公司理財教學課件：ch01 Overview of Corporate Finance and the Financial Environment

CHAPTER1

OverviewofCorporateFinanceandtheFinancialEnvironmentCorporatefinanceFormsofbusinessorganizationObjectiveofthefirm:MaximizewealthDeterminantsofstockpricingThefinancialenvironmentFinancialinstruments,marketsandinstitutionsInterestratesandyieldcurvesWhyiscorporatefinanceimportanttoallmanagers?Corporatefinanceprovidestheskillsmanagersneedto:Identifyandselectthecorporatestrategiesandindividualprojectsthataddvaluetotheirfirm.Forecastthefundingrequirementsoftheircompany,anddevisestrategiesforacquiringthosefunds.SoleproprietorshipPartnershipCorporationWhataresomeformsofbusinessorganization?Advantages:EaseofformationSubjecttofewregulationsNocorporateincometaxesDisadvantages:LimitedlifeUnlimitedliabilityDifficulttoraisecapitalSoleProprietorshipApartnershiphasroughlythesameadvantagesanddisadvantagesasasoleproprietorship.PartnershipAdvantages:UnlimitedlifeEasytransferofownershipLimitedliabilityEaseofraisingcapitalDisadvantages:DoubletaxationCostofset-upandreportfilingCorporationTheprimaryobjectiveshouldbeshareholderwealthmaximization,whichtranslatestomaximizingstockprice.Shouldfirmsbehaveethically?YES!Dofirmshaveanyresponsibilitiestosocietyatlarge?YES!Shareholdersarealsomembersofsociety.Whatshouldmanagement’sprimaryobjectivebe?Ismaximizingstockpricegoodforsociety,employees,andcustomers?Employmentgrowthishigherinfirmsthattrytomaximizestockprice.Onaverage,employmentgoesupin:firmsthatmakemanagersintoowners(suchasLBOfirms)firmsthatwereownedbythegovernmentbutthathavebeensoldtoprivateinvestorsConsumerwelfareishigherincapitalistfreemarketeconomiesthanincommunistorsocialisteconomies.Fortuneliststhemostadmiredfirms.Inadditiontohighstockreturns,thesefirmshave:highqualityfromcustomers’viewemployeeswholikeworkingthereAmountofcashflowsexpectedbyshareholdersTimingofthecashflowstreamRiskofthecashflowsWhatthreefactorsaffectstockprices?SalesrevenuesCurrentlevelShort-termgrowthrateinsalesLong-termsustainablegrowthrateinsalesOperatingexpenses(e.g.,rawmaterials,labor,etc.)Necessaryinvestmentsinoperatingcapital(e.g.,buildings,machines,inventory,etc.)Whatfactorsdetermineofcashflows?Whatfactorsaffecttheleveland

riskofcashflows?Decisionsmadebyfinancialmanagers:Investmentdecisions(productlines,productionprocesses,geographicmarket,useoftechnology,marketingstrategy,etc.)Financingdecisions(choiceofdebtpolicyanddividendpolicy)Theexternalenvironment(taxes,regulation,etc.)Whatarefinancialassets?Afinancialassetisacontractthatentitlestheownertosometypeofpayoff.DebtEquityDerivativesIngeneral,eachfinancialassetinvolvestwoparties,aproviderofcash(i.e.,capital)andauserofcash.Whataresomefinancialinstruments?Instrument

Rate(9/01)U.S.T-bills 2.3%Banker’sacceptances 2.6Commercialpaper 2.4NegotiableCDs 2.5Eurodollardeposits 2.5Commercialloans Tiedtoprime(6.0%)orLIBOR(2.6%)(More..)FinancialInstruments(Continued)Instrument

Rate(9/01)U.S.T-notesandT-bonds 5.5%Mortgages 6.8Municipalbonds 5.1Corporate(AAA)bonds 7.2Preferredstocks 7to9%Commonstocks(expected) 10to15%Whoaretheproviders(savers)andusers(borrowers)ofcapital?Households:NetsaversNon-financialcorporations:Netusers(borrowers)Governments:NetborrowersFinancialcorporations:Slightlynetborrowers,butalmostbreakevenDirecttransfer(e.g.,corporationissuescommercialpapertoinsurancecompany)

Throughaninvestmentbankinghouse(e.g.,IPO,seasonedequityoffering,ordebtplacement)Throughafinancialintermediary(e.g.,individualdepositsmoneyinbank,bankmakescommercialloantoacompany)Whatarethreewaysthatcapitalistransferredbetweensaversandborrowers?CommercialbanksSavings&Loans,mutualsavingsbanks,andcreditunionsLifeinsurancecompaniesMutualfundsPensionfundsWhataresomefinancialintermediaries?TheTop5BankingCompanies

intheWorld,12/1999BankNameCountryTotalassetsDeutscheBankAGFrankfurt$844billionCitigroupNewYork$717billionBNPParibasParis$702billionBankofTokyoTokyo$697billionBankofAmericaCharlotte$632billionWhataresometypesofmarkets?Amarketisamethodofexchangingoneasset(usuallycash)foranotherasset.Physicalassetsvs.financialassetsSpotversusfuturemarketsMoneyversuscapitalmarketsPrimaryversussecondarymarketsHowaresecondarymarketsorganized?By“l(fā)ocation”PhysicallocationexchangesComputer/telephonenetworksBythewaythatordersfrombuyersandsellersarematchedOpenoutcryauctionDealers(i.e.,marketmakers)Electroniccommunicationsnetworks(ECNs)PhysicalLocationvs.Computer/telephoneNetworksPhysicallocationexchanges:e.g.,NYSE,AMEX,CBOT,TokyoStockExchangeComputer/telephone:e.g.,Nasdaq,governmentbondmarkets,foreignexchangemarketsAuctionMarketsNYSEandAMEXarethetwolargestauctionmarketsforstocks.NYSEisamodifiedauction,witha“specialist.”Participantshaveaseatontheexchange,meetface-to-face,andplaceordersforthemselvesorfortheirclients;e.g.,CBOT.Marketordersvs.limitordersDealerMarkets“Dealers”keepaninventoryofthestock(orotherfinancialasset)andplacebidandask“advertisements,”whicharepricesatwhichtheyarewillingtobuyandsell.Computerizedquotationsystemkeepstrackofbidandaskprices,butdoesnotautomaticallymatchbuyersandsellers.Examples:NasdaqNationalMarket,NasdaqSmallCapMarket,LondonSEAQ,GermanNeuerMarkt.ElectronicCommunicationsNetworks(ECNs)ECNs:Computerizedsystemmatchesordersfrombuyersandsellersandautomaticallyexecutestransaction.Examples:Instinet(US,stocks),Eurex(Swiss-German,futurescontracts),SETS(London,stocks).OvertheCounter(OTC)MarketsIntheolddays,securitieswerekeptinasafebehindthecounter,andpassed“overthecounter”whentheyweresold.NowtheOTCmarketistheequivalentofacomputerbulletinboard,whichallowspotentialbuyersandsellerstopostanoffer.NodealersVerypoorliquidityWhatdowecalltheprice,orcost,ofdebtcapital?TheinterestrateWhatdowecalltheprice,orcost,ofequitycapital?RequiredDividendCapitalreturnyieldgain=

+.Whatfourfactorsaffectthecost

ofmoney?ProductionopportunitiesTimepreferencesforconsumptionRiskExpectedinflationRealversusNominalRatesr*=Realrisk-freerate.T-bondrateifnoinflation;1%to4%.=Anynominalrate.=RateonTreasurysecurities.rrRFr=r*+IP+DRP+LP+MRP.Here:r = Requiredrateofreturnona debtsecurity.r* = Realrisk-freerate.IP = Inflationpremium.DRP = Defaultriskpremium.LP = Liquiditypremium.MRP = Maturityriskpremium.PremiumsAddedtor*forDifferentTypesofDebtSTTreasury:onlyIPforSTinflationLTTreasury:IPforLTinflation,MRPSTcorporate:STIP,DRP,LPLTcorporate:IP,DRP,MRP,LPWhatisthe“termstructureofinterestrates”?Whatisa“yieldcurve”?Termstructure:therelationshipbetweeninterestrates(oryields)andmaturities.Agraphofthetermstructureiscalledtheyieldcurve.HowcanyouconstructahypotheticalTreasuryyieldcurve?Estimatetheinflationpremium(IP)foreachfutureyear.Thisistheestimatedaverageinflationoverthattimeperiod.Step2:Estimatethematurityriskpremium(MRP)foreachfutureyear.Step1: Findtheaverageexpected inflationrateoveryears1ton:

n

INFLt

t=1

nIPn=.Assumeinvestorsexpectinflationtobe5%nextyear,6%thefollowingyear,and8%peryearthereafter.IP1 =5%/1.0=5.00%.IP10 =[5+6+8(8)]/10=7.5%.IP20 =[5+6+8(18)]/20=7.75%.MustearntheseIPstobreakevenversusinflation;thatis,theseIPswouldpermityoutoearnr*(beforetaxes).Step2:FindMRPbasedonthis equation:MRPt=0.1%(t-1).MRP1 =0.1%x0 =0.0%.MRP10 =0.1%x9 =0.9%.MRP20 =0.1%x19 =1.9%.AssumetheMRPiszeroforYear1andincreasesby0.1%eachyear.Step3:AddtheIPsandMRPstor*:rRFt=r*+IPt+MRPt.rRF = Quotedmarketinterest rateontreasurysecurities.Assumer*=3%: rRF1 =3%+5%+0.0% =8.0%. rRF10 =3%+7.5%+0.9% =11.4%. rRF20 =3%+7.75%+1.9%=12.65%.HypotheticalTreasuryYieldCurve05101511020YearstoMaturityInterestRate(%)1yr8.0%10yr11.4%20yr12.65%Realrisk-freerateInflationpremiumMaturityriskpremiumWhatfactorscanexplaintheshapeofthisyieldcurve?Thisconstructedyieldcurveisupwardsloping.Thisisduetoincreasingexpectedinflationandanincreasingmaturityriskpremium.WhatkindofrelationshipexistsbetweentheTreasuryyieldcurveandtheyieldcurvesforcorporateissues?CorporateyieldcurvesarehigherthanthatoftheTreasurybond.However,corporateyieldcurvesarenotneces-sarilyparalleltotheTreasurycurve.ThespreadbetweenacorporateyieldcurveandtheTreasurycurvewidensasthecorporatebondratingdecreases.HypotheticalTreasuryand

CorporateYieldCurves051015015101520YearstomaturityInterestRate(%)5.2%5.9%6.0%TreasuryyieldcurveBB-RatedAAA-RatedWhatisthePureExpectationsHypothesis(PEH)?Shapeoftheyieldcurvedependsontheinvestors’expectationsaboutfutureinterestrates.Ifinterestratesareexpectedtoincrease,L-TrateswillbehigherthanS-Tratesandviceversa.Thus,theyieldcurvecanslopeupordown.PEHassumesthatMRP=0.Long-termratesareanaverageofcurrentandfutureshort-termrates.IfPEHiscorrect,youcanusetheyieldcurveto“backout”expectedfutureinterestrates.ObservedTreasuryRatesIfPEHholds,whatdoesthemarketexpectwillbetheinterestrateonone-yearsecurities,oneyearfromnow?Three-yearsecurities,twoyearsfromnow?MaturityYield1year6.0%2years6.2%3years6.4%4years6.5%5years6.5%01256.0%34x%6.2%PEHtellsusthatone-yearsecuritieswi