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Stock Market Trading and insider trading Daily trading volatility Mutual fund scandals late trading and market timing f

What do you read in WSJ? Stock Market Trading and insider trading Daily trading volatility Mutual fund scandals late trading and market timing fees IPO allocations Google Frank Quattrone Executive Compensations Tyco Corporate Governance and Earnings Management Enron, Worldcom

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Stock Market Trading and insider trading Daily trading volatility Mutual fund scandals late trading and market timing f

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  1. What do you read in WSJ? • Stock Market • Trading and insider trading • Daily trading volatility • Mutual fund scandals • late trading and market timing • fees • IPO allocations • Google • Frank Quattrone • Executive Compensations • Tyco • Corporate Governance and Earnings Management • Enron, Worldcom Introduction – MBA504

  2. The Four Basic Areas of Finance • Investments • Financial Institutions • International Finance • Corporate Finance Introduction – MBA504

  3. Investment • What kinds of investment tools we have? • How to issue new securities? • Security Markets • Listing and listing requirements • What do Investment banks do? • Goldman Sachs, Merrill Lynch, JPMorgan, Lehman Brother, Saloman Smith Barney, Morgan Stanley • Investment banking (underwriting): Underwrites IPOs, SEOs, places private equity ... • Brokage Service: execute security transaction, offers M&A advisory services ... • Asset management Introduction – MBA504

  4. Financial Institutions • Commercial Banks • Savings institutions • credit unions • mutual funds • insurance companies • pension funds Introduction – MBA504

  5. International Finance • Foreign Exchange Risk • Political Risk • Terms like LIBOR, EURO, Eurodollar • What would be the impact on Japanese products if Yen Strengthens against Dollar? Introduction – MBA504

  6. Corporate Finance Introduction – MBA504

  7. What is Corporate Finance? Corporate Finance addresses the following three questions: • What long-term investments should the firm engage in? • How can the firm raise the money for the required investments? • How much short-term cash flow does a company need to pay its bills? Introduction – MBA504

  8. Total Value of Assets: Total Firm Value to Investors: Current Liabilities Current Assets Long-Term Debt Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity The Balance-Sheet Model of the Firm What long-term investments should the firm engage in? Introduction – MBA504

  9. Total Value of Assets: Total Firm Value to Investors: Current Liabilities Current Assets Long-Term Debt Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity The Balance-Sheet Model of the Firm How can the firm raise the money for the required investments? Introduction – MBA504

  10. Total Value of Assets: Total Firm Value to Investors: Current Liabilities Current Assets Long-Term Debt Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity The Balance-Sheet Model of the Firm Net working capital Introduction – MBA504

  11. 25% Debt 70% Debt 30% Equity 75% Equity Capital Structure The value of the firm can be thought of as a pie. 50% Debt The goal of the manager is to increase the size of the pie. 50% Equity The Capital Structure decision can be viewed as how best to slice up a the pie. If how you slice the pie affects the size of the pie, then the capital structure decision matters. Introduction – MBA504

  12. The Financial Manager To create value, the financial manager should: • Try to make smart investment decisions. • Try to make smart financing decisions. Introduction – MBA504

  13. The Corporate Firm • The corporate form of business is the standard method for solving the problems encountered in raising large amounts of cash. • However, businesses can take other forms. Introduction – MBA504

  14. Organization Chart Introduction – MBA504

  15. Forms of Business Organization • The Sole Proprietorship • The Partnership • General Partnership • Limited Partnership • The Corporation • Advantages and Disadvantages • Liquidity and Marketability of Ownership • Control • Liability • Continuity of Existence • Tax Considerations Introduction – MBA504

  16. Goals of the Corporate Firm • The traditional answer is that the managers of the corporation are obliged to make efforts to maximize shareholder wealth. Introduction – MBA504

  17. Managerial Goals • Managerial goals may be different from shareholder goals • Expensive perquisites • Survival • Independence • Increased growth and size are not necessarily the same thing as increased shareholder wealth. Introduction – MBA504

  18. Separation of Ownership and Control Board of Directors Management Debtholders Shareholders Debt Assets Equity Introduction – MBA504

  19. Do Shareholders Control Managerial Behavior? • Shareholders vote for the board of directors, who in turn hire the management team. • Contracts can be carefully constructed to be incentive compatible. • There is a market for managerial talent—this may provide market discipline to the managers—they can be replaced. • If the managers fail to maximize share price, they may be replaced in a hostile takeover. Introduction – MBA504

  20. Financial Markets • Primary Market • When a corporation issues securities, cash flows from investors to the firm. • Usually an underwriter is involved • Secondary Markets • Involve the sale of “used” securities from one investor to another. • Securities may be exchange traded or trade over-the-counter in a dealer market. Introduction – MBA504

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