Brokers Awareness program Dr. Mounther Barakat Securities and Commodities Authority
برنامج توعية الوسطاء د. منذر بركات العمري هيئة الاوراق المالية والسلع
Quantity of Funds Demanded • Interest rates are determined by the demand and supply on funds. • Factors to affect interest rates are: • Higher expected income • Economic growth • Government budget deficit • inflation
Fisher Equation • I= Real rate of interest+ expected inflation • Any change in the two will drive interest rates • This is the risk free rate, risk premiums to be added. • DRP, LP, MRP, CP, Conv. Disc., put. Disc., ….
The Pure Expectations Theory • Assume: bond buyers do not have any preference about maturity i.e. bonds of different maturities are perfect substitutes • LT = long-term • ST = short-term
Liquidity Theory • assume: bonds of different maturities are imperfect substitutes, and investors PREFER ST bonds because they are more liquid.
Preferred Habitat Theory • assume: bonds of different maturities are imperfect substitutes, and investor preference for ST bonds OR LT bonds is not constant
Segmented Markets Theory • assume: bonds of different maturities are NOT substitutes at all and are determined in isolation of one another.
The Annual Reportالتقرير السنوي • 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.
2006 7,282 632,160 1,287,360 1,926,802 1,202,950 263,160 939,790 2,866,592 2005 57,600 351,200 715,200 1,124,000 491,000 146,200 344,800 1,468,800 Balance Sheet: Assetsقائمة المركز المالي - الاصول Cash A/R Inventories Total CA Gross FA Less: Dep. Net FA Total Assets
2006 524,160 636,808 489,600 1,650,568 723,432 460,000 32,592 492,592 2,866,592 2005 145,600 200,000 136,000 481,600 323,432 460,000 203,768 663,768 1,468,800 Balance sheet: Liabilities and Equityقائمة المركز المالي – الخصوم وحقوق الملكية Accts payable Notes payable Accruals Total CL Long-term debt Common stock Retained earnings Total Equity Total L & E
Income statementقائمة الدخل Sales COGS Other expenses EBITDA Depr. & Amort. EBIT Interest Exp. EBT Taxes Net income 2006 6,034,000 5,528,000 519,988 (13,988) 116,960 (130,948) 136,012 (266,960) (106,784) (160,176) 2005 3,432,000 2,864,000 358,672 209,328 18,900 190,428 43,828 146,600 58,640 87,960
2006 100,000 -$1.602 $0.11 $2.25 2005 100,000 $0.88 $0.22 $8.50 Other dataمعلومات أخرى No. of shares EPS DPS Stock price
Did the expansion create additional net operating after taxes (NOPAT)?حسابات الدخل التشغيلي بعد الضريبة 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?حسابات صافي رأس المال العمل 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?حسابات رأس المال التشغيلي 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?ملاحظات من حسابات التشغيل Sales NOPAT NOWC Operating capital Net Income 2006 $6,034,000 -$78,569 $913,042 $1,852,832 -$160,176 2005 $3,432,000 $114,257 $842,400 $1,187,200 $87,960
What was the free cash flow (FCF) for 2002?حساب التدفق النقدي الحر 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)حساب القيمة المضافة EVA = After-tax __ After-tax Operating Income Capital costs = Funds Available __ Cost of to Investors Capital Used = NOPAT – After-tax Cost of Capital
EVA Conceptsمفهوم القيمة الاقتصادية المضافة • 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.حساب القيمة الاقتصادية المضافة 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?حساب القيمة السوقية المضافة 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 Multipliersحساب المضاعفات - مثال 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 Multipliersحساب المضاعفات - مثال M/B = Mkt price per share / Book value per share = $12.17 / ($1,952 / 250) = 1.56x
Analyzing the multipliersتحليل المضاعفات • 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.
Trend analysisتحليل النمطية • 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 cashاستخدامات التدفق النقدي الحر • Repurchase stock • Expand business • Reduce debt • All these actions would likely improve the stock price.
Margin Tradingالاتجار بالهامش • 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 Tradingالاتجار 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.%. • Calculate your profits and losses in the case of 10% price move in both directions. • Calculate the minimum price before getting a margin call.
Margin Tradingالاتجار بالهامش Price @ DHS10
Margin Tradingالاتجار بالهامش Price up by 10% @ DHS11
Margin Tradingالاتجار بالهامش • 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 Tradingالاتجار بالهامش Price down by 10% @ DHS9
Margin Tradingالاتجار بالهامش • 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 Tradingالاتجار بالهامش • The minimum price before hitting the first margin call is: P=(IM*P0)/(1-MM) • In our example: P=(.5*10)/(1-.375)=8
Margin Tradingالاتجار بالهامش Price @ DHS11 which the margin call price.
Margin Tradingالاتجار بالهامش • 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%
Margin Tradingالاتجار بالهامش • 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-Eq Cash= 8*1000*0.5-3000 = 1000
Margin Tradingالاتجار بالهامش Your margin now is: M=Eq/Inv. = 4000/8000= 50% back to IM.
Margin Tradingالاتجار بالهامش • See XLS file for further training