People send money to SPV and get shares, SPV takes US dollars and exchange for Mexican pesos and buy shares of bimbo Value of bimbo goes up, value of SPV goes up, value of shares goes up EMH – Efficient Market Hypothesis Weak-Form Efficiency o You cannot make excess returns by examine the historical prices o Technical tests o o Support is the price level through which a stock or market seldom falls (illustrated by the blue arrows). o Resistance, is the price level that a stock or market seldom surpasses (illustrated by the red arrows).
o Support and resistance levels are the levels at which a lot of traders are willing to buy the stock (in the case of a support) or sell it (in the case of resistance). Investors buying bonds and stocks cannot profit by looking at past trends. A recent decline is no reason to think stocks will go up (or down) in the future. Evidence supports weak-form EMH, but “technical analysis” is still used. Semistrong-Form Efficiency You cannot make excess returns by examine all public information All publicly available information is reflected in stock prices. So it does not pay to pore over annual reports looking for undervalued stocks. Largely true Strong-Form Efficiency You cannot make excess returns by examine all information o This is wrong All information, even inside information, is embedded in stock prices. Not true––insiders can gain by trading on the basis of insider information, but that is illegal Valuing Common Stocks Most stocks’ expected total return = dividend yield + capital gains yield. The intrinsic value of a stock is the present value of its expected future cash flow stream. o Dividend growth model o Free cash flow approach o Using the multiples of comparable firms DDM P = ∑ i = 1 n ¿ i ( 1 + r s ) i + ∑ j = n + 1 ∞ ¿ j ( 1 + r s ) i Valuing Common Stocks Div 1 = Div 2 = Div 3 P= ¿ r p r p <r s Comps Look at the comparable companies Similar risk, growth opportunities – 2 key things we are looking for
Means Companies in the same industry Size, market position, strategy, accounting – other things to look at the P/E multiple (the price per share divided by the earnings per share). o Price/Earnings per share o Managers are managing their earnings o Because of the different capital structure could cause different P/E ( heavily affected by capital structure) P/E * EPS c = P s 15 * $3.00 = $45 o Much prefer EV/ EBITDA o EV= Market value of debt (assume the book value are close to the market value) + Market value of Equity (book value is not similar for equity) + MV pfd o Hard to manipulate o robust Cost of Capital Cost of Debt Cost of Preferred stock Cost of Common equity W -Book Value -Market Value -Target Weight: don’t know what the company’s current rate Shortterm debt and Longterm debt have different disadvantages and advantages
Capital Budgeting What to invest in Working capital determine whether your company will success Trade off between o Return o Risk Net Present Value Rule
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