Financial Management - Lecture notes for Professor Voleti Srinivasan. PDF

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Lecture notes for Professor Voleti Srinivasan....

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1/12/2019 ● Proprietorship & Partnership ○ Pros: Low Taxes ○ Cons: Limited Life, Sole Liability ● Corporate ○ Pros: Unlimited Life ○ Cons: Double Taxation ● S-Partnership? (contains more than 2 people, but isn’t considered corporate-contains around 70 shareholders.) ○ Pros: ○ Cons: Managers are naturally inclined to work in their own best interest, which aren’t always the same as the interest of the shareholders. The following factors affect managerial behavior: ➔ Managerial COmpensation Packages ➔ Threat of Firing ➔ Threat of Takeover ➔ Action by shareholders Ways to Improve Collections ➔ Collection Center ◆ Speeds up collection of A/R and reduces mailing time ➔ Electronic Funds Transfer (or wire Transfer or Funds) ◆ A system where payments are automatically deducted from a bank account ➔ Lockbox System ◆ When customers mail payment to a local post office box instead of to the firm Free cash flows are the cash flows that are available (or free) for distribution to all investory (stockholders and creditors). FCF = sales revenue - operating costs - operating taxes - required investments in operating capital.

February 1, 2019 Chapter 12 - Inflation, Capital Markets, Risk & Return, Concepts

Chapter 1 & 2 in a Wrap Inflation - the rate at which the general level of prices for goods ands ervices is rising, and subsequently, purchasing power is falling. Stock = ownership or equity Stockholder own the company Bonds = debt or IOU Bondholders lend money to the company. Primary vs. Secondary Security Sales ● Primary ○ New issue (IPO or seasoned) ○ Key factor: issuer receives the proceeds from the sale. ● Secondary ○ Existing owner sells to another party. ○ Issuing firm doesn’t receive proceeds and is not directly involved. How are secondary markets organized? ● By “Location” ○ Physical location exchanges ○ Computer/telephone networks ● By the way that orders from buyers and sellers are matched ○ Open outcry auction ○ Dealers (i.e. marketed) Markets: a way of exchanging assets Primary Markets are markets for buying assets directly from their sources; the first market where an asset is originally bought and solds. Secondary Markets are those with existing Underwriting is a function that guarantee by investment bankers to purchase the issuer’s securities at a fixed price.

Alternatives to Underwriting ● Investment banker makes “best efforts” to sell security but issuer assumes risk of unsold securities. ● Securities may be sold directly to investors by the issuer in a public Distribution On large issues, investment bankers may share the risk and burden of distribution by forming a “syndicate” A “tombstone” advertising a stock or bond issue may list many underwriters distributing a security. Electronic Communication Networks (ECNs) Electronic trading systems that automatically match buy and sell orders at specified prices.

What is Risk? Risk means uncertainty about a future outcome. Risk varies greatly depending on the investment: - A T-Bill has zero or no risk - A gold-mining expedition in Africa has high risk. Most investors and financial managers are risk averse, meaning they don’t like risk.

Everything that happens during the day can affect the value of your portfolio, e.g. ➔ A snow storm in the Midwet ➔ Congressional testimony by Fed Chairperson ➔ A surprise earnings announcements Risk Variability in the expected return ● High return with high risk ○ Aggressive investors

Comparing Investments With standard deviation being really broad, the higher the risk it is for the return on investment.

As investors, stick with the geometric mean. Rate of Return = ( (Ending Value-Beginning Value)+Income or Dividends ) / beginning value

Beta is a statistical measure of volatility. It measures how responsive or sensitive a stock is to market movements in general. An individual stock’s beta shows how it compares to the market as a whole: Beta = 1 means equal risk with the market Beta > 1 means more risky than the market Beta...