Fina 2322 Lecture notes PDF

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Fina 2322 Lecture notes 2021-2022 liu...

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FINA1003/FINA1310 CORPORATE FINANCE Faculty of Economics and Finance University of Hong Kong Dr. Shiyang Huang Lecture 1: Introduction of Corporate Finance

Key Takeaways • Basic Information • Course Objective and Overview • How to Do Well in This Course • Finance and the Economy • Fundamental Questions of Finance • Financial Management

Instructor Information • Name: Dr. Shiyang Huang •

PhD. in Finance from London School of Economics

• Office: KKL Room 834 • Email address: [email protected] • Format

Online teaching: pre-recorded videos (see Panopto) • HKU Moodle: FINA1310IJ_2020 • Live Q&A sessions: 11am – 12pm and 5pm – 6pm (Tuesday) • Summary of Q&As from students • Intensive live summary and Q&A sessions before exams •

TA Information • Name: Miss. Stephanie Ting • Office: KKL Room 1026 • Email address: [email protected] • Tutorial Format •

Online tutorial: pre-recorded videos (see Panopto on Moodle) •

•

HKU Moodle: FINA1310IJ_2020

Live Q&A sessions: TBD

Survey

• Background? •

• • • •

Economics and Finance Business Social Sciences Engineer, Computer Science Others

Distribution 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00%

Key Takeaways • Basic Information • Course Objective and Overview • How to Do Well in This Course • Finance and the Economy • Fundamental Questions of Finance • Financial Management

Textbook Fundamentals of Corporate Finance • Asia Global Edition • Second Edition • Ross, Westerfield, Jordan, Lim, and Tan •

•

Financial Calculator • •

Necessary A guidance will be provided

Performance Evaluation • Assessment

Attendance and participation (5%) • Homework assignments (20%) • Two assignments • Group based: No. of members should be no more than 5. • Mid-term exam (20%) • Final exam (55%) •

• Implicit contract

View pre-recorded videos every week and be well prepared • Contribution to Q&A sessions • Cheating of any form will not be allowed •

How to Do Well in this Course? • Theory vs. Practice

Most of this course will be devoted to theory • What about practice? •

•

Wall Street Journal or Financial Times

• Some Helpful Suggestions • • • • • •

Do readings ahead of time (skim textbook chapters in advance) Take notes during lectures Review lectures afterwards with your study group Work on assignments in groups Do problems Ask questions

The Big Picture of the Course • This course is about: •

•

Financing and investment decisions Applying to corporations or individuals

• The goal of this course is:

An introductory course to lead you into the are of finance • To guide you in major financial decisions of corporations • To equip you with the core skills in future career •

Examples of Jobs in Financial Industry •

Banker Pay: Who Makes the Most? (WSJ article in 2013) • •

•

The 31-Year-Old Hedge Fund Star Who Was Paid $119 Million (Forbes Magazine in 2013) •

•

Despite their recent troubles, investment bankers are still the best paid professionals For example, investment bankers’ average salary was about 230,000 USD excluding bonus in 2013.

According to a recent Securities & Exchange Commission filing, Och-Ziff Capital Management paid James Levin $119 million in 2013

Various jobs in financial professionals • • •

Investment banks, commercial banks, hedge funds, high frequency trading firms, mutual funds, pension funds Corporations and NGOs FinTech companies: •

Blockchain, BitCoin, P2P lending, Robot-advisers

Finance and the Economy

Fundamental Questions of Finance • Valuation • How are financial assets valued? • How should financial assets be valued? • How do financial markets determine asset values?

• Management • • • •

How much should I save/spend? What should I buy/sell? When should I buy/sell? How should I finance the transaction?

• We apply valuation and management to both personal

and corporate decisions

Challenges of Finance • Time value of money • Cash flows now are different from cash flows later

• Risk • Certain cash flows are different from (uncertain) cash flows • How should we model or quantify the risk?

Challenges of Finance • Time value of money • Quiz 1: how to choose between $10,000 now and $10,100

one month later? • Risk • Quiz 2: how to choose between saving in the bank and

investment in S$P 500 index (U.S. market index)?

Challenges of Finance • Time value of money • Cash now are different from cash one month later • Example: save $10,000 at HSBC

Challenges of Finance • Time value of money • Cash now are different from cash one month later • Example: save $10,000 at HSBC (not a good choice)

Interest at maturity HKD 0.08 Maturity date 15 Feb 2021 Interest rate 0.0100%

Challenges of Finance • Risk • How to choose between saving in the bank (HSBC) and

investment in S&P 500 index • Interest rate vs. return from S&P 500 index: •

0.01% vs. 7% (per year)

Challenges of Finance • Risk • Although S&P 500 index provides 7% per year on average,

the return on S&P 500 index is volatile.

Challenges of Finance

• Risk: crash? •

Example: Black Monday 1987, refers to Monday, October 19, 1987, when stock markets around the world crashed, shedding a huge value in a very short time. The crash began in Hong Kong and spread west to Europe, hitting the United States after other markets had already declined by a significant margin.

Challenges of Finance

• Risk: crash? •

Example: Black Monday 1987

Challenges of Finance

• Risk: crash? •

Example: Financial Crisis of 2007-08, is considered by many economists to have been the worst financial crisis since the Great Depression of the 1930s

Challenges of Finance

• A list of crisis or crashes in the history Year

Crisis or Stock Market Crash

1987

Black Monday 1987

1994-1995 1997-98 1998

1994 Economic Crisis in Mexico 1997 Asian Financial Crisis Russian Financial Crisis

1999-2002

Argentine Economic Crisis

2001

Bursting of dot.com Bubble

2007-2008

Global Financial Crisis

2010

European Sovereign Debt Crisis

2015

Chinese Stock Market Crash

Challenges of Finance

• Risk: can wen predict risk? •

One example: Fail of Long-Term Capital Management (LTCM)

LTCM was run by Myron S. Scholes and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economic Sciences for “a new method to determine the value of derivatives”. • Initially successful with annualized return of over 21% (after fees) in its first year, 43% in the second year and 41% in the third year. • It lost $4.6 billion in less than four months following 1997 Asian Financial Crisis and 1998 Russian Finance Crisis. •

• Detailed information in “When Genius Failed” by Roger

Lowenstein

Course Overview • Introduction • Part I: Valuation • Time Value of Money • Discounted Cash Flow Valuation • Bond and Stock Valuation

• Part II: Risk and Return • Historical Risk and Return Relationships, CAPM

• Part III: Capital Budgeting • Real Investment Decisions, Cost of Capital

• Part IV: Financing Decisions • Raising Capital, Tradeoff between Equity and Debt...