!"#$%&!!"#$%"&$'"%$() =!h!"#!!"#$%!h!"#$!!""#$%! " Market!capitalisation!

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Roderick Booker
5 years ago
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1 " Foreign!Exchange!>!Debt!Capital!and!Money!>!Stock! " Derivatives!!value!determined!y!some!other!financial!instrument! " Financial!Instruments!!facilitators!of!financial!transactions! " Financial!System!!encourage!savings,!and!provides!funds!for!investment! Public*Company*Objectives* " OVERALL!GOAL! Maximise!value!of!the!firm! " Stockholder!Objectives! 1. Maximise!current!wealth! 2. Transform!wealth!into!desirable!time!pattern!of!consumption!!(Modify! consumption)! 3. Manage!risk!characteristics! 2+3!are!facilitated!by!financial!markets! Market*Capitalisation*!"#$%&!!"#$%"&$'"%$() =!h!"#!!"#$%!h!"#$!!""#$%! " Market!capitalisation! NOTE! " Profit! Wealth! Measure!of!value!of!equity/ownership! Shows!the!value!of!all!the!shares! Maximise!this!=!maximising!shareholder!wealth! o Current!Share!Price!=! Wealth! Profits!can!be!adjusted!and!have!detrimental!effects!on!share!price!and!wealth! Adjust!expenses! " Share!price!reflects!consumer!expectations!and!forecasts! Better!Expectations!=!Better!share!price! Agency*Issues* " Management!!remunerate!to!act!on!behalf!of!ownership! But!may!work!in!their!own!interest!instead!of!owners! Different!inherent!desires!by!owners!and!management! Managers!may!thus!do!what!is!in!their!own!best!interests! Ownership!v!Management! Differences'in'Information' " Stock'prices'and'returns! " Issues'of'share'and'other'securities! " Dividends! " Financing!! Differences!in!Objectives! " Managers!v!stockholders! " Top!management!v!operating! management! " Stockholders!v!bank!lenders! " Management,!although!agents!of!stockholders,!may!act!in!their!own!interests!rather!than! maximising!value!!

2 " Misalignment!in!their!objectives!! Agency*Costs*Incurred*When;* 1. Managers!do!not!attempt!to!maximise!firm!value!!opportunity!cost! 2. Shareholders!incur!costs!to!monitor!the!managers!and!constrain!their!actions! Agency*Problem*and*Corporate*Governance** 1. Legal!and!Regulatory!Requirement!! Managers!under!contractual!obligation!to!undertake!certain!tasks! 2. Compensation!plans! Managers!will!act!in!owners!interests!with!adequate!compensation! Aligning!interests!!bonus/share!options! 3. Board!of!directors! 4. Monitoring! 5. Takeovers! Competitors!"! Market!share!! Competition! Often!mature!competitors!!hard!to!establish!internal!growth! 6. Shareholder!pressures! Corporate*Finance*Decisions* Corporation!!legal!entity!!limited!liability! " Managers!maximise!firm!value!through!decisions! 1. Investment!Decisions! 2. Financing!Decisions! 3. Dividend!Decisions! " NOTE! Investment!Decision!(Capital!Budgeting)!comes!before!the!financing!decision! Investment*Decision* " Also!Known!as!CAPITAL'BUDGETING! " What!REAL!assets!should!the!firm!invest!in!to!operate!its!business!and!generate!cash!flows?! " What!investments!should!the!business!make! " Two!main!Considerations! 1. What!TYPE'OF'ASSET!the!firm!should!use! 2. HOW'MANY'ASSETS!it!needs!to!run!the!business! " Capital!Budgeting!Evaluation!!development!of!a!process!to!evaluate!the!desirability!of!asset! purchases! " REAL!ASSETS! Refers!to!physical!assets!such!s!buildings!or!machinery!used!to!manufacture!a! product!for!sale!or!to!provide!a!particular!service! " Often!need!to!select!the!best!real!asset!from!a!range!of!alternatives!(value)!!Trade"off! " Also!concerned!with!purchase!of!intangible!assets!!patents!or!shares!

3 Financing*Decision* " How!should!the!firm!raise!funds!to!purchase!these!assets!!!sale!of!financial!assets! " How!should!the!business!pay!for!its!investments! " Key!Considerations! What!gearing!ratio!to!use!!how!much!debt!v!how!much!equity! What!are!the!costs!of!each!different!source!of!finance! Should!the!firm!issue!short!or!long!term!securities! " Capital!Structure!!debt!v!equity!! Corporations!go!to!capital!market! Dividend*Decision* " How!should!the!firm!pass!on!returns!to!shareholders! Capital!Gains!v!Dividends! o Cash!v!Share!dividends! " What!dividend!policy!to!adopt! " Will!they!repurchase!shares?! Nature*of*Assets* " Assets!can!be!divided!into!real'and!financial!assets! " Linked!by!cash!flows!!"#$%!!"##$%!!"!!"#$ =!"##$%!!"!!"#$#%"$&!!""#$"! Real*Assets* " Assets!that!can!be!put!into!productive'use!to!generate!a!return'(future!cash!flows)! Machinery!and!equipment! Financial*Assets* " Assets!that!represent!a!claim!to!a!series!of!cash!flows!against!an!economic!unit! Who!is!getting!the!cash!flow! Firm*Valuation* " The!market!value!of!a!firm!can!be!determined!in!two!ways! 1. Sum!the!market!value!of!its!real'assets! 2. Sum!the!market!values!of!the!financial'claims!against!those!real!assets! " NOTE!!these!are!the!same!as!all!real!assets!are!claimed!against!financial!assets! " 2!is!more!popular!!active!secondary!market!for!financial!assets! Can!be!miss!priced!as!financial!assets!are!traded!and!represent!consumer! expectations! Capital*Markets* " Medium!for!issuing!and!exchanging!financial!assets! Australian!Securities!Exchange!(ASX)! " Provides!a!means!of!exchanging!current!for!future!consumption! " Facilitates!the!exchange!of!financial!assets!! " Maximise!your!wealth!through!interactions!in!the!capital!market!!

4 Time*Value*of*Money* " Money!has!Time!Value! One!Dollar!TODAY!is!not!the!same!as!One!Dollar!TOMORROW! You!can!invest!your!dollar!and!attain!interests!on!it.!! A*Modern*Financial*System* Functions*of*a*Financial*System* " Financial!system! Comprises!of!a!range!of!financial'institutions,!financial'instruments!and! financial'markets!which!interact!to!facilitate!the!flow!of!funds!between!users! and!suppliers! Overseen!by!a!central!bank!!RBA! Supervised!by!a!prudential!regulator!!APRA! " Financial!Instruments!!issued!by!a!party!raising!funds!!acknowledges!financial!commitment! and!entitling!the!holder!to!specified!future!cash!flows! " Key!Functions! 1. Encourage'savings!and!allocate'these'savings!to!the!most!efficient!users!of! funds! 2. Provide!economic!and!financial!information!to!the!markets! o Employment! o Know!their!revenues!and!future!strategy!and!direction! 3. Important!component!of!monetary!policy!! Encourage*Savings*and*Allocate*Savings*to*most*Efficient*Users*of*Funds* " Financial!system!creates!a!range!of!financial!instruments!of!4!key!attributes!to!encourage! increased!flow!of!savings! " Surplus!entities!can!invest!their!savings!through!the!purchase!of!financial'assets! " Assets!(real!and!financial)!can!be!thought!of!as!a!pack!of!4!key!attributes! " Attributes!of!Financial!Assets! 1. Return!or!Yield! o The!total!financial'benefit!received!(interest!and!capital)!from!an! investment!! o Expressed!as!a!percentage! 2. Risk! o The!possibility!or!probability!that!an!actual!outcome!will!vary!from! the!expected!outcome! o Uncertainty!!any!type! 3. Liquidity! o Ease!of!access!to!the!cash!and!cash!equivalents!of!the!Financial! Asset!! o Access!to!cash!and!other!sources!of!funds!to!meet!day"to"day! expenses!and!commitments!! o Ability/ease!to!turn!your!investment!into!cash!

5 o More!Liquid!=!Less!Return! 4. Time"Pattern!of!Cash!Flows! o The!frequency'of'period'cash'flows!(interest!and!principal)! associated!with!a!financial!instrument! o Interest!can!be!paid!periodically!or!@!maturity! " The!four!attributes!are!varied!to!attract!customer!!range!of!products! " Higher!Risk!=!Higher!Return! Less!risk!!!Less!compensation! Derived!from!expectation! " Asset!Portfolio!!a!combination!of!assets,!each!comprising!attributes!of!return,!risk,!liquidity! and!timing!of!cash!flows! Portfolio!Structuring!!buying!and!selling!of!assets!and!liabilities!to!best!meet! current!savings!!investment!and!funding!needs!!!!changing!your!assets!to! what!you!want! " Savings!are!available!for!investment!capital!!improve!productive!capacity! " Financial!markets!!savings!are!directed!to!the!most!efficient!users!of!funds! Provide*economic*and*financial*information*to*the*markets** " Information!affects!Price!and!Investment!Decisions! " Types!of!Information! 1. Macroeconomic!Announcements! 2. Stock!Information! o Earnings!Announcements! o Audited!annual!reports! 3. Company!Information!! o Financial!Statements! " Continually!report!information! Available!to!public!!"!mergers,!takeovers,!price!sensitive!information! " Efficient!financial!systems!reflect!information!in!the!price!of!financial!instruments! Important*Component*of*Monetary*Policy** " Monetary!Policy!!actions!of!a!central!bank!that!influence!the!level!of!interest!rates!in!order! to!achieve!economic!outcomes! Inflation!is!the!primary!target!!!increase!in!prices!of!G+S!over!time! " Accelerator!and!brakes!on!the!economy! " Target!2"3%!inflation!!alter!cash!rate! " Affect!rate!to!affect!investing! Rate!to!encourage!borrowing!and!investing! Financial*Institutions* " 5!Key!financial!institutions!that!vary!through!their!retail!market!role!and!the!methods!they! source!and!use!their!funds! Meet!the!needs!of!financial!market!participants! 1. Depository!Financial!Institutions!!!Largest! Gather!savings!from!depositors!and!investors!and!use!funds!to!provide!loans!to! customers!

FINANCE'2011' 'CORPORATE'FINANCE'1' ' Topic'One:'Introduction'to'Finance'and'Financial'Markets'(Chp.1)' Financial'markets,'instruments'and'institutes'

FINANCE'2011' 'CORPORATE'FINANCE'1' ' Topic'One:'Introduction'to'Finance'and'Financial'Markets'(Chp.1)' Financial'markets,'instruments'and'institutes' Four components: 1. Commodity raw materials dug out