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Introduction to Financial Management - Valuation and Risk Management

This course provides a practical and hands-on approach to the valuation and financial management of corporations. Learn about the Capital Asset Pricing Model (CAPM) and its significance in measuring risk and determining the return on investment. Professor Andrew L. H. Parkes, a renowned finance expert, will guide you through the fundamentals of financial management.

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Introduction to Financial Management - Valuation and Risk Management

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  1. Introduction to Financial ManagementFIN 102 – 6th Week of Class Professor Andrew L. H. Parkes “A practical and hands on course on the valuation and financial management of corporations”

  2. Capital Asset Pricing Model CAPM - Sharpe/Lintner • This model tells us the meaning of β (beta). • If the share of a company is exactly as volatile as the total market (S&P 500) then the company has β (beta)=1. • If the share moves twice as much as the market then β (beta)=2. • Beta is thus a measure for risk. • The higher the Beta the higher the return-premium (Rj) that the potential share buyer (investor) wants. Intro. to Financial Managment - 6th Week of Class

  3. My bio: • I am a Professor of Finance and David Margolis Teaching Fellow at the Stern School of Business at New York University. I teach the corporate finance and equity valuation courses in the MBA program. I received my MBA and Ph.D. degrees from the University of California at Los Angeles. My research interests lie in valuation, portfolio management and applied corporate finance. My papers have been published in the Journal of Financial and Quantitative Analysis, the Journal of Finance, the Journal of Financial Economics and the Review of Financial Studies, though I am sure that the list of people who have read these articles is a short one. • http://pages.stern.nyu.edu/~adamodar/ Intro. to Financial Managment - 6th Week of Class

  4. Mission: • I am lucky enough to be in a field where a little knowledge and some experience goes a long way, and achieving guru status seems relatively simple. What I do know is neither profound nor earth shattering, but I would like to share it on this site. In that pursuit, I have attempted to keep almost the entire site open and accessible, with the only shut-off portions representing powerpoint slides used by instructors (who use my books). Everything that I learn, do or write in the field of finance will be on this site sooner or later. I hope that you find the content useful and that you will share it with others. Good luck! Intro. to Financial Managment - 6th Week of Class

  5. WHAT IS CAPM? • The required Return of share j (Rj)= • Rj=Rf+ β(Rm-Rf) where Rf is the Risk free rate of interest, and Rm is the return on the total market (the % change in the S&P 500 index) Intro. to Financial Managment - 6th Week of Class

  6. Betas during the stock market bubble…. Intro. to Financial Managment - 6th Week of Class

  7. You might want to read… • A better beta • Executives should correct for the distortion of risk metrics during the unprecedented market bubble of the late ’90s. Intro. to Financial Managment - 6th Week of Class

  8. Homework assignment: Beta and Value • Go to Yahoo Finance and find the Beta value of your company under Profiles; is your teams company a high beta company? • Now calculate the Rj if Rf=4.3% and Rm=7.6%. • The Rj you calculate now is the Cost of Equity of your company (one ingredient of the cost of capital - WACC). • Calculate the Value per share using the formula of chapter 4: V = D1/(Rj % - g%) assume that D1 = (1+g%) D0 a g% higher then 6% is impossible since a perpetual growth at that rate would mean that in 100 years your company will take over the world economy…. • Go to Damodaran’s website if you have time! Intro. to Financial Managment - 6th Week of Class

  9. LEARN YOUR CALCULATORS • The rest of the day today is to get ready for the mid-term exam on Wednesday. • Learn your calculators, make up your formula sheet, ask questions, practice, practice, practice … then practice some more!! Intro. to Financial Managment - 6th Week of Class

  10. The End of Chapter 5 Don’t forget your homework for Wednesday! Intro. to Financial Managment - 6th Week of Class

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