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Finance Society Introduction to Finance Workshop (09.22.2011)
- 1. Introduction to Finance September 22, 2011
- 2. Agenda Introduction To Finance Presentation: Time Value of Money Discount Rates Valuation Accounting Wall Street Upcoming Events Meet the Mentors 2
- 3. Time Value of Money Introduction to Finance
- 4. Dollar Today ≠ Dollar in One Year…Why? To adjust for the opportunity cost of capital, we use Present Value FVt is the “Future Value”, i– “Discount Rate” Key Concept: Time Value of Money
- 5. The Power of Present Value You make 100k each year for the rest of your life, your discount rate is i = .05 PV = (100k/1.05)+(100k/1.05^2)+(100k/1.05^3)+… “Perpetuity formula”, PV = 100k / .05 = $2M Conclusion: Finance === Present Value!!
- 6. Understanding Discount RatesCAPM and WACC 6
- 7. Discount Rates Introduction to Finance
- 8. Discount Rate Intuition Used to discount current and future cash flows (as shown earlier) r (“interest rate”) = risk free rate + risk premium When you take home mortgage, why can’t you borrow at the risk free rate? 8
- 9. Capital Asset Pricing Model (CAPM) Gives us the rate of return on some asset (could be a stock, bond, house, etc.) Three Components: Risk Free Rate (usually 10 year), Market Return (usually S&P), and Beta (see next slide) 9
- 10. What is Beta? “The Market Price of Risk” Beta is the measure of an asset’s sensitivity to the overall market Testing Yahoo Finance: Do a regression of yearly MSFT returns on S&P Returns, the slope should be ~equal to the beta listed 10
- 11. Weighted Average Cost of Capital (WACC) Calculating the asset beta at constant debt-to-value ratio: We take into account capital structure using this formula: 11
- 12. Valuation Introduction to Finance
- 13. Valuation Why is it important? Valuation is at the heart of finance Common Terms Fair Value Intrinsic Value Two primary methods: (1) Comparables/Precedents (2) DCF Others include LBO, Replacement value, Sum-of-the-Parts 13
- 14. Valuation (cont’d) Enterprise Value Value of the operations of the company attributable to all providers of capital Enterprise Value = Equity Value + Debt – Cash Equity Value Portion of value attributable only to shareholders Equity Value = Share Price x Shares Outstanding 14
- 15. Valuation (cont’d) Comparable Company Analysis Look at how similar companies are being valued to derive a value for your company Common multiples: P/E, EV/EBITDA, EV/FCF DCF Trying to value a company today based on the cash flows it’s expected to produce in the future FCF, Terminal value, WACC 15
- 16. Accounting Introduction to Finance
- 17. Balance Sheet 17 A = L + OE
- 18. Balance Sheet (cont’d) 18
- 19. Income Statement 19 Revenue – Expenses = Net Income
- 20. Cash Flow Statement 20 Operating, Investing, Financing
- 21. How the 3 Statements Connect 21
- 22. Wall Street Introduction to Finance
- 23. Wall Street Buy side vs. Sell side Private Equity, Hedge Funds Buy side Investment Bank Sell side Private vs. Public Chinese Wall within Investment Bank Investing Banking Division Private Sales & Trading, Equity Research Public 23
- 24. The Investment Bank 24 Investment Banking Division (IBD) Industry Groups vs. Product Groups Two main purposes: Raise capital Provide strategic advice Sales & Trading (S&T) Buy/sell securities on behalf of clients Many different securities, many different desks Equities FICC Research Fundamental analysis Public (vs. IBD – private)
- 25. The Buy Side 25 People with money to invest Private Equity, Hedge Funds, Venture Capital Private Equity – buy equity in private companies Hedge Funds – buy equity/debt in public companies through complex hedging strategies Venture Capital – buy equity in early-stage companies
- 26. Wrap-Up: Present Value === Finance! CAPM and WACC are used to determine the discount rate in valuation Financial statements allow us to analyze companies Valuation is simply a way of valuing a company or asset Wall Street is more complicated than it seems
- 27. Upcoming Events 27 9/29/2011: Networking 101 Workshop 10/6/2011:Morgan Stanley Presents: What is IBD 10/13/2011: Lazard: Introduction to Restructuring 10/20/2011: Credit Suisse: The IPO Process Special Event 9/30/11: Tour of Wall Street
- 28. 28 Meet the Mentors!
Notas del editor
- Concept of opportunity costs – IMPORTANTWrite out the formula
- Derive the perpetuity formula
- Promote the finance fieldPrepare our members forthe various career opportunitiesWhether it be on the sell-side doing IB, S&T, or ResearchOr perhaps on the buy-side doing PE or HFConnect you with real-world professionals to share industry knowledge and experienceThe speakers that we will have come in are guys that are working in those very same jobs that most Stern students desire, so we will provide you with a great opportunity to learn firsthand what the different jobs on Wall Street are really likeBring together students with similar interests at all levelsThis is a society for people interested in finance, and we bring together people from every year – freshman through seniors This all sounds like a bunch of bullshit, but at the end of the day, we’re going to provide you with the necessary tools, resources, knowledge, support system to help you succeed in whatever career path you chooseBasically, we’re going to prepare you as best we can to get a job on Wall Street
- Something new that we’re doing this year (or rather much improved)There will be an application for the mentorship program, which will go out shortly (so check your emails)We’re going to partner you with some of the superstars of the senior classGuys (and girls) who have worked in Investment Banking, Sales & Trading, and Equity research at places like MS, GS, CS, and JPMOne thing that I think helped me immensely was having friends who were older than me that had gone through the processThey helped me with basically everything, from what to write in an email to how long I should wait before following up with someoneAnd come spring semester, for you juniors, they helped me get through interviews by doing mocks, and lots of other thingsWe’re going to try to do the same thing for you guysMentors will hopefully help you with all of those thingsResume, cover letter helpNetworking helpEven possibly passing along a couple of internship opportunities that they had when they were freshmen and sophomoresAnd when you guys are going through OCR, the seniors who will be your mentors will also more likely than not be on their schools recruiting teams picking resumesIn the Fall, the mentorship program will not be open to freshmen, but we will be opening it up in the Spring (so freshmen stay tuned)
- Something new that we’re doing this year (or rather much improved)There will be an application for the mentorship program, which will go out shortly (so check your emails)We’re going to partner you with some of the superstars of the senior classGuys (and girls) who have worked in Investment Banking, Sales & Trading, and Equity research at places like MS, GS, CS, and JPMOne thing that I think helped me immensely was having friends who were older than me that had gone through the processThey helped me with basically everything, from what to write in an email to how long I should wait before following up with someoneAnd come spring semester, for you juniors, they helped me get through interviews by doing mocks, and lots of other thingsWe’re going to try to do the same thing for you guysMentors will hopefully help you with all of those thingsResume, cover letter helpNetworking helpEven possibly passing along a couple of internship opportunities that they had when they were freshmen and sophomoresAnd when you guys are going through OCR, the seniors who will be your mentors will also more likely than not be on their schools recruiting teams picking resumesIn the Fall, the mentorship program will not be open to freshmen, but we will be opening it up in the Spring (so freshmen stay tuned)
- Something new that we’re doing this year (or rather much improved)There will be an application for the mentorship program, which will go out shortly (so check your emails)We’re going to partner you with some of the superstars of the senior classGuys (and girls) who have worked in Investment Banking, Sales & Trading, and Equity research at places like MS, GS, CS, and JPMOne thing that I think helped me immensely was having friends who were older than me that had gone through the processThey helped me with basically everything, from what to write in an email to how long I should wait before following up with someoneAnd come spring semester, for you juniors, they helped me get through interviews by doing mocks, and lots of other thingsWe’re going to try to do the same thing for you guysMentors will hopefully help you with all of those thingsResume, cover letter helpNetworking helpEven possibly passing along a couple of internship opportunities that they had when they were freshmen and sophomoresAnd when you guys are going through OCR, the seniors who will be your mentors will also more likely than not be on their schools recruiting teams picking resumesIn the Fall, the mentorship program will not be open to freshmen, but we will be opening it up in the Spring (so freshmen stay tuned)
- Something new that we’re doing this year (or rather much improved)There will be an application for the mentorship program, which will go out shortly (so check your emails)We’re going to partner you with some of the superstars of the senior classGuys (and girls) who have worked in Investment Banking, Sales & Trading, and Equity research at places like MS, GS, CS, and JPMOne thing that I think helped me immensely was having friends who were older than me that had gone through the processThey helped me with basically everything, from what to write in an email to how long I should wait before following up with someoneAnd come spring semester, for you juniors, they helped me get through interviews by doing mocks, and lots of other thingsWe’re going to try to do the same thing for you guysMentors will hopefully help you with all of those thingsResume, cover letter helpNetworking helpEven possibly passing along a couple of internship opportunities that they had when they were freshmen and sophomoresAnd when you guys are going through OCR, the seniors who will be your mentors will also more likely than not be on their schools recruiting teams picking resumesIn the Fall, the mentorship program will not be open to freshmen, but we will be opening it up in the Spring (so freshmen stay tuned)
- Valuation is the at the core of what you do in financeYou are always trying to put a value on things in the market, whether it be trading a stock (based on if it’s under/overvalued), advising a company on whether or not to acquire another company, or giving your public view on a particular companyTwo methods – in practice, you’ll use a combo of both
- Question – So, say you’re an investment banker. When your MD comes up to you and says, “what’s the valuation for the company?” what are you going to say?The most commonly cited metric (market cap) gives you the value of the company’s equity. When your looking at the total value of a company, your looking for its enterprise valueQuestion – Does everybody understand all of the components of EV? Think of it as the price a buyer would have to pay to acquire another company.Why deduct cash?
- CompsWhy EV/EBITDA, why not Market Cap/EBITDA or EV/Net incomeConsistency (apples-to-apples) (full company to full company or stockholders to stockholders)
- Give example of a transaction: e.g. increase in sales means increase in cash, decrease in inventory, increase in OEBalance Sheet is also a statement of financial position, shows the financial status of a firm at a particular instant in time; it’s a snapshot of the firmAssets: economic resources that the company expects to help generate future cash inflows, or reduce future cash outflowsLiabilities: economic obligations of the organization to outsiders e.g. debt that is owed to a bankOE: owners’ claim on the organization’s assets. Because debt holders have first claim on the assets, the owners’ claim is equal to the assets less the liabilities
- This is an example of a firm’s balance sheet; shows everything that the firm owns.Most important thing about the balance sheet IT MUST BALANCE!
- An income statement is a report of all revenues and expenses pertaining to a specific time periodNet income is the famous bottom line – the remainder after deducting all expenses from revenuesPretty straightforward but important; essentially we start off with revenue from sales and deduct all expensesExpenses might not be as direct, for example depreciation expenses are cash based or non-cash basedDepreciation is the systematic allocation of the acquisition cost of long-lived assets to the expense accounts of particular periods that benefit from the use of the assets
- Page 184,200The statement of cash flows reports the cash receipts and cash payments of an entity during a particular period and classifies them as financing, investing and operating cash flows.Operating – transactions that affect the purchase, processing and selling of a company’s products and servicesInvesting – how to use capital e.g. acquiring or disposing PPE Financing – transactions that obtain resources for example by borrowing money The statement of cash flows show the performance of a company over a period of time.It focuses on the change in non-cash accounts to explain why the level of cash increased/decreased over a period. Cash is the most objective statementThe lifeline of a company
- http://www.dummies.com/how-to/content/connecting-the-income-statement-and-balance-sheet.htmlhttp://www.dummies.com/how-to/content/connecting-balance-sheet-changes-with-cash-flows.htmlBig Picture: IS and CFS fill in the ‘gaps’ between 2 successive BSYou can think of the income statements as filling in the gaps between balance sheets. The balance sheets show the financial position of the company at discrete points in time and the income statements explain the changes that have taken place between those points. CFS is similar to the income statement, but it delivers a more objective perspective all items are cash-based.Income statement shows how operating activities produce changes in retained earnings, while the statement of cash flows details the changes in the cash account. CFS is important. It is the lifeline of the firm! Firms need cash.
- Buy side vs. Sell sideBuy side is investors (people with $$$)Sell is side those who help investors do things with that money (i.e. investment banks)IBD – help companies/PE shops raise capital or buy/sell companiesS&T – help investors buy/sell different products (stocks, bonds, etc.)Research – help investors make better investment decisions on buying/selling (similar to Equity S&T – often times, S&T will use an Equity Research report as a reason for why their client should buy a stock)Concept of the Chinese WallPrivate IBDHave information that is not in the public sphereEx. Management financial projections – They might release bits and pieces in the press (which becomes public), but often times when they are doing a deal they will give their bankers there full and detailed estimates of their companyPublic S&T, ResearchHave the same information that you and me haveThey make their bets and do their research based off of K’s and Q’sDoes everyone know what I mean by K’s and Q’s?
- IBDIndustry (Coverage) vs. ProductsIndustry groups cover an industry (duh)Ex. Energy, Metals/Mining, Consumer & Retail, Technology/Media/& TelecomThey operate as covering clients and whatever needs those clients have (irrespective of the product – whether that be a debt or equity raising, issuing a dividend, or an M&A situation)Product groups cover a specific productBy product I mean M&A, Equity Issuance (Equity Capital Markets), Debt Issuance (DCM)Ex. M&A, ECM, DCM, Leveraged Finance, Financial Sponsors (sort of)They do not cover clients, but when an industry group suggests that a company do an M&A deal, often times the M&A group will execute the dealSome places have groups that do both (ex. Goldman, MS Media/Comm)The groups constantly work together, as both need each other and have an expertise in a certain area (whether it’s knowing the Oil & Gas space cold, or knowing how to execute an M&A transaction)Two main things that investment bankers do(1) Help companies get moneyHelp them do it in the best way possible (debt vs. equity – fundamental question of corporate finance)(2) Help companies figure out how to best use that moneyM&A (buying a company, selling itself, divesting assets)Also, restructuringKind of goes under bothHelp companies who are in financial distress (aka can’t pay their bills/debt) work out a way to easy their bill payments and get back to profitability (through debt restructuring, divesting assets, etc.)S&TI didn’t do S&T, but I’ll tell you what little I do know about itBuy/sell securities on behalf of clientsDistinction from prop trading – they use the firm’s money to buy/sell securities to make profits for themselvesS&T make money from fees (commission, spread)Market making – guarantee you will provide a bid/ask price if clients ask for itProviding liquidity!Diff securities = diff desksFICCEquitiesResearchJust as there are many different products (equity, fixed income, currencies), there are research analysts that cover those productsWrite very in-depth reports (much more in-depth than banking) and publish them for clientsOften times, their clients are the same clients as S&T and IBDBanking uses ER reports all the time in their own modelsDistinction: Public analysis of companies (vs. private – IBD)
- Buyside – people with money (the client)PE, HF, MF, VCPE – buy equity in private companies, or if the company is public, buy the company whole and take it privateEx. KKR, Blackstone, TPG, CarlyleSide note: These guys do more than just PEHF – buy stocks, bonds, derivativesHedge (obviously)Ex. Soros, SAC Capital, Moore Capital, your very own PaulsonPaulson bet on the mortgage market one year, gold/different stocks the next year, etc.)VC – buy equity early-stage companiesPE and VC are similar; PE buys more established companies (ex. Stable cash flows, mature), VC buys companies that are just starting up or need new capital to fund growth (again, because they are young)Ex. Accel Partners, Union Square (Foursquare, Tumblr, Twitter, Zynga – social media focused)