24/10/2013

Week 6 Time value of money

Looked at a company
separation of ownership re owners (SHs) and managers Types of funding: liability vs. equity (adv. vs. disadv.)

AFX9590 Accounting and Finance for International Managers

Revision: Weeks 6 - 9

Future value Present value Perpetuities

= + +

Annuities

Valuing securities - bonds

Coupon payments
Calculating PV of cash flows from coupons, and face value at maturity (2 separate streams of CFs)

Week 8 Valuing securities - stocks

Bonds (Week 7) mature, stocks do not Risk of debt vs. equity Primary vs secondary market for stocks Stock market characteristics: various e.g. IPOs, secondary sale of shares on stock market; Bid (buyers) ask (seller) Market measures: market capitalisation, EPS, P/E ratio, dividend yield Price and intrinsic value = PV of cash payoffs anticipated by the investor in stock
At each point in time securities with the same risk should offer the same return regardless of being a stock or bond
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Zero coupon bonds

No payments received before maturity

Types of bonds: Government, semi-government, corporate

Default rates on corporate bonds

Value of bonds: coupon rate vs. yield (important**) Holding period return calculations Yield curves Interest rates and inflation

Week 8 continued (Valuing stock)

Dividend discount model (no growth):
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Week 9 Capital budgeting

Net present value How to choose between projects
Equivalent annual annuity for machines with different lives (EAA) Payback rule (how long to recover initial investments) IRR what would be the discount rate if NPV equals zero not useful for mutually exclusive projects. Can give conflicting accept/reject with NPV Profitability index (PI) NPV / initial investment Higher result better Incremental cash flows e.g. Sony playstation 4 release will impact Sony playstation 3 cash flows

Constant growth dividend discount model:

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Non-constant growth: 3 step model

Work out PV expected dividends for set future period Estimate stock price at end of dividend period Take the future estimated stock price and bring it back to a PV and add in the PV of the dividend stream