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Slides2_HD - Corporate Finance(ECON W4280 Lecture 2 Tri Vi...

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Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 1 Corporate Finance (ECON W4280) Lecture 2 Tri Vi Dang Columbia University
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Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 3 Lecture 2 I.1. Valuation concepts A. Discounted cash flow (DCF) B. Bond pricing, yields and the term structure of interests C. Bond arbitrage
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Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 4 I.1.A. Discounted cash flow (DCF)
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Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 5 Remark Section I.1 introduces various theoretical valuation frameworks. They are fundamental results in finance and are awarded Nobel prizes No-arbitrage and equilibrium (Arrow and Debreu) Option pricing (Merton and Scholes) CAPM (Sharpe) These abstract concepts will prove helpful for - decision makings in finance and understanding real financial activities - see motivating example below
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Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 6 Research in Motion stock: the next PALM? Thomson Reuters, 05/20/2011 By Angela Moon THE BEARISH BUTTERFLY EFFECT Earlier this week, RIM recalled some of its Playbook tablet computers due to an operating system flaw. The company had hoped the launch of the long-awaited tablet could revive its fortunes, but the product garnered poor reviews and complaints it had been rushed out before it was ready. Due to the recall, RIM's Nasdaq-listed shares fell as low as $42.61, just 9 cents above an August 2010 trough. On the same day, an options trader bought 3,500 puts at the January 2012 $40 strike for an average premium of $3.77 each, sold 7,000 puts at the January 2012 $37.5 strike at an average premium of $2.83, and picked up 3,500 puts at the January $35 strike for an average premium of $2.10 each. The strategy, known as a bearish put butterfly spread, implies an average breakeven share price of $39.79 by expiration in January. Maximum profits will be made if RIM shares plunge nearly 15 percent from the current price to settle at $37.50 at expiration, according to Caitlin Duffy, options analyst at Interactive Brokers Group. A butterfly put spread involves a bet shares will fall, but only to a specific level. One profits by selling puts at a strike price that is between purchases at strike prices on each side, or the "wings" of the butterfly. "Butterfly spreads on the stock suggest some options players expect RIM's losing streak to continue into next year," she said.
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Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 7 Remark Section I.1 will provide you with the concepts so as to understand this article and to calculate the numbers in this motivating example. The most basic valuation method is the discounted cash flow model.
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Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 8 The time value of money Initial Capital at t=0 : C 0 Interest rate for one period : r Compounding How much is C 0 worth at t=1?
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