Investor expectations, financial

Public investors purchase stock in IPOs or follow-on rounds after the technical risk has declined and the stock is liquid. Some of these investors expect to make their return when important commercial milestones are achieved, i.e., positive Phase 3 results, FDA approval, or financial breakeven, usually within a few years. Other investors are "momentum players" who hope to buy the stock on an upswing and get out before investor enthusiasm wanes, often within several months. Still other speculators enjoy playing the high volatility of biotech stocks, hoping to make returns within several days. 

One might expect securitization to be of greatest benefit to riskier companies. This expectation, however, is only partly true. As a company moves toward the extremes of financial instability and towards the brink of bankruptcy, securitization is less of a benefit. At this point, the SPV has a higher than normal risk of being challenged by the originator s trustee in bankruptcy, and risk-averse investors tend to avoid these transactions. 

OTA used standard financial techniques to obtain estimates of the cost of capital in the pharmaceutical industry as a whole and the cost of capital for pharmaceutical R D investments in particular. We relied on techniques and data provided in a contract report by Stuart Myers and Lakshmi Shyam-Sunder (285). The cost of capital varies over time and across firms, but over the past 15 years the cost of capital in the pharmaceutical industry as a whole varied in the neighborhood of roughly 10 percent after adjusting for investors inflation expectations (see appendix C). 

An investor acquiring a pool of mortgt es from a lender measures the amount of associated prepayment risk by using a financial model to project the level of expected future payments. Although it is impossible to evaluate with any accuracy the prepayment potential of an individual mortgage, such analysis is reasonable for a large pool of loans. This is similar to what actuaries do when they assess the future liability of an insurer that has written personal pension contracts. The level of prepayment risk for a pool of loans is lower than that for an individual mortgt e. 

To influence investors favorably, the entity seeking outside investment must produce a convincing business plan that sets forth the actions to be taken to achieve the expected revenue and profits. The business plan would include the necessary display of financial data. 

A financial investment is approved only if it is profitable, that is, if a positive financial return is to be expected and if the estimated return is in line with the expectations of the investor. The former can be assessed by net present value (NPV) calculations. Related sensitivity analyses give an indication on the key variables affecting profitability and the overall risk associated with a project. Additional criteria might include the internal rate of return (IRR), which is an indication of the average annual profitability of an investment or payback, which provides a time estimate to reach break-even. 

In long-term projects with incomes or expenses in the future, it is important to take price level development into account. At the beginning of the project an investor wants to know the size of his expenses and revenues in the future to be able to estimate the profitability of an investment. Inflation rates over the short term, one to two years, can be estimated with low uncertainty, but over the long term, estimates introduce a big risk. Too low estimates of price rise result in higher expenses than expected, causing financially... 

Regardless of the wording, the entrepreneur can not promise the investor anything. Granted the results will not come as fast as projected (not promised ) by the entrepreneur. On the other hand, the investor can not claim with any sincerity that they really expected the financial results within the time frame proposed. The shareholders are not innocent victims of the unscrupulous promoter. They had voluntarily gotten themselves into this mess. Investors like to complain that they were misled by the entrepreneur, but they really knew better. They have only themselves to blame. They tried to hit a financial home run. Many strike out. Some get more than they hoped for. In both cases, no one forced them to play the game. 

Using this expected price at period 1 and a discount rate of 5 percent (the six-month rate at point 0), the bond s present value at period 0 is 97.4399/(1 -F 0.05/2), or 95-06332. As shown previously, however, the market price is 95.0423. This demonstrates a very important principle in financial economics markets do not price derivative instruments based on their expected future value. At period 0, the one-year zero-coupon bond is a riskier investment than the shorter-dated six-month zero-coupon bond. The reason it is risky is the uncertainty about the bond s value in the last six months of its life, which will be either 97-32 or 97.55, depending on the direction of six-month rates between periods 0 and 1. Investors prefer certainty. That is why the period 0 present value associated with the single estimated period 1 price of 97-4399 is higher than the one-year bond s actual price at point 0. The difference between the two figures is the risk premium that the market places on the bond. 

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