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1-3
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.
1-4
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
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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
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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
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Other dataأخرى معلومات
No. of sharesEPSDPSStock price
2006100,000-$1.602
$0.11$2.25
2005100,000
$0.88$0.22$8.50
1-8
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
1-9
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
1-10
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
1-11
What is your assessment of the expansion’s effect on operations?
التشغيل حسابات من مالحظات
Sales
NOPAT
NOWC
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
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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?
1-13
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
1-14
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.
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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
1-16
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.
1-17
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
1-18
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
1-19
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
low.
1-20
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.
1-21
Potential uses of freed up cashالحر النقدي التدفق استخدامات
Repurchase stock Expand business Reduce debt All these actions would likely improve the
stock price.
1-22
Margin is the amount you put up to trade without paying the full balance.
Initial margin (IM) is the value of your equity in the margin trade.
Maintenance margin (MM) is the minimum equity you need to maintain at all time.
Margin call (MC) is the amount that you need to put up to bring your equity back to the initial margin.
Margin Tradingبالهامش االتجار
1-23
Margin Tradingاالتجار بالهامش
XYZ is now selling at DHS10. You have DHS5000 and would like to purchase 1000 shares. Your broker is willing to extend you a loan at the call money rate+2% for processing and other costs. Maintenance margin is 37.5%.
Calculate your profits and losses in the case of 10% price move in both directions.
Calculate the minimum price before getting a margin call.
1-24
Margin Tradingبالهامش االتجار
Assets DHS Liabilities & Equity
DHS
1000 shares @ 10
10000
Loan 5000
Equity 5000
TA 10000
TC 10000
Price @ DHS10
1-25
Margin Tradingبالهامش االتجار
Assets DHS Liabilities & Equity
DHS
1000 shares @ 11
11000 Loan 5000
Equity 6000
TA 11000 TC 11000
Price up by 10% @ DHS11
1-26
Return with and without use of margins. Without margin:
R=(11000-10000)/10000=10%. With margin:
R=(6000-5000)/5000=20%. Your margin is
6000/11000=54.54%
Margin Tradingبالهامش االتجار
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Margin Tradingبالهامش االتجار
Assets DHS Liabilities & Equity
DHS
1000 shares @ 9
9000 Loan 5000
Equity 4000
TA 9000 TC 9000
Price down by 10% @ DHS9
1-28
Return with and without use of margins. Without margin:
R= (9000-10000)/10000= -10%. With margin:
R= (4000- 5000)/ 5000= -20%. Your margin is
4000/9000=44.44%
Margin Tradingبالهامش االتجار
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Margin Tradingبالهامش االتجار
The minimum price before hitting the first margin call is:
P=(IM*P0)/(1-MM)
In our example:P=(.5*10)/(1-.375)=8
1-30
Margin Tradingبالهامش االتجار
Assets DHS Liabilities & Equity
DHS
1000 shares @ 8
8000 Loan 5000
Equity 3000
TA 8000 TC 8000
Price @ DHS11 which the margin call price.
1-31
Margin Tradingبالهامش االتجار
Return with and without use of margins. Without margin:
R= (8000-10000)/10000= -20%. With margin:
R= (3000- 5000)/ 5000= -40%. Your margin is
3000/8000=37.5%
1-32
Margin Tradingبالهامش االتجار
Need to add cash to the account to go back to 50% or as agreed with the broker.
Margin call calculations:cash = P*N*IM-EqCash= 8*1000*0.5-3000
= 1000
1-33
Margin Tradingبالهامش االتجار
Assets DHS Liabilities & Equity
DHS
1000 shares @ 8
8000 Loan 5000
Cash 1000 Equity 4000
TA 9000 TC 9000
Your margin now is: M=Eq/Inv. =
4000/8000= 50% back to IM.
1-35
Short Selling and Marginsالهامش والبيع على المكشوف
Margin is the amount of cash you put up as a security against the increase in your liability due to short selling.
Initial margin (IM) is the value of your cash balance against the short sold position (liability).
Maintenance margin (MM) is the minimum equity you need to maintain at all time.
Margin call (MC) is the amount that you need to put up to bring your equity back to the initial margin.
1-36
Short Selling and Marginsالهامش والبيع على المكشوف
XYZ is now selling at DHS10. You would like to short 1000 shares. Your broker requires a 50% cash margin paid up front. Maintenance margin is 37.5%.
Calculate your profits and losses in the case of 5% price move in both directions.
Calculate the minimum price before getting a margin call.
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Short Selling and Marginsالهامش والبيع على المكشوف
Assets DHS Liabilities & Equity
DHS
Cash from selling 1000 shares @ 10
10000 Liability (short position)
10000
Cash required as a margin
5000 Equity 5000
TA 15000 TC 15000
Price @ DHS10
1-38
Short Selling and Marginsالهامش والبيع على المكشوف
Assets DHS Liabilities & Equity
DHS
Cash from selling 1000 shares @ 10
10000 Liability (short position)
10500
Cash required as a margin
5000 Equity 4500
TA 15000 TC 15000
Price up by 5% @ DHS10.50
1-39
Return with and without use of short selling.
Without short selling: R=(10500-10000)/10000=5%.
With short selling: R=(4500-5000)/5000=-10%.
Your margin is:4500/10500=42.86%
Short Selling and Marginsالهامش والبيع على المكشوف
1-40
Short Selling and Marginsالهامش والبيع على المكشوف
Price down by 5% @ DHS9.5
Assets DHS Liabilities & Equity
DHS
Cash from selling 1000 shares @ 10
10000 Liability (short position)
9500
Cash required as a margin
5000 Equity 5500
TA 15000 TC 15000
1-41
Return with and without use of short selling.
Without short selling: R=(9500-10000)/10000=-5%.
With short selling: R=(5500-5000)/5000=10%.
Your margin is 5500/9500=57.89%
Short Selling and Marginsالهامش والبيع على المكشوف
1-42
Short Selling and Marginsالهامش والبيع على المكشوف
The minimum price before hitting the first margin call is:
P=P0*(1+IM)/(1+MM)
In our example:P=10*(1+.5)/
(1+.375)=10.909
1-43
Short Selling and Marginsالهامش والبيع على المكشوف
Price @ DHS10.909
Assets DHS Liabilities & Equity
DHS
Cash from selling 1000 shares @ 10
10000 Liability (short position)
10909
Cash required as a margin
5000 Equity 4091
TA 15000 TC 15000
1-44
Short Selling and Marginsالهامش والبيع على المكشوف
Return with and without use of short selling.
Without short selling: R=(10909-10000)/10000=9.09%.
With short selling: R=(4091-5000)/5000=-18.18%.
Your margin is 5500/9500=37.5%
1-45
Short Selling and Marginsالهامش والبيع على المكشوف
Price @ DHS12
Assets DHS Liabilities & Equity
DHS
Cash from selling 1000 shares @ 10
10000 Liability (short position)
12000
Cash required as a margin
5000 Equity 3000
TA 15000 TC 15000
1-46
Short Selling and Marginsالهامش والبيع على المكشوف
The position now is 12000 and the equity is 3000.
The drop in equity is equal to the difference between the initial position and the current position value.
That makes our margin below the 37.5% maintenance margin.
Cash is needed to go back to the initial margin.
1-47
Short Selling and Marginsالهامش والبيع على المكشوف
Need to add cash to the account to go back to 50% or as agreed with the broker.
The drop in equity is equal to:Current position – initial position
12000-10000 = 2000 The value of current equity is equal to
the initial equity – the drop 5000-2000 = 3000
The margin now is equal toCurrent equity/current position
3000/12000= 25% This less than the 37.5% maintenance margin. To go
back to the initial margin, we need to add cash to answer the margin call.
1-48
Short Selling and Marginsالهامش والبيع على المكشوف
To go back to the initial margin of 50% we need to make equity equal to half the current liability position:
IM*P1*N= 0.5*12*1000 = 6000 Margin call calculations:
Margin call amount = Current Equity requirement-Current equity
6000-3000 = 3000
1-50
Advanced Margin Calculations
حسابات هامش اكثر تعقيدا Margin Accounts can become very complex
especially if there are multiple diverse transactions.
An example would be to calculate the margin requirements for buying a stock on margin and short selling another.
Or, you may want to add to that some other securities purchased without the use of margin.
Or, add to all of the above margin calculations for futures contracts and options premiums.
Will revisit later on.
1-51
Segregation of Clients Accounts
فصل الحسابات Client Money is separated from brokers
money. Brokers can no longer use one client
money (free of charge) to lend to other clients for stock purchases.
Benefits: Lower risk. Enhance the availability of cash for clients
withdrawals.
1-52
Segregation of Clients Accounts
فصل الحسابات
Where does the cash go? To banks. Why then move the cash from
brokers to banks? Two reasons: Banks enjoy higher liquidity and
greater readiness to answer cash demand.
Bank capital is structured to have a component that accounts for these deposits, brokers do not.
1-53
Segregation of Clients Accounts
فصل الحسابات What are the problems with brokers
practice of using clients cash to finance other clients stock purchases? Risk of illiquidity Strains on leveraged brokers accounts No brokers capital rules to protect loans
made to clients using other clients money Brokers are not allowed to make such loans
by legal definition of brokering There are no regulations for margin trading
in place.
1-54
Segregation of Clients Accounts
فصل الحسابات
What are the problems of account segregation? - Lower liquidity for trading.
Well this liquidity is not allowed in the first place and markets should have never used this extra liquidity.
1-55
Segregation of Clients Accounts
فصل الحسابات If brokers are so concerned about this
lack of liquidity and they think it is not healthy to stay without it – then why not bear the cost of borrowing from banks to create this claimed extra liquidity?
In no way does the SCA condone or encourage brokers to do so, not until the regulations that deal with that are ready.
These regulations are being worked on and will be ready very soon.
1-56
Segregation of Clients Accounts
فصل الحسابات
So, to avoid this lack of liquidity, why didn’t SCA delay account segregation until after it had such regulations in place?
Well, SCA never allowed lending by brokers and such lending should not be happening.
1-57
Segregation of Clients Accounts
فصل الحسابات What is the difference between the current informal
lending and the lending under SCA regulations?Under current practice Under regulations The current lending is not allowed, it is not the brokers job.
Brokers are legally allowed to lend to customers to purchase securities
There are no liquidity guarantees to meet cash withdrawals
Such guarantees are embedded in the system
There are no capital adequacy rules in place
Adequacy rules will be in place and will be enforced to protect investors money
Current lending practices are very risky and can cause a disaster under very small liquidity strains
Lending will be more secure and mechanisms will be in place to keep things safe
There are no rules to ensure fair and equitable lending, personal connections rule lending
Lending is fair and equitable
Current lending can lead to improper practices like forcing unnecessary trading to make up for lending risk and lending compensations through generating transaction fees to generate income.
Income is generated in a safe and structured manner
1-58
Segregation of Clients Accounts
الحسابات فصل
Under the regulations things will be:
Organized Safe Fair And controllable
1-59
Market Makingصناع السوق
Evidence shows that two of the main problems that emerging markets face are: Capital supply shortage and low liquidity