount rate in valuation
      Financial statements allow us to analyze companies
      Valuation is simply a way of valuing a company or asset
      Wall Street is more complicated than it seems
    • 27. Upcoming Events
      27
      9/29/2011: Networking 101 Workshop
      10/6/2011:Morgan Stanley Presents: What is IBD
      10/13/2011: Lazard: Introduction to Restructuring
      10/20/2011: Credit Suisse: The IPO Process
      Special Event 9/30/11: Tour of Wall Street
    • 28. 28
      Meet the Mentors!