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FIN 620-session1 agenda

FIN 620-session1 agenda - FIN 620 Capital Markets...

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FIN 620 Capital Markets, Institutions, and Long-Term Financial Management Session 1  Agenda 1. Lecture Notes/Comments 2. Power points 3. Self Study Materials 4. Team Formation – Group Project 5. Homework 6. Class Discussion 1. Lecture Notes/Comments RWJ, Chapters 13 14 In Chapter 13 we discuss corporate financing decisions and efficient capital markets. One of the continuing issues in corporate finance is: to what extent can financing decisions create value? Recall that we previously developed NPV as the proper way to evaluate corporate finance decisions. The financing aspect of the business is no different. For example, we can analyze the debt/equity mix decision using the NPV criterion. It is important to note that the identification of positive NPV projects is much more important in the overall value creation of the firm; however, poor financing decisions can have severe consequences. Good financing decisions may increase firm value, but not to the extent as operational projects. Financing value is primarily created by reducing costs and taking advantage of subsidies (i.e., tax benefits). A description of efficient capital markets: Efficient capital market – market in which current market prices fully reflect available information. In such a market, it is not possible to devise trading rules that consistently “beat the market” after taking risk into account. Efficient Markets Hypothesis (EMH) modern U.S. stock markets are, in general, efficient. An important implication of the EMH is that the expected return on securities equals their risk- adjusted required return. The foundations of market efficiency are:
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Rationality – all investors respond in a rationale way to new information Independent events – investor deviations are countervailing and unrelated Arbitrage – competition among investors (professionals) and traders makes a market efficient. Is the degree of market efficiency increasing? Consider the following: - Investors today have virtually instantaneous access to financial and economic information at low (or no) cost. A few years ago, the same information was available only to professional money managers at high cost. - The proportion of individuals owning stocks directly doubled between 1965 and 1990 and doubled again between 1990 and 1997. - A substantial proportion of retail stock market trading is done online. Virtually none was done online a few years ago. - The average P/E ratios were at “historic” highs for many years. They did not start to come down until late 2000 and early 2001, and many companies still have “high” P/E ratios. What does all of this mean? An efficient market is one in which information is quickly and costlessly disseminated to all participants. And while we are not there yet, the advent of the Internet has resulted in being closer to that ideal than we have been previously. Some analysts believe that required returns have fallen because the cost of obtaining information has dropped so dramatically. This would lead to higher sustainable P/E ratios.
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