Gautam Kaul

Univeristy of Michigan

Finance is the study of value

Value creation is about time and uncertainty
Decision making tools
Gary Becker "money is not the issue it is time"

Assumptions
Competitive markets
Frictions small relative to power of ideas
Capital can flow easily
 Time value of money (TVM)

- Terminology
PV= Present Value (value at zero) ($)
FV= Future Value (at certain period) ($)
n= number of periods (T)
r= Interest Rate (%) > 0 (assumption)

Rate of return is on time

Rate of return= (FV-PV)/PV
A dollar today is worth than a dollar tomorrow

- Future Value
FV= PV + r * PV = (1 + r ) * PV
Future value factor = FVF = ( 1 + r )

Future Value in multiple periods

simple interest the FV that comes from rate of return remains constant and adds to present value in periods of ti

**Compounding**
For compound interest
FV= PV ( 1 + r ) ^ n

Future Value of $1000 USD in ten years for 10% interest rate
FV= 1000 * (1 + 0.1) ^10
$ 2,593.74

($2,593.74)
**PMT in the FV formula is the payment between the period to look

What are the values of investing $1000 at 5% versus 15% for 90 years?

A) $1000 at 5% for 90 years B) $1000 at 15% for 90 years

($80,730.37) ($290,272,325.21)

- Simple present value

PV = FV / ( ( 1 + r ) ^ n )

Present value of receiving $1,100 one year if the interest rate is 10%
($1,000.00)
Suppose you will inherit $1210 two years from now and the interes rate is 10%. What is the value today to you?
($1,000.00)

What are the present values of receiving $1 MM at 5% versus 15% fifity years from today?

A) $1 MM at 5% fifity years from today B) $1 MM at 15% fifity years from today

($87,203,726.97) ($922,800.84)
resent value in periods of time
t is the value today to you?

fifity years from today

- At an interest rate of 11% it is better to have $150 today than $250 in 4 years

($164.68) ($227.71)

- Shawn wants to buy a new telescope. He estimates that it will take him one year to save the money and that the

($188.68)

- Jeff has $1,800 that he invests in a safe financial instrument expected to return 4% annually. Marge has $900 an

Jeff Marge
($4,101.78) ($4,530.45)

- Don has just received a cash gift of $65,000 from his rich eccentric uncle. He wants to set it aside to pay for his d
($127,864.84)
 the money and that the telescope will cost $200. At an interest rate of 6%, how much does Shawn need to set aside today to purchase the

ually. Marge has $900 and invests in a more risky venture that is expected to return 8% annually. Who has more after 21 years? And how m

et it aside to pay for his daughter Cynthia's college education. Cynthia will begin college in 10 years and Don's financial advisor says that she
aside today to purchase the telescope in one year?

after 21 years? And how much does he/she have in FV terms?

ancial advisor says that she can earn 7% interest on an investment in a special college fund. How much will Don have in the fund when Cyn
have in the fund when Cynthia begins college?
 Simple applications

- Future value of an annuity

Cash flow - c or PMT

What will be the value of your bank account if you deposit $1 K every year in a bank. You plan to leave home in five

$5,525.63

payments are at the end of the period

How much will be in your bank account 50 years from now if you save $1 K per year and have a interes rate of 5% ve

50 years $1K @ 5% 50 years $1K @ 15%

($209,348.00) ($7,217,716.28)

- Present Value of an Annuity

You are starting college. How much money do you need in the bank today so you can spend $3K every year for the n
Suppose the bank pays an interest rate of 5%

$3K in 4 years @ 5% ineterest

($10,637.85)

- Taking a Loan
You plan to attend an in-state college and your parent will take out a loan of
$100 K at 6%. Ehat are the yearly payments, given that they will have 5 years to pay back the loan?

($23,739.64)

- Perpetuities
A set of equal payments that are paid forever, without growth

PV perp= C / r

in stocks the C converts to dividend in long term context

Examples
Stocks
Company
Long term
 First very 30 years is stronger than later

- growth stock
Company that is growing not equally, new expansion

Perpetuity

g is a rate distinct than normal growth or inflation

u plan to leave home in five years and expect to earn 5% every year in the bank account?

have a interes rate of 5% versis 15%?

end $3K every year for the next four years, starting this year
- Bridgette's grandparents opened a savings account for her and placed $700 in the account. The account pays 3.5% intere

($1,021.98) ($729.98)

($291.99)

- Joe is getting ready to buy a car. He has $20,000 in investments earning 5.6% annually. The car also costs $20,000. If he d

($27,734.06) ($22,523.25)

($5,210.82)

- Ralph knows that he is going to have to replace his roof soon. If he has the roof replaced now, it will cost $15,000. He cou

$ 15,000.00 0.074569923 Goal and seek problem, look for negatives!!

7%

- Jessica is in the market for a new car. She has narrowed her search down to 2 models. Model A costs $28,000 and Model
0.56 0.37
Model A Model B
Future Value $ 15,680.00 $ 6,660.00
Present Value Compare all quantities at PV or FV
after 3 years $13,939.46 $5,920.72
Present Value $ 28,000.00 $ 18,000.00

Cost $ 14,060.54 $ 12,079.28

Comparision $ 1,981.25
B is cheaper for $ 1 981.25

- College tuition has been rising at a rate of 4% per year. Currently the average tuition of a state college is $12,200 per year

Tuition
$12,200 @ 4%

12200 $12,688.00 $13,195.52 $13,723.34 $14,272.27 $14,843.17 $15,436.89

0 1 2 3 4 5 6
$12,083.81 $11,968.73 $11,854.74 $11,741.84 $11,630.01 $11,519.25

PV?
rate of 5% you can think of how much you will need to save for each tuition, one at a time
Total $43,300.73 Compare each quatity separate because of time value!!
 he account pays 3.5% interest. Bridgette wants to be a singer and she has her heart set on a new karaoke machine. The machine costs $200

ar also costs $20,000. If he doesn't pay cash for the car, Joe can get a loan at 2.0% interest for 6 years. The loan is structured so that Joe pay

w, it will cost $15,000. He could wait 4 years, but it will then cost him $20,000. At what rate will these options cost the same? This is also kno

for negatives!!

A costs $28,000 and Model B costs $18,000. With both cars she plans to pay cash and own them for 3 years before trading in for a new car

antities at PV or FV

e college is $12,200 per year. Andrea's son Trevor will begin college in 11 years. Andrea's portfolio is making 5% annually. How much does A

$16,054.37 $16,696.54 $17,364.40 $18,058.98 $18,781.34 $19,532.59 $20,313.90 $21,126.45

7 8 9 10 11 12 13 14
$11,409.54 $11,300.88 $11,193.25 $11,086.65 $10,981.06 $10,876.48 $10,772.89 $10,670.29

uition, one at a time

e. The machine costs $200. How much less will the account be worth in 11 years if she buys the karaoke machine now versus leaving the a

structured so that Joe pays one balloon payment at the end of 6 years. The balloon payment includes the principal plus all interest accrued

the same? This is also known as the break-even point

re trading in for a new car. Her research indicates that the trade in value for Model A after 3 years is 56% of the initial purchase price, while

nnually. How much does Andrea need to have set aside today/now to pay for 4 years of college for Trevor? (Note: Tuition will continue to c

$21,971.51
15
$10,568.67
ow versus leaving the account untouched?

plus all interest accrued over 6 years. If Joe takes the loan will he have enough money available from his investments to make the balloon p

tial purchase price, while the trade in value for Model B is 37%. Jessica has no emotional attachment to either model and wants to make a s

uition will continue to change annually and Andrea's portfolio balance will continue to accrue interest while Trevor is in school. Also, tuition
nts to make the balloon payment? How much will he be short/have to spare?

del and wants to make a strictly financial decision. The interest rate is 4%. For simplicity assume that operating and maintenance costs for t

r is in school. Also, tuition is due at the beginning of each year.)

ting and maintenance costs for the models are identical every year. Which model is the better decision and how much "cheaper" is it than t
how much "cheaper" is it than the alternative?
- Fundamentals of Loan

You plan to attand an in/state college and your parents will take out a loan of 100 K USD
at 6%. What are your yearly payments, given that you will have 5 years to pay back the
Loan?

($23,739.64)

Amortization Table

Beginning Principal
Year Balance Yearly Payment Interest Repayment
1 $ 100,000.00 $23,739.64 $ 6,000.00 $17,739.64
2 $ 82,260.36 $23,739.64 $ 4,935.62 $18,804.02
3 $ 63,456.34 $23,739.64 $ 3,807.38 $19,932.26
4 $ 43,524.08 $23,739.64 $ 2,611.44 $21,128.20
5 $ 22,395.89 $23,739.64 $ 1,343.75 $22,395.89

How much do you owe after second payment?

($63,456.34)

How would you the interest of the third year?

$ 3,807.38

You plan to attand an in/state college and your parents will take out a loan of 100 K USD
at 6%. What are your Monthly payments, given that you will have 5 years to pay back the
Loan?
Divide year rate by months
($1,933.28)

0.005
Beginning Monthly Principal
Month Balance Payment Interest Repayment
1 $ 100,000.00 $ 1,933.28 $ 500.00 $ 1,433.28
2 $ 98,566.72 $ 1,933.28 $ 492.83 $ 1,440.45
3 $ 97,126.27 $ 1,933.28 $ 485.63 $ 1,447.65
58 $ 5,742.32 $ 1,933.28 $ 28.71 $ 1,904.57
59 $ 3,837.75 $ 1,933.28 $ 19.19 $ 1,914.09
60 $ 1,923.66 $ 1,933.28 $ 9.62 $ 1,923.66

- Effective annual rate

EAR = (1 + r/ k) ^k -1

k= compounding interval

0.0616778119
- Saving for College

$ 10,000.00
2.50%

Begin in 5 years for four years

Emilia's portfolio 5% annually

$9,761.90 $9,529.48 $9,302.59 $9,081.10 $8,864.88 $8,653.81

0 1 2 3 4 5 6
10000 $10,250.00 $10,506.25 $10,768.91 $11,038.13 $11,314.08 $11,596.93

Other method
Total amount that requires saves $41,586.22
$34,213.09 ($34,213.09)

Confirmation
2.5% (Tuiti $10,000.00 ($11,314.08) ($11,596.93)
0 1 2 3 4 5 6
5% (Portfol $34,213.09 $43,665.53 $33,969.02

NET FUND $32,351.45 $22,372.09

 $8,447.77 $8,246.63 $8,050.28 $7,858.61
7 8 9 10
$11,886.86 $12,184.03 $12,488.63 $12,800.85

($11,886.86) ($12,184.03)
7 8
$23,490.69 $12,184.03

$11,603.84 $0.00
- Financial Planning

21 years of payments

5% ($641,057.64)
$50,000 $50,000
0
Years 25 26 54 55 75

$50,000 annually for 21 years

29
PMT $10,286.10

She needs to save $10,286.10 every year on her 26th birthday until she gets 54th to get
$50,000 dollars every year during 20 years
- Making Complex Simple

0 1 2 3 4 5
$ 75,000.00 $80,625.00 $86,671.88 $93,172.27 $100,160.19 $107,672.20

At year 10
$154,577.37 Investment
($53,675.06) Draw

$100,902.30 Total
 $ 12,000.00 $ 12,000.00 $ 12,000.00 $ 12,000.00
6 7 8 9 10
$115,747.61 $124,428.69 $133,760.84 $143,792.90 $154,577.37
-

$380,000
Down payment 0.15 $57,000

Total to finance $323,000

Mortage at 5% APR with monthly payments

$1,733.93

($1,095,425.48)
32 31 32 55
55 ? ? ?
24

PMT $14,265

Cost $12,000 5 years loan ($198.01)

Down Paym $2,000 Month

1
Finance $10,000 2
3
- Effective annual rate 0.07 4
0.04 5
6
EAR = (1 + r/ k) ^k -1 7
8
k= compounding interval 9
 10
0.072290081 11
12
13
Rest to Finance $6,412.91 14
Interval 36 15
16
Option A Option B 17
7% 4% 18
($198.01) ($189.33) 19
20
($8.68) 21
22
The option B to refinance the loan at 4% is cheaper per $8.68 per month 23
24
25

180 months for loan

$400,000 84 month to refinance for 3.5% year refinance fee for $5,50
$320,000.0 Loan 15 year @ 8%
$216,322.84 In the 85th month
$3,058.09 Monthly loan

Option A $3,058.09 $409,381.73 Refinance fee for 5,500

$221,822.84
Option B $2,652.57 $293,380.83

Option B is $38,929.69 Cheaper

??33,911 96
-

Price of Car $19,000

Option A Option B
Rebate of $1900 Pay $550 and $225 per month in 36 months
After buy it for 10,900
$8,170.92
$17,100 PV $17,840.28 PV

4% interest Market
$ 120,000.00 $ 120,000.00 $ 120,000.00 $ 120,000.00
56 … … 75

Beginning Monthly Principal

Balance Payment Interest Repayment
$10,000.00 $198.01 $58.33 $139.68
$9,860.32 $198.01 $57.52 $140.49
$9,719.83 $198.01 $56.70 $141.31
$9,578.51 $198.01 $55.87 $142.14
$9,436.38 $198.01 $55.05 $142.97
$9,293.41 $198.01 $54.21 $143.80
$9,149.61 $198.01 $53.37 $144.64
$9,004.97 $198.01 $52.53 $145.48
$8,859.49 $198.01 $51.68 $146.33
 $8,713.16 $198.01 $50.83 $147.19
$8,565.97 $198.01 $49.97 $148.04
$8,417.93 $198.01 $49.10 $148.91
$8,269.02 $198.01 $48.24 $149.78
$8,119.24 $198.01 $47.36 $150.65
$7,968.59 $198.01 $46.48 $151.53
$7,817.07 $198.01 $45.60 $152.41
$7,664.65 $198.01 $44.71 $153.30
$7,511.35 $198.01 $43.82 $154.20
$7,357.16 $198.01 $42.92 $155.10
$7,202.06 $198.01 $42.01 $156.00
$7,046.06 $198.01 $41.10 $156.91
$6,889.15 $198.01 $40.19 $157.83
$6,731.33 $198.01 $39.27 $158.75
$6,572.58 $198.01 $38.34 $159.67
$6,412.91 $198.01 $37.41 $160.60

Beginning Monthly Principal

year refinance fee for $5,500 Month Balance Payment Interest Repayment
1 $320,000.0 $3,058.09 $2,133.33 $924.75
2 $319,075.25 $3,058.09 $2,127.17 $930.92
3 $318,144.33 $3,058.09 $2,120.96 $937.12
4 $317,207.20 $3,058.09 $2,114.71 $943.37
5 $316,263.83 $3,058.09 $2,108.43 $949.66
6 $315,314.17 $3,058.09 $2,102.09 $955.99
7 $314,358.18 $3,058.09 $2,095.72 $962.37
8 $313,395.81 $3,058.09 $2,089.31 $968.78
9 $312,427.03 $3,058.09 $2,082.85 $975.24
10 $311,451.79 $3,058.09 $2,076.35 $981.74
11 $310,470.05 $3,058.09 $2,069.80 $988.29
12 $309,481.76 $3,058.09 $2,063.21 $994.87
13 $308,486.89 $3,058.09 $2,056.58 $1,001.51
84 $217,928.08 $3,058.09 $1,452.85 $1,605.23
85 $216,322.84 $3,058.09 $1,442.15 $1,615.93
Option C
36 months no interest

$527.78
$17,876.24 PV
Contract between borrower and lender
Contract IOU to return money

Loans
Mortages House
Bonds Government
- Treasure Security
Zero coupond bond

What is the distinction between a treasury bill and a strip?

For the time being, the distinction is a strip is the treasury bill,
zero coupon bond with maturity greater than one year.
But treasury bills originally were issued with up to one year maturity.
But you can buy government bonds with greater than one year maturity,
that are also zero coupon, okay?

($95,238.10)

$ 74,726.00
0 1 3 4 5
$ 100,000.00

**In the function Rate one of them should be negative in the amount to assume the operation
 6.00% Is the Rate of return of Yield to Maturity

Suppose that the payment is in six months

2.96% Is the Rate of return of Yield to Maturity per 6 months

- Coupon Paying Bonds

Coupon could be stated as percetage of Face Value

Stated at least as Coupon/2 because rates and normal periods are anually

Coupon 1500
FV= $100,000
C/2 C/2 C/2
0 1 2 … … 12

($94,712.33) Is the price of Bond

Match period of anuallity

- Prices versus Interest Rates

Change rate from 1% to 8%

$120,000.00
1% $111,618.93
2% $105,627.54 $110,000.00
3% $100,000.00 ------> The bond is selling at par
4% $94,712.33 $100,000.00
5% $89,742.24
6% $85,068.99 $90,000.00
7% $80,673.33
8% $76,537.32 $80,000.00

$70,000.00
Convex curve in price of bond
$60,000.00
0% 1% 2% 3% 4% 5%

- Real Data on Bond Markets

finance.yahoo.com.

You go up, and when you'll see something called the Bond Center.

If you notice, the first column is maturity, so 3 month, 6 month, 2 year,

3 year, 5 year, 10 year, 30 year.
What do you see?
You see the pattern that I had mentioned to you before, and
we did numbers with, which is pretty cool.
So the yield to maturity is 0.19, 0.39,
0.92, 1.21, 1.61, 2.25, 2.99.

I hope you can go from the yields to the prices.

Remember though, that the yields are quoted annually, so
remember the rate we divided by 2, and
everything including zero coupon bonds are valued on a six month basis compounded.

We sometimes assume the year for simplicity.

Composite Bond Rates.

The composite bond rates are interesting because although we focused

a lot on US Treasuries, and that's the first panel you'll see,
you'll also see municipal bonds.

And this site is for America and the municipal bonds, you'll see yields
also increasing with maturity, but there's a little bit of a curve ball there.
Because municipal bonds tend to have more risk, these are state bonds,
than federal government,
which assume to have the basic risk free structure, you'll see the rating show up.
So AA, AAA and typically, what you'll find is that the lower
the rating of the bond, the higher the yield of maturity.

Now that doesn't have to be every single time.

Remember this is at one point in time, at one instant in time,
and what we expect to happen is on average, right.
So many times people will say, the stock price fell, and the bond price went up.
Isn't that the opposite of what you would expect?
No. On average,
riskier things are expected to pay more.
Not always, not every time, okay.

If you go down and I'm going to go to the lowest panel,

what you also see are corporate bonds, and again,
you see a whole yield curve going from 2 year AA to 20 year A.
So clearly, AAA is the highest quality.
AA is the next and so on, so forth.
Again, I think you notice two patterns, again, not perfectly.
The two patterns are the following, as time goes up, yield to maturity goes up.
This is not always the case,
but tends to be the case because we are risk adverse.
Long-term bonds, prices fluctuate a lot more given everything else.
Therefore, we are not willing to pay as much for
them as the otherwise similar short-term bonds.
But there is also AAA, AA going on and the way they are listed is,
that the rates of return on a high quality bond should tend to be
lower than the rates of return on a lower quality bond.
Bonds

C C C+FV
0 1 2 … … 10
X

X= Price of Bond
C=Coupon
FV=Face Value
X= PV(C,FV)
 Column C

1% 2% 3% 4% 5% 6% 7% 8%
-

FV = $25,000
0 1 2 … … 20
r = 3%
PV = ?

($13,841.89) price of bond

True because it gives more stability it refers to A,AA, AAA

False you have to divide in terms of coupon return (by means of 3, 6 monhs)

0 1 2 3 4 5 6 7
PV=$770
 n=8 years

3.32% Rate of retur or YTM

Strip
Institution buys Institution Sells
PV=$250 PV=$1000
n=30 years zero coupon
c=$4 / 6 months n= from 6 months to 30 years

"The price of a long-term Strip will typically be lower that of a short-term STRIP"

1
FV=$1,000
8
 bonds are first paid are contracts
stocks require stake normally down payments
stocks are paid in shares
dividends are payments that are not every time paid
equity have lives in bonds
stocks tend to last forever
IOU in expectation sense

- 1926 first depression

One of the main advantages is interest on debt is tax deductible,
whereas dividend is not.
Remember interest is the way you get money on debt.
How do you get money on stocks?
Dividends, and of course you can sell the stock anytime.
So yes, you can have zero debt and for simplicity be both.
Can you have zero stock?
No.
I mean, as I said, no company should give you any money if you don't have any skin
in the game because you'll be incentivized to take too much risk.

I repeat right now, financing itself is not value creating.

Real ideas are.
But if financing weren't available so
freely, money wouldn't go to the best ideas of the world, okay?

nobody should be able to predict it in a good market, because the value of today's
price is based on everything you know about the future.
And so if you knew that tomorrow's price was higher or lower,
today's price would adjust accordingly and you'll see that why.
I think that's just awesome.
It's called market efficiency.
You can read, you can Google something called Random Vock.
It's a very famous concept.
Po=1/.05

20
Finite life of 50 years
$18.26
This is a PV problem, with an r of what?
0.05, and the number of PV is 50.
And what is PMT?
1, close bracket.
Took a long time to do.
[LAUGH] Do it in Excel, this approximately will be 18.26.
What does this mean?
Stare at it.
So let me ask you this.
The value we got for a perpetuity was 20, so 20 minus this is what?
$1.74.
And do you know what that is the present value of?
Getting 1 bucks starting in year 51 forever.
I mean, that's all it's worth today.
You are getting 1 buck repeatedly every year forever.
So on the other hand, now, let me change the example and
try if you increase the interest rate to 10%, what will happen to this number?
This number will become lesser and lesser.
So how the interest rate,
the more the discounting effect and the closer you're seal with
r formula is to what you would need to do even with the spreadsheet, pretty cool.

So welcome to some data.

As I said I could stay here forever, but
I want to quickly show you some kind of statistics.
Go to Yahoo!, finance.yahoo.com.
You can go to your own home sites.
I'll stay with the US one, so that we're on the same page for everyone.
Because I can't go to yours, I don't know where you are.
May the force be with you but I don't know where you are.
So the first thing that jumps out at you is the fact that stocks are talked about
all the time and the chain as the graph is up there.
So right now I'm seeing a S&P 500 Dow NASDAQ.
What is that S&P 500?
S&P 500 is a combination of 500 stocks valuated.
Meaning that you're gonna combine things, you could rate them equally.
But it S&P weights them according to their equity value.
So Microsoft, Google will get more weight, right?
Makes sense.
Then there's Dow.
And Dow is a bunch of 30 stocks.
And I'll show you some data in module six more so.
And it's around 17,565.
I look at it every day, simply because it shows up.
But it's an indicator of what the largest 30 stocks as a portfolio are doing.
And so, depending on where you invest it, you look at various indices.
And portfolios are good to look at.
Because portfolios are what you [COUGH] invest in if you're risk averse,
and I haven't seen anybody who's not.
NASDAQ is an exchange on which many famous companies are traded,
and it's value right now is 5,098.51, it's changing as we talk.
So it's fascinating.
So you see collections of stocks on the very first page.
But then there is a tab on the left which says My Portfolio.
You can create your own and you can track it.
Quotes you can do.
I'll just press market data and see where it takes me.
And it takes you again to market performance.
But then it lists some companies, Bank of America is there,
stock price is there, and so on, so forth.
So I will go to AAPL, just to see what's going on.
And AAPL is one of the biggest companies,
one of the most known to be innovative companies.
So it is trading right now at $118 per share, okay?
And you may obviously you'll be looking at it at a different time,
and it'll be different.
But that's not the point.
The point is, what kind of data is given here.
So the data I'll stay on is big picture.
So this previous closed, that has been the market closed yesterday.
Then the open, meaning when the market opened, what the price was.
The previous closed was 118.
Now it's about 117.5.
Then the bid and ask are prices at which you either buy or sell, from whom?
The broker who's willing to make the market.
So the broker is saying I can sell you at x and I'll buy from you at y and
so on so forth.
First year target estimate, 148.
This is some kind of an estimate.
The next number is very cool but we haven't talked about it.
Remember I told you high risk high return?
What modern finance theory has come up with the concept of beta.
And beta is that component of risk that remains once you are diversified.
So think of Apple.
If you're only holding Apple by itself, which you'll never do
because you're risk averse, then the measure of risk is the variance.
How much it's bouncing around, and you can see on the graph, roughly get a sense.
But if you put in a portfolio, the measure of risk changes completely.
Because it's always in the context of a larger portfolio.
And turns out that its risk is about as much as the market,
because the market's risk is one.
This is beautiful measure, beta.
It's got a Nobel Prize, effectively.
So it's about .9937 right now.
Now this number, by the way, is estimated.
So, unlike the other numbers, it could vary depend on how you estimate it.
And typically you use a fair amount of data, you do it pretty rigorously.
On Yahoo Finance it's probably two years worth of data is used and
that's not sufficient but at least the reports give you a sense of risk.
Days range is given in prices, 52 week range.
Volume, is number of shares traded.
Actually that number's extremely interesting to me.
Is because I don't worry when the stock price falls.
I get very worried when the volume falls to zero, which has happened.
And there has been extreme price movement, right?
So black Monday or a crash.
Why is that bothersome?
Because if trading is not happening that means people don't have faith in
the market and that in some sense is more bothersome.
Prices keep going up and down.
This market cap, what does that mean?
Market cap means price times number of shares.
So, it's a very simple.
And right now it's a big, big number.
$658 billion.
[LAUGH] Lot of money.
Okay, PE ratio is price over earnings.
Now, we know both, we have talked about earnings per share, we know price.
However, the number reported here is affected by accounting ways of measuring
earnings, which as I said, not the ways that we have talked about.
To understand more of that, you'll have to do accounting, do more finance classes.
And then you have dividend, how much dividend is being paid?
So this is interesting too.
We just talked about dividends.
And the dividend is $2.08 per share.
And a dividend yield is how many dividend divided by price?
You see what I'm saying?
So it's trying to get a sense of what the yield is, dividend yield.
And thus, such data is reported all the time and available everywhere.
I will do one more thing and then we'll stop.
You can press key Statistics, which is on the left panel.
And I think I pressed it and it's going to come up in a second.
What that report is even more information about a company.
The balance sheet, all kinds of financial ratios, all kinds of
mode information about volume, about price movements over the past year and so on.
But most importantly, which is different,
is it give you both information about the business.
What are revenues?
What are profits?
They're listed.
But they also give you information about the balance sheet.
And balance sheet has basically as you, saw both the equity and the debt.
The one reality about debt is that it doesn't trade as often as equity.
So the debt numbers you see on Yahoo Finance are trying to measure the book
value of debt, which is equal to market value only the day of the issue.
And after that market value changes, with interest rates,
with probability of default, whatever, but the book value doesn't change, right?
So that's a little bit problematic.
On the other hand, market value, very easy to figure out, right?
It is price times number of shares.
And it is listed right up there.
Right now, 657.83, it's changing, billion dollars.
I hope you enjoyed this section.
Stocks are one of my favorite things ever created.
They reflect the beauty of finance, the beauty of life, and
the beauty of trust in the future.
Growth is good if it creates value on a net basis.
And it's important to study growth very carefully, because it can be good or bad.
May the force be with you and we will end this module.
And you can please start doing assignments if you haven't already.
Of course its up to you when you do them.
And they allow you to take as much time as you want the assignments do.
But doing them almost is a necessity to learn.
Any amount of number crunching or problem solving I do,
will never teach you what you need to learn, unless you do them yourselves.
See you next time.
money
ear and so on.
-

MANDY

$ 57.84
 Po 56 P1 $ 57.84
D1 2.6
D2 3.2
r 9%

Po 43 D1 1.3975
r 9%
DIV1/Po 3.25% P1 45.4725

D1 9.75
r 11%
P0 ? $ 89
Reduce indiosyncratic risk or proper from the industries
Only market risk
Diversify in portfolios