oe meer aEEIT Us matters. a . Session -4 © Wha is Finance ? rt ® science Of managing money. B Whot ts corporate Finance ? | — Ig not just an oxtencion of accounting Corporati. Finance is forward Dooking — talks about cash Plow Definitions ~ Planning , raising controlling & administering funds used tn corpoxdle business Getivity + CF is aligned with gach segment of business functions (monkeling , Accounting, HR «) Financial View of a firm's balanco sheot oe Liabilities Deployed Growth Debt Equity. > One of the dinaction is Cash, if company grows excess cash @ it isa Poem ~% Grrowth Company — Cash grows continuously Mackek Value +0 Book Value — A growing Arend {in Ahis Seatio is a sign off growth}“ Covporale. Fira hice: 8 Big, Picture =]... -—_ rr Tres enl Firming Divider Liquidity Decisions Decisions : Decisions oe Decisions (Hurdle) Huddle sate << Rate of Retwen | for investment to be feasible (Financing ) : Rate of raising capitoh > Rake of Rekwin, project should not be executed , Risk Rotwen Analisis. ¢- Coeficient of variation is used as a paramdn. Higher value > the project is rnone Sucreakive @ Project Financing is costdien than Coxporae Financing Twestenent 1) What business te Growth rete is appropnidte. 2) What assets to acquire ? Financing © optimal. mie of debt 2 equily Divides. s- © Growth Compony, | Th opportunity to doploy cash is mot there , it $I don't declaw dividends & inctead redaploy the genated cash ould be qhento investors | Liquidity .- © Level Trventory G Debtors comercion cycle should be smal © Minimize blockage of funds in CA without compromising, profitability@ By increasing show prico , maxtmization of wealth for investors. Eq: by back einis Ff MONS DY forelen nels ha hanes = Tinwe Valu) _ of mony or) 7 Retuan ~ (corporte Finonee Dexivative arring mangement) Primary Maxket Players stor 2 Gan Side ~<—_— Ines = TInst- Forms of Business * Sapien Partnerships Oe, (Focus in nat) peed noe (Risk voyhigh) Visited Liability (sc, Ple , Lic) 4 Toingt Steck, Cnpnypowers once Coxporate Organogram fos L —_—-- Vehaisman of Bead mae ico LU ie | QM L beti CFO GM Manteig Production Goal of Financial Management Aja] 2[3 | 4 [5 B A ||o| 20 | 30 | 30 jlo B Jo 30| 5 | 5 [o] ~~ Bete : OS Cash in first year Can be Fudeployed « “Time vaLue OF Money Why wonay has time value ? | — Due to inflation seisks © Cowage — Tatrincie Value, Prosent value , Future value , Annuity| Bond & Equity Valuction 5 — ae Cost of Copital ; - Asset. 4 Net Bebt Equity of etna of. of Equily acest of eb Tx cag ot Equity 7, Se Cost of Capital. @ Factors affecting the Stack Preece ~ Dividends — Taxes Finance Life Cycle of Business Maturityete Session. 2 30|9]204g a Time VALUE OF Money | Asse — which gives you a series of Cash Flow | oY. | Fu $100 — 7 Value < ¢ FV= OVX Faluy Me a : , =PVx (Lenn Uy — Fve py (it? Pye py Myeal Evia (ery «pug (i Prseot val 5 Fado) L Fulure Value Annuity (Fva) Discounig fay ; ot 2 % 4 5 Twestment at the end of Poriod bh 49 100 100 400 too bod l L do0(1n)* foolte)? sun(e? toll) 400 ee Sum= Future Value of Annuity Due (Fvap) ie Thestren ad the biginring of Pood eo ee tm ve Y tape Aol) 4oo(ver) Aoo(tea)®> e0(ve Sum= FVAD | |Fvao > vAICOM he em ho ecm Prosent Value of Annuity (PvA) Rot tH ot 2 3 4 5 too 100 400 209 too aoe PVA = oo fe + Me + £00. + too +00 Ce Ce? Cnn “Gees (vse veut of Povity Due (PAD) Qs 2 Yr go tay ——_ } FORMULAES ye 18th $50,000,000 in ne 4 Fv pv (40>) a) soMmx 4d = 50 Mn x 05158 =25+79 My Pv= Ev (tone)? (rar a tel b) PV amount = Exhibit 4 factor X FV amounts Fua = PMT ( ¥ PV amout == BY. amounts Puny = PMT fev (ve) Exhibit 4 Pactore ; 4 ¥ 25:79 Mn = FV amounts Present ee | 2+690 PVA = put (ents, | ¥ (i) 2 | FV omouwts = )95873¢0 Pvap = rer (tt en | + buen Ques ty s- ao. 2 8 12 Future Value Amounts Savinge of th Ra meet 2 . mgeateend yes a Nove Ch + 2 cn he 67}. Gt Osh flow ne42. = Yo,000 x BVIFA = Yo, 000 X9°384 D> $ 335360orang 'e @) bot > op Lagan 4800 = 8,000 X PVIFA { = 48,000 x 71.360 = $ 353280 2 2 3 4 5 6 18 9 0 yy () H+—+—+_ +++ i ane O Sino 0 ie 30,00. 2 Co , v = 50,000 X 4.9/7 + 30,000 X 4.917 S =a = $2use50 + 4 447540 x0-7050 ae = $ 34984y.5 Disease Qucet:- a) Equipment cost = $45,000 Opn 4 Thowase in Sales (Annually) = £ 8000 Total Procent valu = R000 X 5.747 = 4 45976 Mokes sense to PUXsUL as saving of 976 Alber x ~ 45,000 Boor geoo $ 2 ) og gg aa $+ Gee Qi» Bow G00 g,t00 : Lt Tax Saings Sia0 Shen 3680 3600 3600 (Dee-to Deprdaia) So Pest Value = YB00X 5147 + 3é00 X 3.993 =$ 275856 + $ 44ua7y.g = ¢ 41960Sa ANI VE T Nat worthwhile to buy eq tulpmant Pandata nna =46Mn a nof8220,000 &s ee = | Ones 3 Yo Soppunt ns + 4o ~~ $229,000... «$220,000 $ 220,000 / i Dep. ObMn . — = O6Ma $ 0:6 Mn / Ct 04 Mn -- 01 Mn vee Chen 0-24 on 0-24 Mn : | Tarsovingt-97-a0 = | ' Net Cash Flow =4272,000 — - - 272,000 fo + Casein THE Afar Tox = COS) Present Value ———t-9-47- we Kote ~ = $4e25120 Tox Saving = (220,000 — 100000) X 0-6 = T2000- Dep: Tax Saving = 240,000 Total Saving = $812, 000 Crescent Value = 4 312,000 X 6- Oo = 4 2099505 | 4 u Less than cat , $0 doesn't make sense to invest9\10| 2019 Session-3, { maa The Buy vs Rent Decision © Buying — Forced soving weg Dovwn fat ~ 20% eon 1 eae fan AS) TE * [as] ——? Moxkgage Payment Ceurdunt Case) Due Diligence (Verification) Tdian Finvincing Scanaxio Mortgage : ty Dron fomet-20). | POE IS =~ aoe Sw | Emr Due Diligence Us} Contda Scenario Armual Tintorost Rade (AiR) = yy, Annuol, Effective Thtowst Rate (AeIR) . (t+ x \ ahi Monthly ECfeckive Trtowst Rute (MEIR) = (t+ xyMay Qa A—* Compounding frequencyaN Fo) midst for. cuwent Cae — \EIR = (i © an 200 Mem = (44 yo \%2 ; 4] vi Seenartios : After 2 5 10 yrs 0 Fixed Price @ = | Sov. Original toy. 4 Ore 2 24 21. OL 5 Sh By: Purchase Price - 600,000 Down Payment: @) 20. - 420,000 Deed Tox @ Bf. = 28,000 Othoe closing Expenses ~ 2,000 Total closing Expenses ~ 440,000 Mortage Tenure (Yrs) - 25 Frequency in Year -12 Remaining Months ¢ Payment — 300 Mostageye Amount - 480,000 Annual Quoted IR — 0:04 if MITER - (a ou) “a2 -s| = 1003306 Condo Fees (Monthly) = 1055 Propody Tax (Monthly) = 3oba © 4 To make valia pant Maintenance Expenses (Monthly) = 50 as riage Total Momthly Payment (Mortgage) = -pmit (5 no of periods , Pv, 0,0) = -OMT (ay, 300, 420000 10/0) Total Rayment (Tncluding other Expene’)= 399,99 = 2524.99 Monthly Rent = 3000 (Monthly) Additional Payment = 3929.90~ 3000 = 924.99 (Monthiy) Opporctunity Loss = heo.eo | (Monthy) Nek Cash Outflow = 4392.72 | | 23 - 15 | on P 2 i \2 * ‘ Principle Outstanding 216 = 240 gy =v (% » potiod dumaining monthly payment ,0,0°) = 456609 yi Ta5g_ 242109 Scenario | Atte. 2 ys 5 ye Lo ye | SP 600,000 600,000 600,000 = | ee 30,000 — 30,000 | Other Expenses 2000 2000 a | Preincipa.Outstntg 456601 417859 B42109 Nek Procoods tanga {5014) 225 898Down Payment — Lu ,o00 140,000 440,000 Opportunity Loss 34727.42 9225-04 2047229 2-FV (rc, investment, Peried 7 Net Cash Duitlw 9% 9) Net Futute Value - 63337 -g214g (net Procoede ~ Down Payment = Opportunity loss) —‘Adeean # Not a profitable investment , instead she is making a Doss Net Pre Va —s@5r3 | -67365 _ —79970 =-PU( i, No OP periods yf (> ae’ W501) Senaio 2 t- Lose in this case also Stonario 3 1- Sconrio 4 3- She Stats making profit for Syrs, Soyrs Caseha SL i —— 16|10] 2019 Bony _ VALUATION Bont vaLunTion, —Fixed Theome secusily | Face Value ; Coupon —» Ey:- 407+ of FV aes (@ Fue valu) oe | 1oo 100 ae t= yrs i PV of Bond, — 400 Aso Aton | (tos) — (4+005)" (440005)? || | = too Loo | too 100 + 1v00 | (tror05) Chr 0.05)" “Cigp.ogy8 (Go.08)8 1 = 1436.12 & Move than FU, sold at a On | = Coupon Value x f ag 4 \| (oy fet ae | (ity)? | Mot to = Coupon Valuy z Cee Ev iy (aryl City)? Mak we ‘le Equivalent 4 Exedl Formula :- PRICE (Seite ent , ity 1 hale, Yield, Re: ption) i bond ie cold ot value dower than FU, sold at diceount eesuman tenn " 3 z PemOSLas £ TEMMOTY 30% local sone More sate of interest is lower than coupon hale, go bond i¢ sold at premio # if rete of interest is higher than coupon rate, bond ts sold at discount Gam) = (tee) (ri) dens Lanta la ret i ig es ‘ . 1 \ a 4— Fisher's Theory. of Real Tnterest ovina Gualnde Rick Premium Rae. Trtows of, Raionanyy Rate Trtexect — *P¢cdations He vee IR RP dees] Risk Free Rat. Exeal Code +o Calculate Yied s- Yield (settlement, maturity ,Xob, P¥s sedamption , Prequengy, basic) Diffeunt Bonds in Market :- 1) Zero Coupon 2) Tnternational Bonds (To raise. money in 3) Kangaroo Bonds fora qn market) Redemption = Face value ok the ond of the pordod| Bop Rae | \Coc ® > Seesion- 5 AUBABA's BOND’ DILEMMA Vision © To do business easily any whore. 2h. @ To be on escental, Puctrer do all the bousiness people @ t build a Company that Qacts fon 102 years (* SPAN acragg B28, B2¢, C2c Bap, Boe, C2c oe ee , Domestic . Z . 7 XN 7 \ Buyers Jee Sdhos | ~ (eke SS a > 7 ah | Alibaba is facilitating the trede by providing the Linkages a Atigned the vision with the business model mules| 2 Se ser 308 ee ie Why Us 2 Why China 9 @ Low Tntorest Environment Q Undervalued Yuan over velued + @ 4 Proceeds Quantitative Easing :- Govt buys Ahe toxic assets & ‘infuces the cash to boost the economy. ~The jostriction for fluctuation exchange tuailes within | a cortain band fixed by goveenments Primary Morket Bonks Maxkel, Managed Foal Exchange ¢ Syndicated Loans - ee eee ot Corporation Lead Bank. -— [es } Does Due ign E constituted difterant. cununcies 4 Bonds are cheaper. than syndicated loans due. +o P&eed. teala of intowest offered ~Consordium Yoane ‘involves bank of same Currency Yiad = Rick Pao Seale + Risk Premium 6 ee Risk aT - @ Financial Risk, vw. @ Governance Risk, o @ Country Kise | eZ“ " Howe y ©) Fonex Risk Vv © Clientele Risk Z # DUAL SHARE STRUCTURE Shaw A AShare ; 4 vote © Dispropontionale share holding. structure Bond Life Cydle Thvectment Bank Alibaba. Gates — | icin | [ity | Primary Market Secondo. Market Natu Bond Trdenti i " oh sig : Standard Recticked | Provision , © Provision —Mointafn accounts = Maintain Liquidity, — Submit accounts uartuely basis © = Should not coll rectevables ~ Pay toy & other labile ial = Restriction on ‘aesets: purchaced — Maintain agect purchase, through = Collatucal needs to be defined bonds in Pope order Clearlyrin precad' —> Reprerents Fisk ne SELETPY OU Local enineatnm Higher Spread = Higher Risk Premium Se e-Bay > 0557 Baidu —> 4.265 Avwage 09k iad Better dating , DAE = RER RP} So RP will be Alightly lowe = 452 + 08 = 230 Vid = (52 4 0-9) Yield :- (2:32 - 2-43) = 2043 Tf the Twwectment bank faileto gell all the bonds , then it sttunns ramaining bond +0 Company —> But takes a hit on feputationSession- 6 STOCK VALLATION | 23)tolz03 ~ ~ Efficient Manket Hypothesis :- Traders a well thforimed , Stock prices Come = Steck prices follow ' Random Walk' Model ~ Tf thre is anamely tn the macket , tt con bo exploited , Three form of Market Hypothesis :- Weak Form Soni-strong strong foxin —Price & — Public ‘Information — Private + Volume. + Other stastic Price, Volume, Public Tafo + Price Volume of. ee ' — Fain Pra > Stock Price, Undowaluel <> Buy. — Fain Pria < Qtock Price ; Owivalued > eeiy Divided: TH te vodable oo | BShuicheldor pucieve seasidual evenings STock VALUATION MoDéls :- © © Divided Diccount Medel ~FCFF & ECFE ® Relative Valuation Method | © Asset Value Method —Many. Himes undowmines the stock value « | Whenever calculating stock price, use 2-3 mlhods fy“Dey A, fon 4 yr De GH) ty heey yee 105 Ie = tO loo. 105 4.05 fon yer, = ¥ DA © (ayt (ayy woe ee,hU (Tabisite) Cae Clay)" pwidend Discount Moda Ascumption — 1) Company gives a fixed amount of Dividend, (4) Infinite Portod: I ® Pose DL og, Des pyc DE lee (ay)* (xy Gee De Be gL. Db te (Uer)" for = Dito ea ® If it is growing ak a role of ¢ fo Dap DU ea \ty (itsy> (lar)?b(w) = b+ B() + 2 | ) (440) (ltv) “tae se He | Petra DetPrg Po - Po litt) =D, | dt Por—=te-ttrg G4) Deis yume, Wo +fo4- fo- box = Dot Pog wt Py = -Do (4+4) 4-% Fox this model to work y hry | @ If growing ak yee on for n yeas & 9, for next all years, te = Do + Doltta). 4 Dy (tt9)* \tr 4 City)? (Ce) | + Porepetuity ) | Example s— Dor bes Grt0t | Gre St oPletwads r= 157 | 2015 bs ; | rs) /(us) = Ans | 207 15 (Hy)? / (usyt = 4.394 za vs HPS) = bay | 2g NSAP (bog) O1-o05 = 2096 EF) ~Po= 4A + 20.96 = Gi ¢13-78 = 47:89 (5 )3 FRee CASH Flow EVALUATION MODEL Foun methods 40 calculate +. NI EBIT EB\TDA Fr (Net Theome Xe) Cro Nee ai NI+ Nee (+) we tl) Nex ae . + Interest (Hl) Net Tht (et) “f (he) Fer (Hh) Fey Gh ra FCFF Nec- Non Cash Charges + Seo PPL Example. Common Stock Valuation by PE teatio :- PIE Faatlo is a elative model © Vow of common stock = Appropridle P/E ratio X Ectimal. Earnings Por Share for Kear t (Average of other companies ) ® Valw of common stock = Total Assot —Total Liabti No of C& Shaw outstanding" ® Common Stock Valuations LV value } ® Voluing Preferred stock Valun of Prefomed Steck = Annual Prefered Stock Dividend. 9 Session - 7 2a|t0 [08 Risk ® RETURN Retwen = Capitall gain ox Joss from an investment ®) Stock a FS +10 =5 5. +104. (3) he be SAY 100 100 pes it by CG aft ital Yiu ip (oy) ee (® Machine Trvestment, B Jon 2018 20,000 (Po) 42000 Cash Gain Boo (Cosh) _ 4100 Dec 34,201 24500(%,) 14800 = ne 4500. xloo 1100 x too = 500 ¥ Ibo ‘Oe pln 12000 12008 Mle ToS coc) bal) bap = W5), © A(inpiy) (Gold) c (Ms) pry cecilia Doe BY. 23 tBoat agl A*Y- 2047 45 / 457. ver AB yy AS}. Ime aad qa Te. DotyAvvage 15y. 15], 4S +f) 45+]. o Zz 8 Bards 3 AP Goal is to get maximum retwen with ow disk Shonpe Ratio = ¥-¥p > tisk Prue rate — Measunes ‘isk adjusted Peetu Higher the ratio, betbor the rtwors ©) A B 5} of A&B both VW. ATy. 4134. ‘ay. 15+. RY 1p 13]- 434, 15). aay AS]. : Ty. oy. 12+]. Xa = 33 43 ey 13 T2 2 2 0 # A&B hove perfect regatve consolation of “Ah > 0 Wek from combine # During divorsificadion , you need to find funds which axe negatively contelled (oR) veeit ©— Total Risk = Divorsifiable Risk + Non-divorsifialole Risk (noe) 0 Tra pofeclly market mimicking portfolio % "Russell 2000 Trdex”at Risk frea Kale also changes with time Higher Taf lation => Higher Risk Free Rake, ~ # Fractional Tntegradion Diversifiable Risk= 0 500 NOR —> Systematic Risk (8) DR Unsystematic Risk (By frvesting in market , we diversify the Hisks}) Bo “CovQy) > = Cov (tym) 2s ® oe 5 Q = Cov(inm) : pe pre > covijm) = Q.o,.5, -O Substitule b in. a Q — Conrelation b> high high nisk,BOL, Aggressive Bela (High Risk) B=1 , Market Portfolio B <0, Regressive Peta (Low Risk) - F | 2:0 —» Dtimes scisky as that of market B | 2:0 —> C) times thet of the markeb bo | +ve | Lo |+ve I o |N -10 |-ve Maxket risk premium i 4 -2-0]-ve Pee B=0, Treasury Bills Jus Kt + (7p ‘ OP sain Preminon a Ti ffedts all the assets unifornl - 4 nah 4 tp gh[SIGNET Tf |. Teller officalstamiliar withthe qT TT TT miscoflowtaritsand EE SMa So when Country is in Wor Om Leader dies , Xm T :Sescion-@ Softo|zo45 Kapoor's Pont folio YL Wp + B (¥m-¥p) Ye ‘et Cov(t,m) (¥m-¥¢) 2 0 Ye Yer Oo (vin-¥p') T™ YoY s Yo (3m-¥¢) Th p Required f Retunn Risk Premium Con (%y) = Cov(xy) site = B (my) hy t Computed fom deoprescion Con (i,m) = Cov (i,m) T% + Gm pe Re * = x too Bela = Cov(t,m) | eos Ge O< PLA 5 Defensive beta B72 5 Agressive beta CAPM assumes intercept to be Zuo | # TE Dale regression shows an intercept ,it shows abnormal xetwrn from He Stock9-1 — hetwen from company 7 Ki-rm +> pelwen required i -HeE = + B [tm 2’) a Alpha. Companies # we Look ok p-values , to accopt the intercapt’ Volos if p ts too high 5 we. do not accopt intuccept valuss Sepr Calealate daily seluen Step2: Excess Return CXi-%) Step 3. Vax- Cov Matrix Vout = Ui-x)%-¥) ot MMULT % excel £" to do mateix multiplicaion Traividual Vasufanees, Portfolio men = SWE ry Nort fotio Stdv = Sqrt (Cute) =) WT vector W Objective FM 1\,,: Maximize (Pont Poliownean),« Control, > Minimize fhly Dent fai) Markets at: getting intepraked > Something happening in one market affects the othe market, if comelation is highcon - Unitonmly! all markets ane seeing {neeasing Comelations =} Monkets am. getting Closely integrated 4 Tn case of high connlation , divercification does not make much sence =p Emoxging maxkels have lowor conkelation with US & thus Ativan ying In Thdla & China male Further optimisation of Weight Loadings in diffoant monkets can bo performed Using solver ‘ > Depending on sick appetite , objective fn change i fon Misk-averce {nvestor, Objective #" 1- Maximize (se) fon edsk —agruscie Investors vo bjechive: PN = Maximize (‘Mean Retwers) Constraint’: Port folio etd: Dav < Min "4 Phot, of Portfolio mean Vs Portfolio . Voreiarice gives; Port folio frontor Sy = Sep y “Bp (Sie 9) + Vee ‘+B. AML #°R Swell- Big High- Low Faama_Fronch '3- factor wodet | Cohort Fax Factor. Model. | AIT ae 4 oy = yt Bg (Am- Hp) + BL SMB + BaHML + By WME — oy : Wino Lester |iciecanelemar- (Minioues « Vardance) | C {eG Portfolio Voxtanc. vee . Time-Varying momentum sectunn tn Tndtan Stock Market ”