1 Introduction Corporate

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FUNDAMENTAL & TECHNICAL

ANALYSIS

QCF MASTER 2011-2012

NGUYEN QUANGJVN 2011


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COURSE OUTLINE

Objective: give an analytic method for valuing

a corporate (fundamental analysis) andforecast short-term stock price change

1st week: FA; 2nd week: TA

Project: choose FA or TA (valuing a company

or writing an automatic backtesting/tradingsystem)

Exam: Jan/2012211/14/2011


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COURSE OUTLINE

Thought we suppose that stock price is a

random variable, we will "try" somehow topredict it (statistically)

tomorrow, next month, next year?

?

? ?

?

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VNM

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VNM

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COURSE OUTLINE

What may change the stock price of ABC be

tomorrow, next month, next year, next fiveyear,...?

?

?

? Categorize them into: fundamental and

technical reasons611/14/2011


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FA schedule

Monday morning: Introduction, Financial

statements; afternoon: exercise

Tuesday morning: Financial Analysis

e nes ay morn ng: a uat onafternoon: exercise

Thursday morning: Project

Friday morning: Cost of capital, NPV, IRR, EAV

afternoon: external seminarTextbook: Fundamentals of Corporate Finance 3rd, by Richard A. Brealey,

Stewart C. Myers and Alan J. Marcus 711/14/2011


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1st class schedule

Chapter 1

Corporate

Financial Institutions & Markets

ap er rea ng Time value of money

Chapter 3

Financial plan

Financial statements

Exercise 811/14/2011


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Organizing a Business (1)

Sole proprietorships

Partnerships

Corporations

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Sole proprietorships Start your own business, You bear all the costs and keep all the profits

Easy to be established and the lack of regulations governing it.

You are responsible for all the businesss debts and other liabilities. If

the loan, the bank has a claim against your personal belongings. Itcould force you into personal bankruptcy if the business debts are big

enough. Thus as sole proprietor you have unlimited liability.

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Partnerships pool money and expertise with friends or business associates

Yourpartnership agreement will set out how managementdecisions

are to be made and the proportion of the profits to which each

artner is entitled.

Partners, like sole proprietors, have the disadvantage of unlimitedliability.

Many professional businesses are organized as partnerships. (large

accounting, legal, and management consulting firms,...) Most large

investment banks such as Morgan Stanley, Salomon, Smith Barney,Merrill Lynch, and Goldman Sachs started life as partnerships. So did

many well-known companies, such as Microsoft and Apple Computer.

But eventually these companies and their financing requirements

grew too large for them to continue as partnerships.1111/14/2011


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Corporations As your business grows, you may decide to incorporate

Unlike a proprietorship or partnership, a corporation is legally distinct

from its owners, who are not personally liable for the businesss

liabilities. The have limited liabilit .

Stockholders of a corporation own the firm, they elect a board ofdirectors, which in turn appoints the top managers. The separation

between management and ownership gives a corporation more

flexibility and permanence than a partnership

Similarly, todays shareholders may sell all their shares to newinvestors without affecting the business. By organizing as a

corporation, a business may be able to attract a wide variety of

investors.

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Financial Managers (1)

Real assets Assets used to produce goods and services. Tangible (such as

machinery, factories, and offices) or intangible (such as technical

expertise, trademarks, and patents)

Claims to the income generated by real assets. Also called securities.

Financial managers: stand between the firms realassets and the financial markets in which the firm raises cash

CAPITAL BUDGETING DECISION: Decision as to which real assets the

firm should acquire

FINANCING DECISION Decision as to how to raise the money to pay

for investments in real assets.

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Financial Managers (2)

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Financial decision When a company needs financing, it can invite investors to

put up cash in return for a share of profits or it can promiseinvestors a series of fixed payments. In the first case, the

investor receives newly issued shares of stock and becomes a

shareholder, a part-owner of the firm. In the second, the

investor becomes a lender who must one day be repaid. The choice of the longterm financing mix is often called the

capital structure decision, since capital refers to the firms

sources of long-term financing, and the markets for long-term

financing are called capital markets.

But the financial manager is also involved in some important

short-term decisions.

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Financial institutions & market

Bank

Insurance company

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Financial

Why is a financial intermediary different from a manufacturing

corporation?

First, it may raise money differently, for example, by taking deposits orselling insurance policies.

Second, it invests that money in financial assets, for example, in stocks,

bonds, or loans to businesses or individuals. The manufacturing companys

main investments are in plant, equipment, and other real assets.


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Financial institutions & market (2) When large firm could raise funds directly from investors, they

sell financial assets to the public (if it's the first time: IPO). Thesale is usually managed (guaranteed) by investment banks

A new issue of securities is known as a primary issue and it is

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.

In addition to helping companies raise new cash, financialmarkets also allow investors to trade stocks or bonds between

themselves. Such purchases and sales known as secondary

transactions and they take place in the secondary market.

Financial institutions and markets also have other function,

such as The Payment Mechanism. Borrowing and Lending,

Pooling Risk


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Financial plan

(page 98)

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Planning model (1) Example - Executive (or QCF) Cheese Company

Past year

The firms financial planners forecast that total sales next year

will increase by 10 % Then use the PERCENTAGE OF SALES MODELS: Planning model

in which sales forecasts are the driving variables and mostother variables are proportional to sales.

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Planning model (2) New Income statement

How to finance? Keep the same debt/equity level - borrow more $80

Equity: No need to issue new share - retaining $120 of

income

Planning dividend = $220 - $120 = $1002211/14/2011


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Planning model (3) Dividend payment depends on other decision (debt/equity

ratio maintenance) - balancing item If dividend payment is determined independently

(shareholders' interest) -> then debt/equity ratio becomes

How to finance: retain $40 and borrow $160

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Planning model (4) Now put more stuff into

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Planning model (5) Forecast

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Balance sheet is

no more balanced! Somehow the firm will need

to raise an extra $64,000?- External financing is the

balancing item


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Planning model (6) Raise by debt

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Planning model (7) Exercise: build the QCF fruit spreadsheet

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External financing and growth External financing

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when the firm does not need external funding?


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External financing and growth Internal growth rate

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External financing and growth Sustainable growth rate

The firm issues only enough debt to keep its debt-equity ratio constant.The sustainable growth rate is the highest growth rate the firm can

maintain without increasing its financial leverage.

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Proof: exercise


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Financial statements The Balance Sheet

already learned

The Income Statement

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a rea y earne

The Statement of Cash Flows

a little bit more tricky


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The Balance Sheet (1) A snapshot of the firms assets and the source of the money that was used

to buy those assets

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The accountant puts the most liquid assets at the top of the list and works

down to the least liquid.

Asset that are likely to be used or turned into cash in the near future. They

are therefore described as current assets.


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The Balance Sheet (2) Depreciation: rule of thump: allocate the original cost of the asset over its

life (may not reflect actual loss of market value)

Current liability: liabilities that are likely to be paid off most rapidly

Net current asset (net working capital) = current asset - current liability

What is left over after the liabilities have been paid off belongs to the

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s are o ers

Book value (value appear in the BS) could be different from market value,

especially for large fixed asset (same for long-term liability)

The book value of equity measures the cash that shareholders have

contributed in the past plus the cash that the company has retained and

reinvested in the business on their behalf

The market value balance sheet is forward-looking. It depends on the

benefits that investors expect the assets to provide.


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The Statement of Cash Flow Difference between profit and Cash flow?

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The Statement of Cash Flow Difference between profit and Cash flow?

Depreciation vs Capital expenditure:To calculate the cash produced by the business it is necessary to add back

the depreciation charge (which is not a cash payment) and to subtract

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.

Sale and receivable:The cash that the company receives is equal to the sales shown in the

income statement less the increase in unpaid bills:

Cost of production and inventories:

The cash outflow is equal to the cost of goods sold, which is shown in the

income statement, plus the change in inventories:


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The Statement of Cash Flow The statement of cash flows shows the firms cash inflows and

outflows from operations as well as from its investments and

financing

It contains three sections:

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.

Next comes the cash that the firm has invested in plant andequipment or in the acquisition of new businesses.

The final section reports cash flows from financing activities such as

the sale of new debt or stocks.


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The Statement of Cash Flow

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Case study Vinamilk 2009-2010

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Documents

1 Introduction Corporate