Lect 16 221 web

Lect 16 221 web - Managerial Finance Lecture 16 Risk...

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1 Managerial Finance Lecture 16 Risk Management Risk Management, Forwards and Options Class 15: Information Asymmetry Think about the information advantages of players and their potential responses: Any time someone with more information wants to sell you Any time someone with more information wants to sell you something, you should be skeptical: why are you the lucky buyer? When managers have better information than investors: Equity issue is typically a bad signal Why doesn’t debt (typically) have this problem? Because debt works like a warranty: debt is senior Managers tend to issue equity : Wh it i l d tki dl i t When it is overvalued: stock prices decline upon announcements When information asymmetries are low: “hot” markets Pecking order of financing 1. Retained earnings 2. Debt 3. Equity 2
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2 Information asymmetry in the news Technology N tfli St k U d P Netflix Stock Under Pressure By Shara Tibken 23 November 2011 Netflix Inc. said it agreed to raise about $ 400 million in cash from selling stock ($200m) and bonds that can be converted into stock ($200m) . Netflix Inc. shares fell to their lowest point in more than a year. 3 Netflix spokesman Steve Swasey said Monday that the company doesn't have a pressing need for more cash , "but it's always nice to have more money than you need ." He said the company has no immediate plans to use the funds. But Janney Capital Markets analyst Tony Wible said the issuance should raise concerns " Investors need to ask why one of the largest subscription-based platforms in the world needs capital ," he said. "The lack of profitability on almost 23 million global streaming subs suggests that this business may not be as lucrative as the bulls believe ." Roadmap Risk-management (hedging) and firm value Risk-management or hedging policies: identification, assessment, and management of risk exposures Do active risk-management policies affect firm value? Derivatives: Introduction Forwards: basics and pricing Options: call and put options Using derivatives to hedge or manage risks 4
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3 Motivation Firms face multiple risks, but some of them can be avoided : BMW profits are sensitive to $/€ rate BMW sells a large number of cars in North America but manufacturing is • BMW sells a large number of cars in North America but manufacturing is mostly done in Germany • One way BMW can reduce the $/€ exposure is by producing cars in South Carolina: costs and sales are done in U.S. dollars Southwest Airlines can hedge against changes in the price of jet fuel by buying fuel today in the “futures” exchange • The price of jet-fuel in the future is set in advance (contract) Should firms hedge risk exposures ? If you are a senior ? If you are a senior manager in a company: How do you know what risks to hedge and which ones to live with?
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This note was uploaded on 01/08/2012 for the course MS&E 245G taught by Professor Perez-gonzalas during the Fall '11 term at Stanford.

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Lect 16 221 web - Managerial Finance Lecture 16 Risk...

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