IB

12

471.13

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?

3535

Value

Future focus revenue generation

• relative to other revenue options

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Did we make a wise investment?

Value

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Did we make a wise investment?

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Did we make a wise investment?

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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

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Did we make a wise investment? answer based on investor’s subjective

• perceptions

• desires“appetite for risk”

fear & greed

future focus

Stock Exchanges

1602 Amsterdam

1698 London

1790 US

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

Your Daily Paper Company Sales High Low Close Change

Inco 376 030 29.150 28.500 28.600 -.400

stock

highestpricetoday

sales lowestpricetoday

changesince

yesterday’sclose

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

debt equity

usual cost to company less more

when repaid fixed never

claims onincome fixed & regular dividends

assets first last

affect oncontrol no yes

flexibility yes no

tax implications

company before tax after tax

investor/lenderinterest

deductibledividends 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 e-mail 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