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Corporate FinanceIntroductory and Assessment Lecture
Abdul QadeerB. Com (Hons.) Finance
MS Finance
PhD Finance (Continue)
03336487274
Email: [email protected]
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Financial Market
Deals with Surplus andDeficit Funds
Product Market
Factor Market
Household
-Land
-Labor
-Capital
-Entrepreneurship
Business
-Rent
-Wages
-Interest
-Profit
BorrowSurplus
InterestInterest
Global Economic System
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Finance
After 1950, finance emerged as Science but in taking
decision
it is considered as Art
Risk Profile Risk Appetite/tolerance
Subjective Decision
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Risk?
Uncertaintyabout future outcomes
It is concern about downside volatility (unpredictable)
Probability of loss
Probability that actual returnmay be different from desired
return/expected return
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Return and Downside Volatility
Date Price Return
30-Jun-11 100
30-Sep-11 105 0.05 0.131-Dec-11 111 0.0571 0
30-Mar-12 108 -0.027 -0.1
30-Jun-12 112 0.037 0
Average 0.0293
Oil & Gas Development Company Limited
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Sources of Uncertainty
Business Risk
Financial Risk
Liquidity Risk
Exchange Rate Risk
Country or Political Risk
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Business Risk Uncertainty about future income flows.
This risk is associated with unique circumstances or company
specific . For example:
Oil & Gas
Exploration
Distribution
Poultry Farm: Cash flows are higher/lower unexpectedly
Stability and Instability Cooking Oil (S)
Real Estate (I)
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Financial Risk
Chances of loss due to change in Interest Rate and
Exchange Rate.
Interest Rate Risk: uncertainty about future IR.
Exchange Rate Risk: Arises from the change in the
exchange rate of one currency in relation to another.
Translation Risk
Transaction Risk
Economic risk
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Country Risk
Risk associated to specific country.
This risk differ country to country
Political grounds
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Liquidity Risk
In terms of:
Asset: Easily convert into cash
Money Market: surplus cash exists in banks
Capital Market: Presence of buyer and seller
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EMH-Efficient Market HypothesisEfficient Capital Market:
Capital market is financial market where long termdebt (when
company or Government needs funding it(borrower) issues/sale debt
securities in the form ofGovernment Bonds, Corporate Bonds or
notes
Security prices rapidly adjust the arrival of new
information.
Referred as informationaly efficient market
Fama presented efficient market theory in the name of fair
gamemodel
Three types of EMH Weak Form EMH:
Semi strong form EMH
Strong Form EMH
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Weak Form EMH
The weak-form EMH assumes that current stock prices fullyreflect
all security market information, including the
historical sequence of prices, rates of return, trading
volume
data etc
Practical Example:
Open yahoo finance
Enter ^KSE for searching the data of KSE 100 index
Enter time span information
Download the data.
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Semi Strong Form EMH:
Adjust rapidly to the release of all public information; that
is, current
security prices fully reflect all public information. Public
information also
includes all nonmarket information, such as earnings and
dividend
announcements, regarding earnings and dividends etc
Strong Form EMH:
The strong-form EMH contends that stock prices fully reflect
all
information from public andprivate sources
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Corporate Decisions
Why
Where
Who When
How
