清华大学经管学院--金融工程1

1INTRODUCTIONTOFINANCIALENGINEERING©FredSongSeptember20012Introductory•WhatisFinance?•WhatisFinancialEngineering?•What’stheroleofFinancialEngineeringinNewEconomy?–Neweconomy–Financialengineeringande-commerce3WhatisFinance?•Money&Banking—MonetaryEconomics•InternationalFinance—InternationalEconomics4CorporateFinanceCapitalMarket(Investments)FinancialEconomicsMultinationalCorporateFinanceInternationalFinancialMarketFinancialEngineering5WhatisFinancialEngineering?•Generalizing:FinancialEngineeringinvolvesthedesign,thedevelopment,andtheimplementationofinnovativefinancialinstrumentsandprocesses,andtheformulationofcreativesolutionstoproblemsinfinance.•Specializing:FinancialEngineeringisriskmanagementviacreativestructuraltools.6FINANCEI.T.ENGINEERINGF.E.7CHAPTERONE:MMTheoryandNoArbitrage1.MMTheory•TwomeasurementsofvalueAccounting:bookvalue—historiccostFinance:marketvalue—netpresentvalue8Assets=Liabilities+Equity•AccountingEquality:duelentitysystemBookvaluemeasurementFunduseFundsource•FinanceEquality:Funduse=FundsourceMarketvaluemeasurement9CorporateFinanceAssetsLiabilitiesandEquityAsset1Asset2LiabilitiesAsset3..Equity.AssetnTotalAssetsTotalLiabilitiesandEquity?_1niiAssetAssetsTotalAccounting:Yes!Finance:No!CapitalMarketRealEconomyNPVFirmValue+NPV10LiabilitiesValueEquityValueLiabilitiesValueAssetsValueCapitalStructureFinancialleverage:orHasachangeoffinancialleverageanyimpactonthefirmvalue?11M&MTheoryM&Massumptions:•Frictionlessassumptions–Noincometaxes–Notransactioncosts–Noinformationasymmetry–Nocosttoresolveinterestconflictsamongstakeholders•Allliabilitiesarerisk-free12Notes:Amini-caseTwocompaniesEBITCapitalstructureFirmvalue$10millionp.abonds:$40million,8%shares:600,0001.A’sshareprice:$100pershareexpectedreturn:10%1millionshares$100millionB?A2.B’sbond:risk-freethesharenumberissupposedshareexpectedreturn:?13(Risk-free)NoPositionImmediateCashFlowCashFlowintheFutureReplicationofA’sStockUsingB’sStockandBondsB’sTotalPayments=B’sNetEarnings+InterestPayments=(EBIT-$3.2million)+$3.2million=EBITSupposepriceofB’sstock=$90pershareShortsell1%A’ssharesat$100pershareBuy1%B’ssharesat$90pershareBuy1%B’sbonds+$1,000,0001%ofEBIT$540,0001%(EBIT$3,200,000)$400,0001%$3,200,000NetCashFlow$60,0000ArbitragePriceofB’sstock=$100pershare14M&MProposition1•Proposition1:UnderM&MAssumption,i.e.,inthefrictionlessenvironment,thetotalmarketvalueofafirmisindependentofitscapitalstructure.•Thinkofthefirmasagiganticpizza,dividedintoquarters.Ifnow,youcuteachquarterinhalfintoeights,theM&Mpropositionsaysthatyouwillhavemorepieces,butnotmorepizza.—MertonMiler15ProbabilityDistributionofEBITandEPSfortheTwoCompaniesStateoftheEconomyEBITCompanyACompanyBEPSNetEPS(1millionshares)Earnings(600,000shares)Badbusiness$5million$5$1.8million$3.00Normalbusiness10106.811.33Goodbusiness151511.819.67Mean10106.811.33Standarddeviation46.81Beta1.01.01.67NOTE:Eachstateoftheeconomyisequallylikely.16Thecostofcapitaldependsonitsuseandnotonitssource.Proposition!17WeightedAverageCostofCapitalCostofcapitalofthefirmwithoutliabilityEDDrEDErWACCfeEDrWACCWACCrfe%10ABWACCWACCRiskpremiumofWACCFinancialleverageM&MProposition2:ThecostofcapitalofafirmequalsthecostofcapitalofthefirmwithoutliabilityandtheriskpremiumofWACCmultipliedbyfinancialleverage.18Alltransactionsinfinancialmarketsarezero–NPVtransactionactivities.Proposition!19ImplicationofM&MTheory•Frictionlessenvironmentdoesnotexistintherealworld.–Taxes–Transactioncosts–Informationasymmetry–Costsresolvinginterestconflict•Liabilitiesarerisk-bearing20—TaxShieldCompanyA:Taxrate:T=33%CompanyACompanyBClaimantCreditorsShareholdersGovernmentTaxAuthorityTotalFirmValuebeforeTaxation$100million$100million067million33millionCompanyB:(1–T)(EBIT–Interests)+Interests=(1-T)EBIT+TInterests40.0million40.2million19.8million$13.2million21—WACCwithTaxes•OtherM&MassumptionsholdEDTEBITEDDTrEDEETDrEBITEDDTrEDErWACCfffe1111erHasachangeoffinancialleverageanyimpactonthefirmvalue?Answer:Yes!Discountrateforcashflowofthefirm22—StockPriceShareNumberTotalEquitySharePriceCompanyA:1million67.0million$67CompanyB:600,00040.2million$67?IfCompanyAweretoannounceanissueof$40milliondebttobeusedtorepurchaseandretirecommonstockA’scapitalstructure=B’scapitalstructureMarketreaction:priceofA’ssharewouldgouptoreflectthe$13.2milliontaxshield:$(67.0+13.2)million/1million=$80.2pershare.Whereisthebenefitofthetaxshield?23StatePrices100$AP107$AuP98$AdPu=1.07d=0.98103$5.98$1$02.1$02.1$Risk-freesecurity%2frRisk-freeinterestrateBondABondB?BP24—BasicSecuritiesBasicSecurity1BasicSecurity21$01$0ud=?=?Portfolio{BasicSecurity1,BasicSecurity2}AuPAdPreplicatingAuPAdPBondAAdAudPuPAP=1duduNoArbitrage25•Replicatingrisk–freesecurityPortfolio{BasicSecurity1,BasicSecurity2}02.102.1replicatingfdfurr111=1$02.1$11$fr02.1$11$frLetffrr1fdudurdu115447.04357.0durrudurdrffdffuStatePrices26•ReplicatingBondAandBondB100985447.01074357.0AdAuAdPuPP53.985.985447.01034357.0BPNoArbitrageQuestions?1.D