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FINANCE 340

FINANCE 340. BUSINESS FINANCE. MY BACKGROUND. NAME: Ken Shah BORN: Bombay, India PhD: University of Oregon INDUSTRY EXPERIENCE: 4 yrs trader/broker on Bombay Stock Exchange 3 yrs quantitative portfolio management research in Portland, Oregon. RECENT RESEARCH.

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FINANCE 340

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  1. FINANCE 340 BUSINESS FINANCE

  2. MY BACKGROUND • NAME: Ken Shah • BORN: Bombay, India • PhD: University of Oregon • INDUSTRY EXPERIENCE: • 4 yrs trader/broker on Bombay Stock Exchange • 3 yrs quantitative portfolio management research in Portland, Oregon

  3. RECENT RESEARCH • I investigate the choice of mix of debt and equity in a firm (called capital structure) • I investigate why and how companies go public (IPOs) and how they do afterwards

  4. SO THAT I CAN GET TO KNOW YOU BETTER... • Avoid changing seats • Please bring name cards and display EVERY class • Drop by my office and introduce yourself! • Sign and return Honor Code sheet by next class • Attach your photo and tell me a bit about yourself on the Honor Code sheet

  5. COURSE OBJECTIVES • Learn about markets and securites and evaluate their risk and return characteristics • Learn how to make sensible personal financial decisions • Learn how investment opportunities are evaluated in corporations • Learn to exploit computers and Internet to your advantage in finance

  6. COURSE PREREQUISITES • ECO 271, ACCT 231; Junior standing • I will assume you have an understanding of: • Basic Algebra • Basic Statistics • Basic computers and Internet • Excel spreadsheet

  7. General Nature of Course • I am not kidding, this class is not going to be easy. It’s working with LOTS of numbers • Practice! Practice! Practice! That’s the only way you will stay ahead • To stay ahead, you will need to spend about 2 - 3 hours per week outside of class

  8. OPTIONAL TEXTBOOK • Ross, Westerfield & Jordan (RWJ), Essentials of Corporate Finance • My class notes are based on above text • Course packet (slides) at Copymart or downloaded from course website

  9. REQUIRED CALCULATOR • Financial Calculator - HP-10B or HP-17B preferred • Other calculators will not be supported • Other calculators can be used but you will be responsible for knowing how to use them

  10. Self-Study from WWW • You will be required to obtain and understand information from WWW • Details placed on webpage handout related to class topic of the week • You will be tested and responsible for knowing this material for the exam • Come prepared in class with answers to self-study questions. Maybe asked to hand-in

  11. COURSE GRADE

  12. Class Presentations • In groups of 3 students • Maximum of 10 minutes • Any finance-related WSJ article • 20% choice of article • 40% communication of important points, • 40% new information not in article

  13. Stock Market Game • Invest in stocks and index mutual fund • Follow performance using Internet and spreadsheet • Evaluate how you did at the end of quarter • Learn about risk and return!

  14. “House” Rules • Rules outlined in the syllabus • Attendance is required • No makeups, no late submissions, no exceptions • No cheating! You and I have our mutual honor code which you signed and handed in

  15. Class Participation • Participation is strongly urged • Speak up! No question is stupid • Chances are, others are wondering about the same thing - don’t be shy!!

  16. Course Outline • Intro to securities, markets, and calculating returns • Time Value of Money • Bond & Stock Valuation • Capital Budgeting • Diversification and Capital Asset Pricing Model (CAPM), WACC

  17. Class Web Page • Announcements, handouts, lecture slides all available at:http://fac-staff.seattleu.edu/kshah • Feel free to use e-mail: kshah@seattleu.edu • You must include ‘FINC 340 F06’ in subject heading of emails addressed to me

  18. Intro to Markets & Securites COMMON STOCK PREFERRED STOCK MUTUAL FUNDS

  19. Common Stock • Residual Claim • Limited Liability • Right to Vote • Elect Directors, Important Issues • Right to Dividends • Stock Dividends, Splits, Reverse Splits

  20. Preferred Stock • Fixed Dividends • Cumulative Dividends • No Votes • Limited Appreciation • Combines Features of Common Stock and Bonds

  21. Stock Value • Capital Gains • Dividends • Factors • Earnings Growth • Products & Services • Management • Competition & Economic Environment

  22. Evaluating Stocks • Book Value • Earnings per Share • Return on Equity • Payout Ratio • Annual Reports: Bal. Sheet, Inc. Stmts • Quarterly Reports

  23. Trading Stocks • Primary Market • IPOs - Selling stock for the first time • Investment banks, underwriters • Prospectus • Secondary Market • Organized exchanges and dealer networks • Trading of previously issued stock

  24. Trading Stock... • NYSE, Amex, OTC (Nasdaq) • Brokers • Full Service, Discount, Deep Discount, On-line • Dealers • Bid - Ask Spread • Liquidity

  25. Types of Transaction • Buying with Cash • Buying on Margin • Borrowing part of purchase amount from broker • Short Selling • Borrowing stock, selling, buying back later, returning borrowed stock

  26. Types of Orders • Market Order • whatever is the current price in the market • Limit Order • specify the highest price for buying • specify the lowest price for selling • Stop Loss/Gain • order triggered only at a certain price

  27. Stock Quotation • %chg YTD • 52 Weeks Hi Lo • Symbol • Div • Yld % • PE • Vol • Daily Hi, Lo, Close, Net Chg

  28. Market Indicators • Dow Jones Industrial • S & P 500 • Wilshire 5000 • International Trading • Tokyo - Nikkei • London - FTSE ‘Footsie’ • Frankfurt - DAX

  29. International Investing • Today’s markest are global. But it exposes you to: • Currency Risk • risk of converting currency back and forth • Political Risk • appropriation, nationalizations, confiscation by foreign governments

  30. Mutual Funds • Professional money managers investing on behalf of other investors • Investors buy shares of mutual funds • Shares represent a claim on the investment portfolio of mutual funds • Mutual funds can invest in stocks, bonds, real estate, gold, etc. etc.

  31. Types of Mutual Funds • Closed-end Fund • Open-end Fund

  32. Closed-End Funds • Shares are sold, and money raised only once • i.e., fixed number of shares outstanding • Investors may buy/sell closed-end fund shares on exchanges like any other company shares • Subsequent buying/selling among investors does not bring in/take out money from fund

  33. Closed-end Funds... • Shares can sell at a premium or a discount from the per share net asset value (NAV) of the portfolio (after accounting for expenses for operating the fund) • Reasons for premium/discount is not well understood

  34. Open-End Funds • Continuously issue/redeem shares to/from shareholders • Potentially unlimited # of shares • Investors buy/sell shares from the mutual fund company • Never sells at a premium or a discount

  35. Load v/s No-Load Funds • No-Load Funds: no sales commission • typically bought directly from fund mgmt company at NAV • can be bought from brokers e.g. Schwab • Load Funds: charge sales commission • sold through brokers or directly from fund • loads range around 3 to 5% - split between broker & fund

  36. Fund Expenses • Separate from sales loads • Compensation for managing the fund • Range from .2 to 2.5% • 12b-1 charges: SEC permitted use of fund assets for sales promotion, advertising, brokerage commission

  37. Fund Styles • Stock Funds • Bond Funds • Money Market Funds • Index Funds

  38. Stock Funds • Growth vs. Income • Sector Funds • e.g. Hi-Tech, Health Care, Gold etc. • International Funds • World, Europe, Asia, Latin America etc.

  39. Bond Funds • L. T. Gov’t Securities • very low risk • Municipal Securities • Tax exempt • Corporate • High-grade, Junk Bond etc.

  40. Index Funds • Passive Management • try to track performance of popular indexes • Very low expenses • Good vehicle for diversification • Available for most popular stock and bond indexes

  41. Fund Facts • Most fund managers have have a hard time beating a passive indexing strategy • No systematic difference in performance between Load & No-load funds • why pay load??? • Index funds have very low operating expenses • e.g. Vanguard Index 500: .19%

  42. PREVIEW Returns

  43. Returns • Returns are earned in 2 forms: • Dividends • Cash distribution • Capital Gains or Losses • Rise or fall in stock value • Total $ Return = Div. Inc. + Cap. Gain (loss)

  44. Measuring Returns • Dollar Returns • Percentage Returns

  45. Dollar Returns • Example:Buy 100 shares of Caterpillar at $55. Dividends over the year are $1.40. Sell the shares at 60. • Dollar Return? • % Return?

  46. ANOTHER EXAMPLE • Buy 100 shares of Microsoft at $140. No dividends are paid. Sell Shares at $131. • Dollar Returns? • % Returns?

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