m3l1 - Fall 2011 Module 3 Accounting & Finance Lecture 1:...

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David Robinson © D. Robinson, 2011 Fall 2011 Module 3 Accounting & Finance Lecture 1: What Investors Want How Firms Raise Capital
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Accounting & Finance Accounting Finance Managerial Financial Auditing How investors use their money How firms raise money Three financial statements Forms of business Income St. Balance Sheet St. Cash Flows
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Lecture Outline Earning a “good return” What investors are looking for How firms raise capital A typical capitalization over time
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What Investors Want They want “a good return”
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Definition: Return “Return” is how much you earn from an investment Example: Put $100 in a Money Market account paying 1.2 % interest. In one year you will receive $101.20: your ” $100 + $1.20 interest Your return is 1.2 percent
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Definition: “Appreciation” Buy a baseball signed by Barry Bonds for $200 Sell it one year later for $250, you have made a “return” of $50 on your $200 investment, due to appreciation
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Definitions: Total Return Total Return Interest or Dividend Appreciation Savings and bonds pay “interest”, stocks pay dividends
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Definition: Total Return is interest (or dividend) earned plus appreciation Buy a single share of MO (Altria = Philip Morris US) Oct 2010 for $25.42 You could sell it Feb 2011 for $26.82, a profit of $1.40 [1. appreciation] In the meantime, you would have received $1.55 in dividends [2. dividend] [1] + [2] = $2.95 $2.95 / $25.42 = 11.6 % Total Return
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In general, investors want 1. Safety: “ Security of principal (Even if people will tolerate risky returns, they still hope to get their original investment back) 1. A good return ( total return ) An a reasonable idea of what the return is likely to be 1. A greater rate of return for investing money for a longer period of time 2. A greater return for taking on increased risk More for “lack of liquidity” Risk: The chance of no return or a loss of principal
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How does “What investors want” slide compare to text (Nickels, p. 525) “Choosing the Right Investment Strategy”
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The Risk/Return Continuum It may make sense to take on more risk
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Investments along the diagonal make sense Low            Risk               high Return ( Payoff) “safe harbor” speculation
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Prudent investors avoid the rest Low            Risk               high Return ( Payoff) “safe harbor” speculation Don’t exist Con game s Plenty of choices among legitimate investments
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There are many different types of
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This note was uploaded on 04/04/2012 for the course UGBA 10 taught by Professor Xuanmingsu during the Fall '08 term at Berkeley.

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m3l1 - Fall 2011 Module 3 Accounting & Finance Lecture 1:...

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