Notes on Economics and Finance Course

Overview

• Comprehensive video course on finance and economics.
• Designed for smarter investment decisions and grasping global economies.
• Combines theory with practical insights, covers key topics relevant to businesses.

Instructor

• Name: Sriram Chundi
• Background: Originally taught in person, now offering via video.
• Also runs a YouTube channel called Changemakers Media.

Course Topics

1. Key Concepts for Business
2. Capital Markets
3. Valuation of Stocks
4. Business Strategies
5. Financial Statements
   • Analysis of financial statements
6. Capital Budgeting
7. Cash Flow Management
8. Business Cycle
9. Industry Analysis
10. ESG (Environmental, Social, Governance)
11. Macroeconomics
12. Portfolio Diversification
13. Alternative Investments

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Key Concepts Discussed

Thought Experiment

• A magic box produces a fixed dollar amount indefinitely. How much would you pay for it?
• Statistically, to earn $1 per day at a savings account interest rate of 1.05%, you need to invest $34,761.

Mortgage Example

• Buying a house for $100,000:
  • Down payment: $20,000
  • Mortgage: $80,000
  • Annual contributions of $9,396 lead to about 20 years to pay off due to the 10% interest rate.
  • Most payments apply to interest, short principal reductions.

Key Concepts of Today's Class

• Return on Investment (ROI):

  • Compares the efficiency of one investment relative to others.

  • Formula:

    ( ROI = \frac{Current \ Value - Cost}{Cost} )

  • Example: House bought for $100,000, market value $150,000 → ROI = 50%.

  • ROI is limited; does not account for time considerations.

• Time Value of Money:
  • Money today is worth more than in the future due to its earning potential.
  • Example: Investing $1 at 10% over 20 years = $6.73.
• Net Present Value (NPV):
  • Represents the net of all cash inflows and outflows to assess asset value.
  • NPV > 0 = good investment.
  • Importance of the Discount Rate (interest rate for future cash flow assessments).

Financial Products

• Stock:
  • A security representing ownership in a company.
  • Issued for financial purposes (e.g., expansion).
• Bond:
  • Represents a loan from an investor to a borrower, which can include governments.
  • Features include issue price, face value, coupon rate, and maturity date.

Differences between Stocks and Bonds

• Stocks: More volatile, ownership interest, dividends based on performance.
• Bonds: Less risky, fixed payments, debt obligation without ownership stake.

Valuation Techniques

1. Discounted Cash Flow Method:
   • Values assets based on expected cash flows discounted for inflation.
   • Pros: Theory-based, less market influenced.
   • Cons: Prediction inaccuracies, time-intensive.
2. Comps (Comparatives):
   • Measure valuation of a company against others in the industry using relevant metrics (e.g., Price to Earnings).

Business Strategy

• Mission Statement: Summary of company's purpose and values.
  • Elements: Purpose, Target Audience, Unique Explanation, Core Values.

SWOT Analysis

• Strengths: Unique features and competitive advantages.
• Weaknesses: Areas for improvement.
• Opportunities: External trends to leverage.
• Threats: External risks to monitor.

BCG Matrix

• Categorizes products based on market share and growth rate into Stars, Cash Cows, Question Marks, and Dogs.

Financial Statements

1. Statement of Profit or Loss: Summarizes revenues and expenses over time.
2. Statement of Financial Position: Shows assets, liabilities, and equity at a given time.
   • Assets: Current and Non-Current.
   • Liabilities: Current and Non-Current.
3. Cash Flow Forecast: Documents money coming in and out of a company.

Analyzing Financial Statements

• Techniques:
  1. Ratios (Profitability, Liquidity, Activity, Leverage)
  2. Horizontal Analysis (trend over periods)
  3. Common Size Analysis (percent of base figure)

Capital Budgeting

• Evaluating long-term investments like solar panels. Use NPV, IRR, and Payback Period to determine investment viability.

Macroeconomics

• Examines large-scale economic factors, the business cycle's phases:
  1. Trough
  2. Expansion
  3. Peak
  4. Recession

ESG (Environmental, Social, Governance)

• Companies must integrate ESG for sustainability and to attract investment.
  • Assessment frameworks and best practices are critical.

Alternative Investments

• Other than stocks and bonds (e.g., real estate, hedge funds, cryptocurrencies).

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Course Conclusion

• Interconnected nature of economics, finance, and business. Fundamental knowledge for future studies.
• Encouragement to subscribe to Changemakers Media for additional insights.