So what I'd like to do, maybe in 5 minutes at lighting speed, is to go back over the five topics, because remember our first session. It was a look back to the previous course and an advance of this course. So we have five topics an I would like to go very quickly back and remind you a few things. Very big picture things that you need to keep in mind. We started talking about market efficiency and I try to highlight that this is a very important topic, a very practical topic, a very misunderstood topic and I hope that you remember those three things because they are important. We did not talk as a matter of fact weather markets are efficient or not for many reasons. And that's a part of it is because you have evidence that defends market efficiency, evidence that attacks market efficiency and you have hundreds of papers that you could draw on to defend either position that you may have. But more important than that is we didn't talk about whether markets are efficient or not, because remember, market efficiencies and extreme hypothesis is like competition in economics. The markets are not competitive, per se. Markets are more or less competitive. Well, markets are more or less efficient, so it's not really a question one or zero. It's a question of where in between those two numbers were really are. Now that's important because that has implication on the way companies act and on the way investors attend to act. Think about the issues that we talked in terms of stock pricing or stock valuation multiples, or even if you use DCF. The whole question of how much should I pay for a company would be a moot question if you strongly believe that markets are efficient. Simply because you would believe that the market price properly represents the intrinsic value of the company, which is what market efficiency at the end of the day is all about. The more than the stock price represents the intrinsic value of a company, the more efficient markets are and the less that number represents intrinsic value of the company, the less efficient markets are. But you would act accordingly if you think that markets tend to be inefficient, you would either tend to look for miss price companies to make a buck on the difference between or two. And the difference between the value that you believe that a company has and what you would have to pay for that company. Or you would buy into what we call actively managed funds when fund managers are looking for you for those miss price companies to buy them and put them into a fun. On the flip side, the more efficient you think markets are, the less time you would explore. You will spend exploring whether accompanies properly price and the less inclined you would be to pay the high fees that active managers tend to charge, and the more you would go into passive management trackers that simply replicate the performance of an index at a very low cost. So that's the heart of market efficiency, and again it touches upon, and it has an influence in many of the things that companies do and many of the things that investors do and the way in which they behave. We also talked about bonds. Bonds remember are an extremely important for two reasons. They're one of the main sources of funding for companies that governments. And also they're one of the main two assets in the portfolios of investors. Whatever you want to mitigate the volatility of the stocks part of your portfolio, you put bonds into your portfolio. And we talked basically two things about those bonds. First, we kind of interpreted them and we went over the terminology. We talked about their return that you can get, which is basically that yield to maturity. Which remember that although we typically call it the yield, there's a reason why we call it the yield to maturity. Because that number says is there return that you're going to get if you buy at the market price today and you hold the bond until maturity. If you sell anytime before maturity, your return could be higher or lower than that number it's indicated by the yield to maturity. And then we also said and is very important because it goes to the link with the risk part that those yields maturities don't only tell you the return that you're going to get, but also tell you the risk that you're actually bearing. Because nobody pays a 20% yield to maturity if you're not going to bear much risk and nobody would actually accept to have a 2% yield to maturity unless you would be wearing very little risk. So there's a correlation, very obviously between yields to maturity, and the risk that you have to bear and of those we explore more than anything else, default risk. Default risk is remember, bonds pay fixed cashflows, but whether they're going to be paid or not, and the likelihood that they're going to be paid. Well, that's something that we need to determine and that's exactly what rating agencies tend to do. They determine the probability that you're going to be paying those cash flows and therefore they put a letter or a bunch of letters that indicates how likely the issuer is to pay those cash flows. So that's default rates, but there are. Obviously, other sources of risk, there's interest rate risk, there's liquidity risk, there's currency risk, unknown, unknown, unknown. All those things are important. All those things need to be considered when you put the risk of a bond together with a return that you're getting from that bond. Then we talked about stocks and in particular we talked about stocks valuation, and in particular we talked about multiples. That is, remember that there's two ways of value in stocks you can do this DCF or you can do multiples. Ideally you would have to be doing both of them, and the reason we didn't talk about DCF, which we typically in longer corporate finance courses. We actually do introduce the topic of DCF is mostly because there are very good standalone valuation courses in which you can go deeper into discounted cash flow analysis. So we took the alternative road of thinking about multiples. And if you learn one thing about those multiples, I hope that it is that it's not as easy as it seems, meaning is not destroyed forward comparison between these two numbers. You need to choose a proper benchmark, maybe more than one. You need to ask the question whether the multiple you're looking at is different than the benchmark, and if that is the case, why that is the case? And in the why is where you go back to fundamental analysis, when you go back to exploring how the company may grow, how risky the company is relative to what it's been in the past relative to other companies in the sector. So multiples valuation has that thing were valuing the company relative to something else, but that is the beginning of inquire why we find the difference. If we do, is basically what takes us back to understand at the drivers of devaluation. But remember one thing that is very important and that's again once again when a market efficiency comes to play. The more you think that markets are efficient, the less valuation you're going to do, because the more you trust the market price. There is such thing called a value trap which basically sort of highlights the importance of market efficiency. A value trap is stock that you believe is cheap but it deserves to be cheap. It's cheap because the fundamentals of the company are determining that it should be worth less than it was in the past or less than the competitors are price today. So market efficiently as a critical role when we think about the evaluation of companies. And then we talked about two financial policies, capital structure and dividend policy. Capital structure is critical because in the same way that you want your mortgage at the cheapest possible rate, companies also want to pay as little as possible to get capital to invest in whatever other investment opportunities or the markets in which they sell the product. So the way to do that is to think about what are the financial instruments that they need? And in what proportions they need them? With the goal of trying to find the instruments and the proportions that minimize the cost of capital. That is what capital structure is all about. And again, remember some people think of it as basically a decision on how much did we need to have. Some people decide, some companies decide not to have any debt, some companies decide to have a lot of dept, some companies tend to be in between. Remember every time you're increasing the proportion of debt you're increasing the cost of debt, you're increasing the cost of equity. But what's important is that you need to trade off these things. And in that trade off is that you find the optimal capital structure. With all that said, remember that there are variables, this is a very quantifiable topic, but there are variables that matter that are not quantifiable, flexibility always comes to mind. It's important that you remember that CFO's tend to think that they want to have the ability to raise money very quickly in order to take advantage of an unexpected investment opportunity. But they are very much indepted than it would be very difficult or very costly to do that. And finally, dividend policy which we just finished. Dividend policy another critical decision for a company because it determines how much money will go out of the company and how much money will get reinvested in the company, and that depends. Again, we don't have a model but it depends on many variables we need to take into account. We need to take into account the environment, we need to take into account the signal that we're sending. We need to take into account who are our shareholders and whether we want to meet their expectations or use the dividend policy to change the composition of the shareholders. We need to take into account that once we increase or decrease dividends, there's an implicit promise that you're going to keep those higher or lower dividends in the future. That's what we call dividend smoothing. Taxes always play a role, although that role may be different across the countries in which you live. And that dividend is one of the ways in which you can compensate shareholders. You can also buy back the shares from the shareholders, but that is a very different game to play because it doesn't have the implicit promise that if we buy back A lot of shares today expect us to do the same thing tomorrow that usually is not the case. Dividends are sticky, buybacks are not really sticky, and that's the way again, that companies decide whether to pay dividends or how much dividends to pay at every point in time. So with that, we're done with the second part of the course. I understand that the first part, corporate financial essential I had very good reviews and people were happy with it which is one of the reasons why we decided to do the second part. I hope that the first part was useful to you. I hope that this second part was also useful to you and if it was worth your time to actually spend this time watching videos and trying to think a little bit about some corporate finance topics that may be useful to you in your daily life. If it was worth your time, maybe it was worth my time and I'm sure it was worth my time too. So thank you very much for your trust in being with me in another course and maybe, just maybe, I'll see you some other time in the future. Thank you. [SOUND]
