International Financial Management lectures 1-4

• dealer markets: dealers are firms who provide liquidity by purchasing and selling against personal inventory and at own risk
• agency markets: agent buys and sells for customer, gets a commisson 

• primary market: company issues its own bonds 
• secondary: people buy bonds from each other without involving company 

1. sole proprietorship: unlimited liability, depends on life and personal wealth of 1 proprietor
2. partnership: limited partnership limits liability of partners to amount they contributed 
3. corporation: limited liability, shareholders are not liable for obligations of corporation 

• Single tier board structure: shareholders control corporation’s direction, policies, and activities
• Two-tier board structure: management is elected by and reports to a supervisory board 
  • DE: supervisory board with banks, government, trade unions (50%),..

• different objectives, available information and money, between: 
  • managers and shareholders
  • large and minority shareholders 
  • shareholders and debtholders 
• need incentives for manager to act in interest of shareholder 
• agency cost must be accepted to solve agency problem ex cost of monitoring 

1. effective corporate governance framework (CGF): efficient and transparent markets, division of responsibilities
2. protect rights of shareholders (vs managers)
3. equitable treatment of shareholders (controlling vs non-controlling shareholders), protect minority shareholders
4. recognize rights of stakeholders (vs managers / shareholders) 
5. disclosure and transparency: timely and accurate disclosure
6. responsibilities of the board: effective monitoring of management by board, and accountability to company. board must be objective and independent 

amount to which an investment will grow after earning interest 

the value today of a future cash flow

how much do we need to invest today to produce a given payoff at a point in the future? 

• (1+r)^-t 
• measures present value of 1€ received in year t 
• used discount the future value back to the present 

• NPV= net present value = PV - investment 
• one dollar today is worth more than one dollar tomorrow (because of opportunity cost) 

• one safe dollar is worth more than one risky dollar 
  • default risk: borrow won't be able to repay debt 
• expected payoff must be discounted by expected rate of return offered by risk-equivalent investment in markets 
• higher default risk = higher return = higher investment rate 

• NPV rule: accept invesment w positive NPV
• RoR rule: accept investment with rate of return > opportunity cost of capital 
  • return = profit ÷ investment 

• financial concept in which cash flow is theoretically received forever
  • worth nothing today 
• PV of perpetuity = promised payment ÷ annual rate of return (PV = C / r)
• growing perpetuities: stream of cash flows growing at constant rate 

asset that pays a fixed sum each year for specified nb of years 

general formula for value of annuity that pays back 1$ a year for each year of T years starting in year 1

• entitles owner to fixed set of payoffs
  • bond's coupon: regular investment paysments received every year until maturity 
  • bond's principle: final interst payment + face value of bond gotten at maturity
• bond's yield to maturity = rate of return of a bond 

• Constant rate
• Risk-free (is the case for government bond but not corporate bonds)

exposure of bond's price to fluctuations in interest rate 

weighted avg of times when bond's cash payments are received, can be interpreted as average period of repayment 

Measures % change in bond price for 1 percentage point change in yield 

sensitivity of bond's price regarding market interest rate 

• spot rate: interest rate today
• forward rate: interest rate fixed today on future loan at fixed time
• future rate: spot rate expected in the future
• yield to maturity: internal rate of return of an interest-bearing instrument 

Interest is paid on initial investment and interest payments -> investment grows at a compound rate 

The higher the interest rate, the faster the value of initial investment will grow

investment in several short maturity bonds offer same expected return as investment in one long-maturity bond 

• when inflation, convert nominal interest rates to real interest rates 
• 1+r nominal ÷ 1 + inflation rate 

a change in expected inflation rate causes same proportionate change in nominal interest rate 

• = ownership shares in publicly held corporation
• shareholders get voting rights and dividends 
• exchange traded funds, ETFs: portfolios of stocks owned by a shell company as assets 

1. valuation by comparables 
2. DCF formula 
3. stock formula 
4. PVGO

• book to market ratio (book value = firm's historical accounting value / market value = determined by stock market) 
  • >1 undervalued stock, <1 overvalued stock 
• price earning ratio: company's current share price compared to pre-share earnings 
  • high ratio = earnings are expected to grow 

• DCF values stream of cash flows over multiple periods 
• cash flows discounted by return that can be earned in market on stocks with similar risk 
• as time horizon approaches infinity, value of terminal price approaches 0
• -> discounts cash flows by opportunity cost of capital 
  • present values can be added up 
  • PV (AB) = PV(A) + PV(B) 

• simplified version of growing perpetuity, if dividends are epxected to grow forever at constant rate 
• only use when growth rate < discount rate 

• stock prices = avg earnings (under no growth policy ) + PVGO
• PVGO = Present value of growth opportnunities 
  • positive PVGO: underestimates r
  • negative PVGO: overestimates r 

amount of cash a firm can pay out to all the investors after paying for all necessary investment 

• NPV 
• Internal rate of return
• payback period 
• book rate of return
• profitability index 

• recognizes time value of money: 1€ today > 1€ tomorrow bc € today can be invested 
• advantages: 
  • not affected by manager's taste, accounting method, profitability of company or independent projects 
  • NPVs all measured in todays €, can be added up