This is an MBA community web site for finance and investment information, primarily for the UOP MBA/540 class "Maximizing Shareholders Wealth", taught by Prof. Dan O'Shea.

It is written by and for the benefit of the MBA students themselves.

Members can add information to help make this a valuable resource for anyone interested in Finance and Investments!

This is, in reality, your "class notebook" so please feel free to fill it up!

If you find something here is wrong... or you can edit and condense some comments to make them more readable and of better use to our class community... feel free to do so!

Reminder: You can also put a class or team photo in our gallery!

PS: Be sure to check out the "Mergers.PDF" and other attachments which can be found as links at the very bottom of this page!

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Why Invest?

• Due to inflation, in 30 years you’d need $2,427.26 to equal the purchasing power of $1,000 today.

• $1,000 kept in a savings account would grow to only $1,811.36 after 30 years, trailing the effect of inflation.

• $1,000 invested in stocks today would grow to $17,449.40 over 30 years, easily allowing you to outpace the effects of inflation over that time period.

Chart 1

Younger investors tend to stay in less risk due to the lack of knowledge.
Bonds are fearful.

The risk takers are the greedy people. Riskier stock will be more volatale, lower lows and higher highs, but a greater chance of higher returns.

Look at the difference in terms of return from different kinds of investments. If you have an investment paying 3.1% you will make nothing due to inflation. Younger people, when they invest, generally have less risk in their portfolio than they should.

Consider the T-Bill return - only making .7% return on money. That's safe!

Some people like bonds, Dan does not. They tend to be safe.

Notice the distributions, the majority of years the bond returns are negative.

Older investors should be considering the less risky investments.

A well diversified portfolio should pay well over time. Pay attention to when stocks are down, that is the time to buy.



Chart 2

The riskier investments pay better over time. The big jump is between bonds and large company stocks.

The federal government can print money and the state government cannot. U.S. Tresury makes money. What is net real rate of return if U.S Treasury bill is 3.8 and 3.1 of inflation. Meaning anual return of investment from the us treasury is .7 tenths of 1% a year. And you will have to pay taxes on that money. Volatility is realted to return. Small company stocks 16.9% - Inflation 3.1= 13.8% Interest

S&P measures large-company stocks







Chart 3

Sums up much of Ch. 10. Beta of a portfolio is the average of the beta of the investments in the portfolio.

Alpha risk relates to fund performance. A positive alpha means the fund manager is performing ahead of statistical expectation.

A negative alpha means the manager is performing less well than statistically expected.

No matter which fund you choose, there will be at least one fund with a negative alpha.
Beta is a measure of volatility (up and down), based on tradition. Also a predictor of reward.
MPT- Modern Portfolio Therory; past data but facts!

Workshop 1

The Weighted Average Cost of Capital (WACC) is used in corporate finance to measure the cost of capital for a company and is the minimum return a firm must earn on existing assets to keep its stock price constant and satisfy its creditors and owners.

There are many financial markets around the world. You can buy and sell on any of them but must report income on YOUR income taxes.

Maximizing shareholder wealth is more than just making profit. Financial managers have to set as a priority the goal of attaining the highest possible value for the firm, and not for themselves. This course is called Maximizing Shareholders Wealth and not maximizing executives wealth.

Good credit is not difficult to attain, but does require a measure of discipline. For instance, borrowing with the express purpose of achieving a higher credit worthiness may be considered a goal unto itself. Borrow from one institiution a small amount then place it in the best (safe) short term investment vehicle possible. Prior to the debt coming due, pay off the loan in full. Doing this multiple times can gain the borrower good credit. Note: This will probably cost money as it would be difficult to achieve a comparable return on investment between what a bank charges you and what you can get in a safe short term investment. Consider this the cost of bettering your credit worthiness.

All the links that are used in Dan's Blogs come from free services online.
Get a gmail address on google.com
googledocs.google.com (team assignment - can be edited at the same time with all team members).

Remember: We MUST DAZZLE him in week 6 with our presentation.

Expects to see at least (for every assignment) 3 scholarly references on the subject matter. The textbook is not a scholarly reference.

If you don't like the schools reference; you can use scholar.google.com

You can go to your local library (if you find something that you would like to use) ask the ILL (inter library loan) and they will get it for you within a couple of days. This is also free.

For week 6 you can use any resource. Ex: your brother is a stock broker and you can use him
Week 6 will be a team paper and presentation instead of individual.

Everything should be submitted in the individual forums (team log, team charter, individual paper, team paper). When you are submitting an assignment it should only have one attachment. When attaching an assignment use the same title for the subject as what he has written as the assignment title.

For week 2 assignment it would be a good idea to benchmark companies that are struggling with globalization and are into electronic components. To find out more information in regards to companies, you can go to Dan's url and click on investments, scroll down to fundamental research; then click on MSN stock wizard.

Make sure you read the world is flat. This will really wake you up!


Workshop 2

Master List of Investment Web Links

Buy index funds - they are safe and you can forget about it - let God sort it out. Vanguard least expensive. If you use an index funds you are beating 70% of finance mangers.
Because you will accept variability you are going to be paid more.
Beta - if you have no variability then Beta is (zero) 0.0. If you want to look at large company stocks and you want big variability to get high return Beta is 1.0. Something in the middle - like long term corporate bonds would be .5. if you have a beta of 1.5 than it is moving 50% more than the S&P (standard and poors) 500. If you are willing to take 50% more you will get a much higher return.
What is the correct Beta - it depends on what you want. You really don't want to go higher than 1.5. If you know your Beta you can see the long run return based on historical returns - see the average annual return chart. Measure over at least 1 market cycle which is about 5-7 years so when you look at something look at least 10 years to get a feel for the trend.
You want to aspire to a positive alpha. You can get the info on finance.yahoo. You need to know the alpha and beta of the stock ( ask your fund manager) what the (anolog)closest public fund to get the alpha and beta of the investment. you are interested in. Modern portfolio theory ( MPT) is measuring the stock by the alpha and beta.

Société Générale 7 billion lost - 40 billion fraudulently invested - 350 dump on the European stock market.

On January 24, 2008, the bank announced that a single futures trader at the bank had fraudulently lost the bank 4.9 billion euro. Jérôme Kerviel was the "rogue trader". The bank announced that it will be immediately seeking 5.5 billion euro in financing.



Berkshire stock is themost expensive per share in the world (138,400 today).

In sharebuilder.com you buy stock by dollar amount, not number of shares.

If you can buy Berkshire, you can buy anything.

Finance.google.com - the entire website is run out of India.

Fundamental analysis - quality of company - some people say this is the only way to analyze a company for investment risk.

Technical analysis - is it making money or not? - Some people say this is the only way to analyze a company.

The truth lies in the middle. Avoid dark horse companies. Even if you invest in a sound company that has problems, eventually it will come back. There's always a demand for quality.

The Wall Street Transcript is an excellent source of analyst information. A compendium of data from many brokerage firms. The problem - this is a pricey service - it's too expensive. You can get it in the library for free (call ahead). You beat them by outthinking them.

Upcoming Economic Calendar of Events - tells you ahead of time what's coming up (gov't statistical reports, etc).

Every publicly traded company issues an annual report (required to file electronically). Filed with the SEC. US domestic company report is called the 10k (10q is the quarterly update of the 10k), foreign company trading inside the US is called a 20F. Management backgrounds, risk factors, etc. Get it from the SEC website. Issued under the penalty of perjury (Sarbanes-Oxley).

The world is getting smaller. Outsourcing makes it imperative that successful people have a skill beyond a diploma.

There are many free sources of information on the web and in libraries. The Wall Street Journal is free at the UoP online library. Get back your tuition dollars. New York Times archives are also great.

Currency trading markets are huge. They also have the advantage of being open 24 hours a day. It's the most highly leveraged investement (i.e., 400:1).

Index funds are a safe way to get an average fund rate of return.

Check out Barchart.com - a company offering free financial quotes, charts and technical analysis for stock and commodity traders. It is possible that some of the sites listed at the link above may be useful in putting together a well researched project.

7/24 Class Notes by Renee Chang-

Resources:

Go to Google type in define: and word you want to define

Go to Investment Basics to on the "Investment" link from Dan's Bio
MSN Stock Research Wizard for good fundamental and technical research/analysis
Finviz.com will give you a goodTechnical Analysis

Definitions:

A Mutual fund is one investment that invest in other investments. It is good b/c it is diverse and allows you to establish risk (if not risk, no return on investment).

Do trees grow to the sky? NO. Do investment always do well, NO. Reballancing your money-move $ from high accounts (doing well) to lower accounts not doing well because even though accounts are doing well now, at some point they will not do well, and lower accounts will eventually do better. 1/3 1/3 1/3 - 2 Accounts went to 40% and one dropped to 20%. Move some of your 40% $ to the lower accounts to re-balance back to 1/3, 1/3, 1/3.

Exchange Traded fund-like a mutual fund that just like the mutual fund has several funds under it but you can buy and sell any time between 9am and 4pm

REIT- Real Estate Investment Trust- Liquid real estate. Publix's strategically bought Albertons b/c Albertsons owns the land it is on so no other grocery store can move in! You don't want non-performing assets.

2 Tpyes of Research Analysis:

1. Fundamental- Quality of Company (First, pick an investment on Fundamental Research...Is it a good company? Do you agree with what they provide/sell?.... then ask if the company's stock is going up or down and is it time to buy).
2. Technical-Just looks at stocks going up or down.

FYI's:

You can buy stock in UoP!
Always think of lifestyle (Example: Commercial for expensive vs. cheap oil filter; you can pay me now or pay me later) and ROI (Return on Investiment)

How to buy/afford Berkshire:


Workshop 3

7/31 Class Notes by Renee Chang

FYI's:

Every paper needs a APA Cover page and also 3 References. The references do not have to be cited in the text (for problems), just as long as they pertain to the topic of the problems.

Definitions:

Average Cost of Capital - Stocks are 20% Bonds are 10% 20+10=30/2=15

Options – contract that gives you the right, but not required to exercise. Come in two flavors: puts and calls. Downside is limited (can only lose what you put in) upside is unlimited. Negative to options is that they can expire. Use this if you think that a stock is going up but cannot afford it.

Call- Buy when the market is going up. The right to take stock away from someone.

Put- Buy when the market is going down

Bull-Think stock is going up

Bear- Think it is going down

Naked writer -sells stock that they don’t even have. This is extremely dangerous. Upside is limited to the price of the call and downside is unlimited!

Futures- are highly voluble and can lose your shirt. You put up $1.00 and others put in 100’s of dollars to loan you and if you go up Great! If go down it could be really bad (will have to pay others back). There is a good use for futures but not for you! Futures allow farmers to lock in the price. Kellogg’s want to keep factories loaded at all time. If there is no rice available the plant will shut down so it is important to invest in futures so they always have rice coming into the plant and cereal going out.
Exchange traded fund (ETF) is like a mutual fund, but you can exchange trade it so you can trade it at any time. Beta-volatility (how stable) greater than 1.0-1.5 Standard & Porus 500 List of the S&P 500 is the benchmark that you measure stocks by.

Net present value and capital budgeting.

REIT = Real Estate Investment Trust. Liquid real estate investment. One nice point is that they are diversified.

One nice point is that they are diversified. Read the Bear Stearns blog.

Net Present Value Incremental Cash Flows (CASH is king).

Inflation and Capital Budgeting Because of what the government did with Bear Stearns inflation will go up within the next 2 years.

With Net present value it doesn’t matter how long you have the investment for. Blended cost of capital (blended cost of stocks and bonds) average cost of money within that organization.

In this class all we care about is the cash. "Show me the money"! Sunk costs (something already spent) doesn't matter. Example a nursing major decides to switch to finance. The nursing courses that have been paid and taken will be your sunk cost because you can't get it back. Just because "we have come this far" does this mean that we should continue to throw good money after bad.

Incremental cash flows matters (give you a dollar tonight; 100 years from now the value of that dollar is not the same

Opportunity cost (you could be doing something else) matters. Side effects like cannibalism and erosion matter (taking from Peter to pay Paul)

Erosion and cannibalism are both bad things. If our new product causes existing customers to demand less of current products, we need to recognize that. Taxes matter: we want incremental after-tax cash flows.

Inflation matters... consider depreciation Highly recommend we use a decision tree Sensitivity analysis, scenario analysis, and break-even analysis.

Go to his blog in management and scroll down to 2007, click on March, find the friday march 23, 2007 - Scenarios - The Art of the Long view. Scroll down and you willfind a link that will explain "how to build scenarios". To find documents that are in the past...use the way back machine. Monte

Carlo Simulation - means figure out all the ways companies get more customers under certain circumstances. Good example of Monte Carlo simulationis @risk.

Options - contract which gives you the right but not the obligation to do something. Ex: in securities there are options on stocks.

A call option gives you the right but not the obligation to purchase that stock at a certain price, if I think the stock is going to go up. Put option is the samething but in the other direction.

A put option forces someone else to purchase a stock from me at a certain price. I would do this if I think the stock is going to go down. I can buy at $90 and make someone else purchase at $100.

Use the options clearing corporation (middle man) takes the liability if the buyer defaults. To see in the real world go to yahoo finance, click on options. If you don't understand anything about this then click on options 101 and it will explain the call options and put options.

IRR – Internal Rate of Return.


Workshop 4

Financial planning is setting goals and making financial plans that will meet those goals.

The future is uncertain, but statistical analysis can help predict. Past performance is the best indicator of the future.

A financial planning model: The ingredients.

The percentage sales model.

What determines growth? The market, the environment in which you are operating. Consumer demand, ultimately.

Manager job is to have best information sources to help make decisions about the future. For instance the internet - it will not disappear in the next 5 years. Reconceive the business model to match future needs. Going back to the railroad industry of 1950 - passenger trains, cargo - it was very big. If you were in the railroad business you might have conceived yourself as being in the railroad business, but a smarter way would be to conceive yourself as being in the transportation business - imagine other possibilities for the future.

Future studies is a discipline. Go online to the wfa.org the world futures society. They have meetings, seminars etc, all of whom synergistically work to think about the future. There are even studies out there that have already been done that can benefit us. trendwatching.com

The only certainty for the future is change. To really know what you're doing in management you must try to have vision for consumer demand.

The bet for the future is mobile phones. The US has one of the worst mobile phone environments in the world. Overseas they have excellent mobile networks and devices. Carriers in US control what you see. The future is being written now.

Release your brake - let yourself be successful. You have to try many things in life to be successful. Don't be afraid to fail - without trying you're already doing that. Information is easy and mostly free these days. Go for it.

No one can know everything that's going on with a corporation. By and large, the public does not know what's happening at the top.

Can financing decisions create value? Definitely. You want to have more effective decisions. An example. A 401k plan. Companies spend tons of money and in theory they are to motivate employees. In practice, most people don't understand them and because they aren't implemented properly they don't do what they're supposed to. They should be used to recruit and retain talented employees. It makes no sense to have less than a great 401k program.

A description of efficient capital markets. Avoid frontrunning. I know what you won't until tomorrow so the advantage is always mine.

The problem is that some people have information before others. Stockwatch is an effective method to detect insider information. There are two things to know about stock tips. They're either right or wrong. If they're right it's illegal and if they're wrong you would have lost anyway.


Workshop 5

Remember that there are three questions in corporate finance.

The first regards what long-term investments the firm should make (the capital budgeting question). What types and amounts of assets the business needs are determined by the type of business. The left hand side of the balance sheet.

The second regards the use of debt (the capital sructure question). The concept that debt is inherently a good thing is not necessarily valid. There are many reasons that a company may choose not to engage in a debt situation. Apple Computer is a good example. The right hand side of the balance sheet.

Remember, banks want a return on their money, but more importantly, they want a return OF their money.

The third is in how should short-term operating cash flows be managed? There can be a mismatch between cash inflow and expenditure in operating.

Advjusted present value approach

Flows to equity approach

Weighted average cost of capital method.

Capital budgeting when the discount rate must be estimated.

Beta and Leverage

No Tax βequity = βasset (1 + debt/equity ) Corporate Tax βequity = ( 1 + (1-Tc)Debt/equity )βunlevered firm

Options are contracts that give the investor the right to exercise a choice, but not the obligation.

Options come in call or puts.

http://finance.yahoo.com

Choose investing and options. There are numerous definitions and tools.

Calls and puts have an expiration. This is very close to simple legalized gambling.

Week 4
When you read the book - or even watch the film clip of "The World is Flat" you will think you have been sleeping and you have just woken up.
Check out prosper.com - you can lend and borrow money leaving the middle man out - no bank and you can diversify your lending.
If you come up with a solution for your final group paper and can support it it will be acceptable. Chapter outline Chapter 3
What is Financial Planning
A financial planning Model: the Ingredients-
The percentage of sales method
What determines growth -- the degree in which you can keep head count down. The goal is to run a lean company.
Everything we have been learning can be used in the team assignment. Think of outsourcing etc.
Some Caveats of Financial Planning Models

Chapter 13
13.1 Corporate Financing - Decisions and Efficient Capital Markets
13.2 Can Financing Decisions Create Value yes
you really can't tolerate inefficient people in the finance department.
What ever you are today will be different tomorrow. Change is constant and a given.
It is important to always have a plan - if this happens this is what I am going to do.
13.2 Efficient capital markets
13.3 The different types of efficiency
13.4 The Evidence
13.5 The behavior challenge to Market Efficiency

Per Prof Dan - what's the sense of investing time and money in all this stuff if no one uses it. For example @risk - if we are not using it remember someone else is. Dan says " we are citizens of the world". This is just one big globe. There is actually some dirt in the air of Tampa that comes from China!! We should all be comfortable investing all over. It's not why would you do it - its why wouldn't you do it. the most important job you have is hiring. Only hire the insanely great. Anything less than that should not be tolerated. The hiring decision is the most important. Hire some one and fire someone fully loaded is about $5000.00. Are you really insanely great at doing what you do? Don't say you are firing someone - tell them you are freeing up their future - send them to the competitor - remember you want to win. Don't give up to a winning team - be the winning team.

13.6 Empirical Challenges to Market Efficiency - Empirical means we can test it. All the changes we talk about - empirical challenges

** Check out skype - free calls all over the world

13.7 Reviewing the differences
13.8 Implications for the Corporate Finance - it should be easier to maximize shareholder wealth. You can do anything anywhere. The world is flat.

Chapter 14
14.1 Common stock - why don't we finance the entire company with stock? Because the shareholders are taking the risk but the investing public will demand a higher rate of return because the risk is higher using all stock to finance the entire company. Venture capitalist - banks etc are going to want to get a return between 30 -100% per year. This is an ivestment so there is not time to pay back a stockholder. Since they get many requests they don't really need you. So you may decide to borrow - borrowing is always cheaper. No body will want to give you a loan for 100% of the financed needs. So you can borrow some money - borrowing is dangerous because you are promising to pay back on a certain date and if you don't pay it back by that date. Pick your poison.

If you are a new investor than you would not want common stock - you will want to convert to a cumulitive perfered stock - if you miss payments you have to make up all the missed payments in arears.

Week 6 Notes by Renee Chang

Great links:

WWW.MATHWAY.COM Step by step math problems.
GOOGLE DOCS - Have Spreadsheets with financial formulas built in.

Can also use this for powerpoint presentations and add Videos too!

General Notes:

We are Prosumers, we are not only consumers we are procucers in today's society.

How to build a website blog...

Start in Google Docs
Save document
Select Share
Select Publish as a webpage
Can select the public website or RePublish

Go to blogspot.com to creat blog template

Top things to take away from this class...

10 Fundamentals of Finance:
Time Value of Money - A dollar received today is worth more than a dollar received in the future.

Cash, Not Accounting Profits, is King - Cash flows, not accounting profits, may not be the same thing.

Incremental Cash Flows - It's only what changes that counts, not sunk costs.

Managers Take Care of Themselves First - Align compensation with shareholder's interests.

Competitive Markets - Consider the effects of competition and barriers to entry, if any.

Efficient Capital Markets - The markets are quick and the prices are right.

Diversification - Some risks can be diversified away and some cannot.

Risk/Return Trade-Off - Don't take additional risk unless compensated with additional return.

Ethical Dilemmas Are Everywhere in Business - Do the right thing all the time, every time.