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Financial markets: Allocating financial resources cc licensed ( BY NC ND ) flickr photo by photog63: http://flic.kr/p/GzRs8

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Quiz • Closed book/closed notes • Phones & computers put away • You may collaborate with your team • You are responsible for the answers on your quiz • You do not have to choose the same answers as your team

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Time Value of Money • Dollar today vs dollar tomorrow? creative commons licensed (BY-NC-SA) flickr photo by Cathérine: https://flic.kr/p/4wjsVc

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cc licensed ( BY NC ND ) flickr photo by tomfs: http://flic.kr/p/8zGd2J

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Pay for it?

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Cash?

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Loan! (debt)

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cc licensed ( BY NC SD ) flickr photo by axoplasm: http://flic.kr/p/6wWbD

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Pay for it?

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Loan?

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Cash! (equity)

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Sources for capital financing?

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Depositary institutions • Commercial banks • Credit unions • Savings & loans

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Non-depositary institutions • Institutional investors • Securities brokers • Securities dealers • Investment banks

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Types of securities markets • Primary –Initial sale of stocks/bonds –Sold by investments banks/underwriters –Proceeds go to company • Secondary –Resale market –Sold on exchange –Proceeds go to investors

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Debt: Bonds • face value (usu. $1000) • coupon rate • yield

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bond rates maturity yield October 2 yr AA 0.96 0.82 5 yr AAA 1.24 1.36 10 yr AAA 2.44 2.38 20 yr AAA 3.64 3.66

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Debt: Bonds • discount/premium –10yr AAA corporate, 1% coupon rate –discount –10yr AAA corporate, 4% coupon rate –premium

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Debt: Bonds • maturity date • callable bonds • convertible bonds • unsecured/secured • sinking fund

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debt advantages • bondholders are creditors with no say in management • interest paid is tax-deductible • temporary source of funding; will be retired

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debt disadvantages • increase debt –liabilities on balance sheet –may hurt ratios: e.g., debt ratio • legal obligation to pay interest • face value must be repaid at maturity

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Equity: stock • preferred, cumulative preferred • common • IPO

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Initial public offering • Best, 2014: –Shake Shack (SHAK): +267% –Spark Therapeutics (ONCE): +218% –Aduro Biotech (ADRO): +107% • Worst, 2015: –Etsy (ETSY): -74% –Terra Form Global(GLBL): -70% –Invitae (NVTA): -58%

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Google (2004) • priced $85 • closed $100 • today?

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Facebook (2012) • priced $38 • closed $38.23 • today?

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Twitter (2013) • priced $26 • closed $44.90 • today?

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Equity: stock • stock certificate • par value • dividends

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equity advantages • never have to repay shareholders • no obligation to pay dividends • can improve balance sheet –no new debt –increased cash

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equity disadvantages • shareholders have some control of firm • dividends are not tax deductible • shareholder concerns can affect management decisions

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Securities Regulation • SEC –Securities Act, 1933, –Securities Exchange Act, 1934 • EDGAR –Electronic Data Gathering, Analysis, and Retrieval system • prospectus