Lecture Notes on Finance and Economics

Jun 4, 2024

Lecture Notes on Finance and Economics by Sriram Chundi

Introduction

  • Instructor: Sriram Chundi
  • Purpose: To cover key topics in finance and economics relevant to businesses.
  • Format: Combines theory with practical insights.
  • Instructor's YouTube Channel: Changemakers Media.
  • Main Subjects Covered:
    • Key concepts for business
    • Capital markets
    • Valuation of stocks
    • Business strategies
    • Financial statements
    • Analysis of financial statements
    • Capital budgeting and cash flow
    • Business cycle and industry analysis
    • ESG (Environmental, Social, and Governance)
    • Macroeconomics
    • Portfolio diversification
    • Alternative investment types

Key Concepts

Return on Investment (ROI)

  • Definition: Compares the efficiency of different investments.
  • Formula: ROI = (Current Value of Investment - Cost) / Cost
  • Importance: Allows comparison of different asset classes.
  • Limitations: Doesn’t account for time; hence, can't always be directly compared.

Time Value of Money

  • Concept: Money today is worth more than money in the future due to its potential earning capacity and inflation.
  • Example: Continuous compounding where an initial investment grows over time due to interest.

Net Present Value (NPV)

  • Definition: The net of all cash inflows and outflows discounted to their present value.
  • Importance: Helps determine if an investment will generate positive returns.
  • Calculation: NPV > 0 indicates a good investment.

Financial Markets

Stocks vs Bonds

  • Stocks: Represent ownership in a company; higher risk, potential for dividends and appreciation.
  • Bonds: Represent a loan to the issuer (firms, governments); lower risk, fixed payments.
  • Stock Valuation Methods:
    • Discounted Cash Flow
    • Comparables (Price to Earnings, Price to Sales, Price to Book)

Business Strategy and Financial Documents

Mission Statement

  • Purpose: Summarizes the aims and values of a company.
  • Examples: Microsoft, Honda, Walmart.

SWOT Analysis

  • Components:
    • Strengths: Competitive advantages
    • Weaknesses: Areas of improvement
    • Opportunities: Potential markets/technology
    • Threats: External challenges

Financial Statements

  • Types:
    • Statement of Profit or Loss
    • Statement of Financial Position
    • Cash Flow Forecast
  • Analysis Techniques:
    • Ratios (Profitability, Liquidity, Activity, Debt/Leverage)
    • Horizontal Analysis (Trend over time)
    • Common Size Analysis (Percent of base figure)

Capital Budgeting

Key Considerations

  • Definition: Evaluating and selecting long-term investment projects.
  • Importance: Helps in resource allocation, long-term planning, and managing risk.
  • Methods:
    • Payback Period
    • NPV
    • Internal Rate of Return (IRR)

Macroeconomics

Key Factors

  • Business Cycle: Phases of economic activity (Expansion, Peak, Contraction, Trough).
  • GDP Components: Consumer Spending, Investments, Government Spending, Net Exports.
  • Types of Unemployment: Cyclical, Structural, Frictional.
  • Policies:
    • Fiscal Policy: Government spending and taxation.
    • Monetary Policy: Central bank control of money supply and interest rates.

ESG (Environmental, Social, Governance)

  • Definition: Framework for evaluating company performance in environmental, social, and governance areas.
  • Importance: Managing risk, reputation, regulatory compliance, and aligning with investor values.
  • Assessment: ESG ratings, transparency reports.

Portfolio Diversification

  • Definition: Spreading investments across various asset classes to reduce risk.
  • Types of Risks: Systematic (market-wide), Unsystematic (company/industry-specific).
  • Performance Measurement: Benchmarks, Time-Weighted vs Dollar-Weighted Returns.
  • Risk Measurement: Standard deviation.
  • Management Styles: Active (security selection), Passive (index funds).

Alternative Investments

  • Examples: Real estate, equipment leasing, hedge funds, commodities, cryptocurrencies, collectibles.
  • Characteristics: Illiquidity, high risk/high reward, not publicly traded, high costs of entry.

Course Wrap-Up

  • Summary: Explored interconnected nature of economics, finance, and business.
  • Reminder: Subscribe to Changemakers Media for impactful stories.