International Financial Management

Single Tier: shareholders elect CEO; CEO reports to shareholders (more informal arrangement)

Two-Tier: institutionalized shareholder and supervisory body elect CEO; CEO reports to board of directors

• a debt obligation (bond)
• semi-annual coupon payments; upon a coupon rate until bond expires
• upon expiration = face value is paid back 
• paid back before shareholders: bonds are lower risk than equity 

1. calculate cash flows as per coupon rate per annum 

2. calculate present value, using discount rate (PV = cash flow / 1 + discount rate) 

3. add the new sum over time  to find bond price today 

•  Spot is today's interest rate (T=0)
• Forward Interest Rate: is the future interest rate 

• resale price will not reflect the real value of the stock
• daily stock prices can be volatile 
• better to consider the sum of present values of the future dividents 
  • it is impossible to forecast future dividents but one can try using past/present information 

• x axis: standard deviation %; y axis: expected returns
• Graph
  • the efficient frontier shows the portfolios with the highest return for a given risk / or lowest risk for a given return
  • efficient portfolios are on the line
• Result - diversify your stock portfolio to reduce systematic risk 
  • covariance suggests the correlation between stocks; which reduces with a diversified portfolio
• Assumptions
  • everyone is an return risk optimizer (looking for highest return related to lowest risk)
  • higher risks = higher returns 

• primary markets for private placements, intial public offerings (IPOs and warrants 
• secondary markets involve stock exchanges and are the primary venue for public investment in corporate equity

•  A yield curve depicts the interest rates of similar quality bonds at different maturities
• The term structure of interest rates reflects expectations of market participants about future changes in interest rates and their assessment of monetary policy conditions. 
• "Normal / upward sloping yield curve": signals that the economy is in an expansionary mode
• "Flat yield curve": signals that the market is unsure about the future direction of the economy 

• capital structure- how a company funds its overall operations and growth 
  • refers to a company's mix of capital, which consists of a combination of debt and equity.
• M&M Proposition 1: in a world without tax, the value of the firm is always the same under different capital structures
• M&M Proposition 2: interest paid to debt holders is tax deductible as the government taxes net profit. Therefore leading to a tax shield. 
  • full equity = no advantage of tax deduction
  • when there are taxes and the firm has debt and need to pay interset (tax deductible) then the firms value will increase by the amount of the tax shield 
  • firm needs to make a trade-off between tax benefits and cost of financial distress 

• a credit spread reflects the difference in yield between a treasury and corporate bond of the same maturity
• spread is between risk free and risky 

• Naive: investment in 5 stocks
• Proper diversification: look at risk return diversification of every single asset wherein every investment in calculated
• Suggested: Portfolio diversification 

• to make comparable: transform into a common size statement where each item is reprsented in % instead of numbers
• Measuring liquidity: current ratio = current assets / current liabilities 
• Measuring profitability: profit margin = net income / sales

Role of investment bank

• advice to firm
• underwrite proceeds (guarantee to buy certain number of shares)
• market shares / sell them to private investors 
• determine a price for the share 

• in an efficient capital market
  • share prices fully reflect all available information
  • Efficient market hypothesis (EMH): share price will immediately adjust to new information
• Weak market: future share price can be determined by analysing past patterns
• Semi-strong: news, public reports, official information reflected immediately in share price
• Strong: private and public information is reflected immediately in the share price 

• CAPM introduces a factor that measures firm's sensitivity to market movement (beta)
  • risk premium varies in direct proportion to beta
• CAPM provides a useful measure that helps investors determine what return they deserve on an investment

Tobin Separation says: according to an investor's preference, one has to make two choices

• finding the market portfolio: where the capital market line (CML) meets the efficient portfolio
• use lending and borrowing acording to your utility or risk preference 

•  a measure of the sensitivity of the price of a bond to a change in interest rates.

the rate at which the price of a stock increases or decreases over a particular period