Economics 360
Lecture 17
Vidya Kamate
Last Class
Options
Option Strategies
Put-Call Parity
Today
Options Pricing
Binomial Method
Black-Scholes Equation
Pricing Options
We looked at the payoffs from options and
option strategies
The prices of the c
Economics 360
Lecture 8
Vidya Kamate
Last Class
Bond Replication and Arbitrage
Duration
Forward Interest Rates
International Firms
Many firms have international operations, and are thus
paid in that countrys currency
There are risks associated with i
Economics 360
Lecture 9
Vidya Kamate
Today
Capital Budgeting
Calculating actual cash flows from accounting
figures
Depreciation
Net working capital
Salvage value
Capital Budgeting
The process of making investment decisions
How? We are just going to
Economics 360
Lecture 9
Vidya Kamate
Today
Capital Budgeting
Calculating actual cash flows from accounting
figures
Depreciation
Net working capital
Salvage value
Capital Budgeting
The process of making investment decisions
How? We are just going to
Economics 360
Lecture 3
Vidya Kamate
1
Last Time
Present and Future Values
Annuities and Perpetuities
PVGAt =0
1 + g T
C
=
1
r g 1+ r
2
Recall This Example
Interest-Only (I/O) Loan
$5,000, 8% for 4 years
Pay $400 for 3 years, and $5,400 at the
Economics 360-1
Foundations of Corporate Finance
Theory
Instructor: Vidya Kamate
About Me
Kellogg School of Management (2009-present)
Finance PhD Student
Research interests: Fixed income, Municipal Finance
Delhi School of Economics (2006-2008)
M.A. i
Economics 360
Lecture 6
Vidya Kamate
1
Last Class
Types of Bonds
Bond Pricing
Yield to Maturity
Yield Curve
Also known as Term Structure of Interest Rate
2
Today
Replication and Bond Arbitrage
Duration and Interest Rate Risk
Default Risk
Forward Interest
Economics 360
Lecture 8
Vidya Kamate
Last Class
Bond Replication and Arbitrage
Duration
Forward Interest Rates
International Firms
Many firms have international operations, and are thus
paid in that countrys currency
There are risks associated with i
Economics 360
Lecture 5
Vidya Kamate
1
Last Class
Decision-Making Tools for Investment
NPV
Payback period
IRR
Profitability index
Advantages and Disadvantages
How to Fix Shortcomings
2
Today
Bonds
Bond Pricing
Time-Varying Discount Rates
Yield to M
Economics 360
Lecture 12
Vidya Kamate
1
Last Class
Optimal Portfolios
The Efficient Frontier
The Tangency Portfolio
Systematic and Idiosyncratic Risks
2
Today
CAPM
Estimation of Beta
Capital Budgeting and CAPM
3
Risk and Returns
Systematic Risk:
Inve
Economics 360
Lecture 10
Vidya Kamate
1
Last Class
Capital Budgeting
Cash flows resulting from operating revenues,
expenses, depreciation, purchases and sales, and
changes in net working capital
Cash flow equation very important
Changes in NWC, not le
Economics 360
Lecture 13
Vidya Kamate
1
Today
Stock Valuation
Dividends
Gordon Growth Model / Dividend Discount Model
NPVGO net present value of growth opportunity
Tracking Dividend Over Time
2
What is Equity?
Common Stock: Shares issued to the publ
Economics 360
Lecture 16
Vidya Kamate
1
Last Class
Debt and Equity Betas
Weighted Average Cost of Capital (WACC)
Modigliani and Miller (MM) Propositions
With and without taxes
Leverage increases value through tax shield
2
Today
Limits to the Use of
Economics 360
Lecture 17
Vidya Kamate
Last Class
Options
Option Strategies
Put-Call Parity
Today
Options Pricing
Binomial Method
Black-Scholes Equation
Pricing Options
We looked at the payoffs from options and
option strategies
The prices of the c
Economics 360
Lecture 14
Vidya Kamate
1
Last Class
Stock Valuation
Dividends
Gordon Growth Model / Dividend Discount Model
NPVGO and Cash Cow Companies
Tracking Dividend Over Time
2
Today
Debt and Equity Betas
Weighted Average Cost of Capital (WACC)
Economics 360
Lecture 14
Vidya Kamate
1
Last Class
Stock Valuation
Dividends
Gordon Growth Model / Dividend Discount Model
NPVGO and Cash Cow Companies
Tracking Dividend Over Time
2
Today
Debt and Equity Betas
Weighted Average Cost of Capital (WACC)
Economics 360
Lecture 13
Vidya Kamate
1
Today
Stock Valuation
Dividends
Gordon Growth Model / Dividend Discount Model
NPVGO net present value of growth opportunity
Tracking Dividend Over Time
2
What is Equity?
Common Stock: Shares issued to the publ
Economics 360
Lecture 11
Vidya Kamate
1
Last Class
Risk and Expected Return
Portfolio and Diversification
Capital Market Line
2
Today
Optimal Portfolios
The Efficient Frontier
The Tangency Portfolio
Systematic and Idiosyncratic Risks
3
Optimal Portfoli
Economics 360
Lecture 12
Vidya Kamate
1
Last Class
Optimal Portfolios
The Efficient Frontier
The Tangency Portfolio
Systematic and Idiosyncratic Risks
2
Today
CAPM
Estimation of Beta
Capital Budgeting and CAPM
3
Risk and Returns
Systematic Risk:
Inve
Economics 360
Lecture 2
Vidya Kamate
Last Lecture
Corporations
Principal-Agent Problems
Financial Intermediaries
Time Value of Money
FVt = PV0 (1 + r ) t
FVt
PV0 =
(1 + r )t
Today
Geometric Sum Formula
Annuities and Perpetuities
Loan Amortization
Recal
Economics 360
Lecture 3
Vidya Kamate
1
Last Time
Present and Future Values
Annuities and Perpetuities
PVGAt =0
T
C
1+ g
=
1
r g 1 + r
2
Recall This Example
Interest-Only (I/O) Loan
$5,000, 8% for 4 years
Pay $400 for 3 years, and $5,400 at the
Problem
Set
6
Econ
360-‐1
–
Prof.
Masako
Ueda
Due
Monday
Mar
2,
at
the
beginning
of
the
class.
Hand
in
a
hard
copy
(preferred)
or
upload
to
Canvas
a
single
copy
of
your
problem
set.
Problem 1. Explain whether you agree or disagree with the following statements. Do not just write
True or False. Correct answers without correct and relevant explanations will not receive credit.
Quantify your answers when appropriate.
a) (3 points) An in
Question 4 (30 points)
Your mining company is considering an expansion of operations into iron ore. Your engineers surveyed a
particular piece of land (the survey cost $2,000) and concluded the following:
0 You can extract 1,000 tons of iron ore per year.
Z (girth Ci ( y
g e. (5 points) As in (1), consider the case in which managers know that the FDA will approve the
drug, but the market does not know it. Would the old shareholders be willing to nance the
aspiring project by issuing fairly priced debt? To