Corporate Finance

Introductory and Assessment Lecture

Abdul Qadeer
B. Com (Hons.) Finance MS Finance PhD Finance (Continue)

03336487274 Email: dr.aqkhan@live.com

Factor Market

Household -Land -Labor -Capital -Entrepreneurship

Surplus

Borrow

Financial Market
Interest
Deals with Surplus and Deficit Funds

Interest

Business - Rent - Wages - Interest - Profit

Global Economic System

Product Market

Finance
After 1950, finance emerged as Science but in taking decision it is considered as Art Risk Profile Risk Appetite/tolerance Subjective Decision

Risk?
Uncertainty about future outcomes It is concern about downside volatility (unpredictable)

Probability of loss
Probability that actual return may be different from desired return/expected return

Return and Downside Volatility

Oil & Gas Development Company Limited Date 30-Jun-11 30-Sep-11 31-Dec-11 30-Mar-12 30-Jun-12 Price Return 100 105 0.05 111 0.0571 108 -0.027 112 0.037 Average 0.0293

0.1 0 -0.1 0

Sources of Uncertainty
Business Risk Financial Risk Liquidity Risk Exchange Rate Risk Country or Political Risk

Business Risk
Uncertainty about future income flows. This risk is associated with unique circumstances or company specific . For example:
Oil & Gas
Exploration Distribution

Poultry Farm: Cash flows are higher/lower unexpectedly

Stability and Instability

Cooking Oil (S) Real Estate (I)

Financial Risk
Chances of loss due to change in Interest Rate and Exchange Rate.
Interest Rate Risk: uncertainty about future IR. Exchange Rate Risk: Arises from the change in the exchange rate of one currency in relation to another.
Translation Risk Transaction Risk Economic risk

Country Risk
Risk associated to specific country. This risk differ country to country Political grounds

Liquidity Risk
In terms of:
Asset: Easily convert into cash Money Market: surplus cash exists in banks Capital Market: Presence of buyer and seller

EMH-Efficient Market Hypothesis

Efficient Capital Market:

Capital market is financial market where long term debt (when company or Government needs funding it (borrower) issues/sale debt securities in the form of Government Bonds, Corporate Bonds or notes
Security prices rapidly adjust the arrival of new information. Referred as informationaly efficient market Fama presented efficient market theory in the name of fair game model Three types of EMH Weak Form EMH: Semi strong form EMH Strong Form EMH

Weak Form EMH

The weak-form EMH assumes that current stock prices fully reflect all security market information, including the historical sequence of prices, rates of return, trading volume data etc Practical Example:
Open yahoo finance Enter ^KSE for searching the data of KSE 100 index Enter time span information Download the data.

 Semi Strong Form EMH:

Adjust rapidly to the release of all public information; that is, current security prices fully reflect all public information. Public information also includes all nonmarket information, such as earnings and dividend announcements, regarding earnings and dividends etc Strong Form EMH: The strong-form EMH contends that stock prices fully reflect all information from public and private sources

Corporate Decisions
Why Where Who When How