Introduction
(Welch, Chapter 01)
LEE, Dong Wook
Korea University Business School
FALL 2024
Finance
How to allocate money
Guidance:
Value ≡ What something is worth
Thus, finance is about making good financial decisions – i.e., allocating
money in a way that value is maximized.
In this course, we will be discussing financial decisions mostly in the context
of corporation. (Note: The same concepts and techniques are applicable to
individuals’ financial decision making.)
Value
Valuation (finding the value of something)
Extremely important
yet
Awfully difficult
One useful approach, mentioned in ch 1 of the textbook, is relative valuation.
It is based on the law of one price -- self-explanatory.
동질적인 재화이면 같은 가치(가격)을 갖는다
To use this method, one needs (to be able) to find a comparable, alternative,
peer, etc.
(will return to this concept later)
Let’s try Q 1.1.
= similar한거 찾을 수 있느냐
easy /market에서 tade하기 때문에
difficult
difficult
city - there are building, can add up valuation but there are subjective things ->hard to value
relatively easy
hard to value
Some more terms
Cash flows: flows of money
Project: a certain set of cash flows
in/out
ㄴ value of project: net cash flows
Company or Firm: a set of projects
So, we will look at a company/firm as a collection of cash flows.
company/firm as a collection of cash flows
That is,
Entire Firm = all current & future cash inflows
– all current & future cash outflows
= all current & future net cash flows
= all current & future net earnings
Our class focuses on:
▪ How to value cash flows
▪ What increases/decreases the value of cash flows
IN & OUT is just one way of categorizing cash flows.
ㄴ 소스???
Another way is to see where they come from.
income : own money(owner’s money) + source money(liabilities)
▪ Cash flows are generated by assets.
▪ Assets are funded by owners’ money and others’ money.
▪ That is, equities (stocks) and debts (liabilities).
(Each is a “project” with both cash inflows and cash outflows.)
So,
Entire firm = all stocks + all liabilities
own
borrowing money
Let’s try Q 1.2 and 1.3.
cash flows = actual cost + opportunity cost
Yes. Foregone salary is a cost that you are bearing.
benefit: not paying rent fee
valuation is hard
Inflows: value of implicit rent. Capital gain if house appreciates
Outflows: Maintenance costs. Transaction costs.Mortgage costs. Real estate tax etc..
This class will discuss value, value maximization, value-maximizing financial /
corporate decisions, assuming that the market is perfect.
Later in the semester, we move to market imperfections and their
implications for us.
Corporate (social) responsibilities are part of the discussions of market
imperfections.
Under market perfection assumptions, we begin with:
corporations are set up to maximize the wealth of their owners. It is the
government’s job to create rules that constrain corporations to do so only
within ethically appropriate boundaries
(p.6)
Of course, this is debatable. For example, compare:
✓ Business Roundtable 2019
✓ Council of Institutional Investors
So, who owns the company?
Who should own the company?
Any thoughts?
stock holders
wnwn
Let’s try Q 1.4, 1.5, 1.7, 1.8.
yes. ‘law of one price’ is one way to put a value. -> only in certain situation
1) 확실성 2) 선수취
bond is less risky because the amount of interest
rate is garunteed
it’s the same
Assets
Liabilities
traded in the market
= can see valuation in the market place
= 증권
company
▪ Valuing equities
▪ Value debts
Tahemei >
따함 영 vvm
"
Y
Those financial stakes in a company are typically in the form of a security.
Imagine you become an equity-holder or a (partial) owner of a company.
You will probably be doing so by buying a security that represents a
fractional ownership in a company.
If there is similarity within the security, then the equity YOU have and the
equity OTHERS have would be valued the same – LOOP!
If any of them is traded and thus have a price tag, then you can value the
entire equity part.