财务管理英文课件.ppt

1、,chapter 1 In determining the present value we will talk about the discount rate and present value. The discount rate is simply the interest rate that converts a future value to the present value.,Example 4.7 Example 4.8,Present Value - single sumsIf you will receive $100 5 years from now, what is t

2、he PV of that $100 if your opportunity cost is 6%?,Mathematical Solution: PV = FV / (1 + i)n = 100 / (1.06)5 = $74.73 PV = FV (PVIF i, n ) = 100 (PVIF .06, 5 ) (use PVIF table) = $74.73,0 5,PV = ? FV = 100,Present Value - single sumsIf you sold land for $11,933 that you bought 5 years ago for $5,000

3、, what is your annual rate of return?,Mathematical Solution: PV = FV (PVIF i, n ) 5,000 = 11,933 (PVIF ?, 5 ) PV = FV / (1 + i)n 5,000 = 11,933 / (1+ i)5 .419 = (1/ (1+i)5) 2.3866 = (1+i)5 (2.3866)1/5 = (1+i) i = 0 .19,Example 4.9,The Time Value of Money,Compounding and Discounting Cash Flow Streams

4、,Annuities,Annuity: a sequence of equal cash flows, occurring at the end of each period.,Examples of Annuities:,If you buy a bond, you will receive equal coupon interest payments over the life of the bond. If you borrow money to buy a house or a car, you will pay a stream of equal payments.,Future V

5、alue - annuityIf you invest $1,000 at the end of the next 3 years, at 8%, how much would you have after 3 years?,10001000 1000,Mathematical Solution: FV = PMT (FVIFA i, n ) FV = 1,000 (FVIFA .08, 3 ) (use FVIFA table, or) FV = PMT (1 + i)n - 1 i FV = 1,000 (1.08)3 - 1 = $3246.40 0.08,Example 4.11,Pr

6、esent Value - annuityWhat is the PV of $1,000 at the end of each of the next 3 years, if the opportunity cost is 8%?,10001000 1000,Mathematical Solution: PV = PMT (PVIFA i, n ) PV = 1,000 (PVIFA .08, 3 ) (use PVIFA table, or) 1 PV = PMT 1 - (1 + i)n i 1 PV = 1000 1 - (1.08 )3 = $2,577.10 .08,Example

7、 4.12,Interpolation within financial tables: finding missing table values,Example 1: PV=1000(PVIFA2.5%,6) Example 2: 1000=100(PVIFA?%,12 months),Perpetuities,Suppose you will receive a fixed payment every period (month, year, etc.) forever. This is an example of a perpetuity. You can think of a perp

8、etuity as an annuity that goes on forever.,Present Value of a Perpetuity,When we find the PV of an annuity, we think of the following relationship:,PV = PMT (PVIFA i, n ),Mathematically, (PVIFA i, n ) = We said that a perpetuity is an annuity where n = infinity. What happens to this formula when n g

9、ets very, very large?,When n gets very large, 1 were left with PVIFA = i,So, the PV of a perpetuity is very simple to find: PV = PMT/i,Present Value of a Perpetuity,What should you be willing to pay in order to receive $10,000 annually forever, if you require 8% per year on the investment?,= $125,00

10、0,Example 4.13,Other Cash Flow Patterns,Ordinary Annuity versus Due Annuity,Earlier, we examined this “ordinary” annuity:,Using an interest rate of 8%, we find that: The Future Value (at 3) is $3,246.40. The Present Value (at 0) is $2,577.10.,10001000 1000,What about this annuity?,Same 3-year time l

11、ine, Same 3 $1000 cash flows, but The cash flows occur at the beginning of each year, rather than at the end of each year. This is an “annuity due.”,1000 1000 1000,0 1 2 3,-1000 -1000 -1000,Future Value - annuity due If you invest $1,000 at the beginning of each of the next 3 years at 8%, how much w

12、ould you have at the end of year 3?,Mathematical Solution: Simply compound the FV of the ordinary annuity one more period: FV = PMT (FVIFA i, n ) (1 + i) FV = 1,000 (FVIFA .08, 3 ) (1.08) (use FVIFA table, or) FV = PMT (1 + i)n 1 (1+i) i FV = 1,000 (1.08)3 - 1 (1.08) = $3,506.11 0.08,0 1 2 3,1000 10

13、00 1000,Present Value - annuity due What is the PV of $1,000 at the beginning of each of the next 3 years, if your opportunity cost is 8%?,Mathematical Solution: Simply compound the FV of the ordinary annuity one more period: PV = PMT (PVIFA i, n ) (1 + i) PV = 1,000 (PVIFA .08, 3 ) (1.08) (use PVIF

14、A table, or) 1 PV = PMT 1 - (1 + i)n (1+i) i 1 PV = 1000 1 - (1.08 )3 (1.08) = 2,783.26 0.08,Is this an annuity? How do we find the PV of a cash flow stream when all of the cash flows are different? (Use a 10% discount rate).,Uneven Cash Flows,Uneven Cash Flows,Sorry! Theres no quickie for this one.

15、 We have to discount each cash flow back separately.,period CF PV (CF) 0-10,000 -10,000.00 1 2,000 1,818.18 2 4,000 3,305.79 3 6,000 4,507.89 4 7,000 4,781.09 PV of Cash Flow Stream: $ 4,412.95,Retirement Example,After graduation, you plan to invest $400 per month in the stock market. If you earn 12

16、% per year on your stocks, how much will you have accumulated when you retire in 30 years?,Mathematical Solution: FV = PMT (FVIFA i, n ) FV = 400 (FVIFA .01, 360 ) (cant use FVIFA table) FV = PMT (1 + i)n - 1 i FV = 400 (1.01)360 - 1 = $1,397,985.65 .01,House Payment Example,If you borrow $100,000 a

17、t 7% fixed interest for 30 years in order to buy a house, what will be your monthly house payment?,Mathematical Solution: PV = PMT (PVIFA i, n ) 100,000 = PMT (PVIFA .005833, 360 ) (cant use PVIFA table) 1 PV = PMT 1 - (1 + i)n i 1 100,000 = PMT 1 - (1.005833 )360 PMT=$665.30 0.005833,Calculating Pr

18、esent and Future Values for single cash flows for an uneven stream of cash flows for annuities and perpetuities For each problem identify: i, n, PMT, PV and FV,Summary,chapter 9 Risk and rates of return,In financial markets, firms seek financing for their investments and shareholders of a company ac

19、hieve much of their wealth through share price movements. Involvement with financial markets is risky. The degree of risk varies from one financial security to another.,Important principle,Almost always true: The greater the expected return, the greater the risk,1926-1999：the annual rates of return

20、in American financial market,Rates of return,Historical return The return that an asset has already produced over a specified period of time Expected return The return that an asset is expected to produce over some future period of time Required return The return that an investor requires an asset t

21、o produce if he/she is to be a future investor in that asset,Rates of return,Nominal The actual rate of return paid or earned without making any allowance for inflation Real The nominal rate of return adjusted for the effect of inflation Effective The nominal rate of return adjusted for more frequen

22、t calculation (or compounding) than once per annum,When an interest rate is quoted in financial markets it is generally expressed as a nominal rate. For example, if a bank advertises that it will pay interest of 5% per annum on deposits, this interest rate is most likely to be the nominal rate. When

23、 inflation is deducted from this nominal rate, the real rate of interest is obtained. (But this is not exactly correct!) To be more precise, ,Interest rate determinants,Adjusting for inflation,Conceptually:,Nominal interest rate i,=,Real interest rate R,+,Anticipated inflation rate r,Mathematically:

24、,( 1 + i ) = ( 1 + R ) ( 1 + r ) i = R + r + r R,Calculating expected returns,Return A B,4% 10% 14%,-10% 14% 30%,Expected return is just a weighted average R* = P(R1) x R1 + P(R2) x R2 + + P(Rn) x Rn,Case study,Company A R* = P(R1) x R1 + P(R2) x R2 + + P(Rn) x Rn RA* = 0.2 x 4% + 0.5 x 10% + 0.3 x

25、14% = 10%,Case study,Company B R* = P(R1) x R1 + P(R2) x R2 + + P(Rn) x Rn RB* = 0.2 x -10% + 0.5 x 14% + 0.3 x 30% = 14%,Based only on your expected return calculations, which company share would you prefer?,The above example illustrates that,Although it is extremely difficult to predict with accur

26、acy what the return will be on an investment, what we can do is make predictions about the range of returns, the probability with which a certain return will eventuate and hence the return that we could expect to get. So, the expected rate of return may be defined as the weighted average of all poss

27、ible outcomes !,Have you considered RISK?,Risk,What is risk The uncertainty or variability or dispersion around the mean value How to measure risk Variance, standard deviation, beta How to reduce risk Diversification How to price risk Security market line, CAPM, APT,For a Treasury security, what is

28、the required rate of return?,Reason: Treasury securities are free of default risk,For a company security, what is the required rate of return?,Required rate of return,=,Risk-free rate of return,How large a risk premium should we require to buy a corporate security?,+,For a company stock, what is the

29、 required rate of return?,Required rate of return,=,Risk-free rate of return,How large a risk premium should we require to buy a stock?,+,Almost always true: The greater the expected return, the greater the risk,1926-1999：the annual rates of return in American financial market,What is risk?,The poss

30、ibility that an actual return will differ from our expected return Uncertainty in the distribution of possible outcomes,Uncertainty in the distribution of possible outcomes,return (%),return (%),How do we measure risk?,General idea: Shares price range over the past year More scientific approach: Sha

31、res standard deviation of returns Standard deviation is a measure of the dispersion of possible outcomes The greater the standard deviation, the greater the uncertainty, and therefore, the greater the risk,Standard deviation probability data,Calculating Standard deviation,Return A B,4% 10% 14%,-10%

32、14% 30%,RA = 10% RB = 14%,Case study,Company A ( 4% - 10% )2 ( 0.2 ) = 7.2 ( 10% - 10% )2 ( 0.5 ) = 0.0 ( 14% - 10% )2 ( 0.3 )= 4.8,Variance = s2= 12.0 Standard deviation= 12.0 = 3.46%,Case study,Company B ( -10% - 14% )2 ( 0.2 ) = 115.2 ( 14% - 14% )2 ( 0.5 ) = 0.0 ( 30% - 14% )2 ( 0.3 )= 76.8,Vari

33、ance = s2= 192.0 Standard deviation=,192.0 = 13.86%,Case study summary,Case study,Which share would you prefer? How would you decide?,Remember the trade-off!,Which share do you prefer?,That means there is no single right answer!,Investors attitude towards risk,Risk-averse: Try to avoid risk Risk-lov

34、e Try to accept high risk Risk-neutral To be indifference to risk,Portfolios,Combining several securities in a portfolio,Can,How does this work?,Two-share portfolio,Perfect negative correlation removes risk,Simple diversification,Investing in two securities to reduce risk,Portfolio risk,Depends on:

35、Proportion of funds invested in each asset The risk associated with each asset in the portfolio The relationship between each asset in the portfolio with respect to risk,Questions,If you owned a share of every stock traded on the market, would you be diversified?,YES!,Would you have eliminated all o

36、f your risk?,NO! Consider stock market “crashes”!,Two types of risk in a portfolio,Diversifiable risk Firm-specific risk Company-unique risk Unsystematic risk Non-diversifiable risk Market-related risk Market risk Systematic risk,Possible causes of risk,Market risk Unexpected changes in interest rat

37、es Unexpected changes in cash flows Tax changes Foreign competition Overall business cycle Unexpected war,Firm-specific risk A companys labour force goes on strike A companys top management dies in a plane crash A huge oil tank bursts and floods a companys production area,How much diversification?,A

38、lmost all possible gains from diversification are achieved with a carefully chosen portfolio of 20 shares,Before moving on, remember:,Not all risk is equal; some risk can be diversified away and some cannot. As we diversify our portfolio, we reduce the effects of a company-unique risk, but non-diver

39、sifiable risk or market risk still remains no matter how much we diversify. The effect of diversification is greatest when the assets returns in a portfolio are perfectly negatively correlated. When assets returns are perfectly positively correlated, no risk reduction is achieved. Standard deviation

40、 is a measure of total risk for a single asset. When the asset is included in a diversified portfolio, the more relevant measure of risk is market risk.,Level of market risk,Do some firms have more market risk than others?,YES,Risk and return,Investors are only compensated for accepting market risk

41、Firm-specific risk should be diversified away,A need to measure market risk for a firm,Beta is a measure of a firms market risk or systematic risk, which is the risk that remains even after we have diversified our portfolio!,Beta: A measure of market risk,A measure of: How an individual shares retur

42、ns vary with market returns The “sensitivity” of an individual shares returns to changes in the market,For the market: Beta = 1 A firm with Beta =1 has average market risk. it has the same volatility as the market A firm with Beta 1 is more volatile than the market A firm with Beta 1 is less volatil

43、e than the market,Calculating beta,Beta = slope of characteristic line,Required rate of return,An investors required rate of return should only contain a market risk premium,Graphing this relationship,1,4%,11%,SML,Known as the CAPM,The CAPM equation,where Rj = the required return on security j Rf =

44、the risk-free rate of interest bj = the beta of security j Rm = the return on the market index,Example,Suppose the Treasury bond rate is 4%, the average return on the security market is 11%, and XYZ has a beta of 1.2. According to the CAPM, what should be the required rate of return on XYZ shares?,R

45、j = Rf + bj ( Rm Rf ) Here: Rf = 4% Rm = 11% bj= 1.2,Rj= 4 + 1.2 x ( 11 4 ) = 12.4% According to the CAPM, XYZ shares should be priced to give a 12.4% return,CAPM theory,Theoretically, every security should lie on the SML,If a security is on the SML, then investors are being fully compensated for ri

46、sk,CAPM theory,If a security is above the SML, it is underpriced,If a security is below the SML, it is overpriced,Criticisms of the CAPM,Theoretical issue Is it realistic to think that the risk of an asset can be accurately reflected by only the one variable of market sensitivity?,Technical issues R

47、eturn on the market Is this observable? Use of proxy data Risk free rate of return Best proxy? Beta Measurement issues Changes over time,Remains a widely used and important tool,Summary,Understand the concept of expected return as the mean of a range of possible outcomes and the concept of risk as v

48、ariability or spread around that mean Be able to compute the expected return and risk for an investment Realise that risk can be reduced by sensible diversification Understand the notion of market (systematic) risk and distinguish this from firm-unique (unsystematic or diversifiable) risk,Recognise

49、the use of beta as a measure of an investments systematic risk Know how to find an investors required rate of return as a function of beta, using the capital asset pricing model,End of Chapter 9,chapter 10 Valuation of bonds and shares,Definitions of value,Book value Liquidation value Going concern

50、value Market value Intrinsic value,Book value is the value of an item as shown in a firms balance sheet. It often represents an historical value of the item. The book value per ordinary share equals the total book value of the ordinary shares divided by the number of shares outstanding.,Liquidation

51、or disposal value is the dollar amount that could be realised if an asset were sold individually and not as part of the whole business as a going concern. If the firms operations were discontinued, all its assets could be sold as separate items and the proceeds used to repay the firms liabilities. T

52、he total net amount remaining would represent the firms liquidation value.,Going-concern value is the amount realised if the entire firm is sold as a going concern rather than on the basis of liquidating its assets.,Market value of an asset is the observed value for the asset in the market, which is

53、 determined by supply and demand forces working together in the market.,Intrinsic value is the present value of the assets expected future cash flows. It is also called the fair value. It represents how much an investor is willing to pay given their perception of the amount, timing and riskiness of

54、the assets future cash flows.,The value of an asset or a security is its intrinsic value! It is determined by three elements: The amount and timing of the assets expected cash flows The riskiness of these cash flows The investors required rate of return for undertaking the investment,Security valuat

55、ion,The intrinsic value of an asset,=,The present value of the stream of expected cash flows discounted at an appropriate required rate of return,Can the intrinsic value of an asset differ from the market value?,Valuation: An overview,Asset characteristics Amount, timing, and riskiness of expected c

56、ash flows,Investor attributes Perception of riskiness of expected cash flows Willingness to bear risk,Investors required rate of return,Asset value = PV of expected cash flows discounted at the investors required rate of return,+,Basic security valuation model,V,=,+,where V= The intrinsic or present

57、 value of the asset Ct= Cash flow to be received at the end of year t R= The investors required rate of return,Bonds,Terminology Par value Maturity date Coupon interest rate,Bonds pay fixed coupon payments at fixed intervals and pay the par value at maturity,Bond valuation,The coupon payment stream

58、An annuity The par value payment A single sum,Bond valuation,where: $I = The coupon interest payment Rb= The investors required rate of return Vb= The intrinsic or present value of the bond,Bond valuation,Case study,Suppose our firm decides to issue 20-year bonds with a par value of $1,000 and annual coupon payments. The return on other bonds of similar risk is 12%, so we decide to offer a 12% coupon interest rate. What would be a fair price for these bonds?,Mathematical solution,Case study,PV = PMT 1 ( 1 + i )-n / i + FV / ( 1 + i )n = 120 1 1.12-20 / 0.12 + 1000 / 1.1220 = 1000.00 or usin