Finance

Investment for future returns/ cash flow/

Future cash flow is always on uncertainty.

Investment may be same but return may be different.

Future returns may be different for each and every individual.

Finance – the sign of making money / managing the cash

Saving and Forecasting

Accounting - is all about historical trend

- Recording the economic transaction

- about the past

Finance – always think about future

Stock selling – think the future and sell the in-hand stock to get higher cash flow in future

Any company, they need money, they invest on assets.

Intangible assets – Goodwill, invest higher intangible assets for brand name, reputation,

Financial assets – invest money for future cash flow

Investment decision – purchasing of your real assets (eg. Invest of plan, equipment, machine,
process,….)

Even company is doing good and listed company, why still need to think to invest CAPEX?

Capital expenditure (CAPEX) – For future/higher cash flow

CAPEX invest needs for innovation, to expand the business

Cash flow return will be different depends on the nature of business. Some business needs to invest long
time to get back the cash flow. (eg. Construction business)
Financing decision – selling the financial assets (for expecting future cash flow)

For financial investment – money comes from shareholders, bank as a loan

Debt - based on the financial condition and can get from any person that we want

Equity - money from shareholders

Return earnings

Dividends -

Any company acquire another company always means Investment Decision.

Buy back – like stock market, buy own shares from the market supposed for reselling after stock is
growing up

Business Organization

Company is Legal Person/ Legal entity.

Sole Proprietorship - only one-person owner

- Unlimited liability (can give all properties)

Partnership - partnership agreement (roles and responsibilities)

- Lawyers, consultants, available

- Importance to choose the partners with having similar network or higher network
with higher properties.

Corporations - Limited liability

- Public limited companies

- Promoted
- Managed by professionals
- Can be registered in stock exchange
Financial managers

Financial state – balance sheet

Facebook product is the users. The users are the product of the social networking.

CFO - stand between outside investors and inside organizations/project/plan

- Deal with stock exchange

- CFO should know the expected rate of return

Expected rate of return – the thinking of individuals about expecting about the return in their
investment

Financial Institutions and Markets

Insurance company also provide loans to other company in other country.

Financial market - buy and sell financial assets

- Primary markets - first time of issue the share

 IPO – Initial Public Offering

- Secondary markets - share buy and sell by shareholders / first person(owner) is not
involved.
 OTC – Over-the-Counter

- Managing risk – invest in different companies, diverse the investment

Corporate goals

Maximize shareholder wealth

Maximize wealth – shareholders want the value of their shares to increase

Agency problems

Financial Statement - showing the company health and wealth

1. Balance sheet
2. Profit and Loss
3. Cash flow

Limited liabilities company has to publish financial statement to public.

Balance Sheet - includes

1. Asset

2. Liabilities

3. Equity

Assets = Liabilities + Equity

Assets and Liabilities has to match.

Retained earnings is any profit that we made. Retained earnings may be both profit and loss.

Profit and loss are considered upon the Equity.

Assets

1. Current Assets - Cash in hand, can be liquidate immediately

- also called marketable securities (it’s like a bond which can sell easily like stock)
- account receivables (debt that we can get from someone) (if account receivable is
higher, it means company sell the product with credit)
- Inventory (also need to compare with sales)
2. Fixed Assets (or) Non-current assets (or) Intangible assets - Plan, Properties and
Equipment, Land
 - cannot convert them into liquid assets/cash
- all assets if they take much time to convert into cash, it’s fixed assets
- fixed assets will be depreciated
- except Land (there’s no depreciation for land)
- two types of intangible asset (identifiable and unidentifiable)

Higher fixed assets go to higher depreciations.

Liabilities

Company needs to make the payment. Current and Non-current liabilities.

1. Current Liabilities - like salary that need to pay every month, bank interest

- have to pay very short amount of period and regular basis

- very important to manage

- have to make payment based on agreement

- Notes paper is like cheque (committed to give the payment for future
date)

Account payable is increased means inventory is increased.

2. Non-current Liabilities - have to pay after taking long time (after 1 year)
- no need to pay immediately
- loan, bond
- non-current can change to current

Equity

The capital money that belongs to the shareholders.

Any profit or loss concerned with shareholders equity.

Book Value - based on the profit, investment that we have done (Final value of the company)

Income Statement - any daily expense, cost, tax

- everything has to record in income statement even the salary of the owner
- depreciation also treats as expenses

Market Value
Market value is always higher than book value.

Market value is the price that anyone wants to buy with this amount.

Market value shows whether company is good or bad. It shows real value of the company in the market.

Market Capitalization

Taxes

Ratio

Leverage ratios - debt of the company

Liquidity ratios -

Interest coverage ratio - If it is higher, the return will be increased. The lander will be happy.

- Interest coverage ratio is higher means it’s better for the company.

PE Ratio – Price to Earning Ratio

Week 3

Time Value of Money - current value and future value of cash flows

- in finance, value of money will increase for future

- Invest current value to get the better cash flow for future

Risk free return – If we will get the 100% money from our investment. No risk of return on cash flow

Like invest in government bank

Risk return – there’s risk like bank crash – Like invest in public bank

If interest is higher mean more risk.

Simple interest – same interest for every year

Compound interest – interest on interest

All the future cash flow or future value has to compare with discount rate.

Present Value = Future Value / (1 + Return) n

N = number of years

In finance, we cannot eliminate the risk, only can minimize the risk.

High return has high risk. Low return will be low risk.
Annuity – pay amount of money every year

Perpetuity – same interest but received on infinity time

Types of Annuity

1. Fixed – get the committed amount whatever happens

2. Variable – variable return is higher than the fixed (vary based on the
market)
3. Life Annuity – like Life insurance

Annuity Due – like installment

Annuity Due is higher than ordinary annuity.

Inflation – because of limited resources

Inflation is nothing but increase in the price.

Reduce the purchasing power of money.

Higher inflation – interest will be high

Deflation – decrease in the price

If inflation is more than return, it means loss.

Stock market are going to give higher return than inflation.

Consumer Price Index (CPI) –

Nominal Rate (or) Nominal Interest Rate – monthly interest

Real Rate (or) Real Interest Rate – Nominal Rate – Inflation Rate
If inflation rate decrease (or) nominal rate increase, real rate will be increase.

Effective annual interest rate – is compounding factor

Final interest rate which is higher when money is invest on compound month by month.

Corporate bond – issued by corporate company

Bond can be sold with premium or discount.

Characteristics for Bonds

1. Face value – the value which the bond was issued. Very first value of
bond. Same value of the issue bond. Also principle amount

2. Maturity – the exact time frame of the bond that need pay on that date

If assume 5 years – today – 9th March 2019

Maturity will be – 9th March 2024

3. Coupon – is the interest in terms of bond

4. Bond Covenant – agreement between bondholder and issuer/ borrower

and lander

Types of Bonds

1. Coupon bond
2. Zero coupon bond – won’t get interest in regular basis

Can buy with discount

3. Callable bond – want to pay before maturity is called callable, issuer has a right to pay back the
money
4. Puttable bond – opposite of callable, investor directly go and give the bond back, investor has a
right to give bond

Yield – the return

Yield and coupon are not same.

Yield and coupon can be same only when the price is same in the market.
Yield will be different based on the market price.

Loan is cheaper than bond.

Risk of the bond is interest rate.

Current Yield = Coupon / Market Price

Yield Till Maturity (YTM) – compounding factor

Calculate the future value.

124 bps – basis points (means 1.24 percent)]

As a investor will think about

- Yield and return

- Risk
-
-

Week 4

Risk Rating - rating for the bonds or stocks

S&P AAA to C+

Moody Aaa to D

Risk Rating is high, yield will be low.

All the bonds has to be rated.

Stock - is share.

Issue stock means finding investment and they want equity/participation.

Stock – don’t have to pay back the money

To make the return from stock - 1. company will make provide (Dividends)

2. Sell this share/stock with higher rate in the stock market

(Capital Gain)

Common Stock - pays a variable dividend and gives the holder voting rights

- Different dividends

Proxy - give the authority

- Transfer his/her voting rights

Preferred stock - fixed dividend but has no voting rights

- kind of fixed annuity

Preferred stock is less risky than common stock.

Dividends on the preferred stock may be lower than common stock, if the company is thriving over time.

Types of Stock Investments

- Income stocks – company gives regular basis, earn regular basis, earn it and
distribute it
- Growth stocks – reinvesting from earning to expand, don’t distribute the dividend.
As investors, they do capital gain to make money from their stocks.
- Emerging stocks – like new company start and it have future. Like technology
company
- Blue chip stocks – company having huge capital gain or huge market capitalization.
Like Microsoft, Apple, …
- Defensive stocks – whatever happens they give regular return. Like telecom
companies
- Cyclical stocks – company which is based on situation in any cycle. Sometimes good,
sometimes bad.
Income and Growth stocks are common.

Valuing Stock

Par Value – assigned dollar value given to each share of stock.

Market Value – price for which the stock is bought and sold in the marketplace. Nothing what price in
the selling in the market.

IPO (Initial Public Offering) – any starting business, normally they issue IPU

FPO (Further Public Offering) -

Stock Price

Factors that affect price include:

1. The company
2. Interest rates – impact on the investment decision
3. The market
4. Earnings per share

Return on Investment (RoI)

Bull and Bear Markets

Bull Market – rate is going very high. Means stock price is going high

Bear Market – means stock price is going low

Valuation of Different Types of Stocks

1. Zero Growth – no growth in dividends. Same rate in dividends and may happen income stock.
Div1=Div2=Div3=…….
Perpetuity P = Div1/(1+R)1 + Div2/(1+R)2 + Div3/(1+R)3 + ….

P = Div/R
 2. Constant Growth –

Div1 (future dividend) = Div0 (1+g)

P = Div1/(G-R)

If we buy stock, we have to buy stock at the market value. Not book value.

Stock Valuation

Expected return = r = Div1+P1-P0 / P0

Price today = P0 = Div1 + P1 / 1+r

Dividend Discount Model (DDM)

DDM with no growth - P0 = Div1 / r