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principle
A basic truth, law, or assumption: the principles of democracy.
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P t-1 WTRs stock increased in price last year from $25 to $30 and paid a dividend of 0.50. What was WTRs return?
Standard Deviation
11.9% 32.8%
1. 2. 2
Announcement Date
Stock B:
Mean Return - 10% Std. Deviation 20%
The market price of a stock is determined by the interaction of the supply of stock by sellers and the pp y y demand for stock by buyers In the short-run, a stocks current price may be heavily influenced by a very temporary and extreme supply and demand imbalance or by the stock markets reaction to the receipt of new information and may not have anything to do with the true long-term value of a company
Management Has Fiduciary Responsibility to Act In Shareholders Interests Shareholder Value Approach Favors Strategies That Enhance Companys Cash-Flow Generating Ability Creating Shareholder Value Minimizes Value Gaps
Transaction cost comes in many forms: brokerage commissions when you execute a trade, sales loads, 12b-1 and redemption fees when you purchase or sell a mutual fund and yearly asset management fees paid to a mutual fund, stockbroker or investment adviser Transaction costs and the effects of taxes and inflation can greatly reduce the real returns on your investments It should be every investors mission to reduce her transaction costs to the lowest possible level
Future value is the amount of money that an investment will grow to at some future date by earning interest at a certain rate FV = PV * (1 + r)^n For example if you have a stock worth $10 that increases in value at the rate of 6% per year for five years, the value of stock at the end of five years = $10 [(1+.06)^5] = $13.38
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Discounting is the process of going from an expected future value to a present value The math underlying discounting and the calculation of present value is the exact flip side to compounding and future value Discount Factor = 1/(1 + r)^n PV = FV * Discount Factor For example if you will be receiving $100 in 3 years and the discount rate is 10%, PV= $100 * [1/(1+.10)^3] = $75.13
Present Value of $
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Asset Allocation
Portfolio Stocks Bonds Cash
Asset Allocatio n Sector S Allocation Industry Allocatio n Security Selection
Energy
Financials Computers
Motorola
Intel
Texas Instruments
AMD
Low
Low
Risk
High
1. 2. 3. 3 4. 5. 6.
Why has Warren Buffett become famous? Why has Buffett been so successful? Why does BRK.A sell for over $100,000 per share? What types of companies does Buffett like to buy?
What financial metrics does Buffett use in his analysis of companies?
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Finance 301
Assignment for Next Class
Reading: Ch. 3: Corporate Finance Finance, Creating Shareholder Value, and Corporate Governance
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