Upload
a2631213
View
34
Download
1
Tags:
Embed Size (px)
DESCRIPTION
docuemnt 1
Citation preview
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-1
Chapter 2Introduction
This chapter will provide an introduction to financial markets and common financial instruments.
Financial markets are where suppliers of capital (firms) interact with buyers (investors).
Often this is done through intermediaries such as brokers.
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-2
Why Do People Invest?
Investing is not just something other people do.
College education is an investment. Investing is more than just hoping to “make
some money.” It involves deferring present consumption in
the hopes of higher future consumption.
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-3
Equity Capital
Types of equity capital Preferred stock Common stock
This course focuses more on common stock. No guarantee of dividend One share, one vote Shareholders vote on key issues such as
composition of board of directors, choice of auditing firm, and others.
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-4
Why Purchase Common Stock?
A purchaser is looking for at least one of two possibilities: 1. Stream of dividend payments (current income)
2. Increase in stock price (capital gain) Holding period return:
(sales price – purchase price) + dividends x 100
purchase price
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-5
Holding Period Return Example
You purchased a share of McDonald’s stock one year ago for $18.00.
You earn $2.00 in dividends during the year. Today you sell the stock for $18.50. What is your holding period return? ($18.50 – $18) + $2 / $18.00 = .1389 x 100 =
13.89% (before taxes)
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-6
Bonds
Held by lenders Receive repayment over time
Semi-annual interest payments At maturity, amount is repaid (principal)
This is a series of cash flows that has value Priced on an index relative to 100 If a $1,000 bond sells for “102,” it sells for
$1,020
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-7
How to Interpret Bond InformationBond Curr. Yld Vol Close ChgHilton 73/4 04 7.2% 40 101 +1/2
The Hilton bond pays 7.75% interest and matures in 2004.
The annual interest divided by the current price is 7.2 percent. (Note: this is not the return you will receive if you hold the bond till maturity.)
40,000 bonds were traded that day. The bond closed at $1,010 which is $.50 higher than
the previous day.
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-8
Capital Markets
Represents a diverse group of investments Stock market Bond market Mortgage market Futures market
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-9
Stock Market
New York Stock Exchange (NYSE) Founded in 1792 Physical location on Wall Street in New York Approximately 2,800 companies offering
securities here Membership offered in the form of seats
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-10
Stock Market
Nasdaq National Association of Securities Dealers and
Automated Quotations Not a physical location like the NYSE (“over the counter”) Represents a network of securities dealers Fastest growing securities market Makes use of “market makers”—help ensure liquidity of
trading
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-11
Bond Market
Corporate bonds can be traded through the NYSE
Most bonds are traded over the counter Bond ratings
The lower the letter, the greater the quality Quality refers to the risk of default
Companies rating bonds Standard and Poor’s Moody’s
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-12
Important Features of Bonds
How are bond prices and interest rates related? As interest rates rise, bond prices fall.
Some bonds are callable. Company can repurchase bonds at a
certain price during a certain time.
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-13
Money Market
Market for short-term debt instruments Certificates of Deposit Commercial paper
Investors loan to large companies for a very short period of time (9 months or less).
Treasury Bills Loans to the U.S. Treasury
Zero-Coupon bonds Issued at a discount—no interest payments
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-14
Mortgage Market
Pooling of home mortgages by government agencies FNMA and GNMA are two examples. Mortgages are packaged and resold as
securities to investors. Investors are often large institutional investors
like pension funds.
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-15
Raising Capital Primary market
Initial Public Offering (IPO) Common stock is sold to underwriter
(investment banker) Investment banker sells to clients 2003 scandal/settlement
Secondary market Investor to investor, where most trading
occurs
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-16
Features of Stock Trading Bid vs. ask
Bid is the price you will pay to own a share Ask is the price you would receive to sell your
share Difference goes to broker
Average NYSE trade takes 22 seconds Significant reliance upon computers Trading halt in June 2001
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-17
Hedging Risk
We can add value by decreasing the risk (variability) of cash flows.
The concept of insurance as hedging: You buy insurance and if nothing happens
to your house, you still have the house. If your house is damaged, insurance pays
for it and the house is rebuilt.
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-18
Forward and Futures Contracts
Spot price—price paid for a commodity today Change in commodity prices present, risk to
buyer and seller Example: Orange juice grower (seller) and
restaurant owner (buyer) Prices help growers determine what and how
much to produce and restaurants need to establish menu price
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-19
Forward Contracts
An agreement to sell an asset at a fixed price for delivery in the future.
Cash payment is not required until delivery. However, each party must trust the other to
perform. The unique nature of each contract makes
them difficult to sell to third parties.
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-20
Futures Contracts
Similar to forward contracts, except: Terms of contract are standardized, such as amounts
and delivery dates. Clearinghouse acts as go-between to help ensure
performance. Contracts are traded on the Chicago Board of Trade or
Chicago Mercantile Exchange. Most contracts are never delivered. Parties take opposite positions to offset original
position.
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-21
Foreign Exchange
As international trade barriers are removed, more business is conducted away from home country.
Nearly 65% of McDonald’s 2002 revenues originated from outside the U.S.
U.S. companies must report financial operations in U.S. currency.
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-22
Foreign Exchange Example
You operate a hotel in France and accept the Euro.
When the Euro strengthens, this means it takes fewer Euros to buy $1 worth of goods.
As the Euro strengthens, your profits increase upon conversion.
100,000Euros x $1/1Euro = $100,000 100,000Euros x $2/1Euro = $200,000
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-23
Can we hedge this risk?
Similar to commodities, we want to lock in a “price” for our Euros—an exchange rate at a future date.
We can buy a forward or futures contract to accomplish this.
Who would be on the other side of this transaction?
A French company (or other company accepting the Euro) operating in the U.S.
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-24
Lenders to the Hospitality Industry
Commercial banks Traditionally largest lender Bank makes a “spread”—difference between
interest rate on loans and rate on deposits Interest = principal x rate x time Types of loans
Fully amortized (principal and interest) Interest only
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-25
Lenders to the Hospitality Industry
Real Estate Investment Trusts (REITS) There are equity and mortgage REITS Special tax treatment if they pass through at
least 95 percent of earnings to investors Insurance companies and pension funds
Receive large monthly cash flows from premiums and contributions
Try to match assets (loans) to liabilities (policies and pension needs)
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-26
Measures of Stock Market Performance
Dow Jones Industrial Average Index of 30 large companies Weighted by stock price
Standard and Poor’s 500 (S&P 500) 500 companies Fairly common measure of overall stock
market performance Movement is similar to the Dow
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-27
Some Stock Market Statistics Mean—weighted average
Mean Dow annual return (1950–2001) = 9.01% Mean S&P 500 annual return = 9.63%
Returns in a single year have varied from –30% to +44%
This uncertainty around the mean is called variance
Another measure is standard deviation, the square root of the variance
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
2-28
Some Stock Market Statistics
Can we measure the relationship between two individual stocks, two stock indices, or an individual stock and a stock index?
Correlation coefficient = Range is from –1.0 to +1.0 +1.0 is perfect positive correlation -1.0 is perfect negative correlation The Dow and the S&P 500 are highly
positively correlated