برنامج توعية الوسطاء

د. منذر بركات العمري

هيئة االوراق المالية والسلع

Interest Rates and Money Supplyأسعار الفائدة والكتلة النقدية

Interest is the rent of money Equal to the real growth rate of GDP plus the

expected inflation rate plus a premium to compensate for the riskness of the company being analyzed.

Money supply is the amount of liquidity that is being allowed by the UAE central bank. The company being analyzed benefits if the amount of liquidity is near the healthy level.

Both interest rates and money supply have a great effect on the performance and value of the company and need to be taken into consideration in any financial analysis.

Function of Financial Markets and Institutions

وظيفة األسواق والمؤسسات المالية

Allows transfers of funds from person or business without investment opportunities (i.e., “Lender-Savers”) to one who has them (i.e., “Borrower-Spenders”)

يحتاجونها من الى يملكونها ممن االموال تحويل

Improves economic efficiency

االقتصادية الفاعلية زيادة

Segments of Financial Markets1. Direct Finance

• Borrowers borrow directly from lenders in financial markets by selling financial instruments which are claims on the borrower’s future income or assets

المباشر • التمويل

2. Indirect Finance• Borrowers borrow indirectly from lenders via

financial intermediaries (established to source both loanable funds and loan opportunities) by issuing financial instruments which are claims on the borrower’s future income or assets

المباشر • غير التمويل

1-5Flow of Funds Through the Financial System

Function of Financial Markets رسم توضيحي لفكرة انتقال االموال

Classifications of Financial Marketsتصنيف األسواق حسب اإلصدار

1. Primary Market األولية السوق New security issues sold to initial

buyers

2. Secondary Market الثانوية السوق Securities previously issued are

bought and sold

Classifications of Financial Marketsتصنيف األسواق حسب التنظيم

3. Exchanges ) البورصات ) المنظمة االسواق Trades conducted in central locations

(e.g., ADSM, DFM, ….)

4. Over-the-Counter Markets الغير االسواقمنظمة Dealers at different locations buy and

Function of Financial Intermediariesدور الوساطة المالية

Financial Intermediaries الوسطاء الماليين

1. Engage in process of indirect finance

2. More important source of finance than securities markets

3. Needed because of transactions costs and asymmetric information

Transactions Costs التحويالت تكاليف

1. Financial intermediaries make profits by reducing transactions costs

2. Reduce transactions costs by developing expertise and taking advantage of economies of scale and scope.

Function of Financial Intermediaries

المالية الوساطة دور

• A financial intermediary’s low transaction costs mean that it can provide its customers with liquidity services, services that make it easier for customers to conduct transactions توفير

االنتاجي المشروع انهاء الى الحاجة دون السيولة1. Banks provide depositors with checking accounts

that enable them to pay their bills easily

2. Depositors can earn interest on checking and savings accounts and yet still convert them into goods and services whenever necessary without having to discontinue and liquidate investments

Another benefit made possible by the FI’s low transaction costs is that they can help reduce the exposure of investors to risk, through a process known as risk sharing

المخاطر ادارة FIs create and sell assets with lesser risk to one

party in order to buy assets with greater risk from another party (e.g. banks)

This process is referred to as asset transformation, because in a sense risky assets are turned into safer assets for investors

Adverse Selection االستثمار عن االمتناع

1. Before transaction occurs

2. Potential borrowers most likely to produce adverse outcome are ones most likely to seek loan and be selected – brokers and financial analysts can prevent that by studying the credit worthiness of the borrowers

Moral Hazard الغير بأموال المخاطرة1. After transaction occurs2. Hazard that borrower has incentives

to engage in undesirable (immoral) activities making it more likely that won't pay loan back

Financial intermediaries reduce adverse selection and moral hazard problems, enabling them to make profits. How they do this is covered in many of the topics to come.

المخاطر هذه من تقلل المالية المؤسسات

Regulation of Financial Markets Reasons for Regulation التشريع اسباب

المالي

1. Increase Information to Investors

2. Protect investors and their investments

3. Ensure the Soundness of Financial Intermediaries

4. Improve Monetary Control

Regulation Reason: Increase Investor Information

المعلومات توفر زيادة• Asymmetric information in financial markets

means that investors may be subject to adverse selection and moral hazard problems that may hinder the efficient operation of financial markets and may also keep investors away from financial markets

• The Securities and Commodities Authority (SCA) requires corporations issuing securities to disclose certain information about their sales, assets, and earnings to the public and restricts trading by the largest stockholders (known as insiders) in the corporation.

Regulation Reason: Increase Investor Information

المعلومات توفر زيادة

• Such government regulation can reduce adverse selection and moral hazard problems in financial markets and increase their efficiency by increasing the amount of information available to investors

Regulation Reason: Ensure Soundness of Financial

Intermediaries الوسطاء د ش� ر� Because providers of funds to financial

intermediaries may not be able to assess whether the institutions holding their funds are sound or not, if they have doubts about the overall health of financial intermediaries, they may want to pull their funds out of both sound and unsound institutions, with the possible outcome of a financial panic that produces large losses for the public and causes serious damage to the economy

Regulation Reason: Ensure Soundness of Financial

Intermediaries الوسطاء د ش� ر� To protect the public and the economy

from financial panics, six types of regulations are needed: Restrictions on Entry - soundness Disclosure – transparency Restrictions on Assets and Activities – no

dummies Deposit Insurance – peace of mind Limits on Competition – no price wars Restrictions on Interest Rates – no usury

Regulation: Restriction on Entry الدخول موانع

Restrictions on Entry Very tight regulations as to who is allowed to

set up a financial intermediary Individuals or groups that want to establish a

financial intermediary, such as a bank or an insurance company, must obtain a charter from the government

Only if they are upstanding citizens with impeccable credentials and a large amount of initial funds will they be given a charter.

Regulation: Disclosure االفصاح

Disclosure Requirements

There are stringent reporting requirements for financial intermediaries Their bookkeeping must follow certain strict

principles, Their books are subject to periodic inspection, They must make certain information available

to the public.

Regulation: Restriction on Assets and Activities تحديد

النشاطات There are restrictions on what financial

intermediaries are allowed to do and what assets they can hold

Before you put your funds into a bank or some other such institution, you would want to know that your funds are safe and that the bank or other financial intermediary will be able to meet its obligations to you

Regulation: Restriction on Assets and Activities تحديدالنشاطات

One way of doing this is to restrict the financial intermediary from engaging in certain risky activities

Another way is to restrict financial intermediaries from holding certain risky assets, or at least from holding a greater quantity of these risky assets than is prudent

Regulation: Deposit Insurance

التأمين

The government can insure people providing funds to a financial intermediary from any financial loss if the financial intermediary should fail

Regulation: Past Limits on Competition للتنافس حدود

Although the evidence that unbridled competition among financial intermediaries promotes failures that will harm the public is extremely weak, the government needs to impose many restrictive regulations

The purpose is to prevent financial intermediaries from competing to the point where the integrity of the financial system is compromised.

Regulation: Past Restrictions on Interest Rates ألسعار حدودالفائدة Competition must also be inhibited

by regulations that impose restrictions on interest rates that can be paid on deposits

These regulations need to be instituted because of the widespread belief that unrestricted interest-rate competition help encourage bank failures

Regulation Reason: Improve Monetary Control بالكتلة التحكم

النقدية Because banks play a very important role in

determining the supply of money (which in turn affects many aspects of the economy), much regulation of these financial intermediaries is intended to improve control over the money supply

One such regulation is reserve requirements, which make it obligatory for all depository institutions to keep a certain fraction of their deposits in accounts with the central bank (the PMA)

Reserve requirements help the PMA exercise more precise control over the money supply – well, we do not have a currency nor can we control the used ones

The cost of moneyالمال رأس تكلفة

The price, or cost, of debt capital is the interest rate.

The price, or cost, of equity capital is the required return. The required return investors expect is composed of compensation in the form of dividends and capital gains.

What four factors affect the cost of money?المال رأس تكلفة في تؤثر التي العوامل

Time preferences for consumption )sacrifice( Expected inflation )loss in purchasing power( Risk )worry(

“Nominal” vs. “Real” ratesوالحقيقي االسمي العائد

k = represents any nominal rate

k* = represents the “real” risk-free rate of interest, if there was no inflation. Typically ranges from 1% to 4% per year.

kRF = represents the rate of interest on Treasury securities.

Determinants of interest rates) العائد ) الفائدة سعر محددات

k = k* + IP + DRP + LP + MRP

k = required return on a debt security

k* = real risk-free rate of interest

IP = inflation premium

DRP = default risk premium

LP = liquidity premium

MRP = maturity risk premium

Premiums added to k* for different types of debtالمختلفة المخاطر عالوات مقارنة

IP MRP

DRP LP

S-T Treasury L-T Treasury

S-T Corporate

L-T Corporate

Yield curve and the term structure of interest ratesباالستحقاق الفائدة وعالقة العائد منحنى

Term structure – relationship between interest rates )or yields( and maturities.

The yield curve is a graph of the term structure.

Hypothetical yield curveافتراضي عائد منحنى

An upward sloping yield curve.

Upward slope due to an increase in expected inflation and increasing maturity risk premium.

Years to Maturity

Real risk-free rate

1 10 20

InterestRate (%)

Maturity risk premium

Inflation premium

The Yield Curveالعائد منحنى

Corporate yield curves are higher than that of Treasury securities, though not necessarily parallel to the Treasury curve.

The spread between corporate and Treasury yield curves widens as the corporate bond rating decreases.

The Yield Curveالعائد منحنى

0 1 5 10 15 20

Years toMaturity

Interest Rate (%)

5.2%5.9%

6.0%TreasuryYield Curve

BB-Rated

AAA-Rated

The Term Structure of Interest Ratesعالقة سعر الفائدة بالوقت

The Yield Curve Spot and forward rates Theories of the Term Structure

bonds with the same characteristics,but different maturities

focus on Treasury yields same default risk similar liquidity many choices of maturity

The Term Structure of Interest Ratesبالوقت الفائدة سعر عالقة

Treasury securitiesأوراق الخزينة المحددة ألسعار الفائدة وهيكلها الزمني

Tbills: 4, 13, 26, and 52 weeks zero coupon

Tnotes: 2, 5, and 10 years

Tbonds: 30 years Tnotes and Tbonds are coupon

sometimes short-term yields are highest,

most of the time long-term yields are highest

Relationship between yield & maturity is NOT constant

بتغير والوقت الفائدة سعر بين ما العالقة تتغيرالمتوقعة االقتصادية األوضاع

The Yield Curveمنحنى العائد

plot of maturity vs. yield slope of curve indicates

relationship between maturity and yield

Upward Sloping

yields rise w/ maturity (common)

maturity

downward sloping (inverted)

yield falls w/ maturity (rare)

maturity

yields similar for all maturities

maturity

humped

intermediate yields are highest

maturity

Theories of the term structureمحددات العالقة يبن الوقت وأسعار

الفائدة

explain relationship between yield and maturity

what does the yield curve tell us?

The Pure Expectations Theory Assume:

bond buyers do not have any preference about maturityi.e.bonds of different maturities are perfect substitutes

LT = long-term ST = short-term

if assumption is true,then investors care only about expected return if expect better return from ST bonds,

only hold ST bonds if expect better return from LT bonds,

only hold LT bonds

The Pure Expectations Theory

but investors hold both ST and LT bonds

so, must EXPECT similar return:

LT yields = average of the expectedST yields

slope of yield curve tells us direction of expected future ST rates

why? if expect ST rates to RISE,

then average of ST rates will be >current ST rate so LT rates > ST rates so yield curve SLOPES UP

if expect ST rates to FALL,then average of ST rates will be <current ST rate so LT rates < ST rates so yield curve slopes DOWN

if expect ST rates to STAY THE SAME,then average of ST rates will be =current ST rate so LT rates = ST rates so yield curve is FLAT

Is this True? not quite. FACT: yield curve usually slopes up but expectations theory would

predict this only when ST rates are expected to rise 50% of the time

what went wrong?

back to assumption:bonds of different maturities are perfect substitutes

but this is not likely long term bonds have greater price

volatility short term bonds have reinvestment risk

assumption is too strict so implication is not quite correct

Liquidity Theory assume:

bonds of different maturities are imperfect substitutes,and investors PREFER ST bonds

so if true,investors hold ST bondsUNLESSLT bonds offer higher yield as incentive

higher yield = liquidity premium

Liquidity Theory

IF LT bond yields have a liquidity premium,then usually LT yields > ST yieldsor yield curve slopes up.

Liquidity Theory

Problem How do we interpret yield curve? slope due to 2 things:

(1) exp. about future ST rates(2) size of liquidity premium

do not know size of liq. prem.

if liquidity premium is small, then ST rates are expected to rise

maturity

yield yield curve

small liquidity premium

if liquidity premium is larger, then ST rates are expected to stay

the same

maturity

yield yield curve

large liquidity premium

Preferred Habitat Theory assume:

bonds of different maturities are imperfect substitutes,and investor preference for ST bonds OR LT bonds is not constant

liquidity premium could be positive or negative

yield curve very difficult to interpret do not know size or sign of liquidity

premium

Segmented Markets Theory assume:

bonds of different maturities are NOT substitutes at all

if assumption is true, separate markets for ST and LT bonds slope of yield curves tells us nothing

about future ST rates unrealistic to assume NO substitution

bet. ST and LT bonds unrealistic to assume NO substitution

Segmented Markets Theory

The Annual Reportالسنوي التقرير

Balance sheet – provides a snapshot of a firm’s financial position at one point in time.

Income statement – summarizes a firm’s revenues and expenses over a given period of time.

Statement of retained earnings – shows how much of the firm’s earnings were retained, rather than paid out as dividends.

Statement of cash flows – reports the impact of a firm’s activities on cash flows over a given period of time.

Balance Sheet: Assetsاالصول - المالي المركز قائمة

CashA/RInventories

Total CAGross FALess: Dep.

Net FATotal Assets

20067,282

632,1601,287,3601,926,8021,202,950 263,160 939,7902,866,592

200557,600

351,200 715,2001,124,000

491,000 146,200 344,8001,468,800

Balance sheet: Liabilities and Equityالملكية – وحقوق الخصوم المالي المركز قائمة

Accts payableNotes payableAccruals

Total CLLong-term debtCommon stockRetained earnings

Total EquityTotal L & E

2006524,160

636,808 489,6001,650,568

723,432460,000

32,592 492,5922,866,592

2005145,600200,000

136,000481,600323,432460,000

203,768 663,7681,468,800

Income statementالدخل قائمة

SalesCOGSOther expenses

EBITDADepr. & Amort.

EBITInterest Exp.EBTTaxesNet income

20066,034,000

5,528,000 519,988

(13,988) 116,960(130,948) 136,012(266,960) (106,784) (160,176)

20053,432,0002,864,000 358,672

209,328 18,900

190,428 43,828

146,600 58,640

87,960

Other dataأخرى معلومات

No. of sharesEPSDPSStock price

2006100,000-$1.602

$0.11$2.25

2005100,000

$0.88$0.22$8.50

Did the expansion create additional net operating after taxes )NOPAT(?

الضريبة بعد التشغيلي الدخل حسابات

NOPAT = EBIT )1 – Tax rate(

NOPAT06 = -$130,948)1 – 0.4(

= -$130,948)0.6(= -$78,569

NOPAT05 = $114,257

What effect did the expansion have on net operating working capital?

العمل المال رأس صافي حسابات

NOWC = Current - Non-interest

assets bearing CL

NOWC06 = )$7,282 + $632,160 + $1,287,360( – ) $524,160 + $489,600(

= $913,042

NOWC05 = $842,400

What effect did the expansion have on operating capital?

التشغيلي المال رأس حسابات

Operating capital = NOWC + Net Fixed Assets

Operating Capital06 = $913,042 + $939,790

= $1,852,832

Operating Capital05 = $1,187,200

What is your assessment of the expansion’s effect on operations?

التشغيل حسابات من مالحظات

Operating capital

Net Income

2006 $6,034,000

-$78,569$913,042

$1,852,832-$160,176

2005 $3,432,00

0$114,257$842,400$1,187,20

0$87,960

What was the free cash flow )FCF( for 2002?الحر النقدي التدفق حساب

FCF06 = NOPAT – Net capital investment

= -$78,569 – )$1,852,832 - $1,187,200(

= -$744,201

Is negative free cash flow always a bad sign?

Economic Value Added )EVA(المضافة القيمة حساب

EVA = After-tax __ After-tax

Operating Income Capital costs

= Funds Available __Cost of

to Investors Capital Used

= NOPAT – After-tax Cost of Capital

EVA Conceptsالمضافة االقتصادية القيمة مفهوم

In order to generate positive EVA, a firm has to more than just cover operating costs. It must also provide a return to those who have provided the firm with capital.

EVA takes into account the total cost of capital, which includes the cost of equity.

What is the firm’s EVA? Assume the firm’s after-tax percentage cost of capital was 10% in 2000 and 13% in 2001.

المضافة االقتصادية القيمة حساب

EVA06 = NOPAT – )A-T cost of capital( )Capital(

= -$78,569 – )0.13()$1,852,832(

= -$78,569 - $240,868

= -$319,437

EVA05 = $114,257 – )0.10()$1,187,200(

= $114,257 - $118,720

= -$4,463

Did the expansion increase or decrease MVA?المضافة السوقية القيمة حساب

MVA = Market value __ Equity capital of equity supplied

It measures the value added to the company from its activities since its inception.Can not tell who did what.

Calculating Key Multipliersالمضاعفات مثال - حساب

P/E = Price / Earnings per share= $12.17 / $1.014 = 12.0x

P/CF = Price / Cash flow per share= $12.17 / [)$253.6 + $117.0( ÷ 250]= 8.21x

Calculating Key Multipliersمثال - المضاعفات حساب

M/B = Mkt price per share / Book value per share= $12.17 / )$1,952 / 250( = 1.56x

2007* 2006 2005 Ind.

P/E 12.0x -1.4x 9.7x 14.2x

P/CF 8.21x -5.2x 8.0x 11.0x

M/B 1.56x 0.5x 1.3x 2.4x

Analyzing the multipliersالمضاعفات تحليل

P/E: How much investors are willing to pay for $1 of earnings.

P/CF: How much investors are willing to pay for $1 of cash flow.

M/B: How much investors are willing to pay for $1 of book value equity.

For each ratio, the higher the number, the better. P/E and M/B are high if ROE is high and risk is

Trend analysisالنمطية تحليل

Analyzes a firm’s financial ratios over time

Can be used to estimate the likelihood of improvement or deterioration in financial condition.

Potential uses of freed up cashالحر النقدي التدفق استخدامات

Repurchase stock Expand business Reduce debt All these actions would likely improve the

stock price.

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