FINC2011 Lecture Notes - Lecture 1: Reinvestment Risk, Net Present Value, Financial Asset
Document Summary
Real assets: generate cash inflows/income, tangible = e. g. plant + machinery, intangible = e. g. brand names + patents. Financial assets/securities: claims on real assets + cash flow they will generate, used to pay for real assets, borrowing, retaining, reinvesting cash flow, or selling additional shares. If > oc = invest: oc depends on risk, shareholders are risk averse. If > 0 then project is increasing shareholder value. Shareholders/investors: observe current earnings, cash flow, dividends + form expectations for future earnings, correct for risk (adjust by risk premium i. e. risk free rate of return, react = set prices/market values. Corporation: legal entity owned by its shareholders i. e. can make contracts, carry business, borrow/lend money, sue, public listed on stock exchange (e. g. apple, Microsoft, facebook: private i. e. closely held" (e. g. fiat, porsche, ikea, If cash surplus reinvested instead of dividend paid off: not in shareholder interests if < oc of capital, may need to consider stakeholders.
