...CHAPTER 1 INTRODUCTION AND OVERVIEW Learning Objectives The subject matter of economics and finance • The general role of the financial system in a modern economy • The major functions of financial markets and financial intermediaries • What saving is and its uses • How the financial system channels funds from lenders to borrowers • The role of the Federal Reserve and its regulatory and monetary policy responsibilities Lectures Notes I. Economic and financial analysis of an ever-changing system A. Economics is about how society decides what gets produced, how it gets produced and who gets what. B. Microeconomics studies about individual decision making units. Macroeconomics deals with aggregate or total behavior of all households and firms. C. Finance is about how the financial system coordinates the flow of funds from lenders to borrowers and how new funds are created by financial intermediaries in the borrowing process. D. Historically, the financial system has been highly regulated since a smooth functioning, efficient financial system is vital to a healthy economy. C. In recent years, the financial system has been changing due to new ways to raise and use money through financial intermediation, increased globalization, and deregulation. II. Finance in our daily lives A. Money is something generally acceptable and generally used to make payments. Saving is income not spent on...
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...* PV(CF) = CF/(1+r)t AKA PV = FV/(1+r)t * NPV = PV(CFs) – Investment = -C0 +C1/(1+r)+C2/(1+r)2+C3/(1+r)3+… = ∑(Expected CFt)/(1+r)t – Investment * Perpetuity – pays a fixed amount C per period forever * P(C,r) = C/r requires cash flow to begin NEXT period. If begin now, then PV = C + C/r * Annuity – fixed stream of cash flows that has a final period t * A(C,r,t) = C/r [1-1/(1+r)t] * Growing Perpetuity – G(C,r,g) = C/(r-g) C is initial cash flow, r is discount rate, g is growth rate * P/E = 1/(r-g) * High P-E multiple means the firm has good growth opportunities (high g), investments have low risk (low r), or both * Computing NPV – obtain the proper CF to use in the calculation * Rule: Determine all CF which will be realized if the project is taken. Subtract from this the CF that will be realized if the project is not taken. Result represents the CF impact of the project. The present discounted value of these incremental CF is the NPV of the project * CF = EBIT – Taxes + Depreciation – Capital Expenditures (CAPX) * EBIT (Earnings Before Interest & Taxes) = Revenues – Cost – Depreciation * EBIAT = EBIT * (1-TaxRate) * Taxes = CorpTaxRate * (Revenues – Costs – TaxShield) * FinalCF = SellingPrice – Taxes * NWC = Current Assets – Current Liabilities (change in NWC must = 0) * Projects of greater risk must have a higher discount rate as investors demand more return to compensate them for added...
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...HAWAWINI – CHAP11. Managers need to make two major decisions: A – What investments to take; B – How to finance it; A company that decide to finance its projects with external funds, maybe fi nd itself in difficult situation to pay its debts (excessive borrowing). Managers will be under pressure to make decisions that may not be in the best interest of shareholders – example: sell of value –creating assets; Conversely, a firm with too little debt may pass up the opportunity to reduce its tax payments and increase its value through tax savings. The firm’s optimal capital structure is the debt ratio that maximizes the market value of the firm’s assets. We have to analyze how a change in firm’s debt ratio affects: 1 – Profitability, measured with earnings per share (EPS); 2 – Market value of its assets; 3 – Share price; 4 – Cost of capital. Example: 100% equity finance Example: Borrow $100M @ 10% and repurchase of 1M shares EPS increases, but firm’s value remains the same. MM Theorem – capital structure does not increase firm’s value (in a world without taxes and costs of financial distress). This is explained by risk, any gain in EPS is offset by higher risks company faces by taking debt. In the example above, shareholders would be better off with leverage, though company’s management might think it is riskier to do it. So shareholder can replicate leverage on his personal account, by borrowing and buying new shares. * Annual tax shield: Tc x Kd x D ...
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...Chapter 15 Corporate Valuation, Value-Based Management, and Corporate Governance MINI CASE You have been hired as a consultant to Kulpa Fishing Supplies (KFS), a company that is seeking to increase its value. KFS has asked you to estimate the value of two privately held companies that KFS is considering acquiring. But first, the senior management of KFS would like for you to explain how to value companies that don’t pay any dividends. You have structured your presentation around the following questions. a. List the three types of assets that companies own. Answer: Assets-in-place, growth options, and nonoperating, or financial, assets. b. What are assets-in-place? How can their value be estimated? Answer: Assets-in-place are tangible, such as buildings, machines, inventory. Usually they are expected to grow. They generate free cash flows. The PV of their expected future free cash flows, discounted at the WACC, is the value of operations. c. What are growth options? How can their value be estimated? Answer: Growth options are not tangible. They include R&D, such as at drug companies and genetic engineering companies, and building customer relationships, such as at amazon.com. Growth options are valued using option pricing techniques in Chapter 17. d. What are nonoperating assets? How can their value be estimated? Answer: Nonoperating assets are marketable securities and ownership of non-controlling interest in another company. ...
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...New Heritage Doll Company: Capital Budgeting Case The key issue in the case is which of one of the two projects recommended by the Production Division should the company pursue (if any). Below is the summary of the NPV analysis done for both the Match My Doll Clothing (MMDC) and Design Your Own Doll (DYOD) As seen above the NPV for the MMDC project is $9.587 million and the NPV for the DYOD is $4.833 million. Analysis: Even though the NPV for the DYOD is lower than MMDC, it may be advisable the Company to pursue the DYOD doll as it is a more sustainable product line. The revenue of MMDC is based on trends and it is unlikely for the trend of matching doll and child clothing would continue forever. It is also important to note that historically, Heritage Doll has specialized in manufacturing the dolls and it is not specializing in clothing. Drifting from its core competency could go against the company. On the other hand, research has shown that by enabling the customer to design their own dolls that have features that are similar to their own, the company can create a loyal and sustainable customer base. Manufacturing dolls is also internally consistent with the company’s current strategy of manufacturing dolls rather than clothes. The company can continue to generate revenue by doing what it does best. The key takeaway here is that a positive NPV project should not be considered in isolation but instead should be analyzed in conjunction with the overall strategy of...
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...Question 1 10 points Save Macomb Corporation is a U.S. firm that invoices some of its exports in Japanese yen. If it expects the yen to weaken, it could ____ to hedge the exchange rate risk on those exports. sell yen put options buy yen call options buy futures contracts on yen sell futures contracts on yen Question 2 10 points Save A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.01 and the exercise price of the option is $.75. If the spot rate at the time of maturity is $.85, what is the net amount received by the corporation if it acts rationally? $74,000. $84,000. $75,000. $85,000. Question 3 10 points Save Magent Co. is a U.S. company that has exposure to the Swiss francs (SF) and Danish kroner (DK). It has net inflows of SF200 million and net outflows of DK500 million. The present exchange rate of the SF is about $.40 while the present exchange rate of the DK is $.10. Magent Co. has not hedged these positions. The SF and DK are highly correlated in their movements against the dollar. If the dollar weakens, then Magent Co. will: benefit, because the dollar value of its SF position exceeds the dollar value of its DK position. benefit, because the dollar value of its DK position exceeds the dollar value of its SF position. be adversely affected...
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...Peter DeVito Ed Travaglianti Cameron McNeil Corporate Finance Homework #1 1. 6 month | 1 year | Investment | C1 = 10,000 | C2 = 20,000 | 26,000 | r1 = 0.03 | r2 = spot rate = s | | 100 = 31+0.03+ 1031+s where 3 is the coupon payment based on a 6% yield s= 6.09% NPV = -C0+ C1(1+r1)+ C2(1+r2) NPV = -26,000+ 10,000(1+0.03)+ 20,000(1+0.0609) NPV = 2560.66 with positive NPV, YES, we should invest 2. Based on the Annuity Formula and assuming the same 9%, 30 year, with time t=0 (10 years ago) Monthly Payments = 4,023.11 Mortgage = 500,000 AC, r, t= Cr 1-1(1+r)t 500,000= 4,023.11(0.0912) 1-1(1+(0.0912))12(30) 500,000= 4,023.11(0.0912) 1-1(1+(0.0912))360 r≠ 0.09 r= 0.09*0.9122=0.0821 or 8.21% New formula then becomes: 500,000= 4,023.11(0.082112) 1-1(1+(0.082112))12t t= 23.2 years 3. Year | 0 | 1 | 2 | ∞ | Sales | | 100 | 110 | Cr-g=1100.05-0.03=5500 | Profit | | 20 | 22 | C∞= 1100 | Depreciation | | -10 | -10 | | ∆ NWC | | -10 | -1 | -55 | CAPX | | -11 | -12 | | Taxes (40%)(Gross Profit) | | -8 | -8.8 | -440 | Net Cash Flows | | -9 | 0.2 | 660 | CF=Gross Profit-Taxes-CAPX- ∆NWC R1 year: The 1 year rate should be equal to investing in four 3 month rates. FV3 month@ t=1 year FV=1 1+0.0344=1.03034 FVPV=1+r 1.030341= 1+r1 year NPV=0= -C0-91+0.0303+0.21+0.042+ 660 already accounted for r C0=651.5 4. pE=18 g=18% pE=1r-g ...
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...Unit 1 – AO1 – Investigate the roles and responsibilities of two contrasting public services and describe their purpose AO2 – Investigate the internal structure and functional areas for two chosen public services The two public services I am going to speak about are the prison service and the army. The reason is because both have a very important part of the keeping Britain safe. The prisons vision is to provide the very best prison service as possible and to help secure the following points. * Hold prisoners securely and safely * Reduce the risk of any prisoners from re-offending * Providing safe and well-ordered establishments in which we treat prisoners humanely, decently and lawfully To make sure the prison service actually completes their objectives they work in * close partnership with our commissioners and others in the Criminal Justice System to achieve common objectives * Obtain best value from the resources available using research to ensure effective correctional practice * Promote diversity, equality of opportunity and combat unlawful discrimination, and * Ensure our staff have the right leadership, organisation, support and preparation to carry out their work effectively. This is what the prison set out to achieve and how they plan to do it but there is a lot more involved in running a successful prison because a prison is a business. The prison has it goals but the prison needs top security to complete the goals. No...
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...XVIII AIRBORNE CORPS AND FORT BRAGG DFAC SCHEDULE SNAPSHOT NOVEMBER 2014 XVIII AIRBORNE CORPS & FORT BRAGG DINING FACILITY OPEN/CLOSE SCHEDULE November 2014 1-2 CLOSED POPE AAF Weekday 8-11 CLOSED 15-16 OPEN 22-23 CLOSED 27-30 82ND CAB CLOSED 1 Phone# 396-9993/ 7685 DINING FACILITY Location Goldberg Street Weekend Br: 0930-1300 Sup: 1600-1730 Find Your Location Bldg# M-5530 SMOKE BOMB CLOSED CLOSED CLOSED CLOSED CLOSED 2 Phone# 396-2592 /0103 Essayons Street Bldg# H-4842 2nd BCT Closed Weekends Br: 0930-1230 Sup: 1530-1730 Br: 0930-1300 Sup: 1600-1730 Br: 0930-1300 Sup: 1600-1730 Br: 0930-1230 Sup: 1530-1730 Brk: 0800-1000 Lun: 1130-1330 Din: 1530-1730 Brk: 0800-1000 Lun: 1130-1330 Din: 1530-1730 Brk: 0800-0930 Lun: 1200-1330 Din: 1530-1730 CLOSED OPEN CLOSED OPEN CLOSED 3 Phone# 643-6929 Gruber Road Bldg# C 9453 525th BFSB OPEN OPEN CLOSED OPEN CLOSED 4 Phone# 396-8063 Ricketts Street Bldg# 2-5112 WTB CLOSED CLOSED CLOSED CLOSED OPEN 5 Phone# 396-3436 Normandy Drive Bldg# A-4-1832 SWCS OPEN CLOSED OPEN CLOSED OPEN 6 Phone# 396-7291 Merrill Street Bldg# D-3624 3rd BCT OPEN OPEN CLOSED OPEN CLOSED 7 Phone# 432-8798/ 2298 Butner Road Bldg# A-3556 1st BCT OPEN CLOSED OPEN CLOSED OPEN 8 Phone# 643-6886 Bastogne Drive Bldg# B-1732 82ND SBDE CLOSED CLOSED OPEN CLOSED CLOSED 9 Phone# 432-5538 Longstreet Road Bldg# 3-5103 3rd SFG CLOSED...
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...Accredited Tertiary Courses Listing 2012 Accredited Tertiary Courses Listing 2012 – as at 26 September 2012 1 2012 Accredited Undergraduate Courses AUSTRALIAN CAPITAL TERRITORY The Australian National University University of Canberra NEW SOUTH WALES Australian Catholic University Australian Institute of Higher Education Avondale College Charles Sturt University Kings Own Institute Macquarie University Southern Cross University Top Education Institute The University of New England The University of New South Wales The University of Newcastle The University of Sydney University of Technology, Sydney University of Western Sydney University of Wollongong Williams Business College NORTHERN TERRITORY Charles Darwin University QUEENSLAND Australian Catholic University Bond University Central Queensland University Christian Heritage College Griffith University James Cook University Queensland University of Technology The University of Queensland The University of Southern Queensland University of the Sunshine Coast SOUTH AUSTRALIA Flinders University Kaplan Business School The University of Adelaide University of South Australia Open Universities (conferred by Uni of SA) TASMANIA University of Tasmania VICTORIA Australian Catholic University Cambridge International College Carrick Higher Education Deakin University Holmes Institute Holmesglen Institute of TAFE La Trobe University Melbourne Institute of Technology Monash University Northern Melbourne Institute of TAFE RMIT...
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...Ferman3). Senior management recognizing the need to create a more competitive environment within the company began a restructuring process from 1994-2000. In 1999 the company announced it intended to double its generation capacity by 2005 “through acquisition of existing plants and development of new plants” (Esty, Ferman 4). Jim Abel and PPL’s Finance team determined that in order to execute this new strategy PPL needed to maintain access to large amounts of capital at low cost while maintaining the financial soundness of the corporate balance sheet. This culminated in the separation of its unregulated generation businesses from its regulated distribution and transmission businesses in 2000(Esty, Ferman 4). The environment PPL was operating in during this time was not conducive to PPL Global using Corporate Finance to raise the billions of dollars needed to fund the expansion of the company’s generation portfolio. To use Corporate Finance would result in a burden on the company as a whole while putting the PPL at risk of credit downgrades resulting in it becoming increasingly difficult to raise additional needed capital. Thus, the finance team evaluated raising funds at the PPL Global level through project financing and Leasing structures to provide the financial flexibility needed to raise capital while maintaining a sound financial soundness to the corporate balance sheet. Jim Abel expressed that initial...
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...patients, vendors, and employees. Health care finance managers should be well versed in the four elements of financial management, generally accepted accounting principles (GAAP), and ethical financial standards to ensure acceptable financial practices as well as the sustainability of the organization. Four Elements of Financial Management During the planning process, a financial manager uses the organization’s objectives to develop a systematic process by which the objectives will be met. In order for health care facilities to be successful, there is a large amount of planning involved. Of particular concern is healthcare reform. A health care facility has to plan for compliance issues that will directly affect their bottom line. This includes risk management, new information systems, or the purchase of new equipment. Controlling ensures each department within the health care facility is following prudent financial decisions that have already been set and planned. One example of controlling expenses is to approve or deny capital expenditures. Capital expenditures more often than not increase the organization’s assets. Capital expenditures are also usually included in a budget. When controlling, the financial manager must ascertain if the capital expenditure complies with budget and will increase the organization’s assets. When financial managers are organizing and directing, they are deciding how to use the facility’s finances, equipment, and human resources to meet short-...
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...through fifteen thousand merchants. American General Corp. operates in 41 states. Puerto Rico, and the United States Virgin Islands. Well, first we find out that American General Corporation is a blue chip, multibillion dollar company. This tells us right from the beginning that this financial giant is really worth looking at as a potential candidates to be added in our stock portfolio. Considering that this is a financial company dealing with investments, pension funds and life insurance we have to be very careful because these industries are most sensible to overall economy changes, and we know that at this point US economy is going through the period when recession is most expected. To get a better understanding of how this might affect companies risk we have to know how diversified companies investments are. For that we have to evaluate companies performance compare to market performance. ( for this purpose we use chart on returns for American General Corporation to S&P 500 ). As we can see from the chart behavior of the company is almost identical to the behavior of the market, this observation becomes more obvious when we take a look at company's beta which is .95. Well this is not such a great sign because as I already mentioned recession is expected., and as we know with recession overall market returns go down this is knowing the relationship between market and AGC we can predict that American General Corp. performance will...
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...The Rise of Canadian Military Professionalism in World War 1 Paul Dickson in his article “The End of the Beginning: The Canadian Corps in 1917,” attempts to answer the question of what factors were responsible for the turnaround in professionalism and capability of the Canadian Expeditionary Force (CEF) during the later half of the First World War. The author’s thesis is that the Canadian Corps that fought at Vimy Ridge was not the superlative force that the Canadian public thought they were. In fact, during the early period of World War I, before 1916, the Canadian Corps was still in its infancy and definitely undergoing teething troubles, even though the beginning of a firm and solid base was slowly developing. “The Canadian Corps that took Vimy Ridge was not the “elite” formation it would become in 1918, but the foundation was firmly in place.” Prior to 1916, the author explains that the key ingredients to success that are described as “good habits” and a “good organizational culture” , were not fully in place and prevented the CEF from reaching its maximum operational effectiveness. Dickson is intrigued with the CEF in that there was an element that made them unique to both their Allied and Axis counterparts allowing them to reach this “elite” plateau, as the “Canadian Expeditionary Force (CEF) shared many of the problems encountered by other armies on the Western Front…” . He attempts to explore this question and seek answers. Was it better equipment...
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...Easting Headed due east on the afternoon of February 26, 1991, VII Corps was advancing with a front of four armored/mechanized divisions. In the center of this front, leading the way and conducting reconnaissance for the corps, was the 2nd Armored Cavalry Regiment (ACR). The 2nd ACR’s job was to locate the forward elements of the IRG divisions suspected to be in the area, fix them in place, then pass the heavy divisions of VIII Corps through their lines so that they could smash the elite Iraqi units with a single killing blow. It was a difficult assignment, made more so by the weather conditions. The winter of 1990/91 was one of the wettest on record in the Persian Gulf, and had been a major problem during the preceding six weeks of the Desert Storm air campaign. Now the wind was howling, causing a sandstorm that was grounding the Army’s aviation assets and limiting visibility to as little as a thousand meters. Air reconnaissance was limited mostly to signals intelligence data, which meant that finding where the IRG divisions were located, would be up to the 2nd ACR. Like the prairie horse soldiers of 150 years earlier, the troopers of the regiments would grope forward until they physically ran into the enemy, in this case the IRG Tawakalna Division. Generally known to be the best and most aggressive of the various IRG formations, Tawakalna was the unit that would bear the brunt of the coming battle with VII Corps. As 2nd ACR moved forward, the regiment’s three squadrons were line...
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