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Introduction to business: financial markets
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Ted Major
February 25, 2016
Education
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400
Introduction to business: financial markets
CC-BY-SA
Ted Major
February 25, 2016
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Transcript
Financial markets: Allocating financial resources cc licensed ( BY NC
ND ) flickr photo by photog63: http://flic.kr/p/GzRs8
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
Time Value of Money • Dollar today vs dollar tomorrow?
creative commons licensed (BY-NC-SA) flickr photo by Cathérine: https://flic.kr/p/4wjsVc
cc licensed ( BY NC ND ) flickr photo by
tomfs: http://flic.kr/p/8zGd2J
Pay for it?
Cash?
Loan! (debt)
cc licensed ( BY NC SD ) flickr photo by
axoplasm: http://flic.kr/p/6wWbD
Pay for it?
Loan?
Cash! (equity)
Sources for capital financing?
Depositary institutions • Commercial banks • Credit unions • Savings
& loans
Non-depositary institutions • Institutional investors • Securities brokers • Securities
dealers • Investment banks
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
Debt: Bonds • face value (usu. $1000) • coupon rate
• yield
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
Debt: Bonds • discount/premium –10yr AAA corporate, 1% coupon rate
–discount –10yr AAA corporate, 4% coupon rate –premium
Debt: Bonds • maturity date • callable bonds • convertible
bonds • unsecured/secured • sinking fund
debt advantages • bondholders are creditors with no say in
management • interest paid is tax-deductible • temporary source of funding; will be retired
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
Equity: stock • preferred, cumulative preferred • common • IPO
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%
Google (2004) • priced $85 • closed $100 • today?
Facebook (2012) • priced $38 • closed $38.23 • today?
Twitter (2013) • priced $26 • closed $44.90 • today?
Equity: stock • stock certificate • par value • dividends
equity advantages • never have to repay shareholders • no
obligation to pay dividends • can improve balance sheet –no new debt –increased cash
equity disadvantages • shareholders have some control of firm •
dividends are not tax deductible • shareholder concerns can affect management decisions
Securities Regulation • SEC –Securities Act, 1933, –Securities Exchange Act,
1934 • EDGAR –Electronic Data Gathering, Analysis, and Retrieval system • prospectus