IB Winter 2012

Securities & Investment

Accounting & Value How do we know if  we’re succeeding now?  we’ll succeed in the future? What’s our business worth?

35 Value Future focus  revenue generation relative to other revenue options

Did we make a wise investment? Value %

Value Did we make a wise investment?

Value Did we make a wise investment?

Did we make a wise investment? The answer depends on  amount  certainty  variability Value what other investments are offering rate risk β

Did we make a wise investment? The answer depends on  amount  certainty  variability Value what other investments are offering relative rate relative risk relative β

Value Varies 1502  Venice Import-Export issues 7 shares valued at 5 ducats each Let’s pretend there’s a stock market

Value Did we make a wise investment?  answer based on investor’s subjective perceptions desires “appetite for risk” fear & greed  future focus

Stock Exchanges 1602Amsterdam 1698London 1790US

Stock Exchange voluntary private  seats

Stock Exchange  sell & purchase  stocks, bonds, “other” Primary market  newly issued Secondary market  previously issued

Stock Exchange  Stock = Shares  Bonds  “other instruments” “securities”

Securities markets Equity financing  stocks Debt financing  bonds

Securities markets Equity financing  common stocks par value issuing price market value book value dividends capital gains

Buying & Selling Stocks Purchase or sale of shares  Round lot in units of 100  Odd lot in units of other than 100

Buying & Selling Stocks Market order  buy or sell a security at current market price Limit order  buy a security if price <= certain level Stop order  sell a security if price falls below certain level

Securities markets Debt financing  bond written commitment borrower will pay  firm lender will get  investor stated future date  principal + interest

Securities markets Debt financing  bonds variations  maturity »payment date  tax status  potential yield »interest rate  terms of contract

Securities markets Debt financing  bonds as many different kinds as you can imagine

Securities markets Debt financing  bonds Secured Unsecured  debentures Bearer bonds  coupon bonds Registered bonds

Securities markets Debt financing  bonds Retiring Bonds  Callable bonds  Sinking fund provision  Serial bond  Convertible bond

Securities markets participants  Investment bankers  primary market  Stockbrokers  secondary market Full-service brokerage Discount brokerage

Securities markets regulations Brokers licensed Securities registered  Prospectus  Insider trading

Securities markets Margin Trading  down payment  broker borrows from bank secured by stock  broker charges investor interest  investor pays off financing when they sell the stock hopefully at a profit

Securities markets Short Sale sell first buy later  investor “borrowing” shares from broker for a period of time  betting on price going down

Securities markets Reading the Market  Bear market period of falling stock prices  Bull market period of rising stock prices  Random walk

Securities markets Reading the Market  Market indexes a basket of stocks summarize trends  overall market  specific industries/groups

Securities markets Reading the Market  Market indexes Standard & Poors TSE Dow Jones NASDAQ

Reading Stock Quotations stock highest price today sales lowest price today change since yesterday’s close

Corporate Debt a company takes on debt  because it has to can’t get equity gets caught short survival  because it wants to if cost of debt is less than  cost of equity  profit generated

Corporate Debt short-term  trade credit  line of credit  accounts payable  factoring accounts receivable  commercial paper  loan

Corporate Debt short-term  trade credit open book credit promissory note trade draft  trade acceptance

Corporate Debt short-term  line of credit  specified amount  technically, not guaranteed Revolving Credit Agreement  guaranteed  commitment fee

Corporate Debt short-term  accounts payable stretch payments can be costly  reputation  interest common

Corporate Debt short-term  factoring accounts receivable sell A/R at less than face value

Corporate Debt short-term  commercial paper unsecured notes sold for less than face value repurchased in 30 to 270 days  for face value need to be creditworthy

Corporate Debt short-term  loan unsecured secured  collateral

Corporate Debt long-term  loan  corporate bond

Corporate Debt long-term  loan fixed or floating rate quick to process do not require divulging business plans

Corporate Debt long-term  corporate bond

Debt vs. Equity debtequity usual cost to companylessmore when repaidfixednever claims on incomefixed & regulardividends assetsfirstlast affect on controlnoyes flexibilityyesno tax implications companybefore taxafter tax investor/lender interest deductible dividends not deductible

Preferred Shares unlike common shares  no voting rights ½ way between debt & equity

Preferred shares like bonds  fixed payments  priority over common shares unlike bonds  no maturity dates  no legal penalty for non-payment ½ way between debt & equity

Exam  pick 4 most important chapters your votes by Mon  influential I’ll let you know Tue

Exam  proposed chapters ch 3  Conducting Business Ethically and Responsibly ch 4  Entrepreneurship, Small Business, and New Venture Creation ch 11  Understanding Accounting ch 16  Financial Decisions and Risk Management

Exam  chosen chapters ch 3  Conducting Business Ethically and Responsibly ch 4  Entrepreneurship, Small Business, and New Venture Creation ch 12  Understanding Marketing Processes and Consumer Behaviour ch 16  Financial Decisions and Risk Management