Introduction to Financial Management FIN 102 – Week 2

Introduction to Financial Introduction to Financial ManagementManagementFIN 102 – Week 2FIN 102 – Week 2

Dr. Andrew L. H. ParkesDr. Andrew L. H. Parkes““A practical and hands on course on the valuation A practical and hands on course on the valuation

and financial management of corporations”and financial management of corporations”

Intro. to Financial Managment - WeIntro. to Financial Managment - Week 2ek 2

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Financial Management in the 21Financial Management in the 21stst centurycentury

Further Globalization TrendsFurther Globalization Trends

– The world is one big marketThe world is one big market– Products will be made in lowest cost Products will be made in lowest cost

countriescountries– Raw materials will be sourced in lowest cost Raw materials will be sourced in lowest cost

countriescountries

Increasing role of IT and the InternetIncreasing role of IT and the Internet

– The world is one big information networkThe world is one big information network– Technology will allow for faster and better Technology will allow for faster and better

decisionsdecisions– Information will be real time on line Information will be real time on line

availableavailable– Video conferencing will replace time Video conferencing will replace time

consuming travelconsuming travel– Electronic Commerce will increase fastElectronic Commerce will increase fast

Increasing impact of Business EthicsIncreasing impact of Business Ethics

– Companies conduct towards Companies conduct towards stakeholders is getting more stakeholders is getting more attentionattention

– The social responsibility of the The social responsibility of the company is in high focuscompany is in high focus

Wind Power – Sustainable Energy


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The Agency ProblemThe Agency Problem Stockholders versus Management:Stockholders versus Management:

Owners want managers to increase shareholder wealth…Owners want managers to increase shareholder wealth… Managers can be encouraged to do the things that Managers can be encouraged to do the things that

shareholders want them to do through bonuses and option shareholders want them to do through bonuses and option plans related to performance.plans related to performance.

Shareholders versus Creditors:Shareholders versus Creditors: Creditors desire to preserve their principal and interest, if Creditors desire to preserve their principal and interest, if

possible.possible. Restrictive covenants in debt agreementsRestrictive covenants in debt agreements Creditors will take the company into bankruptcy! Creditors will take the company into bankruptcy!

Shareholders – lose everything!Shareholders – lose everything!

For Example: Enron Creditors Recovery Corp. is in the midst of liquidating its remaining operations and distributing its assets to its creditors.


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According to Fortune: The According to Fortune: The world’s richest man (8, Aug. world’s richest man (8, Aug.

20072007 Mexican tycoon Slim is world's Mexican tycoon Slim is world's

richest man, 'Fortune' saysrichest man, 'Fortune' says MEXICO CITY (Reuters) — Mexican MEXICO CITY (Reuters) — Mexican

telecom billionaire Carlos Slim has telecom billionaire Carlos Slim has overtaken Microsoft founder Bill overtaken Microsoft founder Bill Gates as the world's wealthiest man Gates as the world's wealthiest man with riches of $59 billion, with riches of $59 billion, FortuneFortune magazine said Monday.magazine said Monday.

FortuneFortune, which tracks the , which tracks the performance of the world's top performance of the world's top companies, said Slim has increased companies, said Slim has increased his net worth by $12 billion so far his net worth by $12 billion so far this year based on the market value this year based on the market value of his companies listed on stock of his companies listed on stock exchanges.exchanges.

Thanks to Bobby for keeping up on Thanks to Bobby for keeping up on the financial news!the financial news!


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Nominal Corporate tax rates Nominal Corporate tax rates (US)(US)

Corporate Tax RatesCorporate Tax Rates**

Tax Rate Taxable IncomeTax Rate Taxable Income

15% $ 1 - 50,000 15% $ 1 - 50,000 25% 50,001 - 75,000 25% 50,001 - 75,000 34% 75,001 - 100,000 34% 75,001 - 100,000 39% 100,001 - 335,000 39% 100,001 - 335,000 34% 335,001 - 10,000,000 34% 335,001 - 10,000,000 35% 10,000,001 - 15,000,000 35% 10,000,001 - 15,000,000 38% 15,000,001 - 18,333,333 38% 15,000,001 - 18,333,333 35% over 18,333,333 35% over 18,333,333

* Personal service corporations pay a flat * Personal service corporations pay a flat 35%.35%.

n

* Internal Revenue Service

Corporate Income Corporate Income TaxesTaxes

Example calculation provided in class.


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Tax HavensTax Havens Companies have the goal Companies have the goal

of creating value for their of creating value for their shareholdersshareholders

Paying taxes is in conflict Paying taxes is in conflict with the financial goalwith the financial goal

Many companies raise “off Many companies raise “off shore” subsidiary's to avoid shore” subsidiary's to avoid taxestaxes

Famous tax havens are:Famous tax havens are: The Bahama’sThe Bahama’s Grand Cayman islandsGrand Cayman islands MonacoMonaco The Netherlands AntillesThe Netherlands Antilles Ireland (only 12% corporate Ireland (only 12% corporate

tax) tax)


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Assignment #2a: TaxesAssignment #2a: Taxes Your company has made Your company has made

provisions in its Income provisions in its Income Statement over the past 5 years Statement over the past 5 years to pay taxes on its taxable to pay taxes on its taxable income.income.

1.1. Calculate tax (t) as a % of Calculate tax (t) as a % of Operating Profit (EBIT) over the Operating Profit (EBIT) over the years 2002-2006.years 2002-2006.

2.2. Has your company paid the full Has your company paid the full amount of taxes or does it use amount of taxes or does it use “off shore” tax havens?“off shore” tax havens?

3.3. Calculate the tax rates for each Calculate the tax rates for each year as well as the average tax year as well as the average tax rate (%) over the period 2002-rate (%) over the period 2002-2006 also calculate the variance 2006 also calculate the variance ??

Calculating Taxes …


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The Financial EnvironmentThe Financial Environment

1.1. The Financial MarketsThe Financial Markets

2.2. Financial Financial IntermediariesIntermediaries

3.3. Financial BrokersFinancial Brokers

4.4. Secondary MarketsSecondary Markets

5.5. Allocation of Funds Allocation of Funds and Interest Ratesand Interest Rates


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What are some types of Markets?What are some types of Markets? A market is a method of exchanging A market is a method of exchanging

one asset (usually cash) for another one asset (usually cash) for another asset.asset.

Physical assets vs. financial assetsPhysical assets vs. financial assets Spot versus future marketsSpot versus future markets Money versus capital marketsMoney versus capital markets Primary versus secondary marketsPrimary versus secondary markets

The Financial MarketsThe Financial Markets


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What are some Financial What are some Financial Intermediaries?Intermediaries?

Commercial banksCommercial banks Savings & Loans, mutual savings Savings & Loans, mutual savings

banks, and credit unionsbanks, and credit unions Life insurance companiesLife insurance companies Mutual fundsMutual funds Pension fundsPension funds


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Primary vs. Secondary Primary vs. Secondary Security SalesSecurity Sales

PrimaryPrimary– New issue (IPO or seasoned)New issue (IPO or seasoned)– Key factor: issuer receives the proceeds Key factor: issuer receives the proceeds

from the sale.from the sale. SecondarySecondary

– Existing owner sells to another party.Existing owner sells to another party.– Issuing firm doesn’t receive proceeds Issuing firm doesn’t receive proceeds

and is not directly involved.and is not directly involved.


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Public OfferingsPublic Offerings

Public offerings: registered with the SEC Public offerings: registered with the SEC and sale is made to the investing public.and sale is made to the investing public.– Shelf registration (Rule 415, since 1982) allows firms to Shelf registration (Rule 415, since 1982) allows firms to

register an offering and sell parts of the offering over register an offering and sell parts of the offering over time.time.

Initial Public Offerings (IPOs)Initial Public Offerings (IPOs)– Underpricing—Average increase is 14% on first day.Underpricing—Average increase is 14% on first day.– Performance– Underperforms similar stock during three Performance– Underperforms similar stock during three

years after IPO.years after IPO.


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Secondary MarketsSecondary Markets

Markets that trade Markets that trade ALREADY issued Stocks, ALREADY issued Stocks, Bonds or other securities.Bonds or other securities.– Organized Exchanges Organized Exchanges

(NYSE)(NYSE)– Over the Counter Over the Counter

Exchanges (NASDAQ)Exchanges (NASDAQ)– Privately traded or financial Privately traded or financial

institution traded securites institution traded securites (Fannie Mae, Freddie Mac)(Fannie Mae, Freddie Mac)


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Domestic Stock IndexesDomestic Stock Indexes

Dow Jones Industrial AverageDow Jones Industrial Average Standard & Poor’s 500 CompositeStandard & Poor’s 500 Composite Nasdaq 100Nasdaq 100 NYSE CompositeNYSE Composite Wilshire 5000Wilshire 5000


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International Stock IndexesInternational Stock Indexes

Nikkei 225 – TokyoNikkei 225 – Tokyo FTSE 100 – LondonFTSE 100 – London Dax 30 – GermanyDax 30 – Germany Hang Seng - Hong Kong =>Hang Seng - Hong Kong =>

Region and Country IndexesRegion and Country Indexes– Example: Morgan Stanley Capital Example: Morgan Stanley Capital

International (MSCI) Euro IndexInternational (MSCI) Euro Index


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Who are the providers (savers) Who are the providers (savers) and users (borrowers) of and users (borrowers) of

capital?capital? Households: Net savers (#1)Households: Net savers (#1) Non-financial corporations: Net users Non-financial corporations: Net users

(borrowers)(borrowers) Governments: Governments: Net borrowers (except Net borrowers (except

?)?) Financial corporations: Slightly net Financial corporations: Slightly net

borrowers, but almost breakevenborrowers, but almost breakeven


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Transfer of Capital from Transfer of Capital from Savers to BorrowersSavers to Borrowers

Direct transfer (e.g., corporation issues Direct transfer (e.g., corporation issues commercial paper to insurance company) commercial paper to insurance company)

Through an investment banking house Through an investment banking house (e.g., IPO, seasoned equity offering, or (e.g., IPO, seasoned equity offering, or debt placement)debt placement)

Through a financial intermediary (e.g., Through a financial intermediary (e.g., individual deposits money in bank, bank individual deposits money in bank, bank makes commercial loan to a company)makes commercial loan to a company)


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Cost of CapitalCost of Capital

What do we call the price, or cost, of What do we call the price, or cost, of debt capital?debt capital?

The interest rateThe interest rate

What do we call the price, or cost, of What do we call the price, or cost, of equity capital (stocks)?equity capital (stocks)?

Required return = dividend yield + capital gainRequired return = dividend yield + capital gain


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Allocation of Funds and Allocation of Funds and Interest RatesInterest Rates

Production opportunitiesProduction opportunities Time preferences for Time preferences for

consumptionconsumption RiskRisk Expected inflationExpected inflation

What four factors affect the cost of What four factors affect the cost of money?money?


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Risk-Expected Return Risk-Expected Return

ProfileProfile (Fig 2-2)(Fig 2-2)

RISK

EX

PE

CT

ED

RE

TU

RN

(%

)

U.S. Treasury Bills (risk-free securities)U.S. Treasury Bills (risk-free securities)Prime-grade Commercial PaperPrime-grade Commercial Paper

Long-term Government Bonds

Investment-grade Corporate Bonds

Medium-grade Corporate Bonds

Preferred Stocks

Conservative Common Stocks

Speculative Common Stocks


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Types of RiskTypes of Risk Default RiskDefault Risk

– The inability to pay interest The inability to pay interest and/or principle payments of and/or principle payments of debtdebt

Market/Liquidity Risk Market/Liquidity Risk – The inability to sell at the value The inability to sell at the value

expected.expected. Maturity RiskMaturity Risk

– The longer until the security The longer until the security matures, the larger the risk.matures, the larger the risk.

Inflation RiskInflation Risk– The risk that inflation will be The risk that inflation will be

greater than originally greater than originally measured. measured.

Ratings by Moody’s and Ratings by Moody’s and Standard & PoorsStandard & Poors

MOODY’S INV SERVICE STANDARD & POOR’S Aaa Best Quality AAA Highest Grade Aa High Quality AA High Grade A Upper Med Grade A Higher Med Grade

Baa Medium Grade BBB Medium Grade Ba Possess Speculative

Elements BB Speculative

C Lowest Grade D In Default

Key:

Green text: Investment GradeRed text: High Yield (also called “Junk Bonds”)


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Term Structure / Yield CurveTerm Structure / Yield Curve

Term structure of interest rates: the Term structure of interest rates: the relationship between interest rates relationship between interest rates (or yields) and maturities.(or yields) and maturities.

A graph of the term structure is A graph of the term structure is called the yield curve.called the yield curve.

U.S. Treasury yield curve copied from the Wall Street Journal, September 9, 2007.


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Last week’s U.S. Treasury Last week’s U.S. Treasury Yield CurvesYield CurvesU.S. Treasury Yield Curves

3.6

3.8

4

4.2

4.4

4.6

4.8

5

5.2

0 5 10 15 20 25 30

Maturity

Rat

es

4-Sep5-Sep6-Sep7-Sep


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Hypothetical Treasury and Hypothetical Treasury and Corporate Yield CurvesCorporate Yield Curves

6.0%5.9%5.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

1 10 20

Years to Maturity

Inte

rest

Rat

e

BB BondAAA BondTreasury Bond


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Assignment #2b: Yield Assignment #2b: Yield CurveCurve

For Wednesday, September 12, 2007: For Wednesday, September 12, 2007: Assignment 2: In Excel, graph the U.S. Treasury Assignment 2: In Excel, graph the U.S. Treasury Yield Curve. (5 pts)Yield Curve. (5 pts)

Bring a copy to class with a sentence explaining Bring a copy to class with a sentence explaining what you believe will happen to short term what you believe will happen to short term rates in the future.rates in the future.

Go to:Go to: http://www.treas.gov/offices/domestic-finance/http://www.treas.gov/offices/domestic-finance/

debt-management/interest-rate/yield.shtml debt-management/interest-rate/yield.shtml There you will find the daily U.S. Treasury rates There you will find the daily U.S. Treasury rates

(use Sept. 10 or 11, 2007).(use Sept. 10 or 11, 2007).


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Financial StatementsFinancial Statements ““Kicking the tires!” or Kicking the tires!” or

understanding how a company is understanding how a company is doing…doing…

You need to know how to You need to know how to interpret the financials of a interpret the financials of a company when you are in company when you are in business…business…

Only three financial statements Only three financial statements are of importance:are of importance:

The Balance Sheet of a The Balance Sheet of a companycompany

The Income Statement (or The Income Statement (or P&L Profit and Loss)P&L Profit and Loss)

The Cash Flow Statement The Cash Flow Statement Keeping you above water


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The Balance SheetThe Balance Sheet Left hand side of the balance sheet shows Left hand side of the balance sheet shows

the assets of the company.the assets of the company.

AssetsAssets are are fixedfixed (buildings, machines, land) (buildings, machines, land) or or currentcurrent (cash, receivables from (cash, receivables from customers, inventories).customers, inventories).

The right hand side tells you how the The right hand side tells you how the company finances its assets (company finances its assets (liabilitiesliabilities).).

Financing can be done with equityFinancing can be done with equity (shareholders pay in capital and buy (shareholders pay in capital and buy shares) shares) or debtor debt (long term debt and loans (long term debt and loans from banks or short term debt like short from banks or short term debt like short term facilities with banks or through term facilities with banks or through delaying the payment of bills from delaying the payment of bills from suppliers i.e. so called accounts payable). suppliers i.e. so called accounts payable).

Let us have a look at:


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Comparative Balance SheetComparative Balance SheetMicrosoft Microsoft (in millions)(in millions)


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The The IncomeIncome statement statement Covers a specific period Covers a specific period

(mainly year, half year or (mainly year, half year or quarter)quarter)

Reflects sales Reflects sales performance, cost control performance, cost control and profitabilityand profitability

Operating Income is Operating Income is EBITDAEBITDA (Earnings Before (Earnings Before Interest and Tax)Interest and Tax)

NOPAT is EBIT minus NOPAT is EBIT minus (provisions for) Tax (provisions for) Tax (calculate Microsoft’s (calculate Microsoft’s NOPAT in the next slide)NOPAT in the next slide)

$1,000

$1,500

$2,000

$2,500

Q4-FY03

Q1-FY04

Q2-FY04

Q3-FY04

Q4-FY04

+20% +20% Y/Y Y/Y

GrowtGrowthh

Server & Tools RevenueServer & Tools Revenue


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Income Statement Income Statement Q4- 2004Q4- 2004


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Cash Flow StatementCash Flow Statement Shows the performance of Shows the performance of

the company over a period of the company over a period of time in time in generatinggenerating cash. cash.

Shows how the company Shows how the company usesuses that cash generated to invest that cash generated to invest in assets (both fixed and in assets (both fixed and current), or to reduce the current), or to reduce the debt level by paying back debt level by paying back loans.loans.

Shows how the company Shows how the company acquiresacquires cash from outside cash from outside (bank loans) when the cash (bank loans) when the cash generated is not enough to generated is not enough to fund all ambitious plans of fund all ambitious plans of the company.the company.

The real money is here…


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Cash Flow (1)Where the cash comes from….Where the cash comes from….

OperationsOperations

Net incomeNet income $ 7,346$ 7,346

$ 7,829$ 7,829

$ 9,99$ 9,993 3

Cumulative effect of accounting change, net Cumulative effect of accounting change, net of taxof tax

375 375 – – – –

Depreciation, amortization, and other noncash Depreciation, amortization, and other noncash itemsitems

1,536 1,536 1,084 1,084 1,439 1,439

Net recognized losses on investmentsNet recognized losses on investments 2,221 2,221 2,424 2,424 380 380

Stock option income tax benefitsStock option income tax benefits 2,066 2,066 1,596 1,596 1,376 1,376

Deferred income taxesDeferred income taxes (420)(420) (416)(416) 336 336

Recognition of unearned revenueRecognition of unearned revenue (6,369)(6,369) (8,929)(8,929) -11,292-11,292

Accounts receivableAccounts receivable (418)(418) (1,623)(1,623) 187 187

Other current assetsOther current assets (482)(482) (264)(264) 412 412

Other long-term assetsOther long-term assets (330)(330) (9)(9) (28)(28)

Other current liabilitiesOther current liabilities 774 774 1,449 1,449 35 35

Other long-term liabilitiesOther long-term liabilities 153 153 216 216 440 440

Net cash from operationsNet cash from operations 13,422 13,422 14,509 14,509 15,797 15,797


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Cash Flow (2)Cash Flow (2)Where the cash is used….Where the cash is used….

FinancingFinancing

Common stock issuedCommon stock issued 1,620 1,620 1,497 1,497 2,120 2,120

Common stock repurchasedCommon stock repurchased (6,074)(6,074) (6,069)(6,069) (6,486)(6,486)

Repurchases of put warrantsRepurchases of put warrants (1,367)(1,367) – – – –

Common stock dividendsCommon stock dividends – – – – (857)(857)

Other, netOther, net 235 235 – – – –

Net cash used for financingNet cash used for financing (5,586)(5,586) (4,572)(4,572) (5,223)(5,223)

InvestingInvesting

Additions to property and equipmentAdditions to property and equipment (1,103)(1,103) (770)(770) (891)(891)

Acquisitions of companies, net of cash acquiredAcquisitions of companies, net of cash acquired –– –– (1,063)(1,063)

Purchases of investmentsPurchases of investments -66,346-66,346 (89,386)(89,386)

-89,621-89,621

Maturities of investmentsMaturities of investments 5,867 5,867 8,654 8,654 9,205 9,205

Sales of investmentsSales of investments 52,848 52,848 70,657 70,657 75,157 75,157

Your Potential. Your Potential.

Our Passion !Our Passion !

Facts and Figures…Facts and Figures…

……Flair and FeelingFlair and Feeling


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Interpreting your company’s Interpreting your company’s performance (Ch. 2)performance (Ch. 2)

To understand howTo understand how your company is your company is doing you need to doing you need to know much more know much more than just the than just the financials.financials.

You need to know the You need to know the strategy, the strategy, the competition, the competition, the market environment, market environment, the innovation, and the innovation, and the risks.the risks.

For all the different For all the different segments that your segments that your company is operating company is operating in…in…

Nokia is much more then just Mobile Phones…


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Segment Segment PerformancePerformance

Information WorkerInformation Worker $2.9B$2.9B▲▲ 2323%%

Server & Tools Server & Tools $2.3B$2.3B▲▲ 20%20%

Home & EntertainmentHome & Entertainment$499M$499M ▲▲ 3%3%

MSNMSN$588M$588M ▲▲ 5%5%

Microsoft Microsoft Business Business SolutionsSolutions

$196M$196M ▲▲ 9%9%

Mobile and Mobile and Embedded Embedded

DevicesDevices$70M$70M▲▲ 59%59%

ClientClient$2.8B$2.8B ▲▲ 9%9%


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Key Business RisksKey Business Risks

Linux and non-commercial softwareLinux and non-commercial softwareDifficult foreign exchange comparables for 2005Difficult foreign exchange comparables for 2005Difficult 2005 comparables on PC and Server unit Difficult 2005 comparables on PC and Server unit demand demand Reduction in Upgrade Advantage revenueReduction in Upgrade Advantage revenueExecution of business planExecution of business planOngoing legal riskOngoing legal risk

For further information regarding risks and uncertainties associated with Microsoft’s business, For further information regarding risks and uncertainties associated with Microsoft’s business, please refer to the “Management’s Discussion and Analysis of Financial Condition and Results of please refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Issues and Uncertainties” sections of Microsoft’s SEC filings, including, but not Operations” and “Issues and Uncertainties” sections of Microsoft’s SEC filings, including, but not limited to, its annual report on Form 10-K and quarterly reports on Form 10-Q.limited to, its annual report on Form 10-K and quarterly reports on Form 10-Q.


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Assignment #2c: Annual Assignment #2c: Annual reportreport Your company is a S&P500 company and you will be able to Your company is a S&P500 company and you will be able to

find its latest annual reports on its website (investor relations) find its latest annual reports on its website (investor relations) or at www.sec.gov.or at www.sec.gov.

Download the annual reports 2002-2006 and keep them in Download the annual reports 2002-2006 and keep them in your files for quick reference.your files for quick reference.

Copy the Balance sheet, Income statement and Cash flow Copy the Balance sheet, Income statement and Cash flow statement of each year to an EXCEL spreadsheet such that statement of each year to an EXCEL spreadsheet such that you can generate a 5 year overview (2002-2006) for each you can generate a 5 year overview (2002-2006) for each statement.statement.

Perform a segment analysis and Business Risk assessment; Perform a segment analysis and Business Risk assessment; what segments are the money makers which ones are the what segments are the money makers which ones are the value destructors.value destructors.

Now look at your figures and draw conclusionsNow look at your figures and draw conclusions::– How have the assets developed in the balance sheet?How have the assets developed in the balance sheet?– How has the company financed its assets over the years How has the company financed its assets over the years

(mainly debt or equity)?(mainly debt or equity)?– How has the sales growth been over the years?How has the sales growth been over the years?– And how has the profitability performed?And how has the profitability performed?– Is the company generating enough cash to fund its Is the company generating enough cash to fund its

growth?growth?– For what purposes is the company using the cash For what purposes is the company using the cash

generated (pay back loans or invest in future generated (pay back loans or invest in future expansion)?expansion)?


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Assignment #2d: Annual Assignment #2d: Annual reportreport

Companies that follow the Companies that follow the calendar calendar yearyear for reporting, there is 2 for reporting, there is 2 quarters (first half of 200quarters (first half of 20077) more ) more recent financial data available; recent financial data available; download these data (10-Q form in download these data (10-Q form in sec.gov).sec.gov).

These companies may also have Q3 These companies may also have Q3 almost or just now available; check almost or just now available; check investor relations and the release of investor relations and the release of Q3 financials for your company Q3 financials for your company and download them when available.and download them when available.

Now review your conclusions of Now review your conclusions of ##2a 2a based on the latest financials and based on the latest financials and management reports.management reports.

UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934

For the For the Quarter Quarter Ended Ended June 30, June 30, 2004 2004

Commission Commission File Number File Number 1-116051-11605


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Other Performance Other Performance measuresmeasures

ROICROIC (Return on invested Capital) (Return on invested Capital) relating NOPAT (operating result relating NOPAT (operating result after tax) with Capital invested after tax) with Capital invested (Fixed assets plus Net Working (Fixed assets plus Net Working Capital).Capital).

EVAEVA (Economic Value Added) (Economic Value Added) calculating NOPAT after deduction calculating NOPAT after deduction of the Cost of Capital over the of the Cost of Capital over the Capital invested.Capital invested.

MVAMVA (Market Value Added) (Market Value Added) calculating the Market Value calculating the Market Value (common shares outstanding times (common shares outstanding times share price per share) of the share price per share) of the sstock tock of the company minus all paid in of the company minus all paid in capital (Equity Capital Supplied by capital (Equity Capital Supplied by Shareholders)Shareholders)

Some websites for your information


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Assignment #2e: CalculateAssignment #2e: Calculate For your company determine:For your company determine:

ROICROIC based on the latest available financials based on the latest available financials MVA MVA EVAEVA Now compare the ROIC, MVA and EVA of the Now compare the ROIC, MVA and EVA of the main main

competitor of your company.competitor of your company.

Which company is performing better ?Which company is performing better ?

Recommended Reading


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The Federal Reserve SystemThe Federal Reserve System The Board of GovernorsThe Board of Governors The Fed BanksThe Fed Banks The Federal Open The Federal Open

Market Committee Market Committee (FOMC)(FOMC)


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The FedThe Fed: The Board of : The Board of GovernorsGovernors


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The Fed:The Fed: The Fed Banks The Fed BanksThe Twelve Federal Reserve Districts – The Fed Banks


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The Fed:The Fed: The FOMC The FOMC The FOMC: The Seven Governors, New York Fed President and

4 other Fed Presidents – 12 total members Set Monetary Policy for the United States In other words, the FOMC sets the “Federal Funds

Rate” – The interest rate that banks borrow funds from each other

The “Fed Funds” rate determines the “Prime” rate or the interest rate that banks charge their “best” corporate customers

An Increase in the fed funds rate means borrowing is more “expensive.”

A decrease?


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The Fed:The Fed: The FOMC The FOMC 2007 Members of the FOMC2007 Members of the FOMC MembersMembers

Ben S. BernankeBen S. Bernanke, Board of Governors, Chairman, Board of Governors, ChairmanTimothy F. Timothy F. GeithnerGeithner, New York, Vice Chairman, New York, Vice ChairmanCharles L. EvansCharles L. Evans, Chicago, ChicagoThomas M. Thomas M. HoenigHoenig, Kansas City, Kansas CityDonald L. KohnDonald L. Kohn, Board of Governors, Board of GovernorsRandall S. Randall S. KrosznerKroszner, Board of Governors, Board of GovernorsFrederic S. Frederic S. MishkinMishkin, Board of Governors, Board of GovernorsWilliam PooleWilliam Poole, St. Louis, St. LouisEric S. Eric S. RosengrenRosengren, Boston, BostonKevin M. Kevin M. WarshWarsh, Board of Governors, Board of Governors

Alternate MembersAlternate MembersRichard W. FisherRichard W. Fisher, Dallas, DallasSandra Sandra PianaltoPianalto, Cleveland, ClevelandCharles I. Plosser, PhiladelphiaCharles I. Plosser, PhiladelphiaGary H. Stern, MinneapolisGary H. Stern, MinneapolisChristine M. Cumming, First Vice President, New York Christine M. Cumming, First Vice President, New York

Next Meeting: Sept. 18, 2007


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The Fed:The Fed: The Chairman The Chairman

Ben Bernanke

Down .25% or ? Sept. 18, 2007


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The Time Value of Money (Ch. The Time Value of Money (Ch. 3)3)

See the slides that come with the See the slides that come with the textbooktextbook


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End of ClassEnd of Class

Don’t forget your assignments! See you all next week…

Be Be strong….strong….

……Never give up!Never give up!

Introduction to Financial Management FIN 102 – Week 2

Documents

Transcript of Introduction to Financial Management FIN 102 – Week 2