1、International Financial Management,2020/2/7,Ch1 An Overview,Textbook,E. F. Brigham, J. F. Houston. Fundamentals of Financial Management (10th edition). 沈洪涛, 沈艺峰改编. 高等教育出版社，2005.1,2020/2/7,Ch1 An Overview,Reference book:,中国注册会计师协会编财务成本管理中国财政经济出版社,2020/2/7,Ch1 An Overview,About the course:,Performance
2、 EvaluationCourse Attendance 15%Assignment 15%Final Exam 70%,2020/2/7,Ch1 An Overview,Overall requirementsPrepare a mathematic calculator;Prepare some A4 paper and do homework timely;Taking Notes in class is necessary;Read financial news and think like a financial worker; share it with classmates.,2
3、020/2/7,Ch1 An Overview,Ch1 Introduction,1.1 What is Finance and what is Financial Management?1.2 Goals of Financial Management1.3 Summary of the course,2020/2/7,Ch1 An Overview,1.1 What is Finance?,2020/2/7,Ch1 An Overview,What is Finance?,- money resources, income, etc . - supply or get money for
4、a project - the science of managing (private or public) money.,2020/2/7,Ch1 An Overview,Three interrelated areas of the science of Finance,2020/2/7,Ch1 An Overview,What is Financial Management?,Financial Management is an area of finance dealing with the financial decisions economic subjects make and
5、 the tools and analysis used to make these decisions. In this course, we mainly study the financial management of corporations, i.e., corporate finance.,2020/2/7,Ch1 An Overview,(1) About corporations,Forms of Business Organization : Sole proprietorship Partnership Corporation,2020/2/7,Ch1 An Overvi
6、ew,Sole proprietorships & PartnershipsAdvantages Ease of formation Subject to few regulations No corporate income taxes Disadvantages Difficult to raise capital Unlimited liability Limited life,2020/2/7,Ch1 An Overview,CorporationsAdvantages Unlimited life Easy transfer of ownership Limited liabilit
7、y and ease of raising capital Disadvantages Double taxation Cost of set-up and report filing,2020/2/7,Ch1 An Overview,2020/2/7,Ch1 An Overview,The course is mainly about financial management of corporations. However, its basic ideas apply to sole proprietorship, partnership as well as individuals or
8、 other social institutions.,2020/2/7,Ch1 An Overview,(2) Corporate financial decisions include:,Financing Decisions Capital Budgeting Working Capital Management Dividend Policy,2020/2/7,Ch1 An Overview,Assets Liabilities & Equity Current assets Current LiabilitiesLong-term debtLong-term assets Prefe
9、rred StockCommon EquityRetained Earnings,Balance Sheet,2020/2/7,Ch1 An Overview,(3)Basic tools and analysis:,Time value of moneyRisk and return* Cash flow analysis is stressed.,Incomings and outgoings of cash,2020/2/7,Ch1 An Overview,Why to study Financial Management?,-career concerns-personal finan
10、cial planning,2020/2/7,Ch1 An Overview,In short, you will learn from this course :Fundamental principles and practices ofcorporate finance prevailing in international context.,2020/2/7,Ch1 An Overview,1.2 Goals of financial management,Goal 1: Profit Maximization ( or,EPSearnings per share) Maximizat
11、ion?,2020/2/7,Ch1 An Overview,Easy to use and understand; Based on somewhat standardized accounting practices; Net income may reflect firms potential to produce cash flows over time.Re:pp.24,Reasons:,2020/2/7,Ch1 An Overview,INCOME SHEET Sales Less：Sales discounts and allowances Net sales Less：Sales
12、 tax Cost of sales Gross profit Less：Selling expense General and administrative expense Financial expense Income from main operation Add：Income from other operations,2020/2/7,Ch1 An Overview,Operating income Add：Investment income Non-operating income Less：Non-operating expense Add：Adjustment to prio
13、r years income and expense Income before tax Less：Income taxNet income,2020/2/7,Ch1 An Overview,some criticism :,Cannot reflect risk in future cash flows;cash? Account receivable? Cannot reflect time value of money;this year? next year? Cannot reflect the efficiency of investments;input-output? Earn
14、ings manipulation?inventory cost? Fixed asset depreciation? ,2020/2/7,Ch1 An Overview,Goal 2: Shareholder Wealth Maximization (or, Stock Price ) Maximization?,2020/2/7,Ch1 An Overview,This goal is now preferred because of the following reasons:Firstly, the purpose of setting up a business is to maxi
15、mize the owners wealth;,2020/2/7,Ch1 An Overview,Secondly, stock price maximization is better than profit maximization for the following reasons:(1)Current stock price relies upon current earnings, as well as future earnings and cash flow.,2020/2/7,Ch1 An Overview,穗恒运A中报预增2.2倍股价累计上涨超一倍天和财富网 2012年07月
16、11日 09:14 导读：新快报讯记者陈庆麟报道电价上调对企业业绩刺激仍在继续。昨晚，穗恒运A（000531）发布业绩预告显示，预计今年上半年公司净利润1.26元至1.45亿元，同比增长2.2倍至2.7倍，每股收益约在0.37元-0.42元。,2020/2/7,Ch1 An Overview,Basic factors that affect stock price (p.24),Projected cash flows to shareholders Timing of the cash flow stream Risk of the cash flows,2020/2/7,Ch1 An O
17、verview,To be specific, the factors include :,Decisions made by management The external constraints Level of economic activity and corporate taxes Stock market conditionsp.24 Fig.1-2,2020/2/7,Ch1 An Overview,(2)It reflects the capital input-output relationship;(3)It may reflect risk and timing of EP
18、S.,2020/2/7,Ch1 An Overview,Relationship between the 2 goals:,Profit maximization stock price maximization, despite a generally high correlation.,2020/2/7,Ch1 An Overview,2020/2/7,Ch1 An Overview,Now it is widely acknowledged that the primary financial goal is:,shareholder wealth maximization, or, s
19、tock price maximization.,2020/2/7,Ch1 An Overview,But, still, management cannot ignore accounting profit/EPS. WHY? Other things to think about in financial management: Do firms have any responsibilities to society at large? Is stock price maximization good or bad for society? Should firms behave eth
20、ically? p.17 Agency relationship? p.19,2020/2/7,Ch1 An Overview,1.3 Summary of the course,One GoalTwo ToolsFour Blocks,Shareholder Wealth Maximization,Time Value of Money Risk and Return,Financing Decision Capital Budgeting Dividend Policy Working Capital Management,2020/2/7,Ch1 An Overview,One Goal
21、,Two tools,Four blocks,2020/2/7,Ch1 An Overview,Assignment 1,Read textbook : pp.14-17 (The goals of the corporation); pp.23-25 (Managerial actions to maximize shareholder wealth; Does it make sense to try to maximize EPS?) Look for an example to show the stock price is affected by a certain event. S
22、et up a Personal Cash Flow Record, and improve your own financial planning.,2020/2/7,Ch1 An Overview,Personal Cash Flow Record,CHAPTER 2 Risk and Rates of Return,Return and risk: concepts and measures Risk: Stand-alone risk VS. Portfolio risk Risk pricing: CAPM / SML,2020/2/7,Ch2 Risk and Return,2.1
23、 Return and risk: concepts and measures,Rate of return:(Amount received Amount invested)Return = _Amount investedFor example: if $1,000 is invested and $1,100 is returned after one year, the rate of return for this investment is: ($1,100 - $1,000) / $1,000 = 10%.,2020/2/7,Ch2 Risk and Return,The abo
24、ve is the so-called realized rate of return. For stocks you have not sold yet, it is more meaningful to talk about the Expected rate of return.,2020/2/7,Ch2 Risk and Return,Return distribution (continuous),Investment return possibility distribution.,2020/2/7,Ch2 Risk and Return,Return distribution (
25、dispersed),“riskless”,cyclical,countercyclical,2020/2/7,Ch2 Risk and Return,Return: Calculating the expected return for each alternative,2020/2/7,Ch2 Risk and Return,Summary of expected returns for all alternatives,Exp returnHT 17.4%MP 15.0%USR 13.8%T-bill 8.0%Coll. 1.7%HT has the highest expected r
26、eturn, and appears to be the best investment alternative, but is it really? Have we failed to account for risk?,2020/2/7,Ch2 Risk and Return,Investment risk,Risk: 1.Uncertainty; 2.The chance that some unfavorable event will occur. Investment risk: Uncertainty of the securities rates of return/prices
27、; the probability of earning a low or negative actual return.,2020/2/7,Ch2 Risk and Return,Investment return possibility distribution.,2020/2/7,Ch2 Risk and Return,How to describe risk?Standard deviation Coefficient of variance,2020/2/7,Ch2 Risk and Return,Risk measure 1:standard deviation,2020/2/7,
28、Ch2 Risk and Return,Example:some investment alternatives returns,2020/2/7,Ch2 Risk and Return,Standard deviation calculation,2020/2/7,Ch2 Risk and Return,Comparing standard deviations,2020/2/7,Ch2 Risk and Return,Comments on standard deviation as a measure of risk,Standard deviation (i) measures tot
29、al risk. The larger i is, the more likely that actual returns deviate from expected returns. For investment alternatives with the same expected return, i is a good measure to compare stand-alone risk; But for alternatives with different expected returns, no.,2020/2/7,Ch2 Risk and Return,Comparing ri
30、sk and return,* Seem out of place.,2020/2/7,Ch2 Risk and Return,Risk measure 2: Coefficient of Variation (CV),A standardized measure of dispersion about the expected value, that shows the risk per unit of return.,2020/2/7,Ch2 Risk and Return,Example: risk rankings by coefficient of variation,Coll ha
31、s the highest degree of risk per unit of return. HT, despite having the highest standard deviation of returns, has a relatively average CV.,2020/2/7,Ch2 Risk and Return,Whether to choose the one with the lowest CV depends on our Risk attitude,Risk preference?,Risk neutral?,Risk aversion?,2020/2/7,Ch
32、2 Risk and Return,Investor attitude towards risk,Risk aversion assumes investors dislike risk and require higher rates of return to encourage them to hold riskier securities. P.60Required investment returnK=KRF + RP,2020/2/7,Ch2 Risk and Return,Risk premium (RP) the difference between the return on
33、a risky asset and less risky asset, which serves as compensation for investors to hold riskier securities. P.61,Risk premium,Return over riskless asset,Return over risky asset,2020/2/7,Ch2 Risk and Return,How to reduce risks?,Dont put your eggs in one basket!Is it so?,2020/2/7,Ch2 Risk and Return,2.
34、2 Stand-alone risk and Portfolio risk,2020/2/7,Ch2 Risk and Return,Stand-alone risk: the risk of holding just one asset. P.52 Portfolio risk: the risk of holding a group of assets p.62,Nobel Prize winner: Harry Markovitz,2020/2/7,Ch2 Risk and Return,A mix of different securities is calledA portfolio
35、Is a portfolio good or bad? Decide its expected return and risk first!but, how?,2020/2/7,Ch2 Risk and Return,Calculating portfolio expected return,Expected return of a portfolio,2020/2/7,Ch2 Risk and Return,Example:,Assume a two-stock portfolio is created with $50,000 invested in both HT and Coll.,E
36、xpected return of HT,Expected return of COLL,2020/2/7,Ch2 Risk and Return,An alternative method for determining portfolio expected return is:,2020/2/7,Ch2 Risk and Return,But, the risk of a portfolio, p ,is generally NOT the weighted average of the of the component assets.,2020/2/7,Ch2 Risk and Retu
37、rn,Calculating portfolio standard deviation and CV,Expected return of portfolio,2020/2/7,Ch2 Risk and Return,Comments on portfolio risk measures,p = 3.3% is much lower than the i of either stock (HT = 20.0%; Coll. = 13.4%). p = 3.3% is lower than the weighted average of HT and Coll.s (16.7%). Portfo
38、lio provides average return of component stocks, but lower risk than the average of the component stocks.,2020/2/7,Ch2 Risk and Return,General comments about risk,Why? For a two-stock portfolio:Combining stocks not perfectly correlated in a portfolio generally lowers risk.,2020/2/7,Ch2 Risk and Retu
39、rn,Most stocks are positively correlated with the market (k,m 0.65). 35% for an average stock.,2020/2/7,Ch2 Risk and Return,Now, lets create a portfolio by adding stocks one by one.What will happen to the portfolios risk?,2020/2/7,Ch2 Risk and Return,Creating a portfolio:,2020/2/7,Ch2 Risk and Retur
40、n,It means:,Diversification may reduce risk;But, it cannot eliminate risk.,2020/2/7,Ch2 Risk and Return,Breaking down sources of risk,Risk = Market risk + Diversifiable risk,The part of a securitys risk that cannot be eliminated by diversification. (p.68),The part of a securitys risk associated with
41、 random events ;it can be eliminated by proper diversification. (p.68),2020/2/7,Ch2 Risk and Return,Market risk, such as: Unexpected changes in interest rates. Unexpected tax rate changes, foreign competition, and the overall business cycle,2020/2/7,Ch2 Risk and Return,Diversifiable risk (firm-speci
42、fic risk) The part of a securitys risk associated with random events ;it can be eliminated by proper diversification. (p.68)Such as: strike. top management change lawsuit CEOs health condition change,2020/2/7,Ch2 Risk and Return,Since diversifiable risk may be eliminated by proper diversification,to
43、 portfolio-holders, it is market risks that really matter.,2020/2/7,Ch2 Risk and Return,Yes. For example: Interest rate changes affect all firms, but which would be more affected:a) Retail food chain b) Commercial bank,Do some firms have more market risk than others?,2020/2/7,Ch2 Risk and Return,So,
44、 it is meaningful to measure market risk of different firms.But, HOW?,2020/2/7,Ch2 Risk and Return,(3)Beta: a measure of market risk,It measures how an individual stocks returns vary with market returns.Its a measure of the “sensitivity” of an individual stocks returns to changes in the market.,2020
45、/2/7,Ch2 Risk and Return,Beta coefficients for different firms,2020/2/7,Ch2 Risk and Return,beta = 1 : average market risk. The stock is no more or less volatile than the market.beta 1 : more volatile than the market. (ex: technology firms)beta 1 : less volatile than the market.(ex: utilities)Most s
46、tocks have betas in the range of 0.5 to 1.5.,2020/2/7,Ch2 Risk and Return,Can the beta of a security be negative?,Yes, if the correlation between Stock i and the market is negative (i.e., i,m 0). If the correlation is negative, the regression line would slope downward, and the beta would be negative
47、. However, a negative beta is rare.,2020/2/7,Ch2 Risk and Return,Beta coefficients for HT, Coll, and T-Bills,2020/2/7,Ch2 Risk and Return,Comparing expected return and beta coefficients,Security Exp. Ret. Beta HT 17.4% 1.30 Market 15.0 1.00 USR 13.8 0.89 T-Bills 8.0 0.00 Coll. 1.7 -0.87It seems that
48、 Riskier securities have higher returns.,2020/2/7,Ch2 Risk and Return,We know how to measure risk standard deviation or CV for overall risk beta for market risk. We know how to reduce overall risk to only market risk through diversification. Then, how to price risk ?,Lets have a break:,2020/2/7,Ch2
49、Risk and Return,2.3 Risk pricing: Capital Asset Pricing Model (CAPM)/SML,2020/2/7,Ch2 Risk and Return,2.3.1 CAPM,For a risk-averse investor, when he undertakes higher risk, he will require higher rates of return as a compensation.,TB? 3% is OK. Stock? 7%!,2020/2/7,Ch2 Risk and Return,What is the Required Rate of Return?,
