BU111 Final Exam Notes PDF

BU111 Final Exam Notes – Buying and Selling Equities – The Mechanics ** Assume that commission paid on these transactions if 2% on purchase and 2% on sale of investment ** Market Order  Most common type of transaction  To buy a stock you would call a broker and ask to buy a certain number of...

BU111 Final Exam Notes – Buying and Selling Equities – The Mechanics ** Assume that commission paid on these transactions if 2% on purchase and 2% on sale of investment ** Market Order  Most common type of transaction  To buy a stock you would call a broker and ask to buy a certain number of shares (100 is a typical ‘board’ lot)  What you pay when buying shares = Price of share × # of shares being bought + 2% commission  What you get for selling shares = Price of share × # of shares being sold – 2% commission Capital Gain q  Whenever you benefit financially by buying an asset and selling it at a higher price  Capital Gain = Price sold – Price paid OR Face Value – Purchase Price Yield  Yield = what you made ÷ what you paid OR yield = Dollar return ÷ dollar invested  Commission and/or interest expense will be deducted from the return and the stock price (or dollars spent on actual investment excluding commissions) will be used as the denominator  Always use face value of $1000 for bonds Going Long and Buying on Margin  Going long o Means investor has purchased a security o Investor is expecting profit when price of a security increases and the investor sells it (buying low, selling high) o Investor pays the price of the investment  Buying on margin o Make profit when security increases in price and is old o Borrows money for part of investment from the broker o The minimum margin is 80% (the investor must put in at least 80% of value of the investment) o The investor does not have to choose to use the full margin available (could choose to provide 90% of investment) o Results in the investor being able to purchase a larger amount of securities with the same amount of money they would have invested when “going long”  o Advantage is leverage – you are able to increase your buying power (buy more with same investment) therefore increasing potential profits) Margin Buying Costs and Risks  When borrowing money from the broker for buying on margin, you must pay interest on the loan  Buying on margin magnifies your risk if the price falls – if you do not sell your shares before the price falls, the amount that you deposited with the broker is no longer enough to meet to margin requirement (80%) o Investor will receive a margin call from their broker requesting to give him more money in order to reduce the value of the loan he has provided o Calculating the margin = (current market value of the investment – loan) ÷ Current market value of the investment o To bring the margin back up to the minimum is to reduce the amount of the loan to bring the margin back up to 80% - this is the margin call amount o Calculating the margin call amount (solve for margin call amount)  Minimum margin requirement = [Current Market value of investment – (Loan – Margin call amount)] ÷ Current market value of investment Calculating Interest on Margin Loan  Assume that interest is compounded annually  Interest expense = loan × interest rate × portion of year that loan was held  Interest expense is deducted from your capital gain when calculating profit (or return) on a stock transaction Calculating Capital Gain and Yield when Going Long or Buying on Margin  When calculating Capital gain, you must subtract all of to your expenses from the revenue that is generated from the sale of the sale of the investment o When going long – expenses are commission when buying and selling security o When buying on margin – expenses are commission and interest you had to pay  Yield = dollars returned ÷ dollars invested = capital gain ÷ dollars invested o The denominator in yield calculation (the dollars invested will only be actual dollars spent to purchase the security o All expenses will be deducted from the dollars returned Leverage  Engaging in a transaction whose value is greater than the actual dollars you have available  Creates potential to make a larger return or loss than indicated by the investment you have made Selling Short  Sell at a high price and buy back when the price drops  o Registered vs. Bearer  Features o Callable – Issuer can Recall before maturity – why? Interest rate change. o Serial – investor no change, Business re itre debt in stages rather all at once. Less Risky o Convertible – Convert from debt to equity. Attractive for both. Business has less debt and investor can switch.  What impacts the coupon rate at bond issue? o Prevailing interest rates o Credit of issuer o Features  What impacts bond price when traded? o Coupon rate + prevailing rates of interest o Changes in credit rating o Economic/market risk o Inflation  Yield o Percentage return on any investment o Helps us compare investments o Yield = what you paid ÷ what you paid o Which is equivalent to (interest + capital gain) ÷ what you paid = % o Interest = coupon rate × face value o Capital gain = face value – purchase price o ** Always use a face value of $1000 for bonds**  Approximate Yield to Maturity a nnu albo ndint er est an nualc api ta lga in  o p ric epaidf orbon d face value - price paid coupon rate x face value  time to maturity  o price paid (Time = Years) o Assume that you will hold onto bond until maturity o Need to calculate “what you made” on annual basis o Same yield for all bonds with same risk o Can only negotiate Price Paid o “If interest rate go up what happens to expected yield” Expected Yield will go up so price paid will decrease “ Inverse Price VS Yield  Bond Pricing o Bond prices vary inversely with interest rates o Priced at discount = you pay less than face value ($1000) for the bond o Priced at par = You pay face value for the bond (=$1000) for the bond  When reading a bond -> issuer, coupon, maturity, price, yield, change   When investor purchases bond, it is essentially lending money to the company  Principle – when a company issues bonds, it agrees to repay the debt  Maturity date – date will be paid back by  Face value or par value – specific amount of principle to be repaid back  Coupon Rate – interest charged (coupon payments are paid semi-annually – quoted as a percentage of the bonds)  Two types of returns: coupon payments and upon maturity company pays investor the principle/face value/par value o If purchase price of bond was less than face value, the difference of what the investor paid to buy the bon and its face value is a capital gain o Capital loss occurs when purchase price is greater than the face value o IF yield is more then Coupon price goes down vice versa  Yield to maturity on a bond is the rate of return per year if the bond is held to maturity o Approximate yield to maturity = (coupon rate × face value + annual capital gain/loss) ÷ purchase price of bond  Where the annual capital gain (or loss) = (face value – purchase price) ÷ years to maturity  The approximate yield to maturity is higher than the coupon rate b/c the investor is receiving both interest income AND capital gain b/c the investor bought the bond for less than its face value  NOTE – this formula is only used to calculate the approximate yield to maturity on a bond – to calculate the actual price of a bond you must use the time value of money formula Stocks  Represents equity/capital for issuing company  Characteristics o Voting rights o No fixed term o Variable return o Discretionary payment (dividends) o Risk Types of stocks Common Stock Preferred stock Voting rights Yes No – unless number of dividends unpaid – in “arrears” Dividends Not necessarily Yes – fixed % - after interest paid on debt but before common dividend (Promise) not legal oblig. Bankruptcy Paid after preferred Paid after debt holders Price Volatility Most Volatile Less Volatile (dividends) – sensitive to interest rates Marketability More shares, larger market Thinner market Other Features Pre-emptive right – Redemption – company can  o Can negotiate flexible payments (increase amount of payment or pay lump sum at end of year) Vehicle Leases  Leases allow your to use/rent a new car for a period of time, at the end of the period, you can either give care back or pay the residual value shown in the lease agreement  Components that are relevant to lease agreements o Price of care to be leased o APR (annual percentage rate) which is the interest which will be used in the payment calculation o The amount of the down payment you pay towards the price of the care (paid the day you buy the car) o The residual value, which is depreciated value of what the car will be worth at the end of the lease o The monthly lease payments you make during the term of lease  Price of the car = down payment + lease payments +residual  Vehicle leases differ from leases signed when renting an apartment or house b/c with apartment or house lease there is no residual value and do not have opportunity to take ownership of the house o They are similar in that during the term of the lease, you “own” the property Time Value of Money – Formula page 156  A dollar today is worth more than a dollar in the future because o Real Interest o Risk o Inflation  A rational investor will take these factors into consideration with deciding what he wants to receive (or should be willing to pay) when payments are to be received or made at different points in time Present Value Single Amount  Unknown amount at beginning of timeline  How much is your future value worth today? How much do you need to invest today to get a specific return?  The rate used to calculate present value is referred to as discount rate Future Value Single Amount  When you give/get/have money today and try to find out how much it’ll be in the future  Unknown amount is at the end of the timeline Annuities  A series of equal payments of equal time periods   Annuity due – when payment begins at start of pay period (today)  Ordinary annuity – when payment is made at end of pay period o The result is that you would have one less period in which your money accumulates interest before starting your withdrawals  Perpetuity – an annuity that goes on forever (ie dividends or preferred share – as long as company exists, one will receive the payment)  When calculating present value of the coupon payments and the present value of the face value of the bond upon maturity, you can calculate what the present value of the bond price should be today Dealing with Uneven Payment and Compounding Period  Payments and interest compounding rates might occur more than once a year, or payments and interest may occur at different rates o In these cases, must adjust your rate (r), and your compounding periods (n) because the compounding rate much match the payment frequency per year  When interest is compounded and payments are made/received the same number of times per year o “n” must represent total number of payments (number of years × amount of payments per year) o Adjust “r” by dividing it by the number of payments per year o Note – we make the same adjustment to “r” and “n” when dealing with a single payment but multiple compounding periods per year  When interest compounding and payment periods do not match – you must find the rate that matches your payment schedule o Use the effective rate formula for the payment period that your payment schedule indicates o Note – you must adjust “n” in your present or future value formula to reflect the total number of payments  When rate is stated as an Annual Percentage Rate (APR) o Then the effective rate for the payment period = APR ÷ # of payment periods (p) per year o COMPANY PERSPECTVE Repayment Not required Principal paid on matu increased risk Claims on income Only residual claim (dividends) Yes, regular, required, fi increased risk  Pillars 1 & 2– Banks Make Desposits, Borrow & alternate banks SME- Primary Lending Source Pillar 3 – Specialized Mid - Large lending/saving Private Equity fianncing/Borrow intermediaries Pillar 4 – Investment Large and Established Dealer Going public, Stocks and Bonds Pillar 1 and 2: Go to credit union or bank for a Loan Pillar 3: Things like insurance companies that are major investors, venture capitalists, pension funds. What might you go to for then? : For Equity investing. Banks won’t invest as a group in stocks. (Dragons Den) Private equity financing Pillar 4: Where you go when you want to isse public shares and Bonds. When you get really really big and need a lot of money, private equity too much work so you go into investment dealer. This kind of a company which pillar would I go get it from ( Question) PEST – Technological Factors Elements  Internet – affects buying, selling, communication  Information technologies affect information access, inter-firm cycle times  Not limited to computers and information o Ie swifter wet vs mopping Why  Demands constant learning and scanning  Need to scan environment to know what is coming into the market  Need to understand the technology to incorporate it  Creates significant change and challenge Business Implications  Affects what we produce/ what it can do o Ie mergers are harder today  Affects how we produce and how we sell o Information technology allows access to information from anywhere  Inter-firm relations -> where supplies arrive just in time to use it o Cycle times – how long it takes to produce something  Technology reduces producing time (from manufacturing to designing -> ie cars – before you would have to draw the design  by hand and do calculations, make prototype -> now the computer does it all for you What is technology?  Advancements in equipment and its uses o Often substitutes for/magnifies human effort  Makes humans more powerful and productive o Included human knowledge, work methods, equipment, business processing systems  Ie company trying to sell something is much more effective -> able to target your marketing to your hopeful consumer vs open ended tv ads  Ie facebook counts on you to direct advertisements towards  Includes information for technology o The various devices for creating, storing, exchanging, and using information o Consumers use it daily (ie ATM, online shopping) o Companies use it to gather and share information and execute activities Where does technology come from?  Comes from human ingenuity o Informal and formal research and development  Formal is to sit down in a designated time for development  Informal is through everyday tasks o Basic R&D – knowledge without focus  Ie pharmaceutical companies understanding DNA and using that information to develop drugs but don’t necessarily know where its going o Applied R&D – specific problem in mind o Technology Transfer – out of the lab and into the world Technology Shifts –  Electricity  Transportation o Airplanes o Trains/ships o Changed where you could live  Assembly line o Improving productivity o Producing large amounts, which allows access to more products o Changed were we live to cities for an improved quality of life  Internal Combustion Engine o Autos, mass transit  Mass Media o Ability to share awareness and knowledge  Telecommunications  Computers   Quality products -> allowing to build more/ better products  Meeting customer needs -> innovating a solution to a common problem customers have  Achieving financial success –> people will pay for the new product on the market and by solving a problem, the solution will sell itself  Achieving employee commitment -> allowing employees to innovate, keeps them more engaged, and constantly improving upon your product makes the employee’s job less static and more interesting  Management and Organizational Processes o Instant access to information  Getting instant answers  Supplies and inventory been constantly stocked through technologies talking to one another (from supplier and buyer) o Better service through coordination  Critical success factor – employees having quick and easy access to information to better serve customers o Leaner organizations  Don’t need as many resources (improving financial performance)  Diamond E = football team –> the small quick guys are the runners, they can easily move and adjust as the opposing team (threats) come after them -> so easier to adjust to environment when organization is smaller o Improved operations efficiency (ie Computer Assisted Design-CAD, Enterprise Resource Planning-ERP)  Before had to sketch out cars, make calculations, make prototype, fix problems -> CAD helps design cars faster by making calculations and showing things that wont work  ERP maps out what/how many resources will be needed to create product  Having the ability to purchase supplies in bulk  Ie Toyota realized that they were using a variety of nuts and bolts that were only a few millimeters off -> they decided to streamline nuts and bolts so that they all fit into all parts saving 10% of price they were paying o Also more efficient b/c they didn’t need to organize bolts by size  Critical success factors  Financial performance -> trimming the fat allows for more profits (saving time = money)  Innovation -> creating solutions for ways to trim organization through innovation o Greater independence of company and workplace   Employee commitment -> flexibility to work at home (parent with a sick child) -> when employees travel they can make their time more productive  Competitiveness o Creates barriers to entry; cooperation with other firms; reduce cycle times o Ie computer chip manufactures are not popping up all over the place bc it is hard information to duplicate o Ie Locking in customers with game systems  Communication and collaboration o Within firms and with customers o Collaboration with firms  Building quality services by making your thing better by adapting other company’s capabilities  Achieving financial performance by building the technology faster  Customization o Now companies have the ability to produce customized products without reducing financial performance o IE TimBuckTwo -> designing the purse online Threats  Imitation o Information costly to develop but cheap to share o Extremely hard to protect youself from o Your product may be expensive to produce but easy and cheap to replicate (ie music and movies)  New Technologies in unfamiliar areas o Disruptive technologies challenge the value of organizational capabilities and resources o Ie ceiling fans -> it was the way people kept their house cool  Refrigerators used their technology to make air conditioner -> took the industry by storm o If you cant learn fast enough, you will not be able to keep up with the competition  Unpredictable evolution o VHS vs BetaMax  You had to buy tapes that worked consistently with the viewer you have at home  Annoying to many people because they had to make double the copies, movie rental stores needed to have both versions in stock, people needed to have the right equipment to view the right movie  VHS won the battle because they had more partnerships with movie companies who would produce their movie in VHS form  an existing product so quickly. Innovate in (Computer Design) wrong direction Gaining employee Allowing employees to gain Giving employees ability to commitment easy access to information work from anywhere limits their frustration creates issue of unfocused when dealing with work and not getting your customers bang for you buck with Allowing them access to those employees create innovate and use Sometimes better for technology will keep them productivity if all engaged employees are talking Technology allows for through problem at work flexibility of working at which also would create a home. connection among employees which cant happen if they are all working from home. (Alienation) Distinctive Competitive Better understand what it Other companies can now Advantage takes to be unique or easily replicate and have different then competitors. the same level of quality New business models – but at a cheaper price if enter markets brand new they have the better models technology – Maintain Important Technology Concepts  Complementary goods – needed for value; creates vicious or virtuous cycle  Technology standards – requires compatibility of complementary goods o Think – “What can I do with that product -> what other services can I access through that device” o Ie Uber  App that allows you through your phone to access transportation services  What will determine if you use it  Is it on the app store? Can I get it on my phone?  Are there drivers willing to drive me?  Users/consumers/drivers (installed base always trying to grow  All these things makes people want to use it, and makes more drivers want to drive  Installed base – o # of users both costumers, and employees  Network effect – o Value depends on Users – Snapchat add all your friends o what other people say about your product makes a large difference  o Issue -  Cycle o # Of users -> # of complimentary goods -> attractiveness of the product Small installed base Less appealing Fewer standard/ complementary product goods  Solutions: compatibility, alliances/incentives with complementary goods suppliers, build base o Blackberry didn’t have a lot of apps for their phone, provided incentives to developers by giving them a phone o Make sure operating system that developers can easily create application on o Alliances : Blackberry and Apple. Form alliance with complementary good provider if not a lot of financial resources so that they are willing to work with you and make their product compatible o Network effect –  When value of a product depends of its user base (ie facebook)  Get people who are known/ have a lot of followers to promote you  Paying bloggers to look at your technology and write about it o So what? What do they mean in terms of competitive advantage/barriers to entry? More Concepts  Lock in- size of investment o Larger = greater resistance to switch o Reduces bargaining power of buyer o Potential entrants  Creating a large barrier for them b/c hard for them to take your loyal customers away  Doesn’t mean money investment, it could mean leaving  Relationships built (knowing suppliers personally to get quick service and fair price) or  What you are used to (switching from android to apple) or  Emotionally (tempted to stick with who and what you know) Disruptive Technology  Presents a different package of performance attributes that aren’t initially valued by mainstream customers (starts in peripheral markets)  Gains foothold in lower performance segment, improves technology rapidly until they meet mainstream performance needs, then enter these markets  Technology that turns the world on its head, does so many different things and is very advanced  New, disrupting firms often win  For example o IBM known for big powerful, expensive computers  Targeted businesses for high margins  Employee actually came up with idea of personal computers but company rejected it o Steve Jobs saw a need for personal computers  Didn’t want it to be complicated, made it attractive  Personal computers didn’t sell same price and couldn’t do the powerfulssssssssss still that larger computers could  Entered a non-mainstream market, were not even seen as a competitor to IBM  Progess of disruptive technology moves much faster than stainable technology  Eveloved so fast that when it entered high margin, high demand market, it took it by storm o IBM had abilility to keep up because had technology available to build/adjust to create laptops -> had the distribution network to survive  Relate back to diamond E  Clayton Christensen (Professor at Harvard Business School) http://www.youtube.com/watch?v=nJ7EG58J5eo Khan Academy – Online Education  Disrupting education? o Humble beginnings – videos for cousins o Growth through youtube views o Funding from Google and Gates Foundation b/c they loved how it encouraged education and extra support for those who can’t afford it o Expansions to college prep courses, humanities and the sciences o Can be like a free course -> may not get you the credit but it will get you the knowledge  Disrupting education and tutoring Why do large firms sometimes fail?  Align with diamond-e o When disruptive technology occurs -> environment shifts dramatically  We need to make dramatic change too and that’s when diamond- e fails us  Organization  o Structure and capabilities slow response time/ability and influence choice o Organizational processes weeds out ideas that don’t address current customer needs o How we execute – its hard to break a habit  Capabilities o I.e. only writing with right hand, when need to switch to left, you are not strong/capable enough o We resist change b/c it is a weakness o Find ways of doing it differently (typing instead of writing with left hand) o Our strengths become our weakness b/c doesn’t allow company to develop areas that are weaker  Management Preferences o Managers focus on satisfying mainstream customers o Ignore new technologies that don’t initially meet needs of mainstream customer o Move ‘up-market’ to higher margin opportunities o Habit tells large firm managers to avoid small uncertain opportunities  As they will not be fired for making a “sure” decision/opportunity  Greater risk of being criticized if you fail – managerial risk aversion  Resources o Wanting to grow  Little company vs large corporation  Big company needs a big project to make larger impact  LINKS TO DIAMOND-E How to avoid failure if you are the large firm?  Design products based on task they are intended to serve rather than the customers who buy them  If innovation falls into a rut, establish a sub-business and in return will be able to react faster to environment o Ie Canadian Tire – driving school, automotive repair, store etc  http://www.youtube.com/watch?v=ddtBiOo7uME&feature=related (start at 7:17 – 8:25) o Understand the job of the product vs the customer o Understands what the customer wants and ways to perfect your product o IE clothes  Covers you up, keeps you warm, makes a statement about you, reflects your personality  Thinking about the job your product performs and customers will come  http://www.youtube.com/watch?v=AMCJhJE2CKU&feature=related (until 4:01)