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the introductory lectures

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    the introductory lectures the introductory lectures Presentation Transcript

    • Basics for market microstructure Stock market is a slough of fear and greed untethered to corporate realities – Warren Buffet
    • What is finance?
      • Capital markets
        • Portfolio management
        • Asset pricing
          • Time and cross dimensions
        • Risk management
        • Financial engineering
        • Performance evaluation
        • Market microstructure
    • What is finance?
      • Corporate finance
        • Capital budgeting
          • Project valuation
        • Capital structure
        • Mergers and acquisitions
          • Company valuation
        • Going private / public (IPO)
        • Corporate governance
    • Potential employer / job function
      • Investment bank
        • Corporate finance: help companies to raise capital
        • M&A: value companies, structure deals, negotiate
        • Trading equity, FI, FX, derivatives
        • Structured finance: create new instruments
        • Analyst / research
      • Commercial bank
        • Loans to individuals and companies
        • Mortgage
        • Private banking
    • Potential employer / job function
      • Money management: mutual / pension / hedge funds
        • Portfolio manager: select investments
        • Investment advisor
        • Analyst
      • Corporate finance dept in a company
      • Audit company
    • Market microstructure
      • Financial markets
      • Financial instruments
      • Financial intermediaries
    • Financial markets
      • Primary vs secondary
      • Exchanges vs OTC
      • Dealership vs (batch / continuous) auction
      • Listing/Depositary receipts
    • Financial markets
      • Objective: facilitate trading to allow
        • Money transfer over time
        • Risk sharing
        • Price discovery
      • Issues: transaction costs
        • Info asymmetry
        • Liquidity
        • Informational efficiency
    • Financial instruments
      • Basic: stocks and bonds
      • Derivatives: forwards, futures, options, swaps, etc.
      • Indices
    • Financial instruments
      • Objectives
        • Marketable
        • Give specific payoff in a given state of the nature
      • Issues
        • Specifics vs liquid ity/ simplicity
        • Counterparty risk
        • Bad incentives
    • Financial intermediaries
      • Brokers / dealers
      • Commercial banks
      • Investment banks
      • Mutual / pension / hedge funds
      • Wealth management
    • Financial intermediaries
      • Objectives
        • Minimize transaction costs
          • Economies of scale
        • Solve information problems
        • Brokerage vs qualitative asset transformation
      • Issues
        • Agency problem
        • Coordination
        • Conflict of interest
    • Jargon
      • Short sales
      • Spread
      • Insider
      • Market-maker
      • Listing
      • Liquidity
      • Securitization
      • Market efficiency
      • Arbitrage
    • Books x CFA study notes x Jorion Financial Risk Manager Handbook x Энциклопедия финансового риск-менеджмента. Под ред. Лобанова и Чугунова Малюгин. Рынок ценных бумаг: Количественные методы анализа x x Hull. Options, Futures, and Other Derivatives x Haugen. Modern Investment Theory x Megginson. Corporate Finance Theory x Grinblatt, Titman. Financial Markets and Corporate Strategy x x Sharpe, Alexander, Baily. Investments x Бригхем, Гапенски. Финансовый менеджмент Scanned Library Description
    • Further courses
      • Investment theory
      • Corporate finance
      • Econometrics of financial markets
      • Risk management
    • Lecture 2: plan
      • Prices and returns
      • Why is the discount rate positive?
      • Index models and CAPM
      • Sp e cifics of corporation
      • Stocks vs bonds
      • Financial statements and coefficients
    • Prices and returns -Why do prices rise? - Because there are more buyers than sellers!
    • Prices and returns
      • How to define returns?
        • for stocks / bonds
      • Why usually employ returns in models?
      • Why need stochastics?
      • How to account for transaction costs?
    • Discount rate
      • Time preference
      • Inflation
      • Risk
    • Models The one investment certainty is that we are all frequently wrong
    • Index models
      • Market model: R i , t = α i + β i R M,t + ε i , t ,
        • where E(ε i,t )=0, cov( R M , ε i )=0
      • Risk management : ΔR i ≈ β i Δ R M
      • Separation of total risk on systematic and idiosyncratic : var ( R i )= β i 2 σ 2 M + σ 2 ( ε ) i
        • Systematic risk depends on factor exposures (betas) : β i 2 σ 2 M
        • Idiosyncratic risk can be reduced by diversification
      • Covariance matrix : cov ( R i , R j ) = β i β j σ 2 M
        • Assuming E(ε i ε j )=0 for i≠j
    • CAPM
      • More restrictive model: E[ R i , t - R F , t ] = β i E[R M,t - R F , t ]
        • where E(ε i,t )=0, cov( R M , ε i )=0
      • The expected excess return of each asset is proportional to its beta
        • Investors require higher expected returns on assets with higher systematic risk
      • In the equilibrium, everybody invests in the market portfolio (of risky assets) and risk-free rate
    • Мифы / Стереотипы
      • «Количественные модели объективны»
      • «Чем сложнее модель, тем лучше»
      • «Количественные модели могут дать точный прогноз»
      • «Модели дают прогноз и расчет стоимости компании раз и навсегда»
    • Specifics of corporation The most investor can lose is everything?
    • Forms of Business Organization
      • Sole proprietorship
      • Partnership
      • Corporation
      • Evaluate by
      • The life of the entity
      • The ability to raise capital
      • The owners' liability
    • Modern Corporation
      • Advantages
        • Limited liability
          • 1811: general act of incorporation in NY
        • Easy transfer of ownership
        • Unlimited life
        • Ability to raise large amounts of money
    • Modern Corporation
      • Disadvantages
        • Start-up can be costly
        • Earnings subject to double taxation
        • The agency problem
          • Separation of control and ownership
          • The leverage effect of debt
    • Equity vs Debt
      • Shareholders
        • Control rights (e.g., elect directors)
        • Limited liability
        • Residual claim on assets (after paying up liabilities)
        • Dividends (fully taxable)
      • Debtholders
        • Fixed contractual claim against the corporation
        • No voting power unless the debt is not paid
        • Interest on debt is tax-deductible
    • Basic Financial Statements
      • Balance Sheet
      • Income Statement
      • Statement of Cash Flows
      • Objectives:
      • current status and past performance information
      • set performance targets and impose restrictions on the managers
      • template for financial planning
    • The Balance Sheet
      • Assets ≡ Liabilities + Shareholder’s Equity
      • Tabulates a company’s assets and liabilities at a specific point in time
      • Sorting
        • Assets by liquidity
        • Liabilities by maturity
      • Assets and liabilities are represented by historical costs
        • The original cost adjusted for improvements and aging = Book Value
        • Avoid using market value, since is too volatile and easily manipulated
    • Liabilities (Debt) Assets 20X2 20X1 and Stockholder's Equity 20X2 20X1 Current assets: Current Liabilities: Cash and equivalents $140 $107 Accounts payable $213 $197 Accounts receivable 294 270 Notes payable 50 53 Inventories 269 280 Accrued expenses 223 205 Other 58 50 Total current liabilities $486 $455 Total current assets $761 $707 Long-term liabilities: Fixed assets: Deferred taxes $117 $104 Property, plant, and equipment $1,423 $1,274 Long-term debt 471 458 Less accumulated depreciation -550 -460 Total long-term liabilities $588 $562 Net property, plant, and equipment 873 814 Intangible assets and other 245 221 Stockholder's equity: Total fixed assets $1,118 $1,035 Preferred stock $39 $39 Common stock ($1 per value) 55 32 Capital surplus 347 327 Accumulated retained earnings 390 347 Less treasury stock -26 -20 Total equity $805 $725 Total assets $1,879 $1,742 Total liabilities and stockholder's equity $1,879 $1,742 (in $ millions) 20X2 and 20X1 Balance Sheet U.S. COMPOSITE CORPORATION
    • The Income Statement
      • Revenue – Expenses ≡ Income
      • Summarizes the company’s profitability during a time period
      • Categorization of expenses:
        • Operating: provide benefits only for the current period
          • Also included: depreciation (based on historical cost) and R&D
        • Financing: arising from non-equity financing (interest expenses)
        • Capital: generate benefits over multiple periods (depreciated)
    • (in $ millions) 20X2 Income Statement U.S. COMPOSITE CORPORATION Total operating revenues Cost of goods sold Selling, general, and administrative expenses Depreciation Operating income Other income Earnings before interest and taxes Interest expense Pretax income Taxes Current: $71 Deferred: $13 Net income Retained earnings: $43 Dividends: $43 the firm’s revenues and expenses from principal operations $2,262 - 1,655 - 327 - 90 $190 29 $219 - 49 $170 - 84 $86 all financing costs, such as interest expense the amount of taxes levied on income.
    • The Statement of Cash Flows
      • CF(firm) ≡ CF(debt) + CF(equity)
      • Reports how much cash is generated during a period
        • Indicates where the cash comes from and what the firm did with that cash
      • Cash flow statements are independent of accounting methods
        • Accounting rules have a second-order effect on cash flows through taxes
    • (in $ millions) 20X2 Financial Cash Flow U.S. COMPOSITE CORPORATION Cash Flow of the Firm Operating cash flow $238 (Earnings before interest and taxes plus depreciation minus taxes) Capital spending -173 (Acquisitions of fixed assets minus sales of fixed assets) Additions to net working capital -23 Total $42 Cash Flow of Investors in the Firm Debt $36 (Interest plus retirement of debt minus long-term debt financing) Equity 6 (Dividends plus repurchase of equity minus new equity financing) Total $42 Cash received from the firm’s assets must equal cash flows to the firm’s creditors & stockholders:
    • Financial Ratio Analysis
      • Trend / Cross-Sectional Analysis
      • Profitability Ratios
      • Activity Ratios
      • Liquidity Ratios
      • Financial Leverage Ratios
      • Market Value Ratios
    • Profitability Ratios
      • Net Return on Assets (ROA) = Net Income / Total Assets
      • Gross (Pretax) Return on Assets (ROA) = EBIT / Total Assets
      • Return on Equity (ROE) = Net Income / BV(equity)
      • Gross Profit Margin = EBIT / Sales
      • Net Profit Margin = Net Income / Sales
    • Activity Ratios
      • Measuring the efficiency of working capital management:
      • Total Asset Turnover = Sales / Total Assets
    • Liquidity Ratios
      • Measuring short-term liquidity:
      • Current Ratio = Current Assets Current Liability
    • Financial Leverage Ratios
      • Measuring the firm’s capacity to service its debt and long-term liquidity:
      • Debt-to-Capital Ratio = Debt / (Debt + Equity)
      • Debt-to-Equity Ratio = Debt / Equity
        • Can be based on BV or MV
        • Similarly: long-term debt ratios
    • Market Value Ratios
      • Price-to-Earnings Ratio = P S /EPS
        • Stock market price to earnings per share
      • Dividend Yield = Div/P S
        • Latest dividend to current stock price
      • Market-to-Book Value = MV/BV
        • Similarly: Market-to-Book Equity = ME/BE
      • Tobin's Q = MV / Replacement Value
    • Asset pricing
      • P = Σ t CF t /(1+R) t
      • Bond with coupon C and face value F (at T)
      • Stocks
      • Project
      • Company
    • Conclusions Если вам показалось, что я выразился слишком ясно, вы, должно быть, неверно меня поняли