Table of Contents
Chapter 1................................................................................................................ 2
Chapter 3................................................................................................................ 4
Chapter 4................................................................................................................ 6
Chapter 5................................................................................................................ 7
Chapter 6................................................................................................................ 9
Chapter 7.............................................................................................................. 13
Chapter 9.............................................................................................................. 14
Chapter 10............................................................................................................ 18
Chapter 11............................................................................................................ 23
Chapter 12............................................................................................................ 33
Chapter 13............................................................................................................ 38
Multifactor models of risk.................................................................................. 43
Chapter 14............................................................................................................ 45
Chapter 15............................................................................................................ 48
Chapter 16............................................................................................................ 51
Chapter 17............................................................................................................ 57
Chapter 18............................................................................................................ 61
Chapter 20............................................................................................................ 65
Chapter 21............................................................................................................ 67
Chapter 23............................................................................................................ 70
Chapter 24............................................................................................................ 75
Chapter 25............................................................................................................ 78
Chapter 26............................................................................................................ 82
Chapter 27............................................................................................................ 85
Chapter 28............................................................................................................ 87
Chapter 30............................................................................................................ 90
,Chapter 1
Types of firms:
Sole proprietorship (eenmanszaak):
o Owned and run by one person
o Few employees
o Easy to set up
o Unlimited personal liability since there is no separation between the
firm and the owner
Partnership (VOF):
o Similar to a proprietorship, but with more than one owner
o All partners are personally liable for all of the firm’s debts
o The partnership ends with the withdrawal of any single partner
o There are two types of owners in a partnership
General partners
Personally liable for the firm’s debt obligations
Typically runs the firm on a day to day basis
Limited partners
Have a limited liability (max their investment)
Transferable in case of withdrawal
No management authority or legal authority
Limited liability company (LLC, BV):
o All owners have limited liability
o All owners run the business
Corporation (NV):
o A legal entity separated from its owners
Shareholders of a corporation are “taxed twice”. This because first the
corporation pays tax on its profits, and then when the dividends are distributed to
the shareholders, they have to pay personal income taxes. This system is
sometimes referred to as double taxation.
Corporation àartificial being separate from its owners.
S-corporations are a US business structure that passes income to shareholders
for individual taxation. They have ownership restrictions and do not pay federal
income taxes directly.
A C-corporation is a legal structure for a business that provides limited liability
to shareholders and is taxed as a separate entity.
In a corporation, ownership and direct control are usually separate. The board of
directors are elected by shareholders and have
ultimate decision making authority. The board
usually delegates day-to-day decision making to
the CEO.
The financial manager of a corporation is
responsible for three main tasks:
, - Making investment decisions
- Making financing decisions
- Managing the firm’s cash flows
In the case that a firm fails to repay its debts, the firm can negotiate with the
debt holder. If that fails, the firm can reorganize or liquidate its assets.
Primary markets à when a corporation itself issues new shares of stock and
sells them to investors
secondary markets à market for stocks between investors
Bid price à sell price
Ask price à buy price what is asked for the stock?
The ASK is always bigger than the BID.
Bid ask spread à ASK - BID ; the transaction cost investors pay in order to trade.
Limit order à an order to buy or sell a set amount at a set price
Limit order book à The collection of all limit orders
Market order à Order that trades immediately, at the best outstanding limit
order
High frequency traders (HFTs) à a class of traders who, with the aid of
computers, execute trades many times per second in response to new
information.
A stock market dark pool is a private electronic trading platform where large
institutional investors execute trades away from public exchanges. It allows for
more discreet transactions, reducing the impact on stock prices.
, Chapter 3
A competitive market is a market in which goods can be bought and sold at the
same price. As long as the competitive market exists, the value of the good will
not depend on the views or preferences of the decision maker.
Valuation principle à Decisions consider market prices; if benefits exceeds cost,
it enhances the firm value.
The rate at which we can exchange money today for money in the future is
determined by the current interest rate.
Risk free rate (rf) is the interest rate at which money can be borrowed or lent
without risk. The risk free rate is also referred to as the discount rate for a risk
free investment.
Interest rate factor à 1 + rf
1
Discount factor à or FV∗( 1+r )−n
( 1+ rf )
The net present value (NPV) of a project or investment is the difference
between the PV of its benefits and the PV of its cost:
NPV =PV ( benefits ) −PV ( costs )
NPV =PV (all project cash flows)
Project with positive NPV à Accept
Projects with negative NPV à reject
Arbitrage is the practice of buying and selling equivalent goods in different
markets to take advantage of a price difference. An arbitrage opportunity
occurs when it is possible to make a profit without taking any risk or making any
investment. A normal market is a market where there are no arbitrage
opportunities. When borrowing money in another country, there is a risk that
exchange rates change, thus there is no arbitrage opportunity with currency
exchanges.
Law of one price à if equivalent investment opportunities trade simultaneously
in different competitive markets, then they must trade for the same price in both
markets.
In a normal market, the NPV of buying or selling a security is zero.
According to the separation principle, we can evaluate the NPV of an
investment decision separately from the decision the firm makes regarding how
to finance the investment or any other security transactions the firm is
considering.
Value additivity:
Chapter 1................................................................................................................ 2
Chapter 3................................................................................................................ 4
Chapter 4................................................................................................................ 6
Chapter 5................................................................................................................ 7
Chapter 6................................................................................................................ 9
Chapter 7.............................................................................................................. 13
Chapter 9.............................................................................................................. 14
Chapter 10............................................................................................................ 18
Chapter 11............................................................................................................ 23
Chapter 12............................................................................................................ 33
Chapter 13............................................................................................................ 38
Multifactor models of risk.................................................................................. 43
Chapter 14............................................................................................................ 45
Chapter 15............................................................................................................ 48
Chapter 16............................................................................................................ 51
Chapter 17............................................................................................................ 57
Chapter 18............................................................................................................ 61
Chapter 20............................................................................................................ 65
Chapter 21............................................................................................................ 67
Chapter 23............................................................................................................ 70
Chapter 24............................................................................................................ 75
Chapter 25............................................................................................................ 78
Chapter 26............................................................................................................ 82
Chapter 27............................................................................................................ 85
Chapter 28............................................................................................................ 87
Chapter 30............................................................................................................ 90
,Chapter 1
Types of firms:
Sole proprietorship (eenmanszaak):
o Owned and run by one person
o Few employees
o Easy to set up
o Unlimited personal liability since there is no separation between the
firm and the owner
Partnership (VOF):
o Similar to a proprietorship, but with more than one owner
o All partners are personally liable for all of the firm’s debts
o The partnership ends with the withdrawal of any single partner
o There are two types of owners in a partnership
General partners
Personally liable for the firm’s debt obligations
Typically runs the firm on a day to day basis
Limited partners
Have a limited liability (max their investment)
Transferable in case of withdrawal
No management authority or legal authority
Limited liability company (LLC, BV):
o All owners have limited liability
o All owners run the business
Corporation (NV):
o A legal entity separated from its owners
Shareholders of a corporation are “taxed twice”. This because first the
corporation pays tax on its profits, and then when the dividends are distributed to
the shareholders, they have to pay personal income taxes. This system is
sometimes referred to as double taxation.
Corporation àartificial being separate from its owners.
S-corporations are a US business structure that passes income to shareholders
for individual taxation. They have ownership restrictions and do not pay federal
income taxes directly.
A C-corporation is a legal structure for a business that provides limited liability
to shareholders and is taxed as a separate entity.
In a corporation, ownership and direct control are usually separate. The board of
directors are elected by shareholders and have
ultimate decision making authority. The board
usually delegates day-to-day decision making to
the CEO.
The financial manager of a corporation is
responsible for three main tasks:
, - Making investment decisions
- Making financing decisions
- Managing the firm’s cash flows
In the case that a firm fails to repay its debts, the firm can negotiate with the
debt holder. If that fails, the firm can reorganize or liquidate its assets.
Primary markets à when a corporation itself issues new shares of stock and
sells them to investors
secondary markets à market for stocks between investors
Bid price à sell price
Ask price à buy price what is asked for the stock?
The ASK is always bigger than the BID.
Bid ask spread à ASK - BID ; the transaction cost investors pay in order to trade.
Limit order à an order to buy or sell a set amount at a set price
Limit order book à The collection of all limit orders
Market order à Order that trades immediately, at the best outstanding limit
order
High frequency traders (HFTs) à a class of traders who, with the aid of
computers, execute trades many times per second in response to new
information.
A stock market dark pool is a private electronic trading platform where large
institutional investors execute trades away from public exchanges. It allows for
more discreet transactions, reducing the impact on stock prices.
, Chapter 3
A competitive market is a market in which goods can be bought and sold at the
same price. As long as the competitive market exists, the value of the good will
not depend on the views or preferences of the decision maker.
Valuation principle à Decisions consider market prices; if benefits exceeds cost,
it enhances the firm value.
The rate at which we can exchange money today for money in the future is
determined by the current interest rate.
Risk free rate (rf) is the interest rate at which money can be borrowed or lent
without risk. The risk free rate is also referred to as the discount rate for a risk
free investment.
Interest rate factor à 1 + rf
1
Discount factor à or FV∗( 1+r )−n
( 1+ rf )
The net present value (NPV) of a project or investment is the difference
between the PV of its benefits and the PV of its cost:
NPV =PV ( benefits ) −PV ( costs )
NPV =PV (all project cash flows)
Project with positive NPV à Accept
Projects with negative NPV à reject
Arbitrage is the practice of buying and selling equivalent goods in different
markets to take advantage of a price difference. An arbitrage opportunity
occurs when it is possible to make a profit without taking any risk or making any
investment. A normal market is a market where there are no arbitrage
opportunities. When borrowing money in another country, there is a risk that
exchange rates change, thus there is no arbitrage opportunity with currency
exchanges.
Law of one price à if equivalent investment opportunities trade simultaneously
in different competitive markets, then they must trade for the same price in both
markets.
In a normal market, the NPV of buying or selling a security is zero.
According to the separation principle, we can evaluate the NPV of an
investment decision separately from the decision the firm makes regarding how
to finance the investment or any other security transactions the firm is
considering.
Value additivity:
