Basic Financial Management <ul><li>Importance of Financial Intelligence </li></ul><ul><li>Spreadsheet Financial Functions ...
Financial Intelligence <ul><li>Making more money will not solve your problem if money management is your problem. </li></u...
Financial Intelligence <ul><li>“ Being Rich” versus “Being Wealthy” </li></ul><ul><li>Being Rich  is about how much money ...
Financial Intelligence <ul><li>When money works for you,  every dollar is an employee.  Each dollar works to bring you eve...
Financial Intelligence Income  Statement Balance Sheet Income Expenses (Payments) Assets (Own) Liabilities (Debt) Taxes, m...
How The Wealthy Live   They take the income of the poor and middle class, and buy assets that produce more income Income  ...
Rich Dad’s  Cash Flow Quadrant Employee You have a job. Someone else is the boss. Security  before money . Self-Employed Y...
Basic Spreadsheet Financial Functions
<ul><li>A bond with a face value of $1,000 carries a coupon rate of 6.6%.  The bond has 10 years till maturity and has a y...
<ul><li>Peter saves 3k each month. Annual return is 8%  APR compounded monthly . How much will Peter’s saving be 30 years ...
<ul><li>You have decided to buy a house for $312,000. You have saved enough money to make a 10% down payment, but you will...
<ul><li>Your decide to loan your little sister $2,000 so she can buy a car. You require her to pay you back over 30 months...
<ul><li>Has 1M at retirement, annual return is 8%  APR compounded monthly , withdraw 8k each month, how long will the savi...
Investment Risk and Return
What is investment risk? <ul><li>Typically, investment returns are not known with certainty. </li></ul><ul><li>Investment ...
Probability distribution Rate of return (%) 50 15 0 -20 Stock X Stock Y <ul><li>Which stock is riskier?  Why? </li></ul>
<ul><li>Standard deviation  measures the  stand-alone  risk of an investment. </li></ul><ul><li>The larger the standard de...
Expected Return versus Risk 13.4 1.7 Repo Men  0.0 8.0 T-bills 18.8 13.8 Am. Foam 15.3 15.0 Market 20.0% 17.4% Alta Inds. ...
Return vs. Risk (Std. Dev.):  Which investment is best?
Portfolio Return, r p r p  is a weighted average: r p  = 0.5(17.4%) + 0.5(1.7%) =  9.6% . r p  is between r Alta  and r Re...
<ul><li> p  = ((3.0 - 9.6) 2 0.10 + (6.4 - 9.6) 2 0.20 +    (10.0 - 9.6) 2 0.40 + (12.5 - 9.6) 2 0.20    + (15.0 - 9.6) 2...
Two-Stock Portfolios <ul><li>Two stocks can be combined to form a riskless portfolio if    = -1.0. </li></ul><ul><li>Risk...
Portfolio 0 15 Prob. 2 1  1    35% ;   portfolio    20%. Return
Risk Relative to the Market <ul><li>Run a  regression  with returns on the stock in question plotted on the Y axis and ret...
Calculating Beta for PQU r PQU = 0.83r M + 0.03 R 2 = 0.36 -40% -20% 0% 20% 40% -40% -20% 0% 20% 40% r M r KWE
<ul><li>If b = 1.0, stock has average risk. </li></ul><ul><li>If b > 1.0, stock is riskier than average. </li></ul><ul><li...
Finding Beta Estimates on the Web <ul><li>Go to www.thomsonfn.com. </li></ul><ul><li>Enter the ticker symbol for a “Stock ...
Use the SML to calculate each alternative’s required return. <ul><li>The Security Market Line (SML) is part of the Capital...
Required Rates of Return r Alta   =  8.0% + (7%)(1.29) =  8.0% + 9.0% =  17.0%. r M =  8.0% + (7%)(1.00) =  15.0%. r Am. F...
Expected versus Required Returns ^ Overvalued 2.0 1.7 Repo Fairly valued 8.0 8.0 T-bills Undervalued 12.8 13.8 Am. F. Fair...
Stocks and Their Valuation
<ul><li>Dividend growth model </li></ul><ul><li>Using the multiples of comparable firms </li></ul><ul><li>Free cash flow m...
One whose dividends are expected to grow forever at a constant rate, g. Stock Value = PV of Dividends What is a constant g...
For a constant growth stock, If g is constant, then:
What happens if g > r s ? <ul><li>If r s < g, get negative stock price, which is nonsense. </li></ul><ul><li>We can’t use ...
Assume beta =  1.2 , r RF  =  7% , and RP M  =  5% .  What is the required rate of return on the firm’s stock? r s = r RF ...
What’s the stock’s market value?  D 0  = 2.00, r s  = 13%, g = 6%. Constant growth model: =  =  $30.29. 0.13 - 0.06 $2.12 ...
What is the stock’s market value one year from now, P 1 ? <ul><li>D 1  will have been paid, so expected dividends are D 2 ...
<ul><li>The current stock price is  $54.11. </li></ul><ul><li>The PV of dividends beyond year 3 is  $46.11  (P 3  discount...
Why are stock prices volatile? D 1  = $2, r s  = 10%, and g = 5%: P 0  = D 1  / (r s -g) = $2 / (0.10 - 0.05) =  $40 . Wha...
In equilibrium, expected returns must equal required returns: r s  = D 1 /P 0  + g = r s  = r RF  + (r M  - r RF )b. ^
What’s the Efficient Market Hypothesis (EMH)? Securities are normally in equilibrium and are “fairly priced.”  One cannot ...
Upcoming SlideShare
Loading in...5
×

Finance 101

1,644

Published on

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
1,644
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
30
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide
  • 1
  • 1
  • 1
  • 2
  • 3
  • 13
  • 14
  • 18
  • 21
  • 22
  • 26
  • 35
  • 39
  • 43
  • 44
  • 45
  • 1
  • 6
  • 7
  • 9
  • 12
  • 13
  • 25
  • 28
  • Finance 101

    1. 1. Basic Financial Management <ul><li>Importance of Financial Intelligence </li></ul><ul><li>Spreadsheet Financial Functions </li></ul><ul><li>Investment Risk and Portfolio </li></ul><ul><li>Stock Valuation </li></ul>
    2. 2. Financial Intelligence <ul><li>Making more money will not solve your problem if money management is your problem. </li></ul><ul><li> 30 Year Investment Result </li></ul>
    3. 3. Financial Intelligence <ul><li>“ Being Rich” versus “Being Wealthy” </li></ul><ul><li>Being Rich is about how much money you possess in a specific moment in time. </li></ul><ul><li>Being Wealthy is about . . . </li></ul><ul><ul><li>how much money you keep </li></ul></ul><ul><ul><li>how hard it works for you </li></ul></ul><ul><ul><li>how much is left for future generations (who know what to do with it) </li></ul></ul><ul><li>Being Wealthy is about exploding your Passive Income . (How long you can survive without ever having to go to work?) </li></ul>
    4. 4. Financial Intelligence <ul><li>When money works for you, every dollar is an employee. Each dollar works to bring you even more dollars while you’re asleep. </li></ul><ul><ul><li>Passive Income: Interest, dividends, real estate income, royalties, residuals, annuities </li></ul></ul><ul><li>The key is “What investments do you own that will bring you passive income?” </li></ul><ul><li>Buy assets first, luxuries last. </li></ul><ul><li>Ask “how can I afford it?” This stimulates your creativity. </li></ul>
    5. 5. Financial Intelligence Income Statement Balance Sheet Income Expenses (Payments) Assets (Own) Liabilities (Debt) Taxes, mortgage/rent, cards, car, food, fun, rent, clothes, child care, insurance, medical Paycheck, dividends, interest, rents, royalties, profits, advances Mortgage, car loan, credit cards, school loans Stocks, bonds, notes, real estate, business, intellectual property
    6. 6. How The Wealthy Live They take the income of the poor and middle class, and buy assets that produce more income Income Statement Balance Sheet Income Expenses Assets Liabilities
    7. 7. Rich Dad’s Cash Flow Quadrant Employee You have a job. Someone else is the boss. Security before money . Self-Employed You own a job. Loner/”boss.” Perfectionists. Small bus. Owners: Drs., restaurateurs. Independence before money. Developer You own a system that others operate. Coordinator. Delegator. Franchiser. Use other people's time and money. Investor Your money works for you. Make money with money. Other’s liabilities are your assets.
    8. 8. Basic Spreadsheet Financial Functions
    9. 9. <ul><li>A bond with a face value of $1,000 carries a coupon rate of 6.6%. The bond has 10 years till maturity and has a yield-to-maturity (YTM) of 7.6%. The bond pays coupons on a semiannual basis . What is market price? </li></ul><ul><ul><li>= PV(Rate, Nper, Pmt, FV) </li></ul></ul><ul><ul><li>= PV(0.076/2,20,33,1000)=$930.83 </li></ul></ul>Present Value Solution
    10. 10. <ul><li>Peter saves 3k each month. Annual return is 8% APR compounded monthly . How much will Peter’s saving be 30 years from now. </li></ul><ul><ul><li>= FV(Rate, Nper, Pmt, PV) </li></ul></ul><ul><ul><li>= FV(0.08/12, 360, -3000, 0) = $4.47 M </li></ul></ul>Future Value Solution
    11. 11. <ul><li>You have decided to buy a house for $312,000. You have saved enough money to make a 10% down payment, but you will need to borrow the remainder. You arrange for a 30-year mortgage (monthly payments) with a local bank at a stated rate of 6.3% APR compounded monthly. Assume that the first payment will be made one month from now </li></ul><ul><ul><li>PMT(0.063/12,360,280800,0)=$1,738.08 </li></ul></ul>Payment Function
    12. 12. <ul><li>Your decide to loan your little sister $2,000 so she can buy a car. You require her to pay you back over 30 months, making payments of $85.00 at the end of each month. </li></ul><ul><ul><li>= RATE(Nper, Pmt, PV, FV) </li></ul></ul><ul><ul><li>interest rate per month=RATE(30,-85,2000,0,0)=1.645% </li></ul></ul><ul><ul><li>Annual rate: (1+1.645%)^12-1=21.6% </li></ul></ul>Interest Rate Function
    13. 13. <ul><li>Has 1M at retirement, annual return is 8% APR compounded monthly , withdraw 8k each month, how long will the saving last. </li></ul><ul><ul><li>= NPER(Rate, Pmt, PV, FV) </li></ul></ul><ul><ul><li>= NPER(0.08/12, 8000, -1000000, 0) = 270 month=23 years </li></ul></ul>NPER Solution
    14. 14. Investment Risk and Return
    15. 15. What is investment risk? <ul><li>Typically, investment returns are not known with certainty. </li></ul><ul><li>Investment risk pertains to the probability of earning a return less than that expected. </li></ul><ul><li>The greater the chance of a return far below the expected return, the greater the risk. </li></ul>
    16. 16. Probability distribution Rate of return (%) 50 15 0 -20 Stock X Stock Y <ul><li>Which stock is riskier? Why? </li></ul>
    17. 17. <ul><li>Standard deviation measures the stand-alone risk of an investment. </li></ul><ul><li>The larger the standard deviation, the higher the probability that returns will be far below the expected return. </li></ul><ul><li>Coefficient of variation is an alternative measure of stand-alone risk. </li></ul>
    18. 18. Expected Return versus Risk 13.4 1.7 Repo Men 0.0 8.0 T-bills 18.8 13.8 Am. Foam 15.3 15.0 Market 20.0% 17.4% Alta Inds. Risk,  return Security Expected
    19. 19. Return vs. Risk (Std. Dev.): Which investment is best?
    20. 20. Portfolio Return, r p r p is a weighted average: r p = 0.5(17.4%) + 0.5(1.7%) = 9.6% . r p is between r Alta and r Repo . ^ ^ ^ ^ ^ ^ ^ ^ r p =   w i r i  n i = 1
    21. 21. <ul><li> p = ((3.0 - 9.6) 2 0.10 + (6.4 - 9.6) 2 0.20 + (10.0 - 9.6) 2 0.40 + (12.5 - 9.6) 2 0.20 + (15.0 - 9.6) 2 0.10) 1/2 = 3.3%. </li></ul><ul><li> p is much lower than: </li></ul><ul><ul><li>either stock (20% and 13.4%). </li></ul></ul><ul><ul><li>average of Alta and Repo (16.7%). </li></ul></ul><ul><li>The portfolio provides average return but much lower risk. The key here is negative correlation. </li></ul>
    22. 22. Two-Stock Portfolios <ul><li>Two stocks can be combined to form a riskless portfolio if  = -1.0. </li></ul><ul><li>Risk is not reduced at all if the two stocks have  = +1.0. </li></ul><ul><li>In general, stocks have   0.65, so risk is lowered but not eliminated. </li></ul><ul><li>Investors typically hold many stocks. </li></ul><ul><li>What happens when  = 0? </li></ul>
    23. 23. Portfolio 0 15 Prob. 2 1  1  35% ;  portfolio  20%. Return
    24. 24. Risk Relative to the Market <ul><li>Run a regression with returns on the stock in question plotted on the Y axis and returns on the market portfolio plotted on the X axis. </li></ul><ul><li>The slope of the regression line, which measures relative volatility, is defined as the stock’s beta coefficient , or b . </li></ul>
    25. 25. Calculating Beta for PQU r PQU = 0.83r M + 0.03 R 2 = 0.36 -40% -20% 0% 20% 40% -40% -20% 0% 20% 40% r M r KWE
    26. 26. <ul><li>If b = 1.0, stock has average risk. </li></ul><ul><li>If b > 1.0, stock is riskier than average. </li></ul><ul><li>If b < 1.0, stock is less risky than average. </li></ul><ul><li>Most stocks have betas in the range of 0.5 to 1.5. </li></ul><ul><li>Can a stock have a negative beta? </li></ul>How is beta interpreted?
    27. 27. Finding Beta Estimates on the Web <ul><li>Go to www.thomsonfn.com. </li></ul><ul><li>Enter the ticker symbol for a “Stock Quote”, such as IBM or Dell, then click GO. </li></ul><ul><li>When the quote comes up, select Company Earnings, then GO. </li></ul>
    28. 28. Use the SML to calculate each alternative’s required return. <ul><li>The Security Market Line (SML) is part of the Capital Asset Pricing Model (CAPM). </li></ul><ul><li>SML: r i = r RF + (RP M )b i . </li></ul><ul><li>Assume r RF = 8%; r M = r M = 15%. </li></ul><ul><li>RP M = (r M - r RF ) = 15% - 8% = 7%. </li></ul>^
    29. 29. Required Rates of Return r Alta = 8.0% + (7%)(1.29) = 8.0% + 9.0% = 17.0%. r M = 8.0% + (7%)(1.00) = 15.0%. r Am. F. = 8.0% + (7%)(0.68) = 12.8%. r T-bill = 8.0% + (7%)(0.00) = 8.0%. r Repo = 8.0% + (7%)(-0.86) = 2.0%.
    30. 30. Expected versus Required Returns ^ Overvalued 2.0 1.7 Repo Fairly valued 8.0 8.0 T-bills Undervalued 12.8 13.8 Am. F. Fairly valued 15.0 15.0 Market Undervalued 17.0% 17.4% Alta r r
    31. 31. Stocks and Their Valuation
    32. 32. <ul><li>Dividend growth model </li></ul><ul><li>Using the multiples of comparable firms </li></ul><ul><li>Free cash flow method </li></ul>Different Approaches for Valuing Common Stock
    33. 33. One whose dividends are expected to grow forever at a constant rate, g. Stock Value = PV of Dividends What is a constant growth stock?
    34. 34. For a constant growth stock, If g is constant, then:
    35. 35. What happens if g > r s ? <ul><li>If r s < g, get negative stock price, which is nonsense. </li></ul><ul><li>We can’t use model unless (1) g  r s and (2) g is expected to be constant forever. Because g must be a long-term growth rate, it cannot be  r s . </li></ul>
    36. 36. Assume beta = 1.2 , r RF = 7% , and RP M = 5% . What is the required rate of return on the firm’s stock? r s = r RF + (RP M )b Firm = 7% + (5%) (1.2) = 13% . Use the SML to calculate r s :
    37. 37. What’s the stock’s market value? D 0 = 2.00, r s = 13%, g = 6%. Constant growth model: = = $30.29. 0.13 - 0.06 $2.12 $2.12 0.07
    38. 38. What is the stock’s market value one year from now, P 1 ? <ul><li>D 1 will have been paid, so expected dividends are D 2 , D 3 , D 4 and so on. Thus, </li></ul>^
    39. 39. <ul><li>The current stock price is $54.11. </li></ul><ul><li>The PV of dividends beyond year 3 is $46.11 (P 3 discounted back to t = 0). </li></ul><ul><li>The percentage of stock price due to “long-term” dividends is: </li></ul>Is the stock price based on short-term growth? ^ = 85.2%. $46.11 $54.11
    40. 40. Why are stock prices volatile? D 1 = $2, r s = 10%, and g = 5%: P 0 = D 1 / (r s -g) = $2 / (0.10 - 0.05) = $40 . What if r s or g change? g g g r s 4% 5% 6% 9% 40.00 50.00 66.67 10% 33.33 40.00 50.00 11% 28.57 33.33 40.00
    41. 41. In equilibrium, expected returns must equal required returns: r s = D 1 /P 0 + g = r s = r RF + (r M - r RF )b. ^
    42. 42. What’s the Efficient Market Hypothesis (EMH)? Securities are normally in equilibrium and are “fairly priced.” One cannot “beat the market” except through good luck or inside information.
    1. A particular slide catching your eye?

      Clipping is a handy way to collect important slides you want to go back to later.

    ×