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FINANCE 340

This course, led by Dr. Ken Shah, focuses on financial markets, risk evaluation, and investment decisions. With a background as a trader and quantitative researcher, Dr. Shah brings practical insights into capital structure and the implications of IPOs. Students will learn to make informed personal financial decisions and evaluate corporate investment opportunities. Practical application is emphasized through a stock market game, group presentations, and self-study components. The course is rigorous and demands dedication, but offers valuable skills for successful navigation in finance.

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FINANCE 340

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  1. FINANCE 340 BUSINESS FINANCE

  2. MY BACKGROUND • NAME: Ken Shah • BORN: Bombay, India • PhD: University of Oregon • INDUSTRY EXPERIENCE: • 4 yrs trader/broker on Bombay Stock Exchange • 3 yrs quantitative portfolio management research in Portland, Oregon

  3. RECENT RESEARCH • I investigate the choice of mix of debt and equity in a firm (called capital structure) • I investigate why and how companies go public (IPOs) and how they do afterwards

  4. SO THAT I CAN GET TO KNOW YOU BETTER... • Avoid changing seats • Please bring name cards and display EVERY class • Drop by my office and introduce yourself! • Sign and return Honor Code sheet by next class • Attach your photo and tell me a bit about yourself on the Honor Code sheet

  5. COURSE OBJECTIVES • Learn about markets and securites and evaluate their risk and return characteristics • Learn how to make sensible personal financial decisions • Learn how investment opportunities are evaluated in corporations • Learn to exploit computers and Internet to your advantage in finance

  6. COURSE PREREQUISITES • ECO 271, ACCT 231; Junior standing • I will assume you have an understanding of: • Basic Algebra • Basic Statistics • Basic computers and Internet • Excel spreadsheet

  7. General Nature of Course • I am not kidding, this class is not going to be easy. It’s working with LOTS of numbers • Practice! Practice! Practice! That’s the only way you will stay ahead • To stay ahead, you will need to spend about 2 - 3 hours per week outside of class

  8. OPTIONAL TEXTBOOK • Ross, Westerfield & Jordan (RWJ), Essentials of Corporate Finance • My class notes are based on above text • Course packet (slides) at Copymart or downloaded from course website

  9. REQUIRED CALCULATOR • Financial Calculator - HP-10B or HP-17B preferred • Other calculators will not be supported • Other calculators can be used but you will be responsible for knowing how to use them

  10. Self-Study from WWW • You will be required to obtain and understand information from WWW • Details placed on webpage handout related to class topic of the week • You will be tested and responsible for knowing this material for the exam • Come prepared in class with answers to self-study questions. Maybe asked to hand-in

  11. COURSE GRADE

  12. Class Presentations • In groups of 3 students • Maximum of 10 minutes • Any finance-related WSJ article • 20% choice of article • 40% communication of important points, • 40% new information not in article

  13. Stock Market Game • Invest in stocks and index mutual fund • Follow performance using Internet and spreadsheet • Evaluate how you did at the end of quarter • Learn about risk and return!

  14. “House” Rules • Rules outlined in the syllabus • Attendance is required • No makeups, no late submissions, no exceptions • No cheating! You and I have our mutual honor code which you signed and handed in

  15. Class Participation • Participation is strongly urged • Speak up! No question is stupid • Chances are, others are wondering about the same thing - don’t be shy!!

  16. Course Outline • Intro to securities, markets, and calculating returns • Time Value of Money • Bond & Stock Valuation • Capital Budgeting • Diversification and Capital Asset Pricing Model (CAPM), WACC

  17. Class Web Page • Announcements, handouts, lecture slides all available at:http://fac-staff.seattleu.edu/kshah • Feel free to use e-mail: kshah@seattleu.edu • You must include ‘FINC 340 F06’ in subject heading of emails addressed to me

  18. Intro to Markets & Securites COMMON STOCK PREFERRED STOCK MUTUAL FUNDS

  19. Common Stock • Residual Claim • Limited Liability • Right to Vote • Elect Directors, Important Issues • Right to Dividends • Stock Dividends, Splits, Reverse Splits

  20. Preferred Stock • Fixed Dividends • Cumulative Dividends • No Votes • Limited Appreciation • Combines Features of Common Stock and Bonds

  21. Stock Value • Capital Gains • Dividends • Factors • Earnings Growth • Products & Services • Management • Competition & Economic Environment

  22. Evaluating Stocks • Book Value • Earnings per Share • Return on Equity • Payout Ratio • Annual Reports: Bal. Sheet, Inc. Stmts • Quarterly Reports

  23. Trading Stocks • Primary Market • IPOs - Selling stock for the first time • Investment banks, underwriters • Prospectus • Secondary Market • Organized exchanges and dealer networks • Trading of previously issued stock

  24. Trading Stock... • NYSE, Amex, OTC (Nasdaq) • Brokers • Full Service, Discount, Deep Discount, On-line • Dealers • Bid - Ask Spread • Liquidity

  25. Types of Transaction • Buying with Cash • Buying on Margin • Borrowing part of purchase amount from broker • Short Selling • Borrowing stock, selling, buying back later, returning borrowed stock

  26. Types of Orders • Market Order • whatever is the current price in the market • Limit Order • specify the highest price for buying • specify the lowest price for selling • Stop Loss/Gain • order triggered only at a certain price

  27. Stock Quotation • %chg YTD • 52 Weeks Hi Lo • Symbol • Div • Yld % • PE • Vol • Daily Hi, Lo, Close, Net Chg

  28. Market Indicators • Dow Jones Industrial • S & P 500 • Wilshire 5000 • International Trading • Tokyo - Nikkei • London - FTSE ‘Footsie’ • Frankfurt - DAX

  29. International Investing • Today’s markest are global. But it exposes you to: • Currency Risk • risk of converting currency back and forth • Political Risk • appropriation, nationalizations, confiscation by foreign governments

  30. Mutual Funds • Professional money managers investing on behalf of other investors • Investors buy shares of mutual funds • Shares represent a claim on the investment portfolio of mutual funds • Mutual funds can invest in stocks, bonds, real estate, gold, etc. etc.

  31. Types of Mutual Funds • Closed-end Fund • Open-end Fund

  32. Closed-End Funds • Shares are sold, and money raised only once • i.e., fixed number of shares outstanding • Investors may buy/sell closed-end fund shares on exchanges like any other company shares • Subsequent buying/selling among investors does not bring in/take out money from fund

  33. Closed-end Funds... • Shares can sell at a premium or a discount from the per share net asset value (NAV) of the portfolio (after accounting for expenses for operating the fund) • Reasons for premium/discount is not well understood

  34. Open-End Funds • Continuously issue/redeem shares to/from shareholders • Potentially unlimited # of shares • Investors buy/sell shares from the mutual fund company • Never sells at a premium or a discount

  35. Load v/s No-Load Funds • No-Load Funds: no sales commission • typically bought directly from fund mgmt company at NAV • can be bought from brokers e.g. Schwab • Load Funds: charge sales commission • sold through brokers or directly from fund • loads range around 3 to 5% - split between broker & fund

  36. Fund Expenses • Separate from sales loads • Compensation for managing the fund • Range from .2 to 2.5% • 12b-1 charges: SEC permitted use of fund assets for sales promotion, advertising, brokerage commission

  37. Fund Styles • Stock Funds • Bond Funds • Money Market Funds • Index Funds

  38. Stock Funds • Growth vs. Income • Sector Funds • e.g. Hi-Tech, Health Care, Gold etc. • International Funds • World, Europe, Asia, Latin America etc.

  39. Bond Funds • L. T. Gov’t Securities • very low risk • Municipal Securities • Tax exempt • Corporate • High-grade, Junk Bond etc.

  40. Index Funds • Passive Management • try to track performance of popular indexes • Very low expenses • Good vehicle for diversification • Available for most popular stock and bond indexes

  41. Fund Facts • Most fund managers have have a hard time beating a passive indexing strategy • No systematic difference in performance between Load & No-load funds • why pay load??? • Index funds have very low operating expenses • e.g. Vanguard Index 500: .19%

  42. PREVIEW Returns

  43. Returns • Returns are earned in 2 forms: • Dividends • Cash distribution • Capital Gains or Losses • Rise or fall in stock value • Total $ Return = Div. Inc. + Cap. Gain (loss)

  44. Measuring Returns • Dollar Returns • Percentage Returns

  45. Dollar Returns • Example:Buy 100 shares of Caterpillar at $55. Dividends over the year are $1.40. Sell the shares at 60. • Dollar Return? • % Return?

  46. ANOTHER EXAMPLE • Buy 100 shares of Microsoft at $140. No dividends are paid. Sell Shares at $131. • Dollar Returns? • % Returns?

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