Class 1: Introduction

COMM 298 Sections 201 and 202

Introduction to Finance
Cornelia Kullmann

Today
L Introduction
L Briefly discuss objectives of the course.
What is finance?
Why study finance?

L Talk about organizational issues.

Textbook
iClickers -> registration and setting of frequency
Other important rules and regulations
The Stock-Picking Experiment

L Describe the financial system

About Me:
L Cornelia Kullmann
L Office: Henry Angus 869
L Office Hours: TBD
L Phone: 604-822-9533
L Email: cornelia.kullmann@sauder.ubc.ca
L Twitter: @FinanceProfUBC
Follow me for up-to-date information and assignment reminders.

What is Finance?
L Valuation of Future Cash Flows
For individuals (Asset Pricing)
L
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Should I buy or lease a new car?

Should I buy or rent?
Should I buy a 1-year Treasury security or a 5 year high-yield security?
When should I invest in the stock market and why does it go up and down so
much?
L Should I invest my money in a banking account or mutual fund?
L Should I invest my money in individual stocks, a portfolio of stocks, or
bonds?
L Should I buy homeowners insurance?

For corporations (Corporate Finance)

L Which long-term investment projects should a company take on?

L How should a business finance its investments?
L How to make sure a firm has enough working capital to manage everyday
(short-term) financial activities?

Why Study Finance?

L Money
Sooner or later, you will all either have or need money

L Most important course they will take at UBC- even if they dont want
to take any more finance courses.
Real life applications such as
L picking a mortgage
L deciding on whether to buy or lease a car.
L How to invest for retirement
Also helps to better understand the world around us.
L Finance rules!
Better understanding of the news.
L 2008 mortgage and banking crisis
L Euro disaster
L Financial Cliff, US Debt Ceiling

Objectives of the Course

L Part 1:
Introduce principles of asset valuation from perspective of
passive investor
Time value of money
Introduction of different financial instruments and markets
Valuation of assets with known payments
L Risk-free assets
L Risky asses

Valuation of equity securities

Modern Portfolio Theory and the Capital Asset Pricing Model
(CAPM)

Objectives of the Course Continued

L Part 2: Corporate Finance
Introduce principles of asset valuation from perspective of firm
owner and/or firm manager
Valuation of long-term capital investment projects
L What projects should you take on?
L What line of business will you be in?
L What buildings, machinery, equipment, R&D will you need?

Different forms of financing and the optimal capital structure

L Where do you get long-term financing from?
L Will you bring in other owners (raise equity capital) or borrow money (take
on debt, issue bonds)
L How will you manage everyday financial activities?
L The weighted average cost of capital (WACC)

Corporate governance (when owner is not manager)

Readings
L Required Textbook(s):
Ross, Westerfield, Jaffe, Roberts, Corporate Finance, Sixth
Canadian Edition, McGraw-Hill, 2011 (henceforth RWJR or CF)
L Or:
S. Ross, R. Westerfield, B. Jordan, and G. Roberts,
Fundamentals of Corporate Finance, Seventh Canadian
Edition, McGraw-Hill, 2010 (henceforth FCF).
L Students who plan to pursue the finance or accounting option
should buy CF as this textbook will be used in COMM 370

L Lecture Notes
I will post incomplete notes before class and complete notes after class

L Financial Press

Student Evaluations
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Midterm (30%)
Final Exam (50%)
Problem Sets (10%)
Class Participation (10%)
L Please bring name signs and iClickers to Class!

iClickers
L Every student must have an iClicker and bring it to every class!
L Make sure you register your iClicker for this course.
On Vista/Blackboard for Comm 298

L Frequency must be set to AC before each class.

L No minus points for answering question incorrectly.
L For some iClicker questions, you can talk to your neighbors, others
you should attempt to solve on your own.

Additional Requirements
L Calculators
A basic, scientific, non-graphing calculator is needed in this course.
L There is no need to purchase a financial calculator, but some students will find financial
calculators quite useful for this and subsequent courses.

Regardless of the calculator you use, you must show all formulas,
appropriate calculations and a clear understanding of each problem in
order to receive full credit on exams. Answers completed only with a
financial calculator will receive no credit.
GRAPHING CALCULATORS ARE NOT PERMITTED IN EXAMS IN
THIS COURSE

L Fill out last or next to last page of the syllabus; include photo or copy
of a photo that resembles the way you look now.
Dont hand in until you have picked a stock for the stock-picking
experiment

L Bring name signs to each class, please!

The Stock Picking Experiment (1)

L The purpose of this experiment is to give you a better understanding
of what drives stock prices as well as stock market indices.
Does your stocks price increase when the index increases or does it tend to
decrease when the market index increases?
Does it tend to increase or decrease by more than the market index or by less?

L It does not matter whether your stock goes up in value or down.

L Time permitting, we will discuss what happened the previous trading
day to the stock market and at least one of your stocks at the
beginning of each class.
L If you have any questions regarding the Stock-Picking Experiment,
email me (cornelia.kullmann@sauder.ubc.ca).

The Stock-Picking Experiment (2)

L

Find a company whose stock/equity performance you are interested in.

This should be a relatively large company
L Traded on either a US exchange
New York Stock Exchange (NYSE)
Nasdaq
L Or the Toronto Stock Exchange.

Note that some companies are traded on more than one Stock Exchange.
L Example Lululemon: Traded with ticker symbol Lulu in US and LLL.TO in Canada
Which index should you use in this case?

Choose an appropriate stock market index to which you can compare the
performance of your stock
Typically: Index for market stock trades on. Not always, though!
Canadian companys stock: S&P TSX Index or S&P TSX 60 Index for very large
companies.
US companys stock: Dow Jones Industrial Index for Blue Chip companies, the S&P
500 for larger companies, and the Nasdaq Index or Nasdaq 100 for tech companies or
relatively young companies.

The Stock Picking Experiment (2)

L Starting on the Friday the 11th of January and for the duration of the
course you should twice a week (on Fridays and Tuesdays) write
down the following information:

The date.
The closing stock price of the company you picked.
The percentage change in the stock price from the previous trading day.
The reason why the stock price went up or down (if you can find one).
The corresponding stock market indexs level and percentage change
from the previous trading day at closing.
The reason why the index went up or down.
If you pick a US stock, please write down the USD/CAD exchange rate
the first and last time you write down the other information
L

You can use the Excel Template on Vista/Blackboard or make your own.

Equity Securities
L Common Stocks (Equities, Equity Securities)
Issued by corporations in primary markets.
L Initial Public Offerings (IPOs) and Seasoned Equity Offerings (SEOs)

Represent ownership shares in a corporation.

Once issued, the shares are traded in secondary markets (e.g. stock
exchanges)
L TSX, NYSE, Amex, Nasdaq

Owners of shares might receive financial benefits called dividends.

The shareholders elect the Board of Directors
L The Board of Directors controls a corporation, i.e. oversees operations. It is
not directly involved in the day-to-day management of a corporation.
L The Board of Directors hires the firms managers, who conduct day-to-day
operations.

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Stock Market Indices

L Stock market indices are composed of stocks of many companies.
They are used as proxies for price movements of the overall market.
They are also used as a benchmark for measuring portfolio performance.

L The best known indices in the US are:

Dow Jones Industrial Index
L Composed of 30 large, publicly traded US companies (Blue Chip Companies)
L Most widely followed index, despite limitations

S&P 500 Index

L Based on common stock prices of 500 large US companies traded on New York Stock
Exchange or Nasdaq.

Nasdaq Composite Index

L Contains all stocks traded on the Nasdaq stock exchange
Based on over 3000 stocks
Includes foreign stocks
Contains a lot of technology and younger companies.
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Stock Market Indices Contd

L Canadian Indices
The S&P/TSX Composite Index
L Index of around 300 largest companies on the TSX
L Only Canadian-based companies
L Companies represented comprise about 70% of market value of all
TSX listed companies.

The S&P/TSX 60 Index

L Based on common stock of 60 largest companies on TSX

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The Financial System

Surplus Units

Financial
Markets

Deficit Units
People or firms that need
money that they do not
currently have
or
People and firms which are
willing to take on someone
elses risk for a reward

People that have money they

do not currently need
or
People that are exposed to
some risk they would pay to
eliminate

Financial
Intermediaries

Financial Intermediaries
L
L
L
L
L

Chartered Banks
Trust Companies
Credit Unions
Insurance Companies
Investment Funds such as:

Money Market Funds

Bond and Mortgage Funds
Equity Funds (Mutual Funds)
Real Estate Investment Trusts

L Finance Companies
L Central Bank
Please read textbook for more information on these financial intermediaries.

Why do people buy or sell financial assets?

To alter consumption patterns over time.

To alter consumption patterns across future states of

nature.

This is the notion of insurance or risk allocation

Why do firms borrow money or issue stock?

L They need funds to produce goods and services
L They use stocks, bonds, and loans to finance the acquisition
of the buildings, machines, R&D, and other inputs they need
in the production process.
L They have to make sure that they have enough working
capital for everyday operations.

The Role of the Financial System

L

To facilitate the transfer of economic resources through time, across

borders, and industries

To provide ways of clearing and settling payments to facilitate trade.

To pool resources and subdivide ownership in companies.

To provide price information to help coordinate decentralized

decision making in various sectors of the economy.

To allow individuals and firms manage their risk.

Transfer of resources across states of nature