IS4228 Lecture 1 Fall 2021

IS4228: Information Technology and Financial Services
IS4228
Information technology
and financial services
Lecture 1
11 August, 2021
Module details
Instructor: Xiaofan Li
• E-mail: li.x@nus.edu.sg
Teaching Assistant: Vivek Sundar Magesh

• E-mail: vsm@nus.edu.sg
• Office hour: 2:00-5:00 pm Tuesday
Class participation
• Poll Everywhere
• pollev.com/is4228
• Join with your NUS email and account!
• Important for your class participation score!
• Quizzes, Q&A, surveys will be operated through this

platform.
Course expectations
This module expects you to achieve:
• Understand and be able to apply fundamental theories of

finance
• Understand the role of information in finance
• Learn some cutting edge applications of information
technologies in finance
• Able to think about future applications of information
technologies in finance
Course structure
Part I: Fundamentals of corporate finance

• Lecture 1-6
• The law of one price
• The time value of money
• Valuing bonds
• Valuing stocks
• Risk and return
• The capital asset pricing model (CAPM)
• …
• Course material:
• Corporate finance: the core, by Jonathan B. Berk and
Peter DeMarzo (4th version slightly more recommended)
Course structure
Part II: Information technologies and finance

• Lecture 8-9: Classical wisdom of information in finance
• Information and risk
• The no-trade theory
• Theories of insider trading
• Lecture 10-11: Cutting edge applications of IT in finance
• Social media
• Cryptocurrencies
• …
• Lecture 12-13: Group project presentations
Assessment
• Class Participation 10%
• Individual Assignments 5%*5=25%
• Mid-term test 30%
• Group Project 35%

Individual assignments
• 5 Individual assignments
• Each has 5 questions
• Will be published after Lecture 2-6, respectively
• Due before the lecture time next week (6:30 pm the

following Wednesday)
Individual assignments
• 5 Individual assignments
• Each has 5 questions
• Will be published after Lecture 2-6, respectively
• Due before the lecture time next week (6:30 pm the

following Wednesday)
Mid-term test
• E-exam
• Semi-closed book (A 2-sided A4 cheat sheet is allowed)
• Will be taken on the lecture time of Week 7
• Questions in similar formats to indiv

Group project
• Groups of around 6, randomly assigned after the mid-term
test
• 8-10 min presentation
• Presentation on Week 12-13
• Mandatory consultation with Vivek on Week 10
• Voluntary consultation with either Vivek or me at any time
• Among the 35 points
• 0 ~ 25 given by me to each group
• 0 ~ 5 given by you to each other group
• -5 ~ 5 given by peer group members
• Feel free to let me know if you have any suggestions or
concerns
Group project
• Topic: Imagine a future application of information

technologies in finance.
• Research on an aspect of a current financial market (stock
market, cryptocurrency market, insurance market, P2P
lending market, …)
• Think about how development of technologies may
change the dynamics of the industry
• Talk about one specific (imaginary) technology, and its
application in the industry.
• Could be refinement of the current system or exploitation
of current glitches.
Overview
• What is corporation?
• How stock markets operate?
• Financial statement analysis
13
The Corporation
• A corporation is a firm or a group of people authorized to

act as a legal person and can be recognized as such.
• Four types of firms:
• Sole proprietorships
• Partnerships
• Limited liability companies
• Corporations
• The distinguishing feature of a corporation is that it is a
legally defined, artificial being (a judicial person or legal
entity), separate from its owners.
Ownership of a Corporation
• There is no limit of on the number of owners a corporation

can have.
• The entire ownership stake of a corporation is divided into
shares known as stock.
• The collection of all the outstanding shares of a corporation
is known as the equity of the corporation
• Each owner is known as a shareholder, stockholder, equity
holder and is entitled to dividends payments.
• There is no limitation on who can own a corporation’s
stock.
Ownership vs. Control of corporation

Overview
17
Stock Market
• An important feature of an investment is its liquidity (how

easy the investment can be sold at a price that is close to
what you can contemporaneously buy it for)
• Stock markets: organized markets to trade shares of
corporations
• Private corporations
• Public corporations
How stock markets operate?
• Prior to 2005, in major stock markets (NYSE, NASDAQ,

…), market makers (known then on the NYSE as
specialists) matched buyers and sellers.
• They posted two prices for every stock in which they
made a market:
• the price at which they were willing to buy the stock (the
bid price) and the price at which they were willing to sell
the stock (the ask price).
• These market makers provide liquidity.
New Competition and Market Changes

Limit order markets
• limit order—an order to buy or sell a set amount at a fixed

price.
• For example, a limit buy order might be an order to buy
100 shares of IBM at a price of $138/share.
• The collection of all limit orders is known as the limit order
book.
• Exchanges make their limit order books public so that
investors (or their brokers) can see the best bid and ask
prices when deciding where to trade.
• market orders—orders that trade immediately at the best
outstanding limit order
Limit order markets

• Limit orders provide liquidity
• Market orders take liquidity
• Providers of liquidity earn the bid-ask spread, but in so
doing they risk the possibility of their orders becoming
stale.
• Liquidity providers need to constantly monitor the market,
cancelling old orders and posting new orders when
appropriate.
• High frequency traders (HFTs) are a class of traders who,
with the aid of computers, will place, update, cancel, and
execute trades many times per second in response to new
information as well as other orders.
New York Stock Exchange
• Where is NYSE now?

• Wall Street?
• New Jersey!
• giving everybody the same length of cable

• “Giving everybody the same length of cable”
Overview
24
Financial statement analysis
• Anyone with money to invest is a potential investor

• How do investors learn about a company to know whether
or not they should invest in it?
• Firms issue financial statements regularly to communicate
financial information to the investment community.
• Financial statements are accounting reports with past
performance information that a firm issues periodically
(usually quarterly and annually).
• Corporations are required to hire a neutral third party,
known as an auditor, to check the annual financial
statements
GAAP v.s. Non-GAAP
• US GAAP: Generally Accepted Accounting Principles

• Required for each public company
• GAAP standardizes financial reporting and provides a
uniform set of rules and formats to facilitate analysis by
investors and creditors.
• There are instances in which GAAP reporting fails to
accurately portray the operations of a business.
• Some companies provide non-GAAP financial statements.
GAAP v.s. Non-GAAP
• In Q3 2019, 67% of the companies in the Dow Jones

Industrial Average (DJIA) reported non-GAAP earnings
per share (EPS).
• 70% reported non-GAAP EPS that was higher than
GAAP EPS.
• Regarding net income, non-GAAP use has increased 33%
from 1998 to 2017 and 97% of the companies in the S&P
500 used non-GAAP adjustments in 2017, up from 59% in
1996.
Types of financial statements
• All public companies are required to produce:
• The balance sheet

• The income statement
• The statement of cash flows
• The statement of stockholders’ equity
The Balance Sheet

The Balance Sheet Identity
• Assets = Liabilities + Stockholders’ Equity

• The Book value of equity
• Market Value of Equity = Shares outstanding * Market
price per share
• Market Value Versus Book Value
• many of the assets listed on the balance sheet are valued
based on their historical cost rather than their true value
today
• many of the firm’s valuable assets are not captured on the
balance sheet
The Income Statement

The Income Statement
• Gross Profit: the difference between sales revenues and the

costs
• Operating Expenses: expenses from the ordinary course of
running the business that are not directly related to
producing the goods or services being sold
• Earnings before Interest and Taxes (EBIT)
• Net Income
• Earnings per share
• EPS = Net Income/Shares Outstanding
The Statement of Cash Flows
• How much cash the firm has generated, and how that cash
has been allocated, during a set period.
• Different from income statement
• Arguably the most important information of the four
financial statements.
• Three sections: operating activities, investment activities,
and financing activities.
The Statement of Cash Flows

Other Financial Statement Information
• Statement of Stockholders’ Equity

• Change in Stockholders’ Equity = Retained Earnings + Net
sales of stock= Net Income - Dividends +Sales of stock -
Repurchases of stock
• Notes to the Financial Statements
• important accounting assumptions that were used in preparing the
statements
• information specific to a firm’s subsidiaries or its separate product lines
• the details of the firm’s stock-based compensation plans for employees and
the different types of debt the firm has outstanding
• details of acquisitions, spin-offs, leases, taxes, debt repayment schedules,
and risk management activities
• …
Financial Statement Analysis
• Compare the firm with itself by analyzing how the firm has
changed over time.
• Compare the firm to other similar firms using a common

set of financial ratios.
• Ratios related to profitability, liquidity, working capital,

interest coverage, leverage, valuation, and operating
returns
Profitability Ratios
• Information of income statement

• Gross Margin = Gross Profit/Sales
• Operating Margin = Operating Income/Sales
• EBIT margin = EBIT/Sales
• Efficiency of operations
• Corporate strategy
• Walmart vs. Nordstrom
Liquidity and working capital ratios
• Liquidity ratios: financial solvency and liquidity

• information from balance sheet
• Current Ratio = Current Assets/Current Liabilities
• Cash Ratio = Cash/Current Liabilities
• Working capital ratios: the speed at which a company
turns sales into cash
• information from income statement and balance sheet
• Accounts Receivable Days =Accounts
Receivable/Average Daily Sales
• Inventory Turnover =Annual Cost of Sales/Inventory
• Not comparable across industries
Interest coverage and leverage ratios
• Interest coverage ratio: ability to meet its interest obligations

• information from income statement
• EBIT/Interest
• EBITDA/Interest
• EBITDA = EBIT + Depreciation and Amortization
• Leverage Ratios: the firm’s leverage, or the extent to which it
relies on debt as a source of financing, evaluates the risk and
return for the firm’s equity holders
• information from balance sheet
• Debt-Equity Ratio =Total Debt/Total Equity
• Net Debt = Total Debt - Excess Cash & Short-term Investments
• Debt-to-Enterprise Value Ratio =Net Debt/(Market Value of Equity + Net
Debt)
Valuation Ratios
• Price-earnings ratio (P/E):

• P/E ratio= Market capitalization/Net income
= Share price/Earning per share
• Ratio of the value of equity to the firm’s earnings
• a simple measure that is used to assess whether a stock is over-
or undervalued
• based on the idea that the value of a stock should be
proportional to the level of earnings it can generate for its
shareholders
P/E Ratio
• vary widely across industries

• in late 2015, the median large U.S. firm had a P/E ratio of
about 21. But software firms, which tend to have above
average growth rates, had an average P/E ratio of 38, while
automotive firms, which have experienced slower growth since
the recession, had an average P/E ratio of about 15
Operating Returns
• Evaluate a firm’s return on investment by comparing its
income to its investment.
• Return on Equity (ROE) = Net Income/Book Value of Equity
• The DuPont Identity
𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆 𝐒𝐚𝐥𝐞𝐬 𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬
• 𝑹𝑶𝑬 = ∗ ∗
𝑺𝒂𝒍𝒆𝒔 𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬 𝐁𝐨𝐨𝐤 𝐕𝐚𝐥𝐮𝐞 𝐨𝐟 𝐄𝐪𝐮𝐢𝐭𝐲
• The first term is the firm’s net profit margin, which measures its overall
profitability.
• The second term is the firm’s asset turnover, which measures how
efficiently the firm is utilizing its assets to generate sales. Together, these
terms determine the firm’s return on assets.
• The third term is called the equity multiplier, which indicates the value of
assets held per dollar of shareholder equity. The greater the firm’s reliance
on debt financing, the higher the equity multiplier will be.
Thank you!
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IS4228: Information Technology and Financial Services

Teaching Assistant: Vivek Sundar Magesh

• Quizzes, Q&A, surveys will be operated through this

This module expects you to achieve:

• Understand and be able to apply fundamental theories of

Part I: Fundamentals of corporate finance

Part II: Information technologies and finance

• Individual Assignments 5%*5=25%

• Mid-term test 30%

• Group Project 35%

• Each has 5 questions

• Will be published after Lecture 2-6, respectively

• Due before the lecture time next week (6:30 pm the

• Each has 5 questions

• Will be published after Lecture 2-6, respectively

• Due before the lecture time next week (6:30 pm the

• Semi-closed book (A 2-sided A4 cheat sheet is allowed)

• Will be taken on the lecture time of Week 7

• Questions in similar formats to indiv

• Topic: Imagine a future application of information

• How stock markets operate?

• Financial statement analysis

• A corporation is a firm or a group of people authorized to

• There is no limit of on the number of owners a corporation

Ownership vs. Control of corporation

• How stock markets operate?

• Financial statement analysis

• An important feature of an investment is its liquidity (how

How stock markets operate?

• Prior to 2005, in major stock markets (NYSE, NASDAQ,

New Competition and Market Changes

Limit order markets

• limit order—an order to buy or sell a set amount at a fixed

Limit order markets

New York Stock Exchange

• Where is NYSE now?

• giving everybody the same length of cable

• How stock markets operate?

• Financial statement analysis

Financial statement analysis

• Anyone with money to invest is a potential investor

GAAP v.s. Non-GAAP

• US GAAP: Generally Accepted Accounting Principles

GAAP v.s. Non-GAAP

• In Q3 2019, 67% of the companies in the Dow Jones

Types of financial statements

• All public companies are required to produce:

• The balance sheet

The Balance Sheet

The Balance Sheet Identity

• Assets = Liabilities + Stockholders’ Equity

The Income Statement

The Income Statement

• Gross Profit: the difference between sales revenues and the

The Statement of Cash Flows

The Statement of Cash Flows

Other Financial Statement Information

• Statement of Stockholders’ Equity

Financial Statement Analysis

• Compare the firm to other similar firms using a common

• Ratios related to profitability, liquidity, working capital,

• Information of income statement

Liquidity and working capital ratios

• Liquidity ratios: financial solvency and liquidity