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Joanna Małecka FINANCE 2017
FINANCE – resume the classes with Joanna Małecka 2017
The issues necessary to complete the final test1:
I. Introduction to Finance: Deffinision of Finance, Division of Finance, Function of
Finance
1. Market economy is money economy (treasury management). It’s mean that all processes
which take place in market economy take place with the benefit of money. So Finances are the
domain of money economy. In the large meaning they are specify as a money economy consist
in gathering money from different sources, spend and deposit them on different aims in different
ways. Finance -colloquial- are stocks of money which have at the private disposal and public
economic operators. The related literature emphasis finance it’s a process and phenomenon
connected with gathering and shearing money stocks or as a change mechanism and value share
of material goods. They are integrally connected with phenomenon and money processes in
with the currency in circulation deposit could have structure: cash, money on the bank account,
active debts, liabilities. Finance become interested in economics aspect of manage money by:
state and regional self-governments, economic operators (enterpises and other organizational
units and householders)
2. Finance division:
a) The objective context
• creation – creation the currency in the banking system
• money – circulation among economic operators
• gathering money as a savings and monetary reserves
• location capital holdings (money)
b) The subjective context:
• Finance of enterprise:
o Revenues from selling manufactures, goods and services
o Expenditures connected with covering costs this activities and taxes, charges,
share profits, investments, ect.
o Bank finances and others financial agents
o Revenues exist mainly as a deposits and investments make by customers:
enterprises, institutions, population
o Spending by credits, bank investments, securities
o Current bank costs covered by revenues surplus from interest loans rate and
commission from performed operations costs deposits and loans
• Economic entities:
1 This materials are only the supporting materials for repeating and better understanding all issues from the classes. All issue list you could
find on the www.fem.put.pl.
Financial market
Money market
(treasury bills, commercial paper)Capital market (bonds,
stocks)Futures market
(futtures, options)Other segments
(foreign exchange)
Joanna Małecka FINANCE 2017
o revenues from taxes and charges and others form of payment with
payments with a more forced character
o expenditure connected with financing of government activity, social benefits
and municipality
o include the government financing, social insurance/securities and other public-
law connection (ex. Territorial - Self Government)
• Insurance finance:
o revenues from contributions of insured persons and policyholders
o expenditure connected with insurance coverage and the compensation paid by
the insurers and current costs and investment part of insurance companies
• Hausholders Finance:
o revenues mainly from earnings , disability pensions, retireds and others social
benefits from own buisenes and percentage of aggregated capital
o expenditure pander to current needs, purchase of durable goods ,taxes and others
charges
o savings from money surplus and personal financial expenditure
3. Economical functions of public finances in social / competitive market economy
• alocation - it’s a division of the production factors between different activity issues.
In the social market economy allocation take place by finances, so by accumulation and
spending cash. Each acquisition of production factors is named as a money expenditure
(ground, buildings, devices, materials and resources (raw materials).
• redistribution – derivative profit sharing. In the social market economy the initial
distribution of their income sharing spur-of-the-market machinery. Government not
generate profits, so to allocate the public services and to realize public needs, they have
to use the businesses profits, which are win by taxes system, loans, insurance
contribution. The aim of redistribution function of public finance are, among other
rhings,to guaranty each of householders minimal profit, for satisfaction basic needs. The
profit redistribution could take place between buisnesses or between lands in the way:
▪ direct – the transfer of the liquid assets for citizens or other subjects
(f.ex. subsidy, benefits, grants)
▪ indirect – the transfer of the liquid assets for legal persons (institution)
which serve public services
• stabilizing– tenacity of full practice all manufacturing factors. Finance by financial and
monetary politic infer on the general dement and economic growth, what implicate
better using manufacturing factors, reduce unemployment rate and stabilizing money
value.
• control – information function – connected with existing complex files system of
financial operations. The analysis of financial documentation lets to observe how the
financial processes proceed and give information about possible anomaly
(incorrectness) of this process.
The public service allocation not all the time proceed as a social market economy role, so as a
full responsibility for them consumption. Thing and give a tree examples:
• as a social financial economy mechanism it’s un-possibly to finance a kind of government
departments – f.ex. national defence, public administration
• difficult to describe in the measurable way is the amount fares for using the social services
by citizens (f.ex. maintaining the urban vegetated areas, street lightings, clearing of snow)
• to less income, make impossible using the services like f.ex. education, medical carry.
Joanna Małecka FINANCE 2017
4. Which of financial function is connected with this example:
1. X company purchase of land by new headquarters – allocation
2. Downgrading/ reduction of taxes – stability
3. The payment of social insurance contributions – redistribution
4. Checking the currency rate – control
5. Downgrading / reduction of interest rate
6. Payment of pensions
7. Control the government expenditue
8. Transacion subject of bying and seling interest
5. Are the finances:
1. medium of exchange (means of exchange),
2. legal tender
3. assets of gather value reserve
6. What is the difference between active debts and liabilities?
II. The Legal Structure and Raising Capital
Possible form of business activities, Strangths and weaknesses of different legal forms of
activity, The Corporation, Organizational Structures of different legal forms, The concept
of interest (real and actual), Traiding in Money, Financial markets and thei participants
(money market, capital market, futures market, other segments)
NATURAL PERSONS LEGAL PERSONS
Natural persons conducting economic activity
Commercial partnerships and capital companies
with a legal personality:
• joint-stock companies
• companies with the limited liability
Civil law partnerships
Personal commercial partnerships without legal
personality but with the ability of legal acting:
• professional partnerships
• general partnerships (unlimited
partnerships)
• limited partnerships
• limited joint-stock companies
Joanna Małecka FINANCE 2017
Consider what legal form is suitable for your imagined company and explain with
characteristics of chosen form.
III. Financial Statement and Raising Capital
Financial statement; The balance sheet and the income statement; A look at the firm’s
founds flows; The statement of changes in financial position; Financial ratios; Liquidity
and activity ratios; Profitability and debt ratios
The Securities and Exchange Commission (SEC) requires as a minimum four basic financial
statemnts which are:
1. Income Statement
2. Balance Sheet
3. Statement of retained earnings
4. Statement of changes in financial position
Properly read and interpreter statements give the reader a complete, synoptical picture of the
firm’s operations and rules in quantified form.
The Securities and Exchange Commission (SEC) requires as a minimum four basic financial
statemnts which are:
1. Income statement
2. Balance Sheet
3. Statement of retained earnings
Statement of changes in financial position
Joanna Małecka FINANCE 2017
Earnings per Share (EPS) is closely watched by stockholders and market analysts.
Earnings available for common stockholders may or may not be distributed as dividends – all
or part of these earnings may be withhold to finance future operations or expansions.
Joanna Małecka FINANCE 2017
Try answer the questions after analysis the data:
1. What is show by data from two different years?
2. What main conclusion can you draw from these data?
Answers:
1. Possibility to predict the value in the next years .
2. Increase of the company assets from 3 200 000 to 3 500 000 what is compose of current
assets by 100 000 and gross fixed assets by 260 000.
What is it: Extraordinary General Meeting of Shareholders, with whom is it composed and with
such competences?
Joanna Małecka FINANCE 2017
IV. Assessing the Value of Stocks and Bonds
Definiosion of stocks and bonds; Approaching valuation; Using book value; Using
liquidation value; Using expected returns; Valuation of corporate bonds; Computing
yield to maturity
1. Issues and definitions:
Capital stock: part of equity or company
Face value: amount of share capital per share
Issue value: share price on the primary market
Book value: net asset value per share
Market value: stock price resulting from market ratings
Types of shares:
• Rregistered share
• Bearer share
• Common share
• Share having preferance: for vote, dividend, share in mass of bankruptcy
Split: Division of shares to increase the liquidity of trading in a given asset. It consists in
allocating the value of shares to a fixed portion resulting in an investor holding several shares
with a proportionately reduced value
2. Fixed dividend model
• dividend as the only income from equity investments
• the shares purchased by the investor are held for an indefinite period (no effect of the
change in share price)
• dividend value is fixed and does not change over time
Equation for the calculation of values:
where:
P - stock value (price of balance)
D - the constant value of the annual dividend paid per share
k - investor's expected rate of return on investment in shares or discount rate
3. Model of constant growth of dividend (Gordon-Shapiro model)
• dividend as the only income from equity investments
• the shares purchased by the investor are held for an indefinite period (no effect of the
change in share price)
• the value of dividends is increased annually by the "g„
Equation for the calculation of values:
where:
P - stock value (price of balance)
Do - value of the last dividend paid per share
Joanna Małecka FINANCE 2017
k - investor's expected rate of return on investment in shares or discount rate
g - constant annual dividend growth rate
condition: k ˃ g
4. Variable dividend growth model (biphasic model)
• dividend as the only income from equity investments
• the shares purchased by the investor are held for an indefinite period (no effect of the
change in share price)
• for "n" years, the dividend grows at a rate of g1, and then at the end of that period at g2,
Condition: g1>g2
Equation for the calculation of values :
where:
P - stock value (price of equilibrium)
D - Dividend value
k - investor's expected rate of return on investment in shares or discount rate
g1 - dividend growth rate for n years
g2 - dividend growth rate after n years
5. The Company paid a dividend of PLN 50 per share. Due to its dynamic growth, it
intends to increase annual dividend payout by 7% over the next 6 years. It is expected that after
this period the dividend growth rate will be 3%. An investor wishing to purchase shares of this
company wants to achieve an annual rate of return of 10% P - stock value (price of equilibrium)
D – 50 PLN
k – 10%
g1 – 7%
g2 – 3%
n – 6 years
6. Calculate liquidation cost for shares of the company, which liabilities are close on
20mln PLN level, and share capital amounts to 55 tys ordinary shares .The table below
grouped company asset in balance and market values after correction. Liquidation cost is 7%
from amount of the company's assets.
Joanna Małecka FINANCE 2017
Model defined by equation:
CV = LV – D – LC where:
CV - value of the company
LV - the sum of the funds that can be obtained as a result of liquidation of assets
D - liabilities of the company
LC - cost of liquidation
V - value of one share
LC = 29,32mln PLN x 0,07 = 2,052mln PLN
CV = 29,32mln PLN– 20mln PLN - 2,052mln PLN
CV = 7,268mln PLN
P = 7268000 PLN / 55000 = 132,145 PLN
7. Valuation of bonds
Value valuation involves discounting any future cash flows arising from the ownership of
bonds (recalculated at the time of valuation)
where:
V - bond value,
N - number of coupons,
Ct - cash flow associated with the bond at t time,
r - required rate of return (annual or interest payment period)
8. Two investors want to buy a 3-year bond with a value of PLN 100, bearing interest at
5% per annum, with an annual interest payment term. Before making a purchase decision, both
investors made a valuation of the bond based on the assumed yields. The first investor wants to
achieve on the annual return bond at the rate of 6%, and the second 3%.
We get:
where:
V - bond value,
n - coupon value (interest)
N - nominal value
r - required rate of return
V. The Value of the Money
1. Who as a first invented the paper money?
2. When the paper money did appear in Europe?
3. Which of current currency is exchangable for gold?
4. Which interest is more benefitial (profitable) for an investor : 22 % with a monthly
capitalisation or 21% with daily capitalisation?
number of shares
Joanna Małecka FINANCE 2017
5. Jan Kowalski received an inheritance of $ 5000 and proptly put it in the bank where it
draws interest at the rate of 7% annually. Jan would like to know how much money he can
expect to have in the end of the fifth year.
FV5 = 5000 * (1+0,07)5 = 5000 *1,403 = 7015
6. Jan Kowalski expects to recive $ 3000 in 5 years and would like to know the present
value of this sum. The interest level is 6%.
FVn = PV * (1+k) n
PV = FVn * 1/(1+k) n
PV = 3000 * 1/(1+0,06)5 = 2241,77
IMPORTANT: THE PROCESS OF FINDING PRESENT VALUE WHEN FUTURE
VALUE IS KNOWN IS REFERRED AS DISCOUNTING AND IS THE PRICISE
OPPOSITE OF COMPOUNDING (INTEREST CAPITALIZATION)
7. In an attempt to attract depositors BANK X advertises that it will pay 6% of annual
interest, compounded quarerly. What effective rate of interest is the bank thereby
offering its customers?
VI. Financial Report
for monthly capitalisation
for daily capitalisation
re= (1+r/m)
m
– 1 = (1+0,06/4)4
= 0,0614 = 6,14%
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