Lecture Notes (the Basic Financial Tools)

for Class 2 and onwards

Special Topics in Global Business

(“the Mini-MBA Course”)

Spring Semester, 2023

Prepared by YK Kim (김융기)

Adjunct Professor
Institute of International Cooperation
and Education
University of Seoul

Last updated Jan 13th, 2023

 - ultimate goal to avoid takeover: strangers throw up

Class 2 - sur price - absolute truth

1. Why does investing matter to your life?

Let’s assume we invested in S&P 500, U.S. Treasury 7-10 year bonds and U.S. 3 month T-bill.

We used S&P 500 for equity investment, U.S. Treasury 7-10 year bonds for fixed income
investment and U.S. 3-month T-bill for saving in a bank account.

If you saved $1 in the beginning of 2003, you will get the result as in the following graph by the
end of October 2016.

Now the main question is how would we go about investing? In fact, most of unprepared
investors expose themselves to unnecessary risks that can increase their chances of losing
money.

Of course, all of this is not easy. But after all, it might not be that difficult either.

We all need to start somewhere, and this session is designed to do precisely that; provide basic
financial tools to strategic management consulting in practice!

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Class 2

stocks

bond

The graph gives you a general overview on how much you would have made had you invested
$1 in various assets from 2003. Yes, we had extremely low interest rate environment over last
decade. Thus, your saving in a bank account did not make much. However, the main massage
from this graph will be the same even if you look back past 100 years.

Here we can observe that $1 of stocks grew to $3.24 and 1$ of bonds grew to $2.03. On the
contrary, had you held onto $1 in a bank account, you would have $1.17. This chart shows the
importance of investing in various assets to preserve and grow one’s financial net-worth.

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 - Invisible hand - Adam Smith => Market has invisible hand

Class 2
2. Must understand the key financial notes
Samsung in Korean and Apple in America
• Market capitalization = stock price * number of shares outstanding
• Definition of a stock price pay to buy the stock / the constant value of the company / reflects the future will be
getting better / quality of the CEO - Elon Musk
• In general, there are two important financial reports which must be included in the company’s year
1$ today is higher than tmr bcus of inflation => present value
end Annual Report to shareholders:

1) Balance Sheet shows what the company owns, what it owes, and the value of the
remaining amount, called stockholder’s equity (i.e., the net worth of the stockholders’ ownership).
2) Income Statement indicates the company’s sales, cost, and profits earned during the year.

3. Must understand why companies aim for profit maximization

• Utility maximization – Pretty receptionist, luxurious interiors and cars, or etc

• Profit maximization must be put in place in order to avoid a hostile takeover by the corporate
raiders; the stock price tends to be reflected by its earnings in principle.
- To defend company/ takeover

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Class 2
4. Must understand the macro indicators such as Benchmark Interest Rate

• Federal funds rate (discount rate) in the U.S.

• Call rate in Korea
• Other macro indicators:
systematic control
- interest rate/ discount rate (America)
- Yen in JP is really high now

IR up equity down

5. How interest rates affect the economy in terms of:

- Return
• Investment
• Savings
• Inflation - IR up bcus of unexpective -> crack downs inflation ppl have less demand
- inflation - the most worrysome factor
• Foreign money to local bank
IR

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Class 2

6. Must understand the simplified format of the income statement

• Sales
* Operating Profit M=30/100 =30%
• Less: Cost of Goods Manufactured = Operating Profit / SALES
• Gross Profit * EPS (Earrnings per share) = NP / Number of
Shares outstanding (Average Outstanding
• Less: Sales, General & Administration Expenses Shares of the company) = 20,000,000,000/1,
000,000 = 20,000
• Operating Profit
* PER (Price Earnings Retro) = Market Price /
• Less: Net Interest Expenses EPS = 100,000/20,000 = 5(X)
• Recurring Profit
• Less: Taxes Chet IK Robot
Income Statement
• Net ProfitSales In the year ended 12/31/23
100
Loss Costs of goods manufactured (equipment, labor...) 60
Gross Profit (GP) 40
Less: Selling expense 10
Operating Profit 30
Less: Inter expense 5
Recurring Profit 25
Less: Corp Income tax 5
Net profit 20

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Class 2
7. Must understand how the income statement items can affect earnings

• Technology and design

• Sales network
• Capital expenditure/depreciation expenses know how to invest
• Interest expenses how to save money

• Taxes
• etc

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Class 2
8. Why net profits/earnings are important to a stock price

• Price earnings ratio (PER) = stock price/ earnings per share (EPS)

• Earnings per share (EPS)= net profit/ number of shares outstanding

nhất trí/ đồng lòng

• Earnings announcement: market average/consensus/expectation, earnings shock or earnings surprise

• Valuation: undervalued (undemanding)/overvalued (demanding) vs. cheap/expensive

• Relative comparison of valuations in various cases of individual companies, industries and the entire
market

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Class 2
9. How to calculate Dividend Yield

• Dividend yield; A stock's market value in relationship to its dividend amount expressed as a percentage
Pay out by using

• A financial ratio that shows how much a company pays out in dividends each year relative to its share
price. In the absence of any capital gains, the dividend yield is the return on investment for a stock.

• Dividend yield = Annual dividends per share/ Market price per share

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 Class 2
10. Comparison of dividend yield among different equity markets:

• Average dividend yield of Korean companies has been decreased to 1.37% in 2013 from 1.64% in 2011.
(Source: The Korea corporate governance institute); roughly a half of annual interest rate in Korea

• 0.53% in 2012, 1.07% in 2013 for Samsung Electronics while 0.87% in 2012, 0.84% in 2013 for Hyundai Motors;
even much lower than that of large companies in Korea

• 1.82% for India, 2.19% for Japan, 2.19% for the US, 3.08% for Germany, 3.77% for France, 3.99% for
China, 4.12% for the UK and 5.34% for Russia

• 87% of a ratio of internal reserves to net profits (formula=1-payout ratio) for Korean companies while 50-
60% for European, US and Japanese companies; Korean companies shows a reluctance in sharing profits with
existing shareholders (Source; Feb 21, 2014, Maekyung Economic)

• Increasing dividend yield for Korea may be one of options to get a better treatment to offset the Korea discount.

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 Class 2
11. How to calculate the Dividend Payout Ratio
• Pay out ratio
The amount of earnings paid out in dividends to shareholders.
Investors can use the payout ratio to determine what companies are doing with their earnings.

• For example, a very low payout ratio indicates that a company is primarily focused on retaining its earnings rat
her than paying out dividends.

The payout ratio also indicates how well earnings support the dividend payments: the lower the ratio, the mor
e secure the dividend because smaller dividends are easier to pay out than larger dividends

• Pay out ratio

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Class 2
12. Comparison of pay out ratio among global companies in different
equity markets

• 7.1% for Samsung Electronics, the lowest level among the Fortune 100 global companies
• 141% for AT&T in the US, 95%, E.On in Germany, 59% Nestle in Swiss, 54% GE in the US
• 43% China Mobile in China, 36% Indian Oil in India, 30% Toyota and 21% Sony in Japan
(Source: CEO Score, 2012 fiscal year basis)

• Is the Korean equity market less attractive???

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Class 2
13. Understanding the description of Stock Price

• A stock price is defined as the discounted value of future earnings growth.

• Stock prices can be reflected by the overall economy and the corporate earnings.
• Stock prices are said to be a leading indicator of the real economy by 6-8 months.

14. Must have your own Stock Picking Idea

• Underlying technology and its market growth
• Ability to generate recurring profit
• Top management quality
• Major share ownership structure

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Class 2
15. Must understand corporate actions which are perceived as the
shareholder-friendly policy
• Any positive actions in favor of the company which can be materially expressed in the financial
statements (e.g., SEC to cancel and write off own shares)
• Long term corporate actions in relation to ‘green revolutions’ or ‘social responsibility’
• Sound corporate governance in terms of shareholder structure
• Transparent corporate actions including accounting treatment
• Top management quality, ethics and philosophy
treat ur investor:

16. The implication of the shareholder-oriented companies

• Sustainable entity with the going assumption principle

• Actualization of profit maximization and consequent share price reflection
• Gaining a reputation in job market as a desirable company to work for
• Ability to prevent itself from a hostile take-over by a corporate raider

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