Investment Banking- Research Side

Submitted By: 1. Asutosh Biswal 12M00082. Md. Shafi 12M0823. Swetha badigam 12M1104. J.S Chaitanya 12M1035. Seeta Rama Raju 12M0956. Sai Shankar 12M107

Plan of presentation1. Introduction to Investment Banking.2. Functions of Investment Banks.3. Essence of Equity Research 4. Equity Researchi. Fundamental Analysis.ii. Technical Analysis.

5. Equity Valuation modelsiii. Capital Asset pricing model ( CAPM)iv. Dividend discount model v. Profits/Earnings ratio’s

1. Investment Banking:Investment Banks are middlemen between a company that wants to issue new securities and the buying public.So when a company wants to issue, say, new bonds to get funds to retire an older bond or to pay for an acquisition or new project, the company hires an investment bank.The investment bank then determines the value and riskiness of the business in order to price, underwrite, and then sell the new bonds. When an investment bank underwrites stock or bond issues, it also ensures that the buying public – primarily institutional investors, such as mutual funds or pension funds, commit to purchasing the issue of stocks or bonds before it actually hits the market

Top Investment Banks

2.Functions Of Investment BankCorporate Finance is the traditional aspect of investment banks which also involves helping customers raise funds in  capital markets and giving advice on mergers and acquisitions (M&A). Sales and trading: On behalf of the bank and its clients, a large investment bank's primary function is buying and selling products. In market making , traders will buy and sell financial products with the goal of making money on each trade. 

ResearchInvestment Management: Global transaction banking is the division which provides cash management, custody services, lending, and securities brokerage services to institutions.Merchant Banking can be called "very personal banking"; merchant banks offer capital in exchange for share ownership rather than loans, and offer advice on management and strategy.

Functioning of investment banks in raising corporate finance:

3.Essence of Equity Research

It is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings. While the research division generates no revenue, its resources are used to assist traders in trading.All research groups, nonetheless, provide a key service in terms of advisory and strategy. There is a potential conflict of interest between the investment bank and its analysis, in that published analysis can affect the bank's profitsInvestment banks match up buyers and sellers as well as buy and sell securities out of their own account to facilitate the trading of securities, thus making a market in the particular security which provides liquidity and prices for investors.  In return for these services, investment banks charge commission fees.

Research also serves outside clients with investment advice (such as institutional investors and high net worth individuals) in the hopes that these clients will execute suggested  trade through the sales and trading division of the bank, and thereby generate revenue for the firm.

While the research division may or may not generate revenue (based on policies at different banks), its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients.

The equity research division reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings.

Equity Research

• Fundamental AnalysisThe fundamental analysis is a method of finding out the future price of a stock, which an investor wishes to buy. The method for forecasting the future behavior of investment and the rate of return on them is clearly through an analysis of the broad economic forces, industry analysis, the company analysis and ratio analysis.

• Technical Analysis Technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components.

Equity research

Fundamental Analysis

Technical Analysis

1. Economic Analysis

2. Industry Analysis

3. company Analysis

1. The Market Discounts Everything

2. Price Moves In Trends

3. History Tends To Repeat Itself

Fundamental & Technical Analysis1.Fundamental Analysis:

1. Economic Analysis: Natural resources and availability of raw materials, inflation, taxation Policies, Industrial productions , Rupee-Dollar Fluctuation etc…

2.Industry Analysis: Product Line, Raw Material and Inputs, Demand and Market, Government Policy with regard to Industry etc..

3. Company Analysis : Earnings press release, Quarterly financial report , Annual financial report , Statement of cash flows etc..

2. Technical Analysis Assumptions:

1. The Market Discounts Everything2. Price Moves In Trends3. History Tends To Repeat Itself

Basically Technical analysis if performed taking into consideration various type of charts like support & Resistance chart, Moving average chart etc…

5.Equity Valuation:

• CAPM gives the required return, k:

• If the stock is priced correctly, k should equal expected return.

• k is the market capitalization rate.

( )f M fk r E r r

i. Capital assets pricing model

• V0 =current value; Dt=dividend at time t; k = required rate of return

• The DDM says the stock price should equal the present value of all expected future dividends into perpetuity.

ii. Dividend Discount Models (DDM)

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0

k

D

k

D

k

DV

DDM Implications

• The constant-growth rate DDM implies that a stock’s value will be greater:

1. The larger its expected dividend per share.2. The lower the market capitalization rate, k.3. The higher the expected growth rate of

dividends.• The stock price is expected to grow at the same

rate as dividends.

iii.Price-Earnings Ratio and Growth

• The ratio of PVGO to E / k is the ratio of firm value due to growth opportunities to value due to assets already in place (i.e., the no-growth value of the firm, E / k ).

kEPVGO

kE

P1

1

1

0

• When PVGO=0, P0=E1 / k. The stock is valued like a non growing perpetuity.

• P/E rises dramatically with PVGO.

• High P/E indicates that the firm has ample growth opportunities.

Thank you