Common stock represents ownership claim on a firm
Unlike bonds, common stock has no maturity date
Payments are made to shareholders in form of dividends
If you own 100% of the common stock in a firm, then you
APR vs. EAR
The annual percentage rate (APR) is simply the period rate
times the number of periods per year.
Interest Rates and Inflation
APR r * m
The effective annual rate (EAR) is the actual rate paid after
accounting for compounding.
Disclosure of Financial Information
Public companies must file financial results with the
Securities and Exchange Commission (SEC)
on a quarterly basis (10-Q)
and an annual basis (10-K)
Financial Statement Analysis
The four financial statements
Present values are additive
Perpetuities and Annuities
Example: You will receive $4,000 today and $6,000 two
years from now Question: How much is the total
package of cash flows worth?
Calculate present values of multiple cash flows
Next Frontier: Portfolio Theory
In the last lecture, we learned how to calculate mean and s.d.
of returns for a single asset.
In the real world, investors rarely hold just one asset, they
hold many different assets. We call this
Academia vs. The Real World
Risk & Return
Thus far, to calculate the present value of a project, I have given you:
Expected cash flows (CF0 through CFn)
Appropriate discount rate (r)
and asked you to calculate the present value of the cas
Before we begin, a quick demo of MFL.
Time Value of Money
This is not a required component of the course, but many
students find it helpful for extra practice.
Many of the questions will be harder than what you will
encounter on the
Question 1 . _ .
What is the required return for a stock with current price of $45, expected dividend payment of $2 per
share, and a constant growth rate of dividends of 2%? (Enter in decimal form, is. 0.04 for 4%)
Fundamentals of Financial Returns
Rate of return = r = relative payoff from an investment
over some holding period
Ending Value Beginning Value + Payouts
where holding period can be one day, week, month,
quarter, year, dec
Features of a good investment decision rule
Investment Decision Rules (Topic 7)
Decision Rules: NPV vs. IRR vs. Payback Rule
Mutually Exclusive Projects
Does the rule
1. Account for the time value of money?
2. Account for the ris
Introduction to Capital Budgeting
Capital Investment Project
Any expenditure made in the hope of generating more cash later
What is Capital Budgeting?
Study determinants of incremental cash flows
Estimate incremental a
THE UNIVERSITY OF OREGON
CHARLES H. LUNDQUIST COLLEGE OF BUSINESS
Professor Stephen McKeon
381 Lillis, 346-8556
Fundamentals of Finance
Office Hours: Wednesday
1:30 pm 2:30 pm
and by appointment
Efficient Markets & Behavioral Finance
Defining Market Efficiency: If markets are efficient then stock prices today
reflect all currently available information.
Defining a Random Walk: Tomorrows stock price is independent of t
Whack vs. Wack vs. WACC
The Cost of Capital
Whack: To strike with a sharp blow
Wack: An item of dubious quality
Using Beta () to Determine Opportunity Cost of Capital
Weighted Average Cost of Capital (WACC)
WACC: the we
What is Finance?
What is Finance?
Finance is a set of tools that helps you answer the following questions
Learn a little about the field of finance
Learn a lot about the role of the financial manager
What projects do we invest
All About Bonds
Bonds (Topic 6)
Interest Rate Risk
Term Structure of Interest Rates
Credit Risk and Credit Ratings
Bond: Loan made by numerous individuals and/or institutions (the
bond holders) to a firm/state/count