A Financial title is a property title (share of a company) or of a credit or obligation with standardized characteristics and rights (each one for a given issue having the same nominal amount, the right to the same type of dividends, quoted on the same line on the bag, etc.).
financial-securities-concept-characteristics-classes-and-valuation1.1 Issuance of Financial Securities
1.1.1 What is a Financial Title?
A Financial title is a property title (share of a company) or of a credit or obligation with standardized characteristics and rights (each one for a given issue having the same nominal amount, the right to the same type of dividends, quoted on the same line on the bag, etc.).
A title is a commercial document in which a private patrimonial right is incorporated, so that the exercise of the right is legally linked to the possession of the right. It is also a credit content document in which a literal and autonomous right is incorporated. The basis of the regulatory body referring to financial securities in our country is made up of three fundamental laws:
- Securities Law (Law 27287 and complementary).
- General Law of the Financial and Insurance System (Law 26702 and complementary ones).
- Organic Charter of the BCRP (Decree Law 26123 and complementary ones).
1.2 Fixed Income Securities
A company wants to use a different source of resources, which collects money from the market (people or other companies that want to invest) and agrees to pay each of the participants a fixed fee for the money they contributed to the company. This way of getting money from the market is called bond issuance.
A bond is a promise to pay, a "promissory note" given by the issuer of the bond (who "takes" funds) to the buyer of the bond (who "lends" funds)
It is a financial asset that gives the investor the right to receive the repayment of capital and interest from the issuer in accordance with the provisions of the Issuance Conditions.
1.2.1 Features
Bonds have different characteristics from shares because their purpose is to obtain resources for the development of a project and then return it with certain interests without allowing the people who invested to own part of the company.
The characteristics of the bonds are as follows:
• They have a duration determined by the company that issued them.
• The return of the principal and the interests of the loan (investment) is made through coupons, the number, amount and payment dates of which are established by the issuing company.
• The interest earned on the loan made is also determined by the issuing company.
• The bond can be sold by the investor (the one who receives the coupons) before the repayment of the loan (investment) and the interest (profit) have been completed to another investor who wishes to buy it. This new investor will pay an amount of money to the previous investor and now this new investor will receive the coupons.
1.2.2 Classes of Titles
• By Interest
Rate - FIXED interest rate.
Only.
Increasing (“Step up”).
- FLOATING interest
rate Reference rate directly.
Reference rate + "plus".
• Full amortization
at maturity. ("Bullet").
Partial amortizations. The fees can be the same, or different.
• With grace period
• With interest capitalization.
• Zero Coupon
They pay nothing until maturity and are issued at a discount
Classification of Bonds according to their degree of risk, by the three most important Risk Classifiers.
1.2.3 Valuation Process
The value of any Asset is based on the present value of the CFs that that Asset is expected to produce. In the case of a bond, CFs consist of interest payments made over the life of the bond plus a return on the amount of principal borrowed, generally the par value, when the bond matures.
Bondholders may incur capital gains or losses, depending on whether interest rates rise or fall after the bond has been purchased.
Any given change in current interest rates has two separate and opposing effects on bondholders, 1) it changes the current values of their portfolios (interest rate price risk) and 2) it changes the rates of return. to which the CFs from their portfolios can be reinvested (risk of the reinvestment rate of the interest rate). The longer the maturity of a bond, the greater its price changes in response to a given change in interest rates.
In other words, the price is equal to the sum of its Cash Flow discounted by a rate corresponding to the risk of the issue.
The formula to calculate the price of a bond, which uses the concept of present value (PV) is:
1- As long as the current interest rate is equal to the coupon rate, a bond will be sold at its par value. Typically the coupon rate is set equal to the interest rate in effect when a bond is issued and therefore it is initially sold at par.
2- Interest rates change over time, but the coupon rate remains fixed after the bond has been issued.
3- Whenever the interest rate is higher than the coupon rate, the price of a bond will decrease below its par value. Such a bonus is known as a premium bonus.
4- Whenever the interest rate is less than the coupon rate, the price of a bond will rise above its par value. Such a voucher is known as a discount voucher.
5- The market value of a bond will always approach its par value as its maturity date approaches, as long as the company does not go bankrupt.
Pricing of a bond such as a Zeros portfolio.
To determine the price of a coupon bond, we will think of it as a collection of zero coupon bonds, so we can express the price of a bond as
The Law of One Price tells us that if two Assets have the same cash flow, the price must be the same, otherwise there would be arbitrage opportunities that would eliminate this discrepancy.
In the following numerical example we see the procedure in more detail.
Example: Suppose the following data for five bonds:
The objective is to determine the price of Bond 5.
The associated cash flows are:
With this information we can determine the discount factors as follows, 103d1 = 99.5169 therefore d1 = 0.966184
103d2 + 3d1 = 98.1139 therefore d2 = 0.924421
105d3 + 5d2 + 5d1 = 102.072 therefore d3 = 0.882081
102d4 + 2d3 + 2d2 + 2d1 = 91.3698 therefore d4 = 0.841416
The implicit yield in the discount factors expresses the rate at which you can invest or borrow for that investment horizon.
So the price of Bond 5 is:
B5 = 6d1 + 6d2 + 6d3 + 106d4 = 105.8262.
The basic valuation criterion is to replicate the payment of the Asset in question, building a synthetic portfolio of other assets. Invoking the absence of arbitrage opportunities, we obtain the price of the Asset that we want to value. If the market price of Bond 5 were different from 105.8262, there would be an arbitrage opportunity.
To build this portfolio we replicate the cash flow of the bond, then
102 × 4 = 106
105 × 3 + 2 × 4 = 6
103 × 2 + 5 × 3 + 2 × 4 = 6
103 × 1 + 3 × 2 + 5 × 3 + 2 × 4 = 6, where xi represents the amount of bond i necessary to replicate the cash flow of Bond 5. It can be verified that
99.5169 × 1 + 98.1139 × 2 + 102.0715 × 3 + 91.3698 × 4 = 105.8262
Note that the yield of a coupon bond in general is not the same as the yield of a zero with the same maturity. This is because the coupon bond naturally pays coupons before maturity, and they are discounted at the rate implicit in the discount factor for each coupon, which does not have to coincide with the rate implicit in the discount factor of the principal at maturity.. For example, if the rate structure implies higher discount rates for longer terms, the coupon bond will have a lower yield than a zero of equal maturity.
1.3 Equity Securities
When a certain company wants to raise capital one of the options it has to do so is by issuing shares. There are other ways to raise capital, but let's focus now on issuing shares or securities.
In this way, the company gets capital without having to be committed to returning or repaying those funds to whoever puts the money, and therefore without acquiring a debt. By buying them, those who invest capital in them become new owners of a part of the company.
Investors expect their capital to appreciate more and more as the company grows. The mechanics are simple: if the company's profits and finances grow healthily, so will its shares, and the value they represent. And to the same extent that the profitability of stocks increases, their price will also tend to rise.
For that reason, the general trend among investors is to look for companies whose income tends to grow. Let's say that the good performance of a company causes it to earn $ 1.80 per share, and that the book value of each share is $ 12. That means that the return obtained by the investor per share is 15%, a not inconsiderable proportion today when compared to the interest that can be earned by having the money in a savings account or even if a Certificate of Deposit is purchased. or a Treasury bond, whose yield percentages are much lower.
Also, some stocks pay dividends, usually once a year. However, not all pay dividends and focus all their income on growing the value of the stock.
1.3.1 Features
1.3.1.1. Regarding Liquidity:
The liquidity of a share is related to the greater or lesser ease with which any investor can buy or sell these papers on the market. Liquidity is a relative concept, since it cannot be clearly established when a paper is liquid or not, however, it is possible to establish comparisons of the degree of liquidity between different actions, through some parameters, such as:
• Amounts traded
• Presence (transaction days in relation to the total business days of the period)
• Turnover (shares traded in relation to the total outstanding).
Thus, stocks with high levels of transaction, presence and turnover will be more liquid than others with more modest levels.
In periods of great stock market dynamism, the liquidity of the shares tends to accentuate, especially that of those companies whose capital is distributed among a considerable number of shareholders.
1.3.1.2. About the Return:
The return on a share comes from the dividends received and the capital gains generated by the price differences between the time of purchase and sale.
Dividends depend on the results of the company and to the extent that these are positive and permanent, the shareholder will be able to have a stable flow of dividends over time.
It is important to bear in mind that in a healthy economy, the returns of a share will always be greater than those of other alternatives, such as fixed income instruments, for example, since the risks involved in each alternative are different.
1.3.1.3. Regarding Risk:
Any investment in the stock market carries the risk problem implicit, especially if it is an investment in the stock market.
Share prices are essentially variable, and can rise or fall according to the behavior of a series of factors of a political, economic, financial nature, etc. Expectations play a fundamental role in price volatility and in many cases, when these expectations are transferred from the personal to the collective level, they shape the positive or negative trends observed in the market.
Investing in stocks means assuming a risk that in one way or another must be compensated so that resources are not diverted to other safer alternatives that impede the financing of companies through this system. The key element that allows an investment in shares is the profitability or expected return.
The higher the risk assumed, the greater the return that must be required, that is, high risks are penalized with high rates of return required.
1.3.2 Types of Equity Securities
1.3.2.1. Capital Share or Common Share
The history of the stock dates back to the first Favercham Oyster Fishery Co., which issued titles to the company in 1,198. At that time, there was great interest in trading with the new territories, but this activity was extremely risky and expensive. The voyages could take several years and the certainty that the ship could return was greatly reduced. Even rich people did not want to invest even when the returns offered were very high.
This was the origin of the "joint" companies that allowed the adventure to be shared by a large number of people. If the ship did not return, the loss was lower and allowed investors to spread this risk among various "trips or adventures."
This shows us the similarity with current companies that are registered or listed on a stock exchange. In the first place, the property is separated from the management of the company (or the trip) although the owners can comment or discuss the route of the trip or the objectives that are sought with this company. This discussion is today called the right to vote.
Once the ship begins its journey, investors no longer have control over it, as it is up to the captain. For this reason, both the investors of the 18th century and the current investors bet on good management or direction of the company (or ship). A second similarity refers to the fact that investors expect to receive benefits in proportion to their investment, if they gave more money they expect to have more benefits than others who gave less.
There are also differences such as the fact that once the voyage ended, both the ship and its Assets were liquidated. The result was distributed among the investors. On the contrary, the life of a company is much longer and its Assets will only be sold if it is liquidated. What an investor receives in return is the distribution of the profits generated in a given period and that in the stock market is called a dividend.
According to this, we can say that a company is born with the initiative of a group of people who want to carry out a project. To do this, they need various assets: land, buildings, machinery, personnel, among others, and to pay for this capital, they need money that can be obtained in various ways:
• From shareholders: it is known as new capital
• From bank loans: it is known as debt
• From own resources or from the profits generated by the business if we talk about going concern companies.
If the source of financing has been given by the shareholders, they will receive "certificates or certificates" of their contribution. These are the shares and their owners are known as shareholders. These shareholders have the following rights over the company:
• They can give their opinion on the direction of the company (in proportion to the number of shares that the shareholder owns of all the company's shares), that is, they have the right to vote.
• You can sell your shares at any time.
• You can make additional contributions to the business based on your participation in the company.
• You can receive benefits and in the event of the liquidation of the company you are entitled to a part of it.
1.3.2.2. Investment Action
In our country, the creation of investment shares dates back to 1977, with the Labor Community Regime, where Labor Actions (today investment shares) were created in order to give participation in companies to workers from the same. This policy sought that the workers of the companies participate in all the benefits and profits that they generate, without being able to make decisions in the management of them.
With the passage of time, these shares became "Work Shares", a name that was in force until December 1998, when their name was changed to investment shares by Law No. 27028.
Today, investment stocks are not for the purpose that originally sparked their creation; Anyone can acquire them without having to be a worker of the company and they can be creditors of the benefits that the companies generate.
Investment shares have the following rights:
• You can sell your shares at any time.
• You can make additional contributions to the business based on your participation in the company.
• You can receive benefits and in the event of the liquidation of the company you are entitled to a part of it.
• They have a unique difference with respect to capital shares: they do not have the right to vote, that is, they do not have an opinion in the decisions of the company.
Classification according to risk level
Responding to their behavior and level of risk, we can also classify equities in a way different from their legal nature, previously described. Below we list the most commonly accepted categories:
At the top of the classification are the so-called blue chips; then there are growth stocks; cyclical stocks (cyclical stocks), and speculative stocks (speculative stocks), in which, as their name indicates, those who speculate with the volatility of these values in the market tend to invest.
Blue chip stocks are preferred on the stock exchanges. These are financially sound and generally long-standing companies that have shown sustained stability and performance over time and have paid dividends to their shareholders not only during good times, but also in bad (in the BVL: Volcan, Atacocha, Cerro Verde, Minsur, BBVA Banco Continental, Banco de Crédito, Aceros Arequipa, Telefónica, among others).
Growth stocks correspond to companies that are identified by their great growth potential for the future. In fact, certain types of investors tend to put most of their capital in this type of securities following a strategy precisely to grow their investment. These companies tend to reinvest their earnings with a view to further expansion in the future, so they often pay little or no dividends. The market price of these shares can fluctuate rapidly, more than other securities.
Income actions are those that are characterized by regularly providing income to the investor. The key is to select those companies whose products or services generate higher returns than the average return of their peers. When selecting an income share, it is important that the industry to which the company belongs is currently in a relevant position.
Cyclical stocks are defined by the fact that the earnings of these companies tend to vary at certain times. These include those whose prices rise when there is a favorable economic period, and fall when the reverse occurs. Sometimes the fluctuation of these shares is characteristic for the entire sector or industry to which they belong.
However, in a general sense there are stocks that are relatively stable during times when the market declines. The most characteristic examples are food companies, medicine manufacturers and utilities, which suffer less in times of recession.
1.3.3. Valuation Process.
As we said in section 3.2, Company Valuation Methods, analysts use the concept of the time value of money to value financial or real assets.
Updating or discounting of future economic flows is called dynamic valuation, because they do not attend to the equity situation at a certain moment, but to a variable succession of flows or income in a period.
Dynamic valuation methods usually start from or at least be compatible with an elementary formula that has been called the "fundamental principle of valuation". The development of this approach has been called fundamental value analysis. It may refer to the company's own capital as a whole or to an estimate of the market price of a share or package of shares.
From a theoretical point of view, its main function is to define the value of the company or the Assets as the updated value of the potential results that they will generate.
The value of a share is found the same way as the value of other financial assets, that is, as the present value of the current CFs expected in the future. Expected CFs are made up of two elements: 1) the expected dividends in c / year and 2) the price that investors expect to receive when they sell the shares. The expected final price for the stock includes the return on the investment plus a capital gain.
The basic equation for stock valuation is similar to the bond equation. What changes are the components of the CFs. First, think of an investor who buys a stock with the intention of holding it forever. In this case, all he will receive is a stream of dividends, and today's value of the stock is calculated as the present value of an infinite stream of dividends.
For any individual investor the expected CFs consist of the expected dividends plus the expected selling price for the stock. However, the sale price that the ordinary investor receives will depend on the dividends that a future investor expects. Therefore, for all current and future investors in total, the expected CFs should be based on the expected future dividends. So the equation is valid no matter what destination the current investor has planned for the action.
The equation is a generalized stock pricing model in the sense that Divt's timing pattern can be subject to any behavior. However, very often the projected flow of dividends follows a pattern
In general, in the numerical application of these formulas, we will assume that there is perfect information (without limitations or costs) about the company's profits, its dividend policy, investment plans, prices, etc.
In the case of stocks, the income variable is given by the dividend
There are controlling interests that do not pursue financial returns, but rather strategic ones, related to leadership in the product and service markets. The dividend to be received is the least of it; It would even be interesting not to distribute dividends, in order to reinvest in activities that are complementary to others of the controlling shareholder. Included in this concept is the closure of the acquired company, eliminating a competitor.
Indirect or implicit profitability: Variation of financial assets. This profitability may correspond, at least in part, to the proportional part of the dividend accrued and not due.
In general terms, the return expected by the investor will be the sum of the implicit and explicit return:
In this approach, dividend policy is a relevant factor in the 'rational' investor's expectations about income and assets. This is considered the "expression of maximum operability" of the so-called fundamental analysis, however, it is no more than a mere theoretical approach, since it cannot be the case that it is intended to obtain the current value taking for granted the value of the company within of a period.
1.4 Application of Valuation Methods to Peruvian Companies
1.4.1 Case: Valuation of Investment Shares of Minsur SA
The shares of Inversión de Minera del Sur SA (MinsurI1) represent 7.0346% of the Selective Index of the Lima Stock Exchange (ISBVL), being a very dynamic share (100% liquidity), in addition to having a lot of information of the company, which has all of its operations in Peru. That is why we have taken it as a model to carry out the following valuation exercise.
General Company Information
Minsur SA was incorporated and began operations on October 6, 1977, through the transformation of the Peruvian branch of Minsur Partnership Limited of the Bahamas called Minsur Sociedad Limitada, which had been operating in Peru since 1966.
The activities of the Company are regulated by the General Mining Law. The Company is a subsidiary of Inversiones Breca SA, a company domiciled in Peru, which owns 98.74% of the shares representing its capital stock.
Its main activity is the production of tin metal that it produces in its foundry plant located in the city of Pisco. Tin metal is produced using the tin concentrate that is extracted from the San Rafael Mine, located in the department of Puno. 99% of the tin metal produced by the Company is sold on the international market through sales agents.
The administration of the operation of the foundry plant is in charge of Funsur SA in accordance with the terms of the project management, administration and operation contract signed with it in May 1994.
Company Valuation
High tin prices improve the financial position of the company.
The combination of unbeatable international prices with a higher production of refined tin has contributed to substantially improve the financial margins of the company, allowing it to make investments in mining infrastructure aimed at improving the efficiency of its production processes, the largest being referred to the use of natural gas as fuel.
Recently, the international price of tin reached levels of US $ 11,158 per MT not observed since 1989, after production cuts in Indonesia and the risks of lower supplies of the mineral from Bolivia, both countries responsible for 35% of world supply, according to can be seen in the table of Monthly Tin Prices in LME. Likewise, tin prices have been favored by the prospects of greater consumption of the mineral as a substitute for lead, following environmental bans in the European Union that prevent its use in electronic products sold within the 25-nation bloc, a decision that China, Japan and Korea would follow.
Regarding production, the company registers a sustained growth in the levels of mining treatment, which have gone hand in hand with a lower grade of the extracted mineral, which has been accentuated as of the year 2003 when the recovery of the price of metals on the world market. The production of refined products has also been registering significant growth in recent years, as a consequence of the higher level of extracted mineral and investments in machinery, equipment and infrastructure that have allowed to increase the recovery levels of tin in concentrates. The company's income structure has undergone drastic changes in recent years, showing a marked preference for the commercialization of higher value-added products (metallic tin). At the market level, the UScontinues to be the main export destination, in 2005 it contributed 54.7% of its income, followed by Europe (38.8%) and South America (5.5%). Minsur SA has historically had little exposure to the local market - in 2005 they sold 1.0% of their production in the Peruvian market.
Behavior of the Minsur share price during 2006.
Financial Results of Minsur SA for the Fourth Quarter of 2006 (4Q06)
During 2006, the accumulated profits of Minsur SA and subsidiaries registered a growth of 24.8% (in dollars) compared to the same period of the previous year. This behavior was mainly explained by:
- The 16.0% growth in the company's total income, as a consequence of the higher volumes of tin sold, and, in addition, to the variation in the international price of the mineral. During 2006 the price of tin reached an average of US $ 8,220 MT, 7.0% higher than the average prices registered during 2005.
- The recognition of a gain from the increase in the fair value of future contracts entered into by Minsur SA with the London Metal Exchange.
- A 567.9% growth in other income as a consequence of the increase in the fair value of investments available for sale (shares of Rimac Internacional and Explosivos SA) owned by Minsur SA for a value of US $ 17.2 million.
Prospects and Valuation Results
The main elements to take into consideration to analyze the performance of Minsur SA in the coming years are the following:
Behavior of the sector:
The income of Minsur SA shows a high sensitivity to variations in the international price of tin (price commodity risk). For 2006, this mineral reached an annual average value of US $ 8,563 per MT, 16.0% higher than those registered during the previous year. This upward behavior would be explained basically from the perspective of a physical market characterized by a marginal deficit close to 1,000 MT, as opposed to the 4,000 MT of surplus registered during 2005. The referred deficit would be explained by: i) the lower supply of ore from Indonesia, the world's second largest producer, after PT Timah, the second largest tin producer globally, announced a 8.0% cut in its annual production3,ii) the closure of three private refining companies located on Bangka Island (Indonesia) by the government after problems with their mining permits, and, iii) record world consumption of tin in refined products (around 380,000 MT) led by Chinese demand, in a context of environmental bans in Europe which prevent the marketing of household electrical products that have lead as solder
For 2007, it is estimated that tin would continue with its upward trend, especially during IS07, reaching an annual average price of US $ 9,811 per MT, which represents an increase of 12.8% compared to 2006 prices. This trend It is based on the estimates of a physical market with a deficit of around 3,000 MT after the increased demand for the mineral after completing a full year of environmental prohibition in Europe. For the long term, an average price of US $ 7,629 per MT is considered, a level similar to the average annual price of tin in real terms of the last 20 years, including the projected period (2006-08).
Company behavior:
For the next few years, the operating income of Minsur SA will follow the trend of its metallic tin production and the price of the mineral on the world market. For 2006, it is projected that the company would register a 13.6% growth in its sales as a consequence of the increase in the price of tin and of the volumes sold of the mineral in refined products. For 2007, it is estimated that its revenues would continue its upward trend, registering a rise of 3.9% compared to the levels reached in the previous year after higher tin prices in the world market.
Regarding operating costs, during 2006 the company registered an increase of 6.4% in the item, explained by 66.9% by higher mining treatment costs after the increased extraction of lower-grade mineral, and, to a lesser extent, to the largest mining royalty payments that reached a total of US $ 7.4 million.
Another factor that would affect the financial results of the company in the coming years is associated with the change in value of the investments available for sale owned by the company. For 2006, it is estimated that the company would recognize income as a consequence of the higher prices of the common shares of Rimac Internacional and Explosivos SA owned by Minsur SA for a value close to US $ 25.5 million. For 2007, only an increase of US $ 1.5 million after the record levels registered in the BVL during the previous year. However, for 2008, these investments are expected to generate a loss of US $ 3.8 million as a consequence of the projected fall in mineral prices in the world market that would affect the performance of the local stock market.
Thus, the gross cash flow (operational), investment flow (CAPEX) and free cash flow projected for Minsur SA are shown in the following table.
In this way, according to the discounted cash flow valuation method, and under a conservative scenario, the fundamental value of the investment shares of Minsur SA is US $ 1.60, while in terms of nuevos soles, the value is S /. 6.18.
1.5 Exercises on fixed income and variable income securities
A-Valuation of Fixed Income Securities
1) There is a bond with a Nominal Value of $ 1,000, a coupon rate of 7% and a yield to maturity of 9%, It expires in 10 years. a) Should the price be above or below $ 1,000? Explain why. b) Calculate your price.
Given another bond with a Face Value of $ 1,000 with a coupon rate of 8% that today is trading at $ 848. Matures in 15 years, a) Calculate its yield to maturity, should it be below or above the coupon rate? Why? b) Using your conclusion from just now, roughly calculate said return.
2) Convertible bonds (VN = 1,000) are issued that trade for $ 900. Each bond can be exchanged for 100 shares at the option of its holder. The bond has a coupon rate of 6% payable annually and matures in 12 years. The company's debt rating is BBB, debts with that rating have been priced to generate a 12% return. The company's common stock is trading at $ 6 each. How would you calculate the value of this bond? How much value does it add to being convertible?
3) There is a portfolio of two bonds. They both have: VN = $ 1000; coupon rate = 10% per annum (annual payments); maturity in 4 years; and yield = 12% per annum. The first of them returns all the capital at the end and the other in two equal payments every two years. a) Calculate the Duration of both bonds; b) Which of them is convenient to sell if an increase in market rates is expected?
4) It is planned to redeem bonds ($ 40,000,000, 14% / year, 15 years to maturity). If you do, you must pay a “premium call” of 8%. It also tries to issue a new 15-year bond ($ 40,000,000, 10% / year). Furthermore, the costs associated with this redemption and reissue decision are $ 350,000. Should the bonds be redeemed? Don't consider taxes. It is known that the company evaluates its investment projects in the electronic market, using a discount rate of 22%.
5) An obligation with the following characteristics is available.
- Nominal value: US $ 1,000.00
- Maturity period: 20 years.
- Coupon rate: 8.00%
- Periodicity of payments: semi-annual.
Calculate the price of an obligation if the market interest rate is:
a. 8.00%
b. 10.00%
c. 6.00%
B-Valuation of shares
1) Company RPQ has just paid out cash dividends of $ 2 per share. Investors require a 16% return on similar investments. a) If the dividend is expected to grow at a constant 8% per year, what is the current value of the share? How much will the stock be worth in 5 years? b) In the previous problem, how much would the stock sell for today, if the dividend is expected to grow 20% per year for the next 3 years and then stabilize at 8% per year?
2) Examine the following information for two companies funded entirely with equity:
Company A estimates the value of the synergistic benefit from acquiring Company B to be $ 200. Company B indicated that it would accept a cash takeover offer of $ 35 per share. Should company A submit the offer?
Examine the following information for two companies funded entirely with equity:
A is acquiring B by exchanging 25 of his shares for all of B's shares. What is the cost of the merger if the merged company has a value of 11,000? What will happen to the EPS of company A (newly merged A, includes B purchased with A)? And your P / E?
3) Nautillius Marine Products Corp. is currently paying dividends of $ 2 per share and this dividend is expected to grow 15% annually for the next three years, then 10% for the next three years, after which it is expected to grow at a rate of 5% forever. How much value would you place on the stock if a payback rate of 18% was needed?
4) It is known that Qwerty SA distributed dividends of $ 2 per share and it is expected that from there they will grow by 15% for 3 years, 10% for the next 3 years. The company has a price per share / earnings per share ratio of 8 times at the end of year 6, and its earnings per share are expected to be $ 7.50 in year 7. If the share price today is $ 35, What is the expected return on investment? (Assume that the ending or future value after year 6 is based on the forecast of profit for year 7.) Suggestion for scoring: 15%.
C- Extra Exercises
1) (A) Shares, (B) Bonds
(A) You own five hundred shares of EUAC SA, which will pay dividends of $ 2 per share one year from today. Two years later, it will close and its shareholders will receive $ 17.5375 per share due to the liquidation of the same. The return required by the shareholders of EUAC SA is 15% per year. (A1) How much is a share of EUAC SA worth today? (A2) If you prefer to receive exactly equal amounts of money in each of the next two years, detail a strategy that would achieve this and clearly demonstrate that it does.
(B) A bond (Nominal value = 1000) in perpetuity must be redeemed now or never and carry out a new issue, the coupon rate of the outstanding bonds is 15%, and the nominal coupon rate of the new issue would be that of the market 6.7%. Also, early redemption of a bond costs $ 150. Should you rescue?
2) Valuation of known cash flows: Bonds and Shares
a) Danaces SA has maintained an extraordinary growth of 30% per year due to its good sales strategy, which has led to a rapid one. This growth rate is assumed to last three more years and then decline to 10% per year. If from then on the growth rate remains at 10% indefinitely, what is the total value of the stock? The total dividend just paid was 5 million, and the required yield is 20%
b) Determine the price of a bond, and its effective annual yield from the following data: Coupon rate 14%, annual yield 16 % (semi-annual compounding) with semi-annual payments, the bond matures in 7 years. Nominal value = 100.
c) Glossary of financial terms in English translated into Spanish.
d)
e) Account: account
Accountant: accountant
Accounting: accounting
Accounts payable: accounts payable
Accounts receivable: accounts receivable
Accrued assets: Accumulated assets
Acquisition costs: acquisition costs
Acquisition: acquisition or purchase
ADR: American depository receipt
Amortization, paying off: amortization
Amount: amount of a debt
Anti trust laws: antitrust laws
Assets: Assets
At sight: at sight
Auction: public auction
Auditory: audit
Average price: average price
f) Back to back: documentary credit
g) Balance of payments: balance of payments
h) Balance of trade: balance of trade
i) Balance sheet: balance sheet
j) Balloon payment: payment at the end
k) Bankruptcy: bankrupt
l) Basis of assessment: taxable base
m) Be in debt: be in debt, owe
n) Bear market: declining stock market
o) Bench mark: point of comparison
p) Bench marking: process of continually comparing an organization with world leaders.
q) Bias: bias, trend
r) Bid: offer
s) Bill of change: bill of exchange
t) Bill: account
u) Blue chip: large company that is listed on the stock markets and has a liquidity index of 100% (it is brought in every day)
v) Bond: bond. Fixed income financial title.
w) Book keeping: Bookkeeping. Accounting
x) Borrowing: Loan
y) Bottom price: minimum price
z) Break down: breakdown analysis
aa) Break even point: breakeven point
bb) Budget: budget
cc) Bulk: mass, volume
dd) Bull market: market Stock market on the rise
ee) Buyer: buyer
ff) Buying power: purchasing power
gg)
hh) C&F: value including cost and freight
ii) Capital flight: capital flight
jj) Capital gains: capital gains
kk) Capital goods: capital goods
ll) Capital market: capital market
mm) Capital stock: equity shares
nn) Cash balance: cash balance
oo) Cash cows: dairy cows
pp) Cash flow audience: investor cash flow
qq) Cash flow: cash flow
rr) Cash on hand: cash on hand
ss) Cash payment: cash payment
tt) Cash: cash
uu) CEO: chief executive officer: president
vv) Change: change
ww) Check: check
xx) CIF: value including cost, insurance and freight
yy) Circulating capital: working capital
zz) Claim: claim
aaa) Clearing: compensation
bbb) Client: client
ccc) Coaching: personal advice
ddd) COD: cash on deliver: payment on delivery
eee) Collateral: Asset pledged, guarantee
fff) Collect: collection at destination
ggg) Commissions: commissions
hhh) Commitment fee: commitment commission
iii) Commodity: tradable merchandise in world markets, which meet certain characteristics in order to be tradable. Metals (gold, silver, copper, zinc) are considered grains (soy, coffee, corn) and others such as oil and gas.
jjj) Company: company, firm, firm.
kkk) Competition: competition
lll) Competitiveness: competitiveness
mmm) Compound interest: compound interest
nnn) Consolidated debt: consolidated debt
ooo) Consultation: query
ppp) Consumer goods: consumer goods
qqq) Consumer price index: CPI: consumer price index
rrr) Consumer: consumer, customer.
sss) Consumption: consumption
ttt) Contribution founds: contribution of funds
uuu) Convertibility: convertibility
vvv) Cost benefit ratio: cost benefit ratio
www) Cost of living adjustment: inflation adjustments
xxx) Cost price: cost price
yyy) Cost volume profit analysis: sensitivity analysis
zzz) Cost: cost
aaaa) Counter trade: trade
bbbb) Coupon: coupon, removable
cccc) Credit card: credit card
dddd) Credit: credit
eeee) Creditor: creditor
ffff) Currency: current, current
gggg) Currency: currency
hhhh) Current account: current account
iiii) Current Liabilities Current Liabilities. Set of all the debts of a company that have a maturity equal to or less than one year or the maturity period of the company, which must be financed with Current Assets.
jjjj) Custom house: customs
kkkk) Customer: client
llll) Customers duty: customs duties
mmmm)
nnnn) Deal: business
Dealer: seller
Debt limit: level of debt
Debt: Debt
Default: default
Deferred payment: payment in installments
Deferred: deferred
Delivery: delivery
Demand: demand
Deposit: deposit
Depreciation: depreciation
Devaluation: devaluation
Devise: currency
Disbursement: disbursement
Discount: discount
Dividend: dividend
Down payment: initial payment
Draft: bill of exchange
Drawing: draft
Duty: tariff
oooo) Earning report:
income statement pppp) Economic profit: economic value
qqqq) Economic trend: economic situation
rrrr) Efective rate per annuu: annual effective rate ssss) Effective rate: effective rate
tttt) Effective: effective
uuuu) Empowerment: empowerment
vvvv) Enterprice: company
wwww) Entrepreneur: entrepreneur
xxxx) EPS: Earning per Share: earnings per share
yyyy) Split: division of a company in two or deliver part to other
existing zzzz)
aaaaa) EVA: economic value added
bbbbb) Exchange adjustment: exchange
rate adjustment ccccc) Exchange rate: exchange rate, exchange rate
ddddd) Expenditure: disbursement
eeeee) Expense: disbursement, expenses
fffff) Exposure: exposure, risk
ggggg) Face value: nominal value, or face value.
Factory: factory
Fair price: fair price
FASB: accounting standards
Fee: initial commission
Finance evaluation: financial evaluation
Financial backing: financial support
Financial ratios: Financial ratios
Financing evaluation method: financial evaluation method
Financing: financing.
Firm: company, company.
Fixed assets: Fixed assets
Fixed price: fixed price
Float, floating: checks drawn and not cashed
Floating debt: floating debt
FOB: Free on board, free on board
Foreign exchange: currencies
Forward: hedging in foreign currency
Forwards: hedging mechanism (in collateral abroad)
Free cash flow: free cash flow
Freight: freight
Fund transfer: fund transfer
Fund:
Future worth fund: future value
hhhhh)
iiiii) Gambling: bet
Golden parachute: «golden parachute» compensation
Good will: good image, difference between market value and book value.
Goods: goods
Gross benefit: gross profit
Gross income: gross income
GDP (gross domestic product): GDP
jjjjj)
kkkkk) Hard currency: hard currency
Harvesting strategy: remove the cash produced
Hedge: coverage
Hedging: coverage
High income housing: luxury housing
Hire purchase: installment sale
Hurdle rate: cut-off rate
lllll) IBF: international banking facility: transactions in euro dollars in the United States
mmmmm) Importation: import
nnnnn) Income: Income, Income.
ooooo) Income policy: income policy
ppppp) Income statement: profit and loss statement
qqqqq) Income tax: income tax
rrrrr) Income yield capacity: profitability
sssss) Increase: increase
ttttt) Inflation: inflation
uuuuu) Inherited audience: flow of future project cash
vvvvv) Initial investment: initial investment
wwwww) Input: input, input
xxxxx) Installment: credit
yyyyy) Insurance: insurance
zzzzz) Interchange: exchanges
aaaaaa) Interest rate: interest rate
bbbbbb) Inventory: inventories
cccccc) Investment: portfolio / investment
dddddd) Invoice: invoice
eeeeee) IOU: I owe you: I owe you
ffffff) IRR: internal rate of return: internal rate of return IRR
gggggg) Issuing company: issuing company
hhhhhh) Item: item
iiiiii)
jjjjjj) Join-venture: cooperation agreement between companies from two countries, joint business activity between partners from different countries
kkkkkk) Junk bond: junk bond, bond that has the most low credit certification and therefore has a high probability of going into default.
llllll) Label:
Labor label:
Lakeover labor: hostile takeover
Lend: lend
Letter of credit: letter of credit
Leverage rate: leverage ratio
Levy: lien
Liabilities: liabilities
Liquidity ratios: liquidity ratio
Liquidity: liquidity
Listed securities: listed stock On the stock market
Load: cargo
Loan: loan
Long term capital flows: long term capital flow
Long term debt: long term debt
Long term loan: long term loan
Loss: loss
Low income housing: popular housing
Lump sum: balloon payment
mmmmmm) M&A: mergers and acquisitions: mergers and acquisitions
Manager: manager
Manufacturer: manufacturer
Manufactures products: manufactured products
Market price: market price
Market research: market study
Matched timing: paired time
Meeting:
Merger assembly: merger
Monetary adjustment monetary correction: monetary correction
Money growth: money growth
Money received: income
Monthly payment: monthly payment
Mortage: mortgage
Most favored nation treatment: most favored nation treatment
Movement: movements
nnnnnn)
oooooo) National income: national income
Net cash flow: net cash flows
Net present value: net present value
Net price: net price
Net worth: net value (equity)
Net: network
NF: no founds: no funds
Nominal rate: nominal rate
Non profit corporation: non-profit company
NPV: Net present value: net present value
Number, turnover: figure
Offer:
Open market offer: free market
Operation costs: operation costs
Operation expenses: operation expenses
Operation: operation
Ordinary shares: common shares
Output, production: production
Outstanding shares: outstanding shares
pppppp) Pay in cash: pay in cash
qqqqqq) Payback period: recovery period Investment project valuation method that consists of calculating the minimum period of time in which it takes to recover the initial investment outlay.
rrrrrr) Payment advance: advance
ssssss) Payment in arrears: late
payment
tttttt) Payment: payment uuuuuu) Payroll: payroll
vvvvvv) Pay in: Percentage of profits reinvested in the company.
wwwwww) Pay Out: Dividend pay out ratio - is the ratio between the dividends paid by a company to its shareholders and its net result. This relationship varies according to the type of industry in which we find ourselves: companies that have very good opportunities for strong growth prefer this ratio to be very low, on the contrary, public service companies with a very limited corporate purpose, distribute a high proportion of the net benefits to its shareholders.
xxxxxx) Payout ratio = DIV / EPS
yyyyyy) Period:
Planning period: planning
Political economy: political economy
zzzzzz) Pre investment: pre investment
aaaaaaa) Preference shares: preferred shares
bbbbbbb) Preferential trading system: preferential trading system
ccccccc) Price control: price control
ddddddd) Price earning rate: PER. Price-profit ratio. Ratio resulting from dividing the price of a share by the expected earnings per share. It can be interpreted as the theoretical number of years in which the investment will be recovered.
eeeeeee) Price elasticity: price elasticity
Price fall: price drop
Price freeze: price freeze
Price list: rates
Price: price
Prime rate: prime rate
Profit margin: profit margin
Profit: profit, profit, profit.
Project life cycle: project life cycle
Promissory note: pagare
Promissory quota: pagare
Providers: suppliers
Project evaluation: project evaluation
Projection: projection
Purchase: purchase
Purchasing power: purchasing power
fffffff)
ggggggg) Quota: quota
hhhhhhh)
iiiiiii) Rate of growth: growth rate
Rate of interest: interest rate
Rate of return: rate of return
Rate: index, ratio, rate.
Raw material: raw material
Real interest: real interest
Receipt: receipt
Recession: slowdown
Reciprocal trade: trade agreement
Redemption: amortization
Repayment: refund
Refund: refund
Rentability: profitability
Required return: return on investment
Return on assets: return on Assets
Return on equity: return on equity
Revolving found:
Roucher revolving fund:
Runaway inflation voucher: galloping inflation
jjjjjjj)
kkkkkkk) Sale: sale
lllllll) Security: Fixed income financial asset.
mmmmmmm) Set back: setback
nnnnnnn) Settlement: s balances
ooooooo) Share turnover: stock movement
ppppppp) Share: share
qqqqqqq) Shareholder: shareholder
rrrrrrr) Shares of stock: shares
sssssss) Shares outstanding: shares outstanding
ttttttt) Short term loan: short-term loan
uuuuuuu) Simple interest: simple interest
vvvvvvv) Sinking found: sinking fund
wwwwwww) Speculation: speculation
xxxxxxx) Statement of accounts: statement of accounts
yyyyyyy) Stock company: company (corporation)
zzzzzzz) Stock exchange: stock exchange
aaaaaaaa) Stock holder: shareholder
bbbbbbbb) Stock holders: equity
cccccccc) Stock index: stock market indicator
dddddddd) Stock market: stock exchange
eeeeeeee) Stock pile: inventory accumulation
ffffffff) Stock: capital
gggggggg) Stockbroker: broker
hhhhhhhh) Storing: storage iiiiiiii) Sum: sum
jjjjjjjj) Supply: offer
kkkkkkkk) Surcharge: surcharge
llllllll) Surrender value: salvage value
mmmmmmmm) Surtax: surcharge
nnnnnnnn) Swap: financial swap
oooooooo)
Tax: tax
pppppppp) Technical study: technical study
qqqqqqqq) To debit: owe
rrrrrrrr) To
goss into debt: get debt sswesss): owe
tttttttt) Trade: trade
uuuuuuuu) Trading year: fiscal year
vvvvvvvv) Transaction: operation
wwwwwwww) Turn over: rotation
xxxxxxxx)
yyyyyyyy) Unemployment: unemployment
Up turn: rise
zzzzzzzz) Valorization: valorization
Value added network: value added network
Value engineering: value generation
Venture capital: venture capital
aaaaaaaaa)
bbbbbbbbb) Wholesaler: wholesaler
Winery:
Winset winery on line: electronic stock exchange
Working capital: working capital
ccccccccc)
ddddddddd)
Bibliography
ALEXANDER, SHARPE AND BAILEY: Fundamentals of Investments. Theory and practice. Third edition. Pearson Education, Mexico, 2003. (ISBN 970-26-0375-7)
ALTMAN, E. (1986). "Financial Ratios, Determinants Analysis and the Prediction of Corporate Bankruptcy", Journal of Finance.
APARICIO, A., GALLEGO, R. et al. (2002): Financial Calculus. Theory and Practice.
Thompson-Paraninfo
ATHAYDE DE, GY FLORES R, 1998, “Introducing higher moments in the CAPM: some basic ideas”, Getulio Vargas Foundation, Rio de Janeiro.
BIRD, R., and A. McHUGH (1977). Financial Ratio: an Empirical Study.
BREALEY and MYERS: Principles of Corporate Finance. (5th Edition) Mc Graw Hill (1998). ISBN 0-07-007417-8 and 84-481-20023-X
BREALEY RA and SC MYERS. Fundamentals of Business Financing. Principle of corporate finance), 4th. Edition, McGraw Hill, 1993.
CFA Institute (2006): Ethics, Professional
Standards and Quantitative Methods GITMAN L. Fundamentals of Financial Management. Volumes I and II.
ROSS, STEPHEN A., WESTERFIELD, RANDOLPH W., JAFFE JEFFREY F. Corporate Finance. Ed. Mc Graw Hill. 5th edition.
SIMON BENNINGA (2006): Principles of Finance with Excel. Oxford University
Press Inc.
SHARPE, WILLIAM, 1964, "Capital Asset Prices - A Theory of Market Equilibrium Under Conditions of Risk" in Journal of Finance, September 1964, pp. 425-442.
SHARPE, WILLIAM, 1994, "The Sharpe Ratio" in Journal of Portfolio Management, Autumn 1994, pp. 49-58.
STAMPFI and GOODMAN: Mathematics for Finance. Modeling and Coverage. International Thomson Editors (2003). Mexico. ISBN 0-534-37776-9
VAN HORNE JAMES C: Financial Management. Tenth Edition (Prentice Hall Hispanoamericana SA) (1997). ISBN 0-13-300195-4 and 968-880-950-0.
Download the original file
