...The Development of Modern Finance "A Short History of Value" David Roubaud & Jean-Charles Bagneris 10/2011 The Main Steps of the Theory Building • Portfolio Selection (Markowitz, 1952) • CAPM (Sharpe, 1963) • Financing and Dividend Decisions Neutrality (Modigliani et Miller, 1958, 1961,1963) • Efficient Markets (Fama, 1965, 1970) • Options Pricing Theory (Black & Scholes, 1973, Myers, 1977) • Agency Theory (Jensen, Meckling, 1976) • Efficient Markets II (Fama, 1991) • Behavioural Finance (Kahneman & Tversky, 1979, Shiller, 1981, 2000) Portfolio Selection • Investors are rationals and risk averse • Diversification lowers specific risk • Any portfolio is a combination of the market portfolio and the riskless asset The CAPM Capital Asset Pricing Model • Systematic risk of an asset is measured by its beta coefficient • The model calibrates the risk-return relationship • Simple, elegant and linear model => big success • Low explaining power (strong assumptions) • Alternative models are difficult to use 1 The Development of Modern Finance 2 Financial Markets Efficiency "At any given point in time, assets prices on financial markets account for all available information." • Strong assumptions on: – markets organization – investors behaviour • One consequence of EMH is Random Walk Hypothesis • Assumptions are not always true: 3 forms of efficiency (strong, semi-strong, weak) The irrelevance of financing and dividends decisions In a world without taxes and with perfect financial markets...
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...Wednesday, September 16, 2015 Ms. ________ CFO Office of University Finance, Florida International University, Miami, FL 33199 Subject: IMPLEMENTATION OF BUDGET STABILIZATION PLAN TO REDUCE FIU COSTS This letter is to inform all students, staff, administrators, and faculty members of the measures taken to overcome difficulties with the current budget. Despite to our efforts in reducing FIU financial costs, our revenues decreased by 20% compared to last year. Based on close analysis of our budget situation, we are not receiving enough funds from the state, we are spending more than our budget allows, and our tuition costs are lower than other similar educational institutions. We decided to create a strategy for the fiscal year 2016 to stabilize the budget situation. This strategy encapsulates five plans; the first two will be implemented on the summer 2015 while the remaining three plans will be applied starting January 2016. The strategy context will be as follows: * Increase tuition cost and fees by 6.5% to adjust inflation. * Frozen salaries for both faculty and staff for the next eighteen months. * Reducing spending for the fiscal year 2015 by 12%. * Request financial assistance from nonprofit organizations and the government. * Increase endowment by 10% for the fiscal year 2015 and an additional 15% for the following year. We hope that with these difficult actions our budget can be under control in the next two years while preserving...
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...FIN 430 Assignment 4 (Due on Mar.10th) Name: 1. Which of the following statements regarding mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs) is most correct: A. MBSs are created from CMOs. B. Creating CMOs does not reduce the overall prepayment risk of a mortgage passthrough security. C. The prepayment option of an MBS benefits the security holder. D. The cash flows received on the MBS are quite similar to those of a callable coupon bond. B. Creating a CMO can redistribute the prepayment risk among tranches but it does not alter the overall prepayment risk of a mortgage passthrough security. Although MBS and callable bonds both have reinvestment risk, the cash flows from an MBS are different in that mortgage loans are amortizing. 2. Compared to the underlying MBS, a collateralized mortgage obligation (CMO) tranche: A. has less prepayment risk. B. has lower duration. C. may have more or less prepayment risk. D. Allows an investor to select an exact maturity. C. CMOs redistribute prepayment risk and/or the expected repayment term of the underlying MBS among the CMO tranches. If some tranches have less prepayment risk, other must have more. 3. A domestic investor is purchasing foreign bonds. Which of the following statements regarding the exchange rate risk and price movement of the asset is most correct? A. The depreciation of both the asset and the foreign currency benefits the domestic investor. B. The depreciation of the asset and the appreciation...
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...Tania Ibarra September 10th 2013 Phil 305 Over the past years, banks have played a major role in the economy. A role big enough that made Americans feel an obligation to own a home. The American dream of home ownership has been greatly affected over the past years because of the financial crisis in regards to the housing market. In 2009, President Obama reopened the issue about the crisis in the housing market aiming specifically for companies that took advantage of the financial crisis. Those companies, better known as Fannie Mae and Freddie Mac made huge profits because it was easy enough for them to risk bets by buying mortgages. When people bought houses they could not afford, banks took those individuals’ situation and gave mortgages out to those individuals. When the amount of mortgages starting increasing, and people starting losing their homes, earning bad credit, and losing their jobs, president Obama decided it was time to take action. The Glass- Steagall Act was built on a firewall between investment and owning. The purpose of it was to prevent commercial banks from interfering with the banking investment business. It was believed that banks were too involved in investments, which risked the costumer’s money. Since banks had a huge amount of money, they would risk it in investments, making those investments not so leverage. It was when banks started giving out more and more loans and shifting money from one place to another, the Glass- Steagall Act went into...
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...End-of-Chapter Questions and Problems We have found that many students learn better when they have plenty of opportunity to practice; therefore, we provide extensive end-of-chapter questions and problems. The end-of-chapter support greatly exceeds typical introductory textbooks. The questions and problems are segregated into three learning levels: Basic, Intermediate, and Challenge. All problems are fully annotated so that students and instructors can readily identify particular types. Answers to selected end-of-chapter material appear in Appendix C. See Chapter 6, page 191; Chapter 9, page 305. New! What’s on the Web? These end-of-chapter activities show students how to use and learn from the vast amount of financial resources available on the Internet. See examples in Chapter 1, page 22; Chapter 4, page 126. New! S&P Market Insight Problems Most chapters include two or three new end-of-chapter problems that require the use of the Educational Version of Market Insight, Standard & Poor’s powerful and well- known Compustat® database. These problems provide an easy, online way for students to incorporate current, real-world data into their learning. See examples in Chapter 3, page 92; Chapter 4, page 125. xv Basic (continued ) Intermediate (Questions 19–20) Challenge (Questions 21–23) c. If you apply the NPV criterion, which investment will you choose? Why? d. If you apply the IRR criterion, which investment will you choose? Why? e. If...
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...------------------------------------------------- Electronic Processing and The role of professional Accouting and finance bodies and cods of conduct Accounting and Finance ATAR Assignment June 10, 2016 Ramla Mohamed Australian Islamic College June 10, 2016 Ramla Mohamed Australian Islamic College Part 1 a) What membership type are available for the organisation? Types of membership include Associate, CPA and Fellow are an example of memberships available to CPA Australia. b) What qualifications/experiences are required to become a member? Associate(ASA)- As an ASA you have six years to complete the CPA Program, including six education subjects and the experience requirement, in order to become a CPA CPA-To call yourself a CPA, you must: hold a degree or postgraduate award recognized by CPA Australia, in any discipline, have demonstrated competence in our foundation exams, usually demonstrated by the completion of an accredited degree, have completed the CPA Program, including the experience requirement, within six years, undertake continuing professional development (CPD) activities each year and comply with a code of conduct set by CPA Australia Fellow- You must be a CPA with at least 15 years' full-time work in accounting, finance or business. (1) c) How do you maintain membership? As a member of a leading global professional body, you understand the value of life-long learning. Whilst there is an obligation to participate in continuing professional...
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...case study, “The William Wrigley Jr. Company: Captial Structure, Valuation, and the Cost of Capital” the author, Robert Bruner, examines how Blanka Dobrynin, managing partner at Aurora Borealis, explores the opportunity to persuade Wrigley’s board to complete a leveraged recapitalization through a dividend or major share repurchase. Through her active investor strategy, Blanca is trying to increase the value of investment in Wrigley. Blanca’s objective would be to create ultimately new value in Wm. Wrigley Jr. corporation and thus increase the value of Aurora Borealis’ initial investment in the firm. As a result of using the three billion to complete a significant share repurchase or by increasing the dividend to stockholders; Finance theory can be used to demonstrate how Blanca’s strategy will enhance the value of the firm and ultimately increase Aurora Borealis’ initial investment. Case Study Questions Based on the theory and research papers read during the semester, the following is an analysis of the effects of issuing $3 billion of new debt and using the proceeds either to pay a dividend or to repurchase shares on: 1. Wrigley’s outstanding shares? a. A firm can leverage debt to maximize profitability which will allow the firm to compete in a competitive market (DeAngelo & Masulis, 1979). b. The debt will increase the value of a company using shielding cash flows from taxes. c. Masulis believed the price of the stock goes up after...
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...California Clinics, an investor-owned chain of ambulatory care clinics, just paid a dividend of $2 per share. The firm’s dividend is expected to grow at a constant rate of 5% per year, and investors require a 15 % rate of return on the stock. 1. What is the stock’s value? Stock value does not have a constant value. The value fluctuates based on the number of factors which includes dividends, investment growth, and the conditions of economy and financial markets. The stock value is $21.00. A B $2.00 D0 5% E(g) 15% R(Rs) $21.00 E(P0)= $2.00x 1.05 = $2.10 = $21.00 0.15-0.05 0.1 2. Suppose the riskiness of the stock decreases, which causes the required rate of return to fall to 13%. Under these conditions, what is the stock’s value? There are numerous financial risk factors within the stocks and marketing industry. If the stock decreased rate of return fell to 13%, the stock value would be as follow: E(P0)= $2.00x 1.05 = $2.10 = $26.25 0.13-0.05 .08 The stock value would be $26.25. 3. Return to the original 15% required rate of return and assume a dividend growth rate estimate increase to 7% per year, what is the stock value? Dividend growth investing is a lesson in the power of compounding returns. The chart equation below shows the new stock value with an increase of dividend growth rate. A B $2.00 D0 7% E(g) 15% R(Rs) $21.00 ...
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...CALIFORNIA CLINICS Strayer University HSA 530: HealthCare Human Resource Management February 12, 2012 California Clinics, an investor-owned chain of ambulatory care clinics, just paid a dividend of $2 per share. The firm’s dividend is expected to grow at a constant rate of 5% per year, and investors require a 15 % rate of return on the stock. Hint: consult pages 396-397 of your text book for correct formula. Please consult your syllabi for assignment grading criteria. 1. What is the stock’s value? D = the most resent dividend which is = $2.00 per share. E (g) = the constant growth rate = 5% = 0.05 per year. R (Re) = Investors rate of return on the stock = 15% = 0.15 Formula used E (P) = D x (1 + E (g)) / (R (Re)-E (g)) E (P) = $2.00 x (1+ 0.05) / (0.15- 0.05) E (P) = $2.00 x (1.05) / (.1) E (P) = $2.10 / .1 E (P) = $ 21.00 The stock value is $21.00. 2. Suppose the riskiness of the stock decreases, which causes the required rate of return to fall to 13%. Under these conditions, what is the stock’s value? D = the most resent dividend which is = $2.00 per share. E (g) = the constant growth rate = 5% = 0.05 per year. R (Re) = Investors...
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...Syllabus Corporate Finance 1148-FIU01-FIN-6406-SECRXQ_AP_1148-86029 GENERAL INFORMATION | IMPORTANT INFORMATION | COURSE DETAIL | COURSE CALENDAR GENERAL INFORMATION PROFESSOR INFORMATION Instructor: Prof. Edward R. Lawrence Phone: (305) 348-0082 Office: RB 207A Fax: (305) 348-4245 Office Hours: By Appointment E-mail: elawrenc@fiu.edu Website: Professor's Bio COURSE DESCRIPTION AND PURPOSE The course is covered in two parts. In part one; we will have an overview of financial management and financial environment. We will analyze firm’s financial performance using financial ratio analysis. We will then discuss the time value of money (TVM) and use the concept of TVM in the valuation of bonds and stocks. In part two we will understand the methods for computing cash flows and the company’s cost of capital and then use them to learn capital budgeting which involves project selection decisions. COURSE OBJECTIVES The objective of this course is to give the students an operational knowledge of corporate finance by combining theory and applications. Introduce the concepts or risk, return, and time-value-of-money as applied to valuation of securities and capital budgeting. Here are the course level learning outcomes: 1. Perform Internet research and find relevant financial data. 2. Use information technology to assess the financial position of organizations. 3. Learn how to perform financial statement analysis. 4. Learn the mathematics of Time Value of Money...
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...of agency costs by Jensen and Meckling (1976) and bankruptcy costs. Myers (1977, p. 174) concluded his paper “Determinants of Corporate Borrowing” with “The firm should not attempt to borrow as much as possible”. Turnbull (1979, p. 939) proved “…that for a firm maximizing market value, the optimal capital stucture always occurs before the firm’s debt capacity”2. In other words, if you “borrow all you can” the resulting debt level will be greater than the debt level that maximizes stockholders’ market value. Thease results lead to the “trade-off” model. Finally, the “pecking order” model of capital structure has gained favor in recent years and there is ample empirical evidence to warrant this favor. The “pecking order” is: first, finance what you can with internally generated funds (retained earnings); second, debt; and finally, sell stock to raise equity capital [See Myers (1984,...
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...Corporation Law, (HI 5027) Assignment -2 Part-A The director’s duty to prevent insolvent trading is in s588G of Corporations Act, however there no separate law to prevent insolvent trading.s588G of corporation Law deals with protecting creditors in dealing with companies. Creditors usually don’t require protection of s588G because many creditors can protect themselves from the risk of their loan being not paid by obtaining security for the loan for example giving mortgage. So in Case the company becomes bankrupt then secured creditor will have their loan repaid but all creditors do not have this security so the parliament has enacted the s588G which says that it is the fundamental duty of the director to prevent his company from trading while it is insolvent (Hanharan,Ramsay& Stapledon 2012). The duty of the director to prevent insolvent trading is to be followed by all directors but does not apply to officers other than directors also according to s9 definition of director applies to shadow and de facto directors . Section 588G says that the director of the company is liable if the company incurs a debt, company becomes insolvent when it incurs debt, the director suspects the company will become insolvent if it incurs debt and director knows that has reasonable grounds to suspect that company will become insolvent (Hanharan et al 2012). If a director does not prevent a company from incurring a debt then they, or any reasonable person in their place, should have suspected...
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...AGRICULTURAL DEBT WAIVER AND DEBT RELIEF SCHEME, 2008 A report submitted In partial fulfilment for requirements of the course Public Finance Instructor: Prof. Prem Pangotra Prof. R. H. Dholakia Academic Associate: Bangkim Kshetrimayum Submitted by Harish Mahale Kamala Kalavacharla Kashif Mohammad Mayank Kansal Rakesh Gehlot Rishabh Bhansali Tauseef Ahmad Khan 22ndAugust 2013 INDIAN INSTITUTE OF MANAGEMENT, AHMEDABAD AGRICULTURAL DEBT WAIVER AND DEBT RELIEF SCHEME, 2008 Introduction Poor farmers in India face highly volatile incomes. In such cases, the bank loans serve dual purpose of enabling productive investment and providing insurance against highly volatile income streams. But, the lack of access to any sophisticated instruments to manage income risks, leads to the poor farmers accumulating extreme levels of debt, eventually barring them from institutional credits in future. The Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS), 2008 was launched in May 2008 by the Government of India to address the problems and difficulties faced by the farming community in repayment of loans taken by them and in helping them qualify for fresh loans. Under the scheme, Marginal farmers (those cultivating agricultural land up to 1 hectare i.e. 2.5 acres) and ‘Small’ farmers (those cultivating agricultural land between 1 – 2 hectares (5 acres)) received complete waiver of the eligible amount (Direct agricultural loan, short term loan and investment load...
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...EFB 360 Finance Capstone Case Study 2 Distribution to shareholder: Dividends and Repurchase The case of Gainesboro Machine Tool Corporation Abstract 1 Introduction 1 Dividend Irrelevance Proposition 1 Financial Flexibility 2 Agency Theory 2 Signalling Theory 3 Clientele Effects 4 The Optimal Payout Ratio 5 Share Repurchase 7 Conclusion 8 References 10 Appendices 13 Appendix 1: Detailed Calculation of Unused Debt Capacity (0%, 20%, 40% and residual payout) 13 Appendix 2: Residual Payout Calculations 15 Appendix 3: Sensitivity Analysis for Optimal Payout Ratio 16 Appendix 3.1 Debt/ Equity Ratio of 13% and 18% Annual Sales Growth 17 Abstract This paper reviews current literature to explore the financial effects of payout policy on signalling and clientele effects, as well as the financial implications of dividend and share repurchase decisions. Possible reactions that Gainesboro’s various capital providers may have to different payout policies are also examined, to determine an optimal payout policy for Gainesboro, taking into account contextual factors mentioned in the case. Findings suggest that although a 20% payout ratio is feasible, Gainesboro will most benefit from share repurchasing this quarter. Introduction Gainesboro Machine Tool Corporation has a tradition of strong earnings and predictable growth. However since 2000, dividends have started to outgrow earnings. By the first half of 2005, they have not declared dividends yet but...
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...DISSERTATION PROPOSAL The Impact of Foreign Share Ownership on Financial Performance in Australia Word Count: 2,696 Table of Contents 1. Introduction ........................................................................................................................ 3 2. Literature Review ............................................................................................................... 5 2.1 2.2 3. 4. Corporate Governance in Australia ............................................................................. 5 Ownership Structure and Financial Performance........................................................ 6 Hypothesis .......................................................................................................................... 8 Methodology....................................................................................................................... 8 4.1 4.2 Model Design .............................................................................................................. 9 Sample ....................................................................................................................... 10 5. 6. References ........................................................................................................................ 11 Appendix .......................................................................................................................... 14 6.1 6.2 Structure .................
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