8. 1- 8
External
Constraints:
1. Antitrust Laws
2. Environmental
Regulations
3. Product and
Workplace Safety
Regulations
4. Employment
Practices Rules
5. Federal Reserve
Policy
6. International
Developments
Strategic Policy
Decisions Controlled
by Management
1. Types of Products
and Services
Produced
2. Production Methods
Used
3. Relative Use of Debt
Financing
4. Dividend policy
Level of Economic
Activity and
Corporate Taxes
Stock Market
Conditions
Expected
Profitability
Timing of Cash
Flows
Degrees of Risk
Summary of Major Factors Affecting Stock Prices
Stock Price
One of my favorite pictures….
9. 1- 9
Within a corporation, agency
relationships exist between
Shareholders and managers
Shareholders and creditors
Agency Relationships:
10. 1- 10
Ethics Issues
• Is it ethical for tobacco companies to sell a
product that is known to be addictive and a
danger to the health of the user? Is it relevant
that the product is legal?
• Should boards of directors consider only price
when faced with a buyout offer?
• Is it ethical to concentrate only on shareholder
wealth, or should stakeholders as a whole be
considered?
12. What is ESG investing?
• Environmental, Social, and Governance (ESG) investing refers to the inclusion of
traditionally non-financial topics within investment decision-making
Sources: Wall Street Journal, yahoo.com, epa.gov, nytimes.com, cnn.com
Environmental
Biodiversity & land usage
Climate change
Green building
Renewable energy
Water stress/pollution
Governance
Accounting
Board structure
Business ethics & fraud
Corruption
Executive compensation
Social
Consumer protection
Diversity & inclusion
Human capital
Labor standards
Privacy & data security
Environmental impact:
200+ millions of gallons of
water polluted
Financial implications:
Record $20+ billion in fines
Social impact:
Personal information compromised
for 143 million Americans
Financial implications:
Short-term stock price dropped 20%,
a loss of $4 billion in shareholder value
Governance impact:
Largest corporate bankruptcy at the
time with more than 20,000 jobs lost
Financial implications:
Stock price dropped from
$13.90 to $0.26 in one month
INCIDENT
BP Deepwater Horizon oil spill
April 2010
INCIDENT
Equifax data breach
September 2017
INCIDENT
Enron accounting fraud
October 2001
13.
14. 1- 14
The Financial Markets
Financial markets bring together
borrowers and savers
The primary role of financial markets is to
facilitate the flow of funds
15. 1- 15
Flow of Funds
Different financial phases…for example...
– Young adults borrow
– Older working adults save
– Retired adults use savings
Funds transferred from savers to borrowers
17. 1- 17
Types of Financial Markets
Money versus capital markets
Debt versus equity markets
Primary versus secondary markets
Derivatives markets
18. 1- 18
General Stock Market Activities
The secondary market - trading in the
outstanding, previously issued shares of
established, publicly owned companies
The primary market - additional shares sold by
established, publicly owned companies
IPO market - new public offerings by privately
held firms
21. 1- 21
Regulation of Securities Markets
Securities and Exchange Commission
(SEC)
– Jurisdiction over offerings of new
securities to the general public
22. 1- 22We have $100 and the interest rate is 10%.
0 1
|__________________|
$100 ----------------------------> ?
$110
0 1
|__________________|
? <- ---------------------------- $110
$100
23. 1- 23
Cash Flow Time Lines
CF0 CF1 CF3CF2
0 1 2 3
r%
Tick marks at ends of periods, so t=0 is today;
t=1 is the end of Period 1; or the beginning of
Period 2.
Graphical representations used to
show the timing of cash flows.
24. 1- 24
Future Value
The amount to which a cash flow or series of
cash flows will grow over a period of time
when compounded at a given interest rate.
How much would you have at the end of one year if you
deposited $100 in a bank account that pays 10 percent
interest each year?
FVt = FV1 = PV + INT
= PV + (PV x r)
= PV (1 + r)
= $100(1+0.10) = $100(1.10) = $110
25. 1- 25
Finding FVs is Compounding.
What’s the FV of an initial $100
after 3 years if r = 10%?
FV = ?
0 1 2 3
r=10%
100
26. 1- 26
In general, FVt = PV (1 + r)t
After 3 years:
FV3 = PV(1 + r)3
= 100 (1.10)3
= $133.10.
After 2 years:
FV2 = PV(1 + r)2
= $100 (1.10)2
= $121.00.
After 1 year:
FV1 = PV + INT = PV + PV (r)
= PV(1 + r)
= $100 (1.10)
= $110.00.
Future Value
27. 1- 27
What is the PV of $100 due
in 3 years if r = 10%?
100
0 1 2 3
10%
PV = ?
28. 1- 28
Solve FVt = PV (1 + r )t for PV:
( )
t
r+1
1
FV=
rr+1
t
FV
=PV t
( )
( ) $75.13.=0.7513$100=
PVIF$100=
3
1.10
1
$100=PV nr,
What is the PV of $100 due
in 3 years if r = 10%?
29. 1- 29
Present Value
Present value is the value today of a
future cash flow or series of cash flows.
Discounting is the process of finding
the present value of a cash flow or
series of cash flows, the reverse of
compounding.
30. 1- 30
Consider the following two questions:
"What is the present value of $500 to be received in 20 years
if the interest rate is 7 percent?"
and
"How much would I have to invest now in order to receive
$500 after 20 years, given an interest rate of 7 percent?"
38. 1- 38
Find the FV and PV if the
Annuity were an Annuity Due.
100 100
0 1 2 3
r =10%
100
39. 1- 39
What is the PV of this Annuity
Due?
100 100
0 1 2 3
r%=10
100
90.91
82.64
PV = 273.55
40. 1- 40
What’s the FV of a 3-year
Annuity Due of $100 at 10%?
100 100
0 1 2 3
10%
110
121
133.10
FV = 364.10
100
41. 1- 41
PVAdue = PVAordinary x (1+r)]
PVA(due)3 = 100[(2.4869) x 1.10] = 273.55
FVAdue = FVAordinary x 1 + r)]
FVA(due)3 = 100[(3.31) x 1.10] = 364.10
42. 1- 42
Uneven Cash Flow Streams
A series of cash flows in which the
amount varies from one period to the
next.
Payment (PMT) designates constant
cash flows
Cash flow (CF) designates cash flows
in general, including uneven cash
flows
43. 1- 43
What is the PV of this
Uneven Cash Flow Stream?
0
100
1
300
2
300
3
10%
-50
4
90.91
247.93
225.39
-34.15
530.08 = PV