FINANCIAL ANALYSIS

Class 1: Introduction
QCF MASTER 2012
Class 1: Introduction
NGUYEN QUANG
JVN 2012
Question
What may change the stock price of ABC be
tomorrow, next month, next year, next five
year,...?
? ?
?
?
Can we develop an analytical approach in
order to gain better risk/return trade-off
(classified as fundamental or technical)
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COURSE OUTLINE
Objective:
Develop analytical approach towards valuing a
corporate and detech stock investment
opportunity
Integrate concepts from: Corporate finance, Integrate concepts from: Corporate finance,
Accounting, Technical analysis, and Strategy
Investing (demo)
Take the science as much as possible to the
financial management your cutting-edge
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COURSE OUTLINE
Organization:
1-2 Financial analysis
3-4 Valuing
5-6 Risk and investing
7-8 Technical analysis
9 Trading system
10 Invitee
Project
Exam: Jan/2013
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Project
Project is anything that generates a series of
cash flows. Examples?
Projects can range from true physical Projects can range from true physical
investments (the bakery), to pure monetary
investments (stock, deposit), to gambles (the
lottery ticket).
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Organizing a Business
When you have an idea (project), you may
want to realize it and get money (do business)
How a business can be organized:
Sole proprietorships Sole proprietorships
Partnerships
Corporations
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Organizing a Business
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. governing it.
You are responsible for all the businesss debts and other
liabilities. If the business borrows from the bank and
subsequently cannot repay the loan, the bank has a claim
against your personal belongings. Thus as sole proprietor
you have unlimited liability.
Most popular in Vietnam
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Organizing a Business
Partnerships
pool money and expertise with friends or business associates
Your partnership agreement will set out management and
profits share
Partners, like sole proprietors, have the disadvantage of Partners, like sole proprietors, have the disadvantage of
unlimited liability.
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
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Organizing a Business
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 - limited liability. liable for the businesss liabilities - limited liability.
The corporate ownership is represented by share/stock
Stockholders of a corporation own the firm, they elect a
board of directors, which in turn appoints the top
managers. The separation between management and
ownership gives a corporation more flexibility and
permanence than a partnership
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Organizing a Business
Corporations
Managers could be selected/replaced without changing
ownership
Similarly, shareholders may sell all their shares to new
investors without affecting the business. By organizing as a investors without affecting the business. By organizing as a
corporation, a business may be able to attract a wide
variety of investors.
Some disadvantages: Management complex, Tax
If shares are not publicly traded and your company is closely
held. If shares are widely traded, such corporations are
known as public companies
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Financial Managers
To carry the business, managers need a variety
of assets
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)
Financial assets: Claims to the income generated by real
assets. Also called securities.
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Financial Managers
To obtain the necessary money, the company
sells financial assets
These pieces of paper have value: they are claims on the
firms real assets and the cash that those assets will produce.
The companys real assets need to produce enough cash to The companys real assets need to produce enough cash to
satisfy these claims.
Financial managers: stand between the firms real assets
and the financial markets in which the firm raises cash
CAPITAL BUDGETING DECISION
FINANCING DECISION
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Financial Managers
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1. Financial assets are sold to raise cash
2. Cash is used to purchase the real assets
3. Real assets generate (enough) cash
4. Cash is either reinvested (4a) or paid to investors
Financial managers face: investment question and
financial question
Financial decision
FM invite investors to put up cash in return for
a share of profits: Investor receives newly issued shares
and becomes a shareholder, a part-owner of the firm.
a series of fixed payments: In the second, the investor
becomes a lender who must one day be repaid. becomes a lender who must one day be repaid.
The choice of the long-term financing is called
the capital structure decision, and the
markets for long-term financing are called
capital markets (in contrast of money market)
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Role of capital market
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Financial institutions
Raising fund need the understanding of financial
market, which is not easy for companies
What is the solution?
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Financial institutions
Raising fund need the understanding of financial
market, which is not easy for companies
What is the solution?
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Retail bank
Investment bank
Insurance company
Fund
Financial institutions
Financial intermediary is also a firm
But different from a manufacturing corporation
in:
It may raise money differently, for example, by taking
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It may raise money differently, for example, by taking
deposits or selling insurance policies.
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.
Which kind of financial intermediacy is the most popular in
Vietnam?
Financial market
When large firm could raise funds from investors, they sell
financial assets to the public (if it's the first time: IPO). The
sale is usually managed (guaranteed) by investment banks
A new issue of securities is known as a primary issue and it is
sold in the primary market.
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sold in the primary market.
In addition to helping companies raise new cash, financial
markets 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.
(some financial assets do not have secondary market)
Financial market
You may already see the relation between the
stock price and the corporations business?
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Financial market
You may already see the relation between the
stock price and the corporations business?
How much you can raise money by issuing new shares
depends on the stock price. Why?
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How much the stock is transacted depends on the
companys business. Why?
More question
Where is the risk?
Who share the risk?
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The role of financial market?
How the stock price is value?
Reading
Chapter 2: Time value of Money
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Chapter 3: Financial plan
Financial planning is a process consisting of:
1. Analyzing the investment and financing choices
2. Projecting the future consequences of current
decisions. decisions.
3. Deciding which alternatives to undertake.
4. Measuring subsequent performance against the
goals set forth in the financial plan.
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Financial planning models
Financial planning models help planner to
explore the consequence of alternative
financial strategy
Example: percentage of sales model (next Example: percentage of sales model (next
page)
Next class presentation: The Bankruptcy of
W.T. Grant: A Failure in Planning
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Planning model (1)
Executive (QCF) Cheese Company
Past year
The firms financial planners forecast that total
sales next year will increase by 10 %
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Planning model (2)
PERCENTAGE OF SALES MODELS:
Cost, and thus income, is ~ to sales
Asset is ~ to sales (no free capacity)
New Income statements:
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Planning model (2)
Question: How to finance new asset?
* Keep the same debt/equity level?
borrow more $80 borrow more $80
no need to issue new share - retaining $120 of income
And consequently
Planning dividend = $220 - $120 = $100
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Planning model (3)
* If dividend payment is determined independently
(shareholders' interest) -> then debt/equity ratio becomes
balancing item
-> retain $40 and borrow $160
Which solution is better? The financial model does not tell you!
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Planning model (4)
Now put more stuff
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Planning model (5)
Forecast
1) Sales and operating cost up 10%
2) Interest rate remains the same
3) Dividend policy (paying out of 2/3 of earning) remains
the same
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the same
4) fixed assets and net working capital will need to increase
by 10 percent to support the larger sales volume
Balance sheet is no more balanced: the firm
will need to raise an extra $64,000
Planning model (5)
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Planning model (6)
Raise by debt
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Planning model (7)
Self-test 2: build the QCF fruit spreadsheet
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External financing and growth
External financing
Required ext. financing = new investment retained earning
= (growth rate assets) - retained earning
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when the firm does not need external funding?
External financing and growth
Internal growth rate
Internal growth = retained earning/assets
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External financing and growth
Sustainable growth rate
The sustainable growth rate is the highest growth rate the
firm can maintain without increasing its financial leverage
(keep its debt-equity ratio constant)
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Sustainable growth = plowback ratio return on equity
Proof: Exercise