Chapter I Introduction to

Cop Fin
Assets generateincome

Ts
companiestrestlbery
how do companies
tangible Intangible finance these
physical Is not physical borrowing debts
plants beard name retained earningsCrofts
sale new
property patents raisingcapital of
shares
equipment intellectual
machinery property
investment
make
Whatinvestments should the company
investments
How should they pay finance the
T.bgy
aim ofshareholders the company
increase value of
current stock
increase price
returns
How by earning higher
themes than the opportunity
Five important cost of capital Coco
carpfin is all about in earnings that
maximising value
standard could have been
Occ sets the not
foeinvestment
decisions earned byin current
investing
dollar s riskydollar
safe decisions project
smart investment
them
create more value decisions claims on a corporation
smart financing as financialassets
matters a
good governance securities
securities Investment Decisions
can be held on
involvesthefollowing
traded in financial
markets purchaseof real assets
assets
Ex tan shoes managing existing
manage a
control risks
are financial when to dispose shutdown
assets as well
Financing Decisions
involves the following
Investment sale ofsecurities financialassets
meeting obligations to thosewho
Decisions contributed previously
also referred as Iqa adders
stockholders
capitalbudgeting
expenditure CAPE x
capital
listing ofmajor projects approved
capitalbudget investments
for why
are important
investments in intangible assets
computersoftware
Rand advertising marketing
how brand recognition and
know
they helpbuild the run
reputation for long

investments costsandrisks
today's capital are
generate
traps

Financing
É Decisions
lessimportant than
investment decisions
 Two
ways of raising
borrowing from
capital
lenders money
fromshareholders structure
raising
issuing new shores
or retained eatings
capital
btw
hgotation is obligated to pay pdhoice debt a equity
backdebt principalamount
interest
ppg financing
fixed rate of referstofirm's sources of
costoffinancing
long termfinancing
iffishaffedwson but in turn
holdsharesof the corporation
instead portion
receive
Two ways of equity
financing
of the corporationsfuture
cashflows issuance of new
stock
profits a shares
of
shareholders are called
investors
equity Effomeasts
NE exist
generated
assets by
reinvestment on behalf
if can afield
be retained forfuture
ofexistingshareholders
investments yyyy.gg
can be used for payment
dividends market cap capitalization
ofcan be used for repurchase
outstanding shares
ofshares
dnbwhese edu
sfpe
are called
ices
decisions value comes
mainly from
payout the asset so de the
of
balance sheet

they pay taxes but cant vote

Corporations
legalentity itsperson
owned by share DiffdjigThdos
choose and advise
holders top management
 can make contracts sign off on important
decisions
out a business
carry Ls Mara
decisions
borrow lend money us payout
sue or be sued

when company's shares

a
are Igghg.gsnctfromthe cold
not publicly traded
have
limitheose entire
twestment but
closely held held by small not more
investors
group of backers
managers a
publiccompanies
when shares are traded separationof ownership and
in public markets control gives corporations
to raise add permanence
capital
tonal
dowd
FinancialManages
opens doortofor managers a
stand in bluefirm a investors directors act in ther's
own interests rather
then
manage firms operations
by makinggood investment the shareholders owners
of the
decisions double taxation
deal with investors shareholders company a the
owners
and institutions with
financial
markets Costs in terms of the
financial and money
managingcompar
É shop a modiste
legalmachinery
Sole Proprietorliability
unlimited
mom an pop stores
small
Partnerships
unlimited liability
each partner held respon
debt
sibity ofcompany's
too largefor sole prep
double taxation do not
no
Painting
Limited Partnership A
general a limited partners limited
unlimited
liability liability
 Limited liabilityPartnersLps LLP
Limited liabilitycompanies LLC shareholders
want to maximise
all partners have limited wealth
liability want longtermplot
over short term
0 profits investment
cost of capital as require
alter rate of return y
return
of
rate from
male investment oppostu
rate of return from
markets wherethey
mfs
markets
nf can on est by them
as selves
with similar are risk averse
risk

Agency Problems
conflicts bmanagers 9
w
shareholders as can be prevented with good
Agencytosts when
incentives are in place for
do not attempt themanagers
managers value
to maximise firm to monitor
shareholders have actions
control managers
a interests in mind
with personal
can take place
Chapter 2 flow to Calculate Present Values
be invested to interest
Dy can earn
has time value

dollar dollar tomorrow

a today a

I compound atrate
grows interest
compound interest earned
t
Future value of M en te g
money M
m principal
r rate
of interest
t me ofyears the periods
Present Value offuture Cash Flows
is called the
PV
Eye discount factor
at future cashtflow longer you wait for money the
at end of years
a discount rate lower is its present value
called
to me of years
finds
a
present value is
market price
Net Present Value NPV
safe dollar s risky dollar
present value minus
required investment discount rate depends
risk level of
NPV
cotE.FI on the
the project
co requiredinvestment
negatives s o shouldaccept
Ct future cashflows if the
Npr we
a
a discount rate project as it provides
t me ofyearsheads return then the general
greater
futurecashflow
must be market
certain
 return
Rateof Return acceptproject if its rate of cost
is greater than the opportunity of
capital
ingftment a to use Nov when
safe decision
making investment

1 17 do
games
were
not repay but offers METEITT
fixed income annual cash
annual rate of return
on
c f
return
a annual
Cash flow
the perpetuity
g growth rate
Cas
aime a s g
Pu ofperpetuity
E
c a differentfrom
PV e Pu ofsingle
doesn't start
Editing if perpetuity
the but
from first year
from the th year
Pr I Et

tam
sum each
me ofyears
year for a fixed
tam startingimmediately
worth C ta times the value
ofordinary annuity
er
of get amortizing
c fixedfuturecashflows Is partofregular fixed payment
return usedto pay intereston the loan
a annual interest
t me ofyears timeperiods and partof it is used to pay
annuity offtheloan
I Int factor most mortgages are amortizing
loans
Future value ofAnnuities
ÉE I
I
FUt PV i a t
a rateofreturn annual a rateofreturn annual
a interest rate

t
renren.is
t me ofyears

a
annual rate total annual paymentdividedby the
quoted
of payments in year
a
me
efectregqmgatem.gg a annual interest rate
not annual if m me ofpayments in
a
will be greater year
than else
valueof I Elm
equal investment

effectiveness i Elm

I Elm becomes
2.7189
er
of Ites
C fixed cashflow
investors are
prepared annually
to pay more
for con t me ofyears
cash a interest rate
timeous payments
because cash starts to when youdon'twant
flow in immediately themoney at the end
each but
of
rather
year
continuously
for steady stream
a

through the year

Y
 Bonds
Chapter 3 Valuing
Bonds offer a fixed set of simplest type of bond
cash payoffs untie makes payments just
I
consist
maturity
annual interest
once a year

of t
payments
paidjorthe
thepartyon
bond
coupons É
MÉpercentage
of bond

principal or face value

of face value
Name of Bond and
Pv Pv annuity ofcoupons
PV É fat a t
Eat Pu of final payment Cy
c coupon amount
e discount rate r here is also called the bonds
me ofyears maturity
t
coupon t face
value yield to maturity the
Cy lesser them oil
I the bond
bondspriced ones the alwayslesses than of it blends the
the went
facevalue is sold at yield current
a premium yield qyfonfti.gg
investors face a capital value ofthe bond
loss over thelife of the itsremaining
bond egg
bonds paired below the calculated
yield to maturity trial 9
value are sold at
face
a discount
only through
canoe
capital
face aover
1 the
gain the bond above foe when

f
yield to life of
maturity of bond is
greater than pace inter
current known an
yield t est rate is to
if pu greater them price
discount rate is
be
found
too low treasury bonds
In the US bonds are classified traded on Paid semi
maturity income annually

f
based on
bonds
fixed
markets
20 30 years
to years notes have a value of
face1000
2 I yeah bills
 y
not annal yields of us
treasuryon
traded stock exchange treasury bonds are
network of quoted those of
by a
semi annual yields
bongdeads is semiannual
at which yields required
quotepaces asked price to calculate
to semi
they are prepared 4 pencequoted Defs ofpayments
the bond annual
buy a sell by
dealer

Bond Prices a Interest Rates

investors hope that
move in opposite directions the interest rates
so that the
yield to maturityinterest date fall bond
measure of pace of the
on bond
a securities rise
discount rate that explains
the bond price
fluctuation changes
in interest rates
rate of return term
coupon meme
t affect long
bonds more than
price change short team bonds
investment

Real a NominalRates ofInterest t

b w
real cash flow at
defined by relation
inflation interest rates
an CetinflationsatefW
nominal cash flow at t

Consumer Price Index Cbi

index used to track the
level of prices current value
general
measures the amount of independently
needs fortypical purchases
of a family worth of nominal
change in een
the periods
across
measures
with reference
indicates the rate of
inflation
 return calculation
Real rate of Indexed bonds a Real
t area t hominal t intfate rates of interest
most bonds promise
thumb rule
A nominal inflate
1 a fixed nominal
rate of interest
real rate of interest
real
uncertain a depends
high otherwise gives a on inflation

cash payments are

linked to inflation
interest
seal rate of maturityon also changes
based inflation
capital a demand Ls investors surely
rate
earns
return
real of
fobbed on investment
cash are
real flows
but nominal
people's fixed
cash flows vary
opportunities willingness
to save according to change
forproductive
investments Col
by on
governmentG
businesses TIPS
short medium term
real interest rates Treasury Inflation
protected Securitas
are
affected by es
monetary
central policy of
banks
t nominal t end
Fisher's theory i inflation
rate of
change in expected strategy of
causes same
inflation pop rolling over
in mom
oatronate change
rate
shootteaminvestment
oral interest offers some protect
against uncertain
no
effect on required inflation
real interest rate
 Value common stocks
Chapter h of
sale of shares to raise new
auction markets
capital happens on
primary a
markets dealer markets
stock exchanges are secondary electronic comm
markets for the transfer of unication networks
second hand shares Cocos comment
no new capital is generated trades with each
other
market order to sell stock at
best available price change Taye
Funds ETFs
limit order price limit of a
buyer
Ls portfolios of
stocks than can
T to share Ceos be traded as
profits shares a in
packagetrade
TTM trailing 12 months
a
single
PIE Ratto managed
stock poor EPS
mutual funds
forecasted EPs is
more useful here
G invest in portfolios
forwardfts of securities
Dividend Yield Is closed end funds
dividend Is actively managed
shayne
seek to beat the
Beta measures market market
risk of a stock

drawbacks
Book value
does not representassets
is a definite number current value worth
cost do not incorporate inflation
measures original
less an allowance for
asset exclude intangible assets
depreciation of concern
an
do not capture going
is a useful benchmark value
clues
provides useful
about liquidation value
liquidation value Valuationby Comparables
what owes toes get iswhen
shut MM as
a
failedoncompany
its assets are sample of similar firms
down potential comparables
sold off 2
examine how much investor
determined both tan in comparable companies
by to pay per
goble intangible prepared
an are
assets dollar ofearnings f book
assets
ifnota company's stock price is
known
Stock Prices 9 to forecasted EPs
Dividends ang pie of comparable

Dividends
not paid by all
estimated
companies
provides a good

rapidly
reinvest
growing
the
all
companies
back
cash
Pr of stock
into the business Pu of future
dividends pes
mature a profitable companies share
pay regular dividends
stock caste Expected return
owners
of receive

payoffs in two
forms from a share
cash dividends

on
rearranged
I rate of
of yearend
return

P paice of
Po
Iggy Po t
year
initial price
stock was
beginning ofyeas
r discount rate
called the market capitalization
rate as cost
of equity capital
cos opportunity cost of capital
 All stocks of the same risk class
have to be priced to offer the
rate return
same expected of
condition
for equilibrium
in well
functioning capital
markets
total eve dividends
initial
general stock Price Formula terminal price
price of stock
Kfc egg
when there is a constant
as it tends to x Pse becomes
growth rate for compo
a
neglible
my's dividends
Po IE gig
Po
de
DCF S Dividend Discount
Model
Ig fam
requireme

Logically correctfor growth

stocks companies but difficult
4 a
II g
to use when cash dividends
T t growth
far in the future
are
Dividend in dividends

Estimating long run growth however estimation of

Payout ratio to
the growth rate is
Ii dshare Div
hand But luckilythere
is anothermethod
Parotid
I payout ratio dividend growth rate 9
I Div EPS
plowback ratio
ROE
Returnon quity ooo
profits Equity 4 the costofEquity found
r
EPS Book Equity subsequently is an upper
per share estimate ofthe true figure
 Def formula us
above mentioned constant growth
thumb rule at the end of the day
only a
with
cannot be used for companies
high current cannot of
rates growth

instead
If
we should
they
in definitely
be sustained

use a multi growth

model
Po
Eee t

stable constant
n yearfrom which is observed
growth of dividend
t years t
Dive dividend year
a rate of discontate
return
g e
growth constant of Div

Typesofstocke
stocks bought toe
stock price
growth to capitalized value
expectation of capital gains
earnings of average earnings
a future growth for under a no growth
income stocks bought for policy I pry 0
cash dividends

expected rate of stocks from present value

return net
which op pod
as non growth
all as dividends of growth
tumties
b gives pays profits
EPS lol dividend yield t evao
Po Es
Iggy
for
Iggy to
growth stocks Iggy
as well but
market
I Est 1
return equal
a
capitalization
rate
EE 1
55
a
Earnings Perfetto t
 Present value of level stream
of earnings EI
Present value of growth
pv go
opportunities
Ig
share price

how can one that a

stock saystock or
not
is
growth
Ls Pu go or S forms a
if
significant portion of
the stock price
 29 2 Fin P lamming Models
Chapter 29 29 1