Finance 313 FINAL CH8-9

Net Present Value NPV

present value of all net cash flows from the project at time = 0 through at time = n.

Comparison of the NPV and IRR methods

1. 2 conditions for no conflict between NPV and IRR - if only one cash outflow at the beginning (conventional) - if the project is independent, then NPV and IRR will give the same accept/ reject decision. 2. If only one cash outflow at the end (the cash flows are of loan type), then the IRR is really a borrowing rate and lower is better. 3. if cash flows change sign more than once, then it can result in multiple IRR. the maximum number of IRRs that can be is equal to the number of times the cash flows change sign. some cases, there is no IRR solution. NPV has only one solution. 4. for mutually exclusive projects, IRR can be misleading 5. redeeming qualities of the IRR - people seem to prefer talking about rates of return (IRR) than dollars of values (NPV). - NPV requires a market discount rate, IRR relies only on the project cash flows, although you do need an estimate of a required return to make the final decision.

NASDAQ national association of security dealers automated quotation system

1. NASDAQ is a price quotation system, not a trading system. in 1987, Nasdaq institutes a small order execution system (SOES), which is a trading system. 2. multiple market makers post ask and bid prices 3. NASDAQ national market( national Market issues); all transactions are immediately reported on the nasdaq system. larger and more actively traded securities. 4. NASDAQ capital market (small cap issues); reported once a day. small companies securities

IRR

1. Rule - accept/ reject; accept all independent projects whose IRRs are greater than R( the required return). - ranking; rank mutually exclusive projects by their IRRs, selecting the project with the highest IRR. 2. Net present value profile - plot of an investment's NPV at various discount rates.

NPV

1. Rule - accept/ reject; accept all independent projects whose NPVs are greater than zero. - ranking; rank mutually exclusive projects by their NPVs, selecting the project with the highest NPV 2. the NPV of a project is the same as the increase in the value of common equity today by undertaking an investment. 3. the NPV rule satisfies all three criteria.

Types of Market

1. direct search market; buyer and seller search each other directly 2. brokered market; brokers offer search services to buyers and sellers. 3. dealer market; dealers purchase specialized assets at the lower bid price and sell them at a higher asked price. bid asked spread is the profit margin to a dealer. 4. auction market; all participants in an asset converge at one place (physically or electronically) to bid on or offer an asset.

Types of projects

Independent - projects don't compete with one another. accept/ reject approach. Mutually Exclusive - projects are a group of projects that compete with one another in such a way that the acceptance of one project precludes (eliminates) all others in the group. Ranking approach.

proxy voting

a proxy statement is the grant of authority by a shareholder to someone else to vote his or her shares. a proxy fight is a struggle between management and outsiders for control of the board, waged by soliciting shareholders' proxy statements.

dual or multiple classes of common stocks

are created with unequal voting rights in order to provide management or family owners with voting power disproportionately greater than provided by their holdings under a on share one vote rule.

preemptive rights

common stockholders have rights to purchase on a pro rata basis new issues of common stock to maintain control or protect delusion. all new issues of common stock should be through rights offering.

Common stock feature: Voting

common stockholders have the right to elect directors. the board of directors appoints the officers who manage the corporation.

Cumulative dividends

current preferred dividend plus all arrearages (unpaid dividends) to be paid before common stock dividends can be paid.

staggered elections

directors' terms are rotated so they aren't elected at the same time. this makes it harder for a minority shareholder group to elect a director and takeovers attempts less likely to be successful.

Non cumulative

dividend preferred does not have this feature.

NYSE new york stock exchange

membership 1. commission brokers; are partners in a brokerage firm who execute customer orders to buy and sell securities on floor of the exchange. 2. floor brokers; execute orders for commission brokers on a fee basis 3. registered traders (floor traders) buy and sell for their own accounts. 4. specialist; acts as dealer for a small set of securities (about 25% of members) - with a few exceptions, each security listed for trading on the NYSE is assigned to a single specialist. - specialist provides a dealer function to provide continuous and liquid market by absorbing temporary imbalance in buy and sell order. posts the ask prices and bid prices for securities assigned. - most of trading that occurs directly between brokers around the specialist's post. this is called trading in the crowd.

cumulative voting

the directors are all elected at once. total votes that each shareholder may cast equal the number of shares times the number of directors to be elected. In general if N directors are to be elected, it takes [1/ (N+1)] percent of the stock +1 share to assure a deciding vote for one directorship. good for getting minority shareholder representation on the board.

straight(majority) voting

the directors are elected one at a time, and every share gets one vote. good for freezing out minority shareholders.

IRR Internal Rate of Return

the discount rate that forces the NPV to equal zero.