Equity. Convertible Preferred Stock

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1 Ex ante alpha Expected Ex post alpha Actual holding - period holding - period return Re quired return return Contemparaneous required return These quotes are firm commitments by the market maker to transact at those prices for a specified transaction size. This type of market is often referred to as a dealer market. It is also known as a price-driven market (or quote-driven market) In a traditional auction market, liquidity requires that an asset be traded only once or a few times per day. This is known as a call or fixing procedure. An auction market is also known as an order-driven market ADR An ADR program created with the assistance of the foreign company is called a sponsored ADR. ponsored ADRs are often classified at three levels: evel I The company does not comply with EC registration and reporting requirements, and the shares can be traded only on the OTC market (but not Nasdaq)(private placement under rule 44A). evel II The company registers with the EC and complies with its reporting requirements. The shares can be listed on an official U.. stock exchange (NYE, AE) or Nasdaq. evel III The company s ADRs are traded on a U.. stock exchange or Nasdaq and the company may raise capital in the United tates through a public offering of the ADRs. Convertible referred tock minimum value of convertible max [ r eferred tock Value, ConversionValue] Business Cycle Recovery: The economy picks up from its slowdown or recession. Good investments to have are the country s cyclical stocks and commodities, followed by riskier assets as the recovery takes hold.

2 Early Upswing: Confidence is up and the economy is gaining some momentum. Good investments to have are the country s stocks and also commercial and residential property. ate Upswing: Boom mentality has taken hold. This is not usually a good time to buy the country s stocks. The country s commodity and property prices will also be peaking. This is the time to purchase the country s bonds (yields are high) and interest rate sensitive stocks. Economy lows or Goes into Recession: The economy is declining. Good investments to have are the country s bonds, which will rally (because of a drop in market interest rates), and its interest rate sensitive stocks. Recession: Monetary policy will be eased but there will be a lag before recovery. articularly toward the end of the recession, good investments to make are the country s stocks and commodities. Global Duont Model NI EBT EBT EBIT EBIT NI Franchise Value b ( ROE r) E r r b ROE ( ROE r) g + r r ROE ( ) + FF G r Inflation flow-through λ I E E where ρ r I ρ + I ( λ) I ρ + ( λ)

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4 Risks of the Generic trategies Risks of Cost eadership Risks of Differentiation Cost leadership is not Differentiation is not sustained sustained competitors imitate competitors imitate technology changes bases for differentiation other bases for cost become less important to leadership erode buyers roximity in differentiation Cost proximity is lost is lost Cost focusers achieve even Differentiation focusers lower cost in segments achieve even greater differentiation in segments Risks of Focus The focus strategy is imitated The target segment becomes structurally unattractive structure erodes demand disappears Broadly-targeted competitors overwhelm the segment the segment s differences from other segments narrow the advantages of a broad line increase New focusers sub-segment the industry Growth Duration Model g ln a ( ) Eg ( ) Gg + Dg ( ) ( ) T ln Ea Ga + Da H model D g V ( ) + D H ( g g ) D r + [( + g ) + H ( g g )] g Growth rate and ROE (Duont) Net income Dividends Net income g Net income hareholder' s equity

5 Free Cash Flow to the firm FCFF NI + NCC + Int Tax rate FCFF EBIT FCFF EBITDA ( ) FCInv WCInv ( Tax rate) + Dep FCInv WCInv ( Tax rate) + Dep( Tax rate) FCInv WCInv Free Cash Flow to the FCFE FCFF Int Tax rate + Net ( ) borrowing FCFE NI + NCC FCInv WCInv + Net borrowing FCFE CFO FCInv + Net borrowing ( Tax rate) Net borrowing FCFE FCFF Int + /E E E D E D b ( + g) E ( b)( g) Justified /B (forecasted fundamental): B ( E )( b)( g) ROE g EVA EVA NOAT $ WACC EBIT ( t) WACC C COG G & A D t ( ) ( ) WACC C