FINA 3403 Corporate Valuation
Hong Kong University of Science & Technology
Fall 2016
Cost of Capital II
Adjusted Present Value
Gina Kao
The effects of Leverage
Financial Leverage (D/E ratio)
The use of debt to acquire additional assets
What is its effe
FINA 3403 Corporate Valuation
Hong Kong University of Science & Technology
Fall 2016
Cost of Capital
Solutions to Inclass Exercises
Gina Kao
Exercise in Class
What is the target D/E ratio? => 1500/3500 = 3/7
Cost of debt?
4.5%*(1000/1500)+8%*(500/1500)
Table 1 Pro Forma Projections for IFresh, Inc.
($ in thousands)
Income Statement
Jan16
2016
$17,000
$6,600
$10,400
2017
$35,000
$13,500
$21,500
2018
$44,000
$17,500
$26,500
2019
$51,000
$21,100
$29,900
2020
$62,000
$25,500
$36,500
SG&A
Other Expenses
Ea
FINA 3403 Corporate Valuation
Hong Kong University of Science & Technology
Fall 2016
Determine Valuation
Gina Kao
Determine Terminal Value
Terminal Value (TV) : the value of the companys FCF
beyond the projection period
How to estimate Terminal Value (T
FINA 3403 Corporate Valuation
Hong Kong University of Science & Technology
Fall 2016
Midterm Review
Gina Kao
List of concepts
DDM:
No growth
Constant growth
Two stages (or more stages) growth
Value Driver, ROIC and Growth
FCF
Terminal Value (TV)
FINA 3403 Corporate Valuation
Hong Kong University of Science & Technology
Fall 2016
Financial Statements for Valuation
Gina Kao
Overview of Financial Statements
Financial Statements
Balance Sheet
Income Statement
Statement of Cash Flows
Financial An
FINA 3403 Corporate Valuation
Hong Kong University of Science & Technology
Fall 2016
DCF and APV
Case Study
Gina Kao
Recap of APV
Levered and unlevered Beta
E (1
D
D
)u D
E
E
D
D
E 1 (1 t ) U (1 t ) D
E
E
Cost of Debt vs Tax Shield
Corporate Valuatio
Sampa Video, Inc.
Exhibit 1
Summary Financial Information on Sampa Video, Inc., 2000 (in thousands of dollars)
Sales
EBITDA a
Depreciation
Operating Profit
Net Income
FY 2000
22,500
2,500
1,100
1,400
660
Source: Casewriter estimates.
a
EBITDA is the Earni
FINA 3403 Corporate Valuation
Hong Kong University of Science & Technology
Fall 2016
Midterm Exam
Announcement
Gina Kao
Exam Information
Date:
Time:
Oct 13 (Thursday)
70 mins, during class time
L2:
L1:
9:05  10:15am
10:35  11:45am
Venue:
G001 & G0
BIG DATA, Inc.
Exhibit 1
Income Statement
Net Sales
COGS
Gross Profit
SG&A
Depreciation
R&D
Earnings before Interest and Tax
Income Tax (35%)
Net earnings
Exhibit 2
Balance Sheet
Cash
Working Cash
Excess Cash
Accounts Receivable
Inventories
Other
Total Cu
FINA 3403 Corporate Valuation
Hong Kong University of Science & Technology
Fall 2016
Determine Valuation
Solution to Inclass Exercise
Gina Kao
InClass Exercise Big Data, Inc.
Background
You are an analyst from a venture capital firm and your boss
wants
Digimon, Ltd.
Assume all cash are for operation and the tax rate is 35%.
Pro Forma Income Statement
2005
$75,000
2006
$88,358
($16,000)
($18,000)
$41,000
($11,250)
($13,500)
$16,250
($5,500)
$10,750
($75)
$10,675
($3,736)
$6,939
6987.5
($18,665)
($21,622)
FINA 3403 Corporate Valuation
Hong Kong University of Science & Technology
Fall 2016
Cost of Capital II
Adjusted Present Value
Solutions to Inclass Exercise
Gina Kao
Inclass Exercise Minitech
You have been asked by the owner of a small firm, Minitech
Question 1 (3 points)
A fourmonth European call option on a dividendpaying stock is currently selling for $5. The
stock price is $64, the strike price is $60, and a dividend of $0.80 is expected in one month.
The riskfree interest rate is 12% per annum
Prices were taken on Sep 21, 2015
Midprices are used for the followings: (Mid price is the average of Bid and Ask)
F (Mar)
S
T
21580
21629.2
0.523
r
q
0.57%
1.01%
6 month HIBOR
< Too low? Think abou
F (Oct)
S
T
59.045
59.775
0.104
r
PV(Div)
0.25%
0.745
CHAPTER 3: HOW SECURITIES ARE TRADED
CHAPTER3:HOWSECURITIESARETRADED
PROBLEM SETS
1.
Answers to this problem will vary.
2.
The dealer sets the bid and asked price. Spreads should be higher on inactively traded
stocks and lower on actively traded stocks.
3
CHAPTER 5: INTRODUCTION TO RISK, RETURN, AND
THE HISTORICAL RECORD
CHAPTER 5: INTRODUCTION TO RISK, RETURN, AND
THE HISTORICAL RECORD
PROBLEM SETS
1.
The Fisher equation predicts that the nominal rate will equal the equilibrium
real rate plus the expected
c
p
S
PutCall Parity
Left side
c + PV(K)
32.26
3
2.25
31
Right side
p+S
33.25
t=0
1) long call
2) Save money
3) Write put
4) Short stock
Net cashflow
Alternative
1) long call
Diff (t=0)
0.99
Diff (t=T)
1.02
t=T
S <= 30
don't exercise
3
S > 30
exercise

Derivative Securities
FINA 3203
Forwards & Futures
Andrew Chiu, PhD
andrew.chiu@ust.hk
The Hong Kong University of
Science and Technology
FINA 3203: Derivative Securities
Andrew Chiu
Course Overview
Forwards &
Futures
Market
Mechanics
Hedging
Strategies
O
Derivative Securities
FINA 3203
Options Basics
Andrew Chiu, PhD
andrew.chiu@ust.hk
The Hong Kong University of
Science and Technology
FINA 3203: Derivative Securities
Andrew Chiu
Course Overview
Forwards &
Futures
Market
Mechanics
Hedging
Strategies
Optio
Derivative Securities
FINA 3203
Options Trading Strategies
Andrew Chiu, PhD
andrew.chiu@ust.hk
The Hong Kong University of
Science and Technology
FINA 3203: Derivative Securities
Andrew Chiu
Course Overview
Forwards &
Futures
Market
Mechanics
Hedging
Stra
FINA 3104:
Investment Analysis and Portfolio Management
Lecture 12
APT and Multifactor Models (Continued)
Yingying Li
March 23, 2016
Outline of Todays Lecture
Arbitrage with WellDiversified Portfolios
Arbitrage in Multifactor Models
Connecting APT to SM
Topic 8 Option Strategies
1
Three Alternative Strategies
Take a position in the option and the underlying
Take a position in 2 or more options of the same class (calls
or puts) (spread)
Combination: Take a position in a mixture of calls & puts
(straddl
Topic 11 Applications of BS Formula
1
Outline
European options with cash flows to the
underlying
Options on stock indices
Options on foreign currencies
Options on futures
American options
2
Basic Idea
The original BS formula for a nondividend Europ
Lecture 14, Experiment
A: $240,000
B:
$1000,000 with 25% Probability
0 with 75% Probability
Your choice: (A or B)
Lecture 14, Experiment
C: $750,000
D:
$1000,000 with 75% Probability
0 with 25% Probability
Your choice: (C or D)
A+D is suboptim
Topic 8 Introduction to Binomial
Option Pricing
1
Assumptions
1. No transaction cost
2. Stock can be short easily without costs
3. All trading profits are subject to the same tax rate
(or no tax rate)
4. Borrowing and lending are possible at the risk free