Macro12

2. Macroeconomics
Lecture 12
Stock Markets and Personal
Finance
Chapter 10

3. Questions?

4. Valuation
Share Price: $160
Share Outstanding: 5.165 billion
Value ?
$826.4 billion

5. wolframalpha.com

6. Accounting Profit
Explicit Costs
Explicit + Implicit Costs
Economic Profit

7. Finance
Time
Risk

8. Finance
Time - t or n
Risk - r or i

9. Foundation Finance
Formula
(1 + r )
n
r = risk rate
n = time periods

10. FutureValue?
Future Value = Amount Today x Factor
Factor is the Growth Formula
(1 + r )
n
r = rate
n = time periods

11. FutureValue?
(1 + r )
n
r = 10% or 0.10
n = 5 years
(1 + 0.10)5
(1.10)5
1.61

12. FutureValue?
Future Value = Amount Today x Factor
$161 = $100 x 1.61
Future Value is compounding
Future Value is multiplying

13. PresentValue?
Present Value = Future Amount ÷ Factor
Present Value = $100 ÷ 1.61
$62.11 = $100 ÷ 1.61
Present Value is discounting
Present Value is dividing

14. Finance
Unknown - Present Value or Future Value?
Must know rate and number of periods
Compute Factor with formula
(1+r)n
If FV multiply
If PV divide

15. Present Future
x Factor ?
÷ Factor ?
Factor Formula = (1 + r )
n

16. Stock Market and
Personal Finance

17. Trades
Based on a difference of
opinion on value.
Price represents a point
between two opinions that
allows both parties to create
value

18. $
Buyer’s MaximumValue$100
Seller’s MinimumValue$80
Value
Range
Price

19. $
Buyer’s MaximumValue$80
Seller’s MinimumValue$100
NoValue Range
No Price discovery
No Trade

20. The buyer’s value must be
greater than the seller’s
value, or no value range is
created.Without a value
range, no price can be
discovered and no trade
will occur.

21. You should buy
today because
it will double in
value.
Then why are
you selling it?

22. For every buyer there must
be a seller
Why would they buy or sell?
Difference in values

23. Private information
becomes public information
when people act.

24. Dow Jones Industrial Average
DJIA
30 leading companies

25. S&P 500
Weighted by size
Better indicator
NASDAQ
3,000+ Stocks
smaller and
high tech
National Association of Securities
Dealers Automated Quotations

26. Dutch Tulip Mania
1635-1637
$37,500

27. Bubbles Pop

31. Leverage
$100
$95
$5
+5%
$105
$10
+100%
$100
$95
$5
-5%
$95
$0
-100%
$5
$10
$5
$0