Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Week 1
Ken Okamura
What to expect
FINANCE 2
Textbooks: Core readings
Brealey, Myers and Allen. Principles of
Corporate Finance. McGraw-Hill. 10th Ed.
FINANCE 3
Other administrative details
I can be contacted at
ken.okamura@sbs.ox.ac.uk
FINANCE 4
The topics we cover
Topic 1: Investment decisions and valuation
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The topics we cover
Topic 2: Financing decisions and capital structure
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The topics we cover
Topic 3: Risk and return
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The topics we cover
Topic 4: Derivatives
FINANCE 8
What is finance?
Should we invest?
How should we invest?
Who is doing the investing? (who is the “we” above)
How is the price determined? (how much should “we”
expect to receive for investing)
FINANCE 9
Financial markets
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Corporate finance
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Asset pricing
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Household finance
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Financial markets
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Accounting vs. finance
Accounting
Records, collates and reports information about a company’s
operations
Is backward looking and is generally conservative in nature
Financial accounts are based on accruals and not on cashflows,
which is the focus of finance
Accounting’s use for finance
Provides information for financial intermediaries, households
and managers themselves
Provides a basis for forecasting future cashflows
Finance
Is focused on forward-looking decisions under uncertainty
FINANCE 16
Financial intermediaries
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Types of financial markets / products
Foreign exchange
Equity
Derivatives
Fixed income
Commodities
Real estate
Banking
18
A typical investment banking structure
19
What do financial markets do?
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Financial markets function I:
Resource allocation
Across time
Borrowing money: Funding expenditure now for repayment later
Saving money: Depositing in banks, investing in other assets
Across different states of the world
In boom times, equity(shares, stocks) receive higher payments
In bad times, debt holders (bonds, loans) are paid before equity
holders
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Financial markets function II:
Information dissemination/Price discovery
FINANCE 22
Finance theory
Neoclassical Neoinstitutional
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Traditional view
Pre-1950s
Finance treated as an ancillary service to production
process
Finance is not treated as a factor that alters choices of
capital structure (debt vs. equity) or whether financing
can be raised (cost of capital)
Accounting measures exist, but all elements of modern
finance do not: Modern portfolio theory, Efficient Market
Hypothesis, Asset pricing theories
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Modern finance theory
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Neoclassical
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Neoinstitutional approach
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Differences
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Valuation and Fisher model
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Valuation
FINANCE 30
How to represent cashflows
Cashflow table
+
- Time
FINANCE 31
Pharma corp: Mutually exclusive projects
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What is opportunity cost of capital?
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Pharma corp: Mutually exclusive projects
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What is the value of Project A?
+£11.43m
CF1
+
-
-£10m
CF0
FINANCE 36
Pharma corp: Mutually exclusive projects
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Projects B & C
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Observations about B and C
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Shareholder unanimity
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Fisher model
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Indifference curves
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Indifference curves II
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Investors with different preferences III
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Fisher model
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Fisher model II
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Fisher model: No capital market
c0
E
If alpha represent the level of income in years 0 and 1, a shift to beta
means investing in markets to delay consumption in year 0 to year 1, a
move to gamma means borrowing money and spending in year 0
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Present value line
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Lucy and Mark
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How they invest with a capital market
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Fisher separation theorem
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Fisher model
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Summary
FINANCE 56