Brokers Awareness program
Dr. Mounther Barakat
Securities and Commodities Authority
1-1
‫برنامج توعية الوسطاء‬
‫د‪ .‬منذر بركات العمري‬
‫هيئة االوراق المالية والسلع‬
‫‪1-2‬‬
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
1-3
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.,
….
1-4
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
1-5
Liquidity Theory

assume:
bonds of different maturities are
imperfect substitutes,
and investors PREFER ST bonds
because they are more liquid.
1-6
Preferred Habitat Theory

assume:
bonds of different maturities are
imperfect substitutes,
and investor preference for ST bonds
OR LT bonds is not constant
1-7
Segmented Markets Theory

assume:
bonds of different maturities are NOT
substitutes at all and are determined in
isolation of one another.
1-8
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.
1-9
Balance Sheet: Assets
‫ االصول‬- ‫قائمة المركز المالي‬
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
1-10
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
1-11
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
1-12
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
1-13
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
1-14
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
1-15
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
1-16
What is your assessment of the expansion’s
effect on operations?
‫مالحظات 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
1-17
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?
1-18
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
1-19
EVA Concepts
‫مفهوم القيمة االقتصادية 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.
1-20
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 االقتصادية 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
1-21
Did the expansion increase or decrease MVA?
‫حساب القيمة السوقية المضافة‬
MVA = Market value __
of equity
Equity capital
supplied
It measures the value added to the company
from its activities since its inception.
Can not tell who did what.
1-22
Calculating Key Multipliers
‫ مثال‬- ‫حساب المضاعفات‬
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
1-23
Calculating Key Multipliers
‫ مثال‬- ‫حساب المضاعفات‬
M/B = Mkt price per share / Book value per share
= $12.17 / ($1,952 / 250) = 1.56x
P/E
P/CF
M/B
2007*
12.0x
8.21x
1.56x
2006
-1.4x
-5.2x
0.5x
2005
9.7x
8.0x
1.3x
Ind.
14.2x
11.0x
2.4x
1-24
Analyzing the multipliers
‫تحليل المضاعفات‬


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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.
1-25
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.
1-26
Potential uses of freed up cash
‫استخدامات التدفق النقدي الحر‬



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Repurchase stock
Expand business
Reduce debt
All these actions would likely improve the
stock price.
1-27
Margin Trading
‫االتجار بالهامش‬



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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.
1-28
Margin Trading
‫االتجار 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.
1-29
Margin Trading
‫االتجار بالهامش‬
Price @ DHS10
Assets
DHS
Liabilities & Equity DHS
1000 shares @
10
10000
Loan
5000
Equity
5000
TC
10000
TA
10000
1-30
Margin Trading
‫االتجار بالهامش‬
DHS
Price up by 10% @
11
Assets
DHS
Liabilities & Equity DHS
1000 shares @
11
11000
Loan
5000
Equity
6000
TC
11000
TA
11000
1-31
Margin Trading
‫االتجار بالهامش‬




Return with and without use of
margins.
Without margin: R=(1100010000)/10000=10%.
With margin: R=(60005000)/5000=20%.
Your margin is 6000/11000=54.54%
1-32
Margin Trading
‫االتجار بالهامش‬
DHS
Price down by 10% @
9
Assets
DHS
1000 shares @ 9 9000
TA
9000
Liabilities & Equity DHS
Loan
5000
Equity
4000
TC
9000
1-33
Margin Trading
‫االتجار بالهامش‬




Return with and without use of
margins.
Without margin: R= (900010000)/10000= -10%.
With margin: R= (4000- 5000)/ 5000=
-20%.
Your margin is 4000/9000=44.44%
1-34
Margin Trading
‫االتجار 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
1-35
Margin Trading
‫االتجار بالهامش‬
DHS
Price @
11 which the margin call price.
Assets
DHS
1000 shares @ 8000
8
TA
8000
Liabilities &
Equity
DHS
Loan
5000
Equity
3000
TC
8000
1-36
Margin Trading
‫االتجار بالهامش‬




Return with and without use of
margins.
Without margin: R= (800010000)/10000= -20%.
With margin: R= (3000- 5000)/ 5000=
-40%.
Your margin is 3000/8000=37.5%
1-37
Margin Trading
‫االتجار 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
1-38
Margin Trading
‫االتجار بالهامش‬
Assets
DHS
Liabilities &
Equity
DHS
1000 shares @ 8000
8
Cash
1000
Loan
5000
Equity
4000
TA
TC
9000
9000
Your margin now is: M=Eq/Inv. =
4000/8000= 50% back to IM.
1-39
Margin Trading
‫االتجار بالهامش‬

See XLS file for further training
1-40