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Introduction to Finance and Accounting

Introduction to Finance and Accounting. Tanveer Singh Chandok (Director of Mentorship). Last time. Efficient market hypothesis Investing styles Liquidity Long vs. Short Holding Periods Market Capitalization IC i nvesting style. Quiz Time!. Who is the father of value investing?

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Introduction to Finance and Accounting

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  1. Introduction to Finance and Accounting Tanveer Singh Chandok (Director of Mentorship)

  2. Last time • Efficient market hypothesis • Investing styles • Liquidity • Long vs. Short • Holding Periods • Market Capitalization • IC investing style GTSF Investments Committee

  3. Quiz Time! Who is the father of value investing? • Alexander Graham Bell • Benjamin Graham • Warren Buffett • Ben Bernanke GTSF Investments Committee

  4. Quiz Time! Who is the father of value investing? • Alexander Graham Bell • Benjamin Graham • Warren Buffett • Ben Bernanke GTSF Investments Committee

  5. Quiz Time! You shorted AAPL at $750 and covered at $250 (assuming $10 in fees) how much do you make on this trade? • 200 • 490 • -200 • -490 GTSF Investments Committee

  6. Quiz Time! You shorted AAPL at $750 and covered at $250 (assuming $10 in fees) how much do you make on this trade? • 200 • 490 • -200 • -490 GTSF Investments Committee

  7. Quiz Time! Which is not true of an OTC Market? • The prices are not listed in any central location • Buyers assume all the risk • Market makers help to determine prices • Fixed income is an example of an OTC security GTSF Investments Committee

  8. Quiz Time! Which is not true of an OTC Market? • The prices are not listed in any central location • Buyers assume all the risk • Market makers help to determine prices • Fixed income is an example of an OTC security GTSF Investments Committee

  9. Who Am I? GTSF Investments Committee

  10. Who Am I? GTSF Investments Committee

  11. Who Am I? GTSF Investments Committee

  12. Who Am I? GTSF Investments Committee

  13. Who Am I? GTSF Investments Committee

  14. The 1 thing you need to knowA dollar today is worth MORE than a dollar tomorrowToday > Tomorrow GTSF Investments Committee

  15. Time Value of Money • Apples and Oranges • Interesthas an impact on the value of an investment • If compound interest is used: the growth of an investment in different time periods reflects all previous interest earned • If I earned 10% a day on $100 how much would I have tomorrow? • In 4 days? • In 10 days? • Compounding vs. Discounting GTSF Investments Committee

  16. Time Value of Money • Use a timeline to visualize cash flows • Future Value - Value at a time in the future • Present Value - Value in “todays dollars” • Which one should be greater? • Formula: FV = PV (1 + i)^N • FV = future value • PV = present value • i= interest rate per period • N = number of periods GTSF Investments Committee

  17. A few practice problems • Bill earns a 4% annual return on his portfolio, if he invested $1,000 exactly 3 years ago how much does he have today? • Ben needs $50,000 by 2020, if he started investing in 2014 and earned a 5% annual return how much does he need to invest? • Geoff began investing in 2010. He invested $100 and earned a 2.5% quarterly return. How much does he have today? How much will he have in 5 years? GTSF Investments Committee

  18. But.....Why? • As in investor you must be compensated for giving up your money – “rent” • Compensation depends on risk • What are some main risks? • Counterparty (Default) Risk • Reinvestment Risk • Maturity or Duration Risk GTSF Investments Committee

  19. The 3 Financial Statements • What are the 3 Financial Statements? • Balance Sheet • Income Statement • Statement of Cash Flows GTSF Investments Committee

  20. Balance Sheet • Called a snapshot in time • Reflects the company’s assets, liabilities and shareholder equity at the time (quarterly or annually) • Listed in order of Liquidity Assets = Liabilities + Shareholder Equity GTSF Investments Committee

  21. GTSF Investments Committee

  22. GTSF Investments Committee

  23. Income Statement • Measures company’s performance over a period • Operating vs. Non-operating sections Revenues - Cost of Goods Sold (COGS) Gross Margin - Operating Expenses Operating Income (EBIT) - Other Expenses -Income Taxes Net Income GTSF Investments Committee

  24. Income Statement GTSF Investments Committee

  25. Statement Of Cash Flows(CF) • Cash coming in and cash going out • 3 Components of the Statement of CF Cash from Operations Cash from Investing Cash from Financing • Beginning Cash + CF from Ops + CF from Investing + CF from Financing = End Cash GTSF Investments Committee

  26. Statement Of Cash Flows(CF) • Cash from Operations • Cash generated from the normal operations of the company • Cash from Investing • Change in cash from activities outside normal scope of business • May include the purchase of property, plant and equipment, and other investments not on the income statement • Cash from Financing • Cash from the issuance or repurchase/repayment of equity and debt GTSF Investments Committee

  27. The 3 Musketeers • The 3 statements work together; Cash flow from Operations (Statement of CF) Net income (Income Statement) Cash from previous Balance Sheet (Balance Sheet) Beginning Cash Balance (Statement of CF) Ending Cash Balance (Statement of CF) Cash on Balance Sheet (Balance Sheet) GTSF Investments Committee

  28. Company Reporting • Any publicly traded US company is required to report comprehensive financials • Quarterly reports – “10Q” • Annual Reports – “10K” • Foreign companies with stock trading in the US must also file annual and quarterly financial reports • SEC (www.sec.gov) • Footnotes –can often house interesting information about the company that must be disclosed but is not part of the 3 financial statements GTSF Investments Committee

  29. Quiz Time! What equation below is correct? • Beginning Cash + CF from Ops + CF from Investing + CF from Financing = End Cash • Beginning Cash - CF from Ops - CF from Investing - CF from Financing = End Cash • Ending Cash + CF from Ops + CF from Investing + CF from Financing = Beginning Cash • Ending Cash - CF from Ops +CF from Investing - CF from Financing = Beginning Cash GTSF Investments Committee

  30. Quiz Time! What equation below is correct? • Beginning Cash + CF from Ops + CF from Investing + CF from Financing = End Cash • Beginning Cash - CF from Ops - CF from Investing - CF from Financing = End Cash • Ending Cash + CF from Ops + CF from Investing + CF from Financing = Beginning Cash • Ending Cash - CF from Ops +CF from Investing - CF from Financing = Beginning Cash GTSF Investments Committee

  31. Quiz Time! Assets are: • What the firm owns • What the firm owes • Stockholders Equity – Liability GTSF Investments Committee

  32. Quiz Time! Assets are: • What the firm owns • What the firm owes • Stockholders Equity – Liability GTSF Investments Committee

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