Investeren & Beleggen samenvatting
H1: The Corporation and Financial Markets
4 major types of firms:
1. Sole proprietorship: business owned and run by one person, usually small with few (or no)
employees, most common type of firm
a. Straightforward to set up, no separation between firm and owner (only one owner),
owner has unlimited personal liability for any of the firm’s debts
2. Partnership: identical to a sole proprietorship, except it has more than one owner
a. All partners are liable for the firm’s debt, partnership ends on the death or
withdrawal of any single partners (partners can avoid liquidation of agreement
provides for alternatives such as a buyout)
b. Limited partnership: two kinds of owners, general partners and limited partners
(liability limited to investment, no management authority, can’t run business)
3. Limited liability companies (LLC): all owners have limited liability, but they can also run the
business
4. Corporations: legal entity separate and distinct from its owners, solely responsible for its
own obligations (owners of corporation not liable)
a. Formation → state in which it is incorporated must formally give its content
b. Ownership → most corporations have many owners, each owner owns a small
fraction (entire ownership stake divided into shares known as stock)
i. Equity = collection of all the outstanding shares
ii. Shareholder/stockholder/equity holder entitled to dividend payments
c. Double taxing: corporation tax on its profits + shareholders personal income tax
• S Corporations: exemption double taxing→ subchapter S tax treatment: firm’s profit not
subject to corporate taxes, shareholders include this profit on individual tax returns), only if
all the shareholders are US citizens/residents + no more than 100 of them
• C Corporations: corporations subject to corporate taxes, cannot qualify for S treatment
Ownership versus Control
• Board of directors: group of people who have the ultimate decision-making authority,
chosen by the shareholders (more share → more influence)
• Chief executive officer (CEO): runs corporations by instituting rules and policies set by the
board of directors (can also be chairman of the board of directors)
• Chief financial officer (CFO): most senior financial manager
o Financial managers responsible for 1. investment decisions 2. financing decisions
and 3. cash management
• Agency problem: managers put their own self-interest ahead of the interest of shareholders
o Minimize number of decision managers must make with other self-interest
• CEO’s performance → hostile takeover (investors dissatisfied and offer shares at low price,
someone buys large fraction of stock and replaces board of directors and CEO)
o threat often enough to discipline bad managers and motivate the board of directors
to make difficult decisions
• corporate bankruptcy → when a firm fails to repay its debts, the end result is a change in
ownership of the firm, with control passing from equity holders to debt holders
Private companies: limited set of shareholders and their shares are not regularly traded, value of
shares can be difficult to determine
,Public companies: shares trade on organized markets (stock market/stock exchange)
• liquidity: possible to sell quickly and easily for a price very close to the price at which you
could contemporaneously buy it
Primary market: corporation itself issues new shares of stock and sells them to the investors
Secondary market: between investors without involvement of the corporation
(NYSE) Market makers: matched buyers and sellers, posted bid price (at which they were willing to
buy to stock) and ask price (willing to sell the stock), immediately made trade with customer, even
without another customer willing to take the other side of the trade → liquidity provided
• market makers make money because ask prices are higher than bid prices: bid-ask spread
(Nasdaq market) all trades over phone or on a computer network, stocks had multiple market
makers who competed (NYSE only one market maker)
Since 2005 competition from fully electronic exchanges and alternative trading systems
• anyone can make a market in a stock by posting a limit order: an order to buy and sell a set
amount at a fixed process, (limit sell order with lowest price→ ask price, limit buy order with
highest price→ bid price)
• limit order book: collection of all limit orders → traders who post this liquidity providers
• high frequency traders (HFT’s): class of traders who will place, update and execute trades
many times per second in response to new information as well as other order, profiting both
by providing liquidity and by taking advantage of stale limit orders
Dark pools: don’t make their limit order books visible, offer investors the ability to trade at a better
price, with the tradeoff being that the order might not be filed if an excess of either buy or sell
orders Is received → for investors who don’t want to reveal their demand and willing to sacrifice the
guarantee of immediacy for a potentially better price
Fintech: relation between financial and technical innovation
• telecommunications
• invention cuneiform writing → verify transactions across distance
• blockchain technology: allows a transaction to be recorded in a publicly verifiable way
without the need for a trusted third party to certify the authenticity of the transaction
o cryptocurrency (bitcoin): creation and ownership determined via a public blockchain
• automation of banking services, big data and machine learning, competition (because of
internet, non-finance organisations could provide financial services)
H2: Introduction to Financial Statement Analysis
Financial statements: accounting reports with past performance information that a firm issues
periodically (+ annual report → sent to shareholder each year, only for public companies)
• investors, financial analysts and other parties obtain information about a corporation from it
+ useful for managers within the firm for financial decisions
• must be GAAP (Generally Accepted Accounting Principles)
• third party (an auditor) required to hire for checking that it is reliable and GAAP
every public company required to produce 4 financial statements: balance sheet, income statement,
statement of cash flows and statement of stockholders’ equity → provide overview for investors and
creditors
,Balance sheet/statement of financial position: lists the firm’s assets and liabilities (snapshot)
• stockholders’ equity/book value of equity: difference between assets and liabilities,
accounting measure of the firm’s net worth
o unlikely to provide accurate assessment of the true value of the firm’s equity: true
value of assets may be very different from its book value + many of the firm’s
valuable assets are not captured, such as expertise employees, reputation,
relationships, value of future innovations, quality of management team
• assets (left) = liabilities + stockholders’ equity (right side)
• left side shows how the firm uses its capital (investments), right side summarizes the source
of capital, or how a firm raises the money it needs
Assets
• Current assets: cash or assets that could be converted into cash within one year → cash and
other marketable securities (short-term low-risk investments), accounts receivable,
inventories, other current assets such as pre-paid expenses
• Long-term assets: net property, plant, and equipment (deducting by depreciation expense)
o Accumulated depreciation: total amount deducted over an asset its life
o Book value shown in balance: acquisition cost less accumulated depreciation
o Goodwill and intangible assets: the difference between the price paid for the
company and the book value assigned to its tangible assets by acquisition
▪ brand names, trademarks, patents, customer relationships, employees etc
o Amortization or impairment change: captures change in value of these assets
Liabilities
• Current liabilities: will be satisfied within one year → accounts payable, short-term debt,
items such as salary, or taxed, deferred or unearned revenue
• Net working capital: difference between current assets and liabilities, capital available in the
short term to run the business
• Long-term liabilities: extend beyond one year → long-term debt, capital leases, deferred
taxes (are owed but not yet been paid)
Not surprising book value of equity will often differ from amount investors are willing to pay for
equity (see above): market value of equity = shares outstanding x market price per share
• Also called market capitalization: depends on what investors expect those assets to produce
in the future, instead of historical cost of the firm’s assets
Market-to-book ratio (price-to-book ratio) = market value of equity / book value of equity
• Value stocks: firms with low market-to-book ratios, growth stocks: firms with high “ “
Enterprise value (total enterprise value, TEV): market value of equity + debt – cash
Income statement/statement of financial performance (W&V) lists revenues and expenses over a
period of time, last line shows firm’s net income (measure of its profitability during the period)
• Also called a ‘P&L’ statement: profit & loss, net income also called the firm’s earnings
• First lines: revenues from sales, costs of sales, gross profit = difference between sales
revenues and the costs
• Next, operating expenses: expenses from the ordinary course of running the business that
are not directly related to producing the goods or services being sold (selling, general, and
administrative expenses – research and development – depreciation and amortization)
o Operating income = firm’s gross profit net of operating expenses
, • EBIT = earnings before interest and Taxes: adjusted for other sources of income or expenses
that arise from activities that are not the central part of a company’s business
• Pretax income: deduct interest income to outstanding debt, net income: deduct taxes,
represents the total earnings of the firm’s equity holders
Earnings per share (EPS): Net income / Shares outstanding
• Stock options: give employees or executes the right to buy a certain number of shares
• Convertible bonds: a form of debt that can be converted to shares
o Diluted EPS: represents EPS calculated as though stock options had been exercised
and dilutive convertible debt had been concerted → more shares outstanding
Statement of cash flows: utilizes information from income statement and balance sheet to
determine how much cash the firm has generated, and how the cash had been allocated, during a
set period (probably most important for investor), 3 sections:
• Operating activities = net income adjusted by non-cash items related to operating activity
(add back non-cash expenses, such as depreciation)
o Accounts receivable: reduces cash available to the firm, so deduct increases
o Accounts payable: ‘borrowing’, increases cash available to the firm, so add increases
o Inventory: cash expense for the firm, so deduct increases
o Other: deduct increase in any other current assets net of liabilities, excluding cash
and debt
• Investment activities = deduct capital expenditures (purchases of new property, plant and
equipment → recognized as deprecation expenses, deprecation already added back)
o Also deduct other assets purchased or long-term investments made by the firm
• Financing activities = deduct dividends paid, add received cash from sale of its own stock,
add increases in borrowing
• Final line: combines the 3, overall change in cash balance over the period of the statement
(Retained earnings = net income – dividends)
Statement of stockholders’ equity: breaks down stockholders’ equity on balance sheet into the
amount that came from issuing shares versus retained earnings
• Change in Stockholders’ equity = Retained Earnings + Net sales of stock
= Net income – Dividends + Sales of stock – Repurchases of stock
Management discussion and analysis (MD&A): preface to the financial statements, recent year
discussed and background provided on company and any significant events that may have occurred
• coming year, outline goals, new projects and future plans may also be discussed
• disclose any off-balance sheet transactions
Notes to the financial statements: with further details on the information provided in the
statements, for example accounting assumptions used, firm’s subsidiaries or separate product lines,
details stock-based compensation plans for employees, different types of debt etc.
• details of acquisitions, spin-offs, leases, taxes, debt repayment schedules, risk management
Financial Statement Analysis
Investors use accounting statements to evaluate firm in 2 ways:
1. compare the firm with itself (analysing how it changed over time)
2. compare the firm to other similar firm using a common set of financial ratios
