Professional Documents
Culture Documents
BU111 Lectures 1 10
BU111 Lectures 1 10
September-16-09
1:03 PM
What is Business?
- Business
Sum total of all activities involved in the creation and distribution of goods and services for private
profit.
- Primary activities of a business
○ Creation of good/service
OPERATIONS FUNCTION
PRODUCTION FUNCTION
○ Distribution function
MARKETING FUNCTION
- Ancillary (Secondary) Activities
○ Facilitate the primary activities (support or make possible)
Accounting
Finance - generate funds, etc. (not primary purpose)
Human resources
IT
- Profit Motive
○ Drives people to do business
- What is a model?
○ A representation of reality
- What are the characteristics of a good model?
○ A good model simplify our understanding of what would be very complex
○ Good model structures or "frames" our thinking regarding a complex topic
○ Good model provides a meaningful framework for analyzing and studying a complex phenomena
○ Good model also shows up how the various aspects of reality (parts of a model) interact with or
impact upon one another
- Frame business and role that managers must plan in today's business environment
Lectures Page 1
Lectures Page 2
STM 101,tueday 5PM SI
Lecture 2
September-21-09
12:55 PM
Business Stakeholders
- Individuals or groups who depend on a company for the realization of their personal goals and on whom
the company is dependent for the realization of its goals
Employees, stockholders, owners, suppliers, distributors, consumers
- Therefore the relationship between a business and its stakeholders is said to be one of " mutual
dependency "- rely on each other.
Primary Stakeholders
- Owners (shareholders)
- Customers
- Employees
Secondary Stakeholders
- Suppliers
- Creditors
- Communities
- Government
- Society as a whole
- To devise and implement strategies that will allow the organization to achieve the critical success factors
in a manner that meets legitimate stakeholder expectations
- In attempting to achieve this primary objective all managers must be able to analyze two different sets
of environmental factors
Lectures Page 3
PEST: A model for analyzing the external environment
- Because the external business environment is largely uncontrollable, it must be constantly monitored by
management
- Goal is to be proactive vs. Reactive (anticipatory vs. waiting)
- The PEST model breaks the external environment down into four sub -environment: political, economic,
social, technological
Lectures Page 4
Lecture 3
September-23-09
12:53 PM
- Economic environment of a business explains how firms and government to raise capital (money)
necessary to operate.
- Reference: Lab Manual p7-25 reading
- This is commonly refereed to as the Capital Formation Process
○ $ required
Internal
○ 2 Primary Groups
Government -> taxation
□ Finance infrastructure
Public Corporations -> reinvesting profit (retained earnings)
□ Finance capital expansion
Capital markets
- Places where people or institutions with money to invest (lenders/savers) are brought together with
those who require capital (borrower/spenders)
- Capital markets may be actual places
○ The TSX, NYSE
- Capital markets may also be virtual markets with no real physical location
○ The bond market, the money market
Suppliers of Capital
- Financial intermediaries (institutional investors)
○ Institutions that invests the money of others in the capital markets in order to fund a future
liability.
Bank, trust companies, credit unions
Pension funds, insurance companies
Mutual funds
- Public Corporations
- Individual investors
- Foreign governments and investors
Securities
- Things that are bought and sold in the capital markets
- Securities represent proof or evidence that a transaction has occurred between a supplier of capital and
a user of capital
Preferred and common shares, bonds and debentures, options, futures contracts, treasury bills,
Lectures Page 5
○ Preferred and common shares, bonds and debentures, options, futures contracts, treasury bills,
commercial paper, rights, warrants, shares in mutual funds.
External Financing
- Debt financing (borrowing)
○ Gov't
○ Corporations
- Selling a share of ownership (equity financing)
○ Corporations
Funds Required
|
Debt /////////// ////////// /////// /////// /////////////// Equity / Stock
//// ///
Short Long Private Placement Public sale
term Term - Institutional
investors
Banks Money Bonds & OSC - Ontario
Market Debentur Securities
- t-bills es commission
- Commerc
ial paper
- Bankers
acceptan
ces
Stock Over the Counter Investment
Exchanges - Market (OTC) Dealers
preferred & bonds/debentures, (investment
common unlisted stock, bankers)
shares, mutual funds - Agent vs.
Options Principal
(derivatives) (underwriting)
IB takes principal
status, and
assumes risk.
Agent Status -
investment
dealer
(best efforts) -
take commission
on each share
(i.e. Real estate
agent)
Investments
Lectures Page 6
Investments
Lectures Page 7
Lecture 4
September-28-09
12:53 PM
Personal Taxation
- The higher an individual's level of taxable income...the higher that individual's marginal tax rate
- The more you make...the more you pay
- Three different levels of tax must be paid by individuals living in Ontario
○ Federal tax (Canada)
○ Provincial tax (Ontario)
○ Provincial surtax (Ontario)
- The combined federal/provincial marginal tax rate after surtax for an Ontario resident in 2009 is
the sum of his or her:
Lectures Page 8
Federal tax rate + Ontario tax rate + Ontario surtax rate
(p 45)
Lectures Page 9
Lecture 5
September-30-09
1:41 PM
= 2320
$5000 /$50000
= %10
$5000
Lectures Page 10
$5000
$2250 (45% gross up)
$7250 amount subject to tax/taxable amount
= 1149
=$1160
- Dividends 22.98%
- Capital gains 23.20%
- Interest 46.41%
Lectures Page 11
Lectures Page 12
Lecture 6
October-05-09
1:01 PM
Bonds
- A bond is a promise by the issuer or borrower (gov't or corporation) to repay an investor (lender) a set
dollar amount (principal), at a set date (final date of maturity), and to pay the investor a fixed rate of
interest (the coupon rate) each year
Bell 8 of 18
Issuing company, coupon rate (interest rate) (8%), of date of final maturity (2019)
- Face value
○ Most bonds are initially sold at a face value (par value) of $1000 per
bond
- Length of life/date of final maturity
○ Most bonds have a relatively long life from the time they are initially
sold, until they mature
○ Referred to as the bond's "term" or "run to maturity" or "life
expectancy" and is normally 20 years
○ However some bonds may have a longer run to maturity or shorter run
○ Always assume that a bond will have life expectancy of 20 years
- Date of final maturity
○ At the end of it's life, a bond is said to "mature" and the issuer will repay
the principal to holder
- Coupon rate
○ Fixed rate of interest
○ Amount receiver annually:
○ Annual interest = coupon rate * face (par value of bond)
○ An investor will never receive anything more than this amount of
interest, but will also never receive anything less than this amount
- If the issuer of a bond fails to pay the required amount of interest to the investor, it is considered to be
an act of bankruptcy
- The bondholders can then take action to force the company to liquidate its assets and use the proceeds
to pay their outstanding claims (all interest owed plus fill repayment of the principal loaned):
○ The bond indenture (contract)
○ The bond trustee(trust companies, third party, watch over contract, full
power to ask for repayment)
○ The order of liquidation
Order of Liquidation
Lectures Page 13
Preferred creditors (government)
- Unsecured creditors (suppliers, employees, debenture holders)
- Preferred stockholders
- Common stockholders
- If the issuer defaults on the terms of the bond indenture, company liquidates
- The rough bond yield formula assumes that the investor holds the bond until the date of final maturity
Example 1
Calculate the yield on a GM 10 of october 5' 19 purchased for $900 on October 5, 2009
Yield = annual interest/bond + annual capital gain (loss) / purchase price / bond
$900
Calculate the yield on a GM 10 of october 5' 19 purchased for $1100 on October 5, 2009
Lectures Page 14
Yield is greater then the coupon rate
- If a bond sells at a premium (greater than $1000)
○ Yield less then coupon rate
- If a bond sells at par or face value ($1000)
○ Yield equals to he coupon rate
Characteristics of Bonds
Indifference Analysis
1) Bell 8 of 19
2) XYZ 10 of 29.
Solution:
Yield of old bond = yield of new bond
Summary: interest rates in economy have risen from 8% to 10%, you would be indifferent if bond costs
$900
Lectures Page 15
Lecture 7
October-07-09
1:00 PM
Bell 10 of 29
Conversion rate
1 Bond -> 20 shares
C/S = $40 x 20 sh
= $800
$60 x 20 = $1,200.00
○ May allows the investor to realize a capital gain at some time in the future if the form's common stock
appreciates substantially in value
○ Favourable to investor
○ Convertibles sell at lower coupon rates than non-convertibles
- Extendible/retractable feature
○ Allows the investor the option to extend the life of the bond beyond it's maturity date (extendible) or
have the bond refunded before its date of final maturity (retractable)
○ Favourable to investor
○ Can see which way interest rates have moved (likely to move) and make the decision to extend (if
interest rates have fallen below the coupon rate of the bond) or to retract (if interest rates have risen
above the coupon rate of the bond)
Preferred Shares
- Hybrid financing
- Falls between bonds and common stock, characteristics of both
Lectures Page 16
Ex. BMO 10% -> $100 par, $50 par, $20 par
2) Newspaper, online
(PREFERRED)
2. Discretionary dividends
i. Option to not pay dividends
3. Non-voting (similar to bonds)
4. Preference rights
i. Preference in liquidation vs. Common stock
ii. Dividends
1) Arrears - dividends from previous years
5. Preferred stock price vary inversely with inversely with interest
= 66.67$
1. Cumulative feature
2. Call feature (10% 5%)
3. Conversion feature
4. Voting feature
Lectures Page 17
Lecture 8
Wednesday, October 14, 2009
1:00 PM
- Participating feature
○ Once common stock dividends reach a certain prescribed level, and there are still additional
profits available to be distributed in the form of dividends, then the common stockholders and
preferred stockholders will share equally in the distribution of these additional profits on a per
share (pro rata) basis
○ Allows preferred stockholders to receive dividends in excess of the stated preferred stock
dividend rate in years of exceptional company profitability
○ Favourable to investors
Example (slides)
= dividends/share/year
Price / share
Common Stock
- Voting rights
Elect people to sit on board of directors
Right to attend meeting and vote on any issues
Vote on major issues
- Right to receive dividends
Discretionary
No fixed amount
Dependent upon company profitability
- Liquidation rights
- Pre-emptive right
Offer stock first to existing common stock holders
Must be offered in a way that allows them to maintain % share of ownership in business
- Bonds and preferred stock prices are closely related to the prevailing rates of interest in the
economy
- How are common stock prices derived?
- Strictly on the basis on the laws of supply and demand
- If investors fell that a company will be highly profitable in the future that pays high levels of
high levels of demand and payout and appreciation in share values
- This will mean high levels of demand for a limited supply of shares, high rice
- The reverse holds true if investors feel a company will not be profitable
- Low levels of demand and falling stock prices
Lectures Page 18
- Straight buys/straight sells
□ Market orders
- Short selling
- Buying stock on margin
- Stock options -- puts and calls
- Stock markets work on the basis of a bid and ask price system
- Call up a stockbroker and ask for a quote on ABC
- Broker replies ABS is currently trading at a bid price of $9 and an ASK price $10
□ Ask price is the lowest amount per share that anyone is currently willing to sell ABC
□ Bid price is the highest amount per share that anyone is currently willing to pay for a
share of ABC
□ Currently at bid of $9 and ask $10… no shares would be changing hands
Market orders
- Telling your broker to execute your order immediately at the best available price in the
market
- Market order to buy… pay current ASK price and vice versa
Short Selling
- Bull market
□ Prices are generally increasing
□ Buy low sell high
- Bear market
□ Prices are generally falling
□ Sell high buy low (short sale)
Lectures Page 19
2% in 110
= $1250
Short Calls
- Short selling rule: short deposit must be 150% CMV of stock shorted at all times
- If price of stock rises above level at which it was initially shorted - investor is subject to a
short call (deposit with broker is less then 150% of current market value of stock)
- Deposit more money into short deposit
Buying on Margin
Example:
Lectures Page 20
A. Go long - purchase $6300 / $45 = 140 shares
Sell 140 shares @ $55 = $7700
Bought for $6300
$1400
Less 2% IN $126
Etc. 2% OUT
Etc. PROFIT
B. Utilize full margin
Let total amount invested be 'x'
70%x = 6300
X = 9000
- Broker advances 9000-6300 = 2700 (30%)
- Purchase 9000/45 = 200 shares
Sell 200 @ 55 = 11000$
Bought for 9000$
= 2000$
Less 2% IN + 2% OUT = 180 + 220
Interest = 67.50$ ( 10% x $2700 x 1/4 year = $67.50 )
Simple interest
Lectures Page 21
Lecture 9
Wednesday, October 14, 2009
1:29 PM
Short Selling
- Bull market
□ Prices are generally increasing
□ Buy low sell high
- Bear market
□ Prices are generally falling
□ Sell high buy low (short sale)
Short Calls
- Short selling rule: short deposit must be 150% CMV of stock shorted at all times
- If price of stock rises above level at which it was initially shorted - investor is subject to a short call
(deposit with broker is less then 150% of current market value of stock)
- Deposit more money into short deposit
Lectures Page 22
$750 short call
Buying on Margin
Example:
Lectures Page 23
$1532.50 (412.50 more)
Simple interest
Example
XYZ drops to $40
Receive a margin call from broker for amount x that will bring % equity back up to minimum
requirement
Solve for x
X = 300
Lectures Page 24
Lecture 10
Wednesday, October 21, 2009
12:59 PM
Options
- An option is a contract that allows the investor (option 'holder'/'buyer') the right to buy or sell
○ A prescribed a number of shares (1 contract = 100sh)
○ For a prescribed price (exercise, striking price)
○ For a prescribed time period (until expiry--life expectancy)
○ For a market determined premium
Option Contact:
Writer Purchaser
Jim Investor
Bu111C
BUY 100 SH OF RIM Ok. Acceptance.
For price of $72/share for next 3 months
EXAMPLE:
100 shares of underlying interest/security, expiry on July - 3rd Friday at 4:00PM (convention), at $85
strike price at $5 premium/sh
Call Option
Writer
- Sells call option
- Receives premium
- Agrees to sell stock at striking price
- Hopes price of stock will fall or not rise above striking price
Purchaser
- Buys call option
- Pays premium (up front = maximum loss)
- Can buy shares at striking price
- Hopes price will rise above striking price
Call example
Lectures Page 25
- Expect rise stock price
- Abc => CMP $50/sh
- You have $5000, margin requirement 50%
- Strategies:
○ Go long, straight buy
100 shares
○ Buy on margin
5000$ x 50% = 10000
= 200 shares
○ Purchase a call option
Premium $15/sh = 1 contract = $500
$5000/500 = 10 contracts
1000 shares
○ Write a put option
CALL EXAMPLE:
245% = 3 months
12/3 = 4 x 245% = 980%
Put Option
Writer
- Sells put option
- Receives premium
- Agrees to buy stock at striking price
- Hopes price of stock will rise or not fall below striking price
Purchaser
- Buys put option
- Pays premium
- Can sell shares at striking price
- Hopes price will fall below striking price
Put example:
Lectures Page 26
2% in = 60
- 2% out = 100
- 2% on premium = 9
- = 1381$
Lectures Page 27