fina 411 class notes
FINA 410
Dividends Revenue – Total Cost = Earnings
Reinvested
in firm
We analyze a firm in a certain order
1) Global Economy
2) Local Economy
3) Industry
4) The Firm
Earnings are (rev – costs)
Expenses: variable(depend on production) + fixed costs(incurred, pay them once)
Operating Costs
Non-Operation Costs
Earnings depend on factors that:
Firm Specific
Management decisions (Apple pricing decisions)
Corporate culture (Banks take excessive risks)
Labor productivity
Industry Specific
Competition (Low profit margins for a competitive industry)
Input costs
Regulations (Government interference in a sector of an industry, preventing banks in the amount of loans or trading)
Domestic Economy
Local demand
Local supply of inputs
Domestic rates
Global Economy
Global supply of inputs
Global demand
International competition
Foreign exchange
Domestic Macroeconomy
GDP: market value of goods and services produced over a period of time
Unemployment rate: ratio of number of unemployed to total labor force
Inflation: rate at which general level of prices for goods and services is rising
If inflation rate is high, banks will raise interests rates, which makes it more expensive to lend, it will be much more expensive for companies to borrow from banks (to pay salaries)
Interest rates: high interest rates reduce present value of future cash flows
Fiscal policy (budget deficit): government spending in excess of government revenues.
Sentiment: consumer optimism/ pessimism are determinates of economic performance.
**Recap**
Buying a stock enables access to a firm’s earnings
These earnings are affected by the global economy & domestic economy
For most countries, the global economy affects the domestic economy
For the USA, the US economy affects the global economy.
Boeing
Commercial airplanes
Airbus (EADS)
Bombardier
Embraer
Factors that may affect the commercial airplane industry
Price of metals
Dividends Revenue – Total Cost = Earnings
Reinvested
in firm
We analyze a firm in a certain order
1) Global Economy
2) Local Economy
3) Industry
4) The Firm
Earnings are (rev – costs)
Expenses: variable(depend on production) + fixed costs(incurred, pay them once)
Operating Costs
Non-Operation Costs
Earnings depend on factors that:
Firm Specific
Management decisions (Apple pricing decisions)
Corporate culture (Banks take excessive risks)
Labor productivity
Industry Specific
Competition (Low profit margins for a competitive industry)
Input costs
Regulations (Government interference in a sector of an industry, preventing banks in the amount of loans or trading)
Domestic Economy
Local demand
Local supply of inputs
Domestic rates
Global Economy
Global supply of inputs
Global demand
International competition
Foreign exchange
Domestic Macroeconomy
GDP: market value of goods and services produced over a period of time
Unemployment rate: ratio of number of unemployed to total labor force
Inflation: rate at which general level of prices for goods and services is rising
If inflation rate is high, banks will raise interests rates, which makes it more expensive to lend, it will be much more expensive for companies to borrow from banks (to pay salaries)
Interest rates: high interest rates reduce present value of future cash flows
Fiscal policy (budget deficit): government spending in excess of government revenues.
Sentiment: consumer optimism/ pessimism are determinates of economic performance.
**Recap**
Buying a stock enables access to a firm’s earnings
These earnings are affected by the global economy & domestic economy
For most countries, the global economy affects the domestic economy
For the USA, the US economy affects the global economy.
Boeing
Commercial airplanes
Airbus (EADS)
Bombardier
Embraer
Factors that may affect the commercial airplane industry
Price of metals