Finance Society Introduction to Finance Workshop (09.22.2011)
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Transcript of Finance Society Introduction to Finance Workshop (09.22.2011)
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Introduction to Finance
September 22, 2011
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Agenda
Introduction To Finance Presentation:
Time Value of Money
Discount Rates
Valuation
Accounting
Wall Street
Upcoming Events
Meet the Mentors2
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Time Value of Money
Introduction to Finance
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Dollar Today ≠ Dollar in One Year…Why?
To adjust for the opportunity cost of capital, we use Present Value
FVt is the “Future Value”, i – “Discount Rate”
Key Concept: Time Value of Money
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The Power of Present Value You make 100k each year for the rest of your
life, your discount rate is i = .05
PV = (100k/1.05)+(100k/1.05^2)+(100k/1.05^3)+…
“Perpetuity formula”, PV = 100k / .05 = $2M
Conclusion:Finance === Present Value!!
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Understanding Discount RatesCAPM and WACC
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Discount Rates
Introduction to Finance
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Discount Rate Intuition Used to discount current and future cash flows (as
shown earlier)
r (“interest rate”) = risk free rate + risk premium
When you take home mortgage, why can’t you borrow at the risk free rate?
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Capital Asset Pricing Model (CAPM)
Gives us the rate of return on some asset (could be a stock, bond, house, etc.)
Three Components: Risk Free Rate (usually 10 year), Market Return (usually S&P), and Beta (see next slide)
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What is Beta? “The Market Price of Risk”
Beta is the measure of an asset’s sensitivity to the overall market
Testing Yahoo Finance: Do a regression of yearly MSFT returns on S&P Returns, the slope should be ~equal to the beta listed
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Weighted Average Cost of Capital (WACC)
Calculating the asset beta at constant debt-to-value ratio:
We take into account capital structure using this formula:
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Valuation
Introduction to Finance
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Valuation
Why is it important? Valuation is at the heart of finance
Common Terms Fair Value Intrinsic Value
Two primary methods: (1) Comparables/Precedents (2) DCF
Others include LBO, Replacement value, Sum-of-the-Parts
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Valuation (cont’d)
Enterprise Value Value of the operations of the company
attributable to all providers of capital Enterprise Value = Equity Value + Debt – Cash
Equity Value Portion of value attributable only to shareholders Equity Value = Share Price x Shares Outstanding
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Valuation (cont’d)
Comparable Company Analysis Look at how similar companies are being valued to
derive a value for your company Common multiples: P/E, EV/EBITDA, EV/FCF
DCF Trying to value a company today based on the
cash flows it’s expected to produce in the future FCF, Terminal value, WACC
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Accounting
Introduction to Finance
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Balance Sheet
A = L + OE
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Balance Sheet (cont’d)
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Income Statement
Revenue – Expenses = Net Income
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Cash Flow Statement
Operating,Investing,Financing
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How the 3 Statements Connect
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Wall Street
Introduction to Finance
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Wall Street
Buy side vs. Sell side Private Equity, Hedge Funds Buy side Investment Bank Sell side
Private vs. Public Chinese Wall within Investment Bank Investing Banking Division Private Sales & Trading, Equity Research Public
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The Investment Bank
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Investment Banking Division (IBD) Industry Groups vs. Product Groups Two main purposes:
1. Raise capital2. Provide strategic advice
Sales & Trading (S&T) Buy/sell securities on behalf of clients Many different securities, many different desks
Equities FICC
Research Fundamental analysis Public (vs. IBD – private)
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The Buy Side
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People with money to invest
Private Equity, Hedge Funds, Venture Capital Private Equity – buy equity in private companies Hedge Funds – buy equity/debt in public
companies through complex hedging strategies Venture Capital – buy equity in early-stage
companies
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Wrap-Up: Present Value === Finance!
CAPM and WACC are used to determine the discount rate in valuation
Financial statements allow us to analyze companies
Valuation is simply a way of valuing a company or asset
Wall Street is more complicated than it seems
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Upcoming Events
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9/29/2011: Networking 101 Workshop
10/6/2011: Morgan Stanley Presents: What is IBD
10/13/2011: Lazard: Introduction to Restructuring
10/20/2011: Credit Suisse: The IPO Process
Special Event 9/30/11: Tour of Wall Street
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Meet the Mentors!