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Liquidation =
the process of closing a business and distributing its assets to claimants
Sole proprietorship
Partnerships
Limitedartnerships
Limited Liability Companies / Corporations
Owners’ liability is limited to the amount they invested in the firm, they are not required to pay back debts of the firm
Board of directors
CEO
the one entitled to run the firm day-to-day
CFO
Shareholders who own the company can indirectly control the firm by …
Shareholders who own the company can indirectly control the firm by electing the Board of Directors. The Board of Directors is elected by a voting procedure in which each share counts for one vote.
Agency problem =
when the managers work for their self-interests (e.g., by raising their salary)
Shareholders have three methods to limit/remove agency problem
Stock market is divided into primary market and secondary market
Corporations have to provide information to investors so they know how well the firm is making investments and in which business it is concentrating its activity.
The firm provides information to the investors by … .
This makes it … .
following the reporting standards included in the Generally Accepted Accounting Principles (GAAP) and International Report Standard (IRS).
This makes it easy to compare firms from different countries and compare the same firm across time
The most important documents issued by the firm to provide information to the financial markets are:
Values that can be calculated from balance sheet
EPS (earnings per share)
Use and formula
RE (retained earnings) =
And what does it tell us?
A positive RE suggests that the firm’s management has spotted some good investment opportunities and wants to retain some net income to (re)invest in them
ROE =
DuPont Identity =
What’s the difference?
Time value of money =
the difference between the value of money today and the value of cash tomorrow
Present value =
Future value =
Same summation and ^n as for PV over period of time
4 types of cashflow + examples IRL
Start term and common ratio
Growing perpetuity =
Growing annuity =
Total Return =
Discount-Dividend Model (DDM) =
Growth rate of earnings =
Enterprise Value (EV) =
the measure of a company's total value
Illiquid asset =
not easily converted into cash
Illiquid market =
few participants and a low volume of activity.
P0 =
V0 =
Fundamental value of firm today
FCF =
amount of money generated by the firm’s day-to-day activities
EMH:
What is it?
Three forms
How can it fail?
Should you use Return Series or Price Series to analyse asset?
Return Series
Stochastic process
Brownian Motion
Geometric Brownian Motion (GBM) =
Risk =
broadly defined as uncertainty in future cash flow
financial markets evolve unpredictably, like particles in a chaotic system
Formulas + differences + uses
Arithmetic mean
Geometric mean
Starting from stock’s price series, there are 2 main tools to “estimate” their expected return and risk:
Average return
Starting from stock’s price series, there are 2 main tools to “estimate” their expected return and risk:
Variance
Formula + 3 properties
Volatility
= standard deviation =
Empirical rule
Meaning + formula + how to analyse graph
Skewness
Kurtosis
Dividends, and thus share prices, move due to two types of news:
Associated with this type of news, we characterize two types of risks:
