Please find attached the slides for the course of Principles of Corporate Finance (Prof.ssa Ivashkovskaya)

- T1 cor finance and cor analysis Turin2012

- T2 cap structure part1

- T3 cap structure part2

- T4 WACC Turin2012

- HOMEASSIGNMENT

- T5 VALUE

- T6 PAYOUT POLICY FIN

Prof Helena van Zyl (D.Com.) - Director:  Business School
University of the Free State - South Africa

 

1.            GENERAL ORIENTATION

Numerous factors and variables influence the international and national investment environment. However, not all these factors and variables have the same amount of influence on the investment environment. The problem for asset managers and investors is to distinguish between important and less important information that can influence the investment environment, and eventually investment decisions. Richard Bernstein refers to the less important information as “noise”.

Factors influencing the investment environment to be considered are the condition of the global village including the American economy, the level of American interest rates, the Chinese economy, trade relations between America and China, the level of local interest rates, the value of the CURRENCY, conditions in the foreign exchange markets, profit warnings by companies, outcomes of elections, statements by politicians and business leaders, etc.  All these factors impact on local investment conditions and by implication on companies.The question is how to evaluate and interpret these factors when taking investment decisions.  Apart from analysing macroeconomic factors, company-specific factors must also be analysed, e.g. the quality of management, profit records, business strategy, etc.  Eventually all relevant information is used to compile an efficient investment portfolio.

The aim of this course is to provide students with a theoretical and practical basis necessary to understand the international and local investment environment in order to take informed investment decisions and even to compile and manage an investment portfolio.

However, it is important to keep in mind that theoretical knowledge is not sufficient to get a hold on this field of study.  READ and once again READ, is of the utmost importance to equip oneself to be in a position to argue and debate investment issues, and to apply the available information and knowledge. You may also visit the following websites, e.g.:

(1)          http://www.reuters.com
(2)          http://www.cnnfn.com
(3)          http://www.wsj.com
(4)          http://www.ftmarketwatch.com

Remember not to read only economic and financial news.  It is a good habit to read magazines such as The Time and The Economist as well.  Other factors such as political events, announcements and other factors also influence the investment world.  Strange factors can have an impact on the financial markets, e.g. nature disasters, the results of soccer and rugby matches, etc.  Markets are ruled by sentiment more than often, ignoring underlying fundamental factors.  It is very difficult to measure the impact of sentiment on the financial markets.

 

2.            STUDY MATERIAL

2.1         Prescribed study material

Jones, C.P.  2010.  Investments:  Analysis and Management, 11^th ed. New York:  John Wiley.

NB: Study material will be made available with the commencement of classes on 10 December 2012.

 

2.2         Optional literature

Bernstein, R. 2001. Navigate the Noise. Investing in the New Age of Media and Hype. New York: John Wiley & Sons.

Graham, B. 2006. The Intelligent Investor. Revised ed.New York: Collins.

 3.            MODULE OUTLINE

The course consists of three sections, namely:

Section 1:     Investment concepts and portfolio theory

• Background
• Important investment concepts
• Return and risk
• Portfolio theory
• Portfolio selection
• Asset pricing models

Section 2:     Security analysis

• Share valuation
• Fixed income securities
• Market efficiency
• Fundamental analysis
• Technical analysis

Section 3:     Investment management

• Portfolio management
• Investment performance

 

4.            ASSIGNMENTS

You will be required to compile and manage a share portfolio.  You are supposed to use the top-down approach when compiling the share portfolio. (The top-down approach will be explained in class).

The portfolio must be managed actively. Active management does not necessarily imply buying and selling constantly, but to closely keep track of your portfolio. All transactions must be motivated, in other words, you must give reasons for your portfolio decisions.

When compiling your portfolio a fictitious amount of EUR100 000 must be used.  The portfolio must consist of preferably no more than five shares.  Only invest in ordinary shares listed on the local stock exchange.  For simplicity reasons, you are not allowed to invest in warrants, preference shares, bonds, unit trusts, etc.  (ONLY ORDINARY SHARES).

The interim report will give information on the interim performance of your portfolio.  Remember to motivate all the changes you have made to your portfolio.  The length of this report will be three pages. The following criteria will be used for the marking of the second interim reports:

• Technical appearance                               -           15%
• Outlay of portfolio                                       -           15%
• Discussion of performance of portfolio      -           20%
• General discussion and motivations          -           50%

The submission date for the first report is 14 December 2012.

The final report must be submitted on 2 January 2013 at vanzylh@ufs.ac.za   The objectives of this report are to:

(1)          Give you exposure to the real investment world, especially with regard to shares.
(2)          Sensitise you for all the factors (e.g. economic factors, political factors and market sentiment) influencing the performance of investments.
(3)          Start developing the skills how to approach the construction and management of an investment portfolio.

The following topics must be covered in this report:

(1)          A discussion of the international and local investment environment indicating the impact thereof on your portfolio.
(2)          A summary of all the transactions executed, as well as the reasons for the changes.
(3)          An appendix indicating the daily price movements of all the shares in the portfolio.
(4)          A comprehensive discussion/evaluation of one of the companies included in the portfolio.
(5)          An evaluation of the performance of the portfolio.

Use your own initiative and creativity with this report.  The length of the final report must be at least 10 pages typed, 1½ line spacing.  Clarity and grammar will also be considered in marking the assignment. All requirements for submitting an assignment, such as references and a list of resources are required, amongst other requirements. All assignments (reports) should be submitted electronically at vanzylh@ufs.ac.za

Enjoy the assignment and consider it as a challenge.   Good luck!

 

5.            ASSESSMENT

Assessment will be based on an interim report and a final report. The final mark will be calculated as follows:

Interim report                        50%
Final report                           50%

 

6.            SUMMARY OF SUBMISSION DATES

Interim report                       -           14 December 2012
Final report                          -           2 January  2013

 

SECTION 1:     INVESTMENT CONCEPTS AND PORTFOLIO THEORY

1.            INTRODUCTION 

Section 1 gives the background to sections 2 and 3.  After completing this module you should be in a position to understand the different concepts with regard to investments and securities markets.  The importance of risk and return, and the relationship between risk and return will be reviewed.  Furthermore you are introduced to the theory necessary to build a portfolio, namely the Markowitz Portfolio Selection Model and the Capital Asset Pricing Model (CAPM).  The principles used to compose portfolios are explained by these two models.

2.            SECTION OBJECTIVES 

By the end of this section, you should:

• Have reviewed the definitions and terminology with regard to investments
• Describe the investment decision process
• Have reviewed the role of investment companies in the field of investments
• Be able to distinguish between the different types of securities markets
• Explain the relationship between return and risk
• Build a portfolio using the Markowitz Portfolio Selection Model
• Use alternative methods to the Markowitz Model in order to obtain the efficient frontier
• Apply all the facets of CAPM when compiling an investment portfolio
• Describe the Arbitrage Pricing Theory (APT) with regard to security pricing

3.            STUDY UNIT 1 

3.1         Prescribed reading material

Jones, chapters 1 – 5

3.2         Objectives

Once you have completed the study unit you should be able to:

• Define an investment
• Distinguish between financial and real assets
• Describe the investment decision process
• Explain the trade-off between risk and return
• Identify the different risk and return concepts
• Incorporate the relationship between return and risk in investment decisions
• Distinguish between security analysis and portfolio management
• Distinguish between direct and indirect investing
• Incorporate the different indices in managing an investment portfolio
• Explain the use of margin
• Define short sales

4.            STUDY UNIT 2 

4.1         Prescribed reading material

Jones, chapters 6 and 7

4.2         Objectives

Once you have completed the study unit you should be able to:

• Differentiate between value and return
• Describe the components of return
• Incorporate exposure to risk when compiling an investment portfolio
• Identify the different sources of risk
• Calculate total return for bonds and shares
• Distinguish between an arithmetic mean and geometric mean
• Explain the influence of inflation on return
• Use the standard deviation to measure risk
• Distinguish between compounding and discounting
• Use probability distributions in order to deal with uncertainty
• Quantify and measure risk
• Measure a portfolio’s expected return and portfolio risk
• Apply diversification as basis for portfolio management
• Distinguish between the different types of diversification
• Differentiate between the correlation coefficient and covariance
• Describe the relationship between the correlation coefficient and covariance
• Calculate portfolio risk referring to the model of Markowitz
• Define an efficient portfolio

5.            STUDY UNIT 3 

5.1         Prescribed reading material

Jones, chapters 8 and 9

5.2         Objectives

Once you have completed the study unit you should be able to:

• Use the Markowitz Portfolio Selection Model to construct a portfolio
• Integrate the concepts of  the efficient frontier and an optimal portfolio
• Describe alternative methods to obtain the efficient frontier
• Apply asset allocation
• Integrate the effect of borrowing and lending possibilities when compiling a portfolio
• Describe the separation theorem
• Distinguish between the capital market line and the security market line
• Estimate beta
• Evaluate the role of beta in portfolio management
• Construct an optimal portfolio using Sharpe’s Portfolio
• Describe the main characteristics of Arbitrage Pricing Theory briefly
• Interpret a yield spread

 

SECTION 2:    SECURITY ANALYSIS 

1.         INTRODUCTION

Section 2 deals with two of the most important analysis processes in the field of investment management, namely fundamental analysis and technical analysis.  These two methods are used to analyse the investment environment in such a way that portfolio decisions could be made eventually. Furthermore, you should be comfortable with the characteristics of shares and bonds, as well as the different valuation processes in this regard.  You will also be exposed to the importance of market efficiency in the investment environment. After completing this section you should be in a position to apply the top-down approach (fundamental analysis) consisting of firstly, an economic analysis, secondly, an industry analysis and thirdly, company analysis.  Furthermore, you will know how to interpret price movements by using technical analysis in order to take investment decisions.

Apart from security analysis, this section will introduce you to derivative markets and securities.

2.         SECTION OBJECTIVES

Once you have completed the section you should be able to:

• Analyse shares
• Value ordinary shares and how to use the investment strategies with regard to ordinary shares
• Define the concept of market efficiency
• Use fundamental analysis to evaluate investment opportunities
• Interpret how the economy influences the share market
• Apply industry analysis
• Use company analysis as the last step of the fundamental analysis process
• Value fixed income securities
• Use technical analysis to evaluate investment opportunities

3.         STUDY UNIT 4

3.1         Prescribed reading material

Jones, chapters 10, 11 and 12

 

3.2         Objectives

Once you have completed the study unit you should be able to:

• Explain the present value approach as applicable to shares
• Describe the different versions of the dividend discount model
• Apply the P/E approach to the valuation of shares
• Interpret and apply the required rate of return when investing in shares
• Distinguish between asset allocation and security selection
• Describe the different passive and active strategies with regard to the management of a share portfolio
• Identify the relationships between the most important economic variables and the share market.
• Explain why the share market is a leading indicator of the economy
• Describe the different forms of market efficiency
• Identify the implications of the efficient market hypothesis
• Define a market anomaly

4.         STUDY UNIT 5

4.1         Prescribed reading material

Jones, chapters 13, 14, 15, 16, 17 and 18

4.2         Objectives

Once you have completed the study unit you should be able to:

• Identify the most important determinants of share prices
• Use the business cycle to make forecasts of the share market
• Define an industry
• Apply the industry life cycle in order to analyse industries
• Describe the qualitative factors influencing the analysis of an industry
• Distinguish between the different types of industries
• Identify the roles of the balance sheet and income statement with regard to company analysis
• Explain the problem with reported earnings for the fundamental analyst
• Identify the effect of earnings surprises on share prices
• Use the P/E ratio in the investment decision process
• Define all the concepts required for  bond valuation
• Passive and active management strategies applicable to bond portfolios
• Interpret technical analysis
• Distinguish between the market-related, price-related and volume-related technical instruments signals.

 

SECTION 3:    MODERN INVESTMENT THEORY AND INVESTMENT MANAGEMENT

1.         INTRODUCTION

How to manage a portfolio is dealt with in this section.  The most important component of portfolio management is the measurement of performance.  Performance depends largely on market timing and security selection (stock picking).

2.         SECTION OBJECTIVES

Once you have completed the section you should be able to:

• Apply portfolio management as a process
• Formulate an appropriate investment policy
• Evaluate portfolio performance
• Use return and risk considerations when measuring performance
• Analyse the contribution of market timing and security selection to the success of portfolio management

3.         STUDY UNIT 8 

3.1      Prescribed reading material

Jones, chapters 21, 22 and 23 

3.2       Objectives

Once you have completed the study unit you should be able to:

• Describe portfolio management as a process
• Formulate an appropriate investment policy for institutional and individual investors
• Apply asset allocation when constructing a portfolio
• Identify the reasons for probable adjustments to an individual’s investment portfolio
• Describe the framework for evaluating portfolio performance
• Define the different risk-adjusted measures of performance
• Use benchmarking
• Explain the contribution of market timing and security selection to the performance of an investment portfolio