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1-1 Brokers Awareness program Dr. Mounther Barakat Securities and Commodities Authority

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1-2 برنامج توعية الوسطاء د. منذر بركات العمري هيئة الاوراق المالية والسلع

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1-3 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

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1-4 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., ….

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1-5 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

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1-6 Liquidity Theory assume: bonds of different maturities are imperfect substitutes, and investors PREFER ST bonds because they are more liquid.

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1-7 Preferred Habitat Theory assume: bonds of different maturities are imperfect substitutes, and investor preference for ST bonds OR LT bonds is not constant

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1-8 Segmented Markets Theory assume: bonds of different maturities are NOT substitutes at all and are determined in isolation of one another.

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1-9 The Annual Report التقرير 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.

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1-10 Balance Sheet: Assets قائمة المركز المالي - الاصول Cash A/R Inventories Total CA Gross FA Less: Dep. Net FA Total Assets 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

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1-11 Balance sheet: Liabilities and Equity قائمة المركز المالي – الخصوم وحقوق الملكية Accts payable Notes payable Accruals Total CL Long-term debt Common stock Retained earnings Total Equity Total L & E 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

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1-12 Income statement قائمة 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

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1-13 Other data معلومات أخرى No. of shares EPS DPS Stock price 2006 100,000 -$1.602 $0.11 $2.25 2005 100,000 $0.88 $0.22 $8.50

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1-14 Did the expansion create additional net operating after taxes (NOPAT)? حسابات الدخل التشغيلي بعد الضريبة NOPAT = EBIT (1 – Tax rate) NOPAT 06 = -$130,948(1 – 0.4) = -$130,948(0.6) = -$78,569 NOPAT 05 = $114,257

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1-15 What effect did the expansion have on net operating working capital? حسابات صافي رأس المال العمل NOWC = Current - Non-interest assets bearing CL NOWC 06 = ($7,282 + $632,160 + $1,287,360) – ( $524,160 + $489,600) = $913,042 NOWC 05 = $842,400

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1-16 What effect did the expansion have on operating capital? حسابات رأس المال التشغيلي Operating capital = NOWC + Net Fixed Assets Operating Capital 06 = $913,042 + $939,790 = $1,852,832 Operating Capital 05 = $1,187,200

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1-17 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

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1-18 What was the free cash flow (FCF) for 2002? حساب التدفق النقدي الحر FCF 06 = NOPAT – Net capital investment = -$78,569 – ($1,852,832 - $1,187,200) = -$744,201 Is negative free cash flow always a bad sign?

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1-19 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

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1-20 EVA Concepts مفهوم 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.

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1-21 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 EVA 06 = NOPAT – (A-T cost of capital) (Capital) = -$78,569 – (0.13)($1,852,832) = -$78,569 - $240,868 = -$319,437 EVA 05 = $114,257 – (0.10)($1,187,200) = $114,257 - $118,720 = -$4,463

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1-22 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.

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1-23 Calculating Key Multipliers حساب 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

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1-24 Calculating Key Multipliers حساب المضاعفات - مثال M/B= Mkt price per share / Book value per share = $12.17 / ($1,952 / 250) = 1.56x 2007*20062005Ind. P/E12.0x-1.4x9.7x14.2x P/CF8.21x-5.2x8.0x11.0x M/B1.56x0.5x1.3x2.4x

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1-25 Analyzing the multipliers تحليل 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.

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1-26 Trend analysis تحليل النمطية Analyzes a firm’s financial ratios over time Can be used to estimate the likelihood of improvement or deterioration in financial condition.

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1-27 Potential uses of freed up cash استخدامات التدفق النقدي الحر Repurchase stock Expand business Reduce debt All these actions would likely improve the stock price.

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1-28 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 Trading الاتجار بالهامش

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1-29 Margin Trading الاتجار بالهامش XYZ is now selling at DHS 10. You have DHS 5000 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.

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1-30 Margin Trading الاتجار بالهامش AssetsDHSLiabilities & EquityDHS 1000 shares @ 10 10000Loan5000 Equity5000 TA10000TC10000 Price @ DHS 10

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1-31 Margin Trading الاتجار بالهامش AssetsDHSLiabilities & EquityDHS 1000 shares @ 11 11000Loan5000 Equity6000 TA11000TC11000 Price up by 10% @ DHS 11

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1-32 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 Trading الاتجار بالهامش

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1-33 Margin Trading الاتجار بالهامش AssetsDHSLiabilities & EquityDHS 1000 shares @ 99000Loan5000 Equity4000 TA9000TC9000 Price down by 10% @ DHS 9

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1-34 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 Trading الاتجار بالهامش

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1-35 Margin Trading الاتجار بالهامش The minimum price before hitting the first margin call is: P=(IM*P 0 )/(1-MM) In our example: P=(.5*10)/(1-.375)=8

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1-36 Margin Trading الاتجار بالهامش AssetsDHSLiabilities & Equity DHS 1000 shares @ 8 8000Loan5000 Equity3000 TA8000TC8000 Price @ DHS 11 which the margin call price.

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1-37 Margin Trading الاتجار 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%

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1-38 Margin Trading الاتجار 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

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1-39 Margin Trading الاتجار بالهامش AssetsDHSLiabilities & Equity DHS 1000 shares @ 8 8000Loan5000 Cash1000Equity4000 TA9000TC9000 Your margin now is: M=Eq/Inv. = 4000/8000= 50% back to IM.

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1-40 Margin Trading الاتجار بالهامش See XLS file for further training

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CHAPTER 4 Analysis of Financial Statements

CHAPTER 4 Analysis of Financial Statements

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